Sunday, May 24, 2009
TheAffordableMortgageDepression.com
The Affordable Mortgage Depression is published at TheAffordableMortgageDepression.com
Friday, April 3, 2009
The Coming Federal Housing Administration (FHA) Disaster
The FHA is a Government entity which was created in 1934 during the Great Depression. It was formed to improve housing standards, provide adequate home financing by insuring mortgages and stabilize the mortgage market. If these mission statement sounds familiar it is because they closely resemble the rationale behind the existence of other Government entities including Fannie Mae, Freddie Mac, Ginnie Mae, HUD, etc…
These entities directly intervene in the Housing Market by providing mortgages and subsidizing interest rates to borrowers who would not otherwise be qualified to receive such loans.
As a group the Government Sponsored Entities (GSEs) operate with the intent to increase homeownership, improve home affordability and provide mortgage market stability. Obviously they have failed miserably in each and every one of these stated goals. Amusingly, the only achievement which appears to be viable in the near term is the prospect of affordable housing, but the Government continues to misuse the GSE’s in a desperate attempt to prop up housing values and prevent that desired affordability.
Both Fannie and Freddie collapsed in 2008 because their role in the mortgage market had been expanded dramatically by the Government which used these entities as a means to achieve the social goal of greater homeownership. When the Housing Bubble inevitably deflated so did the viability of Fannie and Freddie. The Government then foolishly “doubled down” on its ill-advised housing gamble by using the entities to fill the gap in the mortgage market left by fleeing private capital. This disastrous directive only accelerated the collapse of the Fannie and Freddie and in turn further damaged the mortgage and housing markets.
Instead of learning from their mistakes, the Government has decided to execute the same playbook but this time through a manipulation of the FHA.
According to a recent WSJ report:
“Since the collapse of the subprime mortgage market in 2007, most home loans for people who can't afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home's value.
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.”
The Government has directed the FHA to rapidly grow its operations. It now underwrites and/or purchases thirty-something percent of all mortgages issued. The FHA guarantees losses associated with these mortgages which have been extended to uncreditworthy borrowers and secured with marginal down payments. The FHA has undertaken this extraordinary expansion in the midst of the most rapid decline in housing prices in U.S. history. By definition, virtually all of the mortgages the FHA has underwritten during its three year expansion are already underwater. It is a certainty that large numbers of these mortgages will end up in foreclosure and expose taxpayers to massive financial loss.
This inevitability has already begun to materialize:
“Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier. A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier.”
There is only one possible outcome of the Government’s unsustainable actions. The FHA will fail as massive foreclosures trigger insured liabilities which overwhelm its capital reserves. Of course I expect the Government to cry foul, incite populist furor, shift the blame to an expedient target and cavalierly allocate a few hundred billion dollars from the Federal Reserve, the Treasury or a Stimulus Bill to bail out the FHA. This is the playbook the Government has consistently relied upon to evade culpability for unconscionable abuses of its fiduciary responsibility to taxpayers.
These entities directly intervene in the Housing Market by providing mortgages and subsidizing interest rates to borrowers who would not otherwise be qualified to receive such loans.
As a group the Government Sponsored Entities (GSEs) operate with the intent to increase homeownership, improve home affordability and provide mortgage market stability. Obviously they have failed miserably in each and every one of these stated goals. Amusingly, the only achievement which appears to be viable in the near term is the prospect of affordable housing, but the Government continues to misuse the GSE’s in a desperate attempt to prop up housing values and prevent that desired affordability.
Both Fannie and Freddie collapsed in 2008 because their role in the mortgage market had been expanded dramatically by the Government which used these entities as a means to achieve the social goal of greater homeownership. When the Housing Bubble inevitably deflated so did the viability of Fannie and Freddie. The Government then foolishly “doubled down” on its ill-advised housing gamble by using the entities to fill the gap in the mortgage market left by fleeing private capital. This disastrous directive only accelerated the collapse of the Fannie and Freddie and in turn further damaged the mortgage and housing markets.
Instead of learning from their mistakes, the Government has decided to execute the same playbook but this time through a manipulation of the FHA.
According to a recent WSJ report:
“Since the collapse of the subprime mortgage market in 2007, most home loans for people who can't afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home's value.
The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA's reserves prove inadequate to cover default losses.”
The Government has directed the FHA to rapidly grow its operations. It now underwrites and/or purchases thirty-something percent of all mortgages issued. The FHA guarantees losses associated with these mortgages which have been extended to uncreditworthy borrowers and secured with marginal down payments. The FHA has undertaken this extraordinary expansion in the midst of the most rapid decline in housing prices in U.S. history. By definition, virtually all of the mortgages the FHA has underwritten during its three year expansion are already underwater. It is a certainty that large numbers of these mortgages will end up in foreclosure and expose taxpayers to massive financial loss.
This inevitability has already begun to materialize:
“Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier. A spokesman for the FHA said 7.5% of FHA loans were "seriously delinquent" at the end of February, up from 6.2% a year earlier.”
There is only one possible outcome of the Government’s unsustainable actions. The FHA will fail as massive foreclosures trigger insured liabilities which overwhelm its capital reserves. Of course I expect the Government to cry foul, incite populist furor, shift the blame to an expedient target and cavalierly allocate a few hundred billion dollars from the Federal Reserve, the Treasury or a Stimulus Bill to bail out the FHA. This is the playbook the Government has consistently relied upon to evade culpability for unconscionable abuses of its fiduciary responsibility to taxpayers.
Tuesday, March 31, 2009
Attention Housing Optimists
Today’s S&P / Case Shiller update is all you need to know about present and near term prospects for the housing market.
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
Home price declines continue to accelerate. House values are falling at the fastest pace in U.S. history. Inventories are extraordinarily high. Foreclosure volumes are at record highs and increasing.
Despite month-to-month volatility in the market data and the inevitability that house transaction volumes will eventually increase, there is no possibility that housing prices will stabilize in the near future. Buying a house in this environment is a conscious decision to lose money.
Ignore the media’s coverage of house transaction volumes unless they materially reduce inventories of for-sale properties. Understand that foreclosures continue to expand as a percentage of sale volumes. This is not a positive development for housing prices.
My advice is to ignore any source of housing market analysis that does not incorporate an integrated understanding of these trends in their prognostications.
March 31 (Bloomberg) -- Home prices in 20 U.S. cities fell 19 percent in January from a year earlier, the fastest drop on record, as demand plummeted and foreclosures rose.
Home price declines continue to accelerate. House values are falling at the fastest pace in U.S. history. Inventories are extraordinarily high. Foreclosure volumes are at record highs and increasing.
Despite month-to-month volatility in the market data and the inevitability that house transaction volumes will eventually increase, there is no possibility that housing prices will stabilize in the near future. Buying a house in this environment is a conscious decision to lose money.
Ignore the media’s coverage of house transaction volumes unless they materially reduce inventories of for-sale properties. Understand that foreclosures continue to expand as a percentage of sale volumes. This is not a positive development for housing prices.
My advice is to ignore any source of housing market analysis that does not incorporate an integrated understanding of these trends in their prognostications.
Alan Greenspan's Irrational Exuberance
For those of you still paying attention to the awkward, self-serving denials of Alan Greenspan ponder this.
Mr. Greenspan’s primary defense for the Housing Bubble “not being his fault” is that foreign savers flooded the U.S. market with capital to finance mortgages. Supposedly this capital kept mortgage rates low and eliminated the Federal Reserve’s influence over those rates. It was these foreign-financed, cheap mortgages that caused the Housing Bubble.
Since when did the free flow of capital become a bad thing?
The Housing Bubble had been steadily developing since the mid-nineties. Prices, transaction volumes, leverage ratios, affordable mortgage usage, HUD directed Fannie/Freddie subprime expansion, etc… had already reached unsustainable levels when Mr. Greenspan started slashing interest rates. Of course, Mr. Greenspan can’t cite this as a defense because he would be admitting to having missed, ignored or tolerated the existence of a Housing Bubble prior to 2001 and having contributed to the mania portion of the event with his interest rate policies serving as an inflection point.
Mr. Greenspan’s attempt to attribute the source of the Housing Bubble to foreign-financed, low mortgage rates ignores the actual forces which distorted the market and inflated prices. In fact, mortgage rates are presently at the lowest levels in U.S. history. These rates are materially lower than those that existed from 2001-2005. If Mr. Greenspan’s obtuse explanation were in any way credible housing prices should be soaring. Instead, values are collapsing at the fastest rate in history.
Despite Mr. Greenspan’s protestations, traditional mortgage rates were largely irrelevant from 1995-2005 with respect to housing price appreciation. The Housing Bubble was perpetuated by the abusive availability and the unsustainable terms of Affordable Mortgages. People who should never have had access to mortgages received them. There was almost no financial impediment to buying a house thanks to no down-payment, interest-only, adjustable-rate mortgages.
Today, despite record low mortgage interest rates, credit availability is greatly reduced and marginal, effective mortgage interest rates are dramatically higher as rationality has returned to the market. Once upon a time Mr. Greenspan would have hailed a return to market rationality, now he seems singularly focused on concocting a fictional narrative about his role in Housing Bubble.
Mr. Greenspan’s primary defense for the Housing Bubble “not being his fault” is that foreign savers flooded the U.S. market with capital to finance mortgages. Supposedly this capital kept mortgage rates low and eliminated the Federal Reserve’s influence over those rates. It was these foreign-financed, cheap mortgages that caused the Housing Bubble.
Since when did the free flow of capital become a bad thing?
The Housing Bubble had been steadily developing since the mid-nineties. Prices, transaction volumes, leverage ratios, affordable mortgage usage, HUD directed Fannie/Freddie subprime expansion, etc… had already reached unsustainable levels when Mr. Greenspan started slashing interest rates. Of course, Mr. Greenspan can’t cite this as a defense because he would be admitting to having missed, ignored or tolerated the existence of a Housing Bubble prior to 2001 and having contributed to the mania portion of the event with his interest rate policies serving as an inflection point.
Mr. Greenspan’s attempt to attribute the source of the Housing Bubble to foreign-financed, low mortgage rates ignores the actual forces which distorted the market and inflated prices. In fact, mortgage rates are presently at the lowest levels in U.S. history. These rates are materially lower than those that existed from 2001-2005. If Mr. Greenspan’s obtuse explanation were in any way credible housing prices should be soaring. Instead, values are collapsing at the fastest rate in history.
Despite Mr. Greenspan’s protestations, traditional mortgage rates were largely irrelevant from 1995-2005 with respect to housing price appreciation. The Housing Bubble was perpetuated by the abusive availability and the unsustainable terms of Affordable Mortgages. People who should never have had access to mortgages received them. There was almost no financial impediment to buying a house thanks to no down-payment, interest-only, adjustable-rate mortgages.
Today, despite record low mortgage interest rates, credit availability is greatly reduced and marginal, effective mortgage interest rates are dramatically higher as rationality has returned to the market. Once upon a time Mr. Greenspan would have hailed a return to market rationality, now he seems singularly focused on concocting a fictional narrative about his role in Housing Bubble.
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