Friday, May 29, 2009
Tuesday, May 26, 2009
Tuesday, May 19, 2009
Tuesday, May 12, 2009
Monday, May 11, 2009
Fannie Mae and the Housing Market
Fannie Mae has just released 1st quarter results and they are very bad. As a result of the analysis, the Obama Administration is subsidizing the housing market by at least 50 Billion dollars a QUARTER. This calculation does NOT include any Federal Reserve or Treasury actions. For example, the PPIP or the Fed buying MBS securities. At some point the government cannot continue to subsidize the housing market by such large amounts EVERY QUARTER. Once the huge subsidizes stops, the housing market may face a 2nd collapse. This comment will cover the current delinquencies in the housing market, the hidden subsidizes the housing market is receiving and lastly an estimate of the policies Fannie Mae is going to have to take to become break-even.
1) Delinquencies
Notice the shape of the cumulative delinquencies in the following chart. You will see that the most recent four years have yet to have the curve 'flatten out' (or the 2nd derivative is still positive). This means the ultimate default rate is still hard to predict.
The 2nd chart shows some interesting detail. One of the most important variable is the Mark-to-Market LTV. If people's home loans are bigger than the value of the property, then the home owner has the incentive to default and if they are forced to sell (job loss or forced move) they will likely default. If over 40% of all loans in the state are above 100% MTM-LTV then the housing market CANNOT recover very easy. You will be constantly getting large numbers of foreclosures and these will keep the prices of properties low. Only a dramatic increase in demand will rescue the housing market. Historically, housing markets in this condition take YEARS to recover.
2) The hidden subizies the housing market is receiving.
The amount of the losses at Fannie Mae this past quarter are stunning. With $5 billion in revenue, they had $20.8 billion in CREDIT LOSSES and $28 billion in costs. Any attempt at bring Fannie Mae to break-even would require significant increases in revenue and dramatic decreases in costs. Yet they actually DECREASED their prices by 50%!!! SAY What?!!?!?
In the quarterly statement, the average guaranty fee charged by Fannie Mae fell 10% from 29.5 to 27.4. Given they only have control over a small percentage of the fee this is insane. Over 90% of this number is set from prior years. A change of this magnitude indicates they must be setting new business at 10bps or less. If they wanted to break-even they would RAISE the fee to 30-50bps instead of cutting the rate to 10bps. Note this low rate on their business is for the life of the mortgage loan (the next 30 years). Thus they are locking in a very low rate for future generations and it will be difficult for Fannie Mae to EVER be profitable.
How long can the government afford to give Fannie Mae $20 billion a QUARTER? The losses have yet to peak and this number may rise next quarter. What's more they are taking action to lock Fannie Mae into long-term losses. When will the government HAVE to stop this huge losses? When they do, the housing market will take a second dive down. Note also this is just Fannie Mae. Freddie Mac is having similar losses and FHA's insurance has to be taking a beating too. A guesstimate of $50 billion a quarter may be in the ball park.
3. To make Fannie Mae break-even the price they charge for guaranteeing loans HAS to rise. They have to increase the fee to as high as 50 bps. Yet because this increase in fee will be felt across the housing market, the likelihood of it happing is low. But the government is going to have to do something to stabilize the income and losses at Fannie Mae. They cannot continue forever to shell out $20 billion a quarter. Yet the policies currently being pursued will require that level of commitment.
Without a doubt the HUGE subsidy to the housing industry is starting to stabilize housing prices. Without the huge expenditure, housing prices would continue to fall; however, unless actual demand starts to increase or inflation really goes up, it's hard to imagine the circumstances under which the housing market does not take years to recover. The supply of housing is higher than the demand and subsidizing the demand does not make a healthy normal market.
1) Delinquencies
Notice the shape of the cumulative delinquencies in the following chart. You will see that the most recent four years have yet to have the curve 'flatten out' (or the 2nd derivative is still positive). This means the ultimate default rate is still hard to predict.
The 2nd chart shows some interesting detail. One of the most important variable is the Mark-to-Market LTV. If people's home loans are bigger than the value of the property, then the home owner has the incentive to default and if they are forced to sell (job loss or forced move) they will likely default. If over 40% of all loans in the state are above 100% MTM-LTV then the housing market CANNOT recover very easy. You will be constantly getting large numbers of foreclosures and these will keep the prices of properties low. Only a dramatic increase in demand will rescue the housing market. Historically, housing markets in this condition take YEARS to recover.
2) The hidden subizies the housing market is receiving.
The amount of the losses at Fannie Mae this past quarter are stunning. With $5 billion in revenue, they had $20.8 billion in CREDIT LOSSES and $28 billion in costs. Any attempt at bring Fannie Mae to break-even would require significant increases in revenue and dramatic decreases in costs. Yet they actually DECREASED their prices by 50%!!! SAY What?!!?!?
In the quarterly statement, the average guaranty fee charged by Fannie Mae fell 10% from 29.5 to 27.4. Given they only have control over a small percentage of the fee this is insane. Over 90% of this number is set from prior years. A change of this magnitude indicates they must be setting new business at 10bps or less. If they wanted to break-even they would RAISE the fee to 30-50bps instead of cutting the rate to 10bps. Note this low rate on their business is for the life of the mortgage loan (the next 30 years). Thus they are locking in a very low rate for future generations and it will be difficult for Fannie Mae to EVER be profitable.
How long can the government afford to give Fannie Mae $20 billion a QUARTER? The losses have yet to peak and this number may rise next quarter. What's more they are taking action to lock Fannie Mae into long-term losses. When will the government HAVE to stop this huge losses? When they do, the housing market will take a second dive down. Note also this is just Fannie Mae. Freddie Mac is having similar losses and FHA's insurance has to be taking a beating too. A guesstimate of $50 billion a quarter may be in the ball park.
3. To make Fannie Mae break-even the price they charge for guaranteeing loans HAS to rise. They have to increase the fee to as high as 50 bps. Yet because this increase in fee will be felt across the housing market, the likelihood of it happing is low. But the government is going to have to do something to stabilize the income and losses at Fannie Mae. They cannot continue forever to shell out $20 billion a quarter. Yet the policies currently being pursued will require that level of commitment.
Without a doubt the HUGE subsidy to the housing industry is starting to stabilize housing prices. Without the huge expenditure, housing prices would continue to fall; however, unless actual demand starts to increase or inflation really goes up, it's hard to imagine the circumstances under which the housing market does not take years to recover. The supply of housing is higher than the demand and subsidizing the demand does not make a healthy normal market.
Tuesday, May 5, 2009
Robry's Supply Numbers Stabilized.
The supply picture appears to have stabilized around 437 (+ or - 2) for the past 5 weeks. While everyone is waiting for the production to fall, at least the production is not increasing.
Friday, May 1, 2009
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