Here is a link: http://www.federalreserve.gov/econresdata/releases/mortoutstand/mortoutstand20090331.htm
This report brings some clarity to the problems we are facing. For example, the Fed establishes the size of the mortgages outstanding. The Fed puts that number as of year-end 2008 at a whopping $14.6 trillion. There has been a lot of discussion lately about the rapid rise in Public Sector debt towards the scary 100% of GDP level. Well, private mortgage debt is already there.
In 1990 mortgage debt was 66% of GDP. In 2000 it was 68%. However, from 2000 to 2008 that rate jumped to 100+% of GDP. This represents an expansion of mortgage credit of $7.8 trillion, a 100% increase in outstanding mortgages in just eight years. There was a 50% increase in the Mortgage Debt to/GDP ratio in the first eight years of this decade. This surge in available credit led to the bubble in housing that is killing us today.
There has been a lot of finger pointing going on as to who is responsible for the economic problems that we face. The question, “How did we get into this mess?” is being answered with, “The reckless guys on Wall Street did it”. A review of the information provided by the Fed does not support that conclusion.
The Fed report includes data on Non Farm, nonresidential and Farm mortgages. This information is not included in the following analysis. Only the One-to four family residences and Multi-family residences are included. These two categories totaled nearly $13 trillion as of December 2008.
The major changes in the 2004 - 2008 period:
Mortgage pools and the Banks are the only notable categories. Of the $3.1 trillion in growth over the period $2.8 or 90% comes from Mortgage Pools. In this category are the SPIV’s, SIV’s, CDO’s and other toxic waste that turned this mortgage pool into a cesspool. The category, 'Federal/Agency' is a surprise number. It looks as if the DC share of the mortgage mess was negligible. The data suggests that this category represents less than 10% of the problem and that the Federal involvement grew at a rate less than GDP. Nothing could be father from the truth. The Agency and the Pool categories are intertwined.
The Fed provides information regarding the Pool that we are drowning in. $6.9 trillion of the pool is residential mortgages. Of that amount only $2 trillion is identified as ‘Private’. The balance of $4.9 trillion has been securitized, guaranteed and sold by either Ginnie Mae, Freddie Mac, or Fannie Mae. In other words, the Feds own 70% of the Pool.
If the Pool is tainted we aught to look at who has been peeing in it. In this case it is clear that the Private Sector financial contribution to the growth of the now problematic pool is minor when compared to the Government’s direct involvement.
The following chart summarizes the Mortgage debt to GDP ratio over 23 years. The level was relatively stable for the years 1985 to 2000. Thereafter it exploded. This dramatic increase in financial leverage is the fundamental reason for the problems that we face today. It is not possible that such a significant expansion of Government credit could have been accomplished without the direct involvement of the President.
Then President Bush spoke on the subject of expanding mortgage credit in June of 2002. The speech was given to a large HUD audience. The speech was met with applause. It is worth reading. Link to speech http://www.hud.gov/news/speeches/presremarks.cfm
His words establish his state of mind on the issue of expansion of mortgage credit. The following are some excerpts from that speech:
-I believe when somebody owns their own home, they're realizing the American Dream. I want that pride of ownership to extend all throughout our country. The goal is, everybody who wants to own a home has got a shot at doing so. We want 5.5 million more homeowners by 2010
-I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action. It is essential that we stay focused on the goal, and work hard to achieve that goal. And when it's all said and done, we can look back and say, because of my work, because of our collective work, America is a better place. Out of evil came incredible good.
-The single barrier to first-time home ownership is high down payments. We can deal with that. It is essential that we make it easier for people to buy a home.
-The problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. There's too many pitfalls. The Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with home ownership.
-I called upon the private sector to help us and help the home buyers. I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.
-Economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security.
Well before this speech Mr. Bush initiated the steps that linked Congress, the Executive Branch, Treasury, Fannie and Freddie in his grand plan to achieve his Goal. He engineered the massive increase in the Mortgage/GDP ratio. His intentions may have been good. His actions have brought us to our knees.
Along the way Mr. Bush solicited the support of anyone he could to achieve his 'goals'.
A couple of points for consideration:
ReplyDelete(1) FNMA and FHLMC were created to provide liquidity in the mortgage market. Although these agencies were (briefly) in the private sector, the mission never changed. That these entities held and continue hold a large share of outstanding mortgages in the US is by design.
(2) The private sector portion of the mortgage pool was 17.7% of the total in 2004 and 20.6% in 2008. The Agency portion was therefore declining over the same period. One could say that private holdings grew by 20% as lending standards declined most precipitiously. Not fair perhaps, but the data could be presented that way.
If FNMA amd FHLMC are holding the mortgage securites, that means, presumably, that Citi, BofA, Hypo Real Estate, RBS, and the like are not. The problems at the agencies are on the public balance sheet, even if Government accounting denies this. I don't understand how the Agency holdings can account for the meltdown in the private sector.
I blame "W" for everything up to and including my athlete's foot, but even I'm not convinced this data supports blaming "W" for the mortgage crisis.
I totally agree that Wall Street does not have sole responsibility for the financial crisis. My local Borders had an entire section of books with the subject of "get rich in real estate." A mania is sustained by many actors in the public and private sector; Wall Street could not have done it alone.
Now if the entire blame for the financial crisis can somehow be laid at the feet of Larry Summers, I could probably buy into that theory without reservation.
Thanks for blogging.
OG, Tks.
ReplyDelete1) I agree that it is by design that they exist. They perform some very important functions. It was never in anyone's design that they make up 70% of the mortgage market. That is way to big.
2)Another way to say this is, "The Agency portion remained stable during the period at approximately 80%. AS the increase was $3.1 trillion the Agency portion of the increase was $2.5T while the Bank portion was only $.6 Trillion.
I think the Agency holdings are the problem in the private sector today because they were the primary source of the expansion of credit that caused the RE bubble. When the bubble burst it had a cascading effect. It first took out FNM and FRE. That led to the TARP and the bank bailout. The broad contraction of credit resulting from the pop of this bubble has killed the private sector.
On W. His words: Out of evil will come incredible good. This guy connected the need to stimulate the economy with Homeland Security. The "evil" thing comes into his thinking on domestic housing. He went over the top on this.
The debate will be: What is the worst thing G. Bush did? Go to war with Iraq or double the historic size of the mortgage market to GDP?
As an economist, I look at things by the numbers. Iraq will cost 1 trillion. The mortgage mess and the related consequences is likely to cost us 4 trillion.
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