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.
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