Housing Bubble Bursting?

[Randolph Kinney]

GSEs to report losses, hold more than $6.3 trillion

Freddie, Fannie debt may pose risk to economy

NEW YORK (CNNMoney.com) -- The increased share of housing debt taken on by Freddie Mac and Fannie Mae during the housing slump has put the two government sponsored enterprises at risk, it was charged Thursday.

The two outfits are "reducing risks in the market, but concentrating mortgage risks on themselves. These risks are beginning to take their toll," said James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie. He was speaking Thursday at a Senate Banking committee on regulatory reform.

Freddie will report its first ever annual loss for 2007 at the end of February, while Fannie, is expected to report its first loss in 22 years for the year.

As the subprime crisis has grown, banks have backed away from buying mortgages in the secondary market. This has left Fannie and Freddie, which do the same thing, to pick up the slack.

As a result, the two government sponsored entities (GSEs) saw the housing debt they and the Federal Home Loan Banks carry grow by 16 percent to $6.3 trillion, more than the total public debt of the United States, according to Lockhart.

This will be a hoot for the GSEs. They are concentrating debt that lenders and other secondary market participants do not want. As the default crisis worsens, so will their losses and the extinction of their capital for buying mortgages.

The housing crisis will be worse this year than last.

 

[Randolph Kinney]

Why are people buying US Treasury debt?

30-Year Treasuries Fall Most Since June After $9 Billion Sale

Why would you want to lock your money into the US dollar long term, at yields below the government's own inflation numbers? The only reason people are still buying short term bonds is because the collapse of the structured finance markets has left them no where else to park their funds.

I was wondering that very same question ... after reading this, it was obvious! Silly me. :Eyecrazy:

 

[Randolph Kinney]

Option ARM bomb will explode, no way to stop it

Exploding ARMs Disrupt Bernanke Drive to Calm Deteriorating Credit Markets

The estimated 1 million homeowners with $500 billion of option ARMs are beyond the help of interest-rate cuts by Federal Reserve Chairman Ben S. Bernanke. While subprime borrowers face an average increase of 8 percent or less when their adjustable- rate mortgages reset, option ARM homeowners may see their monthly payments double after their adjustments kick in.

The loans accounted for 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, up from 8.3 percent in 2005, according to an estimate by industry newsletter Inside Mortgage Finance.

IndyMac, the second-largest independent U.S. home lender, made $43 billion of the loans from 2005 through the third quarter of 2007.

``Obviously we've been through what we've all been through, there's many things we regret,'' Perry said. IndyMac no longer makes the loans because mortgage-bond buyers aren't interested, he said.

Laperriere estimates that 85 percent of option ARM borrowers owe more than their original loan balance.

``The problem is, you can refinance an option ARM to a 30- year conventional loan at a 5.5 percent interest rate, and you're still looking at your payment going up 150 percent,'' Laperriere said. ``That's pretty ugly.''

There is no way to refinance these loans into loans with affordable payments. Now couple that will falling home values and the debt owed is more than the house is worth. The fuse was lit the day the loan was made. These loans are destined to explode taking down lenders, insurers, investors and the home owner.

 

[Riick]

"IndyMac, the second-largest independent U.S. home lender, made $43 billion of the loans from 2005 through the third quarter of 2007.

Obviously we've been through what we've all been through, there's many things we regret,'' Perry said.
IndyMac no longer makes the loans because mortgage-bond buyers aren't interested, he said. "

:new_2gunsfiring_v1: Not a SHRED of remorse for selling poison. I've met Dope dealers with higher moral values.

 

[Randolph Kinney]

Impact of falling mortgage equity withdrawl not felt yet

Cash-Out Refi's Declining in Both Numbers and Amounts

In spite of declining house prices and tightening credit, Americans are continuing to pull cash out of their homes according to Freddie Mac's Cash-Out Refinance Report for the fourth quarter of 2007, but in fewer numbers and much lower amounts than recorded even one quarter earlier.

The actual amount of money pulled out of home equity, however, declined more sharply between the third and fourth quarters. In the former $58.3 billion was cashed out while in the October-December period in 2007 $37.8 million was pocketed by homeowners refinancing their homes. This was less than half the amount cashed out in the fourth quarter of 2006.

The total effect on home equity withdrawal is deeper than we document with our Cash-Out Refinance Report because at the same time that lenders tightened standards on their prime first mortgages, which is what we have recorded, many of them withdrew from the home-equity lending market or greatly tightened their criteria for new home equity loans.

Nofhaft said that while home owners hold a very large amount of equity in their homes, this equity cushion is eroding. "According to the Federal Reserve Board of Governors, total owner's equity in household real estate fell by $160 billion between the first quarter of 2007 and the third quarter (the most recent quarter available), to $10.58 trillion. Research conducted by Fed economists suggests that consumers are more sensitive to changes in their home equity wealth than to changes in stock market wealth, and thus this decline in aggregate home equity is likely to have a dampening effect on consumer spending independent of the volume of equity that homeowners convert into cash."

My bold.

Consumer spending has slowed but it is going to really show up this year as home prices continue to fall, lenders continue to tighten credit conditions and defaults on loans in general skyrocket. There is no new money coming in to replace the mortgage equity withdrawal shortfall.

John Mauldin has a piece on the phony-baloney unemployment data. It will take time for the real numbers to be determined. One thing has changed since the last recession: "What the payroll number misses are the self-employed and there are more than 10 million of them. So the bottom line is that what the payroll data have missed is the fact that over the past six months, 520,000 self-employed individuals have fallen by the wayside (more than were lost in the entire 2001 recession)."

We know from the fee appraiser's point of view, many of us are as good as unemployed with few orders coming in. Living out of savings, borrowing, second jobs, etc., are sustaining some. Others will have to leave the profession to find work to make a living.

Meanwhile, credit risk is being reassessed on an ongoing basis with more restrictions coming to be put in place. Credit restrictions means less money is available to lend and to spend. Markets for debt are shrinking without government guarantees. That forces lenders to hold the loans reducing their lendable capital. It is a credit spiral down. With out a mechanism to exchange loan paper into cash or credit at the FED, it's like being constipated, lending slows down until the stop is hit (exhaustion of capital).

Stand by for more market volatility with declining values as investors retreat into what is perceived to be safe. Retail sales will continue to show extreme weakness while commodity prices continue to rise.

 

[Randolph Kinney]

One more thought

After writing the above, it occurred to me the reason behind the government (democrats & republicans, both houses of congress and the president) panic to give away money is the lack of spending by the consumer. It is a one time shot that fixes nothing.

It also occurred to me that with financial institutions still being constipated and continuing to tighten credit conditions, the FED has to lower interest rates to make up for the shortfall. The FED's biggest tool is the control over the money supply and interest rates. Nothing has changed to make the credit crisis less intense. Therefore, I expect to see at least another 0.75% cut in the FED funds rate on or before they meet in March.

 

[Riick]

I was going to post about Mauldin's take, but Mr. K beat me to it.

The headlines of the piece tell a great story, and here is the LINK

Consumers, Credit, and Complications

[FONT=Arial, Helvetica, sans-serif]In this issue:[/FONT]​

• [FONT=Arial, Helvetica, sans-serif]Consumers, Credit, and Complications[/FONT]​
• [FONT=Arial, Helvetica, sans-serif]Unemployment is Understated[/FONT]​
• [FONT=Arial, Helvetica, sans-serif]The Credit Crisis is Simply Getting Worse[/FONT]​
• [FONT=Arial, Helvetica, sans-serif]The Falling Knife of Credit Spreads[/FONT]​
• [FONT=Arial, Helvetica, sans-serif]Capital Ratios Are Under More and More Pressure[/FONT]​
• [FONT=Arial, Helvetica, sans-serif]The ISM Services Survey Simply Falls out of Bed[/FONT]​

= = = = = = = = =​

As for the increase in Mtg limits, here's a shortened version of what BLOOMBERG had to say:​

= = = = = = = = == = = = = = = = == = = = = = = = == = = = = = = = =

Jumbo' Loan Increase May Not Stem Housing Decline (Update1)​

By David M. Levitt
Feb. 8 (Bloomberg) -- A congressional plan to let Fannie Mae and Freddie
Mac insure larger mortgages may not be enough to reverse the U.S.
housing market slide, said Nishu Sood, a homebuilding analyst with Deutsche Bank Securities.

<snipped>

``The headlines are more exciting than the potential for real impact,''
Sood wrote in a research note yesterday. ``Not only do the proposals
have limited reach and a short timeframe, but also qualification standards
could limit the number of buyers that could benefit.''

<snipped>

The measure may only help buyers in the most expensive markets. In only
eight markets, including the metro areas of New York, Boston, Los Angeles-Orange County,
San Jose-Santa Clara in California, and Washington, are prices high
enough for the rise in loan limits to have an impact, according to Deutsche Bank.

The San Jose-Santa Clara area, home of Silicon Valley, had the U.S.'s
highest median existing home price, $852,500, in the third quarter,
according to the National Association of Realtors.

<snipped>

More than 80 percent of the property owners who sought to refinance
through Prime Rate Funding in the last three months were unable to do
so because their home's value had dropped, said David Pearl, the
mortgage director of Prime Rate Funding Group Inc., a Timonium,
Maryland-based brokerage that serves homeowners in
Maryland, Pennsylvania, Virginia and Delaware.

<< and as WE all know >>

``As far as refinances go, the issue is even with raising those loan
limits, people are tapped out on their equity, so it may not make a
difference from the point of getting out of their existing situations,''
said Kevin Henneman, branch manager of Prime Rate Funding.
.
.
"Another fine kettle fo Fish you've gotten me into Ollie"

 

[Cigar]

So the bottom line is that what the payroll data have missed is the fact that over the past six months, 520,000 self-employed individuals have fallen by the wayside (more than were lost in the entire 2001 recession)."

Another thing they are missing is that in many states, like California, Texas, and Arizona, the so-called builders in the booming tract home construction industry were subcontracting the work to labor contractors hiring illegals off the books, all of that labor is quietly disappearing. Of course it was never on the books, but it displaced labor which would have been on the books.

 

[Randolph Kinney]

Another thing they are missing is that in many states, like California, Texas, and Arizona, the so-called builders in the booming tract home construction industry were subcontracting the work to labor contractors hiring illegals off the books, all of that labor is quietly disappearing. Of course it was never on the books, but it displaced labor which would have been on the books.

Very good point!

It has been noted last year with all the cut backs in residential home building, there was no commensurate rise in unemployment for that industry. However, it is beginning to show up this year. I suppose most of the illegals have been let go or they have voluntarily gone back to where ever they came from so that additional cut backs are "real" people.

 

[MARK JOLLIFF]

I have read numerous articles about how illegals are returning to Mexico as their employment opportunities dry up. For those who want something done about illegal immigration this may be it. I'm sure it's not THE solution people were looking for but as people stop going out to eat, start cutting their own lawns ,cleaning their own houses etc along with the construction slow down don't be surprised if you see illegals telling people at the borders "turn around"! By the way tonnage where I work (garbage company) is down to 1600 tons a day. Each driver hauls a 100 tons a day and we have 56 drivers. Layoffs are in the works for the first time in decades. Also commute traffic is WAY down! Funny little indicators but trust me after 28 years in this business they are accurate!