Matrix Blog

FHFA released its

July 2009 monthly housing price index report today which showed more of the same – month over month price increases (up 0.3% from June) and year over year decreases (down 4.2%).

Since OFHEO (pronounced O-Fay-O), I’ve been wondering how to pronounce FHFA and not be kicked out of Acronym Heaven (aka Washington, DC).

Kathleen Hays of Bloomberg Radio interviewed me today on her new show “The Hays Advantage” M-F 1-3pm EST and dubbed FHFA (Foo-FA). That works for me.

While it is encouraging news that the bottom isn’t falling out of the housing market, this index basically reflects the low to mid layers of the housing market since it is based on data from Fannie Mae and Freddie Mac, who only handle conforming mortgage products. Currently this means mortgages of $417,000 or less in most of the country and $729,750 in the handful of “high priced” housing markets. That is the market that is recovering first since it has a secondary investor market for bamnks to sell their paper too and ifree up their capital.

I find it a bit troublesome that, as we hang on the edge of our seats each month, the revisions for prior releases are all over the map. Last month, the month over month was 0.5% (6% annual) which was revised downward to 0.1% (1.2% annual). Still, the news is better than its been.

If you are a believer in trend lines, the following chart suggests we have about 10% more to go until the market reaches the trend broken circa 2001. That means that the sideways motion we are experiencing would have to change for the worse over the next several years. Factors could include more foreclosures, rising mortgage rates, elimination of first time home buyers tax credit, etc. While I am concerned, thats more bad karma than I can process.

Read the report.

Tags: FHFA, OFHEO, Radio

4 Comments

Every quarter for more than a year, we have seen losses in the neighborhood of $10B – $20B for each of the former GSEs Fannie and Freddie. However, with the Stim and bailouts in the multi-trillion range, the current losses seem like chicken feed (no offense meant to hard working chickens).

My kids remind me often of the Austin Powers quote:

Why make trillions,
…when you can make…billions?

Modified version “why lose trillions, when you can lose billions?”

FHFA, the federal oversight agency that was created after the meltdown began (don’t get excited, it is essentially the former OFHEO and appears to be run per the same executives that were in charge of oversight before the meltdown) reported that both Fannie and Freddie are facing “critical” problems.

Ok, this is nothing new. We know these agencies will be losing money for many years until we undergo extensive de-leveraging.

What continues to be a concern for me is the ability of these agencies to attract talented people to steer them. Even though the GSEs are essentially federal agencies, they are dealing with enormous and complex problems. Their predecessors were highly compensated but, like everyone else, didn’t see it coming.

Images of the government issued gray painted rooms and bulky metal desks come to mind – ie, your local DMV. One could argue that the “talented” executives were the ones that got us in trouble. However, I think this is an over simplification and short sighted.

One hurdle to putting Fannie and Freddie back on firm financial footing is the many vacancies in their executive ranks. Hiring has been slowed by compensation concerns, the agency said.

That’s why salary caps in most company situations are probably short-sighted. Ben & Jerry’s took several years to find a CFO because of their 5x salary cap from lowest to highest paid employees kept away good talent.

Yes some Wall Streeters got crazy compensation packages, but do we get even with them and apply it to all executives connected with this financial morass that take Fed dollars or work in Fed agencies? Is this a case where the exception makes the rule?

How will “toxic mortgages” be sold off if the company purchasing them feels even a hint of salary cap talk, even retroactive salary caps? Senior executives are not likely to jump in the pool, if their bathing suit might be taken away without warning – ok, bad visual but hopefully you get my point.

Although when I renewed my driver’s license last year, it only took 10 minutes.

Tags: FHFA, Fannie Mae, GSE, OFHEO, Freddie Mac

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Tags: HVCC, OFHEO, Appraisal Institute

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I have been particularly impressed with the way that the newly created Federal Housing Finance Agency has been keeping us informed on what they have been doing to help with the housing market since the credit crunch began in the summer of 2007.

Organized, neat, outspoken, timely. You only have to read the FHFA mission statement to understand what they are all about:

Promote a stable and liquid mortgage market, affordable housing and community investment through safety and soundness oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

Sounds like a necessary regulatory agency to me.

The FHFA’s predecessor, Office of Federal Housing Enterprise Oversight (OFHEO) was also responsible for regulatory oversight during the Fannie Mae accounting scandal and the collapse of the GSEs leading to their bailout in September 2008, had a remarkably similar mission statement as FHFA’s.

OFHEO has an important and compelling mission

to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac.

Before the global credit crunch and US housing market decline, where was the actual oversight of Fannie Mae and Freddie Mac? Today the new institution replacing the old one is run by the same person (whom I find to be quite well-spoken) and their new web site is nearly identical to the old one yet the mission has now expanded to include the Federal Home Loan Banks.

The implication of promoting liquidity in the revised mission statement isn’t a new concept since that was one of the primary reasons for the existence of Fannie Mae and Freddie Mac in the first place. And OFHEO’s advocacy of affordable housing seemed to morph from low income housing to simply making housing finance costs cheaper.

Still, I have higher hopes for all federal regulators going forward now that they have been lulled from hibernation.

After all, there’s a bear out there.

Tags: FHFA, Fannie Mae, GSE, OFHEO, Bailout Nation, Freddie Mac

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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

Comments Off on [Conforming Defined] The More Things Change, The More They Stay The Same

It finally happened. The GSEs are no longer private corporations. The bailout is finally here.

I called this bailout on October 5, 2005 and was teased or ignored. History teaches us we forget history.

I have been lamenting (whining) for the past several months that nothing has really changed since last summer when the credit markets imploded. Sure, we had the stimulus plan and the housing bill became law, NY AG wrangles a deal with the GSEs to change the way with mortgage brokers and appraisal management companies were involved in the mortgage process. The housing bill created the FHFA which was a new and improved OFHEO, which had been in charge of GSE oversight before the seizure.

GSEs have been taken over and we are in bailout mode. Its fair to say this is the worst mortgage crisis in history.

Why the GSEs were doomed

They had an unfair advantage over competitors because they were protected by the federal government. Thats the very same government that was forced to bail them out. It makes a strong argument for promoting fair competition.

You can’t serve two masters:

the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The irony about the GSE set up is that was consistent with most members of the mortgage pipeline. Appraisers served the mortgage broker and the lender. Mortgage brokers served the borrower and the lender. Banks served the investors and their shareholders.

Fannie Mae continued to play with their spreadsheets even after the accounting scandal.

Fannie Mae did not have a grip on their accounting practices, OFHEO/FHFA was ill equipped to keep them in check, or they were simply incompetent. Remember FNMA kept revenue off the books in the original accounting scandal a few years back so they would not draw attention and be able to show better results the following year. Now they didn’t meet capital requirements to offset their mortgage market exposure.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

Despite all the confidence telegraphing by Lockhart (OFHEO), Mudd (FNMA) and Syron (FHLMC), few really believed the GSEs had a grip on the extent of the situation. After all they were part of the process.

They hold or back 5.3 trillion in US mortgages which is about 50% of the mortgages out there. The GSEs accounted for about 80% of new mortgages being issued since last summer’s credit crunch. With investor confidence fading fast, the Treaury department could not let the last pillar left in the mortgage market crumble and it appeared to be headed that way.

What does this mean to housing?

Its not clear until this all shakes out, but probably not much initially.

However, if the investors see the faith and credit of the US in action and this brings them to the table, it may eventually bring more liquidity to the credit markets and that may bring some of the risk down, lowering rates or tempering their rise. However, housing still has a lot of shakeout with foreclosures and inventory, but at least this is a step in the right direction.

It’s actually the first constructive step towards recovery. If we are going to pay through the nose, it might as well be towards something positive, as painful as that is. The stimulus plan and the housing bill are painful, but don’t do anything about solving the financial crisis.

“I would view it as the beginning of the markets recognizing and accepting the reality of our financial problems, which is the beginning of fixing them,” said Mr. Rosner, a managing director at Graham Fisher, a financial research firm.

In other words, perhaps there is hope credit markets will get a grip in the next couple of years.

An aside
It has always been my observation that Freddie Mac was the step child of Fannie Mae. It stemmed from my appraisal background. Freddie Mac let Fannie Mae design their forms. Freddie Mac was essentially created after Fannie Mae to provide competition for it yet it nearly always let Fannie Mae take the lead. Even its stock price seemed to mirror Fannie’s. But Freddie didn’t get into hot water in the accounting scandal and Freddie Mac was agreeable to the Treasury take over before Fannie Mae because they had more of a handle on how short their capital was. In fact one could suggest that when it counted, Freddie Mac was the leader all along. Of course, that doesn’t matter any more. CORRECTION: It was Freddie not Fannie…nevermind.

Inter-office announcement
Its a time for change: I win the office pool on the WAMU bet. Good grief, he should get an award for outstaying his welcome.

Tags: FHFA, Fannie Mae, GSE, OFHEO, Bailout, Freddie Mac

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It’s 48 hours of market report nirvana!

Guess what?

1. Home prices are falling. [shocking]

2. And prices during the spring market didn’t fall as much as the winter. [informative]

This is all very new and helpful. [sarcasm]

Here’s a recap

• NAR’s existing home sales report was released yesterday. Interpretation not to be relied on based on past spin. Headlines don’t match content.

• the widely followed Case Shiller Index (bad news version) (good news version) who has not been able to kick start the trading of housing derivatives. Excludes, co-ops, condos, most foreclosures and new development.

• the GSE fueled OFHEO Home Price Index (good news version) (bad news version), issued by the agency that, ironically, was neutered by the GSEs during the housing boom for their mantra of creating “affordable housing.” Excludes new development and condos.

• the Commerce Department’s new housing start stats, which has some of the wildest and widest margin of error ever thought possible. This does not factor in cancellations, which in some markets have been as high as 100%.

Here’s a thought. Mortgages are more expensive and less accessible than two years ago. Until that changes, I wouldn’t expect real, measured improvement. Improvement will come eventually. Let’s deal with the situation at hand rather than all the focus of calling the turnaround correctly.

What especially drives me crazy has been the viewpoint that things are getting better based on rising activity and/or prices in the spring in certain markets. It’s called “seasonality.”

Tags: Case-Shiller, GSE, OFHEO, Seasonal Adjustment

Comments Off on [Bullish In Technicolor] Housing Prices Show More Weakness

Source: RedKid

Just when I was able to cite “OFHEO” and Office of Federal Housing Enterprise Oversight (who comes up with these names?) from memory, along comes a new agency created from the Housing and Economic Recovery Act of 2008 recently passed into law.

FHFA: Federal Housing Finance Agency. No web site yet – I tried www.fhfa.gov

It has to compete with a bunch of others organizations that use the same acronym:

FHFA Fairfax Hispanic Firefighters Association (Virginia)
FHFA Fairly Homogeneous Farming Area
FHFA Family Health Foundation of America
FHFA Federal Housing Finance Agency
FHFA Florida Health Freedom Action (South Miami, FL)
FHFA Florida Home Furnishings Association
FHFA Florida Housing Finance Agency
FHFA Foot Health Foundation of America

I am hopeful the new agency will be better suited to provide better oversight than OFHEO did. OFHEO was essentially a rubber stamp for the GSEs until a few years ago when the FNMA accounting scandal woke it up. A new director took the reigns at OFHEO, James Lockhart, who seems to be doing all the right things (and one heck of a lot of press releases).

From the latest press release, it looks like the current director of OFHEO had a big hand in creating the new agency, FHFA. Since Lockhart has been pretty coherent, I’ll try to consider this as a good thing.

No web site, no information on the structure. Nothing but a press release so far. We’ll have to wait. Of course, credit and liquidity are very limited and need to be fixed before housing takes a turn for the positive, so I hope its not too long.

Takeaway: Odds are government will move too slow to provide meaningful solutions to the credit crunch in a world that moves much faster. In fact, the lack of action over the past several years set the stage for the condition we are currently in so I am not sure what we are waiting for.

By the way, freecreditreport.com …isn’t.

Tags: FHFA, GSE, OFHEO

2 Comments

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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…and those expectations are continued weakness.

The focus on oil and fuel efficiency of cars seems to be taking over the BBQ conversation from housing these days.

the relationship between consumption and m.p.g. is curvilinear, and there is a greater savings at lower m.p.g.’s. Over 10,000 miles, the 28 m.p.g. car uses 198 fewer gallons than the 18 m.p.g., more than double the savings of the 50 m.p.g. car compared with the 34 m.p.g. one.

With this new measure, the researchers suggest, consumers would more easily see the value of swapping an inefficient car for one that is even just modestly more efficient.

Speaking of curvilinear relationships, check out this recent ad in Craigslist. A friend of mine is having great difficultly finding an apartment. Apparently this landlord has the answer.

Today is just full of fun announcements…

Isn’t it summer Being outside, enjoying the sunshine? Optimism? Consumer Confidence plunged to a 16-year low in May.

As expected, the S&P/Case Shiller Index showed continued decline in April, the beginning of the “spring market” when sales activity is most robust. In fact, it showed a record decline for its 20 year history. I think there was hope brewing that the housing market is approaching bottom. It’s hard to see that with a 15.3% annualized decline and a 17.8% decline from peak.

Of course, OFHEO released their numbers today as well and guess what? OFHEO shows the housing market is declining 4.5% annually (over the same period that Case Shiller measures). That’s because CSI includes the entire price spectrum and OFHEO excludes non-conforming mortgage sales. It is interesting how much the data gets skewed by the high end market. Based on the difference between these two indexes, the high end is tanking (no pun intended).

Tomorrow, the FOMC announcement is on tap. The futures markets are betting on no change in rates. I would think further rate cuts will hurt the economy by empowering inflation. Rate cuts in the past year have not helped housing in any measurable, even curvilinear way.

At least not enough to get pumped up about (sorry).

Tags: Case-Shiller, OFHEO

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In the recent edition of PMI’s Housing and Mortgage Market Review (which is now a better read since chief economist David Berson came over from FNMA), focus was on affordability this month. Mortgage lending has gotten back to basics since last summer. Thats a positive long term view and will hopefully promote better overall financial stability of the banking system. It will be interesting to see how long this new found religion lasts after lenders post substandard profit performance over the next several years.

Underwriting standards remain tight, but there is a general feeling that affordability is better now that mortgage rates are relatively stable and prices have fallen in many markets.

NAR publishes a housing affordability index which the PMI analyzes. Affordability has jumped substantially over the past 6 months. The index bases its index on three factors:

• Mortgage rates (modest gains)
• House prices (NAR existing home sale stats are skewed by mix)
• Family income (slower growth)

Prices are the real wild card here since the other two factors aren’t improving affordability. The PMI report spends a lot of time analyzing the OFHEO and S&P indexes which use the repeat sales methodology.

However, the problem with the NAR Affordability Index is not which price index is selected. The problem is that it does not consider availability of credit. Underwriting standards are the highest they have been in years. Its not an apples to apples index because the formula doesn’t consider this major variable (it wasn’t necessary to consider this 10 years ago because underwriting standards were relatively stable) to affordability. Availability of credit is now the key driver of affordability.

To say affordability is “way up”, while technically true, has no real world application. The word “affordability” in this application is simply the name of a metric, not a correct word to describe whether borrowers are more able to purchase a home.

If affordability is “way up”, why are home sales declining and foreclosures rising?

Logic says that if affordability is up significantly, we would have seen a surge of home purchases since the beginning of the year. That hasn’t happened. Why? Because many who would have qualified for a mortgage in 2005, doesn’t qualify today even if there was no change in their financial condition.

Reality. Can’t live with it, can’t live without it.

Tags: OFHEO, NAR, National Association of Realtors

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It seems a bit early to start reflecting on the lessons learned from the housing/mortgage problems we face, since, well, we still face them.

Don’t get me wrong.

It is always good to look back over your efforts and evaluate whether anything different could have been done to yield a different result. It is just that this infers closure and it is too early to summarize.

OFHEO – James Lockhart, the director spoke last week at the 44th Annual Conference on Bank Structure and Competition in Chicago (think Auto show, only less metallic paint) on the “Lessons Learned from the Mortgage Market Turmoil.”

He arrived on the scene after the party already begun and despite the criticisms levied towards both him and his agency, I actually think he did well with what powers he has to employ.

Plus, he likes charts “To set my remarks in context, I often like to start with a chart that gives some perspective…” Start with a chart and I am on your side.

Key lessons learned

• what goes up too far goes down too far. In other words, bubbles burst.
• mortgage securities are risky and that there is a long list of financial firms that have had problems with those securities, including problems related to model, market, credit, and operational risks. A key lesson from the savings and loan crisis that was ignored was not to lend long and borrow short, as structured investment vehicles (SIVs) did.
• Another lesson ignored is that in bull markets investors and financial institutions tend to misprice risk, which can result in inadequate capital when markets turn.
• A new lesson that should be learned is that putting subprime mortgages, which almost by definition need to be worked, into a “brain dead” trust makes no sense.
• Another lesson is that overreliance on sophisticated, quantitative models promotes a hubris that has frequently caused serious problems at many financial institutions

Lessons learned specific to the GSEs

• The first is about pro-cyclical behavior during the credit cycle. An important issue for supervisory agencies is how to create incentives for institutions to behave in a less pro-cyclical manner without interfering with their ability to earn reasonable returns on capital.
• A second lesson from recent experience is the importance of capital. Capital at individual institutions not only reduces their risk of experiencing solvency and funding problems and of contributing to financial market illiquidity, but also helps them avoid the need to retrench in bad times and miss what may be very attractive opportunities in weak markets.
• Those two lessons provide compelling arguments for a third: legislation needs to be enacted soon that would reform supervision of Fannie Mae and Freddie Mac and, specifically, give a new agency authority to set capital requirements comparable to the authority the bank regulatory agencies possess.

These are important points because the GSEs dwarf other debt and the GSEs have been losing money as of late. Here’s a few charts that may be of interest from his speech:

FDIC – Sheila Bair, FDIC CHairman was speaking in Washington, DC at the Brookings Institution Forum, The Great Credit Squeeze: How it Happened, How to Prevent Another http://www.fdic.gov/news/news/speeches/chairman/spmay1608.html on the same day Lockhart was speaking in Chicago. A full court press of self-reflection. Like Lockhart, Bair has been very outspoken and I believe lucid in her depiction of the problems at hand. To her credit, she has clearly articulated the problem with the mortgage system.

Her salient points are:

• …things may get worse before they get better. As regulators, we continue to see a lot of distress out there.
• Data show there could be a second wave of the more traditional credit stress you see in an economic slowdown.
• Delinquencies are rising for other types of credit, most notably for construction and development lending, but also for commercial loans and consumer debt.
• The slowdown we’ve seen in the U.S. economy since late last year appears to be directly linked to the housing crisis and the self-reinforcing cycle of defaults and foreclosures, putting more downward pressure on the housing market and leading to yet more defaults and foreclosures.
• Reform is not happening fast enough
• She explains HOP loans are NOT a bailout
• The housing crisis is now a national problem that requires a national solution. It’s no longer confined to states that once had go-go real estate markets.
• The FDIC has dealt with this kind of crisis before.

Take away

Both OFHEO and FDIC seem to be saying we need to take action now and they were powerless to do anything before this situation evolved into its current form?

It makes me wonder whether any regulatory proposals will do much good. Regulators did not take action or propose safeguards while the problem was building. How can they suddenly have wisdom now? While these recommendations and insight seem prudent but isn’t it kind of late for that?

Speaking of monoliths, here’s Steve Ballmer getting egged in Hungary.

Tags: Fannie Mae, FDIC, GSE, OFHEO, Sub-Prime, Bailout Nation, Freddie Mac

Comments Off on [Premature Lecture] Agencies Go Full Court Press On Self-reflection