Quick Note on the Deficit battle

Our friends at the Washington Post have dug around the fringes of the deficit and found some interesting facts from the Treasuries Macroeconomic Advisers. It would appear that the US is building/recovering  its way out of the deficit. Good news, as long as it can be maintained – Ed

The deficit is falling fast. Can Washington accept victory?

In other words, if policymakers can just not blow it and keep the recovery on track, that alone will do a good bit of the heavy lifting of deficit reduction.

Those forecasts of falling deficits would of course change if there were a recession or an abrupt change in policy. But it is increasingly clear that American fiscal policy for the next few years is not the disaster zone that some commentary makes it out to be. The reasons are straightforward enough. The economy is…

First off, it was a bad idea to privatize the two GSA’s Fannie Mae and Freddie Mac. The reason that these two GSA’s exist at all, is because of private industries inability to maintain a level, stable platform to of financing options in support of the housing industry. 1981 saw the culmination of policy errors come to a head as interest rates soared to over 18% for 30 year fixed rate mortgages for single family, owner occupied properties. The Fed, under Paul Volcker, was at the time under pressure to reign in inflation that had exceeded 13.5% in the previous year and threatened to become worse.

While pushing rate up to stem inflation, which was accomplished as inflation was trimmed to a little over 6% in 82 and then to the lower 3%  in 83, the populous, including Congress recognized a vulnerability  to the housing market, both new construction and existing. Without a stable source of funding, the housing market could very quickly deteriorate causing rounds of stagflation and damage to the GDP.

Fortunately, the US housing market had Fannie Mae, established in 1938, and Freddie Mac, established in 1970, as obvious stabilizers. Government entities that were financially strong enough to purchase mortgages from local banks and sophisticated enough to package them into securities that had a market in sovereign wealth funds, insurance companies and pension funds.  The stability of the issues was the result of stringent, but fair to borrowers and investors, underwriting standards that moved the housing markets along at a near predictable pattern. That was until the mid 90′s when values of property values began to soar past any reasonable expectation. Sadly, the Fed saw fit to let the market run itself out, the US economy along with it.

To wind down or re-privatize Fannie Mae or Freddie Mac would be a tragic mistake. It would indicate that the government has forgotten why those two entities existed in the first place, while ignoring the lessons of recent past. While not opposed to privatization of certain functions over seen as certain GSE’s, Fannie Mae and Freddie Mac should not be among them as it too valuable an asset of the US citizens. – Ed

Fannie’s Windfall Blurs Debate Over Its Fate

In a sign of how the rebounding housing market has sharply reversed Fannie’s fortunes, the company said it could report an even larger gain when it reports first-quarter earnings next month if it determines that the company is profitable enough to reverse certain write-downs of tax benefits that could be worth more than $58 billion.

The record windfall and possibility of similarly heady profits could have important political ramifications. Fannie Mae and its smaller sibling, Freddie Mac, which earlier this year reported its own record profit of $11 billion profit for 2012, now

While all seems positive in the residential housing area, some are still cautious, and with good reason.

One area of home purchases causing the concern is the investor community. The same folks who bought properties, leading into the bubble with “low interest sub-prime mortgages” (usually short term adjustables, negative amortization or short term notes) purchasing with the expectation that they would handily profit when the unsuspecting “greater fool” showed up to relieve them of the property and debt. As we all know, after awhile, we just run out of “greater fools”. Sadly these “investors” created nightmares for legitimate purchasers (need a roof over the families head) as well as the communities they abandon when the music finally stopped.

Today, we have “investors” back into the field not looking for a quick kill, but for yield. As The Fed has kept interest rates low in an effort to drum up the economy, part of which are low interest rate “prime” mortgages to kick start the housing market, which is a large contributor to GDP. That yield is generated from rental on the housing they bought at “low/bargain” prices with those low interest rates. As long as interest rates remain low, the yield will no doubt beat any other investment available.

The caveat is that, once what was the area of local “Mom and Pop” proprietors, familiar with the area, we appear to have large companies with funds looking for yield but unfamiliar with the logistics of managing single family rental housing units and their accompanying local and state regulations.

When interest rates start to rise, these same enthusiastic yield investors may have other thoughts – Ed

Cash Course in Housing Economics

It is true that the Federal Reserve’s efforts to get the economy going have helped spark a recovery in housing. Just not in quite the way it intended. Both home sales and prices have been on the rise over the past year, offering relief at a time when the U.S. has been fighting through a sluggish recovery at home and financial uncertainty overseas. Housing’s gains have also provided evidence that the Fed’s extraordinary efforts to put the economy back on its feet are having an impact.

But a cursory look at the data shows that there is something unusual going on.

Even though overall home sales are now back to 2007 levels, mortgage activity isn’t. In the fourth quarter, mortgage originations aimed at purchasing a home came to $123 billion, according to the Mortgage Bankers Association, compared with $226 billion five years earlier. Rates are…

That old saying about “sticking to your knitting” seems to have found a sweet spot with multi family developers and managers.

Over the past few years while the nation hobbled along under the “Great Recession”, some people were under the impression that the great benefactor from the recession was rental housing as interest rates were low along with vacancy at near historic lows in much of the country. During the run-up to the beginning of the real estate crash in 2006/7, most emphasis had been on the single family and condo sectors. Multi family rental became almost transparent, at least on the surface. 

Although not spending much time in the headlines, many multi family rental developers and managers were thinking that the grass was greener in somebody else’s back yard. So with backing from investment REITS, pension and insurance funds a number cast their nests into what looked like the rapidly, soon to be more rapidly, growing senior housing and assisted living communities market.  Entry was easy, buy some land, get local approvals, build the facility and customers would mob the front doors. Most of this came true except that those customers/tenants had higher levels of expectations and needs. Totally different that what had been expected, hence many developers and managers have exited the field to return to their areas of expertise, while specialist in senior facilities continue in theirs. – Ed

It’s All-In or Nothing to Compete in Seniors Property

Greensboro, N.C.-based Bell Partners Inc., a multifamily investment and management firm, announced it had sold two North Carolina seniors housing facilities, Alta Oakridge in North Raleigh and Alta Walk in Durham. These two properties were the last remaining independent living communities in which Bell had an ownership interest, effectively pulling the company out of the elderly facility business.

The company now owns or operates 242 apartment properties, a portfolio of almost $15 billion in 69,000 apartment units across 15 states. Jon Bell, president of the firm, says it’s a challenge to operate a sustainable, best-in-class company in one sector, must less multiple businesses…

The only constant is change
-Heraclitus (c.535 BC – 475 BC)

It wasn’t that long ago that the only multi-family financing source in the sector was Fannie Mae. The private sources of capital had quickly dried up shortly after ( a few before) the housing crash. The risk seemed too high and they were too occupied with the tsunami of defaults that backed up into their portfolios. Lest we forget the, suddenly alert, regulators making their concern felt.

But, that was yesterday, today the market appears to be regaining its bearing and is beginning to compete in the space that only the GSE’s were able to function. With vacancy rates low along with interest rates this would appear to get that new project into the ground or refinance the current inventory. Rates in the current range have only one direction to move as the Fed examines the latest economic data. Their most pressing concern is sparking a round of inflation that would be difficult to quickly control given the liquidity the markets are awash in at this moment. Another few months of above economic expectations could well trigger rates to tighten. – Ed

Banks Step Up Battle Against Fannie in Small Loan Space

For the last few years, Fannie Mae seemed like the be-all end-all in the small loan space, since many banks were still getting their houses in order in the wake of the Great Recession. But now, plenty of private-sector lenders are gaining traction, offering more flexible underwriting to entice borrowers away from Fannie Mae…

GSE Reform – something that may actually make sense.

Combining the back offices of Fannie Mae and Freddie Mac will certainly eliminate much duplication and excess cost/overhead. As both organizations compete for the same product and their underwriting nearly parallels each other this move makes perfect sense. 

Perhaps the next logical move would be to combine these two GSE’s into a single unit. With the demise of Thrifts since the mid 80′s along with the rise of independent mortgage banks the field for management and administration has certainly leveled. 

The spinoff of Fannie and Freddie into the private sector in the 90′s was an ill-conceived move that undermined the original need for these GSE’s originally, and that was liquidity. Enacted by Congress  to establish and maintain liquidity, during a time when banks simply ran out of lendable funds, was a good solution.  Additionally, this allowed lenders in need of stable income streams, such as insurance companies and pension funds to shop in a marketplace that offered high credit rated instruments comprising bundles of mortgages on primary residences, safety.

Combining both agencies under one roof as GSE’s, not private enterprises, will be in the best interest for all concern, especially the US taxpayer. The only caveat is letting them run autonomously with minimal interference from Congress, which contributed to the “Great Recession” – Ed

Fannie, Freddie to Create Joint Firm

The regulator overseeing Fannie Mae FNMA  and Freddie Mac FMCC announced Monday one of the most concrete efforts to date for building a new infrastructure that could ultimately replace the government-controlled mortgage companies.

Edward DeMarco, acting director of the Federal Housing Finance Agency, said the agency would begin forming a company that would consolidate some of the “back-office” functions currently replicated individually by each firm. The company would have its own chief executive and board and for now would be jointly owned by Fannie and Freddie, Mr. DeMarco said in a speech Monday before the National Association of Business Economics in Washington, D.C…