FT Alphaville noted earlier today the extent to which the US government is propping up the housing market. Programmes such as the Hamp are explicitly aimed at supporting house prices; while the Federal Reserve is due to buy $1.25 trillion worth mortgage-backed securities (MBS).
Moral (housing) hazard aside, the government’s support poses a major problem for the US economy. It means when the US government finally does withdraw its extraordinary policies there will be no one that can easily step in to take its place.
Traditionally banks and thrifts have accounted for about 20 per cent of total debt outstanding in the US credit mark, according to Deutsche Bank estimates. Much of that was focused on the housing finance market, where they held 42 per cent of mortgages. The problem is that lending hasn’t picked up yet.
Here’s a nice chart from Deutsche Bank to illustrate the problem:
That’s bank holdings of total loans, residential mortgage loans and agency MBS, and they continue to decline despite a host of initiatives, and sometimes public prognostications to the contrary.
Meanwhile the biggest part of the Fed’s ballooning balance-sheet comes from its MBS purchases:
See the problem?
The financing backbone of the American mortgage market has effectively been transferred from the banks to the government. We’re not saying the US government had much of a choice in this process, but it does mean they’re now on the hook for a functioning mortgage market for the foreseeable future.
As Deutsche Bank’s Mustafa Chowdhury and Marcus Huie put it:
We have described the zombie bank phenomenon before . . . No matter how favorable other factors are, bank participation in the mortgage sector has declined. Their US mortgage business has been reduced, despite quantitative easing and near-zero funding rates. It looks as if banks won’t be substantial buyers of mortgages, even after the Fed’s quantitative easing ends ends in March. Thus, in the long term, the omission of banks from their historical central role in the mortgage market is negative for that market.
It’s also worthwhile noting that the US government isn’t alone in this particular problem.
Concern has been voiced over money supply in the UK, as the Bank of England brings its own (massive) quantitative easing programme to an end. In Europe, analysts have claimed that the European Central Bank has created a liquidity monster through its various credit support operations.
Central bankers of the world — we do not envy thee.
Related links:
Is negative convexity the new Bernanke conundrum? – FT Alphaville
Could UK money supply collapse post-QE? – FT Alphaville
Teun’s tightening tactics – FT Alphaville