Tag Archives: housing

Pete the Banker: Where’s Our Economic Recovery?

I guess I am just tired of hearing how good it is when most Americans and Oregonians have yet to experience an economic recovery.

Image Credit: Wall Street Journal
Image Credit: Wall Street Journal
 We are constantly besieged by news that the economy is in recovery, that economic growth is accelerating, that housing is finally emerging from a long slumber.  Politicians and the Rah- Rah -Rah trade association crowd continually proclaim that better times and utopia are just ahead.  Just be patient and trust us.  Jobs will pick up and everything will be fine.  Six years and still waiting!

Yet the economy has been plagued by slow growth the so called new normal.  Demand has been tepid and intermittent.  Jobs clip along at a rate of increase of 200,000 to 250,000 per month, when in recovery economists suggested just a few years ago that we needed at least 300,000 to 350,000 per month during recovery to get us to true full employment. 

The slow recovery has been blamed on a number of factors (Bush of course) with weather and jobs being the main culprits.  Like weather hasn’t been around since man emerged from the hunter-gatherer stage. And with jobs we are just fine with waiters and hotel clerks replacing higher paying executive and engineering jobs.  And the middle class, we just sort of rediscovered them after they finally decided the new normal was a good excuse for a new Senate.

Most troubling from my perspective is the housing industry.  The headlines continuously proclaim housing is in recovery.  Their main focus has been on housing prices which have been increased given the incessant Federal Reserves QE “infinity” programs and Federal initiatives like HAMP, HARP which have spent $billions to modify mortgages and prevent foreclosure.  But continuous rumors of recidivism hampering foreclosure prevention programs undermine Administration claims of success.

Yet the fundamentals of the industry are far from solid.  Sales of homes remain at 2009 -2010 levels.  Existing sales announced this last week were at 8 month lows.  Financing is nebulous. Applications have declined massively and purchase applications are dismal. Lack of financing is a primary concern with dependence on government sources dominant.  Underwriting standards are unrealistic and dictated by the CFPB, requiring credit ratings in the 700 – 750 range as a minimum.

More recently given the flailing real estate sales market, Fannie, Freddie, and the FHA have reverted to “sub-prime” financing in an effort to revive the failing residential capital markets. Sub-prime financing, this time exclusively at the hands of government controlled lending sources has returned.  Mortgage Financing provided is 95% of value and higher, with little regard for the risk of default. Worse, the Federal Government is on the verge of re-instituting European Accounting and Banking Standards (Basel Accords) which at best amplified the financial crisis in 2008.  These International Standards seem more an attempt to liquefy the international monetary system than provide security to the domestic real estate industry and mortgage financing system.

This has been to little avail.  Applications continue to fall and private lenders have little appetite for the risk involved in low interest rate, long term mortgages.  The Feds are no longer subsidizing mortgage market through quantitative easing and price increases are beginning to slow.  Fannie Mae and Freddie Mac continue to sell portfolio loans.
 
This Administration, has not let the market correct.  Is frightened by the lack of demand in housing and the by lack of response of housing market/housing financing markets to government intervention.  As a result the Administration has thrown caution to the wind and through HUD and the FHFA returned to reliance on the very lending factors that caused the 2008 financial collapse, subprime lending.  Nor despite repeated assertions does the Administration have any intent of reforming the residential capital markets, inclusive of Fannie Mae and Freddie Mac.
 
The Administration  talks a good game, but its actions are at best ineffectual.  Consumer demand and housing demand continue to suffer, the result of uncertainty created between the continual promises an emergent vibrant economy and actual muted results.

Pete the Banker is a Banker who wishes to remain anonymous after what happened to Joe the Plumber by the President and his shock troops in the 2008 election. He is a member of the Victoria Taft Blogforce.

Pete the Banker: The housing market begins its retreat

Several indicators reflect a housing market set back.

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Uncertainty about the economy, job stability, and inability to finance continue to scare many potential residential buyers away, especially first time buyers.  At the recent Pacific NW Mortgage Bankers Conference, volumes cited by the residential mortgage banker community were running some 25% – 30% below 2013 levels, resulting from lower refinance rates and tepid mortgage volume for home purchases. 

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QE3 has driven two elements, prices have risen and foreclosures declined.  With anticipation of Fed’s exit from the QE3 program this Fall, housing price increases have stalled and now foreclosure activity is picking up. 
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New construction of single family residences also remain depressed, despite the mass media’s headlines that new construction permits and starts have been improving dramatically which they cite as evidence of housing recovery.  One problem with the media’s line of reporting, the recent increases permit and starts reflects increases in multi family units (apartments), rather than single family residences.
And there’s more. Treasury rates will likely soon impact mortgage rates. 
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And the bond market will impact mortgage rates sooner or later. Probably sooner. Take a look at these quotes from CNBC:

“Demand for U.S. Treasurys waned for a fifth consecutive session, ahead of an official auction of 10-year notes on Wednesday and a key Federal Reserve meeting next week.”

 And,

“Ten-year notes fell in price to yield 2.53 percent on Wednesday, ahead of a Treasury auction of $21 billion in the benchmark bonds. Auction performance has weakened sharply recently and the last three auctions have tailed.  

“Bond yields have risen in recent days—pressuring Wall Street—on fears the Federal Reserve could raise interest rates sooner rather than later. This came after fresh research from the San Francisco Fed suggested investors’ expectations for rate hikes lagged those of the central bank.”

And they continued their ascent on Friday,

Benchmark 10-year notes were last down 18/32 in price with the yield at 2.61 percent, slightly below a session high of nearly 2.62 percent, the highest since July 8.

I think it is hard to suggest that this rate increase is a long term phenomena yet, but at some point the Fed is likely to lose its credibility with Treasury bond investors over its easing policy.  Especially given their insistence that unemployment is nearing 6% and inflation only 2% (one can easily challenge both these assertions).  But here is the counter argument.  As pointed out in this article, it is hard to refute the potential for unmitigated disaster in the international scene (given this President) which would promote the flight of investors to the safety of Treasuries, driving up prices while driving down interest rates once again.

Pete the Banker: Mortgage World a Very Different One Today

monopoly houseIt appears that implementation of Dodd Frank and the Obama Administration policy assures perpetuation of federal control of the residential mortgage market.  Hardly sounds like a  benefit to those borrowers shoved into government guaranteed high cost FHA loans.  Intentional or simply ineptitude??!

Note this from the MBA President

 “A Very Different World Today”

David H. Stevens, President and CEO Mortgage Bankers Association

“It’s about an inefficient, and at times contradictory, system with poorly crafted regulations that has gone well beyond consumer protection and now causes credit-worthy borrowers to be rejected from home financing. Some borrowers today with FICO scores of 650 and above and who are willing to put down 10%-15% still cannot get a loan. Because the rules that govern lenders today are unclear making the risk of litigation that much higher, qualified borrowers like these are being edged out of the system. Lenders protect themselves by only approving loans to those with perfect credit.
Don’t just take my word for it. The following is a direct quote from a commenter on one of my more recent LinkedIn blog posts:
“The process has indeed been miserable, mostly because of silly regulations. The fact that I am self employed has been a further challenge even though I make substantially more than I used to at my old job. The most ridiculous part is that through a strange regulation they insisted that we were not qualified for a conventional mortgage with a much lower monthly payment even though we had the cash to put down, but they had no problem qualifying us for the government backed FHA [loan] for nearly double the monthly payment and very little down. The FHA [loan] would have put us in a serious hole financially as opposed to the conventional mortgage.”
Policy makers should take the appropriate steps to clear up this uncertainty and strike the right balance in the real estate finance system. We need a system where homeownership is a doorway to opportunity and borrowers can once again feel safe, confident and secure in their loans, but also a system that thrives in an environment that encourages a competitive, responsible marketplace so business can grow.”

Read his memo for yourself here.