Greg Ip

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

Archive for the ‘Mortgages’ 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 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 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 »

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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.

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September 1, 2011 at 3:58 pm

Consumer borrowing: Taking credit

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Consumers tiptoe back towards borrowing, but not for houses

May 5th 2011 | WASHINGTON, DC | from the print edition

[Greg Ip]

AMERICA’S economic recovery will soon be two years old, yet it remains disappointingly weak. That is due, more than anything, to the painful process of deleveraging, as banks and borrowers

work off a mountain of debt.

There are, however, glimmers of a turn-around. A survey released on May 2nd by the Federa

l Reserve found more banks easing standards for consumer loans than at any time since 1994.

And sure enough the figure for consumer loans excluding property has risen in recent months (see chart).

The data reveal telling cross-currents: rising confidence and incomes are delivering a boost to some forms of credit, even as a fundamental shift in attitudes, born of the recession, continues to chip away at America’s culture of borrowing.

Written by gregip

May 5, 2011 at 3:26 pm

The American economy: The great debt drag

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Sep 16th 2010 | WASHINGTON, DC

[Greg Ip] IN THREE decades of selling cars in southern California, David Wilson has been through countless ups and downs. So when sales at his 16 dealerships, mostly around Los Angeles and Orange Counties, fell by a third in 2008, he naturally expected them to go up again. They still haven’t.

Mr Wilson now realises that his boom-year sales were a by-product of the state’s housing bubble. Dealers reckon that before the crisis a third of new cars in California were bought with home-equity loans. “Now there’s no home equity,” says Mr Wilson, “there’s no down-payment for cars.” He foresees no sales growth for another two to three years. “The country is not optimistic. If you’re not optimistic you don’t buy a new house or new car.”

He’s right: Americans are not optimistic. Official statistics say that the economy has been growing for nearly 15 months, but so sluggishly that most people seem to think it is still in recession. For a few months it looked as if the economy might even shrink again, as growth slowed to a mere 1.6% (at an annualised rate) in the second quarter, job creation almost stopped and home sales plunged. Read the rest of this entry »

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September 16, 2010 at 4:00 pm

From Zombie Banks to Zombie Mortgages?

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Op-Ed in The Wall Street Journal
  • SEPTEMBER 10, 2010

Japan misallocated capital during its lost decade. How the U.S. can avoid its mistakes.

By Greg Ip

Japan’s recent demotion to world’s third-largest economy, behind China, triggered two distinctly different feelings in the United States.

One was Schadenfreude. At the end of the 1980s Japan was a contender for the No. 1 spot. It was the rich world’s fastest growing big country. Its companies dominated electronics, steel, automobiles and even banking. Its political and business leaders were paragons of long-term strategic thinking, while budget and trade surpluses left it rich with cash. Meanwhile, the U.S. was on the brink of recession, its corporate managers obsessed with short-term profits and its politicians incapable of mustering a coherent industrial strategy. “Japan has created a kind of automatic wealth machine, perhaps the first since King Midas,” Clyde Prestowitz wrote in 1988. The U.S. was “a colony-in-the-making.”

What happened next, of course, is history. Japanese property and stock prices cratered, its banking system seized up, and a decade (actually, two now) of economic stagnation followed.

The second feeling Japan’s misfortunes evoked is dread. The U.S. has gone through its own spectacular property crash and banking crisis and is now mired in a painfully weak recovery. Does it face a long period of stagnation as Japan did? Read the rest of this entry »

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September 11, 2010 at 5:26 pm

Fannie Mae and Freddie Mac: Unfinished business

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Can the American mortgage market survive without taxpayer support?

Jul 22nd 2010 | Washington, dc

[Greg Ip] THE hefty financial overhaul that Barack Obama signed into law on July 21st (pictured) left behind one big piece of unfinished business. In 2008 Fannie Mae and Freddie Mac, mortally wounded from losses on loans acquired during the bubble, were placed in “conservatorship”, a halfway house between bankruptcy and outright nationalisation. There they remain, their losses duly covered with new injections of capital by the Treasury—$145 billion so far. Tim Geithner, the treasury secretary, has promised to address the matter of Fannie and Freddie by early next year but so far he has no answers, only questions (literally so: in April he asked the public to comment on seven of them). Read the rest of this entry »

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July 22, 2010 at 4:00 pm

The Worst Ideas of the Decade: Housing Prices Always Rise

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by Greg Ip

[Washington Post Outlook Section, Dec. 20, 2009]

Countless delusions and mistakes brought on our financial crisis, but none did as much damage as the belief that home prices never go down.

People have long seen real estate as a safe investment. The notion is intuitive – the supply of land is limited, and the population is always growing – and until 2007, national home prices had not fallen significantly since the Great Depression.

Yet at the start of this decade, this belief became the lynchpin of an entire investment philosophy, as survivors of the dot-com bubble sought a refuge for their money. Read the rest of this entry »

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December 20, 2009 at 9:00 am

Governments’ contingent liabilities: Fiscal iceberg

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Sep 24th 2009 | WASHINGTON, DC
From The Economist print edition

Guarantees offered during the crisis pose lasting risks to America

[Greg Ip] THE visible costs of the financial crisis are well known: bank recapitalisations, stimulus spending and shrunken tax revenues. Another set of liabilities—the guarantees thrown up around financial systems a year ago to quell panic and keep credit flowing—has received far less attention. Guarantees are popular because they entail no immediate cost. But they leave the sovereign balance-sheet exposed to lurches in the financial system’s fortunes. Read the rest of this entry »

Written by gregip

September 24, 2009 at 9:00 pm


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