Developments in the US mortgage market

For over a year now, we have been writing a post to show that the American crisis did not result from titration

We then argued that the crisis has been postponed and amplified by securitization, but that the latter is not the cause. The term financial crisis is misleading. The financial sphere is only showing elements of crisis that find their explanations out of it, it recapitulates them without being the seat of crises.

Thus, when the securitization of mortgage loans burst the so-called subprime crisis, the difficulties of the financial sector only served to express the fact that since 2005 households had reached the limits of their capacity to finance residential real estate. The bad loans distributed in 2003-2004 then took precedence over the sound financing of real estate with the end result of a continuous appreciation of the value of household wealth and a collapse of real estate prices in 2007.

The financial crisis only showed the existence of financing of real estate – public and private – more and more doubtful after 2003. The claims – real and non-real – being scattered throughout the financial system, the system crashed in less than a week with the fall of Lehman Brothers and AIG ‘s abyss, Freddie Mac, and Fannie Mae. 7000 billion of assets have appeared threatened by toxic financial products, and in the uncertainty of their location, money flows have almost halted in the financial market. However, it is not the toxic products that caused the crisis, it is widespread doubt about the ability of many private creditors to honor their debt that has tipped the US into a crisis they are not ready to get out.

We examine in this post the effects of the American depression on securitization. Just as the latter was parallel to the growth of private mortgage debt, the crisis has led to a deflation of securitization as sensitive as the fall in property prices or the contraction of the economy. This deflation does not obey the same logic. We have shown that private titration followed the public securitization in our May post and that the real estate securitization movement was initiated by the GSE. The public securitization sector has been in the lead, with the private sector lagging behind. The timing of the crisis has led to a widening of the gap between private securitization and public securitization as a result of public securitization policies that the private sector was unable to follow until later. The collapse of private trituration and the continued development of public securitization are the result of this contrasting evolution.

The examination of the trituration also concerns the refinancing of the balance of payments deficit. Titration had a virtue: exporting part of the debt of households and businesses outside the US. We have often mentioned the existence of a portfolio investment crisis weighing on the refinancing of the balance of payments by the balance of financial flows. We give in this post a quantified assessment of the effects of the trituration crisis on financial flows. We used data from the FED and the Treasury to achieve this result.

In conclusion, we will be able to evaluate the effects of the securitization crisis on the value of the dollar. All quarterly data on the charts is annualized. These charts are all from the Flow of Funds Accounts published by the FED on September 17, 2010, with the exception of the chart of ABS published by the Treasury for just a little over a year.

Since US-based triturating is being matched by mortgages, we need to look first at the evolution of these credits

They form the basis of securitization transactions. We will find a little lower securitization of consumer credit whose counterpart – or pledge – can be houses or durable consumer goods, including cars.

Mortgage loans have clearly been hit hard by the effects of the crisis. Their negative evolution means either debt write-offs or higher credit write-offs. We will talk about contraction of mortgages in the latter two cases.

The total amount of mortgages (Red) has contracted, but in a less severe manner than one might have imagined. Mortgage loans have fallen by just over $ 500 billion since 2007.

The breakdown of mortgages shows that the fall in mortgages was more significant for houses (dark blue: $ 522bn) than for apartments (light blue) which rose slightly (+ $ 94bn). In contrast, commercial mortgage loans (dark green) have remained broadly at the same level since 2007, the increase is negligible. Commercial credits have for counterpart premises for various economic activities (office, hotel, walls of shops …). We will leave out the homes adjacent to the farms (light green) which form a very small amount of total mortgages.

The effects of the crisis on the base of securitization, mortgage loans, therefore seem relatively modest. The detailed analysis of the securitization will strongly qualify this remark.