Posts filed under “Think Tank”
Just as the high in the housing industry from the home buying tax credit wears off, Congress is back with another injection with both parties bringing the drugs. It doesn’t matter if it makes economic sense or not, the temporary high feels so good and who cares what the long term implications are. Mark McGwire and Jose Canseco would be proud, as would Pablo Escobar, may he rest in peace. Also, the Japanese politicians from the 1990′s aren’t feeling so lonely anymore and in fact I think there is a huge autographed picture of the Japanese LDP party in the Congressional cafeteria. My point is, by not letting the economy heal on its own and quickly delever will only prolong the agony and kick the can further down the road as the bills will have to get paid anyway.
The euro is rebounding after 4 days of declines after German unemployment unexpectedly fell for a 4th straight month in Oct and the unemployment rate fell to 8.1%, .2% less than expected and at the lowest level since March. Also, Euro region economic confidence rose to the highest since Sept ’08 and was almost 2 pts above forecasts and a retail sales index in the region rose back to 50. New Zealand didn’t follow the RBA and kept rates unchanged at 2.5% while Russia cut its benchmark rate by 50 bps to 9.5%. Q3 GDP in the US is expected to be 3.2% annualized, the first positive reading since Q2 ’08. While the report card can be seen as old news as the economy is already 1/3 of the way thru Q4, it will give us a staring point from which Q4 GDP began. Initial Jobless Claims are expected to total 525k, down 6k from last week.
As the debate intensifies on whether and what form to extend the home buying tax credit, one argument against it is why give a credit to someone who planned on buying a home anyway. With 85% of 1st time home buyers who were eligible to collect the tax credit planning to buy a home anyway,…Read More
Description: Facing a shortage of U.S. dollars and a growing need to support their dollar-denominated assets during the financial crisis, international firms increasingly turned to the foreign exchange swap market and other secured funding sources. An analysis of the ensuing strains in the swap market shows that the dollar “basis”—the premium international institutions pay for…Read More
With most of the biggest companies having already reported Q3 earnings, attention shifts to a slew of important economic data over the next few weeks and also the two day FOMC meeting concluding a week from today. With the stock market getting tired (4 failed rallies in the past 5 trading days) and in correction…Read More
From a major NY Trading Desk 10/27: Central banker judgment is the ultimate regulatory loophole Only time will tell how effective the new rules and regulations currently being implemented by policymakers in the Western world will be. I’ll throw my two cents in and say that simply letting bad businesses fail would greatly curtail the…Read More
Category: Think Tank
Sept Durable Goods was about in line with expectations both headline and ex transports. Orders rose by 1% and were up .9% ex transports. Non Defense Capital Goods ex Aircraft were up 2% after the prior two months of declines. Orders for vehicles and parts in particular fell .1% after the two prior month gains….Read More
The 2 year note auction was very strong as the yield was about 3 bps below where the when issued was traded and the bid to cover at 3.63 is the highest since Aug ’07 and well above the one year average of 2.65. Indirect bidders totaled 44.5%, about in line with the previous few….Read More
Recent Developments in Mortgage Finance
By John Krainer
As the U.S. housing market has moved from boom in the middle of the decade to bust over the past two years, the sources of mortgage funding have changed dramatically. The government-sponsored enterprises—Fannie Mae, Freddie Mac, and Ginnie Mae—now own or guarantee an overwhelming share of originations. At the same time, non-agency mortgage securitization and loans retained in lender portfolios have largely dried up.
The period following the 2001 recession through 2006 is rightly called a housing boom. House prices and net borrowing by households surged in the early part of the decade, easily outpacing growth in household income. But, with the onset of the financial crisis and the failure of many mortgage market participants, access to mortgage finance declined dramatically. This Economic Letter summarizes some of the key ways that the mortgage market evolved during the boom years and during the ensuing housing market bust. It focuses on changes in the way loans were made and funded and how loan characteristics themselves changed.
Sources of mortgage finance
One of the distinguishing features of the U.S. housing finance system is the role played by the capital markets in funding residential mortgages (see Green and Wachter 2007). The direct link between housing finance and the capital markets is through securitization of home loans in various types of mortgage-backed securities (MBS). The pooling of mortgages into MBS permits the separation of loan origination and funding, as well as the transfer of risk. Also, depending on the type of MBS, securitization can facilitate the separation of credit risk—the possibility that borrowers default on their mortgages—and market risk, defined as changes in the value of a portfolio of mortgages as interest rates move and borrowers prepay. Securitization transforms relatively illiquid loans into highly liquid securities. In addition, pooling mortgages from different geographic regions serves as a way for investors to diversify away from shocks to local housing markets.
With the development of MBS and other types of structured financial products, banking institutions, including commercial banks, savings institutions, and credit unions, have slowly but steadily ceded market share to capital market investors in holding residential mortgage assets in portfolio. According to Federal Reserve flow of funds data, the banking institution share of total mortgage assets declined from a peak of about 75% in the mid-1970s to about 35% in 2008. Much of the decline in banking institution housing portfolios over this period was related to the expansion of the government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac, and Ginnie Mae. The GSEs purchase mortgages for securitization and guarantee MBS against credit risk.
Fannie Mae and Freddie Mac require that mortgages conform to certain standards to qualify for securitization. For example, mortgages must meet set size limits and underwriting guidelines. Ginnie Mae guarantees the repayment of principal and interest on MBS backed by federally insured loans, such as Federal Housing Administration (FHA) or Department of Veterans Affairs loans. Unlike Fannie Mae or Freddie Mac, Ginnie Mae is explicitly backed by the U.S. government.
Starting in the late 1990s, the GSEs’ near-exclusive hold on residential MBS issuance was challenged by so-called non-agency, or private-label, securities issued by brokerage firms, banks, and even homebuilders. Non-agency securitizations are conceptually very similar to agency securitizations. Lenders sell loans to an arranger, which then packages the loans, creates securities with claims to the cash flows of the loans, and sells the securities to investors (see Bruskin, Sanders, and Sykes 2000). However, in contrast to agency MBS, purchasers of non-agency securities are exposed to credit risk as well as market risk. Also, non-agency securitizations are more complex, involving many specialized parties. In recent years, securities were typically separated into tranches and structured to create different payoffs—more complicated arrangements than typical of agency securitizations. At its peak in late 2007, non-agency securitizations accounted for nearly 20% of outstanding mortgage credit.
An avalanche of research and commentary has examined why non-agency securitization grew so fast during the housing boom. One argument suggests that policymakers were worried that the GSEs were becoming too big and systemically important. These fears led to the imposition of caps on GSE portfolios, giving a boost to alternative sources of mortgage funding as the demand for housing finance boomed. Another story points to the decline in economic and financial market volatility that took place in the 1990s, especially in the first part of the decade. This phenomenon may have led to an increase in lending to previously marginal borrowers—a development that was probably not unique to mortgages but occurred in other asset markets as well.
The Oct Consumer Confidence # was a weaker than expected 47.7, almost 6 pts below forecasts and down from 53.4 in Sept. While the headline figure is still well above the bottom of 25.3 back in Feb, the Present Situation fell to the lowest level since Feb 1983. Expectations fell 8 pts to 65.7 but…Read More
David Rosenberg is a 20 year veteran of the Street, David most recently was Merrill Lynch’s chief North American Economist, where he correctly warned about the Housing and Credit Collapse and Recession in advance. He is the Chief Economist of Canada’s Gluskin Sheff
What made things so interesting is that in 2007, when I was at Merrill and calling for a recession, it was such an outlier view even though it seemed so obvious to me at the time. To think that it only became a widespread consensus view in the fall of 2008 when the downturn was already in full force for a good eight months. Back then, the bears still felt they had to be vindicated, and of course, the only barometer that seems to matter to anyone was the stock market, which gave absolutely no ‘heads up’ at all for what was to come down the pike. But now, it is universally viewed that the recession is over, that a recovery has begun, and a growing number of commentators are calling for 4%+ real GDP growth for 2010. We have never been a fan of group-think, but that is what we have on our hands today.
The question really is how robust is the economy and what is the root of optimism. It comes down to the massive doses of medication that have been applied by Uncle Sam. Unless we want to sustain state capitalism, which is what we had by the way, throughout the 1930s and 1940s, then this unprecedented public sector incursion into the capital market and the economy is going to have to end at some point.
But when you have a system that continuously extends unemployment insurance, provides subsidies for cars and homes (and the latter is still being considered as an extension at a cost of over $1 billion a month for the taxpaying public) not to mention the credit-boosting initiatives by the Fed and the FHA. The Obama team is now considering a capital infusion into small businesses as a means to bolster employment in this critical part of the economy. Friday’s WSJ also suggests that the Democrats are mulling over tax credits for “additional big ticket items.” Yes, that is true. Despite all the fraud involved in the homebuyer tax credit plan, its extension and indeed expansion is not being discussed in Congress. (100,000 improper claims for the tax credit? Who cares? It’s for a good cause.)
All of this (you have to see the Tim Geithner interview in BusinessWeek) is not being dubbed another fiscal plan — it is only an “extension” of the first. At the same time, we have a system where all the big banks have been safeguarded by the government and the liabilities of the entire system guaranteed by the taxpayer. Deficits continue to be racked up — $1.4 trillion in the past year and over $1 trillion as far as the eye can see and we are still being told that this all the fault of the prior Administration. The question that has to be asked is, while the coupon payments will be made, do the entities who are buying U.S. Treasuries today really ever expect to get their capital back? Without either deep spending cuts or tax increases (a dirty three-letter word in the U.S.A. — remember Bush Sr.’s “read my lips” back in the early 90s that cost him the election?) the only way out of this fiscal mess caused perhaps by the prior Administration and now accentuated by the current Administration will be by monetizing the debt.
Category: Think Tank