FacebookTwitterRedditEmail

The Sorry State of the Banking Industry

Friday, the National Association of Realtors will report April existing home sales and prices. These are expected to continue the down trend of recent months and reflect the sorry and dysfunctional state of the banking industry.

Existing home sales and prices are fundamental indicators of the vitality of the housing market and significantly affect consumer confidence and the health of the economy. Until the Federal Reserve instigates reform among the major New York banks, housing prices will remain depressed, and broader U.S. economic growth will be lethargic.

In March, the annual pace of sales was 4.93 million, down 2 percent from the previous month and 19.3 percent from a year earlier. The median price in March was $200,700, a bit higher than in February, but 7.7 percent lower than a year earlier.

The NAR’s index of pending home sales measures new contracts and provides a forward looking indicator of final sales one or two months in advance. Over the last year, this indicator has slid fitfully, and for February and March combined it was down about 21 percent from a year earlier.

Based on this information and other soundings from the credit markets and broader economy, my proprietary forecasting model indicates existing April existing home sales will come in at about 4.84 million. The median prices should fall to about $198,000.

Housing sales will remain well below the 7.1 million posted in 2005 and prices will continue to slide. During the recent bubble, home and land prices got out well in front of fundamentals, such as household personal income and housing density. But for creative mortgages, which created huge profits for New York banks and have since proven poisonous, many sales would have never been completed at the lofty prices recorded in 2006 and early 2007.

The U.S. consumer faces a constant drumbeat of bad news. Housing prices are falling, gas prices are rising, good new jobs are getting scarcer than hen’s teeth, and credit card terms are getting tougher, even as the Federal Reserve makes credit to banks cheaper.

Federal Reserve efforts to increase liquidity and bank lending have not made mortgages adequately more available, especially in the Alt-A and subprime categories. Alt-A loans are for homeowners offering good repayment prospects but either less-than-perfect credit or recent income records.

Fannie Mae, generally, only takes a limited number of nonprime lenders, and cannot finance many upper-end, more expensive homes.  It certainly does not finance the kind of liars loans, based on fictitious assertions about home values and buyer incomes, that Citigroup, Merrill Lynch and others bundled in bonds for sale to unknowing fixed income investors to create transactions fees, profits and huge bonuses for executives.

Federal Reserve Chairman Ben Bernanke’s strategy has two components. The Fed has lowered short-term interest rates by slashing the Federal Funds rate 3.25 percentage points since September 2007, and the Fed has permitted banks to use subprime-backed mortgage securities to borrow from the Federal Reserve. The latter is the so-called term auction facility.

These policies do not solve the basic problem, because these policies do not provide banks with opportunities to write many new non-Fannie Mae conforming mortgages.

Banks cannot provide the housing market with adequate amounts of mortgage financing by taking deposits, writing mortgages and keeping those mortgages on their portfolios. Bank deposits are not nearly enough to carry the U.S. housing market. Much the same applies for loans to businesses.

In normal times, regional banks bundle mortgages into bonds, so-called collateralized debt obligations, and sell these in the bond market through the large Wall Street banks.

The recent subprime crisis revealed the large banks were not creating legitimate bonds. Instead, they sliced and diced loans into incomprehensibly complex derivatives, and then sold, bought, resold, and insured those contraptions to generate fat fees and million dollar bonuses for bank executives.

This alchemy discovered, insurance companies, mutual funds and other private investors will no longer buy mortgage-backed bonds. Banks can no longer repackage mortgages and other loans into bonds and are pulling back lending. Home prices tank, consumers spend less, businesses fail and jobs disappear.

Private investors have taken massive losses, and the large banks have taken more than $150 billion in losses on their books. This has left the banks short of capital and in liquidity crises. The banks turned to foreign governments, through sovereign investment funds, to sell new shares and raise fresh capital, and to the Fed to boost liquidity.

Neither the sovereign investment funds nor Bernanke have required the banks to change their business models, which essentially pays bankers for creating arcane investment vehicles that generate transactions fees, rather than writing sound mortgages and selling simple, understandable mortgage-backed securities to investors.

Rather than reform their business practices to reenter the fixed income market, Citigroup and other large financial houses are scaling back or abandoning mortgage finance, and trolling financial markets for other lucrative opportunities to write derivatives that pay outsized profits and huge bonuses.

Most recently we have learned Citigroup’s hedge fund engineers have been practicing slight of hand to sell derivatives based on bank-owned life insurance policies, bilking investors and other banks for fees.

Until Citigroup and other major New York banks abandon such tainted business practices, the bond market virtually remains closed to mortgage finance, other than CDOs offered by Fannie Mae, and cannot supply the volume and array of mortgage products necessary to support a full housing recovery.

The legislation to update regulation for Fannie Mae and other federally sponsored banks and provide additional federal funds to assist these institutions in working out troubled mortgages will help but the private banks must be reformed and revitalized to fully finance a vibrant housing market.

The economic stimulus package tax rebates, interest rate cuts and administration help for distressed homeowners are useful. The stimulus package is less than the losses taken by private investors and the banks on CDOs.

Getting the housing market going and the economy growing will require Bernanke to aggressively pursue banking reform. Without genuine changes in the way Wall Street handles mortgages and other loans, the economy can’t get back on track.

PETER MORICI is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

July 15, 2020
Jennifer Loewenstein
Forging Greater Israel: Annexation by Any Other Name
John Davis
This is No Way to Live
Melvin Goodman
Bolton’s Book is Not the “Bomb” as Advertised
Kenneth Surin
Boris Johnson’s “Blundering Brilliance”…Now Only the Blundering Remains
Daniel Warner
Audacity and Hope in the Summer of Discontent
Thomas Klikauer – Nadine Campbell
Propaganda Beyond Trump
Omar Ramahi
Hagia Sophia and the Catastrophe of Symbolism
Binoy Kampmark
The Yeezy Effect: Kanye West Joins the Presidential Race
Robin Wonsley – Ty Moore
Minneapolis Ballot Measure to Dismantle the Police Will Test the Strength of Our Movement
Robert Jensen
‘Cancel Culture’ Cannot Erase a Strong Argument
Tom Clifford
Jack Charlton, Soccer and Ireland’s Working Class
Elliot Sperber
Mother Goose in the End Times
July 14, 2020
Anthony DiMaggio
Canceling the Cancel Culture: Enriching Discourse or Dumbing it Down?
Patrick Cockburn
Boris Johnson Should not be Making New Global Enemies When His Country is in a Shambles
Frank Joyce
Lift From the Bottom? Yes.
Richard C. Gross
The Crackdown on Foreign Students
Steven Salaita
Should We Cancel “Cancel Culture”?
Paul Street
Sorry, the Chicago Blackhawks Need to Change Their Name and Logo
Jonathan Cook
‘Cancel Culture’ Letter is About Stifling Free Speech, Not Protecting It
John Feffer
The Global Rushmore of Autocrats
C. Douglas Lummis
Pillar of Sand in Okinawa
B. Nimri Aziz
Soft Power: Americans in Its Grip at Home Must Face the Mischief It Wields by BNimri Aziz July 11/2020
Cesar Chelala
What was lost when Ringling Bros. Left the Circus
Dan Bacher
California Regulators Approve 12 New Permits for Chevron to Frack in Kern County
George Wuerthner
Shrinking Wilderness in the Gallatin Range
Lawrence Davidson
Woodrow Wilson’s Racism: the Basis For His Support of Zionism
Binoy Kampmark
Mosques, Museums and Politics: the Fate of Hagia Sophia
Dean Baker
Propaganda on Government Action and Inequality from David Leonhardt
July 13, 2020
Gerald Sussman
The Russiagate Spectacle: Season 2?
Ishmael Reed
Lin-Manuel Miranda’s Perry Mason Moment
Jack Rasmus
Why the 3rd Quarter US Economic ‘Rebound’ Will Falter
W. T. Whitney
Oil Comes First in Peru, Not Coronavirus Danger, Not Indigenous Rights
Ralph Nader
The Enduring Case for Demanding Trump’s Resignation
Raghav Kaushik – Arun Gupta
On Coronavirus and the Anti-Police-Brutality Uprising
Deborah James
Digital Trade Rules: a Disastrous New Constitution for the Global Economy Written by and for Big Tech
Howard Lisnoff
Remembering the Nuclear Freeze Movement and Its Futility
Sam Pizzigati
Will the Biden-Sanders Economic Task Force Rattle the Rich?
Allen Baker
Trump’s Stance on Foreign College Students Digs US Economic Hole Even Deeper
Binoy Kampmark
The Coronavirus Seal: Victoria’s Borders Close
Evaggelos Vallianatos
Power, Knowledge and Virtue
Weekend Edition
July 10, 2020
Friday - Sunday
Lynnette Grey Bull
Trump’s Postcard to America From the Shrine of Hypocrisy
Anthony DiMaggio
Free Speech Fantasies: the Harper’s Letter and the Myth of American Liberalism
David Yearsley
Morricone: Maestro of Music and Image
Jeffrey St. Clair
“I Could Live With That”: How the CIA Made Afghanistan Safe for the Opium Trade
Rob Urie
Democracy and the Illusion of Choice
FacebookTwitterRedditEmail