Barney Frank: Missing the Lede on the GSEs

The headline, of course is that he is calling for the gradual elimination of Fannie Mae and Freddie Mac:

"I think they should be abolished," Frank said. "The only question is what do you put in their place. This is a situation where given the importance they had come to play in housing, you can't tear down the old jail until you build a new one. And that's a process that we've started."

This is legitimately a big news story, but the rest of his proposal is far more revolutionary. He is a calling for an end to government subsidies to home buyers:

Frank went on: "I have been very critical for a long time that not everybody should be a homeowner. There are people in this society who for economic and frankly social reasons can't and shouldn't be homeowners. I do want some government help to build affordable rental housing."

It's this 2^nd point that is a big deal. While the GSEs (Government Sponsored Entities) were a vanishingly small part of the housing bubble, as house prices exploded, their share of the market fell precipitously, what was a huge part of the market was the enormous subsidies made available to both home buyers, sellers, builders, and agents.

This distorted the market in some very profound ways, and it is very likely that if these measures had not been in place, we would have seen neither the bubble nor the crash.

We sacrificed our economy on the alter of home ownership.

More in the Annals of the Unsurprising

Home prices are falling now that the home buyer tax credit has expired:

More U.S. home sellers cut their listing prices in April, aiming to seal deals in the waning days of federal tax credits meant to revive housing, real estate web site Trulia.com said on Wednesday.

Monetizing housing, i.e. using artificial means to inflate prices, was never a good policy, and it is a transparently bad policy now.

This Article Makes Me Feeling Queasy

A New York Times financial reporter describes how he got tied up in the foreclosure crisis.

I guess the article is a good description of the mania that gripped the nation,^* but it makes me feel like a peeping Tom, so I let it percolate in my mind for a while.

It's informative, but it made me feel like I was intruding to read it.

^*Well, not so much me, I bought a house in 2004 with a 30 year fixed rate mortgage and 20% down, at only about a 15% greater payment than the half a duplex I was renting, I had to move, and so I bought, even though I though houses were overpriced.

The Housing Market is Doomed

I know this as a certainty.

How do I know this?

Because Alan "Bubbles" Greenspan has declared that, "we are finally beginning to see the seeds of a bottoming" in the housing industry.

Since he is wrong on everything, I would suggest shorting home builders.

If You Can't Make It There, YOu Can't Make it Anywhere

Because New York City commercial property sales are collapsing, and those sales that are made are being done by
companies leaving Manhattan for Brooklyn in order to save costs.

And while we are at it, we have a hollow condo in Brooklyn, One Brooklyn Bridge Park, which is still 2/3 empty.

If you cannot make money in real estate in New York, you cannot make money in real estate anywhere.

If You Can't Make It There, YOu Can't Make it Anywhere

Because New York City commercial property sales are collapsing, and those sales that are made are being done by
companies leaving Manhattan for Brooklyn in order to save costs.

And while we are at it, we have a hollow condo in Brooklyn, One Brooklyn Bridge Park, which is still 2/3 empty.

If you cannot make money in real estate in New York, you cannot make money in real estate anywhere.

WaMu Ousts CEO

Kerry Killinger had already been dumped as chairman of the board earlier this years.

Deck chairs, meet Titanic.

If You Can Make it There, You'll Make it Anywhere

And the housing crash has hit New York, as Manhattan apartment prices are falling, and the same thing is happening with luxury homes in central London which is even pricier.

Shadow Inventory

Oh
My
God

Shadow inventory are houses available but not listed in the MLS system.

Most often, these are REO (Real Estate Owned, foreclosures and such), and the Sacramento Real Estate Statistics blog has some numbers on a few markets.

City	MLS Listings	Foreclosure Inventory	% of Listings
Sacramento	14,913	31,219	209%
San Francisco	18,647	35,402	190%
Inland Empire	45,490	82,114	181%
San Diego	18,771	31,168	166%
Los Angeles	62,379	88,843	142%

So the massive inventory out there, might account for less than half of all the houses actually on the market.

Time to freak out?

Hedge Funds Going Vulture

They are buying delinquent mortgages at pennies on the dollars, and if they can modify the mortgages to make a profit, good. If not, foreclose, and sell at a discount, but you still make a profit on it.

OK, these Numbers are Grim

This time, it's commercial mortgage back securities, and the default rate is about 4%, but this number is expected to quadruple if the economy slows down significantly.

Let's note that this is commercial property, the stuff that's supposed to be largely recession proof that we are talking about here:

Such a scenario corresponds "to the negative predictions currently offered by commercial real estate experts", analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.

The higher defaults under such a slowdown compares with a historical default rate of 7.9 per cent, and with the milder scenario that Fitch thinks is more possible of 0.8 per cent economic growth and a 13.7 per cent rate of default.

It would cause non-investment grade bonds - B and BB rated CMBS - to suffer loss rates of 100 per cent and 95.9 per cent, respectively. Meanwhile, 30.6 per cent of the lowest-rated investment grade bonds - BBB rated - would experience losses, while loss severities would rise to 37.9 per cent from an historical average of 33.5 per cent.

The data suggest that recently issued CMBS may fall victim to inflated property values and weaker underwriting standards experienced at the height of the US property boom in 2006 and 2007, as well as the weaker economy. Those bonds make up about 49 per cent of the outstanding CMBS market of more than $800bn. The survey covers all Fitch-rated bonds issued during those two years, making up 74 deals worth $217.3bn. That was about 60 per cent of all CMBS issued during the period.

These numbers are apocalyptic.

Loan Servicers Under Stress

One of the funny bits of the current mortgage market is that even when the banks hold the loans, they don't generally handle the money.

They pass this off to loan servicing firms, who send out the bills, collect checks, handle escrow, etc.

Well, it appears that they have to make payments of interest and principal to the loan holders for accounts up to 90 days delinquent, in addition to handling property tax payments, and as a result, they are taking a beating from the skyrocketing rate of delinquencies.


H/t HousingWire

Cost of 'Stealth' Housing Bailout: $1.43 Trillion

Steve Liesman at CNBC Runs the numbers on the housing bailout to this point:

Federal Reserve	$446 B	Term Auction Facilities, $150 B, Bear $29 B, $14 B Discount Window to Banks, Repurchase Agreements $88 B, Swap Lines to Euro banks $65B, Treasuries lent out for liquidity boost $100 B
Federal Home Loan Bank	$274 B	Advances to member banks
Fannie and Freddie	$621 B
FHA	$90 B	Added since October
Total	$1431 B

Ouch.

Senate Passes Housing Bill

It already passed the house, so it will go to Bush, who says that he will sign it.

My guess on the total effect, very little, since there is no mechanism to encourage lenders to actually cut a deal.

The single thing that would help the most, and it would cost the government nothing would be to allow bankruptcy judges to modify mortgages for primary residences, as they can for investment and vacation property.

Maybe after January 21.

Why the Home Inventory Situation is Worse than You Think

Care of Barry Ritholtz's The Big Picture

Now for the really scary part: Shadow Inventory. The glut of homes for sale is likely much larger than reported. Inventory counted by the Realtors group only includes foreclosures that have been listed on the multiple listings service. The enormous number of REOs, auction properties, defaults and foreclosures not listed ARE NOT IN THIS DATA.

Ouch. Note that as foreclosures sore, this shadow inventory will become a larger part of the total inventory.

Fannie Mae Has $5 Billion Overhang in Unsold Foreclosures

And the number is getting bigger, because they are picking up homes twice as fast as they are selling them.

On a related note, it appears that you can pick up a 3br in Flint, MI for $5,000 (the number of zeros are correct)...That's a depressed community.

Kiss of death for Fannie, Freddie from White House - MarketWatch

Rex Nutting, the Market Watch Washington Bureau Chief says that the implosion of Fannie Mae and Freddie Mac is a certainty.

Why does he see it as a certainty? Because Bush and His Evil Minions^™ don't see it happening.

Other Things that Bush and His Evil Minions^™ never expected:

• Terrorists to fly airplanes into buildings.
• Saddam Hussein to have been telling the truth about not having any weapons of mass destruction.
• Iraqis to object to a long-term occupation by a foreign power.
• Hurricane Katrina.
• People in New Orleans to object to the government's response to Hurricane Katrina.
• The Democrats to take control of Congress.
• The Democrats to cave in so easily on important issues after they took control of Congress.
• Scooter Libby to get caught.
• Jack Abramoff to get caught.
• Abu Ghraib to be discovered.
• Scott McClellan to smell the coffee.
• The housing bubble.
• The credit bubble.
• The housing collapse.
• The credit squeeze.
• Bear Stearns to fail.

To quote Bender the robot, "We're boned".

GSE Dead Pool

The Government Sponsored Entities (GSE), Fannie Mae and Freddy Mac, are the second and third largest borrowers in the world, with the federal government being #1, and it appears that they are in trouble.Fannie, Freddie plunge on reports of feds planning bailout - Jul. 10, 2008


well, former St. Louis Federal Reserve President William Poole just said that the GSE's are insolvent under fair accounting rules.

If they go boom, it's not hoard gold time, it's hoard canned goods and ammunition time.

This may sound alarmist, but the credit markets are already demanding the highest spread from Treasury debt ever, 74 basis points, and White House officials are drawing up contingency plans in the event that one or both of them fail, so Pool is not alone in his concerns.

We haven't even made to the 7th inning stretch in the credit crunch.

Economics Update

The Bank of England has decided to hold interest rates steady. It's not like they had much of a choice. Inflation is heating up, and they are in the middle of a house bubble collapse that rivals ours, so doing nothing was the only option.

If they raised rates, they make the housing crash even worse, if they lower rates, inflation gets worse.

Their inaction appears to have strengthened the dollar, since it points towards few hikes by the European Central Bank too.

In employment, initial applications for unemployment are down from last week (it's a noisy measure), but it's still much worse than last year, and teen summer employment is the worst in 40 years, "If the average holds, total summer hiring in May, June, and July would be about 1.2 million, which would be the smallest gain in teen summer employment since 1958."

In energy, retail gasoline prices fell a bit, but crude oil spiked above $140 again, because of tensions in Nigeria and the US and Iranian saber rattling.

In real estate, mortgage rates are a bit higher this week.

343,159

Houses lost to foreclosure in the first half of 2008, as opposed to the first half of 2007, where 145,696.

That's a 136% increase.