It’s no secret in Washington that RESPA reform — that’s the acronym for the real estate settlement rules that govern all home sales and financings — is a hot potato that nobody seems able to handle.
Read more:
Washington Report: Industry Critics and RESPA
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.
View original here:
[GSE Reminder] Hey, There Are No Guarantees
Washington is still buzzing over Treasury Secretary Henry Paulson’s blunt, tough-love comments about the home foreclosure crisis and the real estate market last week.
Read more here:
Washington Report: Foreclosures Fact of Life?
According to Attorney General Michael B. Mukasey there’s no need for a federal task-force to unearth big-name mortgage fraud. That’s what he told the New York Times last week, and instead said that investigations were best handled by local prosecutors.
Read the original here:
Do We Need A Federal Mortgage Investigation?
McLEAN, VA — Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 6.08 percent with an average 0.6 point for the week ending May 29, 2008, up from last week when it averaged 5.98 percent. Last year at this time, the 30-year FRM averaged 6.42 percent.
See original here:
Mortgage Rates Rise to 11-Week High on Inflation Jitters
The Senate Banking Committee has just passed the Federal Housing Finance Regulatory Reform Act of 2008 by an overwhelming and bipartisan vote of 19-2.
Read more here:
Senate Takes On Mortgage Walk-Away
McLEAN, VA — Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 5.98 percent with an average 0.5 point for the week ending May 22, 2008, down from last week when it averaged 6.01 percent. Last year at this time, the 30-year FRM averaged 6.37 percent.
Long-Term Rates Slip on Weak Economic News
Despite all the grim news about gas prices and recession, there are more than a few encouraging signs popping up in the national economy that aren’t getting a lot of attention.
Read the rest here:
Real Estate Outlook: Encouraging News
The Economist magazine appropriately named Map of misery article on US Housing showcases a map of OFHEO data that chronicles the change in housing prices by County/State.
The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.
Yesterday I joked about Bernanke using heat maps and The Economist saw the humor in it as well.
Sounding more like a cartographer than a central banker, Ben Bernanke this week showed off the Federal Reserve’s latest gizmo for tracking America’s property bust: maps that colour-code price declines, foreclosures and other gauges of housing distress for every county. His goal was to show that falling prices meant more foreclosures, and to urge lenders to write down the principal on troubled loans where the house is worth less than the value of the mortgage. His maps—where hotter colours imply more trouble—also make a starker point. The pain of America’s housing bust varies enormously by region. Hardest hit have been the “bubble states”—California, Nevada and Florida, and parts of the industrial Midwest. The biggest uncertainty hanging over the economy is how red will things get.
But can a “bottom” be projected?
One of the most favored ways to measure a housing market by The Economist magazine is to track the ratio of rental prices to sales prices. From 1960 to 1995, rent/price was 5% to 5.5%. When prices soared over the last decade, the ratio is 3.5%. In order to get the ratio back up to 5%, prices have to drop 10% to 15% assuming rents are flat. It’s lookin’ like at least 2010 before this happens.
In terms of projecting when we will see an end to the weak housing market, try correlating it with handgun accuracy. NYC police officers hit their targets roughly 34 percent of the time. Of course, when they fire at dogs, roughly 55 percent of shots hit home.
Go here to see the original:
[Mapping Misery] Only 10-15% To Go!
The FRB’s April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices showed that:
In the April survey, domestic and foreign institutions reported having further tightened their lending standards and terms on a broad range of loan categories over the previous three months. The net fractions of domestic banks reporting tighter lending standards were close to, or above, historical highs for nearly all loan categories in the survey.
In other words, it’s a lot harder to obtain financing.
Chairman of the Federal Reserve said in a speech yesterday that the decline in home prices was different this time and more flexibility in solving the problem is called for.
In a 10-page speech, Mr. Bernanke said (is 10 pages double spaced supposed to be significant?) that some regions of the country including California, Florida, Colorado and parts of the Midwest have experienced sharp increases in the number of homeowners who are delinquent on their mortgages, despite data that does not reveal the classic causes of foreclosures, like higher unemployment rates.
Instead, much of the problem can be attributed to a decline in home prices, which, Mr. Bernanke said, can “reduce the ability and incentive of homeowners, particularly those under financial stress for other reasons, to retain their homes.”
(image of lightbulb turning on) Borrowers were allowed to have mortgages they could not afford and speculators have less incentive to hold on to their properties. Economic vulnerability is made even more precarious by the vulnerability of the GSEs. (Today, Fannie Mae Posted unexpected losses associated with credit performance).
Bernanke’s comments on GSEs
Separately, the government-sponsored enterprises (GSEs)–Fannie Mae and Freddie Mac–could do more. Recently, the Congress expanded Fannie Mae’s and Freddie Mac’s role in the mortgage market by temporarily increasing the limits on the sizes of the mortgages they can accept for securitization. In addition, because the GSEs have resolved some of their accounting and operational problems, their federal regulator, the Office of Federal Housing Enterprise Oversight, has lifted some of the constraints that it had imposed on them. Thus, now is an especially appropriate time for the GSEs to move quickly to raise significant new capital, which they will need to take advantage of these new securitization and investment opportunities, to provide assistance to the housing markets in times of stress, and to do so in a safe and sound manner.
As the GSEs expand their role in housing markets, the Congress should move forward on GSE reform legislation, which includes strengthening the regulatory oversight of these companies. As the Federal Reserve has testified on many occasions, it is very important for the health and stability of our housing finance system that the Congress provide the GSE regulator with broad authority to set capital standards, establish a clear and credible receivership process, and define and monitor a transparent public purpose–one that transcends just shareholder interests–for the accumulation of assets held in their portfolios.
Bernanke actually says “Location, Location, Location”
There is significant locational disparity in the performance of housing markets across the country. Bernanke showed a very cool set of heat maps on a variety metrics.
View original here:
[Credit Spiral] Declining Home Prices Primary Cause Of Declining Home Prices
Confused about inflation?
Each month, the Bureau of Labor Statistics gathers 84,000 prices in about 200 categories — like gasoline, bananas, dresses and garbage collection — to form the Consumer Price Index, one measure of inflation. It’s among the statistics that the Federal Reserve considered when it cut interest rates on Wednesday.
The New York Times created a CPI chart on steroids today (sorry, Jose), that is one of the best illustrations of the complicated calculation for inflation or CPI. Most importantly, housing comprises 42% of the inflation calculation and its methodology may be out of sync with reality.
Basically, the ebb and flow of housing sales was deemed not representative of owner occupancy because of investor sales, so a rental equivalent was derived in 1983.
Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.
Rental equivalence - This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market. Clearly, the rental value of owned homes is not an easily determined dollar amount, and Housing survey analysts must spend considerable time and effort in estimating this value.
Of course, this is wildly flawed simply because rental markets do not perform the same as purchase markets. It could be argued that inflation was understated significantly in 1998-2005 during the housing boom years because although asset prices rose rapidly, the equivalent rents did not. And today, the sharp decline of home prices understates decline in inflation. It was felt that rental values were not as volatile as purchase values.
In other words, it was more statistically convenient for the federal government to rely on a rental equivalent. I still don’t have a great comfort level on how the rental equivalent is calculated.
Well so what?
CPI direct impacts Fed policy as well as government cost of living calculations for various payouts. It’s really a big deal. The skeptical side of me wants to think this is merely a method to keep COLA calculations low since housing prices have risen fairly regularly on an historical basis.
Bonus (admittedly inflated)
Check out flip chart video and look for “No stone throwing regardless of housing situation” and my favorite, the “pie chart of procrastination.” Worth a look.
View original here:
Inflating Inflation Parts And Its Rental Equivalent
The Federal Open Market Committee cut the federal funds rate another 25 basis points to 2%. The WSJ breaks out the announcment FOMC statement in a feature called Parsing The Fed.
Hint: Housing AND inflation
This will be it for a while.
Mortgages aren’t dropping so I don’t see this having much of an effect on anything housing related. Mortgage rates are rising because none of these actions actually assuage (sp?) investors in the securitization market. In fact, I can’t think of one thing that has been done over the past 9 months at a federal level that has actually averted a weaker economy and drop in the housing market.
Read the original here:
[FOMC Parse] Pausing To Smell The Flowers
Bank earnings are down.
Way down.
Real concerns about future losses from non-performing mortgages, other credit instruments like credit cards and the need to recapitalize.
Fed policy has been pretty generous to the economy, no?
No.
Current hopeful scenario: Lower the federal funds rates a lot so that banks can lower mortgage rates to enable consumers to refi their way out of trouble for the time being or purchase a new home.
Looked good on paper…
But mortgage rates have been rising, whether it’s a jumbo or conforming, fixed or adjustable.
Banks need to recapitalize because they have been forced to lend and hold the mortgages they issue in their own portfolio.
Borrow at a low rate,
lend at a high rate.
Enjoy the spread.
Banks can lend at a higher rate because fewer banks are lending so there is less competition. In addition, the banks that are still lending have much tighter underwriting requirements compared to the past 3-4 years.
Why? Banks now have to be more accountable for risk in their mortgage lending decisions rather than offloading risk to investors, who would in turn offload the risk to other investors and so on.
It’s all about the credit markets. Until they begin to function again, banks will not be incentivized to offer lower the rates on mortgages they issue.
This is another form of “bailout.” The Fed is keeping the banking sector from imploding (opposite of spreading - very lame, sorry).
Read the rest here:
[Bail Out] Worried About Future, Banks Spread Out
