Fire Hydrant of Freedom

This is an opinion I can get fully behind.

Time to Dump on Housing


    by Martin Hutchinson
    November 26, 2012

The U.S. National Association of Homebuilders Housing Market Index jumped to 46 on Monday, its highest level since May 2006, just before the peak in house prices. In Britain, especially in southeast Britain, house prices remain inordinately high in terms of wages, rents and purchasing power. In the United States house prices are subsidized by innumerable tax and other benefits, including an effective government guarantee of most home mortgages. In both countries, house prices are subsidized by interest rates that have been inordinately low for over four years. In both countries, government budget deficits threaten the stability of the financial system and the economy generally. Overall, it's time to put housing policy into reverse and to reclaim some of the subsidies from the housing sector.

Housing subsidies are largely a product of politicians’ sentimentality. In both the United States and Britain before 1980, house prices were affordable in terms of average incomes and housing finance operations like Jimmy Stewart’s Bailey Building and Loan ("It's a Wonderful Life," 1946) made mortgage loans to middle-income people who had saved a sufficient down-payment. It's likely this idyll could have continued forever but for the inflation of the 1970s, which caused interest rates to rise in both countries so that in Britain mortgages (which generally carried floating interest rates) became unaffordable and in the U.S. the losses on fixed-rate mortgages destroyed the balance sheets and cash flows of the savings and loan associations.

The inflation of the 1970s also affected the public's attitude to housing. In both countries, houses ceased being simply places to live and became investments. From this point, the better-off ceased worrying about the upkeep costs of a large house and began to extend themselves in the mortgage market, hoping to maximize their investment profits. The result was a massive run-up in prices in fashionable areas like London, New York and most of California, which took both housing and local jobs well out of range of ordinary people. I am by most standards quite wealthy, at least in terms of income, but I could no more afford to live comfortably in today's London than I could afford a luxury yacht and its attendant upkeep and crew.

The ideal we should aim at is Germany, where thanks to the admirable Bundesbank there has been little inflation, so home ownership is limited. Only around 43% of the population owns a home and finance is available for at most 80% of the purchase price, normally less. German house prices have been flat or slightly declining in nominal terms for two decades, and only recently, as euro monetary policy has been by German standards excessively lax and euro interest rates have been held down below German inflation, has there been a bump of maybe 10-15% in prices.

It's not a coincidence that Germany has the most successful industrial sector in Europe. Because of its lower house prices less of its savings are wasted in home purchase, even though the rich, like the Victorian British, are substantial investors in rental properties. (They invest little in equities, substantially in bonds and not at all in hedge funds or other worthless excrescences of the Anglo-American capital markets.) Houses are affordable, either to buy or to rent, yet staff are mobile when they are needed to be, since only the oldest and longest established own their homes.

In short, the German housing and house finance market is a good template, and our policies should be aimed at mirroring that market.

In the United States, the home mortgage interest tax deduction should be abolished, providing a sizeable $60 billion annually towards closing the $1 trillion Federal budget deficit. If as is likely a populist president and Congress wimp out of most of the tax increases in the “fiscal cliff,” abolishing the home mortgage interest deduction will at least provide a modest move towards fiscal sanity, even though that particular tax break is not as egregious as the "carried interest" treatment of private equity profits or the tax break for charitable donations, both of which actively encourage economically destructive behavior.

The most egregious housing subsidy in the U.S. system is the effective Federal guarantee of home mortgages through Fannie Mae and Freddie Mac. This grew up almost accidentally, resulting from the development of mortgage securitization techniques in the 1970s and 1980s. It has resulted in the death of the Jimmy Stewart model, and its replacement by a gigantic bureaucracy, which makes the mortgage process far more difficult than it needs to be.

In addition, the Federal Housing Administration  guarantees mortgages itself, a duplication of effort if ever there was one, and has exhausted its capital, having loosened its lending restrictions in 2008 just as everyone else was tightening them. The FHA now supports 15% of all mortgages, up from 5% in 2008, and its stated purpose of enabling the indigent to get mortgages has been stretched to include a maximum guarantee limit of no less than $729,000.

We were informed this week that Fannie Mae has expanded its staff by over 1,000 since its bankruptcy in 2008, although Freddie Mac has cut back slightly. In addition a nominal 15% decrease mandated by Congress in the value of mortgages bought directly by the entities has been effectively ignored.

This subsidy has gone on long enough. With housing recovering, these entities need to be shut down, not over a period of a decade or more but within a year. The U.S. banking system is eminently capable of making home mortgages itself, as it did for decades before 1970, and if the cost of housing finance increases somewhat, so what? It will push people towards lending and away from excessive leverage, both favorable developments for the overall economy.

There are other subsidies that also need to be removed. Under the Basel banking regulations, mortgages are given preferential; treatment in banks’ capital calculations compared with other loans. Experience since 2006 worldwide has shown the risk assumptions behind this to be faulty, as are the even more egregious subsidies given to holding government paper. Changing this is simple; the housing sector does not deserve such consideration.

The final subsidy to remove is that of ultra-low interest rates. These favor investment in long-term assets of limited volatility, such as home mortgages, thereby allowing banks to load up on mortgage assets on a highly leveraged basis while neglecting the far more economically valuable activity of lending to small business. Low interest rates have de-capitalized both the United States and Britain; they have also driven British house prices up to inordinate heights, and will do so again in the U.S. if the current housing recovery is allowed to fester.

Remove these subsidies, and house prices in Manhattan, the fashionable bits of California and South East England will collapse, halving or more in the Russian Mafia-dominated purlieus of central London. That will have a number of beneficial effects. It will cause losses to the more foolish and spendthrift rich, who have overinvested in housing. It will deter young successful people form overinvesting in housing, thereby increasing their investment in equities and especially small businesses. At a less exalted level, it will remove the bias between renting and home ownership, thereby increasing workforce mobility, so that families will tend to buy houses only when they are well established with children, perhaps in their 40s.

Naturally, to get Germany's housing market, the authorities in Britain and the United States will need to adopt Germany's monetary policy (or rather, that of the Bundesbank before 1999). For Britain, this will not be all that difficult; the traditions of the Bank of England include the wholly admirable Montagu Norman and Rowland, Lord Cromer. While there are few if any of the current staff left from the period of those worthies, there is at least no institutional bias against sound money.

In the United States, it will be more difficult. Paul Volcker lasted only eight years and was immensely lucky; one can imagine the fate of his sound policies when matched against a President George W. Bush rather than Ronald Reagan. The legislation governing the Fed needs rewriting, with the "dual mandate" to cover unemployment removed, and provision made so that Fed policy is adequately "Volckerized" in spite of political pressure. Mere independence is not enough; we have seen in the past few years the damage that can be done when an independent Fed is run by a Chairman more populist than Huey Long. Historically, however, even the Gold Standard Fed of the 1920s proved prone to meddling in the wrong direction, creating a surge of speculation in the 1920s followed by an orgy of debt deflation in the early 1930s. Criteria must be set so that future Fed Chairmen are forced to govern by monetary policies that mimic a true "free banking" Gold Standard, in which money creation is automatic and central bank policy meddling minimized.

That's for the long term, and after this month's election results not immediately feasible. However, removing the multiple egregious subsidies to housing is currently feasible, and forms a major element in the lengthy and difficult task of restoring the U.S. and British economies to full health.

 (The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations—8% versus 46.5%, according to recent research. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005)—details can be found on the Web site www.greatconservatives.com and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley—2010). Both now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.

DougMacG,

Certainly what you write is a significant part of the equation as well.  But I really look at demographics.   To give you an idea on where new homeowners can come from:


US Homeownership by Age Group (Decennial Census)
                                   1980           1990            2000     2010
15 to 24 years                  22.1%   17.1%   17.9%   16.1%
25 to 34 years                  51.6%   45.3%   45.6%   42.0%
35 to 44 years                  71.2%   66.2%   66.2%   62.3%
45 to 54 years                  77.0%   75.3%   74.9%   71.5%
55 to 64 years                  77.6%   79.7%   79.8%   77.3%
65 years plus                  70.1%   75.2%   78.1%   77.5%
Total    Ownership               64.4%     64.2%   66.2%   65.1%

When we look at homeownership by age, it is readily apparent that the age group from 45 year up has little or no potential to grow the homeownership numbers. Those who can reasonably afford a home have already bought.  Additionally, although there will be some MUB in the 45-54 bracket, this number is severely restricted due to equity issues, income issues, and now, credit issues due to so many having experienced foreclosure.

The 35 to 44 cohort offers some hope over the next 10 years with the potential to increase rates above 70%, but this will be offset by the demise of the 65 plus bracket.

The 25 to 34 cohort is where we have to look currently for growth. But as we know, this is the age group most significantly hampered by debt issues, especially student loans, etc.  Additionally, they are also the ones being most affected employment wise.  Until economic realities change, there is little to suggest a major movement towards homeownership in this group.

The 15 to 24 cohort will be what will at least sustain housing at today's levels, if the income and future debt issues can be resolved.


    Census Population by Age
Age               2010                2000               1990
15-24   43,626,342   39,183,891   36,774,327
25-34   41,063,948   39,891,724   43,175,932
35-44   41,070,606   45,148,527   37,578,903
45-54   45,006,716   37,677,952   25,223,086
55-64   36,482,729   24,274,684   21,147,923
65-74   21,713,429   18,390,986   18,106,558
75+           18,554,555   16,600,767   13,135,273

Age wise, we see the potential that the younger cohorts bring to the table. The 15-24 and 25-34 cohorts have sufficient numbers to increase housing demand, even considering offsetting deaths, but this potential can only be realized by a complete change in economic realities. Until we get employment and income sorted out and sustainable levels and practices, these cohorts will not have the ability to begin a true housing recovery.

Looking at these numbers and weighing in all the various other factors, I can only conclude that we have 15-20 years before things really improve.  And even then, it is based upon a complete economic revival, which under present day leadership from both sides, it will not happen.




 

DougMacG,

Good observations.

Multi Unit is never going to lead the way out of the Housing Crisis. It will simply work to alleviate some of the damaging effects of what is going on elsewhere in the industry, primarily offering low cost housing to the displaced (6 million homes at this time), the displaced to come, another 6 - 10 million, those entering the workforce and not being able to buy homes due to accumulated debt, and 1 million new "legal" immigrants a year.  Multi Unit under these circumstances is a realistic opportunity.

I have been having problems working on my next article. The problem entails how to present an overwhelming amount of data and evidence to support housing depression for decades. Here is my thinking.

We know that the Move Up Buyer (MUB) must lead the way out of our present mess. But at this time, the MUB represents no more than 55% of total sales. And actual sales are really not increasing. Why is this?

1.  28% of current homeowners are Negative Equity, and when you combine them with Near Negative Equity, the number is about 53%.  These people are out of the market for many years, except for a very few who might benefit from 2% appreciation per year. But if values fall further, then the total number could quickly reach 60%.  Anyway, at least 50% of potential MUB are gone for now.

2.  The Fed has been subsidizing lower interest rates, currently at 3.34%. The people who have been refinancing "down", plus the "recent" buyers, are now "locked into" the homes. Don't expect MUB from this sector.  (Thank you Fed for screwing this part up.)

3.  The bulk of homeowners with equity are into their 50's and above. They are not going to become a MUB, instead, as they age, they will much more likely begin to downsize.

4.  Those who have experienced foreclosure or are in foreclosure are out of the market for 10-15 years, contrary to what "official" underwriting guidelines say of 4 years.  The vast majority do not recover and repurchase in under 10 years.

5.  Decreasing wages and higher debt have led to otherwise potential MUB's being debt restricted from qualifying.

6.  There are not enough New Buyers (NB) to purchase the homes that an MUB would sell.  Additionally, the elderly who pass will have the majority of their homes put up for sale, which will attract NB.

7.  The "smart" MUB who says "Hell No!!!  Too risky to take on more debt by moving up.

8.  When rates increase, many potential MUB's get priced out of the market again.

9. General economic conditions.

The simple fact is that the MUB market is very restricted, and there are not enough potential MUB's to lead the way out of the crisis.  So for the market to move, other forces must take the lead..................New Buyers or Investors..................more on them later..............and that is not good either......................

All right, you trying to pull my chain.....

Once again, we have the pundits looking at things from a very narrow perspective. 



I have not yet obtained the NAR non-seasonal data, so I posted the Calculated Risk NAR seasonal data.  Some key points:

1.  Oct Sales did increase over Sep 12, but if you look from May 2012 to Aug 2012, the Oct Sales are down substantially.  Why the increase in Sep Sales, it remains to be seen what is going on.  It certainly is an outlier.

2.  Sep 2012 Sales were revised down, by 6.7%.  How much will Oct be revised down?

3.  Oct sales were on contracts written in Aug and Sep.  Was there a 'lag" in closing that caused the uptick in Oct for sales?  Would this also explain why Oct had a huge drop over Aug sales?  Until the Nov and Dec data comes in, we cannot reasonably say what is going on?

4.  Median sale prices are up Y over Y by 11%, and prices increasing by 10%.  BFD (sarcasm).  It doesn't mean a thing.  Median is the midpoint of all sales. So? Maybe higher priced homes are now being targeted.  It does not mean that values are increasing.  Case Shiller compares existing home resales and finds that prices are up 2.2% Y over Y.  This is the only comparison that makes sense.  (Don't forget how restricted inventory affects pricing.

5.  Why are fewer distressed properties selling?  Because foreclosures have been restricted through the OCC and Ag Settlements, plus the banks have learned that keeping foreclosures off the market and only releasing a few at a time drives up prices.  It does not show an improving market, especially when you realize that rates are at historic lows, and sales are really not improving.

6.  Don't trust the NAR data.  The NAR misrepresents everything. They are the marketing firm for realtors.  (BTW, the US Census data on home sales comes from the NAR so it is circumspect as well.)

Now for Housing Starts:



Single family starts is where any recovery must come from.  Though the chart has too much information, the reality is that if you use non-seasonal data, then housing starts for Oct fell for single family homes, from 52.5 thousand to 48.8 thousand. Multi-unit went from 26.5 thousand to 26.2 thousand, essentially unchanged.  However, the "magical" seasonal number for starts shows seasonal up from 73 thousand to 87 thousand.

This is why I do not like seasonal data. It "rounds" things off and can give an entirely different perspective than what is happening on the ground.

Is Housing in a recovery?  If you want to interpret the data to show it is, then doing a Short Term perspective, you can make an argument that it is.  If you want a more accurate picture, then take a longer view, over a significant historical timeline, and you see a different story.

Add into the equation that the population of the US increases 2 to 3 million per year, and you can judge even better just how well off housing is. 

I am working on another analysis of where any true buyers are, and the issues facing housing, from the negative equity homeowner to the age demographics, and all things between. When finished, it will really show the issues ahead, and why those who are promoting a housing recovery are not looking at the long term trend.

Over the next few days, you will be reading about Foreclosure Starts for Oct 2012 and for the 3rd Quarter 2012.  The articles will be mentioning how Foreclosure Starts and Delinquency Rates are falling, Year over Year.  This gives the impression that the Foreclosure Crisis is improving.  For a sample of such articles:

http://www.calculatedriskblog.com/2012/11/mba-mortgage-delinquencies-decreased-in.html

MBA: Mortgage Delinquencies decreased in Q3

The MBA reported that 11.47 percent of mortgage loans were either one payment delinquent or in the foreclosure process in Q3 2012 (delinquencies seasonally adjusted). This is down from 11.85 percent in Q2 2012.

From the MBA: Mortgage Delinquency and Foreclosure Rates Decreased During Third Quarter

    The delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 7.40 percent of all loans outstanding as of the end of the third quarter of 2012, a decrease of 18 basis points from the second quarter of 2012, and a decrease of 59 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.
 
    The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. ... The percentage of loans in the foreclosure process at the end of the third quarter was 4.07 percent, down 20 basis points from the second quarter and 36 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.03 percent, a decrease of 28 basis points from last quarter, and a decrease of 86 basis points from the third quarter of last year.
   
    “Mortgage delinquencies decreased compared to last quarter overall, driven mainly by a decline in loans that are 90 days or more delinquent,” observed Mike Fratantoni, MBA’s Vice President of Research and Economics. “The 90 day delinquency rate is at its lowest level since 2008, and together with the decline in the percentage of loans in foreclosure, this indicates a significant drop in the shadow inventory of distressed loans-a real positive for the housing market. The 30 day delinquency rate increased slightly, but remains close to the long-term average for this metric. Given the weak economic and job growth in third quarter, it is not surprising that this metric has not improved. ”

    “The improvement in total delinquency rates was accompanied by a further drop in the foreclosure starts rate, which hit its lowest level since 2007. Moreover, the foreclosure inventory rate decreased by 20 basis points over the quarter, the largest quarterly drop in the history of the survey. The level however, is still roughly four times the long-run average for this series as we continue to see back logs of loans in the foreclosure process in states with a judicial foreclosure system. The foreclosure rate for judicial states decreased slightly to 6.6 percent and the foreclosure rate for non-judicial states showed a steeper drop to 2.4 percent. The difference in the foreclosure rates of the two regimes is at its widest since we started tracking this metric in 2006."

Yes, Foreclosure Rates are down, but here is why.

1.  The OCC 2011 Consent Decree and the Attorney General's Settlement Decree required lenders to change foreclosure and servicing procedures. Additionally, they transcribed new procedures for Loan Modification efforts.  The result of all the changes forced lenders to radically reduce foreclosures while making the changes.  Oct 1, 2012, the changes were required to take effect.

2.  New statutes in many states in 2010 and 2011 forced lenders to either alter foreclosure practices, or in cases like New Jersey and South Carolina, cease foreclosures for 12-18 months. Nevada implemented a modification program that reduced foreclosure starts by 95%, while lenders attempted to comply. 

3. HAMP modification programs are still going on, and the HAMP mods take several months to go from trial to permanent.  And if the mod is denied, then the person can re-apply, extending out further the time in the home without foreclosure starting.  (60% of such permanent mods will fail within two years.)

4. Short Sale attempts also reduce the Foreclosure Starts, and when a Short Sale is actually granted, it permanently reduces the Foreclosure rate. Denied Short Sales will eventually drive up the Foreclosure rate, but only after 6-12 months while the Short Sale is attempted to be worked out.

The bottom line is that Foreclosure Starts have been delayed by all these actions.  Now that new procedures have taken effect, the Rates should begin to increase again.


Mortgage Delinquencies are down Year over Year by 174,000. This is about 14,500 per month.  What factors may be a result of this?

1.  More loan mods being done, which we know is happening.

2.  More Short Sales being completed, which is occurring.

3.  Completed foreclosures, which will be less likely to seriously reduce delinquencies, since the completed foreclosures are being replaced by new filings, though at a decreased rate.

The simple fact is that based upon foreclosure prevention efforts, delinquencies should be down.


Where do we go from here?

Yes, foreclosure start numbers have improved, but likely only temporary.  Foreclosures will begin to increase after the beginning of the year.  This is because the Modification efforts that delay foreclosures will be completed, with increasing frequency. Those denied, and most will be, will  find that the Foreclosure Process is initiated shortly after.  Foreclosures will also begin anew because the state imposed moratoriums will expire, allowing lenders to foreclose in different states.

But this is only the "short term" effects. What else can we expect?

1.  The Alt A loans have now turned adjustable, except for some 7 & 10 year terms.  These loans have current interest rates of no more than 3.25% generally, since they are tied to either the LIBOR or MTA Indexes.  Essentially, they have received "temporary modifications".  As Index values increase, which they will, the loan interest rates increase, so all of these loans will be at risk. 

2.  50% of Subprime loans remain. All are at their Start Rates, since the LIBOR Index is so low. When rates go up, the loan rates will increase again, at 1.5 to 2% per year.  More loans will fail.

3.  Most modified loans, whatever type loan, have been modified at 2% rates for 5 years, and then they go up 1% per year, until they max out at the "contract rate", which up to the last year was between 4 and 6%.  Expect them to begin failing after 5 years.  (This was done by design, simply to delay foreclosures. The Treasury admitted this.)

4.  Prime loans are failing in greater numbers, even though they are 30 year fixed.  They will continue to fail due to lack of or decreasing income.  Liquidity Crunch will doom these borrowers.

5.  Currently, home values are claimed to be rising at a 2% Year over Year rate. This number is absurd because the 2% rate is the Median of all sales. Since higher priced homes are now selling more frequently, the "value" will be higher.  Additionally, in areas of restrained inventory, prices are becoming over inflated again.  (Does anyone seriously believed that 25% Year over Year price increases in Arizona reflect reality? In my own area, 1600 square feet homes in the same neighborhood, all similar, can go from $140k to $220k.  This is no rational for the prices being paid, except that there is a one month supply of homes listed.  Inventory is being held back to force higher prices.)

28% of homes currently have negative equity. As foreclosures increase, values will fall again, creating more negative equity. At 150% negative equity, at least 40% will default strategically default, if they see no likely increase in values.

If honesty in reporting existed, the true nature of housing would be reported.  But that would further depress the market, so you will not hear that.

BTW, I am working on an article which covers where the new buyers, if any, have to come from.  It will show why we should not expect any home sales recovery in the near to intermediate future.






.  Modification procedures before the foreclosure process is started will take at least three months on any loan being considered for a modifications

DataQuick has just released Housing Sales for the Southern California area. The numbers are being touted as showing that housing is recovering. Typical of how the numbers are being reported is below.  Fortunately, others have already done some analysis, saving me time. 


DataQuick announces that Oct Sales are up, and prices are up.  Mortgage Orb, an industry website, carries the ball to the 1 Yard Line.  Here is how they read the numbers.

http://mortgageorb.com/e107_plugins/content/content.php?content.12748

Southern California Home Sales Up Sharply In October

Southern California home sales experienced a strong increase in October, according to new research released by San Diego-based DataQuick.

DataQuick reports that a total of 21,075 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 18% from 17,859 sales in September, and up 25.2% from 16,829 sales in October 2011. Last month's sales were the highest for the month of October since 22,132 homes sold in October 2009, though they were 11.1% below the October average of 23,709 since 1988, when DataQuick's statistics begin.

The median price paid for a home in the six-county region was $315,000 last month, the same as in September and up 16.7% from $270,000 in October 2011. The September and October medians are the highest since the median was $330,000 in August 2008.

However, the region's lower-cost areas continued to post the weakest sales compared with last year. The number of homes that sold below $200,000 fell 11.2% year-over-year, while sales below $300,000 dipped 0.3%.

Foreclosure resales accounted for 16.3% of the resale market last month, down from 16.6% the month before and 32.8% a year earlier. Last month’s level was the lowest since it was 16% in October 2007.

"Watching the market rebalance itself is fascinating," says DataQuick President John Walsh. "In some categories and in some neighborhoods, demand outstrips supply, pushing up prices. In other areas, the market is still largely dormant. Low interest rates are a huge factor, where mortgages are available, which they aren’t for a lot of potential buyers."


However, Dr Housing Bubble actually looks at the numbers in detail, and with a critical take. He points out the problems with the data.

The Southern California housing market is tearing a path into the fall real estate season.  As we detailed in a previous post many families will have a hard time saving $100,000 for a down payment so the market is being flood with foreign investors, flippers, baby down payment buyers, and big pocket investors.  Let us call this the FFBB crowd.  Since foreclosure resales are making up a smaller part of the selling mix the median price is ripping a path across the mainstream press creating a self-fulfilling vortex feeding into the real estate money piranha machine.  It is an interesting mix because household incomes are stagnant yet a tremendous amount of subsidies and interest is causing prices to move up.  Let us examine the latest sales data for Southern California.

Long live the jumbo loan market

The jumbo loan market is picking up steam.  Jumbo loans as a percent of all sales are now back to levels last seen in December of 2007:



Why the heavy usage of jumbo loans?  Prices are running up because of scant inventory and the low interest rate environment.  Foreign money is flowing into targeted areas while domestic big pocket investors are purchasing up other properties.  Higher priced properties are making a big move:



Sales between $300,000 and $800,000 are up a stunning 41 percent over the last year.  Sales in October for properties priced above $500,000 went up by 55 percent.  These are actual sales and this is occurring in the fall when sales typically edge lower.

A quick preview looks like this:

    All cash buyers:                 32 percent (near peak)

    FHA insured buyers:       25 percent

    Jumbo loan buyers:        21 percent

Welcome back to the California housing market.  Foreign money and big pocket local investors make up the all cash segment.  The resurgence of flippers is now in full force:

Homes sold twice within six months:

    October 2011:                    3.7

    October 2012:                    6.1  (increase of 64 percent)

And we are seeing this flipping activity in many hipster neighborhoods.  I know many people are shocked since they will look at local income figures but keep in mind this is happening because a large pool of money is coming in from outside forces.  This is also happening in many prime cities of Canada.  This hot money will continue flowing as long as the host nation continues to boom.

Since foreclosure resales are now a much smaller part of overall sales, we are seeing the median price move up sharply:



Source:  DataQuick

SoCal home sales are up 25 percent over the year while the median price is up 16 percent.  Keep in mind this is happening at a time when household incomes are stagnant.  As we have mentioned, the FFBB group is the current herd running through the 405 and 101.  To try to personalize:

    -Foreign money – current prices are cheap relative to domestic markets (weak dollar adds even more leverage as a hedge).  Interested in targeted markets (not all of US).

    -Flippers – prices are going up so selling into momentum (musical chairs game starting up again)

    -Baby down payment  buyer – FHA insured going to more local families trying to jump in and play this game.  Paying via much higher mortgage insurance premiums.

    -Big pocket investors – buying up places in areas like the Inland Empire for rentals or flips (yields are being squeezed thanks to competition)

Not exactly the bubble of the 2000s but this is certainly a market fueled by speculation and hot money.  Throw in the Fed’s push for low interest rates via QE3 and you have local families levering up to compete with all these other groups.  The result?  Big jump in sales and prices.  But does this have momentum?


Now do you see why I detest those who simply report the company line without a true analysis of the data? There is simply no reason to believe that a recovery is on the horizon, especially when you look at the monthly and regional data that I posted previously.

Pat

I have given up trying to figure out how to put the graphs up on this website.  So I uploaded everything to my own website, and I can summarize here, and you can check out my website for the graphs.

http://lfi-analytics.com/home/sep-2012-housing-starts-analysis/

What I did was to take the last 12 months of Housing Starts for single family, and also take the New Home Sales for the same period of time. The purpose was to compare both on a monthly basis and by regional basis as well. (Note: I discount Multi Unit because it is not going to overtly affect the Single Family Market, which is where recovery must occur.) What the info shows:

The first chart shows the overall numbers, on a national basis. It suggests that a housing recovery is in process, but when we look at Single Family, it shows that Single Family has stabilized over the last several months. And, with winter setting in, we will see Single Family starts decrease significantly. Notice that while Single Family stabilized, it was only Multi Family that continued to rise.  (Could Multi Family be rising because builders expect a trend away from Single Family Ownership, or because of rental costs?)

Single Family Area Starts shows that only the South is showing any strong growth since the beginning of the year. The other regions experienced some growth beginning at the end of the 1st quarter 2012, but the growth leveled off quickly, and will decrease as winter arrives.  The strength of the South makes one wonder why it is so much stronger, but IMO, it can be a result of three factors:

1.  Cost of homes in the South may be lower.

2.  Replacement of Housing Stock lost by tornados over the last two years.

3.  People moving from the Rust Belt and other areas of low job expectations, to areas where jobs may be more plentiful.

Next, I looked at Monthly New Home Sales.  The New Home Sales number is determined by when the contract is signed, not closed. For a majority of developers, they do not get permits until the contract is signed, so this number, when compared to Starts, is a true indicator of strength.

Again, the South is leading the way with New Home Sales, as with Starts.  The West has half the activity of the South, and the Midwest and Northeast have one quarter the activity. This pretty much fits into the same pattern as with New Home Starts.

Next, I looked at Housing Starts to Sales.  One would expect a close correlation between the two.  Through the end of 2011 and beginning of 2012, a loose correlation did exist, but after Apr 2012, Starts and Sales really begin to diverge. Sales stabilize, but Starts continue to increase. a 20k unit per month gap occurs.  Why?  No effective analysis can be done, but we can make some assumptions.

1.  Build up inventory for sales over the winter when the weather prevents new starts.

2.  Low cost of money makes building and holding until sale less costly, especially if rates begin to increase.

3.  Expectations that demand will not fall much during the winter.

Finally, I compared Starts to Sales on a regional basis.  This revealed any interesting situation. 

1.  The Northeast Sales and Starts were generally in pretty close correlation.  Starts tended to be double the Sales, but when dealing with 2-3k sales per month, this is statistically unimportant. With Sales and Starts having stabilized in the summer, by the winter, I expect to see up to a 50% drop for the winter in Starts.

2.  The West was in almost perfect correlation. Sales strongly tracked with Starts. But both Sales and Starts stabilized in the summer, and will fall in the winter months.

3.  The Midwest was very interesting in that Starts in the middle of the year were far above Sales, uncommonly so.  Why? Could it be the same reasons as in the South?

4.  The South showed a strong correlation between Sales and Starts until Apr 2012, and then Sales tapered off and began to fall while Starts continued to rise. This may be a combination of both tornado replacement, and then building inventory for the winter months.

Based upon what I see, a genuine housing recovery is not in effect.  It would appear on the surface to be occurring, but both regional sales and starts in the Northeast, Midwest and West do not tend to support recovery.

Additionally, there are issues that will affect housing that I have not covered in the Housing Start section, but will do so next.  This includes Shadow Inventory, Existing Sales, Negative Equity, falling income, demographics, and a host of other items.

It is my belief that housing is structurally unsound for at least the next decade, and could be up to two decades. There are just too many negatives pushing down upon the market to expect a realistic recovery in even the intermediate term.  As for me personally, I am renting right now, and have no plans for buying again for at least five years minimum.  There is simply no reason to want to buy, and have the headaches that go with home ownership.  (This is becoming a more common perspective as well.)

Now that the New Home Sales have come in, I can finish up a reply on where Housing really stands right now.  It will cover housing starts, etc.  Will take about two days to do, since I have Expert Witness reviews to complete today and tomorrow.

Sorry about being late to the party.  Very busy at this time, but here goes on some comments.

Nov Housing Stats

The report identifies all growth occurring in the multi unit sector.  This would suggest that  builders and investors know that single family homes are still overbuilt, and are not expecting new family creation to add to the SFR market in the near term.


I took a look at the latest Housing Stats, and some observations:
•   As indicated in the article, Multi Unit Starts were the key reason for the increase in the number of new starts.  Why was the increase in Multi-Unit? 

My thoughts:  Dependent upon which source you use, the housing market is over built by from 1m to 3.5m units, mostly Single Family.  Why concentrate on Multi Unit, unless you expect that the Single Family units are still overbuilt, there are not enough qualified buyers to purchase the inventory and that there will not be a reasonable housing recovery for an extended period.

•   A 681k annual rate of new Total Starts is 118k over the estimated amount of “new family creation”.  So, Housing Starts is still adding to excess inventory.

•   Single Family Starts up by 2.3% Year over Year.  That amounts to 15,000 new starts.  Not really that much, so Single Family Housing is still reeling, especially if one considers that 2001 saw 1.6 million units built.

•   The South is leading in Single Family Starts, at 233k for the year.  The West has 91k, and this number has fallen in a range of 75k-93k over the last two years.  The East at 41k, and the Midwest at 71k.  The Northeast and Midwest have similar trends existing as in the West.

•   Why is the South growing much faster than the other parts of the area?  Weather factors that cause replacement of Single Family Units?  Better economy like in Texas?
As you can see, a cursory look like Wesbury does means little.  The devil is in the details, and the details do not suggest much movement in Single Family, which is the most important category.

Other:

The NAR released its “adjustments” to the Sales figures from 2007-2011.  The adjustment was 14.5% downward.  They confirmed that the 2011 stats were inflated by the 14.5% figure, and when looking at 2007-2010, the NAR simply used the same 14.5% amount, instead of calculating actual amounts.  I believe that the number is still significantly overstated, but without independent 3rd party confirmation, it is not possible to know the true facts.
 
FHA Article
The FHA article gives a decent overview of the housing mess FHA is in.  Right now, it is undercapitalized by 2%, per legal requirements.  There have been no notable plans for curing the undercapitalization of FHA.

FHA is doing approximately 40% of all new purchase loans.  People go FHA when they cannot get approved through the GSE’s.  The reason that most go FHA is poor credit, and lack of any real down payment.  2.5% down can get you approved with FHA.

Loans done with a value of 95 – 97.5% go into default at a 16.5% (appx) rate.  Since this is a large portion of the FHA business, expect defaults to continue to rise.

Fannie & Freddie Lawsuit

Don’t expect anything from the lawsuits.  The major players, Johnson and Raines, are nowhere to be seen in the lawsuit.  The suit is simply “window dressing” for an election year, nothing else.

Mandated Foreclosure Review for 2009-2010 loans

The reviews are not going to accomplish anything.  The key element is proving “harm” to the homeowner. 
I have been reviewing large numbers of loans for “harm” over the past few years.  Only in a very few cases can “harm” be proven.  In almost every case, the “harm” did not meet or exceed the “harm” to the lender in missed mortgage payments.  For those seeking foreclosure reviews, they are going to be severely disappointed.
At this time, there is nothing to suggest that an earthshaking change is coming to the Housing Market.  Things appear to be as stagnant as the Western Front in WW1.

Additional

BTW, two weeks ago I had lunch with a person who “owned” several small banks in his lifetime.  He now consults with banks for restructuring and a return to health.  Currently, he is working with 40 banks across the US, and is a paid advisor for the GSE’s on developing the new Underwriting Standards. We are both involved in a large court case in CA, regarding a regional bank.

Lunch was the perfect time to ask him about why the banks were not lending.  Of course, he asked my opinion, and I stated Capital Impairment as a major factor, and then the lack of qualified borrowers.

His response was that the banks that he deals with, and all here would recognize most names, have plenty of capital to lend.  They have been making very reasonable returns on their money, especially since their current cost of funds is no greater than 0.20%, i.e., less than 1%.

The problem as he described it, was that there are few really qualified borrowers in the market.  Either the borrowers do not qualify for a loan, or they are too risky even if they qualify.  The good borrowers are not in the market at this time.

GM,

You have me figured out already?

I do not like housing starts as an indicator of anything.  It is too volatile of a number, subject to many outside factors.  To provide some insight, here are housing starts over the past few years.

1991     1,014
1992    1,200
1993    1,288
1994           1,457
1995    1,354
1996    1,477
1997    1,474
1998    1,617
1999    1,641
2000           1,592
2001    1,637
2002    1,748
2003    1,889
2004    2,070
2005    2,155
2006    1,839
2007    1,398
2008       905
2009       583
2010            598
2011            628   seasonally adjusted

Housing starts are therefore up 30k from last year.  But, and a huge but at that, the starts are down 60% from typical yearly averages.  So historical trends show that housing is still in the dumpster.  But, that is not all.

2011 saw Joplin and Tuscaloosa hit by major tornados in Apr and May.  Other towns and cities were hit across the Midwest as well.  And flooding was rampant in some areas. Huge numbers of homes were destroyed or condemned.  Lag time from destruction to the beginning of rebuilding can be anywhere from three months or longer. 

It would be very interesting to be able to factor in the rebuilding of those communities to see how much affect that these efforts had the increase in housing starts.

Wesbury, like most others, assume that everything happens in a vacuum.  They don't allow for outside factors to influence what they would like to report.  Therefore, they examine data with an attitude of "confirmational bias".  In other words, they see the info that promotes their beliefs, and ignore any data that can contradict what they believe.

Forget Wesbury being an idiot. He is "intellectually dishonest" and a "fraud".

Alright Crafty,

You force me to comment.  Let me take a sip of wine and I will start..........gulp....gulp....gulp.....now that is better!!!

Wesbury is an idiot.  Laurie Goodman with Amherst is about the best at evaluating this......besides me.  LOL.  (She misses some things that I find important, like credit quality, GSE lending, etc.)

Wesbury ignores the 6.5m homes that are currently delinquent on payments, of which 90% will be foreclosed upon.  This will add to inventory.  He also ignores coming price depreciation that even Fannie is now predicting to be about 6.7% this year, and about 7% next year.  This is in line with Case Shiller.  It will contribute to even more foreclosures.

The buyer pool is pretty much gone.  65% of all new purchases are FHA.  The loans represent above 95% loan to value for the most part, or there are credit issues that prevent GSE approval.  FHA loans now have a 16% default rate.

Yes, the 25 plus age bracket is increasing by 1.1%, but that includes everyone.  Age 25 - 34 is 40m total.   But the idiot fails to consider that there are over 40m people that are 60 and above.  "Ya think" that they might be downsizing, selling, moving into assisted facilities and other such things as they age and that will offset the gains?  And what about all the deaths to follow?

What happens when rates go up? Home values fall, leading to more foreclosures.  And where are the move up buyers who might buy the new construction homes?  There are few because of negative equity, and negative equity homes are predicted to go up to 52% of the total in the next couple of years.

There were 313,000 new home sales, seasonally adjusted in Sept 11.  This is the worst since records were kept, starting in 1966.  And, in 1966, the population of the US was 187m.

Family creation units is usually about 1.2 million, but over the past 3 years, it has been 400-500k.  Plus, family units are decreasing because families are living together to "survive" the economic conditions.  This is especially so with foreclosure victims.  Where will the buyers for new homes come from.

The 25 plus crowd that Westbury counts on are heavily burdened with both revolving debt and student loan debt.  Plus, real wages are decreasing.  How will they afford homes?  Especially when interest rates increase?

What happens when the Fed quits buying GSE loans?  There is no demand left.  After all, the coupon rate on new GSE loans is about 3.12%.  When the Fed buys loans, where does the money go that the investor was paid when the loan was retired?  Not to a new loan with all the risk.  Try the stock market.

Remember, Wesbury is an advisor to the Chicago Fed.

JDN,

The government got into the mortgage business in 1936, to promote housing recovery and foreclosure prevention during the Depression.  Since then, it has completely evolved.

In 1968, government mortgages were a major budgetary item.  To get it off the budget, Fannie was born, and then Freddie.  They were allowed to act on their own, by their own form of securitization.

By 1993, F&F owned a significant part of the mortgage market, based upon the guarantees.  F&F became political animals with the goal of being for all purposes, the primary, and pretty much sole provider of mortgages in the US.  With the help of politicians and government guarantees, they held 60% of the market by 2006, and including VA and FHA, 95% of the market now.

For the last 20+ years, the government has needed F&F to do mortgages.  That is because manufacturing in the US had been falling, and housing was one of the few wealth creation industries left in the country.  With housing came durable goods sales, home furnishings, construction, infrastructure, schools, etc.  This propped up the failing economy.  And, it led to revenues in stated, county, city and federal budgets.

Now, the government is engaged in trying to keep the economy going by restarting housing.  Of course, their efforts are failing because housing is simply not affordable, an excess or housing units exist, and people are too debt burdened to buy homes.

The drop in the maximum value for Fannie and Freddie loans will only apply to a few areas and states.  It will mean very little overall in the scheme of things.

If one could look at Fannie and Freddie loans, you would likely find that there are very few loans being done in the monetary range where the reduction is occurring.  That is because of three factors: 

Home values have fallen below the range in most areas.
Those who could have taken advantage of refinancing opportunities have done so.
For those who could qualify to buy, banks would be loaning to them.

This is simply another public relations ploy for F&F and the government.

Those are all National Association of Realtor figures.  Since Feb, the NAR has been in the process of "changing" their methods of calculating home sales because of differences between them and Corelogic numbers.  There is about a 33% to 45% difference, with the NAR numbers being significantly higher. 

Most people in the industry go with Corelogic numbers, unless they are realtors. 

Of course, realtors and loan brokers never lie, do they?  After all, they are telling us that it is a "great time to buy".  Heck, they were saying that in 2008, 2009, and 2010, when values were still falling.

Major problem with this report...........

New family starts are running about 400k per year.

40m people aged 65 and up with 77% home ownership rates are beginning to pass and more will occur each day and year.  Boomers also.

Up to 3.5m housing units overbuilt. 

Real wages back to 1996 levels.

Home values still overpriced.

Lack of qualified buyers.

What will happen is that qualified buyers will buy the new homes, for the "prestige" of having a new home, and the resales go stale with the rest of the overbuilt housing units.

Nothing is as it seems with Washington and politics, and the lawsuits with FHFA and the SEC certainly show this to be true.  Never more so than this.  The truth is that I have had discussions the past week with knowledgeable people who are just as confused.  What I do know:

       There are increasing demands for the privatization of F&F, or the deisbanding of each.

       F&F has cost the taxpayers approximately $240b, and some estimates suggest that it could go as high as $1.1T, by the end of the crisis.

       There are calls to eliminate the Federal guarantees of F&F loans.

       F&F controls 60% of the lending market today.  FHA & VA has 35% and 5% by other lenders.

       It is believed that another $50B is needed within a short time period for further bailouts.

       Eliminate F&F, or even just the guarantees, and interest rates will rise, lending will stall further, and home values will fall further.

       F&F knew the quality of the mortgages that they were buying.  They resisted buying them until 2004, when they saw that they were losing market share, quality borrowers already
       had bought or refinanced.  The market had changed, and subprime and alt-a would be the products that kept F&F moving forward.

F&F are "political animals".  They use every political mechanism to achieve their goals, and their goals are to completely dominate the industry as they do now.  They will fight with every means at their disposal to remain alive and dominate. 

Based upon all the above, I can only conjecture:

      1.  FHFA know that F&F are facing greater losses.  More bailout money will increase the demands for elimination of F&F.  Elimination means further decline in the housing market.
          FHFA is their "regulator" and understands this very well.  Eliminate F&F, and there is no need for FHFA.  No Federal Agency wants to do something to eliminate their own agency.

          F&F has all the loan documents for each loan that they buy, unlike securitized loans.  Since 2007, F&F have been demanding "repurchases" of defective loans.  60% of the demands
          are successfully defended against the repurchase by the banks.  40% end up in buy backs.

      2.  The SEC investigation is for the same issues that FHFA has alleged in its lawsuits against the lenders.  No monetary compensation of admission of fraud apparently on the table. So,
           what is the purpose?

If a "settlement" occurs whereby there is no monetary award or admission of wrongdoing, this would provide an argument for F&F to claim that they had done no wrong.  Then, they can go to their favorite politicians to derail any attempts to shut them down, or end the guarantees.

Further bailouts of F&F would jeopardize such a strategy.  So if the FHFA can go after the banks and get a settlement, then that would lessen the bailout needs.  Furthermore, the banks would need to give an admission of liability, and that would further support the F&F claim that they did not know what was going on.

The banks would have to pay the damages from the settlement.  You can bet that the FED would be lurking in the background, ready to "bail out" endangered banks through the issuance of more credit.  That way, we would not experience bank failures.

Again, this is only conjecture. But it is the only scenario that makes sense to me.

         

Nevada suffered a 9.9% Year over Year decline in Home Values, according to Corelogic.  This was for Feb 2011.

From what I hear, whole sub-divisions remain empty in the LV area.  People will not buy because of the lack of neighbors.  It is just as easy to buy in the new sub-divisions, and have neighbors, and a new home.

Foreclosure completions are still lagging behind as compared to homes in deficiency status.  There is a large "Shadow Inventory" as well as what is on the MLS. 

In other words, home values will continue to fall.  The bottom is not in yet.

Even without Interest Rates increasing, the Double Dip is in.  If appraisals were using foreclosures sales, instead of organic sales, and that the comps were being "cherry-picked", then it would be obvious that the Dip was here.

As it is, the only reason there was any "recovery" in housing last year and the year before was the government incentive to new buyers.

Doug,

A couple of comments...............

NAR is completely unreliable.  They are a marketing firm for all purposes, promoting home ownership.  They misrepresent the current status of the market to suggest a recovering market, when one does not exist.

As to unencumbered properties, 1 in 3 homes have no mortgage.

"Real Estate Market still dropping....more than it needs to".  Sorry, but I totally disagree, at least in the major markets.  Most people today cannot qualify for a mortgage.  This is because prices are still far to high.  Prices need to fall further, to more sustainable levels, and to bring people back into the market, by being able to qualify for a loan.

Furthermore, loan qualifying standards are still too loose.  Fannie will qualify people up to 65% Debt Ratios, with certain compensating factors.  I can show time and again that the compensating factors will not alleviate the risk of even a 45% Debt Ratio, needless to say a 65% ratio. 

You mention the 1 to 1 factor of people needing homes, and those coming to market.  I don't know where you live, but here in CA, that is completely off.

Right now, there are 16m total empty units of housing.  This includes rentals, for sale, and apartments.  There are 7.1m more people deficient in their mortgages.  1m REO properties are believed to exist that have not been listed.  Where are all the people for these empty units?  We are seriously overbuilt.

To solve the problem of housing in the US, there are certain facts that must be accepted.


The right to own a home does not exist, no matter what the government believes.

There are large numbers of people who will never be able to afford a home, and they should not be "offered" a program where they can buy, and then lose the home.

Qualifying for a home should not be easy.

Let the foreclosures occur. Get out of the way.

Let home values fall until the market stabilizes.

Privatize Fannie and Freddie, and end government guarantees.

Wesbury has not got a clue.

1.  He is quoting NAR statistics.  These statistics are completely unreliable.  They are considered about 1m overstated.  (Ever met a Realtor who didn't lie about how good they were doing?)

2.  Home sales are dropping, and not increasing.

3.  With regard to Inventories, he neglects the 7.1m homes delinquent on their mortgage payments.  This is "shadow inventory" that will come to market this year and next.  Furthermore, the inventory he quotes is based upon MLS.  The non-listed REO drive this number up considerably.

4.  Only buyers are first time homeowners and investors.  There are few move up homeowners because they cannot sell their homes due to the underwater status.  First time homeowners who can qualify for homes are being severely depleted.

5.  Loan standards are such that guidelines for income  verification are back to 1980 standards.  Unfortunately, Fannie and Freddie are still allowing purchases and refinances at 45% or greater DTI, based upon the Fannie Automated Approval Systems.  This will change because those borrowers will eventually default at those levels of DTI.

6.  Home values are going to drop at least 20% more, and as the economy double-dips, this will get worse.

Wesbury is drinking the Kool-Aid.

This was absolutely no surprise. 

Sometime this month, the National Association of Realtors will be coming out with "restated" numbers of housing sales.  For years, they have been "overstating" the number of home sales monthly.  They got caught up with and are supposed to release more accurate numbers this month.

Interest Rate have now fallen below 4% again, and home sales are falling.  Home values are falling as well.  No one should consider buying in this environment.

BTW, when appraisals are done, the appraisers are only looking at "organic" home sales when possible.  These are sales of homes that have not been foreclosed upon.  Obviously, prices are "higher" than REO sales.  Lenders, in order to keep up home values, don't want foreclosure sales to show on the appraisal because that would drive home values down further.  This way, they can attempt to keep values propped up a bit.

7.1 million homes delinquent in payments at this time.  80% or more will be foreclosed upon.  The worst is yet to come.

This was an article I wrote supporting MERS.


The Case for MERS

When the subject of MERS arises, there is guaranteed to be very quick and visceral reaction on the part of homeowner advocates.  The reaction will be such that one would believe that MERS was the greatest evil ever perpetrated upon the planet.  Next would come a demand that MERS be declared unlawful and any parties associated with MERS be thrown in jail.  This is a shortsighted and narrow minded view which is based upon a lack of knowledge of the realities of securitization.

Prior to securitization and before the expansion of National Banks, the recording of deeds and later their assignments was a relatively easy process.  That is because the entities doing the lending typically had branches in or near to the counties that they were lending.  Furthermore, they did not have that significant of a volume of business.  This made the process of recording deeds and assignments simple and effective.

Securitization would necessarily mean that a change to the process would have to occur.  Securitized trusts could contain up to 8000 loans spread across 3,143 counties in the U.S.  Most of these counties did not have the capabilities for electronic recording.  Less than 700 have the capability today.  Therefore, for effective securitization of products, local people would have to be hired and maintained on a daily basis to effect the assignments as necessary.

Assuming that a trust had 5000 loans in it, the following processes would have had to occur all within the time period of generally 30 days between the cut-off date and the closing date of the trust.

    * The originating lender would need to complete an assignment of the Deed and have it notarized.  It would need to be assigned to the purchasing lender.  The entire loan package would then be delivered to the purchasing lender.

    * The purchasing lender would need to cut a check to each recorder’s office, and then employ someone to take that deed and the check and have it recorded in the local county.  Once recorded, the purchasing lender would then need to create a new assignment to the Sponsor of the trust.  The loan package including the assignment would again be transferred to the Sponsor.

    * The sponsor would have to cut a check to reach recorder’s office, and then employee someone to take that deed and the checking and haven’t recorded in the local county.  Then the Sponsor would have to create a new assignment of the deed to the Depositor and then deliver the entire loan package to the Depositor.

    * Now, the Depositor must cut checks, and then send the assignments out for recording to each county.  When accomplished, since the Depositor has “established” the Trust, it must complete new assignments to the Trust, cut checks, and have everything recorded again.

The total process for the 5000 loans and four assignments per loan must be accomplished within the 30 days from the cut-off date to the closing date.   Obviously, it is apparent that this cannot be done.

For securitization to occur, and remember that securitization provides up to 85% of the total dollar volume for mortgage lending, methodology must exist that will allow for the tracking of mortgage loan ownership in securitized trusts, and without the problems of attempting to record each and every assignment.

An entity such as MERS, or MERS in a different form is absolutely necessary to meet the demands of securitization.  A separate entity should be established, private in nature, with no lender or banking ownership, and separate from the government.  It should allow for the public tracking of mortgage ownership, freely and readily accessed through the Internet.  By such a manner, the issues related to MERS and the controversy over foreclosure, and beneficiary status, can be eliminated.

I fully realize that many will take exception to this concept.  However, if securitization is ever to be restarted, and the housing market to recover, such a standard practice must be implemented.

Yes, they would.  And the lender would issue a 1099 for the amount.

GM,

A Ponzi Scheme does describe this government exactly.

GM,

Right now, there are 7.1 million loans that are delinquent and which will likely default.  Shadow inventory, that is bank owned, and both listed for sale and not listed for sale is perhaps another 2.1 million.  That is at least 9.2 million homes either foreclosed upon, or at risk.

HAMP and other Modified Loans are also at risk.  Of the 500,000 HAMP modifications alone, once the interest rate begins to adjust, five years down the road, most of those will default, if they haven't already.  Likely, those loans will default much earlier since 75% of those have Debt Ratios greater than 50%.

Then, it must be added in the "future defaults" from homeowners with 5 or 7 year fixed adjustable rate mortgages.  More defaults will occur due to the worsening economy. And Strategic Defaults will add to the deepening cesspool.  Likely, a conservative number of total homes to default and then face being sold again is  more than 12 million.  (I believe that number to be more likely about 15 million.

The National Association of Realtors has been claiming about 4.8 million "sales" per year.  It is now known that these numbers have been overstated for years and that it is more than likely less than 3.5 million. This number of sales consists of anywhere from 35% to 50% of foreclosures.  The rest are "short sales", "organic sales" or new home sales.

Most people who are actively engaged in the foreclosure crisis, and without ulterior motives, believe that it will take 4-5 years for defaults to reasonably stabilize.  Then, it will take several years, from 3-7 years, for inventory to be reduced.  (A significant impact of this will be "pent-up sellers" who can finally begin to sell homes and "move up" to bigger homes".  But this will be offset by Boomers who downsize.")  Once inventory is stabilized, then we can expect a more normal increase in values of about 3.5%.

Unless hyper-inflation occurs, we are looking realistically at a decade or more to stabilize.  Then, slow appreciation, but not reaching previous heights for a long period of time, if ever.

However, now for the "cold shower", if that was not bad enough.

Currently 95% of all loans are securitized through Fannie and Freddie or other agencies.  The rest of the loans are portfolio loans, held by lenders.  Private Securitization is pretty much non-existent until a purchaser can know what the risk is per loan.  (One of my new products addresses just that issue.)

When Fannie and Freddie get privatized, which is needed, then there will be no more government guarantees of mortgages.  This means that mortgage loans will be harder to qualify for, reducing the number of borrowers in the market for loans.  Then, to attract investors, interest rates must rise, which will reduce borrower's buying power.  When rates rise, home values drop.  Only when values drop enough again, can the "priced out" borrowers return to the marketplace.  (I expect at least 30% more of a drop in values, and maybe up to 50%.)

As you can see, things will not get easier for housing for an extended period of time.  Just hope that my "expectations" are very pessimistic and things won't be so bad.

For all

I am a friend of CD who has been on the front lines of the Housing Crisis since Oct 07.  I have worked almost exclusively with homeowner's and their attorney for two years, before making a move to represent lenders.  The reason for that move is because most homeowners were "willing victims" themselves, at the minimum, and at worst, engaged in fraud themselves.  The attorneys that represented the homeowners were no better, it was only an income stream for their business.  They knew that the homeowners would only lose in court, but did not care.

Most of what you read in the Media and on the Internet are misrepresentations, falsehoods, and Internet Myths.  The representations have no basis in fact, or if some representations are accurate, most of the time, the errors can be fixed.  So, be careful of what you read, especially from websites like Living Lies, Foreclosure Fraud, etc.

Now, on to the article that CD just posted.....

Gretchen Morgensen and Michael Powell were the writers again.  Morgenson writes at least twice per month like this.

I am getting so  tired of these type of articles. These people take a line in the sand, and will not change their opinions in the face of facts presented to them.

I am totally convinced that MERS is lawful, especially after seeing the documents held by banks and the MERS Membership Agreement.  These documents show a legitimate Power of Attorney or Agency relationship with MERS and the lender. 

People like Morgensen have either not seen these documents, or just ignore them, because the documents do not "fit the story" that they want to tell.  As well, they ignore court cases that don't support their viewpoints.

Yves Smith of Naked Capitalism is one of these alsol.  She did not like what I wrote about the culpability of the homeowners, or court cases against what she was arguing, so she blocked me from posting comments.

When you ask these people about the fact that the homeowners are in default, not having made payments for up to two years, the reply is always bank fraud.  Banks took advantage of the homeowners.  Never do they mention that in almost all cases, the damned homeowners knew what they were doing.  And now, the homeowner wants to file Quiet Title actions so as to void the debt.

CA, Oregon and Arizona are trying to pass through new Statutes to address the foreclosure issues.  The statutes will dictate the process to be used to ensure that the foreclosures are lawful, and the foreclosing lender has ownership of the Note.  This process should be fairly straight forward, as the proposed statute now reads.  It will involve more work for the lender, but that should not be a big issue.

However, foreclosure attorneys are still going to "attack" legal standing and other parts of the foreclosure process. For them, it is all about the business model, getting money in, and not caring who is correct.

(I have already developed foreclosure exams that will fully review the process and the legitimacy of the foreclosure.  It was meant to be used for bank clients, but if asked, I will use it for foreclosure attorneys.  It is a totally unbiased look at all the facts.)

Regarding MERS, a recent Appellant Court decision in CA, Gomes v Countrywide, has pretty much solved that issue.  MERS was upheld to be a legitimate Agent for lenders.  MERS can foreclose since in the Deed of Trust, the homeowner grants MERS the right to foreclose, and that there is no need to Prove the Note.  Now, a homeowner can only try to go to BK Court to fight MERS, and that is proving difficult.  (You should see the homeowners who are arguing that the decision doesn't mean a thing in CA.  And the arguments are pathetic.)

Robo-signing is another false argument.  I have seen the corporate resolutions that allow these persons to sign, and cannot find fault with them.  Yes, there is a problem with "lack of actual knowledge", but in CA, that is not required.  As well, by the time the documents are signed, the file has been reviewed at least three times for accuracy. 

Rarely, a foreclosure will be claimed to be unlawful because the borrower was not in default, but I have yet to see one.  Anyway, I would not accept that it was unlawful unless I reviewed the documents myself.  Believe it or not, homeowners and their attorneys do lie.

An interesting case out of Alabama in the trial courts has ruled that a homeowner cannot argue Securitization and New York Trust law. The problem was that the homeowner was a Third Party Beneficiary, which is an accurate read on the situation.  Of course, it is not applicable jurisdictionally in other states.  But, the arguments can easily be applied in other states.  Again, homeowner advocates are saying that this ruling is flawed.

The argument that was being attempted was that under New York Trust Law, there is a specific procedure for the Note to be assigned to the Trust.  It had to be in the Trust by the Closing Date of the Trust.  The argument was that since the Deed had not yet been assigned, then the Note was not in the Trust, and therefore no legal standing to foreclose existed.

These type arguments ignore certain factors.  Assignments may be in recordable or non-recordable form.  In non-recordable form, under UCC Code, simply transferring the Note, would also transfer the Deed.  Courts have ruled on this often, though certain states like MA may say that the Deed follows the Note instead of the former.  Part of the Ibanez decision in MA spoke about that.

Ibanez also referred to another way to prove transfer of the Note into the Trust.  That was to show "intent" by using the Pooling and Servicing Agreement, the Mortgage Loan Schedule, and the Trustee Acceptance Letter.  Of course, this type of procedure is ignored by Morgenson and others.

Many may hear attorneys and others talk about actions to "Quiet Title".  Quiet Title means that the Note is voided. This is the goal of every homeowner action.  The homeowner want to get the home for free, though they will deny it.  So when you here Legal Standing, just know that the homeowner has no intention of paying his debt, and instead wants to "welch" out of it.

I will be setting up a separate thread here so that people can specifically ask questions, etc. and I can clear up misconceptions.  I will attempt to provide unbiased review of the issues, and offer recommendations.  Furthermore, I will try and explain what is the future of housing at this time, and what we can expect.