Why did Americans (and Spaniards and Irish) borrow so much against housing in the 2000s, only to find themselves stuck with more debt than assets? It sounds like a simple question, but it’s surprisingly difficult for economists to agree on an answer.
The standard approach is to attribute the excesses to changes in the behaviour of lenders, who, for whatever reason, became much more eager to give mortgages to people they previously would have avoided with terms they previously would have considered reckless. (For more on the European cases, see here.)
For example, about a third of all mortgage debt originated in 2005 and 2006 was either subprime or “alt-A”, according to data from Inside Mortgage Finance, compared to the stable 1990-2003 average of about 10 per cent. Subsequent experience tarnished these product segments so badly they effectively disappeared. Read more
We understand if you missed it given all the focus given to another report published on Friday by the US Bureau of Labor Statistics, but we want to call your attention to a new BLS study on housing costs.
The most expensive metro area isn’t New York or San Francisco but Washington, DC — after comprehensively counting the costs of utilities and other services besides the raw amount of money spent on rent or a mortgage. Meanwhile, it costs more to live in Detroit than in Miami! Read more
It’s only one of several reasons, of course, as housing is a much bigger source of wealth and collateral for households and was obviously devastated in the crisis (hurting the middle class and poorest Americans the hardest). Read more
Two charts to nurture some hope this morning.
First, a reminder that when long established trends turn, they can do so very quickly. And second, if there is a real turn in the US, there is plenty of scope for activity to pick up. Read more
The Q2 results from Wells Fargo and JP Morgan have again raised the issue of declining mortgage refinancings (if rates stay elevated), along with spurring more general worries about the housing market.
Here’s the Wall Street Journal on Friday: Read more
Even before last week’s FOMC meeting and the subsequent spike in long-term rates, the US refinancing wave was already receding, the result of both the higher rates and the limited pool of eligible borrowers.
Refinancing showed further unsurprising signs of decline in Wednesday’s mortgage application numbers, even as the number of applications for home purchases continued its steady uptick. (Though be careful with the dual Y axes above, and see Calculated Risk for more). Read more
It was only a matter of time before the mortgage refinancing wave receded.
As we noted last October, the limited pool of eligible borrowers meant that refinancing activity was already limited in how much it could increase. Read more
Every now and then, we take a look at why the US housing comeback continues at a pace that has disappointed those of us who believed (and still hope) that a rebound in household formation will produce a self-sustaining acceleration in the broader recovery.
After the release on Thursday of disappointing housing starts but encouraging building permit numbers for April, we’ll do so again now. Start with this helpful chart from Capital Economics: Read more
Courtesy of Goldman Sachs.
A chart from Goldman economists showing their projections for the housing market’s contribution to GDP growth through the end of next year:
Most of the discussion about quantitative easing and the housing market in the last few years has naturally focused on how the appeal of lower rates is helpful, but does nothing about the more structural impairments in mortgage markets.
But monetary policy functions in numerous ways, one of which is the portfolio balance channel — whereby investors are incentivised to invest in riskier asset classes because the yields on safe assets have pushed down. BNP Paribas have an interesting note arguing that this too is having an impact on housing, specifically via the rental market: Read more
We saw some funny and half-mocking tweets in response to this op-ed by Roger Altman, mostly because “A housing boom will lift the US economy” sounds like a headline that was found inside a time capsule packed a decade ago, maybe one you’re not supposed to open because it houses evil spirits, like the Dybbuk box in the new Sam Raimi flick.
Whatever, given our own ruminations on the topic (see the related links below), we think Altman deserves to be taken seriously. Read more
If you haven’t been reading your daily Calculated Risk, the analysts at CreditSights have a useful roundup of this week’s mostly positive US housing data:
There was a swathe of data on the U.S. housing market out this week, which continued tounderscore that the nascent real estate recovery is becoming more convincing, although inabsolute terms it remains a soft recovery.
It might just be us, but Fannie and Freddie’s makeover by the US Treasury last Friday seems not to have got much broader (political) play. It’s almost trite to observe that the GSEs have had almost no hearing in the 2012 election noise machine so far.
Odd when this could be a turning point in the mortgage agencies’ ties to the government. Read more
So farewell then, 10 per cent Fannie and Freddie senior pref dividends.
It’s GSEs. It’s a guilty pleasure of sorts in housing recovery indicators. It’s also – arguably – the future of US housing reform.
Freddie Mac posted $3bn of net income in the second quarter. That means it has positive net worth (well a pat on the back for you, Freddie) and hence, it’s paying far more back to the US Treasury this year than it’s taking out, in dividends on the government’s preferred stock. (See also Fannie, earlier.) Read more
We think this idea deserves a little more attention. It’s another reason to maybe not panic about the fall in the US ISM manufacturing reading earlier in the month.
From Josh Lehner at Oregon Economic Analysis (and a healthy hat-tip to Calculated Risk for pointing the way): Read more
Three’s a trend — Citi’s joined JP Morgan and Wells Fargo in reclassifying home equity (junior lien mortgage) loans as bad assets this quarter.
From a footnote in its Q1 results: Read more
Released by the Justice Dept on Monday. First — the Complaint by US government agencies against Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo and Company, Citigroup INC. and Ally Financial Inc.
(Click image for full doc) Read more
A chart from Goldman Sachs:
Bank of America stops pricing and piping over new mortgages to Fannie. BofA will take its high-quality housing collateral elsewhere in this town, obviously. (?)
From the latest 10-K anyway: Read more
The details of the foreclosure settlement this morning mostly reflected what had been reported late last night, and here was the final take from the FT’s Shahien Nasiripour and Kara Scannell:
Under the agreement, Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial will be forced to improve their mortgage procedures, reduce borrowers’ loan balances and monthly payments, and make about $4.2bn in cash payments to an estimated 750,000 aggrieved homeowners and state governments. … Read more
Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial are on the verge of signing a deal on foreclosures with nearly all US states, the FT reports. The agreement, which could come Thursday or Friday, would see banks pay $5bn in penalties in return for states dropping litigation over mortgages, the WSJ says. The agreement would require banks to provide $3bn in refinancing aid to home-owners. Another $17bn is tied up in “credits” that banks would earn for giving payment relief to borrowers, but this sum could increase to $30bn. That means the “value” of the settlement could vary between $25bn and $40bn. A breakthrough in getting a deal came after New York and California decided to join talks, Reuters adds.
President Barack Obama will announce details of his plan to allow millions of home owners to refinance into lower-cost loans later on Wednesday, the WSJ says. The proposal appeared in President Obama’s State of the Union address, but remains controversial in Congress for its up to $10bn costs. Republicans have said they will oppose taxing banks to pay for the measure. The White House is nevertheless also likely to pursue policies that avoid Congressional approval, such as a plan to auction foreclosed homes en masse to investors seeking to develop them as rental property.
In his second meeting as chairman of the Federal Reserve in May 2006, Ben Bernanke heard a Fed governor warn about the nation’s mortgage market. But Mr Bernanke described the cooling of the housing boom as a “healthy thing”, reports the WSJ. “So far we are seeing, at worst, an orderly decline in the housing market,” he said. Mr Bernanke’s words were contained in 1,197 pages of transcripts released Thursday of closed-door Fed meetings from that year. FT Alphaville has more quotes and links to the most cringe-worthy highlights.
A grand settlement between the government and banks to resolve the foreclosures scandal may feature large principal reductions for mortgage holders, exposing MBS investors to losses, the FT reports. It is likely banks would be able to reduce loan principal on mortgages owned by investors through mortgage-backed bonds, people familiar with the matter said. Allowing banks to count investor-owned mortgages as part of their aid to borrowers would follow the pattern of a controversial 2008 deal between Bank of America and regulators. Meanwhile, the Treasury has declined to rule out changes to the Hamp programme in its last year, Housing Wire reports.
Finance writers and television shows have used flipping houses as a symbol of the pre-crisis housing bubble.
But we weren’t aware of any statistical evidence until we saw this post on Monday from Liberty Street Economics, the New York Fed’s blog. The post is well worth a read and if you’re really interested here’s the underlying paper. Read more
On Thursday the Massachusetts Attorney General Martha Coakley sued five US banks for alleged illegal mortgage practices, further destroying hopes of a grand 50-state settlement between state lawyers and banks. This was expected but it’s still a potentially damaging blow to Bank of America, Wells Fargo, JP Morgan Chase, Citi, and GMAC, and to a housing recovery that is yet to even begin.
The contents of the suit should be familiar to FT Alphaville readers — robo-signing, Ibanez violations, Mers, and loan modification failures. Read more
Policymakers are considering ways to buy troubled government-guaranteed mortgages from a new refinancing programme in case investors balk, people familiar with the matter have told the FT. Mortgages refinanced under the Home Affordable Refinance Program, which has recently been extended to cover more loans, are currently not eligible for packaging into securities. Officials are considering allowing Fannie Mae and Freddie Mac to issue MBS made up of refinanced loans to investors, and for the agencies to buy the MBS to retain on their balance sheet if a private market fails to develop.
Richard Koo, the balance sheet recessionista’s balance sheet recessionista, tucked this chart into the back of his note last week: