We are learning more and more--as a country and private citizens--that you can't throw money at a problem and expect to resolve it.
Washington Redskins owner Daniel Snyder behaves in the same manner that the U.S. Treasury acts toward banks. Snyder expects to throw money at staff and players and that will get the D.C. region a winning football team. Not so. It gets a bunch of greedy players who think they've won something before playing the game.
Earning--or not earning--millions of dollars means much more to many of these players than winning the Super Bowl. That's great for the players and staff, but what about the fans? They end up paying to watch a crappy product on the football field.
As for the Fed printing money and throwing it at banks, with the hope that they become magically solvent despite billions of dollars, maybe trillions, in toxic assets. That's led to executive compensation, bonuses and no lending to borrowers and businesses.
Without debt, all this country sees is a bunch of greedy investment bankers make more money while states and municipalities layoff police and teachers. Communities turn to crap and taxpayers watch neighborhoods in foreclosure and decline.
So, yes, we can throw money at a problem and hope it goes away--but it doesn't. It only helps the needs of the few outweigh the needs many.
Problem solving sometimes requires time, patience and hard work--three things nobody in power wants to deal with these days.
Monday, October 19, 2009
Friday, October 9, 2009
Mortgage Rates Likely to Rise
If the Federal Reserve stops purchasing debt from Fannie Mae and Freddie Mac--as they said they would do in the first quarter next year--mortgage rates will likely rise.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Wednesday, October 7, 2009
The Other Mortgage Market
It's funny to just be hearing about how bad commercial real estate will get because I've been writing for the past year about how bad it's been getting--and it gets worse.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
Tuesday, October 6, 2009
Mortgage Time Warp
If you're in the camp that I'm in--that we're in a deflationary period as United States consumers deleverage off credit highs because there's nowhere else to go but down--then consider the current residential mortgage industry.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
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