U.S. HOUSING CONTINUES TO WEIGH ON THE BANKING SECTOR
Good comments here from the Bank of Canada brought to our attention via David Rosenberg’s morning note. They discuss the significant malaise in residential real estate and put the effect of this drag into perspective for the US banking sector:
“The U.S. banking system has recovered markedly since the crisis (Char t 12), as suggested by the results of the 2012 U.S. bank stress test. However, the recovery is still being hampered by the continuing malaise in the residential housing market. Banks in the United States have maintained the same level of exposure to residential real estate—around 40 per cent of their total loan books—since 2006.
The housing market has remained weak since December, and house prices are about 30 per cent below their pre-crisis peaks. About 10 per cent of housing-related loans are either delinquent (i.e., 30 days or more in arrears) or in some stage of foreclosure (Chart 13). In addition to non-performing housing loans, U.S. banks hold a sizable number of “real estate owned” (REO) properties, which are part of the U.S. shadow housing inventory.
REO are properties that are associated with defaulted mortgages and that have not been disposed of following foreclosure proceedings. At an estimated 400,000 units, the volume of REO properties was broadly unchanged over the second half of 2011.
The number of REO properties is strongly influenced by developments in housing activity and prices. If the housing market remains soft (or worsens), an increasing number of the currently delinquent mortgages would default. At the same time, banks would find it difficult to sell defaulted properties at favourable prices. This would lead to a rise in the REO properties held by banks.”
If my outlook for housing is right (a standard post-bubble “work out” period with no “bottom” event) then this drag should remain a risk for many years to come.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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I dug into the housing crises, and it led me to the Shadow Banking system. Then, parsing out the flows of the Shadow Banking, it became apparent that it was a borrow short lend long scheme. Really, the scheme is little different from savings and loan.
Mutual funds and the like look for places to park their money for short term; this in order to make a little interest money. This short term money is traded for certificates of securities. These securities are derived from the famous “tranches” created by a SPV (special purpose vehicle), usually at a too big to fail bank. In other words, your housing loans are converted to a security, where it then attracts short term money. Borrow short to lend long is a NO NO that should not be allowed. In other words, our banking system is breaking a hard and fast natural law, and our politicians and most economists do not even see it.
Briefly, following the circuit, your housing loan documents leave the originating bank like they are on fire and shot out of a cannon. (The originators are induced to become liars by this scheme, as they have no risk.) These loan documents then find their way to the SPV, where they are converted. These conversions still have at their base, the original Federal Insured housing “loan”, which ultimately gives the securities their value.
In other words, all money has at its base as law. Despite all the words from economists and bankers about risk levels, it is the goodwill of the public and the willingess of government insure that gives all money, including Shadow Bankers their credit money power.
The robo signing scandal was in no small part due to the conversion of housing loans at the SPV. Owners of the certificates of securities could demand the underlying asset, the house, in the event of a financial panic. But, that goes up against another set of long standing real estate laws. Ironically, mutual funds and the like, many of which hold our 401K money, are large buyers of our mortgages. You pay your usury on your housing, a fraction is siphoned off by the TBTF banks, and then more goes to the short term holder of the “certificate of security…a derivitive”.
Since we have dollar as reserves, the U.S. government should find some other way to insure the massive flows of dollar money around the world, rather than using our housing stock, and insulting us with borrow short and lend long crackpot schemes. Deficit spend by the U.S. governement overseas, creates large flows of dollars that want to return and buy TBills and also can act as short term money.
As far as I’m concerned 40% housing attached to banker’s ledger is too much, and the numbers are probably much higher if Shadow banking is factored in.
Attaching real estate to the ledger is a tactic desired by the FIRE sector. If real estate is financed by credit, then it causes asset inflation. Supply and demand does not easily follow the quick surges in credit formation. Also, the normal S shape curve of an economy does not follow credit fomation as well. Nor, does the exponential usury at the base of credit follow real wealth formation. In other words, the banking sector does not serve us in their current incarnation. When the FIRE sector attaches all of our land to their ledgers, then that is a form of taxation. Just the real estate value of New York State, exceeds the value of all of our Companies.
The usury stream should be taxed, and labor untaxed. FIRE sector will always advocate for labor taxes, so they can be free to put the population into debt bondage. The evidence of this abounds in California, where they pay both high labor taxes, and also have money vector out of their wallet to pay debts.
In a real economy (not what we have), the amount of money stock flowing is enough to keep the wheels greased. Canada proved this with their State Banking system by 1974.
Buying long term housing could be funded out of existing money stock and does not need excessive credit creation. Our wealth output should be returned to the people who create it.
Classic deleveraging balance sheet recession. Borrowers are still scarred from Great Recession. Credit is still tight but when borrowers aren’t knocking on the door, there is simply nothing anybody can do. Not sure why every quarter people are calling a bottom. Just like interest rates, residential real estate can have quite long cycles.
Everyone needs to watch this…
http://www.youtube.com/watch?v=7y2KsU_dhwI
US housing is going to be a disaster when (Not IF) interest rates are going to rise.
Although you can expect some fierce resistance from the Fed. The Fed knows this all too well, which is why it is doing all it can to keep rates low. Nothing to do with stimulating the economy. All to do with preserving their beloved financial institutions.
Agreed. But it’s NOT the FED that determines rates. If investors (together the REAL “Mr. Market”) find “greener pastures” for their money then they’ll sell T-bonds/notes and eventually T-bills (like between 2004 and 2006) and move the money to those other investments. Precisely BECAUSE of those extreme low yields on the 10 and 30 year T-bond today, money can decide to move to those greener pastures, i.e. out of T-bonds. The same happened in 1979.
We saw that in 1994/1995 as well. Back then the 10 year yield rose from under 7% to slightly over 8%. Why ? Because investors pulled their money out of T-bonds and poured their money in e.g. real estate investments. It was the beginning of the US housing boom of the 1990s which turned into the US housing bubble somewhere between 1998 and 2003.
When I look at a number of charts today I see a such a setup emerging that could push interest rates (much) higher. FED or no FED.
actually – the only groups currently buying T-Bills are the Fed and SSI, everyone else has left the building. since the Fed and SSI can basically buy unlimited amounts of T-Bills, they can (and have been) hold the interest down. Interest on T-Bills have been declining for 30 years. Similar to Japan, the Fed can keep rates as zero for many decades to come. But also similar to Japan, there are many other unintended consequences that will strangle the 99%.
I watched the 180 movie. There is a lot of history that is not covered, or is confused in the movie. I find this typical of historians, especially those that don’t understand money systems.
We cannot find out how the Babylonians ran their money system, but we can find out how they took out their trash. Private money power allows history to be erased. For this reason, most people do not know the money root causes of WW2.
First of all, the pride defect resides in all humans. That means Jews, Germans, Blacks, Whites, Asians….everybody. Secondly, there a predators in all tribal groups. Some predators wrap themselves in flags, or wrap themselves is sheep clothes, when really they are wolves. The economist Thorstein Vleben talks about this at length, but his ideas get short shrift. They are too terrible to consider. For example, all societies develop with Shamans and others in ceremonial positions as a wealth gathering means against their population. This includes predatory Jews who prey on their own population. This includes Christian leaders who prey on their populations, and so on. Of course there are Angelic people who serve their populations. How to tell the genuine apart from the predators, is the question. Jewish Kapos in the concentration camps are a good example of Jews who became predators against their own people.
What is not discussed in the movie is how Germany was busted out economically. The German people were wiped out with hyperinflation, and that so psycholgically changed them, they were willing to grab onto the first populist who comes along and tells them he is a savior. Since German’s are no different than any other poeople, then it is instructive for us. American’s elected a populist – Obama as a “savior” after the bubble crash of 2008. Pay attention to the money, it is part of the feedback that instructs civilization. We have a big economic crash, then us humans can revert to our baser selves. It is not a German thing, it is a human thing. It is also a money thing… our malformed system has to be fixed.
For right or wrong, German’s looked around for who screwed them with the Versaille treaty and the causes of the hyperinflation. They found out that many of the bankers were Jews. Again, predators can be of any race or religon, and the Versaille treaty was certainly predatory. You can read some of Hitlers statements, and he laughs about the “goldmen” and their fixation on gold money. Germany got wealthy without gold from 1932 to 1939; which is a strong reason why the German people would follow Hitler into WW2. Federer was a Greenbacker, who instructed Hitler on what to do, and it worked.
Most economists don’t even agree that we are in a balance sheet recession. So how to you teach even more ignorant historians about inter-ally debts, and bear raiders, and mefo bills, and Federer money, and all of the money system intricacies of that period?
The most telling part of the movie is not how ignorant the sheeple are, but how ignorant the movie makers are. We can’t leave economics to the economists. Almost none of them got the 2008 bubble crash right. How can these same crippled economic minds teach historians?
The Democratic congress, lead by the Black Caucus, was a huge proponent that Fannie and Freddie did NOT need a 3% reserve, since it was FED guaranteed. Therefore, they should lend out ALL of the money to non-qualified buyers, which they did! It’s called socialism and it doesn’t work and it didn’t work! The FEDeral Reserve is hiding huge amounts of bad paper and it’s going to take YEARS to work through it… if we can! However, we are now becoming more and more socialist at an alarming rate! There is a HUGE price to be paid and it’s NOT over yet! In 44 years of trading, in the last 12 years I’ve watched the three smartest traders in the world LEAVE the USA! That is really ALL we need to know! Period!
In 2009 (and 2010 ??), in an attempt to prop up the US housing market the US gov’t came up with FHA insured mortgages with only 5% downpayment. Insane ! Since it’s FHA insured the taxpayer is going to bleed in the future for the follies of this scheme. Even the department of Agriculture was in 2009 issueing mortgages.
FHA loans have been around MUCH longer than 2009.
http://en.wikipedia.org/wiki/FHA_insured_loan
3% down was the standard for many years, now it is 3.5% down.
Limited to owner occupied, and full documentation of income.
USDA insured loans have been around a long time as well, but only serve a tiny part of the market (rural areas). They allow for zero down, but other than that, are similar to FHA loans (full doc, owner occupied).
http://en.wikipedia.org/wiki/Rural_Housing_Service
FHA and USDA loans did not cause the housing bubble, and to insinuate otherwise is foolish.
The borrower paid FHA MI premiums have recently been increased, in order to head off any insolvency in the FHA fund. Not to say that FHA insolvency cannot happen, but it is not the most likely of scenarios.