Yesterday in the Wall Street Journal there was a fascinating and very important front page article on the state of the housing market. ( “No Easy Exit for Government as Housing Market’s Savior”) Here are my important take-aways from that piece.
– FHA mortages were once 20% or orgination and are now 80% ( what kind of loans are there? “loans to borrowers who cannot afford a big down payment”)
– The government just published a 51 page report “detailing rescue programs that are slowly getting scaled back..housing is not one of them.”
– Fannie and Freddie ( now under ‘ full ‘ government supervision) combined have own or guarantee $5.4 trillion of mortgage loans.
– US Housing prices are down 30% from the peak. ( now reread the part about Fannie and Freddie above)
– Since the start of the year the FED has purchased $836 billion of mortgage backed securities with a target of $1.45 trillion. ( including some FN and FH debt)
– the program to subsidize first home buyers has brought them in, like the cash for clunkers program, but that is soon over. ( pushed demand forward)
– and ok here is about the only good news – sales of exisiting homes is up 17%.
So here is the problem and why I just cannot believe that a meaningful economic recovery is close at hand. The financial crisis was triggered primarily because low credit quality borrowers started defaulting on their mortgages( sub -prime). Those default rates are now off the charts and hundreds of billions of losses have materialized. Now here is the punch line – What we have experienced is the first WAVE of losses and there is much much more to come. ( Alt A loans, option ARMS hitting resets, higher quality residential mortages, commercial loans, credit card loans and more )
I think about it like this. If the US economy is an airplane it crashed last fall. The government fixed the plane enough to get it back in the air. ( see 51 page report on what they did ) Now it is in the air flying at low altitude and the government is trying to blanket the ground with pillows. The main ones are buying mortgages from the open market ( to drive down rates), providing loans to borrowers where they have control ( FHA), trying to encourage ( force) banks to modify loans, and investment encouragement programs (?? which I think failed??? giving cheap money to hedge funds to buy loans). This may, MAY be enough to keep the plane in the air but the risk of it crashing to the ground and through that layer of pillows remains very high indeed.
The housing market led us in the this crisis and it will have to lead us out.