Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘Housing’ Category

America’s mortgage markets: Spread besting

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To the Fed’s frustration, mortgage profits have been soaring

Mar 2nd 2013 | WASHINGTON, DC |From the print edition

BEFORE they became a magnet for losses and lawsuits, mortgages were moneyspinners for America’s banks. They are again. The Federal Reserve’s campaign to push down interest rates has fuelled a wave of home-buying and loan refinancing. And to the frustration of the Fed, those lower rates are not being fully passed on to customers by the banks.

Profitability on federally-guaranteed mortgages is tied to the difference between what a bank charges a homeowner, and the yield paid to an investor once the loan is bundled into a mortgage-backed security (MBS). Since mid-2011 MBS yields have fallen further than mortgage rates, so the spread widened to a record (see chart) before falling back a bit recently.
Fannie Mae and Freddie Mac, two government-backed housing agencies, have played a part by hiking the fees they charge to guarantee a loan against default. That cost gets passed on to borrowers. But even after accounting for these fees, banks still earn roughly $3.50 on every $100 loan they sell compared with about $1.50 in 2007, according to a study sponsored by the Federal Reserve Bank of New York*.

Banks now need a wider spread to cover the cost of buying back dud loans from Fannie and Freddie because of faulty underwriting. But that adds only 19 cents to the cost of a $100 loan, the authors figure. Most of the increase reflects higher profits for originators. Some have pricing power over customers who have trouble refinancing elsewhere. But capacity constraints matter more. Before the crash a lender would respond to higher demand by adding staff or buying more loans from outside brokers, says Paul Miller of FBR and Co, an investment bank. Now it simply holds the line on interest rates, which tempers volume but boosts profits. Read the rest of this entry »

Written by gregip

February 28, 2013 at 12:06 pm

Posted in Housing, Mortgages

The economy: Waiting for the chop

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The economy has survived austerity thus far this year thanks to housing, but the “sequester” could change that

Mar 2nd 2013 | WASHINGTON, DC |From the print edition

[Greg Ip] WHEN Barack Obama and the Republicans in Congress agreed on January 1st to let a payroll tax cut expire and tax rates rise on the rich, they rolled the dice with the economy. They in effect bet that America’s recovery was solid enough to withstand higher taxes and spending cuts, including a “sequester” due to take effect on March 1st. At 1.9% of gross domestic product, that is a contraction second only to that of Greece among rich countries this year (see chart 1).

At America’s biggest retailer, it looked at first like the gamble had not paid off. “Where are all the customers? And where’s their money?” one executive at Walmart said in an e-mail dated February 1st obtained by Bloomberg News. February sales to date “are a total disaster,” another wrote on February 12th.

But the company painted a less dire picture on February 21st, when it reported its earnings. While sales had indeed flattened out, the culprit was not, it appeared, tax increases, but delayed tax refunds (also a result of the January 1st legislation). Customers last year cashed $4 billion worth of income tax refunds at Walmart’s shops, but so far this year had cashed only about $1.7 billion. Presumably when the refunds come through in March, so will the usual spending they bring. Read the rest of this entry »

Written by gregip

February 28, 2013 at 12:03 pm

Fannie Mae and Freddie Mac: Back to black

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The Treasury squashes hopes that the agencies may ever be private again

Aug 25th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip] SINCE 2008 Fannie Mae and Freddie Mac, America’s two housing-finance giants, have been on life support, spared from insolvency by an intravenous drip of taxpayer cash. Lately, however, the companies have shown signs of life: earlier this month both reported their biggest profits since being forced into “conservatorship” four years ago (see chart).

That has sent a frisson through investors clutching preferred shares issued back when the companies minted money by using their quasi-governmental status to borrow cheap and buy or guarantee most residential mortgages in America. Between March and early August, many of Fannie’s old preferred shares, which now trade over the counter, jumped from around $1.50 to more than $3 (still a fraction of their $25 par value).

Several factors explain the turn in the companies’ fortunes. Read the rest of this entry »

Written by gregip

August 23, 2012 at 8:47 pm

The housing market: Pulling its weight at last

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Investors help turn the housing market into a source of growth

Aug 4th 2012 | PHOENIX, ARIZONA | from the print edition

[Greg Ip]

STEVE SCHMITZ surveys the street outside his newly bought four-bedroom house and enthuses over what he sees. Stucco houses with tidy gardens, just like his, line the road. A minivan is parked outside one, an SUV sits in the driveway of another. An elementary school is just a few blocks away. It is as idyllic as a new homeowner could wish in this western suburb of Phoenix.

Mr Schmitz, however, is no ordinary homeowner. The house is just one of more than 1,000 which his company, American Residential Properties, has acquired since 2008 in Phoenix, Las Vegas and California. ARP bought the house for roughly half its peak selling price of more than $300,000 in a “short sale”: in essence, a sale forced on the owner to avoid foreclosure. After carpet cleaning and repainting it was quickly rented for $1,300 a month, about half what the original owner had been paying for a mortgage.

Mr Schmitz, however, is no ordinary homeowner. The house is just one of more than 1,000 which his company, American Residential Properties, has acquired since 2008 in Phoenix, Las Vegas and California. ARP bought the house for roughly half its peak selling price of more than $300,000 in a “short sale”: in essence, a sale forced on the owner to avoid foreclosure. After carpet cleaning and repainting it was quickly rented for $1,300 a month, about half what the original owner had been paying for a mortgage.

Investors like Mr Schmitz are an important part of why America’s long-suffering housing market may at last have turned the corner. Read the rest of this entry »

Written by gregip

August 2, 2012 at 4:13 pm

The American economy: Unmired at last

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America’s recovery is neither robust nor dramatic. But it is real

Mar 17th 2012 | WASHINGTON, DC | from the print edition

[Greg Ip] SINCE Florida’s property market collapsed and its economy tanked, Hillsborough County has endured almost nonstop austerity. In the past five years the government of the county, halfway up the state’s Gulf coast, has eliminated a quarter of its 6,000 positions through attrition and lay-offs. It has scaled back after-school child care. Workers’ pay has been frozen for three years.

But the fiscal year that begins in October holds the prospect of relief. Property-tax revenue is declining more slowly. Tourism-related taxes have stabilised. Sales-tax revenue is actually up. There is still a deficit to be eliminated, but it is a third of the size it was a year ago; the county thinks it will need no lay-offs next year. Things aren’t getting better, says Tom Fesler, the county’s budget director. “It’s more a function of just not getting worse.”

Such faint praise is not as damning as it seems; there has been an awful lot of worse in the past few years. America’s recovery may have officially begun in mid-2009, but it has bogged down repeatedly since. That has in part been due to circumstances beyond American control, such as rising oil prices and Europe’s debt crisis. But it has also been due to the hangover of the recession: consumers have been shedding debt, lenders have been reluctant, housing markets have been moribund, and state and local governments like Mr Fesler’s have been cutting budgets in the face of prohibitions on deficits.

Some of those impediments have now gone away. Read the rest of this entry »

Written by gregip

March 15, 2012 at 1:40 pm

The new housing-relief plan: Underwater rescue

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A plan to ease mortgage refinancing will have modest benefits, at best

Oct 29th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

SOMETIMES the best stimulus is not the biggest, but the one that’s possible. While Barack Obama has been haranguing Congress, without success, to pass his $447 billion stimulus plan, a more modest effort paid off on October 24th when the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, the two big mortgage-finance companies, made it easier for borrowers to lower the rates they pay on their mortgages.

Mortgage rates are the lowest in a generation, triggering a rush by homeowners to retire higher-rate loans and take out new ones (see chart). But roughly a quarter of homeowners cannot refinance because their mortgages exceed the value of their homes. In early 2009 the administration introduced its Home Affordable Refinance Programme (HARP), allowing refinancing for “underwater borrowers” with no history of delinquency. Although Fannie and Freddie were taken over by the federal government in 2008, HARP would not expose the taxpayer to any more loss, since refinancing did not make the loan riskier.

The programme has been a disappointment. Read the rest of this entry »

Written by gregip

October 27, 2011 at 9:30 am

Fannie Mae and Freddie Mac: Self harm

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The twins still watch their bottom line, to the economy’s detriment

Sep 3rd 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

AS BARACK OBAMA casts around for ways to bolster the American economy, one area of focus is a still-moribund housing market. He could start by taking a closer look at Fannie Mae and Freddie Mac, America’s housing-finance giants.

When the two government-sponsored entities (GSEs) were listed companies, they acquired or stamped guarantees on millions of loans that in retrospect were far too risky. Those bad loans drove them to the brink of collapse in 2008, forcing their regulator to take them over. The Treasury has since injected some $140 billion into them to keep them solvent. That matters. In the first half of this year the two guaranteed roughly 70% of all new loans. They have also helped 1.7m homeowners through loan modifications and other measures. Yet although the GSEs are ostensibly government-controlled, they still try to maximise profits and minimise losses.

The entire article is linked here.

Written by gregip

September 1, 2011 at 3:58 pm

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