Tag Archives: Freddie Mac

Horrifying Comments From A Freddie Mac Phd Economist

The housing market continues show contracting sales volume. April existing home sales fell 0.4% (SAAR – Seasonally Adjusted Annualized Rate) from March and 4.4% from last April. Existing home sales have dropped year-over-year 14 months in a row. This is the worst run since the housing crisis.

Obviously from a seasonal standpoint, if the market were healthy, home sales should be increasing month-to-month notwithstanding questionable statistical “adjustments” imposed on the data by the NAR. Furthermore, existing home sales are based on closings, which mean the report measures contracts that were signed in late February to late March/early April. during this period the 10yr Treasury rate fell from 2.8% to as low as 2.35%. But lower rates are not stimulating home sales in spite of rapidly rising inventory.

This is because the much of the remaining “pool” of potential home buyers can not afford the all-in cost of home ownership in spite of lower financing costs. Almost 30% of all mortgages that Fannie and Freddie underwrote and packed into bonds last year were for home buyers whose total debt payments were in excess of 43% of their gross (pre-tax) income. This metric – the borrower’s DTI – has nearly doubled since 2015. The mortgage/housing market is headed for a repeat of 2008.

New home sales also showed a drop from March. But the March number was curiously revised significantly higher – an upward revision to 723k SAAR. The number is so much higher than any number reported for any month in the last 12 months that it looks comical in the data series. John Williams (Shadowstats.com) referred to the report as “regular nonsense monthly volatility and lack of statistical significance.”   In fact, the jump in new home sales tabulated by the Government does not remotely correlate with mortgage purchase application data released by the Mortgage Bankers Association, which shows a decline in purchase applications that would correspond to April’s new home sales data

NOTE:  new home sales are based on contracts signed.  90% of all new homebuyers use a mortgage. Therefore declining purchase apps would translate into decline new home contract signings.  New homebuilders, for the most part, have been reporting declining new home orders (see Toll Brother’s latest earnings release from last Monday, for instance).

This brings me to an exchange between Texas real estate professional, Aaron Layman, and the deputy chief economist at Freddie Mac – Lawrence Kiefer. It seems that this Freddie Mac executive could not understand by lower interest rates were not translating into higher home sales. This economics Einstein was puzzled that the large pool of millennials were renting rather than buying. It’s pretty clear that this ivory tower dork is clueless about the amount of student debt held by the millennial demographic.  Kiefer suggested to Aaron that higher student debt levels could possibly be net positive for the housing market if it leads to higher incomes. The Twitter exchange between Aaron and Mr. Kiefer has left me speechless. You can read more here: Aaronlayman.com

Perhaps studying this chart might help Freddie Mac’s Mr. Kiefer better understand the basic problem:

In my weekly Short Seller’s Journal, I present detailed analysis of the housing market, pulling back the curtain of lies used by industry pimps to hide the truth. In addition, I provide specific short ideas along with suggestions for using options to short stocks synthetically. You can learn more about this newsletter here:  Short Seller’s Journal information

The Government Is Desperate To Re-Stimulate Housing Sales

The Fed printed $2.5 trillion to prop up the mortgage market and the Government “refurbished” all of the mortgage programs it sponsors (Fannie Mae, Freddie Mac, FHA, VHA, USDA) in a way that positioned the Government/taxpayer as the new subprime lender of choice.  The two programs combined inflated a new housing bubble – one that ended up fueling housing price inflation  more than sales volume.   The FHA program was the first program to replace the collapsed subprime mortgage lenders of the mid-2000’s with a 3.5% down payment program. It’s market share of mortgage underwriting rocketed from 2% in 2008 to around 20% currently.

As home sales began to falter in mid-2014, the Government rolled out a revision to the Fannie and Freddie programs in early 2015 that reduced the down payment requirement from 5% to 3% and reduced the monthly cost of mortgage insurance.  The VHA and, believe it or not, the USDA (U.S. Dept of Agriculture) programs provide low interest rate mortgages with zero down payment.

Fannie and Freddie permit the borrower to “borrow” the down payment or receive down payment assistance from a home seller willing make price/fee concessions in an amount up to the 3% down payment.  In other words, under FNM/FRE, a homebuyer can close a conventional FNM/FRE mortgage with zero down payment.   These alterations to the taxpayer guaranteed mortgage programs provided another short-term bounce in home sales volume and sent home prices soaring.

The housing market is headed south again.  Just in time, the Government is making it even easier for a potential buyer to load up more debt to leverage into the American dream. Fannie Mae is raising the debt-to-income ratio on its 3% down payment product from 43% to 50%.  DTI is the total household monthly debt payments divided by pre-tax income. While the credit standards are not quite as insane as during the last housing bubble, the current mortgage underwriting standards facilitated by the Government do not allow any cushion for household financial instability. This is especially true considering more than 50% of all households can’t write a $500 check to cover an emergency.

The latest iteration from the Government  reeks of desperation.  But wait, it gets even better. Some mortgage companies are now offering a 1% down payment mortgage that includes a 2% “gift” from the mortgage company in order to conform to the 3% FNM/FRE underwriting convention. The mortgage lender pays the 2% portion of the down payment.

However, this is not a free lunch “gift.” The mortgage lender assesses a higher rate of interest to the borrower than would be otherwise available from a standard FNM/FRE 3% down-payment mortgage. The mortgage lender, as the servicer of the mortgage, keeps the difference between the interest rate on the mortgage paid by the borrower and the amount of interest payment “passed-thru” to FNM or FRE. Over the life of the mortgage, assuming the borrower does not default, the mortgage company makes substantially more than was “gifted” to the borrower.

If a homebuyer does not have enough capital to make a 3% down payment, the odds are that the buyer also does not have the financial strength to maintain the cost of home ownership. Home-buyers who are “gifted” 2% of their down-payment do not need down-payment assistance, they need earning assistance.

This is going to end badly, especially for the taxpayer.  Obama promised after his mult-trillion dollar Wall Street bailout that the Government would not bail out the banks again. This “promise” guarantees that it will happen again.  Only this time the source of financial nuclear melt-down will be many:  mortgages, auto loans, unsecured household debt (credit cards) and student loans.   Oh ya, then there’s the derivatives. The sell-off in the banking sector since March 1st reflects the market’s awareness of the rising degree of risk lurking in the financial system from an orgy of reckless debt creation.

I don’t know when the this giant Ponzi bubble will blow, no one does, I just know that it will be worse than 2008 when it does blow.  The balloon latex is stretched so tight at this point that any systemic “vibration” not anticipated by the Fed could impale the thing.

The above commentary was partially excerpted from IRD’s latest issue of the Short Seller’s Journal.  Two financial sector stocks and one auto sector stock, all three of which have been falling and could easily get cut in half from their current level by year-end with or without a market “accident” were presented.  To find about more, click here:  SSJ Subscriber Information. 

I look forward to any and every SSJ. Especially at the moment as I really do think your work and thesis on how this plays out is being more than validated at the moment with the ongoing dismal data coming out, both here in the U.K, and in the U.S – James

 

Fannie And Freddie Are Headed For Another Bailout

Taxpayers pumped over $200 billion in to Fannie Mae and Freddie Mac after the financial collapse of 2008.   While the Obama Government used taxpayer subsidized loans to move  a large quantities of foreclosed housing inventory from the FNM/FRE and in to big investment funds, FNM/FRE were busy ballooning their mortgage holdings – again.

Now the Inspector General’s Federal Housing Finance Agency has issued a warning that both FNM/FRE are headed for another bailout, which is no surprise to me:

“Future profitability is far from assured,” Federal Housing Finance Agency Office of Inspector General said in a report, pointing out that the firms could again chalk up losses on their derivatives portfolios, similar to those they reported in the fourth quarter. “This increases the likelihood of additional Treasury investment,” the report stated.  Reuters (LINK)

Similar to when Fannie was plugged full of derivatives under former CEO Franklin Raines – who by the way had no clue how catastrophic the situation was and should be in jail but instead received a $100 million “you’re fired” severance agreement – the Government has once again looked the other way while Wall Street unloaded another avalanche of derivatives onto FNM/FRE.   Once again the Taxpayers will pay for this.

This is not a ‘warning” – this is a “get ready here it comes” statement.   The fact is that most of FNM/FRE’s “profitablity” has been driven by the same fraudulent “mark to model” accounting that has generated most the big bank profits since 2009.

fragile-by-design

And the Government used this fraudulent accounting to suck money out of FNM/FRE.   The “improved” balance sheet has enabled both FNM/FRE to issue debt to investors.  The money raised has been used reload their mortgage holdings and for dividend “payback” payments to the Treasury.

FNM’s CEO warned of the possibility of another bailout in February, after announcing FNM’s smallest dividend payment to the Treasury in more than four years.  This is not a warning – it’s an inevitability.  The housing market is set to re-collapse, which will blow-up both Fannie and Freddie – once again.