Mercury Rising 鳯女

Politics, life, and other things that matter

Understanding where the mortgage crisis work-through is today

Posted by Charles II on June 20, 2010

Calculated Risk has an extremely important explanation of where we are in the real estate crisis, with the following graphic expressing the key information:

(Graphic from Calculated Risk, who got it from economist Tom Lawler)

The bottom three bars are repossessed properties owned by the US government. Notice that that has been rising, perhaps indicating that bad mortgages are being offloaded onto the government through the secondary market or perhaps simply indicating that the general default rate has been rising, or both.

The next bar up, PLS, is private-label securities, mostly CDOs and CDOsquareds. These would be held by investment banks. Notice that they surged through the 3rd quarter of 2008, which is when the bailout began, and shrank steadily. Some of this presumably is due to the expiry of the securities themselves, either through write-off or through the mortgages being paid off. But I wonder how many of those securities are held on the books of the Federal Reserve. According to the Federal Reserve, as of the end of January, it held (via Zero Hedge):

$74B through Maiden Lane (created to deal with Bear Stearns collapse)
$34B through Maiden Lane II (created to deal with AIG collapse)
$55B through Maiden Lane III (created to deal with AIG collapse)

One can find more recent figures on the NYFed site, but they’re not much changed. In the H.4 statistical release for the end of 2009, they were being held on the books at about one-third to one-half the value listed in the above report ($26, $15, and $22B, respectively).

At present, the Federal Reserve states it is holding 1.1T in mortgage-backed securities (see H.4 reports), up about $200B from December 2009. Unfortunately, I don’t know the quality of these. The Fed says these are backed by Fannie, Freddie, and Ginnie Mae (see Tables 10 and 11).

The top bar is the fraction of bad mortgages held by banks and thrifts. Notice that these have increased steadily at least through late 2009. This suggests that the level of distress is still rising.

Finally, notice that the level of repossessed properties stabilized in late 2009 at a level of 500,000. This is up 100,000 from the end of 2007 and down 125,000 from the peak level, but it has been rising this year (don’t ask me to explain the discrepancies between Barclay’s analysis in the last link, and the analysis of Tom Lawler, represented in the graph. It may have to do with differences between where properties are in the foreclosure pipeline).

To summarize, the Fed appears to be carrying about $100B in private-sector losses through the Maiden Lane facilities (guesstimate based on the difference between the NY Fed statement and the H.4), and Fannie, Freddie, and Ginnie securities that can be held at face value only because they carry a Treasury guarantee. If we assume that they are defaulting at a 10% rate, that means another $100B in what should be private-sector losses being paid off by the Treasury.

Another important ballpark number: the nominal value of half a million houses is at the very least $5T (and perhaps double or even triple that). If they decline just 10% in value, that’s another $500B in losses to be absorbed by banks, shadow banks, and the government. Since about 200,000 of those are on the government’s books, that’s $200B to be paid by you and me, another $200B by the shadow banks, and $100B to be paid off by banks… backed up by the FDIC.

What’s important to notice is how much risk has been offloaded by the banks and shadow banks onto the federal government and the Federal Reserve (which, ultimately, relies for its credibility on the federal government). If there’s another downturn, or further drops in housing prices, most of the cost will come from our pockets.

Until the overhang of foreclosed properties drops to the level that it was at before the onset of the crisis, the carrying capacity of the system to deal with further shocks is greatly diminished. That can only happen when (a) we stop chasing immigrants out of the country, and (b) when wages rise enough that people can afford houses. That’s not going to be any time soon, especially since deficits will ultimately force tax increases and, since the wealthy will pit off the day of reckoning until disaster is at hand, that won’t be until there is significant social unrest.

This is how share prices can go up even as the overall financial situation remains at best murky.

2 Responses to “Understanding where the mortgage crisis work-through is today”

  1. I always thought that handing money over to the banks to prevent defaults due to shaky mortgages was a short-circuit of sorts. It handed over the liquidity but left the defaulting homeowners — whose tax money was being handing out! — still in the tender mercies of the greedy yacht-sailing, pony-club plutocrats who’d just had THEIR futures secured.

    If I’d been in charge of the United States government at the time, I would have said, “sure, here is the money to cover the properties in default. HAND OVER THE MORTGAGES. Thank you. These homes are now the property of the US government, and we will recover the money from the homeowners in a manner that secures as many of them as possible as homeowners.”

    But that wasn’t done. Now people are living in their cars in parking lots while the banks “own” empty buildings falling into disrepair and being stripped of copper wiring. What was the point of this exercise, except to balloon the US deficit and debt?

  2. Charles II said

    We were discussing this on MercRising in April of 2007 when this was a controversial issue.

    I also like this post from June of 2007, just three years ago.

Sorry, the comment form is closed at this time.

%d bloggers like this: