More bad news on the housing front

[nathanm]

This is nice. FHA's reserves are getting dangerously low. In 2006 when they weren't a big part of the mortgage making market, this wouldn't be a big deal. Now that they're guaranteeing something on the order of a quarter of all new mortgages, it is a bigger issue. For a while last year FHA guaranteed mortgages were just about the only reasonably priced mortgages available for all but the most perfect borrowers.

I'm wondering how many of the fraudulent loan originators just moved to FHA when everybody else stopped lending.

If they have to reduce their guarantee volume, that will severely impact home prices, especially in lower end properties that are currently also being propped up by the FTHB tax credit. Sadly, that is the one area that's been the bright spot in the housing market.

http://www.reuters.com/article/gc03/idUSTRE58H2TG20090918

[cannon_fodder]

Sorry, but we need to remove "home ownership" as a government subsidized part of the American dream.  Or at least redefine home ownership to enable people to buy into a building or something other than the classic "American dream" of suburban sprawl.   It discourages density, it encourages unsustainable and inefficient cities, and helps create expenses many families really can't afford (your mortgage payment+insurance are the tip of the home ownership iceberg), AND is contributing to the bankrupting of our government.   

Why do we want to encourage people of wealth to construct palaces and encourage people of limited means to take on a huge debt load?  If they want to, fine.  If they don't, why does the government want to push them to?  No government encouragement for home ownership = no housing bubble to begin with.  So claiming it is needed to correct a problem that it solved is a circular argument.

When we need tax incentives, guaranteed loans, and bailouts to make the system work . . . it's probably not a sustainable system. 

[Conan71]

This is nice. FHA's reserves are getting dangerously low. In 2006 when they weren't a big part of the mortgage making market, this wouldn't be a big deal. Now that they're guaranteeing something on the order of a quarter of all new mortgages, it is a bigger issue. For a while last year FHA guaranteed mortgages were just about the only reasonably priced mortgages available for all but the most perfect borrowers.

I'm wondering how many of the fraudulent loan originators just moved to FHA when everybody else stopped lending.

If they have to reduce their guarantee volume, that will severely impact home prices, especially in lower end properties that are currently also being propped up by the FTHB tax credit. Sadly, that is the one area that's been the bright spot in the housing market.

http://www.reuters.com/article/gc03/idUSTRE58H2TG20090918

I'm trying to figure out what is so extraordinary about this story.

I'm not worried.  The government will continue along it's pattern of the last 8-9 years and will simply print more money, issue more debt and move on down the road.  This administration and Congress will ensure that affordable housing is a reality.

Considering that the government owns Freddie and Fanny now, a government-backed mortgage is more the rule than exception.  Also, considering that the government is propping up banks with failing credit portfolios, it seems as if the Feds are backing all mortgage loans. 

[nathanm]

Sorry, but we need to remove "home ownership" as a government subsidized part of the American dream.  Or at least redefine home ownership to enable people to buy into a building or something other than the classic "American dream" of suburban sprawl.   It discourages density, it encourages unsustainable and inefficient cities, and helps create expenses many families really can't afford (your mortgage payment+insurance are the tip of the home ownership iceberg), AND is contributing to the bankrupting of our government.   

Why do we want to encourage people of wealth to construct palaces and encourage people of limited means to take on a huge debt load?  If they want to, fine.  If they don't, why does the government want to push them to?  No government encouragement for home ownership = no housing bubble to begin with.  So claiming it is needed to correct a problem that it solved is a circular argument.

When we need tax incentives, guaranteed loans, and bailouts to make the system work . . . it's probably not a sustainable system. 

I agree in general that all the tax incentives and whatnot are unneeded. However, homeownership is an excellent means of fostering communities. One thing that I agree with Republicans on is that owners tend to take better care of their property than renters/absentee landlords. FHA, at least, will insure loans for higher density housing (condos).

Where FHA is needed is to help the underserved. People who, say, don't have a credit score because they eschewed credit cards, thus being untouchable by traditional banks without 20% down or more no matter what their verifiable income and assets. Or people who are a few years out of bankruptcy and have stable employment and the means to pay the loan.

FWIW, the FHA loan programs fund their own operations and have since the 30s. The only reason it's having an issue now is the collapse of traditional PMI companies and subsequent flight to FHA. (Which is one of its purposes)

Where the problem may come in is if the magic mortgage brokers moved on to FHA to continue their scams after the regular channels dried up. If there was as much outright fraud in FHA guaranteed loans as there was in the conventional market, there might be an issue. FHA doc requirements are pretty stiff, however.

And I don't really care one way or the other about owning. It was literally cheaper to buy than rent, so we ended up buying. I don't think we should push people one way or the other, but I have no problem with a program that helps people buy if that's what they choose. FHA borrowers pay insurance precisely so the program can help those who might otherwise be unable to purchase without being a drain on the public coffers.

Anyway, in the big picture, if home prices fall more, it's bad news for everybody. Not because your home is worth less, but because the recovery rate on foreclosure will fall even farther. Besides, the nationwide mortgage/rent ratio is back down from the stratosphere. Prices shouldn't fall a whole lot farther unless there's deflation across the entire economy. A lack of lending to qualified buyers would force home prices artificially low.

Additionally, a lack of lending decreases workforce mobility, exacerbating unemployment, among many other effects.

Conan: While the FHA insurance is explicitly guaranteed by the taxpayer, that's not really the issue. The bigger issue is FHA being forced to suddenly cease insuring new loans due to lack of reserves. Given the FHA's stringent documentation requirements, I don't think you'll see nearly as big of an issue with defaults in the FHA insured portfolio absent fraudulent originations. It should be closer (although somewhat higher than) Fannie and Freddie's owned mortgage losses, which is not where they're "losing" most of their money. Most of their writedowns have come from MBS, not from mortgages on their books.

Hell, with interest rate spreads where they are, Fannie and Freddie are making a killing on their mortgage book. They're vastly cash flow positive, as most banks are right now. What may kill Fannie and Freddie is the high interest rate (10%, IIRC) on the government support.

[Wrinkle]

nathanm, you seem to have a handle on all this.

Tell me, isn't the Fed printing more money just the equivalent of devaluation of the dollar? iow, making a dollar buy less. So, it's a form of inflation by itself. Adding all this cash to the circulation keeps what has occurred in balance, all while simultaneously devaluing the entire system.

Interesting reading, but not sure I understand it all.

[FOTD]

nathanm, you seem to have a handle on all this.

Tell me, isn't the Fed printing more money just the equivalent of devaluation of the dollar? iow, making a dollar buy less. So, it's a form of inflation by itself. Adding all this cash to the circulation keeps what has occurred in balance, all while simultaneously devaluing the entire system.

Interesting reading, but not sure I understand it all.

The devaluing of the system took place under the Busheviks to get re elected. They manipulated the Fed and the treasury to keep interest rates low, they loosened regulations and oversight and they spent a trillion on the military attempting to inflate the economy. The result was a continued deflationary period. We need to reinflate. So printing more money is not all that bad.


From Bear to Bull
"James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery."
This mornings WSJ had an article by James Grant that was bullish. This really surprised me...
http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html#mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop

"With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery."

[Wrinkle]

The devaluing of the system took place under the Busheviks to get re elected. They manipulated the Fed and the treasury to keep interest rates low, they loosened regulations and oversight and they spent a trillion on the military attempting to inflate the economy. The result was a continued deflationary period. We need to reinflate. So printing more money is not all that bad.


From Bear to Bull
"James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery."
This mornings WSJ had an article by James Grant that was bullish. This really surprised me...
http://online.wsj.com/article/SB10001424052970204518504574420811475582956.html#mod=WSJ_hpp_MIDDLENexttoWhatsNewsTop

"With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery."

I'm no monetary heisman, but that sounds like crap to me.

There's no greater manipulation ever than what's going on now.

[nathanm]

nathanm, you seem to have a handle on all this.

Tell me, isn't the Fed printing more money just the equivalent of devaluation of the dollar? iow, making a dollar buy less. So, it's a form of inflation by itself. Adding all this cash to the circulation keeps what has occurred in balance, all while simultaneously devaluing the entire system.

Interesting reading, but not sure I understand it all.

The wealth destruction brought on by fraudulent mortgage brokers in concert with the Mansack and the other banks who got in on the action later was very deflationary. To the tune of a couple trillion dollars. In essence, the "printing" of more money, as you put it, is preventing deflation. It actually didn't fully offset the deflationary impact. The CPI went down last year, which is why the folks on Social Security were screaming about not getting their cost of living increase.

It is true that if the spending continues at the pace it has for more than another year or two, it will cause inflation. The difficulty is navigating the narrow rapids and not crashing on the rocks to both our left and right. On one side we have "not enough stimulus," which results in more wealth destruction, deflation, more layoffs, and continued (or renewed) recession. On the other, we have "too much stimulus," which results in rampant inflation. Honestly, up to about somewhere between 5-10% inflation a year, too much inflation is better than deflation.

It sucks for savers, to be sure, but inflation also promotes economic recovery to some degree. Unless you hit it just right and get stagflation instead. (Although I argue that stagflation was mostly caused by women entering the workforce at a time when economic fundamentals were not strong) We're in rocky waters, to be sure, and doing too little will be just as bad if not worse than doing too much.

The dollar had been pretty strong until the recovery, because people around the world still consider it about the safest currency to be in. It's been doing poorly the last few weeks, but we may well see a bounce vs. the Euro soon as people cash in their gains. The dollar was up against the Yen last week, which is a good sign. I think we'll be fine unless we end up getting our debt up to 90-100% of GDP, which shouldn't be necessary unless we end up back in a deep recession in short order. In that scenario we might end up with an even weaker dollar, but that will be good for employment here, so a weak dollar isn't all bad.

[Red Arrow]

Honestly, up to about somewhere between 5-10% inflation a year, too much inflation is better than deflation.

I'll go along with some inflation compared to deflation but I think 10% is pushing too much.  I got really good returns on my CDs in the Jimmy Carter years but they weren't really worth any more than what I put into them by the time inflation got done with them.  As I approach retirement age, I don't want a lot of inflation.

[nathanm]

I'll go along with some inflation compared to deflation but I think 10% is pushing too much.  I got really good returns on my CDs in the Jimmy Carter years but they weren't really worth any more than what I put into them by the time inflation got done with them.  As I approach retirement age, I don't want a lot of inflation.

You'll get no argument from me unless the alternative is equally severe deflation. When deflation sets in, money doesn't get spent, even for productive needs, so the economy goes to hell in a handbasket rather quickly. It's a similar cycle that gets most recessions and depressions going.

I'd rather stick with the 2-3% inflation regime. It seems to be a healthy norm that encourages consumption, but doesn't penalize saving too terribly, nor is it so fast that wage growth fails to keep up most of the time.