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Short-Term Debt Is Tenuous And Can Disappear At The Moment It Is Needed Most

A report from Bloomberg. “Financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market. Behind the concern aired recently at the Financial Stability Oversight Council headed by Secretary Mnuchin: the rapid growth of so-called shadow banks in the origination and servicing of home loans, especially riskier ones.”

“‘There is a real weakness here,’ said University of California, Berkeley professor Nancy Wallace, who co-wrote a 2018 paper titled ‘Liquidity Crises in the Mortgage Market’ with a fellow academic and three Fed economists. ‘Many of these firms are financially fragile.'”

“That’s because they’re dependent on short-term bank credit lines that could be pulled at times of financial stress. The worry is that could end up hurting the housing market and the economy as the financiers are forced to cut back or curtail their mortgage business.”

“As conventional banks pulled back from the mortgage market due to limited profit opportunities and increased regulation after the financial crisis, the independent mortgage companies flooded in. They currently originate around 70% of agency-supported residential home mortgages and about 90% of the riskier loans backed by the Government National Mortgage Association, or Ginnie Mae. Six of the top ten originators of home mortgages in 2018 were independent mortgage lenders, with Quicken Loans Inc. as No. 1.”

“Unlike conventional banks, the independent mortgage companies are generally monoline operations, dependent on one business to make money. Of the dozen or so evaluated by Moody’s none have an investment-grade rating on their debt. They’re not regulated by the Fed or the Federal Deposit Insurance Corp. And they lack the deposit base and access to emergency Fed financing that commercial banks enjoy.”

“In originating loans, the nonbanks depend on credit lines to fund the mortgage until it is sold. They also rely on short-term financing to cover their obligations as loan servicers when borrowers fall behind on their payments.”

“‘Our greatest focus right now is on liquidity,’ said Chuck Cross, a senior vice president at the Conference of State Bank Supervisors, one of the groups that presented at the FSOC. ‘That short-term debt is tenuous and can disappear at the moment it is needed most.'”

“The credit lines are subject to cancellation or revision if the mortgage companies violate any of the contracts’ covenants, including being profitable in at least one of the two most recent quarters. Many were in breach of their covenants last year when a slump in mortgage refinancing helped push them into the red, said Warren Kornfeld, a senior vice president at Moody’s Investors Service.”

“But they were able to obtain waivers from their lenders and maintain the lines, given the overall strength of the economy. That won’t be so easy though if the outlook is more uncertain, Kornfeld said.”

“Kornfeld doubted that conventional banks would rush to fill the void if the nondepository lenders exited the mortgage market. ‘The banks will be cautious about stepping back in,’ he said. ‘That will have an overall ripple effect on the economy.'”

From Crain’s New York Business. “While sales activity continues to slow down, the month of September saw more price drops across neighborhoods compared to the month prior, according to a recent report by RealtyHop. Manhattan saw the highest number of price drops with five of its neighborhoods making the list of neighborhoods with the highest number of price drops. Turtle Bay-East Midtown came in at the top with a total of 245 price drops, an increase of 19% compared to last month when it had 206 price drops.”

“Rounding up the top five neighborhoods with the highest number of price drops are Upper East Side-Carnegie Hill with 225 price drops, Hudson Yards-Chelsea-Flatiron-Union Square with 161, the Upper West Side with 150, and the West Village with 140.”

“Although Manhattan was dominant among the neighborhoods with the highest number of price drops, Queens, the Bronx, and Brooklyn saw the highest median percentage price drops. The Queensbridge-Ravenswood-Long Island City areas saw a median price drop of 21.1%, while Morrisania-Melrose in the Bronx saw a median price drop of 17.9%.”

“Three neighborhoods in Brooklyn rounded up the neighborhoods with the highest median percentage price drops including Starrett City at 11.1%, Rugby-Remsen Village at 8.4%, and Brownsville at 8%.”

The Los Angeles Times in California. “One of the most pedigreed estates on the L.A. market just got a tad cheaper. ‘American Idol’ creator Simon Fuller has trimmed the price of his lavish Bel-Air mansion to $32.5 million, down $2.5 million from his original asking price.”

This Post Has 54 Comments
  1. ‘They currently originate around 70% of agency-supported residential home mortgages and about 90% of the riskier loans backed by the Government National Mortgage Association, or Ginnie Mae…Unlike conventional banks, the independent mortgage companies are generally monoline operations, dependent on one business to make money. Of the dozen or so evaluated by Moody’s none have an investment-grade rating on their debt’

    So in other words this whole thing is hanging by a string. Long time readers here knew this years ago.

    1. Combine this with what we read yesterday:

      ‘The subprime mortgage-backed bond may be dead in America a decade after it helped trigger the global financial crisis, but a security with some of the same high-risk characteristics is starting to take off. It’s called the non-qualified mortgage — basically a loan granted to borrowers whose checkered financial record made them ineligible for conventional mortgages.’

      ‘This surge in issuance of non-QM bonds, as they’re called, comes just as some initial indications of delinquency rates on the loans are starting to emerge. The short answer: They’re high. About 3% to 5% in some bonds’

      http://housingbubble.blog/?p=2575

      1. May 25, 2018

        “In his corner of American finance, where hard selling meets hard luck, Angelo Christian is a star. Each time Christian sells a home loan, the company he works for, American Financial Network Inc., takes as much as 5 percent. Many of Christian’s customers have no savings, poor credit, or low income—sometimes all three. Some are like Joseph Taylor, a corrections officer who saw Christian’s roadside billboard touting zero-down mortgages. Taylor had recently filed for bankruptcy because of his $25,000 in credit card debt. But he just bought his first home for $120,000 with a zero-down loan from Christian’s company. Monthly debt payments now eat up half his take-home pay. ‘If he can help me, he can help anyone,’ Taylor says. ‘My credit history was just horrible.’”

        “Christian can do this kind of deal because he is, in effect, making the loan on behalf of the federal government through its most important affordable housing program. It’s a sweet deal: He gets his nearly risk-free commission. Taylor puts no money down. If things go south, the government ultimately bears the risk. Many borrowers ‘are living paycheck to paycheck and, if they lose their jobs, they go into default immediately,’ says John Burns, a housing consultant.”

        http://thehousingbubbleblog.com/?p=10443

        1. “If he can help me, he can help anyone, Taylor says.”

          Wow. These nimrods actually think they are being helped.

      2. October 30, 2019

        “Historically, Fannie and Freddie have competed for market share with the FHA, and in recent years the two enterprises have offered more mortgages with low down payments and to borrowers with high debt-to-income ratios, similar to the types of loans the FHA was designed to offer to lower- and moderate-income Americans. Separately, Calabria once again raised the alarm regarding the risk that Fannie and Freddie could fail again. Currently, the dollar amount in loans that the two enterprises own or guarantee is roughly 500 times larger than the amount they have in capital reserves.”

        “‘We’re not forecasting a downturn, but if we do have a downturn in the next couple years, they will fail,’ Calabria said. ‘They will become insolvent, and they will run out of capital.’”

        http://housingbubble.blog/?p=2557

        Starting to see the picture?

        1. I’m confident they are actually already insolvent. 500:1

          Death, divorce and job loss beats those odds any day.

          Defaults will increase just because the “market” isn’t going up. And it’s going down. Got the picture.

  2. “Six of the top ten originators of home mortgages in 2018 were independent mortgage lenders, with Quicken Loans Inc. as No. 1.”

    But it doesnt matter – Quicken and its founder are politically connected – and say they are rebuilding downtown Detroit – so nobody cares

    1. “Quicken and its founder are politically connected – and say they are rebuilding downtown Detroit – so nobody cares”

      (Note: Quicken is owned by Dan Gilbert. Keep this in mind as you read on.)

      On Dan Gilbert’s ever-growing rap sheet, and corporate welfare | News Hits
      https://www.metrotimes.com/news-hits/archives/2017/08/30/on-dan-gilberts-ever-growing-rap-sheet-and-corporate-welfare

      (snip)

      Meanwhile, back in Detroit, there’s been a different reaction to Gilbert’s use of public funds for his projects.

      Last month, metro Detroiters ooh’ed and ahh’ed at the conceptual drawings for Gilbert’s planned downtown skyscraper on the Hudson site, which will be the city’s tallest structure when it’s complete sometime around 2020.

      Detroit Free Press staff writer and Dan Gilbert lapdog John Gallagher billed it as an “architectural icon,” and a “stunningly ambitious” and “eye-popping” project. Other slightly less giddy outlets noted that the 52-story building will transform the city’s skyline, and that it would be the most the ambitious downtown high-rise since the Renaissance Center’s 1977 construction.

      Of course, Gilbert gets the credit, but taxpayers could end up paying for most of it.

      That’s because Michigan’s lawmakers passed a group of laws informally called the “Gilbert Bills” that are specifically designed to provide corporate welfare to Gilbert as he builds the new skyscraper. It’s a slightly complicated package, but it ultimately means taxpayers could end up covering most or all of the 734-foot, $775 million project’s cost. That’s despite the fact that Gilbert is worth an estimated $6.2 billion. (By comparison, the Renaissance Center cost $500 million in the mid-1970s. It was privately funded.)

      Also last month, Wayne County announced its intention to give downtown land it owns to Gilbert in exchange for a new jail that he’ll build elsewhere in the city. He plans to use the downtown land for a soccer stadium, though the financing and benefit to city residents aren’t totally clear.

      Aside from the hype, Gilbert was also in the news for other reasons at the end of July — Quicken lost another lawsuit. This time a federal judge in West Virginia dinged Quicken with an $11 million fine for providing estimated property values to appraisers that ultimately put buyers underwater, but benefited Quicken.

      While the company — now the nation’s third-largest mortgage lender — initially escaped blame for the local mortgage foreclosure crisis, and its formidable PR machine spins a rather flowery picture of itself, an ongoing succession of lawsuits and investigations contradicts their self-assessment.

      At this point in 2017, piecing together the lawsuits and investigations that are playing out since 2011 provides a much different picture of Quicken Loans. On one hand there’s Dan Gilbert, Detroit’s superhero. On the other, there’s Dan Gilbert, a supervillain who courts, judges, the Justice Department, and other outlets have accused of systematically preying on Quicken Loans’ poorest customers in the years leading up to the recession.

      Which brings us to Quicken Loans’ rap sheet.

      (end of the snip but not the end of the story. access the link for more info)

      1. Also take a look at how the Ilitch family is hoarding prime downtown land in order to put their business interests ahead of rebuilding Detroit.

  3. “Financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market.

    It won’t be economically damaging to the Fed’s oligarch patrons. These Fed-engineered boom-bust cycles are the most efficacious way to facilitate the wholesale transfer of wealth from the middle class to the .1% who will be snapping up their distressed assets for a song.

  4. One of the most pedigreed estates on the L.A. market just got a tad cheaper. ‘American Idol’ creator Simon Fuller has trimmed the price of his lavish Bel-Air mansion to $32.5 million, down $2.5 million from his original asking price.”

    Hate to break it to you, greedhead, but you’re going to have to slash a whole lot more than a ‘tad’ if you expect to offload your shack.

  5. This was posted today on another blog.

    “Having anything to do with any type of real estate transaction starting even long before 2007 wil guarantee it will be leading to many felonies. The entire industry, possibly with a few exceptions, is a total and complete fraud. But everybody knew that at least by 2007 and not only did things continue on criminal as had happened prior to 2007 it escalated in organized criminal activities that were allegedly made legal (not).

    Believe me when every detail of the processes are documented and the criminalities of each piece are listed there will be few if any that don’t have massive criminal consequences pending for anything any were ever involved with relating to real estate.

  6. “But they were able to obtain waivers from their lenders and maintain the lines, given the overall strength of the economy. That won’t be so easy though if the outlook is more uncertain, Kornfeld said.”

    Luckily the outlook has never been better!

    Opinion
    Trump economy remains strong, much to Democrats’ dismay
    By Charles Gasparino
    November 4, 2019 | 4:48pm | Updated
    President Donald Trump
    President Donald Trump Getty Images

    If the stock market is worried about the President Trump getting impeached it has a funny way of showing it: The Dow, the S&P and Nasdaq set new records Monday, buoyed by strong corporate earnings, a possible trade deal and the wide-spread belief among sophisticated investors that the US economy will continue to chug along handsomely.

    Despite what you hear from doomsayers like the newly minted Dem front-runner Elizabeth Warren, the rising Trump economy is raising all boats, not just the fat cats on Wall Street. At least that’s what the people who have money in the game are saying, and their word counts a lot more than any leftist politician.

    1. The ‘Affordable Housing’ Fraud
      By Dr. Thomas Sowell
      September 29, 2015 5 min

      Nowhere has there been so much hand-wringing over a lack of “affordable housing,” as among politicians and others in coastal California. And nobody has done more to make housing unaffordable than those same politicians and their supporters.

      A recent survey showed that the average monthly rent for a one-bedroom apartment in San Francisco was just over $3,500. Some people are paying $1,800 a month just to rent a bunk bed in a San Francisco apartment.

      It is not just in San Francisco that putting a roof over your head can take a big chunk out of your pay check. The whole Bay Area is like that. Thirty miles away, Palo Alto home prices are similarly unbelievable.

      1. “Affordable housing” is a wealthy liberal trope, and a tacit acknowledgement that most housing in their community is overpriced, and needs to stay that way to protect theIr investment.

        Here’s “yours“; keep your unwashed paws off of “ours”.

  7. Ya gotta love an optimist!

    Founder of world’s biggest hedge fund warns of ‘big squeeze’ with investors ‘buying dreams rather than earnings’
    By Mark DeCambre
    Published: Nov 5, 2019 2:18 p.m. ET
    Dalio says we’re headed to a ‘warlike environment’
    Bloomberg
    Ray Dalio doesn’t sound so bullish on the market.

    Ray Dalio, the founder of hedge-fund behemoth Bridgewater Associates, says he believes investors haven’t necessarily been investing on a firm footing and that it’s a condition that will eventually have to be rectified.

    The prominent investor, during a particularly downbeat CNBC interview on Tuesday, suggested investors are flush with cash because of monetary policy but haven’t been discerning about investment strategies. They are “buying dreams rather than earnings and stocks,” he said.

    His comments come as WeWork parent We Co. canceled a prominent public sale of stock amid a fervor over its business model and valuation.

    At the same time, results for the third quarter have come in better than feared but have otherwise been weak on absolute terms.

    Dalio, whose fund counts some $150 billion in assets under management, painted a particularly gloomy picture of financial markets that have managed to register all-time highs after a fitful past several months.

      1. “This was a great post.”

        +1 Indeed. Thanks!

        It’s like a juggling act. The student loans, housing and healthcare crises (balls) are already in the air. Add another ball, pension funding, and the fed will be desperately busy trying not to drop all of them.

        1. student loans, housing and healthcare …pension

          Consider the possibility that the Fed doesn’t care about any of these things per se, only one thing and that is the health of the banks that own the Fed.

    1. Oh dear. FBs who were banking on a steady stream of paying “guests” to help them cover the mortgages on shacks they couldn’t otherwise afford are well and truly screwed. Gosh, I sure hope they find alternative sources of income so those “investments” don’t go into foreclosure.

      When city officials acted to reign in the Airbnb bonanza, short-term renters pushed back, saying putting their homes up on the site helped them defray high housing costs by bringing in paying guests.

      The regulations limit how often landlords can rent properties if they don’t live on site. They also forbid short-term rentals in buildings with more than four units if the owner isn’t present and prohibit renters from serving as hosts.

  8. Reference: The 1963 movie “It’s a Mad, Mad, Mad, Mad World“.

    https://tinyurl.com/y3dxm5km
    The World Has Gone Mad and the System Is Broken
    Published on November 5, 2019
    Ray Dalio | Co-Chief Investment Officer & Co-
    LinkedIn

    “Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish.

    “At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen.”

    “This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.”

  9. Tucson will not become sanctuary city after Prop 205 fails to pass

    http://www.wildcat.arizona.edu/article/2019/11/n-prop-205

    Tucson is the most socialist/red bunch of voters in Arizona, maybe a little less than Flagstaff but a real city compared to Flagstaff. It came down to this IMO: a symbolic Orange Man Bad thing versus real money out of your pocket and basically encouraging a lot of scum-bags to move there. Especially if you have a criminal record as you couldn’t be extradited.

    1. That’s great to hear! Sanctuary city status usurps the constitutional, Federal mandate for immigration and border control and is BS. Test all politicos by oath of office and fire all those who would violate it. There are many. Send them to North Korea for some life lessons.

    2. just like 2016, the election will be a binary choice. Trump won in 2016 because the other choice was Hillary. In 2020, it will be Trump against most likely against an open borders pay for their medical care Democrat. If the ideology does not sell in Tucson it is going to be difficult to sell to a a collection of states which have an electoral college majority. Obama won re-election because he ran against Romney not because he was wildly popular particularly among people who actually vote. Trump has been at or above Obama among likely voters during similar periods of his presidency according to Rasmussen. Of course, both presidents were below 50 percent. Historically, unpopular but when an 0-8 team goes against an 0-8 team, one of them has to win.

      1. It’s not the unknown that will bite you, it’s what you’re so sure of that might not be so.

        Alot can happen in a year.

      2. Border politics are a different animal. I’ve lived within 30 miles of Mexico for 8 years at various times. Border patrol/ICE is a way of life. Without it the cartels would take over. It’s very real. And as I’ve mentioned many times, Mexican Americans are not likely to favor illegal immigration.

        1. Without it the cartels would take over

          And seeing Mexico descend into near anarchy as the cartels thumb their noses at the Mexican government and even the army should give Americans along the border a good chill down their spines (and even those not near the border too).

          The proposition, which was officially titled Tucson Families Free and Together Ordinance

          Gotta love the names they give these props. There was a prop in Denver that would have allowed the homeless to camp in parks and on sidewalks. It was called “The Right To Survive”. The prop went down in flames, about 80% voted no.

          1. ‘The ballot measure was soundly rejected by 71.4 percent of voters in Tucson, according to unofficial election results released by the city, with all precincts reporting. Some remaining ballots will be counted in the coming days. The measure was widely opposed by local leaders including the Pima County Sheriff, Tucson Police officials and Tucson’s largely Democratic city council and mayor.’

            https://www.kgun9.com/news/political/elections-local/tucson-voters-soundly-reject-sanctuary-city-initiative

      3. when an 0-8 team goes against an 0-8 team, one of them has to win

        Nice…I’ll have to use that one.

  10. A report from Bloomberg. “Financial regulators led by the Treasury’s Steven Mnuchin and the Federal Reserve’s Jerome Powell have been put on notice about the risk of an economically damaging cash crunch in the $11 trillion home mortgage market.“

    “Financial regulators” = oxymoron

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