by Calculated Risk on 3/25/2010 12:13:00 PM

From HotelNewsNow.com: STR: NYC leads weekly occupancy rate gains

Overall, the U.S. industry’s occupancy ended the week with a 5.2-percent increase to 61.4 percent. Average daily rate dropped 1.9 percent to finish the week at US$98.30. Revenue per available room for the week was up 3.2 percent to US$60.39—the third consecutive week that RevPAR experience a year-over-year increase.

The following graph shows the occupancy rate by week since 2000, and the rolling 52 week average occupancy rate.

Click on graph for larger image in new window.

Note: the scale doesn't start at zero to better show the change.

The graph shows the distinct seasonal pattern for the occupancy rate; higher in the summer because of leisure/vacation travel, and lower on certain holidays.

Although the occupancy rate is up 5.2% over the same week last year, the level is still well below normal - the average occupancy rate for this week is close to 65%, significantly above the current 61.4%.

The low than normal occupancy rate is still pushing down room rates (on a YoY basis) although revenue per available room (RevPAR) increased for the third straight week.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 3/25/2010 10:04:00 AM

Fed Chairman Ben Bernanke is testifying before the House Committee on Financial Services: Federal Reserve's exit strategy

This is mostly a technical discussion, but the Q&A might be interesting.

Here is the CNBC feed.

Here is the C-Span Link (updated link)

by Calculated Risk on 3/25/2010 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending March 20, the advance figure for seasonally adjusted initial claims was 442,000, a decrease of 14,000 from the previous week's revised figure of 456,000. The 4-week moving average was 453,750, a decrease of 11,000 from the previous week's revised average of 464,750.
...
The advance number for seasonally adjusted insured unemployment during the week ending March 13 was 4,648,000, a decrease of 54,000 from the preceding week's revised level of 4,702,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since 1971.

The four-week average of weekly unemployment claims decreased this week by 11,000 to 453,750.

The dashed line on the graph is the current 4-week average. The current level of 442,000 (and 4-week average of 453,750) is still high, and suggests continuing weakness in the jobs market. Note: There is no way to compare directly between weekly claims, and net payrolls jobs.

Note: by request, next week I'll post a graph as a percent of covered employment.

by Calculated Risk on 3/24/2010 11:58:00 PM

From Sewell Chan at the NY Times: China Says It Will Not Adjust Policy on the Exchange Rate

After meeting with officials at the Treasury and Commerce Departments on Wednesday, China’s deputy commerce minister, Zhong Shan, told reporters, “The Chinese government will not succumb to foreign pressures to adjust our exchange rate."
...
“It is wrong for the United States to jump to the conclusion that China is manipulating currency from the sheer fact that China is enjoying a trade surplus,” Mr. Zhong told reporters in a meeting at the Chinese Embassy. “Besides, it’s wrong for the United States to press for the appreciation of the renminbi and threaten to impose punitive tariffs on Chinese experts. This is unacceptable to China.”

This is more posturing before the Treasury releases the worldwide currencies report on April 15th that might name China a "currency manipulator".

by Calculated Risk on 3/24/2010 08:01:00 PM

From Fed Vice Chairman Donald Kohn: Homework Assignments for Monetary Policymakers

Kohn's assignments:
1) "One assignment is to evaluate the implications of the changing character of financial markets for the design of the liquidity tools the Federal Reserve has at its disposal when panic-driven runs on banks and other key financial intermediaries and markets threaten financial stability and the economy."

2) "In addition to providing liquidity on an unprecedented scale, we reduced our policy interest rate (the target for the rate on overnight loans between banks) effectively to zero, and then we continued to ease financial conditions and cushion the effect of the financial shock on the economy by making large-scale purchases of several types of securities. My second assignment involves improving our understanding of the effects of those purchases and the associated massive increase in bank reserves."

3) "Number three involves considering whether central banks should use their conventional monetary policy tool--adjusting the level of a short-term interest rate--to try to rein in asset prices that seem to be moving well away from sustainable values, in addition to seeking to achieve the macroeconomic objectives of full employment and price stability."

4) "The fourth and final assignment concerns whether central banks should adjust their inflation targets to reduce the odds of getting into a situation again where the policy interest rate reaches zero."

All four topics are interesting ... Kohn believes that the inflation target should be around 2%, and that the impact on rates from the MBS purchase program "comes mainly from the total amount we purchase relative to the total stock of debt outstanding", not the flow of purchases - suggesting little increase in mortgage rates when the Fed stops buying MBS in a week.

by Calculated Risk on 3/24/2010 04:11:00 PM

1) New Home sales. New Home sales were at a record low in February. The weather might be partially to blame for the February record, but the reality is there are just too many existing home units available - so new home sales and single family housing starts will be under pressure for some time - and also housing related employment.

New home sales will probably get a boost in March and April from the homebuyer tax credit. To qualify, homebuyers must sign a contract by the end of April and close by the end of June. Since new home sales are counted when the contract is signed, any boost will happen in March or April. For existing home sales, the boost will come when the deal closes, so the boost to sales will come in May or June.

2) Modification Programs

BofA announced a principal reduction plan for certain Countrywide borrowers.

CNBC's Diana Olick reports that Treasury might announce a principal reduction program in the next few days: Bank Of America's Mortgage Write Down—Just the Start?

The reason this program is so important though is because we know something is in the works over at Treasury to do something like it. We may even get news of that later this week, according to some of my sources.

The Special Inspector General for TARP criticized HAMP today. The report was critical of the changing goals (no way 3 to 4 million will avoid foreclosure), the performance metrics, the marketing of the program, the low conversion rate to permanent status, and the high risk of re-default. The report notes that Treasury expects between 50% and 66% of temporary modifications will become permanent, and 40% of borrowers in the program will re-default (either while temporary or permanent). Those are horrible numbers.

3) And in other news today:

John Keefe at MarketWatch writes: Durable Goods For February Show A Weak Pulse

Fitch downgraded Portugal (one of the PIIGS): Fitch Downgrades Portugal's Debt

Also from the WSJ: Debt Fears Drop Euro to 10-Month Low

4) And on the Consumer financial protection agency from Jodi Kantor at the NY Times: Behind Consumer Agency Idea, a Fiery Advocate

Ask Elizabeth Warren, scourge of Wall Street bankers, how they treat consumers, and her no-nonsense bob will shake with indignation. She will talk about morality, about fairness, about what she calls their “let them eat cake” attitude towards taxpayers. If she is riled enough, she might even spit out the Warren version of an expletive.

“Dang gummit, somebody has got to stand up on behalf of middle-class families!” she exclaimed in a recent interview in her office here.

by Calculated Risk on 3/24/2010 01:15:00 PM

Here is the BofA plan mentioned last night ... this is for specific loans only (Countrywide subprime, Option ARMs and a few others), and BofA estimates this will apply to about 45,000 borrowers for a total of about $3 billion in principal reduction.

From BofA: Bank of America Introduces Earned Principal Forgiveness Among Enhancements to Its National Homeownership Retention Program

Bank of America announced it will look first at principal forgiveness – ahead of an interest rate reduction – when modifying certain subprime, Pay-Option and prime two-year hybrid mortgages qualifying for its National Homeownership Retention Program (NHRP). Several enhancements are being made to the program, including the introduction of an earned principal forgiveness approach to modifying mortgages that are severely underwater.
...
Bank of America developed and launched the NHRP in 2008, in cooperation with state attorneys general, to provide assistance to Countrywide borrowers who financed their home with certain subprime and Pay-Option adjustable rate mortgages (ARMs). Bank of America removed these from the Countrywide product line upon acquiring Countrywide in July 2008.

These new components of the agreement apply to certain NHRP-eligible loans that also meet the basic qualifications for the government's Home Affordable Modification Program. They include:

• A first look at principal reductions in calculating an affordable payment through an earned principal forgiveness approach to severely underwater loans.
• Principal forgiveness through a reduction of negative-amortization on certain Pay-Option ARMs.
• Conversion of certain Pay-Option ARMs to fully amortizing loans prior to a recast.
• Addition of certain prime two-year hybrid ARMs as eligible for the NHRP mortgage modification programs.
• Inclusion of Countrywide mortgages originated on or before January 1, 2009, as eligible for modifications under the terms of the NHRP.
• A six-month extension of the term of the NHRP program to December 31, 2012.

"The centerpiece of these enhancements is a program of earned principal forgiveness that addresses severely underwater mortgages with some of the highest rates of delinquency – specifically subprime loans, Pay-Option ARMs and prime two-year hybrid ARMs that are 60 days or more delinquent with a principal balance of 120 percent or more," said Barbara Desoer, president of Bank of America Home Loans.

Read more »

by Calculated Risk on 3/24/2010 12:38:00 PM

The following graph shows existing home sales (left axis) and new home sales (right axis) through February. I jokingly refer to this as the "distressing gap".

Click on graph for larger image in new window.

The initial gap was caused by the flood of distressed sales. This kept existing home sales elevated, and depressed new home sales since builders couldn't compete with the low prices of all the foreclosed properties.

The spike in existing home sales last year was due primarily to the first time homebuyer tax credit.

Notice that there was also a bump last year in new home sales from the tax credit.

NOTE: New home sales and existing home sales are reported at different times: new home sales are reported when the contract is signed, and existing home sales are reported when the deal closes. So the bump in new home sales last year happened earlier than the spike in existing home sales.

The same thing will happen over the next few months. Any bump in new home sales from the tax credit will happen in March and April - when the contract is signed. Any bump in existing home sales will probably happen in May and June when escrow closes.

The second graph shows the same information as a ratio - new home sales divided by existing home sales - through February 2010. (In previous posts about this ratio, I graphed existing home sales divided by new home sales - this is the same ratio inverted).

This ratio is near the all time low set last November. In November existing home sales were artificially boosted by the first time home buyer tax credit - but as mentioned above - the bump in new home sales had happened earlier.

Eventually this ratio will return to the historical range of new home sales being around 15% to 20% of existing home sales. However it will probably take a number of years to return to a more normal market.

by Calculated Risk on 3/24/2010 10:00:00 AM

The Census Bureau reports New Home Sales in February were at a seasonally adjusted annual rate (SAAR) of 308 thousand. This is a new record low and a decrease from the revised rate of 315 thousand in January (revised from 309 thousand).

Click on graph for larger image in new window.

The first graph shows monthly new home sales (NSA - Not Seasonally Adjusted).

Note the Red columns for 2010. In February 2010, 24 thousand new homes were sold (NSA).

This is below the previous record low of 29 thousand hit three times; in February 2009, 1982 and 1970.

The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales fell off a cliff, but after increasing slightly, are now 6% below the previous record low in January 2009.

Sales of new single-family houses in February 2010 were at a seasonally adjusted annual rate of 308,000, according to estimates released jointly today ... This is 2.2 percent (±15.3%)* below the revised January rate of 315,000 and is 13.0 percent (±12.2%) below the February 2009 estimate of 354,000.

And another long term graph - this one for New Home Months of Supply.

There were 9.2 months of supply in February. Rising, but still significantly below the all time record of 12.4 months of supply set in January 2009.

The seasonally adjusted estimate of new houses for sale at the end of February was 236,000. This represents a supply of 9.2 months at the current sales rate.

The final graph shows new home inventory.

Note that new home inventory does not include many condos (especially high rise condos), and areas with significant condo construction will have much higher inventory levels.

New home sales are far more important for the economy than existing home sales, and new home sales will remain under pressure until the overhang of excess housing inventory declines much further. Obviously this is another extremely weak report.

by Calculated Risk on 3/24/2010 08:52:00 AM

The MBA reports: Mortgage Refinance Applications Decrease in Latest MBA Weekly Survey

The Market Composite Index, a measure of mortgage loan application volume, decreased 4.2 percent on a seasonally adjusted basis from one week earlier. ...

The Refinance Index decreased 7.1 percent from the previous week and the seasonally adjusted Purchase Index increased 2.7 percent from one week earlier. ...

The refinance share of mortgage activity decreased to 65.0 percent of total applications from 67.3 percent the previous week. This is the lowest refinance share observed in the survey since the week ending October 30, 2009. ...

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.01 percent from 4.91 percent, with points decreasing to 0.76 from 1.30 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

Click on graph for larger image in new window.

This graph shows the MBA Purchase Index and four week moving average since 1990.

There was a slight increase in purchase applications last week, but the 4-week average is still near the levels of 1997 - after falling sharply at the end of last year. This index shows no indication yet of the expected increase in home sales due to the expiration of the home buyer tax credit.

by Calculated Risk on 3/24/2010 05:35:00 AM

From Reuters: BofA to start reducing mortgage principal-sources

Bank of America will ... announce plans to start forgiving mortgage loan principal for troubled homeowners who owe more than 120 percent of their home's value or are battling ever-expanding "negative amortization" loans.

According to a summary of the program obtained by Reuters, Bank of America pledged to offer an "earned principal forgiveness" of up to 30 percent in two stages. The lender will first offer an interest-free forbearance of principal that the homeowner can turn into forgiven principal annually over five years, provided they stay current on their payments.

Apparently under the plan, the mortgage debt will be reduced to 100% of the house's value over 5 years. The details should be released today by BofA.

by Calculated Risk on 3/23/2010 11:59:00 PM

Note: This index is a leading indicator for Commercial Real Estate (CRE) investment. Any reading below 50 indicates contraction.

The WSJ reports that the American Institute of Architects’ Architecture Billings Index increased to 44.8 in February from 42.5 in January.

The ABI press release is not online yet.

Click on graph for larger image in new window.

This graph shows the Architecture Billings Index since 1996. The index has remained below 50, indicating falling demand, since January 2008.

The second graph compares the Architecture Billings Index with the year-over-year change in non-residential structure investment.

Historically, according to the AIA, there is an "approximate nine to twelve month lag time between architecture billings and construction spending" on non-residential construction. This suggests further significant declines in CRE investment through all of 2010, and probably longer.

Note: Nonresidential construction includes commercial and industrial facilities like hotels and office buildings, as well as schools, hospitals and other institutions.

by Calculated Risk on 3/23/2010 08:03:00 PM

From the Mercury News: Gas tax deal comes with goodies for California home buyers and green-tech manufacturers

The deal reached Monday provides $200 million in new tax credits for homebuyers, to be split evenly among those buying a home for the first time and anyone buying a newly constructed home. Anyone qualified who makes a purchase between this May and August 2011 will receive a credit for 5 percent of the home's purchase price, up to $10,000 over three years.

Dumb. Not that there is budget problem in California ...

by Calculated Risk on 3/23/2010 03:43:00 PM

From San Francisco Fed President Janet Yellen: The Outlook for the Economy and Inflation, and the Case for Federal Reserve Independence

Some excerpts on housing (Note: Yellen is likely to be nominated as the next Fed Vice Chairman):

It was housing of course that led the economy down. The great bust wiped out some $7 trillion in home values. In the second half of 2009 though, housing showed signs of stabilizing and I became hopeful that the sector would provide a significant boost to the economy this year. Now the market seems to have stalled. Home prices have been more or less stable since the middle of last year, but new home sales have resumed a downward slide and are at very low levels. Existing home sales spiked towards the end of last year in response to the homebuyer tax credit and have receded markedly since then. The credit expires this spring, removing an important prop. With sales still weak, builders have little incentive to ramp up home construction.

The continued high pace of foreclosures also creates risks to the recovery of the housing sector. Mortgage delinquencies and foreclosures are still rising as a consequence of the plunge in house prices over the past few years combined with high levels of unemployment. Despite the return to growth of the broader economy, we’ve seen no let-up in the pace at which borrowers are falling behind in their loans. Further additions to the already swollen stockpile of vacant homes represent a threat to house prices and new home construction activity.

It’s not always easy to understand the dynamics of the housing sector. Last year, for example, the share of mortgages that was 30 to 89 days past due declined. On the face of it, that looked like a hopeful sign. Unfortunately, when my staff examined the numbers more closely, it turned out that the drop actually represented a worsening of mortgage market conditions. What you want to see is delinquent borrowers becoming current. Instead, what happened was that delinquent mortgages moved in the other direction to an even poorer performance status. Many wound up in foreclosure. All in all, I expect that the share of loans that are seriously delinquent will continue to move higher. I am also concerned that we had a temporary reprieve in new foreclosures as the federal government’s trial modification program got under way. But not all of these modifications will stick, which means that some borrowers in the program could find themselves facing foreclosure again.

At the end of this month, the Fed will complete a large-scale program of purchases of mortgage-backed securities issued by Fannie Mae and Freddie Mac. Lenders sell mortgages to these two agencies, which package them as securities sold to investors. Last year, the Fed began buying these securities as part of a series of extraordinary measures to promote recovery. At the time the program was announced, mortgage spreads over yields on Treasury securities of comparable maturity were very high, reflecting in part the disruptions that had occurred in financial markets. I believe that our program worked to narrow those spreads, bringing mortgage rates down and contributing to the stabilization of the housing market. Financial markets have improved considerably over the last year, and I am hopeful that mortgages will remain highly affordable even after our purchases cease. Any significant run-up in mortgage rates would create risks for a housing recovery.

As Yellen notes, one of the defining characteristics of this housing bust is how few mortgage delinquencies are cured. Of course when a borrower has equity in their home, they can cure the delinquency by selling. And this time many borrowers have negative equity and can't sell.

I think Yellen is a little too optimistic on the overall economy - she is forecasting 3 1/2% GDP growth this year. And on unemployment:

I was heartened when the unemployment rate dropped in January to 9.7 percent from 10 percent the month before. I was further encouraged when the rate remained at 9.7 percent in February, suggesting it was not just a flash in the pan. In the months ahead, we could get a bump in employment from census hiring. But that, of course, would be temporary. Given my moderate growth forecast, I fear that unemployment will stay high for years. The rate should edge down from its current level to about 9 1/4 percent by the end of this year and still be about 8 percent by the end of 2011, a very disappointing prospect.

I think that is a little optimistic too - although the next few months will see a slight decline because of Census hiring (but that will be unwound later in the year).

by Calculated Risk on 3/23/2010 01:23:00 PM

CR Note: The following is from long time reader Shnaps. Shnaps has been working in the mortgage industry in various capacities "since people were extending the antennas on their mobile phones". Shnaps currently serves in a key role related to HAMP at one of the largest non-prime mortgage servicers in the Nation.

Shnaps writes:

One aspect of the Making Home Affordable loan modification program known as ‘HAMP’ is almost always taken for granted in its wide reporting – that the borrowers in fact need ‘help’. Moreover, it is generally taken for granted that those seeking modification under HAMP simply cannot afford their monthly mortgage payment. It is assumed that they have made great sacrifices, assumed they have already cut back drastically on discretionary expenses, assumed that they have already gone over their monthly budgets with a fine-toothed comb to eliminate all but the most necessary expenditures in an effort to keep their home. So prepare to be shocked – shocked! – as I share with you that I have seen first-hand that this assumption is oftentimes greatly, seriously flawed.

Let me begin with a word to the wise for HAMP applicants: unless you believe Snooki is now in charge of approving HAMP applications, it might be a good idea to cut back a bit on some of the creature comforts to which you have become accustomed at least a month before submitting your HAMP modification application.

Allow me to explain. The guidelines for servicers participating in HAMP stipulate that the borrower must submit a “hardship affidavit”. This, ostensibly, is to serve as their sworn testimony that they have been driven into default due to some particular hardship they encountered, and despite making every possible sacrifice, they can no longer “maintain payment on the mortgage and cover basic living expenses at the same time". (see HAMP Directive)

To demonstrate this, applicants are required to submit recent paystubs and bank statements. The statements are to help further corroborate the income they report (lest they forget to include all of their paystubs) and also to demonstrate that their monthly expenses are as described on their application. Which is to say that they have already ‘cut back to the bone’ and STILL are unable to make ends meet.

So how do these look in practice? The very first ‘HAMPlication’ that your correspondent pulled up recently showed a wanton disregard for minimizing spending. On the contrary, it looked like “cutting back” for this applicant does not involve such Draconian cuts as eliminating:

• visits to the tanning salon
• the nail spa
• some kind of gourmet produce market (have you seen the price of arugula?)
• various liquor stores
• A DirecTV bill that must involve some serious premium programming or pay-per-view events (or both?).
• And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.

And that was just in one month! They were seeking to reduce a $1,880 mortgage payment that had just gotten to be a real cramp to their ability to keep a roof over their heads.

I’d like to say this is the exception, but it’s much closer to the norm. Many people who request HAMP modifications submit bank statements that demonstrate little if any “belt-tightening” going on.

Somehow, we now expect the same people who asked for ‘liar’s loans’ to be truthful on when it comes to ‘hardship affidavits’?

by Calculated Risk on 3/23/2010 11:22:00 AM

Earlier the NAR released the existing home sales data for February; here are a couple more graphs ...

Click on graph for larger image in new window.

This graph shows NSA monthly existing home sales for 2005 through 2010 (see Red columns for 2010).

Sales (NSA) in February 2010 were 7.9% higher than in February 2009, and 3.2% lower than in February 2008.

We will probably see an increase in sales in May and June because of the tax credit, however I expect to see existing home sales below last year later this year.

The second graph shows the Year-over-year change in reported existing home inventory.

There was a rapid increase in inventory in the 2nd half of 2005 (that helped me call the peak of the bubble), and the YoY inventory has been decreasing for the last 19 months. However the YoY decline is getting smaller - even with a large reported inventory (and probably more shadow inventory). This is something to watch.

This slow decline in the inventory is especially concerning with 8.6 months of supply in February - well above normal.

by Calculated Risk on 3/23/2010 10:00:00 AM

The NAR reports: February Existing-Home Sales Ease with Mixed Conditions Around the Country

Existing-home, which are finalized transactions that include single-family, townhomes, condominiums and co-ops, slipped 0.6 percent nationally to a seasonally adjusted annual rate of 5.02 million units in February from 5.05 million in January, but are 7.0 percent higher than the 4.69 million-unit pace in February 2009.
...
Total housing inventory at the end of February rose 9.5 percent to 3.59 million existing homes available for sale, which represents an 8.6-month supply at the current sales pace, up from a 7.8-month supply in January. Raw unsold inventory is 5.5 percent below a year ago.

Click on graph for larger image in new window.

This graph shows existing home sales, on a Seasonally Adjusted Annual Rate (SAAR) basis since 1993.

Sales in February 2010 (5.02 million SAAR) were 0.6% lower than last month, and were 7.0% higher than February 2009 (4.69 million SAAR).

Sales surged last November when many first-time homebuyers rushed to beat the initial expiration of the tax credit. There will probably be another increase in May and June this year, although that will be probably be smaller than the November increase. Note: existing home sales are counted at closing, so even though contracts must be signed in April to qualify for the tax credit, buyers have until June 30th to close.

The second graph shows nationwide inventory for existing homes.

According to the NAR, inventory increased to 3.59 million in February from 3.27 million in January. The all time record high was 4.57 million homes for sale in July 2008.

Inventory is not seasonally adjusted and there is a clear seasonal pattern - inventory should increase further in the spring.

The last graph shows the 'months of supply' metric.

Months of supply increased to 8.6 months in February.

A normal market has under 6 months of supply, so this is high - and probably excludes some substantial shadow inventory.

I'll have more later ...

by Calculated Risk on 3/23/2010 08:21:00 AM

From Bloomberg: Treasury’s Geithner Urges End to Fannie, Freddie ‘Ambiguity’

U.S. Treasury Secretary Timothy F. Geithner said the government should end the “ambiguity” over its involvement in mortgage finance companies Fannie Mae and Freddie Mac.

“Private gains can no longer be supported by the umbrella of public protection, capital standards must be higher and excessive risk-taking must be appropriately restrained,” Geithner said in testimony prepared for the House Financial Services Committee that was obtained by Bloomberg News. The hearing is scheduled for today at 10 a.m. in Washington.

Here is Geithner's testimony (ht TD) Some excerpts (note: Embargo was broken by the Financial Services Committee and several web sites):

The Administration has defined a framework of objectives for reform of the mortgage finance system. A reformed housing finance system should deliver stability and efficiency to the housing market, while minimizing the risks and costs borne by the American taxpayer.

Objectives of Reform

In considering reform, the Administration will be guided by the view that a stable and wellfunctioning housing finance market should achieve the following objectives:

Widely available mortgage credit. Mortgage credit should be available and distributed on an efficient basis to a wide range of borrowers, including those with low and moderate incomes, to support the purchase of homes they can afford. This credit should be available even when markets may be under stress, at rates that are not excessively volatile.

Housing affordability. A well-functioning housing market should provide affordable housing options, both ownership and rental, for low- and moderate-income households. The government has a role in promoting the development and occupancy of affordable single- and multi-family residences for these families.

Consumer protection. Consumers should have access to mortgage products that are easily understood, such as the 30-year fixed rate mortgage and conventional variable rate mortgages with straightforward terms and pricing. Effective consumer financial protection should keep unfair, abusive or deceptive practices out of the marketplace and help to ensure that consumers have the information they need about the costs, terms, and conditions of their mortgages.

Financial stability. The housing finance system should distribute the credit and interest rate risk that results from mortgage lending in an efficient and transparent manner that minimizes risk to the broader financial and economic system and does not generate excess volatility. The mortgage finance system should not contribute to systemic risk or overly increase interconnectedness from the failure of any one institution.

The housing finance system could be redesigned in a variety of ways to meet these objectives. However, the Administration believes that any system that achieves these goals should be characterized by:

Alignment of incentives. A well functioning mortgage finance system should align incentives for all actors – issuers, originators, brokers, ratings agencies and insurers – so that mortgages are originated and securitized with the goal of long-term viability rather than short term gains.

Avoidance of privatized gains funded by public losses. If there is government support provided, such as a guarantee, it should earn an appropriate return for taxpayers and ensure that private sector gains and profits do not come at the expense of public losses. Moreover, if government support is provided, the role and risks assumed must be clear and transparent to all market participants and the American people.

Strong regulation. A strong regulatory regime should (i) ensure capital adequacy throughout the mortgage finance chain, (ii) enforce strict underwriting standards and (iii) protect borrowers from unfair, abusive or deceptive practices. Regulators should have the ability and incentive to identify and proactively respond to problems that may develop in the mortgage finance system.

Standardization. Standardization of mortgage products improves transparency and efficiency and should provide a sound basis in a reformed system for securitization that increases liquidity, helps to reduce rates for borrowers and promotes financial stability. The market should also have room for innovations to develop new products which can bring benefits for both lenders and borrowers.

Support for affordable single- and multifamily-housing. Government support for multifamily housing is important and should continue in a future housing finance system to ensure that consumers have access to affordable rental options. The housing finance system must also support affordable and sustainable ownership options.

Diversified investor base and sources of funding. Through securitization and other forms of intermediation, a well functioning mortgage finance system should be able to draw efficiently upon a wide variety of sources of capital and investment both to lower costs and to diversify risk.

Accurate and transparent pricing. If government guarantees are provided, they should be priced appropriately to reflect risks across the instruments guaranteed. If there is crosssubsidization in the housing finance system, care must be exercised to insure that it is transparent and fully consistent with the appropriate pricing of the guarantee and at a minimal cost to the American taxpayer.

Secondary market liquidity. Today, the US housing finance market is one of the most liquid markets in the world, and benefits from certain innovations like the “to be announced” (or TBA) market. This liquidity has provided a variety of benefits to both borrowers and lenders, including lower borrowing costs, the ability to “lock in” a mortgage rate prior to completing the purchase of a home, flexibility in refinancing, the ability to pre-pay a mortgage at the borrowers’ discretion and risk mitigation. This liquidity also further supports the goal of having well diversified sources of mortgage funding.

Clear mandates. Institutions that have government support, charters or mandates should have clear goals and objectives. Affordable housing mandates and specific policy directives should be pursued directly and avoid commingling in general mandates, which are susceptible to distortion.

NOTE: 10 AM ET embargo was broken by several web sites before this was posted.

by Calculated Risk on 3/22/2010 11:56:00 PM

"A sampler of versusplus.com musical econoparodies!" (I've posted most of these over the last couple of years):

by Calculated Risk on 3/22/2010 08:45:00 PM

There will be hearing tomorrow about Fannie and Freddie, but the Obama administration will only "outline broad principles".

From Jim Puzzanghera at the LA Times: Pressure rises to overhaul Fannie Mae, Freddie Mac

[I]n a hearing Tuesday, lawmakers will start pressing the Obama administration for an exit strategy [for Fannie Mae and Freddie Mac] ...

"It's clear that Fannie and Freddie, as they currently exist, should be put out of existence, which means the important question is what combination of entities public and private will replace them," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee.

He has called Treasury Secretary Timothy F. Geithner to testify at the hearing before his committee about how to do that.

And from Nick Timiraos and Michale Crittenden at the WSJ: New Plan to Reshape Mortgage Market

The administration will outline broad principles for the future of the mortgage market at the hearing, including stronger consumer protections and explicit guarantees for any government backstop of mortgages.

"The housing-finance system cannot continue to operate as it has in the past," Mr. Geithner says in prepared testimony. The administration won't issue a detailed overhaul proposal until later this year.

Clearly we can't go back to a structure that privatizes profits and socializes losses.