Zero Hedge — Fed Net Worth Turns Negative Following Record $66BN In Paper Losses Tyler Durden

What immediately caught the attention of financial analysts is that the gaping Q3 loss of over $66 billion, dwarfed the Fed's $39.1 billion in capital, leaving the US central bank with a negative net worth, which would suggest insolvency for any ordinary company, but since the Fed gets to print its own money, it is of course anything but an ordinary company as Bloomberg quips.

Commenting on the Fed's paper losses, former Fed Governor Kevin Warsh told Bloomberg that "a central bank with a negative net worth matters not in theory. But in practice, it runs the risk of chipping away at Fed credibility, its most powerful asset.’’

...a negative net worth is sure to raise eyebrows especially after Janet Yellen said in December 2015 that "capital is something that I believe enhances the credibility and confidence in the central bank."…

This is also a reason central banks still hold gold, which Keynes called "the barbarous relic." Makes no sense in a modern monetary system for currency sovereigns, but whatever — perception is reality.

While a central bank can operate with negative net worth, such a condition could have political consequences, Tobias Adrian, financial markets chief at the IMF said. “An institution with negative equity is not confidence-instilling,’’ he told a Washington conference on Nov. 15. "The perception might be quite destabilizing at some point."

Zero Hedge
Fed Net Worth Turns Negative Following Record $66BN In Paper Losses
Tyler Durden

Les Picker — The U.S. Foreclosure Crisis Was Not Just a Subprime Event

The U.S. Foreclosure Crisis Was Not Just a Subprime Event
The crisis began in the subprime mortgage sector, but twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.

Many studies of the housing market collapse of the last decade, and the associated sharp rise in defaults and foreclosures, focus on the role of the subprime mortgage sector. Yet subprime loans comprise a relatively small share of the U.S. housing market, usually about 15 percent and never more than 21 percent. Many studies also focus on the period leading up to 2008, even though most foreclosures occurred subsequently. In A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012 (NBER Working Paper No. 21261), Fernando Ferreira and Joseph Gyourko provide new facts about the foreclosure crisis and investigate various explanations of why homeowners lost their homes during the housing bust. They employ microdata that track outcomes well past the beginning of the crisis and cover all types of house purchase financing—prime and subprime mortgages, Federal Housing Administration (FHA)/Veterans Administration (VA)-insured loans, loans from small or infrequent lenders, and all-cash buyers. Their data contain information on over 33 million unique ownership sequences in just over 19 million distinct owner-occupied housing units from 1997–-2012.

The researchers find that the crisis was not solely, or even primarily, a subprime sector event. It began that way, but quickly expanded into a much broader phenomenon dominated by prime borrowers' loss of homes. There were only seven quarters, all concentrated at the beginning of the housing market bust, when more homes were lost by subprime than by prime borrowers. In this period 39,094 more subprime than prime borrowers lost their homes. This small difference was reversed by the beginning of 2009. Between 2009 and 2012, 656,003 more prime than subprime borrowers lost their homes. Twice as many prime borrowers as subprime borrowers lost their homes over the full sample period.

The authors suggest that one reason for this pattern is that the number of prime borrowers dwarfs that of subprime borrowers and the other borrower/owner categories they consider. The prime borrower share averages around 60 percent and did not decline during the housing boom. Although the subprime borrower share nearly doubled during the boom, it peaked at just over 20 percent of the market. Subprime's increasing share came at the expense of the FHA/VA-insured sector, not the prime sector.
The authors' key empirical finding is that negative equity conditions can explain virtually all of the difference in foreclosure and short sale outcomes of prime borrowers compared to all cash owners. Negative equity also accounts for approximately two-thirds of the variation in subprime borrower distress. Both are true on average, over time, and across metropolitan areas.

None of the other 'usual suspects' raised by previous research or public commentators—housing quality, race and gender demographics, buyer income, and speculator status—were found to have had a major impact. Certain loan-related attributes such as initial loan-to-value (LTV), whether a refinancing occurred or a second mortgage was taken on, and loan cohort origination quarter did have some independent influence, but much weaker than that of current LTV.

The authors' findings imply that large numbers of prime borrowers who did not start out with extremely high LTVs still lost their homes to foreclosure. They conclude that the economic cycle was more important than initial buyer, housing and mortgage conditions in explaining the foreclosure crisis. These findings suggest that effective regulation is not just a matter of restricting certain exotic subprime contracts associated with extremely high default rates.

NEBR Digest — 16 August 2015
The U.S. Foreclosure Crisis Was Not Just a Subprime Event
Les Picker
ht Mark Thoma at Economist's View

Bill McBride — Lawler: Consistent with Other US Housing Reports, Negative Equity Estimates Vary Widely!

CR Note: This is from housing economist Tom Lawler. Lawler has been pointing out the inconsistency in US housing data; this time on negative equity.

Calculated Risk
Lawler: Consistent with Other US Housing Reports, Negative Equity Estimates Vary Widely!
Bill McBride

One of the biggest problems in doing "scientific" economics is the quality of the data. GIGO.

Simon Black — Here's What Happens When A Central Bank Goes Bust

Apparently the gold bugs over at ZH haven't heard that the Fed is allowed to operate with negative equity, or Karl Whelan's argument that central bank operations are not contingent upon solvency in a non-convertible floating rate system. 

You don't even need MMT to understand this. Gold standard thinking is a zombie that refuses to die.

Zero Hedge
Here's What Happens When A Central Bank Goes Bust
Submitted by Simon Black of Sovereign Man

Dirk Ehnts — Asmussen on negative equity at the ECB

So, there is no problem with negative equity at the ECB, it seems. It’s just that the rules – once again – that had been put into place do not allow the ECB to function properly as a central bank. Without a major change in the rules regarding the ECB the crisis will never stop. The existing system is faulty and only “works” because Mario Draghi broke the rules. “Works” means here that the financial system does not collapse. However, the problems in the real economy are still there. The euro zone is in recession, some countries have mass unemployment and young people face the worst job market since the end of WW II.

econoblog101

Asmussen on negative equity at the ECB

Dirk Ehnts | Berlin School of Economics and Law

Interesting how the rules only apply to "the little people" and can be broken to help the big folks in order to "save the system."