Regulatory Arbitrage Infinity! Law Limiting CEO Pay To $600,000 At Fannie and Freddie Easily Skirted Since Presidents Are Not Subject To Law

US Senator Elizabeth Warren probably thinks that the T-Rexs and Raptors in Jurassic Park can be regulated or contained. Just like she thinks that G-SIBS can be regulated without causing harm to the economy. But life finds a way.

Quicken Loans (and Rocket Mortgage) are examples of financial institutions that escape  regulation by remaining a privatley-held corporations. But there are zads of ways to avoid regulations imposed on  financial institutions.

Massachusetts Sen. Elizabeth Warren wants to make sure top executives at mortgage giants Fannie Mae and Freddie Mac are not being paid more than a congressionally-mandated salary cap allows.

An example of bypassing the regulatory swamp? Regulations prohibit Fannie Mae and Freddie Mac CEOs from making more than $600,000 per year. 

In a recently unveiled proposal – called the Respect the Caps Act – Warren is looking to close a loophole both agencies are said to be taking advantage of in order to pay their top executives millions.

Warren’s legislation was developed in response to a watchdog report from the Federal Housing Finance Agency’s (FHFA) Inspector General. According to the report, the FHFA – which oversees Fannie and Freddie – approved plans that circumvented the congressionally-mandated salary cap at the two agencies, which is set at $600,000. This was said to be done by separating the CEO and president roles, transferring tasks from the CEO to the president, and raising the president’s pay. Presidents are not subject to the pay cap.

As a result, two executives at Fannie were said to be paid $4.2 million to perform the same tasks a CEO has performed for $600,000. At Freddie, the figure was $3.85 million.

“Following the financial crisis, Congress passed my bipartisan bill to cap pay raises for executives at Fannie Mae and Freddie Mac. Instead of enforcing the law, the FHFA has allowed executive compensation at Fannie to increase by $3.6 million and at Freddie, by $3.25 million,” Warren said in a press release.

If the director of the Federal Housing Finance Agency – a post that Mark Calabria was just confirmed to – were to approve salaries that exceeded the $600,000 cap, he could be removed according to the terms of the bill.

The cap was put in place in 2015 after the former FHFA director sought to allow executives to receive a hefty, multimillion dollar pay package.

The former FHFA diector was … Mel Watt/

Dmilogo

 

CRE Bubble? Commercial Real Estate Prices Since The Financial Crisis (Apartments Have Largest Run-up, Retail Has Poorest)

Given the advent of on-line shopping, commercial real estate prices are not quite back to where they were at the height of the asset bubble prior to the financial crisis of 2008-2009. Suburban office space is barely above the pre-crisis peak.

reindices

On the other hand, apartment prices are substantially above where they were in 2008-2009, as are CBD (Central Business District) offices.

All with the help of The Federal Reserve’s low interest rate policies. But notice that the growth rate of CRE has slowed (except for apartments).

The good news for CRE investors? The Fed isn’t likely to keep raising their target rate or continue to shrink their balance sheet.

wirpo

A Tale Of Two Central Banks (Fed Vs ECB And Their Bank Stocks)

This is a tale of two Central Banks: The US Fed and the European Central Banks. And their respective commercial banks.

First, The Federal Reserve. US commercial banks recovered from the global financial crisis, although not completely.

usbanksfed.png

But for the ECB, such is not the case for European banks.

ecbbanks.png

Indeed, this a tale of two Central Banks.

twocbs

Financialization And New York City Rents (Rent Bubble????)

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy.  And the center of US financialization is … New York City with its investment banks like Goldman Sachs.

While west coast housing prices are cooling (but still uber-expensive on the coast). NYC rents are still hot.

Rents climbed to a first-quarter record in Manhattan, and to all-time highs in Brooklyn and Queens, data from StreetEasy show. At the same time, purchases declined and almost a fifth of home-sellers in the three boroughs were forced to cut their prices.

Many New Yorkers, weary of bargaining with owners whose list prices are still out of touch with a slowing market, are choosing to remain renters until they find the perfect deal. That’s given landlords power to raise rates and offer fewer lease sweeteners, said Grant Long, senior economist at StreetEasy.

Central Park South was Manhattan’s costliest neighborhood in the first quarter, with a median asking rent of $7,200. Landlords sought $3,785 in Greenwich Village, $3,995 in Chelsea and $2,900 on the Upper East Side. Borough-wide, rents rose 2.6 percent from a year earlier, the biggest annual increase since 2016, according to a StreetEasy index.

Owners listed apartments for a median of $3,035 in the Long Island City neighborhood of Queens, and $2,995 in Brooklyn’s Williamsburg.

The Flatiron district is no slouch at $4,615 median rent. This trendy area has numerous millionaires and billionaires (as Bernie Sanders loves to say).

Screen Shot 2019-04-18 at 9.33.02 AM.png

But since the advent of financialization in the 1980s, the wealth distribution in the US has become the most skewed since the 1930s.

wealth-distribution10-15a

And much of the skew is about the consolidation of financial power in New York City (and regulation of the 0.1% resides in Washington DC.

Yes, The Federal Reserve, the hell hound for Wall Street, has helped inflate asset bubbles and keep them frothy, benefitting the 0.1%.

At the national level, home price growth YoY, while slowing, still exceeds average hourly earnings for the majority of US workers as well as core inflation.

homepricesfed

So, are we in a housing bubble? Previously, “economists” have said that a housing bubble is when home price growth exceeds wage growth. But when I speak to the Five Star Government forum on housing on Tuesday, I will be the only one that says the word “bubble.”

Mentioning a bubble in the 5 Star gathering is like including Carolina Reaper 2,200,000 SHU peppers in the spice mix.

fivestarspiv

Blitzkrieg Bop! US Mortgage Rate Fall As Economic Barbell Stresses US Rates (Treasury Volatility Curve Sends Disturbing Message)

US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.

On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.

Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.

You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.

morgratvol

Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.

Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.

mbaprare

Wipeout! Hidden Bond Market Dangers Expose Traders to $2 Trillion Wipeout

Wipeout! 

(Bloomberg) — Behind the rally in global debt markets lurks a disaster just waiting to happen. At least, that’s what some long-time market watchers are warning.

While dovish comments by the Federal Reserve and other central banks have prompted investors to pile back into bonds, two troubling developments could make buyers uniquely vulnerable to deep and painful losses, they say. One is the sheer amount of ultra-low yielding debt, which means investors have almost no buffer in the event prices drop. That’s compounded by the worry liquidity will suddenly evaporate in a selloff and leave holders stuck with losses on positions they can’t get out of quickly.

Granted, nobody is actually predicting when things will turn ugly in the bond market, and history hasn’t been particularly kind to the doomsayers. Still, the risk is real, they say, and caution is more than justified. By one measure, the amount of investment-grade bonds has doubled to $52 trillion since the financial crisis. And yields have, on average, fallen to roughly 1.8 percent, less than half the level in 2007. If they were to rise by a mere half-percentage point, investors could be looking at almost $2 trillion in losses.

“This is an element of hidden leverage that is not appreciated,” says Jeffrey Snider, global head of research at Alhambra Investments. “We are eventually going to have a shock.”

The current situation is a legacy of the easy-money polices enacted by central banks following the financial crisis. With interest rates at or near zero, governments and corporations went on a historic borrowing binge — and investors gorged on debt that yielded little in return. What’s more, rules to strengthen financial firms and curb their risk-taking meant the big banks now played a much smaller role as intermediaries, transferring more of the risk of getting in and out of trades onto investors.

Using the US Treasury 10-year (yellow) and 3-year Treasury (green) yields, here is a chart of global Treasury modified duration (white).

glboalduration.png

Yes, the pounding of global interest rates downwards thanks to Central Bank “easing” has created a potential duration. wipeout.

cbassets

And the short-term Central Bank rate hammer is helping to keep global rate depressed, leading to higher duration risk.

fedstratge

Yes, the Central Banks DID do that!

6102ba514f5b3c655c3bef51cc69e224ea134479f987ddf67c3c50202a0acb7e

 

Here We Are Again! JPMorgan Sold Credit Derivative Protection On $177 Billion Of Junk Credits

The specter of credit derivatives, the theme of the book and movie “The Big Short” has returned!

From Wall Street On Parade:

According to JPMorgan’s 10K, it has sold credit derivative protection on $177 billion of “subinvestment grade” i.e., junk credits.

[When you sell credit protection, you are on the hook to pay the buyer if that entity goes belly up. When you are selling credit protection on subinvestment grade entities, it is far more likely that they could go belly up.]

JPMorgan Chase will likely argue that they have also purchased boatloads of credit derivatives, which might be on the same entities, but there is no way for anyone to accurately predict if this mega bank has aligned these risks correctly. Even the bank admits that, writing in its 10K the following:  

“JPMorgan Chase could incur significant losses arising from concentrations of credit and market risk. JPMorgan Chase is exposed to greater credit and market risk to the extent that groupings of its clients or counterparties:

“Engage in similar or related business, or in businesses in related industries;

“do business in the same geographic region, or;

“have business profiles, models or strategies that could cause their ability to meet their obligations to be similarly affected by changes in economic conditions.

For example, a significant deterioration in the credit quality of one of JPMorgan Chase’s borrowers or counterparties could lead to concerns about the creditworthiness of other borrowers or counterparties in similar, related or dependent industries. This type of interrelationship could exacerbate JPMorgan Chase’s credit, liquidity and market risk exposure and potentially cause it to incur losses, including fair value losses in its market-making businesses…

“JPMorgan Chase regularly monitors various segments of its credit and market risk exposures to assess the potential risks of concentration or contagion, but its efforts to diversify or hedge its exposures against those risks may not be successful.”

JPMC notional contracts:

Screen Shot 2019-04-09 at 9.46.55 AM.png

And protection sold (sounds like Frank Nitty from The Untouchables) ..

Screen Shot 2019-04-09 at 9.55.14 AM.png

Here we are again!

cjhere

Refi Inferno? Residential Mortgage Refinancing Applications Jump 38.50% WoW As Mortgage Rate Decline To 4.06%

According to the Mortgage Bankers Association, residential mortgage refinancings shot up 38.50% from the previous week.

mortgagestt

Here is the chart of mortgage refinancing applications with the mortgage rate drop to 4.06%.

mbarefi

Mortgage purchase applications were more modest at +4.06% WoW despite the rapid decline in mortgage rates.

mbap

30-year mortgage rates have been falling thanks to deterorating conditions in the EU.

Is this a refi inferno?  Or is it just a slight increase? Call it a relative inferno!

ltrefi

 

 

Low (Rate) Rider! New Home Sales Increase As Mortgage Rates Drop To 4.06% (Core Inflation Drops To 1.4% YoY As Well)

The 30-year mortgage rate is dropping fast and the housing data is low riding on the rate decline.

freddiecom

And with the drop, both new home sales and existing home sales are enjoying a revival.

nhsehsrates.png

The Core PCE and Core PCE deflator YoY (aka, core inflation) are both declining. The deflator is actually down to 1.4% YoY.

corepec

US 1-Unit Housing Starts Fall 17% In February (Apartment Starts Rise 23.5%) As Lenders Tighten Credit

Yes, I know it was February.  But 1-unit housing starts falling 17% is not a good sign. At least apartment (5+ unit) starts are booming (+23.5%).

housijngstarts

While lenders tightening credit is no where near where it was in the past, it is still important to look at.

tightenup

On a year-over-year basis, 1-unit starts fell 10.6%.

housingstartsyoy

Federal Reserve board nominee Stephen Moore (great public speaker!) was touting the wage growth under President Trump. Turns out the his tout was true! The yellow line is wage growth YoY, compared to the cooling Case-Shiller (my auto correct tried to spell it Case-Swiller) house price index.

wagescsyoy

In terms of house price growth (as of January), Washington DC loses its crown as the slowest growth top 20 metro area. San Diego and San Francisco are now the slowest growing (sub 2%). Los Angeles is growing slower than DC. The fastest is Las Vegas at 10.5% YoY.

Screen Shot 2019-03-26 at 11.03.57 AM