Ira Artman’s Sterling Slivers: The Housing Dickens


                                  , First and Last House Doorknocker, #D190

With apologies to Charles Dickens’ A Christmas Carol and the Bank of America. See References.


The housing market was dead. There can be no doubt about that. The economist Shiller, and the chief mourner Bernanke, had each signed the burial register. I had signed it.

The housing market was as dead as a doornail.

I knew it was dead? Of course I did. How could it be otherwise? For several years I had placed the peak at ought - five’s end, and the recession at ought-seven’s.

The downturn’s mention brings me back to my beginning. It must be clearly understood that the housing market was dead, or nothing wonderful can come from this story.

There is nothing peculiar about my front door knocker, except it was large. It is also true that I had seen it, night and day; during the more than 20 years I had lived in my postwar tract-built home. And you’ll have to explain to me, if you can, how it happened that I, with my key in the knob, saw in the knocker, not a knocker, but a home.

A house with a yellowish light about it.  It’s mocking quaintness made it more terrible; as if homes had not been the source of both our recent glory and our anguish.

As I looked fixedly at this phenomenon, it became a knocker again.

I was truly startled. But I put my hand on the doorknob, turned it firmly, walked in, and turned on the lights.

After sorting the mail, I picked out the latest housing publication from Bank of America - Outlook for the RMBS Market in 2009, settled into a comfortable chair, flipped on an bowl game, and started to read the 100+ page document…

I awoke with a start, to find that the bowl game was gone, and my television screen filled with a close-up of a middle-aged man. Behind him, I could see rows of houses.  He looked at me intently as he called out my name.

Source:  Ernest Hamlin Baker, Cover, Time Magazine © 3 July 1950; and The Time 100 – William J. Leavitt, 7 Dec 1998.

“Good evening…”   

“Hello,” I said. “What do you want with me, and who are you?”

“Much … in life I was the homebuilder that built your home, and thousands like it, William Levitt.  I am here tonight to warn you that you have a hope to change your fate, so that it is not one with the housing market. You will be haunted tonight,” intoned the vision, “by Three Spirits.”

“Is that the hope for change that you mentioned…?” I queried.

“It is.”

“I-I think I’d rather not,” I said.

Without their visits,” said the image, “you cannot hope to shun the path that the housing market treads. Expect the first at midnight by your cellphone clock. Expect the second at two, and the last at four.  You shall not see me again. For your own sake, remember what I have said.”

And with that, his picture was replaced by an aerial shot of a football field.


When my phone glowed twelve, I sensed an unearthly presence in the room.  In front of the TV screen I saw a man with white hair but a smooth face.  The strangest thing about him was the light streaming from the top of his head, and it filled the room.

“Are you the Spirit, sir, whose coming was foretold to me?” I asked.

“I am.”

“Who, and what are you, and why are you here?” I demanded.

I am the Ghost of Housing’s Past, and I am here to reclaim your welfare.  Let me sit down for a moment.  May I see that booklet you were … reading?”

The Spirit reached over and picked up the BofA publication from my lap, and flipped rapidly through its pages.  After a minute or so, he put it down and began to speak.

“During 2008, existing home sales stabilized after dropping for two consecutive years, while new home sales continued to decline, as the housing downturn spread to more regions of the country.  New home sales have been suppressed by foreclosure sales, and this,” he paused, looking dreamily off to one side for a moment, “…will continue in ’09.”

“Home prices affordability is now close to its historical high due to the decline in home prices and interest rates.  The Fed announced at the end of ’08 that it would buy up to one-half trillion dollars of Agency MBS even as lenders continued to tighten underwriting standards.  The recent sharp increase in the unemployment rate has worsened credit, and it should continue to do so.

“Mortgage originations for ’08 are expected to reach $1.5 trillion.  This would be roughly $1 trillion below the levels of ’07, and only half of that originated in ’06.  Most of the decline is due to the decline in the non-agency sector, caused by the virtual shutdown of the Alt-A and subprime sectors.

“While total mortgage debt outstanding had increased by roughly $800 billion a year, every year, from 2000 - 2007, in 2008 it increased by only $100 billion.

Prepayment speeds have declined to historically low levels across all collateral types.  Conforming loans, had had prepaid at 22% CPR at the peak in ’05, now prepay at only 5% CPR.  GNMA prepay speeds are around 7% CPR, down from the ’05 peak of 30% CPR.  The slightly higher GNMA speeds reflect servicer buyout activity and streamlined-refi programs…”

With that, the Spirit looked at me intently.  “I can see that you’re tired, and I probably should be going. Why don’t you rest a spell?”

Immediately, I was overcome by an irresistible drowsiness, and before I knew what was happening I sank into a heavy sleep.


When the phone shown two, the TV screen began to flicker, and in a moment it glowed orange with the flames of the holiday Yule log, as I stirred.

Out from the screen stepped a glorious giant of a man, with ruddy cheeks.

“Well hello!” said the Spirit.  You should know me better, man. I am the Ghost of Housing’s Present, or soon-to-be.   Listen to me.”

“Spirit,” I said submissively, ” tell me what you will. I learned a great deal at midnight.  If you can teach me, now, let me profit by it.”
“Touch my robe, and hand me that booklet.”

I did as I was told.

The Spirit easily rolled up the thick booklet in his giant hand, until it was a tube.  He held one end under his nose, and inhaled deeply. “I am here to tell you about the year soon-to-come, 2009. Listen to me carefully, man…”

“2009 will be marked by a continued deterioration in unemployment and credit.  Up until this point, the prior housing market decline has been unusual, in that the housing decline occurred while the employment markets had been relatively robust.  In 2009, the customary relationship between unemployment and housing will reassert itself, and drive the next phase of mortgage credit deterioration.

“While there had been concerns that ARM resets in ’09 would lead to a spike in those rates and worsen the markets decline, the Fed should be vigilant in its efforts to keep short rates down.

Loan modifications will be THE issue of 2009. Acting in their own self-interest, or at the government’s … suggestion, lenders will deploy different programs, tailored to the specific characteristics of each outstanding product.  Subprime borrowers will probably be offered rate modifications, to achieve certain affordability ratio targets, while Option ARM borrowers will probably be offered principal foregiveness programs, since their rates are already low.

Total mortgage debt outstanding should decline somewhat in 2009, even as a low rate environment encourages jumbo and Alt-A borrowers to refi into Agency (Fannie, Freddie, or Ginnie) products.  Total mortgage debt outstanding should decline - for the first time since the 1950′s - by roughly $300 billion. Agency loans should account for more than 80% of the $2.1 trillion that could be originated given a favorable rate environment.

“In all of this, the wildcard is the government. What measures will the new Administration undertake to resuscitate the market?How will they be received? How forgiving will the government-controlled Agency’s underwriting standards be?  And will the government be able to keep rates low?”

The Spirit looked at me, as he paused.  “Not even I can tell … you … now.  What time is it?”

I glanced for just a moment at my phone, and saw that it was already 3:59 AM.  When I looked up, expecting to see my giant visitor, he was gone.


A moment later, I beheld a solemn Phantom, draped and hooded, coming, like a mist along the ground, towards me. It was shrouded in a deep black garment, concealing its head, face, and form.  I could see nothing expect for one outstretched hand.

“Am I in the presence of the Ghost of Housing Markets Yet To Come?” I said.

The Spirit answered not, but pointed to me with its hand.

“You are about to show me shadows of the things that have not happened, but might happen in the time before us,” I pursued. “Is that so, Spirit?”

The Spirit nodded its head, and that was the only answer I received.

“Ghost of the Future!’ I exclaimed, “I fear you more than any other. But I know your purpose is to do me good, and I hope to live to be another man from what I was. Will you not speak?”

In reply, the Spirit grabbed my BofA booklet, tilted its shrouded head back, and furiously rammed it down its throat.   A few moments later, after what might have been a dry burp, it pulled out an I-Pod and earbuds from its cloak, and handed these to me. It gestured that I should listen.

Once I had everything in place and on, I heard a hollow, aged voice.

“For the last few decades, mortgage financing was funded by a combination of securitization, insured bank deposits, and FHLB advances. Until 2008, about 70% of mortgage finance came from the originate-to-distribute securitization market.  Fannie and Freddie remain active, but only because they are now clearly government controlled, with investors believing that the government will stand behind them.

“A redesigned mortgage finance system may contain one or more of the following:

  • Fannie and Freddie might be re-privatized, even as a new entity would be created that would specifically support their securitizations during market disruptions.  This might take the form of a government backed bond-insurance company that would insure - during times of stress - GSE’s MBS or debt, or private label MBS, for a fee.
  • Fannie, Freddie, and Ginnie could be combined into one government organization, and the old GSE portfolios would be allowed to run-off.  The government could explicitly back all MBS issued by this new entity, much as it does for Ginnie Mae today.
  • A “covered bond” market might develop.  Investors in covered bonds have recourse to both the assets in the “cover pool” (i.e., on-balance sheet assets) as well as to the issuer to remove some of the problems that developed in the originate-to-distribute securitization business.  This gives investors protection both from the issuer’s insolvency and from degradation in the collateral’s credit quality.  It may be attractive to some of the pools of private capital that have fled the non-agency MBS market.”

I turned off the I-Pod.

“Spirit!” I said, “this is an unfamiliar future, and so different from what was past.  How shall I find my own role in this strange and unforgiving place?  As we foresake securitization, or simple balance sheet funding - which will investors embrace.  Where should I place my own bets and trust?  Where should I go?”

The Ghost pointed at me, and a stiff finger emerged from the cloaked arm, pointing to the I-Pod.

“Oh, you want it back,” I acknowledged. “Here it is.”  I reached toward the Spirit, and a black coldness grabbed the unit from my palm.

In an instant, it was gone.

NOTE:  Views expressed above are not necessarily those of the Bank of America or its staff. 
- - - - - - - - - - - 
I used to work with numbers for a living, but I’m looking forward to the future as I look for my next job or at least an idea.  Till next time. Merry Christmas & Happy New Year.

Sharad Chaudhary, et al., Bank of America - Outlook for the RMBS Market in 2009, 10 Dec 2008.

Charles Dickens, A Christmas Carol, Dec 1843., dickens – The Devil.

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