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The Fed's $2.7T mortgage problem

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Re: The Fed's $2.7T mortgage problem

#81

Post by aidenn0 »

dvt wrote: post #61
aidenn0 wrote: post #49

Earlier quoted context omitted.

If housing prices deflate more than 20%, nearly everyone who bought a house with 20% down in the past 2 years will be underwater, no?

If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.

I meant to say much more than 20%; you don't build a whole lot of equity in the first years of a 30 year mortgage due to the amortization schedule.

Re: The Fed's $2.7T mortgage problem

#82

Post by camnora »

kmonsen wrote: post #48
anm89 wrote: post #39

Earlier quoted context omitted.

If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.

But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash? I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.

I think the idea is that the Fed is trying to tamper demand by softening the economy. Lower demand will inevitably help prices. It doesn't help much though if we get a "rough landing" and people can't afford food/housing because they're out of a job.

Re: The Fed's $2.7T mortgage problem

#83

Post by camnora »

JumpCrisscross wrote: post #78
camnora wrote: post #75

> If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury. Why does this reduce the amount of funds to the treasury? The losses are on the Feds balance sheet. My understanding is that the Treasury is not involved here, but the article hints at them being affected. Is it im…

> Why does this reduce the amount of funds to the treasury? It's an accounting thing [1]. When the Fed makes a profit, it remits it to the Treasury [2]. (I believe this is an anachronism from the gold standard days, but not sure.) [1] https://www.stlouisfed.org/on-the-economy/2018/september/fed... [2] https://www.wsj.com/articles/fed-sent-88-5-billion-in-profit...

Oh neat, TIL. Thanks

Re: The Fed's $2.7T mortgage problem

#84

Post by anm89 »

kmonsen wrote: post #48
anm89 wrote: post #39

Earlier quoted context omitted.

If they can't kill inflation by killing equity markets and bonds the last target left is the housing market. So if you believe that their true goal is to kill inflation at this point, which I more or less do, than the thing the Fed feels like it needs to do is to target housing prices directly and their best lever for that is the MBS on the balance sheet.

But if the inflation is not due to overconsumption in the US, but about global problems with supply side issues on the front and China in lockdown not helping at all, how does it make sense to cause a housing crash? I certainly think the fed should stop to build the bubble, but it should also not go all in and crash everything.

You can kill inflation with demand side strategies, even if the root cause of the recent changes in inflation are supply side.

Imagine an ad infinitum example. Let's say the price of gas goes to $1M a gallon. The fed then somehow removes every dollar from the economy. The price of gas is still going to be approaching zero when denominated in dollars after demand is forced to zero(in reality the price of gas would just change to be denominated in physical violence in this mad max scenario but that's an aside)

Re: The Fed's $2.7T mortgage problem

#85

Post by camnora »

m348e912 wrote: post #50
anm89 wrote: post #10

I was talking about this with a friend today. I think if the Fed announced they were selling agency MBS as part of their QT program we would see a paradigm shift in markets. Like limit down kind of days. I think that's what the punch bowl being taken away truly looks like. And if the S&P down 35% doesn't get inflation down, then I think that's probably next on the list.

Just curious, how does the Fed selling Freddie Mac and Fannie Mae/Ginny Mae mortgage backed securities cause a shift in the markets? What's the likelihood the Fed would actually do something like that?

An increase of MBS offered on the market will cause mortgage rates to rise because there's too many loans for sale and not enough buyers. Buyers will demand higher and higher rates to make it worth their while.

Re: The Fed's $2.7T mortgage problem

#86

Post by gopher_space »

vkou wrote: post #76
gopher_space wrote: post #68

Earlier quoted context omitted.

> As a result, businesses either have to raise wages, or shut down, or significantly reduce their hours. If these were your only choices you were on the edge of profitability right before a global pandemic hit. Plenty of reasons for that. Commercial Rent Control is "progressive" and the people who own property like this can afford to let it sit vacant indefinitely and will literally abandon this amount of profit beca…

This started before the pandemic hit, the pandemic just accelerated the growth of housing prices in those towns, as remote-workers started moving to them.

Nobody needs to be speculating on the lumber market.

Re: The Fed's $2.7T mortgage problem

#87

Post by medvezhenok »

aidenn0 wrote: post #81
dvt wrote: post #61

Earlier quoted context omitted.

If we assume that the home-owners have been building equity in their homes for the past 2 years, no, they would be at 0 + equity. This of course stings a little, but still not underwater or filing for bankruptcy.

I meant to say much more than 20%; you don't build a whole lot of equity in the first years of a 30 year mortgage due to the amortization schedule.

It depends a lot on the interest rates involved.

At 2.6%, 45% of your first payment goes toward the principal, and around 3.5 years into a 30 year mortgage you hit 50/50 split between the principal and interest.

At 5% interest, 22% of your first mortgage payment goes toward the principal and you only hit parity at around year 15-16.

At 10% interest rate, only 5% of your first mortgage payment goes toward the principal. You hit parity (50/50) around year 23.

Re: The Fed's $2.7T mortgage problem

#88

Post by recursivedoubts »

gmadsen wrote: post #54
JumpCrisscross wrote: post #17

> it will incur big financial losses that reduce the funds the central bank returns to the Treasury...expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people This isn't how it works. No doubt, some will try to spin it that way. But the Fed balance sheet's gains and losses are an accounting artefact. (It will always make money when low…

how independent is it really if they are printing money to buy treasury bonds?

the fed is independent... of the government

their job is to protect the big banks, the rest is window dressing for TV-americans

Re: The Fed's $2.7T mortgage problem

#89

Post by rufus_foreman »

dvt wrote: post #30

> The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill. I think this article is a bit of a nothingburger. Of course QT has the opposite effect of QE, that's the entire point . The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDO…

>> The 2020 housing boom will not blow up like in 2008

This is correct. The current boom will not blow up like in 2008, it will blow up in a new and unanticipated way. Likely due to complex and lightly regulated financial innovations that have grown in size since the last crash.

Re: The Fed's $2.7T mortgage problem

#90

Post by riskneutral »

JumpCrisscross wrote: post #70
qeternity wrote: post #59

Earlier quoted context omitted.

> The 2020 housing boom will not blow up like in 2008 because today's mortgage backed securities are much more stable than the C-tier CDOs of yester-year CDOs did not blow up the housing market. The housing market blew up the CDO market. In 2007, people said the exact same thing, and by every single metric the housing market is far more extended than it was then.

> CDOs did not blow up the housing market. The housing market blew up the CDO market. Both statements are correct because there was a feedback loop.

It was more like dominos falling than a feedback loop. It was poor / fraudulent mortgage underwriting standards which caused a housing bubble and subsequent collapse of house prices and increase in mortgage defaults. The CDO market provided a large part of the funding for those mortgages and suffered as a result. The panic over the CDO market's collapse caused a widespread credit crisis for anyone suspected of having exposures to CDOs, and then the US government decided to allow a major bank to fail due to credit crisis (Lehman Brothers). This was a terrible mistake that nearly caused the cascading failure of the entire financial sector and forced the US government to execute a huge bailout operation. The blame lies with the US government, for first failing to properly regulate the market, and then allowing Lehman Brothers to fail without understanding the consequences.

The consequences of the 2008 financial crisis reverberated for over a decade, and then COVID-19 pandemic arose and the government decided that it wasn't going to make the "same mistake" again and started bailing out everyone. However, they overshot, misallocated funds, caused runaway inflation, then failed to recognize the persistent inflation and acted too late to curb it. That brings us to today, where there is ongoing speculation about whether this will be a "soft landing" or a "hard landing." If history is any guide, then I think that this kind of market situation this means we can expect another spectacular crash in the near future. The consequences of the 2008 financial crisis and subsequent rescue operation were still unresolved when the pandemic began, because the Fed had not figured out how to unwind its bloated balance sheet from all those years of Quantitative Easing. Just when the Fed thought it would start unwinding, the pandemic hit, and the Fed balance sheet grew astronomically. Now, for the first time in decades, the Fed is facing the runaway inflation that "common sense" would have predicted, and they have no choice but to initiate a "rug pull" on the economy in order to bring inflation under control. This will only end when the US consumer is bruised badly enough to reduce consumption, which will put the economy into a tailspin which will cause massive wealth destruction for investors. It's hard to see how the Fed can keep kicking this can down the road. Somewhere along the way there will be a black swan event. Perhaps Russia will choose to escalate cyber, kinetic and/or economic warfare against NATO at the very moment that a US market crash is occurring.

I sincerely hope that I'm wrong, but my Spidey Sense is tingling like it's 2001 or 2008.

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