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Tan-Man pleads for more government "help" to ease lending (while still under SEC Investigation)
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2007 Oct 30, 10:15am 18,790 views 130 comments
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Has anyone read Fed Govenor Fred Mishkin's comments at the Fed's site yet? (Patrick's links)
"The interest of the Federal Reserve in financial stability does not arise out of a concern for the functioning of financial markets as such or out of a desire to aid distressed investors or institutions. Rather, the Federal Reserve vigorously promotes financial stability because of the intimate connection between a stable financial system and solid macroeconomic performance."
I would love to see a disection of this piece, here.
"$417K should be PLENTY"
Yes it should. Especially when considering "current incomes".
That's what makes this all the more frustrating. Here we are, PLEADING for there to be "some" relationship between incomes and home prices and all we're getting is last ditch efforts to support that very disconnect!
No one's had more fun at Orangelo's expense than myself but it's hardly just him. It would be easier to identify those that *don't have an interest in propping up home prices "at all costs". Raise the limit to $830K!? You've got to be kidding me.
Steveoh,
That was a great article. The peice you quoted is consistent with the mandate of the FOMC - price stability and maximum sustainable unemployemnt.
More genrally the article discusses the current complexities of providing liquidity. While Moral Hazard for fraudulent borrowers and lax lenders has made a lot of hay at this site, this article points to the bigger Moral Hazard of banks (and international investors) presuming bailouts from the Fed.
I think this will be one of the earliest explanations for why the Fed will provide money to some banks and not to others. The discount window will be very closed to certain entities. And if this causes bank failure which causes some unemployment as well as some inflation - so be it. The Fed cannot be seen as backing bad lending. All investors, caveat emptor.
Things are playing out exactly as people have forseen, even big banks will begin to implode and the Fed will ovrsee the sale of their assets and accounts. The difference between this and the savigs and loan crisis will be magnitude. This one will be big. And since many countries have the same fundametal problems as the US (overpriced collateral) and exotic, highly leveraged financing, the hit to asset prices will have to be larger as their is less 'real money' to buy the bargains.
This is going to be ugly. For anyone aged 20-50, this will be the biggest financial event you will see in your life.
Steveoh,
The problem is, Mishkin, like the rest of the Fed, says one thing and does another. Nice that he touts price stability, diminishes the need to help financial markets. However, unless they know something the rest of us don't about truly how badly the real economy is doing, they are being incredibly hypocritical.
I have no expectations of rates being held today. The real question is 25 vs 50 bp.
I enjoyed Chris Thornberg's comments in Reuters:
"Fires out, California housing still burns"
"We've got a giant mess on our hands" says Chris.
Ya' think?
skibum :
The problem is, Mishkin, like the rest of the Fed, says one thing and does another.
Absolutely. It's very much like Paulson wanting "strong dollar". Say one thing, do another. Rinse. Repeat.
We will see another "The risk remains that inflation will fail to moderate as expected". This Fed will go down in history as one with the least credibility. But then, once you are someone's bitch, I guess you don't really mind people laughing at you.
RE: The Tan Man, disgruntled shareholders are suing him and other mgmt for their recent share selloff while painting a rosy picture of CFC:
http://www.bloomberg.com/apps/news?pid=20601087&sid=avos6a_QIVNo&refer=home
KQED (88.5 in SF, KQED.org streamed) is having a forum on 'Desperate Homesellers at 11:00am today, it sounds like it might be interesting.
When last night's earthquake hit I was sitting in a chair talking on the phone to a friend three blocks away. I said 'Oooh, this feels like it's going to get big.' and she said 'What? What are you talking about?' She didn't feel a thing. Another friend called me immediately after and I clicked over to her and she told me it felt largish to her as well.
My friend who lives eight blocks away and I felt it fairly well, but our friend who lives right in between us felt nothing at all. Supposedly we are all on the same geological strata. It's odd how earthquake waves affect things.
Latest trend here in SoCal. This one 'isnt in the news' yet but im noticing a whopping jaw droping 50% of homes that actually do sell are selling AT A LOSS. Its actually higher because im not counting realtor commission, closing costs, remodeling, maintenance, vacancy. The other trend is only 1 of 3 listings actually sell, the rest get cancelled when wish price fairy doesnt show up with multiple offers(or the trustee sale occurs and listing is cancelled). Used to be 9 of 10 listings sold.
The 'sold at loss' are foreclosures, short sales, and the occasional seller bringing a check to closing. The sellers walking away with a profit bought pre 2004 and did not heloc.
The trend started in september after the financial nuclear bomb went off. Now we are in financial nuclear winter....how many years does it last again?
@Steveoh,
What skibum & SIBA said.
@HelloKitty,
Historical precendent suggests a 5-8 year downturn. Great CR post with graphs here: http://calculatedrisk.blogspot.com/2007/10/housing-busts-and-sticky-prices.html
Today's Family Values are brought to you from Washington state:
http://tinyurl.com/22ldhz
How's the housing market up in the Pacific Northwest area? Has Bend turned yet?
25 bp, as I expected. Just enough to try to appease Wall Street, while trying their darndest to maintain some credibility.
Interestingly, the market did not like it at all. 100 pt Dow drop just after the announcement. I suspect some were unhappy with "only" 25bp, while others are not happy with the accompanying statement, still trying to give credence to fighting inflation, and with one vote (Hoenig) actually for keeping rates steady.
"wish price fairy"
"financial nuclear winter"
LOL! I'd read this morning that 27% of SAC's "sales" are actually foreclosures! I'd advocate reading the Reuters article w/ Chris Thornberg for all our CA posters. So many of his comments were targeted specifically toward the CA mkt. He seemed to imply that CA will likely have (or is in) a "Statewide Recession" and that the impacts will be greater there.
DinOR,
Much of California is probably already in recession. It's only in hindsight that economists will "Christen" these times recessionary. Unemployment is noticeably higher in CA than the most of the rest of the US (save the disastrous rust belt). There is no real employment growth in all those Central Valley, IE, Sacto boom areas other than real estate related jobs, and we know what's happening there. Tech in Silly Valley is reporting strong earnings, but even here there are signs of belt tightening. All in all, it's not surprising he's calling for a statewide recession.
The Saint Joseph statues are back:
http://www.stjosephstatue.com/
How much was Mozillo compensated last year?
@SFWoman,
Family "values" indeed! They ran that story at 5:00am on the NW Cable News and... I thought.. this COULDN'T wait until after everyone's had their coffee?!
The Bend Bubble Blog is accusing those of us on the PDX blog of being pansies! They're circulating a rumor that a local (and rather high profile) builder is going to declare BK! I had tried to warn that Aaron Krowne (Mortgage Implode-O-Meter) had gotten into considerable legal difficulties for announcing a MB firm was D.O.A. They later claimed that his pre-mature announcement lead to lenders cutting off their warehouse lines of credit leading to their ultimate (and inevitable) demise!
How hard would it be for a builder to make the same claim? Bend is (according to a local MB) a disaster area! However he feels the impact to the community will be minimal. For the most part the growing, out of control inventory was to a large extent, simply REIC players flipping homes, lots etc. to one another. That's a relief!
Wow, Bernanke cut 25bps and I feel almost "content" about it (vs. another 50 pt-cut). I guess my expectations of the Fed have gotten so low that even a modest bad move looks like good news now.
Arny movement on 30 year mortgages rates? Presumably the ceiling for a qualified buyer (20%down, traditional debt to income ratio, owner occupied) using a savings & loan (whose business is to lend to community memebers to buy homes, not seek the highest returns possible in investing) would be something like Fed Funds rate plus 2.5%?
Specuvestors would have to go to Wall Street and their rate, given foreign averision to American debt, would now (finally) be higher?
Peter P
2007 Oct 31, 5:23am
Ten-year Note rates are up. Fed rate cuts will not help mortgage rates, only banksters.
@skibum,
I hear ya', and I HAVE been on the fence about Chris. However in this crazy, upside down world (as HARM rightly notes) it looks like the fear this time is that a correction in housing prices will lead to a recession, NOT vice versa?
The economy was never all THAT good to begin with, or certainly not "good" enough to drive home prices where they've been.
It's like going to "intervention" where alcohol, cocaine and strippers are provided in abundance (think Henry T. Nichols the 3rd type helpings). Then, after the abuser goes into cardiac arrest he's hauled off to the ER and we declare the "intervention" a success! (It's hard to abuse when a nurse has to come by once an hour to check your monitor).
DinOR:
In many ways, the limit on conforming loans is a ruse. Does it really matter what the limit is -- $1mm, $2mm, hell, $10mm -- if it's coupled with a traditional 28/36 DTI ratio, verifiable income, and a 20% (even 10%) downpayment? $1mm at 6% on a fixed 30 yr is about $6000 P&I plus another (at least) $1k for taxes. So that would require a verifiable of $25k per month -- $300k per year. Only about 1.5% of families make over $250k per year; virtually all of them own houses.
Unless the conforming limit is coupled with a replication of the underwriting standards of 2006, a change isn't going to do a thing -- except make Fannie/Freddie a convenient scapegoat as prices decline (e.g. "Well, if the government had raised the limits, then people could get mortgages").
Peter P,
I think we may see 2 markets emerge. 30 year rates have gone with the bond markets for years now since that was the cheaper rate. However, if Wall Street refuses real estate as collateral, then the mom and pop savings and loans that do NOT sell their loans may be offering the most attractive rates. It may be hard to tell though since they are not now, nor will be, the bulk of the market given their restrictions: owner occupied, 20% down, DTI ration of 35% or less.
Dunno, it will be very netersting to see how that micro-market plays itself out.
Anyone know what the traditional spread on Fed Funds to 30 year rate is for small savnings and loans that wanna cover for their low risk and low profit portfolio? Assuming these small banks can go get money from the Fed at 4.5% they should be able to pass that on to borrowers at 6.5%? 7%? At some point it would seem that would have to be able to beat a fear driven Wall Street/foreign investor in terms of an attractive rate to a borrower.
Only about 1.5% of families make over $250k per year; virtually all of them own houses.
Though in the BA, it's quite a bit greater than 1.5%...
Y'all see that thing way off in the distance?
I'm not sure what it is, but it could be a liquidity trap.
Ed S.
That is such an excellent point. And... I imagine someone with a respectable FICO, decent income and a down payment big enough to make their monthly payments tolerable this is all pretty moot.
You're right, for the most part it won't change a thing. Still, it's pretty amazing what these loan salesman won't do to keep "the game" afloat for just a little while longer? Or rather what they "think" will kept afloat a little longer.
eburbed,
"Only about 1.5% of families make over $250k per year; virtually all of them own houses.
Though in the BA, it’s quite a bit greater than 1.5%…"
Actually this chart doesn't even show 250k+.
It's from 2006 and it shows that those who are at the 200k range here in the BA are at 7.5% or so. So while that's considerably more than 1.5% in the rest of the USA it's still not enough to sustain prices.
1985:
20% down, on deposit for at least year, proof of origin
28ish% TOTAL DTI
On the job for at least 2 years
Excellent credit
3 months mortgage left on deposit after the transaction
2006:
Pulse
How did this happen again, Mr. looks like he ate 10 bunches of carrots?
And here's another interesting article about Silly Valley's income levels and affordability:
Peter P
2007 Oct 31, 7:26am
Anyone know what the traditional spread on Fed Funds to 30 year rate is for small savnings and loans that wanna cover for their low risk and low profit portfolio?
There are too many other variables involved, e.g. inflation expectations, shape of yield-curve, etc.
Peter P
2007 Oct 31, 7:28am
It’s from 2006 and it shows that those who are at the 200k range here in the BA are at 7.5% or so. So while that’s considerably more than 1.5% in the rest of the USA it’s still not enough to sustain prices.
In Japan, the majority of families make much more than 250K Yen a year.
USD is heading towards that direction anyway.
OT, but I just won "most creative" Halloween costume at work. I went as "Mr. Subprime".
"2006
Pulse"
When I got my first home loan in the late 80's the process took about 3 months. Additionally they wanted to see that your assets had "aged". You couldn't just borrow 5K from a buddy just long enough for it to show up on an account statement. They wanted to several months worth.
2006? Like going up to the drive-thru.
@Peter P,
I will have to email you or upload to another site. Patrick shut off the upload tool a few months ago due to spam/security issues.
Some of our predictions are coming true at a frightening pace. The Canadian $ is at 1.065 and Aus$ is over 0.93.
I joked a month ago that US$ will soon have parity with Aus $, then Yuan, then Indian Rupee and finally Yen. This is crazy. When has a major developed nation saw its currency plummet so fast ?
My FXA holding has performed better than GOOG. I am not sure if I should be happy about it.
Peter P
2007 Oct 31, 7:55am
I will have to email you or upload to another site. Patrick shut off the upload tool a few months ago due to spam/security issues.
Sure. You have my e-mail address. Thanks HARM!
Love to see it. :)
When has a major developed nation saw its currency plummet so fast ?
Wiener Germany.
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LA Daily News: Foreclosures, housing slump hurting California economy
And what else, pray tell, SHOULD the government have done to "ease lending" that is has not already done (which itself is the single biggest reason why houses here are so damned expensive)? The government (incl. Fed) thus far has:
1. Dropped short rates to 1% and held them there nearly 3 years.
2. Cut 50 bps when it should have been RAISING them to combat inflation/defend the USD.
3. Provided every conceivable preferential tax incentive known to mankind to inflate housing prices, including raising the capital gains "homestead' exemption to $250/500K, virtually waiving the old primary residency rule (replacing it with "any 2 will do"), generously expanding the 1031 exchange to RE, etc., etc.
4. Growing the GSEs to absorb 50% of the national mortgage market and (until recently) hiking the conforming price limit every year, regardless of how working class incomes were doing.
5. Deliberate non-enforcement of mortgage fraud laws, ignoring blatant cash-back financing scams, phantom/shill bidders, lending to illegal aliens, identity theft, allowing the NAR to run a virtual information monopoly (MLS) etc., etc.
6. No application of fiduciary rules/SOX to mortgage brokers, lax-to-nonexistent regulation of the RE industry vs. securities.
No non-rich person in L.A. can buy a house because (a) the prices are too damn high, and (b) the NINJA-ARM easy money spigot just got turned off. $417K should be PLENTY of money to buy a run-of-the-mill middle-class house *anywhere* in the U.S., given current incomes. Putting taxpayers on the hook for even MORE bad loans will not make them more "affordable", but create an even bigger moral hazard, reward the reckless & stupid, punish the responsible & prudent, prolong the inevitable bust, and make the aftermath even worse than it already is.
I guess Tan-Man had to throw in a couple of truthful statements just to confuse people, though his dates are off --it should be "late 1990s through 2006". Meanwhile, the man best known for that unique orange glow may be getting measured for an orange jump suit.
Discuss, enjoy...
HARM
#housing