Posts filed under “Think Tank”

Economic data

GDP in Q3 grew 3.5%, faster than the consensus of 3.2% but Nominal GDP was below forecasts as it grew 4.3% vs an expected gain of 4.6%. It was thus an .8% gain in the deflator vs expectations of a 1.4% rise that helped in part lift the REAL GDP figure above estimates. Personal Consumption did bounce back by 3.4%, .3% more than expected and helped out by the CASH program as spending on durable goods rose by 22.3%. Helped out by the home buying tax credit, residential construction added .5% to GDP, the 1st time its contributed to GDP since Q4 ’05. Spending on equipment and software rose 1.1%, the 1st increase since Q4 ’07. Trade was a drag as imports grew faster than exports. Inventories fell $130.8b, less than the Q2 decline and thus added .94% to GDP. Real final sales, which take out the inventory influence, rose by 2.5%. Federal Govt spending rose 7.9% offsetting a drop in state and local spending.

Initial Jobless Claims totaled 530k, 5k above expectations but were little changed with last week. Continuing Claims fell again and to the lowest level since March but much of that decline has more to do with people exhausting the initial 26 weeks of benefits rather than finding a new job. There was however a drop on the week in the amount of people receiving Emergency Unemployment Compensation and Extended Benefits (off a big upward revision to the prior week) but there is also a high probability that it’s due to the exhaustion of benefits. The monthly payroll data will determine by how much as we hope that those running out of benefits find new jobs. The uncertainty in this is why Congress is debating another extension of unemployment benefits.

Category: MacroNotes

Mark McGwire, Jose Canseco and Pablo Escobar would be so proud!

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…Read More

Category: MacroNotes

Cash for Clunkers cost how much?

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

Category: MacroNotes

The Global Financial Crisis and Offshore Dollar Markets

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

Category: Currency, Federal Reserve, Think Tank

Attention about to shift back to the economic data

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

Category: MacroNotes

Early Morning Look

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

Durable Goods about in line

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

Category: MacroNotes

2 yr note auction showed solid demand

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

Category: MacroNotes

Recent Developments in Mortgage Finance

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.

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Category: Credit, Real Estate, Think Tank

Consumer Confidence down and Present Situation hits lowest level

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

Category: MacroNotes