That Was Quick! HUD Suspends Cut to FHA Mortgage Insurance Premiums

Well, THAT was quick! In less than a month, the FHA has suspended the cut to FHA Mortgage Insurance Premiums (MIPs).

HUD Suspends Cut to FHA Mortgage Insurance Premiums
2017-01-20 18:18:43.242 GMT
By Jesse Westbrook
(Bloomberg) — The Department of Housing and Urban Development announced the suspension in a letter to mortgage
lenders Friday

.* Fee cut for loans issued on or after Jan. 27 suspended “indefinitely,” letter says

* Obama administration had announced cut to FHA insurance premiums earlier this month

That was quick!


Another Fine Mess! At Least Half of Students Defaulted or Failed to Pay Down Debt Within 7 Years

Another fine mess … when the Federal government takes over the student loan market which is now over $1 trillion.


But at least the YoY growth is slowing down.


“Many more students have defaulted on or failed to pay back their college loans than the U.S. government previously believed.  Last Friday, the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers.” 

Not exactly a surprise, particularly when we are experiencing the WORST wage recovery from a recession since 1965.


Student loan already are the worst performing of the major debt classes (and that is BEFORE the data is adjusted for the recent revelation of underreporting).


The far more dire implications, however, are for broader student loan market, because if the latest unfabricated data suggesting that loan delinquencies are rapidly rising toward 50% across most of America’s colleges, then the US is facing a default problem of staggering proportions. Recall that back in December 2014, The Treasury Borrowing Advisory Committee forecast that in an aggressive scenario, as much as $3.3 trillion in student loans could be oustanding by 2024. Incidentally, that is the scenario that has captured the growth of student loans since it was presented.


And then there are alleged problems with the largest student loan servicer, Navient.  Wait a minute! The Department of Education wasn’t paying attention to the student loan SERVICERS?????

Perhaps this should be the new themesong of the Department of Education.


Pittsburgh Mills Galleria Mall Sold For $100 At Foreclosure Auction (Formerly Valued At $190 Million)

A Pittsburgh PA area shopping mall just sold for a whopping $100, ten years after it was valued at $190 million. And was appraised at $11 million in August.

I wonder if the $190 million to $100 decrease is reflected in the Moody’s/RCA retail real estate index?


Remember, that the NY Fed’s Bill Dudley sounded an alarm on retail sales .. and what to do about it. But when average hourly earnings YoY is the worst recovery from a recession since 1965, it is difficult for a retail mall (NON-elite) to succeed.


But $190 million to $100? Let’s throw in locational factors as an impediment to success as well. But in the Obama “Recovery” era of low wage growth and add in Amazon for online shopping, this is not a fairy tale that ends well.

I certainly hope this property not held by a pension fund! They have enough problems with massive underfunding already. (The property was held in a trust MSCI 2007 HQ11 recently).





NY Fed’s Dudley, Retail Sales, Home Prices And … Bubbles

Is the New York Fed’s Bill Dudley calling for another home price bubble to solve the malaise in retail sales in the USA?

The fate of U.S retailers, many of whom are under siege from online competitors, may rest in the prospects for the U.S. housing market, said William Dudley, president and CEO of the Federal Reserve Bank of New York, in an interview done on Tuesday morning by Macy’s CEO Terry Lundgren at the National Retail Federation’s (NRF) annual convention about evolving consumer behavior.

The second most important asset on the balance sheet of many households is housing equity. So, in addition to being a source of shelter, housing can be a major form of collateral for borrowing for many households. In fact, for those households that have collateral available to secure loans, housing equity is by far the most important form of collateral.

So, that more home prices rise, the more equity is available for home equity EXTRACTION. Remember the housing bubble?

If we look at Bill McBride’s chart of mortgage equity withdrawal, as of Q3 2016, mortgage equity withdrawal (as a percent of disposable personal income) is FINALLY positive again


And home prices are now higher (on average) than during the disastrous house price bubble … that exploded. But the GOOD NEWS is that negative equity share in housing is the lowest it has been since 2009.


Here is the problem, Terry. For most Americans, it has been the WORST wage recovery after a recession since 1965. THAT is a major reason why retail sales are in a malaise.


So if wage growth is the worst since 1965, who you gonna call to stimulate retail sales? Debt busters!!

We have already suffered through a catestrophic mortgage debt bubble and 1-4 unit mortgage debt outstanding growth is finally back in positive territory again. So I hope Dudley is NOT calling for another massive expansion in mortgage credit!


The worst wage recovery after a recession is the real cause of the retail malaise, not the lack of extractable home equity.



Whack-a-mole! The Case For Covered Bonds And Why It Is Difficult in the USA

My friend John Wake from Phoenix Arizona asked me about mortgage finance legend Jack Guttentag’s stance on covered bonds. I must say that I am a proponent of covered bonds for the US mortgage market.

What is a covered bond? A covered bond is a debt security backed by cash flows from mortgages or public sector loans. They are similar in ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.  A covered bond continues as an obligation of the issuer (usually a bank).


This is in stark contrast to the experience of the housing bubble where non-bank lenders originated loans, sold them to investment banks who then issued asset-back securities. The non-bank lenders, in this case, kept little or none of the loans on their balance sheets.


Guttentag (whose blog I highly recommend) advocates for a Danish type of covered bond market. In a perfect world, I agree.

But the US mortgage market is anything but a perfect world (or market). It is dominated by The Federal government in the form of mortgage giants Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA).  But lest we forget, there is also the Department of Agriculture and the Federal Home Loan Bank system playing in this market. Not to mention a myriad of regulators (The Fed, Office of the Comproller of the Currency, FDIC, Consumer Financial Protection Bureau, etc).

Like in the game “Whack-a-mole,” you can get rid of, for example, Fannie Mae and Freddie Mac, but you still have the FHA, the Federal Home Loan Banks, the Department of Agriculture remaining. Each provides taxpayer-subsidized financing and have low cost of financing.

How can a superior model like covered bonds compete with the Federal government leviathan of subsidized mortgage financing? At Professor Guttentag suggests, it will take time.

But the tangled web of bank and mortgage regulators makes it even more difficult. Hopefully, stripping the Consumer Financial Protection Bureau of some of their regulatory bite will help.  But there has to be a “meeting of the minds” between the numerous regulatory bodies to make covered bonds work.

Yes, the US mortgage market remains like a “Whack-a-mole” game. You knock down one Federal entity (and taxpayer subsidy) and another one jumps out. Not to mention regulators.



Pension Party! “Zero” Interest Rate Policies Lead To Massive Debt Gorging (CalPERS Massive Pension Underfunding)

The Federal Reserve’s zero interest rate policies (ZIRP) have an unwelcomed effect: both the Federal Government and Private Pensions gorged themselves on low-cost debt.

The Federal Reserve lowered their Fed Funds target rate starting in 2007, then started their asset purchases in late 2008, culminating in a dramatic decline in interest rates.


Then, since the end of Q4 2008, both the Federal government AND private pension funds gorged on debt: Federal devt rose by 77% though the end of 2015 and private pension debt rose by 66%.


Then we have the STATE pension funds where unfunded liabilities will hit $1.75 trillion. Weak investment performance and insufficient contributions will cause total unfunded liabilities for U.S. state public pensions to balloon by 40 percent to $1.75 trillion through fiscal 2017.


Of course, California and their CalPERS are in league of their own. California Governor Jerry Brown is eyeing a 42% increase in the gasoline tax to help bail out the woefully underfunded CalPERS system. Not to mention a 141% increase in vehicle registration fees.

What happens when interest rates RISE and pensions have to refinance their debt at higher rates (just like the Federal government?).

To quote Craig from Parks and Recreation, “What’s wrong with you? You look like Meryl Streep at the end of Iron Weed.”


I fear that CalPERS and the other state, Federal and private pension funds will look far worse.

On a side note, did you ever notice that Hillary Clinton’s outfit resembled the Gorgan from the Star Trek episode “And The Children Shall Lead”?




Addicted To Gov? Ben Carson And The 30 Year Mortgage Backstop (HUD Secretary Hearings)

Poor Ben Carson. He is being subjected to the “addicted to gov” crowd in the US Senate (those Senators who can’t envision a world without Federal subsidies and regulation).  But are the savings from a residential mortgage backstop large enough to justify its existance?

(Bloomberg) – By Joe Light – Ben Carson, President-elect Donald Trump’s nominee for the top U.S. housing-policy job, told lawmakers that he questions the need for a government backstop of the market for 30-year mortgages, saying the private market could take on much of the responsibility.

Carson commented in response to a question Thursday at aSenate confirmation hearing where some Democrats questioned his qualifications to lead the Department of Housing and Urban Development, which has responsibilities ranging from insuring low-down-payment mortgages to administering rental assistance for low-income home owners. The housing industry has defended the federal backing as essential in keeping down mortgage costs. 

Carson also said he believes private companies should play a greater role in the mortgage market. He said he supports a government backstop in the market, but also said he believes the 30-year fixed-rate mortgage could continue to exist if that backstop ceased to exist.

“You can’t do it overnight. It has to be a gradual change,” Carson said. “We can’t do it in a haphazard way.” 

Fannie Mae and Freddie Mac, which are controlled by an independent agency, along with the Federal Housing Administration, which is administered by HUD, backstop the vast majority of the mortgage market. Many economists say the support allows lenders to offer relatively inexpensive 30-year fixed- rate mortgages, which are rare in other countries.

So, what would happen to the 30 year fixed-rate mortgage if the backstop was removed? Let’s compare Bankrate’s survey of the 30 year fixed-rates and their survey of 30-year JUMBO fixed-rates (meaning mortgages that are too big to be purchased by Fannie Mae and Freddie Mac). The most recent spread betwen jumbo 30 year fixed-rate mortgages and 30 year fixed-rate mortgages. The spread is currently 50 basis points.


Previously, I estimated (controlling for borrower and loan charateristics) that the savings from the guarantee was as little as 28 basis points. Is 28 basis points really that costly to homebuyers?

Regarding the Federal Housing Administration (FHA), the FHA 30 year fixed-rates have been higher than the Bankrate 30 year fixed-rates since the financial crisis (but were lower than before the crisis).


But suppose that mortgage rates rise 200 basis points without the guarantee? That would be the “market rate” as opposed to a taxpayer subsidized rate. Between The Fed and the mortgage backstop, there is little wonder why housing is so unaffordable in the USA (particularly on the coasts).

And it is true that the US is one of the only countries to be so heavily invested in 30 year fixed-rate mortgages. 


Seriously, is the US housing market so addicted to government backstop that borrowers can’t tolerate an increase in mortgage rates of 28-50 basis points? In other words, is housing addicted to gov?