Big Bubbles! House Price Bubbles and Financial Stress (The Do Ho Financial Market)

Yes, we live in a “Do Ho” economy where bubbles (and not tiny ones) are pervasive. 

Look at the YoY growth in the all-transactions index from FHFA for US house prices compared to the St Louis Fed Financial Stress Index.


When the financial stress index is low (less than zero), we see BIG home price bubbles.

Of course, home price bubbles occur when YoY changes in home prices outpace household earnings growth YoY.


If Don Ho were still alive, he could redo tiny bubbles as BIG bubbles.




For Fannie-Freddie Regulator (FHFA), Battle Heats Up With White House (Buffer Drops To Zero In 2018!)

The fight continues over Fannie Mae and Freddie Mac, the mortgage giants in conservatorship with their regulator, FHFA, as the buffer for F&F goes to zero in 2018.

(Bloomberg) -By Joe Light- While the Consumer Financial Protection Bureau grabs headlines, another independent U.S. regulator is quietly locked in its own showdown with the Trump administration. (CFPB Director Richard Cordray stepped down and tried to appoint his own successor Leandra English. The Trump Administration wanted to appoint Mick Mulvaney, who serves as head of the Office of Management and Budget. A court ruled that Trump has the authority and Cordray did not.)

The Federal Housing Finance Agency is in deep discussions with the White House over what to do with more than $7 billion owed to the government at year-end by Fannie Mae and Freddie Mac.

FHFA officials in negotiations have said they want Fannie and Freddie to keep $2 billion to $3 billion each as a buffer against losses, according to people familiar with the matter. Administration officials in exchange want to limit the mortgage giants’ market footprint by steps such as tightening restrictions on the size of loans they back, according to the people, who requested anonymity because the talks are private.

The ongoing negotiations could face a de-facto deadline at the end of December, when Fannie and Freddie are scheduled to pay $7.7 billion to the U.S. Treasury. If FHFA Director Mel Watt chooses to withhold some of that money without the administration’s sign-off, it could set off another firestorm between President Donald Trump and an independent agency led by an appointee of his predecessor Barack Obama.
Spokeswomen for the FHFA and the Treasury Department declined to comment.

Bailout Agreements
Fannie and Freddie don’t make mortgages. They buy them from lenders, wrap them into securities and give guarantees to make mortgage-bond investors whole if borrowers default.

The FHFA negotiations stem from the bailout agreements struck when the government took control of the companies in 2008. Fannie and Freddie eventually received $187.5 billion to weather the financial crisis, and in exchange taxpayers received a new class of senior preferred stock that paid a 10 percent dividend, along with warrants to acquire nearly 80 percent of their common stock.

In 2012, the Treasury and FHFA, which controls Fannie and Freddie, amended the agreements. Instead of a 10 percent dividend, taxpayers each quarter receive a dividend equal to all of the companies’ net worth above a specified capital buffer. (This is the infamous “profit sweep” that helped fund the dying Obamacare healthcare law).

Zero Buffer
That buffer is $600 million each this year, but drops to zero in 2018. At that point, Fannie and Freddie would need another bailout from Treasury to cover even small quarterly losses. The companies have $258 billion to draw on from the U.S. Treasury if needed, but that amount can’t be replenished with future profits. If the companies make their fourth-quarter payment as scheduled, they will have paid taxpayers a combined $283.6 billion.

At the center of the conflict is Watt, a former Democratic congressman picked by Obama to lead the agency in 2013. After fierce opposition from Senate Republicans who tried to block his confirmation, Democrats changed the rules to eliminate the use of the filibuster for some presidential nominees, enabling Watt to get through.

After becoming director, Watt exhibited an independent streak, making moves that irked Democrats and Republicans alike. The behavior won him the respect of many Republican lawmakers. They’ve limited their criticism of Watt even as they lambasted former CFPB Director Richard Cordray, who set off a public battle over the agency’s leadership last week by trying to put his chief of staff in charge as he walked out the door.

Investor Confidence

Watt has said that his concern is with how mortgage-bond investors might react if Fannie and Freddie begin to draw funds from the remaining Treasury commitment. For now, many investors treat the companies’ mortgage-backed securities as if they have no risk of losses from borrower defaults. Watt has said that perception could change if the $258 billion line of credit is being tapped to cover losses.

“We reasonably foresee that this could erode investor confidence,” Watt said at a House Financial Services Committee hearing in October. “This could stifle liquidity in the mortgage-backed securities market and could increase the cost of mortgage credit.”

The possibility of losses is more than theoretical. Freddie Mac in 2015 and 2016 posted small quarterly losses as a result of a quirk in how the company accounted for interest-rate hedges. The capital buffer kept the company from needing bailout money.

One-Time Loss
Fannie and Freddie could also face one-time losses if Congress passes a bill that reduces the corporate tax rate. That’s because the change would reduce the value of Fannie and Freddie assets that can offset taxes.

The $2 billion to $3 billion requested by FHFA officials could withstand a small loss but likely wouldn’t be enough to protect against a cut in the corporate tax rate.

Treasury Secretary Steven Mnuchin has publicly said he expects the companies to pay their dividends as scheduled.

In the private talks, administration officials have suggested that FHFA agree not to raise the size of a mortgage that Fannie and Freddie can buy. That so-called conforming loan limit currently stands at $424,100 for most of the U.S. and at $636,150 for areas with the priciest homes.

On Tuesday, FHFA raised the limit for most areas of the U.S. to $453,100 for 2018. The agency raises the limit based on changes to its own home-price index, pursuant to the law governing the agency. It’s unclear what discretion the FHFA would have in taking steps to limit the increase.

Private Capital
Trump administration officials have said they want to increase private capital’s role in the mortgage market, a goal that could be furthered by freezing the loan limit.

FHFA officials have resisted the administration’s request to stop a loan-limit increase, the people said. Complicating matters, Watt has publicly said that he believes the companies’ bailout agreements allow him to withhold some or all of the dividend without White House approval.

Some lawmakers have urged Watt to let the companies keep capital, while others have said the move could be interpreted as an early step toward fully recapitalizing the companies and releasing them from government control. Watt has been adamant that he won’t recapitalize and release the companies without congressional approval.

Retaining a combined $4 billion to $6 billion from a quarter where the companies owe $7.7 billion would allow the companies to make partial payments rather than stopping the dividends completely.

Of course, if the bond and housing markets are in a bubble and they burst/shrink, Fannie Mae and Freddie Mac are likely to suffer negative earnings again and will require a bailout. Then again, so will a number of banks.



What The Hel(oc)? HELOC Rates Now 100 BPS BELOW The Prime Rate

According to Black Knight,  19 Percent of Active HELOCs Are Scheduled to Reset in 2017. 

​​More than 1.5 million home equity lines of credit (HELOCs) will see interest-only draw periods end in 2017, with payments becoming fully amortizing, roughly 100,000 less than in 2016

  • Just under $100 billion in outstanding unpaid principal balances (UPB) on HELOCs are facing resets in 2017, with an average $62,500 UPB per line of credit
  • On average, HELOC borrowers whose lines reset in 2017 will see payment increases of $250 per month, more than doubling current average monthly payments
  • One in five borrowers facing HELOC resets in 2017 have less than 10 percent equity in their homes, making refinancing problematic; this represents a decline from 31 percent of borrowers facing resets last year
  • Recent interest rate declines have increased the refinanceable population to 4.1 million, a 46 percent increase from mid-March and the highest point yet in 2017
  • Interest rate fluctuations have caused the refinanceable population to increase or decrease by as much as 20 percent from week to week throughout Q1 2017

But it is now Q4 2017 and the total outstanding HELOC volume continues to decline since peaking in 2009.


But in order to prevent a reset bloodbath, HELOC rates are going to have to fall. And there is what has happened. The top chart shows the sudden decline in HELOC rates in November 2017. The bottom chart shows the spread of HELOC rates to the Prime Rate.


Yes, the HELOC rate is now almost 100 basis points LESS than the Prime Rate.


Something fishy OR bad data? It was Thanksgiving week when the plunge occurs and that week is often notable for lack of respondents to Bankrates’ survey of rates.


Trapped! Dodd-Frank And The Demise Of Bank Real Estate Lending

Nothing has been the same since the financial crisis and the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law by President Barack Obama on July 21, 2010. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB).

Whether you like more regulation or not, Dodd-Frank and the CFPB have had a chilling effect on the mortgage market. Note that before The Great Recession, real estate loan growth at commercial banks YoY regularly exceeded M2 Money Stock growth YoY. Not so starting in late 2008. With the exception of a brief respite in 2016, M2 Money Stock growth YoY has exceeded Real Estate Loan growth YoY.


An alternative explanation of the slowdown in Real Estate Lending YoY since 2008 is the growth of excess reserves of depository institutions.

To deal with the 2008 financial crisis, the Federal Reserve pumped large amounts of reserves into the banking system and introduced new programs that altered the terms of the trade-off banks make when deciding their level of excess reserves. In short, the marginal benefit of holding additional reserves has increased, whereas the marginal cost has decreased. As a result of these new Federal Reserve policies, holding reserves is now much more attractive to banks. It is more attractive because the cost of holding excess reserves—in the form of forgone interest—is significantly lower than it was before the crisis.


So, the US still has excess reserves trapped in the Federal Reserve system. Between excess regulatory burden (Dodd-Frank, CFPB) and slow wage growth, we have a problem with the banking industry. It is not generating sufficient lending growth to stimulate the economy.

Will The Federal Reserve raise the interest rate on excess deposits that will encourage commercial banks to jump back into the residential mortgage market? Currently, a number of non-bank lenders are leading the mortgage market, such as Quicken Loans and PennyMac.


An alternative to the traditional depository institution lending model is represented by Quicken Loans. These loans are NOT kept on Quicken’s balance sheet, but sold to other market plays and can be securitized.

So, we continue to have a mortgage lending hangover thanks to the excesses of the subprime and ALT-A markets of the last decade. It resulted in the predictable regulatory overreach which has discouraged traditional banks from making residential mortgage loans (except Wells Fargo, of course).


Here is CFPB Director Richard Cordray!


Deutsche Bank Ramps Up Leveraged Loan Business In “Hail Mary Pass” For Revenues (More Risky Lending)

Deutsche Bank is still suffering from the global financial crisis where their stock price peaked at $125 and is now only $16.93, despite the staggering intervention from the European Central Bank (ECB).


Deutche’s revenues have been faltering due to a decline in trading revenue. DB’s trading revenue was down 30% year-on-year to €1.512 billion versus €2.162 billion in Q2 2017.  Trading revenues in Q2 2017 fell 18% year-on-year to 1.666 billion euros versus 2.027 billion euros.


Hence, Deutsche Bank is now throwing a “Hail Mary pass” and  hoping that leverage loan growth saves the day.  A leveraged loan is a commercial loan that is extended to companies or individuals that already have considerable amounts of debt. Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower.

That’s the ticket. Bet on risky corporate loans as your HMP (Hail Mary Pass). Well, leverage loans had their best year in 2017.


But DB’s rank in terms of leveraged loans is shrinking.


DBs earning per share is the stuff of … the German Battleship Bismarck.


Yes, global central bank policies have definitely encourage more risk taking.

Deutsche Bank? F*** that $hit. JP Morgan Chase!!!

Here is Boston College’s Doug Flutie making his memorable “Hail Mary” pass against Miami. The blueprint for DB’s leverage loan pass for increased earnings.


Simply Unaffordable: These Cities Make USA Housing Look Dirt Cheap

As the late Robert Palmer crooned, housing is simply unaffordable in many cities. And most of those cities are outside the USA.

(Bloomberg) — As people around the world move into cities and look for housing, one thing is clear: Most will have a hard time paying for it.

Average monthly take-home pay won’t cover the cost of buying a 1,000-square-foot residence or renting a three-bedroom home in any of the 105 metropolitan areas ranked by the Bloomberg Global City Housing Affordability Index – based on a general rule of thumb among U.S. lenders that people should spend no more than 28 percent of net income on housing costs. Only 12 cities would be considered affordable if they spend 50 percent.


Residents face many obstacles, including urban land-use regulations, underdeveloped rental markets and difficulty getting financing, according to Enrique Martínez-García, a senior research economist at the Federal Reserve Bank of Dallas who studies housing prices. Policy solutions to these problems aren’t clear, he adds.

 “Not having access to credit is a challenge to develop a healthy housing market,” he said. “But opening it up too fast might be a problem as well; it might actually lead to a boom-bust episode.”

The Bloomberg index calculates the affordability of renting or buying in city centers and suburbs. Rankings are based on self-reported data, including net salary and mortgage interest rates, compiled by, an online database of city and country statistics.

Since 2012, 48 cities in the Bloomberg index have become less affordable, while affordability improved in 51. (Historical data aren’t available for all 105.) In nine of the bottom 10, average net income fell, while income in eight of the top 10 cities rose as rental and mortgage costs declined.

Emerging economies currently have the least-affordable housing, led by Caracas and Kiev in Ukraine. The remaining cities among the bottom 20 include seven in Asia and six in Latin America. London is the least-affordable major city in Western Europe, with average monthly rent and mortgage payments equaling 135 percent of monthly net income.

In Rio de Janeiro, Brazil’s second-largest city, average monthly take-home pay of $640 won’t unlock a rental even on the outskirts of town, let alone provide the means to buy a house or apartment in the city center, where monthly mortgage payments approach $2,000. This contributes to multiple-income households and also may explain why more than one in five Rio residents lived in informal shantytowns called favelas in 2010, the most recent data available. Six of the 10 cities with the greatest deterioration in the past five years are in Latin America.

Seven of the top 10 most-affordable cities are in North America: four in the U.S. and three in Canada.  The least-affordable metro area in the two countries is Vancouver, where an influx of foreign cash has caused a surge in home prices. New York ranked near the middle of the index.

Two of the cities with the greatest improvement are in China: Shenzhen and Guangzhou. Even so, housing demand across the country continues to outweigh supply, “despite rapid construction and the large-scale delivery of new homes” in cities including Shenzhen, according to Kate Everett-Allen, head of international residential research at real-estate consultant Knight Frank in London. That’s because of “mass urbanization” and relatively low wages, she said, adding that home prices in several cities grew at an annual rate of as much as 40 percent last year.

Four Chinese metro areas, including Hong Kong, were among the 20 least-affordable in the index. 

Yes, the USA, while more affordable that the rest of the world, is suffering from low wage growth while home price growth is more rapid. In fact, the FHFA home price index is growing YoY at over 2X average hourly wage growth YoY. 6.63% versus 2.54%.


Note that home price growth started to exceed hourly wage growth in 1998, the beginning of the dreaded housing bubble that blew sky high.

I guess Americans have been addicted to gov since the 1987 stock market crash.

Hurricane Equifax II: Even Wells Fargo Says To Consider A Credit Freeze

How bad is the Equifax data breach? Where 143 MILLION consumers potentially had their Social Security numbers, credit card numbers and birthdates revealed? It is so bad that a major US bank, Wells Fargo, suggested that customers consider placing a freeze on their credit.

That is fine for those who don’t use credit on a regular basis, but what about those people who still wish to borrow funds to purchase a home or automobile? By NOT freezing your credit, you are at risk of loans being (fraudulently) taken out in your name.

Although Equifax was the primary recipient of market wrath, the other major credit monitoring companies Transunion and the UK’s Experian have experienced declined in their equity values as well.

And with real estate, automobile and credit card lending already in a decline YoY, imagine what a credit freeze will do?

Here is the Federal Trade Commission’s FAQ on freezing your credit.

Now the Wells Fargo wagon is suggesting freezing your credit which means no more loans.