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More Socialized Housing Continues Assault on Capitalism

Posted by Larry Doyle on September 28th, 2009 8:43 AM |

Is there any doubt that the heart of our economic crisis centered on the mispricing of risk in a wide array of mortgage products? If that is in fact the case — and it is — then why does Uncle Sam continue to go down this road? In so doing, the ‘old man’ will only prolong the current housing crisis and likely promote another one as well. Why? A borrower’s ability to access funding at levels not correlated with that borrower’s ability to repay serves as an enormous incentive for the borrower to take undue risk. Inevitably, these greater risks will lead to greater losses. Who will absorb the losses? Ultimately, you and me. Where do we witness more of this socialized housing? Let’s navigate our way into the world of municipal housing finance.

Bloomberg details growing developments on this topic in writing, State Housing Agencies in U.S. Said Slated for Treasury Help:

State housing agencies in the U.S. would get help in providing mortgages to low-income borrowers under a U.S. Treasury Department program to provide new liquidity and purchase mortgage bonds, Treasury officials said.

The program would provide as much as $15 billion in fresh liquidity for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public.

A few questions, answers, and comments:

1. Given the enormous rally in the equity and bond markets, where is the private capital to support this initiative? There is plenty of private capital along with excess capital sitting at banks, BUT that capital would only lend itself at rates commensurate with the risks embedded in the value of the real estate and the borrowers.

2. The housing finance agencies’ inclination to ask Uncle Sam for financing and Uncle Sam’s willingness to provide it is nothing more than a socialization of this segment of the domestic housing market. How do we know? What entities will purchase the debt backing these financings?

Bloomberg highlights:

The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person.

Oh what fun. Uncle Sam will continue to bury more mispriced debt in the books of the current wards of the state, Freddie and Fannie.

3. Why would private investors be reluctant to more aggressively provide financing to these municipal housing finance agencies? We only need to revisit the fact that virtually all of these agencies utilized a form of auction-rate security known as a VRD (variable rate debt note), which in layman’s terms is nothing short of a form of Ponzi-type financing. Investors remain stuck with a tremendous amount of this debt.

If a borrower burned you on a financing, wouldn’t you increase the rate for future borrowings?

One final comment. Socialized housing finance will certainly dissuade private enterprise from entering any part of this market for a protracted period.

Capitalism remains under assault.


Related Commentary

$35 Billion Slated for Local Housing
by Deborah Solomon
Wall Street Journal; September 28, 2009

Water Finds Its Own Level

Posted by Larry Doyle on May 6th, 2009 5:15 AM |

If housing led us into this mess and is going to lead us out, then bring an extra pair of boots because we still have a long way to go.

Could the government intervention in the housing market promote short term support but also long term pressure? What do I mean? As I wrote yesterday in Mortgage Magic or Mortgage Mayhem, the government is providing real subsidies in terms of mortgage rates, guarantees, closing costs, and points. These subsidies are generating support to segments of the housing market. That said, housing in general remains under severe pressure in many regions. The higher priced markets with very limited government intervention are virtually stagnant.  

Pressure from the higher end is actually prompting some banks to allow for short sales in which the bank absorbs the loss from a home sold below the outstanding mortgage balance. Why would a bank do that? Very simply because the bank believes a sale now, even at a loss, is better than a foreclosure later generating an even greater loss.

I think we will see further downward pressure on prices and a delay in real improvement in housing due to the fact that more homeowners are now under water on their mortgages. The WSJ reports, House Price Drops Leave More Underwater. How many are underwater? Almost a third of American homeowners!!  

Government intervention is simply attempting to apply sandbags to this problem. While I fully empathize with the families impacted, these sandbags are no remedy or foundation for a long term fix. In fact, I think these sandbags are potentially causing pools of private capital to refrain from entering the market. Why is that? A market that is being artificially supported will always cause real money to wait in the wings. 

As the water finds its own level, the private capital will definitely enter. In so doing, it is very likely the private capital will ultimately push the market to levels even higher than current.

Any market participant knows, though, that a market that is manipulated may stay elevated for a short stretch but will move lower, find its natural clearing level, and then move higher. Housing is no different.     


What About Commercial Real Estate

Posted by Larry Doyle on March 16th, 2009 12:31 PM |

On my radio show last evening, I touched on some of the pressing issues facing our economy and, in turn, our markets. These issues include residential housing, municipal finance, automotive, and commercial real estate. While the first three issues seem to get a wealth of very personal and humanistic coverage from the media, the world of commercial real estate seems much more opaque. The site of large office buildings, suburban shopping malls, upscale hotels, warehouses, and apartment complexes do not evoke the level of human emotion involved in a foreclosed home, municipal layoffs, or factory closings. That said, the problems in the commercial real estate industry should generate just as much concern if not more. Why?

These commercial properties are the glue in our entire world of global finance. While the development of the commercial mortgage-backed securities market brought a large amount of liquidity to this sector, the shutdown of that market has just as quickly sucked the oxygen right back out. What has happened as a result? The lack of a transparent market has caused an overwhelming lack of liquidity and as a result properties are not trading. Why? The disparity between perceived value from the buyers’ and sellers’ perspectives is so wide that we could drive that proverbial Mack truck through it. (more…)

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