>> we now have about $1.4 trillion in mortgages on their own balance sheet. making the fed as i previously said the world's largest savings and loan. the fed's goal is to push house prices higher, and in my view, they have no overachieved. i want to look at house prices in a much longer perspective.

i hope you can see some of his chart. this is a 60 year history that goes from 1953-2015. it's a slight of the consumer price index versus average u.s. house prices, both indexed to 1953 equal 100. what you can immediately see if you can't read numbers is that there is an extremely strong correlation and mean reversion of house prices to general inflation, which makes sense if you think about it. obviously, with the bubble we went far off that underlying trend, and then with a shriveled house prices came right back. if you can look over on the right hand side they came right back and touched the trend but now have bounced up, well over the trend again.

indeed, as far over the underlying inflation trend as house prices were in 2001. here's another way of looking at the same underlying data. this is, over the same 60 years, the percent deviation of house prices from the general inflation line, in other words, the previous slide expressed as percent differences, the trend deviation is about zero, but now as i said we are back to the deviation of 2001 when the bubble, being stoked by the fed, was taking off. and we are now, if you look at the very end of that line, in terms of this deviation in general inflation, over the previous house price peaks of

the 1970s and of the 1980s, as we are about to enter post bernanke world. what will the post bernanke world, post will bring for housing finance and for government finance, a very hot topic of late? not to be forgotten for the ongoing travails of european government finance. luckily, we have an excellent panel to give us the answers. let me briefly introduce them in the order in which they will speak. which will be right down the day is for me. first will be jay brinkmann, chief economist and senior vice president of research and education at the mortgage bankers association. jay joint mbaa in 2001 as that of its research group after having worked in portfolio strategy on the dark side for fannie mae. is also then deput deputy chieff staff to the governor of

louisiana and taught financial institutions and regulation at the university of houston, and we wonder if in teaching you ever imagine the extent of regulation that you would actually experience lead the next will be mark foley, editorial director of national mortgage news. marquez cover the mortgage business since 1984 so he is now on his fifth real estate cycle, and brings us wisdom accordingly. mark directed in his team that won the george of award for financial journalism and his editorials have won awards from the american society of business press editors and the native american journalist association. third will be desmond lachman, resident fellow at aei, known for its accurate pessimistic forecast. [laughter] previously desmond was a managing director and chief emerging-market economic strategist at salomon smith

barney, was, a deputy director of the international monetary fund's policy development department. focused on the global macro economy and global currency issues, desmond has written extensively and with great insight on the international economic crisis, u.s. housing bust, the u.s. dollar, and the strains of the euro area, which he will touch on again today for us. next will be chris whalen, an executive vice president and managing director. chris is also cofounder of lord weiland which provides customized risk management tools and consulting on banks and financial services industry. is the author of the book inflated, how money and debt build the american dream, and he is the cofounder of this series of bubble conferences which go back to march 2007 when the bubble was just starting to turn

into a shriveled. finally, we will hear from john makin, a resident scholar at aei and former consultant to the u.s. treasury and the congressional budget office and the imf. john specializes in international finance and financial markets, including the u.s., japan, and the european economies. the author of numerous books and articles on financial policy, john also writes aei's monthly and insightful economic outlook which i recommend to you. each panelist will speak from 12-50 minutes. we will then give them the chance to respond to each other or to clarify points. and then we will open the floor for your questions. unless the questions run out sooner we will adjourn probably at 4:00. jay, you have the floor. >> thank you, alex. when i was looking at this conference, the post bubble,

post-bernanke world, i was thinking it's been five years since the gses reported to conservatorship and i would've forecast back then the title of this would've been housing finance in the post-gse world, and that just goes to show the accuracy of my forecasting ability which has marked by tiger at the chief economist. [laughter] -- marked my entire career as a chief economist. so what i want to talk about really was for topics generally and then skip around a little bit, the impact of the fed's buying of purchase program going forward, give you sort of a snapshot of what we're seeing in the current lending market, show you a new tool that we rolled out at the nba for looking at mortgage credit, the availability of credit in the market, and then just a discussion of new bubbles since the bubble is in the title so thought i should come up with something on that end. first of all in terms of the

federal reserve balance sheet, just a massive growth that we continue to see not only in the total balance sheet with the makeup of the balance sheet. this goes back to may, the gray blue editing mortgage-backed securities, something they did not hold prior to 2009 but an increasing influence in that market. if you look at, this is a chart, if you look at the topline you can see from where you are the change over, about 11 month change in the market, 170 billion outstanding is the total growth in mbs. of that the fed over this buried picked up about 480 billion, which meant that other sectors had to give up their holdings. the drops we saw were among banks. short in the gse portfolio runoff which is part of plan drops and holdings of overseas investors, mortgage reits pulling back from their holdings of mortgage-backed securities and finally all other money

managers. so the right of some of the different investment firms, investing for retention funds or other portfolios accident the fed pulling us out of those portfolios, forcing them to look to something else to deploy that cash. so when you look at them, the growing footprint of the federal reserve in this market, what then is the application for crowding out private capital? at what point is the fed no longer assisting the market, but at what point is the fed the market? so the fed is no holding roughly one-fourth of mortgage-backed securities outstanding. they have purchased about 30% of all the mortgages originated since last summer. that's not securitized. that's total mortgages originated, and that unless we see some tapering through 2014, they will be by more than half of all the mortgages originated.

again, not just securitized but those originated. i think that raises the question then, what happens if the mortgage market tapers and the fed doesn't? do we want the federal reserve to have that size role in purchasing this many of the mortgages it originated? and i would defer to my colleagues here as to say, what would happen if we saw similar behavior in greece or some of the other countries, if a central bank said we will making this purchase for such a large share of the lending that takes place. finally, than what is the fed exit strategy from this? are they in fact been going to start selling these at some point with upward pressure on interest rates? i don't think so. that would defeat some of the purposes of what they've been doing. but there has been discussion that to the extent they need to

begin withdrawing some liquidity, they could do it in another fashion such as with repos. if we suddenly saw something in the order of 500, 600 million -- billion dollar fed repo book, what then does that do in terms of the impact of the rest of the repo market for other dealers who rely on this form of financing, that's the issue the federal reserve has delivered a lot of liquidity but as it moves around and impacts of these markets, doesn't realize the impact of existing private structures such as the repo market? i keep thinking it's not unlike perhaps filling up the kids backyard swimming pool with a firehose, that you hold onto the kid but by the end of it the pool is probably missing, the dog, cat and half of your backyard just because of the impact of what this could have ended different markets. we will see whether or not that is been observed and how carefully they go through it. let me go through a little bit of what we are seeing in the

mortgage market. first of all, we find applications as indicated by that black line absolutely have collapsed since chairman bernanke now famous press conference and the pickup in rates so that we are now down to terms of her index levels back to about 2009. purchase market has not declined as precipitously because we do not see the same run ups. the difference here, if you look at the blue line, that represents existing home sales, that has continued to go up even the purchase applications have gone up very slightly. a couple of drivers behind that speed is just clarify. beaming applications for mortgages to make a purchase? >> applications for mortgages to buy a home. thank you. i slipped into the jargon. so it is who's actually buying these, are the investors, what's behind some of these cash purchase is? but think this market in terms of mortgages to purchase homes

will continue into next year, not as sensitive to interest rate changes. but there are a lot of people apparently if the realtor numbers are correct, i'm homes without a mortgage. what do the applications look like? a lot of numbers are, let me walk you through quickly, august 2011, august 2012 and august 2013. the shift in share in the jumble market, a lot of concerned about what's happening with jumbos that is the gse market, the be all end all of what's taking place in fact when they look at the demand for mortgages, this is to buy homes. this is just to purchase homes. between 11, between 12 and between 13 some of the fastest growing segments, albeit still small, is in the jumbo market but the jumbo market is now up

to about 12.5% which is right in the range of the traditional 10-15% that we've seen in that market year in and year out. this is a new index that we have created at mba to try to measure mortgage credit availability. this was something i had thought of a few years ago we were looking at some of the different measures and people kept talking about the credit box. if we could take this, we can take the enterprise and get the managemenmeasurement of how thig would expand or contract. my staff looked at me and said, what if we just cannot? i said okay, that will work, too. so we did is we have a count of all of the lenders, what they post in terms of the credit criteria that they would choose for correspondent lending. we count for things like high ltv loans, low credit score

loans, longer duration, interest only, short-term arms, sort of what combination. and we bring this to get a look at okay, what is the outer boundary that's being offered in this measurement that we can get, and we get pretty regular feeds from all the major correspondent lenders in the country. we have generally been going up, and the index sort of peaked in, i guess that's june, july, that buried, downturn coincided exactly with when the qualified mortgage regulations were finalized. people were so speculated up to that point, what is going to be, what other regulations going to be? as soon as those regulations came out we started to see this downturn and we expect to see a continued tightening as we approach the effective date of january when all these will go into effect. we also look at builder

applications, builder affiliated mortgage companies, what's going on with their applications for new construction, where is the new activity taking place? because this is a new index we don't have adequate coverage and a number of parts of the country to give a year over year comparison, but of those days where we have the volume, the states in green show the highest activity in terms of new construction taking place with loans to finance those new homes. those areas that have still held back. but one of the things that stood out when i looke look at this, s what's going on in nevada ask because nevada still is running a fairly high percentage of loans in foreclosure, as well as florida. yet we are seeing fairly decent increases in loans being made to build new homes. but if you look at sort of the inventory of the loans that are

in foreclosure, the loans that are 90 days or more past due but haven't entered, compared to the actual number of loans for sale as we had pickup in sales and as new home building has come back, that inventory of homes actually listed is dwarfed by those in foreclosure. does that make sense in this sense? if you've got long-term demand and supply, and if you have regulatory constraints that limit your ability to get those foreclosed loans to leave, to get out of the legal system and get back on the market, you would expect then sort of thinking ahead as to, you would expect new construction to be lower in those states that still hahave higher foreclosures. the problem is potential buyers can't see what that inventory is. was available right now, sort of a limited for sale supplied as you can see in the previous

chart, numbers, not really knowing what the inventory is so they have been buying new homes. a long-term equilibrium that come once those foreclosures come onto market may be a case that long-term demand would be less than supply that is on that market, could within say a price decline? so i plotted the redline, what are the states in terms of their loans in foreclosure, and then plotted what is the rank in terms of the year to date permits for new construction. i guess it comes out of commerce and home builders have that up on the site and i would expect a summit of a crossing pattern. in fact, it's random. if you try to plot a line across that it's just flat. but there are and if you look at that lower left hand quadrant, states that have high percent of loans and for closure and high

percentages of new construction. potentially an area where you would see a bubble. so i am not sitting here predicting that now we have a bubble in the states. what i'm saying is if you are looking for one, you've got to get beyond the state numbers, you've got to look at local communities because it could be a case in new jersey, maybe the foreclosures in newark or some place like that and the new constructions along the beach or hurricane sandy took it out, or similar stories in other states, but simply on a state level the states that are in that circle are states like oregon on, nevada, new york, maine, states that have judicial foreclosure systems, system of have this regulatory impediment to clearing the foreclosure inventory out of the court system and being delivered back into the market, yet high levels of new construction. are witnessing a negative effect of the judicial and other regulatory holdups to the

system? in nevada, there was a new law that put restraints on foreclosures. in comparison, i would say new jersey, illinois, states with high foreclosure rates would not seem the same level of new construction. so again i'm not saying these are bubbles, but i'm saying if one were to look for a bubble like the title of alex's conference, you might want to start looking at some of the individual communities in these states. with that, thanks. >> mark. >> thanks, alex, thanks for inviting me back to this symposium again. i also want to thank my fellow panelists, distinguished group of people that we work for and am looking for everything you guys have to say. so the title of my presentation -- try again. new metaphor. now, i hesitate to say anything

even critical of the fed because either it won't really plate a role. but a couple annoying things. those of you who know me like a i'd like to go delivery sources to shine a light. i came up with the push me pull your gun if remember your children's store, dr. doolittle, a doctor who talk to animals, push me pull you was when the characters in that story. it was, a combination of a gazelle and a unicorn. it had feathers on both sides of its body. one of the advantages of this is a good talk at the same time without being rude. it didn't always agree on which direction to go and. so i think that the fed has been all bit of a push me pull you in recent months.

the little dose-e-doe they have done on buyin my got interestedi think there's a technical economic term about you can check in on this. i'm income on getting out, ma i'm back in. something along those lines. but anyway, they are in excess or to come in and we've seen the effects of the talk about tapering and rates going up, in the third quarter numbers are in jvm jason voss a report really devastating reductions in mortgage revenues. chase down 60 some%, wells fargo down 63. i think a few of the smaller regional banks reported yesterday and their lone falloff hasn't been as great. those numbers certainly give you pause. why is that? refinancings as jay said have

really dried up and people are hoping that with sales prices increasing, that purchase mortgages were you actually buy a house would replace the lost volume and refinancing. that hasn't really happened. the reason jay mentioned this in june that the fed started talking about saying that they would taper, signaling an end to bind down the market, rates went up. why am i slightly annoyed at this? because the result was a big companies like the one i just mentioned, thousands of people not fired. at the top of the market, when mortgage market was at its peak and mortgage market employed just a little bit over 500,000 people. at the bottom of the market, less than 250,000 people. so you can see what a tremendous devastation that has been. in more recent times, the bottom has come up through i think

somewhere around 260,000. giacobbe has numbers on these. but now we're seeing lots and lots more firings. i think that's just kind of this whipsaw where people lose their jobs. i think it's a bad thing. when i first started in the business i used to refer to something called mortgage city. and what i do was i would plot how many people worked in the business and what city in the united states that population would correspond to. so back 20 years ago when it was closer to 5000, it was albuquerque, new mexico. now the most recent one that i've done, it's east lansing, michigan, is the closest match to the point that i was plodding at that time. you know, alex is a great student and hunting everybody down to the population of moose jaw saskatchewan we will be in really big trouble here.

hopefully it won't go that far. so what did the fed do? it reversed course. it didn't actually begin but said it would think about doing it sooner, and so rates dropped. in more recent times, you know, after indicated easy again, the rates have dropped slightly. freddie mac number today was 4.23 on the 30 year but is lower than the recent high. so isn't going to indicate we'll see more refinancing in the fourth quarter, we'll have to see about that. stay tuned. to me this is a classic push-me pull-you whipsaw for the industry. so let's talk a little bit about the purchase mortgage business. and i will digress just a tiny bit. i was at a conference this summer in detroit, so i can

think about detroit a little bit about new orleans because 10 years ago i don't think i could possibly have conceived that we could have suffered this damage to two of our greatest cities. but we did with new orleans, it was the storm, and detroit was more of an economic storm. so i'm happy to see, and you've probably seen them in the recent week or so, some green sheets there. and declared capital numbers, detroit was number two metro for home price increases. was up 4.3% for the quarter, 23.3% for the year. of course that's up from historic lows. prices are still down two-thirds from market high. average price of home sales is 107,500, which is really, really low. the increases in sales indicates to me that there are going to be

more home sales in detroit, and around the country, and that will lead to an increase in the purchase mortgage market. i was thinking about what could we do to help, in the mortgage business to help the city of detroit. the thing i came up with was there was a group that invited me to come out and speak, called herbage builder, and they were based just outside of detroit. and they decide to have a meeting downtown. i wanted to give a shout out to kevin smith, a ceo, and suggest that as a model as jay's group does meeting. my group does meetings. let's meet in detroit. it's a beautiful city. really one of the crown jewels of america. and i hate to say how much it's been hard. -- it's been hurt. so the purchase mortgage business traditional wisdom is

it's a purchase business rather than a transitory -- refi business. the jackpot is when you have old markets gaining at once. so could that happen? refis could come up again if rates drop, stay steady or dropped from what they are now. and prices are up in just about every nsa in the country. so i think if there's no more push-me pull-you there might be a small chance of that happening. so i want to share with you what i'm looking at now. i just got a cut of the numbers. the percentage of mortgages to minorities, 16.6% in 2012. it's down slightly from 17% in 2011. i think of his 16.7% in 2010.

you might say those are really low numbers, but in the kind of markets that we've had over the past few years, treading water might be a good response to that. so who knows? the mortgages for 2012, the numbers are always a little bit funky but it came to to .1 trillion which is up 50% on 2011 numbers which were 1.4 trillion. so i think that's probably the refi a factor going on. i just got yesterday afternoon, i think this will be really interesting, but i haven't been able to analyze these yet. so watch for next week's newspaper. the final thought on the metaphor as i said as a push-me pull-you, this is quite wise, if an animal has two heads on either side of its body, it must

sometimes talk out of its rear end. so with that, i will yield back the balance of my time to the chair. >> thank you, mark. desmond. >> thank you, alex, for inviting me again here and what i want to talk about is europe and the outlook in europe. and i will just start by saying that there's a great sense of complacency about the european prospects, both almost european policymakers and in the marketplace, in fact at this weekend's meeting of the imf, there was a clear sense of -- on the part of the european principles that the meeting was dominated by problems in the united states with very little mention about the problems in europe. what i want to do is indicate in

my remarks why i don't show that complacency, and why i think that basically certainly in the markets what is happening is the liquidity being provided by the federal reserves printing, together with the transaction program of the ecb that the markets think have to move the risk, has really made people not really focused on europe's what i think are poor economic but as important political, fundamental fundamentals but i think the process still goes on. so what i said at previous seminars is there is a fundamental reason why i don't think europe can work indiana because basically the economics doesn't make much sense.

and the idea is that there are two kinds of issues they're trying to do with in fixed currency arrangements. one is, budget deficits occupied, public debt level to high so that got to engage in fiscal austerity. and the other is because they lost competitiveness, they've had to have what they call an internal devaluation, which basically means wage and price deflation that complicates their fiscal problems. site don't think that the austerity can really work, and that's where they hated going out forward. so i think just to take stock of where we are to see how much damage has already been done by those kinds of policies. so the first chart put up just indicates as the blue line is the united states recovering

from the downturn, the lehman crisis 2008-2009. you see the united states has recovered production. united states recovery is not particularly strong but they are above where they were in 2008-2009. the europeans have yet to recover that. now, the situation gets a lot worse when you consider the individual countries. so germany seems to be doing okay. so the green line is germany's above where it was in 2008-2009. but forget about small countries that are real basket cases like greece or portugal or ireland. just take a look at italy and spain. so we see that italy and spain i have something like 7% below where they were at the peak of the crisis, some five years later. so the outward gaps in italy and

spain are pretty fairly high. and the point i'm trying to make is that even if you get a recovery, and less the recovery is very strong, it's not going to change how badly those economies really feel they are pairing -- getting. we see this in terms of the unemployment numbers that unemployed and overall injured is now 12%, but in places like greece and spain, we talk about unemployment i was up 28%. youth unemployment is really horrendous in europe, something like 24% overall. but places like greece and spain you have more than 50% out of work. so in short order i don't think the austerity has really worked, that has caused very deep recessions. public finance is still on very good shape, and what you really have is a political process that

has been going on and it strikes me that across the european periphery, you can take whichever country you are wanting to look at, what we're getting is where getting an erosion of support for the centrist parties. we're getting popped parties arising. which means that is the difficult for these countries to stay the course of budget austerity and structural reform, which they still have to do. now, there are a couple of reasons why one could be optimistic, and i think these are the reeds on which the european policymakers are already hanging decades. the first is that, finally the longest recession in over all europe has come to an end after six negative quarters. you have had a little bounce in the second quarter of 2013.

and if you look at the pmi indices, they are showing a modest increase the so there's hope that there is some recovery. but i don't think that gives support for very strong growth. the second reason, on the optimistic side is that if you look at the bond spreads, they have really come down, way down from the peak. but as i said, that is really a function of a lot of liquidity and the ecb's monetary transaction program wind that comes to an end, something might change. let me just list the reasons that i'm skeptical about the outlook in europe. the first point i would make is that basically what they are

doing is they are pouring very much the same policies as before, and this is the case after the german election. the germans are making it pretty clear that they're wanting to stick to the playbook of budget austerity, structural economic reform, not too much of a hurry to get a banking union going. so the problem that i've got is its budget austerity, banks cutting credit, and deleveraging of the private sector really got us into the deep recession, why do we think that application of the same policies are going to lead to a meaningful recovery? so i don't really see the basis for a strong recovery in the periphery, and i think that that is really very problematical. the point just in terms of the credits restriction as you just seem places like spain, banks

are cutting credit by something like 6%, italy cutting credit by 4% and there's absolutely no sign that the germans are going to move towards banking union for allowing them to do so. that is him money to pop -- problem the banks. they are not really rectifying that problem, so what you see is very much high interest rates for those who can borrow in the periphery that countries like italy and spain, they are paying something like three percentage points more than you would in germany for loans, which is hardly the way to get and economy moving. the imf as we see has really got negative growth forecast for all of these countries for 2013, of a sizable amount to italy i think is something like 1.8%. spain, negative 1.6%. but hoping for some recovery

2014 which as i say i don't see, i'm not sure i see the basis for that. the second reason why i'm very skeptical about european out of the woods, if i just look at the debt to gdp ratios of the sovereigns, forget about greece, which is a special case which they were fixed by turning out the official debt, i look at italy island in portugal, all of these countries are above 25% of gdp. very large budget deficits that are driving it. another problem that one starts is if you look at the price data, europe is this inflating at a very rapid rate that european inflation, overall inflation that is about 1%. if you look at places like greece, prices are falling but if you look at places like ireland, practically flat but

you don't get a recovery you will go into deflation, and we know that if you've got deflation and no growth, very difficult to get out of those high debt levels. so as soon as the liquidity dries up, i think that we could see something that has occurred with many of the emerging markets right now as the talk of tapering occurring in europe. another reason for skepticism is that much of the improvement in the external accounts has come to import compression because the economies are very depressed. but if you look at the competitiveness side of places like italy and spain, that's the red and purple line, they haven't gained much against germany over this period. so there's still a lot of disinflation to occur. i think that the main problem of the euro is going to come from the political side, that these

countries that the political and social conditions of these countries are deteriorating. you don't get a recovery to i would think that process continues. and the problem is really going to come from countries which is not being able to do the adjustment that the germans are requiring of them in order to get the loans. the last points i would make is that the ecb, the backstop that they have put in place with outright monetary program would indicate that they will buy as many of the bonds as they need with the maturity of one to three years, that has to be tested, that what markets are not paying attention to is those commitments by the ecb were made conditional upon the countries

applying for economic programs. italy and spain are not in a political position to apply for i am f-stop programs that would allow the ecb. and what we've also got to watch if the constitutional court in germany is supposed to be delivering the ruling soon as to whether the amount -- unlimited amount of purchasing by the ecb is consistent with the banks obligations under the german constitution. and i think we could get a surprise in that the constitutional force could put limitations on what the ecb could do. so in short, where i think we're headed in the period ahead is, once again for a crisis, ics to show up in the european directories on the political side, whether it's something of

portugal, the government falling, or greece or the italians not being able to get their act together. but what we've seen is wasting very strong commitment on the part of europeans to try to hold this together, but they show absolutely no signs of trying to get ahead of the crisis with something like a banking union or something like a fiscal union. so my view is that europe is going to continue to constitute the primary risk of the global economic recovery the years ahead. that is something don't buy, i can understand the reasons why they want to be optimistic, but i don't think that there's a real basis for being as optimistic as the europeans are on their economic outlook. thank you. >> thank you, trembling, for your usual jovial and mary note. [laughter] chris. >> thank you very much, alex. and thank you again for sponsoring these interesting

sessions that we've been having for quite a few years. i think it is extremely important to note how much time has gone by since the break in the housing bubble. today, i'm going to talk a little bit about, to connect some of the comments jay and others have made on the mortgage side with what is or what is not happening in the banking sector. then i want to finish up by talking about the fed and some of the objectives of quantities in -- quantitative easing. one of the key criteria's of the fed in keeping interest rates so low is to encourage credit creation. the mortgage industry traditionally has been the primary conveyor belt for monetary policy. you drop rates, borrowing costs are down and you we liquefy bolivars both consumers and businesses. unfortunately, in this cycle that has not happened so let me talk a bit about why that is. first off to cover the obvious, for the past year or more we've

seen an improvement. home prices, if you just look at the headlines you would conclude that we have had a reasonable recovery am especially compared to some of the past few years. losses by banks are down dramatically. indeed, so much that they've been able to release loan loss reserves back into in, and help the earnings over the past two years, and more. but i would suggest to you that you need to dig down a little bit below the surface to understand what's really happening. this is the case-shiller composite home price index. if you take the distressed properties out of the case-shiller numbers, we are really up only about six-7% year over year. that is to say, the cash fire, the distressed by was really what was driving a lot of the pricing increase in the market early on. and particularly in areas of the country that had gone down a lot. so the southeast, the southwest,

nevada, all of the sand states if you will, california particularly. these markets bounced very nicely. and they came back. now you've also seen some of the secondary cities that didn't go up as much, didn't go down as much, also participated in the recovery. remember, there were two factors driving this recovery. one was a shortage of supply. there were not that many homes available going back to the earlier point. the other was a cash buyer. simply because they were ready buyers in the market who didn't need to go out and get a mortgage in our current regulatory and find. they were able to go out and immunity. and, indeed, we knew how -- we have a direct connection between the equity markets and home price markets sadly because of all of the companies that have gone public in the last 12 months or more with an explicit strategy for purposes homes. this next chart i think tells

part of the story in terms of the availability of houses. this shows you past-due assets from banks. 90 days or more and not accruals. new defaults have been going down. this is why banks have been allowed by regulators to release preserves and put those monies back into income. again helping the earnings. but what we haven't seen really is an improvement in the more difficult properties, if you will, especially properties in the northeast that are still going through the foreclosure process. there's something like a quarter of a trillion dollars worth of loans and homes that are still caught up in some way, shape or form in these states were it can take you up to three years between default and when the note holder or the bank, what have you, actually gets control

of the house and kinsella. so as a result you still do have a big price -- supply squeeze but if you look at a state like nevada which has bounced considerably from the lows of several years ago, you still have an enormous percentage of the population who are underwater and they simply cannot sell their homes. even though you've seen a good improvement from the lows, it's still not nearly enough to get most homeowners to the point where they can go out and voluntarily sell her house. the one thing you will notice at the very bottom, the purple line that is going up, that's mortgage servicing rights. when interest rates go up, when prepayments expand the value of a mortgage servicing asset goes up as well. this has had a big influence on earnings for banks for the past couple of quarters your it's one of those little nuances that analysts think about. one of the things i always like to emphasize when we talk about home prices is what are the two

main drivers for the housing market, jobs and consumer income. in both cases we're seeing a fairly weak recovery in the housing market, and squirting -- excluding investor, excluding cash buyers. what we're talking about before, that purchase homeowner, the first time family. in part because we have a kind of schizophrenia right now in terms of policy. on one and the fed is buying all of these treasuries and mortgage-backed securities, keeping interest rates very low to encourage mortgage finance. particularly one would think in the agency market. but on the other hand, we have dodd-frank, without the foreclosure settlement, we have all these new state laws that are discouraging lending. in fact, what the fed is really saying with the new basel iii proposal is do not make any loans that you can't get a government guarantee on. that's really i think right now constraining the market terribly. something like a third of all

prospective homeowners cannot get a mortgage from a bank today. so you have these two opposing policy positions, the bank regulator on the one hand, the monetary policy authority on the other. they are very much at all is. i think that's one of the chief reasons why this summer may be the peak in home prices in the united states. not in general i think you'll see the averages continue to move up, but a decelerating rate. when you look at the number of cities, the number of metropolitan areas that are improving month after month, i think they will dwindle and eventually you see the really hot markets as it was a couple years ago, holding most of the weight in terms of polling the case-shiller index up. now, this chart is probably the most important one in my presentation. my good friend at oxford.com provided is to be. this shows the change in owner households versus the change in

winter households. if you look at that green line that's the homeownership rate. is down to about 65% right now, a lower than that. if you go back to the previous chart, talking about distressed assets, roosted on them instead of them once of the banking industry works through all of that, that homeownership rate will be down around 61%, perhaps even lower. again, the reason here is several fold. lack of income growth, lack of job growth opportunities, in other words, could implement market, and then also the inability of many borrowers to get a loan. most commercial banks today will not touch it unless you're in the mid seven hundreds in terms of ficus goes. coming people in this room have a fico score that is above 700. raise your hand. not even half of the room. [inaudible] >> right. [laughter] but the point i'm making is that

we have really swung the pendulum very radically from the period of 10 years ago where you get a mortgage if you were breathing to today when getting a mortgage is extremely difficult. not only do you need to be employed by a third party, not self-employed, but you have to have a number of other documentation points which frankly frees people out of the market. the old days just getting a loan based on your bank account records and all that are gone. you have to submit tax forms to get a mortgage in this country do. are some americans who can't do that. this chart shows mortgage originations, some of jay's data. what i like about this chart is the blue line and the green line, the blue line is total volume. the green line is refinancing to the redline is the purchase market. you can see what's going on. the purchase market really hasn't moved. and i think it's not so much we're seeing a poor housing

recovery here per se, but we are kind of reverting to the means, back to alex's earlier comment. this is a normal market where we don't have excess of credit creation and we do indeed have very strict credit standards and relative terms. at lunch today i was reminded us it was a time when national banks were not allowed to make risky loans at all. after world war ii we had a terrible fight in washington about making real estate loans with a loan-to-value ratio. i have the hearings on that particular day. they are a fascinating read. so today, we tolerate 20% down as the standard that's been sent under the dodd-frank law, and yet you can see that originations are not really very strong when it comes to purchases. more importantly, if you look operation going back to mark's comment about laos, what the banks are telling you is they are really going to pare back the resources that they have devoted to mortgage financing in the future.

the reason they're laying off people, transferring assets, getting rid of facilities is they are having to make medium to long-term plans about what business they're going to be in going forward. i don't think banks will get out of the mortgage business and timely. that's wrong, but i do think that over time it's going to become a much smaller piece of the overall business. this is another i think rather striking chart which shows a couple of things but it shows you both the portfolio holdings by all u.s. banks of mortgages, and then what they're selling into the securitization market. again you can see the topline, the total portfolio of all u.s. banks, is flat and slowly trending lower. about 20% historically of the total bank balance sheet, or gives that they keep spent what is that number on the right and? >> that is $4 trillion out of a 13 trying dollars balance sheet. so what you can also see is the

redline is a less than 2 trillion. the sales, the purple line on the very bottom are slowly trendy little. they just don't have the volume to sell the mortgage. and effect they are keeping them. banks are bidding for non-agency loans, large jumbo loans, two, three, $4 million this not because these to the they have very low value ratios reason high credit scores. they will keep them on balance sheets even though under basel iii they will be penalized for doing so. so let me just finish off by talking about the regulatory environment, because going back again to the theme of our talk today and the fed and everything else, when the fed, president obama nominated janet yellen to be the next fed chairman, i wrote a piece on breitbart.com about this. when i talked to my former colleagues at the fed, they can't give me a straight answer in terms of explaining why they're doing what they're

doing. all of the old rules for monetary policy have been thrown out the window. so the only thing they can think of to do is to keep interest rates low and an attempt to generate great activity in the housing market and overall. so what have we accomplished by keeping rates low? well, consumers with good credit have been able to refinance. that's good. corporations have also been able to issue an awful lot of debt, maybe too much. but it also refinanced, and lowered their credit cards. we have an enormous amount of consumers, small businesspeople, et cetera, who are pretty much locked out of this. under the basel accord under typical mortgage, 740 fico bar will have a 50% best way. in other words, they have to put 4% of the face amount of the load of s. capital. once you start going up the risk curve, and in the six times, 650, it's 100%. not only that, because this is a

long maturity of that, 30 year mortgage, right? it's going to get a capital charge, to be your typical bank treasure when you're looking at taking on mortgages to hold in their own portfolio, is looking at 120, 130% risk away. 10, $12 worth of capital. that's very expensive when you remember that you can buy three times as many ginnie mae's with the same amount of money. so what we're really saying to banks is don't make real estate loans. given this policy, you have to go back and say to yourself, why is the fed doing what they're doing? because ultimately by buying a lot of mortgage-backed securities the only thing they are really doing is encouraging banks to make agency loans, in other words, they make it a guarantee from u.s. government. the other final point i would make, probably the most famous part of the dodd-frank law, barney frank scare scared i thif is skin in the game. this is where they basically said that if you want to do a

private mortgages to get outside of this agency market that's been defined force, you have to keep extra skin in the game. in other words, you have to retain more of the deal. the only problem with this is if you a thing about subprime market, my firm, the biggest buyer of nonperforming loans in the country, would also securitize many of these loans. but we always keep more than 5%. skin in the game. it's the nature of the business. when you make a subprime loan you typically reserved most of the prophet. you don't take it to income the way you would do as an agency loan. so right off the bat it's a different business. but when you look at the way the agencies have implemented dodd-frank qualified mortgage definition for the consumer side, and didn't qualified residential mortgage for the purpose of securitization, they have equated the two, they are the same but what does this mean? it means the least of our borrowers, the bottom third if you will of mortgage market,

they have to pay the tax. because if their mortgage is included in one of those deals, according to my colleagues, it's somewhere between half and three quarters a year in terms of apr. the other group that is being blocked are all of the jumbo borrowers whose loans are too big to be sold into the agency market. they will pay the tax, too. but meanwhile, we have enshrined government in this little playground called qualified mortgages, and they pay nothing. what is the policy purpose of that? and i would end my remarks. thank you. >> thank you, chris. chris gave us a slightly different version of marks push-me pull-you, then the government as a whole with going in opposite directions. the credit regulation severely constraining mortgages at the same time the fed is buying of mortgages trying to expand them. that's a curious contradiction i think.

my own view is that nobody knows all of the things that are happening in the financial system, as a result of the fed's huge bond market intervention. but my guess is that the interest rate risk of the whole system has probably been magnified in some extremely large fashion, and we are going to find out later on when it comes back to bite us. john? >> thank you, alex. provocative phrase, come back to bite us. as each of the panelists was discussing the post bubble period, and we haven't really talked to you about the post-bernanke said, but i'll do a little bit of that, in terms of the challenges that will be facing janet yellen. but the big theme, and i tried to explore this in one of the economic outlooks here, which is

basically looking at the global financial crisis and the challenge of american wealth accumulation. the fed has been put in a very difficult position. if i look at this broadly, i kind of see an oscillation, which american households that are trying to preserve and store wealth are running to the stock market, to the housing market and back to the equity market. ..