Tag Archives: mortgages

The Federal Reserve Keeps Buying Mortgages, by Alex J. Polluck

Why is the Federal Reserve in the mortgage market at all? From Alex J. Polluck at mises.org:

Runaway house price inflation continues to characterize the U.S. market. House prices across the country rose 15.8% on average in October 2021 from the year before. U.S. house prices are far over their 2006 Bubble peak, and remain over the Bubble peak even after adjustment for consumer price inflation. They will keep on rising at the annual rate of 14–16% for the rest of 2021, according to the AEI Housing Center.

Unbelievably, in this situation the Federal Reserve keeps on buying mortgages. It buys a lot of them and continues to be the price-setting marginal buyer or Big Bid in the mortgage market, expanding its mortgage portfolio with one hand, and printing money with the other. It should have stopped before now, but the purchases, financed by newly created fiat money, or monetization, go on. They proceed at the rate of tens of billions of dollars a month, stoking the house price inflation, making it harder and harder for new families to afford a house. A recent Wall Street Journal opinion piece was entitled “How the Fed Rigs the Bond Market”—it rigs the mortgage market, too.

The balance sheet of the Federal Reserve has grown to a size that would have amazed previous generations of Federal Reserve governors and economists. Although we have become somewhat accustomed to it, so fast do perceptions adjust, it would also have surprised readers of Housing Finance International of five years ago, and readers of 15 years ago would probably have judged the current reality simply impossible. Over time, we keep discovering how feeble are our judgments of what is possible or impossible.

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The Most Important Asset Class In The World, by David Robertson

You probably won’t guess it, even with ten tries, but it is an important asset class. From David Robertson at realinvestmentadvice.com:

Here we are, ten years after the bankruptcy of Lehman Brothers, and one would be hard pressed to find evidence of meaningful lessons learned.

“As long as the music is playing, you’ve got to get up and dance,” – Chuck Prince, Citigroup

Chuck’s utterance now sounds more like a quaint remembrance than a stark reminder. Ben Bernanke’s proclamation also sounds more like an “oopsie” than a dangerous misjudgment by a top official.

“We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers …” 

One of the most pernicious aspects of the financial crisis for many investors was that it seemed to come out of nowhere. US housing prices had never declined in a big way and subprime was too small to show up on the radar. Nonetheless, the stage was set by rapid growth in credit and high levels of debt. Today, eerily similar underlying conditions exist in the Chinese residential real estate market. Indeed, a lot of investors might be surprised to hear it called the most important asset class in the world.

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Nightmare Before Christmas for Spanish Banks, by Don Quijones

Most Spanish banks are looking at huge fines and restitution to mortgage borrowers for failing to inform them that their mortgages were a heads-we-win-tails-you-lose-proposition for the banks, and consequently they were overcharged. From Don Quijones at wolfstreet.com:

The European Court of Justice just delivered a landmark ruling that could cost Spanish banks – or Spanish taxpayers, in case of another bailout – billions of euros: 40 out of Spain’s 42 banks will have to refund all the money they surreptitiously overcharged borrowers as a result of the so-called “mortgage floor-clauses” that were unleashed across the whole home mortgage sector in 2009.

These floor clauses set a minimum interest rate, typically of between 3% and 4.5%, for variable-rate mortgages, which are a very common mortgage in Spain, even if the Euribor dropped far below that figure. In other words, the mortgages were only really variable in one direction: upwards!

This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost certainly never be activated. After all, they argued, what are the chances of the Euribor ever dropping below 3.5% for any length of time?

In its original ruling from 2013, Spain’s Supreme Court argued against applying the law against floor clauses retroactively to 2009 on the grounds that it would potentially cripple the banks’ finances. The EU’s advocate general, Paolo Mengozzi, echoed that sentiment in July when he proposed putting Spain’s “macroeconomic considerations” (legalese for “what is best for the banks”) before the microeconomic needs of consumers.

To continue reading: Nightmare Before Christmas for Spanish Banks

The Home as Miracle Subprime ATM Re-Surges, by Wolf Richter

From Wolf Richter at wolfstreet.com:

Clearly, American consumers failed to do their job of propping up GDP in the fourth quarter.

GDP was crummy, with its snail-like growth rate of 0.7%, hammered by energy, exports, production, and inventories that are coming out of everyone’s ears and that businesses are finally whittling down. Even auto production has suddenly softened though it had been booming for years. And spending by businesses, which are caught up in a wave of cost-cutting and financial engineering, was dismal.

So the powerful force that was supposed to have propped up GDP was consumer spending, which accounts for 70% of it. Economists were in total agreement that consumers had “every reason to spend,” with the official unemployment rate being so low and credit so easy. But consumers just didn’t go along with the program enthusiastically enough. The warm weather got blamed.

But there’s hope.

Even while businesses are cutting back and slashing expenses, consumers are rediscovering in massive numbers the miraculous concept of using their homes as ATMs.

The housing market in many cities has by now transcended the crazy peak levels of the prior housing bubble, the one that everyone called “bubble” only after it had imploded, while denying its existence throughout its life.

And consumers are once again using these soaring home prices, ephemeral as they may be, as miraculous ATMs that just keep on giving.

So Equifax reported today that the number of first mortgage originations in the January through October period soared 37% year-over-year to 6.64 million mortgages, and that the total balance of these first mortgages skyrocketed by 51%.

$1.56 trillion of first mortgages were originated in the period, the result of a booming number of mortgages combined with rampant home-price inflation. Note, these are just first mortgages and do not include refis.

To continue reading: The Home as Miracle Subprime ATM Resurges

Living a Lie, from The Burning Platform

From the administrator at theburningplatform.com:

“Above all, don’t lie to yourself. The man who lies to himself and listens to his own lie comes to a point that he cannot distinguish the truth within him, or around him, and so loses all respect for himself and for others. And having no respect he ceases to love.” – Fyodor Dostoyevsky, The Brothers Karamazov

The lies we tell ourselves are only exceeded by the lies perpetrated by those controlling the levers of our society. We’ve lost respect for ourselves and others, transforming from citizens with obligations to consumers with desires. The love of mammon has left our country a hollowed out, debt ridden shell of what it once was. When I see the data from surveys about the amount of debt being carried by people in this country and match it up with the totals reported by the Federal Reserve, I’m honestly flabbergasted that so many people choose to live a lie. By falling for the false materialistic narrative of having it all today, millions of Americans have enslaved themselves in trillions of debt. The totals are breathtaking to behold:

Total mortgage debt – $13.6 trillion ($9.9 trillion residential)

Total credit card debt – $924 billion

Total auto loan debt – $1.0 trillion

Total student loan debt – $1.3 trillion

Other consumer debt – $300 billion

With 118 million occupied households in the U.S., that comes to $145,000 per household. But, when you consider only 74 million of the households are owner occupied and approximately 26 million of those are free and clear of mortgage debt, that leaves millions of people with in excess of $200,000 in mortgage debt. Keeping up with the Joneses has taken on a new meaning as buying a 6,000 sq ft McMansion with 3% down became the standard operating procedure for a vast swath of image conscious Americans. When you are up to your eyeballs in debt, you don’t own anything. You are living a lie.
The lie was revealed as housing bubble burst and national home prices plummeted by 30%, resulting in millions of foreclosures, the worst recession since the Great Depression and homeowners equity falling to an all-time low of 38%. The Fed induced 2nd housing bubble has convinced millions to believe the lie again. The Fed easy money, Wall Street buy and rent scheme, with the FHA acting as the new purveyor of 3% down mortgages, has artificially boosted homeowners equity back to 57% just in time for the next housing collapse. Living a lie will result in more pain and suffering for those who didn’t learn the lesson last time.

To continue reading: Living a Lie

Insane Son of Sub-Prime

Mortgage Giants Set To Loosen Lending

Fannie, Freddie Near Deal to Lift Limits; Concerns Persist

Fannie Mae, Freddie Mac and mortgage lenders are nearing an agreement that could lower barriers and restrictions on borrowers with weak credit, a move that would expand access to home loans amid the sluggish housing recovery.

The move by the mortgage-fianance giants and their regulator, the Federal Housing Finance Agency, would help lenders protect themselve from claims of making bad loans, according to people familiar with the matter.

Fannie and Freddie are also considering programs that would make it easier for lenders to offer mortgages with down payments of as little as 3% for some borrowers, the people said. That would be a reversal for the loan giants. The moves could be announced this coming week.

Wall Street Journal, 10/18-14-10/19/14 (Weekend edition)

Wasn’t a big part of the last financial crisis mortgage loans made to people who could not pay them back? We’re still cleaning up that mess, but in government, nothing succeeds like bad ideas and failure. A 3 percent move down in housing prices would leave the mortgage giants holding the bag…again. If at first you fail spectacularly, do the same thing all over.