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Council on Foreign Relations has a very interesting chart on who financed the massive amounts of debt that the U.S. government issued in the first half of 2009.– it is divided by “official buyers” who generally are government entities have have motivations other than profit and “economic buyers” who are looking for a return.

The Federal Reserve plans to slow and then stop its purchases by the end of the first quarter of 2010. This raises the question of who will replace this source of demand, and at what price.

This would likely result in higher mortgage costs next year if the Fed stops buying GSE paper because of reduced liquidity (The article has several other charts which serve to emphasis the Fed’s role in stabilizing the banking system and keeping mortgage rates low).

The point of the Fed’s purchases was to lower mortgage rates during the worst of the housing slump and lower funding costs at the GSEs, which were struggling with skittish investors in the private market. That plan has largely worked; rates for a 30-year fixed-rate loan have fallen to 5.11%, according to Bankrate.com, and GSE debt with five-year maturities traded at 30.5 basis points above Treasuries this week.

But most analysts are predicting those rates will rise by at least 50 basis points before the Fed stops buying and could rise even further afterward. That might not hurt as much on the MBS side, as long as investors have an appetite for mortgages, but could pose problems on the debt side if investors are worried about funding an institution that might not be around a few years down the road.

At the same time, there is discussion of dismantling the GSE’s in favor of a new agency or restructure into smaller agencies.

My sense is that we can’t revert to the old Fannie and Freddie because they answered to 2 masters: Taxpayers and Shareholders.

I don’t see how mortgage rates don’t edge up next year. That offsets any hope that housing prices will begin to rise and suggests there are a number of years to go before they do.

Tags: GSE, Bankrate.com

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One of the most glaring housing issues that hasn’t been resolved is loan modifications. There are multiple owners of the mortgage, the servicers aren’t incentivized to move forward.

There was an interesting article in the New York Times which described how the lack of traction in loan modifications may not be simply the lack of infrastructure to handle the volume but rather the incentive to loan servicer, those who make more money in fees by taking longer to move forward than to resolve rather than move on to the next case.

Less than 10% of modified mortgages result in a forgiveness of debt. Late fees and other associated payments are tacked on to the end of the mortgage term, resulting on higher payments or a much larger mortgage balance. In many cases loan modifications can result in higher payments – no wonder the default rate is high. How about modifying some stupidity?

Holden Lewis of Bankrate.com and I spoke about this yesterday in the podcast now available on The Housing Helix – he disagrees with the New York Times article premise that delay is profitable.

James Surowiecki’s “No Home Yet” article in The New Yorker lays out the modification landscape quite succinctly:

• servicers can make more money on fees by “dragging their feet”
• mortgagae delinquencies continue to rise
• servicers can’t renegotiate in bulk
• borrowers aren’t informed

But the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders. Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.

Speaking of scrambling.

Tags: Bankrate.com, Pizza

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I got to speak with Holden Lewis, a long-time reporter for Bankrate.com. He’s a prolific blogger of all things mortgage related at Mortgage Matters.

I’ve been following Holden’s work for years. He’s also interviewed me in the past so it’s nice to switch things around a bit.

Check out the podcast

The Housing Helix Podcast Interview List

You can subscribe on iTunes or simply listen to the podcast on my other blog The Housing Helix.

Tags: Bankrate.com

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Tags: Bankrate.com

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Not much wiggle room left for the Fed, but always time for New Wave “turning Japanese” nostalgia.

I keep thinking about the 0% discount rate set by the Bank of Japan since the mid-1990s and how that hasn’t worked. The Bank of England’s rate was dropped to 2%, the lowest since 1951.

Referring to Great Britain, but the same concept applies to the US economy:

Like Japan, the recession has shown government spending to be way out of kilter with the size of the post-bubble economy, and our budget deficits are set to easily reach those of Japan at its peak.

In Barrons:

Are U.S. Markets Turning Japanese?
It would seem so as yields plunge well below 3%. Think of it as the 1970s in reverse.

BABY BOOMERS, MORE THAN ANY OTHER GENERATION, seem stuck in their youths. Think of how the tastes of so many of their numbers remain ossified in the 1960s and 1970s, from Classic Rock on the radio to recreations of the autos of their youth, such as the VW Beetle, the Mustang and the Mini.

So, too, have their expectations about the economy. Prices only go one way — up — whether for the stuff they buy every day (except for computers and the other electronic accoutrements), their assets such as stocks or houses, or the pay for their services. They can no more conceive another kind of world than one without cell phones. And any departure must be an aberration, surely short-lived and certain to revert to the norm they’d known.

In other words, finance, as we know it, is undergoing massive change and the products we end up with are not going to be the same as we had a few years ago when the market was always going up.

Mortgage rates are fallng and mortgage applications (not necessarily successful applications) have just tripled and the US Treasury is talking about pushing rates as low as 4.5%. Although it doesn’t address jumbo mortgages, it is a first sign of progress, but by no means does it solve a whole lot.

Some say that with the nearly 8 trillion in exposure we taxpayers have through guaranties and investment, rates will rise with the flood of paper issued to pay for all this. I’m not sure. If the economy is lackluster at best for the next 2-3 years, I have a hard time seeing rates rising with the lack of demand in the near term.

Aside: Donald Trump is complaining his new Chicago condominium project is too expensive.

Yet another aside: This is your child’s brain on a Sony HD 52 inch Flat Screen with surround sound.

Big 3 + UAW aside: Combined common stock worth $3B, so lets give them $34B To date they have: fought emissions restrictions, fuel economy, safety features, make poor quality cars, and paid 12,000 people to not work. I went to school in Michigan and, despite obvious sympathy for hard working people in this situation, I have a hard time seeing how things are going to change in any way whatsoever. I’ll bet they don’t go on the same extravagant trips that AIG took if this goes through now that they have driven their own hybrids.

Tags: FNC, Jumbo Mortgage, Bankrate.com, Radio

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The Federal Housing Finance Agency (FHFA) announced that the conforming loan limited for mortgages will remain at $417,000.

The Federal Housing Finance Agency (FHFA) today announced the conforming loan limit will remain $417,000 for 2009 for most areas in the U.S. but specified higher limits in certain cities and counties. The conforming loan limit is the maximum size of loans that Fannie Mae and Freddie Mac can purchase in 2009.

According to provisions of the Housing and Economic Recovery Act of 2008 (HERA), the national loan limit is set based on changes in average home prices over the previous year, but cannot decline from year to year. Loan limits for two-, three-, and four-unit properties in 2009 will remain at 2008 levels as well: $533,850, $645,300, and $801,950 respectively, for homes in the continental U.S.

In theory, if housing markets continue to fall sharply in certain parts of the country, the implied mortgage risk will actually increase because the cap on the mortgage limit can not be reduced. Of course we are in the middle of a financial crisis caused by throwing risk out the window so it’s ironic that it’s actually against the best interests of the financial market to be more conservative in this regard. Probably because that’s not really the problem.

So we keep the loan limit the same again despite:

• declining market conditions
• change the name of the agency to FHFA from OFHEO (OFHEO was responsible for oversight of Fannie and Freddie before they needed to be bailed out)
• run by the same person as before who now suggests FHFA has plenty of ammunition (no offense intended to Mr. Lockhart).

From the contrarian department…

Yet here’s something new (hat tip to Holden Lewis of Mortgage Matters) that definitely doesn’t conform to longstanding rhetoric from someone who reported last year at this time about 5 months in a row that the problem with credit was temporary…

[NAR Chief Economist Lawrence] Yun says, without giving specifics, that the federal government should step in to stabilize house prices. That’s quite a plea, coming from a representative of an organization that’s usually all for hands-off government. There’s nothing like a severe recession to make free-marketers abandon their principles with alacrity.

And the contrarian-contrarian department…

Here’s an opinion that’s contrarian to those who claim to be contrarian: lowball offers in a weak real estate market don’t work according to accomplished real estate author, writer, agent, speaker Ali Rogers, well-known for her book “Diary of a Real Estate Rookie“

Some real estate gurus would argue that that’s okay, you should go ahead and make ridiculous offers, because if you’re willing to ask a gazillion people you’ll finally run down one exhausted one who will capitulate. Then, hey, it’s like you won the lottery.

One problem with that strategy: I don’t generally think it works.

Tags: Conforming Mortgage, FHFA, Fannie Mae, Lawrence Yun, OFHEO, Bankrate.com, NAR, National Association of Realtors, Freddie Mac

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A lot has been made of the lack of moral hazard on Wall Street, festering into the current crises.

Michael Lewis, author of a number of great books, including Liars Poker comments in his recent column titled: Bright Side of a Total Financial Market Collapse:

No sooner did Greenspan shuffle off the stage and sell his memoir than the financial system he helped shape fell apart.

He’s left not only a mess but a void. No matter how well- educated we become in our financial affairs, we still need public officials to look up to, unthinkingly.

Slate’s new The Big Money is an excellent resource for financial news commentary. Martha White’s article: What Is a Moral Hazard? The economic reasoning behind bailout or no bailout is a good read.

While bailout seems to be the financial term du jour, right behind it is the more ambiguous “moral hazard.” Treasury Secretary Henry Paulson cited moral hazard as the reason not to swoop in to save Lehman Bros. and Merrill Lynch. Puzzling to many, though, was that while moral hazard was discussed in conjunction with the rescues of Bear Stearns, AIG, Fannie Mae, and Freddie Mac, it wasn’t a deal breaker in any of those cases.

…moral hazard is the idea that insurance in any form makes people riskier.

When I was 15 years old back in the Bicentennial summer of 1976, I rode my bicycle 4,400 miles zig zagging across the US with a group formerly called Bikecentennial. Of 4,000 people who participated, 3 people actually died riding that summer, and within our own group of a dozen riders, those who did wear helmets experienced wrecks and those who didn’t wear helmets (like me), were fine.

I often wondered if wearing a helmet made the riders more prone to take risks. I don’t think so – they represented a cross section of temperaments in our group. In fact, I bought a helmet when I got home and have worn one ever since – and no wrecks.

Perhaps it is more as an argument of convenience. Throw it in if it helps make the case?

The absence of moral hazard of the current situation was created by the GSE structure to begin with. Investors assumed the US would bail out ‘Mac & ‘Mae if they ever ran into trouble because they were “government sponsored”. I can only imagine what would happen to the financial system if the former GSEs were allowed to fail. “Faith and credit of the US” would have meant nothing forever, or at least as long as the current Yankee Stadium is old.

And the system seems to be unraveling quickly judging by more actions this weekend.

Paulson and Bernanke have been making moves faster than Congress or the President can seemingly comprehend. Expect Congress to start fighting the changes once they get it.

“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues last week, according to one meeting participant.

A bit unnerving but the Bush administration has been disconnected from the crisis until a few days ago, when it began to back Paulson’s actions. In fact, that was a requirement of Hank’s acceptance of the position to begin with, unlike his predecessors in the current administration.

And the candidates, until a few weeks ago, didn’t discuss the issue directly – and still don’t seem to get and at the very least, didn’t see it coming. Paulson and Bernanke need to move fast.

The lesson learned from this bailout of epic (trillions) proportions, was best said by Floyd Norris in his Reckless? You’re in Luck

If an activity is important enough to justify a government nationalization to prevent a default, it is important enough to be regulated. The regulators need to know what risks are being taken, and by which institutions, in time to act before a crisis develops.

Had the government bothered to do that in years past, it might not have faced the decisions it faced this week. First, it let one big firm go down, and then it became scared enough to nationalize another one to keep it afloat.

Now, showing no sign of embarrassment over how badly they failed before, the current crop of regulators seem to be unified in their determination not to let the markets force them to make a similar choice on some other big financial institution.

It’s not about more regulations, its about regulations that deal with today’s markets.

Paulson and Bernanke will have to wrestle with these issues later, right now, they are suggesting we all wear a helmet.

Tags: GSE, Bankrate.com, Bear Stearns, Alan Greenspan, Ben Bernanke, Henry Paulson, Bailout Nation, Lehman

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I am struck by the extreme range and contrast of housing development beyond traditional on-site construction. From mobile homes on the low end to art-like pre-fab homes on the high end.

Single-wide, double-wide, wide-load

The mobile home market, which often represents the lower end of the housing demographic, is seeing particular hardship right now in the availability of financing. It is sort of a a hybrid of real estate and chattel (personal property).

In the development of mobile home parks it is not unusual for the home owner to be situated on leased land, something not generally done in traditional home building. Pre-fab homes (the kind you see being hauled in two halves on semi-tricks) are generally lumped into the same category. A few years ago there was a meltdown in the manufactured home mortgage market so now the new housing law directs Fannie Mae and Freddie Mac to come up with new loan products and flexible underwriting standards for manufactured homes. Don’t count on it.

Tubes on stilts

On the other end of the spectrum, pre-fab housing is seen as making a statement, an artistic interpretation of housing. The exception would be the type where the art/brand transcends the house, like the Frank Lloyd Wright utilitarian homes scattered throughout the midwest and Levittown. Long since bastardized to match today’s living standards. Worthy of the Museum of Modern Art, the emphasis is placed on design over functionality and practicality.

And of course, The Haute Couture of Suburbia



I digress… Little pink houses for you and me. And while we are thinking rock n roll, here’s proof that the wheels really coming off the wagon.

Tags: Fannie Mae, Bankrate.com, Freddie Mac

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Fannie Mae and Freddie Mac are government sponsored enterprises (GSE). Yet they have shareholders and are profit driven. They play a critical role in the stability of the US mortgage market (and housing) by promoting liquidity, helping mortgage rates and availability consistent throughout the country.

One of the things that made them have a competitive advantage over others was their inferred backing by the federal government.

In the New Yorker this week, James Surowiecki writes in his column Sponsoring Recklessness

The two companies have long been required to tell investors that their securities are not guaranteed by the federal government. But in the financial markets everyone has always assumed that this demurral was just window-dressing, and everyone, it turns out, was right. Last week, when fears of a possible collapse of the two companies threatened to spark a major financial crisis, the Treasury Department and the Federal Reserve quickly came up with a rescue package. What had been an implicit guarantee became an explicit one

Fannie was privatized in 1968 so president Johnson could move the debt off the federal books to help sell the Vietnam War budget, not to help the mortgage market.

Help to the consumer in terms of their impact on keeping low mortgage rates may be exagerated.

A paper by the economist Wayne Passmore, of the Federal Reserve, suggests that in fact Fannie and Freddie have only a small effect on the interest rates that homeowners pay, saving them less than one-tenth of a percentage point.

The GSE self-preservation mechanism has been aggressive lobbying using former high placed government officials, very effective in enabling them to grow to $5 trillion in mortgage debt. A blip on the radar could cause more damage than Congress is able to burden the taxpayers with.

More than $10 billion in losses in the past two quarters, the GSEs (and FHA) are looking for more money to capitalize to help bailout the housing market at Congress’ urging.

Holden Lewis over at Bankrate wrote a great post on this last week called The GSEs and moral hazard.

Daniel Gross, my friend over at Slate and Newsweek, makes a better argument for the help GSEs provide to the taxpayer/homeowner suggesting that a bailout of the GSEs would actually be a bargain.

I guess I have a hard time accepting that anything the federal government would do would be a bargain and the long term concept of nationalization of the GSEs would be cost effective, but hey, I don’t have to refinance my mortgage.

Tags: Dan Gross, FHA, Fannie Mae, GSE, OFHEO, Bankrate.com, Bailout Nation, Freddie Mac

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Here’s a collection of phrases that caught my eye for our newfound understanding about our new housing/credit morality/thinking:

Moral Hazard – I have linked to Holden Lewis’ brilliant post before: Moral hazard is when people take unwise risks because they are sheltered from the consequences. For example, if you wear a seat belt and drive a car with airbags, you’re more likely to tailgate.

Rally between Concern Phase and Fear & Capitulation Stage – Comstock Partners has some great commentary about the housing market: Now even Fed Chairman Bernanke has caught on to the dangers of the bursting of the bubble.  He stated in both Tuesday’s and Wednesday’s testimony before Congress, “the housing market is the central element of the financial crisis.  Anything we and Congress can do to strengthen the housing market, or strengthen the mortgage financing market, will be helpful.  We can do this by restoring confidence in the Government Sponsored Enterprises (GSEs).”  We are happy to have Mr. Bernanke on board, but are not too happy about begging Congress to slow down the process by trying to get bills passed that would postpone the inevitable decline and make the eventual decline even worse. We have to let the free market work its way through the housing crises.

Flat is the new up – Daniel Gross of Slate’s column captures the feeling of victory in today’s economy. Last weekend, at a suburban barbecue, I asked a friend who works for an asset-management company how his firm was faring in these turbulent times. “We’re actually doing OK. Keeping our heads above water.” At which point another guest chimed in: “Hey. Flat’s the new up.”

Nexus between fear and greed – I wrote about this one before.

Foreclosure Contagion – Zubin Jelveh’s Odd Numbers blog in Portfolio.com offers a wealth of sharp insight on an array of economic topics: The researchers also find that the negative hit from a foreclosure is strongest right before a lender takes control of the property. They argue “that when foreclosure is inevitable, efforts to speed the foreclosure process would be effective at reducing the contagion effect.”

It’s a good time to buy real estate – housing prices double every ten years – NAR is hard selling and yes, it may be a good time to be real estate in certain markets and for some people. Because NAR says this 24/7, it’s hard not to cast a jaded glance their way.

Tags: Dan Gross, CNBC, GSE, Bankrate.com, Ben Bernanke

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The Federal Open Market Committee was widely expected to raise rates a few weeks ago amid growing concerns over inflation. However, that concern eased in recent weeks as it became apparent that the overall economy was still weak and the rate was left unchanged.

Repeat of last month’s hint: Housing AND inflation

I would doubt there will be a change in the federal funds rate until after the election – a coincidence I am sure [wink].

Here’s a great discussion on Fedspeak and the Feds’s political connections by Holden Lewis over at Bankrate.

But assuming not much fixing happens until after the election, can the next President actually do anything about the state of the economy?

Here are the minutes from the last meeting:

Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Of course, as Congress struggles to pass legislation to ease some of the homeowner pain (which, as a body of government, I feel the issue is far too complex for them to arrive at an effective solution because excessive compromise is the result), mortgage debt is snowballing.

Hurry up.

Although 71% of Americans describe the federal government’s economic policies as bad, a recent Harris Poll found that More Now Believe Their Household’s Financial Condition Will Improve in Next Six Months.

Huh?

I think it’s not just the Fed that’s unsure about the economy at the moment.

Tags: Bankrate.com

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My kid’s last day of school was yesterday so I’m fighting the urge to take the summer off. Ok, it’s not possible, but I can dream.

It’s been a week to remember.

• Two US senators completely missed signs of favoritism. Sen. Kent Conrad, a Democrat from North Dakota, said the Senate Ethics Committee will look into mortgage loans he received from Countrywide Financial Corp…Sen. Christopher Dodd, a Connecticut Democrat who is chairman of the Senate Banking Committee, also has acknowledged receiving mortgages from Countrywide.
• The first sign of last summer’s problems – Two former Bear Stearns hedge fund managers were arrested today. “This is not about mismanagement of a hedge fund investment strategy,” said Mark J. Mershon, the head of the New York office of the Federal Bureau of Investigation, at a news conference Thursday. “It is about premeditated lies to investors and lenders.”
• It’s real money – The FBI arrested over 300 real estate brokers in mortgage fraud schemes since March whose victims lost more than $1B.

Fast and easy credit that was relatively unchecked by regulators provided the perfect environment for fraud, the creation of instant wealth and/or newly found leverage to those who were willing to use it or accept it.

We seem to be entering the fourth phase of the credit crunch (not marriage). Discover, Fret, Propose, Charge, Reconsider, Solve

This week’s persistence award goes to a woman who, for 6 months, tried to get someone at WaMu to talk to them about their mortgage (hat tip to Holden Lewis/Mortgage Matters). Can someone please explain to me how WaMu’s CEO has been able to hold onto his job?

Here’s Politco’s list of mortgages held by US Senators.

Tags: Bankrate.com, Bear Stearns

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