The Ongoing Collapsing ( Housing Focus)

Ht nc

One would hope that we are past the worst of the housing crises.  Peak home production was in the Summer of 2005, and the financial meltdown was in 2008.  WE have had a number of years to work our way through it.

Unfortunately, there are some indications that we did not work our way through the problems, but rather papered over the issues by throwing good (borrowed) money after bad (borrowed) money.

The problem comes when you run out of people willing to lend the money.   During the Great Depression, the fear of this issue is what caused FDR to attempt to balance the budget and the Fed to tighten up the money supply causing a second crash:  thus putting the Great into the Great Depression.

Well there are a couple of indications that we are reaching that point.  We will start with the Emerald Islands (Ireland) before United States before travelling to the Emerald Islands (Ireland).

As note, if you lend a country (or anybody) money at a higher interest rate higher than their growth rate, you are essentially making one of those ever-flipping “pay-day” loans.   Just as the customer must come up with some outside source of money, or borrow more money, to settle the current debt (since the loan is for his paycheck), the country must do the same.  As the loan keeps getting flipped, more and more interest get tacked onto the original amount.  You can get to the point fairly quickly where the entire payment is equal to only the interest (the fee if you will) and none of the principal is being paid down.

Finally, just as in the United States, your taxes go toward the bank bailout whether you walked away from your loan, or whether you own your own home outright.  You may have received some side benefits from an artificially propped up leverage economy, but it is fair to say those benefits were probably not evenly distributed.

To simplify the Irish narrative:

1.    The Irish Banks need 35bn euros more.

2.    They already have received ~208 bn euro(293 US$) from the Euro Central  Bank:

a.    117 bn by European Central Bank

b.    71 bn by Irish Central Bank

c.    20bn bond guarantee to banks by Irish Central Bank

3.    To which can be added the 67.5bn lent to the Irish Government by the E.U.

The unbelievable truth about Ireland and its banks

Robert Peston, BBC, March 30, 2011

Unless something unexpected happens in the next 24 hours, the total amount of additional capital that will need to be injected into these banks will be a bit less than 35bn euros - including 8bn euros that was supposed to be injected into them at the end of February, but was postponed because of Ireland's political turmoil.

That is an almost unbelievably large number. When I think about it, I have a small panic attack - because it represents… 55% of its GNP.

No financial institution or bank will lend to them. Ireland's banks can't borrow from anyone except the Irish people (who, poor souls, have nowhere much else to put their deposits). But even if they wanted to, Irish households could not possibly put money into the banks fast enough to allow those banks to repay all the institutions - such as German banks - which lent far too much to Ireland's banks in the boom years.

So [the total so far] is 208bn euros of taxpayer loans to Ireland's banks - equivalent to a remarkable 154% of GDP.

It is pretty extraordinary that it has taken so long for the banks to be forced to recognize their mortgage losses - since house prices have more-or-less halved over the past few years, the economy was in deep recession after the 2008 crash and has subsequently been pretty stagnant, and unemployment has been rising.

By guaranteeing all their liabilities in the autumn of 2008, they turned the bloated liabilities of the swollen banks into public sector debt.

All those losses have fallen on Ireland's citizens, who are not blameless for the mess (they didn't have to borrow too much) but aren't the only ones at fault…The money they've been lent by the IMF and euro zone carries an interest rate of 5.8% on average - which is significantly greater than Ireland's economy and tax revenues can grow right now, and therefore forces Ireland into a potentially never-ending vicious cycle of public spending cuts and low growth.

As Obama and Congress fiddle, America liquidates housing sector

Christopher Whalen, Reuters, March 29, 2011.

Obama is compared by some to Louis XIV (and Mrs Obama to Marie-Antoinette)  in terms of his detachment from the nation’s priorities, particularly the ongoing meltdown in the housing sector.

We wrote this week in The Institutional Risk Analyst, Wanted: Private Investors Seeking First Loss Exposure on RMBS, March 28, 2011 about some of the details of the secondary mortgage market.  In simple terms, there is about $11 trillion in financing behind the real estate sector: $4.4 trillion in the portfolios of banks, $5.5 trillion in agency securitizations guaranteed by Uncle Sam, and $2 trillion or so in private label securities.

In order to believe the claims of my conservative friends about “reform” of government agencies like Fannie Mae and Freddie Mac you must believe that some of the $5.5 trillion in no-risk agency securities is going to be willing to migrate into the bucket of private label securities, where investors take actual credit risk…

The net, net here is that the available pool of credit available for the housing sector is shrinking and thus prices must also decline to adjust for that supply of credit.  This fact of continued decline in home prices is going to have a chilling effect…

In a rational world where programs such as HAMP were really effective to restructure underwater loans and, of necessity, say 50% of all HELOCs were written down to zero, both the Too Big To Fail banks and the private mortgage insurers would be insolvent. ”

I estimate that Fannie and Freddie alone are hiding $200 billion worth of bad loans on their books simply because there is no market for these foreclosed homes.  Ditto for the largest servicer banks such as Wells Fargo, Bank of America, JPMorgan Chase and Citigroup.  To clean up this mess with finality is going to cost $1 trillion or so in round numbers.  But nobody in Washington wants to go there.