Housing has been in a death spiral for a few years, and the latest evidence suggests that government support is the only thing keeping the housing market from complete collapse.
Facts are facts, and the fact that housing has been on government sponsored life-support for a few years has been under-reported and ignored. The housing marketplace has not improved, and is being kept alive only through massive government intervention and systemic support. As this support is gradually withdrawn, the housing market will continue to weaken. The pincer-like effects of continuing unemployment and increased foreclosure activity will multiply the effects of the gradual withdrawal of government aid.
The New York Times, reports here, that the nationalization of Fannie Mae and Freddie Mac fifteen months ago has resulted in massive government subsidies to these organizations. Fannie and Freddie, as they are commonly known, are stockholder-owned corporations chartered by Congress as government-sponsored enterprises (GSE’s). In September 2007, these GSE’s were placed into conservatorship of the Federal Housing Finance Agency. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about one-third to one-half of the U.S.’s $12 trillion mortgage market.
The controversy over Fannie and Freddie is fueled by the fact that the government has conveniently omitted their massive liabilities, estimated at nearly $5-8 trillion in debt and guarantees, from the Federal government’s financial statements. Recording their liabilities on government financial statements would dramatically increase gross federal liabilities and further weaken the US dollar, as sovereign investment funds would lose faith in the U.S.’s ability to repay these massive debts.
How to reorganize Freddie and Fannie have been highly controversial topics, as no one has yet determined how to replace the massive liquidity that these organizations inject into the housing market. The Federal Reserve has nearly exhausted its stated buying cap of $1.25 trillion in mortgage backed securities from Fannie and Freddie. The Federal Reserve has created, in the last year, nearly all the liquidity in the housing markets. Without these injections, housing’s death spiral would be nearly complete and Fannie and Freddy would collapse.
In a stealth maneuver that was not anticipated, the Treasury decided on Christmas Eve 2009 to eliminate the caps on how much bailout money the failed mortgage giants would receive to stay in business. Now, taxpayers will be on the hook for an “unlimited” amount for at least the next 3 years. The 3 year cap maximum is noteworthy, because it represents the likely range of mortgage resets (and mortgage failures), now estimated to last through 2012.
Assistance to homeowners in distress has been virtually nil, with government loan modification programs permanently modifying only 67,000 loans of nearly 4,000,000 foreclosure filings in 2009. The number of modified loans is a statistical blip and aberration.
Practically, foreclosure filings will continue to increase in 2010 and 2011, as mortgage resets peak. The government and banks will be unable to stem the hemorrhaging, which will cause an increasing tide of bank failures and FDIC takeovers, already estimated at nearly 1,000 banks. Keep in mind that only approximately 200 banks have been placed into receivership by the FDIC, to-date. 800 banks remain takeover targets, discounting the effects of the impending commercial real estate crisis.
Coupled with an impending crisis at the Federal Housing Administration, which insures nearly $1 trillion in mortgages, this crisis is approaching a critical phase. Mortgage delinquencies at Fannie and Freddie are increasing steeply, the Federal tax credit on home purchases is due to expire soon, and the Federal Reserve is quickly approaching the terminal phase of its support to Fannie and Freddie. Can the Federal government continue to nationalize the housing market?
No one has come up with a new model for liquifying the national mortgage markets, yet continued Federal support will result in substantially higher inflation, higher gold prices, higher interest rates, and a substantially weakened US dollar. The US government cannot continue to print dollars indefinitely without significant and substantial negative impacts to our economy, yet it remains the only support for the housing market. This ends badly.
