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Did you write the 1st sentence for the latest Petition for a Writ of Certerrori: "These cases arise from the most significant nation-
alization of private companies in our nation’s history."
Skepi, were you on vacation?
TH providing color on credit loss expenses/reserves: "There are two different things going on with Freddie’s credit statistics.
The decline in the percentage of loans in forbearance is the expected consequence of having many borrowers who took advantage of the company’s Covid-related forbearance policy returning to paying status, and we should expect to see this percentage continue to decline in future quarters.
The shift from a (positive) benefit for credit losses in the second quarter of 2021 and the first quarter of 2022 to a (negative) provision for credit losses (of $307 million) last quarter is something I’ve been alerting readers to expect for some time. Both Freddie and Freddie saw massive increases in their provisions for loan losses between June 30, 2008 and December 31, 2011, and a consequent huge increase in their loan loss reserves. This was one of the main ways FHFA, in coordination with Treasury, engineered the mammoth non-cash losses that resulted in the need for the companies to take huge draws of senior preferred stock during this period. Since the end of 2011, both companies had been reversing those unneeded loss reserves through positive benefits for loan losses. Finally, at the end of 2021, the loss reserves at each had been drawn down to a more normal level. For Freddie, that was 17 basis points as a percent of outstanding single-family loans guaranteed. So, what should we expect to have happened subsequently? Both companies should now be making positive loss provisions to cover their current-quarter net credit losses (Freddie’s, in the second quarter, were $64 million) and to keep their loss reserve growing in line with their book. That’s exactly what we saw in the second quarter of this year. I consider “normalized” single-family credit losses at both companies to be around 4 basis points per year (they’re still below that), and for Freddie–with its $2.93 trillion in single-family loans guaranteed–that would be $1.17 in loan loss provisions per year, or $293 million per quarter, very close to the $307 million provision it actually took.
The other reason (aside from the expected shift from a positive to a negative loss provision) for the drop in Freddie’s second quarter 2002 earnings from this year’s first quarter and the second quarter of 2021 was significantly slower amortization of upfront guaranty fees, because of the recent rise in interest rates. This reduced level of upfront fee amortization should continue for the foreseeable future."
TH recently on CRT'S: "I hope FHFA is paying attention to what is going on here. When home prices are rising sharply and most of Fannie’s (and Freddie’s) new guarantees are refis, investors love securitized CRTs because they transfer huge amounts of income and very little likely credit losses. Now that we’ve switched to more of a purchase market–with higher average original LTVs and somewhat lower credit scores–and the outlook for future home price appreciation is much less certain, investors want fewer CRTs, and on more favorable terms.
It’s easy to understand why Wall Street and the investment community are such fans of CRTs–they price them to make (lots of) money at Fannie and Freddie’s expense, and can stop buying new issues whenever the chance of actually having a significant amount of credit losses transferred to them gets too high. It’s much less understandable why FHFA–which is supposed to be a “safety and soundness” regulator–pushes them so heavily. I tried to explain the problem with the companies’ CRT programs in my comment on FHFA’s September 16 proposed CRT-related amendments to its ERCF capital rule, but as expected it paid no attention to any of the facts and analysis in this comment and adopted its amendments as proposed. And it’s apparently going to keep pretending that CRTs really will be a net benefit to the issuing entities until it becomes painfully obvious to anyone with a heartbeat that, as currently structured, they have not, do not, and will not. In the meantime, Fannie and Freddie will have lost billions as a consequence of this fantasy of a willfully blind and stubborn regulator."
Nice, Commander! You and the dogs are always welcome to stay here in the DC burbs at my place if you want to.
The federal government is not the Great Oz, and gets smacked down daily by Judges throughout the country. I don't think major government decision makers would be wise to implement the Warrants without 1st finding out what the federal judiciary rules on whether or not what they've done here is kosher.
What do you think?
Housing Supply is still short several million units according to Freddie Mac's chief economist, but new houses are produced at about 1million per annum in the last year or two which is starting to get close to or above the amount the American Housing Market needs when looking at US population growth through births minus deaths plus net migration into the US plus housing obsolescence and losses from acts of nature.
Mortgage Interest rates were at 50 year lows last year and the pandemic really juiced demand but the doubling of mortgage rates in the last six months is allowing the inventory of existing houses for sale to increase from an unhealthy 2.3 months to closer to 3 months supply and moving to 4 to 6 months supply.
The NAR believes a 6 month existing housing supply is a balanced market between supply and demand.
If you look at the Freddie Mac 2Q22, you can see the summary of what the Takings Cases are asking for in their Pleadings.
I haven't read the pleading in the Takings Case litigation, but which remedies are they seeking?
Most of the historical and precedential USSCT Takings Cases, as I am sure you are aware, involve real property not personal property and I would hazard to guess that no precedential Takings Cases involve a federal government Conservator acting as Regulator and Conservator.
Lastly, from what I understand, IF the federal government owns 80% (not 79.9%) of the GSES, then the $7T+ MBS has to be included in the liabilities side of the federal balance sheet. Does the federal government really want that?
Mortgage Rates have almost doubled since the beginning of the year, that should help lower demand for housing and increase supply some. Jerome said yesterday that getting inflationary pressures down is their current top priority.
American family balance sheets are in relatively strong financial shape especially for those able to refinance their home mortgages at 50 year lows.
People also seemed to have saved more as well but remain cautious about the future.
A genie gave me 3 wishes, I wished for: Health, Happiness, and a copy of the WSJ, one year from now !
What remedies are Plaintiff shareholders asking for in the Takings Case?
The federal government has been a bad actor here and remember there are still some undisclosed intra governmental communications that will likely show internal discussions about how much the federal government would take via the 3rd Amendment from the gses to fund the governments operations.
Recall at the time, that Mitch O'Connell was attempting to starve the federal government of access to the public purse in an unsuccessful attempt to starve Obama care of money and they shut down the federal government for awhile.
If the DOJ claims Executive Privilege on those intra governmental communications, it is possible that an in camera view of these intra governmental communications by a federal Judge for the limited purpose of calculating monetary damages would be acceptable.
The federal government knows what those intra governmental communications are and it could finally be the spark necessary to get the federal government boot off our necks, do the right thing, THAT THEY SHOULD HAVE DONE FROM THE BEGINNING and return these companies to their owners by eliminating the LP and warrants.
But let's see if the SCOTUS does anything with the Petition for a Writ of Certerrori by Plaintiff shareholders first.
Don't give me your JPS/KT answer of 20cents/share or WHATEVER the price was at the time of the Takings!
Why? Because if you think that the artificial loan loss reserves and a multitude of other FHFA regulator induced accounting shenanigans like the write down and subsequent write up of the $50B tax credits won't come into play, I've got a bridge for sale for you in Brooklyn.
Tell me, how many companies in world history booked $130B in after tax net income in 2013?
Hamish and his legal team have laid it out well in their Petition. I've believed from August 17, 2012, that this HAS ALWAYS BEEN A TAKINGS CLAUSE VIOLATION.
In the event SCOTUS denies the Petition and gives this horrific governmental overreach a thumbs up to both the executive and legislative branches, this will likely NOT be the last time we see a Nationalization in the United States by "our" government.
If after 2 to 5 years of more costly exhaustion of the pending litigation turns out to be fruitless for shareholders, we could probably launch 2 or 3 more lawsuits under different legal doctrines as I've mentioned in several previous posts.
But we really need a well heeled shareholder with the patience of Job, and the 3 people on this board maybe all that's left !
Not really sure, the Supremes can basically do whatever they want, deny the petition for the Writ of Certerrori, Accept it, or I imagine do nothing.
Whose gonna stop'em? JB can't fire them, the US Congress?
Someone on the yahoo board named Monetizer (YG?) says probably this Fall...
See you in September....
Foreshadowing for a challenge to the Net Worth Swipe via the Major Questions Doctrine as articulated by the USSCT in WV v. EPA?
From the Petition for a Writ of Certerrori: "The Com-
panies “dominate the secondary mortgage market and have the power to reshape the housing sector.” Id. at
1785."
A 14 YEAR CONservatorship of 2 private corporations making $20B to $30B in Net Income per annum is probably unique in American financial history.
The August 17, 2012, Net Worth Swipe is as well.
ROLG pointed out a while back how the Delaware Courts have much more experience with direct versus derivative shareholder claims and the federal judiciary seems to be struggling with where to draw the line on that issue here.
As Hamish Hume and his well paid legal team has pointed out in their Petition to the Supremes for a Writ of Certerrori, to allow our federal government to bypass the US Constitutional safeguards of the 5th Amendment Takings Clause would have major significance for private property rights of American Corporation Shareholders, both now and in the future.
Why?
Because it will just be a matter of time before our federal government does it again. Imagine Bernie Sanders, Elizabeth Warren, and a majority of others from the Progressive Left, during the next inevitable financial crisis, copying SCOTUS APPROVED HERA language into newly created legislation.
Maybe Das Kapital will become required reading for future generations of American children, wouldn't that be great!
Bernie 2024!!!
Did Skepi write the 1st sentence of the Petition for Writ of Certerrori?
1
INTRODUCTION
These cases arise from the most significant nation-
alization of private companies in our nation’s history.
"II. Review Of The Federal Circuit’s Decision Is
Important, For Its Own Sake (Particularly
In Light Of Collins) And Because Of Its Im-
plications, And This Case Is An Ideal Vehicle.
These cases are exceptionally important for three
reasons.
First, these cases are important in themselves.
They involve enormous sums of money and ask
whether private investors in two critical, congression-
ally chartered corporations are entitled to some rem-
edy for the taking of their property for the public ben-
efit. It is thus unsurprising that the government’s ac-
tion in this case has already received this Court’s at-
tention.
The Fifth Amendment’s Takings Clause “was de-
signed to bar Government from forcing some people
alone to bear public burdens which, in all fairness and
justice, should be borne by the public as a whole.”
Armstrong v. United States, 364 U.S. 40, 49 (1960).
The combination of this Court’s decision in Collins
(holding the Net Worth Sweep authorized) and the
Federal Circuit’s decision here (holding that the gov-
ernment may make just “some people alone,” Petition-
ers, bear the cost of that arguably public good) is a
paradigmatic instance of that principle.
The government lawfully imposed the Net Worth
Sweep on the Companies for the benefit of taxpayers
and received a windfall of over $120 billion while evis-
cerating the shares of Petitioners. See Collins, 141 S.
Ct. at 1774, 1777; see id. at 1776 (“The facts alleged in
the complaint demonstrate that the FHFA chose a
path of rehabilitation that was designed to serve pub-
lic interests.”). Because it was within the govern-
ment’s power to impose the Net Worth Sweep taking
shareholders’ rights, private shareholders cannot
maintain an APA claim. Id. at 1778. But shareholders
pursued takings claims asserting that if the govern-
ment is entitled to take their property, they must at
least be paid just compensation. However, the lower
courts rejected these claims finding that shareholders
lack standing. Without this Court’s intervention,
these cases establish a pernicious precedent that the
government may take private property for the public
benefit, and the owners of the property lack any rem-
edy for the taking. Accordingly, this case is a perfect
vehicle for the Court to address the question pre-
sented, which is dispositive, and involves likely the
most extreme nationalization of private companies in
our nation’s history."
I added the Bold myself !
Second, the case has significant broader implica-
tions, because what the government did here provides
a simple map for corporate takeovers and shareholder
wipeouts by the government. All Congress needs to do
is pass a statute similar to the Recovery Act that
makes it easy for the government to put a company
into “conservatorship” or receivership. Then, the gov-
ernment can with impunity do what it wants with the
company for the benefit of the public: Shareholders
will be unable to assert APA claims to challenge the
government’s authority to act (because there is a stat-
ute authorizing the action under the reasoning of Col-
lins); shareholders will have no direct claims to be
compensated for that authorized action (under the
Federal Circuit’s reasoning here); the companies un-
der government control will of course bring no claims
against the government; and the shareholders will
(assuming Congress drafts its statute with minimal
care to avoid the rule of First Hartford, supra Bkgd.
B.1) have no ability to bring a derivative claim on the
companies’ behalf.
And the government has used that control to its
benefit, without the need to impose regulations
through the ordinary course.
Unlike private shareholders,
the government is entitled to sovereign immunity lim-
iting instances in which it can be sued, and it is not
subject to the same securities laws as a private share-
holder. Whereas a private controlling shareholder
owes fiduciary duties to minority shareholders and
cannot engage in insider trading, the government as
a controlling shareholder has not been subject to those
same rules.
the government has the power to take
control of a private company and force it to take ac-
tions that injure private shareholders but are benefi-
cial for the government, and it gets to do that without
having to comply with the same general corporate
laws that govern private controlling shareholders. Al-
lowing the decisions of the lower courts to stand per-
mits the government to do this without even the rem-
edy (and counter-incentive) of having to pay for the
private harm from what it does in the public interest.
In other words, without this Court’s intervention, the
Takings Clause will be meaningless to shareholders
because the lower courts have removed the mandate
that the government pay “just compensation” for tak-
ing private property in the public interest.
CONCLUSION
The Court should grant the petition.
"the Federal Circuit in a two-sentence
footnote suggested (without holding) that Petitioners
do not have a cognizable property interest in their
stock because it had held that the Companies once in
conservatorship had no cognizable property interest
in their net worth. Pet.App.53a n.14.
This off-hand, unbriefed suggestion, going to the
merits rather than the directness of the claim, is friv-
olous and would not present any genuine question.
First, even if the Federal Circuit were correct as to the
Companies (which it is not, see, generally Andrew T.
Barrett v. United States, Petition for A Writ of Certio-
rari, No. 22-__ (July 22, 2022)), the suggestion would
not follow. If, for example, the Companies were liqui-
dated, no one would claim they retained any interest
in their property, yet private shareholders would re-
tain their property rights in the liquidation proceeds.
Indeed, the Recovery Act expressly recognizes this
truism. Supra Statement A. Supposing the govern-
ment may with impunity seize the Companies’ assets,
it is a separate question whether it may do the same
to Petitioners.
Second, the mere possibility of something like the
Net Worth Sweep, under the Recovery Act’s general
authorization of a conservatorship, does not vaporize
property rights during the conservatorship. That is so
even under the Federal Circuit’s (overly generous)
view of the malleability of background property rights
in the face of new legislation. The most that inheres
“in the title,” so as to “defeat a property interest,” is
“specific regulation,” not potential regulation. Piszel v.
United States, 833 F.3d 1366, 1374–75 (Fed. Cir. 2016);
A&D Auto Sales, Inc. v. United States, 748 F.3d 1142,
1152 (Fed. Cir. 2014) (same). The whole point of the
Takings Clause is that the government must compen-
sate property owners for authorized action. E.g., Pre-
seault v. I.C.C., 494 U.S. 1, 17 (1990).
Third, the two cases on which the Federal Circuit
relied are irrelevant on this issue, which is why no
party cited either of them on it in the Federal Circuit.
They merely involved challenges to being placed into
conservatorship or receivership (and consistent with
longstanding background law)—which is not at issue
here—not to action such as here in the course of a con-
servatorship or receivership (and unlike any taken be-
fore). See Golden Pac. Bancorp v. United States, 15
F.3d 1066, 1069, 1073–74 (Fed. Cir. 1994); Cal. Hous.
Sec., Inc. v. United States, 959 F.2d 955, 958–59 (Fed.
Cir. 1992). That is why the same court had no trouble
later recognizing a shareholder’s property interest in
even a contingent surplus from a receivership. First
Hartford, 194 F.3d at 1296; see Cal. Hous, 959 F.2d at
957 n.2 (similar); see also Waterview Mgmt. Co. v.
F.D.I.C., 105 F.3d 696, 701 (D.C. Cir. 1997) (“To read
the statute . . . to permit a federal agency acting as
conservator or receiver to sell assets in disregard of all
pre-receivership rights, raises significant constitu-
tional questions under the takings clause.”).
Fourth, even if one were merely applying a Penn
Central balancing analysis of a regulatory-taking
claim in the context of a regulated industry, the result
would be the same. See Cienega Gardens v. United
States, 331 F.3d 1319, 1350 (Fed. Cir. 2003) (explain-
ing that a party can have reasonable investment
backed expectations even where a business operates
in “a heavily-regulated industry,” because not all reg-
ulatory changes are reasonably foreseeable); cf. Col-
lins, 141 S. Ct. at 1776."
"The Net Worth Sweep transformed Petitioners’ pri-
vate property into Treasury’s public property. What-
ever the merits of a claim by Petitioners challenging
that, it is at least a direct claim, one they should be
allowed to press on the merits.
Moreover, the Federal Circuit’s “overpayment” re-
characterization makes no sense as to the Net Worth
Sweep. Unlike at the time of the original entry into
conservatorship, at the time of the Net Worth Sweep,
Treasury added no new investment. Nor could it have:
Its authority to do so had expired in 2009. See Collins,
141 S. Ct. at 1771. Instead, the Net Worth Sweep
simply expropriated Petitioners’ equity rights. This
results in direct claims for taking those rights."
Nice analogy to a seminal USSCT Takings Clause case, Lucas v South Carolina (A developer paid millions for a beach front lot and after Hurricane Hugo, the South Carolina Coastal Commission told him he couldn't build a home there, put he could pitch a tent if he wanted to.): "It is of course of no moment that the government
allowed Petitioners to retain their stock certificates.
The analysis in Lucas v. South Carolina Coastal
Council, 505 U.S. 1003 (1992), confirms that. Lucas
established that the government can commit a per se
taking of property by regulating the property in such
a way as to deprive it of all value. Id. at 1017–18. Alt-
hough the property owner still has the papers repre-
senting their title, “total deprivation of beneficial use
is . . . the equivalent of a physical appropriation.” Id.
at 1017. Although Petitioners may still hold their
stock certificates, a deprivation of their rights inci-
dental to the certificates is equivalent to a physical
appropriation—in either case they have no beneficial
use of their property. That loss produces a direct claim,
one they should be able to litigate on the merits."
"After the Net Worth Sweep, it is impossible for any
private shareholder to ever receive any distribution—
either in the form of a dividend or liquidation prefer-
ence. Shareholders invested in the Companies with
the expectation that if circumstances allowed, they
had a right to distributions through dividends or a liq-
uidation preference, and the government in the years
before the Net Worth Sweep reinforced those expecta-
tions. But through the Net Worth Sweep the govern-
ment made this impossible. Indeed, the government
did this with the intent to benefit taxpayers at the ex-
pense of private shareholders. Supra 6. That is a clas-
sic direct claim. See Pittsburgh, 281 U.S. at 487; Amer-
ican Power, 325 U.S. at 386–87."
Thanks, Navy and you too Glen!
Sandra's dilemma from Marks onerous suffocating Capital Rule, according to last years CRS report: "If the GSEs were to exit conservatorship under current circumstances, their attempts to sustain profitability levels to
meet shareholder equity requirements with limitations on lending activities could pose a future dilemma."
"In the proposed and final rules, FHFA illustrates the combined calculations of UNWLR and
RWCR for Fannie Mae and Freddie Mac. The proposed rule provides an example in which the
combined UNWLR would exceed the combined RWCR.106 The final rule provides an example in
which the combined UNWLR would exceed the combined RWCR. If the GSEs were to exit conservatorship under current circumstances, their attempts to sustain profitability levels to
meet shareholder equity requirements with limitations on lending activities could pose a future dilemma."
Source: Congressional Research Service
https://crsreports.congress.gov
R46746
Well, if you think about it, actually, Fannie Mae and Freddie Mac basically exist to keep the US Secondary Mortgage Market humming along (most critically, during periods of distress as a ready, willing, and able buyer).
Look at March 2020? Where were the Libertarian "free markets unencumbered by Gubmint interference in the capital markets" crowd? Were they complaining about Gubmint interference in the US Secondary Mortgage Market?
I'll tell you where they were, heading for the exits IN MASS, dumping MBS all the way. It's THE very REASON that the GSES exist in the 1st place. The GSES seem to me to be an excellent response to the inevitable peaks AND troughs of our US Residential Housing Market.
Thus, I believe, one COULD argue that Fannie Mae and Freddie Mac act like any Socialist Banker would love, A BUYER OF LAST RESORT!
And you are correct, they tried to keep underwriting on the conservative side and their losses were and continue to be less than most financial intermediaries, even when the GSES were forced by their regulator to vacuum up a lot of the garbage private label MBS that brought the world economy to its knees in 2008.
This guy still thinks that unleashing the "private MBS market" (likely with government guarantees) IS the solution to GSE reform. I guess he didn't pay attention to what happened when the "free capital markets" brought the world economy to its knees in 2008-2009:. "Also cited as a solution by Dr. Holtz-Eakin was GSE reform.
“Outside of short-term fixes, the most effective action Congress can take to improve the overall health of the housing market is to continue the effort to reform the GSEs,” added Dr. Holtz-Eakin. “The United States does not have a functioning private secondary mortgage market, and has a distorted primary market thanks to Fannie and Freddie. If Congress seeks a healthy and functioning housing market that benefits all participants, including seniors, then it must continue its efforts to reform the GSEs.”
https://dsnews.com/daily-dose/07-22-2022/housing-instability-gse-reform
Sandra Thompson last Wednesday described a Captain Obvious situation, the US Housing Supply is experiencing an acute shortage. The Federal Reserve's aggressive rate hikes seems to be cooling housing demand making housing more expensive but not increasing supply.
Dick Bove in a piece he did a number of years ago described how the federal government encouraged increases in the housing supply via government programs throughout the history of the United States, especially as the GI's returned from WWII.
Todays NYT has an article showing how some states are considering getting into the real estate development biz: "Right now, builders have too many homes and not enough people to sell them to. In the long term, the United States has the opposite problem: Not enough houses for all the people who want them.
The United States has a deep, decades-old housing shortage. Also, at the moment, homebuilders across the country are pulling back on development because they can't sell enough homes.
How can both of these things be true? That riddle is at the heart of the boom-bust nature of housing, where an excess of regulation and the mixed incentives of the market mean there is never a supply that lines up with demand. One way or the other, solving it will require more building during downturns, and, most likely, some sort of public program to subsidize it.
Consider what the past few months have visited on Hayden Homes, a regional homebuilder that is based in Redmond, Ore., and builds about 2,000 houses a year throughout the Pacific Northwest. At the beginning of the year, Hayden's biggest problem, shared by almost every other U.S. homebuilder, was figuring out how to supply enough houses for everyone who wanted one.
The company couldn't find enough land, workers were scarce, lumber prices were exploding, and the faltering supply chain turned the search for everything from dishwashers to garage doors into a kind of corporate scavenger hunt.
The one thing builders were not short on was qualified buyers, who were in abundance because of low interest rates, high household savings and the sudden ability for millions of workers to set up home offices wherever they wanted. To deal with the crush of demand, builders like Hayden began choosing buyers from waiting lists or conducting elaborate lotteries to pick a "winner" from the crowd.
Now, in the space of a few weeks, the situation for Hayden, and the housing market, has reversed. Interest rates on the average 30-year mortgage have jumped to about 5.5 percent, from about 3 percent at the start of the year. That has added hundreds of dollars a month to the typical house payment and disqualified many buyers. At the same time, a broader slowdown in home sales and price gains have caused many would-be purchasers to pull back for fear of buying at the market's peak.
Following a steep decline in sales for June, and after watching its waiting lists dissipate, Hayden is rejiggering its inventory to emphasize smaller, cheaper dwellings, and ratcheting back the number of already-built "spec homes" it produces. All of this is happening even though the ranks of prospective buyers are still broadly employed, still sitting on a down payment and still dreaming of a new home.
"We would rather forgo a few sales in the future than be stuck with homes we are unable to sell now," said Deborah Flagan, a vice president at Hayden.
The problem facing Hayden and other builders is simple: Sales of new homes are falling -- down 15 percent this spring from a year earlier -- at the same time that a wave of homes, begun before the jump in interest rates, are hitting the market. The number of homes that have been completed but not yet sold hit a 15-month high in May. Redfin, the real estate brokerage, recently reported that buyers are trying to back out of sales agreements at the fastest pace since the early weeks of the pandemic.
"Demand has slowed enough that builders are finding themselves with homes and no buyers for them," said Ali Wolf, chief economist with Zonda, a housing data and consulting firm. "That is a problem we haven't faced in years."
Developers are responding the way Economics 101 says they should: by cutting prices on the houses they have already built, and by pulling the plug on virtually any project that wasn't already too far along to be abandoned. Builders started construction on about 93,000 single-family homes in June, down 16 percent from a year earlier.
"Very smartly, builders are saying hey, let's rein it in," said Rick Palacios Jr., director of research for John Burns Real Estate Consulting. "Yes, we are undersupplied from a structural standpoint, but when rates roughly double in the space of three or four months, builders don't care. They are planning their business for the now."
If the slowdown continues for more than a few months, as many economists predict, the next step will be to cut back on future land development. The likely effect of this would be that when housing gets going again, builders will remain behind. So families will once again be clamoring for homes, getting one will once again depend on winning a lottery -- and the housing shortage will continue to crush family finances and make it harder to build wealth.
"This is going to have a significant impact on future supply," said Randall Lewis, a principal at the family-owned Lewis Group of Companies, a developer of master planned communities in California and Nevada. Mr. Lewis's company takes raw land and over the course of decades adds basic infrastructure like sewers, streets and traffic signals. When companies like his pull back, the number of lots homebuilders can use in the future declines.
"We are now saying we're going to look project by project and say which ones are we are going to go ahead on and which we are going to take a pause on," he said. "As a developer, the question is, how much money do you want to put in the dirt when you don't know what the future is going to hold?"
That is a problem, because while the challenge for builders, in the short term, might be that they have too many homes and not enough buyers, the challenge for the country, in the long term, remains precisely the opposite: There are not enough houses for all the people who want them.
Last year, Freddie Mac estimated the nation's housing supply deficit at 3.8 million units, up from 2.5 million in 2018. Other analysts come up with different figures, but pretty much everyone agrees that the country hasn't been building nearly enough homes to keep up with demand, especially for middle and lower-income families. The failure to build those units is the single biggest contributor to the affordability crisis that in recent years has spread from a few coastal cities to a much larger swath of the country.
Sam Khater, Freddie Mac's chief economist, said there was an irony to what's happening right now: The Federal Reserve is trying to snuff out inflation by increasing interest rates, which is leading to a pullback in construction, which will make housing even less affordable down the road. In a sense, policymakers are solving the immediate cost-of-living crisis (inflation) by making the longer-run cost-of-living crisis (housing) even worse.
"It's an unintended consequence," Mr. Khater said.
The housing market has responded so quickly to the Fed's actions because it is built on debt, making it ultrasensitive to interest rates. Builders borrow money to build new homes, then sell them to buyers who, for the most part, borrow 80 percent or more of the home's cost. When banks pull back on credit by raising monthly borrowing costs, it causes buyers and builders to retreat for different versions of the same reason, which is the fear they will be left with property they can no longer afford and might be worth less than they paid for it to boot.
The slowdown in homebuilding wouldn't have such a significant effect on the nation's overall housing supply if builders could quickly adjust to demand, making up for the recessionary shortages during boom times. But they can't: Housing is a hugely fragmented industry of mostly independent companies that includes developers that spend decades turning raw land into parcels that can be built upon and subcontractors that hire laborers by the hour. The system works fine when demand is strong, but deteriorates with even a modest sign of trouble and can take years to restart, creating a backlog that gets deeper each time building slows.
"It's much easier to turn it off than to turn it on," Mr. Palacios said.
The collapse of the housing market during the Great Recession put many smaller home builders out of business, and left the ones that survived extremely cautious. Housing starts cratered to 554,000 in 2009 from 2.1 million in 2005, then barely recovered, even as demand steadily grew. Only in the past couple years did developers finally start building at something close to their pre-bubble pace -- only to slam on the brakes now that rates are rising.
That cyclical dynamic is exacerbated by another problem. In the places where new housing is needed the most, existing homeowners don't want it and local governments won't allow it. Around the country, a combination of rampant NIMBYism -- neighbors who protest new development -- along with zoning and land use regulations, heavily limit how much housing can actually be built.
In other words, backlogs grow during downturns because of market forces, then persist during good times because of government-imposed limitations on construction.
"It's a chronic issue," Mr. Khater said. "We have both a market failure and a government failure."
Those failures are both on display in San Francisco, which has a decades-old housing shortage. When interest rates were low and demand was strong, developers desperately wanted to build, but had to spend years obtaining the necessary approvals and permits. Now that the market has turned, some of the projects that managed to survive that process are being called off because developers can no longer afford to build them.
Michael Covarrubias, chief executive of TMG Partners, is a developer of residential and commercial property in the Bay Area. Mr. Covarrubias said he had two projects he could legally start construction on, with about 800 condominiums between them. But they're furloughed because of rising costs of materials and financing.
"Real estate at its core is a simple business," Mr. Covarrubias said. "You have to get a return on your costs, and it's harder and harder to make the math work."
Around the country, the persistent shortage of housing has caused a number of legislators to revisit an old idea: Public housing. In California, Hawaii, Rhode Island, Maryland, and Colorado, legislators have either introduced or passed proposals to allow state and local governments to develop housing for a range of incomes.
"If government gets in the business of providing housing, we can be that countercyclical supply," said Alex Lee, Democrat of San Jose and member of California's State Assembly. This year Mr. Lee introduced a measure that would have created a new state agency to build mixed-income housing across California. It failed in committee, but Mr. Lee has vowed to continue pursuing government-built housing.
To expect private companies to build during downturns is to expect them to risk financial ruin. The government can try to help families with rising costs by capping rent increases and providing subsidies or loan programs that help first-time home buyers.
But unless the government builds new housing itself, or creates incentives for builders like Hayden to keep at it when it doesn't make sense, the housing shortage is destined to compound each time the economic winds blow against the building industry.
The precise solution is politics, but there's little mystery what the problem is. America doesn't have enough housing, and someone has to build it, in bad times as well as good.
That's EXACTLY right! The Collins case focused the USSCT's attention on the Constitutionality of the insulated from executive branch oversight FHFA Director, NOT whether or not the 3rd Amendment was in violation of the Takings Clause, the Major Questions Doctrine, nor whether HERA'S statutory provision that the FHFA can do anything that is "in its best interests or the public it serves.", is too vague of a grant of power to a federal agency and is therefore void for Vagueness.
Only 1 way to find out though...
ST doesn't seem to be in a hurry to R,R, and R. Getting the GSES out of the CONservatorship will only take 33.75 years at the current status quo, longer when you add 3 to 5 inevitable residential real estate market downturns.
You have any Libertarian heirs or are they all a bunch of Snowflakes (you can always leave your shares to the Pacific Legal Foundation. https://pacificlegal.org/) !
The 3rd Amendment was implemented to make sure that the GSES "never go pretend private again", this decision by UNELECTED BUREAUCRATS in DC may be in violation of the Major Questions Doctrine as articulated last month in West Virginia v EPA. https://www.supremecourt.gov/opinions/slipopinion/21
Only 1 way to find out for sure...
That's right, I still think that if the current pending litigation is fruitless for shareholders AND the FHFA and/or the UST continue with their recalcitrant ways and fail to adequately right the wrongs they've inflicted on the shareholders, we should continue challenging them in the judiciary as well as pointing out the injustices and bad public policy in both the executive and legislative branches.
One major difference between Mel Watt and Sandra Thompson is their backgrounds. Sandra seems to clearly understand that financial intermediaries need capital and her years of experience as a regulator and her deeper knowledge and understanding of how financial intermediaries operate and also her knowledge that looser credit underwriting is disastrous for both mortgagors and lenders are other ways Sandra and Mel differ.
Besides, let's face the facts, her mamaries are much more pleasant to look at then old fart Mel "skirt chaser" Watt !
Our "dear leaders" ALL TAKE AN OATH TO UPHOLD THE US CONSTITUTION, but few take it seriously! JB is on record saying that the CDC Eviction Moratorium was very likely UNCONSTITUTIONAL BUT DID IT ANYWAY KNOWING IT WOULD BUY ANOTHER MONTH OR TWO FOR DISTRESSED TENANTS!
And if people think DJT was any better, his administration came up with the whole goofy unconstitutional idea to begin with!
But remember, your investment theory with the "Fulcrum security", is centered around these ideas of instant recap, the dilution solution, and getting your noncumulative dividends turned on asap.
How long ago did Collins launch their lawsuit, 6 years ago? We haven't even gone to trial yet. I told you that multi billion dollar Litigation involving an adversary with unlimited resources and time just takes time.
As a non fulcrum security holder, if it looks like the final resolution of this most unfortunate situation is to hose the commons, then yes, by all means at a minimum, this American will make them fight for it in court !
NOW is the time to flesh out the legal pros and cons of each of the legal theories to challenge this atrocious, coercive and abusive governmental overreach, but that would be antithetical to you and your fulcrum security friends, wouldn't it !
KT, you and your fulcrum security friends don't care about Justice do you? Just give me my money!!!! HeeeHeee! !
The DEATH SPIRAL IS TOTAL BS, BUT THE DOJ ATTORNEYS KEEP SPEWING THAT GARBAGE AND THE SUPREMES BOUGHT IT HOOK, LINE, AND SINKER!