Investors are betting on the future of the U.S. housing industry
Convincing investors that housing is a good investment again is no easy sell. However, many of the same investors that once made bets against subprime and the broader housing industry in the years leading up to the crisis are now making the exact opposite bets by taking the long view. This is a hopeful sign for the U.S. economy.
Some of the largest U.S. hedge fund investors and private equity firms are applying a variety of investment strategies in attempt to profit from the industry’s low pricing multiples. While traditional investors purchase agency (government insured) MBS, which can yield up to 10 percent, more speculative hedge fund investors are purchasing non-agency (un-insured) MBS, which can yield up to 30 percent. Recently, investment-banking firm Credit Suisse priced its third private-label RMBS for 2012. S&P rated several of its tranches at AAA.
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Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.
- John Adams
Political entrepreneurs will take advantage of the opportunities to act quickly without having to justify what motivates them.
Today’s post comes from a paper by Charles Calomiris, Henry Kaufman Professor of Financial Institutions at Columbia University Graduate School of Business, on U.S. banking reform in the early 20th century.
In his study, Professor Calomiris provides excellent insight in to the political motivations behind the creation of Regulation Q, the separation of banking activities (Glass-Steagall), and the creation of FDIC insurance (Calomiris, “The Political Lessons of Depression-Era Banking Reform,” July 2012).
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Federal Housing Administration may need bailout in 2013
- For the first time in its 78-year existence, the Federal Housing Administration (FHA) may need to draw on taxpayer funds after exhausting its reserves because of rising mortgage delinquencies. As of February 2012, the agency was in the red for roughly $700 billion in losses. Actual losses could total much higher when the White House releases its annual budget in February 2013.
- Many of its losses stem from financing mortgages during the deepening of the housing crisis in 2008 and 2009. Altogether, loans 90 days or more past due account for over 9 percent of its mortgage portfolio.
- According to Moody’s Analytics, home prices would have dropped an additional 25 percent if not for the agency’s efforts in providing cheap financing in the face of tighter lending standards.
Bernanke cautiously optimistic on housing
- Last week, Federal Reserve Chairman Ben Bernanke stated: “It is encouraging that we are seeing signs of improvement in the housing market in most parts of the country. House prices nationally have increased for nine consecutive months, residential investment has risen about 15 percent from its low point, and sales of both new and existing homes have edged up.”
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Here’s an idea for how to fix U.S. fiscal policy: immigration reform.
According to a recently released working paper from John Kennan out of the University of Wisconsin-Madison and NBER “…the estimated net gains from open borders are about the same as the gains from a growth miracle that more than doubles the income level in less-developed countries.”
You read that correctly. Opening national borders to foreign workers will create a global boom. Kennan estimates that annual wages could increase up to $10,000 per worker from immigrating to a more developed country (like the U.S.). One study suggest an increase of just $7,000 in annual salary would increase world GDP over 30 percent! Other estimates are even higher.
Liberalizing immigration however, is politically unpopular, especially in times of high unemployment, as it is in the U.S. today. Opponents argue that mass immigration will push down wages and take jobs from U.S workers. That’s not the case.
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Timothy Geithner chose to lay the groundwork for President Obama’s stance on tax reform at the WSJ’s CEO Council. According to the Treasury Secretary, rates on upper-income earners (those with greater than $200k if single and $250K if married) will go up, not just by closing loopholes, but by increasing marginal tax rates.
In his press conference, President Obama offered two stark choices: We can fail to act and thereby increase taxes on everyone and send the economy in to recession, or we can negotiate an end to Bush tax cuts, thus increasing taxes only on the wealthy.
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New housing rules considered regulatory “perfect storm” in last stages of finalization; delay in Basel III regulatory capital standards
- The Qualified Mortgage (QM), Qualified Residential Mortgage (QRM) and Basel III rules have officially gone through public comment. QM and QRM will see implementation in the coming months; however, a delay hit the regulatory capital standards under Basel III.
- Industry participants submitted over 1,000 letters during the comment period in regards to regulatory capital standards. A number of bankers, members of congress and other industry leaders requested that regulators provide community banks with more flexibility when implementing the new rule. The Fed “views the decision to clarify the Basel timeline as a procedural step and not in any way an indication that the rulemaking will slow or stop.”
- Media outlets continue to cite regulatory uncertainty over new mortgage rules as the main culprit behind the reduced lending environment. The new rules will have significant effects on the future of lending; however, industry surveys have singled-out forced mortgage repurchases, better known as “put-backs,” as the number one reason for tight lending at this time.
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Glenn Hubbard in the FT outlined steps to avoid the upcoming fiscal cliff:
1. Raise tax revenue by closing loopholes for high income earners via capping tax deductions. For more on caps, see my previous post “Cherry picking the Romney tax plan.”
2. Gradually cut spending over the next several years; specifically by decreasing the growth of defense spending and non-defense discretionary spending, while increasing the retirement age for social-security benefits.
3. Politicians and the public at large need to look at the facts - taxing the rich cannot provide enough taxes to fund our government - all income earners will need to pay a higher share going forward to maintain our entitlement system.
Neither the Democrat strategy of only taxing the rich, nor the Republic strategy of lower taxes without naming specific spending cuts will help solve this crisis.
Both capping deductions and reducing spending will amount to political hell in Washington. It will not be pleasant, but facts should ultimately win the day. If the math doesn’t work we must admit it, and only by understanding the issues and being honest will we reach fiscal sanity.
Dr. Hubbard prefers cuts to spending instead of increased taxation and cites research by two Harvard economists that looked at OECD countries over a 30+ year period. They found that policies which reduced spending rather than increased taxes were more likely to reduce deficits and less likely to cause recessions.
When The Economist writes something about U.S. fiscal policy, I pay attention. Especially when someone like Greg Ip (Twitter), who heads up The Economist’s Washington, DC bureau as Economics Editor, titles an article “How to Solve the Fiscal Crisis.”
I’d say that roughly 80 percent of my talking points come from its weekly magazine or blogs. Some people may think that’s silly - I don’t. Note that when I reference talking points, I don’t mean repeating them verbatim; I use them as a guide for thinking.
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