"….and then the great housing bust ended in 2010 and they all lived happily ever after…." - Lawrence Yun, chief economist, National Association of Realtors

O.K. Yun may not have said it exactly like that, but this looks pretty darn close. [Thanks L!]

Home sales will increase 15 percent to about 5.7 million units and REALTOR® income will be up 20 percent in 2010, NAR Chief Economist Lawrence Yun told a packed room of REALTORS® today in a residential economic update at the 2009 NAR Conference & Expo.

Yun credited the home buyer tax credit with unleashing sales on the lower-end of the housing market this year, bringing up to 400,000 first-time buyers into the market who wouldn’t have bought otherwise. That influx tightened inventories of starter homes, shored up prices, and helped reduce households’ fear over continuing price drops.

This virtuous cycle will continue now that the federal government has extended the credit to mid-2010 and expanded it to make a smaller credit available to repeat buyers and to households with higher incomes. “The key is stabilizing prices and preserving household wealth,” he says.

Yun predicts the supply of homes to stabilize at the historic norm of six to seven months. Homes above $500,000 will remain elevated in the near-term, but that weakness will be offset by a hefty drop in starter-home inventories, which are running at about a five months supply.

The tightening inventory at all price points will help improve market performance by bringing supply into better balance with demand, but the added sales, particularly on the higher end, will also increase the number and quality of the market comparables used by appraisers to assign valuations. Once appraisals improve, foreclosures will ease, blunting their drag on the market and making it less likely that Fannie Mae, Freddie Mac, and even FHA will need help from the taxpayer.

What a happy, feel-good story.  It’s enough to bring tears to your eyes. I may need a tissue….

Dr. Jay Butler of ASU’s Realty Studies has released his monthly report on the Phoenix housing market.  He says he see’s "signs of recovery" in the market, but then goes on to say the market is "still bottoming out".  Here’s what Butler said about sales:

In October, foreclosures on 3,815 homes accounted for 38 percent of the total market, according to Butler. This is an increase from September’s 32 percent, but a drop from the 46 percent of a year ago. That’s not the whole story, however. Approximately 45 percent of traditional transactions — 6,140 sales — involved properties that had been in foreclosure. That means foreclosure-related activity was 66 percent of the market in October — about level with September.

While sales have returned to the levels of the boom years, the market is being driven by speculation and foreclosures.  October sales undoubtedly received a bump from the concern of buyers that the $8,000 credit would not continue.  Speculators, however, are having a hard time finding renters for these properties–the rental market is glutted.  The Phoenix economy continues to be poor and is unlikely to sustain it’s former rate of immigration.  What we are basically seeing is the activity of vultures picking over the carcass–this is not healthy activity.

Median Price

The median price in the Phoenix market held steady at $140,000 in October, 20 percent less than the $175,000 of a year ago. The median price for foreclosed properties, however, rose from $136,800 in September to $153, 450 in October compared to $159,775 a year ago.

The median price is off of its lows:

Year-over-year depreciation seems to have moderated as well:

So is this the "bottom"? Are we seeing "recovery"?  Here’s what Butler has to say:

Recovery is a matter of definition. The ordinary homeowner expects recovery to bring his home value back to the level of purchase, but whether or not that will happen is an open question, Butler said. Another definition relates to market structure. Butler said that typically, foreclosures account for 3 to 5 percent of the market, a fraction of the current level.

. . .

"The current economic recovery is limited, with the possibility of higher rates and a continuing weak job market," Butler writes. "Further, the housing tax credit — which has been extended to April 2010 — could be dissipating the pent-up demand and weakening its influence in the coming few years. And, foreclosures will eliminate many households from obtaining home financing to buy another home."

Investors are making the market right now, Butler commented. Lured by low prices, they are buying homes to flip or to rent out. A lot of people are troubled by the fact that the market is still being driven by investors rather than buyers who intend to live in the homes. One perception is that the growth in rental houses will negatively impact the already weak apartment market.

All told, Butler thinks the market is still bottoming out rather than recovering.

My take is that this is a plateau, not a "bottoming".  This data is basically watching only the lower end of the market, as sales above the conforming limit are basically dead.  In September, about a quarter of listings were for homes over $400K.  As Butler pointed out, there were 18 homes in foreclosure this month priced at over a million dollars. This is a sign of things to come. We have not yet begun to see a bottoming in this segment of the market.  With upper-end housing going into foreclosure at an increasing rate, lower-end housing will have no chance to appreciate. 

I disagree that "recovery is a matter of definition".  When you think about it, housing is a consumer product. As long as consumers are in financial straights and concerned about the future, they are not going to be investing in housing.  Until Phoenix consumers have recovered, housing won’t recover–no matter what the numbers say.

Suddenly here’s another week where there’s just about no movement in foreign central bank holdings. The Fed’s own MBS holdings ticked up $1.179 billion, and the cenbanks’ total went down just a tad more than that. There’s a lot of volatility in the Treasury Debt weekly figure that’s coming out of somewhere, but I have no idea from where. This week’s Reuters report¹ was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.² Here is Doom’s updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy collapsed again to a mild $1.748 billion selloff.

The agencies number increased $0.509 billion. There have been several sub billion dollar moves lately.

The net change of US obligations was actually a slight dip of $1.239 billion, but it’s going to take more than one week of negative growth before that treasuries bottle-rocket would begin to show a course change.

Needless to say, twist’s ratios graphs were flat (mild uptick).

The Setser 52-week chart converged in both lines (big treasuries buy vs agencies dump a year ago).

________________________

Notes and References

[1]: "Foreign Cenbanks U.S. Debt Holdings Slip in Week - Fed", by Ellen Freilich, Reuters / ABC News, November 12, 2009.

[2]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[3]: The updated data set as a Comma Separated Value (CSV) file is here.

WASHINGTON (Reuters) – Not sure what to give Uncle Sam this Christmas? How about a nice, fat check to help whittle away at the $7.6 trillion national debt?

The U.S. Treasury Department accepts gifts, payable to the Bureau of the Public Debt. Just mail them to the attention of Department G, Post Office Box 2188, Parkersburg, West Virginia, 26106-2188. Make a note in the memo section that it is a gift to reduce the debt held by the public.

Yes, really.

It’s all on the Treasury’s website, at the end of the list of frequently asked questions.

What their FAQs don’t explain is why you’d write them a check when the money would be gone before the ink could even dry on the paper.  Or why, when it’s "Here a bailout, there a bailout, everywhere a bailout, bailout", we seem to be donating whether we want to or not.

Have anything to say about this story- or on anything else today?  You can’t be off-topic, this is an open thread.  Let us know what’s on your mind.

Oops.  It looks like one couple’s home loan was modified right out from under them:

PHOENIX — Despite being up-to-date on their modified mortgage payments, a Valley couple found Chase foreclosing on their home.

"You work so hard. Put a lot of money down on your house. You pay your taxes. You pay your mortgage, and it’s all stolen from you,” said Jeff Zerner, the homeowner.

He and his wife, Yanthy, found out about the foreclosure when the new owner posted a notice on their door Nov. 4.

“I get this notice that says you have five days to vacate the property,” he said. “So I called the number (on the notice) and I say, ‘Who are you?’ and they say, ‘We’re the legal owners of this house. It went up for foreclosure."

Just days before, the Zerners thought their home was safe. They had finished their trial modification with Chase and were led to believe they would qualify for a permanent modification.

“We paid Chase several hundred dollars, which they accepted in good faith,” said Zerner. "I feel extremely ripped off.”

Chase officials admit they made an error by selling the house.

How did this happen?

Loan modifications and foreclosures are parallel processes. In the Zerners case, the sides failed to communicate with each other to halt the foreclosure until it was too late.

It doesn’t sound like the bank has a lot of confidence in the ability of their borrowers to go on to permanent modification. Homeowners in a loan modification process might want to keep an eye out for a Notice of Trustee Sale, just in case. 

Liz and Jerry Dawson expect their three Valley rental homes to be vacant at times, but they were unprepared to be hit by vandals, something that is becoming more common for empty rentals.

The Ash Fork couple were even more surprised when their insurance company refused to pay the damage claim because their north Phoenix home had been vacant for more than 60 days.

"You just feel betrayed," Jerry Dawson said of the insurance company’s
 denial of their claim.

Liz Dawson said she hopes that other landlords realize their insurance risk if their properties have been vacant.

Accidental landlords- longtime home sellers who gave up and decided to rent out the property instead, aren’t always aware of insurance rules for rentals. It can be a bit of a shock to find out how much more it is than a typical homeowner’s policy.  Policies for vacant properties are even worse.

Jim Gontjes, Foremost Insurance Co. regional product manager, said policies typically limit coverage for properties that are vacant for 30 or 60 days. Some companies will continue coverage with a permitted-vacancy clause, but that requires what can be a substantial increase in the premium, he said.

"Work with your agent so they’re aware of the situation . . . and can find other options for coverage," Gontjes said.

This year, his company, based in Grand Rapids, Mich., has written coverage for more than 2,100 vacant properties in Arizona through September. That is an increase of 161 percent from a year ago, Gontjes said.

Increased premiums, increased risk of vandalism, lower rents and a smaller chance of keeping the property occupied.  It’s a tough time to be a landlord- especially if you don’t read your insurance policy.
 

Good news that more than 650,000 borrowers have been put into trial mods, no news that we have no idea how successful those mods are now five months after the program really got cooking.

It’s coming, that’s what the folks at Treasury say. 

I have a strong suspicion that if the program were meeting with any success at all, the data would have been a lot more forthcoming.

That doesn’t seem to be the only omission either.  A class action lawsuit was dismissed in Minneapolis yesterday by a group of homeowners fighting foreclosure after their loan mods were rejected.  The homeowners claim that they weren’t given proper notice,  nor were they informed that they had the right to appeal.

The judge ruled that loan modifications were not an entitlement nor were there "due process" qualifications. The attorney for the homeowners said that the Treasury was making changes however:

Treasury now requires that loan servicing companies collect data on denials, provide written notices of denials within 10 days, halt foreclosures when homeowners challenge denials and provide homeowners with some of the data that went into servicer’s decisions.

So the Treasury not only doesn’t know [or isn't saying] the performance rate of loans in the trial period, it didn’t even bother to ask lenders how many borrowers were being rejected?  How could anyone adequately assess the value of the program without knowing the percentage of successful modifications or the percentage of applicants that were even allowed into the program? Additionally you would think that a breakdown as to WHY borrowers were being rejected would be useful- especially if this data could be compared between lending institutions.

There is a scene in movie The Sound of Music where the Nazis discover the Von Trapp family attempting to escape in the middle of the night.  The officer tells Captain Von Trapp, So Captain- we have not asked you where you are going, and you have not asked us why we are here.  Captain Von Trapp responds Apparently we are both suffering from an appalling lack of curiosity.

The Treasury seems to be suffering from the same thing– an appalling lack of curiosity. Either that, or an appalling unwillingness to share what they know.

I can’t help but wonder if Extreme Makeover isn’t a miniature example of subprime lending.  EM is helping people get into homes they couldn’t possibly afford.  These people either can’t handle the associated bills, or are allowed to borrow more than they can possibly repay against the home.

Euclid, a tutor to King Ptolemy, once said,"There is no royal road to geometry" when Ptolemy requested that Euclid make the subject easier.  We might want to consider that there is no royal road to homeownership either. 

Unlike some claims, homeownership does not cause prosperity.  Homes–even those that are owned free and clear–are demanding responsibilities. They are not money makers.  Renting is often the better deal.

Let us consider the poor beneficiaries/victims of EM receiving a home beyond their means when considering policies that advocate easy lending. The road too often leads to foreclosure

It’s been nearly three and a half years since I put up Doom’s first, rather uninspiring post. [In my defense, it was only a test.]  We were joining the ranks of a number of "bubble bloggers". 

Bubble bloggers were for the most part, regular folks who saw an insane real estate market and said, "It’s going to crash, and someone should say something".  Some, like HousingPanic, Ben Jones and Patrick had inspired a national audience, others were smaller and more local. There was a lot of comradery in those days.  We’d check each others posts, and add each other to the blogroll.  We had fun taking potshots at the likes of Lereah and Mozillo and watched the data in our local markets.

This morning I read Chuck Ponzi’s Top 10 signs you’ve been following the housing bubble too long.  Chuck, we’re you writing about me?

10. You kinda miss the days when everyone was still on blogspot.  Uh… except for that Ritholtz guy.

9.  Everything looks like a bubble now.  Even bubbles.

8.  Oompa Loompas and “The Tan Man” evoke feelings of intense disgust.

7. You know who Tanta and the Mortgage Pig are and you miss them.

6.  You KNOW Neil has got popcorn.

5. The inflation vs. deflation argument was sooo 2007.

4.  You wonder if Schiller has a time machine.

3. You know the rental multiplier for your neighborhood.

2. You think the Flying Monkey Warriors vs. Greg Swann battle was epic and you totally know who won.

1.  Hoodoodanode?

I can add another to Chuck’s list- you realize that nearly half your blogroll has disappeared.  Bloggers have logged off, cease to post, or have sold their name to RE interests or online casinos.

I told John that sadly, I think it’s time to do some housekeeping.  These are the names that I’m about to purge from the list.  If anyone has any suggestions as to who should or shouldn’t be on our roll- please speak up and let us know: [Links are still live on the left sidebar if you want to check these out.] We are also open to adding goodies if you know of any out there.

Blown Mortgage
Bakersfield Blog
Bubbletracking
Bull not Bull
Hawaii Blog
House Bubble
Housing Fear
HousingPanic
Lawrence Yun watch
Marin real estate
NAR Wisdom
OC Fliptrack
Real Estate Realist
San Diego Predatory Lending
Southern Florida

As for John and myself, I don’t think of us as "bubble bloggers" these days.  Housing bubble is nearly an outdated term now.  Real estate and economic commentators?  Nah, that sounds like talking heads from CNBC.  I guess we’re just bloggers- and for some amazing reason we’re still here.
 

Unrealistic assumptions, multiple layers of investors, and stratospheric prices, helps illustrate why this downturn is more complicated than previous ones…

I don’t  know about you, but I’m so tired of hearing about supposed "green shoots" that I’m ready to forgo the salad bar any more.  When you dig behind the green stuff though, you start reading things like the above quote from Michael Panzer’s A Tsunami Of Red Ink.  This tsunami is in commercial real estate:

Already, prices have plunged 41% from the peak in 2007, according to Moody’s/REAL Commercial Property Price Index—worse than the 30.5% fall in the housing market from its 2006 apex. "We’ve never seen this extreme a correction as far back as the data go, which is the late 1960s," says Neal Elkin, president of Real Estate Analytics, the research firm that created the index. Adds billionaire investor Wilbur Ross: "Commercial real estate has gone from being highly liquid at sky-high prices to being extremely illiquid at distressed prices."

To appreciate why this bust is like no other, first consider the typical commercial real estate downturns that used to crop up every 5 or 10 years. The pattern was predictable: When prices for apartment complexes, office buildings, shopping malls, and other properties began to rise, developers sped up their projects to cash in on the bull market. Eventually, some of those developers, unable to fill all the new space, began to default on their loans, and lenders were stuck with the buildings they’d financed. The slump lasted no longer than the time it took for the property glut to be worked down.

But overbuilding isn’t the culprit in this bust. An oversupply of money is what pushed commercial real estate over the edge.

It turns out the same excesses that drove the housing market’s crazy rise and fall were present in commercial real estate, too—but they have largely gone unnoticed until now. Bankers, in their haste to make more and bigger loans, blindly accepted borrowers’ wildest growth assumptions and readily overlooked other shortcomings on loan applications. They did so in part because they could easily sell their dubious loans to investors in the form of commercial mortgage-backed securities. As the market overheated, it became a breeding ground for fraud: A flurry of new court cases reveals the disturbing extent to which commercial mortgage borrowers may have doctored loan documents.

So how bad can this wave get?

While the housing crisis seems to be easing, the commercial storm is still gathering strength. Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners. Analysts at Deutsche Bank (DB) estimate that borrowers will have trouble rolling over as many as three-quarters of the loans they took out in 2007, the most toxic vintage.

For the banks and investors whose money fuels the economy, this presents major problems. Their losses will likely cast a shadow over lending—and, by extension, the overall economy—for years. The market won’t fully recover until 2020, says Kenneth P. Riggs Jr., CEO of Real Estate Research, and in cases where "values were over the top…maybe never."

I disagree with Panzer that the housing crisis is easing.  Home sales have been brisk- but government funded and only in the bargain basement.  Foreclosures are down, but mods don’t seem to be working.  Heck, Fannie’s just happy to get renters in her homes any more. I do agree though that that CRE has a lot of trouble ahead of it- and the combination is liable to be rough on lenders.

Just like any residential street in Antioch, Gateway Drive has sidewalks, a paved road, retaining walls separating yards and sewer pipes. What it doesn’t have is residents.

Not human ones, anyway.

Instead, it’s burrowing owls, coyotes, jackrabbits and kestrels that have moved in.

This tract of land on the edge of development in Southeast Antioch has stood primed for new houses for more than two years, since the housing market collapsed and construction halted.

Now, native species have reclaimed the land — a reminder that until recently this part of Contra Costa County, now blanketed with development, was habitat for wildlife.

Any other reminders we should be aware of?  News, links, ideas?  This is an open thread- let us know what’s on your mind.

The United States Constitution Article 1, Section 8 puts Congress in charge of the national checkbook.  Legislation enacted over the years however, has created loopholes big enough to drive a semi through.  This may end up being one of the biggest ones:

The credit crunch has displayed yawning democratic deficits, like the inability of Congress to get a proper handle on the Federal Reserve’s emergency lending programs. But with Fannie and Freddie, it is the Treasury that gets to freely commit massive amounts of money. Both companies have bought most of the mortgages written in America this year and are modifying large amounts of loans to keep people in their homes.

This matters to investors. From a macroeconomic perspective, it is unhealthy when the government faces few checks when pouring billions of dollars into one sector of the economy, in this case, the housing market. The Treasury has committed up to $400 billion to keep Fannie and Freddie solvent. The two have already received or requested over $110 billion of that total.

Legislation passed last year puts no dollar limit on how much the Treasury can plow into Fannie and Freddie. Granted, Congress signed off on that bill, and the Treasury does have to explain its injections to Congress. But legislators may look back at one of the biggest blank checks they have signed.

What’s more, a possible accounting-rule change could force Fannie and Freddie to consolidate trillions of dollars of assets and liabilities early next year. Since Uncle Sam controls the companies, that would effectively balloon the government’s balance sheet.

Accounting rule changes only seem to serve as rose colored glasses anymore.  It’s hard for me to believe that an accounting rule change that would make the government’s balance sheet look worse will ever happen. 

What is far more likely than the accounting rule change is that the Treasury will continue to pour money down the dark hole of the GSEs in the name of stabilizing housing.   Someone needs to point out to Congress that the Constitution is intended to promote the GENERAL welfare, not the CORPORATE.

Well I think at some point we’re going to have a government in power that’s going to make a choice between the American people and our creditors, who are predominantly foreign. And I think that choice will involve letting the dollar depreciate. I don’t think we’ll ever actually repudiate our debts, as long as we can print more dollars. But I think that’s the fundamental political issue that faces our entire society … - Chris Whalen

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a eighth and final selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

The lively Question and Answer session that closed the conference featured everything from Roubini’s lurid medium term scenarios to Zimmernan’s surprising advice that Re-remics, along with just about any other recent real estate securitizations, are perfectly safe to buy.

Alex Pollock: [1:31:26] Let me come to our questions. We’re going to, we have microphones, a microphone in the back. Please remember how this works. Wait for the microphone, please tell us your name and your affiliation, and then ask your question. For those of you who may feel the urge to make an assertion in addition to your question, may I ask you to keep your assertion short and to the point, otherwise I’ll feel compelled to ask you to come to your question. … I have a hand way in the back, here. … Oh, it’s Bert [laughs] …

Bert Ely: I was hiding on you, Alex. Bert Ely, banking consultant. A suggestion and a question. In terms of describing the kind of recovery you have, let me offer another suggestion to you that I’ve been using. I call it a washboard recovery. Slow and very bumpy over the next few years.

My question relates to something that some of you have alluded to, Desmond particularly, but I think needs a little bit more attention. And that is as we look at the economy coming out of this recovery, to what extent can Congress help or hurt the recovery through its various regulatory reform activities. We have a lot of that percolating along right now — executive pay limits, the CFPA and who knows what else?

So I’d be interested in what the panel’s thoughts are as to the dangers, if you will, to the recovery from Congress’ initiatives and the Administration’s initiatives to try and prevent a repeat of this crisis.

Alex Pollock: [undecipherable] … would you take this?[ph] Well, you have the pendulum point, Tom, …

Tom Zimmerman: Yeah, I mean I think those are probably minor things. It’s not good, it’s certainly not going to help, but I don’t think that’s the, you know … Yeah, you shouldn’t be doing that right now, but I think those are probably minor things compared to some of the broader pictures, broader comments[ph] and issues we’re dealing with here.

I don’t think that will, in itself, stifle the … It’ll cost more for the average consumer for his credit card loan, for his credit card debt, for his car loans. And a sustantial number of Americans won’t be able to get a loan, that’s what will happen, because you will price people out of the market.

But yes, you will have a safer and sounder system to some extent, but you will pay for it.

Nouriel Roubini: Anything wrong with having lots of people not being able to borrow, since this is a crisis of overborrowing?

[laughter]

Tom Zimmerman: No … I don’t know … if you …

Nouriel Roubini: No. Seriously.

Tom Zimmerman: No, but if you … One of the reasons we have payday lending is because banks don’t lend to a lot of people now. I suppose payday lenders will get an exemption, just like we have a lot of exemptions out of the new Consumer Finance Act, we’ve got all sorts of [undecipherable] exemptions because Congressman [tape skip] wants it that way. But I don’t know where it ends, but … Yeah, you know even the Mafia lends money too. You know, we … Yeah, for a rate, right.

So, you know, if you restrict the functioning system, in a way there will be lending, it will take place, it’s just whether it takes place through the back door, or through the front door.

Alex Pollock: Just a quick comment then, and we’ll go onto another question.

Chris Whalen: You know, the "legislative reforms" quote-unquote on the Hill are not about helping anyone. They’re about building monuments. Both Shelby and Dodd want to build a monument to consumer protection. Meanwhile, we will not have meaningful reform in the one area that is crucial, which is Over the Counter [OTC] Derivatives. If you look at the latest turn of the legislation on the House side, it pretty much leaves the dealers alone. They might as well not even pass it, there will be no change.

Alex Pollock: I have a question back here …

Brian Gardener Brian Gardner with [1:35:00] Keefe, Bruyette & Woods. Kind of staying on the theme of legislation that’s up on the Hill. It’s interesting to … after every member of the Committee has been recognized over the last couple of days, after they say think-you Mr. Chairman, the next statement is, "We can never let this happen again." In 1913, you know, and it was "We can never let this happen again." When we set up the banking and regulatory system in the ’30s, "We can never let this happen again." When we did FedICIA and FIRREA, "we can never let this happen again."

And this seems to be playing out.

One thing that has not been touched on today, and I’d like your collective opinions on this, is, "Where should we be going on … more on the regulatory side, with bank capital standards?"

Alex Pollock: Somebody want to take up bank capital? John?

John Makin Well the answer to the comment is, "We can, and we will." [laughs] I think the lesson of all these iterations is that there’s no magic regulatory bullet. And the notion that somehow there is, is probably what fosters the problem. And again the Congress is not very good at designing legislation that fosters better performance in the financial system, and there’s no reason why you would expect them to be. They’re ignorant of what goes on in the financial markets and, let’s face it, they’re driven by (*gasp*) political motives.

Why else would you — again, to go back to a comment that Nouriel said … This crisis was caused by massive government subsidies to purchase homes by people who couldn’t really afford them. So what does Congress do? They pass an $8,000 tax credit for people who can’t really afford to buy a home to buy one. I mean, how stupid can you get?

So we can’t let this happen and we won’t? Nonsense: we can and we will.

Alex Pollock: Chris …

Chris Whalen: To pick up on John’s comment, the Congress doesn’t have a problem at the moment. They don’t see a crisis, because as long as the Treasury can borrow and fund their activities without their having to go back to the electorate and raise taxes they have no problem. The only time the Congress in the United States will have a problem is if the Treasury market has a failed auction. That’s when they start to have a real political problem, but at the moment, they have no problems.

And that’s why we see this ridiculous Kabuki on Capitol Hill. It has nothing to do with the actual problems of the country, it has to do with those members of the political class remaining entrenched. And as long as they can sell bonds, they’re going to stay right where they are.

So the policy moves that they take really have nothing to do with our collective wants and needs, really. I don’t think the Congress is at all representative anymore, even though John’s characterization is completely right.

You know, it took 30 years for the Congress to study market structure problems between the 1880s and the beginning of the Roaring ’20s. That’s how many crises we had to go through before we finally got Glass-Steagall; people forget that.

Alex Pollock: I have a question right here when … well OK, we’re going to move forward, to the right-hand side here.

Steve Votaw:OK [undecipherable] was my microphone. Steven Votaw with Deloitte consulting. I have actually two questions, and I think in light of what we’ve all talked about in terms of this bubble, like the housing bubble and the concentration of all banks in housing, I’m not convinced that the too-big-to-fail would really work. I mean wouldn’t … if we had a lot of smaller banks, wouldn’t they all just fail at the same time?

And then the second part of the question is — Desmond, you have only 10 percent down on home prices? But it seems like that backlog of foreclosures is pretty huge. Why only 10 percent down?

Alex Pollock: Both those questions are for you, Desmond.

Desmond Lachman: Just remind me of the first one …

Alex Pollock: If you had a whole lot of small banks, instead of a few big ones, wouldn’t they all just fail.

Desmond Lachman: … Do you know, if you had a lot of small banks, all doing exactly the same kind of thing, all being being subjected to exactly the same kind of shock, I would agree with you. But that’s hopefully not what you’re going to get in a very competitive system where you’ve got a lot of small banks doing different things.

So you could allow banks to fail, and that that would send very good signals. You know, you would get rid of moral hazard; you wouldn’t just have these banks able to borrow indefinitely knowing that the borrowers are going to be bailed out.

10 percent … I certainly think that prices could overshoot and I’d want to see what happens. If what I’m thinking is going to occur, we do get a double dip. Then I think you certainly could go way below.

I think that a point that Marty Feldstein [1:40:00] keeps making is that in the same way as you overshot equilibrium you can undershoot on the way down. There’s nothing magic about it. I think that there’s a dynamic process.

What would concern me is if you get yourself into a loop with lower prices causing more people to be underwater, creating greater incentives for people not to want to pay their mortgages you know we’ve really got a problem.

Alex Pollock: Nouriel?

:Nouriel Roubini Yeah, but in …

Alex Pollock: We’ll get Nouriel quickly and Tom, and then we’ll come to the next question.

:Nouriel Roubini Yeah, on the issue of many smaller banks I actually agree with the view that you can have systemic risk even if you have thousands of smaller banks. I mean one example was, you know, the S&L crisis — 1,400 of them went bust, none of them was a Lehman or a Bear (systemically important), meaning if there are conditions that create a bubble, whether it’s easy money, poor regulation / supervision, subsidization by the government of housing or whatever, you’re going to create a bubble, and then everybody’s going to behave the same way, it’s going to go bust, and then you have a systemic banking crisis.

So certainly too-big-to-fail is a problem, but unless we go to the core of the reasons why everything [undecipherable] bubble in the United States that goes bust, and then we have a severe economic / financial crisis is going to happen over again if we had lots of small banks.

Alex Pollock: Tom …

Tom Zimmerman: Yeah, I was going to say pretty much the same thing only from subprime perspective. We had a bunch of small subprime lenders and they were all doing the same thing. And because the regulators didn’t come down and say, "You can’t make these kind of really idiot loans." If you were in subprime lending and you didn’t do it, you were out of business.

So it’s the old, "You have to …", the bad loan drives the good loans out, clearly. And if you’re a … if you get by of those bad loans, people love it and they’ll go for it, and that’s why you need regulation.

Alex Pollock: There’s a famous saying of John Maynard Keynes that the market can stay irrational longer than you can stay solvent. That’s on the downside. On the upside, which is what Tom just described, there’s a parallel saying, "The market can stay irrational longer than you can stay employed." And therefore, you participate. I have a question right here. Go ahead.

Jack Phelps[ph]: Yes, Jack Phelps[ph], FHFA. I think along the lines of dealing with systemic risk, TBTF, I think Chris touched on, one of the necessary reforms is moving OTC derivatives to a clearing house. I think that’s a necessity. I think the other part that we hear zero discussion of … I think Alex maybe had a thoughtful piece² in the American Banker a week or two [ago] on this, is perhaps separating payments from commercial / merchant investment banking, and let’s treat the payments system as a utility, let’s protect it, not let it be affiliated in that kind of structure.

And if me move to that, then we can have these large firms fail, we can protect that. So I think that’s a necessary reform. Perhaps somebody can comment on that.

John Makin: Yeah, I would just say that I agree with the need to have banks that are focused on transaction services. But investment banks remember, that are large and subject to counterparty runs like we saw last September, can bring the system down. So there is a size issue there.

And so I think we have to be aware of that as well.

[crosstalk]

Alex Pollock: … OK Chris …

Chris Whalen: Remember Bear and Lehman were clients of banks, as John was saying. So having them not directly plugged into the clearing systems doesn’t help you. But what I do think we have to move towards, and you’ve heard it kind of discussed in the regulatory community, is — make debt of these holding companies convertable. And I mean all of it. You could do it in 10 percent increments.

Because then, you’ve got the resolution baked in, and we can stop talking about winding down these large institutions. That’s not what we need. We need to fund them, and [tape-skip] do stupid things, the bondholders have to know that they’re going to convert.

Alex Pollock: … just say what that means — what do you mean, "convert"?

Chris Whalen: Well now, [undecipherable] if you had Citi last year. Before the government put equity in, instead the bondholders would have been told, à la GM, "you’re converting into equity." You drop the interest expense of the entity immediately, and the next day you charge off … You know, Citi holdings, to give you an example, has about $300 billion in assets, half of which are covered by loss sharing agreements. If instead we had charged that off and used the new funds from the bondholders to recapitalize the entity, we’d be done. You’d never have to write a check again, if you’re the public perspective.

Alex Pollock: You’ve been waiting here up in the front … Then I’m going to come to the back here next.

John Serrapere Yeah, it’s John Serrapere from Arrow Insights and from Pittsburgh. One of the things I wanted to comment about is I want to thank you for putting on these presentations. I’ve made 5 of 6. It feels like I’ve made 12 of 9. [laughter] But it’s been a most rewarding in terms of my research. I just want to thank everybody.

But the question I had is — When the G20 was going on in Pittsburgh [1:45:00] I was able to get in some private forums (pre- the G20, of course) and one of the things I’ve learned that I didn’t know is that, one, it’s the G23, and another one is that … because there’s three members that really are always there.

But I learned that there’s a piece in NAFTA in 1999, drafted by Geithner, that actually prevents financial regulation for global financial intermediaries. So if we passed a law here and the banks are involved in other countries, it can’t be enforced in terms of the free trade. And Geithner actually drafted this when he worked for the Administration.

Now it’s a clause that’s reviewed, and it’s apparently being reviewed and it’s going to be added to the new Doha round? And it would revert, make impossible for you to reverse anything that was drafted after 1999 on a global basis. And I was unaware of this, but I was wondering if anyone in the room understands its impact on financial regulation.

Alex Pollock: Any comments?

Nouriel Roubini: I mean, the only point that I’d make is that whatever you have to do, you have to do at the global level, otherwise there would be jurisdictional arbitrage. And so whatever agreements are made about reforming the system of financial[ph] regulation, we cannot do more than others or vice versa … otherwise it would be a game of jurisdictional arbitrage.

Alex Pollock: Thank-you. Can I have a question way in the back here?

anonymous questioner: Why should we, and pardon me, maybe this is naive, but speaking to the international matter here, because I think we’re looking at a macro solution, but …

First, why should we be worried about jurisdictional arbitrage if we decide that our macro solution would be, first, keeping our Constitution? So Article 1, Section 8 compliant trade would be demurring on keeping G20 agreements. So what do you say to us where we decide that, you know, we’ve got to clean up our house here?

Because we’re not going to have enough people who can pay their mortgages and buy cars and things like that, you know, once you’ve offshored their production into one of the former colonies of our allies, which is in effect complying with … US’ compliance with the G20 agreements is collapsing our economy and offshoring our productions.

So Free Trade’s been [crosstalk] … but that’s my question, you know. I mean. what are you say that [crosstalk] where our macro solution’s are something we need to do?

Alex Pollock: … What are we … how are we to answer this naive question? Why do … as you said, why do we care about this international jurisdictional issue?

Chris Whalen: Well I think at some point we’re going to have a government in power that’s going to make a choice between the American people and our creditors, who are predominantly foreign. And I think that choice will involve letting the dollar depreciate. I don’t think we’ll ever actually repudiate our debts, as long as we can print more dollars. But I think that’s the fundamental political issue that faces our entire society …

To what extent are we going to go along with this wishful thinking about a global economy when we still have entities that are national?

And look at banking. Look at Basel II. There is no global framework here. There is no global accounting system. There is not even a global definition of default, for chrissake. So how can we pretend that this is a global regime for capital adequacy?

Alex Pollock: One minute in the penalty box for the profanity, but just do you …

Chris Whalen: … my name is Chris …

[laughter]

Alex Pollock: … do you favor a global accounting system, Chris?

Chris Whalen: It’s not possible.

Alex Pollock: Nouriel …

Nouriel Roubini: I mean, if what we’re going to do is to essentially devalue the real value of our public debt and avoid debt deflation through inflation and debasing our currency (it’s an option), at that point, I think that the creditors of the United States are going to pull the plug.

Because if we’re going to the route of high inflation then China, the Gulf States, Brazil, Mexico, Russia, Japan, you name it, they’re not going to go and sit back and take the capital levy of hundreds of billions of dollars on their own dollar assets. And they’re going to run away.

Last time around we did it in the ’70s we were a net creditor country and a net lender. We were running current account surpluses. This time around we are the biggest net debtor in the world, to the tune of $3.5 trillion and we’re still borrowing on net half a trillion a year because we have a large current account deficit.

So you can try and impose that capital levy, then you have a sudden stop of capital and the dollar collapses, and then you have a spike in interest rates and you have disorderly stagflation again.

So it’s too easy to say we’re going to screw our creditors, because those creditors are not going to bend over and say, "I’ll take it." They’re going to run away, and it’s going to be nasty at that point.

[laughter]

Alex Pollock: John …

John Makin: Well I want to add, we’re all kind of in this … in the same dilemma.

Comment: that is … [1:50:00]

The maturity of US Federal Debt is very short, something on the order of 2 years, so the option of … It’s really not going to work very well if we try to zap our creditors.

And secondly, I don’t think that the Fed is in a mood to do this. I know everybody’s very sceptical, but I don’t think the Fed will play along. And that will cause some difficulties with the Fed’s independence, but this Fed will go down fighting to avoid the sort of simple-minded "inflate our way out of this" story.

Alex Pollock: Question right here please.

Barry Wood: Barry Wood, free-lance economics correspondent.

In terms of what Nouriel was saying about the dollar carry trade, what’s the solution to this. Can market deal with it?

There’s resistance in Brazil, that tax you mentioned. There’s resistance in Europe to seeing the dollar more than to $1.50 [== 1 euro]. What can be done as a corollary to force the renminbi in China to come up and not go down with the dollar?

Nouriel Roubini: Well I think that, you know, the trouble is that the Fed keeps on having zero rates and expects to keep them at zero. And the Fed reduces volatility by buying long rates, then the game everybody’s going to play is a carry trade. And that’s what’s happening right now and other countries are in trouble because either they intervene, like the Asians are doing, because their currencies are appreciating too fast. And if you intervene is unstabilizing intervention and therefore you increase your base money and credit growth becomes worse. Or you decide to cut interest rates, and that’s the same thing, because you try to avoid your currency from appreciating by following the US monetary policy. Or you try to do what Brazil does.

But they are all variants of the same, that imply that everybody around the world has to import our monetary policy, and therefore our easy money becomes a global easy money, and that particular bubble continues. And that’s the scary part of it. It’s really the scariest thing that’s happening right now.

People say the economy’s recovering, these asset prices are going up because of that. The reality is that money not only is free, but if you borrow in the US is a negative interest rate. And everybody’s playing exactly the same game. And people are not realizing that it’s the most dangerous game we’re playing right now.

Of course the trouble the Fed is facing is that it has two objectives. One is to stabilize growth and avoid deflation, and the other one to avoid financial instability.

But they’re using one instrument, the Fed Funds Rate, to achieve stability of growth and avoid deflation. But they’re creating exactly like 2003-2006, financial instability. Because at that time we kept the Fed Funds Rate too low for too long, and you normalize it too slow, too little. And we created the asset bubble, the mortgage bubble, the housing bubble.

This time around, is occurring on a global scale. It’s not just the US. What’s happening right now with this carry trade, is creating a global asset bubble that we haven’t seen in decades. And is going to go bust.

Alex Pollock: Nouriel, given all that, what’s your forecast for the price of gold?

Nouriel Roubini: Actually, you know, on gold, in my view, gold goes very high under two scenarios. One in which you have inflation, and the other one in which you have again, Armageddon, in which you cannot even backstop the financial system.

For the time being I see a glut of capacity globally, demand weak, weak recovery, and there’s deflation and firms cannot sell their goods and they’re slashing prices.

And on the labor side, slack in labor market — unemployment at 10 percent. So for the time being, I see just deflation around the world, and that cannot be good for gold.

Too, gold could sharply spike if we’re going to go back into, again, another double-dip in which we cannot anymore backstop the financial system. Because you’ve got governments that are going to be essentially having banks too-big-to-fail and too-big-too-be-saved. If you get into that world in which really we cannot backstop the financial system because they government is insolvent, that’s the time to buy guns, ammunition, canned food, [laughter] gold bars and run to your log cabin in the mountain.

That was the world after Lehman, and that was the world of February / March. That’s when gold went above $1,000 again, right?

So gold usually goes up when you have inflation, expectation like the first half of last year, or when we have catastrophe and Armaggedon. Those two theories, for now, have been reduced. The one of the inflation because you have this slack in goods and labor market, and the other one because we’ve decided to backstop the financial system.

If we have a double dip, that’s a different story. But in that case, before we get inflation then we get a near-Depression and stagnation.

Alex Pollock: Chris, quick comment and then a question coming here.

Chris Whalen Well you know it’s interesting, if you look at the UK real estate market right now, it’s going up, even though the economy there is flat. And I think what you’re seeing, to John’s earlier points, is that holders of paper money are starting to look for solid assets to buy.

So I think even in this country you’re going to see selective spikes upward in prices for really prime real estate, but only when it’s been marked down. [1:55:00]

Christine Eisner[ph]: Christine Eisner[ph] with KW Commercial. My question is regarding the re-evaluation of real estate mortgage investment conduits, or Re-remics.

How effective or ineffective do you think this this tool is in relation to the banks’ reserve requirements, and possibly the real estate industry.

Alex Pollock: Tom, you maybe want to take that one?

Tom Zimmerman: Would you say that again?

Christine Eisner[ph]: It’s the Re-remics. Re-evaluation of real estate mortgage investment conduits, regarding a bank’s reserve requirements? In other words, …

Tom Zimmerman: Is this the changed rule about the tax code you’re referring to? About the fact that for some commercial real estate CMBS you …

Christine Eisner[ph]: They’re re-evaluating the package of investment portfolios and they’re taking the good loans and they’re re-evaluating them upwards and taking the bad ones and …

Tom Zimmerman: Oh! Oh that. Oh, no. That’s not going to be a big problem. That’s … That’s just a matter of re-securitization. They’re taking a pool of securities — several pools of securities. Taking some of the … taking those loans and repackaging them and now selling off part of that as a triple-A again.

So it’s a little bit like they did before, only this time the rating agencies and the criteria for these Re-remics are so much stricter that investors will buy those triple-As without much concern.

Now we can say when they did that 4 years ago and got screwed, but under this current regime of the rating agencies, what they require for those Re-remics and the kind of collateral going into them, anyone that’s frugal is going to want to buy that stuff, because it’s just rock solid.

That’s a little bit like, if you can buy a mortgage loan created today, it would be great, because, you know, you’ve got 20 percent down and high LTVs and all that. So if you have the wherewithal to buy certain assets right now, even beyond this thing we’ve been talking about here, …

What happens, when banks go through a crisis like they did in 1990/’91 or like we’re just going through now, lending criteria, what few loans they make, are rock solid. So it’s a little bit like when they re-securitize these mortgage loans right now, this is the best of the best. So I don’t view this as a problem.

Alex Pollock: Alright, time for one more question. We’ll come to the back here.

Dale Kinsella[ph] Hi. Dale Kinsella[ph] with SSA. I was wondering if you guys could comment on there being a correlation between the economic downturn and the high unemployment and stagnant and falling wages. Is this … is there really not a big correlation, and this is more due to competition than labor markets from like China, for instance. And there being a lot more competition in the labor market in the United States.

Alex Pollock: … John? …

Dale Kinsella[ph] … 20 years ago an Ivy League law degree meant a lot more than it does today, for instance.

Alex Pollock: John?

John Makin: You know, look. I think when the economy … The primary pressure on employment is simply that there’s massive excess capacity and for most businesses labor is 70 percent of their cost base, so, you know, what we’ve seen … certainly over the past 6 months is, anybody who’s reporting better earnings is saying, "Well, we contained a lot of … cut a lot of costs." And they way to cut costs is to lay people off, and so that’s what we’re seeing.

The … So that scale effect is far more dominant than the substitution effect, which would be the operation of alternate production facilities abroad. It has some effect, but it’s being overwhelmed by a simple surge in excess capacity that forces people to cut a lot of costs as rapidly as they can. [1:58:44]

Notes and References

[1]: "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis", AEI event homepage, October 22, 2009.

[2]: "Deposit Insurance a Persistent Problem", by Alex J. Pollock, American Banker / AEI, October 7, 2009.

On one hand, there is the fervent political desire to make deposits riskless for the public, so that depositors do not need to know anything about or care about the soundness of their bank. But their deposits fund businesses that are inherently very risky, highly leveraged and cyclically subject to much greater losses than anyone imagined possible.

To that end, FHFA has informed Fannie Mae that a possible transfer of a portion of its LIHTC investments to unrelated third-party investors is consistent with FHFA’s ongoing efforts to conserve Enterprise assets and with the Enterprise’s multifamily housing mission. … FHFA Acting Director Edward J. DeMarco, November 5, 2009¹

Many thanks to twist for data-mining that gem from the dark recesses of the DC bureaucracy. So in all the turbulence going around, the most urgent crisis facing America is …

• Swine Flu? not even in the top 10
• Recession? OVER! OVER! OVER!
• CMBS Tsunami? way out in the offing, won’t hit for weeks
• Looming Shortage of "Dow 10K" Party Hats? not even that …

America’s most urgent crisis is the fallout from October 23, 2008, when DeMarco’s predecessor Jim Lockhart testified in Congress and mentioned the word explicit.²

Once a week³ ever since, the OMB’s most consistently optimistic analyst (let’s just call him "Phineas Q. Pangloss") has come back from a long lunch, taken a deep breath, and circulated a research note to the effect that …

… Yeah sure guys, no problem. Treasury can cut off their support⁴ to the GSEs any time they want to. And holders of Agency Debt would be, like, totally cool with the resulting haircut. After all, every piece of senior debt ever issued by Freddie, Fannie and the gang came stamped with a nice big notice that "This Ain’t No Sovereign Obligation of No USA!"

And the reason this happens every week without fail is that should the OMB ever come to the same conclusion as Mr. Market (that there’s no way in Hell that Geithner’s ever going to throw the agencies holders under the bus) they would have no choice but to immediately double the nominal value of the US National Debt.

But there’s one small problem. Fannie & Freddie are being used as a couple of cudgels to beat back the housing recession, and so their balance sheets are swelling by the day with more and more toxic MBS. Profitable? Probably never as they’re situated, but if the farce of conservatorship ends and they revert to the pre-1968 world where Fannie was an actual Federal Government department like Ginnie, you trigger the above disaster.

Enter LIHTC. If Fannie requests another $15 billion (like they did yesterday) too often, even Pangloss will have to recognize the evident truth that

1. Fannie’s a basket case; and,
2. Treasury is their explicitly dependable sugar daddy.

So the GSEs and their regulator, the FHFA, are going to use every trick they can think of to keep up the pretense that the Enterprises are going concerns.

Now LIHTC is tax-reduction credits, many $billions worth, but Fannie isn’t going to have a bit of taxable income for many, many years. So to achieve a benefit for its own balance sheet, they have to find someone else with $billions of fresh profit who will buy the credits at a discount so they can reduce their taxes. Hello, Goldman⁵ and Mr. Buffett.⁶

But in real life, Fannie and the US Treasury are two pockets on the same pair of pants. The net effect of this exploit would be to give a direct government gift of billions of dollars to some of America’s most flush companies so that Fannie can put off for a couple of months formally going back to Geithner for their next infusion of cash. What’s Wrong with This Picture?

So at any rate, Doomers will I’m sure be ecstatic at the heart-warming news that response-times to aid the needy have reduced considerably since Katrina. Guy Fawkes’ fireworks have barely cooled down and already WSJ⁷ is reporting FHFA approval for selling $2.6 billion-worth of the credits to unnamed, but surely deserving counterparties. Would that FEMA could start dropping relief packages as expeditiously.

UPDATE: The plot thickens.¹¹

If you were curious about the recent news regarding Goldman Sachs’ (GS) and Warren Buffett’s (BRK.A) interest in acquiring the tax losses of Fannie Mae (FNM), the details are in Fannie’s 10-Q.

This deal was agreed to and inked a month ago. It is still pending approval. So the information that was first reported by Bloomberg was a deliberate plant. A possible objective would have been to get a decision on the transaction before yesterday’s release. Note that the Q provides an update of the deal’s status as of November 5. Someone was waiting to edit this section right up to the last minute. A tad unusual.

……………………..

Further (Friday PM late): This¹² just in from the WSJ.

The U.S. Treasury blocked Fannie Mae’s proposed sale of nearly $3 billion in low-income housing tax credits to Goldman Sachs Group Inc. and Berkshire Hathaway Inc. on Friday after concluding that the deal was too costly for taxpayers.
…

But Treasury Department officials blocked the deal after concluding that it would have resulted in a loss of tax revenues greater than the savings to the federal government had it allowed the sale. "In short, withholding approval of the proposed sale affords more protection of the taxpayers than does providing approval," an administration official said in a statement.
…

Approving the deal could have also furthered a perception that policy makers have taken steps that have favored Goldman ahead of other banks at a time when populist sentiment against Wall Street has surged.

But since the debt that finances things like that is still regarded as the world’s safest investment, foreign central banks are eager to buy the stuff. While The Fed’s own MBS holdings rose a trivial $0.328 billion, and the cenbanks’ agencies not much more than that, their Treasury Debt buy was more than healthy, according to this week’s Reuters report⁸. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.⁹ Here is Doom’s updated CSV version¹⁰ of the agencies and treasuries foreign central bank holdings data set.

The treasuries buy was a lusty $18.159 billion, more than doubling last week’s figure.

Agencies were back in positive territory, but only added $0.758 billion.

The net change of US obligations was an excellent $18.917 billion, well over $2 billion a day.

Twist’s ratios graphs are down once again.

The Setser 52-week chart saw convergence in both lines (the year-ago results were both more intense).

________________________

Notes and References

[1]: "Statement of FHFA Acting Director Edward J. DeMarco Concerning the Possible Transfer of Fannie Mae Low-Income Housing Tax Credits to Investors" (PDF), FHFA, November 5, 2009.

[2]: "Fannie, Freddie Have `Explicit Guarantee,’ FHFA Says", by Dawn Kopecki and Jody Shenn, Bloomberg, October 23, 2009. [Of course this statement was "clarified" to custard as soon as Lockhart realized what he'd just said. Senior government officials spent weeks speaking around an "effective guarantee" that has never been defined.]

“The conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac,” Lockhart told the Senate Banking Committee in testimony today from Washington.

[3]: Cass Sunstein please note — 1) this is satirical, 2) I am making it up

[4]: "Fannie Mae 3Q Loss Narrows; Requests Another $15B From Govt", by Kevin Kingsbury, Wall Street Journal, November 5, 2009.

[5]: "Goldman’s Attempt To Buy Fannie’s Tax Credits", by Daniel Indiviglio, Atlantic, November 3, 2009.

[6]: "Buffett joins Goldman’s Fannie tax credit bid - WSJ", by Greg Morcroft, MarketWatch, November 4, 2009.

[7]: "Fannie Arrives at a Deal to Sell $2.6 Billion in Unused Tax Credits", by Nick Timirao, Wall Street Journal, November 6, 2009.

[8]: "Foreign cenbanks’ US debt holdings up in week - Fed", by Ellen Freilich, Reuters, November 5, 2009.

[9]: "H.4.1 Factors Affecting Reserve Balances", Federal Reserve Statistical Release (weekly), Federal Reserve Bank of New York.

[10]: The updated data set as a Comma Separated Value (CSV) file is here.

[11]: "Goldman, Buffett Deal with Fannie Mae Inked a Month Ago", by Bruce Krasting, Seeking Alpha, October 6, 2009.

[12]: "Treasury Blocks the Sale of Tax Credits by Fannie", by Nick Timiraos, Wall Street Journal, October 7, 2009.

WASHINGTON, Nov. 5 /PRNewswire-FirstCall/ — Fannie Mae (NYSE: FNM) is implementing the Deed for Lease(TM) Program under which qualifying homeowners facing foreclosure will be able to remain in their homes by signing a lease in connection with the voluntary transfer of the property deed back to the lender.

 

"The Deed for Lease Program provides an additional option for qualifying homeowners who are facing foreclosure and are not eligible for modifications," said Jay Ryan, Vice President of Fannie Mae. "This new program helps eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities."

 

The new program is designed for borrowers who do not qualify for or have not been able to sustain other loan-workout solutions, such as a modification. Under Deed for Lease, borrowers transfer their property to the lender by completing a deed in lieu of foreclosure, and then lease back the house at a market rate.

I’ll agree that it keeps properties from being vacant, disrupting families and provides more affordable housing.  I suspect however, that it helps continue with "mark-to-fantasy" bookkeeping and slows recovery in the housing market.

This is for primary residences only, so it won’t do much for the speculators out there.  In fact, it will probably be detrimental to the rental market, as it will keep a pool of potential renters out of the market.

In the ongoing debate about whether one should walk away from an underwater mortgage or not, one University of Arizona professor speaks out strongly in favor of taking a hike. According to Brent T. White, an associate professor of law at the University of Arizona:

A failure to grasp the true economics of the situation is holding back many Americans whose home values have dropped far below the amount they owe and who would be better off renting, Mr. White says. Fear, shame and guilt also are preventing rational decisions, he believes. And, he says, those “emotional constraints” are encouraged by politicians and bankers, who ruthlessly and amorally follow their own economic interests while telling Joe Soggy Homeowner he has a moral duty to pay his debt so long as he possibly can.

I was sent the above article by Doom friend M.R., and highly recommend reading the comments section.  There are a number of intelligent comments taking up both sides of the walking debate.  The article discusses White’s paper Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.

White says that he is not amazed by the number of folks walking away from their mortgage- he’s amazed by the number that don’t.  He repeatedly refers to walkers as "rational homeowners".  We often hear how you might as well hang on and sit tight- markets are cyclical and values will come back in a few years.  Besides, you don’t want a black mark on your credit rating.  Here’s why White refers to walkers as "rational" though:

White gives the hypothetical situation of "Sam and Chris".  Sam and Chris purchased a typical home in Salinas, CA for $585K in January 2006.  They have a monthly payment of $4,300/mo., slightly less than 31% of their income.  The couple just break even every month.

Unfortunately for Sam and Chris, the housing market began to collapse in 2007. Though they still owe about $560,000 on their home, it is now only worth $187,000. A similar house around the corner from Sam and Chris recently listed for $179,000, which, with a modest 5% down, would translate to a total monthly payment of less than $1200 per month – as compared to the $4300 that they currently pay. They could rent a similar house in the neighborhood for about $1000.

Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity – assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.

I personally think the world is a better place when people make a good-faith effort to pay their bills.  Consequently I was a little disturbed by this statement of White’s:

Unlike lenders who follow market norms, individual homeowners are encouraged to behave in accordance with social norms of “personal responsibility” and “promise-keeping.” Thus, individual homeowners tend to ignore market and legal norms under which strategic default might not only be a viable option but also the wisest financial decision. As a result, individual homeowners have born a disproportionate share of the costs of the housing meltdown.

Given that the "market norms" for lenders have been governed by greed and a lack of responsible behavior, it hardly seems that encouraging homeowners to follow the same market norms would lead to a better society or a more stable economy. White makes this point however:

One obvious response to the above discussion is that society benefits when people honor their financial obligations and behave according to social and moral norms, rather than strictly legal or market norms. This may be true if lenders behaved according to the same social and moral norms. In the case of lender-borrower behavior, however, there is a clear imbalance in placing personal responsibility on the borrower to honor their “promise to pay” in order to relieve the lender of their agreement to take back the home in lieu of payment. Given lenders generally superior knowledge and understanding of both mortgage instruments and valuation of real estate, it seems only fair to hold them to the benefit of their bargain. At a basic level, sound underwriting of mortgage loans requires lenders to ensure that a loan is sufficiently collateralized in the event of default. In other words, in appraising a home the lender should ensure that the loan amount, at the least, does not exceed the intrinsic market value of the home.

I believe people have an obligation to pay their financial agreements to the best of their ability.  On the other hand, I also believe that people have an obligation to try and not be a financial burden to others.  How can a couple like the hypothetical Sam and Chris pay for their kids college and braces, save for emergencies and fund their retirement if they spend the rest of their working careers trying to pay off one financial mistake?

Two things have become clear to me in all of this.  One is that both parties need to have skin in the game to minimize unethical behavior.  When either party has access to easy money and low risk, the odds are that they are going to exploit it to their own advantage. The other thing is that at the end of the day, it is very difficult to judge those who are walking away.  As White points out in his paper, the vast majority of defaults are not strategic- people simply have no choice.  As for the rest, there are as many situations out there as there are people.  Walkers run the gamut from the fraudulent scumbags who planned on walking before they ever closed to the heartsick couples who painfully decided that walking is the lesser of several financial evils.

White does not advocate all underwater borrowers walking. [In fact, he indicates that he is also underwater, but feels he is better of staying put.]  He does however believe that in many cases walking is the rational thing to do. If I were sitting in the position of "Sam and Chris", it would be difficult not to agree with him.

“The injunction of Jesus to love others as ourselves is an endorsement of self-interest,” Goldman’s Griffiths said Oct. 20, his voice echoing around the gold-mosaic walls of St. Paul’s Cathedral, whose 365-feet-high dome towers over the City, London’s financial district. “We have to tolerate the inequality as a way to achieving greater prosperity and opportunity for all.”  Bloomberg¹

Thank goodness for Tatjana’s 17th Century English Lit course.  The last few months would have made no sense at all if I hadn’t decided to make a close study of Donne’s sermons and Laud’s adventures in Xtreme Interior Decoration.

As it stands, I can just sort of work my way through the section on  "The Growth of Individualism" in Tawney’s 1922 Religion and the Rise of Capitalism and treat the whole affair as a kind of cosmic joke.

When the banking lobbyists marched up the Hill on September 18, 2008 and seized control of the economy it was the perfectly symmetrical event to the fall of Soviet Communism.  We’re now enjoying (on a compressed time frame) the same post-collapse rise of oligarchs that Russia experienced in the late ’90s.  Perhaps if Putin’s not too busy pulling the strings back home, Larry could sign him on as a consultant.  Obama’s got a serious problem if he lets these guys strut around unhindered.

———————–

[1]: "Profit `Not Satanic,’ Barclays Says, After Goldman Invokes Jesus", by Simon Clark and Caroline Binham, Bloomberg, November 4, 2009.

The housing credit’s impact is particularly pronounced in the Savannah area.

The number of first-time buyers locally is unavailable, but pricing and loan trends indicate they could make up more than 40 percent of the market.

Homes priced under $200,000 have outsold those priced above that number by almost a 2-to-1 margin this year, with homes sold for $100,000 to $149,999 - "starter homes" - outpacing all others.

And almost half of the houses financed locally this year were done with loans backed by the Federal Housing Administration or the Veterans Administration, which cater to first-time buyers.

And how would allowing the credit to expire affect the market?

A drop in local building permit applications in September offered a glimpse of what a creditless future could look like. Permits tripled in Chatham County during the summer months as builders began construction on homes that could be completed in time to be bought and occupied ahead of the Nov. 30 tax credit deadline.

Permit numbers dropped drastically in August and September, a trend the head of the local homebuilders association, Matthew Young, said reflected the industry’s wait-and-see approach to the post-tax credit market.

"If they don’t extend" the credit, Young said, "they will wait and see what sales are like after that."

Here’s a great chart from Business Insider that shows how this credit has skewed the market in favor of first time homebuyers:

 So how critical is the home buyer tax credit?

There is no question that the tax credit has kept the housing market on life support, but it has done nothing to genuinely improve its condition.  As the information from Savannah indicated, if the tax credit were to expire, it is likely that the market would fizzle once more.  It has not provided some sort of "green shoot jumpstart".  It might even discourage the market in the long run as buyers ask, "Well if it’s $8,000 now, what might it be later?"  After all, they are already expanding the credit from first time buyers to the move-up crowd as well.

One of the big issues however is the ongoing weakness in the jumbo market, and a $6,500 credit is unlikely to do anything for that.  While a $8,000 tax credit is significant if you are buying a $100,000 house, a $6,500 credit is not much of an incentive for purchasing a more expensive home. A weak economy, expensive financing and tighter lending is still keeping downward pressure on upper-end housing and a lid on starter home appreciation.  Home prices remain out of line with fundamentals and until that changes the market will remain in the doldrums.

Long term the tax credit cannot keep the market going nor do much for the move-up market.  The credit might be critical to politicians to give the appearance of "doing something", but anything that skews the market so badly can only serve to delay its recovery.

So, you know, there’s nothing for safety and soundness like a comfortable oligopoly. We might think about that and … we’re planning, for those of you who are interested, a conference, coming up in a few months, contrasting the Canadian house finance and financial system with the American system. So there’s a little advert — little preview.

Doom Transcripts: Index & Guide

Well, that certainly got my attention

Housing Doom is pleased to present a seventh selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Most of AEI’s "team bear" participated in a brief but lively discussion after the presentations.

Alex Pollock: [1:21:56] Thank-you, Desmond.  Having heard five really interesting presentations, let me give the panelists, if they want, a chance to add something, or react to the others.  Nouriel?

Nouriel Roubini: Just a comment on the last point that Desmond made. In this crisis, regulated banks got in trouble, but also a lot of non-regulated financial institutions — were broker/dealers like Bear and when bust. And so in some sense, suppose we go back to Glass-Steagall and not against it? What does it rule out? And then you’re going to have a bunch of broker/dealers or non-bank Shadow Banks that are going to become too big to fail. They’re going to do crazy things and eventually we’ll have to bail them out.

So do we need to really go back to Glass-Steagall? Or we need to break up every financial institution and make it so small that it can fail and who cares? And we don’t have to bail them out. What’s the appropriate policy choice on that? And I think that’s an open question for everybody else on the panel.

Alex Pollock: Other comments? Chris? … and then I’ll come to Desmond.

Chris Whalen: The most striking thing I heard from the other presentations was that chart of existing homes. [slide 13 (Lachman's deck)] We still have a third of the purchasers in the investor category. In ‘05/’06/’07 we had 40 percent of all home purchases in the US by investors. So that shouldn’t make you feel good.

I mean, homeownership used to be a form of forced savings, as Alex and I have discussed many times. And it’s still a speculative vehicle. So if you go back to the banks and look at the forebearance that’s currently keeping those loss numbers down, and you look at the emergence of yet a new acronym, TDRs, Troubled Debt Restructurings, which is essentially the banks’ way of saying, "Well, we won’t push you into foreclosure, we’ll live with you."

That, to me, is scary. Because if you don’t have a vigorous recovery next year, then transactions like Wells / Wachovia don’t work. They’re all premised on a bounce.

Alex Pollock: Desmond?

Desmond Lachman: My view is that I don’t think that there is a silver bullet on financial reform; that I think that Glass-Steagall by itself, you know, I don’t think really it solves the problem. That I think it helps, but I think that you’ve really got to do a lot more in terms of creating the right kind of incentives; changing the whole compensation scructure on Wall Street would be one way of doing it. Getting the rating agencies not to be paid by the issuers would be another thing; that you can just think of a whole multitude of real reforms that you need.

I think what bothers me now is you’ve just got far too many of the financial institutions have got the whole of the financial … firstly you’ve got far more concentration than we had before. The 10 top banks now are controlling more of the markets, we’ve got a lot less competition. So that breaking these banks up into smaller units, having some kind of competition, I think that that would really be [1:25:00] something that one wanted to go.

I’m also concerned that you’ve just got a huge moral hazard now, that all of these banks have got access to the Fed window, which they didn’t have before. So you really just, I think, encouraging moral hazard on a great scale.

You really need a total overhaul of the system. Otherwise I think all we’re going to do … [1:25:00] …… is we’re going to just repeat the boom / bust kind of cycle that we’ve looked through the last few years.

Alex Pollock: John …

John Makin: I think the comments that I’ve heard everyone make suggests to me a kind of framework that I’m imagining some thoughtful policymakers are contemplating. And that is: We look at the post-bubble situation and we look at the policy response, and they sort of … we had to save the too-big-to-fail institutions.

I think that leaves central banks especially with a very difficult choice. That is, either they reinflate the bubble, and Nouriel suggesting that we’re on the way to doing that, and I think there’s a good case to be made that that’s probably going on. Or they say, "All right, we’re going to get tough and we’re going to consign ourselves to a kind of global lost decade à la Japan where we’re going to do the right thing, we’re going to step up, we’re not … we’re going to kind of create a different attitude toward risk-taking." The problem with that is that it’s very difficult to implement, maybe politically imposible, and very risky.

So I think as … So what’s the outcome? Well, it’s sort of like — damned if you do, damned if you don’t — as Nouriel’s suggesting.

And so it may lead to hesitation — although one reminder: We have had two major burst bubbles in the past 80 years, and in both cases, in the case of the Fed in 1936/37, when we raised tripled reserve requirements, raised reserve requirements 3 times, and tightened fiscally; and then in Japan in August of 2000 when they abandonded the zero interest rate [ZIRP] policy … In both cases the central bank made a feint — that’s f-e-i-n-t — toward the sort of tough medicine and created such a crisis that they had to back off.

So I think that’s something I’m watching as I follow the discussions among central bankers, is that the risk of trying to exit this too aggressively while worrying about the need to not create another bubble. That’s a huge dilemma.

Alex Pollock: Tom? (let me just see) … Tom, anything? … Chris?

Chris Whalen: I want to ask John a question. In the past, reflation has lifted all boats. But the concern that I have and what I want to ask you, because you have studied this for a long time, is: What happens if the reflation doesn’t help the real economy? What happens if it’s only effective on those who have direct access to the monetary authorities?

John Makin: Well, I think that your … it’s a fair description of what’s happening now. The monetary base has been boosted tremendously by the Fed’s activities. The Feds have said, "OK, here’s a lot of cash" to the banks.

The money multiplier has collapsed, so that M2 aggregates, or most credit aggregates, are flat to falling. So in a way, the effort to stimulate the economy went through the usual channel at a … When you’re at zero interest rates you try to do quantitative easing if … and the Fed doesn’t like to call it that …

But so far those efforts have been a total failure. And not only that, but if you look at the behavior of money relative to nominal GDP, velocity has actually collapsed.

So we’ve already failed to affect quantitative easing and interest rates are at zero.

Alex Pollock: A case you might think of there, Chris, would be the reflation and runaway inflation of the late 1970s. We remember the history that it had an inflationary runaway in the early ’70s, a commodity / oil price boom. Interest rates to then unheard-of levels in the US, then a big recession and a big bust — ‘75/’76. And then the inflation, which created inflation, but also created stag-flation and ultimately the bust of the 1980s.

One other point I’d like to make on the question of Glass-Steagall, or of banks that are too big. [1:30:00] Here’s a counter-example.

Canada is now held up as an example of a financial system which has weathered the current bust quite well. And actually, the Canadian banks also weathered the 1930s much better than the Americans did.

Well what’s the structure of the Canadian financial system? It’s 5 big financial companies, big banks, who control the whole system.

So, you know, there’s nothing for safety and soundness like a comfortable oligopoly. We might think about that and … we’re planning, for those of you who are interested, a conference, coming up in a few months, contrasting the Canadian house finance and financial system with the American system. So there’s a little advert — little preview.

Let me come now to your questions …

Nouriel Roubini: Quick question …

Alex Pollock: Yeah, go ahead.

Nouriel Roubini: You know, they are oligopoly, but aren’t they highly regulated? Much more than our financial institutions, so …

Alex Pollock: They’re highly regulated and the oligopoly is more than the banks, it’s the club of the regulators, the central bank, the government and the banks. You know, the traditional in-group system, as I interpret it.

That gets you safety and soundness, but it may not get you a lot of vibrant innovation. [1:31:26]

Notes and References

[1]: "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis", AEI event homepage, October 22, 2009.