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What follows is a snippet from the most recent Martenson Report (Housing and Wealth: Part II).
This is important information. What I've found and present below is that the Federal Reserve is not just supporting the housing market, it is the housing market.
Just as important as a person's desire to buy a home is their ability to gain access to mortgage funding.
The mortgage market is a gigantic beast with many moving parts, but it is pretty easy to understand from a high level.
The process works like this: A homeowner secures a mortgage from a bank or mortgage company. Then the mortgage is sold off to another company, with the cash generated by that sale now available to lend to other potential homeowners. Ultimately the mortgage may pass through several sets of hands but ultimately it lands with a terminal holder.
In that chain, the mortgage might get sold off several times, or perhaps sliced and diced by Wall Street wizards, but all that matters is that some company (with cash) is there at the end to buy the mortgage to keep the whole chain moving along.
Lately, the "terminal buyers" in that chain have increasingly ended up being the federal government (through the GSEs) and the Federal Reserve.
And not just by a little bit, but by a lot.
Here are the numbers:
So far in 2009 (through August), a total of 3.2 million existing homes were sold for an average price of $217,000, while 263,000 new homes were sold for an average price of $264,000.
Taken together, and assuming that we live in a world where 10% is the average down payment, we get this table:
That is, a total of ~$686 billion in new mortgages were issued in 2009 (through August).
Now let's look at how many Mortgage Backed Securities (MBS) and agency debt obligations were accumulated by the Federal Reserve on its balance sheet over the same period of 2009:
(Source)
It turns out that in 2009 (again, through August), the Federal Reserve has bought $624 billion of MBS and a further $98 billion of Agency debt, for a total of $722 billion in money injection into the housing market through Fannie Mae, Freddie Mac, and the FHLB.
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of new (purchase) mortgages in 2009.
That's not a free housing market; that's a market bought, owned, and sustained by the Federal Reserve's willingness to print up three quarters of a trillion dollars out of thin air.
While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that's immaterial. All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line. The chain needs a terminal buyer, and that buyer has become the Federal Reserve.
The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages. By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.
Without the Fed's activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.
What all this means is that when (not if) the Federal Reserve begins to try and unwind itself from all of the magnificent interventions of the past year, it must contend with the fact that it is the housing market.
Where the Fed is hoping that it can gently release the soft chubby fingers of the housing market, which will then toddle off under its own power, it will discover that it is actually carrying a helpless newborn.
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Thanks, Chris.
Don't forget that in addition to the homes being sold, there are a ton of people refinancing their mortgages at these low rates. So although the Fed number adds up to more than the number of home sales, it is still just a part of the total mortgages being originated.
Keep up the great work!
Rob
Hello Chris. Is it possible that the government is using the ESF to trade our gold reserves so that we don't even need to print money?
http://www.usagold.com/gildedopinion/tur...
Robk,
of course I agree with you that the refi market is another part of what is traditionally viewed as "the mortgage market," but a refi does not impact housing demand either up or down, it is merely an existing mortgage renegotiated. I view refis as a form of churning.
I focus on purchase applications because that's where the action is, at least with respect to the sort of activity that could lead to a shift in house prices.
Cheers,
Chris
Wow Chris - These last few reports have been just mind-boggling, eye-opening and thought provoking. I kinda had a feeling it would be a while before "things returned to normal" but to put this into such clear vision of what lies ahead on that path to recovery - well you've made my arguement for me. Thanks for your insight! . . . and excuse me while I go to the corner and meditate . . .EGP
EndGamePlayer
I have two things to say:
1. Holy Cats!
2. I hope its a least 6 more months before CNN catches on to what's happening because I still have lots more silver to buy.
"Even if we are occupied with important things and even if we attain honor or fall into misfortune, still let us remember how good it once was here, when we were all together, united by a good and kind feeling which made us perhaps better than we are." - Fyodor Dostovevsky
With the government artificially propping up so many segments of society in an unsustainable manner.
What does this say about what will happen to our government(s)? Does the obvious need to be stated?
Nichoman
"Lord, give me the STRENGTH and WISDOM to see things as they are...not the way I believe they are"
-- Leonardo Da Vinci
"The important thing is not to stop questioning." -- Albert Einstein
Wells Fargo just sold our mortgage to Freddy Mac. I wonder why.
I also wonder how many others have experienced the same.
The letter, dated September 21, 2009, begins:
"The purpose of this notice is to inform you that your mortgage loan was sold to Freddie Mac or to Freddie Mac as trustee for a trust holding your mortgage loan on August 27, 2009. Selling mortgages to Freddie Mac is a standard part of the mortgage business for many of the nation's mortgage lenders. ... The transfer of ownership of your mortgage loan has not been publically recorded."
A "standard part"... oh really?!? Was any of that imaginary FED money given to Wells Fargo in this transaction?
Also, WHY was the transaction NOT publically recorded? Are they hiding something from the Chinese or Japonese creditors and lenders?
Note: this was not a typo: "to Freddie Mac or to Freddie Mac" - that's exactly the way it was printed.
Chris,
This is amazing work.
The question I have though is that what are hte consequences of a government-owned mortgage market? When they own all the mortgages, what happens?
Here's what I got: for deliquent mortgages, the government won't be making any money -- this means that on all the "investments" that the Fed has made in legacy (a.k.a. toxic, a.k.a. failed) assets, they won't be getting any returns. So eventually there'll be some further public outcry on the fact that the government has made long-term investments in mortgages (usually 30-year financial products) which will be proven to be overvalued and underperforming.
I recognize that government control of the mortgage market should be an issue of concern, but other than taxpayer money being funnelled into overvalued, underperforming MBSs, what effect does this action have on interest rates, housing markets, and the economy in a more macro- sense?
Just a thought, if the federal government is now the terminal buyer of a majority of the mortgage debt in the US. Are mortgages held by Fannie Mae / Freddy Mac considered federally subsidized debt? The classification of this debt is extremely critical as it can lead to the financial enslavement of persons to the state.
Currently during a BK an individual can “write-off” all debts but two types: tax debt (federal, state, & local). Second is federally subsidized debt like student loans. If the mortgage notes at some point become classified as federally subsidized debt and the housing market completely implodes driving home prices to nothing the future would be a person losing their home, with no way to get a “fresh start”. This would create a population of millions who will become indentured financial servants to the state. I know it seems out there now, but so was spending trillions in a 6 month period just 1 year ago. Please reply and let me know if I am way off base.
Dave
Dave
Chris
Surely the situation is actually much worse than even you say.
The $686bn of existing and new home sales would include many cash purchasers. About 40% of homeowners have no mortgages. OK this is partly because some folks pay off their mortgages eventually, but others buy for cash, and have never had a mortgage.
Anecdotally from Davos' blog there have been many more purchases at the bottom end of the market
(sub $100k and sub $150k) undertaken by speculators.
Thus the Fed have not just been buying up (an amount equivalent to) all new mortgages, but a chunk of the refis also.