Nov 23. FHA farce

–Curve edged a bit higher Friday.  Treasury option expiration was uneventful as tens rejected the 120 strike.  Rates were a bit higher even as stocks traded soft.  Ten year yield up 2 bps at 3.363%.

–Existing Home Sales today expected 5.70M rate.  Existing Home Sales have been trending up for most of this calendar year for several reasons. 1) Tax credits for first time buyers (and extension of this program) 2) Expanded role of the FHA with low downpayment requirements 3) Low mortgage rates as the gov’t continues to be the major if not sole buyer of agency debt.  What once was primarily a private marketplace, with risks borne by market participants, has been totally supplanted by the gov’t with risks now shifted onto taxpayers.  

–This is from a NY Times article (Nov 19): “The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.”

–But here’s an article that really put the role of the FHA into perspective for me, again from the NY Times.

http://www.nytimes.com/2009/11/20/business/20limits.html?_r=2&ref=todayspaper

It’s about 3 friends who bought a two apartment building in SF for $1 M with just $33,000 down, financed by the FHA.  It is absolutely mind-blowing that this type of deal would be approved.  Have to read it to believe it. 

–Further driving home the absurdity of the mortgage market is this tidbit from ZeroHedge about Well Fargo.  http://www.zerohedge.com/article/balance-sheet-exposures-wfc-pnc-i-did-it-my-way

In the case of WFC, the bank has taken the position that NONE of its conforming residential exposures should be brought on balance sheet despite the FASB rule change.  As we discussed in The Institutional Risk Analyst this week, “Why? Because the loans inside these securitization vehicles are insured by FHA, so goes the thinking of WFC and its auditor, thus the bank has no liability to these entities or the securities they have issued to investors. Pretty neat trick, eh?”

Thus WFC is basically saying that none of the bank’s $1.1 trillion in conforming OBS exposures need to be represented or reserved against.  My problem with this is two-fold:  First, the FHA and/or GSEs will return some portion of the securitized loans, so WFC should explicitly disclose this cost and reserve against it.  Second, it seems to be pretty arrogant for WFC to take such an aggressive positions with respect to these OBS vehicles, even with a third party guarantee, especially given the intent of the FASB rule change.

I don’t know what the rest of the country is like, but in Chicago there appears to be an absolute glut of condos, some of which are being converted to rental, some auctioned, but it still seems like there is a long way to go.

–This is from a Huffington Post piece: “While the overall U.S. financial system is showing signs of stability, a rapidly rising tide of troubled loans for commercial real estate threatens the survival of hundreds of the nation’s small and medium-sized banks.”

–This is from Goldman (Jan Hatzius) “Meanwhile, house prices and credit quality look set continue to weigh on the US financial system, the availability of bank credit, and ultimately the pace of the economic recovery.”

 

–Real estate is still a major disaster, and the Fed’s program to buy $1.4T of MBS is slated to end in the first quarter.  Then what?

 

–And in non-US news: http://www.zerohedge.com/article/potential-ukrainian-default-spooking-markets  Possible Ukraine GOV’T default related to railway…

Posted on November 22, 2009 at 5:46 pm by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply