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Posts Tagged ‘mortgage defaults and delinquencies’

Housing Plans Promote Long, Slow Decline

Posted by senseoncents on February 26th, 2010 9:32 AM |

Why do I remain overall bearish on housing?

All reports to the contrary, the pace of delinquencies will continue to steadily pressure housing — especially in selected markets.

While the Obama administration is dogged by the issues within housing, I continue to believe that their approach is more exacerbating the situation than improving it. What is the crux of the problem within housing? The law of unintended consequences which changes the behaviors of some, given the engagement with others.

Bloomberg provides some insights on Obama’s new proposals toward housing in writing, Obama May Prohibit Home-Loan Foreclosures Without Preview:

The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. (more…)

Uncle Sam’s Continuation of the Housing Bubble

Posted by Larry Doyle on September 2nd, 2009 8:57 AM |

With housing prices down 30+% on average over the last few years, is Uncle Sam blowing fresh air into the housing balloon and actually creating another housing bubble? I believe that’s exactly what is happening.

If you are scratching your head and think I am off base with my assertion, please navigate this path along our economic landscape with me.

What drove the housing bubble? Cheap rates and undisciplined lending from the private sector. What added to the bubble? The internal ‘hedge fund’ portfolios of Freddie Mac and Fannie Mae.

What is perpetuating the housing bubble if not creating another mini-bubble of sorts? Cheap rates and undisciplined lending directly from Uncle Sam or supported by Uncle Sam. What is adding to this bubble? Those same internal portfolios at Freddie and Fannie.

What entities within Uncle Sam’s domain are providing the cheap rates and undisciplined lending?

1. The Federal Housing Administration ( FHA-insured loans are packaged into GNMA securities, which have the explicit backing of Uncle Sam)

2. The Federal Reserve’s quantitative easing program in which it has purchased hundreds of billions in mortgage-backed securities with authority to purchase a total of $1 trillion+ in MBS is also blowing fresh air into the balloon.

3. Freddie and Fannie are also supporting the bubble by providing fresh capital via their portfolios.

People may say that Uncle Sam had to provide this capital because the private sector would not. In fact, The Wall Street Journal makes that very assertion this morning in writing, Industry Seeks Fannie, Freddie Overhaul:

Together with the Federal Housing Administration, Fannie and Freddie now purchase or guarantee nearly nine in 10 new mortgages, since private buyers of such loans have been absent amid the housing bust.

I categorically do not accept this assertion. There is more than enough private capital in the system to purchase these mortgages. The issue is that the private capital will only purchase these mortgages at appropriate risk adjusted prices. Freddie, Fannie, the FHA, and the Federal Reserve are stepping ‘through the market’ and subsidizing mortgage rates by at least 50 basis points and, in turn, crowding out private buyers. The WSJ continues:

Fannie and Freddie have taken nearly $96 billion of capital infusions from the U.S. Treasury since last November. The companies have received nearly 10 times that amount in additional support through purchases of debt and mortgage-backed securities by the Treasury and the Federal Reserve.

[Picking up the Slack chart]

Who is benefiting from these subsidized rates? New homeowners. Do not think for a second, however, that risks are properly aligned in this current mortgage dynamic.

The continued mispricing of risk will mean our housing market will experience more protracted levels of delinquencies, defaults, and foreclosures than if mortgage rates were higher and real discipline were instituted into the lending process.

In fact, unless our country accepts a fully socialized mortgage finance system, mortgage rates will have to move higher to reflect private sector pricing. Risks and returns will then be properly aligned and the bubble will deflate.


Related Sense on Cents Commentary:
“Uncle Sam Guaranteeing Sub-Prime Loans” (May 4, 2009)

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