Scale and magnitude have defined this housing crisis
This chart tells the story of US residential mortgage finance over the last 30 years. On the right Y-axis, I have charted delinquency and foreclosure rates, and on the left Y-axis, I have charted the homeownership rate and % of owner-occupied homes mortgaged. My last version of this blog (Feb 18) was significant because we broke the all time high in ‘All Loans Past Due’ category and I had to re-scale the right Y-axis to above 10%. Netting out the 5.9 million foreclosures started over the last 3 years, that means that 1/10 houses were still delinquent on their mortgage – a frightful number considering that the previous 10 years only saw 5.5 million foreclosures.
The housing markets are poised for a recovery
I have maintained that housing lead us into this crisis and it will lead us out. All delinquency categories declined for the first time in the Mortgage Bankers Association’s National Delinquency Survey (Q1 ’10). In particular, the ‘All Loans Past Due’ declined from 10.44% to 9.38%. Consumer self-cure behavior is also showing signs of improvement. The 30 day delinquent category declined from 3.63% to 3.07% - these levels were last touched in late 2006/early 2007, the very beginning of the housing recession. According to the LPS Mortgage Metrics Report, the volume of loans curing to current hit an all time high in March 2010 (almost 700,000).
Little darling
It’s been a long, cold, lonely winter
Little darling
It feels like years since it’s been here
Here comes the sun
Here comes the sun, and I say, It’s alright
It’s hard to say we’ve completely turned the corner. Lack of Euro-coordination could derail the credit markets and contagion could inflict damage on banks and US companies with exposure to Europe. Also, a strong dollar doesn’t do our exports any favors. But housing is starting to look like the “next worst place” to put money. Inflation is tame; new home building posted some gains in April; stocks have corrected somewhat; Redwood Trust created the first private label jumbo securitization in more than 2 years; rumors are that PennyMac will bring another issuance in Q2 ‘10. The last remaining behemoth the government needs to solve is Fannie/Freddie.
Future of the GSEs (or just Freddie Mac)
In February, Geithner suggested that Treasury is waiting until 2011. It’s possible that a series of private label securitizations could reduce reliance of government intervention. Further, Freddie Mac’s recent $8 billion loss was not really a tangible loss; rather, it was the mostly the result of an accounting change (FAS 166/167). They had to consolidate all VIEs/QSPEs onto their balance sheet (even ones where they are only guaranteeing the credit risk, and don’t ‘hold the paper’) – this meant recognizing at ‘fair value’ all ‘other-than-temporary’ impairments. Of the $2 trillion that Freddie Mac owns or guarantees, $1.4 trillion is owned by third parties. An $8 billion loss is less than a .4% impairment. Was the ‘loss’ material? Yes, but they only needed to recognize these assets and the impairments once. Further, the GSEs have complied (for the most part) with HARP/HAMP/HAFA. These programs mean material changes to the value of loans and securities. Do we really believe that loan terms could be changed en masse and investors holding those loans or securities wouldn’t feel some impairment? That’s why it’s not surprising that the investor backing nearly 20% of US resi mortgage debt would feel a little pain. [Note: Citi, BofA, JP Morgan, & Wells had to consolidate about $450 billion of loans/securities for the same reason].
In closing, I think we might be in for a very interesting recovery if housing bucks any notions of a double-dip scenario. It’s been a long, cold, lonely winter. Here comes the sun.
