This Kung Fluey shut down is going to have MASSIVE repercussions here in the not too distant future.
Like within two months, max.
I would like you to notice that this is not some Zero Hedge financial doom piece,.
Under the CARES Act, Congress has invited millions of Americans to stop paying their mortgages. The impact of this massive unfunded mandate is that the U.S. financial system is headed for a potential default when the cash flow expected from millions of Americans does not arrive.
Bear in mind that these same Americans will stop making payments on car loans, credit cards and other obligations at the same time that they stop paying the mortgage.
The Trump administration has been slow to fashion a solution for dealing with the cash shortfall that will hit the U.S. financial system in about 30-45 days.
The mortgage industry, including banks, nonbank lenders and servicers, and the government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, will be able to make required payments on $7.7 trillion in mortgage-backed securities in April. But by May, the system will run out of cash and neither the banks, the nonbanks or the GSEs will be able to pay the holders of mortgage bonds – bonds, by the way, which are guaranteed by the U.S. Treasury.
One big obstacle facing the Trump administration in fashioning a workable solution to fund missed mortgage payments is Federal Housing Finance Agency head Mark Calabria. Recently, the GSEs Fannie Mae and Freddie Mac had a liquidity facility ready to put in place to support conventional issuers.
Meetings were scheduled with members of Congress to discuss the plan. Then, suddenly and without any explanation, Calabria ordered the GSEs to stand down and shelve plans to support the industry. To say that people in and around the housing industry were flabbergasted is an understatement.
Following Calabria’s action to shut down the servicer liquidity facility planned by the GSEs, the Financial Stability Oversight Council or “FSOC” met and decided to take a “wait and see” approach to providing liquidity to mortgage servicers, banks and nonbanks alike. The FSOC’s decision was largely taken because of erroneous advice from Director Calabria, who has never actually worked in finance much less in the housing industry. The FSOC and Director Calabria are playing with fire.
The White House, Treasury and Federal Reserve need to put aside Director Calabria’s flawed advice and announce a “solution” to the liquidity issue for agency residential mortgages this week.
We then have a couple of weeks to work out the details, which in simple terms involves the bank and nonbank servicers running an overdraft secured by the mortgages and financed by the Fed.
If a solution is not put in place quickly, then the U.S. Treasury faces the unseemly prospect of financing the payments to agency and Ginnie Mae bond holders in extremis.
The U.S. will be on the edge of the precipice and within just days of a sovereign default.
Anybody who thinks that the market for U.S. Treasury securities can survive the collapse of the agency and government-insured mortgage markets should think again.
Automobiles are not moving off the parking lot.
That’s according to an industry report that showed a sharp decline in auto sales across all auto makers—see table. Meanwhile industry inventories have been climbing up from an average of 55 days back in April of 2015 to 70 days last month.
Coming after months of sluggish sales and generous incentives, the big drop in April sales could be a sign of an impending collapse which could parallel that of 2008-9.
- U.S. jobless claims surged to 1,000% of financial crisis highs with 6.6 million new filings.
- The data suggest the coronavirus recession will be deeper and longer than predicted.
- The U.S. is on track to suffer depression-era conditions if job losses continue.
U.S. jobless claims doubled this week, with 6.6 million people filing for unemployment benefits amid coronavirus shutdowns. That’s 1,000% as high as the peak of the Great Recession. Over the past two weeks, about 10 million people lost their jobs.
Unemployment Spike Could Be Dangerous
Of course, the reason Great Recession job losses don’t look quite as shocking is because they happened over a longer period of time. The enormous spike we’re seeing today is the result of millions losing their jobs at once rather than over the space of months.
Which is more dangerous? It remains to be seen.
In Michigan, the state unemployment filing system crashed this week because it was overloaded. In California, it may take much longer than usual for hundreds of thousands of jobless people to get their benefits. In New York, one laid-off worker says she called the state labor department 800 times before getting through.
As previously unimaginable layoff numbers pile up across the country, the state-by-state systems for getting benefits into the hands of people who lost their jobs are stressed, inefficient and not sending money quickly enough to the people who most need it. And it may only get worse: The weekly unemployment figures that will be reported Thursday are expected to climb higher than last week’s record-shattering totals, thrusting more people into already overwhelmed systems.
I could go on and on but I think you are probably getting the picture by now.
If not, here is the condensed version,
Don’t forget to say Thank You.