Housing Liquidity Crisis Looms: Debt Deflation Follows

Authored by Mike Shedlock via MishTalk,

A liquidity crisis in housing is on the way. Non-banks are at the center of the storm.

The Brookings Institute says a Liquidity Crises in the Mortgage Market is on the way.

This is in guest post format. What follows are key snips from a 68-page Brookings PDF.

This article isn't very long. My comments follow.

Abstract

Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate.

Nonbank Stress

There is now considerable stress on Ginnie Mae operations from their nonbank counterparties:

“. . .Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over. . . . Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks. . . ”

Nonbank Share in $Billions

GSEs and Ginnie Mae

Although both the GSEs and Ginnie Mae guarantee mortgage-backed securities, there are a number of essential differences. In particular, Ginnie Mae servicers are exposed to greater liquidity strains, and a greater risk of absorbing credit loss, than GSE servicers.

Guarantee and Issuance of Securities

Guarantee and issuance of securities Both the GSEs and Ginnie Mae provide a guarantee to their mortgage-backed securities (MBS) investors that they will receive their payments of interest and principal on time. One crucial difference between these institutions, though, is who issues the underlying securities. The GSEs purchase loans from mortgage originators and issue the securities themselves. For Ginnie Mae MBS, financial institutions originate or purchase mortgages and then issue securities through the Ginnie Mae platform. In both cases, the loans in the securities have to meet certain underwriting standards and other requirements. The GSEs set the standards for the loans in their pools. For Ginnie Mae pools, the standards are set by the government agency that provides the insurance or guarantee on the mortgage (Federal Housing Administration, Veterans’ Administration, Farm Service Agency, Rural Housing Service, or Office of Public and Indian Housing).

Insurance Against Credit Risk

Another crucial difference between the GSEs and Ginnie Mae is who bears the credit risk associated with mortgage default. As shown in figure 3, for loans in GSE pools, the mortgage borrower takes the initial credit loss (in the form of her equity in the house), followed by the private mortgage insurance (PMI) company (if the mortgage has PMI), and then the GSE. For loans in Ginnie Mae pools, the mortgage borrower is again in the first-loss position, followed by the government entity that guarantees or insures the loan. However, the Ginnie issuer/servicer — unlike in the GSE case — is expected to bear any credit losses that the government insurer does not cover. Ginnie Mae covers credit losses only when the corporate resources of the issuer/servicer are exhausted.

Loss Priority

Servicing Strains

Figure 12 shows the share of all mortgages in 2016 that were originated by nonbanks and insured by the FHA or VA.

Servicers with heavy concentrations may be more vulnerable to servicing-advance strains.

Consequences of a Nonbank Mortgage Company Failure

In the event of a failure of a nonbank mortgage company, there are three main types of parties who would bear losses: (1) consumers; (2) the U.S. government and, by extension, taxpayers; (3) the nonbanks, their shareholders, and their creditors.

If nonbank failure resulted in a reduction in mortgage origination capacity, it is not clear that other financial institutions would extend credit on the same terms to these borrowers, or perhaps even extend credit at all. This contraction in mortgage credit availability has the potential to be a significant drag on house prices.

*  *  *

Mish Comments

The Brookings article is 68 pages long. The above snips capture the essence of their liquidity crisis claim but they provide much more detail.

Shocks Coming

Nonbanks are vulnerable to macroeconomic shocks, rising interest rates, home price declines and job losses, often with a bare minimum down payment.

This is happening while debt-to-income DTI ratios are on the rise and median FICO scores are dropping.

This is hardly surprising given homes are not affordable.

Failure is a Given

Brookings provides the failure hierarchy, and failure is a given.

To keep the latest bubble going, nonbanks kept lowering and lowering credit standards as home prices kept rising and rising.

This is a recipe for disaster, and disaster is at hand.

Housing Collapse Coming

Four days ago, before I saw the Brookings article, I commented Housing Collapse Coming Right Up.

The Brookings article reinforces my opinion.

Meanwhile, overdue debt is at a seven-year high. Distressed debt surged 11.5% in the fourth quarter.

​The Financial Times also notes "More Americans are also falling behind on their mortgages, for which problematic debt levels rose 5.2 percent over the same period to $56.7 billion."

Deflationary Debt Trap Setup

These numbers are huge deflationary. When credit expands there is inflation. When credit contracts (think defaults, bankruptcies, mortgage walk-away events), debt deflation occurs.

Here's my definition of inflation: An increase in money supply and credit, with credit marked to market.

Deflation is the opposite: A decrease in money supply and credit, with credit marked to market.

Looking Ahead

  • Credit card delinquencies are priced as if they will be paid back. They won't.

  • As soon as recession hits, defaults and charge-offs will mount. In turn, this will reduce the amounts banks will be willing to lend.

  • Subprime corporations who had been borrowing money quarter after quarter will find they are priced out of the market, unable to roll over their debt.

In a fiat credit-based global setup, this is how the real world works.

Unanimous Opinions

Seldom are opinions nearly unanimous. This is one of those times. Nearly everyone is looking for "inflation".

We have it! It's in home prices, junk bond prices, and equity prices.

The equity bubble is about to burst. For discussion, please see Sucker Traps and the Arithmetic of Risk.

Rear View Mirror Inflation

We have so much inflation that Inflation is in the Rear-View Mirror.

The inflation economists expect to happen, already has happened, in stocks, in home prices, in junk bonds.

They don't see it because they do not understand what inflation really is.

Debt Deflation Coming Up

I expect another round of asset-based deflation with consumer prices and US treasury yields to follow.

Comments

All Risk No Reward NotApplicable Fri, 03/09/2018 - 13:49 Permalink

Where's the tax payer listed as responsible for the debts of the Money Power Mega-Corporate fronts and their Government front?

---------Money Power
................../...........\
Donald Trump     Media

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."

~Lord Acton

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~Napoleon Bonaparte

"Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States under Alexander Hamilton).

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.”
~Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.

“The one aim of these financiers is world control by the creation of inextinguishable debt.”
~Henry Ford

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
~James Madison

"The youth who can resolve the money question will do more for the world than all the professional soldiers of history."
~Henry Ford, Sr.

How To Be a Crook
https://www.youtube.com/watch?v=2oHbwdNcHbc

Poverty - Debt Is Not a Choice
https://www.youtube.com/watch?v=t7BTTB4tiEU

Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire
https://www.youtube.com/watch?v=96c2wXcNA7A

Debunking Money
https://www.youtube.com/watch?v=5iBSBVew-3Y

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"
https://www.youtube.com/watch?v=Q6nL9elK0EY

And It's Gone
https://www.youtube.com/watch?v=TGwZVGKG30s

People with good intentions but limited understanding are more dangerous than people with total ill will.
~Martin Luther King, Jr.

"Although the so-called "moral issues" were raised, in view of the law of natural selection it was agreed that a nation or world of people who will not use their intelligence are no better than animals who do not have intelligence. Such people are beasts of burden and steaks on the table by choice and consent."
~Silent Weapons for Quiet Wars
https://www.lawfulpath.com/ref/sw4qw/index.shtml

"Our minds are the first bastion against such foreign ‘attacks’ and once the offenders have breached that they have unfettered access to the Heart and finally the Soul. Tragic situation for humanity.
~Jamie, Comment
https://aadivaahan.wordpress.com/2018/02/22/our-collective-dystopian-si…

In reply to by NotApplicable

NumbersUsa Fri, 03/09/2018 - 13:09 Permalink

"On November 21, 1962, the Department of Justice ordered the AZC (AIPAC) to begin registering as an Israeli foreign agent. This touched off an intense battle between the Justice Department and the AZC which outlasted (killed) both JFK and RFK. The bloodied and bruised Justice Department hid away its files on the affair until they were finally declassified and released in 2008.

The effort to register Israel’s foreign agents clearly failed. Just 42 days after the Justice Department order, the American Israel Public Affairs Committee incorporated itself in Washington and took over the AZC’s functions. Since the year it was ordered to register—as part of the AZC—AIPAC has extracted an inflation-adjusted $250 billion from US taxpayers for its foreign principals. Influencing the conduct of US policy "by techniques outside normal diplomatic channels" has never stopped."

And the jew supremacists at AIPAC want your guns, your money, your kids & your soul.

All Risk No Reward NumbersUsa Fri, 03/09/2018 - 13:56 Permalink

The Big Bad is the small cabal Money Power Monopolists.  They are the puppeteers.

Everyone else, including ordinary Jewish people (even the "Jewish supremacist" programmed ordinary people, just like the programmed "white supremacists") are puppets.

Now, there is a Money Power "Human Power dElite" that is, at the sole discretion of the Money Power Monopolist, over respresented with Jewish sellouts.

The Human Power Elite
https://www.youtube.com/watch?v=r-vCd3VMMhM

They Live - The Sellout - John Carpenter
https://www.youtube.com/watch?v=C6dgppKq8UU

People using their minds independently of the Money Power Monopolist programming designed to project their evil upon ordinary human patsies know that individuals are responsible for their own personal decision, not the collective.

People who blame an entire group for the actions of a tiny minority within that group are victims of Money Power Monopolist COLLECTIVIST PROGRAMMING.

Take your mind back from the programming.

In reply to by NumbersUsa

HardlyZero itstippy Fri, 03/09/2018 - 19:12 Permalink

When the lenders have little to lose (deep pockets) then they just keep lending even during inflated real estate times.  It is like a runaway condition...like the 3rd Matrix movie.  Eventually there is just too much credit chasing constrained real markets.  If 10 people bid on each house, the house price goes up every time.

It will be a shock when the cheap/free credit dries up.

In reply to by itstippy

blindfaith NoDebt Fri, 03/09/2018 - 13:18 Permalink

Indeed, but but but Amazon will save us. They will finance out over priced homes and give us PRIME membership as a bonus.

 The United States of Amazon will save all of us.  We can buy our sleeping bags on Amazon, Charge our phones on the Amazon provided charge stations under the freeways and even have Amazon deliver their wonderful products to our new under the freeway homes ( would you please move over, your elbow is on my bag zipper...thank you).  AND....Buy all the cheap manufactured food we want from Amazon on Amazon credit cards.

 

WOW...we are in Amazonlandia now.....yippee!  I love President (for life) Jeff.and vice pres Suckerberg...don't you?

Is it ANY wonder the kids see no future, no hope, no life, no way to get ahead.  Thank George Sozeros and the Silicone Valey gang for our new America...oops...Amazonlandia of the United States.

In reply to by NoDebt

nsurf9 Fri, 03/09/2018 - 13:17 Permalink

"They don't see it because they do not understand what inflation really is."

Sure they do - that's why we have an open-door policy to cheap, illegal immigrat labor to depress wages - the only metric the "Fed" wants to look at - while stealing your money's buying power.

P.S. Did you and your great grandchildren want a 100 year, or 200 year mortgage on that one bedroom crap-shack?

All Risk No Reward nsurf9 Fri, 03/09/2018 - 14:03 Permalink

>>Sure they do - that's why we have an open-door policy to cheap immigration labor to depress wages - the only metric the "Fed" wants to look at - while stealing your money's buying power.<<

Ordinary people are so gullible.

"Pretend inferiority, promote their (your enemy's) arrogance."
~Sun Tzu, Art of War

Of course they know what inflation is, that's why they conceal the real numbers from public consumption!!!

BTW, their inflating credit and monetary aggregates exponentially against realized GDP growth is a criminal activity according to Section 2A of the Federal Reserve Act that states monetary and credit aggregates must grow "commensurate" with the productive capacity (measured by GDP) of the country.

That's now almost a 40 year long crime spree inflicted upon the Muppets who think these people are dumb.

No, the Muppetry is dumb, that's why we are debt-money enslaved helots and they d*mn near run the world - and you can't even conceive of that reality!

BTW, Section 2A of the Federal Reserve Act HAS NO PENALTY.  Is it even a law without a penalty?

Funny how the "dumb" people who "don't comprehend inflation" write laws with no penalties for themselves, BUT ALL THE LAWS THAT APPLY TO THE SUPER SMART PEOPLE WHO "UNDERSTAND INFLATION" HAVE PENALTIES, AND RATHER HARSH ONES AT THAT.

In reply to by nsurf9

I Write Code Fri, 03/09/2018 - 13:24 Permalink

Nearly everyone is looking for "inflation". We have it! It's in home prices, junk bond prices, and equity prices.

I knew there must be a point to this article if I just kept reading.

So, um, then official deflators miss it, screwing the common folk.

Yeah, that works.

But then why should it stop?

Winston Churchill I Write Code Fri, 03/09/2018 - 13:34 Permalink

For the same reasons as last time if you look at the mechanics of what went wrong.

Only this time it will be much much faster as the non bank aggregators have no access to the REPO market.

It was only when the shadow banking system realized TBTJ were repo'ing the same mortgages that had already been

sold in RMBS tranches that it all fell apart.That little trick got the banks 18 months of breathing space, but they

got even greedier instead of getting out they doubled the ponzi.

In reply to by I Write Code

All Risk No Reward I Write Code Fri, 03/09/2018 - 14:19 Permalink

>>But then why should it stop?<<

The simple answer is that all exponential functions must come to an end, or they must grow to infinity.

Do you see infinite debt and debt service on flat incomes?

If so, please show the detailed mathematics that underly your claim.

The Crash Course - Chapter 3 - Exponential Growth
https://www.youtube.com/watch?v=CvVFTJMUEj4

The Crash Course - Chapter 4 - Compounding Is The Problem
https://www.youtube.com/watch?v=ijf7UxI7EFE

The other reason is that the Money Power Monopolist WANT IT TO STOP.  THEY WANT THE COLLAPSE.

Why?  Because debt-money enslaved helots that get forced into bankruptcy, including the government, will have their assets stripped by the Money Power Monopolists.

They don't just want your soul, they want your physical wealth and authoritarian control over the planet.

Why is the planet impoverished?  Because impoverished people are easier to control.

It is amazing what most people will do for day's meals when they are very hungry.

Here are a number of resources that explain the set-up and the eventual denouement of this tyrannical debt-based monetary system of ordinary human enslavement.

"The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks."
~Lord Acton

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
~Napoleon Bonaparte

"Let the American people go into their debt-funding schemes and banking systems, and from that hour their boasted independence will be a mere phantom."
~William Pitt, (referring to the inauguration of the first National Bank in the United States under Alexander Hamilton).

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.”
~Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.

“The one aim of these financiers is world control by the creation of inextinguishable debt.”
~Henry Ford

“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
~James Madison

"The youth who can resolve the money question will do more for the world than all the professional soldiers of history."
~Henry Ford, Sr.

How To Be a Crook
https://www.youtube.com/watch?v=2oHbwdNcHbc

Poverty - Debt Is Not a Choice
https://www.youtube.com/watch?v=t7BTTB4tiEU
Renaissance 2.0 The Rise of [Debt-Money Monopolist] Financial Empire
https://www.youtube.com/watch?v=96c2wXcNA7A

Debunking Money
https://www.youtube.com/watch?v=5iBSBVew-3Y

Krugman (and each MIT economist professor - THEY KNOW AND THEY OCCULT!) is a Goebbelsian propagandist as he covers the crimes of wolves with his fake sheep suit and lisp.

Krugman to Lietaer: "Never touch the money system!"
https://www.youtube.com/watch?v=Q6nL9elK0EY

And It's Gone
https://www.youtube.com/watch?v=TGwZVGKG30s

People with good intentions but limited understanding are more dangerous than people with total ill will.
~Martin Luther King, Jr.

"Although the so-called "moral issues" were raised, in view of the law of natural selection it was agreed that a nation or world of people who will not use their intelligence are no better than animals who do not have intelligence. Such people are beasts of burden and steaks on the table by choice and consent."
~Silent Weapons for Quiet Wars
https://www.lawfulpath.com/ref/sw4qw/index.shtml

"Our minds are the first bastion against such foreign ‘attacks,’ and once the offenders have breached that, they have unfettered access to the Heart and finally the Soul. Tragic situation for humanity.
~Jamie, Comment
https://aadivaahan.wordpress.com/2018/02/22/our-collective-dystopian-si…

In reply to by I Write Code

Liberaldisdain Fri, 03/09/2018 - 13:29 Permalink

Recession for a decade calling Mish.   Has this guy been right about anything?  Does anyone on the site hold people responsible for what they say besides the running joke Gartman?  

Oh wait, Gartman is not a contributor to ZH. nuff said. 

Vlad the Inhaler Fri, 03/09/2018 - 13:37 Permalink

Author missed the boat.  These entities have pawned their loans off onto the taxpayer.  Everyone from the GSEs to the banks to the homeowners will get some sort of bailout.  The taxpayers, savers, and future generations are the ones who will get screwed yet again.

j0nx Fri, 03/09/2018 - 13:38 Permalink

Housing market is nowhere near collapse. 10 years maybe. Demand is sky high and inventory is low. Last time around it was the opposite.

GreatUncle j0nx Fri, 03/09/2018 - 13:46 Permalink

You buy a house with what? FIAT.

Interesting so the $ is guaranteed in your mind for the next 10 years?

Imagine populism over the last 2 years and then scale it accordingly for the next 10.

Revolt will tear economices to bits with unrest and anger rising.

Nope can't see it lasting that long without regime change in most western nations.

In reply to by j0nx

itstippy j0nx Fri, 03/09/2018 - 14:51 Permalink

"Housing market is nowhere near collapse. 10 years maybe. Demand is sky high and inventory is low. Last time around it was the opposite."

Actually, last time around was identical.  In 2003-2007 everyone was buying.  House flipping shows were all over the TVs.  Long time renters were offered financing to buy and they took it.  Long time homeowners sold the place for a huge profit and bought their dream homes using even more debt.  "Climb the property ladder" was the mantra.  Demand was sky high.

Houses were on the market for mere hours.  Bidding wars were common.  You had to offer substantially over the asking to get the house.  Homeowners were getting letters from real estate agents offering to sell their homes for them.  There wasn't nearly enough inventory.

Then in 2008 the defaults hit, credit dried up almost overnight, and demand disappeared entirely.  Foreclosures and jingle mail took off.  The housing mania was over.

In reply to by j0nx

CRM114 j0nx Fri, 03/09/2018 - 17:44 Permalink

Not so.

I've heard a few saying, and it's true round here, that the housing market is highly fragmented. Low price houses, even with a lot of reno needed, are selling in 24 hours. Top end properties are going rapidly to those with the money, barely anything is moving in the middle. The market as a whole is tightening up drastically. As soon as all those who can get a mortgage at the low end have moved (and they won't be moving again fast, 'cos of all the renos needed), and the top end are settled, house sales will crunch dramatically. Could be as early as June.

I'm rural; my realtor told me last June he has sold 5 houses over asking in 25 years, and three more in the last month. The market's gone mental, but it isn't showing up in the averages.

In reply to by j0nx

besnook Fri, 03/09/2018 - 13:42 Permalink

as much as everyone would like to call this the big one this turn is actually looking like a normal turn even if the "recovery" hasn't returned to the height of 2007 metrics.