March 19, 2010 - Mike Robinson
This last summer of 2009 saw the U.S. real estate industry breath a sigh of relief. There was actually some money available for buying houses. At least there was FHA money. In Colorado, that meant a government backed mortgage up to $417,000 was available to a homebuyer. In addition, the Obama Administration put a cherry on top of the FHA cake by including an $8,000 tax credit for 1st time homebuyers. Things weren't rocketing up in the Real Estate Market but it looked like the hemorrhaging had stopped.
Now we are finishing up the first year of the Age of Obama and unemployment continues to rise. What has happened to housing? The U.S. Treasury has propped up the market by buying mortgage backed securities (MBS) but the signs of exhaustion are everywhere.
The Federal Housing Administration, which propped up the collapsing housing market last year, acknowledged this month that it has drained its cash reserves to dangerously low levels, heightening concerns that it might need a taxpayer bailout. its capital reserve ratio has fallen to 0.53%. That cushion is far below the 2% of its liabilities that Congress mandates, itself a 50 to 1 leverage ratio, and down from 3% last autumn.
The two semiprivate parties, Freddie Mac and Fannie Mae, that actually buy up the mortgages to make the system run are in trouble. Since Freddie and Fannie are traded on the market, you can see their health by looking at their stock price. Freddie Mac shares, which peaked at $73.70 in December 2004, closed November 12th at $1.23 in New York Stock Exchange composite trading while Fannie Mae closed at $1.04.
So, is there any mortgage money out there or not?
You can find the answer if you dig a little. In this case, we can look at the two best sources of how many homes are being sold. The National Board of Realtors and the National Association of Homebuilders keep the most respected records on existing home sales and new construction home sales respectively.
If you line those sales figures up with the amount of mortgage backed securities that are sold, you can see a fiscal train wreck in our future. How many homes are sold?
The most recent month that has data available is September, 2009. The Securities Industry & Financial Markets Association (SIFMA) keeps score of issuance and sales of Mortgage Backed Securities (MBS). In September, Americans bought 472,000 existing homes and 34,065 new construction homes. How much did we pay for these new digs? The grand total is about $110 billion. This would be fine as long as investors buys this $110 billion of mortgages so the cycle can repeat itself next month.
And the U.S. Treasury has complied. They and a few investors bought up a little over $132 billion in mortgage backed securities. Sounds good right?
The problem is the trend line. When the Obama Administration took over in January 2009, world finance was in a shaky mess. George Bush gave his successor, Barack Obama, a present. Half of the TARP money Bush pushed through Congress was unspent. It was a nice gift to the...