View From a Height

This, from tomorrow's Wall Street Journal:

The program is the Term Asset-Backed Securities Loan Facility, or TALF, in which investors are given low-cost loans from the Fed and in turn use the money to buy securities backed by consumer debt. The loans in this program are three-year loans and so far have been aimed at car debt, credit-card debt and other consumer loans. The Fed is preparing to announce new loans with five-year terms to better match the needs of investors in commercial-mortgage-backed securities, an effort to boost that sector.

Officials have been reluctant to make such long-term loans, for fear five-year commitments could hamper the central bank's ability to withdraw money from the financial system down the road. They have been looking to design the expansion so the loans are less appealing in later years.

...

The $700 billion CMBS market has rallied in the past month on hopes TALF would be used to restart the market. Yields on triple-A CMBS bonds have fallen to about 10% from 12%, according to Trepp, which tracks commercial-property debt markets.

Bringing down the yields on existing debt is critical to spark new lending because, as long as investors can buy top-rated CMBS that yield as much as junk bonds, it would be unprofitable for banks to make new loans. That is because they would have to offer higher yields to attract investors, wiping out their profits.

How is this wrong?  Let us count the ways.

1. The government is actively encouraging debt-backed securities in real estate
2. This worked so well before that it now finds itself in partnership with the UAW, with Chrysler declaring Chapter 11.
3. The credit card experiment was so successful in bringing down card rates that Obama called in the credit card companies to explain to them a) who's in charge now, and b) their rates are too high
4. Just because you artificially lower rates by creating demand doesn't mean the investments are any better
5. It's inflationary, because it puts money into the system that the Fed can't get out quickly
   
6. They want to limit the benefit in the out-years, making the whole project less attractive to speculators investors

The last paragraph doesn't make any sense to me.  First of all, it's only true if the banks can only make money re-selling the debt.  How about, you know, collecting the interest on the original loans?  Secondly, if the investors would already rather buy CBMS debt than junk bonds, the rate should already be lower.

In fact, bringing down the yields is critical to spark new lending because the borrowers can't afford the rates the banks want to charge.

You know, kind of like how some people couldn't afford mortgages.

Posted by Joshua Sharf at 8:20 PM | Permalink | Comments (0)

The Wall Street Journal is reporting that the Obama Administration now wants to use Fannie and Freddie as a source of warehouse capital for small mortgage banks.

The regulator has asked representatives of mortgage banks, including the Mortgage Bankers Association, to come up with a detailed plan for Fannie and Freddie to help mortgage banks get credit. John Courson, chief executive officer of the association, said in an interview that the plan should be ready to be presented to the regulator within about a week. One possibility is that Fannie and Freddie will guarantee debt issued by warehouse lenders, making it easier for them to provide financing to mortgage banks.

...

Mortgage banks typically are small, family-owned companies. Unlike commercial banks or thrifts, they aren't licensed to take deposits and so don't have that source of money for their loans. Instead, they borrow money from warehouse lenders, which often are units of larger banking companies. The mortgage banks use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to investors such as Fannie or Freddie.  (emphasis added -ed.)

In short, the mortgage banks were one of the prime sources of securitization.  Properly done, securitization is a good thing, and if the buyers, rather than the sellers, assess the risks, then there's some chance it could work again.  But it's far from clear that the mechanisms are in place for banks to assess these risks.  The lack of warehouse capital itself should be a sign that those funders don't believe there are buyers yet for mortgage-backed securities.

So, rather than let that market re-develop on a sounder basis, the Obama Administration plans to lend the mortgage banks the money to originate the loans which it then plans to buy itself.

The Administration apparently has tired of even trying to conceal the financial shell games it's playing.

Posted by Joshua Sharf at 7:50 PM | Permalink | Comments (0)

Colorado will receive $34 million to buy up distressed properties. Of that, Denver will get about $6 million.

This isn't right, This isn't even wrong.

Look at the path the money follows to get here:

The state of Colorado will allocate the HUD funds, and community development groups, with the help of elected officials, will use the money. NSP money can be combined with HUD's Community Development Block Grant (CDBG) Program funds as well as other funding resources.

This doesn't even include all the administrative costs; some of the $6 million will go to those, as well. The fingers in the pie include: the IRS, HUD, the state of Colorado, community development groups, local elected officials, who will rely on local bureaucrats, all of whom have incentives to maximize their respective cuts, none of whom have incentives to actually improve neighborhoods. I'd love to see the cost accounting at the federal, state, and local levels for this cash, but none will be forthcoming, I'm sure.

Worse still, $6 million isn't even worth the effort. According to the City Assessor's Office, we can roughly value all the residential real estate, both real property and condos, at about $40 billion. Six million isn't enough to arrest a trend of declining home prices; it is, however, enough to pick favorites and reward allies.

If there are distressed properties for improvement at a profit, there are plenty of investors willing to risk their own money, without having to make the round trip through three different bureaucracies.

Maybe they could even hire some of those paper-pushers to do the framing.

Posted by Joshua Sharf at 4:03 PM | Permalink | Comments (0)