The competitive economic landscape, in the unfolding crime scene, was depicted in Housing Smoke and Mirrors (25) “The Game’s Afoot”. The scenario was described as follows:
“As we move into the final quarter of 2013 the housing market dynamics are clearly defined. The question of the “Taper” undermines the whole landscape. Upon this landscape are placed the shrinking GSE’s; busily transferring risk off balance sheet onto the Fed before the “Taper” cuts them off. Into this landscape comes the FHA and its “Acronyms” to establish a position in the niche vacated by the GSE’s. The FHA is already cash strapped however; and requires a Federal bailout, even before any new crisis materializes. The whole landscape is buffeted by the fiscal headwinds of the partisan Congress, currently fighting over the Debt Ceiling. Flames of a legal nature, in relation to the last housing crisis, are also beginning to spark. The Federal Reserve and its expanded balance sheet has been the only certainty thus far; and now it is uncertain because of the “Taper” and the introduction of a new Chairman. Suspects, motive and opportunity already exist for the enactment of a new crime.”
The perception became reality at the end of September. On Monday 30 September, the Fiscal headwind blew as the Government began its rolling shutdown. HUD was the first housing related casualty; which immediately calls into question the ability of the Federal Government “Acronyms” to expand into the shrinking housing footprint of the GSE’s[i]. Federal home loan processing will be an immediate casualty, as processing workers are sent home. Fannie and Freddie however, being private entities, remain open for business; but unfortunately they are scaling back their activities. Fannie Mae reported that its book of business shrank again in August, by a compound annual rate approaching 30%[ii]. In Housing Smoke and Mirrors “Elementary” it was also observed that the game was afoot for Freddie Mac; as it swiftly moved to “Streamline” its footprint reduction in the HAMP , Streamlined Modifications (SMP’s) and Pay for Success (PFS) initiatives[iii]. Fannie and Freddie were also seen to be engaged in a mutual competitive destruction exercise; as they both compete to offer better terms to investors in their “shared risk” bonds. As the housing market fundamentals weaken, it is logical to expect that they will further undercut each-others offering terms; so that they ultimately end up holding more of the risk that they are supposed to be transferring.
The Federal “Acronyms” have been choked off just as the GSE’s are also throttling back the provision of liquidity to the housing sector. The parlous state of the “Acronyms” was underlined by the official bailout of the FHA during the week[iv]. The FHA opines that it is still liquid; however the bailout suggests that it is not solvent. Given the partisan debate over the budget in Congress, it is hard to see the FHA and its “Acroynms” escaping from further balance sheet and funding problems.
There was also a signal from the Mortgage Bankers Association (MBA) that demand for purchase loans was showing signs of price inelasticity of the wrong kind.
MBA Purchase Applications
Released On 10/2/2013 7:00:00 AM For wk9/27, 2013
The Refinance Index increased as interest rates declined, however the Purchase Index continued to head lower. This suggests that buyers have curbed their enthusiasm. The MBA was also one of the first organizations to sound the alarm over the impact of a prolonged Government shutdown. David H. Stevens, President and CEO of the Mortgage Bankers Association released a statement which opined that “the longer it goes, the greater impact it will have on borrowers, the housing market and the national economy.“[v]
There were also signs that the speculative interest in the market was waning. The Carlyle group announced that it was scaling back its apartment holdings[vi]. Even though there may be a move towards renting, as the purchase market cools, Carlyle still sees rental prices as unsustainably high. It also suggested that new supply in the apartment sector is coming on line, so that demand has now been balanced.
In Housing Smoke and Mirrors (25) “The Game’s Afoot” the FHFA’s ace up its sleeve, in the form of HARP, was observed. HARP derived interest rates were seen as trumping higher market derived interest rates; so that the refinancing market can be sustained. It was alleged that 50% of Americans with HARP eligible mortgages still aren’t aware that they can avail themselves of this refinancing opportunity. The FHFA was therefore proselytizing the benefits of HARP in order to enlighten this 50% and keep the refinancing momentum going[vii]. The FHFA recently enlisted the support of the commercial enterprise Zillow in this proselytizing. Zillow clearly has a wider “footprint” than the FHFA; by nature of its business activities. The FHFA is therefore now using Zillow to drive refinancing to the HARP “Acronym”. It was interesting to observe that the FHFA is very keen to engage the borrowers who have 125%+ loan to value (LTV) mortgages in the HARP programme. It is clearly these highly leveraged distressed borrowers who are the 50% cohort which believes that they are too leveraged to qualify for HARP. Zillow will now disabuse them, HARP will refinance them and the Federal Reserve Balance sheet will enable them; for as long possible before the “Taper” and/or the “Shutdown” close the window. The Taxpayer and the Fed balance sheet are now expanding their footprint into the 125%+ LTV category. These distressed borrowers are actually getting their credit risk repriced lower, because of the HARP federal subsidy, even as the economy weakens and their underlying credit worthiness deteriorates. This latest case of Moral Hazard has been institutionalised at source, rather than via a Federal Bailout as it was in 2008 at the second attempt in Congress, this time round. If the Republicans don’t play ball however and won’t agree to support this process then the system will collapse again.