Tuesday, September 30, 2008

The FED's recent open market operations - The Alternative Bailout

This morning the Federal Funds rate was 7%. Doesn't sound so bad, huh? Well, the problem is that the Fed Funds target is 2%. What does this mean? The cost of US banks lending to each other was 5% higher than it should be. If the spread between the actual and target rates persists, banks become very reluctant to lend to each other and to consumers. Draw this out over weeks and the flow of money (lending) will be hindered and the economy will slow down considerably (more than we want).

But the Fed has not been sitting idly by. In order to reduce the Fed Funds spread, the Fed pumped $20b into the money markets at 9:40am today. In fact, over the last 30 days, the Fed has injected $530b into the US financial system. And the problem isn't just with US banks. We are in the middle of a worsening global credit crunch, with one of the indicators being the TED spread (a measure of illiquidity).

The open market operations in which the Fed is engaging is the ongoing bailout, or aka The Alternative Bailout. Granted, we're not talking about a $700b blank check. But the Fed's operations are just as risky, if not more. The assets that the Fed purchases ARE returned to the owner and the loan IS repaid with interest to the Fed, but repayment in the current market is not a given. The assets that the Fed is now purchasing, thanks to temporary policy changes announced on 9/14, are not just Treasuries and MBS (allowed in 2007) but a broad range of asset types such as equities, junk bonds and subprime mortgage bonds.

Fed takes fresh steps to battle credit crisis (AP, 09/29/2008)
"Under one new step, the Fed will boost the amount of 84-day cash loans available to U.S. banks. The Fed is increasing the amount to $75 billion, up from the current $25 billion starting on Oct. 6. Banks bid on a slice of the loans at an auction. That move will triple the supply of 84-day loans to $225 billion, from $75 billion, the Fed said. Meanwhile, the Fed will continue to make $75 billion worth of shorter, 28-day loans available to banks. All told, the total amount of cash loans — 84-day and 28-day — available to banks will double to $300 billion from $150 billion, the Fed said. Moreover, the Fed will make a total of $620 billion available to other central banks, expanding ongoing currency "swap" arrangements with them where dollars are traded for their currencies. That's up from $290 billion previously in such arrangements."

The Fed's balance sheet is $800b
, which leaves approx. $200b in lending ability. This is not a good debt-to-high credit limit ratio.

I don't think we have much leftover for Hedge Funds.

Friday, September 26, 2008

Largest bank failure in US history competes for attention

Under normal circumstances, news of the largest bank failure in US history would be THE news of the day/week/month. But these are not normal circumstances. The $700b government bailout remains center stage.

"Thanks to their flexible lending rules, Paul got a quick approval." Pretty much sums it up.

"Seattle-based Washington Mutual has about $307 billion of assets and $188 billion of deposits, regulators said. The nation's largest previous banking failure was Continental Illinois National Bank & Trust, which had $40 billion of assets when it collapsed in 1984."

JPMorgan Chase's purchase of the banks assets for $1.9b makes them the largest residential lender in the country. We're all aware of "too big to fail", but now we're talking about too big to succeed?

Tuesday, September 23, 2008

Murder, He Wrote

From the files of Prof. Michael "Sherlock" Holmes, great-great-great-grand nephew of the noted Baker Street detective by adoption on his mother's side via a lesser known cousin: 

I have gathered an auspicious lot in the manor’s living room today for my first interviews.  President Bush and members of his administration.  Noticeably absent, however, is Secretary of Treasury Henry “Hank” Paulson.  I must question him later.

My other suspects wait in sequestered rooms of the large, country manor, guarded by Chief Inspector Donnybrook’s bobbies. 

“We’re here on the most solemn of occasions,” I say starting off.  “We’re to investigate a murder.  A murder most fowl!”

A piercing female scream interrupts me but punctuates my accusation.  The banshee cry comes not from Condi Rice but from my gracious and lovely assistant, Miss Longleggs.  Talented in so many areas, Miss Longleggs also possesses a heighted flair for the dramatic.

But I continue:  “The death of the United States housing market.   The death of the American dream.  And perhaps, even the death of the U.S. financial system.”

Sitting on the edge of an ottoman with his hands confidently riding his knees, George Bush looks distracted, as if he’s waiting for permission to run to something more important. 

“Let’s get this over with.  I’ve got a war to prosecute and wrap up.”

All I can think is that somewhere there’s a baseball game that’s about to start. “Yes, Mr. President.”

I rub my forehead, remembering that Hercule Poirot always tried to care for “his little grey cells,” before solving a crime. 

“Mr. President, are you familiar with the term, ‘the buck stops here?’”

“Is that a hunting phrase?” he asks with a hint of a smile.

Geez, this is going to be a long interview.  “No.  It’s . . .”

“Come on, I know what you’re talking about. “  Mr. Bush looks a little disappointed that I didn’t get his joke.  “You’re referring to the faceplate Harry Truman kept on his desk in the Oval Office.”

“Yes, he meant that all responsibility ends in your office.  There’s no one else to pass the buck up to.”

“So what you’re saying is that because these mortgage difficulties occurred under my watch, that I am somehow responsible for this mess.”

“You catch on fast.”

“Let me let you in on what seems to be a secret to most people.  I’m smarter than I look.  You don’t become President of the United States by being a dumb ass.” “Hell, I had better grades at Yale than John Kerry did.  And he got lauded as a genius, while I’m supposed to be no smarter than a box of hair.”

His soft, phlegmatic face hardens into something of gravitas.  He bears his gaze and takes an Alpha-male step towards me.  “And I’m nobody’s, nobody’s. . . What’s that term?”

He looks around the room.  “Karl, what’s that word for a thing you control by strings?  Where’s Karl Rove when you need him?”

His staff just shrugs and shakes their heads.

“We did try to subpoena him, but he wouldn’t show up,” I respond.

“Marionette! That’s the word I was looking for.  You know, stringy puppet.   I’m nobody’s stringy puppet.”

I straighten my backbone.  “Mr. Bush, this whole debacle has taken place under your administration.  Mr. Obama, who in all likelihood will win the next election, runs on a platform that has little substance other than the promise than to be different from you and your policies.”

He points his finger at me.  “Every administration only has so much attention they can devote.  It’s finite.  You can’t raise the amount of attention you give to the war on terror without lowering the amount you give to something else. After 9/11, we engaged ourselves in a full scale assault on fascist Islamism.  That was, and still is, the greatest threat to our nation. 

“So is that your alibi?” I ask incredulously.

“Yes, and it’s a damn good one.”

“Let me give you that for the moment.  What about the money supply, President Bush?  You made money so cheap that it fueled the housing bubble.”

“That was Alan Greenspan.  Go talk to him.”

“I will.  But right now, I’m talking to you.  You could have reigned in Mr. Greenspan.  You could’ve fired him if he didn’t listen to you.  But you let him practically give money away.”

“After those planes hit the Twin Towers and the Pentagon, we faced a similar economic crisis as we do today.  And we needed to go to war.  I couldn’t let the nation face a major war and a depression at the same time.  So I let Alan loosen the reigns.”

“You did more than that.  I remember in the days after the terrorist attack you encouraged people to spend.   Take a trip to Disneyland, you even said.”

“Yes, we needed consumer confidence.”

“But how does that mesh with every other time we’ve gone to war in the past.  Presidents like Franklin Roosevelt called on people to conserve, put their savings into war bonds.”

“We have a fundamentally different economy than in the 30’s.  Today, we don’t have a large manufacturing base.  It’s all about consumer spending.  I had to keep the economy going.

“Even if it came to this bubble?”

“Given what we faced, yes, I’d say.  Even if we faced this bubble bursting.”

I take out my pad with notes.  “But there have been more specific accusations against you, Mr. President.  A one-time attorney general even, claimed that you did nothing to protect the consumer who bought most of these home loans.

“He wrote in the Washington Post: ‘Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.’

“’Let me explain: The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers.’

“’In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government's actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.’

“But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks.’”

“And who was this prominent writer?” The President asked wryly.

“Er, it was Elliot Spitzer.  He was a crusading attorney general who went after Wall Street. . .”

“I know who Elliot Spitzer was.  Tell me, was this written before or after he was completely discredited as Governor of New York by sleeping with hookers and illegally paying them?”

“Well, sir, before.”  Suddenly, I feel like I should’ve kept my mouth shut.

“Does anyone hold him in much regard now?”

“No, sir.  But you still don’t seem to get the point.  You were at the head of the switch when what Alan Greenspan has called the worst financial crisis in over a hundred years has occurred.  Why don’t you seem that bothered by it?:

A look of confidence overcame his visage.  “Because long ago, I stopped worrying about what people thought of me and instead did what I thought was right. I go to sleep not troubled by what my poll approval numbers are.  I rest with assurance that when history knows the full story, of what we faced, and what my administration has accomplished in the war on terror that I shall be vindicated.”

“That future judgment doesn’t help a lot of people right now.”

“Don’t let my phlegmatic exterior fool you into not thinking I don’t know that they’re not hurting people right now.   Too many people in the press and the public have mistaken what they see as calmness as aloofness.”

“And what would you call it, sir?”


“You should probably be a little less equanimous and a little more concerned about your approval ratings.  Last I read, they were at 27%.”

He seems impressed.  “That good, huh?  For a while I worried that I might actually get to some negative numbers.  How about that, Karl?  Can we go into negative numbers?  Karl!?”

For a moment, I don’t know if he’s joking.  He’s already proven to me to be brighter than I had been led to believe. 

But Condi Rice answers her boss. “Mr. President, Karl Rove isn’t here.”

I close my notebook.  I’ll get no further information from Mr. Bush.  There are other suspects to interview.

Monday, September 22, 2008

The Blame Game

One of the favorite things to do in the midst of a crisis is to point fingers.  We want to know who the hell got us in this mess. And in the last few weeks as Freddie and Fannie’s independence has collapsed, the blame game has become a predominant pastime.   It doesn’t solve anything, but it does allow reporters and politicians to fill up the news cycles with venom.

As we hold our breath, waiting for our leaders to figure our way out of these treacherous woods, we thought we might play a game of Clue. We’ve been given a list of suspects, enough to fill an Agatha Christie novel.

The present president and his administration, the former president and his administration, Congress, mortgage brokers, realtors, appraisers, banks, speculators, Wall Street, Alan Greenspan, the consumer and, just to satisfy those suffering from paranoia, the Illuminati.

We’ve assembled them all in the English country manor.  The police have already removed the body, known as the housing market, from the estate grounds.  But we have just learned that someone else has collapsed in our midst, the financial market.  And they may have been fatally poisoned. 

Over the next two weeks, we’ll look at the primary suspects and talk about their culpability in this murder spree.

Tomorrow:  George Bush.

Friday, September 19, 2008

MBS market swings back this afternoon

Looks like the Treasury may have already started implementing it's plan to double MBS purchases this month.

Around 3:30pm, someone (government?) came into the MBS market and went on a buying spree, BIG time. I can only assume that it's the Treasury or Fed, since this kind of move in prices in that short amount of time can only be achieved with serious purchase power. Of course, I could be wrong - it could be a very large institutional investor who's betting that prices will go up from here.

This morning we were down ~45bps (basis points). We are now up 112bps.

Banks have yet to issue rate changes, but we are, after all, late in the afternoon on a Friday (after an extremely volatile week). I expect we'll see better rates (1/8%) on Monday morning, if these prices hold.

Mortgage rates may return to pre-Frannie bailout levels by next week

Fannie Mae 30yr 5.5

X axis - date, Y axis - price (lower prices = higher rates)

It seems that Paulson & Co. managed to save his former employer (Goldman Sachs) and many other Wall Street firms with the most recent rescue plans. The stock markets are cheering. But the FNMA MBS market is not taking this well. The reversal we're witnessing has essentially wiped out the improvements we saw right after the announcement of the the Fannie & Freddie bailout. I expect we'll see an increase of 1/8 to 1/4% in mortgage rates today, and if this trend continues I wouldn't be surprised to see the 30yr fixed rate rise above 6.25% in the next week or two. But if there's something that the current market is teaching us, things can change in a heartbeat.

If you're still floating your mortgage rate, you may want to contact your loan officer ASAP to get some advice.

Wednesday, September 17, 2008

The cost so far (rounded to the nearest billion)

Tab for Government Rescues Rises to $900 Billion (Reuters, via CNBC.com)

"The U.S. Federal Reserve stepped in to rescue insurance giant American International Group from bankruptcy with an $85 billion loan on Tuesday, the latest in a series of bailouts and loans for the financial and housing sectors.The action brings the total tab for government rescues and special loan facilities this year to more than $900 billion."

Tuesday, September 16, 2008


(DOW Chart - CNNMoney.com)

(Fannie Mae 30yr MBS)

Around 11am the market popped and the mortgage bond market prices dropped. Now the reverse is occurring. The uncertainty in the market is making it very difficult to judge when to lock or float (or invest in the stock market, for that matter).

Rates set to improve this morning

The MBS market is showing early gains in trading and I expect we'll see an improvement in rates this morning. The turmoil on Wall Street continues to drive funds into more secure investments like mortgage securities and bonds. But things can change on a dime and the market continues to remain VOLATILE.

Friday, September 12, 2008

Light at the End of the Tunnel?

With the Fannie Mae & Freddie Mac bailout this week we saw a 1/2% drop in the 30yr fixed mortgage rate. And some economists are predicting rates will drop further, possibly to the mid 5% range. So while the lower rates could spur a refinance boom, the hope is that it will help bring support to housing prices and subsequently stabilize the market.

Fixed-rate mortgages under 6%; biggest weekly drop in 28 years (USA Today, 09/11)
"Interest rates on U.S. 30-year, fixed-rate mortgages dropped by 0.42 percentage point in the past week, the biggest seven-day drop in more than 28 years, Freddie Mac says. The fixed rate is now at its lowest in five months"

A call for a housing bottom worth listening to (CNN Money, 09/11)
"The bottom of the housing market is coming into view," said Zandi, whose recent book "Financial Shock," examines how the subprime mortgage crisis occurred. "House prices, based on the S&P Case-Shiller index, are down 20% peak-to-trough and I expect them to fall another 5% to 10%.""The key is housing affordability," Zandi said. "The [price] decline is beginning to restore affordability, which is now near its long-term average. In some places, Boston, Chicago, Denver, Orange County, affordability has been restored and those markets have stabilized."

Supply of Homes for Sale Declines in Metro Areas (WSJ, 09/11)
"The supply of homes available for sale in 29 major metropolitan areas in August was down 2.6% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif."

So maybe we're closer to the 7th inning as opposed to the 3rd inning as Nouriel Roubini suggests. But the credit market remains a shadow of its former self. Guidelines are more restrictive than they were just 6 months ago and the trend of tightening will continue. The fact is, fewer folks qualify for mortgages these days.

Monday, September 8, 2008

The Right Man at the Right Time

By now most know about the Fannie Mae & Freddie Mac "bailout". It's been blogged, reported & commented about for months. So if you didn't catch it on every major news channel & site this morning, you will.

While some are questioning whether the largest bailout in US history was really necessary, most (experts) say that it was and the fallout from other options (receivership or equity injection) would have been worse.

Paulson: "We had no choice"

And former Secretary of Treasury John Snow said it best on Squawk Box this morning (interviewed in front of the Rotunda at UVA), "This action was necessary in the face of the realities of the financial markets, the need to stabilize housing and the larger issues of the US economy and it's spill over affects on the rest of the world. So we are where we are, I guess now the question is can we find a good path out of this so that we get a permanent solution coming out of the next congress..."

Realty Check (CNBC) on the the housing market will react.
Questions is, "How much and how soon"
Mark Zandi of Moody's Economy, "It will help the housing market, it won't bring an end to the housing downturn immediately though."

I truly feel sorry for the thousands of employees at Fannie Mae & Freddie Mac. This is like Enron times two. "Fannie Mae’s workers had $116 million in the employee stock ownership plan at the end of 2006. Today, it’s more like $17.5 million. Ouch."

Friday, September 5, 2008

Friday Links

Breaking news on WSJ, Treasury Is Close to Finalizing Plan to Backstop Fannie, Freddie. It sounds more like a major liquidity injection, rather than a plan to "nationalize". Apparently the fact that Fannie & Freddie are very profitable right now isn't going to keep the Feds from intervening. But according to CNBC, Paulson & Co don't have many options.

I guess it's not official until someone comes out with a study and announces it: "Housing Bubble Has Popped". Yeah, I'd say...

Folks, you might want to stock up on a few supplies and batten down the hatches. It's going to get wet & windy this weekend.

On a lighter note-
I've heard of (and seen) homes in which house cats have the run of the place, but this is ridiculous: Bobcats on a bank owned roof (LA Times blog). "Taking advantage of a slump in local real estate, a family of bobcats has moved into a foreclosed Lake Elsinore home, lolling about on fences and walls and riveting an entire neighborhood."

Last but not least (I couldn't help myself)-
A new foreclosure avoidance (scam) book: "Save My House, Save My A**". This is not an endorsement. I haven't read it, nor do I plan to.

What's in a Name?

Those logophiles and trivia buffs among us might be interested in the origin of the word jumbo, as in the term mortgage professionals use to describe large loans over $417,000.

 It comes from the name of a Nineteenth Century circus performer ­– Jumbo the Elephant.

London Zookeepers created the African pachyderm’s name by mixing two Swahili words,“jambo” (hello) and “jumbe” chief.


Standing over eleven feet tall, the gentle giant became popular for giving children rides on his back at the London Zoo.  His growing fame brought him to the attention of P.T. Barnum who acquired the animal, despite the protests of English children, and brought Jumbo to the Greatest Show on Earth Circus.

Jumbo found new fans on this side of the Atlantic.  And thanks to Barnum’s showmanship, the giant elephant became a beloved cultural icon as the embodiment of the optimism and larger than life spirit of the late Victorian age.  By the time of the animal’s death in 1885, Jumbo’s name had become synonymous with large and huge. 

And no, Jumbo was not a white elephant.

Wednesday, September 3, 2008

The Law of Unintended Consequences

Sometimes the attempt to fix a problem actually creates more difficulties than the original problem itself.  This is especially true when Congress gets involved.  As Ronald Reagan quipped, “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’”

Expensive jumbo loans have proven to be a drag on the current housing markets.  Until recently, these loans were for amounts greater than $417,000.  If your mortgage was less than this and you had good credit, you went with what is termed a conventional loan.  This is a loan guaranteed by the GSE’s (Government Sponsored Enterprises), Fannie Mae and Freddie Mac.

The GSE’s didn’t buy home loans greater than $417k.  Federal law set this limit for two main reasons.  Congress originally set the GSE’s up for common people to afford homes, not rich folk.  Secondly, higher loan amounts created greater risk for the financial institutions backing them.  And Congress wanted the GSE’s to remain safe and solvent.

Consequently, jumbo loans are generally more expensive than conventional loans.  They can be up to 1.5% higher in rate.  With higher rates, these homes become less affordable.  And less affordable homes puts downward pressure on housing prices. 

But in some markets, insane housing prices have left few shacks (Think California, or more closely to home, Northern Virginia) that could be had with loans less than $417,000.

And so Congress decided to fix this problem.  In last February’s housing rescue package, the House and Senate raised the limit of what Fannie and Freddie could guarantee to nearly $730,000.  The actual amount varied by locality, depending on the median price of homes.

In the Charlottesville area, this limit climbed to only $425k as the cost of homes in Albemarle was diluted by relatively cheap abodes in the surrounding counties.  So it has been of little help to the central Virginia market. 

In fact, it may be hurting us, as well as the rest of the country.

In forcing Fannie and Freddie to buy riskier loans, Congress pushed them into more uncertain financial health.  Investors reacted by turning more reluctant to buy any of the bonds guaranteed by the agencies.

The only way the GSE’s can make their bonds more attractive is to offer a higher premium.  They have to increase what the mortgage backed securities will pay investors.  Of course, their greater costs get passed on to the consumers obtaining the mortgages.

So the law has not worked, neither as intended or expected.  Instead of making jumbo-sized homes more affordable, it has actually driven up the cost of conventional mortgages. 

This makes conventional sized homes less affordable.  This puts downward pressure on housing prices, leaving us in a worse place than where we began before government tried to fix the problem.

CNN Money offers more detailed analysis here.

Tuesday, September 2, 2008

Meet George Jetson

Well, this is not actually about mortgages.   But it is the future of what we’re spending our energy talking about financing: The home of tomorrow. 

At least, it’s what Panasonic forecasts the abodes of the next decade will evolve into.

In Tokyo, the Japanese mega-corporation recently opened a concept home to the public.  I suppose a concept home is a lot like those concept cars Detroit rolls out every year, too cool for school tech - the ubiquity of which never approaches closer than the ever receding horizon. 

The home of the future features new necessities such as an uber-teched out home office, wellness center and micro-mist saunas, as well as oxygen foam baths.  And it is a lot smarter than today’s brick and mortar stick-builts. 

According to Electronic House, it will do some of the dumb things you forget or are too lazy to do.  It will sense when you’ve fallen asleep and then turn off the computer/tv (there are a lot of these computer/tv monitors around the house) and other appliances.   

Designed with babies as well as grandmas in mind, it will be very eco and generational friendly.  It is earthquake proof.  And if that isn’t enough for you to start working on your credit score for the new mortgage you’re going to need, it will even generate a large portion of its own power ‑ which it uses to run the scores of other new gadgets installed everywhere.

By the time all this is affordable, I’m guessing we’ll have lots of 100% financing available again.

As for me, I’m still waiting for flying cars and robot maids.

You can read more about this techno-geeks dream and see a slide show here.

Upcomming Housing Related Events

Commonwealth of Virginia Energy & Sustainability Conference
September 17-19, Richmond Convention Center

Virginia Statewide Neighborhood Conference
September 18-20, Fairfax County, VA

The Governor's Housing Conference
November 12-14, Hampton Convention Center

Enterprise Community Partners
Transforming & Redefining Community Development
November 19-21, Baltimore, MD