Chinese ‘Adamant’ On Private Sector Home Lending
A couple of reports on the GSE’s. “”Fannie Mae, the largest U.S. home funding company, on Thursday said that its mortgage portfolio shrank by annualized 7.2 percent in February after declining 3.1 percent in January. The retained mortgage holdings ended last month at $720.8 billion, as the portfolio extended the shrinking pattern seen each month but one dating back through all of last year.”
“Fannie Mae’s mortgage holdings slid by an annualized 19.6 percent last year. The company has been downsizing its portfolio because mortgage assets have been costly and there has been increased competition from other investors. Also, the company had been raising capital to meet regulatory requirements due to accounting problems that will spur an estimated $11 billion earnings restatement.”
And Reuters reports that even the Chinese don’t like a government subsidy for lenders. “China has no desire to create Freddie Mac or Fannie Mae style government sponsored enterprises (GSEs) to help develop its mortgage market, a former regulator of the two U.S. home funding companies said on Thursday.”
“Armando Falcon, formerly a director of the Office of Federal Housing Enterprise Oversight in the U.S., said he met with senior officials from the People’s Bank of China, the Chinese central bank, in January. ‘The Chinese are adamant about having private sector mortgage lenders that are not reliant on government subsidies,’ the former regulator of the two U.S. government sponsored enterprises (GSE) told a bond conference in Italy.”
“Falcon said Freddie and Fannie were created during the Depression in the 1930s, and Americans are still living with their unintended consequences. ‘The unintended consequences are their portfolios create systemic risk to the financial system,’ Falcon told Reuters.”
“Falcon said there is tension for Freddie and Fannie because they are shareholder owned companies with government charters. The charters require them to boost home ownership by keeping mortgage money flowing. To do this, they buy mortgages from underwriters, giving lenders money to make more loans. They pool these mortgages into securities for sale to investors, and keep some in their investment portfolios.”
“‘My advice to governments around the world is to try and promote private sector mortgage lending not reliant on government subsidies,’ Falcon said.”
Those Commies! Trying to run a mortgage system entirely in the private sector! Next they will be putting flouride in the drinking water!!
They’ll be sapping our precious bodily fluids before you know it. Actually, I think they already are, if you’re buying a house.
We must invade immediately, before the free enterprise system allows the Chineese to dominate the world!
It’s sad when a communist country has less subsidy than the US. Long time readers will remember Mr. Falcon took on Fannie Mae when most in congress were still defending them. As far as the shrinking portfolio, the reason is anybodys guess because there are no financials and the monthly summary they put out is no help.
You can’t make this stuff up! Now the country that practically invented capitalism is getting schooled in free market economics by the communist Chinese.
well, if they don’t like GSEs they should not be buying any CMOs from Fannie Mae and Freddie Mac. i guess, they do like it as long as it helps them export goods to the u.s. btw, did anybody see the warning from today’s “The Economist” not to get rid of the M3 measure too soon:
http://economist.com/opinion/displayStory.cfm?story_id=5661583 (subscription required):
Central banks
Running on M3
Mar 23rd 2006
From The Economist print edition
Ignore money at your peril
ONCE, a central banker who did not believe in monetarism would have been viewed as equivalent to a priest who admits to being an atheist. A quarter of a century ago, control of money was seen as both necessary and sufficient to curb inflation—so most central banks set monetary targets. Monetarism has since become unfashionable. Financial deregulation and innovation made the money supply harder to interpret, let alone control. As the link between money and prices seemingly broke down, central banks scrapped money targets and instead focused on inflation directly. Or as Gerald Bouey, a former governor of the Bank of Canada, once said, “We didn’t abandon the monetary aggregates, they abandoned us.”
Today, America’s Federal Reserve barely glances at money. Indeed, from this week it will stop publishing M3, its broadest measure of money. The Fed claims that M3 does not convey any extra information about the economy that is not already embodied in the narrower M2 measure, so it is not worth the cost of collecting it. It is true that the two Ms move in step for much of the time, but there have been big divergences. During the late 1990s equity bubble, for example, M3 grew faster; over the past year, M3 has grown nearly twice as fast as M2. So it looks odd to claim that M3 does not tell us anything different. The Fed is really saying that it doesn’t believe money matters.
It is ironic that the Fed is dropping M3 only days after a conference was held to honour Otmar Issing, chief economist of the European Central Bank (ECB) and the architect of its highly money-oriented policy (see article). At that meeting many economists and former central bankers from around the world expressed unease about the recent rapid pace of growth in global money and credit. As Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.” Monetary aggregates are a fickle guide to the economy over the next year, but over longer periods the link between money and prices still holds. Many big mistakes in economic history were made when policymakers ignored monetary signals: the Great Depression in the 1930s, the great inflation of the 1970s, and the financial bubbles in Japan in the late 1980s and East Asia in the late 1990s.
Those experiences surely suggest that central banks should keep a close eye on the growth in money alongside their immediate inflation goals—which is exactly what the ECB has done, with its much (and unfairly) criticised “two-pillar” strategy. The first pillar looks at how economic activity might influence inflation over the next year or two; the second focuses on the growth in money as a cross-check on medium- to long-run developments. The Bank of Japan’s new monetary-policy framework adopted earlier this month has borrowed several elements of this approach. The Bank plans to focus on price stability and growth one to two years into the future, but also to carry out a broader assessment of medium- and longer-term risks, such as asset prices and credit growth. So, in scrapping M3, the Fed is looking like the odd man out.
Research by the Bank for International Settlements has confirmed that monetary aggregates do still contain useful information. In particular, rapid growth in money and credit as well as asset prices usually signals the build-up of economic and financial imbalances, which often cause financial stress later on. Central banks cannot use the money-supply numbers as a way to set monetary policy on auto pilot: but they would be foolish to ignore the hazard warning lights.
Great article, oikonomikos. Here’s what I believe is the fatal flaw in focusing solely on inflation: the inflation guages (CPI and PPI) are too narrowly focused. Inflation is commonly described as too many dollars chasing too few goods. How can you tell that there are too many dollars? You see the result in the increasing price of goods. However, what if the dollars are chasing something else - like assets? Looking at the CPI-meter doesn’t tell you anything. Consequently, central banks do nothing to stop the growth of liquidity. Now let’s say that all that cash eventually stops chasing assets and starts chasing goods. Suddenly, the CPI is rocketing off the charts but it’s too late to do anything about it — the money supply has already become to bloated. In other words, the money was “hiding” in assets, and since the central bankers weren’t watching assets, they let the problem grow out of control without even realizing it.
my biggest objection is the methodology behind calculating the indexes…the prize is just to hight to allow objectivity there…since so many other indicators are tied to CPI and PPI the government is happy fudging (massaging, tweaking - u pick the term u like) numbers to fit whatever is politically acceptable. the best example is tv sets new plasma needs to be ‘deflated’ to fit its technological granddaddy and who knows maybe they even measure it by square inch…imagine that your tv cost per square inch is really dropping even though you are still splashing…can’t buy television in inches i guess
Not to mention the exclusion of basic necessities like food and energy from the core CPI.
China has no need to create a Fannie/Freddie, because most of their banks are OWNED by the government. Duh!
Listen guys, China is a Pseudo-capitalistic dictatorship and will be like that for a long time.
Speaking of the Chinese, on CNBC during a brief Q&A, some economist was describing China’s appetite for US bonds as the support for low interest rates. If they decide not to buy, interest rates could jump, essentially overnight, 2-3pts. Of course there was a realtor saying “It’s always a good time to buy” and “Don’t wait and let that property slip away”. My question is, “Why not?”. There is another nicer & CHEAPER ONE GETTING LISTED AS YOU ARE DECIDING!!!
OT - KBH up $3 today. Short covering?
Or share buybacks to help pump up the stock in the wake of those great numbers they reported yesterday?
Or it could be fund managers putting their clients’ hard earned money at peril for no reason but the code of the Street: scratch mine, scratch yours!
I don’t think too many private investor sheople would go long with all the press out on housing meltdown… despite the brainwashing efforts put forth by CNBC and related pumpers
I think anyone clued in enuf to short held tight today and probably has the resources to ride out any last gasps.
Everything spiked straight up on the Existing Home Sales number because people can only read headlines. The rest of the day was a short squeeze.
Tomorrow is New Home Sales; I’m expecting that their numbers will be even better relatively speaking than the Existing Home Sales number (which I simply refuse to believe) because the builders eagerly lower their prices to make sales.
So I think shorts are screwed for another week or so, and I don’t know what official pronouncement could change that. (Everybody assumes that Bernacke will raise by 1/4%, and I doubt that he will just come right out and say “Holy crap, look at those housing sales numbers, man things are out of control there.” The WLS disaster gave all the HB’s a big gap up on Friday morning but by Monday’s close most of them had given all of Friday’s gains back. These sales figures are industry wide however.
The funny thing is that Chuck Schummer and Lindsey Graham went to China to threaten a 27.5% tariff on all Chinese imports if they don’t re-evalutate their currency. I hope the trade war will start, which will stop the debt-consumption loop that’s been going on. But, there is no chance. Even the Senate pass the bill, Bush will veto it without loosing a breath.
Supposedly they have have the votes to overturn the veto!
It will be really interesting if they get this into law. If the button is pushed, the world will be over.
Has Bush vetoed anything yet? Dont bet that he will this time.
Last I heard, they were still trying to teach him how to spell “veto”. He’s a quick study though, and I’m sure he’ll get it before the end of his term.
Bush hasn’t veto’d anything.
Tie it to some pork for the oil industry and it will get signed.
“‘My advice to governments around the world is to try and promote private sector mortgage lending not reliant on government subsidies,’ Falcon said.”
Great advice, Mr. Falcon, but good luck in ever seeing this implemented. It is just too sweet for politicians to milk these subsidized intervention schemes (GSEs, federally subsidized crop & flood insurance, etc.) for the steady flow of campaign contributions they generate. In a world where taxation has been demonized by a quarter-century of Republican rhetoric, big subsidized govt programs provide great political cover for extracting involuntary campaign contributions from the electorate.
OT- can’t get onto Ziprealty….maybe their server is too bogged down by all them listings
Not only do the GSE’s accountant’s cook the books, but the asset base securing the mortgage loans they purchase have all been “appraised” by HS educated trainee hacks hired by appraisal management companies whose policies are to hired those who will work the quickest and the cheapest.
As the saying goes, “You get what you pay for in life…”
The GSE’s are toast…
I agree, they have like a 2% cash reserve cushion. The first wave of defaults will wipe them out. If FNM is still in business in 2008 without a bailout I’ll eat my hat.
Bail-out is guaranteed. It will carry a bunch of GSE provisions, restrictions that will gradually disappear over time so the bubble has a chance to re-bloat.
I’ll hazard a guess that the Chinese may be less interested in purchasing GSE-underwritten MBS if the re-bloating scenario plays out.
all gov agencies are perpetual- rural electrification anyone ?
affordable housin yo
Rural electrification at least has some public-good aspect to back it up. There is not much good I can see in helping low income folks buy houses they otherwise could not afford, and which will ultimately lead them into bankruptcy.