Monday, February 1, 2010

All This for 4 Walls and a Roof?

Well I got a bit sidetracked this evening so this post will be short and sweet! Sometimes reading quality blogs is like my Wikipedia addiction and I look up and realize I have been reading for hours!

All This for 4 Walls and a Roof?
There was all kinds of information out there today, but in the end it all distills down to housing and mortgage debt. It always has, and it will until the bitter end.

We have discussed this many times before in that the banks were largely insulated from a downturn after the Dotcom bust because they sold shares for a fee and sold them to you and me. When everything went bust they really had little skin in the game. This time the banks are knee deep in the losses and while you or I can just lose our investment, the banks have lent out 10X as much money as they ever had so losses get problematic fast.

Some key charts are on tap and I would suggest reading the links back as the work is high grade.

First off, The Automatic Earth pointed me towards a telling chart and write up by Michael David White and you really need to read the whole thing. I am including one chart because I think it is very important and also to get you to read the article.

The following is a chart of Residential Mortgage Debt Outstanding and a trendline for supportable mortgage debt:

What bears notice is that outstanding mortgage debt has only declined very little from the peak. The chart shows a drop from $11.95 trillion to $11.88 trillion. How is this possible you may ask as you have seen the Case-Shiller index for home prices and that has cratered over 20% depending on region? This is because not all homes are sold every day or every year.

This is a key point. The outstanding mortgage debt has only declined very little and this is due to the relatively small numbers of home sales that have generated losses that have been recognized. Now of course the problem is that values associated with this debt are far below where they are held by banks. This has always been the problem.

And thus one should not be surprised to see the ends of the earth the US government will go to to support home prices. They are protecting an insolvent banking system. I think this chart may be the most important chart I have seen in some time.

So why does this matter?

The banks have steadily unloaded the toxic paper onto the government. The government thinks this is a temporary issue and is willing to hold the loans until such a time when home prices rebound enough to support the underlying debt. It is not just the banks that have been helped.

Russia had approached China in an effort to dump GSE debt to force the US government to guarantee it:
Paulson: Russia tried to exacerbate US financial crisis
Which of course the government did, allowing foreign CB's to dump GSE debt back on America in exchange for newly minted Treasuries. What a deal! The words "unlimited funding assistance" come to mind for some reason.

How much of the housing market is our government responsible for? Try all of it:
SIGTARP Warns of Second Housing Bubble
The report warns the government’s efforts to stabilize the housing market may create a second bubble. “The government has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor,” the report said.

Included in the report was the above chart, which tracks the expanding percentage of mortgage flows attributable to the government-backed mortgage entities like Fannie Mae Freddie Mac and Ginnie Mae in the mortgage-related finance market. As the chart shows, during the housing bubble, government-sponsored enterprises (GSE)-sponsored lending was at extremely low levels, but has since increased beyond levels even seen during the government intervention during the Savings and Loan crisis 20 years ago.

Just amazing.

It gets better of course, it always does.

Housing Doom notes that GSE liabilities are currently left off the budget numbers because, well, why scare anyone?:
Reuters: Budget Does not Count $Trillions in GSE Liabilities
Now that would be interesting.

Thinking about the debt needs for the US government I often wonder where all the buyers will come from. Of course sometimes you have to look close to home:
The Treasury Is Soliciting Your Feedback Regarding The Proposed Annuitization Of 401(k)
More and more trial balloons about attaching 401k money to government mandated bond purchases. Argentina anyone?

I am running a bit late so I will wrap this up.

The only mission of this ponzi finance scheme is to manage the mortgage market long enough that the losses will not engulf the system or finish the currency. Some may have wanted to learn about bubbles because after they burst it can take a LONG time for things to come back. Of course with a printing press on hand this process can be done very quickly via devaluation.

When viewed in aggregate I find it hard to make another plausible conclusion. You can offer alternate ideas in the comments section.

Have a good night.


getyourselfconnected said...

Rock on! The Mogambo Guru is back:

Dave in Denver said...

the mortgage bubble chart is awesome. here's the thing: when a bubble pops and goes the other way, it almost always overshoots its long term trendline to the downside. things are going to get really tough in this country and not many people are prepared.

watchtower said...

The Mogambo Guru said:

"In this case, the banks will charge higher fees for their “banking” services and charge higher interest rates to their customers"

and also this:

"...because such insane inflation in the money supply is going to result in terrifying, horrifying inflation in prices..."

However the White House (picked this up over at Stagflationary Mark's place) said:

"WASHINGTON, Feb 1 (Reuters) - The White House budget proposal released on Monday assumes the U.S. economy is heading for a six-year run of above-average economic growth with no sign of a worrisome spike in inflation or interest rates."

Alex, I'll take 'things that make you hmmmm?' for a thousand.

getyourselfconnected said...

Calculated Risk has the Obama admin unemployment forecast up tonight and if you want to laugh take a look at this crap:

yeah that chart is "gold".

Dave in Denver said...

gold and silver a bit perky this evening.

getyourselfconnected said...

Damn I am never gonna hit my entry points. Time to rework the numbers!

Advocatus Diaboli said...

The administration forecast on unemployment is doubleplus good!

getyourselfconnected said...

maybe on MARS!

GawainsGhost said...

This is not capitalism. It is corporatism. What is that? Good question. And the answer is loss of freedom.

I remember first encountering the term back in 2002, in an article by Robert Locke at FrontPageMagazine. Here is the link.

A prescient and frightening read.

Rob Dawg said...

I wrote Aug 2006:
By my estimate $2.5T in MEW is unsupported by reasonable asset valuation. In total somewhere between $7T and $9T in phantom equity is exposed in any retracement to the mean. An orderly retreat will allow inflation to eat away much of this. A decline in the dollar may result in a disproportionate amount of pain to be taken by foreign investors. No matter how the pain is spread, there will be consumer pain. Likewise because of govt spending policies that resemble the proverbial cricket in summer we can expect massive deficits and even larger tax increases.

Anonymous said...


sedentary state said...

I think Bill Bonner said it best,

Millions of homeowners are underwater. Some of them will drown. Others will get out through the windows…leaving the house to sink, along with the housing market.

watchtower said...

Thanks for sharing that link Gawain, it was very interesting to me.

In fact I emailed the link to my brother to see what he thought about it.

Robert Locke wrote that in 2002, all I can say is "wow".

GawainsGhost said...

Watchtower, if you enjoyed that article you might also enjoy this one.

It's about Mark Twain's radical liberalism, which has no place in the current political environment and to which I full subscribe.

My favorite quotes from Twain:

"If voting mattered, they wouldn't let us do it."

"Imagine you were an idiot. Imagine you were a member of Congress. But I repeat myself."