S&P's To Blame

A debt crisis once was created
By avarice run unabated,
As the market was flawed
By schemes to defraud
In bonds that were triple-A rated.

Now Justice may fin'lly report
That they're taking the raters to court
For the role of those chaps
In the housing collapse,
In which they provided support.

Conditions Are Tight

Said Bernanke: "By now it is evident
That tight mortgage standards are prevalent,
Which is really too bad,
As it's time that we had
An impetus, not an impediment."

Federal Reserve Chairman Ben Bernanke gave a speech at a housing conference yesterday in which he noted the tight lending conditions currently prevailing in the mortgage market. Although loose lending standards contributed to the 2008 economic collapse, and tightening standards in response was appropriate, Bernanke said it appears that “the pendulum has swung too far the other way,” denying some creditworthy borrowers. This may slow the housing revival and impede the economic recovery, warned the Chairman.

That mortgage lenders remain reluctant to lend puts a spotlight on the limitations of Fed action, inasmuch as the central bank has recently begun a program to buy $40 billion a month of mortgage-backed securities as a way of freeing up the market's credit capacity. Chairman Bernanke spoke in Atlanta at the Operation HOPE Global Financial Dignity Summit. His remarks did not address the question of whether "financial dignity" is an oxymoron.

Housing Really Starts

Said the home builder Joey Ferraro*:
"I'm working like there's no tomorrow.
Though the fiscal cliff looms,
The consumer assumes
It's the best time to buy and to borrow."

The Census Bureau reported new residential construction today for the month of September, and stunned everybody with a 15% increase in housing starts. Ground was broken on an estimated 872,000 homes, versus 758,000 in August. Analysts, the most optimistic of whom had predicted 800,000 starts, were completely surprised; even Jack Welch, maintaining his Twitter silence from the safe distance of Quito, did not cast aspersions on this unbelievable number.

What unanticipated factors led to this surprising result? For one thing, as we read in the Journal today, a gradual improvement in the housing market has reduced the supply of unsold homes to six months, from eight months a year ago. But, aren't the threat of the fiscal cliff as well as tax and regulatory uncertainty putting a damper on economic activity? Not for home buyers, apparently. They appear to realize that, with home prices rising and mortgage rates at record low levels, there may never be a better time to act.

*All Joey Ferraros appearing in this work are fictitious. Any resemblance to real Ferraros, living or dead, is purely coincidental.

Note: this post appeared originally in the Wall Street Journal's Total Return blog.

Submerged and Subprime

The mortgage malaise is enduring
And frustrates our efforts at curing,
When a fourth of all dwellings
Are currently selling
For less than the loans they're securing.

The Wall Street Journal reports that the Consumer Financial Protection Bureau, as part of an effort to unify and update mortgage lending standards, has developed the concept of a "qualified mortgage" which, if adhered to by lenders, would provide them with a safe harbor against borrower lawsuits. The CFPB would like to simplify regulation and hopes that offering sought-after legal relief and regulatory certainty to lenders will induce them to lend again.

While such initiatives are commendable, I cannot escape the thought that they ignore the elephant in the room: that roughly a quarter of all US residential mortgages are underwater, and half of those underwater mortgages are delinquent. To clear this market imbalance will take a combination of foreclosures, lender write-downs and the passage of time; there are no quick fixes.

Garden State Foreclosure Rate

Said a realtor, scanning the rows
Of colonials, shacks and chateaux:
"Though it's not plain to see,
Ev'ry eighth mortgagee
May discover the bank will foreclose."

Bloomberg reports that New Jersey has overtaken Nevada to win second place in the nation's delinquency derby. With a mortgage delinquency rate of 12.7% (up 1.3 points over last year), the Garden State still has much ground to gain before reaching Florida's winning 17.5%. Aside from the generally tough economy, and regional factors such as the financial industry's job losses, the surge in our delinquent mortgages here in New Jersey is driven by a slowdown in the state's foreclosure process. Foreclosures were effectively halted in December 2010 by a state court demand that such procedures be based on a personal review of each case, as opposed to "robo-signing", in which assembly lines of workers issue stacks of documents. The result is that "New Jersey’s judicial review of all foreclosures, which delays seizures to help borrowers, threatens to hold down prices for years as properties remain subject to repossession and then may be sold at a discount," according to Bloomberg.

Overheard on Maiden Lane

"When the market was in its last throes,
We bought AIG CDOs.
With the passage of time
Their value did climb,
So gainfully we may dispose."

With the sale of $3.4 billion of toxic mortgage debt, the role of the New York Fed in the $182 billion rescue of AIG came to an end last week. As Maiden Lane III LLC repaid the last of its $24.3 billion loan from the Federal Reserve Bank of New York, the Fed could celebrate a $6.6 billion gain to the public from this rescue program. Created during the dark days of 2008, the three Maiden Lane limited liability companies were set up by the Fed to stabilize the derivative markets in which AIG was a major player, as well as facilitate the takeover of Bear Stearns by JP Morgan.

According to Bloomberg, "AIG’s rescue in 2008 swelled to include a $60 billion credit line from the New York Fed, as much as $52.5 billion for two Maiden Lane programs and a Treasury investment of up to $69.8 billion." Maiden Lane III LLC combined the New York Fed's $24.3 billion loan with $5 billion of equity from AIG, to buy $29.3 billion of collateralized debt obligations (CDOs) on which the insurer had written credit default swaps. At a time when the CDOs' values were plummeting, this allowed the swaps to be canceled, thus stabilizing AIG's potential liabilities. It also bought the luxury of time for the mortgage market to recover before selling the CDOs. Over the ensuing four years, the market recovered enough to close out the Maiden Lane programs gainfully.

Rip the Band-Aid?

For the market in homes to get going,
One should think of arresting the slowing
Of foreclosure delays
On homes that appraise
For less than the owners are owing.

Dr. Goose, who is no expert on America's housing malaise or real estate generally, recently checked into this topic to see what progress we are making at the halfway point in what appears to be a "lost decade". First the good news: according to MarketWatch, the level of foreclosure activity declined 3% in July (10% year-over-year), making the 22nd straight month that the numbers declined on an annual basis. However, the number of properties entering foreclosure rose 6% in July, the third such monthly increase in a row. 27 states registered y-o-y increases.

To a degree, it appears that the fall in overall foreclosure activity and the more recent rise in foreclosure starts relate to the same phenomenon: in states such as Florida, Illinois and my adopted state of New Jersey, foreclosure processing and procedural issues (or "levels of dysfunction," in the words of a RealtyTrac analyst) had slowed the pace of filings last year. The resulting bottleneck is evidently only now beginning to clear, resulting in the latest uptick in starts. By the same token, well-intentioned laws to aid distressed homeowners, such as that recently enacted in Oregon, may only delay the inevitable in many cases, thereby delaying as well the hoped-for clearing of the market.

At the End of his String

Said Bernanke: "I wish we could bask
In the glow of achieving our task
That the jobless plateau
And inflation stay low,
But at this point, it's too much to ask."

"It's likely no difference at all if I
Induce mortgage interest to fall, if I
Have no guarantees on
The prospects who seize on
Cheap funding, but can't really qualify."

The Federal Open Market Committee wraps up its latest two-day meeting this afternoon and, as always, releases a statement at 2:15. Reuters' Pedro da Costa writes that economists expect the Fed to indicate a "readiness to act" in support of flagging US economic growth. Eric Green of TD Securities, for example, says: "We do not expect any new initiative from the Fed. A dovish statement signaling willingness to do more will manage frustrated expectations for more (monetary easing)." One such heretofore unrequited expectation is that of a third round of quantitative easing ("QE3"), in which the Fed would likely buy long-term mortgage bonds. This would help to lower long-term interest rates, making it cheaper to borrow, and also "breathe fresh life into a housing sector that is finally showing some signs of healing," as Mr. da Costa writes. One problem with such a move is that, as previously noted in this space, US households have been trying to reduce their excessive debt levels, while many who might like to exploit cheaper mortgages cannot qualify to get one.

Own to Rent

Said a real estate vulture from Texas,
Buying properties out of his Lexus:
"Though it hardly may seem
The American Dream,
It's a help in reducing the excess."

Over at The Wall Street Journal, Dawn Wotapka and her colleagues on the real estate beat had a busy Wednesday, as they dug into the implications of strong increases in both new- and existing-home sales in the USA. New homes are now selling at an annualized rate of 343,000, 9.9% higher than a year ago. It's "another sign that the long-beleaguered housing market is in recovery mode," and suggests that "the industry's improvements are widespread." Existing home sales increased 3.4% in April, to an annual rate of 4.62 million, and the median home price has risen 10.1% in the last year, to $177,000. It almost goes without saying that sales volumes and prices are far lower than in the pre-crisis times.

Meanwhile, the Journal's Real Time Economics blog shows the cloud behind the silver lining: "Investors have accounted for about 20% of existing-home sales over the past few years. Speculators are taking advantage of falling home prices and low borrowing rates, as well as the shift from owning to renting. With demand for rental properties rising, landlord incomes increased 15% in the year ended in the first quarter." If losing your home and renting a new one is The New American Dream (as Dr. Goose put it), then investors have been quick to turn the dream into a reality.

Delayed Gratification

Said a young man without a home loan,
Back at home with his folks in Bayonne:
"While household formation
Is met with frustration,
My wild oats are sitting unsown."

Might there be demographic implications in the US economic data and outlook? A couple of current posts in The Wall Street Journal's Real Time Economics blog leave one to wonder if a "baby bust" may be developing. First, stagnant wages are limiting consumer spending; since October 2010, real wages have declined 1.2%, and consumers have limited capacity to tap their already tapped-out credit card lines to propel domestic spending. Secondly, RTE reports that the Conference Board has looked into the future of housing and seen a wave of renting and downsizing; actually, that sounds like the present if you add living at home with the parents. It all adds up to less room for the pitter-pattering of little feet, and less money to keep them in baby booties, in the foreseeable future.

Money, Power & Wall Street - The Limericks

The tale of financial collapse
Is ever-enthralling, perhaps
Because of the way
The reckoning day
Has evaded those gluttonous chaps.

Thus, a crisis with hardly an equal
Has an ending that doesn't quite speak well,
Like a Hollywood thriller
Whose psychopath killer
Escapes to return in the sequel.

On Monday evening it seemed as though the whole of the financial Twittersphere was glued to, and tweeting about, the PBS Frontline documentary "Money, Power & Wall Street". Although we all know the story by heart, it seems that we cannot tear ourselves away; perhaps because, four years later, so little has changed in the financial landscape and no-one has been brought to justice for wrecking the global economy. It's really as if "the killer is still free." Some of the evening's most memorable tweets reflected this foreboding sentiment, from the earnest:

Truly, how can people watch this and still say we should repeal financial regulation and go back to the old status quo? #frontline

— Austan Goolsbee (@Austan_Goolsbee) April 25, 2012

To the angry:

Derivatives STILL remain exempt from Insurance regulations, have no reserve requirements $AIG $BAC $C $LEH $BSCwashingtonpost.com/business/credi… $$

— Barry Ritholtz (@ritholtz) April 25, 2012

To the snarky:

Obama: "I'm gonna change everything on Wall Street, right after I take this meeting with Robert Rubin..." #frontline

— Downtown Josh Brown (@ReformedBroker) April 25, 2012

What's your take on the crisis and the documentary?

Q&A at the Mortgage Fraud Settlement Negotiations

"Pray tell us: what must we do,
That the Feds and the states will not sue?"
"In dollar terms: 25,200,000,202."

The Obama administration and 49 US state attorneys general have announced a $25 billion settlement of mortgage foreclosure fraud charges with the five biggest mortgage loan origination banks. The five firms - Ally Financial Inc./GMAC Mortgage, Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. - will underwrite benefits to certain mortgage borrowers that are modest in their individual impact but may provide a marginal impetus to the housing and mortgage markets. The benefits include principal reduction for those at imminent risk of default; refinancing eligibility for some "underwater" borrowers; and $2,000 cash payments to some whose homes were foreclosed during the last three years. However, the largest impact of the settlement is not on homeowners but on the banks, from which a significant legal risk has been removed. Banks are not completely out of the woods yet, though; bondholders can still sue to have the mortgage originators buy their bad loans back.

Fannie, Freddie, Financial Crisis

A party that needn't be named
Made GSEs chiefly to blame
For the mortgage collapse,
Though inquisitive chaps
Say the data don't back up this claim.

Writing in The Big Picture blog, Roosevelt Institute fellow Mike Konczal brings out the data to refute the oft-heard claim that the cause of the mortgage crisis was Congress' pushing Fannie Mae and Freddie Mac to make imprudent loans. Among the key facts:

• More than 83% of subprime loans issued to 2006 were from private firms, and went into the private label securitization market. 
• From 2002-2005, the GSEs (government-sponsored enterprises, such as Fannie and Freddie) saw their share of US mortgage originations drop from 50% to 30%. 
• Before the crash, conservative think tanks such as the American Enterprise Institute were arguing that the GSEs were were blocking the issuance of subprime mortgages, by purchasing too few of them. 

Obama Harps on his Refi Program

"Since Congress won't do as they oughta
For folks who have homes underwater,
As Lender-in-Chief, I
Will back ev'ry refi
Allowed by executive order."

With an eye toward the 2012 election, President Obama has evidently decided that half measures taken on one's own are better than whole measures frustrated by House Republicans. Thus, the Administration announced with great fanfare a loosening of restrictions on its HARP (Home Affordable Refinance Program), which would actually benefit only one out of eleven underwater homeowners. For those mortgagors with loans taken out before May 2009 and guaranteed by Fannie Mae or Freddie Mac, the new HARP will allow a refi at any loan-to-value ratio, doing away with the former 125% limit. Indications are however that only about a million homeowners qualify for this "expanded" program, and it does not appear that the pace of refinancing will pick up, so the most telling impact of the new HARP may be on the campaign trail, when the President runs against the "do-nothing Congress."

Crowded Out by MasterCard

The thing that is most in the way
Of a really robust USA
Is the mountain of debt
On consumers who let
All their spending get carried away.

Joe Weisenthal points out in the Business Insider that the biggest impediment to American employment growth is a lack of demand for goods, which can be traced back to the enormous household debt burden (see graph). Though declining, it is still too high. The only ways around this problem are to develop more exports or substitute government spending until consumers get back on their feet. In a much-maligned conclusion, Weisenthal determines that, far from "getting in the way," government is failing to do its part.

It's Your Turn

Said Bernanke, recounting the facts,
While deflecting some Red-State attacks:
"The Fed did our part;
It's on Congress to start
To simplify filing one's tax."

Fed Chairman Ben Bernanke addressed the Congressional Joint Economic Committee on Tuesday, and told them that they and their colleagues must work together with the White House to renew the "close to faltering" American economy. His suggested Congressional to-do list includes finding a permanent solution for Fannie Mae and Freddie Mac; easing mortgage refinancing while enabling banks to rent out foreclosed properties; and simplifying the US tax code. At the same time, he dismissed the ever-more-frequently heard Republican criticism that, by keeping interest rates low, the Fed is enabling federal budget deficits. "I don't think that's a valid point," retorted the Chairman.

Operation Twist

Said Bernanke, groovily dancing:
"Our economy needs more enhancing;
And the timing is apt
For the fiscally strapped
Whose mortgages beg refinancing."

Fed Chairman Ben Bernanke hopes that the reserve bank's remake of its 1961 hit "Operation Twist" will cause the mortgage market to shake it up, baby.  So named because it coincided with the popular dance craze, the original Operation Twist attempted to lower long-term rates through the Fed's buying long-term Treasury bonds and selling short-term notes. Similarly, the 2011 cover version, announced after a two-day meeting of the Fed Open Market Committee, calls for the sale of $400 billion worth of notes with maturities of 3 years or less, the proceeds of which will be used to buy 10- to 30-year bonds. In addition, maturing mortgage bonds in the Fed's portfolio will be rolled over into new mortgage purchases, in a bid to support the still-ailing home loan market.

Adrift on the Red Sea

A maritime man from Schenectady,
Surveying the seascape dejectedly,
Said: "A fifth of home loans
Are, like Davy Jones,
Underwater, with negative equity."

"Are homeowners fixing their balance sheets?" asks the Wall Street Journal's real estate blog, and cites lower-trending US mortgage default figures as a hopeful sign. However, it goes on to say that the "shadow inventory" of homes in foreclosure -- as well as those with defaulted or delinquent loans likely to be foreclosed on -- has remained consistent. CoreLogic recently estimated that 22.7% of all homes have negative equity, a figure essentially unchanged over the last two years. Bewarrrre Davy Jones locker, all ye mortgage lenders!

A Deadbeat's Confession

"When my debt service proved but a fiction,
The bank didn't press for eviction,
As experience showed
That an empty abode
Would only invite dereliction."   

A visitor from Florida gave anecdotal evidence that many mortgage lenders there would prefer to allow a defaulted borrower to remain, and maintain a house, rather than foreclose and invite the unwanted attention of squatters and vandals in neighborhoods with many vacant homes.

Neighborly Advice

"From one's mortgage," said Mr. DeLay,
"One cannot in good faith walk away;
When I got in a jam,
I stayed where I am,
And simply neglected to pay."

A visitor from Florida mentioned this increasingly common practice there, which renders quaint the old dilemma of whether to "walk away" from one's underwater mortgage.  Anecdotal evidence is that some "home owners" continue to occupy their dwellings for up to three years without making the home loan payments. If only the Smiths at 212 Willow Lane had known about this...