Tuesday, September 22, 2009

Stuffing Sam

In financial market parlance "getting stuffed" is being left with a losing position in a trade because the counterparty to the transaction claims to not recognize it (also known as DK, or Don't Know). It's equivalent to someone dropping their trash on your doorstep and walking away, claiming it's not theirs.

So with mortgages. Who do you think is left holding the bag of the toxic mortgages? Why, you and me and our collective Uncle Sam, of course. Between the end of 2005 and the first quarter of 2009 mortgages increased by $2.5 trillion to a total of $14.6 trillion (see chart below, click to enlarge).

Owners Of Mortgages In The USA

Out of that $2.5 trillion increase, $1.65 trillion or 65% was accounted by mortgage pools or trusts issued and backed by Government Sponsored Enterprises (GSEs) like Fannie Mae, Freddie Mac and Ginnie Mae (mostly by the first two), plus some direct ownership of loans by the same agencies. Fannie Mae pools grew by 40%, Freddie Mac by 38% and Ginnie Mae by 67% (the latter accounts for a small portion of the total mortgage pie, however).

The following chart gives the breakdown in the 1Q2009; a massive 41% of all mortgages outstanding are now directly owned or guaranteed by Uncle Sam, since Fannie and Freddie have been placed into federal conservatorship.

The Government Owns and/or Guarantees 41% of All Mortgages

In other words, Sam - i.e. all of us - is getting "stuffed". Why? Because mortgage delinquencies are soaring along with unemployment (see chart below).

Delinquencies And Unemployment

In the last chart there is an interesting divergence: between 2001 and 2003 unemployment rose from 3.9% to 6.3% but mortgage delinquencies actually fell - and kept falling even further after that. That was due to Greenspan's slashing rates to create the real estate bubble, now bursting so spectacularly. Could it be that we are in for a long period of "pent-up" mortgage defaults, above and beyond what would be normally correlated with unemployment?

Are we going to be "getting stuffed" for years to come?


  1. That cute little word "delinquincies" says a mouthful, doesn't it ?

  2. Thanks for the comments (as usual). I had one question on the stat about the government owning or guaranteeing 41% of mortgages--I can see them owning 41%, but I think the number they guarantee (through Fannie and Freddie) is much higher. As I understand it, the GSE's are in two lines of business--insuring principal and interest payments on MBS's and managing a (leveraged) portfolio of mortgages.

    Can you clarify?


  3. Ain't it great? The banks lend the money make the profits and when it turns bad hand it over to Uncle Sam.

  4. Don't misunderstand me as this frustrates me as much as everyone else.

    But one does have to ask why we get into these things in the first place?

    For if my memory serves me correctly, it was supposed to be because we were making the world a kinder and fairer place.

    More law of unintended consequences.

    To use a wonderful quote from Deb (which to be fair was was positionally related to a very different idea but works here just fine): "If you don't want to deal with Indians, don't colonize their country".

  5. BWdIK,

    The federal agencies own directly 6% of all mortgages. They also guarantee another 35% through the mortgage-backed securities (MBS), i.e. pools and trusts, they have issued. So, the total is 41%. (That's $6 trillion, BTW, and the losses could be staggering.)

    For example, Fannie would buy a bunch of mortgages from the private sector, stick them inside a pool, turn that into a tranched bond which they backed and then sell it.

    When Uncle Sam took over Fannie and Freddie the guarantee became his responsibility.


  6. Thanks to MERS it is also a very good question how many of the mortgage-derived bonds that actually have a real, "live" mortgage backing them.

    If there no direct, traceable connection between the physical deed to a property and the bonds (original note) written against the value of the property then - And Why Not - any amount of bonds can be issued on Any property i.e. Out Of Thin Air.

    As long as the bond issuer pays "The Wig" to the buyer all are Happy. That is, until the buyer wishes to get his money back because his AAA bond has lot 90% in value.


    Now it appears that a judge thinks that just MERS saying they have a claim is not enough, they must actually produce the original note.

  7. This is OT..sort of.

    Thai, your comments please.


  8. Hi Edwardo, I'm a nosy butt-in person who sure doesn't know as much about this topic as Thai, but... I think this "analysis" is an example of thinly disguised apocalyptic thinking based on textbook theories of 1) economics/capitalism 2) health care 3) human beings.
    It is....100% abstraction in my book.
    So you can guess what I think of it.
    Let's see what Thai says...
    It's all yours, Thai baby.

  9. Edwardo- The health care system is quite a bit more robust than most people give it credit. I tend to agree with Hell that the changes being asked are quite minor (I don't agree with him that shuffling savings between different pocketbook accounts in America is the same thing as increasing consumption, but that is a separate issue).

    The bill will not bring the system crashing down so I agree with Deb.

    @Deb- re: "apocalyptic thinking"

    FYI the more humerus amongst us refer to the worriers in the eschatological blogoshpere as "apocoholics" or "doomers" ;-)

    But Edwardo does ask a fair question (if you look at his blog you notice he too has an interest in complexity science and complex systems).

    It is well known that in scale free networks, bringing a hub down can bring a network down (Open the .pdf and go to page 8 or Scientific American page 57 and you will see a diagram... Hell likes to refer to this as "a fish rots from his head")

    Obama is not messing with the health care system's hubs imo.

    Just like he refuses to mess with the hubs of the financial system.

    He is not an idiot

    Obviously just my 2 cents

  10. Well, in my book, he SHOULD mess with the hubs of the financial system...
    But I have a decided doomer streak in me.
    And I wasn't criticizing Edwardo. I was commenting on his link...
    It's funny sometimes how you don't even need to know anything (or very much...) about a particular subject in order to perceive that the way it is being presented is specious.

  11. I wasn't feeling criticized, but thank you for the defense, the plug and the response, nonetheless And my view, Thai, is that while Obama may at present appear politically canny for his "business as usual" approach, that bird won't fly going forward. Barry O is a one termer in the making.

  12. Edwardo- re: health care reform.

    I am not sure if you saw this or not but in case you missed it.