Since 2008's market melt-down and the advent of record numbers of foreclosures along with the loss of 35% of market value of the underlying assets, the secondary mortgage market has been reeling to and fro like a drunk down at the local bar.
Image by osipovva via flickr.com
Private investment has fled the secondary market and mortgage backed securities, leaving the government and the Federal Reserve to fill in the massive sink hole left behind.
If I were an editorial cartoonist, I'd be drawing a picture of Fed Chairman Ben Bernanke, clinging with his left hand, to a house about to slide into a sink hole, while frantically throwing boulder-sized chunks of dollars into the enormous hole with his right hand. Unfortunately this would not be a funny cartoon because this is an economic hole that is way too deep for one man to fill, even if that one man happens to be the operator of the largest printing press in the world.
The Fed Chairman and the administration continue what has become an endless game of printing money to keep the mortgage market doing 'business as usual', and driving the Fed balance sheet to unprecedented levels in the process. All of this effort has resulted in 'good news' for housing, but at a cost that will come due at some point in the near future, unless we see a sudden, unexpected economic boom that can reverse the current trend of systemic unemployment and eroding incomes.
Those who make their living inside the housing industry cling to every scrap of 'good news' about the housing market, preferring to believe that things are getting better, just as they chose to believe in 2006 that home prices could never go bust. It makes folks feel better when they can ignore or deny a truth that they simply don't want to face. Those folks won't like this article a bit, and most probably won't be tweeting this one. But ignoring the messenger won't make the message go away.
Even in the face of the lowest mortgage rates in 50 years, home prices would still be trending downward if not for the large quantity of purchases being made by newly created, Wall Street funded investment companies who are buying up foreclosures in record numbers, by borrowing hundreds of millions from banks who are then selling foreclosed properties back to the investors. These same investors are also buying up new homes, and other available inventory. Some 35% of all home sales at present are associated with investment activity. I'd bet that's it's more like 40% or even more. Current tracking data does a poor job of identifying who the buyers really are, and how the property will be used.
The banks have not only attempted to avoid the reality of falling asset values by keeping shadow inventory off the market for years now, they're funding a new system of investment buying that has been helping increase home sales numbers and prices of late. The same banks that are foreclosing on home owners are also lending millions of dollars to the big companies who are buying up these foreclosures. It's a circular strategy that forecloses, then funds the buyers who'll buy them. It is increasing prices slightly, which is what the banks want. But the resulting shift from owners to non-owners will have an impact on the housing market and related industries for decades to come.
FHA delinquencies are approaching an unprecedented 20% of all FHA insured loans. This is going to lead to major problems with the Federal Housing Administration. A bailout is likely if FHA is to continue to exist. Government insured mortgages account for about 90% of today's mortgage market. Since 2008 FHA has virtually facilitated home mortgage loans, as few private lenders would make low down payment loans without the taxpayer-backed assurance that FHA provides. It's like a house built on stilts waiting for an inevitable earthquake.
And as if all this were not enough proof of housing's monumental struggle, home sales are highly dependent on the Federal Reserve to continue to manipulate interest rates to keep them low. Essentially the Fed is buying up most of the mortgage backed securities in order to force mortgage rates down and provide 'new' sources of funding for mortgage loans. The question is how long can the 'all-powerful' Fed keep these rates down? It's virtually impossible that they will stay low indefinitely, given the need to sell more U.S. treasuries to help pay for massive federal deficits. We are at the point where we are now monetizing the budget deficits.
Essentially QE3 is the largest counterfeiting operation in the history of the world, as stated on Rob Chrisman's website. I have to agree. Essentially one agency is printing the money that is being used to purchase securities from another. It's all a big shell game, done under the auspices of trying to bolster employment.
But the phony employment story is understandable, because if Bernanke actually came out and admitted the real reason for doing this ' that without it mortgage rates would skyrocket ' well, that would not sound so good. And the housing industry 'powers-that-be' would have a tough time spinning that into good news for the mainstream media to report.
The president of the Richmond Fed, Jeffery Lacker objected to QE3 strongly. Lacker's contention is that an open-ended QE3 will have a very negative long term impact on the economy. He's right, but no one is listening to him. As usual, the industry does not want to hear about the problems with the underlying fundamentals.
It's been my experience that the only way to prepare for a disaster is to be willing to recognize that a disaster is possible. And the 2008 'melt-down' would be nothing compared to a scenario in which the Fed is no longer able to control interest rates. And with the yearly interest payments on the Federal debt now at an estimated one-half trillion per YEAR, it's anyone's guess how long the so-called housing recovery will last, since it's built on a foundation of phony economic activity.
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Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.
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