Wednesday, June 5, 2013

Washington's Ongoing Housing Market Bailout

While recent reports seem to show that America's housing market is showing modest signs of improvement, such would not likely be the case without the massive and ongoing intervention of the government in Washington.

Let's open by taking a look at a bit of history as provided by FRED:

Current homeowners' equity (i.e. the "skin that they have in the game") in real estate for the fourth quarter of 2012 was $8.223 trillion.  This is down 38.9 percent or $5.245 trillion from its peak of $13.468 trillion in the first quarter of 2006.

Here's a look at what happened to homeowners' real estate assets in total:

Current homeowners' assets in real estate totalled $19.914 trillion in the fourth quarter of 2012, down $5.085 trillion or 20.3 percent from its peak of $24.999 trillion in the third quarter of 2006.

In addition, to further help you put the current situation into perspective showing us that all is still not well four years on, here is a graph showing the percentage of residential properties in various states that were in the unenviable state of negative equity in Q3 2012:

Apparently, all is still not healthy despite Washington's ongoing efforts.

According to the recent Bipartisan Policy Center's report "Housing America's Future", the private sector in the United States is not pulling its weight in bearing the risk of mortgage credit.  When Fannie Mae and Freddie Mac neared collapse in 2008, the federal government had to step in with billions of dollars of support and, right now, Washington supports more than 90 percent of single-family mortgages through the aforementioned Fannie and Freddie as well as Ginnie Mae and the Federal Housing Administration.  On top of that, Washington supports roughly 65 percent of the rental mortgage market.  This means that American taxpayers are highly vulnerable to future housing market corrections.  This issue is becoming increasingly important as the Treasury Department's investment in "The Enterprises" reached $187.5 billion in October 2012 and could reach as high as $191 to $209 billion by 2015 before dividends are paid as shown in this Federal Housing Finance Agency press release.  Fortunately, in the case of Fannie, the recently announced $59.4 billion dividend will cover some of the $116.1 billion in public funds borrowed from taxpayers to cover losses on trillions of dollars worth of mortgages.

Here is a pie chart showing who held America's mortgage debt in the third quarter of 2012:

Notice that Fannie and Freddie were holding 44.2 percent of all outstanding mortgage debt; this totalled $4.64 trillion in total of which $502 billion was held in portfolio and $4.1 trillion was in mortgages held by third parties, mainly as mortgage-backed securities.  According to the Federal Reserve, in total, there was $13.137 trillion in mortgages of all types in America in Q4 2012 of which $9.923 was in one to four family residences.  This is down from $11.137 trillion in 2008, a drop of 10.9 percent.

Here is a graph from FRED that shows the ramping up of mortgage debt during the 1990s and 2000s and the decline after 2008:

How do we solve this problem and put an end to the government bailout of the real estate and banking sector?  The Housing Commission behind the aforementioned report suggest that a limited catastrophic government guarantee be established that ensures the timely payment of principal and interest on mortgage-backed securities and that this guarantee should be:

1.) paid for collecting premiums that are in excess of expected claims and that the premiums are large enough to create a surplus pool for future funding if needed.

2.) triggered only after private capital in the loss position has been fully exhausted.

3.) applied only to the securities themselves and not to the equity or debt of the entities that issue or insure them (i.e. AIG).

The authors also suggest that both Fannie Mae and Freddie Mac be eliminated since it is obvious that the implication that Washington/taxpayers will back these government-sponsored enterprises (GSEs) has led to a near catastrophic failure.  These GSEs should be replaced with a wholly owned government corporation that would provide a limited government guarantee for mortgages.  It would not issue mortgage-backed securities and mortgages, rather, it would simply guarantee investors that they would receive timely payment of both principal and interest on these securities.  All other participants in this new scenario are at risk for their own finances with no implicit or explicit guarantee of federal government assistance.  This would put the new government corporation fourth in line for losses after borrowers and their home equity, private credit enhancers and the corporate resources of both the issuers and servicers of the mortgage debt and mortgage-backed securities.  This would firmly place the ultimate responsibility for failure where it belongs, in the hands of the private sector who was largely responsible for the collapse in 2008 through the unfettered growth of toxic and unstable (and wealth creating for Wall Street) mortgage securities.

The Commission notes that the mortgage lending system has over-reacted to the crisis (that was largely created by them in the first place), a fact that is preventing well-qualified families from accessing mortgage credit now.  Along with that, lenders are requiring multiple appraisals of properties and are using distressed properties as "market comps" where distressed properties are used to establish the value of a potential borrower's home.

While measures like new home construction and sales levels are showing improvement and the market price of homes is coming off of its decade-long lows as measured by Case-Shiller, it is clear that the underlying problems in America's real estate market still require rather substantial tweaking before the market can be considered healthy.  Right now, one of the greatest risks in the housing market is not just to home owners, rather, it is the heavy load currently being borne by American taxpayers that could prove to be problematic over the long haul unless changes are made to the system as noted above, particularly if the American economy follows its European counterpart into the white porcelain bowl.

1 comment:

  1. When you ask if housing has bottomed out and moving up, my answer would have to be, I don't know, and either do they. However I can state several things without reservation. Calling the home buying we have seen in both the new and existing markets "pent up demand" may be a stretch, many houses still remain empty or under leased, this means the occupants are not fulfilling their obligations. With population growth slowing, values changing, and a slightly more occupants per home, less houses will be needed, more on the subject below,