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The Real Culprits Are The Ones Doing The Inflating

A weekend topic starting with The Intercept. “If you were reading the news back in 2008, then you probably remember how residential mortgage backed securities fueled by subprime mortgages tanked the global economy. Now John Flynn, a veteran of the mortgage securities market, says it’s happening all over again — this time in the commercial real estate market. Flynn joins Ryan Grim and The Intercept’s Jon Schwarz to discuss.”

“RG: So John Flynn, as you start digging deeper into the underlying documents, behind the CMBS loans, you start to find something that looked a little bit similar to what John Schwarz just described. When did you start to realize that you were onto something fairly huge? JF: It was in late 2017, basically. I started out: ‘OK, I’m just gonna do 10 of these and I’ll see where it goes.’ And all ten of them were inflated. I’m like, ‘What?’ And so I kept going from there, basically.”

“RG: Right. And so you found that often these numbers were different. How often was it that the error was inflating the amount of income? JF: It was inflated over 90 percent, maybe over 95 percent of the time. And I never went back and measured it because this is very laborious work.”

“RG: So what’s the function of that? What’s the benefit to the lender? JF: So the liar loans in RMBS, the credit driver for RMBS is the borrower’s credit, the borrower’s income. And the credit driver for CMBS is cash flow. Cash flow is king, right?”

“And so if you inflate the cash flow, you — of course — get a higher income that increases what they call the debt service coverage ratio, which is the NOI — the net operating income — and there’s thresholds under regulatory guidelines that loans have to meet to be sold into a pool.”

“And so the benefit is, one, that they get the loan sold, that is an otherwise unsalable loan; benefit number two is it can load on more debt, because with that NOI increase, it also increases the value. Number three, is they show a less volatile cash-flow profile of the underlying asset; less volatility is a higher credit quality, right?”

“RG: Right. So there’s an extraordinary amount of benefit to the lender to be able to inflate the cash flow that their borrower claimed to have.”

“JF: Well, look, we’re in a low-interest-rate environment right now. Right? So the hunt for yield is on. Any money out there needs to be placed to earn a yield — any kind of yield. And CMBS still offers a reasonable yield as compared to treasuries. And so the demand will still be there, and if there’s no accountability in this low-interest-rate environment, all they need to do is inflate numbers again. So to get these troubled loans refinanced, people say, ‘Oh, how are they going to get refinanced?’ Well they could just create value.”

“RG: Same way they just did. JF: Yeah. Why wouldn’t you?…Let me interject there: everyone points at the credit rating agencies as the culprit, but they’re easy targets because they can’t fight back, right? They don’t suffer any damage or blowback from the credit rating agencies because they’re not the banks, they won’t suffer in deal flow, etc. But the real culprits are the ones doing the inflating.”

From Twin Cities Business. “A new analysis of commercial real estate loans backed by multifamily properties found ‘areas of concern starting to appear in major U.S. markets.’ That’s according to New York-based Trepp, which tracks data on commercial mortgage-backed securities (CMBS). The apartment building boom has been running uninterrupted for several years across the U.S. Now Trepp says that it is seeing signs that the market is ‘fraying’ in some cities.”

“Trepp analyzed data for loans backing more than 22,000 multifamily properties. Out of that pool, Trepp found that 4.8 percent of those apartment properties had occupancy rates below 80 percent for 2020. Many larger metros in the U.S. are in worse shape. The five markets with the highest percentage of loans backed by multifamily properties with occupancy under 80 percent are: Boston: 28%, Santa Monica, Calif.: 22.8%, Tallahassee, Fla.: 15.4%, San Francisco: 14.6%, Seattle: 11%.”

“Other large metros with a notable percentage of properties seeing occupancy levels below 80 percent include Kansas City, Memphis, Cleveland, Indianapolis and Washington D.C. Trepp found 7.4 percent of properties in New York reporting occupancy below 80 percent.”

From Bisnow Boston in Massachusetts. “Boston’s multifamily market is showing significant signs of stress, and it is leading the nation in an ominous metric that shows that stress could soon turn into distress. More than 28% of Boston apartment properties with CMBS loans sit at less than 80% occupied, a new Trepp report shows, well above the national average of 4.8%. The vacancy, fueled by a flight to the suburbs and the lack of the city’s typically large student population, has driven rents to drop precipitously in Boston.”

The San Francisco Examiner in California. “Generous dollops of doom and gloom from the local commercial real estate world this week, courtesy of Cushman & Wakefield’s Marketbeat for the first quarter of 2021. It would take the most sublime shade of rose-colored glasses to put a positive spin on these numbers — 18.7 percent vacancy rate in San Francisco (it was at 6 percent in the first quarter of 2020); 7.87 million square feet of direct vacancy and 7.99 million of subleased space. That’s almost 16 million square feet of ghost town, representing more than a billion dollars of lost revenue at Q1’s average asking price of $73.76 per square foot.”

“For now we’re faced with a conundrum: What do we do with all of this empty office space?”

From Bisnow Houston in Texas. “Moody Law Group founder John Moody Jr., who specializes in commercial real estate law, told Bisnow that lease restructuring, foreclosures, deed restrictions, bankruptcies, reopening challenges and permitting are among the most pressing hurdles for his clients navigating a world where the pandemic’s hold is easing. ‘I’m doing a ton of people buying out of their office leases, people downsizing other office leases, tenant defaults. I’ve negotiated settlements on a bunch of leases that are in default. There’s still a lot of lease issues out there,’ Moody said.”

“Moody has worked with clients to craft demand letters and place loans in default, but those situations have not been able to move forward. He noted that once foreclosures are permitted to resume, the huge backlog could cause some temporary challenges in managing the volume. ‘We have posted for foreclosure a number of times during this shutdown for clients. We just haven’t actually been able to foreclose. It’s just been a lot of these kinds of threatening letters and forms saying we’re going to foreclose, but we really haven’t been able to,’ Moody said.”

The New York Post. “The rental market remains in the pits, according to the first-quarter market report from listings portal StreetEasy, which found that city rents continue their free fall to record lows. In Manhattan, for instance, median rents dipped to a brand-new low of $2,700 per month, marking the borough’s cheapest housing price recorded on StreetEasy since the site began tallying in 2010. That figure marks a significant year-over-year drop.”

“In Brooklyn, median rents slipped 10 percent year-over-year to $2,390 — its lowest level since 2011. Queens saw its prices slip to $1,999, the first time they’ve slid below $2,000 in eight years. That borough’s rents are down 10.5 percent year-over-year.”

“Midtown saw the largest decline in median rents to $2,895. That’s down 14.8 percent from the same quarter last year. A close second: the Upper East Side, which slipped 13.9 percent year-over-year to $2,400. In prime North Brooklyn, home to trendy Williamsburg and Greenpoint, renters can find a $2,500 median price for a one-bedroom unit — the area’s lowest in more than 10 years. And in northwest Queens, the borough’s priciest submarket — which includes Long Island City, Astoria and Sunnyside — rents slid 9 percent year-over-year to a median of $1,800.”

“In an effort to lure tenants in, city landlords are throwing in some serious extras. In Manhattan, more than 44 percent of landlords offered a concession of at least one month free rent on a 12-month lease — 22 percentage points higher year-over-year and the highest sum that StreetEasy has ever recorded. In Brooklyn and Queens, 25.4 percent and 26.6 percent of landlords, respectively, also gave concessions — a record high share for both boroughs.”

The Real Deal on New York. “Buyers are getting a big break on Ron Perelman’s properties and loans backed by them. Citigroup has sold loans secured by three of Perelman’s Upper East Side properties at a discount of approximately 40 percent, Bloomberg News reported. The loans, scooped up by an undisclosed party for $115 million, were in default with a balance of $193 million, according to the outlet. They mature in 2023.”

“Citi’s move comes as two of the three buildings securing the loans were sold this month — at least one far below what Perelman paid for it, according to documents filed Thursday. The offices of Perelman’s investment firm MacAndrews & Forbes at 35 East 62nd Street sold for $25 million, and the company’s adjacent building at 39 East 62nd Street went for $10 million. Perelman’s firm bought the latter building in 2004 for $14.5 million.”

From Yield Pro. “The global pandemic didn’t stop developers from planning new apartments projects—often in smaller, quickly growing metro areas. The boom in apartment construction that began around 2015 barely slowed down in 2020. They took out a total of 416,200 building permits in the pandemic year 2020. It was the fifth year in a row that developers took out permits to build more than 400,000 apartments, continuing a boom that began in 2015. The total of new multifamily permits in 2020 was down from a record of 481,300 the year before—but not by much.”

“‘Developers are encouraged by much of what they see,’ says Greg Willett, chief economist for RealPage, Inc., based in Richardson, Texas. Lenders seem happy to provide the money. ‘There’s lots of capital available for development,’ says Willett. ‘Investors are eager to deploy it.'”

“Developers have been more able to find suburban sites where they can build garden apartments since the pandemic. Even in the most expensive metro areas, like New York, developers are beginning to find more opportunities to build in suburban areas. ‘There are going to be towns that are going to be open to this,’ says Richard Katzenstein, national director of Marcus & Millichap Capital Corporation. ‘This is all about taxes.'”

This Post Has 59 Comments
  1. ‘It was in late 2017, basically. I started out: ‘OK, I’m just gonna do 10 of these and I’ll see where it goes.’ And all ten of them were inflated. I’m like, ‘What?’…And so you found that often these numbers were different. How often was it that the error was inflating the amount of income? JF: It was inflated over 90 percent, maybe over 95 percent of the time’

    I expect the MSM to avoid this like the plague. Why? Because everybody is in on it. It’s too big to be otherwise. It’s already one huge sh$t sandwich. I highly recommend you read this article in full. Note the part where big institutional lenders “rig” court outcomes. And the moral hazard stinks to high heaven.

    ‘So to get these troubled loans refinanced, people say, ‘Oh, how are they going to get refinanced?’ Well they could just create value’

    ‘RG: Same way they just did. JF: Yeah. Why wouldn’t you?’

    1. BTW recall the one and done report out of the WSJ on the University of Texas report on CRE bonds. A year or so ago. They found over-valuation of up to 40%. So this wasn’t really about the real estate. This was the usual shenanigans of wall street/mega finance firms dummying up a lot of worthless paper and selling it off. The real estate was just the vehicle.

      So the WSJ, somehow felt obligated to report on these massive frauds. But said not another peep. And nobody else I’m aware of touched it.

      Here’s a saying I heard that applies to the REIC media: you can ignore reality. But you can’t ignore the consequences of ignoring reality.

      1. It’s almost impossible to have a bubble without fraud. During the bubble stage, everyone remains in denial about the fraud because it’s profitable. When the bubble collapses, the fraud gets exposed and everyone says “ there’s no way we could have known about the fraud”. There are few consequences for the bubble masters because too many people participated. Who is going to indict themselves? It is as it has always been.

      2. The great bubble paradox: you can’t have a bubble until there is an overwhelming consensus of experts telling you it doesn’t exist.

    2. “Wall Street bankers packaged and sold garbage loans that eventually blew up the global economy, ruining millions of lives in the process and fueling the rise of right-wing authoritarian populism around the world.”

      Interesting theory I hadn’t heard previously.

      “Other than Teresa Giudice, star of the Bravo TV show “The Real Housewives of New Jersey,” and her husband Joe, basically nobody went to prison for any of it.”

      That’s pathetic. Too big to jail?

  2. ‘In an effort to lure tenants in, city landlords are throwing in some serious extras. In Manhattan, more than 44 percent of landlords offered a concession of at least one month free rent on a 12-month lease — 22 percentage points higher year-over-year and the highest sum that StreetEasy has ever recorded. In Brooklyn and Queens, 25.4 percent and 26.6 percent of landlords, respectively, also gave concessions — a record high share for both boroughs’

    As large as the rent drops are, it’s is a farce. The effective rents have to be down 50% or more. Factor in that 50% of Manhattan vacancies are”warehoused”. Widespread fraudulent behavior, right out in the open and no secret. NYC real estate is apparently a cesspool of corruption.

  3. Long time readers will remember we touch on the S&L debacle from time to time. But in Texas, every single major bank went down too. And it was commercial real estate that did it, not oil loans. Day after day, the reports in the Dallas Morning News dripped out the ongoing disaster of inflated loans, fraud, defaults that were baked in the cake. It’s the same now. Fraud on this scale will blow up. And I’d say all these people involved knew it and know it today.

    ‘Lenders seem happy to provide the money. ‘There’s lots of capital available for development’

    QE is ultimately deflationary. We don’t need one more airbox, but they continue at near record levels cuz the money is there.

    1. “‘Lenders seem happy to provide the money. ‘There’s lots of capital available for development’”

      Yeah, well why not be happy to provide money for lending? The fees are really good and the money that is put at risk belongs to somebody else.

      If you want a different sort of behavior then alter the incentives.

      “Because everybody is in on it. It’s too big to be otherwise. It’s already one huge sh$t sandwich.”

      And there it is.

    2. But now we’re told an omnipotent FED has an endless printing press and that could never happen again. So, “it’s different this time.”

    3. There’s a lot of talk about Fedcoins and CBDCs, central bank digital currencies. The Fed would create a digital wallet on each consumer’s smartphone, and then print salaries and UBI directly into that wallet for consumers to spend. All purchases would be stored on a blockchain, bitcoin-style. No more printing money to banks and hoping they lend it into circulation. No more begging Congress to pass stimmies. No more relying on the clunky IRS to deliver munnies. No more germy cash. There’s speculation that this is what the Great Reset is about. There’s more speculation that Fedcoin is the sole reason that central banks allow Bitcoin to flourish, solely to accustom the public to purchases which are digital, tracked, and possibly programmable (never mind that pesky 4th Amendment). Once the Great Reset is accomplished, Fedcoin established, and we become China, they’ll bring the hammer down on rebel crypto for good.

      Right now, price inflation is happening at the first stop for the money train, at the bank level: stonks, derivatives, CRE, corporate debt, Treasuries. Some price inflation is happening at the second stop, at the big-ticket consumer level: cars, houses. Once the Fedcoin is deployed, that inflation will shift to consumer goods. Stock up on socks and undies.

      1. This is absolute crackpot stuff – just giving people money when nothing is produced nor is any income earned? Not even the FED in their echo chamber would believe that’s sustainable. History is littered with the remains of currencies, and digital or not that is failed model before it even gets off the ground.

        1. They know it isn’t sustainable. That’s the point. Because it’s us they plan on not sustaining.

          1. BS. There’s no way they plan on destroying the dollar then destroying a digital currency after that. These clowns would be murdered by the score.

          2. They aren’t destroying ALL currencies. They are going to destroy the dollar (electronic and cash), establish Fedcoin which is a digital currency, and THEN destroy Bitcoin. End result: All Fedcoin. Digitally tracked, and with an expiration date, so you have to spend it or it turns into a pumpkin. China is leading the way.

            And who would murder the leaders? Big banks? They’ve known this is coming years in advance and they are preparing, plus I bet they get to run some of it. The proles and SJWs? The proles will be pleased because they’re getting UBI. Maybe BIPOCS will get a reparations BOGO special, and the SJWs will love it that. The resulting hyperinflation later on? Who cares. Klaus and Nancy and Uncle Joe are all at or near 80. They’ll be dead by then. Gates and his billion buddies? They are a bit younger but they all have $20M bunkers in Patagonia or New Zealand. They’ll just retreat to their super yachts with their fava beans and a nice Chianti.

      2. This business that the technology that makes electronic money work is a driver of its value seems like a bunch of hooey. For now, governments are collectively permitting what would be called counterfeiting if not for the shiny object of the blockchain, or what not. When governments decide to not tolerate electronic counterfeit money any longer, everyone will be quite surprised by how quickly the cryptocurrency bubble ends with a loud pop.

      3. “The Fed would create a digital wallet on each consumer’s smartphone, and then print salaries and UBI directly into that wallet for consumers to spend. All purchases would be stored on a blockchain, bitcoin-style.”

        Sounds like Big Brother’s financial oversight is soon to come, including discrete wealth redistribution through race-based UBI.

  4. 1) From Twin Cities Business. “A new analysis of commercial real estate loans backed by multifamily properties found ‘areas of concern starting to appear in major U.S. markets.’ That’s according to New York-based Trepp, which tracks data on commercial mortgage-backed securities (CMBS). The apartment building boom has been running uninterrupted for several years across the U.S. Now Trepp says that it is seeing signs that the market is ‘fraying’ in some cities.”

    Trepp analyzed data for loans backing more than 22,000 multifamily properties. Out of that pool, Trepp found that 4.8 percent of those apartment properties had occupancy rates below 80 percent for 2020. Many larger metros in the U.S. are in worse shape. The five markets with the highest percentage of loans backed by multifamily properties with occupancy under 80 percent are: Boston: 28%, Santa Monica, Calif.: 22.8%, Tallahassee, Fla.: 15.4%, San Francisco: 14.6%, Seattle: 11%.

    Other large metros with a notable percentage of properties seeing occupancy levels below 80 percent include Kansas City, Memphis, Cleveland, Indianapolis and Washington D.C. Trepp found 7.4 percent of properties in New York reporting occupancy below 80 percent.

    and

    2) From Yield Pro. “The global pandemic didn’t stop developers from planning new apartments projects—often in smaller, quickly growing metro areas. The boom in apartment construction that began around 2015 barely slowed down in 2020. They took out a total of 416,200 building permits in the pandemic year 2020. It was the fifth year in a row that developers took out permits to build more than 400,000 apartments, continuing a boom that began in 2015. The total of new multifamily permits in 2020 was down from a record of 481,300 the year before—but not by much.

    “‘Developers are encouraged by much of what they see,’ says Greg Willett, chief economist for RealPage, Inc., based in Richardson, Texas. Lenders seem happy to provide the money. ‘There’s lots of capital available for development,’ says Willett. ‘Investors are eager to deploy it.‘”

    – The cognitive dissonance between these two articles is palpable. Developers have overbuilt CRE, and are continuing to overbuild. All of this flies in the face of high vacancy rates. What’s motivating them to build? Cheap credit and shady loans perhaps? Who’s going to be the bagholder though?

    1. “Who’s going to be the bagholder though?”

      Answer: Not them.

      Incentives. The incentives are skewed.

    2. What’s motivating them to build?

      The credit to do it. Powellbucks sloshing around everywhere, looking for a place to go die.

  5. ‘This is all about taxes.’”

    One of the most honest statements I can recall reading. Always about the money.

  6. Dumb question of the day: Isn’t the activity described here an example of criminal fraud, happening in plain sight?

    “And so if you inflate the cash flow, you — of course — get a higher income that increases what they call the debt service coverage ratio, which is the NOI — the net operating income — and there’s thresholds under regulatory guidelines that loans have to meet to be sold into a pool.”

    1. Nah. You can rip off billions doing things like that, and it’s just a slap on the wrist, maybe a little hush money paid to the SEC or similar. But if you steal an item on the street level, you might get your head busted in and some jail time.

        1. Politicians know of these great inequities, but they don’t do a damn thing about it. They might throw a crumb here and there, like in CA not prosecuting theft up to $950 or whatever, but that does nothing to address the disease.

          The real solution is to prosecute everybody to the fullest extent of the law, from the smallest to the largest. And the laws need more teeth. I’m in favor of setting amounts where white collar criminals face life in prison when fraud and theft eclipses a certain amount – say a million bucks.

          The loss of the rule of law is what has brought us to where we are, perhaps even more than the FED’s grossly irresponsible money printing. As Ben has highlighted, this entire system is built upon fraud.

  7. “For now we’re faced with a conundrum: What do we do with all of this empty office space?”

    How difficult would it be to replace the empty office space with luxury condos?

    1. Riots again in Portland last night. One resident who tried filming them had rocks thrown through his windows.

      “They’re not sending their best”

    1. Today is Saturday, April 24th and Joe Biden is not the legitimately elected president of the United States.

      The 2020 election was stolen.

  8. I’m trying to understand the factors which have led to the purported inventory declines (transactions are in record territory, indicating a lot of stock but very fast transactions) over the past several years, and the increased sales and prices.

    I’ve concluded: it’s the Fed Funds rate that drives the market. It takes several continuous quarters of rises to cool the market. A sharp quick drop is like dropping a match onto tinder – it sets it aflame. A narrative develops around the market (“fundamentals are strong”, “cheap to borrow” etc) which sustains it. Because housing is a debt-driven market, make the debt cheaper and easier to get means a more robust market. Inject money into the financial sector and they will begin speculating in real estate. Combine the two and boom. There are housing runups around the world – it’s been a global phenomenon. The common theme is low interest rates.

    Below are some data sources to help consider this issue:

    1) New home sales since 1965: https://fred.stlouisfed.org/series/HSN1F
    2) Existing home sales since 1980:
    https://tradingeconomics.com/united-states/existing-home-sales
    http://www.mortgagenewsdaily.com/data/home-sales-existing.aspx
    3) Active inventory:
    • Active listing count (note: you may have to click on 1Yr, then click on 5 or 10 year – seems like a bug): https://fred.stlouisfed.org/series/ACTLISCOUUS
    • Months of inventory view: https://fred.stlouisfed.org/series/MSACSR
    4) Historic mortgage rates chart:
    • (check out the 5 year view and all) http://www.freddiemac.com/pmms/
    • (suggest 5 year view) https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate-chart
    5) Case Shiller index: https://fred.stlouisfed.org/series/CSUSHPINSA
    6) FHFA Home Price Index: http://www.mortgagenewsdaily.com/12232020_fhfa_hpi.asp
    7) Fed Funds Rate 62 year chart: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
    8) 10 Year Treasury chart for 54 years back: https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
    9) Median sales price of houses in US going back to 1965: https://fred.stlouisfed.org/series/MSPUS
    10) Social Security Admin median and average individual income: https://www.ssa.gov/oact/cola/central.html

    [Interesting note: searching for these on Bing gives better results than Google. Varies from search to search. DuckDuckGo tracks Bing results closely]

    For the 2008 bubble:
    * Right as the tech bubble started deflating in 2000, Greenspan dropped the Fed Funds rate to 1%.
    * House prices ran up in tandem.
    * Starting 2004 they raised the Fed Funds Rate for 2 years continuously, up to about July 2006.
    * House sales started dropping precipitously as of September 2005.
    * They say 30 year mortgages track 10 year Treasury interest rates, but they look to track the fed funds rate as well.
    * Home sales peaked in September 2005 and dropped until 2009.
    * Fed dropped the Fed funds rate to essentially zero in late 2008. Finally, it sparked the updraft in both prices and sales in 2010. That was the turnaround. So, note it’s not mechanically JUST interest rates, but interest rates plus a narrative – market psychology.

    For this current Covid runup:
    * They again collapsed the Fed funds rate to essentially zero in March 2020.
    * Home sales dropped till May till when they boomed.
    * House prices did dip in 2019, after the Fed Funds rate went up incrementally for three years continuously. The Fed was more tentative in increase rate and total increase than the previous round. But then they dropped it again as the housing market slowed. The movement is important but also the absolute level is important as well. Also at the end of 2019 was the repo market disruption.
    * The market psychology here (bored people with free time and money looking for excitement) in tandem with historically low mortgage rates created a conflagration.

    So, summary: it’s the Fed Funds Rate, which influences a lot of other interest rates through various and sundry channels, it seems to me. As long as that’s zero, this boom will run (and market psychology cooperates). Raising the FFR consistently for a few years can slow the market. Also, market psychology seems to be self-sustaining. This boom has been running for 11 years and now prices have gone vertical/parabolic. Will side effects ever suppress the fire?

    But… once the housing market turns, with the purported “debt deflation” theory, the Fed quickly loses their nerve and drop the rates again, sparking another run-up.

    Covid, had both a throttle and a brake, so it might be a wash: the throttle was the people sitting at home all day, looking for some excitement, and buying a house seems like a great idea, what with the cratering interest rates. The brake was, do you really want to expose yourself to the public, do a physical move in the midst of covid? I suspect there was a net acceleration. But 2.6% mortgage rates are what I think are the real runup.

    The demand for houses is always strong. Population is always increasing ( https://www.google.com/search?q=us+population ). Conventional wisdom about houses is like a heavily laden container ship – it takes a long time to respond. Two years of aggressive FFR hikes turned the market in 2006; About two years of hiking the FFR, from Nov 2016 to Dec 2018 dropped sales and slightly dropped prices.

    It comes down to, “Do people think they’re improving their standard of living, or that of their progeny?” Some amount of activity has been pulled forward by the low rates.

    As far as active inventory being low goes, it’s like a bucket of water with a hole in the bottom. Increase the size of the hole (the number of transactions) and the water level (inventory) drops. And vice versa, to increase it.

    What’s interesting to consider is market psychology. If market psychology every changed while the printer is running full blast (buying MBS, pegging interest rates at the lower bounds)… that could get be an interesting development. OTOH, fifty years of conditioning that housing only ever goes up (FOMO, population always increasing, no more land, etc) is a heavy counterbalance.

    As always, caveat emptor and YMMV.

    1. Even if interest rates were zero, principal still must be paid. The bills will come due soon for all the loans currently in forbearance. FOMO can turn into fear of getting stucko “FOGS” almost overnight.

      1. “Even if interest rates were zero, principal still must be paid.”

        Or rolled over. And over. And over.

        “The bills will come due soon for all the loans currently in forbearance.”

        Unless this forbearance thingy gets extended. And extended. And extended.

        “FOMO can turn into fear of getting stucko ‘FOGS’ almost overnight.”

        Until then, party on.

        1. “Unless this forbearance thingy gets extended. And extended. And extended.”

          And if I understand correctly, forbearance only affects the suspension of payments, not the amounts of priciple and interest that will eventually need to be repaid. In fact, unless I am missing something, the interest due compounds exponentially during the forbearance period. So a longer period of forbearance will result in much larger amounts of interest owed to Mr Banker. And since home values are going up like a rocket, homeowners will be good for the money owed once the forbearance period eventually ends. And the payments can potentially be spread out over the homeowner’s entire future lifetime, if necessary, to keep them to manageably low levels.

          All told, these extended forbearance measures look highly favorable for Mr Banker.

          1. I seriously doubt most homeowners understand how much interest buildup occurs while they are not making payments. I highly recommend reading this LDS Church talk for anyone who wants to begin to understand:

            Understanding Interest on Debt
            By Scott Nash

            “Borrowed money is had only at a price, and that price can be burdensome.”

          2. “…All told, these extended forbearance measures look highly favorable for Mr. Banker…”

            A effortless way to turn that 30 year mortgage effectively into a 100 year mortgage.

            Mr. Banker could reap exponential extra millions.

          3. “Living in the perpetual present,…”

            It’s interesting to me, and somewhat ironic, that as financial gamblers become ever more narrowly fixated on their day trading gains, the standard interest rate discount valuation model of finance suggestz that the value of payments made in the distant future are becoming increasingly valuable compared to near-term payment flows.

            I don’t claim to know what this portends, nor exactly what Alan Greenspan meant when he said, way back in 2005, “Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

            But I can say for certain that at this point, we are in one of history’s most protracted periods of low risk premiums on record, and the aftermath will not be much fun.

            This leads me to believe policymakers will do their best to keep the punch bowl cull of alcohol in perpetuity. However, Stein’s Law may prevent this from working out very well in the long run: “If something cannot go on forever, it will stop.”

    2. The Fed Funds Rate is a short term borrowing rate at which banks make overnight loans. For decades, the Fed has tamped it down as needed to help resuscitate the economy from recessions, with no attendant housing inventory collapse. In fact, a normal part of recovery at the end of a traditional recession was an increase in housing inventory, due to foreclosed homes that went on the market during the aftermath.

      However, so far as I am aware, the aftermath of the 2007-2012 housing collapse is the first time since the Fed began operations in 1913 that they deliberately implemented housing price support as a policy tool, as part of iQuantitative Easing measures. This involved the onset of large scale purchases of Mortgage Backed Securities, which directly suppresses mortgage lending rates. Long-term Treasury yield suppression also helps drive down mortgage lending rates, since these are a substitute asset for mortgage bonds.

      Lower mortgage rates enable the purchase of a more expensive house on the same share of income, and the abolition of traditional limits on what share of income can be applied to a mortgage amplifies the effect (see thread above). Other extraordinary factors in play are pandemic forbearance measures, which enable borrowers to continue living in their houses without making mortgage payments, and the effects of the Fed’s price support and other government housing interventions to create a kind of dog whistle for institutional investors to pile into U.S. housing to a historically high degree, in order to capture a share of the subsidized price gains. All of these factors, plus the incentive when prices are rapidly rising for homeowners to hang on to their homes and enjoy a six figure annual income supplement, help explain the incredible housing inventory shrinkage.

      So in short, it’s longterm lending rates, suppressed to historic lows throughout the Fed’s recent protracted period of extraordinary intervention, which is a major contributor to low inventories. The low Fed Funds Rate is a red herring.

    3. I did notice something interesting in recent Fed Funds Rate dynamics, which is that the highest levels reached since July 2008 were in summer 2019. After July 2019 the Fed Funds Rate started dropping back towards zero, long before the pandemic ever appeared on the radar screen.

      If anyone has a good explanation for why this nascent effort by the Fed to take away the punchbowl died in the arse, please share!

      1. That and the restarting of QE plus the flooding of liquidity by the Treasury (PPP, direct payments, enhanced unemployment, etc.) in 2020 and 2021 makes it seem that there are some rumblings of collapse deep within the bowels of the banking system. The virus was the phony justification for the above.

      2. If anyone has a good explanation for why this nascent effort by the Fed to take away the punchbowl died in the arse, please share!

        Two factors: The repo market started cracking, with overnight rates going to 10 percent, in late summer: https://www.reuters.com/article/us-usa-fed-repo-tools-explainer/explainer-the-fed-has-a-repo-problem-whats-that-idUSKBN1W30EJ

        The second was that Trump was hugely opposed to higher interest rates, stating that lower or even negative interest rates would let the economy take off “like a rocket ship.” In fact, today’s new Fed policy model, where they’re actually going to wait for “significant” inflation instead of proactively taking action, is doubtless influenced by that episode: https://www.barrons.com/articles/the-fed-will-wait-thats-a-positive-for-stocks-and-a-departure-from-the-past-51616022872 (“Don’t fire until you see the whites of their eyes” appears to be the new command from the Federal Reserve.”)

        The Fed is a tool created by the government and Wall Street. Yellen was not piping the tune Dimon and Trump were dancing to, quite the opposite. Some politicians like to maintain the image of Fed independence, but Trump didn’t really care.

  9. Is yer portfolio positioned well for the next stonk crater event that nobody can see coming? Lolz!

    1. The Financial Times
      Opinion The Long View
      Risk strategies to adopt when markets turn mad
      As froth and speculation builds, investors should prepare for shocks
      Michael Mackenzie
      Hometown deli in Paulsboro, New Jersey
      Hometown International, the owner of a humble deli in Paulsboro, New Jersey, recently topped a $100m share market valuation
      Michael Mackenzie yesterday

      It is not hard to spot signs of the froth and speculation in current markets. Every week seems to throw up cases that challenge any precept of rational investing.

      One latest example is dogecoin, a cryptocurrency branded with the image of a Shiba Inu dog, that started as a joke in 2013. At times championed by Elon Musk, dogecoin rallied sharply this week after its supporters encouraged buying of the currency to mark a day celebrating cannabis on Tuesday. Dogecoin slipped later, reducing its overall market value from intra-week peaks above $50bn to $28bn. But it is still up nearly 5,000 per cent since the start of the year.

      Elsewhere, another example to emerge has been the stunning rise in Hometown International, the owner of a humble deli in Paulsboro, New Jersey, that recently topped a $100m share market valuation. The deli had $21,772 in sales in 2019 and only $13,976 in 2020 when it was closed due to Covid-19 from March to September. As hedge fund manager David Einhorn remarked in a letter to his investors, “the pastrami must be amazing”.

      All this might be entertaining. But as Einhorn also pointed out, small investors who are drawn into “these situations are likely to be harmed eventually”.

      It is also indicative of a lottery ticket approach to investing by many retail investors, buying in the hope of others buying. That, of course, is clear-cut evidence of the top of a market cycle. The question for investors with a greater sense of risk management is what to do now.

      Understanding and assessing risk is a crucial aspect of successful long-term investing. Academic studies show that investors feel a loss more intensely than a gain. Yet risk management is often underplayed.

      That is certainly the case in the world of asset management, where the acknowledgment of risk often ranks below the goal of generating returns that can maintain client flows and fund the future liabilities of pensions and other long-term liabilities.

      FactSet this week examined the market rout of March 2020 via a survey of 101 asset managers, insurers and pension plans. The survey identified “a lack of early warning signs within risk analytics as well as a lack of collaboration between risk and those involved in investment decisions”.

      This resulted in fewer than half of risk management strategies performing well during the pandemic among the firms surveyed. Nearly half of respondents reported “significant losses”, with 8 per cent experiencing losses of more than a quarter.

      1. “dogecoin rallied sharply this week after its supporters encouraged buying of the currency to mark a day celebrating cannabis on Tuesday”

        That sounds like a winner.

        I bought some more BRKB this week. They don’t pay dividends but they invest in companies that produce actual stuff.

        1. “Dogecoin slipped later, reducing its overall market value from intra-week peaks above $50bn to $28bn. But it is still up nearly 5,000 per cent since the start of the year.”

          Let’s see if I understand this logic:
          It’s value has dropped by nearly half from the level of a couple of weeks ago. But that somehow doesn’t matter, since it went up by a completely insane 5000 percent over the previous three months.

          Sounds to me like the kind of nonsense financial journalists are prone to spew in order to explain away a collapsing bubble.

    1. The Financial Times
      Chinese economy
      China tightens credit conditions in bid to balance growth and debt
      Policymakers seek to shore up patchy economic recovery while avoiding the risks of overheating
      Workers balance on scaffolding at a construction site in Beijing. The property industry has helped fuel China’s economic recovery but regulators are concerned about the risk of a credit bubble © AFP via Getty Images
      Thomas Hale and Hudson Lockett in Hong Kong and Joshua Oliver in London 7 hours ago

      Credit growth in China is slowing gradually as policymakers seek to navigate the world’s most prominent recovery from the pandemic without fuelling unsustainable indebtedness.

      China this week kept its benchmark lending rate unchanged for the 12th month in a row, but other indicators show that Beijing, which exercises greater control over its state-dominated banking system than most major economies, is using other policies in a bid to dampen down the risk of overheating in its unbalanced, industry-heavy recovery.

      Total social financing, the country’s main gauge of credit growth which measures lending across the domestic financial system, rose by 12 per cent year-on-year in March, its slowest pace since April last year, according to official data released this month.

      Mike Riddell, a lead fund manager at Allianz Global Investors, warned that China’s credit cycle is “the main global growth dynamic to watch” because it had “driven a lot of global reflation” so far.

      Any further tightening would drag on global growth as it recovers from the pandemic, he said.

      “Already China’s been the first major economy to tighten policy,” said Julian Evans-Pritchard, senior China economist at Capital Economics.

      The slowdown in credit growth over the rest of the year will be driven by policymakers’ deleveraging initiatives — the most significant one being the deleveraging in the property sector
      — Michelle Lam, Société Générale</

    2. “Will Jessica discover Chester’s affair? Will Benson discover Chester’s affair? Will Benson care?”

      “These questions—and many others—will be answered in the next episode of…Soap.”

  10. The core risk is that market psychology turns while the money printing taps are wide open (implemented by purchases of government debt, MBS and pegging interest rates low). What then? More of the same? Then what? Eventual currency collapse?

    What if monetary policy – this “expert redistribution” of purchasing power towards government, Wall Street, debtors and the top 10% of the population – does not actually address the root causes of recessions?

    The PTB keep talking about “secular stagnation” (aging population, less people required to create value due to technology) being the root cause of the economic slowdown since Great Financial Debacle of 2008, rather than excessive debt being the root cause. It could be both, or it could be the debt, or yet something else.

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