What Happened to Animal Spirits?

 Financial FAQs

"We're seeing a strong divergence between animal spirits of the stock market and what we're actually seeing unfold from businesses and business leaders," a White House official told reporters Monday, CNBC reported, adding, "The latter is obviously more meaningful than the former on what's in store for the economy in the medium to long term."

FREDconsumersentiment

The White House admission that the rise in “animal spirits” over Trump’s reelection had waned and that business leaders with were guiding the financial markets lower “in the medium to long term” because of Trump’s on again, off again tariff announcements, thereby doubting the possibility that the Republican campaign promises of lower taxes and fewer regulations will be of much benefit.

Such market enthusiasm couldn’t last when it became obvious that Trump’s contradictory messaging and his lack of knowledge about foreign trade could lead to tariff wars, which in the words of a growing number of business leaders, showed “he doesn't know what he is doing”.

Consumers are beginning to catch on as well, which is resulting in the decline of their own animal spirits. The above chart of declining consumer confidence as measured by the University of Michigan last peaked in January 2024 with Donald Trump’s re-election, when consumers believed in Trump’s promises to bring down inflation on “Day 1” of his second term.

But that hasn’t yet happened, and consumers are not happy about it. In the words of the U. of Michigan’s survey director Joanne Hsu:

“Consumer sentiment fell for the second straight month, dropping about 5% to reach its lowest reading since July 2024. This decrease was pervasive, with Republicans, Independents, and Democrats all posting sentiment declines from January, along with consumers across age and wealth groups.”

The term, “Animal Spirits”, was first coined during the Great Depression to explain why consumer behaved the way they did. Roosevelt’s New Deal that gave workers more benefits, such as the 8-hour work day, workers compensation, and social security, was created to boost their spirits and led to the recovery from the Great Depression.

Nobel Laureates George Akerlof and Robert Shiller even wrote a book about it that was entitled, Animal Spirits; How Human Psychology Drives the Economy and Why It Matters for Global Capitalism.

It was an important book because it refuted the long-held theory that so-called free market, or Laissez Faire, economic theories create more sustained growth with fewer regulations.

But Republicans’ touting of the benefits of sless regulated markets was a giant lie that led to President Reagan’s trickle-down economic theories, because with little or no oversight or regulations of their trades, the wealthiest always prospered the most because they had the time and money to research the markets.

Therefore conservatives that favored less regulation had to create a myth that some of that wealth was bound to “trickle down” to Main Street and benefit ordinary wage-earners to placate voters.

Professors Akerlof and Shiller showed it was a lie. Most consumers in fact do not have the resources or knowledge to adequately research what they buy or invest in. They discovered in their research that most consumers act on hearsay, or word of mouth, in making purchase decisions, including when to buy real estate.

And because consumers didn’t or wouldn’t do the necessary historical research in early 2000 when buying homes, but believed that housing prices could never decline, they pushed up housing prices so much that builders built too many homes, which was a major reason for the busted housing bubble and resultant Great Recession.

History has shown that the tax cuts and market regulations the Trump campaign promised will make the wealthy even wealthier, and 80 percent of Americans that are wage earners, less wealthy.

It’s the real reason Trump has unleashed “Chainsaw Musk”—to terrorize government workers into quitting their jobs and destroy as much as possible of Roosevelt’s New Deal, and the laws and regulations that have benefited most Americans since then.

Harlan Green © 2025

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Conforming Mortgage Limits Rise for 2017

Financial FAQs

The Federal Housing Finance Authority, or FHFA, just announced it is increasing the limit for conforming mortgages from $417,000 to $424,100 in most regions of the United States starting Jan. 1, 2017—the first such increase since 2006.

The approximately 1.7 percent bump in the baseline conforming loan limit follows the FHFA’s announcement that  the average U.S. home price has returned to its pre-decline peak, which it hit in the third quarter of 2007. The FHFA bases the loan cap on its quarterly Housing Price Index, which gauges average single-family home prices. The index rose 1.5 percent during the third quarter of 2016 and is up 6.1 percent over the past year, enough to push it above its previous high point.

Graph: Econoday

The FHFA is the supervising entity of conforming loans guaranteed by Fannie Mae and Freddie Mac.
FHFA house price index eased slightly in September and was up 0.6 percent after increasing 0.7 percent in August. On the year, the FHFA index surged to plus 6.1 percent, down from August's gain of 6.4 percent. In the third quarter, house prices were up 1.5 percent and were 6.1 percent higher than the third quarter in 2015. 

Eight of nine census divisions posted monthly gains in September ranging from plus 1.3 percent in the in the Pacific with the Northeast declining 0.2 percent. On the year, the Pacific region was up 8.1 percent with New England in the rear at 2.9 percent.

Conforming loan limits are significant because they apply to home loans that meet the underwriting guidelines of Fannie Mae or Freddie Mac, the government-sponsored entities that acquire mortgages from lenders and ensure a steady flow of money to the mortgage market.
Interest rates for nonconforming, or jumbo mortgages, are generally higher than rates for loans that fall under the cap, and these types of mortgages can be more difficult to obtain.

“Today’s conforming loan limit increase is a much-needed recognition of rising home prices in high-cost markets, and a help to first-time and lower-income borrowers looking to utilize an FHA mortgage,” said NAR President William E. Brown. “Credit remains tight, but this decision will help more qualified buyers address the hurdles and high costs standing between them and the dream of homeownership.”

Conforming loan limits are higher than the baseline cap in parts of the country where home prices are especially high, but cannot be more than 150 percent of the baseline limit—$636,150 for 2017—for the contiguous U.S. Exceptions are established for Alaska, Hawaii, Guam, and the U.S. Virgin Islands, where loan limits in specific locations may exceed that amount.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Higher Housing Sales, Leading Indicators Mean More Growth

Financial FAQs

Two more signs of improved economic growth came out today. Boosted by a greater share first-time buyer sales not seen in nearly four years, existing-home sales maintained their upward trajectory in June and increased for the fourth consecutive month, according to the National Association of Realtors. Only the Northeast saw a decline in closings in June, and sales to investors fell to their lowest overall share since July 2009.

This is while the Conference Board’s Index of Leading Economic Indicators, a predictor of future growth, rose 0.3 percent in June. “The U.S. LEI picked up in June, reversing its May decline,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Improvements in initial claims for unemployment insurance, building permits, and financial indicators were the primary drivers. While the LEI continues to point to moderating economic growth in the U.S. through the end of 2016, the expansion still appears resilient enough to weather volatility in financial markets and a moderating outlook in labor markets.”

Graph: Calculated Risk

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, climbed 1.1 percent to a seasonally adjusted annual rate of 5.57 million in June from a downwardly revised 5.51 million in May. After last month's gain, sales are now up 3.0 percent from June 2015 (5.41 million) and remain at their highest annual pace since February 2007 (5.79 million).

The share of first-time buyers was 33 percent in June, which is up from 30 percent in May and a year ago and is the highest since July 2012 (34 percent). Through the first six months of the year, first-time buyers have represented an average of 31 percent of buyers; they were 30 percent in all of 2015.

But very low housing inventory is hampering many entry-level homebuyers. Total housing inventory at the end of June dipped 0.9 percent to 2.12 million existing homes available for sale, and is now 5.8 percent lower than a year ago (2.25 million). Unsold inventory is at a 4.6-month supply at the current sales pace, which is down from 4.7 months in May.

Graph: Econoday

On the other hand the Federal Housing and Finance Authority’s price index that documents conforming, more affordable home prices, is slowing, which should help affordable homebuyers. The FHFA house price index rose only 0.2 percent in May for the weakest performance since August last year and one of the weakest of the whole recovery. The year-on-year rate is likewise sagging at recovery lows, at plus 5.6 percent for a 3 tenths dip from April.

“First-time purchasers have begun coming back to the housing market, more slowly than expected and more slowly than they have historically,” Stuart Miller, chief executive of Lennar Corp. said during the builder’s call Wednesday to discuss its fiscal second quarter results with investors. “They’ve had the most difficulty accessing the mortgage market. And although that is beginning to open up … they are not yet jumping into the marketplace.”

New England is among the weakest regions, down 1.3 percent in the month with a year-on-year gain of only 3.9 percent. The Pacific and Mountain regions are the strongest, the former down slightly in the month but up 7.9 percent on the year with the latter up 1.2 percent in the month for an 8.5 percent year-on-year gain.

"The modest bump in June sales to first-time buyers can be attributed to mortgage rates near all-time lows and perhaps a hopeful indication that more affordable, lower-priced homes are beginning to make their way onto the market," said NAR chief economist Lawrence Yun. "The odds of closing on a home are definitely higher right now for first-time buyers living in metro areas with tamer price growth and greater entry-level supply — particularly areas in the Midwest and parts of the South."

So let us hope that builders can fill the dearth of entry-level housing that could bring in more young homebuyers as they form their own families.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

The Fannie-Freddie Debacle Continues

           We are already seeing the results of Obama Administration attempts to kill Fannie Mae and Freddie Mac, the Government Sponsored Entities that guarantee more than 60 percent of all mortgages originated in the U.S. housing market these days. The Mortgage Bankers Association in particular is beginning to worry that taxpayers will have to pick up the tab in the event of another housing bust, since Fannie and Freddie aren't being allowed to maintain a capital cushion.

Obama's Treasury Department has refused to allow Fannie and Freddie to maintain a capital base as their profits decline. Instead, all their profits flow into Treasury coffers due to a 2012 amendment to the government's conservatorship agreement.

“Once their capital goes to zero, there will be no cushion between the GSEs [government-sponsored enterprises] and the need for additional draws on the remaining Treasury commitment, roughly $250 billion,” said Michael Fratantoni, the MBA’s chief economist and senior vice president of research and industry technology, in an article for The Hill.

The government took over Fannie and Freddie in 2008 to keep them from collapsing under the weight of bad mortgage debt. The two entities have drawn a total of $187.5 billion from the Treasury Department and have repaid $241 billion in dividends, though those payments don’t even count toward their debt, because of Treasury’s decision to commandeer all their profits.

The nominal head of Fannie and Freddie is Mel Watts, head of the Federal Housing and Finance Agency that also controls both FHA and VA mortgage agencies.  And he is saying it is up to Congress to fix the problem.  But Congress has done nothing, as the tug of war continues over whether the GSEs should be public supported or privately funded organizations.

“I continue to hope that Congress can engage in the work of thoughtful housing finance reform before we reach a crisis of investor confidence or a crisis of any other kind,” he said in a Feb. 18 speech. 

In fact, the U.S. Treasury is really behind the 2012 amended conservatorship agreement that requires each firm’s capital to be reduced from $1.2 billion this year to $600 million next year and then to $0 in 2018, 10 years after the financial crisis. So taxpayers will still be on the hook, unless Congress can make up its mind.  But that isn’t happening, and probably won’t happen until after the Presidential election.

             Fannie and Freddie hold a combined $5 trillion in mortgage guarantees on their books but face shrinking earnings and a zero-capital predicament — a situation David Stevens, head of the Mortgage Bankers Association (MBA), called “unheard of.”  Stevens called the situation “a terrible predicament” because Fannie and Freddie “are completely critical to our housing system,” in The Hill article.

            Stevens said he expects that one of the GSEs will need to take a draw from the Treasury Department’s credit line sometime this year — possibly as early as the first quarter, a move likely to reverberate on Capitol Hill. 

            But that may not have to the case, according to documents filed in lawsuits against FHFA and the Treasury Department by holders of Fannie and Freddie stock that have been rendered valueless by the amended conservatorship. For starters, plaintiffs say, Treasury justified the conservatorship of the GSEs via accounting gimmicks since they faced no liquidity issue at the time of the crisis and recession. They note that Fannie Mae’s Cash Net Income, adjusted for non-cash items, was positive throughout entire crisis and recession.

            Fannie Mae disclosed they held $36.3 billion cash in the bank on September 30, 2008 with a maximum exposure of roughly $6 billion per quarter. That was enough liquidity to survive over 18 months, assuming it didn’t bring in another dime.

Graph: Huffington Post

But due to that last minute (2012) 'tweak' to the original conservatorship order by FHFA, all profits went into the Treasury General Fund, which raised suspicions that Treasury was behind the move to capture all profits for its own uses, rather than returning value to preferred stockholders. How is that fair when the GSEs weren't responsible for the bubble, or subprime loans, or the Great Recession?

We know this because some $16 billion in settlements have already been recovered from those commercial banks and Wall Street entities that submitted fraudulently underwritten mortgages misrepresenting their loan quality to Fannie and Freddie.

Why has the White House resisted calls to unseal their documents in pending lawsuits by preferred stockholders attempting to recoup losses due to the conservatorship? Antonio Weiss,, a Treasury counselor, gave their only response to Bloomberg News.

“Some have suggested the federal government could stop supporting Fannie and Freddie in the near term by allowing the companies to retain their earnings. This overlooks the high level of capital required to adequately cover the risk of the $5 trillion in assets on the GSEs' books. A recent analysis from Moody’s and the Urban Institute made clear that it could take decades for Fannie and Freddie to build safe and sound levels of capital and that recap and release would ultimately drive up the cost of mortgages.”

So this is the Treasury and White House response--inaction. Let's keep the taxpayer on the hook for all losses in the event of another downturn, rather than allowing the GSE's to begin to build their capital base again.

It may therefore be up to the courts to decide who is at fault in the continuing debacle--at a time of record low interest rates and a housing market just beginning to recover.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

March Existing-Home Sales Spike

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February—the highest annual rate since September 2013 (also 5.19 million), said the National Association of Realtors report.

 

Graph: Calculated Risk

Sales have increased year-over-year for six consecutive months and are now 10.4 percent above a year ago, the highest annual increase since August 2013 (10.7 percent). This seems to corroborate yesterday’s Fannie Mae’s Economic & Strategic Research Group report that said economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, “but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end.”

Total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, much too low for sustainable sales.

NAR Chief economist Lawrence Yun said, "The modest rise in housing supply at the end of the month despite the strong growth in sales is a welcoming sign. (But) For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize. More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market."

Prices are still rising, in other words, because of the lack of inventory. The FHFA just reported homes being purchased with conforming loans saw prices rise 5.4 percent in March. This is while new-home construction is still below par, with March starts up just 926,000, vs. the 1 to 1.2 million starts needed to increase inventories, and 2 million units annual rate at the height of the housing bubble.

Graph: Econoday

An even better indicator of future housing growth was the Mortgage Bankers Association weekly activity report. The Refinance Index increased 1 percent from the previous week, reports Calculated Risk. The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013. The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

“Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week,” said Mike Fratantoni, MBA’s Chief Economist.

All of the above is significant evidence that the buying season should pick up after winter doldrums, as it has in past years. How much remains to be seen. Consumers also have to come out of their winter doldrums.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New Home Sales Surging

The Mortgage Corner

New U.S. homes sold at an annual rate of 539,000 in February to mark the best month of sales in seven years, the government reported Tuesday. The pace of sales for January was also revised up sharply to 500,000. It's the first time annualized sales have hit 500,000 or more for two straight months since early 2008.

Graph: Calculated Risk

“This is 7.8 percent above the revised January rate of 500,000 and is 24.8 percent above the February 2014 estimate of 432,000," said the Census Bureau. And it reduced the for sale inventory to a 4.7 month supply, which is low considering the pent up demand for housing sales sure to grow this year, with low inflation and rising employment.

Low inflation should be a factor in housing sales this year, if oil prices stabilize, since it boosts householders’ take home pay. Price rises moderated last year. The Federal Housing Finance Authority just reported that same-home prices of homes with conforming loans rose 5.1 percent in January, down slightly from 5.4 percent in December. But we are in mid-winter, so look for more price rises as the spring selling season kicks in.

Graph: Econoday

Overall CPI inflation was unchanged in February, which is better than the negative -0.1 percent drop in January. Oil prices have stabilized around $50/barrel for Brent Crude at the moment, but who knows what this year will bring with so much unrest with major oil producers in the Middle East, and even Russia?

Graph: Trading Economics

CNBC’s Diana Olick reports that lack of existing-home inventory is the real problem. “Lack of supply of existing homes is pushing prices again, up 7.5 percent year over year to a median sale price of $202,600 in February, according to the NAR, that reported slower February existing home sales,” she says. “And don’t blame it on the weather, according to NAR chief economist Lawrence Yun.

“He calls this reacceleration of price gains, "unhealthy," per Olick. “Affordability had been helping the housing recovery inch along, but now it is weakening and fast becoming a roadblock to homeownership. Still-rising rents are contributing to the problem, keeping first-time buyers from being able to save for a down payment.”

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.2 percent to a seasonally adjusted annual rate of 4.88 million in February from 4.82 million in January. Sales are 4.7 percent higher than a year ago and above year-over-year totals for the fifth consecutive month.

Lawrence Yun, NAR chief economist, says although February sales showed modest improvement, there’s been some stagnation in the market in recent months. “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

The median existing-home price for all housing types in February was $202,600, which is 7.5 percent above February 2014. This marks the 36^th consecutive month of year-over-year price gains and the largest since last February (8.8 percent).

Hence those rising prices and low inventories should spur more new-home construction this year.  But housing construction is barely in recovery mode, and has a long way to go to approach the 800,000 to 1 million unit per year average of past decades.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

GDP Growth Higher, Case-Shiller Prices Steady

The Mortgage Corner

The economy in the second and third quarters posted its best back-to-back growth in 11 years, And the Conference Board’s Index of Leading Economic Indicators showed strong growth over the next six months. offering fresh evidence that the U.S. will enter the new year with good momentum.

The government last Tuesday said gross domestic product rose at a 3.9 percent annual pace in the third quarter instead of 3.5 percent. Combined with a 4.6 percent gain in the second quarter, the U.S. has posted its best six-month stretch of growth since the middle of 2003.

Graph: Trading Economics

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in October to 105.2 (2004 = 100), following a 0.7 percent increase in September, and no change in August.

“The LEI rose sharply in October, with all components gaining over the previous six months,” said Ataman Ozyildirim, Economist at The Conference Board. “Despite a negative contribution from stock prices in October, and minimal contributions from new orders for consumer goods and average workweek in manufacturing, the LEI suggests the U.S. expansion continues to be strong.”

The largest of the 10 contributors were manufacturer’s new orders, up some 10 percent, and the 10-year Treasury bond rate dropping from 2.62 percent to 2.21 percent, boosting consumer spending and housing sales.

“The upward trend in the LEI points to continued economic growth through the holiday season and into early 2015,” said Ken Goldstein, Economist at The Conference Board. “This is consistent with our outlook for relatively good, but not great, consumer demand over the near term. Going forward, there are continued concerns about slow business investment and lackluster income growth.”

 

Graph: Econoday

S&P/Case-Shiller reported almost half of major cities tracked in Tuesday’s housing data saw prices fall in September, while almost half saw them rise,. Overall, the gauge of home prices in 20 cities was basically unchanged in September, ticking down .03 percent, a sign the summer sales market has ended.

Annnual growth cooled as well, with year-over-year home prices rising 4.9 percent in September — the slowest pace since October 2012 — compared with annual growth of 5.6 percent in August.

Here’s a chart summarizing the results:

The leaders were Charlotte, NC, and Miami, while the year-over-year leaders in price rises were again Miami, Las Vegas and San Francisco. With the Federal Housing Finance Authority loosening some conforming mortgage qualification standards, and if conforming interest rates remain below 4 percent, we could see overall housing prices stabilize and maybe even begin to rise again in 2015.

But it all depends on the jobs market, of course, and we see robust job growth continuing into the first half of 2015, as well, before the Fed begins to raise their short term interest rates.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

New Fannie, Freddie Regulator Won’t Cut Loan Limits

The Mortgage Corner

WASHINGTON (MarketWatch) — This headline just out.  Mortgage-finance giants Fannie Mae and Freddie Mac won’t be directed to lower the limits for mortgages that they back, the new head of their federal regulator said Tuesday. In a departure from his predecessor, Mel Watt, director of the Federal Housing Finance Agency, is generally seen as favoring efforts to maintain borrowers’ access to credit, rather than focusing on winding down the government sponsored enterprises.

This is terrific news for the housing market, needless to say. One of the first actions by President Obama’s appointee to run the Federal Housing Finance Authority (FHFA) is to make it easier for home borrowers and buyers to obtain conforming mortgages—mortgages that are guaranteed by Fannie Mae and Freddie Mac, and which comprise more than 60 percent of mortgages issued these days.

The conforming limits will therefore still be $417,000 for the best conforming rates—3.875 percent with 1 origination point for 30-year fixed rates in California today—and $625,500 for so-called Hi-Balance conforming loans—now at 4.125 percent for 0 points origination in California.

“This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market,” Watt said Tuesday at a Brookings Institution event.

This is while Congress and the White House work on housing-finance reform, with the Obama administration still trying to shut down Fannie and Freddie, even though they are the only agencies willing to guarantee 30-year fixed rate mortgages for middle class homeowners and buyers, and thus are the reason housing is recovering at all.

It is the misguided belief that allowing Fannie Mae to disappear—the Federal National Mortgage Association formed during the New Deal—and Freddie Mac, or the Federal Home Loan Mortgage Corporation, formed in the 1970s to further affordable housing—will no longer make the government responsible for keeping a viable housing market for most Americans.

Graph: Calculated Risk

But that is flatly wrong. Without some kind of federal ‘backstop’ that guarantees both mortgage quality and assurance that banks will continue to lend mortgages, we would not have the housing market and a homeownership rate of today. The early 1980s were the best example of banks and lenders refusing or unable to issue new mortgages when then Fed Chairman Volcker raised interest rates above 16 percent to combat inflation.

The foreclosure rate for conforming loans has always been the lowest of any conventional loans. Fannie Mae reported recently that the Single-Family Serious Delinquency rate declined in March to 2.19 percent from 2.27 percent in February. The serious delinquency rate is down from 3.02 percent in March 2013, and this is the lowest level since November 2008.
And Freddie Mac also reported that the Single-Family serious delinquency rate declined in March to 2.20 percent from 2.29 percent in February. Freddie's rate is down from 3.03 percent in March 2013, and is at the lowest level since February 2009. Freddie's serious delinquency rate peaked in February 2010 at 4.20 percent.

So their foreclosure rates are close to the historical average of 1 percent, whereas other ‘private label’ mortgages (those mostly portfolio loan issued and held by banks) have remained above 4 percent.

The FHFA is looking at making sure that the companies operate safely in the current environment, Watt said. Watt, who has been noticeably absent until now from the debate over how to reform the U.S. housing market, said Tuesday that the FHFA has three goals: maintain, reduce and build.

“Since any stumbles along the way could have ripple effects in the $10 trillion housing finance market, there’s a lot at stake in getting this right,” Watt said. But getting it right doesn’t mean the federal government shouldn’t have the responsibility to maintain the viability of homeownership, a responsibility it has kept since the 1930s.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

So Fannie and Freddie Weren’t the Problem…

Popular Economics Weekly

We are learning just how much mortgage fraud was committed by 17 national and international banks and other financial entities that the Federal Housing Finance Authority (FHFA) originally sued to recover some $200 billion in losses to the GSEs that it regulates, Fannie Mae and Freddie Mac.

This tells us where the real faults lies for the credit bubble that led to the housing bubble.  The once private stock corporations and now wards of the government, Fannie Mae and Freddie Mac, didn’t precipitate the housing bust.  They weren’t even the main issuers of faulty mortgages that imploded with the Great Recession. It was the federally-supervised commercial banks themselves that misrepresented many of the mortgages it sold to Fannie and Freddie, thereby giving them the cover of AAA rated assets, when they were much closer to junk bond quality.

Fed Chairman Alan Greenspan had lowered short term interest rates below what was the inflation rate at that time—some 3 percent—whereas his fed funds rate was as low as 0.5 percent.  (That meant if money was lent at below the inflation rate, it was basically free money because inflation would eat away at the amount owed so that it was actually worth less when paid off, or sold, than the face amount of the debt.)

And banks jumped into the housing bubble that resulted, almost ignoring the most basic lending safeguards from such ‘free’ money, such as verifying income and assets of the borrowers that Fannie and Freddie required.  In other words, Fannie and Freddie guaranteed that nothing was “stated” on the loan application that wasn’t verified.

The GSEs themselves were also at fault for allowing mortgage banks such as Countrywide Financial (acquired by Bank of America) to package and sell Mortgage Backed Securities to Fannie and Freddie that mainly consisted of negatively amortized ‘liar’ loans with very low initial payment rates, and little or no income and asset verification.  But that was a small portion of the defaulted loans, and in fact Fannie and Freddie guaranteed mortgages have far and away the lowest default rates.

Wall Street insiders now believe that up to $50B could be the tab to settle all the pending cases, according to the New York Times.  Some $1.96 Trillion in so-called private-label mortgages were issued by banks from 2005 to 2008 during the height of the housing bubble, according to the latest figures.

As of January, the FHFA has settled six of the private-label RMBS cases, recovering nearly $8 billion for taxpayers.  Whether due to a lack of adequate supervision, or outright fraudulent misrepresentation of the credit quality of those mortgages, these banks sold Fannie and Freddie mortgages that didn’t meet the strict credit standards of the GSEs.

Graph: NY Times

Banks such as JP Morgan Chase ($5.1B), Deutsche Bank ($1.9B) and now Credit Suisse ($885B) have settled, while admitting they had inadequate oversight.  But Bank of America and Goldman Sachs are holding out, so are going to trial sometime in midyear 2014. 

Others that have settled include, GE (Ally Bank), United Bank of Switzerland and Citigroup.  They had failed to prove in federal court that the mortgages underlying their Mortgage Backed Securities sold to Fannie and Freddie were due to the busted housing bubble that caused the loss of some $5 Trillion in real estate values, rather than their faulty underwriting practices.

Twelve of the cases remain, including FHFA’s lawsuits against Barclays Bank (BCS), Bank of America (BAC), Credit Suisse Holdings (CS), First Horizon National Corp., Goldman Sachs & Co. (GS), HSBC North America (HSBC), Merrill Lynch & Co., Morgan Stanley (MS), Nomura Holding America (NMR), SG Americas (Societe Generale), The Royal Bank of Scotland Group (RBS) and Countrywide Financial Corp.

So don’t blame Fannie and Freddie for wanting to expand home ownership, as those who oppose government ownership or regulation of anything have contended, and seem to have convinced the Obama administration.  They were as much a victim of deceptive lending practices as the borrowers and homeowners who lost out due to the resulting Great Recession.

Harlan Green © 2014

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Conforming Mortgage Limit Reductions Postponed

The Mortgage Corner

Federal officials will delay any reduction in the maximum size of home-mortgage loans eligible for backing by Fannie Mae and Freddie Mac until next spring at the earliest, said FHFA Administrator Ed DeMarco in a Wall Street Journal article--DeMarco: No Mortgage Limit Declines Before Spring 2014. It is reputably from heavy resistance from the real-estate industry and many lawmakers in Congress.

This is in the face of the recent government shutdown and debt ceiling debate that has slowed economic growth this year, and even next year, if a budget agreement isn’t reached by January 2014.

Couple this with a recent slowdown in real estate sales, including for new homes.  There appears to be little doubt that rising mortgage rates, combined with higher home prices, resulted in a material slowdown in net new-home orders last quarter, says Calculated Risk. Mortgage rates, of course, have fallen considerably since early September, though they remain well above levels since during the first five months of the year.

Currently, Fannie and Freddie can guarantee mortgages that have balances as high as $417,000 in most of the country and up to $625,500 in expensive housing markets, including parts of California and New York. Loans within the limits are called “conforming” or “High-Balance conforming loans.

Potential loan-limit changes will be announced six months ahead of their implementation date, said Demarco, and such changes wouldn’t be announced until November at the earliest. “Anything we do would have a long lead time and would be gradual and measured,” said Mr. DeMarco.

When the agency does move ahead with loan limit declines, the declines will apply to both the national limit and the high-cost limits, which were enacted on an emergency and temporary basis by Congress in 2008.

It will be politically difficult to lower these limits, and the limits probably wouldn't be adjusted down very much.  The conforming loan limit was $252,700 in 2000. Using the FHFA Purchase Only index, the national conforming loan limit might be lowered to around $360,000.

Using the CoreLogic or Case-Shiller Comp 20 indexes, the conforming loan limit might be lowered to $380,000 to $395,000. Not a large downward adjustment for the national limit.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Bank Lending Still Stingy

The Mortgage Corner

The Federal Reserve just published its quarterly Senior Loan Officer survey on lending standards by the largest banks. They basically adhere to the strictest Fannie Mae and Freddie Mac guidelines for residential loans, such as minimum 620 credit score and debt-to-income ratios around 45 percent. Banks were a bit more liberal with commercial and industrial loans—apartment lending in particular, which is red hot due to dropping vacancy rates.

The banks“…on balance, reported having eased their lending standards and having experienced stronger demand in several loan categories over the past three months,” said the report.

But not in housing, perhaps the largest segment and one that gives consumers the greatest feeling of financial well-being. Even with record low interest rates banks are being stingy, which is why there is a record some $1.76 trillion in excess reserves sitting at the Fed. Banks’ overall lending has increased just 3 percent per annum of late, versus the historical 6 percent during good times, as in this Federal Reserve graph that dates from 1987 Q1 to 2013 Q1.

Graph: Federal Reserve

This could change, however, as loan delinquency rates continue to decline and banks become less risk averse. Calculated Risk just reported Processing Services (LPS) released their Mortgage Monitor report for March. According to LPS, 6.59 percent of mortgages were delinquent in March, down from 6.80 percent in February. LPS reports that 3.37 percent of mortgages were in the foreclosure process, down from 4.19 percent in March 2012.

This gives a total of 9.96 percent delinquent or in foreclosure. It breaks down as:
• 1,842,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,466,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,689,000 loans in foreclosure process.
It is a total of ​​4,997,000 loans delinquent or in foreclosure in March, down from 5,589,000 in March 2012.

The March Mortgage Monitor report also found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent. However, as LPS Applied Analytics Senior Vice President Herb Blecher explained, a borrower’s equity position is still a key indicator of his or her propensity to default.

“There has always been a clear correlation between higher levels of negative equity and new problem loan rates,” Blecher said. “Looking at the March data, we see that borrowers with equity are actually outperforming the national average -- at 0.6 percent, this group is quite close to pre-crisis norms. The further underwater a borrower gets, the higher those problem rates rise. Borrowers with loan-to-value (LTV) ratios of just 100-110 percent are actually defaulting at more than twice the national average. For those 50 percent or more underwater, we see new problem rates of 4 percent.

Graph: LPS

“Still, the overall equity trend has been a very positive one,” Blecher continued. “LPS’ latest data shows that the share of loans with LTVs greater than 100 percent has fallen 41 percent from a year ago. In total, there were approximately 9 million such loans, or about 18 percent of active mortgages. Some states, including the so-called ‘sand states’ (Arizona, Florida, Nevada and California), are still well above the national level, at an average 28 percent, but they, too, have seen improvement over the last year, with negative equity dropping over 40 percent across those four states since January 2012.”

So we know that rising housing values will continue to benefit homeowners and lenders. As foreclosure rates continue to fall, there is less downward pressure on housing values, since foreclosed homes sell on average some 33 percent below market prices.

Corelogic just reported that home prices nationwide, including distressed sales, increased 10.5 percent on a year-over-year basis in March 2013 compared to March 2012. This change represents the biggest year-over-year increase since March 2006 and the 13th consecutive monthly increase in home prices nationally. On a month-over-month basis, including distressed sales, home prices increased by 1.9 percent in March 2013 compared to February 2013.

Banks are not doing much for the housing market, in particular, leaving Fannie Mae and Freddie Mac to guarantee 90 percent of current home loans originated by lending institutions. Meanwhile, the Federal Housing Finance Authority has just announced it will no longer allow Fannie and Freddie to guarantee so-called ‘non-qualified’ loans after 2013, which are basically those loans that don’t amortize principal to be paid off in 30 years or less, such as interest only mortgages.

The hugely excess reserves held by banks once again highlight their conservative nature. And with Fannie and Freddie withdrawing from all but the most basic mortgages, we can only hope that other lending institutions—such as Mortgage Banks and Credit Unions—will recognize the lending opportunities that rising housing prices afford, if the housing recovery is to continue.

Harlan Green © 2013

Follow Harlan Green on Twitter:www.twitter.com/HarlanGreen

Mortgage Delinquencies Lowest Since 2008

The Mortgage Corner

The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.09 percent of all loans outstanding at the end of the fourth quarter of 2012, the lowest level since 2008, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 3.74 percent, the lowest level since the fourth quarter of 2008, down 33 basis points from the third quarter and 64 basis points lower than one year ago.

“We are seeing large improvements in mortgage performance nationally and in almost every state.  The 30 day delinquency rate decreased 21 basis points to its lowest level since mid-2007. With fewer new delinquencies, the foreclosure start rate and foreclosure inventory rates continue to fall and are at their lowest levels since 2007 and 2008 respectively,”   said Jay Brinkmann, MBA’s Chief Economist and Senior Vice President of Research.

The foreclosure starts rate decreased by the largest amount ever in the MBA survey and now stands at half of its peak in 2009. Similarly, the 33 basis point drop in the foreclosure inventory rate is also the largest in the history of the survey.   

Brinkman said the two biggest factors impacting the number of loans in the foreclosure process still are the magnitude of the problem in Florida and the judicial foreclosure systems in some states.  12 percent of the mortgages in Florida are in the process of foreclosure, down from a peak of 14.5 percent last year but still an extraordinarily high rate that is impacting the national rate.  In addition, while the percentages of loans in foreclosure dropped in almost all states, the average rate for judicial states was 6.2 percent, triple the average rate of 2.1 percent for nonjudicial states.

And RealtyTrac reported foreclosure-related sales accounted for 21 percent of all U.S. residential sales during 2012, down from 23 percent of all sales in 2011 and down from 28 percent of all sales in 2010.

Graph: RealtyTrac

Properties not in foreclosure that sold as short sales in 2012 accounted for an estimated 22 percent of all residential sales — bringing the total share of distressed sales to 43 percent including both foreclosure-related sales and non-foreclosure short sales.

California, Georgia, Nevada posted highest percentage of foreclosure sales in 2012. Foreclosure sales accounted for more than 38 percent of all residential sales in California in 2012, the highest percentage of any state but down from 44 percent of all sales in 2011 and down from 49 percent of all sales in 2010. California pre-foreclosure sales in 2012 increased 12 percent from 2011 while California REO sales decreased 27 percent over the same time period.

Home prices continue to recover, rising gradually. The FHFA price index for December for homes with Fannie Mae and Freddie Mac conventional mortgages gained 0.6 percent, following a rise of 0.4 percent the prior month. The December advance was led by the East South Central region, increasing 2.3 percent, with the Middle Atlantic region down 0.1 percent.

Graph: Econoday

The year-on-year rate posted at plus 5.8 percent versus 5.4 percent in November.
The FHFA report combined this morning with a favorable Case-Shiller report, point to further progress in restoring home prices toward pre-recession levels. Much of the price rise comes from the decline in for sale inventories to a low 4 month supply at current sales rates for both new and existing-home sales.

And as the number of foreclosure and short sale transactions continue to decline, prices could rise even faster, further boosting the real estate recovery.

Harlan Green © 2013

Follow Harlan Green on Twitter: www.twitter.com/HarlanGreen

Home Sales Surging

The Mortgage Corner

Total existing home sales are accelerating, and prices are rising along with declining inventories. Sales that include single-family homes, townhomes, condominiums and co-ops, rose 5.9 percent to a seasonally adjusted annual rate of 5.04 million in November from a downwardly revised 4.76 million in October. They are 14.5 percent higher than the 4.40 million-unit pace in November 2011. Sales are at the highest level since November 2009 when the annual pace spiked at 5.44 million.

NAR chief economist Lawrence Yun said there is healthy market demand. "Momentum continues to build in the housing market from growing jobs and a bursting out of household formation," he said. "With lower rental vacancy rates and rising rents, combined with still historically favorable affordability conditions, more people are buying homes. Areas impacted by Hurricane Sandy show storm-related disruptions but overall activity in the Northeast is up, offset by gains in unaffected areas."

Graph: Calculated Risk

The problem now is inventory, as months of supply have been falling as lenders work off their shadow inventory of defaulted properties. Supply fell sharply to 4.8 months at the current sales rate from 5.3 months in October which was already a multi-year low. The number of existing homes on the market, at 2.03 million, is the lowest since 2001.The good news is that it is boosting home prices.

The national median existing-home price for all housing types was $180,600 in November, up 10.1 percent from November 2011. This is the ninth consecutive monthly year-over-year price gain, which last occurred from September 2005 to May 2006.

October FHFA home prices, a better measure of affordable homes with Fannie Mae or Freddie Mac conforming loans were up a better than expected 0.5 percent nationally after remaining virtually unchanged in September. On the year, the index was up 5.6 percent after increasing 4.1 percent the month before.

Graph: Econoday

Distressed homes - foreclosures and short sales sold at deep discounts - accounted for 22 percent of November sales (12 percent were foreclosures and 10 percent were short sales), down from 24 percent in October and 29 percent in November 2011. Foreclosures sold for an average discount of 20 percent below market value in November, while short sales were discounted 16 percent.

Graph: Econoday

LPS reports that delinquencies continue to decline. The total delinquency rate has fallen to 7.03 percent from the peak in July 2010 of 10.57 percent. A normal rate is probably in the 4 to 5 percent range, so there is a long ways to go. The in-foreclosure rate was at 4.08 percent. There are still a large number of loans in this category (about 1.96 million).

"The market share of distressed property sales will fall into the teens next year based on a diminishing number of seriously delinquent mortgages," said the NAR’s Yun.

Well, it does look like 2013 will fulfill predictions that housing will be in full recovery. The Fed has said it will hold interest rates at record lows through 2015, so what more could prospective home buyers wish for? Maybe a few more new homes under construction.

Harlan Green © 2012

National Home Prices (Finally) Recovering

The Mortgage Corner

Is the end of the housing bust in sight?  The Case-Shiller Home Price Index reported the fourth consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in September suggests that house prices probably bottomed earlier this year.

And this is the slow time of year when families that have already moved to put their children in new school districts. It really means that those at the bottom of the housing bubble—Las Vegas (up 1.4 percent, 3.8 percent YoY), Phoenix (up 1.1 percent, 20.4 percent YoY), San Diego (up 1.4 percent, 4.1 percent YoY)—are finally seeing some relief from the worst economic slump since the Great Depression.

Graph: Calculated Risk

“Home prices rose in the third quarter, marking the sixth consecutive month of increasing prices,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “In September’s report all three headline composites and 17 of the 20 cities gained over their levels of a year ago. Month-over-month, 13 cities and both Composites posted positive monthly gains.”

The Federal Housing Finance Authority (FHFA) house price index posted also another monthly increase in September. This measure is up 4.4 percent YOY, a bigger YOY gain than the 3 percent rise in the Case-Shiller index. Also, the FHFA index is down just 16 percent from its peak, about half the cumulative decline in the Case-Shiller gauge. Most of the discrepancy reflects the fact that the FHFA index is much less affected by distress sales, since it covers only properties financed with conventional GSE mortgages (Fannie Mae and Freddie Mac), which have more stringent qualification guidelines.

This may be because of the continuing rise in consumer confidence. The Conference Board’s Consumer Confidence survey rose again with buying plans for homes a special positive, said the report. The consumer confidence index rose to a new recovery high of 73.7 in November from an upwardly revised 73.1 in October. Strength is centered in the expectations component which is up 1.1 points to 85.1. The present situation component is down one tenth to 56.6.

Graph: Econoday

A major reason for the increased confidence is a jump in those who expect to buy a house in the next six months. This is the latest indication of building momentum for the housing sector. Inflation expectations are another plus in the report, down two tenths for the 12-month outlook to 5.6 percent in what is a reflection of falling gas prices.

California is also doing well. I reported last week that Southern California home sales also rose sharply in October as move-up buyers joined investors, according to San Diego-based DataQuick, shifting the mix of homes selling upward as foreclosure resales hit a five-year low. Southern California's real estate market bucked the typical fall slowdown last month, with buyers snapping up pricier homes and sales roaring up 18 percent over the prior month.

Sales hit a three-year high for an October, rising 25 percent from the same month last year. The median sale price for a Southland house last month was $315,000, equal to September and up 17 percent from October 2011.

Harlan Green © 2012