"The Second Wave" Option ARMs, Alt-A etc
08-05-2010
, 07:16 PM
08-10-2010
, 10:44 AM
Spike in Failed Trades Forces Fed Back into MBS Market (From end of June)
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This week [end of June], the Federal Reserve Bank of New York Open Market Trading Desk began conducting a limited amount of agency mortgage-backed security (MBS) "coupon swap operations" in order to facilitate the timely settlement of agency MBS trades.
A coupon swap is a transaction conducted at market prices that involves the sale of one agency MBS with the simultaneous agreement to purchase a different agency MBS. Coupon swaps allow the Federal Reserve to sell agency MBS coupons that are not readily available for settlement in the market and simultaneously purchase a different agency MBS coupon that is more readily available for settlement.
The Federal Reserve uses coupon swaps as a tool to address temporary imbalances in market supply and demand. The New York Fed transacts agency coupon swaps only with primary dealers who are eligible to transact directly with it. Agency MBS coupon swaps WILL NOT reduce or increase the Fed's MBS inventory. FRBNY MBS FAQ
Plain and Simple: coupon swaps give the Fed the ability to sell primary dealers MBS coupons that are experiencing a shortage of deliverable loan supply. In exchange, primary dealers sell the Fed the same amount of MBS, but different coupon rates, specifically those being actively produced by loan originators (4.0s and 4.5s right now).
A coupon swap is a transaction conducted at market prices that involves the sale of one agency MBS with the simultaneous agreement to purchase a different agency MBS. Coupon swaps allow the Federal Reserve to sell agency MBS coupons that are not readily available for settlement in the market and simultaneously purchase a different agency MBS coupon that is more readily available for settlement.
The Federal Reserve uses coupon swaps as a tool to address temporary imbalances in market supply and demand. The New York Fed transacts agency coupon swaps only with primary dealers who are eligible to transact directly with it. Agency MBS coupon swaps WILL NOT reduce or increase the Fed's MBS inventory. FRBNY MBS FAQ
Plain and Simple: coupon swaps give the Fed the ability to sell primary dealers MBS coupons that are experiencing a shortage of deliverable loan supply. In exchange, primary dealers sell the Fed the same amount of MBS, but different coupon rates, specifically those being actively produced by loan originators (4.0s and 4.5s right now).
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WHY IS THE FED BEING FORCED TO INTERVENE IN THE TBA MBS MARKET?
A huge spike in failed trades over the past year, specifically in 5.0 and 5.5 MBS coupons.
A huge spike in failed trades over the past year, specifically in 5.0 and 5.5 MBS coupons.
08-22-2010
, 04:42 PM
The fallacy of cheap home prices and the two income trap – dual income households underscore massive housing inflation. Nationwide home prices overvalued by 25 percent.
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Housing inflation has run at an elevated pace since the 1970s and ramped up starting in the 1990s. Yet what masked much of the pain was access to easy credit but also the rise of the two income household. The housing bubble is worse than many expect and probably for the wrong reasons. Many readers make the wrong assumption that because we are largely a two income household nation that home values had to rise simply because of this transition. It was a simple 2 plus 2 calculation. This is wrong and it is more likely that home values grew in the last decade more on the introduction of exotic mortgage products that didn’t rely on income measures. There is little debate that many cities in California are still in major housing bubbles. Yet nationwide home values are still overpriced by 25 percent. Let us examine why.
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In the 1950s and 1960s it was very doable for one blue collar job to support one household. That is, purchasing a home with a 30 year fixed rate with one blue collar income was not an extraordinary accomplishment. But what pushed the rate from 47% (of both spouses working) in 1967 to 67% today? Of course the obvious part is the rise of women in the workforce but the more sinister reality is that households now need two incomes just to stay within the middle class. It was more out of necessity.
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We have the same raw number of people working in manufacturing as we did in the 1940s! Of course our population has expanded dramatically over that time. It is amazing that 4 out of 10 Americans work in the low paying service sector (i.e., McDonalds, Wal-Mart, cashiers, etc). That is why the median household income of Americans is roughly $50,000 (in California it is roughly $60,000). Now given the large amount of dual income households, you can do the math on individual wages. The housing market inflation has been underplayed because you have dual income households working lower paying jobs. So yes, income has gone up but the per capita wage for each individual has gone down. Even with two incomes, the current price of housing in the U.S. is too high. That is why the Federal Reserve has done everything imaginable to keep rates artificially low. But guess what? Unless they can throw in a third income to the household people won’t be buying.
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The balance sheet of Americans has taken a major hit since the recession started. In fact, residential real estate values (the place where most have their net worth) have cratered by $6 trillion. But look at the above. The debt hasn’t adjusted. This has to do with banks not realizing the actual losses (i.e., shadow inventory, etc). Yet the reality is losses have occurred. And when you even run hypothetical scenarios you can understand why having two incomes isn’t a big win:
This is an interesting perspective. If you run through nearly each line item above, everything has gone up in price over this time. Don’t even start with healthcare or college costs because the chart would tilt right over. But even looking at mortgage payments and taxes, things have shifted. Also, with the single income household you didn’t need two cars or needed to pay for daycare/babysitting. These are added costs that come when per capita incomes have shrunk.
Now with many households becoming one income households yet again because of this recession, we see the tide rolling out and how bad things really are. Combine this with a tightening of credit access and the reality is revealed. Home values are still extremely expensive and have been covered up by dual income households and massive amounts of debt. Remove both of those and you get a very ugly economic picture.
This is an interesting perspective. If you run through nearly each line item above, everything has gone up in price over this time. Don’t even start with healthcare or college costs because the chart would tilt right over. But even looking at mortgage payments and taxes, things have shifted. Also, with the single income household you didn’t need two cars or needed to pay for daycare/babysitting. These are added costs that come when per capita incomes have shrunk.
Now with many households becoming one income households yet again because of this recession, we see the tide rolling out and how bad things really are. Combine this with a tightening of credit access and the reality is revealed. Home values are still extremely expensive and have been covered up by dual income households and massive amounts of debt. Remove both of those and you get a very ugly economic picture.
08-24-2010
, 11:30 AM
CR - Existing Home Sales lowest since 1996, 12.5 months of supply
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Existing Home Sales Plunge 27.2%, Record Drop, Trounce Expectations Of 13.4%, Lowest Number Since May 1995
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But have no fear, looney Realtor spin is here: NAR: July Existing-Home Sales Fall as Expected but Prices Rise
Keep in mind CR's admonition from above:
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This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.
Sales in July 2010 (3.83 million SAAR) were 27.2% lower than last month, and were 25.5% lower than July 2009 (5.14 million SAAR).
Sales in July 2010 (3.83 million SAAR) were 27.2% lower than last month, and were 25.5% lower than July 2009 (5.14 million SAAR).
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The last graph shows the 'months of supply' metric.
Months of supply increased to 12.5 months in July from 8.9 months in June. A normal market has under 6 months of supply, so this is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will start declining.
Months of supply increased to 12.5 months in July from 8.9 months in June. A normal market has under 6 months of supply, so this is extremely high and suggests prices, as measured by the repeat sales indexes like Case-Shiller and CoreLogic, will start declining.
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Ignore the median price! Double digit supply and lowest sales rate since 1996 are the key stories.
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Existing Home Sales Plunge 27.2%, Record Drop, Trounce Expectations Of 13.4%, Lowest Number Since May 1995
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Hello Double DIPression my old friend. 3.83 million sales on 4.65 million expectation. Previous 5.37 million revised to 5.26. The chart says it all: lowest sales since May 1995, months supply largest since 1999.
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But have no fear, looney Realtor spin is here: NAR: July Existing-Home Sales Fall as Expected but Prices Rise
Keep in mind CR's admonition from above:
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Ignore the median price! Double digit supply and lowest sales rate since 1996 are the key stories.
08-24-2010
, 12:34 PM
08-30-2010
, 05:47 PM
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Back in 2005, your garden variety resale transaction accounted for more than 80% of all home sales. By November of 2006 that had slipped slightly to 78% while New Homes accounted for nearly 20% of all transactions (a peak share). Just over 2 years later in January of 2009, the new home share had slumped to 14%, and starting in that month there were more REO sales in the preceding 12 month period than new homes sold. So for the last year and a half, banks have sold more houses than home builders have.
10-19-2010
, 06:24 AM
11-04-2010
, 11:26 AM
Market Prices In QE 7 As S&P Says Cost To Resolve GSEs Could Approach $700 Billion, Double FHFA Estimate
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Two weeks ago, the FHFA, using Moody's assumptions and modelling, said that a worst case scenario for Fannie and Freddie could result in total costs to taxpayers of $363 billion, an incremental $220 billion to the $148 billion already spent to keep the nationalized housing branch of the US government. Today, S&P has released a stunner which says that actually fixing the GSEs, and "resolving and relaunching" the bankrupt entities, would actually cost as much as $685 billion, or over another half a trillion in taxpayer costs. And as for the reason why the market is surging, and will be until the US annexes Zimbabwe, now that it is pricing in QE 7, S&P says that according to its estimates, the backlog of shadow inventory is 40 months! Tomorrow: another trillion dollar capital defficiency hole, uncovered somewhere in the ponzi that is the US economy, will cause QE 8 to be priced in. And so on.
From S&P:
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From S&P:
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As Standard & Poor's Ratings Services sees it, the problems in the U.S. housing market are far from over. Moreover, with a growing portfolio of unsold homes, a sluggish economy, stubbornly high unemployment, the prospect of rising foreclosures, and billions in legacy losses, it appears unlikely in our view that housing and mortgage markets will be able to operate normally without continuing and substantial government involvement. That will likely mean further taxpayer support for Freddie Mac and Fannie Mae, the government-sponsored enterprises (GSEs) that, along with the Federal Housing Administration, now buy more than 90% of all home loans compared to less than half before the crisis.
That support has so far come at a price, which we believe is likely to rise substantially. Standard & Poor's estimates that the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac could reach $280 billion, including the $148 billion already invested--money largely spent to make good on loans gone bad. (Both GSEs are already in receivership.) That $280 billion, however, could swell to $685 billion, by our estimate, with the establishment of a new entity to replace Fannie and Freddie that the government would initially capitalize. Although federal authorities have taken no concrete public steps toward sponsoring a GSE alternative, , Standard & Poor's believes that it's a useful exercise to consider how much such a recapitalization might cost taxpayers....
That support has so far come at a price, which we believe is likely to rise substantially. Standard & Poor's estimates that the ultimate taxpayer cost to resolve Fannie Mae and Freddie Mac could reach $280 billion, including the $148 billion already invested--money largely spent to make good on loans gone bad. (Both GSEs are already in receivership.) That $280 billion, however, could swell to $685 billion, by our estimate, with the establishment of a new entity to replace Fannie and Freddie that the government would initially capitalize. Although federal authorities have taken no concrete public steps toward sponsoring a GSE alternative, , Standard & Poor's believes that it's a useful exercise to consider how much such a recapitalization might cost taxpayers....
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A Backlog Of Unsold Homes Is Exacerbating The Housing Slump
The U.S. housing market remained in a severe slumpthrough the first three quarters of 2010. As a result, we see very little momentum toward a more steady housing market in 2011. Despite reports of stabilizing mortgage delinquencies at Fannie and Freddie, we believe there is significant uncertainty related to the build-up in inventory, which is likely to continue to keep home prices down (see chart).
The U.S. housing market remained in a severe slumpthrough the first three quarters of 2010. As a result, we see very little momentum toward a more steady housing market in 2011. Despite reports of stabilizing mortgage delinquencies at Fannie and Freddie, we believe there is significant uncertainty related to the build-up in inventory, which is likely to continue to keep home prices down (see chart).
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12-28-2010
, 04:37 PM
Housing Prices Commence Their Downward Price Movement In Search Of Equilibrium Scraping Depression Levels
Plus fun images like:
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Anyone who regularly follows me knows that I have been adamant in disagreeing with any who actually assert that the US has entered a housing recovery. The bubble was blown too wide, supply is too rampant, with demand too soft and credit tighter than frog ass. Today, the Case Shiller numbers have come out, and after a few months of showing price increases, have come around full tilt to reveal the truth – Reggie Middleton style!
From CNBC:
To begin with, the Case Shiller index is highly flawed in tracking true price movement in a downturn such as this since said downturn is being led mostly by elements that the CS index purposefully omits. This means that those price drops that are being shown by the Case Shiller index are actually highly optimistic and seen through spit shined rose-colored glasses. The reality is a tad bit uglier...
From CNBC:
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U.S. single-family home prices fell for a fourth straight month in October pressured by a supply glut, home foreclosures and high unemployment, data from a closely watched survey showed Tuesday. AP The Standard & Poor’s/Case-Shiller composite index of 20 metropolitan areas declined 1.0 percent in October from September on a seasonally adjusted basis, a much steeper drop than the 0.6 percent fall expected by economists. The decline built on a revised decrease of 1.0 percent in September and took prices down 0.8 percent from year-ago levels. It was the first year-on-year drop in the index since January. The housing market has been struggling since home buyer tax credits expired earlier this year. To take advantage of the tax credits, buyers had to sign purchase contracts by April 30.
“The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing] , as six cities set new lows for the period since 2006 peaks. There is no good news in October’s report,” said David Blitzer, chairman of the index committee at S&P.
Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.
Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.
“The (housing) double dip is almost here [there was no double dip, just a result of .GOV bubble blowing] , as six cities set new lows for the period since 2006 peaks. There is no good news in October’s report,” said David Blitzer, chairman of the index committee at S&P.
Eighteen of the 20 cities showed weaker year-on-year readings in October and all 20 cities showed monthly price declines.
Unadjusted for seasonal impact [in other words, closer to the truth], the 20-city index fell 1.3 percent in October after a 0.8 percent decline in September.