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A liquidity crisis in housing is on the way. Non-banks are at the center of the storm.

The Brookings Institute says a Liquidity Crises in the Mortgage Market is on the way.

This is in guest post format. What follows are key snips from a 68-page Brookings PDF.

This article isn’t very long. My comments follow.

Abstract

Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate.

Nonbank Stress

There is now considerable stress on Ginnie Mae operations from their nonbank counterparties:

“. . .Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex.

…click on the above link to read the rest of the article…

Housing Collapse Coming Right Up

March 8, 2018

Housing Collapse Coming Right Up

Mortgage rates are high and rising. Refinancing opportunities are nonexistent; home affordability has collapsed.

The latest Black Knight Mortgage Monitor is worth a very close look.

Here’s what the report says about the feature chart.

Recent rate jumps coupled with climbing home prices have increased the cost to purchase the median home by $67/month (+6 percent) over the past six weeks.
Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.
It currently takes 23 percent of the median income to purchase the median home, the highest share since 2009.
However, overall affordability remains better than long-term historical averages, even taking the recent rate jump into consideration. Purchasing the median home requires one percent less of the median income than 1995-1999, three percent less than 2000-2003 (before the sharp run-up in home prices) and two percent below those combined benchmarks (1995- 2003).
Average incomes are more than 20 percent higher today than in 2006 (according to the Census Bureau) and interest rates 2.3 percent lower. As such, affordability remains much better than at the pre-recession peak, even though today’s home prices have surpassed 2006 levels.
Assuming all else remains equal, to return to 2006 affordability levels, interest rates would have to climb north of 8.0 percent or the median home price increase to $420K.

Statistical Nonsense

Black Knight is correct on points 1-3. Statistically, it is correct on points 3-6. However …

Regarding point 5: It’s not average incomes that matter, it’s median incomes.

And real median incomes have declined in seven out of the last 11 years.

Regarding points 4 and 6: Those who want a home and can afford a home have a home. The rest struggle because incomes have not kept up with home prices.

Notions of affordability are statistical nonsense. Black Knight does mention some of these issues in relation to other charts.

…click on the above link to read the rest of the article…

Home Prices Sink, Sales Plunge in Toronto

March 7, 2018

Home Prices Sink, Sales Plunge in Toronto

Homeowners who bought a year ago are down C$110,000 on average.

Home sales in the Greater Toronto Area, Canada’s largest housing market, plunged 35% in February compared to a year ago, to 5,175 homes. The plunge in volume was spread across all types of homes. Even the previously white-hot condo sector froze over:

Detached houses -41.2%
Semi-detached houses -28.7%
Townhouses -26.8%
Condos -30.8%.

New listings of homes for sale rose 7% year-over-year to 10,520, according to the report by the Toronto Real Estate Board (TREB). The total number of active listings of homes for sale – which includes the new listings and the listings from prior months that hadn’t sold – skyrocketed 147% year-over-year to 13,362 homes.

At the current sales rate, total listings signify a supply of 2.5 months, which indicates that the housing market isn’t exactly drowning in listings, but the heat has burned out.

This is confirmed by the average days on the market before the home is sold or the listing is pulled: at 25 days, it was still relatively low, but it had nearly doubled from 13 days in February a year ago when the market was approaching its April apogee.

The plunge in sales volume, which has been going on for months, and the surge in listings signify that the market is in the process of changing direction. Housing markets move very slowly, over years, and not minutes. But prices are now following the decline in volume.

The average price for the Greater Toronto Area (GTA) plunged 12.4% overall to C$767,818. This represents a drop of about C$110,000 in the average home price over the 12-month period.

It split up this way:

City of Toronto: -6.1% to C$806,494.
Rest of the GTA without Toronto: -16.1% to C$743,196.

…click on the above link to read the rest of the article…

Housing Collapse Coming Right Up

March 5, 2018

Housing Collapse Coming Right Up

Mortgage rates are high and rising. Refinancing opportunities are nonexistent; home affordability has collapsed.

The latest Black Knight Mortgage Monitor is worth a very close look.

Here’s what the report says about the feature chart.

Recent rate jumps coupled with climbing home prices have increased the cost to purchase the median home by $67/month (+6 percent) over the past six weeks.
Overall, it costs $1,141 in monthly principal and interest to purchase the median home using a 30-year fixed mortgage with 20 percent down, the largest monthly payment required since late 2008.
It currently takes 23 percent of the median income to purchase the median home, the highest share since 2009.
However, overall affordability remains better than long-term historical averages, even taking the recent rate jump into consideration. Purchasing the median home requires one percent less of the median income than 1995-1999, three percent less than 2000-2003 (before the sharp run-up in home prices) and two percent below those combined benchmarks (1995- 2003).
Average incomes are more than 20 percent higher today than in 2006 (according to the Census Bureau) and interest rates 2.3 percent lower. As such, affordability remains much better than at the pre-recession peak, even though today’s home prices have surpassed 2006 levels.
Assuming all else remains equal, to return to 2006 affordability levels, interest rates would have to climb north of 8.0 percent or the median home price increase to $420K.

Statistical Nonsense

Black Knight is correct on points 1-3. Statistically, it is correct on points 3-6. However …

Regarding point 5: It’s not average incomes that matter, it’s median incomes.

And real median incomes have declined in seven out of the last 11 years.

Regarding points 4 and 6: Those who want a home and can afford a home have a home. The rest struggle because incomes have not kept up with home prices.

…click on the above link to read the rest of the article…

The Pricking of the Canadian Real Estate Bubble?

February 28, 2018

THE PRICKING OF THE CANADIAN REAL ESTATE BUBBLE?

First of all, sorry for the lack of posts lately. Long story, but rest assured, I am back on track and the old ‘tourist regular postings have resumed.

Next up, today I will write about Canadian real estate. I know, many of you find that about as exciting as watching Winter Olympic curling, but give me a chance – after all, we Canadians have a way to make even curling entertaining.

The Canadian real estate bubble

As most everyone knows, over the past decade, Canada has experienced a massive real estate boom.

And for the past half dozen years, we have had to endure all the proclamations from hedge fund managers about the coming great Canadian housing market crash. Although there has also been some Canadian skeptics, the majority of these doomsdayers have been American managers who, after experiencing their own real estate crisis, can only imagine the next “big short” occurring in Canada.

These managers often simply took the US playbook and applied it to Canada, never considering that the US situation might be different. Nor did they factor in the possibility that Central Bank reaction functions might have changed since the Great Financial Crisis.

Don’t mistake me for some sort of unapologetic delusional Canadian housing bull. I think prices are nuts. But what I think is even more insane is the amount of balance sheet expansion from global Central Banks. We must always remember – the Canadian real estate bears are fighting against the authority that has the power to dictate the quantity of the asset in which we price all these other assets in.

…click on the above link to read the rest of the article…

The Fed Targets Stock Prices – Here’s Why

February 18, 2018

The Fed Targets Stock Prices – Here’s Why

The week before the Dow/SPX quickly plunged 10%, the Fed had reduced its SOMA account (the SOMA account is its “QE” account) by $21 billion. Just as quickly as the stock market dropped, it has sharply recovered more than half of its losses from the previous week. As it turns out, the Fed added $11 billion back to its SOMA account. That’s an $11 billion injection of cash directly into the banking system. Clearly the Fed’s actions were a large factor in the 10% plunge and the subsequent bounce.

The Federal Reserve is targeting stock prices with it’s monetary policy because, if it did not, the financial system would collapse led by collapsing pension funds and the housing market. The pension collapse alone would run into the trillions of dollars.

I have a good friend/colleague who works at big public pension fund. He did a “stress test” study with the data available to him on all big public pensions. He concluded that, based on the current stated amount of underfunding at every big pension fund, if the Dow/SPX declined 10% or more over a sustained period of time – where “sustained period” is defined as 3-4 month – every public pension fund in the country would collapse.

You’ll note in the graphic above that the three 10% drops in the Dow since August 2015 were followed with sharp, “V” recoveries. Each one encompassed 10% drawdowns which were remarkably brief. The latest 10% plunge has been met with an equally forceful recovery, with the 10% decline allowed to persist for less than three trading days.

Craig Hemke – aka “Turd Ferguson” – invited me to discuss the the massive financial pressures building in the U.S. financial and economic system. It’s 2007 before the de facto financial system collapse on steroids. The factors discussed explain why the Fed will not let the stock market sustain a meaningful sell-off – visit TF Metals for the podcast link.

Canadian Existing Home Sales Crash In January

February 15, 2018

Canadian Existing Home Sales Crash In January

After five straight months of acceleration, January saw Canadian existing home sales crash 14.5% – the biggest drop on record…

Home prices rose 2,3% over the past 12 months, but it appears a sudden close-eye on Chinese buyers has hit the market hard as Toronto home sales crashed a stunning 27% from December (prices down 4.4% YoY) and Vancouver sales down 10.5% MoM (prices up 18.1% YoY).

Canadian existing home sales are down 2.4% YoY.

Must be the weather, right?

This comes less than a week after horrific jobs data struck Canada – thanks to minimum wage-hikes.

The Canadian job market has never lost more part-time jobs – ever – than in January…

As a reminder, The Bank of Canada hiked ‘dovishly’ in January…

The BOC also noted that “while the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.”

We suspect that hike-trajectory may slow further.

A Warning Knell From the Housing Market–Inciting a Riot

February 7, 2018

A WARNING KNELL FROM THE HOUSING MARKET – INCITING A RIOT?

Global residential real estate prices continue to rise but momentum is slowing
Prices in Russia continue to fall but Australian house prices look set to follow
After a decade of QE, real estate will be more sensitive to interest rate increases

As anyone who owns a house will tell you, all property markets are, ‘local.’ Location is key. Nonetheless, when looking for indicators of a change in sentiment with regard to asset prices in general, residential real estate lends support to equity bull markets. Whilst it usually follows the performance of the stock market, this time it may be a harbinger of austerity to come.

The most expensive real estate is to be found in areas of limited supply; as Mark Twain once quipped, when asked what asset one should invest in, he replied, ‘Buy land, they’re not making it anymore.’ Mega cities are a good example of this phenomenon. They are a sign of progress. As Ian Stewart of Deloittes put it in this week’s Monday Briefing – How distance survived the communication revolution:-

In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased.

Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job.

…click on the above link to read the rest of the article…

“This Isn’t a Drill” Mortgage Rates Hit Highest Level Since May 2014

January 30, 2018

“This Isn’t a Drill” Mortgage Rates Hit Highest Level Since May 2014

A housing bust may be just around the corner. Rates have climbed to a level last seen in May of 2014.

Mortgage News Daily reports Mortgage Rates Surge to Highest Levels in More Than 3 Years.

The chart does not quite show what MND headline says but the difference is a just a few basis points. I suspect rates inched lower just after the article came out.

For the past few weeks, rates made several successive runs up to the highest levels in more than 9 months. It was really only the spring of 2017 that stood in the way of rates being the highest since early 2014. After Friday marked another “highest in 9 months” day, it would only have taken a moderate movement to break into the “3+ year” territory. The move ended up being even bigger.

From a week and a half ago, most borrowers are now looking at another eighth of a percentage point higher in rate. In total, rates are up the better part of half a point since December 15th. This marks the only time rates have risen this much without having been at long term lows in the past year. For example, late 2010, mid-2013, mid-2015, and late 2016 all saw sharper increases in rates overall, but each of those moves happened only 1-3 months after a long term rate low.

Not a Drill

So far this month, MBS have stunningly dropped over 200 bps, which easily translates into a .5% or more increase in rates. I’ve been shouting “lock early” for quite a while, and this is precisely why, This isn’t a drill, or a momentary rate upturn. It’s likely the end of a decade+ long bull bond market. LOCK EARLY. -Ted Rood, Senior Originator

Housing Bust Coming

Drill or not, if rising rates stick, they are bound to have a negative impact on home buying.

…click on the above link to read the rest of the article…

Rate Squeeze in Vancouver & Toronto Housing Bubbles

January 23, 2018

Rate Squeeze in Vancouver & Toronto Housing Bubbles

Variable-rate mortgages, the HELOC phenomenon, and new stress tests meet higher rates.

The Bank of Canada raised interest rates another 25 basis points last week. It was the third time in the past six months. Rates have more than doubled in that time, going from 0.50% to 1.25%. This hike was baked into the economic data, and now it’s getting baked into the debt loads of Canadian households.

Following the announcement, Canadian banks hiked their prime lending rateby an equivalent 25 basis points. The prime lending rate is the annual interest rate Canada’s major banks use to set interest rates on variable-rate loans, lines of credit, variable-rate mortgages, and HELOCs (Home Equity Lines of credit).

This means nearly instantly higher interest payments for borrowers carrying variable-rate mortgages, HELOCs, and lines of credit.

This is critically important, considering the context of the current situation. Interest rates have been at historically low emergency levels since the Financial Crisis. This has allowed households to absorb elevated house prices and a record amount of debt. Each rate hike reduces the ability to service that debt.

Given the current size of the mortgages, for Vancouver households, a 1% rate increase in their variable mortgage rate would require an additional 9.2% of their income to make the payment, according to Better Dwelling, and for households in Toronto, it would require an additional 8.3% of their household income. In Montreal, it would require an additional 3.2% of their household income:

Further, the newly required stress tests for variable-rate mortgages require that applicants qualify at the minimum specified rate of the stress test, which just jumped from 4.99% to 5.14%, or at the actual rate they’re borrowing at PLUS 2%, whichever is greater.

…click on the above link to read the rest of the article…

Stephen Poloz Right To Be Worried

December 16, 2017

Stephen Poloz Right To Be Worried

Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites yesterday at the prestigious Canadian Club.

However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data.

Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.”

But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind.

The Poloz Bubble

Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness.

Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels.

Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Polozwith the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election.

Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months.

Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes.

More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians.

…click on the above link to read the rest of the article…

Swedish Housing Bubble Pops As Stockholm Apartment Prices Crash Most Since June 2009

December 15, 2017

Swedish Housing Bubble Pops As Stockholm Apartment Prices Crash Most Since June 2009

Even though Sweden’s property bubble is not the longest running (that accolade goes to Australia at 55 years), it is probably the world’s biggest with prices up roughly 6-fold since starting its meteoric rise in 1995.

Of course, as we noted last month when the SEB’s housing price indicator, which measures the difference between those who believe prices will rise and those who expect them to drop, took its first substantial tumble, the era of the steadily inflating housing bubble in Stockholm may finally have come to an end.

Now, it seems that the “hard data” is aligning with the “soft data” as Swedish home prices across the Nordic country posted their first decline since the spring of 2012, down 0.2% year-over-year and 2.9% sequentially. Per Bloomberg:

The property market in the largest Nordic economy is rapidly cooling after years of price increases that were driven largely by housing shortages and ultra-low interest rates. Supply is now outstripping demand and stricter mortgage rules, as well as growing apprehension among households, are driving prices lower. The drop is being led by high-end apartments in Stockholm.

According to Maklarstatistik’s number, nationwide apartment prices fell a monthly 3 percent in November, adding to October’s 1 percent drop. House prices fell 1 percent in the month, after being unchanged in October. Apartment prices in greater Stockholm fell 3 percent in the month and were down 4 percent from a year earlier, the first such decline in almost six years.

Worse yet, the slump in Stockholm specifically is even more dramatic with apartment prices down 4.2% sequentially, the steepest since October 2008, and 6.0% year-over-year, the biggest June 2009.

…click on the above link to read the rest of the article…

Canada Home Values Hit “First Quarterly Decline since Q1 2009” as Household Debt Binge Hits New High

December 14, 2017

Canada Home Values Hit “First Quarterly Decline since Q1 2009” as Household Debt Binge Hits New High

How exposed are over-indebted household to rising interest rates?

Household debt in Canada rose to a new record of C$2.11 trillion in the third quarter 2017, up 5.2% from a year ago and up 10.7% from two years ago, Statistics Canada said on Thursday in its quarterly report on national balance sheets. Mortgages accounted for 65.6% of the total. Canada’s infamous household-debt-to-disposable income ratio, one of the highest in the world, rose to a breath-taking record of 173.3%.

The ratio means that households, on average, owed C$1.73 for every dollar of after-tax income earned. This chart shows how the indebtedness in relationship to after-tax income has soared since 2001, when Canada’s housing boom took off in earnest:

While US households “deleveraged” somewhat during the Great Recession, mostly by defaulting on their debts when housing crashed and jobs vanished, Canadian households barely took a breather as there was no housing bust in Canada. Hence the consistently rising and record-breaking debt-to-disposable income ratio above.

Disposable income in 2016 got hit by “a significant downward revision,” based on new data received from Canada’s tax collection agency, Statistics Canada said. This resulted “in an upwards shift to this ratio.”

The debt-to-disposable-income ratio of 173%, scary as it is, is just a national average. But it’s not normally the top of the income categories that get in trouble. It’s the lower categories.

In a separate report also released on Thursday on the distribution of income and assets, Statistics Canada added to this debate:

Economy-wide debt-to-asset and debt-to-disposable-income ratios can mask the financial risk associated with increasing debt for a given group of Canadian households.

In 2016, the national average debt-to-disposable-income ratio was 172.1%. Decomposing this by household disposable income quintile reveals that the debt-to-disposable-income ratio for the bottom income earning households was 333.4%, while the debt-to-disposable-income ratio for the top was 128.3%.

…click on the above link to read the rest of the article…

Second Cockroach: Canadian Mortgage Lender Crashes After Admitting Mortgage Fraud

December 5, 2017

Second Cockroach: Canadian Mortgage Lender Crashes After Admitting Mortgage Fraud

Back in April/May, Canada’s biggest mortgage lender, Home Capital Group, crashed its way into the headlines, coming clean over its balance sheet-full of liar loans, suffered a bank run, and was forced to take emergency liquidty from taxpaying pensioners, and was eventually bailed out by good old Warren Buffett.

“Probably nothing…”

Well just when everyone though that crisis was over, a second cockroach in the Canadian mortgage bubble fiasco just emerged…

Laurentian Bank of Canada fell the most in almost nine years after reporting it found customer misrepresentations on some mortgage loans it sold to another firm.

Echoing problems that almost sunk Home Capital Group, Bloomberg reports that:

An audit “identified documentation issues and client misrepresentations” with some mortgages from its B2B Bank unit that were sold to a third-party firm, the lender said Tuesday in its annual report.

Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm.

It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

Just as we saw with Home Capital, the CEO initially shrugged it off as immaterial:

“This is largely a documentation and securitization-eligibility issue,” Chief Executive Officer Francois Desjardins said in a call with analysts.

“It is not material for the bank, its operations, its funding nor its capital. We have worked to change processes to ensure that this issue is resolved.”

However, the total value of the mortgages sold to the third-party issuer was about C$1.16 billion, according to the bank.

Laurentian said it was first alerted of the issue in September by the purchaser and initiated its own audit.

Have no fear though:

…click on the above link to read the rest of the article…

Australian Banks – First The Housing Bubble Bursts, Now A Public Inquiry

December 1, 2017

Australian Banks – First The Housing Bubble Bursts, Now A Public Inquiry

We keep returning to the subject of Australia and the growing signs that its bubble economy is bursting. Earlier this month, we discussedhow the world’s longest-running bull market – 55 years – in Australian house prices appears to have come to an end. We followed this up with “Why Australia’s Economy Is A House Of Cards” in which Matt Barrie and Craig Tindale described how Australia’s three decades long economic expansion had mostly been the result of “dumb luck”.

As a whole, the Australian economy has grown through a property bubble inflating on top of a mining bubble, built on top of a commodities bubble, driven by a China bubble.

Last week, in “The Party’s Over For Australia’s $5.6 Trillion Housing Market Frenzy”, we highlighted some scary metrics for Australia’s housing bubble – notably how the value of Australian housing is more than four times gross domestic product – higher than other nations with housing bubbles, e.g. New Zealand, the UK and Canada. Two days ago, we noted the number of Australians optimistic about the year ahead had plunged to a record low.

Moving on to the nation’s banks, while Australian households are the second most indebted in the world, its banks are the most exposed to housing debt…

…which doesn’t augur well if, as we expect, the housing bubble deflates. We pointed out that an additional risk for Australia’s banking sector, which certainly wouldn’t help the property market either, was the growing demand for a public inquiry. This follows a series of scandals relating to misleading financial advice, attempted rate-rigging, fee gouging and alleged breaches of anti-money laundering laws. According to Australia’s ABC News.

…click on the above link to read the rest of the article…

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