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7/28/2019 Quantitative Easing & the Housing Market
http://slidepdf.com/reader/full/quantitative-easing-the-housing-market 1/21
CARRINGTON INVESTMENT SERVICES
599 PUTNAM AVENUE
GREENWICH, CT 06830
American Enterprise Institute
April 9, 2013
Quantitative Easing & the Housing Market
Carrington Investment Services is a SEC registered broker-dealer, member of FINRA and S IPC
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1
Quantitative Easing & Housing
QE is a radical Fed policy intended to reflate asset, job markets
Fed funds target has been set at 0.25% since 2008
FOMC is purchasing $40 billion per month of agency securities and $45b/m of Treasury paper, reinvesting principal payments into RMBS
FOMC (3/13): “… these actions should maintain downward pressure onlonger-term interest rates, support mortgage markets, and help to make
broader financial conditions more accommodative”
FOMC believes that QE will help to revive job market and boost activityin housing, consumer sectors, indirectly create jobs
QE is effectively a massive tax; a wealth transfer from individual andcorporate savers to debtors, constraining spending by former
QE also represents significant reduction/manipulation of the duration offinancial assets, creating future credit, liquidity risk to banks, individualinvestors when QE policy ends
April 9, 2013
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2
Net Interest Margin – All US Banks ($M)
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000Total interest income
Total interest expense
Net interest income
Source: FDIC Quarterly Banking Profile (12/31/2012)
QE has lowered bank funding cost by $80 billion per quarter
April 9, 2013
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3
2013 Housing Market Outlook
Key housing metrics are pointing in the right direction…
Home prices are appreciating steadily
• January 2013 up 8.1% YOY, best in six years
• Consensus forecast is for 3-4% increase in 2013
• For first time since 2006, no quarterly winter price decline
Existing home sales are up• Anticipated sales of 4.9-5.0mm units
New home sales are up dramatically
• Anticipated sales of 400-450,000
Housing starts are at multi-year highs
• Home builders are running 2-3x 2011 run rates
Delinquency and foreclosure rates are down
• Bank charge-offs at 1% of total loans down from over 2.5% in 2009
April 9, 2013
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4
Case-Shiller 10/20 City Index
0.00
50.00
100.00
150.00
200.00
250.00
J a n u a r y 1 9 8 7
O c t o b e r 1 9 8 7
J u l y 1 9 8 8
A p r i l 1 9 8 9
J a n u a r y 1 9 9 0
O c t o b e r 1 9 9 0
J u l y 1 9 9 1
A p r i l 1 9 9 2
J a n u a r y 1 9 9 3
O c t o b e r 1 9 9 3
J u l y 1 9 9 4
A p r i l 1 9 9 5
J a n u a r y 1 9 9 6
O c t o b e r 1 9 9 6
J u l y 1 9 9 7
A p r i l 1 9 9 8
J a n u a r y 1 9 9 9
O c t o b e r 1 9 9 9
J u l y 2 0 0 0
A p r i l 2 0 0 1
J a n u a r y 2 0 0 2
O c t o b e r 2 0 0 2
J u l y 2 0 0 3
A p r i l 2 0 0 4
J a n u a r y 2 0 0 5
O c t o b e r 2 0 0 5
J u l y 2 0 0 6
A p r i l 2 0 0 7
J a n u a r y 2 0 0 8
O c t o b e r 2 0 0 8
J u l y 2 0 0 9
A p r i l 2 0 1 0
J a n u a r y 2 0 1 1
O c t o b e r 2 0 1 1
J u l y 2 0 1 2
Composite-10 CSXR-SA
Composite-20 SPCS20R-SA
Source: Standard & Poor's (3/31/2013) April 9, 2013
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5
2013 Housing Market Outlook
But it’s a slow, atypical recovery in housing prices
Economic growth is weak
• Unemployment rates are stubbornly high, creating 150-200k jobs monthly
Existing home sales will be 2mm off peak levels in 2013
• Household formation will grow, but homeownership rates will decline
Home prices have recovered - but only to 2003 levels
• Low inventory levels and investor interest price drivers
• Mix of properties sold (fewer REOs) contributing to price hikes
Mortgage origination is expected to decline this year & next
• Credit remains tight – and QM rules will likely make it tighter
•
Total 1-4 lending down $200-300 billion in 2013 to $1.4 trillion• Very little non-agency mortgage lending
• Bank refinance “boom” probably peaked end of 2012
April 9, 2013
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6
Banks Not Supporting Housing Sector
No net bank credit growth under home price recovery
Fed QE policy dramatically reduced cost of funds forbanking sector, but this is not translating into growth inbank credit for 1-4 family home purchases
Tougher credit criteria, increased regulatory hurdleslargely offsetting cheaper bank funding costs. Banksfocused on writing prime loans for FHA, agency market
Flat to down lending by banks, plus reduced servicing,agency balances, adding to tight credit markets for manyborrowers. Agency loan guarantee fees have doubled andwill go higher over next several years
April 9, 2013
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7
Loans for Real Estate, All Banks ($M)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
Loans secured by real estate
1-4 Family residential mortgages
Nonfarm nonresidential
Construction and development
Home equity lines
Multifamily residential real estate
Source: FDIC Quarterly Banking Profile (12/31/2012)
Bank portfolio of residential real estate loans flat to down…
April 9, 2013
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Unused Credit Lines, All Banks ($M)
Source: FDIC Quarterly Banking Profile (12/31/2012)
Exposure at default for residential, commercial real estate flat…
April 9, 2013
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9
Exposure at Default: Top 50 Banks (%)
Source: FDIC RIS/The IRA Bank Monitor (12/31/2012)
50
100
150
200
250
300
Citi
Peer Avg
JPM
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10
Gross Defaults: Top 50 Banks (bp)
Source: FDIC RIS/The IRA Bank Monitor (12/31/2012)
0
100
200
300
400
500
600
M a r - 0 0
S e p - 0 0
M a r - 0 1
S e p - 0 1
M a r - 0 2
S e p - 0 2
M a r - 0 3
S e p - 0 3
M a r - 0 4
S e p - 0 4
M a r - 0 5
S e p - 0 5
M a r - 0 6
S e p - 0 6
M a r - 0 7
S e p - 0 7
M a r - 0 8
S e p - 0 8
M a r - 0 9
S e p - 0 9
M a r - 1 0
S e p - 1 0
M a r - 1 1
S e p - 1 1
M a r - 1 2
S e p - 1 2
C
Peer Avg
JPM
April 9, 2013
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Non-Performing Loans, All Banks: ($M)
Source: FDIC Quarterly Banking Profile (12/31/2012) April 9, 2013
0
20,000
40,000
60,000
80,000
100,000
120,000
2 0 1 2 : Q 4
2 0 1 2 : Q 1
2 0 1 1 : Q 2
2 0 1 0 : Q 3
2 0 0 9 : Q 4
2 0 0 9 : Q 1
2 0 0 8 : Q 2
2 0 0 7 : Q 3
2 0 0 6 : Q 4
2 0 0 6 : Q 1
2 0 0 5 : Q 2
2 0 0 4 : Q 3
2 0 0 3 : Q 4
2 0 0 3 : Q 1
2 0 0 2 : Q 2
2 0 0 1 : Q 3
2 0 0 0 : Q 4
2 0 0 0 : Q 1
1 9 9 9 : Q 2
1 9 9 8 : Q 3
1 9 9 7 : Q 4
1 9 9 7 : Q 1
1 9 9 6 : Q 2
1 9 9 5 : Q 3
1 9 9 4 : Q 4
1 9 9 4 : Q 1
1 9 9 3 : Q 2
1 9 9 2 : Q 3
1 9 9 1 : Q 4
1 9 9 1 : Q 1
1 9 9 0 : Q 2
1 9 8 9 : Q 3
1 9 8 8 : Q 4
1 9 8 8 : Q 1
1 9 8 7 : Q 2
1 9 8 6 : Q 3
30-89 days past due
90 days or more pastdue
In nonaccrual status
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12
Estimated Originations: 1990-2014 ($B)
April 9, 2013
0
100
200
300
400
500
600
700
800
900
2 0 0 0 - Q 1
2 0 0 0 - Q 3
2 0 0 1 - Q 1
2 0 0 1 - Q 3
2 0 0 2 - Q 1
2 0 0 2 - Q 3
2 0 0 3 - Q 1
2 0 0 3 - Q 3
2 0 0 4 - Q 1
2 0 0 4 - Q 3
2 0 0 5 - Q 1
2 0 0 5 - Q 3
2 0 0 6 - Q 1
2 0 0 6 - Q 3
2 0 0 7 - Q 1
2 0 0 7 - Q 3
2 0 0 8 - Q 1
2 0 0 8 - Q 3
2 0 0 9 - Q 1
2 0 0 9 - Q 3
2 0 1 0 - Q 1
2 0 1 0 - Q 3
2 0 1 1 - Q 1
2 0 1 1 - Q 3
2 0 1 2 - Q 1
2 0 1 2 - Q 3
2 0 1 3 - Q 1
2 0 1 3 - Q 3
2 0 1 4 - Q 1
2 0 1 4 - Q 3
Mortgage Originations: 1-4 Family:
Purchase (Bil.$)
Mortgage Originations: 1-4 Family:
Refinance (Bil.$)
Source: Mortgage Bankers Association (3/31/2013)
Mortgage originations for refinance and purchase are falling
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13
Bank Loan Servicing & Sales ($M)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
Q4 2012Q3 2012Q2 2012Q1 2012Q4 2011
Total Loans Serviced
1-4 Family Loans Sold
Source: FDIC Quarterly Banking Profile (12/31/2013)
April 9, 2013
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14
Non-Bank Securitization ($B)
Source: Deutsche Bank, Thomson Reuters, Bloomberg (12/31/2013)
0
50
100
150
200
250
300
350
400
450
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
RMBS/Other
Equipment
Credit Card
Student Loan
Auto
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15
Households and Homeownership Rate
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16
Basel III, Dodd-Frank & Housing
New bank capital regulations are offsetting benefit of QE
Basel III and other regulations literally forcing commercialbanks out of real estate sector, creating huge opportunityfor non-banks
The total amount of credit provided to the US housing
sector directly by banks and indirectly via private labelsecuritizations has not recovered
Non-banks have an enormous opportunity to take share,customers from commercial banks in new loan originationand loan servicing sectors
Hundreds of billions of dollars worth of loans, MSRs andother assets likely to be sold by banks next three years,remaking the residential mortgage market
April 9, 2013
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Basel III and Housing
LTV Ratio Category 1 RiskWeight
Category 2 RiskWeight
0-59% 35% 75%
60-79% 50% 100%
80-89% 75% 150%
90-100% 100% 200%
Source: BIS, Board of Governors (12/31/2012)
Basel III risk weights negative for credit availability to housing
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Basel III, Risk & Housing
Basel III, Dodd-Frank Offset Fed Efforts via QE
Credit: Basel III places big premium on “AAA” rated,
Low-LTV, prime assets across the board. Residentialmortgages have 10x risk weight vs. Basel 2.5
Liquidity: Market risk is big factor under Basel III, forcing
banks into shorter duration prime assets (floaters, ARMs,short CMOs) and commercial assets such as auto loans andcredit cards
Capital: AOCI filter under Basel III also pushes banks intoshorter duration assets (autos, credit cards, prime loans)
CFPB: New rules for “qualified mortgage” push lendersinto prime loans, discourage non-QM lending by banks
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Conclusion
Q: Is QE Behind the Recovery in Housing? A: Yes
QE has changed investor risk preferences
• Large investor participation in market for residential homes
• Mom & Pop, institutional investors involved broadly in price rally
Recovery is not supported by traditional fundamentals
• Declining bank lending, agency volumes
• Weak employment, GDP, home ownership
End of bank refinancing boom not a function of QE
• Policy drivers behind refinancing boom have run course
• Streamlined refinancing rules likely to have modest impact in 2013
Falling yields may cool investor passion• Gross yields on public rental strategies imply net 4-5% net returns
• HPA seen in 2012-2013 may not be easy to capture
April 9, 2013
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Contact Information
Christopher WhalenManaging Director & Executive Vice President
Carrington Investment Services LLC599 West Putnam Avenue
Greenwich, CT 06830Office: 203-661-6186
April 9, 2013