Fire Hydrant of Freedom
Politics, Religion, Science, Culture and Humanities => Politics & Religion => Topic started by: Crafty_Dog on March 02, 2009, 09:18:29 AM
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Given the gathering apocalyptic looking storm clouds, I'm thinking the Political Economics thread is becoming a bit unweildy and so begin this one with the latest liberal fascist economic drivel from His Glibness:
IBD
Home Invasions
By INVESTOR'S BUSINESS DAILY | Posted Wednesday, February 25, 2009 4:20 PM PT
Activism: The community organizers who helped tank the housing market plan to seize private property being foreclosed. Acorn's "homesteaders" will squat in homes they don't own as Congress members urge them on.
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Last October, we noted a campaign appearance in late 2007 by then-candidate Barack Obama at the Heartland Democratic Presidential Forum organized by Deepak Bhargava, executive director of the Center for Community Change.
Before leaders of community organizing groups including Acorn, Obama pledged: "We're gonna be having meetings all across the country with community organizations so that you have input into the agenda for the next presidency of the United States of America."
The kind of input Acorn had in mind, and the agenda it apparently has set for America, was seen last week after Acorn representatives broke into a foreclosed home in southeast Baltimore, part of its "Home Savers" campaign in at least 22 cities.
Under this program, teams of activists will become squatters in foreclosed homes, daring authorities to forcibly evict them. Among those condoning such defiance of the law is Rep. Marcy Kaptur, D-Ohio, who told the squatters: "Stay in your homes. If the American people, anybody out there is being foreclosed, don't leave."
Is this what Congress had in mind when it included several billion dollars in the "stimulus" bill for groups such as Acorn to engage in "neighborhood stabilization" activities? This is like giving fire prevention funds to arsonists.
The irony here is that it was Acorn, under the cover of the Community Reinvestment Act, that intimidated banks into making risky loans in the name of "fairness." And it was Acorn that organized to intimidate financial institutions into giving what have been called "ninja" loans — for no income, no job, no assets — to people who could not afford them.
When Acorn broke into the house at 315 South Ellwood Ave. in Baltimore, member Louis Beverly, after cutting a lock with bolt cutters, proclaimed: "This is our house now." But it isn't Acorn's house. Nor is it the house of former owner Donna Hanks, who bought it in the summer of 2001.
As columnist Michelle Malkin points out, both the house and Ms. Hanks have an interesting history. The house went into foreclosure in the spring of 2006. Somewhere between that purchase and foreclosure, Ms. Hanks refinanced the original home loan to the tune of $270,000. That's a lot of extra cash.
In July 2006, she filed for bankruptcy under Chapter 13 and as part of the deal agreed to pay $10,500 in arrears, which resulted in a halt to the 2006 foreclosure. In September 2006, the bankruptcy court ordered her employer to deduct $340 a month from her bartender salary to pay down the debt.
According to court records, that still left her $1,228 a month in take-home pay from that job. She also claimed second and third jobs bringing home another $1,625 a month. In addition, there was a pro-rated tax refund in the pot. In February 2008, a second foreclosure was filed. Hanks had two years to pay and didn't. She tried to game the system and failed.
President Obama now proposes spending $275 billion to help us pay our neighbors' mortgages and the mortgages of people like Ms. Hanks. Consequences are the incentive to avoid risky behavior.
So why are we rewarding failure and abolishing consequences? Many of the homeowners the government is bailing out took unnecessarily chancy loans that helped bring about the financial crisis.
Some people legitimately need help. Most people don't. More than 90% of Americans are still employed, and more than 90% of homeowners still pay their mortgages on time. Paying one's taxes is patriotic, we're told. So is paying one's mortgage.
Also see http://www.daybydaycartoon.com/2009/02/26/ and the following days-- one of my very favorite strips!
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Some people legitimately need help. Most people don't. More than 90% of Americans are still employed, and more than 90% of homeowners still pay their mortgages on time.
The housing "crisis" seems to be concentrated in certain regions: I bolded the relevant text below:
http://media-newswire.com/release_1086806.html
(Media-Newswire.com) - February 25, 2009 — National housing price declines and foreclosures have not been as severe as some analyses have indicated, and they are not as important as financial manipulations in bringing on the global recession, according to a new analysis of foreclosures in 50 states, 35 metropolitan areas and 236 counties by University of Virginia professor William Lucy and graduate student Jeff Herlitz.
Their analysis shows that most foreclosures have been concentrated in California, Florida, Nevada, Arizona and a modest number of metropolitan counties in other states. In fact, they claim that "66 percent of potential housing value losses in 2008 and subsequent years may be in California, with another 21 percent in Florida, Nevada and Arizona, for a total of 87 percent of national declines."
"California had only 10 percent of the nation's housing units, but it had 34 percent of foreclosures in 2008," Lucy and Herlitz reported.
California was vulnerable to foreclosures because the median value of owner-occupied housing in 2007 was 8.3 times the median family income, while the 2007 national average was only 3.2 times higher than median family income ( and in 2000, it was lower still at 2.4 ).
Another vulnerability to foreclosures was seen in the Los Angeles metropolitan area, where more than 20 percent of mortgage-holders in each county were paying at least 50 percent of their income in housing-related costs.
"But even in California, enormous variations existed among jurisdictions, such as in the San Francisco area, where Solano County had 3.69 percent of housing units in foreclosure in November 2008, while only 0.24 percent of housing units were in foreclosure in the City of San Francisco — a 15 to 1 difference," according to Lucy and Herlitz.
Across the country, the run-up in housing prices from 2000 to the national peak in 2006 has contributed to a 10-months' supply of houses for sale, nearly six months more than the norm from 1998 through 2005, they concluded. But most of the excess supply is either foreclosed properties for sale in declining areas — which constituted 45 percent of total sales in some months of 2008 — or "opportunity" sale offerings by owners seeking to take profits on the price escalation of previous years, which often happens when the price of existing homes rise appreciably. Only a small portion of the excess supply is from current construction of new houses, they said.
Potential losses in housing values from 2008 foreclosures in all 50 states — if values decline to 2000 levels — were less than one-third of the $350 billion provided to banks and insurance companies to cope with losses in mortgage-backed securities, Lucy and Herlitz estimated.
"Damage to the balance sheets of large banks and AIG occurred not mainly from losses on foreclosed residential mortgages, but because of borrowing short-range to buy long-range derivatives and from selling credit default swaps insuring derivatives backed by mortgage payments," Lucy and Herlitz said.
"These financial manipulations had high-speed forward gears, but when the housing bubble burst, the banks and AIG discovered they had neglected to create a reverse gear with which they could separate foreclosed properties from some forms of mortgage-backed securities."
Although there are pockets of substantial declines, claims that overall housing values have tanked nationwide are exaggerated, they said. "In the Washington, D.C. metropolitan area, for example, prices have barely changed in the District of Columbia, Alexandria and Arlington County, and parts of Fairfax County in Virginia. The largest price declines ( more than 30 percent in 2008 ) have been in Prince William County, Va., but even there, the range of price declines in its six zip codes ranged from 49 percent to only 6 percent."
The number of foreclosures usually were lower in central cities than in some suburban counties, probably due to less demand in those suburbs, according to Lucy and Herlitz.
Part of this loss of demand can be accounted for by shifts in the age distribution in the population. The population segment from age 30 to 44, when the biggest increase in home ownership occurs, has been declining in recent years. Those are prime child-rearing years for families, so demand for houses with four or more bedrooms has declined and led to an excess of large houses in some counties.
The Obama administration's proposed foreclosure prevention program sets a target of households spending between 31 percent and 38 percent of their income on housing-related expenses. The program will try to prevent foreclosures in residences where Fannie Mae and Freddie Mac have purchased the mortgages by permitting downward adjustments to mortgage rates, to where the value of mortgages is not more than 105 percent of the houses' value, they said.
"This policy will help homeowners where price declines have been modest, as they have been in most states, most metropolitan areas and most counties," Lucy and Herlitz said.
This study includes foreclosure, house value and income data for 2007 or 2008 for 50 states, the 35 largest metropolitan areas and 236 counties in the 35 metropolitan areas.
Lucy is Lawrence Lewis Jr. Professor of Urban and Environmental Planning in U.Va.'s School of Architecture. Herlitz is a graduate student in the Department of Urban and Environmental Planning.
For information, contact William Lucy at 434-295-4453 or whl@virginia.edu.
— By Jane Ford
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Politician says that might be solution for area hit hard by foreclosures
The Associated Press
updated 4:38 p.m. CT, Mon., March. 2, 2009
PORT ST. LUCIE, Fla. - Just five years ago, Port St. Lucie was America's fastest-growing large city. Then the foreclosure crisis slammed it like a hurricane.
Today it sits in one of the hardest-hit counties in the nation. Thousands of houses are empty or unfinished. Neighborhoods are littered with for-sale and foreclosure signs and overgrown, neglected yards. Break-ins are on the rise.
But one politician believes he has a unique solution: Declare St. Lucie County a disaster area as if it had been hit by, well, a hurricane.
"This is a manmade disaster," County Commissioner Doug Coward acknowledged. But he said that is why "we've got to do something. Clearly, the economic crisis of the country far exceeds the ability of local governments to solve it, but we're trying be a part of the solution."
The declaration would act like a mini-stimulus plan, giving government officials access to a $17.5 million county fund usually reserved for natural disasters.
The county would be able to put some of that money toward shovel-ready construction projects and loosen the bidding requirements so that local contractors got the jobs. That, in turn, could enable residents to pay their mortgages and stave off foreclosure.
Other politicians fear a disaster declaration could scare off investors and drive down the county's credit rating, which would make it more expensive to borrow money. But the idea has appeal among many homeowners, particularly those in the construction trades, which are seeing unemployment rates of up to 40 percent.
Housing bust
Jacqueline Byers, research director for the National Association of Counties, said she knows of no other U.S. county that is contemplating such a move.
"Everybody is kind of foundering around. Counties are looking for ways to address their shortfalls. This might be an innovative way to do it," she said.
During Port St. Lucie's boom, houses sprang up by the thousands as young and old flocked to the area, lured by affordable prices, open space and a bit of a slower lifestyle.
Port St. Lucie — the spring-training home of the New York Mets, situated inland from the more expensive Atlantic Coast along Florida's Turnpike, about 100 miles north of Miami — nearly doubled in population from 88,000 in 2000 to 151,000 in 2007. Three biotechnology institutions opened in the county.
But then the foreclosure crisis struck and the economy went south. Many people soon realized they had bought more house than they could afford.
The county had more than 10,000 foreclosures last year, up from 4,165 the year before. Unemployment stands at 10.5 percent, more than double three years ago.
The newly out-of-work have been showing up in large numbers at St. Lucie Catholic Church, where free dinners are served every Thursday night. The church began serving meals to about 35 people a year ago. Last week, there were 175.
"We even give them a little bag to take home to try to help them through the week," said volunteer Karen Cuevas. "But we can't give out too much because we're not getting as much in."
Emergency relief
Coward, who hopes to put the disaster-declaration idea to a commission vote within a few weeks, said that the laws regarding the emergency fund refer to manmade as well as natural disasters, and that the county attorney believes the idea is legal. He said the money could go toward new roads, a courthouse expansion, utility improvements and other projects.
Among those who could benefit are Bonnie Bigger, 60, and her 29-year-old son, Jason. Their lender began foreclosure proceedings against them last week for falling $4,500 behind on their $776-a-month mortgage payments on a condo they have been living in since 1984.
She retired a year ago from her job as a 411 operator, but Social Security and disability payments just aren't cutting it, and she has had trouble finding part-time work. Her son, who works in construction, just had his hours cut back by 40 a month.
"We're hurting," he said.
But Port St. Lucie Mayor Patricia Christensen warned that labeling the county a disaster area could have a devastating effect. She said that after word of the idea got out, the city's New York bond issuer called to check on whether it was on the brink of ruin.
"I understand what the county is trying to do," Christensen said. "But we're starting to see improvements in our city. The real estate market is turning around, and although the homes aren't selling for the high prices that they were a few years ago, they are starting to sell."
'Band-Aid on cancer'
The idea may or may not help folks like the Derek and Kellyanne Baehr. They are six months behind on their $2,160-a-month mortgage and struggling to avert foreclosure.
Derek, 40, has been unemployed for the past 10 years after being diagnosed with a rare neurological disorder that will eventually put him in a wheelchair. The couple have lived in their modest, single-story stucco home for four years, and admit they got in over their heads with the $209,000 purchase. They said the house is now worth just $135,000.
After months of trying to work with their lender, they got a slight reduction in their interest rate, but "it was like putting a Band-Aid on cancer," Derek said.
"We can't continue to go on this way," said Kellyanne, 37, who fears she could soon lose her job as an accounting clerk because another round of layoffs is coming. "I cry about every day."
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
URL: http://www.msnbc.msn.com/id/29470399/
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WSJ
The Next Fannie Mae
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors..ArticleComments (18)more in Opinion ».EmailPrinter
Much to their dismay, Americans learned last year that they “owned” Fannie Mae and Freddie Mac. Well, meet their cousin, Ginnie Mae or the Government National Mortgage Association, which will soon join them as a trillion-dollar packager of subprime mortgages. Taxpayers own Ginnie too.
Only last week, Ginnie announced that it issued a monthly record of $43 billion in mortgage-backed securities in June. Ginnie Mae President Joseph Murin sounded almost giddy as he cheered this “phenomenal growth.” Ginnie Mae’s mortgage exposure is expected to top $1 trillion by the end of next year—or far more than double the dollar amount of 2007. (See the nearby table.) Earlier this summer, Reuters quoted Anthony Medici of the Housing Department’s Inspector General’s office as saying, “Who would have predicted that Ginnie Mae and Fannie Mae would have swapped positions” in loan volume?
Ginnie’s mission is to bundle, guarantee and then sell mortgages insured by the Federal Housing Administration, which is Uncle Sam’s home mortgage shop. Ginnie’s growth is a by-product of the FHA’s spectacular growth. The FHA now insures $560 billion of mortgages—quadruple the amount in 2006. Among the FHA, Ginnie, Fannie and Freddie, nearly nine of every 10 new mortgages in America now carry a federal taxpayer guarantee.
Herein lies the problem. The FHA’s standard insurance program today is notoriously lax. It backs low downpayment loans, to buyers who often have below-average to poor credit ratings, and with almost no oversight to protect against fraud. Sound familiar? This is called subprime lending—the same financial roulette that busted Fannie, Freddie and large mortgage houses like Countrywide Financial.
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Associated Press
.On June 18, HUD’s Inspector General issued a scathing report on the FHA’s lax insurance practices. It found that the FHA’s default rate has grown to 7%, which is about double the level considered safe and sound for lenders, and that 13% of these loans are delinquent by more than 30 days. The FHA’s reserve fund was found to have fallen in half, to 3% from 6.4% in 2007—meaning it now has a 33 to 1 leverage ratio, which is into Bear Stearns territory. The IG says the FHA may need a “Congressional appropriation intervention to make up the shortfall.”
The IG also fears that the recent “surge in FHA loans is likely to overtax the oversight resources of the FHA, making careful and comprehensive lender monitoring difficult.” And it warned that the growth in FHA mortgage volume could make the program “vulnerable to exploitation by fraud schemes . . . that undercut the integrity of the program.” The 19-page IG report includes a horror show of recent fraud cases.
If housing values continue to slide and 10% of FHA loans end up in default, taxpayers will be on the hook for another $50 to $60 billion of mortgage losses. Only last week, Taylor Bean, the FHA’s third largest mortgage originator in June with $17 billion in loans this year, announced it is terminating operations after the FHA barred the mortgage lender from participating in its insurance program. The feds alleged that Taylor Bean had “misrepresented” its relationship with an auditor and had “irregular transactions that raised concerns of fraud.”
Is anyone on Capitol Hill or the White House paying attention? Evidently not, because on both sides of Pennsylvania Avenue policy makers are busy giving the FHA even more business while easing its already loosy-goosy underwriting standards. A few weeks ago a House committee approved legislation to keep the FHA’s loan limit in high-income states like California at $729,750. We wonder how many first-time home buyers purchase a $725,000 home. The Members must have missed the IG’s warning that higher loan limits may mean “much greater losses by FHA” and will make fraudsters “much more attracted to the product.”
In the wake of the mortgage meltdown, most private lenders have reverted to the traditional down payment rule of 10% or 20%. Housing experts agree that a high down payment is the best protection against default and foreclosure because it means the owner has something to lose by walking away. Meanwhile, at the FHA, the down payment requirement remains a mere 3.5%. Other policies—such as allowing the buyer to finance closing costs and use the homebuyer tax credit to cover costs—can drive the down payment to below 2%.
Then there is the booming refinancing program that Congress has approved to move into the FHA hundreds of thousands of borrowers who can’t pay their mortgage, including many with subprime and other exotic loans. HUD just announced that starting this week the FHA will refinance troubled mortgages by reducing up to 30% of the principal under the Home Affordable Modification Program. This program is intended to reduce foreclosures, but someone has to pick up the multibillion-dollar cost of the 30% loan forgiveness. That will be taxpayers.
In some cases, these owners are so overdue in their payments, and housing prices have fallen so dramatically, that the borrowers have a negative 25% equity in the home and they are still eligible for an FHA refi. We also know from other government and private loan modification programs that a borrower who has defaulted on the mortgage once is at very high risk (25%-50%) of defaulting again.
All of which means that the FHA and Ginnie Mae could well be the next Fannie and Freddie. While Fan and Fred carried “implicit” federal guarantees, the FHA and Ginnie carry the explicit full faith and credit of the U.S. government.
We’ve long argued that Congress has a fiduciary duty to secure the safety and soundness of FHA through common sense reforms. Eliminate the 100% guarantee on FHA loans, so lenders have a greater financial incentive to insure the soundness of the loan; adopt the private sector convention of a 10% down payment, which would reduce foreclosures; and stop putting subprime loans that should have never been made in the first place on the federal balance sheet.
The housing lobby, which gets rich off FHA insurance, has long blocked these due-diligence reforms, saying there’s no threat to taxpayers. That’s what they also said about Fan and Fred—$400 billion ago.
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By LINGLING WEI and PETER GRANT
Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.
Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.
The CMBS sector is suffering two kinds of pain, which, according to credit rater Realpoint LLC, sent its delinquency rate to 3.14% in July, more than six times the level a year earlier. One is simply the result of bad underwriting. In the era of looser credit, Wall Street's CMBS machine lent owners money on the assumption that occupancy and rents of their office buildings, hotels, stores or other commercial property would keep rising. In fact, the opposite has happened. The result is that a growing number of properties aren't generating enough cash to make principal and interest payments.
.The other kind of hurt is coming from the inability of property owners to refinance loans bundled into CMBS when these loans mature. By the end of 2012, some $153 billion in loans that make up CMBS are coming due, and close to $100 billion of that will face difficulty getting refinanced, according to Deutsche Bank. Even though the cash flows of these properties are enough to pay interest and principal on the debt, their values have fallen so far that borrowers won't be able to extend existing mortgages or replace them with new debt. That means losses not only to the property owners but also to those who bought CMBS -- including hedge funds, pension funds, mutual funds and other financial institutions -- thus exacerbating the economic downturn.
A typical CMBS is stuffed with mortgages on a diverse group of properties, often fewer than 100, with loans ranging from a couple of million dollars to more than $100 million. A CMBS servicer, usually a big financial institution like Wachovia and Wells Fargo, collects monthly payments from the borrowers and passes the money on to the institutional investors that buy the securities.
CMBS, of course, aren't the only kind of commercial-real-estate debt suffering higher defaults. Banks hold $1.7 trillion of commercial mortgages and construction loans, and delinquencies on this debt already have played a role in the increase in bank failures this year.
But banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.
"There is no incentive for banks to realize losses" on their commercial-real-estate loans, says Jack Foster, head of real estate at Franklin Templeton Real Estate Advisors.
CMBS are held by scores of investors, and the servicers of CMBS loans have limited flexibility to extend or restructure troubled loans like banks do. Earlier this month, it was no coincidence that CMBS mortgages accounted for the debt on six of the seven Southern California office buildings that Maguire Properties Inc. said it was giving up. "During most of the evolution [of CMBS] no one ever thought all these loans would go into default," says Nelson Rising, Maguire's chief executive.
Maguire Properties
Among the office buildings that Maguire will turn over to creditors is Stadium Towers Plaza.
.Indeed, many property developers and investors complain there is no way to identify the investors that hold their debt and that it is difficult to negotiate with CMBS servicers. In light of the complaints, the Treasury is considering guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, according to people familiar with the matter. But investors in CMBS bonds argue that the servicers are ultimately bound contractually to the bondholders.
So Maguire will soon have a lot of company. In a study for The Wall Street Journal, Realpoint found that 281 CMBS loans valued at $6.3 billion weren't able to refinance when they matured in the past three month, even though 173 such loans worth $5.1 billion were throwing off more than enough cash to service their debt.
Mounting foreclosures in the CMBS sector would likely depress values even further as property is dumped on the market. And this would put pressure on banks to write down loans. "What's going on in the CMBS world is a precursor for what might be seen in banks' books," predicts Frank Innaurato, managing director at Realpoint.
The commercial-real-estate market could yet be salvaged by an improving economy and bailout programs coming out of Washington. In addition, capital markets are starting to ease for publicly traded real-estate investment trusts. Since March, more than two dozen REITs have managed to raise more than $13 billion by selling shares.
Still, most of the $6.7 trillion in commercial real estate is privately owned. Also, it is unlikely commercial real estate will benefit much from an early stage of an economic recovery. What landlords need is occupancy and rents to rise, and that means employers have to start hiring and consumers need to shop more. So far, there are few signs this is happening.
Write to Lingling Wei at lingling.wei@dowjones.com and Peter Grant at peter.grant@wsj.com
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http://www.philstockworld.com/2009/09/09/setting-up-the-next-leg-down-in-housing/
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The $1.7 trillion mortgage securitization market is still a mess, despite (or in part because of) the Federal Reserve's $700 billion splurge into the market. But another reason may be Treasury's decision to undermine private mortgage-backed securities (MBS) contracts.
BlackRock Inc. Chairman Laurence Fink went so far recently as to call this "one of the biggest issues facing American capitalism." He's worried that to protect banks from billions of dollars more in writedowns on bad second liens (a.k.a., home-equity loans), Treasury is trashing private contracts. "There is modification going on protecting our banks, protecting their balance sheets" and "I'm just very worried about it." Until that issue is cleared up, he says, we won't "get a vibrant securitization market back."
One reason the MBS market blossomed in the first place is because investors who bought a mortgage security believed that first mortgages were senior to second liens. In the event of a foreclosure, second liens would be extinguished first and holders of the first mortgage would get what was left because that's what the contract said.
This changed in April when Treasury announced that instead of foreclosing on delinquent borrowers and wiping out second liens, mortgage servicers (mainly the biggest banks) would be given incentives to modify both loans, thereby spreading the losses. In mid-August, Treasury announced the details of its "Second Lien Modification Program," or 2MP, calling it "a comprehensive solution to help borrowers achieve greater affordability by lowering payments on both first lien and second lien mortgage loans."
Treasury says it is merely trying to help borrowers stay in their homes. But there's little evidence that modifications are stabilizing the market. Treasury's recent release of second-quarter mortgage loan data showed that redefault rates are stubbornly high, even though most new modifications now provide for lower monthly payments of interest and principal.
Nearly 30% of loans modified in the first quarter of this year are now 60 or more days delinquent, up from less than 23% in the first quarter of 2008 and about the same percentage as in the second quarter of 2008. "The percentage of loans that were 60 or more days delinquent or in the process of foreclosure was high and rose steadily in the months subsequent to modification for all quarterly vintages," the report said.
Treasury's other political goal, as Mr. Fink points out, is to help the banks avoid more losses. U.S. financial institutions hold almost $1.1 trillion in second liens, also known as home equity loans or "helocs." Some 42% of all helocs are held by four banks—Bank of America, J.P. Morgan Chase, Citibank and Wells Fargo. Since in a traditional mortgage foreclosure the second loan is usually wiped out, these big four banks have an exposure in the hundreds of billions of dollars.
Mortgage-finance consultant Edward Pinto points out that these same lenders have about $800 billion of first mortgage loans on their books, representing 8% of the total outstanding first mortgage loans in the U.S. But they also act as the servicers on almost 60% of total first mortgages, which means they handle negotiations on loan modifications. Thus when a home owner asks one of the big four banks to redo a loan, the banker may have a greater interest in saving the home-equity loan than in protecting the creditors of the first mortgage.
A vibrant MBS market depends on the sanctity of U.S. contracts. If the world's investors see that the Treasury is willing to reward banks at their expense, there will be fewer such investors in U.S. securities. There will also be less capital for housing. Treasury needs to revisit its foreclosure rules to protect the U.S. reputation of honoring contracts, and the faster the better.
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Barney Frank, Predatory Lender
Almost two-thirds of all bad mortgages in our financial system were bought by government agencies or required by government regulations.
By PETER J. WALLISON
Recent reports that the Federal Housing Administration (FHA) will suffer default rates of more than 20% on the 2007 and 2008 loans it guaranteed has raised questions once again about the government's role in the financial crisis and its efforts to achieve social purposes by distorting the financial system.
The FHA's function is to guarantee mortgages of low-income borrowers (the mortgages are then sold through securitizations by Ginnie Mae) and thus to take reasonable credit risks in the interests of making mortgage credit available to the nation's low-income citizens. Accordingly, the larger than normal losses that will result from the 2007 and 2008 cohort could be justified by Barney Frank, the chairman of the House Financial Services Committee, as "policy"—an effort to ease the housing downturn through the application of government credit. The FHA, he argued, is buying more weak mortgages in order to help put a floor under the housing market. Eventually, the taxpayers will have to judge whether this policy was justified.
Far more interesting than the FHA's prospective losses on its 2007 and 2008 book are the agency's losses on its 2005 and 2006 guarantees, when the housing bubble was inflating at its fastest rate and there was no need for government support. FHA-backed loans during those years also have delinquency rates between 20% and 30%. These adverse results—not the result of a "policy" effort to shore up markets—pose a significant challenge to those who are trying to absolve the U.S. government of responsibility for the financial crisis.
When the crisis first arose, the left's explanation was that it was caused by corporate greed, primarily on Wall Street, and by deregulation of the financial system during the Bush administration. The implicit charge was that the financial system was flawed and required broader regulation to keep it out of trouble. As it became clear that there was no financial deregulation during the Bush administration and that the financial crisis was caused by the meltdown of almost 25 million subprime and other nonprime mortgages—almost half of all U.S. mortgages—the narrative changed. The new villains were the unregulated mortgage brokers who allegedly earned enormous fees through a new form of "predatory" lending—by putting unsuspecting home buyers into subprime mortgages when they could have afforded prime mortgages. This idea underlies the Obama administration's proposal for a Consumer Financial Protection Agency. The link to the financial crisis—recently emphasized by President Obama—is that these mortgages would not have been made if regulators had been watching those fly-by-night mortgage brokers.
There was always a problem with this theory. Mortgage brokers had to be able to sell their mortgages to someone. They could only produce what those above them in the distribution chain wanted to buy. In other words, they could only respond to demand, not create it themselves. Who wanted these dicey loans? The data shows that the principal buyers were insured banks, government sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, and the FHA—all government agencies or private companies forced to comply with government mandates about mortgage lending. When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans were either on their books or were in mortgage-backed securities they had guaranteed. An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80% of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.
The role of the FHA is particularly difficult to fit into the narrative that the left has been selling. While it might be argued that Fannie and Freddie and insured banks were profit-seekers because they were shareholder-owned, what can explain the fact that the FHA—a government agency—was guaranteeing the same bad mortgages that the unregulated mortgage brokers were supposedly creating through predatory lending?
The answer, of course, is that it was government policy for these poor quality loans to be made. Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market. Now the motives of the GSEs fall into place. Fannie and Freddie were subject to "affordable housing" regulations, issued by the Department of Housing and Urban Development (HUD), which required them to buy mortgages made to home buyers who were at or below the median income. This quota began at 30% of all purchases in the early 1990s, and was gradually ratcheted up until it called for 55% of all mortgage purchases to be "affordable" in 2007, including 25% that had to be made to low-income home buyers.
It was not easy to find candidates for traditional mortgages—loans to people with good credit records or the resources for a substantial downpayment—among home buyers who qualified under HUD's guidelines. To meet their affordable housing requirements, therefore, Fannie and Freddie reduced their lending standards and reached into the FHA's turf. The FHA, although it lost market share, continued to guarantee what it could, adding to the demand that the unregulated mortgage brokers filled. If they were engaged in predatory lending, it was ultimately driven by the government's own requirements. The mortgages that resulted are now problem loans for the GSEs, the FHA and the big banks that were required to make them in order to burnish their CRA credentials.
The significance of the FHA's troubles is that this agency had no profit motive. Yet it dipped into the same pool of subprime and other nontraditional mortgages that the GSEs and Wall Street were fishing in. The left cannot have it both ways, blaming the private sector for subprime lending while absolving the government policies that created the demand for subprime loans. If the financial crisis was caused by subprime mortgages and predatory lending, the government's own policies made it happen.
Mr. Walllison is a senior fellow at the American Enterprise Institute.
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Whoa!
http://www.youtube.com/watch?v=cMnSp4qEXNM&NR=1
http://www.youtube.com/watch?v=usvG-s_Ssb0&NR=1
http://www.liveleak.com/view?i=ae3_1222100943
The White House released this list of attempts by President Bush to reform
Freddie Mae and Freddie Mac since he took office in 2001.
Unfortunately, Congress did not act on the president's warnings:
** 2001
April: The Administration's FY02 budget declares that the size of Fannie Mae
and Freddie Mac is "a potential problem," because "financial trouble of a
large GSE could cause strong repercussions in financial markets, affecting
Federally insured entities and economic activity."
** 2002
May: The President calls for the disclosure and corporate governance
principles contained in his 10-point plan for corporate responsibility to
apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)
** 2003
January: Freddie Mac announces it has to restate financial results for the
previous three years.
February: The Office of Federal Housing Enterprise Oversight (OFHEO)
releases a report explaining that "although investors perceive an implicit
Federal guarantee of [GSE] obligations," "the government has provided no
explicit legal backing for them." As a consequence, unexpected problems at a
GSE could immediately spread into financial sectors beyond the housing
market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO,"
OFHEO Report, 2/4/03)
September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's
review found earnings manipulations.
September: Treasury Secretary John Snow testifies before the House Financial
Services Committee to recommend that Congress enact "legislation to create a
new Federal agency to regulate and supervise the financial activities of our
housing-related government sponsored enterprises" and set prudent and
appropriate minimum capital adequacy requirements.
October: Fannie Mae discloses $1.2 billion accounting error.
November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw
explains that any "legislation to reform GSE regulation should empower the
new regulator with sufficient strength and credibility to reduce systemic
risk." To reduce the potential for systemic instability, the regulator would
have "broad authority to set both risk-based and minimum capital standards"
and "receivership powers necessary to wind down the affairs of a troubled
GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank
Supervisors State Banking Summit And Leadership, 11/6/03)
** 2004
February: The President's FY05 Budget again highlights the risk posed by the
explosive growth of the GSEs and their low levels of required capital, and
called for creation of a new, world-class regulator: "The Administration has
determined that the safety and soundness regulators of the housing GSEs lack
sufficient power and stature to meet their responsibilities, and
therefore?should be replaced with a new strengthened regulator." (2005
Budget Analytic Perspectives, pg. 83)
February: CEA Chairman Mankiw cautions Congress to "not take [the financial
market's] strength for granted." Again, the call from the Administration was
to reduce this risk by "ensuring that the housing GSEs are overseen by an
effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And
Freddie's House In Order," Financial Times, 2/24/04)
June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed
by the GSEs and called for reform, saying "We do not have a world-class
system of supervision of the housing government sponsored enterprises
(GSEs), even though the importance of the housing financial system that the
GSEs serve demands the best in supervision to ensure the long-term vitality
of that system. Therefore, the Administration has called for a new, first
class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie
Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House
Financial Services Subcommittee on Oversight and Investigations Testimony,
6/16/04)
** 2005
April: Treasury Secretary John Snow repeats his call for GSE reform, saying
"Events that have transpired since I testified before this Committee in 2003
reinforce concerns over the systemic risks posed by the GSEs and further
highlight the need for real GSE reform to ensure that our housing finance
system remains a strong and vibrant source of funding for expanding
homeownership opportunities in America? Half-measures will only exacerbate
the risks to our financial system." (Secretary John W. Snow, "Testimony
Before The U.S. House Financial Services Committee," 4/13/05)
** 2007
July: Two Bear Stearns hedge funds invested in mortgage securities collapse.
August: President Bush emphatically calls on Congress to pass a reform
package for Fannie Mae and Freddie Mac, saying "first things first when it
comes to those two institutions. Congress needs to get them reformed, get
them streamlined, get them focused, and then I will consider other options."
(President George W. Bush, Press Conference, The White House, 8/9/07)
September: RealtyTrac announces foreclosure filings up 243,000 in August
up 115 percent from the year before.
September: Single-family existing home sales decreases 7.5 percent from the
previous month the lowest level in nine years. Median sale price of
existing homes fell six percent from the year before.
December: President Bush again warns Congress of the need to pass
legislation reforming GSEs, saying "These institutions provide liquidity in
the mortgage market that benefits millions of homeowners, and it is vital
they operate safely and operate soundly. So I've called on Congress to pass
legislation that strengthens independent regulation of the GSEs and
ensures they focus on their important housing mission. The GSE reform bill
passed by the House earlier this year is a good start. But the Senate has
not acted. And the United States Senate needs to pass this legislation
soon." (President George W. Bush, Discusses Housing, The White House,
12/6/07)
** 2008
January: Bank of America announces it will buy Countrywide.
January: Citigroup announces mortgage portfolio lost $18.1 billion in value.
February: Assistant Secretary David Nason reiterates the urgency of reforms,
says "A new regulatory structure for the housing GSEs is essential if these
entities are to continue to perform their public mission successfully."
(David Nason, Testimony On Reforming GSE Regulation, Senate Committee On
Banking, Housing And Urban Affairs, 2/7/08)
March: Bear Stearns announces it will sell itself to JPMorgan Chase.
March: President Bush calls on Congress to take action and "move forward
with reforms on Fannie Mae and Freddie Mac. They need to continue to
modernize the FHA, as well as allow State housing agencies to issue tax-free
bonds to homeowners to refinance their mortgages." (President George W.
Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)
April: President Bush urges Congress to pass the much needed legislation and
"modernize Fannie Mae and Freddie Mac. [There are] constructive things
Congress can do that will encourage the housing market to correct quickly by
? helping people stay in their homes." (President George W. Bush, Meeting
With Cabinet, the White House, 4/14/08)
May: President Bush issues several pleas to Congress to pass legislation
reforming Fannie Mae and Freddie Mac before the situation deteriorates
further.
"Americans are concerned about making their mortgage payments and keeping
their homes. Yet Congress has failed to pass legislation I have repeatedly
requested to modernize the Federal Housing Administration that will help
more families stay in their homes, reform Fannie Mae and Freddie Mac to
ensure they focus on their housing mission, and allow State housing agencies
to issue tax-free bonds to refinance sub-prime loans." (President George W.
Bush, Radio Address, 5/3/08)
"[T]he government ought to be helping creditworthy people stay in their
homes. And one way we can do that and Congress is making progress on this
is the reform of Fannie Mae and Freddie Mac. That reform will come with a
strong, independent regulator." (President George W. Bush, Meeting With The
Secretary Of The Treasury, the White House, 5/19/08)
"Congress needs to pass legislation to modernize the Federal Housing
Administration, reform Fannie Mae and Freddie Mac to ensure they focus on
their housing mission, and allow State housing agencies to issue tax-free
bonds to refinance subprime loans." (President George W. Bush, Radio
Address, 5/31/08)
June: As foreclosure rates continued to rise in the first quarter, the
President once again asks Congress to take the necessary measures to address
this challenge, saying "we need to pass legislation to reform Fannie Mae and
Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For
Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)
July: Congress heeds the President's call for action and passes reform of
Fannie Mae and Freddie Mac as it becomes clear that the institutions are
failing.
In 2005-- Senator John McCain partnered with three other Senate Republicans
to reform the government¹s involvement in lending.
Democrats blocked this reform, too.
-
Fears of a New Chill in Home Sales
By DAVID STREITFELD
Published: October 27, 2009
Even as new figures show house prices have risen for three consecutive months, concerns are growing that the real estate market will be severely tested this winter.
Artificially low interest rates and a government tax credit are luring buyers, but both those inducements are scheduled to end. Defaults and distress sales are rising in the middle and upper price ranges. And millions of people have lost so much equity that they are locked into their homes for years, a modern variation of the Victorian debtor’s prison that is freezing a large swath of the market.
“Plenty of pain yet to come,” said Joshua Shapiro, chief United States economist for MFR. He is forecasting an imminent resumption of price declines.
This summer, housing seemed at last to be stabilizing. A flood of last-minute buyers trying to conclude a deal before the tax credit expires Nov. 30 helped push up the Standard & Poor’s/Case-Shiller home price index a seasonally adjusted 1 percent in August, it was announced on Tuesday.
That was the first time since early 2006 that the widely watched measure of 20 metropolitan areas put together three consecutive increases.
While underlining the importance of that long-awaited rise, Maureen Maitland, the S.& P. vice president for index services, warned, “Everything is up for grabs this winter.”
Consumers seem acutely aware of the strains ahead. The Conference Board’s consumer confidence index fell unexpectedly in October, after reaching its high for the year in September, the board announced on Tuesday.
The only hot sector of the real estate market has been foreclosures. Investors and first-time buyers have been competing for these, often creating bidding wars. But with the economy still weak, many analysts expect more foreclosures.
Another factor likely to weigh on home sales in the coming months is a rise in interest rates. As the Federal Reserve ceases its buying of mortgage-backed securities, rates may well drift up to 6 percent, from 5 percent.
Worries about the fragility of the housing market, fanned by the real estate industry, may prompt an extension of the tax credit. The controversial program has spurred as many as 400,000 buyers, including Brenda Colon, a nurse in Las Vegas.
“If you had told me in January that I would be buying a house, I would have laughed,” said Ms. Colon, 48, who lives with her two daughters and granddaughter. “But the tax credit was just the kicker to throw me over.”
Yet despite the tax credit and other local and federal incentives for homebuyers in Las Vegas, prices there are continuing to fall, shedding 0.8 percent in August. The city’s home prices have declined on average more than 55 percent from their peak, more than in any other metropolis.
Whenever the tax credit finally expires, Las Vegas and every other city will have to confront the inevitable question after all such stimulus packages: what will motivate the buyers of tomorrow?
“In my office, people were buying homes left and right because of that tax credit,” said Kitty Berberick, who works for an insurance company in Las Vegas. “That credit was a godsend.”
Ms. Berberick, 62, could not strike a deal in time, and now has signed another lease for her apartment. If the credit is not extended, she said, she is likely to give up the search entirely until the market really crashes.
This, of course, is the sort of fatalistic attitude that relentlessly drove down prices last fall.
“Everyone keeps telling me, it’s going to go down before it goes up,” Ms. Berberick said. “I hope it does, because then I can buy.”
The recovery is both modest and tentative when measured against the preceding plunge. Prices have fallen nearly a third from their peak, and are down 11.4 percent over the last year.
In most major cities, it is as if the housing boom never happened. Prices over all are back to where they were in the fall of 2003. Some cities have been pushed down even more: In Cleveland, prices are at 2001 levels; in Detroit they’re at 1995.
It is the magnitude of this decline that makes Karl E. Case, the Wellesley professor for whom the Case-Shiller index is partly named, an optimist.
While acknowledging “there are a lot of dangers out there,” Mr. Case said “housing is as affordable as it’s been in 20 years. I don’t see a very rapid recovery, but I think we’ve seen the bottom.”
Sixteen of the 20 cities in the index rose in August, including San Francisco, up 2.6 percent, and Minneapolis, which rose 2.3 percent. Besides Las Vegas, three cities fell: Charlotte, Cleveland and Seattle. New York was up 0.3 percent.
The Case-Shiller numbers on prices lag behind the National Association of Realtors’ report on existing-home sales, which has been issued for September. Sales were up 9.4 percent from August, with the tax credit again getting much of the credit.
Critics of the credit argue that the number of those who merely qualify for it — and gladly take it — greatly outnumber those it is precisely intended to assist: people who would not have bought a house otherwise. That means, they argue, that the government is essentially paying more than $40,000 for each purchase that would not have occurred without the credit.
That is an expensive proposition, said Roberton Williams, a senior fellow at the Tax Policy Center who has closely followed the issue. “The bigger threat to the housing market is not the reduction in demand from the end of the credit, but the continuing wave of foreclosures we’re likely to see over the next 18 months,” he said.
In California, there is strong evidence that foreclosures are beginning to migrate from the subprime inland areas to the more exclusive coastal region.
According to MDA DataQuick, third-quarter notices of default in Santa Barbara were up 25 percent from 2008; in San Luis Obispo, they rose 46 percent; in Marin County, they were up 66 percent.
Defaults in hard-hit Sacramento, by contrast, were up only 10 percent. In Merced County in the Central Valley, an epicenter of the bust, they actually fell.
While defaults are only the first stage in foreclosure, Mr. Shapiro, the MFR economist, expects many formerly creditworthy homeowners to go under. He says he thinks the recent improvement in Case-Shiller numbers is an aberration rather than the beginning of a long-term improvement, with consequences for the larger economy.
“Another leg down in home prices, even if much more limited than the initial move, would nonetheless weigh on consumer spending,” Mr. Shapiro said, adding that he did not expect a second recession
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Until we have comments from an economically literate and honest source, here's this from POTH.
Housing Agency’s Cash Reserves Down Sharply
Brendan Smialowski for The New York TimesDavid H. Stevens, the Federal Housing Administration commissioner, during a Congressional hearing in October.
By DAVID STREITFELD
Published: November 12, 2009
The Federal Housing Administration, the government agency whose loan-insurance programs have become a crucial source of support for the housing market, said on Thursday that its cash reserves had dwindled significantly in the last year as more borrowers defaulted on their mortgages.
“There is a real risk. Nobody has a crystal ball,” said Shaun Donovan, secretary of Housing and Urban Development.
The agency released an audit that spelled out the rapid deterioration of its finances. It is tightening loan standards in hopes it will not become another drain on the United States Treasury, but is reluctant to clamp down so much that it snuffs out the tentative recovery in housing.
How successfully the agency walks this tightrope could well determine whether the recovery gathers force, or whether home prices slide again — perhaps creating a fresh economic downturn.
As recently as a few weeks ago, the F.H.A. had said that even under the bleakest economic forecast, its cash cushion would quickly recover. On Thursday, it abandoned that position.
“There is a real risk. Nobody has a crystal ball,” Shaun Donovan, secretary of housing and urban development, said in an interview. “We recognize there is a possibility that the reserves go below zero and stay there.”
Still, Mr. Donovan stressed that the agency, which had a role in one out of five home purchases in the last year, would not need a direct taxpayer bailout.
“There is no extraordinary action that Congress or anyone else needs to take,” he said during a news conference in Washington.
Instead, the agency would borrow from the Treasury, under authority previously granted by Congress. In the worst case, involving a protracted recession, the audit said the F.H.A. would run out of capital in 2011 and have to borrow $1.6 billion from the Treasury to pay insurance claims, a relatively small sum.
That is not a situation the agency considers likely. In line with many analysts, the agency expects the housing market to turn down again over the next nine months and then to recover. Under this projection, foreclosures would be manageable and the reserves would quickly grow.
The F.H.A.’s annual audit was scheduled for release last week, but was mysteriously delayed at the last minute. On Thursday, as it released the document, the agency explained that it wanted its auditors to include more negative forecasts as a way of understanding the worst-case risk.
The audit showed reserves to be 0.53 percent of the total portfolio, far below the 2 percent minimum mandated by Congress and far less than the audit last year had forecast. In 2007, just before housing prices began their worst slump in decades, the reserves were above 6 percent.
Ann Schnare, a consultant who has analyzed the F.H.A. balance sheet, put the situation this way: “They’re running on empty.”
As the fortunes of the F.H.A. have deteriorated over the last few months, the agency has become a focal point for dissatisfaction over federal efforts to prop up the housing market.
It is drawing comparisons to Fannie Mae and Freddie Mac, the giant agencies created by Congress to keep the mortgage market supplied with cash by buying up pools of home loans. With borrowers defaulting in the downturn, Fannie and Freddie have required enormous bailouts.
The F.H.A.’s role differs from that of Fannie and Freddie. Through its insurance, it helps marginal buyers get loans if they do not have the 20 percent down payment a traditional bank loan requires. The agency requires a 3.5 percent down payment. Critics say it went overboard and insured too many loans to unqualified borrowers in 2007 and 2008, a position with which the agency itself now agrees.
Nearly one in five loans it insured in 2007 falls into the category of “seriously delinquent,” it said Thursday. These loanholders are at least three months behind in their payments. For 2008 loans, 12 percent of them were seriously delinquent.
The F.H.A. says it is insuring loans to more financially secure buyers with higher credit scores. The average credit score of new borrowers, it said, is 693, compared with 633 two years ago.
In a sense, the agency is bulking up and giving as many loans as it can to qualified buyers as a way to diminish the relative size of the pool of problem loans. It guaranteed more than $360 billion in mortgages in the last year, four times the amount of 2007.
Critics say this is only increasing the size of the ultimate peril.
“They keep saying they’re going to outrun their problems, but some way, somehow, the taxpayer is going to end up on the hook,” said Edward Pinto, a former executive with Fannie Mae.
During the news conference, Secretary Donovan and the agency’s commissioner, David H. Stevens, said that the cash reserve, the figure that has fallen to 0.53 percent of loans outstanding, was merely a supplement to a much larger fund that the F.H.A. was holding against expected losses. Between the two accounts, the agency has $31 billion to cover losses over the next 30 years.
The F.H.A.’s problems stem from its rapid transition from a wallflower to the most popular student in class.
During the housing boom, buyers flocked to private subprime lenders, who offered deals that required no money down and no documentation. The F.H.A., which required its token down payment and documentation of the borrower’s earning power, lost ground.
But as the market tumbled and the subprime outfits failed, F.H.A. loans became the next best thing. Brian Montgomery, who ran the F.H.A. for the Bush administration, said in a recent interview that the agency felt it had no choice but to open the doors to a broader group of applicants.
Citing pressure from Congress and the White House, Mr. Montgomery said: “We had to let these loans through.”
Mr. Montgomery, now a consultant, says that anyone dismayed by the possibility of yet another bailout should feel a different emotion toward the Department of Housing and Urban Development and, for that matter, himself: gratitude.
“They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression,” Mr. Montgomery said.
Louise Story contributed reporting.
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second post
By EDWARD PINTO
All agree that the bursting of the housing bubble caused the financial collapse of 2008. Most agree that the housing bubble started in 1997. Less well understood is that this bubble was the result of government policies that lowered mortgage-lending standards to increase home ownership. One of the key players was the controversial liberal advocacy group, Acorn (Association of Community Organizations for Reform Now).
The watershed moment was the 1992 Federal Housing Enterprises Financial Safety and Soundness Act, also known as the GSE Act. To comply with that law's "affordable housing" requirements, Fannie Mae and Freddie Mac would acquire more than $6 trillion of single-family loans over the next 16 years.
Congress's goal was to force these two government-sponsored enterprises (GSEs) to purchase loans that had been originated by banks—loans that were made under the pressure of another federal law, the 1977 Community Reinvestment Act (CRA), to increase lending in low- and moderate-income communities.
From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements."
View Full Image
Associated Press
.The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse?
The previous year, as Allen Fishbein, currently an adviser for consumer policy at the Federal Reserve, has noted, Acorn and other community groups were informally deputized by then House Banking Chairman Henry Gonzalez to draft statutory language setting the law's affordable-housing mandates. Interim goals were set at 30% of the single-family mortgages purchased by Fannie and Freddie, and the Department of Housing and Urban Development has increased that percentage over time. The goal of the community groups was to force Fannie and Freddie to loosen their underwriting standards, in order to facilitate the purchase of loans made under the CRA.
Thus a provision was inserted into the law whereby Congress signaled to the GSEs that they should accept down payments of 5% or less, ignore impaired credit if the blot was over one year old, and otherwise loosen their lending guidelines.
The proposals of Acorn and other affordable-housing advocacy groups were acceptable to Fannie. Fannie had been planning to use the carrot of affordable-housing lending to maintain its hold over Congress and stave off its efforts to impose a strong safety and soundness regulator to oversee the company. (It was not until 2008 that a strong regulator was created for Fannie and Freddie. A little over a month later both GSEs were placed into conservatorship; they have requested a combined $112 billion in assistance from the federal government, and much more will be needed over the next few years.)
The result of loosened credit standards and a mandate to facilitate affordable-housing loans was a tsunami of high risk lending that sank the GSEs, overwhelmed the housing finance system, and caused an expected $1 trillion in mortgage loan losses by the GSEs, banks, and other investors and guarantors, and most tragically an expected 10 million or more home foreclosures.
As a result of congressional and regulatory actions, the percentage of conventional first mortgages (not guaranteed by the Federal Housing Administration or the Veteran's Administration) used to purchase a home with the borrower putting 5% or less down tripled from 9% in 1991 to 27% in 1995, eventually reaching 29% in 2007.
Fannie and Freddie acquired $1.2 trillion of loans from banks and other lenders from 1993 to 2007. This amounted to 62% of all such conventional home purchase loans with a down payment of 5% or less that were originated nationwide over the same period.
Fannie and Freddie also acquired $2.2 trillion in subprime loans and private securities backed by subprime loans from 1997 to 2007. Acorn and the other advocacy groups succeeded at getting Congress to mandate "innovative and flexible" lending practices such as higher debt ratios and creative definitions of income. And the serious delinquency rate on Fannie and Freddie's $1.5 trillion in high-risk loans was 10.3% as of Sept. 30, 2009.
This is about seven times the delinquency rate on the GSEs' traditional loans. Fifty percent of the high-risk loans are estimated to be CRA loans, with much of the remainder useful to the GSEs in meeting their affordable-housing goals.
The flood of CRA and affordable-housing loans with loosened underwriting standards, combined with declining mortgage interest rates—to 5% in 2003 from 10% in early 1991—resulted in a massive increase in borrowing capacity and fueled a house price bubble of unprecedented magnitude over the period 1997-2006.
Now this history may repeat itself as many of the same community groups are pushing Congress to expand CRA to cover all mortgage lenders, credit unions, insurance companies and others financial industry segments. Are we about to set the stage for another catastrophe?
Mr. Pinto was the chief credit officer at Fannie Mae from 1987 to 1989. He is currently a consultant to the mortgage-finance industry.
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Crafty, The Pinto piece is the best I have read describing how this all went wrong. Liberals think it was the greedy capitalists packaging and disguising bad loans in portfolios that caused the problems, but \packaging mortgages of different sizes and shapes would not have caused any new problem IF the underlying loans had been based on creditworthiness, with real valuations and down payments, with default rates at or under the historic levels of between 1 and 2%.
Unfortunately there is a segment of America not ready for home ownership and forcing them in before they are ready doesn't work. There is a segment of our country without a consistent work history, that does not have good credit or a history of paying all their bills, much less on time. They tend to live in America's inner cities and they are disproportionately non-white. If you lend based on creditworthiness or opposed the bill of 1992 or the expansions upon expansions of forced and incentivized bad lending policies, you were labeled racist.
Programs made in the name of affordability are what made the product unaffordable - just like we are doing with health care and college tuition.
If we wanted real affordability, we would: 1) use market discipline to control the price, not skew it with artificial rules and subsidies, and: 2) Affordability, meaning cost as a fraction of income, comes mostly from the denominator - INCOME, which is based on education, effort and getting people to participate positively in our economic system. Most government intervention and spending programs do the opposite.
Handing people freebies that require negative behavior to qualify, and artificial flooding of markets with taxpayer money has exactly the opposite affect; it increases dependency and pushes costs up further and further from reach.
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Nice article. It explains some things that I did not quite get. I think that 2 other factors that might be considered are the Banking act in the 90's that allowed savings and loans to do commercial banking- I think it was part of the S&L bailout back then. The government probably did not want to jail a those boards of directors that it found had violated the rules.
The other reason is a kind of "common sense rule of thumb". We were taken off the gold standard back during the depression- it got reduced to a fractional standard "temporarily". Later due to money supply concerns, the standard was dropped completely. I suspect that, in the absence of a standard, a new one just naturally developed. (Nature fills a niche, or power rises in a vacuum?) That standard became- dirt- or real estate. When the banking act mentioned below was passed, the "moderating influence" was decoupled from the economy. The result was a boom and bubble and the inflation was held down by the Fed- masking what was happening.
This was done in the name of providing houses for people who had not "earned" them by gaining the finances, and knowledgfe to iknow what the hidden costs of owning a house are. I also hear (rumor alert?) that it was permissible in some cases to have "Affidavits of income", which people lied on, and they were never checked due to pressures to "earn the buck".
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Near zero interest rates (in relation to inflation and taxes), the FMs taking the risk and the CRA requiring the banks to make bad loans. What could go wrong?
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The economy and the stock market may be recovering from their swoon, but more homeowners than ever are having trouble making their monthly mortgage payments, according to figures released Thursday.
A couple waits to speak to a financial counselor at an event last month in Daly City, California, aimed at helping people get their mortgages restructured to avoid foreclosure.
Nearly one in 10 homeowners with mortgages was at least one payment behind in the third quarter, the Mortgage Bankers Association said in its survey. That translates into about five million households.
The delinquency figure, and a corresponding rise in the number of those losing their homes to foreclosure, was expected to be bad. Nevertheless, the figures underlined the level of stress on a large segment of the country, a situation that could snuff out the modest recovery in home prices over the last few months and impede any economic rebound.
Unless foreclosure modification efforts begin succeeding on a permanent basis — which many analysts say they think is unlikely — millions more foreclosed homes will come to market.
“I’ve been pretty bearish on this big ugly pig stuck in the python and this cements my view that home prices are going back down,” said the housing consultant Ivy Zelman.
The overall third-quarter delinquency rate is the highest since the association began keeping records in 1972. It is up from about one in 14 mortgage holders in the third quarter of 2008.
The combined percentage of those in foreclosure as well as delinquent homeowners is 14.41 percent, or about one in seven mortgage holders. Mortgages with problems are concentrated in four states: California, Florida, Arizona and Nevada. One in four people with mortgages in Florida is behind in payments.
Some of the delinquent homeowners are scrambling and will eventually catch up on their payments. But many others will slide into foreclosure. The percentage of loans in foreclosure on Sept. 30 was 4.47 percent, up from 2.97 percent last year.
In the first stage of the housing collapse, defaults and foreclosures were driven by subprime loans. These loans had low introductory rates that quickly moved to a level that was beyond the borrower’s ability to pay, even if the homeowner was still employed.
As the subprime tide recedes, high-quality prime loans with fixed rates make up the largest share of new foreclosures. A third of the new foreclosures begun in the third quarter were this type of loan, traditionally considered the safest. But without jobs, borrowers usually cannot pay their mortgages.
“Clearly the results are being driven by changes in employment,” Jay Brinkmann, the association’s chief economist, said in a conference call with reporters.
In previous recessions, homeowners who lost their jobs could sell the house and move somewhere with better prospects, or at least a cheaper cost of living. This time around, many of the unemployed are finding that the value of their property is less than they owe. They are stuck.
“There will be a lot more distressed supply entering the market, and it will move up the food chain to middle- and higher-price homes,” said Joshua Shapiro, chief United States economist for MFR Inc.
Many analysts say they believe that foreclosures, instead of peaking with the unemployment rate as they traditionally do, will most likely be a lagging indicator in this recession. The mortgage bankers expect foreclosures to peak in 2011, well after unemployment is expected to have begun falling.
There was one sliver of good news in the survey: the percentage of loans in the very first stage of default — no more than 30 days past due — was down slightly from the second quarter. If that number continues to decline, at least the ranks of the defaulted will have peaked.
“It’s arguably a positive, but it doesn’t undermine the fact that there are still five or six million foreclosures in process,” Ms. Zelman said.
The number of loans insured by the Federal Housing Administration that are at least one month past due rose to 14.4 percent in the third quarter, from 12.9 percent last year. An additional 3.3 percent of F.H.A. loans are in foreclosure.
The mortgage group’s survey noted, however, that the F.H.A. was issuing so many loans — about a million in the last year — that it had the effect of masking the percentage of problem loans at the agency. Most loans enter default when they are older than a year.
When the association removed the new loans from its calculations, the percentage of F.H.A. mortgages entering foreclosure was 30 percent higher.
The association’s survey is based on a sample of more than 44 million mortgage loans serviced by mortgage companies, commercial and savings banks, credit unions and others. About 52 million homes have mortgages. There are 124 million year-round housing units in the country, according to the Census Bureau
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Wall St. Finds Profits Again, Now by Reducing Mortgages
By LOUISE STORY
Published: November 21, 2009
As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.
Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.
But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.
While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.
For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.
The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.
The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.
But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.
These new mortgage investors thrive in the shadows. Typically, the funds employ intermediaries to contact homeowners and arrange for mortgages to be refinanced.
Homeowners often have no idea who their Wall Street benefactors are. Federal housing officials, too, are in the dark.
Policymakers have encouraged investors and banks to put more consumers into government-backed loans. The total value of these transactions from hedge funds is small compared with the overall housing market.
Housing experts warn that the financial players involved — the investment funds, their intermediaries and certain F.H.A. approved lenders — have a financial incentive to put as many loans as possible into the government’s hands.
“From the borrower’s point of view, landing in a hedge fund or private equity fund that’s willing to write down principal is a gift,” said Howard Glaser, a financial industry consultant and former official at the Department of Housing and Urban Development.
He went on: “From the systemic point of view, there is something disturbing about investors that had substantial short-term profit in backing toxic loans now swooping down to make another profit on cleaning up that mess.”
Steven and Marisela Alva say they do not know who helped them with their mortgage. All they know is that they feel blessed.
Last December, the couple got a letter saying that a firm had purchased the mortgage on their home in Pico Rivera, Calif., from Chase Home Finance for less than its original value. “We want to share this discount with you,” the letter said.
“I couldn’t believe it,” said Mr. Alva, a 62-year-old janitor and father of three. “I kept thinking to myself, ‘Something is wrong, something is wrong. This sounds too good.’ ”
But it was true. The balance on the Alvas’ mortgage was ultimately reduced to $314,000 from $440,000.
The firm behind the reduction remains a mystery. The Alvas’ new loan, backed by the F.H.A., was made by Primary Residential Mortgage, a lender based in Utah. But the letter came from a company called MCM Capital Partners.
In the letter, MCM said the couple’s loan was owned by something called MCMCap Homeowners’ Advantage Trust III. But MCM’s co-founders said in an interview that MCM does not own any mortgages. They would not reveal the investor that owned the Alvas’ loan because they had agreed to keep that client’s identity confidential.
Michael Niccolini, an MCM founder, said, “We are changing people’s lives.”
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(Page 2 of 2)
In Washington, mortgage funds are lobbying for policies that favor their investments, particularly mortgages held in securitized bundles. They want more mortgage balances to be lowered, which might help mortgage bonds perform better. Big banks generally oppose such reductions, which lock in banks’ losses on the loans.
In April, about a dozen investment firms formed a group called the Mortgage Investors Coalition to press their case. One investor who is speaking out is Wilbur L. Ross, who runs a fund that buys mortgages and owns a large mortgage servicing company.
Mr. Ross said modifications that simply lower interest rates or lengthen the duration of a loan, as is typical in the government modification program, do not work well.
“They make a payment or two, but then one night the husband and wife will sit down at the table and say, ‘Do we really want to make 140 monthly payments into a rat hole?’ ” Mr. Ross said.
The Fortress Investment Group, a hedge fund in New York, is one of the firms at the forefront of picking through mortgages. Fortress created a $3 billion credit fund in 2008 partly to buy loans from banks like Citigroup, which were under pressure to purge loans to raise cash.
“They’re going ahead and they are refinancing them and getting their money out right away,” said Roger Smith, an analyst at Fox-Pitt Kelton. “What Fortress is doing is actually good for the borrower.” Congress, however, may not be happy that hedge funds are making money this way, Mr. Smith said.
Fortress, which declined to comment, typically buys batches of loans and works with other companies to evaluate which ones might qualify for F.H.A., Fannie Mae or Freddie Mac refinancing.
Sometimes Fortress works with Nationstar, a mortgage servicer and originator that it owns. Other times, Fortress uses an outside partner like Meridias Capital, a lender in Henderson, Nev., that once originated Alt-A loans, which are just above subprime.
After the mortgage market imploded, Meridias began dissecting portfolios of troubled loans for investment funds.
Because firms like Fortress purchase blocks of mortgages at distressed prices, they are able to reduce the principal amount of the loans. Nick Florez, president of Meridias, calls such transactions an “incentive refinance.” He said he would not agree to take a loan unless he could help the homeowner. He said he was able to reduce the loan amount by 11 percent on average.
“I’m giving money away,” said Mr. Florez, who is a 35-year-old Las Vegas native. “It’s really a feel-good business.”
It is too early to know how the new loans will work.
David H. Stevens, the new commissioner of the F.H.A., said he was monitoring F.H.A. lenders but did not have thorough information about which ones work with distressed investors. So far he has not seen a problem from loans coming from hedge funds.
“They’re helping to protect people in their homes and they’re refinancing people from a distressed situation,” he said.
But he acknowledged that funds have an incentive to aggressively push homeowners into federally guaranteed loans, since the investors get their money back as soon as they complete the refinancing.
Seth Wheeler, a senior adviser in the Treasury Department who specializes in housing policy, declined to say whether the investment firms that are lowering principal for homeowners are altruistic or not.
“Investors are doing it where it both benefits the investor and the borrower,” he said.
Part of the risk may be determined by how the funds compensate the F.H.A. lenders and whether the lenders are beholden to the funds for business.
David Zitting, the chief executive of Primary Residential Mortgage, the company that refinanced the Alva family’s loan, said his company did not receive fees from the hedge funds.
“They have all sorts of motivations that, frankly, we don’t understand,” he said. “We don’t do anything special for them because that’s not fair lending.”
The Alvas had to dip into their savings to qualify for their new federally insured loan, since the biggest F.H.A. mortgage they could get was for $285,000, they said. They paid off $21,000 in credit-card and car loans, and put up an additional $29,000 for their new mortgage, depleting their already meager savings.
Brian Chappelle, a mortgage consultant, said loans to people like the Alvas, with modest incomes and scant savings, could turn out to be risky.
“It does raise risk concerns for F.H.A.,” he said.
The Alvas are grateful for the help. Their home is, Marisela said, a dream come true. “I’m very happy,” she said. “We never thought this was possible.”
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http://iamfacingforeclosure.com/blog/2009/12/01/anatomy-of-a-government-abetteded-fraud-why-indymaconewest-always-forecloses/
Interesting article by a friend of mine.
The latest insight on the foreclosure crisis — and help for those in need.
Today is Friday, December 11th, 2009
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Patrick Pulatie is the CEO for Loan Fraud Investigations (LFI). LFI is a Forensic/Predatory Lending Audit company in Antioch CA, and has been doing homeowner audits since Nov 07. LFI works daily with Attorneys throughout California, assisting homeowners in the fight to save their homes. He and Attorneys are constantly developing new strategies to counter foreclosure efforts by lenders.
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Anatomy of a Government-Abetted Fraud: Why Indymac/OneWest Always Forecloses
December 1st, 2009 • Related • Filed Under
Filed Under: Avoid Foreclosure • FDIC • HAMP • IndyMac/OneWest • facing foreclosure • featured • government-abetted fraud
Several times per week, I get phone calls from attorneys. These calls all start out the same. “I am unable to get loan modifications done through a lender. What can I do?” The first question I ask is if the lender is Indymac/One West. Invariably, it is.
I also field the same type of calls from homeowners and from loan modification companies. Everyone is having the problem of Indymac not cooperating with regard to doing loan modifications. Furthermore, if I google the issue or check out loan modification forums, the same is true on the internet.
What is going on with Indymac/One West? Why aren’t they doing loan modifications? This article will try and bring together the known facts for a better understanding of the situation, and discuss what the Indymac situation means for foreclosures in general — and the government’s response to the crisis. First, to understand the situation today, one must have an understanding of the recent history of Indymac.
History
Indymac was a national bank in the U.S. It was insured by the FDIC. On July 11, 2008, Indymac failed and was taken over by the FDIC.
Indymac offered mortgage loans to homeowners. A large number of these loans were Option ARM mortgages using stated income programs. The loans were offered by Indymac retail, and also through Mortgage Bankers would fund the loans and then Indymac would buy them and reimburse the Mortgage Banker. Mortgage Brokers were also invited to the party to sell these loans.
During the height of the Housing Boom, Indymac gave these loans out like a homeowner gives out candy at Halloween. The loans were sold to homeowners by brokers who desired the large rebates that Indymac offered for the loans. The rebates were usually about three points. What is not commonly known is that when the Option ARM was sold to Wall Street, the lender would realize from four to six points, and the three point rebate to the broker was paid from these proceeds. So the lender “pocketed” three points themselves for each loan.
When the loans were sold to Wall Street, they were securitized through a Pooling and Servicing Agreement. This Agreement covered what could happen with the loans, and detailed how all parts of the loan process occurred.
Even though Indymac sold off most loans, they still held a large number of Option ARMs and other loans in their portfolio. As the Housing Crisis developed and deepened, the number of these loans going into default or being foreclosed upon increased dramatically. This reduced cash and reserves available to Indymac for operations.
In July, 2008, the FDIC came in and took over Indymac. The FDIC looked for someone to buy Indymac and after negotiations, sold Indymac to One West Bank.
OneWest Bank and its Sweetheart Deal
OneWest Bank was created on Mar 19, 2009 from the assets of Indymac Bank. It was created solely for the purpose of absorbing Indymac Bank. The principle owners of OneWest Bank include Michael Dell and George Soros. (George was a major supporter of Barack Obama and is also notorious for knocking the UK out of the Euro Exchange Rate Mechanism in 1992 by shorting the Pound).
When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to simplify the terms. Some of the major details are:
OneWest would purchase all first mortgages at 70% of the current balance
OneWest would purchase Line of Equity Loans at 58% of the current balance.
In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.
How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:
The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.
At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.
Note: It is not readily apparent as to whether this agreement applies to loans that IndyMac made and Securitized but still Services today. However, I believe that the Agreement does apply to Securitized loans. In that event, OneWest would make even more money through foreclosure because OneWest would keep the “excess” and not pay it to the investor!
Pooling And Servicing Agreement
When OneWest has been asked about why loan modifications are not being done, they are responding that their Pooling and Servicing Agreements do not allow for loan modifications. Sheila Bair, head of the FDIC has also stated the same. This sounds like a plausible explanation, since few people understand the Pooling and Servicing Agreement. But…
Parties Involved
Here is the”dirty little secret” regarding Indymac and the Pooling and Servicing Agreement. The parties involved in the Agreement are:
The Sponsor for the Trust was…………Indymac
The Seller for the Trust was……………Indymac
The Depositor for the Trust was………..you guessed it………….Indymac
The Issuing Entity for the Trust was……………….(drumroll)……………….Indymac
The Master Servicer for the Trust was……..once again………Indymac
In other words, Indymac was the only party involved in the Pooling and Servicing Agreement other than the Ratings Agency who rated these loans as `AAA’ products.
To make matters worse, Indymac wrote the Agreement in order to protect itself from liability for these garbage loans. By creating separate Indymac Corporations — which the Depositor, Sponsor, and other entities were — Indymac created a bankruptcy-remote vehicle that could not come back to them in terms of liability. However, they did not count on certain MBS securities and portfolio loans coming back to bite them and force them under.
Now, the questions become:
If Indymac was responsible for Securitization at every step in the Process, and was responsible for writing the Pooling and Servicing Agreement, can they be held accountable for the loans that they are foreclosing on?
Since Indymac was the Issuing Entity, can they actually modify loans, but refuse to do so because they can make money for OneWest Bank by refusing to do so?
Does Indymac have to “buy back” the loan from the Indymac Trust in order to do a loan modification?
These are questions that I have no answer for. All I know is that at every step of the way, Indymac was involved in the process, and have taken steps to protect themselves from liability for loans that should never have been made.
Loan Modifications
As referred to earlier, the Agreement covers all aspects of the Securitization Process. With respect to Loan Modifications, the Agreement for Indymac INDA Mortgage Loan Trust 2007 – AR5, states on Page S-67:
Certain Modifications and Refinancings
The Servicer may modify any Mortgage Loan at the request of the related mortgagor, provided that the Servicer purchases the Mortgage Loan from the issuing entity immediately preceding the modification.
Page S-12 states the same “policy”:
The servicer is permitted to modify any mortgage loan in lieu of refinancing at the request of the related mortgagor, provided that the servicer purchases the mortgage loan from the issuing entity immediately preceding the modification. In addition, under limited circumstances, the servicer will repurchase certain mortgage loans that experience an early payment default (default in the first three months following origination). See “Servicing of the Mortgage Loans—Certain Modifications and Refinancings” and “Risk Factors—Risks Related To Newly Originated Mortgage Loans and Servicer’s Repurchase Obligation Related to Early Payment Default” in this prospectus supplement.
These sections would appear to suggest that the only way that OneWest could modify the loan would be as a result of buying the loan back from the Issuing Trust. However, there may be an out. Page S-12 also states:
Required Repurchases, Substitutions or Purchases of Mortgage Loans
The seller will make certain representations and warranties relating to the mortgage loans pursuant to the pooling and servicing agreement. If with respect to any mortgage loan any of the representations and warranties are breached in any material respect as of the date made, or an uncured material document defect exists, the seller will be obligated to repurchase or substitute for the mortgage loan as further described in this prospectus supplement under “Description of the Certificates—Representations and Warranties Relating to Mortgage Loans” and “—Delivery of Mortgage Loan Documents .”
The above section may be the key for litigating attorneys to fight Indymac. If fraud or other issues can be raised that will show a violation of the Representations and Warranties, then this could potentially force Indymac to modify the loan.
HAMP
At this point, it becomes important to note that Indymac/OneWest signed aboard with the HAMP program in August 2009. Even though they became a part of the program, they are still refusing to do most loan modifications. Instead, they persist in foreclosing on almost all properties. And even when they say that they are attempting to do loan modifications, they are fulfilling all necessary requirements so that they can foreclose the second that they “decide” the homeowner does not meet HAMP requirements, — which, since they can make more money by foreclosing on the property, meets the HAMP requirements for doing what is in the best interests of the “investor”.
Why did Indymac even sign up for HAMP, if they have no intention of executing loan modifications? Clearly, just for appearances.
One Final Question
It now becomes incumbent upon me to ask one final question. The Shared-Loss Agreement states the following:
2.1 Shared-Loss Arrangement.
(a) Loss Mitigation and Consideration of Alternatives. For each Shared-Loss Loan in default or for which a default is reasonably foreseeable, the Purchaser shall undertake, or shall use reasonable best efforts to cause third-party servicers to undertake, reasonable and customary loss mitigation efforts in compliance with the Guidelines and Customary Servicing Procedures. The Purchaser shall document its consideration of foreclosure, loan restructuring (if available), charge-off and short-sale (if a short-sale is a viable option and is proposed to the Purchaser) alternatives and shall select the alternative that is reasonably estimated by the Purchaser to result in the least Loss. The Purchaser shall retain all analyses of the considered alternatives and servicing records and allow the Receiver to inspect them upon reasonable notice.
Such agreements are usually considered to be interpreted to the benefit of the homeowner, as with HAMP and other programs. In legalese, it is called “Intent”.
What was the “Intent” of the Shared-Loss Agreement? Was the intent to provide OneWest Bank solely with a profitable incentive to take over Indymac Bank? If so, then OneWest has been truly successful in every manner.
Or was the intent to offer to OneWest Bank a way to be compensated for losses for foreclosures, but with the primary goal to assist homeowners in trouble? If this was the intent, then OneWest has failed miserably in its actions. And if so, could OneWest be actionable by the Federal Government for fraud?
In fact the true “Intent” was to limit losses to the Treasury Department. Each and every loan modification done would save the Treasury, and the tax payer, from 80-95 cents on every dollar.
Since, technically, One West would get 5-20 cents of any savings, it should have been an incentive to use foreclosure alternatives. But the reality is that the quick turnaround on foreclosure seems to give OneWest a better return. As a result, OneWest appears to simply ignore the intent and just foreclose (as far as I can tell).
So, OneWest’s failure to modify loans may actually amount to fraud on the Treasury and US taxpayers.
Conclusion
I have presented the story of Indymac/OneWest and what is happening today. But the story does not end with OneWest. There are over 50 different lenders and servicers who have Shared-Loss Agreements executed with the FDIC. Each Agreement offers essentially the same terms. Though other Lenders do not appear to be acting as flagrantly as OneWest, they are all still engaging in the same actions.
What is the solution for this problem?
For homeowners individually, the most successes are being achieved by borrowers who are getting knowledgeable attorneys who will not just threaten litigation, but are also willing to act and file the necessary lawsuits. That tends to bring OneWest Bank to the table.
For the country as a whole, and homeowners in mass, the problem must be brought to the attention of your local Congress Critters. You must hold their feet to the fire. They must know that if they do not respond to what OneWest and other lenders are doing, then they are subject to being voted out of their nice and cushy Congressional Offices.
Will this be easy? No way. After all, the lenders have the money and the ears of Congress. But if we do not draw the line here, then
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Second post of the day
REAL ESTATE DECEMBER 10, 2009
American Dream 2: Default, Then Rent
By MARK WHITEHOUSE
Interactive graphics:
1) http://online.wsj.com/article/SB126040517376983621.html#project%3DRECOVER0912%26articleTabs%3Dinteractive
2) http://online.wsj.com/article/SB126040517376983621.html#project%3DSTRATEGIC_DEFAULTS_0912%26articleTabs%3Dinteractive
PALMDALE, Calif. -- Schoolteacher Shana Richey misses the playroom she decorated with Glamour Girl decals for her daughters. Fireman Jay Fernandez misses the custom putting green he installed in his backyard.
But ever since they quit paying their mortgages and walked away from their homes, they've discovered that giving up on the American dream has its benefits.
Both now live on the 3100 block of Club Rancho Drive in Palmdale, where a terrible housing market lets them rent luxurious homes -- one with a pool for the kids, the other with a golf-course view -- for a fraction of their former monthly payments.
"It's just a better life. It really is," says Ms. Richey. Before defaulting on her mortgage, she owed about $230,000 more than the home was worth.
People's increasing willingness to abandon their own piece of America illustrates a paradoxical change wrought by the housing bust: Even as it tarnishes the near-sacred image of home ownership, it might be clearing the way for an economic recovery.
Thanks to a rare confluence of factors -- mortgages that far exceed home values and bargain-basement rents -- a growing number of families are concluding that the new American dream home is a rental.
Some are leaving behind their homes and mortgages right away, while others are simply halting payments until the bank kicks them out. That's freeing up cash to use in other ways.
Ms. Richey's family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March. Mr. Fernandez takes his girlfriend out to dinner more frequently. "We're saving lots of money," Ms. Richey says.
The U.S home-ownership rate has charted its biggest decline in more than two decades, falling to 67.6% as of September from a peak of 69.2% in 2004. And more renters are on the way: Credit firm Experian and consulting firm Oliver Wyman forecast that "strategic defaults" by homeowners who can afford to pay are likely to exceed one million in 2009, more than four times 2007's level.
Stiffing the bank is bad for peoples' credit, and bad for banks. Swelling defaults could also mean more losses for taxpayers through bank bailouts.
Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that's roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.
The flip side of those losses, though, is massive debt relief that can help offset the pain of rising unemployment and put cash in consumers' pockets.
For the 4.8 million U.S. households that data provider LPS Applied Analytics estimates haven't paid their mortgages in at least three months, the added cash flow could amount to about $5 billion a month -- an injection that in the long term could be worth more than the tax breaks in the Obama administration's economic-stimulus package.
"It's a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."
As the stigma of abandoning a mortgage wanes, the Obama administration could face an uphill battle in its effort to keep people in their homes by pressuring banks to cut their mortgage payments. Some analysts argue that's not always the right approach, particularly if it prevents people from shedding onerous debts and starting afresh.
"The effect of these programs is often to lead homeowners to make decisions that are not in their economic best interests," says Brent White, a law professor at the University of Arizona who has studied mortgage defaults.
Few places in the U.S. were better suited to attract true believers in home ownership than Palmdale. A farming community that expanded in the 1950s to accommodate the aerospace industry around nearby Edwards Air Force Base, the city more than doubled its population from 1990 to the present as it became the final frontier for Los Angeles-area workers looking to buy.
About half of Palmdale's 147,000 residents endure a daily commute that can extend to two hours or more one way. In return, they get a homestead in a high-desert locale of haunting beauty, with Joshua trees dotting the landscape, and real-estate developments locked into a master grid of streets with anonymous names such as Avenue O-8 or Avenue M-4.
The 3100 block of Club Rancho Drive, built by Beazer Homes mostly in 2002, captures the essence of Palmdale's appeal. Winding along the southern edge of the Rancho Vista golf course just south of Avenue N-8, its spacious homes, verdant lawns and imported birch and sycamore trees exude a sense of middle-class tranquility.
Club Rancho became a solid community of owner-occupiers, many of whom stretched their finances to the limit. As of the end of 2007, total mortgage debt attached to the 13 houses on the block for which records are available had reached $4.5 million.
Fast-forward to the end of 2009, and the picture changes radically. Thanks to a 50% drop in home prices, at least two owners on the block now owe between $60,000 and $160,000 more on their mortgages than their houses are worth. Four more homes have already passed through foreclosure into the hands of new owners.
In the process, the block's total mortgage debt has fallen 37%, to $2.7 million.
Much of Club Rancho also has converted to rentals, a shift mirrored across Palmdale. Five homes on the 3100 block are now occupied by renters, up from only two in 2007. In the past six months, at least three families have moved into those rentals after walking away from other homes.
Ms. Richey, the teacher, arrived in Palmdale in 1999. In 2004, she and her husband, Timothy, bought a two-story home on Caspian Drive, near Avenue O-8, with a no-down-payment loan. They took pride in the amenities they installed: a powder room with granite countertops, a backyard pool and play area, and the purple-and-turquoise fantasy playroom upstairs for their three daughters.
But the value of the house plunged to less than $200,000 in 2009. Their $430,000 mortgage, with its $3,700 monthly payment, began to look more like an unwanted burden. By May, amid troubles getting tenants for two rental properties she also owned, Ms. Richey decided the time had come to cut a deal with America's Servicing Co., a unit of Wells Fargo & Co. servicing the mortgage on the house.
After three months of wrangling, she says she finally received a modification approval. The new monthly payment: about $3,300, far more than she had hoped. A Wells Fargo spokesman confirmed the bank offered Ms. Richey a modification under the Obama administration's Making Home Affordable program, and said, "The Richeys turned down the lowest payment we could offer."
Ms. Richey and her husband had already been working on Plan B -- exploring the neighborhood's "For Rent" signs.
On one trip, they drove by the house at 3152 Club Rancho Drive. It was bigger than their house on Caspian, had a pool with three waterfalls, and boasted a cascading staircase that Ms. Richey says she could picture her daughters descending on prom night. The rent was $2,195 a month.
The situation presented Ms. Richey with a quandary now facing more than 10 million U.S. homeowners who owe more on their mortgages than their houses are worth.
On one hand, walking away from her home would be easy. California is one of 10 states that largely prevent mortgage lenders from going after the other assets of borrowers who default. But she also had to consider the negatives. Her credit could be tarnished for years and, perhaps most importantly, she feared her friends and neighbors might ostracize her.
"It was scary," she says, noting that people tended to keep such decisions to themselves for fear of being stigmatized. "It's still very hush-hush."
Tom Sobelman, whose family of four lives across the street from Ms. Richey, at 3127 Club Rancho Drive, sees mortgages as a moral as well as financial obligation. He's still paying the mortgage on an investment property he owns nearby, despite the fact that the rent is about $1,000 a month short of covering his costs.
Mr. Sobelman, 37, argues that people who choose to default are unfairly benefiting at the expense of taxpayers, who have put trillions of dollars at risk to bail out struggling banks. "All these people are gaming the system, and I'm paying for it," he says. "My kids are going to be paying it off."
Mr. Sobelman has plenty of company. In a recent study of people who owe more on their mortgages than their houses are worth, economists Luigi Guiso, Paola Sapienza and Luigi Zingales found that about four out of five believe defaulting on a mortgage is morally wrong if one can afford to pay it. But they also found that the people become 82% more likely to say they'll default if they know someone else who defaulted.
Moral or not, the individuals who want to shed their mortgage debts are quickly transforming the Palmdale real-estate market.
Adam Robbins, who runs the local Realty World franchise and manages about 80 properties, says about 90% of his prospective tenants are people in Ms. Richey's situation. So he and other rental managers are loosening rules to accept people who have been through foreclosures.
"Those are all good people," he says. "They just got bad loans or bought at the wrong time."
Ms. Richey and her family made the move to Club Rancho Drive in August, when she was already several months behind on the mortgage. With Mr. Robbins's help, she recently sold the house on Caspian Drive for $195,000, money that the bank will accept to settle the $430,000 mortgage debt. She's also considering walking away from the mortgages on her two rental properties.
Showing a visitor the personal touches in her new home, including a $1,800 dining set she bought with some of her newly available income, she notes the advantages of being a renter rather than an owner.
"You take a risk for the American dream," she says. "I don't have to worry about paying property tax, homeowners' insurance, the landscaping, cleaning the pool or any repairs."
Others on Ms. Richey's block have made similar moves. Mr. Fernandez, the firefighter, moved into 3139 in July, after stopping the $4,800 monthly payments on the home he owned around the corner on Champion Way.
Mr. Fernandez says he made four attempts to modify the larger of the two mortgages on his home, which add up to $423,000. Ultimately, he was offered a monthly payment that, together with back taxes, was higher than what he had been paying. Today he's working to partially reimburse his lenders, IndyMac Bank (now OneWest Bank) and American First Credit Union, by selling the home, which he expects to fetch about $300,000.
A spokeswoman for OneWest Bank said the bank "offered Mr. Fernandez the lowest payment possible under the [Federal Deposit Insurance Corp.] loan modification guidelines." A spokesman for American First said the company always seeks to help clients stay in their homes.
With an income of about $8,300 a month and a rent of $2,200, Mr. Fernandez says he now has the wherewithal to do things he couldn't when he was stretching to pay the mortgage. He recently went to concerts by Rob Thomas and Mat Kearney. He also kept his black BMW 6 Series coupe, which has payments of about $700 a month.
"I don't know if I'll buy another house again, because it's such a huge headache," he says.
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Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.
The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses—a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?
The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."
The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.
The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.
Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.
This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down.
Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble.
That's why on Christmas Eve Treasury also rolled back a key requirement of the 2008 bailout—that Fan and Fred begin shrinking the portfolios of mortgages they own on their own account, which total a combined $1.5 trillion. Risk-taking will now increase, so that the government can once again follow Barney Frank's infamous advice that the companies "roll the dice" on subsidies for affordable housing.
All of which would seem to make the CEOs of Fannie and Freddie the world's most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.
Freddie also has one of the world's highest-paid human resources executives. Paul George's total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.
Where is Treasury's pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?
Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn't offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic. Senate Banking Chairman Chris Dodd (D., Conn.) and ranking Republican Richard Shelby recently issued a joint statement on their "progress" toward financial regulatory reform, but their list of goals also doesn't mention Fannie or Freddie.
Since Mr. Shelby has long argued for reform of these government-sponsored enterprises, their absence suggests that Mr. Dodd's longtime effort to protect Fan and Fred is once again succeeding. It would be worse than a shame if, having warned about the iceberg for years, Mr. Shelby now joins Mr. Dodd in pretending that these ships aren't sinking.
In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves.
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Find an honest real estate pro. (yeah I know they are salesman, but you can hope) Put him in charge of renegotiation of mortgages policy, and limit the bank's recovery to 80% of value at most. They have already been bailed out, if they cannot make a go of it like Chrysler did in the 70's, let them go down the drain. "Too big to faill" is crap, it seems that there needs to be a serious "holy crap!" moment handed to them (kind of like coming home at 16-17 to bags packed with your name on them setting on the porch....) to get it together, take the pain/ loss and fix themselves.
Alternatively, if you are going to be just handing out money, figure out the "almost able, or were able to make payments until layoff" and pay off those mortgages. Those who were fraudulent in their applications or never were really able to make payments- turn them into renters. Take their title away and let the bank grow a rental agency branch...........
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What about the sanctity of contract?!? :-o
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Sanctity of contract? The rule of law is soooo pre-obama. We have Changed!
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Well, as it I see it, that is precisely the fight we have ahead.
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I disagree with your reasoning completely.
If there was dishonesty, then there are a great variety of fraud related statutes-- but that is not the issue here.
The government pumped up a credit bubble (virtual zero interest rates, the FMs, the CRA, and more), people lied on their apps, banks didn't care because the loans were guaranteed by the FMs etc etc.
If you allow the State to break contracts between private parties, the damage done is deep, profound, and long lasting.
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"...the damage done is deep, profound, and long lasting."
So true. A mortgage is the claim against the property guaranteeing the payment with a specific right to take it back if necessary. Eliminate that right and everything is an unsecured loan. Or make ever-changing rules and restrictions that are applied unevenly and what you get is called a third world country.
People under-appreciate things like foreclosure, bankruptcy, right to fire employees etc. They all sound so negative but are part of our freedoms, part of free markets, dynamic capitalism and a stable set of ground rules needed to make large, long term investments. You don't give up your first born and they don't chop off your arm. But they do get to take your house if you don't pay and they should get to hire someone else if they don't think you do your job well enough. You get to start over, find new work where you are more appreciated, get a smaller house if necessary or play a part in rejuvenating an older part of town that lost some value.
Who benefited when values were only going up and up and up, artificially and beyond affordability? I would argue the answer is really no one. Mine went up 8-fold, and all I really had was the same property with richer neighbors and higher property taxes.
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This story is from last May. Happy to look at new numbers for failed programs. Posting this separate from the argument that forced negotiation is wrong; it also doesn't work. If you identify that someone cannot afford a place, then show them there is a positive consequence for defaulting... what is (70%)most likely to happen next?? I wonder if it cost us $4-$6 to give away each dollar like it did with cash for clunkers.
http://www.housingwire.com/2009/05/22/fannie-program-sees-70-recidivism/
Fannie Program Sees 70% Recidivism
A program aimed at helping delinquent borrowers become current once more on their mortgages will likely see decreased volumes at mortgage giant Fannie Mae (FNM: 1.12 -2.61%) after the Federal Housing Finance Agency (FHFA) noted a significant majority of participants soon redefaulted after receiving aid.
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It's not about fixing the economy, it's about the dems buying votes, as usual.
[youtube]http://www.youtube.com/watch?v=P36x8rTb3jI[/youtube]
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There isn't a need to 'adjust things' in a firm contract. You gave them the right to take back in exchange for the money to buy. You make the payments and then they release the lien against the property. If/when you miss they have a choice of remedies - collect the money owing or take back the asset securing the loan. When they take back the property you are released from your obligation for the rest of the payments. Make it more complicated, make it more costly to take back and up go the costs, fees and interest rates, making money harder to find and houses harder to buy.
You can apply for a new, longer loan to stretch out the payments from the same or a different mortgage company to replace the existing mortgage during its term. But that is voluntary and far different than forcing a business to negotiate/take less or pay later than what was promised in the original contract.
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Exactly.
Changing subjects a bit:
Taylor Disputes Bernanke
Please consider Taylor Disputes Bernanke on Bubble, Says Low Rates Played Role.
John Taylor, creator of the so-called Taylor rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.
“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.
“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.
Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.
“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.
Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.
“Low rates certainly contributed to the crisis,” Baker said in an interview on Jan. 3. “I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”
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January 10, 2010
THE WAY WE LIVE NOW
Walk Away From Your Mortgage!
By ROGER LOWENSTEIN
Source: First American CoreLogic, November 2009
John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who arevoluntarily choosing not to pay.
Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?
Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)
The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.
There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.
The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.
Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.
Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.
In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.
And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.
No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.
Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.
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This from POTH :roll:
======================
Justice Dept. Fights Bias in Lending Recommend
By CHARLIE SAVAGE
Published: January 13, 2010
WASHINGTON — The Justice Department is beginning a major campaign against banks and mortgage brokers suspected of discriminating against minority applicants in lending, opening a new front in the Obama administration’s response to the foreclosure crisis.
Tom Perez, the assistant attorney general for the department’s Civil Rights Division, is expected to announce Thursday in New York that the administration is creating a new unit that will focus exclusively on unfair lending practices.
“We are looking at any and every practice in the industry,” Mr. Perez said in a recent interview.
As part of an expansion of the Civil Rights Division approved by Congress last year, the Justice Department is hiring at least four lawyers and an economist for the new unit, while about half a dozen current staff members will transfer into it.
Mr. Perez plans to formally announce the new unit at the “Wall Street Project” conference organized by the Rev. Jesse Jackson’s Rainbow/PUSH Coalition. He characterized the effort as a major turnaround, and criticized the previous administration as failing to scrutinize lending practices amid the subprime mortgage boom.
While past lending discrimination cases primarily focused on “redlining” — a bank’s refusal to lend to qualified borrowers in minority areas — the new push will instead center on a more recent phenomenon critics have called “reverse redlining.”
In reverse redlining, a mortgage brokerage or bank systematically singles out minority neighborhoods for loans with inferior terms like high up-front fees, high interest rates and lax underwriting practices. Because the original lender would typically resell such a loan after collecting its fees, it did not care about the risk of foreclosure.
It is a rarely used theory, and it carries political risks. Some critics have contended that government rules pushing banks to lend to minority and low-income borrowers contributed to the financial meltdown. The campaign could rekindle that debate.
“They encourage lenders to make risky loans for reasons such as diversity, and then when lenders have a problem because they made too many risky loans, they condemn them for that,” said Ernest Istook, a fellow at the conservative Heritage Foundation and a former Republican congressman from Oklahoma.
Still, Mr. Istook emphasized that he was “not defending anybody who engages in wrongful redlining practices.”
A representative of the Mortgage Bankers Association, the lobbying arm of the real estate finance industry, did not respond to a request for comment.
Under federal civil rights laws, a lending practice is illegal if it has a disparate impact on minority borrowers, and the Obama administration is signaling that it intends to make the enforcing of fair lending laws a signature policy push in 2010.
The division has already opened 38 investigations into accusations of lending discrimination. Under federal lending laws, it can seek compensation for borrowers who were victimized by any illegal conduct, as well as changes in a lender’s practices.
John Relman, a housing lawyer, said there was plenty of evidence that some banks violated fair housing laws during the subprime boom.
Mr. Relman has helped the Cities of Baltimore and Memphis sue Wells Fargo over the costs taxpayers incurred because of foreclosures. As part of those lawsuits, he obtained affidavits from former Wells Fargo loan officers who said the bank had systematically singled out minority borrowers for high-interest, high-fee mortgages, bypassing its own underwriting rules. The State of Illinois has also sued the bank.
Wells Fargo has denied any wrongdoing. Last week, a judge dismissed Baltimore’s lawsuit, saying there were too many other causes of the damage to inner-city neighborhoods to blame the bank. Mr. Relman said the city intended to file a new complaint that focused more narrowly on recouping costs associated with specific properties.
But it is much easier for the federal government to sue banks like Wells Fargo. Mr. Relman said he hoped the Justice Department decided to join the cases.
“Not only would we welcome them; we encourage them to get involved,” Mr. Relman said. “It’s long overdue.”
Mr. Perez has hired Eric Halperin as a special counsel for fair lending. Mr. Halperin, a career lawyer in the division from 1998 to 2004, is currently the Washington director and head litigator for the Center for Responsible Lending, a nonprofit group that focuses on financial products it deems predatory.
The division has also gained access to data the Treasury Department is collecting from banks about loan modifications for people seeking to avoid foreclosure. It intends to search for signs of any disparate impact on minorities.
The Justice Department is also working with several state attorneys general who have taken an interest in bringing potential lawsuits over banks’ subprime lending practices.
Richard Cordray, the attorney general of Ohio, said federal and state officials were sharing information and helping one other develop potential legal theories about how to go after reverse redlining.
“We are looking at a common problem and a common pattern to determine what can be done about it,” Mr. Cordray said.
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Well, in my opinion this is exactly the sort of liberal fascist drivel that contributed so much to the housing bubble to begin with. :lol:
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http://hotair.com/archives/2010/01/15/video-moral-hazard-and-the-root-of-the-financial-collapse/
Moral hazard and economics 101.
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Goodness no!
I was referring to the piece that I posted.
Sorry for the confusion.
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I saw a seemingly serious conversation on the CNN biz show this morning (including with Nobel laureate Stiglitz(sp?) that the Fed is scheduled to stop buying mortgages in March. Not sure I got the details right, but it seems like gravity is about to assert itself , , , ?
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By DAVID STREITFELD
Published: February 2, 2010
In 2006, Benjamin Koellmann bought a condominium in Miami Beach. By his
calculation, it will be about the year 2025 before he can sell his modest
home for what he paid. Or maybe 2040.
Benjamin Koellmann paid $215,000 for his apartment in Miami Beach in 2006,
but now units are selling in foreclosure for $90,000. “There is no financial
sense in staying,” he said.
New research suggests that when a home’s value falls below 75 percent of the
amount owed on the mortgage, the owner starts to think hard about reneging
on a home loan.
“People like me are beginning to feel like suckers,” Mr. Koellmann said.
“Why not let it go in default and rent a better place for less?”
After three years of plunging real estate values, after the bailouts of the
bankers and the revival of their million-dollar bonuses, after the Obama
administration’s loan modification plan raised the expectations of many but
satisfied only a few, a large group of distressed homeowners is wondering
the same thing. New research suggests that when a home’s value falls below
75 percent of the amount owed on the mortgage, the owner starts to think
hard about walking away, even if he or she has the money to keep paying. In
a situation without precedent in the modern era, millions of Americans are
in this bleak position. Whether, or how, to help them is one of the biggest
questions the Obama administration confronts as it seeks a housing policy
that would contribute to the economic recovery.
“We haven’t yet found a way of dealing with this that would, we think, be
practical on a large scale,” the assistant Treasury secretary for financial
stability, Herbert M. Allison Jr., said in a recent briefing.
The number of Americans who owed more than their homes were worth was
virtually nil when the real estate collapse began in mid-2006, but by the
third quarter of 2009, an estimated 4.5 million homeowners had reached the
critical threshold, with their home’s value dropping below 75 percent of the
mortgage balance. They are stretched, aggrieved and restless. With figures
released last week showing that the real estate market was stalling again,
their numbers are now projected to climb to a peak of 5.1 million by June —
about 10 percent of all Americans with mortgages.
“We’re now at the point of maximum vulnerability,” said Sam Khater, a senior
economist with First American CoreLogic, the firm that conducted the recent
research. “People’s emotional attachment to their property is melting into
the air.”
Suggestions that people would be wise to renege on their home loans are at
least a couple of years old, but they are turning into a full-throated
barrage. Bloggers were quick to note recently that landlords of an
11,000-unit residential complex in Manhattan showed no hesitation, or shame,
in walking away from their deeply underwater investment.
“Since the beginning of December, I’ve advised 60 people to walk away,” said
Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Everyone has lost hope.
They don’t qualify for modifications, and being on the hamster wheel of
paying for a property that is not worth it gets so old.”
Mr. Walsh is taking his own advice, recently defaulting on a rental property
he owns. “The sun will come up tomorrow,” he said.
The difference between letting your house go to foreclosure because you are
out of money and purposefully defaulting on a mortgage to save money can be
murky. But a growing body of research indicates that significant numbers of
borrowers are declining to live under what some waggishly call “house
arrest.” Using credit bureau data, consultants at Oliver Wyman calculated
how many borrowers went straight from being current on their mortgage to
default, rather than making spotty payments. They also weeded out owners
having trouble paying other bills. Their estimate was that about 17 percent
of owners defaulting in 2008, or 588,000 people, chose that option as a
strategic calculation. Some experts argue that walking away from mortgages
is more discussed than done. People hate moving; their children attend the
neighborhood school; they do not want to think of themselves as skipping out
on a debt. Doubters cite a Federal Reserve study using historical data from
Massachusetts that concludes there were relatively few walk-aways during the
1991 bust.
The United States Treasury falls into the skeptical camp.
“The overwhelming bulk of people who have negative equity stay in their
homes and keep paying,” said Michael S. Barr, assistant Treasury secretary
for financial institutions.
It would cost about $745 billion, slightly more than the size of the
original 2008 bank bailout, to restore all underwater borrowers to the point
where they were breaking even, according to First American. Using
government money to do that would be seen as unfair by many taxpayers, Mr.
Barr said. On the other hand, doing nothing about underwater mortgages could
encourage more walk-aways, dealing another blow to a fragile economy.
“It’s not an easy area,” he said.
Walking away — also called “jingle mail,” because of the notion that
homeowners just mail their keys to the bank, setting off foreclosure
proceedings — began in the Southwest during the 1980s oil collapse, though
it has never been clear how widespread it was.
In the current bust, lenders first noticed something strange after real
estate prices had fallen about 10 percent.
An executive with Wachovia, one of the country’s biggest and most aggressive
lenders, said during a conference call in January 2008 that the bank was
bewildered by customers who had “the capacity to pay, but have basically
just decided not to.” (Wachovia failed nine months later and was bought by
Wells Fargo. )
=========
(Page 2 of 2)
With prices now down by about 30 percent, underwater borrowers fall into two
groups. Some have owned their homes for many years and got in trouble
because they used the house as a cash machine. Others, like Mr. Koellmann in
Miami Beach, made only one mistake: they bought as the boom was cresting.
It was April 2006, a moment when the perpetual rise of real estate was
considered practically a law of physics. Mr. Koellmann was 23, a management
consultant new to Miami.
Financially cautious by nature, he bought a small, plain one-bedroom
apartment for $215,000, much less than his agent told him he could afford.
He put down 20 percent and received a fixed-rate loan from Countrywide
Financial.
Not quite four years later, apartments in the building are selling in
foreclosure for $90,000.
“There is no financial sense in staying,” Mr. Koellmann said. With the
$1,500 he is paying each month for his mortgage, taxes and insurance, he
could rent a nicer place on the beach, one with a gym, security and valet
parking.
Walking away, he knows, is not without peril. At minimum, it would ruin his
credit score. Mr. Koellmann would like to attend graduate school. If an
admission dean sees a dismal credit record, would that count against him?
How about a new employer?
Most of all, though, he struggles with the ethical question.
“I took a loan on an asset that I didn’t see was overvalued,” he said. “As
much as I would like my bank to pay for that mistake, why should it?”
That is an attitude Wall Street would like to encourage. David Rosenberg,
the chief economist of the investment firm Gluskin Sheff, wrote recently
that borrowers were not victims. They “signed contracts, and as adults
should also be held accountable,” he wrote.
Of course, this is not necessarily how Wall Street itself behaves, as
demonstrated by the case of Stuyvesant Town and Peter Cooper Village. An
investment group led by the real estate giant Tishman Speyer recently
defaulted on $4.4 billion in debt that it had used to buy the two apartment
developments in Manhattan, handing the properties back to the lenders.
Moreover, during the boom, it was the banks that helped drive prices to
unrealistic levels by lowering credit standards and unleashing a wave of
speculative housing demand.
Mr. Koellmann applied last fall to Bank of America for a modification,
noting that his income had slipped. But the lender came back a few weeks ago
with a plan that added more restrictive terms while keeping the payments
about the same.
“That may have been the last straw,” Mr. Koellmann said.
Guy D. Cecala, publisher of Inside Mortgage Finance magazine, says he does
not hear much sympathy from lenders for their underwater customers.
“The banks tell me that a lot of people who are complaining were the ones
who refinanced and took all the equity out any time there was any
appreciation,” he said. “The banks are damned if they will help.”
Joe Figliola has heard that message. He bought his house in Elgin, Ill., in
2004, then refinanced twice to get better terms. He pulled out a little
money both times to cover the closing costs and other expenses. Now his
place is underwater while his salary as circulation manager for the local
newspaper has been cut.
“It doesn’t seem right that I can rent a place somewhere for half of what I’m
paying,” he said. “I told my bank, ‘Just take a little bite out of what I
owe. That would ease me up. Isn’t that why the president gave you all this
money?’ ”
Bank of America did not agree, so Mr. Figliola, who is 48, sees no recourse
other than walking away. “I don’t believe this is the right thing to do,” he
said, “but I’ve got to survive.”
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Just flagging the issue, NOT agreeing with the analysis herein.
=====================
http://www.bloomberg.com/apps/news?pid=20601109&sid=aFCB.UOdUErg&pos=15#
On the Edge’ Banks Face Writedowns on FDIC Auctions (Update1)
By James Sterngold
March 8 (Bloomberg) -- A Federal Deposit Insurance Corp. plan to auction more than $1 billion in assets seized from failed banks next month, including a loan to build a W Hotel in Atlanta, may trigger writedowns that weaken lenders nationwide.
Almost half of the loans were originated by Silverton Bank N.A., whose collapse last May was the biggest in Georgia history. Community banks that joined Silverton in providing $80 million for the 237-room hotel and condominium complex, as well as backing for 39 other projects, could be forced to write down their stakes to reflect sale prices.
The auctions may have wider repercussions. Of the $41 billion in assets seized from failed banks held by the FDIC as of the end of January, $15.6 billion are real estate loans and about 4 percent of those involve participations by other lenders, according to agency spokesman Andrew Gray.
“These banks can’t believe that the regulator they pay to protect them is going to sell these loans to someone who can flip them and cause them serious losses,” said Robert Reynolds, a lawyer at Reynolds Reynolds & Duncan LLC in Tuscaloosa, Alabama, who represents 25 lenders that took part in financing the W Hotel. “Our banks just cannot believe they’re being treated in a way that ultimately hurts the FDIC’s insurance fund, because some of them are right on the edge.”
Bank Failures
A total of 140 banks failed last year, and FDIC Chairman Sheila Bair said the number may be higher this year. It stands at 26 as of March 6. The agency said on Feb. 23 that 702 banks were on its “problem” list as of Dec. 31, up from 552 at the end of the third quarter. The FDIC’s insurance fund had a deficit of $20.9 billion at the end of the year.
“This whole thing is a mess waiting to happen across the country,” said Geoffrey Miller, a professor of securities law at New York University and director of the Center for the Study of Central Banks and Financial Institutions.
“Unlike the subprime mortgage problems, which hit mostly bigger financial institutions, the commercial real estate crisis is going to hit mostly smaller and regional banks,” Miller said. “It was common for them to make these loans and buy participations. It’s a systemic problem that the FDIC has to deal with.”
‘Maximize’ Recovery
That view was echoed by John J. Collins, president of Community Bankers of Washington in Lakewood, Washington. Some banks in his state have expressed concern that they may have to take writedowns as a result of the FDIC sale of seized loans in which they participated, he said.
“We have a number of banks teetering on the edge, and we don’t need this problem,” Collins said in an interview.
The FDIC is “required by statute to maximize its recovery on receivership assets,” Greg Hernandez, an agency spokesman, said in an e-mail. “This is achieved through a broad, competitive bid process.”
The agency is also trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, according to people briefed on the matter.
A $416 million package of Silverton assets being auctioned for the FDIC by Deutsche Bank AG includes $254 million of loans for commercial real estate projects such as the W Hotel in which the bank sold participations, according to Deutsche Bank’s announcement of the sale. They range from providing $752,000 in financing for convenience stores in Los Angeles to $46 million for a Le Meridien Hotel in Philadelphia. Bids are due April 12.
The FDIC will entertain offers for individual loans or the entire Silverton portfolio, retaining a 60 percent interest to benefit from future profits, Hernandez said.
W Hotel
The agency is separately auctioning $610.5 million of overdue loans seized from failed U.S. lenders, including $85.3 million in Silverton assets and $220.2 million issued by New Frontier Bank in Greeley, Colorado. That sale is being handled by New York-based Mission Capital Advisors LLC. The deadline for bids is April 6.
The loan for construction of the W Hotel in downtown Atlanta was made in April 2008, a month after the collapse of Bear Stearns Cos., according to Reynolds. The developer of the property is Atlanta-based Barry Real Estate Cos., which owns commercial projects in Atlanta, Dallas, Orlando, Florida and Birmingham, Alabama.
One Condo Sale
The hotel, managed by Starwood Hotels & Resorts Worldwide Inc., opened in January 2009. It offers amenities such as a Bliss Spa and a service for obtaining skybox seats at Atlanta Braves baseball games.
Silverton’s Specialty Finance Group LLC, which made the loan, notified the developer that it was in default, according to a letter dated April 16.
The hotel is operating at “close to 60 percent” occupancy, said Hal Barry, chairman of Barry Real Estate. The occupancy rate for luxury hotels nationwide in the fourth quarter of last year was 60.6 percent, according to Smith Travel Research Inc. in Hendersonville, Tennessee. There are also 76 condominiums in the complex, of which one has sold, he said. He declined to comment about the status of the loan.
A sale of Silverton’s $23 million share of the financing at half its book value could force participating banks to take more than $30 million in writedowns, Reynolds said.
The sale of loans from failed banks in 2009 brought on average 43 percent of their book value, according to an FDIC summary. Non-performing loans, those on which the borrower has defaulted or there is little prospect of repayment, were sold for 26 percent of their book value on average.
Servicing Rights
Reynolds has proposed that the FDIC sell Silverton’s interest in the project separately from its lead role in servicing the loan. That would enable the participating banks to buy the servicing rights and seek a long-term workout, avoiding any immediate writedowns. Selling the servicing rights along with Silverton’s portion of the loan, which give the owner the ability to restructure or foreclose on a loan, could encourage short-term investors, Reynolds said.
If the loan is sold to a buyer who restructures it at less than book value or forecloses on the property, participating banks would have to write down their stakes, said Russell Mallett, a partner at PricewaterhouseCoopers LLP in New York who specializes in bank accounting. Absent a restructuring, banks have flexibility in how they value loans, he said.
“This is not a perfect real estate development, but it could work its way out of its problems if they get more funding and we’re patient,” said Ralph Banks, executive vice president of Merchants & Farmers Bank of Greene County in Eutaw, Alabama, which owns less than $1 million of the loan.
‘Decreases’ Value
That view was supported by executives at two other lenders that bought participations who asked not to be identified because their banks’ roles as owners of the W Hotel loan haven’t been disclosed.
The FDIC has a policy of not splitting servicing rights from loan ownership because it “decreases the value of those assets,” said Hernandez, the agency spokesman.
Reynolds said the banks he represents may bid for Silverton’s share of the W Hotel loan if they can come up with the capital in order to stave off writedowns. Some of the lenders are already in financial trouble, he said, declining to identify them. One that participated in the loan, Florida Community Bank in Immokalee, Florida, failed on Jan. 29.
‘Deal With Themselves’
Silverton, a wholesale bank based in Atlanta with no consumer operations, was owned and overseen by more than 400 community lenders in the region. It was founded in 1986 and provided banking services, including wire-transfer systems, bond trading and credit-card operations, to about 1,400 institutions in 44 states.
Reynolds said the banks that owned Silverton, some of which had representatives on its board, never imagined it would fail.
“My clients had a long, successful record with Silverton,” Reynolds said. “When they signed their participations, they felt they were signing a deal with themselves because they all owned the bank. We all thought this was a way to diversify risk.”
The bank’s troubles began in early 2007, when it changed from a state to a national charter so it could accelerate its growth, according to a report by the Treasury Department’s Office of Inspector General, which reviews failures of banks regulated by the Office of the Comptroller of the Currency.
Defaults Double
Silverton’s commercial real estate lending rose to $1.2 billion at the end of 2008 from $681 million at the end of 2006, the report said. The bank had $4.1 billion in assets when it failed last year, and the FDIC said the closing will cost its insurance fund $1.3 billion.
“The board and management either chose to ignore or failed to acknowledge the indicators of a declining real estate market,” the inspector general’s report said.
Real estate loans at U.S. banks that are at least 90 days overdue or that are expected to default almost doubled in 12 months to 7.1 percent, according to December FDIC data. Non- performing loans for construction and development rose to 16 percent from 8.6 percent.
“This is a situation the FDIC is going to face more, since the number of bank failures is going up,” said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine. “The FDIC is not in the business of managing loans, so they do have to sell them. But they also have to look at the bigger picture and take a global approach by liquidating those assets without hurting the banks that bought participations.”
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Foreclosures Are Rising
By: Diana Olick
The new foreclosure wave is here.
Yes, banks are ramping up loan modifications and ramping up short sales and ramping up deeds in lieu of foreclosure, but the plain fact is that as the systems are oiled, the loans are moving through faster, and the pig in the python is showing its face.
We won't get the numbers until next week, but sources tell me they will likely be a new monthly record. Tens of thousands of loans have been hitting the "notice of trustee sale" bin, and that means they are coming to foreclosure. The actual foreclosure numbers have been down recently because of all the modification efforts, but as we see more loans not qualifying for modifications and more loans defaulting on modifications, the foreclosure numbers rise.
And this is just the beginning.
All the uniform policies and practices that the government has put in place, whether on modifications or short sales, will quicken the process. Foreclosures, which can now take 2 years plus to complete, will happen in less than a year, start to finish.
Clearly the Administration knew of the impending rise in foreclosures, as it revamped its modification, refinance and short sale programs last month, increasing incentives all around and pushing for principal write down. The big question of course is how will the new wave affect home prices, especially in the hardest hit markets.
I pushed Fannie Mae's chief economist Doug Duncan on this in an interview today on the mortgage giant's new National Housing Survey. He cited the over 5 million mortgages out there that are seriously delinquent, and said that while the 30-day delinquencies seem to have peaked, "certainly some of the foreclosure backlogs are working their way through the system at this point." He also said home prices will dip again before hitting bottom later this year.
Yesterday we saw a big bump in the Realtors' Pending Home Sales Index, but my sources tell me that was largely driven by contracts on short sales, which have a far lower rate of closing than regular sale contracts. Estimates are that only about 35 percent of short sale contracts go to closing versus 80 percent of conventional sale contracts.
The home buyer tax credit deadline is 24 days away, and that is pushing some of the numbers up, but not as much as some had hoped.
Credit Suisse's Dan Oppenheim noted an uptick in buyer traffic in March thanks to the credit, but his survey of real estate agents found, "buyers remain hesitant due to employment concerns. Most of the demand occurred at the low-end of the market."
http://www.cnbc.com/id/36195838
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Posting about Justice Stevens elsewhere I was reminded again about the Kelo decision where the government gets to decide who owns YOUR house and I noticed that the timing of that decision coincides with the peak of the housing market. It's not that people don't still need homes or want to own their own and make them nice, it's just that the dream of paying off your mortgages and having 100% control over your small piece of America for a lifetime (and pass it on to your heirs) has became a farce. Your rights as what we used to call the property owner don't extend much further than having your name appear as 'taxpayer' on the next property tax assessment.
People kept putting large amounts borrowed money into homes but were less and less motivated to invest very much of their own, which happened to make the market less and less stable prior to collapse.
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By PETER J. WALLISON
Now that nearly all the TARP funds used to bail out Wall Street banks have been repaid, the government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac stand out as the source of the greatest taxpayer losses.
The Congressional Budget Office has estimated that, in the wake of the housing bubble and the unprecedented deflation in housing values that resulted, the government's cost to bail out Fannie and Freddie will eventually reach $381 billion. That estimate may be too optimistic.
Last Christmas Eve, Treasury removed the $400 billion cap on what the government might be required to invest in these two GSEs in the future, and this may tell the real story about the cost to taxpayers. In typical Washington fashion, everyone has amnesia about how this disaster occurred.
The story is all too familiar. Politicians in positions of authority today had an opportunity to prevent this fiasco but did nothing. Now—in the name of the taxpayers—they want more power, but they have never been called to account for their earlier failings.
One chapter in this story took place in July 2005, when the Senate Banking Committee, then controlled by the Republicans, adopted tough regulatory legislation for the GSEs on a party-line vote—all Republicans in favor, all Democrats opposed. The bill would have established a new regulator for Fannie and Freddie and given it authority to ensure that they maintained adequate capital, properly managed their interest rate risk, had adequate liquidity and reserves, and controlled their asset and investment portfolio growth.
These authorities were necessary to control the GSEs' risk-taking, but opposition by Fannie and Freddie—then the most politically powerful firms in the country—had consistently prevented reform.
The date of the Senate Banking Committee's action is important. It was in 2005 that the GSEs—which had been acquiring increasing numbers of subprime and Alt-A loans for many years in order to meet their HUD-imposed affordable housing requirements—accelerated the purchases that led to their 2008 insolvency. If legislation along the lines of the Senate committee's bill had been enacted in that year, many if not all the losses that Fannie and Freddie have suffered, and will suffer in the future, might have been avoided.
Why was there no action in the full Senate? As most Americans know today, it takes 60 votes to cut off debate in the Senate, and the Republicans had only 55. To close debate and proceed to the enactment of the committee-passed bill, the Republicans needed five Democrats to vote with them. But in a 45 member Democratic caucus that included Barack Obama and the current Senate Banking Chairman Christopher Dodd (D., Conn.), these votes could not be found.
Recently, President Obama has taken to accusing others of representing "special interests." In an April radio address he stated that his financial regulatory proposals were struggling in the Senate because "the financial industry and its powerful lobby have opposed modest safeguards against the kinds of reckless risks and bad practices that led to this very crisis."
He should know. As a senator, he was the third largest recipient of campaign contributions from Fannie Mae and Freddie Mac, behind only Sens. Chris Dodd and John Kerry.
With hypocrisy like this at the top, is it any wonder that nearly 80% of Americans, according to new Pew polling, don't trust the federal government or its ability to solve the country's problems?
Mr. Wallison is a senior fellow at the American Enterprise Institute.
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A friend writes:
I am not claiming the absence of fraud in the origination of mortgages. I am talking about the impact of mortgage securities and derivatives of mortgage securities upon the balance sheets of deposit banks and investment banks. Also, I am talking about the creation and sale of these securities and derivative securities by investment banks to other institutional investors.
As the real estate boom progressed, banks and mortgage companies originated more and more bad mortgage loans. These loans continued to be securitized along with the good loans that were originated at the same time. Even though these mortgage securities contained the bad loans, federal government approved credit rating agencies continued to rate these securities as AAA and AA debt. Why? Mainly because of flawed risk models that ignored the individual components of the mortgage security and focused upon quantitative analyses of probable default rates. These models underestimated the probability and the size of the eventual default rates.
The Basel accords encouraged deposit banks and investment banks to invest their own capital into low risk assets. They also encouraged the same institutions to rely upon the government approved ratings agencies to determine the risk of their assets. Why? Because the banks could then show their regulators that government regulated third parties without any financial interest in the bank had determined the riskiness of their assets.
Why was there a sudden demand by institutions and people to own mortgage securities? Simply, it was the low interest rate environment created by the regulators of the deposit banks. Everyone from Lehman to my parents wanted higher interest. Mortgages were safe because real estate never went down in value. Right?
So, then, let’s address David’s original complaint. It focused upon the creators and sellers of the mortgage securities and the derivatives of those securities. Let’s assume David’s opinion is entirely true. Still, the investment banks and securities firms operate in a highly regulated environment. They are self-regulated by FINRA. In turn, the SEC oversees and must approve every FINRA regulation that is implemented. Moreover, the SEC itself directly regulates the investment advisory business at these big investment banks, hedge funds at and independent of these banks, and the securities themselves.
The Federal Reserve, the OCC, the States’ banking regulators, and the FDIC all regulate and oversee the deposit banks. Their examiners obviously saw that these banks owned growing amounts of mortgage securities on their balance sheets. None of these regulators thought to ask these banks why they owned mortgages originated at other banks and not their own. Why? Because all of these securities were comprised of slices of lots of mortgages thereby spreading the risk even better than keeping one’s own mortgages plus the regulated ratings agencies all said that this paper was rated AAA and AA. Diversification. Ratings.
The reason that internal “whistleblowers” (and I use that term loosely) like Mr. Lee were ignored was simply that their employers owned stuff that was rated investment grade and that the employers had bought into the flawed risk model. Government approved regulators had also approved the risk models. So had the ratings agencies.
The only effective risk management came from the short sellers like Paulson. They were the only people that actually looked into the individual mortgage components of each security and derivative. Also, they had studied the residential and commercial real estate markets and had concerns about another cycle of oversupply. But they needed investment vehicles through which they could invest against mortgage securities according to their analyses. Hence, the synthetic CDO. But since the synthetic CDO is also a security, it, too, is regulated by the SEC.
So, the solution proposed by the political class is to create more of the same type of regulatory institutions that have missed the excesses of every investment and credit cycle since their creation. Yep, next time, it will be different. Right. Like Natalie Wood’s character in Miracle on 34th Street, “I believe. I believe. I believe …”
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"because of flawed risk models that ignored the individual components of the mortgage security and focused upon quantitative analyses of probable default rates. These models underestimated the probability and the size of the eventual default rates."
I agree with what he writes and that is only part of the story. He is not denying fraud, just saying that plenty more went wrong. But the whole program of trying to force money into neighborhoods without sound lending fundamentals was a fraud in itself, an invitation for worse fraud in the field, and the whole ratings debacle was a fraud. Those of in the neighborhoods watched it happen and those who watched the Fannie Mae-Freddie Mac Oversight Hearings watched it happen. Billions or trillions in fraud, under our nose, without consequence.
Home lending is a 3-legged stool that collapses when you remove any one of the legs: a) creditworthiness of the borrower, b) income of the borrower and c) the ratio of real equity to real value in the asset. If a solid income earner with a history of paying his/her bills saves up and pays 10-20% for a down payment and borrows less than a third of his/her income for housing expense, then that loan has normal chance of default which I think is between 1 and 2% and the loss to the mortgage company is negligible.
How can it be that we chopped out the legs of the stool on lending fundamentals and then predict that default rates will remain low and constant? That is beyond incompetence. There should be consequence.
How could we not know in a highly leveraged, speculated and overpriced market that there would be a correction and that the higher the market went the harder it would fall? How could we think that choosing an anti-growth agenda in November 2006 to take unemployment from 4.9 to 10.3% would not put millions of people without savings out of their house payment? How could we not know that stricter use of 'mark to market' rules even for loans that are not in default would exaggerate the collapse in values of the portfolios?
For all we have learned, what are we doing now? Increasing the federal role in mortgage lending from 90% to 100% and continuing to flood FREE MONEY into false housing values with the extended homebuyer credit of thousands of dollars to anyone, paying people to move instead of staying put. Looks like a continuing recipe for self-destruction to me.
I know areas of Minneapolis where the whole block got the funny loans and the whole block went to foreclosure while none of those lenders, borrowers, originators, realtors or appraisers have been prosecuted for organized fraud crimes. This foreclosure map of one side of one relatively prosperous city, Minneapolis, is a must see IMO! http://ww2.startribune.com/projects/foreclosures/northminneapolis.html
How could a financial rating service or a government oversight agency not see this coming and still draw a salary?
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Additional comments from my friend:
I am not beating the drum for the ratings agencies to be “the responsible party”. I am merely pointing out that the ratings agencies were an important part of the entire regulated system. The regulatory system encouraged reliance upon the evaluations of the agencies.
As the 1990’s progressed, purchasers of credit securities wanted higher yields than government bonds and bank deposit interest were providing. Mortgage securities appeared to be the right answer to this market demand. Conventional wisdom held that real estate value would remain relatively stable. Default rates were low and predictable. In fact, prepayment was thought to be the biggest risk to an MBS holder. Yields were better than traditionally safe investments. Prepayment and default risk could be minimized by spreading these risks across large pools of mortgages. The largest issuers of MBS were Fannie Mae and Freddie Mac, both of which possessed the undeclared backing of the federal government.
As interest rates remained low in this decade, more and more investors flocked to the higher relative yields of the MBS. This led Wall Street to create derivatives so that large holders of MBS could hedge their risk. In this environment, there were likely sales abuses. However, Wall Street did not cause large numbers of sophisticated and unsophisticated investors to buy mortgage debt and the derivatives of mortgage debt. Higher yield combined with apparent relative safety caused the demand for these securities to skyrocket.
The systemic failure in this area occurred because the assumptions in the generally accepted risk models failed. The regulators and Wall Street all accepted these assumptions. Buyers of the debt securities accepted these assumptions. When the risk model failed, owners of these securities wanted to know the specific default risk they faced in each mortgage security that they owned. That specific risk was not easily determinable because the securities themselves were complicated. If someone owned a derivative, they needed first to learn the identities of the actual mortgage securities that the derivative concerned. Then, they needed to determine the state of the actual mortgages covered by the security referenced by the derivative. Supply flooded the secondary credit markets and bids dried up because potential buyers could not easily determine the default risk in any security that had been offered.
Most everyone in most mortgage securities transactions believed in the same risk models. The regulators believed in the same risk models. The rating agencies believed in the same risk models. The Wall Street firms that made markets, that bought, and that sold these securities believed in the same risk models. Only a few short sellers using credit default swaps began to doubt those models.
Without the demand for higher yields and without the assumption that mortgage securities were almost as safe as US government debt, capital would not have flowed into mortgage securities. Without that capital, New Century, WaMu, Countrywide and all of the other sub-prime and Alt-A blackguards would not have had possessed capital sufficient to make all of their bad loans. This does not excuse the fraud at mortgage origination and any fraud committed by any Wall Street firm that marketed mortgage securities and their derivatives. IMO, however, these things occurred because of the systemic failure; they did not cause the systemic failure.
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http://www.americanthinker.com/2010/05/has_the_sec_charged_the_right.html
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The President: Good evening. As we speak, our nation faces a multitude of challenges. At home, our top priority is to recover and rebuild from a recession. Abroad, our brave men and women in uniform are taking the fight to al Qaeda wherever it exists. Tonight, I want to speak with you about a battle we're waging against an enemy that is assaulting the very homes our citizens live in.
In September 2008, Fannie Mae and Freddie Mac imploded when their losses became unsustainable. In part because so many of our financial institutions relied on mortgage-backed securities based on bad loans, a housing crisis exploded into a financial crisis. And Americans continue to suffer from the effects. Unlike a hurricane or oil spill, where the damage is obvious to the eye, the damage wrought by Fannie and Freddie is much more insidious. As president, I have many smart people in my administration. But you do not need a Nobel Prize to know the problem here.
Fannie and Freddie bought mortgages offered by banks, which it then resold as mortgaged-backed securities. Banks liked this, because it meant more money to lend. In the name of enabling ever more Americans to own their homes, and encouraged by Congress, Fannie and Freddie expanded into ever more risky mortgages. In the end, these two companies helped send billions in loans to Americans who lacked the means to pay them back—while spreading risk throughout our financial system.
"I have met with moms and dads who bought modest houses that were within their means—and now find their tax dollars going to bail out neighbors who bought bigger houses not within their means."
.Think of these bad loans as a nasty leak polluting our financial system. While most other large financial firms either have failed or are now recovering, the damage caused by Fannie and Freddie continues largely unabated. The Congressional Budget Office says that plugging these bad loans has already cost taxpayers $145.9 billion, making them the single largest bailout of all.
Make no mistake: We will fight Fannie and Freddie with everything we have got for as long as it takes. We will make these two government-created companies pay for the damage they have caused. In fact, we are going to make Fannie and Freddie pay with their lives. Tonight I'd like to lay out our battle plan going forward:
First, the cleanup. For more than three decades there's been a culture of corruption in the regulatory oversight of these companies. I inherited a situation in which these firms lobbied and captured their regulators. Fannie and Freddie's privileged place in the market was sustained because they were a source of riches for Washington's Republican and Democratic establishments. Even today we see this oily alliance at work in the recent decision by Congress to exempt Fannie and Freddie from their financial reform bill.
Tonight I promise you: We will do whatever it takes, for as long as it takes, to change this.
One of the lessons we've learned from Fannie and Freddie is that you cannot combine private profit with taxpayers bearing risk. For decades we've propped up Fannie and Freddie's near monopoly. And for decades we have failed to face up to the fact that homeownership is not the best path for everyone. Time and again, reform has been blocked by former congressmen of both parties whom these companies hired to spread the money around and persuade Congress to back off.
So the second thing I will do is meet with the chairmen of Fannie Mae and Freddie Mac. And I will tell them the day of reckoning has come. We are going to break up Fannie and Freddie and end the privileges they enjoy from the government.
.You know, for generations, Americans have scrimped and saved to provide a better life for their families. That is now in jeopardy. I have met with moms and dads who bought modest houses that were within their means—and now find their tax dollars going to bail out neighbors who bought bigger houses not within their means. I have stood with retirees whose pensions have been devastated. And I have sat in the living rooms of families who now face foreclosure on homes they were falsely assured they could afford.
The sadness and the anger they feel is not just about the money they've lost. It's about a wrenching anxiety that their way of life may be lost. I am a prayerful man. But I do not believe that the American people should have to pray that their own government isn't undermining their homes, their savings, and the lives they have built for their families.
The financial crisis was not caused by Fannie and Freddie alone. But fixing them is essential. To this important task, we bring hope, which comes from the confidence that free men and women in a free economy will in the end make better decisions than any government. And tonight we revive that hope by delivering change to two of the fattest cats Washington has ever known.
Thank you, and may God bless America.
Write to MainStreet@wsj.com
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My savy friend Rick N. writes:
"I think that Nicholas Taleb had the best idea for working out the housing debacle. The creditor banks must exchange the now unsecured part of their debt for equity in the devalued real estate. Re-write the loan balances and payments based upon the current market values and let the owners and the banks share in any future gains in proportion to the amount of the write-down versus the original mortgage balance. Don’t subsidize the banks with federal aid for the write-down but don’t require them to post more capital on their books. Reduce the individuals’ cost bases to the new amount and let capital gains be calculated from the lower amount. This should help reduce the demand for money and permit excess liquidity to be withdrawn over time."
Some other savy responses:
Rick,
The banks cannot write down the balances of the loans to current market values. To do so would be to immediately cause reserve issues, and the FDIC would have to walk in and close the banks. That would happen to every bank in the country. You cannot just say that the banks don't have to worry about the lack of capital reserves in this case. Heck, they are all insolvent anyway.
Then, the government would have to "bail-out" the banks with trillions of dollars of taxpayer money. You know what that means.
What about all the homeowners who are not underwater with their properties? Even in California, only 1 in 4 are underwater. So, the other homeowners get screwed.
Then, what about the privately securitized loans? That amounts to at least 40% of the loans. Would they be required to do the same? Write down to fair market value? Then each investor would lose their money. The remaining Trusts would become insolvent.
What about the Contracts Clause in the US Constitution? A forced write-down by the government would be unconstitutional.
One can simply say that this and that should be done, but the realities are much different.
The only way that the Housing Crisis will end is for the government to get out of the way and let the foreclosures continue. Let the private sector approach the banks, using people who understand how to save banks with new capitalization and then selling off the bad loans for 25-30 cents on the dollar.
Get it over fast, instead of this drip, drip, drip.
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Remember the Chrysler Bond Holders got ¼ of what the unsecured debtor the UWA. Contracts schmontracts, this bunch of redistributionist doesn’t give a rat’s ass for contract law.
What about the Contracts Clause in the US Constitution? A forced write-down by the government would be unconstitutional.
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Then, the government would have to "bail-out" the banks with trillions of dollars of taxpayer money."
That may be what our idiots in Washington would do, but it's not what they "have" to do and not what they should do. According to Hussman's arithmetic, in most cases corporate bond holders wouldn't even be totally wiped out in a normal restructuring -- and depositors would lose nothing. This bailing out of bankers has been done not for the sake of "us," but for the sake of the bailed out bankers.
Pat, you are so right when you say this problem has to be resolved by the private sector. All of this interest rate manipulation, government purchases of Fannie and Fredie, leveraged bank purchases of Treasuries, federal guarantees of this and that ... it's all distorting pricing throughout the economy and wrecking havoc with the distribution of capital and the entire productive system. Nothing is going to work quite right until our government disengages itself in a significant way. If, instead, the government continues to double up on its bet we can start to worry about a serious calamity.
Rick, I don't much like Taleb's suggestions as you are presenting them simply because it is yet another "central planning" solution. If the banks can and want to renegotiate mortgages, they are free to do that in the context of free exchange -- we don't need some kind of national policy decision on that point. This whole debacle has been caused, from top to bottom, by bad ideas implemented by government.
To use Bass's tired cliche, everything the government and the Fed have done so far has only "kicked the problem down the road." Nothing is getting straightened out, in fact many problems are being exacerbated. Sure, some prices have adjusted in apparently the right direction (house prices have fallen, for example) but these new prices are determined by the myriad of distortional policies in place, not by free people entering into voluntary exchanges on unfettered markets.
Tom
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Neither Taleb nor I advocate a governmentally forced work-out. It should be voluntary and done under the provisions of each contract that permit amendments with the written mutual consent of the parties. Work-outs like this are done all of the time when debt is swapped for equity. That does not violate the Constitution’s contract clause. In fact, to the extent that government subsidies create a different incentive, one could argue that the subsidies themselves and the GSE’s themselves effectively violate the contracts clause.
The reserve issue is governmental regulation. The equity in the secured assets provides an offset to the lost value of the loan. And, what is the alternative? Kicking the can further down the road?
Rick
PS: I’m curious about why every responder so far has assumed that Taleb’s proposed solution was “governmental” or “central planning.” The only governmental involvement would be waivers by the banking regulators of any reserve capital requirements. Everything else in the proposal is an appeal for a mutually agreed upon debt-for-equity swap between debtor and creditor as the best way for both parties to deleverage
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http://www.msnbc.msn.com/id/38811725/ns/business-the_new_york_times
**Real estate as an investment is dead.**
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September 5, 2010
Housing Woes Bring New Cry: Let Market Fall
By DAVID STREITFELD
The unexpectedly deep plunge in home sales this summer is likely to force the Obama administration to choose between future homeowners and current ones, a predicament officials had been eager to avoid.
Over the last 18 months, the administration has rolled out just about every program it could think of to prop up the ailing housing market, using tax credits, mortgage modification programs, low interest rates, government-backed loans and other assistance intended to keep values up and delinquent borrowers out of foreclosure. The goal was to stabilize the market until a resurgent economy created new households that demanded places to live.
As the economy again sputters and potential buyers flee — July housing sales sank 26 percent from July 2009 — there is a growing sense of exhaustion with government intervention. Some economists and analysts are now urging a dose of shock therapy that would greatly shift the benefits to future homeowners: Let the housing market crash. When prices are lower, these experts argue, buyers will pour in, creating the elusive stability the government has spent billions upon billions trying to achieve.
“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University. “If we keep trying to stimulate the market, that’s the definition of insanity.”
The further the market descends, however, the more miserable one group — important both politically and economically — will be: the tens of millions of homeowners who have already seen their home values drop an average of 30 percent.
The poorer these owners feel, the less likely they will indulge in the sort of consumer spending the economy needs to recover. If they see an identical house down the street going for half what they owe, the temptation to default might be irresistible. That could make the market’s current malaise seem minor.
Caught in the middle is an administration that gambled on a recovery that is not happening.
“The administration made a bet that a rising economy would solve the housing problem and now they are out of chips,” said Howard Glaser, a former Clinton administration housing official with close ties to policy makers in the administration. “They are deeply worried and don’t really know what to do.”
That was clear last week, when the secretary of housing and urban development, Shaun Donovan, appeared to side with current homeowners, telling CNN the administration would “go everywhere we can” to make sure the slumping market recovers. Mr. Donovan even opened the door to another housing tax credit like the one that expired last spring, which paid first-time buyers as much as $8,000 and buyers who were moving up $6,500. The cost to taxpayers was in the neighborhood of $30 billion, much of which went to people who would have bought anyway. Administration press officers quickly backpedaled from Mr. Donovan’s comment, saying a revived credit was either highly unlikely or flat-out impossible. Mr. Donovan declined to be interviewed for this article. In a statement, a White House spokeswoman responded to questions about possible new stimulus measures by pointing to those already in the works.
“In the weeks ahead, we will focus on successfully getting off the ground programs we have recently announced,” the spokeswoman, Amy Brundage, said.
Among those initiatives are $3 billion to keep the unemployed from losing their homes and a refinancing program that will try to cut the mortgage balances of owners who owe more than their property is worth. A previous program with similar goals had limited success. If last year’s tax credit was supposed to be a bridge over a rough patch, it ended with a glimpse of the abyss. The average home now takes more than a year to sell. Add in the homes that are foreclosed but not yet for sale and the total is greater still. Builders are in even worse shape. Sales of new homes are lower than in the depths of the recession of the early 1980s, when mortgage rates were double what they are now, unemployment was pervasive and the gloom was at least as thick.
The deteriorating circumstances have given a new voice to the “do nothing” chorus, whose members think the era of trying to buy stability while hoping the market will catch fire — called “extend and pretend” or “delay and pray” — has run its course.
“We have had enough artificial support and need to let the free market do its thing,” said the housing analyst Ivy Zelman.
Michael L. Moskowitz, president of Equity Now, a direct mortgage lender that operates in New York and seven other states, also advocates letting the market fall. “Prices are still artificially high,” he said. “The government is discriminating against the renters who are able to buy at $200,000 but can’t at $250,000.”
A small decline in home prices might not make too much of a difference to a slack economy. But an unchecked drop of 10 percent or more might prove entirely discouraging to the millions of owners just hanging on, especially those who bought in the last few years under the impression that a turnaround had already begun.
The government is on the hook for many of these mortgages, another reason policy makers have been aggressively seeking stability. What helped support the market last year could now cause it to crumble. Since 2006, the Federal Housing Administration has insured millions of low down payment loans. During the first two years, officials concede, the credit quality of the borrowers was too low.
With little at stake and a queasy economy, buyers bailed: nearly 12 percent were delinquent after a year. Last fall, F.H.A. cash reserves fell below the Congressionally mandated minimum, and the agency had to shore up its finances. Government-backed loans in 2009 went to buyers with higher credit scores. Yet the percentage of first-year defaults was still 5 percent, according to data from the research firm CoreLogic.
“These are at-risk buyers,” said Sam Khater, a CoreLogic economist. “They have very little equity, and that’s the largest predictor of default.”
This is the risk policy makers face. “If home prices begin to fall again with any serious velocity, borrowers may stay away in such numbers that the market never recovers,” said Mr. Glaser, a consultant whose clients include the National Association of Realtors. Those sorts of worries have a few people from the world of finance suggesting that the administration should do much more, not less.
William H. Gross, managing director at Pimco, a giant manager of bond funds, has proposed the government refinance at lower rates millions of mortgages it owns or insures. Such a bold action, Mr. Gross said in a recent speech, would “provide a crucial stimulus of $50 to $60 billion in consumption,” as well as increase housing prices.
The idea has gained little traction. Instead, there is a sense that, even with much more modest notions, government intervention is not the answer. The National Association of Realtors, the driving force behind the credit last year, is not calling for a new round of stimulus. Some members of the National Association of Home Builders say a new credit of $25,000 would raise demand but their chances of getting this through Congress are nonexistent.
“Our members are saying that if we can’t get a very large tax credit — one that really brings people off the bench — why use our political capital at all?” said David Crowe, the chief economist for the home builders.
That might give the Obama administration permission to take the risk of doing nothing.
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Talk about a financial scandal. A consumer borrows money to buy a house, doesn't make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.
The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington's financial crisis of the week.
In the 23 states that require judicial foreclosures, lenders seeking to seize property from a delinquent borrower must file a summary judgment motion in court. Typically, this document must be signed in the presence of a notary by a "witness" who has reviewed the relevant documents and confirmed that the borrower is in default and the lender owns the mortgage.
View Full Image
Associated Press
.Recently GMAC Mortgage, whose parent Ally Financial is majority-owned by the U.S. government, suspended foreclosures in those 23 states after acknowledging that in some cases notaries may not have been present and the signers may have relied upon others to review the documents instead of doing it themselves. Bank of America and J.P. Morgan Chase then halted their own foreclosures in those 23 states to ensure they are following the letter of the law, and yesterday BofA announced its moratorium is now nationwide.
We're not aware of a single case so far of a substantive error. Out of tens of thousands of potentially affected borrowers, we're still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home. Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven't paid.
In their zeal to find and prosecute the great bank defendant, state Attorneys General aren't waiting to see if anyone within their borders was actually harmed. In a civil suit, Ohio's Attorney General Richard Cordray has even charged an Ally employee with fraud for signing the documents without reading them. In a Journal interview, Mr. Cordray compared the employee to Nazis at Nuremberg who claimed they were just following orders.
As far as we know, House Speaker Nancy Pelosi hasn't compared any bank employees to Nazis, but this week she demanded an investigation by the Department of Justice. The next day Attorney General Eric Holder announced that his Financial Fraud Enforcement Task Force is examining the issue. But even if one believes this is more than a technicality, the issue is whether the banks violated state laws, not federal ones.
On Thursday, Senate Majority Leader Harry Reid jumped into the fray by demanding a halt to all foreclosures in Nevada, though Nevada is not one of the 23 states affected and therefore presents not even a theoretical violation of the law. The same day, Representative Edolphus Towns (D., N.Y.) demanded a national foreclosure moratorium, which Mr. Reid then endorsed on Friday. Even normally sober Republican Senator Richard Shelby has called for a federal probe of bank regulators.
Yes, the same crew (Mr. Shelby excepted) that ran roughshod over its own transparency rules—not to mention the established customs of the House and Senate—to restructure American medicine is now appalled that some paperwork at private businesses may have been incorrectly processed. To be clear, bank employees appear guilty of sloppy work, and problems in the back office should be corrected, but freezing activity in a $2.8 trillion financial market is the last thing this economy needs and is in no way proportional to the problems reported so far.
Now President Obama is refusing to sign a previously noncontroversial measure to have states recognize notarized documents from other states. Among other things, the bill would have streamlined the process of moving people out of homes they can't afford and therefore would have helped to allow housing markets to clear and begin to heal. Allowing supply to meet demand in housing must not be one of the "progressive agendas" that Mr. Obama recently told Rolling Stone he is committed to advancing.
If evidence emerges of policies or actions that wrongly threw people out of their homes, by all means investigate and prosecute violations of law. But allowing people to live in homes without paying for them is not cost-free. That cost will be borne directly by investors in mortgage-backed securities and mortgage servicing companies, and ultimately by American taxpayers, who now stand behind 90% of new mortgages, thanks to guarantees by Fannie Mae, Freddie Mac and the Federal Housing Administration.
The bigger damage here is to the housing market, which desperately needs to find a bottom by clearing excess inventory and working through foreclosures as rapidly as possible. The moratoriums further politicize the housing market and further delay a housing recovery. In an economy and a financial system engulfed in Washington-created uncertainty, the political class has decided to create still more.
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Obama and the dems move us another step towards being a banana republic.
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Indeed.
Also, some very interesting cases are likely to come up for title insurance , , , :-o
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Doug:
I'm not sure we are reading this the same way. If I understand you correctly, you are discussing a signature at the closing.
If I understand correctly the issue presented concerns robo-signatures as part of the foreclosure process.
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Crafty, Thanks for getting me headed right on that. I will fix that post. I've never seen a foreclosure document; I like the ones that say paid in full. :-) Was there a law requiring personal signatures of bank officers on foreclosure documents or is someone trying to make tighter rules now?
If foreclosures were defective then they have to go back and do it again and that helps no one. A simple quit claim deed would also do if the defaulting homeowner is not fighting the repo. I hear about 'cash for keys' programs which I believe are really cash for documents (quit claim?) so this may just be a cost of doing sloppy business. Too bad the taxpayer is on the hook for what should be private sector business. If it takes another 6 months, 12 months (?) then the defaulting party is just that much further away from ever making their loan current, and living for free never seems to have benefit the defaulter.
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http://www.smh.com.au/business/foreclosures-the-real-us-time-bomb-20101011-16g4e.html
Not surprisingly, the virtual breakdown of the foreclosure system has created a political storm because it could threaten the liquidity of the banks, particularly the smaller ones.
Reports out of the US over the weekend are that up to 40 state attorneys-general, as well as members of Congress, plan to meet and will call for an across-the-board moratorium on foreclosures to sort out alleged irregularities in foreclosure documents submitted by the banks.
US courts are choked with cases where notes and mortgages were missing from bankruptcy mortgage claims, despite a clear rule that they should be attached. It seems the many mortgage originators which encouraged people to lie about their financial capacity when taking out loans, also didn't bother with the paperwork.
Put simply, some mortgages changed hands many times without the full chain of documents completed. Upon challenge, many companies have been unable to show they had the paperwork, leading to their cases being dismissed.
On September 27, the Department of Justice in North Carolina wrote to Ally Financial: ''This office has received information regarding Ally Financial/GMAC Mortgage's questionable preparation of documents to support home mortgage loan foreclosure actions. In particular, the information indicates that GMAC Mortgage employees routinely signed off on large numbers of affidavits without personal knowledge of the accuracy of the contents of the affidavits. The allegations of improper verification of affidavits are supported by sworn deposition testimony by a team leader of GMAC Mortgage's document execution team for foreclosures.''
The Washington Post reported a day later that millions of people were working their way through the US court system in the wake of the financial crisis. It described the foreclosure process as a system rife with shoddy documents, forged signatures and, according to some state law enforcement officials, outright fraud by lenders eager to rid themselves of bad loans.
The subprime collapse had already wreaked havoc globally as house prices began to fall and the loans became worthless, with millions of borrowers walking away from their obligations. This pushed property prices lower and resulted in the collapse of Bear Sterns, Lehman Brothers, Merrill Lynch, Wachovia, Washington Mutual and hundreds of smaller banks.
While it had a huge impact on the banking system in the US, it didn't destroy it, because lenders were able to foreclose or obtain possession of a property by evicting the borrower and selling it, albeit at a fraction of the loan.
But with question marks hanging over the legality of many foreclosures, the bomb could be about to go off in the US.
As Hugh McLernon at IMF, who has been an avid observer of the subprime crisis, said: ''The central question in any foreclosure is whether the person seeking foreclosure has the standing to ask for it. This is usually done by producing to the court the documents showing that the applicant made the loan and is entitled to the mortgage rights, including the right to foreclose and sell when the borrower stops paying interest.''
For McLernon, the answer is to change the legislation so as to dispense with the need to produce documentation, which is the ad hoc position so far adopted by the court system without legal authority. However, with elections looming in the US, the speedy passage of difficult laws will be difficult.
The alternative is to clog the courts and erode the fragile confidence in the US government and the US financial system. With such a mess bubbling away, the release of consumer sentiment figures, trade figures and US consumer prices is a sideshow to the true health of the US economy.
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http://www.financialsense.com/contributors/james-quinn/consumer-deleveraging-commercial-real-estate-collapse
Prepare.
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PHOENIX — Bank of America and GMAC are firing up their formidable foreclosure machines again today, after a brief pause.
But hard-pressed homeowners like Lydia Sweetland are asking why lenders often balk at a less disruptive solution: short sales, which allow owners to sell deeply devalued homes for less than what remains on their mortgage.
Ms. Sweetland, 47, tried such a sale this summer out of desperation. She had lost her high-paying job and drained her once-flush retirement savings, and her bank, GMAC, wouldn’t modify her mortgage. After seven months of being unable to pay her mortgage, she decided that a short sale would give her more time to move out of her Phoenix home and damage her credit rating less than a foreclosure.
She owes $206,000 and found a buyer who would pay $200,000. Last Friday, GMAC rejected that offer and said it would foreclose in seven days, even though, according to Ms. Sweetland’s broker, the bank estimates it will make $19,000 less on a foreclosure than on a short sale.
“I guess I could salute and say, ‘O.K., I’m walking, here’s the keys,’ ” says Ms. Sweetland, as she sits in a plastic Adirondack chair on her patio. “But I need a little time, and I don’t want to just leave the house vacant. I loved this neighborhood.”
GMAC declined to be interviewed about Ms. Sweetland’s case.
The halt in most foreclosures the last few weeks gave a hint of hope to homeowners like Ms. Sweetland, who found breathing room to pursue alternatives. Consumer advocates took the view that this might pressure banks to offer mortgage modifications on better terms and perhaps drive interest in short sales, which are rising sharply in many corners of the nation.
But some major lenders took a quick inventory of their foreclosure practices and insisted their processes were sound. They now seem intent on resuming foreclosures. And that could have a profound effect on many homeowners.
In Arizona, thousands of homeowners have turned to short sales to avoid foreclosures, and many end up running a daunting procedural gantlet. Several of the largest lenders have set up complicated and balky application systems.
Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.
Short sales are also hindered when homeowners fail to forward the proper papers, have tax liens or cannot find a buyer.
Because of such concerns, homeowners often are instructed that they must be delinquent and they must apply for a modification first, even if chances of approval are slim. The aversion to short sales also leads banks to take many months to process applications, and some lenders set unrealistically high sales prices — known as broker price opinions — and hire workers who say they are poorly trained.
As a result, quite a few homeowners seeking short sales — banks will not provide precise numbers — topple into foreclosure, sometimes, critics say, for reasons that are hard to understand. Ms. Sweetland and her broker say they are confounded by her foreclosure, because in Arizona’s depressed real estate market, foreclosed homes often sit vacant for many months before banks are able to resell them.
“Banks are historically reluctant to do short sales, fearing that somehow the homeowner is getting an advantage on them,” said Diane E. Thompson, of counsel to the National Consumer Law Center. “There’s this irrational belief that if you foreclose and hold on to the property for six months, somehow prices will rebound.”
Homeowners, advocates and realty agents offer particularly pointed criticism of Bank of America, the nation’s largest servicer of mortgages, and a recipient of billions of dollars in federal bailout aid. Its holdings account for 31 percent of the pending foreclosures in Maricopa County, which includes Phoenix and Scottsdale, according to an analysis for The Arizona Republic.
The bank instructs real estate agents to use its computer program to evaluate short sales. But in three cases observed by The New York Times in collaboration with two real estate agents, the bank’s system repeatedly asked for and lost the same information and generated inaccurate responses.
In half a dozen more cases examined by The New York Times, Bank of America rejected short sale offers, foreclosed and auctioned off houses at lower prices.
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“When I hear that a client’s mortgage is held by Bank of America, I just sigh. Our chances of getting an approval for them just went from 90 percent to 50-50,” said Benjamin Toma, who has a family-run real estate agency in Phoenix.
Bank of America officials also declined interview requests. A Bank of America spokeswoman said in an e-mail that the bank had processed 61,000 short sales nationwide this year; she declined to provide numbers for Arizona or to discuss criticisms of the company’s processing.
Fannie Mae, the mortgage finance company with federal backing, gives cash incentives to encourage servicers, who are affiliated with banks and who oversee great bundles of delinquent mortgages, to approve short sales.
But less obvious financial incentives can push toward a foreclosure rather than a short sale. Servicers can reap high fees from foreclosures. And lenders can try to collect on private mortgage insurance.
Some advocates and real estate agents also point to an April 2009 regulatory change in an obscure federal accounting law. The change, in effect, allowed banks to foreclose on a home without having to write down a loss until that home was sold. By contrast, if a bank agrees to a short sale, it must mark the loss immediately.
Short sales, to be sure, are no free ride for homeowners. They take a hit to their credit ratings, although for three to five years rather than seven after a foreclosure. An owner seeking a short sale must satisfy a laundry list of conditions, including making a detailed disclosure of income, tax and credit liens. And owners must prove that they have no connection to the buyer.
Still, bank decision-making, at least from a homeowner’s perspective, often appears arbitrary. That is certainly the view of Nicholas Yannuzzi, who after 30 years in Arizona still talks with a Philadelphia rasp. Mr. Yannuzzi has owned five houses over time, without any financial problems. When his wife was diagnosed with bone cancer, he put 20 percent down and bought a ranch house in North Scottsdale so that she would not have to climb stairs.
In the last few years, his wife died, he lost his job and he used his retirement fund to pay his mortgage for five months. His bank, Wells Fargo, denied his mortgage modification request and then his request for a short sale.
The bank officer told him that Fannie Mae, which held the mortgage, would not take a discount. At the end of last week, he was waiting to be locked out of his home.
“I’m a proud man. I’ve worked since I was 20 years old,” he said. “But I’ve run out of my 79 weeks of unemployment, so that’s it.”
He shrugged. “I try to keep in the frame of mind that a lot of people have it worse than me.”
Back in Phoenix, Ms. Sweetland’s real estate agent, Sherry Rampy, appeared to receive good news last week. GMAC re-examined her client’s application and suggested it might be approved.
But the bank attached a condition: Ms. Sweetland must come up with $2,000 in closing costs or pay $100 a month for 50 months to the bank. Ms. Sweetland, however, is flat broke.
A late afternoon desert sun angles across her Pasadena neighborhood.
“After this, I’ll never buy again,” Ms. Sweetland says. “This is not the American dream. This is not my American dream.”
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I will ask a savvy friend of mine for his comments on this:
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IN Congressional hearings last week, Obama administration officials acknowledged that uncertainty over foreclosures could delay the recovery of the housing market. The implications for the economy are serious. For instance, the International Monetary Fund found that the persistently high unemployment in the United States is largely the result of foreclosures and underwater mortgages, rather than widely cited causes like mismatches between job requirements and worker skills.
This chapter of the financial crisis is a self-inflicted wound. The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits. The result can be seen in the stream of reports of colossal foreclosure mistakes: multiple banks foreclosing on the same borrower; banks trying to seize the homes of people who never had a mortgage or who had already entered into a refinancing program.
Banks are claiming that these are just accidents. But suppose that while absent-mindedly paying a bill, you wrote a check from a bank account that you had already closed. No one would have much sympathy with excuses that you were in a hurry and didn’t mean to do it, and it really was just a technicality.
The most visible symptoms of cutting corners have come up in the foreclosure process, but the roots lie much deeper. As has been widely documented in recent weeks, to speed up foreclosures, some banks hired low-level workers, including hair stylists and teenagers, to sign or simply stamp documents like affidavits — a job known as being a “robo-signer.”
Such documents were improper, since the person signing an affidavit is attesting that he has personal knowledge of the matters at issue, which was clearly impossible for people simply stamping hundreds of documents a day. As a result, several major financial firms froze foreclosures in many states, and attorneys general in all 50 states started an investigation.
However, the problems in the mortgage securitization market run much wider and deeper than robo-signing, and started much earlier than the foreclosure process.
When mortgage securitization took off in the 1980s, the contracts to govern these transactions were written carefully to satisfy not just well-settled, state-based real estate law, but other state and federal considerations. These included each state’s Uniform Commercial Code, which governed “secured” transactions that involve property with loans against them, and state trust law, since the packaged loans are put into a trust to protect investors. On the federal side, these deals needed to satisfy securities agencies and the Internal Revenue Service.
This process worked well enough until roughly 2004, when the volume of transactions exploded. Fee-hungry bankers broke the origination end of the machine. One problem is well known: many lenders ceased to be concerned about the quality of the loans they were creating, since if they turned bad, someone else (the investors in the securities) would suffer.
A second, potentially more significant, failure lay in how the rush to speed up the securitization process trampled traditional property rights protections for mortgages.
The procedures stipulated for these securitizations are labor-intensive. Each loan has to be signed over several times, first by the originator, then by typically at least two other parties, before it gets to the trust, “endorsed” the same way you might endorse a check to another party. In general, this process has to be completed within 90 days after a trust is closed.
Evidence is mounting that these requirements were widely ignored. Judges are noticing: more are finding that banks cannot prove that they have the standing to foreclose on the properties that were bundled into securities. If this were a mere procedural problem, the banks could foreclose once they marshaled their evidence. But banks who are challenged in many cases do not resume these foreclosures, indicating that their lapses go well beyond minor paperwork.
Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.
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As a result, investors are becoming concerned that the value of their securities will suffer if it becomes difficult and costly to foreclose; this uncertainty in turn puts a cloud over the value of mortgage-backed securities, which are the biggest asset class in the world.
Other serious abuses are coming to light. Consider a company called Lender Processing Services, which acts as a middleman for mortgage servicers and says it oversees more than half the foreclosures in the United States. To assist foreclosure law firms in its network, a subsidiary of the company offered a menu of services it provided for a fee.
The list showed prices for “creating” — that is, conjuring from thin air — various documents that the trust owning the loan should already have on hand. The firm even offered to create a “collateral file,” which contained all the documents needed to establish ownership of a particular real estate loan. Equipped with a collateral file, you could likely persuade a court that you were entitled to foreclose on a house even if you had never owned the loan.
That there was even a market for such fabricated documents among the law firms involved in foreclosures shows just how hard it is going to be to fix the problems caused by the lapses of the mortgage boom. No one would resort to such dubious behavior if there were an easier remedy.
The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.
Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?
There are alternatives. One measure that both homeowners and investors in mortgage-backed securities would probably support is a process for major principal modifications for viable borrowers; that is, to forgive a portion of their debt and lower their monthly payments. This could come about through either coordinated state action or a state-federal effort.
The large banks, no doubt, would resist; they would be forced to write down the mortgage exposures they carry on their books, which some banking experts contend would force them back into the Troubled Asset Relief Program. However, allowing significant principal modifications would stem the flood of foreclosures and reduce uncertainty about the housing market and mortgage securities, giving the authorities time to devise approaches to the messy problems of clouded titles and faulty loan conveyance.
The people who so carefully designed the mortgage securitization process unwittingly devised a costly trap for people who ran roughshod over their handiwork. The trap has closed — and unless the mortgage finance industry agrees to a sensible way out of it, the entire economy will be the victim.
Yves Smith is the author of the blog Naked Capitalism and “Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism.”
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U.S. home prices expected to slide another 8%
http://finance.yahoo.com/news/US-home-prices-expected-to-cnnm-28872967.html?x=0
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Marc,
Here is Part 1. It covers the historical perspective. Just cut and paste everything below.
Crafty,
I apologize for not replying to previous requests, but I have been extremely busy. I finally caught up on current work, but preparing for two new projects. This first post is extremely long, but it must be to explain how we got to where we are today.
To establish my bona fides to speak to the subject of the housing crisis, here is my background. I spent 12 years doing mortgage loans. In late 2007, unable to help borrowers, I teamed with attorneys to assist homeowners. My responsibility was to evaluate loan documents. I reviewed everything from TILA/RESPA to fraud, securitization, MERS and the foreclosure process. Much of what you read on other websites, I originally brought to light. Many of the “loan audits” seen today have my original ideas, word for word. Some firms have taken old exams I did from early 2009 and copied them as their own work. Even then, because they do not know the underlying thought processes, their exams are inaccurate.
The exams that I do today are the most comprehensive in the country. They are unbiased, covering even the homeowner, and I tell it like it is. Borrower fraud, Lender Fraud, Securitization issues and the Foreclosure Process are all covered. As a result, I work both sides, for homeowners and for lenders.
Most of what people read today about the housing crisis is based upon one-sided, biased thinking. The persons writing articles only look from the homeowner’s perspective, and try to develop arguments for stopping foreclosures. They will not entertain any arguments in defense of the banks. As a result, they give out substandard information to homeowners, doing them and attorneys a major disservice.
The Housing Crisis, of which I am writing an article, has its roots going back to the Depression and then 1934-1936, when the original FHA was created to stabilize and then stimulate housing. Prior to this time, home loans were done solely by local banks, with terms of 3-5 years, and loan amounts generally in the range of $1,000 to $3,000. FHA and the end of WW2, changed all of this.
The returning veterans and the changed role of women created a new stimulus for housing. This led to the creation of the VA and offering of VA loans. Housing and its ancillary industries became one of the great supports for economic growth.
By the 1960’s, FHA had become a large budgetary item. Congress created Fannie Mae and Freddie as off balance sheet items, who then securitized loans through bonds, etc. This offered an “incredible” stream of money for housing, and truly stimulated the market even more.
Not content to let things be, Congress created other programs like the Community Reinvestment Act so that “non-qualified” persons could by homes. This added even more demand for housing.
Shortly after, in the 70s, the economic structure of the US began to change. Manufacturing, the true mechanism of wealth creation began to fall off. Other countries began to offer products in the US, and many US firms went oversea, or completely out of business. The economy began to be “service” oriented, which does not create wealth, but only serves to transfer it from one person to another.
Also, during the 70’s, B of A and Salomon Brothers experimented with Securitization, but at the time, it really did not “take off”.
The 80’s saw even more changes to the economic structure of the US. Manufacturing was leaving in droves, and the Service Sector becoming ever more important. But wealth creation was not occurring until the “Telecommunications” Bubble in the 19080’s, with the Cellular and Airwave changes, which stimulated the economy. This affected housing and saw to housing growth, until 1989, when many areas saw economic recession and a drop of 20% or more in housing.
The early 90s saw a change in the economy again with the downsizing of the military. Industry and housing was damaged, with values again falling. This continued until the Mid 90s, when the Dot Com Bubble exploded.
Concurrent with the Dot Com Bubble, housing and home values began to take on new momentum. The money being made on Dot Com stock investments offered large sums of money for the public, who used the money for housing and other goods.
In 1990, another event occurred which would spur housing at a later time, and, in fact, lead to massive securitization. Long Beach Savings, the predecessor of Ameriquest and other Sub-Prime lenders, united with Greenwich to offer $67m in Mortgage Backed Securities. The offering was a great success, and all other lenders took notice.
Fannie Mae, Freddie Mac, B of A and others formed a working group in 1993 to determine how to take advantage of the success of the Long Beach offering. The group came back in 1995 with recommendations, one of which was to form MERS. By, 1996, MERS had been created and in 1998, it was ready to go full ahead. But there was still one issue to resolve.
Glass Steagall was the final hurdle. To begin to securitize loans, it must be repealed and in 1999, it was repealed. Now, commercial banks, investment banks and insurance companies could “intrude” on each other’s turf.
During 98 & 99, another factor delayed the process of securitization. The implosion of Long Term Capital affected the lending industry significantly. In Oct 98, sub-prime lenders were folding up shop in droves. Credit lines were pulled, and there was nothing to replace the lines. Only a few large sub-prime lenders survived.
Then, in Mar 2000, the Dot Com bubble burst. We all know how the market tanked. With it, the economy went into recession. Housing took another hit. Just as things looked better and the recession was ending, 9-11 occurred.
It must be remembered that none of this was occurring in a vacuum. During the previous 30 years, the economy had faced massive changes. Manufacturing had declined and the service industries began to dominate. The auto industry had destroyed itself by its concessions to unions. Electronics were dominated by Asian countries.
The American consumer had changed as well. With the growing prosperity, the consumer had all their “toys”. Everyone owned autos and hard goods. When new goods were bought, it was to replace older goods. American industry was in either a “mature” market, or a “declining” market phase.
No replacement “Bubble” industries were on the horizon. The economy was facing a resumption of the recession as a result of 9-11. The government was left with few options for recovery.
To reassure the Markets and to stimulate the economy, Greenspan started to ease interest rates. As he eased, this created problems across the board. It led to the point that the people with “real money” were seeing little Return on Investment. Guaranteed income was desired, but there was nowhere to turn. The solution was the Housing Market. If the Housing Market was stimulated, then there would be construction, home improvement, infrastructure and other industries affected positively.
2002 saw the beginning of full scale securitization. Wall Street had need for the income from the guaranteed income streams generated by securitization. The government had the need for the stimulus created by housing. Lenders had the need for the money to lender that came from Wall Street. A match thought to be “made in heaven” was really the “stimulus from hell”.
Through the following years up to 2007, the need to feed Wall Street kept growing. By early 2004, qualified borrowers no longer existed, so the lenders loosened standards for lending. No matter what, the demand for Mortgage Backed Securities continued. Eventually, anyone with a heart beat could qualify for a loan.
During this period of time, the Government knew what was happening, but they could do nothing about it. To restrict lending would result in recession and a revealing of the underlying weakness of the economy. So the Fed allowed the charade to continue.
By mid 2006, the strains were showing. Defaults were increasing. Home values in certain parts of the US were failing, and especially hard in areas like Florida. At the end of 2006, the first Sub-Prime lenders were closing. This trend would continue throughout 2007, at which time the Housing Bubble burst.
The purpose of this long writing was to show the historical perspective of housing and securitization. Essentially, it was to show that Housing has been one of the significant “supports” of the US economy for decades. Since the 80’s, the US has relied upon “Bubbles” to keep the economy growing. When a bubble bursts, the economy goes to pieces.
With the Housing Bubble gone, there are no “easy” Bubbles to see coming. The government will try to create a new bubble with Green technology, but that will likely be a no starter. Health Care will be another bubble, but it would end up destroying the economy. So, every effort to restart Housing will need to be made.
I should point out that Illegal Immigration comes into play here. Illegal Immigration means people coming to the US, with their wants and needs. Housing and ancillary industries will be helped by the influx of people, so don’t expect to see anything done on immigration.
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Securitization & MERS
The first post was to provide a historical view of the role housing played in the economy and the background for how we got into this mess. It is necessarily simplified, but it generally details the history. This post will attempt to explain securitization and the issues in question.
Securitization was the process whereby loans were sold to Wall Street in the form of bonds and certificates. It involved a number of different entities established solely for the purpose of securitization. The purpose of such entities was to provide REMIC status, or favored tax status to the “final holders” of the notes and income streams.
The major entities that were involved in the securitization process”
The Originator: The lender that funded the loan. (There are table funders involved at times, but they simply used the Originator’s money, so this is irrelevant for this discussion.)
The Sponsor/Seller: This was the entity that “collected” the loans together from different lenders so that the loans could be securitized.
The Depositor: The Depositor took the loans from the Seller, broke them up into the different tranches, had the tranches rated, and prepared the bonds for sale. The Depositor also created the Trust, and at the closing date of the Trust, deposited the loans into the Trust.
Issuing Entity: This is the Trust.
Underwriters: The agencies who “rated” the bonds.
Servicer/Master Servicer: The entities who collected the monthly payments and handled administrative details to include foreclosure, modifications, etc.
Trustee: The entity who “oversees” the operations of the Trust, Servicer, etc. All “authority” is delegated.
There are a number of documents associated with the securitization of the loans, most important of which was the Pooling and Servicing Agreement, aka the PSA.
When loans were securitized, there were specific procedures outlined that had to be done. Adherence to those procedures is at the crux of the legal arguments related to securitization.
The primary procedure was that when the loan was securitized, the loan would be “sold” first to the Sponsor, then the Depositor, and finally to the Issuing Entity. Each loan was to be “assigned” to the entity taking possession of the loan and there was to be a “perfected Chain of Title” according to the PSA. However, each PSA made allowances for MERS, and for a MERS loan, there need not be the Assignments.
The actual process that the lenders have used was to make assignments to the Trust after default of the loan. No intervening assignments to the Sponsor or Depositor would occur. This is where attorneys are alleging the fraud and arguing “Prove the Note”.
The problem with such an approach is that when the loan is securitized, Commercial Code arguably takes precedent. Securitization is covered under Commercial Code, and not Real Estate Law. Under UCC, the Deed “follows” the Note. When a Note is transferred, it carries the Deed of Trust with it. So, simply the endorsement of the Note is enough to transfer all beneficial interest in the Deed. Assignments would not be required. That was the purpose of endorsing the Note “in blank”. The Note is turned into a Bearer Instrument, and assignments would not be needed.
It can now be seen that the different requirements under Real Property Law and under Commercial Code contradict each other. And, there are no legal precedents that cover Real Property and Personal Property Law combined. (Bonds and securitization fall under Personal Property and SEC.) Judges have no idea how to resolve the contradictions and so they go with what they are comfortable with. Is the loan in default? If so, let the lender foreclose and then the lender can sort it all out.
(Some argue that the homeowner should use the PSA and assignment requirements to attack the lender. The problem is that the homeowner would be using a “third party beneficiary” argument, and such arguments would not be allowed.)
MERS is playing a huge role in the litigation as well. MERS is an electronic registry designed to track the ownership and servicing rights of each loan registered with MERS. MERS has taken the place of the beneficiary on loans.
Since MERS is the “nominee for the beneficiary” or “agent”, when assignments are made, or foreclosures are initiated, MERS is usually the “stated authority”. This is a point of contention. Does MERS have the authority to do assignments or foreclose?
The actions against MERS are taking place in the Judicial Foreclosure states and in the Bankruptcy Courts. Often, you will see cases where the courts have ruled against MERS and its authority. However, these cases are not common, though the persons quoting those cases make it appear common. The majority of the courts are ruling in favor of MERS. The Minnesota Supreme Court has ruled in favor of MERS. Arkansas has ruled against MERS. Ultimately, this will only be resolved by either the US Supreme Court or by Federal Legislation. (Non-Judicial States “duck” this issue by relying solely on the foreclosure statutes for the state.)
(I have reviewed extensively both the issues with Securitization and with MERS. I have thoroughly read the judicial rulings on both sides, and the statutes. There are good points to be made on both sides, but when related to homeowners, there is a real issue that I will discuss later in this response.)
Servicing of the loans is another issue being argued. The attorneys are claiming that the servicer has no authority to foreclose, and that only the Trust can foreclose. These arguments are bogus since the PSA gives the servicer the authority to act for the Trust. But, if the Trust can be shown to not own the loan, then the argument has some credence.
You will also read that loans were sold into more than one Trust. Yes, in some cases that has happened, but this is a very few cases, and it was outright fraud on the part of the Originator. Most of the claims are on the basis of a complete misunderstanding of the securitization process and later processes that occurred.
Once the bonds were sold to certain investors, the investors combined the bonds with other bonds. They added credit enhancements and then broke these up and sold them as “synthetic CDO’s”. These were artificially created bonds, and in a term that I use, a “second generation” bond. These actions are where people get confused about the loans being placed into more than one trust.
Another point of confusion for attorneys is that loans could always be “removed” from the Trust, and replaced with other loans. The original Mortgage Loan Schedule filed with the SEC need not be updated, so a loan would appear to be in the Trust, when it had been removed and replaced. When a Notice of Default was filed with the name of the new Trust, this led to confusion that the loan might be in more than one Trust. Attorneys not understanding this will file allegations to delay the foreclosure.
Again, yes, there have been instances of a loan being placed into more than one Trust, in a fraudulent manner, but these instances are not the norm.
The current “Big News” is regarding the filing of fraudulent foreclosure documents. The allegations consist of people signing the documents and not having factual knowledge of the defaults. It is being alleged than the foreclosures are fraudulent. Yes, the issue of the “robo-signers” is valid. But here is what is not being told.
When a home goes into default, the servicer is the entity first aware of the default. They fully document the files, and know the status of the loan at every step. (Yes, errors can occur, but these errors are not the norm.) When the loan hits a certain stage of default, usually three months or longer, it is now ready for foreclosure. All of the documents are packaged together and then sent to the entity that will be foreclosing. The documentation of the default is in the package.
The foreclosure firm takes the information and prepares the documentation. So it has the factual proof that such default exists. Once the foreclosure documents are prepared, the “robo-signer” signs the documents. True, the signer has not inspected the documents, but both the servicer and the foreclosure firm have inspected the documents. Therefore, two entities have direct knowledge of the default. The bottom line is that the “robo-signer” arguments are nothing more than delaying tactics.
There are so many more arguments and facets to the issues involved, I could write a book about it, and still not cover all the issues. I just wanted to cover a few key elements here. If anyone has questions, I will be more than happy to respond to the questions and also other topics.
Before I end and get back to work, I want to say a couple more things.
Homeowners and advocates are arguing lender fraud on the loan. They claim that the lender has violated a fiduciary duty to the homeowner by providing them a loan that they could not repay. The truth is that courts have ruled continuously that a lender has “no fiduciary duty” to a borrower. So this argument does not fly.
Furthermore, what would happen if the lender declined the loan? The answer is simple. The homeowner would have gone to another lender to get the loan. They would have continued until they found a lender. So this argument is bogus.
Also, in over 3500 exams that I have done, I can conclusively prove borrower fraud on 90% of them. This is in addition to any lender or broker fraud. So, almost always, those who are the most vocal against the lenders have “unclean hands”. Lenders will soon be going after them.
Finally, many advocates claim that the appraisals were grossly inflated. The argument is that the homes were never worth what they were sold at, and that the true value might be $200k-$300k less. The inflated appraisals were used by the lenders as part of the “fraud”.
What these advocates and homeowners refuse to accept is that people were making the offers and were willing to pay the price of the home. Therefore, the values were “legitimate” at the time. (You don’t hear these same people argue that when stocks fall, the price of the stocks were fraudulently inflated.) Also, you can bet that every time a similar home in their neighborhood sold at a higher value, then every homeowner in the neighborhood rejoiced over the amount of money that they just made.
The reality is that everyone was at fault in the foreclosure crisis; homeowners, lenders, Wall Street, the Federal Government, everyone. There may be a few exceptions, but these are not the norm. Now, everyone wants to go after the lenders and ignore their own responsibility in their fate.
There are solutions to the Housing Crisis, but it is not what homeowners and advocates want to hear. The reality is that most people who are in foreclosure will never be able to afford the home, even with modification. It is that simple. Those people need to be foreclosed upon.
Principal Reduction should not be forced upon lenders and the securitizing entities. Among other things, it violates the Contract Clause of the Constitution. Furthermore, it punishes people who are not in foreclosure or who are not underwater. Only 25% of the homes are underwater. It will be everyone else who pays for the reductions.
Lenders who own the loans in their portfolio should not be forced into principal Reductions. That will destroy their capital reserves and will immediately force the lender into receivership.
The only solution is to get out of the way of the banks and to let them foreclose on most people.
I know that my comments are going to give rise to much criticism and complaints. Some will likely complain that I am on the side of the banks. The truth is that I take no sides. I am an unbiased participant in what is going on, and I will remain so. I tell both sides as it is, like it or not.
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Crafty Dog asked me to comment about what would have happened without interventions of the government. Here is what must be kept in mind.
Whether you are talking about Fannie and Freddie or Private Securitization, the money used by these entities all comes from Wall Street sources. Only portfolio loans use a “banks” money/deposits. So, 80% to 90% of the total amount used for mortgage loans is Wall Street. Remove this money from the mix, and housing crashes like it did in 07 and 08.
The creation of Fannie, Freddie and other sources certainly spurred housing, but in the last few decades drove the cost of homes up considerably. Loose and plentiful money due to low interest rates drove up demand far beyond what was reasonable and affordable.
The Community Reinvestment Act and other housing incentives created further demand. Unfortunately, this demand ended up with people buying homes that were not qualified to buy homes, and thus we see the end result.
The blame cannot be based solely on the CRA and other housing programs. The real blame must be placed upon the government using housing as a wealth and job creation program far beyond what could reasonably be expected.
Starting after 9-11, if the government had kept interest rates high, it is likely that the housing boom would not have occurred. The recession would have continued, but it would have resolved itself within a year or two. Sure, the damage from the recession would have financially hurt many, but the “cure” has certainly been much worse.
Housing would not have seen the value inflation that actually occurred. Likely, we would have seen increases in value in the 2-3% range, after an initial drop in values.
Home sales, due to the easy money policy of the Fed would not have taken off. They would have been restrained as in all recessions, but would eventually return to more “normal” levels. Instead, due to the easy money policies, Wall Street turned to “guaranteed returns” from MBS, believing that housing would be safe investments. This resulted in such an increase in lending money, and such demand for loans from Wall Street that prudent lending standards were tossed out the window.
If one could build a timeline of the decrease in lending standards from 2002 to 2007, it would be shocking. Each year would show a steady decline in lending standards. By mid 2004, there were few credible buyers left, and so loans with credit scores of 550, stated income became common. Option ARMS became the loan of choice, because that was the only way that people could ever make the monthly payment. By 2006, prove that you had a pulse, and you could buy a home.
People are now clamoring for an end to Freddie, Fannie and Securitization. None of these people have any idea of what would happen. All the funds left for lending would be with the banks, as money held on deposit. This is 10-15% of the money needed to support a credible housing industry. The entire housing industry would be stifled and crash. Lending would cease except for the few who could afford substantial down payments of 40% or greater. Home values would fall drastically for of buyers. The end result would be a greater calamity than what we have now.
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We need to let it crash. Only then can we have real pricing.
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Marc, What your friend writes makes perfect sense to me. Very nice detail on the lead up and buildup to the collapse and right on the mark regarding the prescription from here. Foreclosures need to go forward. That is the mechanism for the correction and the correction needs to happen. Maybe some errors were made in a few foreclosures but it didn't make any sense to me that foreclosure firms don't know how to do foreclosures or that they would use robo Signatures if those weren't allowed.
I agree with GM but would like to substitute 'let it correct' for let it crash. We shouldn't need to approach zero or far over-correct in order to right-size these values. Unfortunately there are others factors causing uncertainty and over-correction in housing, same as for the lack of investment and hiring in the rest of the economy, compounded by homeowners or potential homeowneers not finding work or with depressed or stagnant incomes. In other words, if employment had recovered and incomes were growing and housing was the only problem we could have grown out of this somewhat quickly, without this prolonged death recovery.
My place went up 8-fold in 2 decades to the peak. The bulk of that came from artificial and inflated factors. I was proud of my investment when it doubled. After that it just became bizarre with pretend values with runaway taxes until property taxes exceeded food, clothing, transportation and shelter combined. Now I have paid more in real estate taxes than I paid for the house, but I digress...
I wonder when we will learn anything from the events described. Why would we want to get people into homes they can't afford? Why do we still want values to be artificially high? Why would we want markets and values to be constantly changing, unstable and out of whack, high or low? Why would we want to prevent or delay a correction? Why do we keep doing things that over inflated the market? We were still offering multiple thousand dollar home buyer credits long after the crash which is a federal stimulus spending program that Democrats are still passing off as a "middle class tax cut'". http://www.politifact.com/truth-o-meter/statements/2010/feb/02/david-axelrod/axelrod-claims-democrats-passed-25-tax-cuts-last-y/
A different way to encourage home ownership might be lower property taxes and to reduce economic penalties for hiring, earning and creating and retaining wealth.
Today it seems equally bizarre to me how low some foreclosure prices have gone, down to 14 cents on the dollar of previous purchase in some cases. Buyer exhaustion, and it keeps getting worse as the inventory keeps coming. The wild fluctuations and high levels of uncertainty are still screwing up the efficiency and integrity of the market.
One observation about foreclosure owners is that they do almost nothing to make the houses ready for sale beyond emptying them. I can't understand why they won't do basic, neglected repairs and small investment to protect their asset value, bring the house up to at least their own lending standards and slow the free fall of prices.
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"Let it correct" does sound better.
America has developed a serious debt addiction and needs to hit bottom and sober up. The longer we delay the day of reckoning, the worse it will be.
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By NICK TIMIRAOS
The total cost to rescue and then overhaul mortgage giants Fannie Mae and Freddie Mac could reach $685 billion, according to estimates published Thursday by Standard & Poor's.
Fannie and Freddie have already cost taxpayers nearly $134 billion, but S&P analysts said Thursday that the government could ultimately be forced to inject $280 billion into the firms because of a slowdown in the housing market.
Any entities that might replace Fannie and Freddie would need new start-up funding that would go beyond the money already committed.
A consensus of academics, industry officials and investors has coalesced around the idea of using the government to provide explicit guarantees for securities backed by mortgages that meet certain standards. Tough questions loom over how those guarantees would be structured and priced and what entities would provide them.
Analysts estimate that it would cost an additional $400 billion to sufficiently capitalize any entities that would take the place of Fannie and Freddie. Those capital levels could be lower, at around $225 billion, if the government were to retain ownership in any surviving entity.
"As it stands now, we believe that addressing the [companies'] problems is likely to be an expensive repair job for U.S. taxpayers," wrote S&P analysts Daniel Teclaw and Vandana Sharma.
While mortgage delinquencies have eased in recent quarters, analysts warned that high unemployment, a weak economy, and a sluggish housing market could prompt costs to rise "substantially" over the next year. "It's no secret that a better economy would help ease the [firms'] predicament," the report said.
The S&P loss estimates are higher than those made last month by the firms' federal regulator. The Federal Housing Finance Agency said that the taxpayer tab for the companies is on pace to reach $154 billion under the current home-price forecast. If the economy enters a double-dip recession and home prices fall more than 20%, the cost to taxpayers could reach $259 billion.
The government took over the troubled housing-finance giants two years ago through a legal process known as conservatorship. The Treasury has promised to inject unlimited sums through 2012 and nearly $300 billion after that in order to maintain a positive net worth and to avoid triggering liquidation.
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http://www.calculatedriskblog.com/2010/11/lps-over-43-million-loans-90-days-or-in.html
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I just read a good book last night; "The Big Short" "Inside the Doomsday Machine"
by Michael Lewis.
He blames Wall Street.
"When the crash of the U.S. Stock market became public knowledge in the fall of 2008, it was
already old news. The real crash, the silent crash, had taken place over the previous year,
in bizarre feeder markets where the sun doesn't shine and the SEC doesn't dare, or bother,
to tread; the bond and real estate derivative markets where geeks invent impenetrable securities
to profit from the misery of lower and middle class Americans who can't pay their debts."
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"He blames Wall Street."
Umm , , , so what? :lol:
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"He blames Wall Street."
Umm , , , so what? :lol:
That is kind of his point; they will do it again.... :-)
But it is a good look at the inner workings of the bond and derivative markets.
And how their blind greed drove firms and by extension the economy to ruin.
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Forgive me my sarcasm but , , , drum roll please , , , Duh. OF COURSE Wall Street is greedy. It is precisely why the Government should not lead them into temptation by guaranteeing mortgages (the FMs) or make them invest in people who can't pay (the Community Reinvestment Act) or create a bubble with unnaturally low interest rates or bail theirs asses out when things go south.
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Put me with Crafty here, it was the tampering (to put it lightly) with the market to create defective underlying assets, not the packaging of the product that caused failure.
I recall a Dem friend blaming gas prices (under Bush) on greed. Oil companies are doing this and oil companies are doing that, as if that inspiration came on suddenly. Excuse me but greed (self interest / profit motive) was the only thing that remained constant during that market turmoil.
Competition is what squeezes out excess profits (in housing, healthcare, investment banking, manufacturing, energy, anything) and it is usually excessive government regulations that prevent a price-competitive environment from forming.
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Actually the book makes an excellent case that it was if fact "the packaging of the product that caused failure."
It was all smoke and mirrors....
It's a bit technical, but a good book...
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We already have substantial laws on the books regarding fraud in its various incarnations. Without the FMs guaranteeing the loans, people would have been paying attention and apart from the fraud for those who didn't , , , too bad. Stupid SHOULD hurt.
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"Stupid SHOULD hurt"
Stupid needs to hurt instantly. If a 2-year old puts a hand on a hot stove, the kid screams and pulls the hand off the stove. He doesn't leave his hand on the stove until it is charred and smoldering. These housing market mistakes didn't need to go into the tens of trillions of dollars of damage. We constantly insulate economic errors from correction or consequence, and that only makes everything much much worse.
Everybody makes mistakes. Instant correction makes them stay small. In prosperous times we wanted a wider cross-section of America to become home owners. But a home owner doesn't become a home owner by government decree unless you eliminate the meaning of the term. First you build up your education and then your income. Then you build up your credit while you live beneath your means (imagine that!) and save up your down payment. By then you have developed the level of commitment, maturity and responsibility to pursue a 30 year plus life decision and stick with it. Shortcut that and you haven't. Borrow 100% or more and you aren't a homeowner. If we artificially drive up the price of homes, we aren't helping people get in. If we make the interest rate on savings 0% we aren't helping them save. Take away the right to foreclose and we don't have mortgages. Policy error, policy error, policy error.
Forrest Gump could have figured this out better than the current class of clowns.
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http://www.businessinsider.com/the-20-cities-with-the-most-underwater-homes-2010-11
The scariest number for anyone invested in the real estate market is this: 23.2%.
That's the record-high share of mortgages that are now underwater, as estimated by Zillow.
Negative equity is the prime factor driving a record number of mortgage holders into delinquency. Delinquencies will lead to foreclosures, which will drive down home prices, creating more negative equity -- a very dangerous cycle.
In some parts of America, a gob smacking percentage of homes are underwater. In Las Vegas, for instance, four out of five mortgages are now underwater.
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The percentage of U.S. consumers who are delinquent on their mortgages could fall to about 5% by the end of 2011, from an expected 6.2% at the end of this year, according to a leading credit bureau.
Even so, the proportion of consumers who are 60 or more days overdue on their mortgages would still be sharply higher than the historical range of 1.5% to 2%, according to TransUnion LLC, which analyzed about 27 million randomly selected consumer records from its database. The Chicago credit bureau first started tracking these statistics in 1992.
In data released Tuesday, TransUnion forecasts that mortgage delinquencies will fall to 4.98% in the fourth quarter of 2011 from 6.21% at the end of this year. According to TransUnion, this delinquency rate peaked at 6.89% in fourth quarter of 2009, as lenders tightened underwriting standards.
A decrease in mortgage delinquencies, traditionally a precursor to foreclosure, could boost the faltering recovery in the U.S. economy and the residential real-estate market.
"We think that the mortgage industry isn't out of the woods yet, but it's starting to move in a better direction," said Steve Chaouki, a group vice president in TransUnion's financial-services unit.
Protracted and high unemployment and depressed home values are contributing to the elevated delinquency rate.
TransUnion also forecast that credit-card delinquencies, an important gauge of future losses for lenders, will continue to fall, though not nearly as sharply. By the end of this year, the ratio of credit-card borrowers who are 90 days or more delinquent on one or more of their credit cards is expected to reach 0.75%—below the levels at the beginning of 2007, at the peak of the credit boom, according to TransUnion.
As credit quality improves, this delinquency rate is expected to fall to 0.67% by the end of 2011. Credit-card delinquencies are lower than mortgage delinquencies in part because credit-card lenders have more ways to control the potential losses, such as reducing customers' credit lines.
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A friend writes:
"The repercussions of the Housing boom & bust are likely to continue for years to come."
Seeing foreclosures nationwide on Google Maps, described at Google Map Foreclosure Tricks:
Google Maps Foreclosure Listings
1. Punch in any US address into Google Maps.
2. Your options are Earth, Satellite, Map, Traffic and . . . More. (Select “More”)
3. The drop down menu gives you a check box option for “Real Estate.”
4. The left column will give you several options (You may have to select “Show Options”)
5. Check the box marked “Foreclosure."
Note: This map does not reveal any of the millions of REOs that have already been sold by the banks that hold them.
But the maps do reveal an entire nation littered with foreclosure sales. It is an ugly and graphic depiction of how much inventory is out there, and why housing is stillmany years away from being healthy.
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Existing home sales increased 5.6% in November to an annual rate of 4.68 million To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/22/2010
Existing home sales increased 5.6% in November to an annual rate of 4.68 million, slightly below the consensus expected pace of 4.75 million. Existing home sales are down 27.9% versus a year ago, when sales were artificially high due to the homebuyer credit.
Sales in November were up in all major regions of the country. Sales increased for single-family homes, but declined for condos/coops.
The median price of an existing home increased to $170,600 in November (not seasonally adjusted), and is up 0.4% versus a year ago. Last November, prices were down 5.7% from the prior year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 9.5 from 10.5 in October. The decline in the months’ supply was due to both the faster selling pace and a decline in overall inventories.
Implications: Existing home sales rebounded sharply in November, increasing 5.6% after falling 2.2% in October. Some of the rebound may have been due to the end of the moratorium on foreclosures that probably reduced sales in October. Regardless, we believe the underlying trend will be upward over the next year, as sales continue to rebound without artificial government support. Although the data will zig and zag from month to month, we expect sales to get back to about 5.5 million units at an annualized rate. And we expect the rebound even if mortgage rates float back upward. Housing in November was more affordable than at any time in the past 40 years, and as buyers get more secure about the state of the economy, private-sector job creation accelerates, and purchasers become more confident that their homes will eventually rise in value rather than decline, they will be more willing to buy homes even if interest rates are higher. For example, mortgage rates averaged about 7.5% in the late 1990s and were not an impediment to climbing home sales. In other housing news this morning, the FHFA index, a measure of prices for homes financed with conforming mortgages, increased 0.7% in October (seasonally-adjusted), the first gain since May, although this measure of prices is still down 3.4% versus a year ago.
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New single-family home sales increased 5.5% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/23/2010
New single-family home sales increased 5.5% in November, coming in at a 290,000 annual rate, but still fell short of the consensus expected pace of 300,000.
Sales were up in the South and West but down in the Northeast and Midwest
At the current sales pace, the months’ supply of new homes (how long it would take to sell homes in inventory) fell to 8.2 in November from 8.8 in October. The drop in the months’ supply was mainly due to the faster selling pace. The number of homes for sale fell 4,000 to 197,000, down 65.6% versus the peak in 2006. Interestingly, this is the lowest level of new homes in inventory since 1968.
The median price of new homes sold was $213,000 in November, down 2.7% from a year ago. The average price of new homes sold was $268,700, down 2.2% versus last year.
Implications: The market for new homes remains sluggish, still suffering from the expiration of the homebuyer tax credit but also from intense competition from the large inventory of foreclosed homes on the market, many of which were built within the past decade. The tax credit, which required buyers to sign a contract by the end of April, moved sales forward into the early part of this year. New home sales, which are counted at contract, increased to a 414,000 annual pace in April. But sales dropped off almost immediately, and have only averaged 289,000 in the seven months since. It is important to note that, despite the slow pace of sales, inventories are still declining and are already at levels not seen since the late 1960s. As inventories fall, homebuilders will need to start building more homes. Given a growing population and the need for more housing, the pace of new home sales should more than triple over the next several years to roughly 950,000. With lumber prices on the rise in recent months, that process may be underway. On the price front, the median sales price of new homes rose to $213,000 in November, bouncing back after going below $200,000 last month. This price measure is down 2.7% versus a year ago. We expect the new home market to continue to improve, albeit gradually.
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A front-page Wall Street Journal feature, titled "Housing Recovery Stalls," worries that "a new bout of declining home prices is threatening to hamper the U.S. recovery."
A dip in the Case-Shiller moving average of home prices in 20 cities for August to October is said to be "troublesome headwind" for the economy in 2011, and "markets such as Sacramento, Las Vegas and parts of Arizona and Florida are at risk of more declines."
Some of those cities may indeed account for a significant share of the Case-Shiller index, because that index covers only 20 cities (and Sacramento, the centerpiece of the story, is not one of them). However, a few troubled cities in a few states do not represent the entire nation.
The Federal Housing Finance Agency (FHFA), which examines all 50 states, reported home prices rising in October. The FHFA found third-quarter home prices higher than a year ago in 10 states, but seven of those 10 are excluded from the Case-Shiller index.
Yet even Case-Shiller shows home prices higher than a year ago in three cities where the boom-bust cycle was quite severe — Los Angeles, San Diego and San Francisco.
Writing ominously about the Case-Shiller index in the Wall Street Journal, however, bearish author Peter B. Schiff prophesizes that home prices all over the country will fall by somewhere between 24.32% and 28.3% over the next five years.
He imagines home prices must magically revert to some "3.35% annual 100-year trend line," even though no prices of any assets or goods have ever followed such a century-long "trend." This is utter nonsense.
To get closer to reality, suppose home prices in 2011 really did keep falling in "Sacramento, Las Vegas and parts of Arizona and Florida." So what? GDP growth depends on new production, not on prices at which existing homes change hands. In November, housing starts were up 3.9% and new homes sales were up 5.5%.
Falling home prices ultimately help the homebuilding industry because lower prices increase home sales and shrink the excess inventory of existing homes. The stock of existing homes fell to 9.5 months of supply in November from 12.5 months in July. That, not "stalling" prices, is the housing recovery that matters.
Moreover, new homebuilding often occurs in cities where home prices are not falling. Regardless of troubles in Sacramento and Las Vegas, the National Association of Home Builders reports year-to-date increases in building permits of 172% in San Jose (through October) and 88% in Carson City. Surprisingly, building permits were also up 59% in Miami and 133% in Detroit.
The most persistently incorrect argument about the alleged dangers of letting overpriced homes fall to an affordable level is that falling home prices supposedly have a devastating effect on household wealth.
"Homes remain a key part of Americans' wealth," says the Journal article. "Households held $6.4 trillion of home equity at the end of the third quarter, alongside $12.2 trillion in stocks and mutual fund shares. ... For every dollar decline in housing wealth, consumers reduce spending by about a nickel in the subsequent 18 months, Moody's Economy.com chief economist Mark Zandi estimates."
The table alongside shows that the $6.4 trillion of home equity in the third quarter was only 11.9% of estimated household wealth, which was $54.9 trillion. The Journal's reference to "$12.2 trillion in stocks and mutual fund shares" leaves out retirement accounts, bonds, rental property, farmland, precious metals and family-owned businesses, among other things.
Alan Reynolds, a senior fellow with the Cato Institute, is the author of Income and Wealth (Greenwood Press 2006).
More by Alan ReynoldsHousing wealth has no more impact on consumer spending than any other sort of wealth. In fact, the $6 trillion increase in overall household wealth since early 2009 was nearly as large as total home equity. The five-year decline in home equity is partly because homeowners took out larger mortgages to cash out equity while home prices were rising.
The notion that an assumed "double dip" in housing prices might cause a double dip in real GDP confuses home prices with homebuilding. Many who now warn of grave dangers arising from a brief dip in the Case-Shiller index are the same folks who once told us, quite incorrectly, that the economy could never recover until the Case-Shiller index turned decisively upward.
Lower prices on homes are clearly helping recent home buyers, leaving them with more money to spend on other things. Sellers, real estate agents and mortgage lenders prefer higher prices, of course. But that is why government policy should never favor sellers over buyers.
In short, anxiety about falling home prices is based on (1) a limited sample of 20 cities, (2) confusing home prices with homebuilding, (3) forgetting that lower prices are as beneficial to buyers as they are harmful to sellers and (4) grossly exaggerating the importance of housing to overall wealth.
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"anxiety about falling home prices is based on (1) limited sample... (2) confusing home prices with homebuilding, (3) forgetting that lower prices are as beneficial to buyers as they are harmful to sellers and (4) grossly exaggerating the importance of housing."
"the $6.4 trillion of home equity in the third quarter was only 11.9% of estimated household wealth, which was $54.9 trillion. The Journal's reference to "$12.2 trillion in stocks and mutual fund shares" leaves out retirement accounts, bonds, rental property, farmland, precious metals and family-owned businesses, among other things."
-Alan Reynolds cuts through the noise nicely. It's too bad that reported economic data are so often full of flaws. If we fix the employment and income situation, housing will take care of itself. Foreclosures now have to do with jobs and income, not valuations IMO.
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http://news.yahoo.com/s/ap/us_foreclosure_rates
NEW YORK – The bleakest year in the foreclosure crisis has only just begun.
Lenders are poised to take back more homes this year than any other since the U.S. housing meltdown began in 2006. About 5 million borrowers are at least two months behind on their mortgages and industry experts say more people will miss payments because of job losses and also loans that exceed the value of the homes they are living in.
"2011 is going to be the peak," said Rick Sharga, a senior vice president at foreclosure tracker RealtyTrac Inc. The firm predicts 1.2 million homes will be repossessed this year.
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A push by Republican lawmakers to scale back government backing for home mortgages is meeting resistance from the housing industry, a longtime ally of the party.
View Full Image
Associated Press
Rep. Jeb Hensarling said Fannie and Freddie's role should be transferred to the private sector.
.In recent months, banking executives and mortgage investors from groups including the Financial Services Roundtable, the Mortgage Bankers Association and the National Association of Real Estate Investment Trusts have met with Republican lawmakers and their staffs to press them on the need for a permanent government role in guaranteeing mortgages.
But many Republicans blame government-controlled mortgage giants Fannie Mae and Freddie Mac for fueling the housing bubble that helped spark the financial crisis, and some new members of Congress want government to take a smaller role in the economy. That has some lawmakers pledging to resist any effort to revamp the U.S.'s system of housing finance that would leave taxpayers exposed to losses.
"I know the industry is here, and they are saying we need a government guarantee," said Rep. Spencer Bachus (R., Ala.), now chairman of the House Financial Services Committee, at a September hearing.
"If I were the industry, I would be doing the same thing because I would love to make loans and if they failed, let the taxpayers make up the loss," Mr. Bachus said. "That's a pretty sweet deal."
Since the 1930s, the federal government has backed the housing market through Fannie Mae and, later, Freddie Mac. The two firms bundle mortgages into securities that are sold to investors, who are then protected against any losses if borrowers default.
That support, the housing industry argues, is key to lenders' willingness to offer the traditional 30-year, fixed-rate mortgage at low rates.
The Obama administration is due by mid-February to issue a proposal to overhaul Fannie and Freddie, which have been under government control since 2008. Officials are likely to present two or more approaches, including one with a limited but explicit government guarantee of securities backed by certain types of mortgages, and another with no such guarantees. Democrats generally support the guarantees to preserve wide availability of the 30-year mortgage.
Many investors and the housing industry argue that guarantees are needed to ensure the availability of home loans during downturns, when private lenders retreat. Under several proposals, the mortgage industry would pay the government fees for support, much as the Federal Deposit Insurance Corp. collects fees from banks to handle failures.
If investors in mortgage-backed securities don't have that government guarantee, they will demand higher interest rates and some may not invest at all, said Jeremy Diamond, managing director of Annaly Capital Management, who has met with GOP staff. His message to lawmakers considering full-scale privatization: "You will end up with a mortgage market that is smaller, less liquid and more expensive."
The idea of any kind of government guarantee raises the hackles of many in the GOP, especially members sympathetic to the tea-party movement, which made a mantra of opposing bailouts.
"You're going to be setting the housing industry, who have traditionally had a tremendous influence on the Republican Party, against the tea party," said Mark Calabria, director of financial regulation studies at the libertarian Cato Institute.
Last week, Rep. Jeb Hensarling of Texas, the House's fourth-ranking Republican, said he would introduce legislation to transfer Fannie and Freddie's role to the private sector within five years with no future guarantees. "My goal is to get the taxpayer off the dime," he said.
Critics say reformulating the system to look like the FDIC wouldn't relieve taxpayers of the burden because the government isn't likely to charge enough for the insurance protection, resulting in a rerun of the government's takeover of Fannie and Freddie, which has cost taxpayers $134 billion.
"The government's guarantee eliminates an essential element of market discipline—the risk aversion of investors," said a paper released last week by the conservative American Enterprise Institute. "So the outcome will be the same: the underwriting standards will deteriorate, regulation of issuers will fail and taxpayers will take losses once again."
In the months ahead, GOP lawmakers—especially those who remain cautious about privatization—are likely to face a lobbying blitz from home builders, community bankers, real-estate agents and other businesses in their home districts that depend on federal housing support.
Community banks, for example, will likely argue that they would face higher costs to originate mortgages.
The burden on the industry is to "show that the risk to the taxpayer is going to be minimized," said Paul Leonard, chairman of the Financial Services Roundtable's Housing Policy Council.
Write to Nick Timiraos at nick.timiraos@wsj.com
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http://www.washingtonpost.com/wp-dyn/content/article/2011/01/25/AR2011012502271.html
Home prices fall in nearly all major cities, heightening fears of double dip
By Dina ElBoghdady
Washington Post Staff Writer
Tuesday, January 25, 2011; 4:12 PM
Home prices slipped in nearly every major metropolitan area in November, with a few cities hitting their lowest levels since prices peaked about four years ago, according to a closely watched index released Tuesday.
From October to November, prices fell in 19 of the 20 metro areas tracked by the Standard & Poor's/Case-Shiller index, widely considered a gauge of the housing market's health. The only exception was San Diego, where prices were basically unchanged.
Only four areas posted year-over-year gains in November, including Los Angeles, San Diego, San Francisco and the Washington region. But in the aggregate, prices dipped 1.6 percent in November from the same time a year earlier, falling in 16 cities.
The nine cities that hit their lowest annual levels since the housing bust started were Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Ore., Seattle and Tampa.
The 20-city index is now about 3 percent above April 2009 levels, "suggesting that a double dip could be confirmed before spring," said David Blitzer, the index committee's chairman.
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GM:
I acknowledge what you just posted and the gravity of its implications, yet there also is this:
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Data Watch
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New single-family home sales increased 17.5% in December To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 1/26/2011
New single-family home sales increased 17.5% in December, coming in at a 329,000 annual rate, blowing away the consensus expected pace of 300,000.
Sales were up in the West, Midwest, and South, but down in the Northeast.
At the current sales pace, the months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 6.9 in December from 8.4 in November. The drop in the months’ supply was mainly due to the faster selling pace. The number of homes for sale fell 5,000 to 190,000, down 66.8% versus the peak in 2006 and the lowest level of new homes in inventory since 1968.
The median price of new homes sold was $241,500 in December, up 8.5% from a year ago. The average price of new homes sold was $291,400, up 4.7% versus last year.
Implications: New home sales jumped 17.5% in December, the biggest percentage gain since 1992, coming in well above consensus expectations. The increase was mostly due to stronger sales in the West. Outside the West, sales were up only slightly. It is important to note that new home inventories are still declining and are already at levels not seen since the late 1960s. As inventories keep falling, homebuilders will eventually need to start building more homes. Given a growing population, the pace of new home sales should roughly triple over the next several years to about 950,000. On the price front, the median price of new homes sold rose to $241,500 in December, coming in at the highest level since April 2008. This was probably influenced by the large increase of sales in the West where homes are usually priced higher. Median new home prices are up 8.5% versus a year ago. In other recent housing news, the Case-Shiller index, a measure of home prices in the 20 largest metro areas, dipped 0.5% in November (seasonally-adjusted) versus a consensus expected decline of 0.8%. Prices are down 1.6% in the past year, but still up 1.2% versus the cycle low in May 2009. The FHFA index, a price measure for homes financed by conforming mortgages, was unchanged in November but down 4.3% in the past year. In the factory sector, the Richmond Fed index, a measure of manufacturing in the mid-Atlantic, came in at +18 in January versus +25 in December. Although lower, the Richmond index still signals strong growth in manufacturing activity.
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First a comment on GM's post on Political Economics: http://reason.com/blog/2011/02/03/coming-soon-a-300-percent-incr "Coming Soon: A 300-Percent Increase in Foreclosures"
I don't buy the conclusion in the title (they do back it up with numbers), but the article has excellent reporting. Much of the information presented is in clickable links for sourcing.
I would add that lots of people are so-called underwater in value and keep paying because they don't want to move and don't want to default.
Remember, foreclosure is the good part - the contract as the parties originally agreed working as designed to get the asset (and the family leaving) back to the market. The fact that the borrower quit paying their obligation - that was the bad part and that is well into past by the time foreclosured home hit the market.
In light of the demonstrated failure of programs that slow the foreclosure process to keep people in the wrong home for them, we should consider the opposite, speedier returns to market and fully privatized renegotiations.
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18.4 million homes are vacant, 11% in Q4 2010 according to Census numbers. Here on CNBC: http://www.cnbc.com/id/41355854. I saw that go by on drudge a couple of weeks ago but didn't see it on the forum. That is a very scary number, though in my business, an 11% vacancy rate or a theoretical 89% collection rate would be a dream.
Remember there are many many bureaucratic barriers to bringing vacant homes back to market depending on where you are and a good number of the foreclosures are in highly regulated municipalities. In Minneapolis as an example, there is a $1000 fine/fee in addition to the annual rental license fee to bring a house into the rental market, and a far more expensive, complied-with truth-in-housing report required for a sale. In other words the old 'fixer-upper' 'sweat equity' bargain idea is highly illegal and could trigger something called a 'Code Compliance' order requiring an old house to be brought up to new code, which is financially akin to condemnation in a low end property.
These regulation mean that these properties can be bought only with high-risk cash, not mortgages as they are not insurable, or legal to rent or live in.
Foreclosed homes often have the furnace or even entire kitchen stripped etc. and sold as they leave. I've bought them with the electrical panel removed and feed wires dangling hot. As they sit empty the copper pipes get stolen. Banks rarely will do more than empty and mow to protect their value. Before the crisis, banks we worked with wanted the property sold at best price / any price usually in less than one day because they didn't want the liability of ownership. Anyone in the business of buying these properties has got to be tapped out at this point no matter what you started with.
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I think the only reason there is anything of a middle class left in California is that underwater homeowners don't want to default or take the loss.
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The ABCs of QRM
Why a regulation you haven't heard of matters as much as Fannie and Freddie.
By Bethany McLean
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Practically everyone who is concerned about the future of the housing market is focused on Fannie Mae and Freddie Mac. The Treasury is leaking details of its overdue plan for the hobbled mortgage giants; the House Financial Services Committee held a hearing so Republicans could rant about the evils of government involvement in the housing market; think tanks are holding conferences to devise solutions.
But behind the scenes, there's another huge debate taking place, one that has every bit as much potential—maybe more—to shape the housing market. It involves a provision in last summer's Dodd-Frank financial reform legislation, one that was inserted partly due to Lou Ranieri, the former Salomon Brothers bond trader and executive who helped create the modern mortgage market back in the 1980s. The provision is called the qualifying residential mortgage, or QRM. What is a QRM? Well, that's precisely the cause of the debate. The answer will play a big role in determining who can get a mortgage at what cost.
One of the factors that made the housing bubble so big was that financial institutions that made mortgages were able to sell them off, whether to Wall Street firms or to Fannie and Freddie, thereby ridding themselves of the risk. Over time lenders became increasingly indifferent to the question of whether the borrowers could pay. (Many of them couldn't, as we all know now.) To fix this, Dodd-Frank imposed a requirement that mortgage companies keep 5 percent of the risk on their own books even when they sold off the loans. The idea was to give lending institutions a financial incentive to care about their borrowers' creditworthiness—"skin in the game," as the requirement is colloquially called. Banking regulations also compel lenders to maintain capital against that risk, thereby increasing their cost. Five percent may not sound like a large commitment, but for smaller institutions that operate on a thin margin (community banks, independent mortgage companies) it's huge. Even big banks, which face a slew of new capital requirements, find it a headache.
As Lou Ranieri watched Congress enact this so-called risk-retention requirement, he began to worry that while it was necessary for some types of mortgages, it could also limit, unnecessarily, the availability of all mortgages. "We need to come out of this [crisis] with a functioning housing market," he says. What Ranieri calls "old-fashioned mortgages"—traditional 15- or 30-year loans where the borrower pays off interest and principal every month, and where the loan is fully documented, among other things—held up fine even at the height of the crisis, according to analysis he presented to members of Congress. Was it really necessary for lenders to keep "skin in the game" for such super-safe mortgages? (Ranieri also thinks that just as stockbrokers can be held liable for selling customers unsuitable products, those in the mortgage lending chain should be held liable for selling unsuitable mortgages, whether those mortgages are old-fashioned or not. But that's a slightly different discussion.)
So, with input from Ranieri, a bipartisan group—Democratic Sens. Mary Landrieu of Louisiana and Kay Hagan of North Carolina and Republican Sen. Johnny Isakson of Georgia—inserted a provision into the financial reform legislation stipulating that old-fashioned mortgages (i.e., those that met certain time-tested guidelines) would be exempt from the skin-in-the-game requirement. These were the mortgages labeled "qualifying residential mortgages." Congress left the details of what could and could not be considered a QRM up to a clutch of federal agencies that includes the banking regulators, the Department of Housing and Urban Development, and the Federal Housing Finance Authority, which oversees Fannie and Freddie. They are supposed to issue a final regulation by April 21.
That rule will likely have a huge impact on what sort of loans lenders offer, and to whom. Smaller, thinly-capitalized mortgage originators can't afford to keep any of the risk, and other lenders simply don't want to keep it, so mortgages that don't qualify will be more expensive and harder for average consumers to get. Or, as the Mortgage Bankers Association predicts, loans made outside the QRM framework "will be costlier and likely to be made only to more affluent customers." J.P. Morgan Chase estimates that the 5-percent risk-retention requirements could increase rates on loans that don't qualify as QRMs by up to 3 percentage points.
Decisions about the QRM will also have a big effect on Fannie and Freddie (assuming Fannie and Freddie are still around when the rule takes effect). Because lenders will have to retain 5 percent of the risk on any nonqualifying loans that they sell, they will probably sell fewer such loans to Fannie and Freddie. In effect, how QRMs are defined will dictate which mortgages end up on the government's books. So if the government is going to maintain any kind of role in the housing market, then taxpayers have skin in the QRM game too. In which case, shouldn't the government tailor regulation of QRMs to minimize that risk?
The difficulty is that neither the regulators themselves, nor the industry, agree on what a qualifying mortgage should be—and whether minimizing risk should be the only criterion. The stricter the definition—for instance, requiring a 30-percent down payment—the fewer homeowners will get QRM mortgages. That's fine if your goal is to make sure that qualifying mortgages never default. But what if your goal is to make sure home mortgages remain affordable and widely available? Using Census Bureau data, the research firm Height Analytics calculated that in 2009, 47 percent of homebuyers who borrowed money to purchase their home made a down payment of less than 10 percent. So even requiring a seemingly modest down payment of 10 percent would disqualify about one-half of all prospective borrowers from obtaining QRMs. "As a result, these borrowers would have to take out a mortgage with a significantly higher interest rate or their efforts to buy a home could be restricted," Height Analytics noted.
Requiring a high down payment also stands to benefit the bigger players. Wells Fargo, which made some less-than-pristine loans during the subprime mania, sounded like a recovering alcoholic in a letter to regulators last fall that said a 30-percent down-payment requirement would provide a "simple and balanced" definition of a QRM. Big banks can afford to keep loans that don't qualify on their balance sheet. Smaller institutions can't. The Community Mortgage Banking Project, a coalition of mostly smaller lenders, argues in a position paper that a restrictive QRM definition would concentrate lending in the "too big to fail" banks. Operating in a less competitive market, the big banks could boost profits by charging higher rates to consumers who didn't qualify.
At the opposite pole is the Mortgage Bankers Association, which represents many non-bank mortgage originators whose business models depend on selling off the loans they make. The MBA wants even very risky loans in which borrowers pay only interest, not principal, to qualify as QRMs. "unnecessarily constraining the mortgage market," the MBA wrote in a letter to regulators last fall, "will not only deny the American dream of homeownership to many qualified persons, it will further depress the housing market and threaten the economic recovery." Of course, that's the same reasoning the MBA applied before the subprime crash.
Then, there are the mortgage insurers, companies such as MGIC and Radian, for whom the QRM represents nothing less than an existential threat. Mortgage insurance exists because Congress requires it on loans with a down payment of less than 20 percent that are bought by Fannie and Freddie. But if a QRM by definition requires a 20-percent down payment, what place will there be for mortgage insurance? So mortgage insurers are arguing that insurance makes mortgages safer for both borrowers and lenders, and are applying their considerable lobbying clout to stay in the game.
As for the regulators, sources say the Federal Reserve and the Federal Deposit Insurance Corporation, which traditionally care more about the safety and soundness of the financial system than they do about homeownership, are pushing for a conservative down-payment requirement—at least 20 percent. But they are meeting some resistance, too. A fixed down-payment requirement "would likely result in a furor on Capitol Hill," notes Height Analytics, because it would block such a large percentage of buyers from qualifying for a less costly loan. Although the housing-focused agencies like HUD and the FHFA haven't made public statements, the general sense in Washington is that they want a less strict standard in order to promote affordability and accessibility.
Sources in Washington say that the regulators will propose a rule requiring a hard down payment of 20 percent. But that would be controversial, and with all these conflicting agendas, the research firm MF Global predicts "very little chance" that we'll see a final QRM rule by the April 21 deadline. A "more realistic deadline," it says, "is mid-summer." A lot will ride on the regulators getting this right.
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Educate me please:
Is the US government obligated as a matter of law to cover the FMs debts?
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Crafty: "Is the US government obligated as a matter of law to cover the FMs debts?"
IIRC, during the collapse of 2008 the answer to that question was 'no' for most of those assets as a strict, direct, legal obligation, but 'yes' as a practical matter that the full faith and credit of the USA was being used to sell the securities. In other words the guarantee was with the GSE, Fannie Mae, Freddie Mac, but everyone knew that the GSE is the US Government.
That was then, I don't know what changes are in the latest 'financial reform' or other new laws. My understanding is that from 90% of mortgages going through the federal government (citation needed for article authorizing that) we are moving toward 100%.
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So, the answer to my question is "No"?
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Not quite that simple, depends on which assets, when, and if indirectly on the hook has the same legal meaning as a direct guarantee. A lot has changed since the fall 2008, huge amounts I believe, were brought in and directly guaranteed. Pose this to Scott G...
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It's enough to make you believe in miracles: The Obama Administration is now on record as saying that Fannie Mae and Freddie Mac should go out of business. It took a global financial panic and $140 billion in taxpayer losses, but on Friday there it was in black-and-white in the U.S. Treasury's report to Congress on reforming the mortgage market: The Administration will "ultimately . . . wind down both institutions."
This marks a break with decades of bipartisan support and protection for the two government-sponsored giants of mortgage finance. Fannie Mae has its roots in the Roosevelt Administration, and a phalanx of bankers, mortgage lenders, homebuilders and Realtors worked together to keep the companies growing and federal mortgage subsidies flowing. Now even some Democrats—though not yet those on Capitol Hill—admit their business model was a catastrophe waiting to happen.
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Under the Administration's proposals, Fan and Fred wind down over five to seven years. The two mortgage giants would, in effect, gradually price themselves out of the mortgage finance market by raising guarantee prices and down payment requirements, while lowering the size of the mortgages they could securitize and guarantee. This sounds like a plausible set of first steps to lure private capital back into the mortgage market, where some 92% of all new mortgages are currently underwritten or guaranteed by the government.
The $5 trillion question, however, is what would replace Fan and Fred. And here the Obama Administration has punted, offering the "pros and cons" of three broad proposals without endorsing any one of them.
Door No. 1 is the best of the lot by our lights. Under this option, federal guarantees would be limited to Federal Housing Administration (FHA) loans for lower-income buyers and VA assistance for veterans and farm programs—each a narrowly targeted market segment. A Treasury official says this would reduce the taxpayer backstop over time to about 10% to 15% of the mortgage market.
The Administration puts the case for federal withdrawal from the broader housing market in compelling terms: "The strength of this option is that it would minimize distortions in capital allocation across sectors, reduce moral hazard in mortgage lending and drastically reduce direct taxpayer exposure to private lenders' losses." Bravo.
Treasury points to other benefits: "With less incentive to invest in housing, more capital will flow into other areas of the economy, potentially leading to more long-run economic growth and reducing the inflationary pressure on housing assets. Risk throughout the system may also be reduced, as private actors will not be as inclined to take on excessive risk without the assurance of a government guarantee behind them. And finally, direct taxpayer risk exposure to private losses in the mortgage market would be limited to the loans guaranteed by FHA and other narrowly targeted government loan programs: no longer would taxpayers be at direct risk for guarantees covering most of the nation's mortgages."
Those two paragraphs more or less sum up 20 years of Journal editorials on housing.
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Corbis
.So what's not to like? The Administration says this option could reduce access to credit for some home buyers, and that it would leave the government without the tools to intervene in a future crisis. As for the credit point, other countries have high rates of home ownership with far less government support. If the government stands aside, it would open the way for alternative forms of finance, such as covered bonds, that now can't compete in the U.S. because of government favoritism for the 30-year mortgage model. This would open options for borrowers by increasing the diversity of financing.
As for a future crisis, government intervention is less likely to be needed if the market isn't distorted by government subsidies in the first place.
Behind Door No. 2 is a rump Fan or Fred, one that would stay small in "normal" times but stand ready to step in with Uncle Sam's firepower in a future housing-finance crisis. But as the Administration acknowledges, it would be difficult both to stay small and retain the capacity to go large when needed. We'd add that the political pressure to expand any federal mortgage-lending program would be too great for lawmakers to resist. Within a generation, the winding down of Fan and Fred would be unwound.
But the greatest danger lies behind Door No. 3, which looks like Fannie in a new suit. Under this last option, the Administration envisages a group of tightly regulated, well-capitalized private mortgage insurers whose policies would be backstopped by government reinsurance. The government would charge premiums for this insurance, "which would be used to cover future claims and recoup losses to protect taxpayers." This reintroduces the lethal mix of private profit and public risk by other means.
The problem with Fan and Fred from the beginning was not—despite the Administration's claims—that the profit motive corrupted their benign goals. Rather, the political influence and financial power of the housing lobby ensured that the companies operated outside the normal rules of politics and financial discipline. Thanks to an implicit government guarantee, the market never put any limit on their growth, even as their liabilities climbed into the trillions. Few politicians had the nerve to challenge a housing lobby that would attack them for opposing home ownership. The same political flaws would afflict a future reinsurer and its coterie of putatively private insurers.
The power of the housing lobby is implicit even in the Treasury's refusal to pick a preferred reform. As with entitlement reform, the Administration is leaving the hard work to House Republicans, who will bear the brunt of the political blowback. A reasonable GOP fear is that the Administration, whatever its rhetoric now, will pounce with a veto when it's politically advantageous—in, say, 2012.
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Our view is that there should be no federal housing guarantee. If Congress wants to subsidize housing for the poor, it ought to do so explicitly through annual appropriations. One lesson—perhaps the most important—of the financial crisis is that broad policy favors for housing hurt every American by misallocating capital and credit. The feds created incentives to pour money into McMansions we didn't need while robbing scarce capital from manufacturing, biotech and other uses that might have created better jobs and led to a more balanced and faster growing economy.
We realize this is political heresy, but it is the beginning of wisdom in getting government out of the mortgage market. We're glad to see the Administration concede this rhetorically, even if it lacks the courage to embrace its logical policy conclusions.
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http://www.inman.com/news/2011/02/15/decline-in-real-estate-sales-greater-stated
Decline in real estate sales greater than stated?
Statistics published by the National Association of Realtors appear to overstate sales of existing home by 15 to 20 percent, mortgage and property data aggregator CoreLogic says in a new report that concludes home sales fell more sharply last year than previously thought.
A NAR spokesman said the Corelogic claim "is premature at best," and NAR will be making some benchmark revisions to its historic sales data later this year.
NAR's figures -- based on data collected from multiple listing services and large brokerages -- show sales of existing homes fell 5 percent in 2010, to 4.9 million. But CoreLogic, which collects public sales records from county recorders and courts, estimates that home sales actually fell 12 percent, to 3.6 million.
The implications are not trivial: a slower rate of sales means that it will take longer to burn through unsold inventory, and a glut of homes for sale in a given market can undermine prices. CoreLogic says the unsold inventory on the market in November represented 16 months of supply, compared to NAR's estimate of 9.5 months.
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Existing home sales increased 2.7% in January To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/23/2011
Existing home sales increased 2.7% in January to an annual rate of 5.36 million, beating the consensus expected pace of 5.22 million. Existing home sales are up 5.3% versus a year ago.
Sales in January were up in the Midwest, South, and West, but down in the Northeast. Sales increased for both single-family homes and condos/coops.
The median price of an existing home fell to $158,800 in January (not seasonally adjusted), and is down 3.7% versus a year ago. Average prices are down 2.6% versus a year ago.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 7.6 from 8.2 in December. The decline in the months’ supply was due to both the faster selling pace and a decline in overall inventories.
Implications: The housing market continues to heal. Existing home sales grew 2.7% in January, the third increase in a row. Sales are now at the fastest pace since eight months ago, when the homebuyer tax credit expired. Also, sales of existing homes are now very close to the long-term trend of 5.5 million units annually. With housing affordability hovering at the highest level in at least 40 years, the market for homes is poised to continue improving. Incomes are rising, mortgage rates remain relatively low, and homes are cheap. Lenders are asking for large down payments, but this is no different from a year ago. In other recent housing news, the Case-Shiller index, a measure of home prices in the 20 largest metro areas around the country, declined 0.4% in December (seasonally-adjusted) and was down 2.4% in 2010. Prices have fallen six straight months, since the end of the homebuyer tax credit. However, the decline in 2010 was the smallest since prices peaked in 2006 and we expect a modest price gain in 2011. Meanwhile, manufacturing continues to soar. The Richmond Fed index, a measure of manufacturing activity in the mid-Atlantic, increased to +25 in February from +18 in January, signaling robust growth in goods production. Combined with recent good news from the Philly Fed survey, the nationwide ISM manufacturing index likely remained at a very high level in February.
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FWIW Schiller, of the Case-Schiller index cited herein says that he thinks further declines of 15-25% are entirely possible.
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Isn't Brian Wesbury a bull 100% of the time. I don't recall him every saying anything negative.
Then again I don't follow him much anymore.
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http://hotair.com/archives/2011/02/24/new-residential-sales-sink-12-6-from-december-18-6-from-previous-january/
New residential sales sink 12.6% from December, 18.6% from previous January
posted at 2:55 pm on February 24, 2011 by Ed Morrissey
In other words, don’t expect the construction business to rebound soon. In a release two hours ago, the Census Bureau announced that new residential sales dropped 12.6% over a mild bump upward in December, down to a seasonally-adjusted annual rate of 284,000 units. That number barely avoids the low-water mark reached in October 2010 of 280,000 units, which was itself the lowest such figure in the entire historical run of the data, which goes back to 1963:
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This is exactly why tax codes should not be tinkered with in regards to social engineering. They should be the same for everyone, flat, no write offs, no loopholes.
How could government employees under assault not be outraged? This is classic the rich get richer and reap unfair benefits. Repubs would do well to at least recognize this and say/do something about it. The silence from them on issues like this is deafening.
****Tax breaks on real estate deals for people like A-Rod cost city 900M a year
Juan Gonzalez - News
Friday, February 25th 2011, 4:00 AM
Sipkin/NewsA city program gives huge tax abatements to condo owners in newly built housing. A-Rod, for instance, will pay just $100 a month in taxes on his new $6 million bachelor pad. Related NewsLupica: A-Rod out of the spotlight? For Yanks to win, he'd better find itA-Rod: Bombers will survive without LeeLupica: Hamilton shows A-Rod how its doneA-Rod expects to be in top form next seasonA-Rod confronts Grim realityLupica: It's time for Alex to be GreatYankees star Alex Rodriguez will pay virtually no property tax for a $6 million apartment he is buying on the upper West Side.
Rodriguez will be billed around $1,200 this year in real estate tax for his 3,000-square-foot, five-bedroom penthouse with spectacular views of the Hudson River.
Over the next 10 years Rodriguez and his fellow residents will continue to receive huge discounts on their tax, a city housing official said.
For Rodriguez, a full tax bill would be at least $60,000 annually, the latest city assessment records show.
A spokeswoman for Extell, the company that built the 2-year-old luxury Rushmore Towers near the West Side Highway, declined to discuss the taxes on the slugger's new bachelor pad.
But the only two penthouses that went into contract this month at the Rushmore, each of which was listed at more than $6 million, have been assessed at a little over $100 per month in taxes, one real estate expert told the Daily News.
So how is it possible that tens of thousands of ordinary city residents struggle each year with soaring tax bills for their co-ops, condos and homes, while the Yankees' $33-million-a-year star gets to pay next to nothing?
Well, Rodriguez and many other well-heeled New Yorkers have learned to take advantage of a little-known tax abatement program that has existed for decades.
The politicians and real estate insiders call it the "421A" program. It grants as much as a 98% percent tax abatement for up to 25 years to condo owners in newly built housing.
The bulk of the 421A benefit has gone to luxury housing in Manhattan, though a few reforms by City Hall and the Legislature in 2007 at least required developers to build 20% affordable housing to qualify for the tax abatement.
This year alone, the 421A program will cost our city more than $900 million in lost revenues, the Independent Budget Office says.
That's money that could prevent layoffs of firefighters and teachers. That could fund senior citizen centers and pay for after-school programs.
You haven't heard much about this, but the 421A program ended in December for any new construction. But the city's powerful real estate industry is determined to get it renewed and even get it expanded. Its lobbyists are working feverishly behind the scenes to pressure Council and lawmakers in Albany.
Brooklyn City Councilman Brad Lander has been leading the fight against that renewal.
It's too much of a giveaway to developers, Lander says, especially since there's already a glut of luxury housing in this town.
The developers want to link any extension of rent stabilization laws for tenants, which the Legislature must vote on by June, to a deal on extending the 421A tax abatement for builders.
The industry hopes Gov. Cuomo, who made a name for himself a long time ago as an advocate for affordable housing, will take their side.
In so many ways, big and small, the minority who have the big money keep trying to get government to give them more financial breaks at the expense of the rest of us.
"Where's the fair share if people who have paid millions of dollars for an apartment get away with paying no real estate taxes, when people in co-ops are being slaughtered?" said Bayta Lewton, of the Coalition for a Livable West Side.
Even before the pennant race begins, A-Rod has become the poster boy in another race - to end these tax abatements that have run amok.****
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FOR more than a decade, the American real estate market resembled an overstuffed novel, which is to say, it was an engrossing piece of fiction.
Mortgage brokers hip deep in profits handed out no-doc mortgages to people with fictional incomes. Wall Street shopped bundles of those loans to investors, no matter how unappetizing the details. And federal regulators gave sleepy nods.
That world largely collapsed under the weight of its improbabilities in 2008.
But a piece of that world survives on Library Street in Reston, Va., where an obscure business, the MERS Corporation, claims to hold title to roughly half of all the home mortgages in the nation — an astonishing 60 million loans.
Never heard of MERS? That’s fine with the mortgage banking industry—as MERS is starting to overheat and sputter. If its many detractors are correct, this private corporation, with a full-time staff of fewer than 50 employees, could turn out to be a very public problem for the mortgage industry.
Judges, lawmakers, lawyers and housing experts are raising piercing questions about MERS, which stands for Mortgage Electronic Registration Systems, whose private mortgage registry has all but replaced the nation’s public land ownership records. Most questions boil down to this:
How can MERS claim title to those mortgages, and foreclose on homeowners, when it has not invested a dollar in a single loan?
And, more fundamentally: Given the evidence that many banks have cut corners and made colossal foreclosure mistakes, does anyone know who owns what or owes what to whom anymore?
The answers have implications for all American homeowners, but particularly the millions struggling to save their homes from foreclosure. How the MERS story plays out could deal another blow to an ailing real estate market, even as the spring buying season gets under way.
MERS has distanced itself from the dubious behavior of some of its members, and the company itself has not been accused of wrongdoing. But the legal challenges to MERS, its practices and its records are mounting.
The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-less-striking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
“The state court is attracted like a moth to the flame to the legal owner, and that isn’t MERS,” says Walter T. Keane, the Salt Lake City lawyer who represented the homeowner in that case.
And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
But this, Judge Robert E Grossman said, was not his fault.
“This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country,” he wrote, “that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”
With MERS under scrutiny, its chief executive, R. K. Arnold, who had been with the company since its founding in 1995, resigned earlier this year.
A BIRTH certificate, a marriage license, a death certificate: these public documents note many life milestones.
For generations of Americans, public mortgage documents, often logged in longhand down at the county records office, provided a clear indication of homeownership.
But by the 1990s, the centuries-old system of land records was showing its age. Many county clerk’s offices looked like something out of Dickens, with mortgage papers stacked high. Some clerks had fallen two years behind in recording mortgages.
For a mortgage banking industry in a hurry, this represented money lost. Most banks no longer hold onto mortgages until loans are paid off. Instead, they sell the loans to Wall Street, which bundles them into investments through a process known as securitization.
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MERS, industry executives hoped, would pull record-keeping into the Internet age, even as it privatized it. Streamlining record-keeping, the banks argued, would make mortgages more affordable.
But for the mortgage industry, MERS was mostly about speed — and profits. MERS, founded 16 years ago by Fannie Mae, Freddie Mac and big banks like Bank of America and JPMorgan Chase, cut out the county clerks and became the owner of record, no matter how many times loans were transferred. MERS appears to sell loans to MERS ad infinitum.
This high-speed system made securitization easier and cheaper. But critics say the MERS system made it far more difficult for homeowners to contest foreclosures, as ownership was harder to ascertain.
MERS was flawed at conception, those critics say. The bankers who midwifed its birth hired Covington & Burling, a prominent Washington law firm, to research their proposal. Covington produced a memo that offered assurances that MERS could operate legally nationwide. No one, however, conducted a state-by-state study of real estate laws.
“They didn’t do the deep homework,” said an official involved in those discussions who spoke on condition of anonymity because he has clients involved with MERS. “So as far as anyone can tell their real theory was: ‘If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.’ ”
County officials appealed to Congress, arguing that MERS was of dubious legality. But this was the 1990s, an era of deregulation, and the mortgage industry won.
“We lost our revenue stream, and Americans lost the ability to immediately know who owned a piece of property,” said Mark Monacelli, the St. Louis County recorder in Duluth, Minn.
And so MERS took off. Its board gave its senior vice president, William Hultman, the rather extraordinary power to deputize an unlimited number of “vice presidents” and “assistant secretaries” drawn from the ranks of the mortgage industry.
The “nomination” process was near instantaneous. A bank entered a name into MERS’s Web site, and, in a blink, MERS produced a “certifying resolution,” signed by Mr. Hultman. The corporate seal was available to those deputies for $25.
As personnel policies go, this was a touch loose. Precisely how loose became clear when a lawyer questioned Mr. Hultman in April 2010 in a lawsuit related to its foreclosure against an Atlantic City cab driver.
How many vice presidents and assistant secretaries have you appointed? the lawyer asked.
“I don’t know that number,” Mr. Hultman replied.
Approximately?
“I wouldn’t even be able to tell you, right now.”
In the thousands?
“Yes.”
Each of those deputies could file loan transfers and foreclosures in MERS’s name. The goal, as with almost everything about the mortgage business at that time, was speed. Speed meant money.
ALAN GRAYSON has seen MERS’s record-keeping up close. From 2009 until this year, he served as the United States representative for Florida’s Eighth Congressional District — in the Orlando area, which was ravaged by foreclosures. Thousands of constituents poured through his office, hoping to fend off foreclosures. Almost all had papers bearing the MERS name.
“In many foreclosures, the MERS paperwork was squirrelly,” Mr. Grayson said. With no real legal authority, he says, Fannie and the banks eliminated the old system and replaced it with a privatized one that was unreliable.
A spokeswoman for MERS declined interview requests. In an e-mail, she noted that several state courts have ruled in MERS’s favor of late. She expressed confidence that MERS’s policies complied with state laws, even if MERS’s members occasionally strayed.
“At times, some MERS members have failed to follow those procedures and/or established state foreclosure rules,” the spokeswoman, Karmela Lejarde, wrote, “or to properly explain MERS and document MERS relationships in legal pleadings.”
Such cases, she said, “are outliers, reflecting case-specific problems in process, and did not repudiate the MERS business model.”
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MERS’s legal troubles, however, aren’t going away. In August, the Ohio secretary of state referred to federal prosecutors in Cleveland accusations that notaries deputized by MERS were signing hundreds of documents without any personal knowledge of them. The attorney general of Massachusetts is examining a complaint by a county registrar that MERS owes the state tens of millions of dollars in unpaid fees.
As far back as 2001, Ed Romaine, the clerk for Suffolk County, on eastern Long Island, refused to register mortgages in MERS’s name, partly because of complaints that the company’s records didn’t square with public ones. The state Court of Appeals later ruled that he had overstepped his powers.
But Judith S. Kaye, the state’s chief judge at the time, filed a partial dissent. She worried that MERS, by speeding up property transfers, was pouring oil on the subprime fires. The MERS system, she wrote, ill serves “innocent purchasers.”
“I was trying to say something didn’t smell right, feel right or look right,” Ms. Kaye said in a recent interview.
Little about MERS was transparent. Asked as part of a lawsuit against MERS in September 2009 to produce minutes about the formation of the corporation, Mr. Arnold, the former C.E.O., testified that “writing was not one of the characteristics of our meetings.”
MERS officials say they conduct audits, but in testimony could not say how often or what these measured. In 2006, Mr. Arnold stated that original mortgage notes were held in a secure “custodial facility” with “stainless steel vaults.” MERS, he testified, could quickly produce every one of those files.
As for homeowners, Mr. Arnold said they could log on to the MERS system to identify their loan servicer, who, in turn, could identify the true owner of their mortgage note. “The servicer is really the best source for all that information,” Mr. Arnold said.
The reality turns out to be a lot messier. Federal bankruptcy courts and state courts have found that MERS and its member banks often confused and misrepresented who owned mortgage notes. In thousands of cases, they apparently lost or mistakenly destroyed loan documents.
The problems, at MERS and elsewhere, became so severe last fall that many banks temporarily suspended foreclosures.
Some experts in corporate governance say the legal furor over MERS is overstated. Others describe it as a useful corporation nearly drowning in a flood tide of mortgage foreclosures. But not even the mortgage giant Fannie Mae, an investor in MERS, depends on it these days.
“We would never rely on it to find ownership,” says Janis Smith, a Fannie Mae spokeswoman, noting it has its own records.
Apparently with good reason. Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.
The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership. They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
THE Sarmientos are one of thousands of American families who have tried to pierce the MERS veil.
Several years back, they bought a two-family home in the Greenpoint section of Brooklyn for $723,000. They financed the purchase with two mortgages from Lend America, a subprime lender that is now defunct.
But when the recession blew in, Jose Sarmiento, a chef, saw his work hours get cut in half. He fell behind on his mortgages, and MERS later assigned the loans to U.S. Bank as a prelude to filing a foreclosure motion.
Then, with the help of a lawyer from South Brooklyn Legal Services, Mr. Sarmiento began turning over some stones. He found that MERS might have violated tax laws by waiting too long before transferring his mortgage. He also found that MERS could not prove that it had transferred both note and mortgage, as required by law.
One might argue that these are just legal nits. But Mr. Sarmiento, 59, shakes his head. He is trying to work out a payment plan through the federal government, but the roadblocks are many. “I’m tired; I’ve been fighting for two years already to save my house,” he says. “I feel like I never know who really owns this home.”
Officials at MERS appear to recognize that they are swimming in dangerous waters. Several federal agencies are investigating MERS, and, in response, the company recently sent a note laying out a raft of reforms. It advised members not to foreclose in MERS’s name. It also told them to record mortgage transfers in county records, even if state law does not require it.
MERS will no longer accept unverified new officers. If members ignore these rules, MERS says, it will revoke memberships.
That hasn’t stopped judges from asking questions of MERS. And few are doing so with more puckish vigor than Arthur M. Schack, a State Supreme Court judge in Brooklyn.
Judge Schack has twice rejected a foreclosure case brought by Countrywide Home Loans, now part of Bank of America. He had particular sport with Keri Selman, who in Countrywide’s court filings claimed to hold three jobs: as a foreclosure specialist for Countrywide Home Loans, as a servicing agent for Bank of New York and as an assistant vice president of MERS. Ms. Selman, the judge said, is a “milliner’s delight by virtue of the number of hats that she wears.”
At heart, Judge Schack is scratching at the notion that MERS is a legal fiction. If MERS owned nothing, how could it bounce mortgages around for more than a decade? And how could it file millions of foreclosure motions?
These cases, Judge Schack wrote in February 2009, “force the court to determine if MERS, as nominee, acted with the utmost good faith and loyalty in the performance of its duties.”
The answer, he strongly suggested, was no.
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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.
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"Believe it or not, homeowners and their attorneys do lie"
An analogous situation are patients who go to doctors feighting chronic pain to get narcotic Rx.
It is rampant. And of course there are doctors who sell their souls to get the cash payments which is usually how the encounter works. I know because I, like all doctors have patient coming in with multiple scams. The stories are endless but there are consistent patterns much of the time.
The doctors write their notes, as though everything is hunky dorry and the patient shows them an old injury or gives them the compliants, pays in cash and then goes fills the script and gets high or sells the stuff.
The doctors pretend they don't have a clue and they were just "helping" a pain patient.
They play niave or just say, "how was I supposed to know". "I take the patient at his/her word and it is not be job or place to judge them or deny them pain medicine and chance they may be legitimate and be suffering".
And some doctors are niave. Patients will play into their good natures by complimenting them. But those in practice for some time learn the ropes.
There is no questions doctors, myself included, who do get fooled, and it is sometimes very difficult and even impossible to know if the patient is lying or not without following the patient around after they leave the office. But there are doctors who will play "the game" and pretent it is all legit just to get the cash. They can get 100s of patients, cash paying, to their office, in weeks or months, some from out of state, if they want. It is rampant. It has been for decades. Probably worse now.
They know it is very hard to do anything about it and they feel as long as they document there "well meaning" intentions they can't be proved to be crooks and drug dealers. And most of the time they are right.
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Crime does pay....
"In many ways, the Raj case is just the government’s attempt to change the subject. Insider trading had nothing to do with the bubble that caused the 2008 financial collapse that ignited a bailout of the big banks, led to the Great Recession, and has the general public demanding Wall Street accountability. Not a single Wall Street executive has gone to jail over the excesses that led to the collapse. For all the millions spent on examining the bankruptcy of Lehman Brothers, the collapse that sparked the broader meltdown, the government is having a difficult time even coming up with a civil case against its senior executives where they can avoid jail but simply pay fines and possibly face a bar from doing business in the securities industry. Prosecutors are coming to the conclusion that it's difficult, maybe impossible, to put people in jail for greed and irrational exuberance."
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Crime does pay. Particularly white collar crime.
That is why I don't understand why we have law enforcement retiring at 50 when we have stealing and thievery rampant in our society. This society does not take theft seriously. The law enforcement officers could be retrained to go after some of this stuff.
"Not a single Wall Street executive has gone to jail over the excesses that led to the collapse"
Nor did any politician pay in away way for their complicity from the SEC to Barney Frank etc.
"Prosecutors are coming to the conclusion that it's difficult, maybe impossible, to put people in jail for greed and irrational exuberanc"
Sure with the same millions stolen they can now hire million dollars liars for hire (to quote The Guardian Angels guy) to make near impossible for any prosecuters to get anywhere. The rest of us can't hire attorneys for hundreds of dollars an hour. Talk about health care making people broke.
Only the millions of people out of work are suffering. It does make one question the concept of trickle down economics, the wealth gap which gets wider. I continue to have a problem with that. Yet, when all taken into context,
to me the less intrusive government theory is the least of the two evils. More regulation makes things worse and does little good. Indeed government cannot even enforce what they have on the books.
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JDN, Your post is in quotes but no source, author, link. I usually find it through google - don't make us work that hard. Your title says "Crime does pay...." but the post doesn't mention a crime. Please clarify. Thank you.
From the piece "Prosecutors are coming to the conclusion that it's difficult, maybe impossible, to put people in jail for greed and irrational exuberance." - I hope so.
http://news.yahoo.com/s/dailybeast/20110307/ts_dailybeast/12789_rajrajaratnamandwallstreetscourtroomshowdown_1
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Doug; sorry, I usually source.
I too intrinsically agree nothing is wrong with "greed and irrational exuberance", however I draw
the line when greed begets illegal activity. The "crime" in this instance is insider trading. An insidious crime that
people think is harmless, yet it's path of damage can harm hundreds of thousands of people.
Frankly, in my opinion "white collar crime" is not nearly punished as severely as it should be; it is difficult to prove
and perpetrators are protected by an army of high priced attorneys, it seems unstoppable.
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"The "crime" in this instance is insider trading. An insidious crime that
people think is harmless, yet it's path of damage can harm hundreds of thousands of people."
Agreed.
Not to mention the outright fraud and scams.
"Frankly, in my opinion "white collar crime" is not nearly punished as severely as it should be; it is difficult to prove
and perpetrators are protected by an army of high priced attorneys, it seems unstoppable."
Agreed.
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JDN, Thank you. The crime deserves punishment, but the attacks on pursuing profits only muddle that issue. It is moral absence, not greed or desire to make a good living, that 'begets illegal activity'.
"Frankly, in my opinion "white collar crime" is not nearly punished as severely as it should be; it is difficult to prove..."
It gets punished when convicted but financial law enforcement seems inept. Also the 'watchdog media' is a thing of the past, all chasing the same false stories, it seems to me. No one in the financial press for example uncovered anything about Enron except their own political hatred until after it was spiraling downward.
Agreed, insider trading is no joke, it undermines markets which is/was our economic system, I would call it akin to treason. Like Hillary's corrupt commodity futures. It undermines everyone who trusts the market and places a trade. I posted a personal friend story of taking a company from scratch to going public to selling for an amazing price. No real player like him, even with a great sense of humor, cracks so much as a joke about how things are going in the company outside of what goes out to everyone in a conference call. For 2 years as a rumored takeover target we tried to tease him for information. I have a first cousin managing one of the market's largest mutual fund companies for decades. You will get more of his view by googling him than he would tell his own mother in a private phone call.
But a lot of these publicized cases about making or losing a lot of money don't involve a real, underlying crime. The facts determine that.
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MONTEREY, Calif. — By summer’s end, buyers and sellers in some of the country’s most upscale housing markets are slated to lose one their biggest benefactors: the deep pockets of the federal government. In this seaside community of pricey homes, the dread of yet another housing shock is already spreading.
“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”
For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.
But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.
Michael S. Barr, a former assistant Treasury secretary, said the federal government’s retrenchment would be painful for many communities. “There’s always going to be a line, and for the person just over it it’s always going to be an arbitrary line,” said Mr. Barr, who teaches at the University of Michigan Law School. “But there is no entitlement to living in a home that costs $750,000.”
As the housing market braces for more trouble, homeowners everywhere have been reduced to hoping things will someday stop getting worse. In some areas, foreclosures are the only thing selling. New home construction is nearly nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell 7.5 percent over the last year.
The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.
Getting the government out of the mortgage business, however, is proving much more difficult than doling out new benefits. As regulators prepare to drop the level at which they will guarantee loans — here in Monterey County, the level will drop by a third to $483,000 — buyers and sellers are wondering why they should be punished simply for living in an expensive region.
Sellers worry that the pool of potential buyers will shrink. “I’m glad to see they’re trying to rein in Fannie Mae, but I think I’m being disproportionately penalized,” said Rayn Random, who is trying to sell her house in the hills for $849,000 so she can move to Florida.
Buyers might face less competition in the fall but are likely to see more demands from lenders, including higher credit scores and larger down payments. Steve McNally, a hotel manager from Vancouver, said he had only about 20 percent to put down on a new home in Monterey County.
If a bigger deposit were required, Mr. McNally said, “I’d wait and rent.”
Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.
He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”
The National Association of Realtors, 8,000 of whom have gathered in Washington this week for their midyear legislative meeting, is making an extension of the loan guarantees a top lobbying priority.
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“Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”
Federal regulators acknowledge that mortgages will get more expensive in upscale neighborhoods but say the effect of the smaller guarantees on the overall housing market will be muted.
A Federal Housing Administration spokeswoman declined to comment but pointed to the Obama administration’s position paper on reforming the housing market. “Larger loans for more expensive homes will once again be funded only through the private market,” it declares.
Brokers and agents here in Monterey said terms were much tougher for nonguaranteed loans since lenders were so wary. Borrowers are required to come up with down payments of 30 percent or more while showing greater assets, higher credit ratings and lower debt-to-income ratios.
In the Federal Reserve’s quarterly survey of lenders, released last week, only two of the 53 banks said their credit standards for prime residential mortgages had eased. Another two said they had tightened. The other 49 said their standards were the same — tough.
The Mortgage Bankers Association has opposed letting the limits drop, although a spokesman said its members were studying the issue.
“I don’t want to sugarcoat this,” said Mr. Barr, the former Treasury official. “The housing finance system of the future will be one in which borrowers pay more.”
The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. In many affected counties, the loan limit will fall about 15 percent, to $625,500.
Monterey County, however, will see a much greater drop. The county is really two housing markets: the farming city of Salinas and the more affluent Monterey and Carmel.
Real estate records show that 462 loans were made in Monterey County between the current limit and the new ceiling since the beginning of 2009, according to the research firm DataQuick. That was only about 1 percent of the loans made in the county. But it was a much higher percentage for Monterey and Carmel — about a quarter of their sales.
Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans.
“That can definitely blow a lot of people out of the water,” Ms. Daunt said.
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Reminds me of a Sam Kinnison stand up routine, where Jesus was looking down on Jim and Tammy Fae Bakker's complex and asking "When did I say build a waterslide"?
The founding fathers are looking down at us and asking "Where did we say real estate was a role of the federal government"?
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Housing starts dropped 10.6% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/17/2011
Housing starts dropped 10.6% in April to 523,000 units at an annual rate. They were also revised up by 6.6% in March, but are still down 23.9% versus a year ago.
The drop in April was mostly due to a 24.7% fall in multi-family starts (which are very volatile from month to month). Still, multi-family starts are 6.6% higher than a year ago. Single-family starts fell 5.1% in April and are down 30.4% versus a year ago.
Starts plummeted in the South, declined in the Northeast, but were up in the Midwest and West.
New building permits fell 4.0% in April to a 551,000 annual rate and were revised down by 3.3% in March. Permits are down 12.8% versus a year ago with permits for single-family units down 18.6%.
Implications: Housing starts fell 10.6% in April, coming in well below consensus expectations. The number of homes under construction also fell to the lowest level on record (dating back to 1970). However, it appears the drop in starts in April was primarily due to an unusually violent tornado season. On net, all of the drop happened in the South. Outside that one region, starts were up 5.5%. In addition, two-thirds of the decline in starts was in multi-family units, which are volatile from month to month. In other words, with the drop in starts in April concentrated in one weather-ravaged region and primarily due to the more volatile component of home building, today’s report does not signal a future downward trend. Instead, we anticipate a significant rebound sometime in the next couple of months. Multi-family building has been generally moving up since late 2009 and, with the ongoing shift toward renting over owning, that trend should re-assert itself. Meanwhile, the South is still suffering, now with floods. But the impact of these disasters should clear by June. Also, not every aspect of home building is suffering. Completions increased 4.1% in April and yet are still at a low enough level so that builders can continue to work off the large excess inventory of homes. In fact, the pace of home building is still so low that inventory reduction will continue at a robust pace even as home building begins its long-term recovery later this year.
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The founding fathers are looking down at us and asking "Where did we say real estate was a role of the federal government"?
The government shouldn't have a role. The Mortgage Deduction should be eliminated. It would raise needed money and get government out of the real estate business.
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How about Fannie and Freddy? HUD?
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Get rid of them. Banks are big boys; they should start acting like one. Make the loan based on it's merit; period. And if they make bad loans, well....
Yet truly poor people need housing; not necessarily a "house". We are a "rich" country. Something needs to be done and to be frank,
I don't know exactly what HUD does. But they don't need to be in the housing business. I'ld call it the shelter
business for the homeless maybe; spartan and dry is fine.
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Dang JDN, you sure ate your Wheaties this morning! :-D
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EL MIRAGE, Ariz. — The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.
All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.
Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.
“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”
Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.
Although sales have picked up a bit in the last few weeks, banks and other lenders remain overwhelmed by the wave of foreclosures. In Atlanta, lenders are repossessing eight homes for each distressed home they sell, according to March data from RealtyTrac. In Minneapolis, they are bringing in at least six foreclosed homes for each they sell, and in once-hot markets like Chicago and Miami, the ratio still hovers close to two to one.
Before the housing implosion, the inflow and outflow figures were typically one-to-one.
The reasons for the backlog include inadequate staffs and delays imposed by the lenders because of investigations into foreclosure practices. The pileup could lead to $40 billion in additional losses for banks and other lenders as they sell houses at steep discounts over the next two years, according to Trepp, a real estate research firm.
“These shops are under siege; it’s just a tsunami of stuff coming in,” said Taj Bindra, who oversaw Washington Mutual’s servicing unit from 2004 to 2006 and now advises financial institutions on risk management. “Lenders have a strong incentive to clear out inventory in a controlled and timely manner, but if you had problems on the front end of the foreclosure process, it should be no surprise you are having problems on the back end.”
A drive through the sprawling subdivisions outside Phoenix shows the ravages of the real estate collapse. Here in this working-class neighborhood of El Mirage, northwest of Phoenix, rows of small stucco homes sprouted up during the boom. Now block after block is pockmarked by properties with overgrown shrubs, weeds and foreclosure notices tacked to the doors. About 116 lender-owned homes are on the market or under contract in El Mirage, according to local real estate listings.
But that’s just a small fraction of what is to come. An additional 491 houses are either sitting in the lenders’ inventory or are in the foreclosure process. On average, homes in El Mirage sell for $65,300, down 75 percent from the height of the boom in July 2006, according to the Cromford Report, a Phoenix-area real estate data provider. Real estate agents and market analysts say those ultra-cheap prices have recently started attracting first-time buyers as well as investors looking for several properties at once.
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Lenders have also been more willing to let distressed borrowers sidestep foreclosure by selling homes for a loss. That has accelerated the pace of sales in the area and even caused prices to slowly rise in the last two months, but realty agents worry about all the distressed homes that are coming down the pike.
“My biggest fear right now is that the supply has been artificially restricted,” said Jayson Meyerovitz, a local broker. “They can’t just sit there forever. If so many houses hit the market, what is going to happen then?”
The major lenders say they are not deliberately holding back any foreclosed homes. They say that a long sales process can stigmatize a property and ratchet up maintenance and other costs. But they also do not want to unload properties in a fire sale.
“If we are out there undercutting prices, we are contributing to the downward spiral in market values,” said Eric Will, who oversees distressed home sales for Freddie Mac. “We want to make sure we are helping stabilize communities.”
The biggest reason for the backlog is that it takes longer to sell foreclosed homes, currently an average of 176 days — and that’s after the 400 days it takes for lenders to foreclose. After drawing government scrutiny over improper foreclosures practices last fall, many big lenders have slowed their operations in order to check the paperwork, and in two dozen or so states they halted them for months.
Conscious of their image, many lenders have recently started telling real estate agents to be more lenient to renters who happen to live in a foreclosed home and give them extra time to move out before changing the locks.
“Wells Fargo has sent me back knocking on doors two or three times, offering to give renters money if they cooperate with us,” said Claude A. Worrell, a longtime real estate agent from Minneapolis who specializes in selling bank-owned property. “It’s a lot different than it used to be.”
Realty agents and buyers say the lenders are simply overwhelmed. Just as lenders were ill-prepared to handle the flood of foreclosures, they do not have the staff and infrastructure to manage and sell this much property.
Most of the major lenders outsourced almost every part of the process, be it sales or repairs. Some agents complain that lender-owned home listings are routinely out of date, that properties are overpriced by as much as 10 percent, and that lenders take days or longer to accept an offer.
The silver lining for home lenders, however, is that the number of new foreclosures and recent borrowers falling behind on their payments by three months or longer is shrinking.
“If they are able to manage through the next 12 to 18 months,” said Mr. Zandi, the Moody’s Analytics economist, “they will be in really good shape.”
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New single-family home sales rose 7.3% in April To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 5/24/2011
New single-family home sales rose 7.3% in April, coming in at a 323,000 annual rate, beating the consensus expected pace of 300,000.
Sales were up in all major regions of the country.
At the current sales pace, the months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 6.5 in April from 7.2 in March. The decline in the months’ supply was due to both the faster pace of sales and lower inventories, which fell 5,000 from last month, hitting the lowest level on record, since at least 1963.
The median price of new homes sold was $217,900 in April, up 4.6% from a year ago. The average price of new homes sold was $268,900, down 0.6% versus last year.
Implications: New home sales rose 7.3% in April, beating consensus expectations for the second straight month. And for the first time since August 2007, sales increased in all four major regions of the country, showing that the gain in sales was widespread and not confined to one area. On top of that, the level of new homes in inventory fell to the lowest level on record, since at least 1963. While this is all very good news, it does not necessarily signal the start of a consistent upward trend. Sales remain in the range we have seen since last May, and the new home market still faces two major challenges. With such a large number of existing homes on the market, many of which are like new or are in foreclosure and steeply discounted, the new home market isn’t as attractive to buyers. Credit conditions also remain very tight, despite low mortgage rates, particularly for buyers who don’t have very good credit scores and a 20% down-payment. So while housing is clearly beginning to recover, these issues will keep the pace of recovery subdued for the time being. We expect new home sales to eventually increase substantially, but it will take several years to fully recover. In other news this morning, the Richmond Fed index, a measure of manufacturing activity in the mid-Atlantic, dropped to -6 in May from +10 in April. While this number was a disappointment, it is not consistent with other manufacturing indicators that show continued growth in manufacturing.
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http://www.digtriad.com/news/watercooler/article/178031/176/Florida-Homeowner-Forecloses-On-Bank-Of-America
How great is this? :-D
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ROTFLMAO!!! :lol:
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That is VERY Funny!
Back in 2005, I was a paid business consultant, and was hired by a Mortgage company to analyze their turnover, sales and closure rate. I was floored to learn of the practices in the Banking industry, and am NOT surprised that it tanked. If you haven't heard of the dark secret of the Banling Industry called YSP (yearly spread premium) you need to, and you should understand it well.
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http://www.vegasinc.com/news/2011/jul/08/las-vegas-home-sales-surge-prices-continue-fal/
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http://www.vegasinc.com/news/2011/jul/08/las-vegas-home-sales-surge-prices-continue-fal/
The Nevada state legislature repealed the laws of supply and demand. :wink:
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By ROBERT BRIDGES
At the risk of heaping more misery on the struggling residential property market, an analysis of home-price and ownership data for the last 30 years in California—the Golden State with notoriously golden property prices—indicates that the average single family house has never been a particularly stellar investment.
In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We've diverted capital from more productive investments and misallocated scarce public resources.
Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6% per year—to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census. Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61%.
So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.
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Here's another way of looking at the situation. If a disciplined investor who might have considered purchasing that median-price house in 1980 had opted instead to invest the 20% down payment of $19,910 and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index, the value of his portfolio in 2010 would have been $1,800,016. The stocks would have been worth more than the house by $1,503,196. If the analysis is based on 2007, the stock portfolio would have been worth $2,186,120, exceeding the house value by $1,625,850.
In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets? The answer is that for policy makers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.
These positive effects are transitory, however, when local economies have insufficient permanent employment to justify a constant level of demand for new housing stock. Existing housing does little to create new employment beyond limited levels of service employment. By contrast, a business investment in the amount of the several hundred thousand dollars represented in the value of a house would likely create many permanent jobs and produce income, profits and competition. As with most things, the benefits of building new homes come with a sobering caveat: What becomes of the work force once the party is over?
Home values may gain value over time, but home equity is locked-in until the house is sold. The profits may then be reinvested or spent, creating significant stimulative effects, but usually this happens when market conditions are strong, exacerbating unsustainable market booms. When troubled assets are dumped, or when defaults occur during weak market conditions, the trough is deepened.
Housing markets may be forever doomed to cyclicality for many reasons, but public policies that stimulate new construction or home purchases by tax and financing subsidies, reduction of qualifying incomes, buyer credits, mortgage backstopping, and preferential zoning and permitting, only intensify these cycles. Efforts to reduce loan balances and to create special rescue programs have reduced the security of loans, challenged the enforceability of contracts, and driven up real borrowing costs. Nearly a third of our states do not allow lenders the recourse provisions necessary to go after a borrower's personal assets in case of default on a residential mortgage. The sanctity of mortgage obligations has become the rough moral equivalent of the 55-mile-per-hour speed limit.
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Getty Images/Illustration Works
There is also a misconception that paying off a home mortgage is a path to financial or retirement security. The reality is that tapping the equity is expensive: Home-equity loans or lines of credit made with low qualifying incomes often command high interest rates and costs. If an emergency occurs—the loss of a job, or a business setback—it's likely that the same conditions creating the problem will lower the value and impede the marketability of the home and curtail the availability of financing for a buyer. Funds set aside for emergencies should always be liquid assets.
Is it wise for coming generations to continue to view ownership as the cornerstone of personal finance? Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can't afford both. With the specter of looming cuts in Social Security and other entitlement programs, or even possible systemic insolvency, the challenge for tomorrow's retirees is income self-sufficiency.
A nation of house buyers becomes captive to the economic cyclicality caused by bursts of construction activity, and it is not lifted or sustained by the limited levels of service employment related to existing housing. By contrast, a nation of business startups and investors supports our capital markets and creates long-term employment, income, exports and the myriad technological advancements desperately needed by an expanding American society.
New home construction and the markets for existing homes should be recognized as activities secondary to, and dependent on, employment. Healthy job markets create healthy property markets, not the reverse. Housing demand driven by job growth creates conditions capable of sustaining a stable level of construction employment, attracting private equity investment, sustaining competitive private debt markets, encouraging capital growth, and ensuring the lowest possible housing prices.
Owner-occupied homes will always be the basis for healthy and stable neighborhoods. But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.
Mr. Bridges is professor of clinical finance and business economics at the University of Southern California's Marshall School of Business.
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A recent George Will column writing about a new book recapping the runup to the collapse with a focus on housing, blaming liberal Democratic policies (with willing RINOs).
http://www.washingtonpost.com/opinions/burning-down-the-house/2011/06/30/AGeRSGuH_story.html
George F. Will: Burning down the house
“The louder he talked of his honor, the faster we counted our spoons.”
— Emerson
The louder they talked about the disadvantaged, the more money they made. And the more the financial system tottered.
Who were they? Most explanations of the financial calamity have been indecipherable to people not fluent in the language of “credit default swaps” and “collateralized debt obligations.” The calamity has lacked human faces. No more.
Put on asbestos mittens and pick up “Reckless Endangerment,” the scalding new book by Gretchen Morgenson, a New York Times columnist, and Joshua Rosner, a housing finance expert. They will introduce you to James A. Johnson, an emblem of the administrative state that liberals admire.
The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.”
The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”
In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.
There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-
income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.
As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption.
Under Johnson, an important Democratic operative, Fannie Mae became, Morgenson and Rosner say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7 billion a year. They retained about a third of this.
Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. That year Johnson’s $1.9 million bonus brought his compensation to $21 million. In nine years, Johnson received $100 million.
Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.
By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by the summer of 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties.
Morgenson and Rosner find few heroes, but two are Marvin Phaup and June O’Neill. These “digit-heads” and “pencil brains” (a Fannie Mae spokesman’s idea of argument) with the Congressional Budget Office resisted Fannie Mae pressure to kill a report critical of the institution.
“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.
Morgenson and Rosner report. You decide.
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Housing starts increased 14.6% in June To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 7/19/2011
Housing starts increased 14.6% in June to 629,000 units at an annual rate, easily beating the consensus expected pace of 575,000. Starts are up 16.7% versus a year ago.
The increase in June was about evenly split between multi-family starts, which rose 30.4% (and which are extremely volatile from month to month) and single-family starts, which rose 9.4%. Multi-family starts are double levels from a year ago while single-family starts are up 0.4%.
Starts rose in all major regions of the country.
New building permits increased 2.5% in June to a 624,000 annual rate, also easily beating consensus expectations. Compared to a year ago, permits for multi-unit homes are up 34.0% while permits for single-family units are down 3.8%.
Implications: Housing starts spiked higher in June, rising 14.6%, well above consensus expectations. The gains were about evenly split between the volatile multi-family sector, which has been trending higher since late 2009, and single-family homes. This gain supports our view from a couple of months ago that the dip in home building in the Spring was due to the unusually wicked tornado season. The details of today’s report were strong as well. Building permits, a sign of future activity, beat consensus expectations and the total number of homes under construction increased for the first time since 2006. Starts are not going to increase every month, but home building is set to trend higher over the next several years. Population growth and “scrappage” rates suggest that once the excess inventory of homes is cleared that the underlying trend for building activity is about 1.6 million starts per year. That’s about 2.5 times current levels. In other words, home building must increase substantially just to get back to “normal” levels, not even to go back to the overbuilding of the prior decade. For at least the near term, growth in multi-family construction should outpace the growth in single-family units. There is an ongoing shift toward renting rather than owning. Part of that shift is due to tight credit conditions which are unlikely to disappear very soon.
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Do we make this business look to easy? Article WHAT? authorizes the federal government to go into the landlord business.
Gov't considers turning foreclosures into rentals
WASHINGTON (AP) -- The Obama administration may turn thousands of government-owned foreclosures into rental properties to help boost falling home prices.
The Federal Housing Finance Agency said Wednesday it is seeking input from investors on how to rent homes owned by government-controlled mortgage companies Fannie Mae and Freddie Mac and the Federal Housing Administration.
http://hosted.ap.org/dynamic/stories/U/US_GOVERNMENT_HOME_RENTALS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2011-08-10-13-18-31
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IIRC pp wrote a couple of months ago that real estate prices would drop for one more year due to the still large backlog in foreclosures. Just thought I would bring the question here from the stock, gold and investment threads, have people thought about putting any of what they might have left in real estate, with the idea that there are some amazing buys available out there and it is impossible to time the exact bottom of any market. Assuming this once great country eventually makes a strong comeback, prime property will again have real value. Housing will turn right after (if/when) investment and employment conditions turn IMHO.
I have shared pp's wisdom with people off the board, adding that a) there is no hurry if prices are still falling and b) you can buy now if you anticipate the price at the bottom of the market and offer it now. What does the seller have to gain by waiting for prices to fall further.
Real estate has some similarities to gold, somewhat finite quantity and not directly tied to a currency, and differences like property taxes, regulatory abuse and other things that can go wrong. OTOH, gold is at record highs and real estate at recent record lows. I have bought homes during this downturn for 30% less than I was paying 30 years ago, with as fast as a 2 year rough payback on purchase price from rent. People could conceivably buy the site or land of their dream home now and build it later when incomes improve.
Each market is different. I wonder what others are seeing.
http://www.twincities.com/ci_17826562
Twin Cities home prices down (another) 15 percent; 4 in 10 sales are foreclosures
The Twin Cities median home price fell more than 15 percent last month to $140,000 from a year earlier, according to data released today.
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CounterPOV: Popped bubbles don't bounce.
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"CounterPOV: Popped bubbles don't bounce."
Fair enough. We will see. But people need a place to live and they demand location and quality, in the sense of being willing to pay a good share of their income to get it. With gold for example, it is only a function of what other people will pay for it - more volatile up and potentially more volatile down.
More importantly (IMO), some experts say housing is still overpriced and maybe most of it still is. I only buy when I think it is under-priced / under-valued.
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Good luck and prosperity to both of us :-)
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"CounterPOV: Popped bubbles don't bounce."
Fair enough. We will see. But people need a place to live and they demand location and quality, in the sense of being willing to pay a good share of their income to get it. With gold for example, it is only a function of what other people will pay for it - more volatile up and potentially more volatile down.
More importantly (IMO), some experts say housing is still overpriced and maybe most of it still is. I only buy when I think it is under-priced / under-valued.
If one can find property in a place that is a location you don't mind having a pretty permanent base of operations and can own it outright, that can be a good thing for the rough times I expect to see happen not far off from now.
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A VERY valid point, but one distinct from the investment POV.
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A VERY valid point, but one distinct from the investment POV.
I think the idea of a home as more than a place to live is dead and gone, at least for a generation, if not longer.
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Housing starts fell 1.5% in July to 604,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/16/2011
Housing starts fell 1.5% in July to 604,000 units at an annual rate, slightly beating the consensus expected pace of 600,000. Starts are up 9.8% versus a year ago.
The decline in July was due to single-family starts, which fell 4.9%. Multi-family starts (which are extremely volatile from month to month) rose 7.8% in July. Multi-family starts are up 47.9% from a year ago while single-family starts are down 0.9%.
Starts fell in the Midwest and West, but rose in the Northeast and South.
New building permits fell 3.2% in July to a 597,000 annual rate, below the consensus expected pace of 605,000. Compared to a year ago, permits for multi-unit homes are up 16.3% while permits for single-family units are down 1.2%.
Implications: Housing starts came in at a 604,000 annual pace in July, slightly beating consensus expectations. While this was lower than last month, the level of starts remains far above levels we saw earlier this year, supporting our view from a few months ago that the dip in home building in the Spring was due to the unusually harsh tornado season. The decline in July was due to single-family starts, which fell 4.9%. In the volatile multi-family sector (which has been trending higher since late 2009), starts rose 7.8%. After rising last month, the total number of homes under construction fell again – to the lowest level on record (since at least 1970). This decline was largely due to the fact that building completions rose 11.8%, to the highest level in over a year. We should see a shift again next month to fewer completions and rising starts as the housing market slowly recovers. Based on population growth and “scrappage” rates, home building must increase substantially to avoid shortages in some regions of the country and with the ongoing shift toward renting rather than owning, growth in multi-family construction should continue to outpace the growth in single-family units. In other news this morning, import prices rose 0.3% in July. Overall import prices are up 14% in the past year and up 5.5% excluding oil. Export prices declined 0.4% in July but are up 9.8% in the past year. Ex-agriculture, export prices rose 0.2% in July and are up 8.3% in the past year, the largest increase on record (dating back to the mid-1980s).
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Data Watch
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Existing home sales declined 3.5% in July to an annual rate of 4.67 million units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/18/2011
Existing home sales declined 3.5% in July to an annual rate of 4.67 million units, coming in below the consensus expected pace of 4.90 million units. Existing home sales are down 21.0% versus a year ago.
Sales in July were down in the West and South, but up in the Northeast and Midwest. All of the decline in sales was due to single-family sales; condos-coops sales were unchanged.
The median price of an existing home fell to $174,000 in July (not seasonally adjusted), and is down 4.4% versus a year ago. Average prices are down 3.2% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 9.4 from 9.2 in June. The increase in the months’ supply was mostly due to the slowdown in the pace of sales. An increase in condos-coops inventories also boosted the months’ supply.
Implications: Sales of existing homes fell to an eight-month low in July. The consensus expected a gain to 4.90 million units at an annual rate due to the strong showing of pending home sales over the past couple of months. Pending home sales are homes that have gone under contract to be purchased. What seems to have happened is that people have decided to cancel on their contracts. The National Association of Realtors said that cancelled contracts to buy existing homes remained at higher levels over the past two months from a more typical 9% - 10% over the past year. The spike in cancellations is probably due to a couple factors. First, stricter lending rules and low appraisals seem to be playing a large factor. Second, with the debt debate looming in July this may have spooked some people from closing on their contracts. We expect a bounce back in existing homes next month. In other news, The Philly Fed index fell to -30.1, the lowest level in over two years. The consensus expected a decline to 2.0. There are times when manufacturing surveys are more based on sentiment, and we believe with all the financial turmoil that has been happening in Europe, along with the large market losses over the last couple weeks, that this is one of those times. However, mid-month manufacturing indicators should not be completely ignored and we will be paying close attention to these along with the weekly indicators we follow to see if we see any change to our forecast. So far, other than data which measure sentiment, the economy appears to be avoiding any sharp downturn.
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The only positive side of the continued housing debacle is that I am extremely thankful that pp gave us a headsup that it was going down for (at least) another year. I got some mileage out of that information helping others and it turned out to be true.
It is all tied together. The economy doesn't come back without housing and housing doesn't come back without a positive turn in the economy.
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New single-family home sales fell 0.7% in July To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 8/23/2011
New single-family home sales fell 0.7% in July, coming in at a 298,000 annual rate versus a consensus expected pace of 310,000.
Sales were down in the South and West, but up in the Northeast and Midwest.
At the current sales pace, the months’ supply of new homes (how long it would take to sell the homes in inventory) was unchanged at 6.6 months. Inventories fell slightly, but so did the pace of sales. Inventories are at their lowest level on record, dating back to 1963.
The median price of new homes sold was $222,000 in July, up 4.7% from a year ago. The average price of new homes sold was $272,300, up 8.0% versus last year.
Implications: New home sales declined slightly in July, remaining in the very low range they have been in since May 2010. This number is based on contracts signed in July, at the height of the debt ceiling debate and (unwarranted) fears of a government default. New home sales face a number of strong headwinds. Credit conditions remain tight (even as mortgage rates decline) and many existing homes are selling at steep discounts, including foreclosed properties and short sales. However, the inventory of new homes for sale fell to the lowest level on record yet again in July. This is exactly what must happen to speed up the eventual housing recovery. The median price of a new home is up 4.7% versus a year ago while average prices are up 8.0%. In other news this morning, the Richmond Fed index, a measure of manufacturing in the mid-Atlantic, fell to -10 in August from -5 in July. Regional surveys of manufacturing activity have performed poorly so far in August, but this probably reflects the nature of survey data, which can sometimes reflect sentiment rather than actual levels of business activity. Chain-store sales have decelerated modestly so far in August (when they usually slow anyhow) but are still running solidly above year-ago levels, 3.6% according to Redbook, 3% according to the International Council of Shopping Centers.
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This is Pravada on the Hudson and so we must read between the lines. I could be wrong but I wonder about the conjunction of the subject matter of this article and the recent investigation of 17 financial firms. IIRC Fannie Mae's Raines (who now sits with major-donations-recipient-as-a-Senator Oboma) already got in trouble for accelerating FM's profits so as to inflate his bonuses)
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Regulators are nearing a settlement with Fannie Mae and Freddie Mac over whether the mortgage finance giants adequately disclosed their exposure to risky subprime loans, bringing to a close a three-year investigation.
The proposed agreement with the Securities and Exchange Commission, under the terms being discussed, would include no monetary penalty or admission of fraud, according to several people briefed on the case. But a settlement would represent the most significant acknowledgement yet by the mortgage companies that they played a central role in the housing boom and bust.
And the action, however limited, may help refurbish the S.E.C.’s reputation as an aggressive regulator, particularly as the country struggles with the aftereffects of the financial crisis that the housing bubble fueled.
But the potential settlement — even it if it is little more than a rebuke — comes at an awkward time for Fannie Mae and Freddie Mac. Last week, the government overseer of the two companies sued 17 large financial firms, blaming them for luring the mortgage giants into buying troubled loans. That is a similar accusation to the one the S.E.C. is leveling at Fannie and Freddie — that the two entities misled their own investors. The case against the financial firms could be complicated should Fannie and Freddie sound a note of contrition for their own role in the implosion of the mortgage market in settling with the S.E.C.
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LinkedinDiggFacebookMixxMy SpacePermalink6 CommentsTwitter .The agency abandoned hopes of assessing a fine because of the precarious financial positions of the two companies, according to the people briefed on the case, who spoke on condition of anonymity because the deal was not yet final. The government has already propped up Fannie Mae and Freddie Mac with more than $100 billion since taking control of them in 2008. Any fee levied against them would simply wind up on the taxpayers’ tab.
The negotiations have been going on since at least early summer, and a deal may not materialize until later this year, these people cautioned. Fannie Mae, Freddie Mac and the S.E.C. all declined to comment.
The sprawling investigation into Fannie Mae and Freddie Mac once encompassed both civil and criminal elements, making headlines as one of the most significant cases to stem from the financial crisis. The case also threatened to ensnare some of Fannie and Freddie’s former top officials. Earlier this year, recent chief executives at both companies received so-called Wells notices from the S.E.C., an indication that the agency was considering a civil enforcement action against them.
But three years on, the civil settlement would be the only government action against the companies.
The criminal inquiry has sputtered to a halt. The Justice Department has concluded its inquiry, at least at Freddie Mac, according to a securities filing in August by the company. No charges have been filed against either company.
At the S.E.C., regulators have zeroed in on the fine print of Fannie’s and Freddie’s disclosures, according to those who have been briefed on it. The agency is specifically looking at the way the companies reported their subprime mortgage portfolios and concentrations of loans extended to borrowers who offered little documentation.
While Fannie and Freddie do not offer home loans, they buy thousands of mortgages from lenders and resell them in packages to investors. The S.E.C.’s case hinges on whether the companies misled the public and regulators by lowballing the number of high-risk mortgages on their books.
One potential weakness of the case is that it hinges on the definition of subprime, which the government itself has struggled to nail down. The term often references loans to borrowers with low credit scores and spotty payment records. But Fannie and Freddie categorized loans as prime or subprime based on the lender rather than on the loan itself.
The path to the current settlement talks at Fannie Mae and Freddie Mac has been a delicate one. While internally, the two companies did not view the government’s case as particularly strong, they said they moved to settle to spare time and precious resources, according to one person close to the talks. In addition, the companies asked that whatever the settlement, it not include a fine or accusations of fraud in the hopes of protecting an already battered morale and an empty purse at the institutions.
In particular, a fraud accusation could cause an exodus of the employees best equipped to dig the institutions out of their current morass, people close to the talks said. A settlement with the mortgage companies would be a first step in wrapping up the S.E.C.’s broader examination. The agency is still pursuing potential claims against at least four former executives at Fannie and Freddie.
This summer, lawyers for Richard Syron, the former chief of Freddie Mac, and Daniel H. Mudd, his counterpart at Fannie Mae, met with the S.E.C.’s enforcement chief, Robert Khuzami, according to some of the people briefed on the case.
The S.E.C. has sent Wells notices to Mr. Syron; Mr. Mudd; the former chief financial officer at Freddie Mac, Anthony J. Piszel; and Donald J. Bisenius, executive vice president at Freddie until his recent departure.
None of the individuals have been accused of any wrongdoing.
Mr. Mudd and Mr. Syron are the two most prominent executives swept up in the case. Mr. Mudd is now chief executive of the public traded hedge fund and private equity firm Fortress Investment Group. Mr. Syron, a former president of the American Stock Exchange, is an adjunct professor at Boston College and serves on its board of trustees.
Through their lawyers, Mr. Mudd and Mr. Syron declined to comment. The S.E.C. could yet decide not to sue the former executives.
Ultimately, the two mortgage companies have larger worries to confront than the potential citations: chief among them is their continuing viability.
Earlier this year, the Obama administration announced plans to wind down the two companies, leaving the fates of the companies unresolved and the future of government-backed housing finance in doubt.
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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.
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One link on the lawsuit story: http://dealbook.nytimes.com/2011/09/06/u-s-takes-hard-line-in-suits-over-bad-mortgages/ Feds suing institutions that are federally insured... Cut off new funding and existing losses get worse. Yes, very confusing when there is no painless way out.
PP, Great to you have you back in. A bad situation but very helpful info. I have made good use of the info you already posed; not getting rich but avoiding new mistakes. Combining the numbers Fannie, Freddie, FHA and VA, mortgages are 95% federal(?) and the other 5% I assume are federally insured banks? And none of it is savings based, as in the old S&L concept.(?) As one who is greatly exposed to the continued downturn, this is painful. Housing is tied to jobs and income so the ending of bailouts and closing of failed agencies needs to follow the policies that will lead back to growth, meaning no time soon.
Other groups tied to property values include the property tax authorities across the country. I wonder what percent of foreclosed homes never make it back to life. 90,000 in Detroit alone? http://online.wsj.com/article/SB10001424052748703950804575242433435338728.html
(I hear the Kelo property in New London is still available.)
The reforms needed lead to higher mortgage interest rates, but that is in addition to the certainty that rates out of the Fed eventually will rise and that rise could be severe when new dollars already printed have their known effect. People only pay the monthly that they can afford so it follows that values will drop further. Plenty of people are still in adjustables at artificially low rates partly because they can't qualify to refinance what they already owe, so when rates go up and up, down go more more properties into default.
Besides aging baby boomers with fading birth rates, net immigration I think is close to zero so demographics won't bring any explosion of demand.
I favor privatization wherever possible, but that alone doesn't make any of this go away. Only sustained, robust economic growth can make a positive difference on housing IMO. That could be years out?
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Doug,
I am generally very busy, so I tend to forget about this website. Right now, I am preparing for being an expert witness in a Predatory Lending trial, one of the worst I have ever seen.
The link to the article you posted made me wonder about the author, who is a law professor. He writes: "Unlike other purchasers, the F.H.F.A. can pursue its claims even though Fannie Mae and Freddie Mac bought the mortgage securities from 2005 to 2007 because a provision of federal law extends for up to three years the limitations period for filing claims." Unless my calendar is all screwed up, we are past the three year mark for even 2007 vintage loans.
You are right about the 95% percentage. The other 5% are generally banks, some hard money lenders, and one securitized product each year, from Redwood Trust.
The rest of what you write sounds like you really understand what is going on. The fact is that we are not likely to have housing recovery for less than 20 years.
Here are links to a 3 Part Article I wrote for a website about what we face.
http://ml-explode.com/2011/08/promoting-housing-recovery-parts-i-and-ii/
http://ml-explode.com/2011/08/promoting-housing-recovery-part-iii-proposed-solutions-for-the-housing-market/
The 9th Circuit Court just dealt those arguing against MERS a potentially fatal blow. It essentially said that the actions of MERS were properly disclosed through the Deed of Trust, and one could not claim fraud. It also ruled that the Note and Deed were not fatally separated, and that the use of MERS did not mean that foreclosure was impossible. Combine this ruling with Gomes v Countrywide in California, and essentially there are only "technical defects" left to argue, and those defects can be corrected so that foreclosure can occur. Of course, BK is still an option to try and prove legal standing, but the MERS ruling will make that more problematic.
Attorneys for homeowners are trying to spin the 9th decision as showing how to argue foreclosure in State Courts, but this is simply more "misrepresentation" to keep their income flows rolling in. For my analysis on this,
http://globaleconomicanalysis.blogspot.com/2011/09/arizona-circuit-court-ruling.html?x#echocomments
http://globaleconomicanalysis.blogspot.com/2011/09/mers-addendum-circuit-court-ruling-has.html?x#echocomments
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Pat and all, I have gone through the links to those writings and others and am extremely impressed. Though I am a big picture person, there are many pieces in this puzzle that are interesting topics of their own and apply to other topics here as well.
It is fascinating (scary) to see how the government sponsored entities like Fannie and Freddie went, in a short time, from just a way to open home ownership up to a few more people to a takeover of 95% going on 100% of the market. Hard to follow that story and not think of what is happening in health care.
This passage from 'Forces Facing The Housing Market' applies to a discussion on tax deductions today: "Debt reduction commissions have recommended that one manner to increase income to cover debt would be in eliminating the mortgage deduction. The affect of any such action would immediately crash the housing market. For many, the deduction is the single most important reason to buy a home. Eliminate the deduction, you eliminate purchases, and the result is another round of decreasing home values."
We need to solve problems in this country but we don't need to move so radically against a largely positive thing when we could correct about a hundred thousand worse policies first.
There are other points I would like to explore, one is how impending inflation will affect housing. Pat made a powerful point in loan modifications that pushing the excess principle past the original term of the mortgage allows those dollars to be paid back in 30 year forward dollars for example- far cheaper for the borrower without requiring a principle write down now for the lender. The effect of inflation even at 3-4% is an integral part of a 30+ year money equation and inflation that is coming is likely much higher.
A big factor in the housing recovery is how general economic conditions affect how we work our way past the foreclosure and underwater inventory excesses. The 6, 10 or 20 year recovery time estimates assume I think that we keep trudging forward at Obamanomic economic stagnation speed. Another scenario is that we may not be that far away from an economic growth resurgence that is more robust than experts are predicting. 6 million more foreclosed homes sold may only require somewhere between 6 and 12 million new jobs, which is not unprecedented or out of the realm of possibilities.
On the demographic front, I would add the possibility of a pro-active immigration policy, bringing in some measure of investment, skill and youthfulness. For example, one idea is to offer the best and brightest of those who already come here for our universities the possibility of staying under certain positive conditions. New entrants might be more welcome, appreciated and assimilate better and faster if they are small business entrepreneurs and employers, energy or software engineers or filling other specific needs in our economy. They are more likely to acquire housing of their own if they are legal, documented and economically engaged. Not just housing but social security and retirement systems survival will require new workers and new energy. A controversial idea but food for thought.
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Amen to the appreciation of Pat's superb posts.
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With the government's lawsuits last week against 17 big banks, we can now say we've seen it all. The suits attempt to argue that Fannie Mae and Freddie Mac, the government-created mortgage giants at the center of the financial crisis, were in fact unwitting victims.
One has to laugh or cry examining the complaints drafted by Fan and Fred's regulator, the Federal Housing Finance Agency (FHFA). As the conservator for the two mortgage monsters since their federal rescue in 2008, the FHFA is suing most of the financial industry on grounds that banks misrepresented to Fan and Fred the quality of loans inside mortgage-backed securities bought by the two firms during the housing boom. Yes, Fannie Mae and Freddie Mac are now shocked, shocked to discover they were buying low-quality mortgages during the housing mania.
We know that FHFA Acting Director Edward DeMarco has a mission to protect the taxpayers who have bailed out Fannie and Freddie with $171 billion and counting. It's also true that Mr. DeMarco deserves taxpayer gratitude for his efforts to resist additional housing bailouts. But when examining the new bank lawsuits, it's worth remembering that an attorney doesn't have an obligation to sue everyone with whom his client has ever done business. And taxpayers may wonder if they'll really be better off after Washington attempts this cashectomy on a still-weak banking system.
Any cash would have to come from a settlement, because we can't imagine the feds bringing these cases into a courtroom. At that point the FHFA's attempt to cast Fan and Fred as victims might have to be reconciled with a voluminous FHFA paper trail blaming Fan and Fred for "unsafe and unsound practices," "imprudent decisions" to "purchase or guarantee higher risk mortgage products," and its determination to take on more risk despite internal and external warnings.
Even the report of the Financial Crisis Inquiry Commission, whose Democratic majority tried to minimize government's role in the meltdown, acknowledged the Fan and Fred mess. Its final report quoted an FHFA examiner who observed that Fannie was "the worst-run financial institution" he'd seen in 30 years as a regulator.
The common theme in the new lawsuits is that banks misled Fan and Fred about how many of the loans inside the mortgage pools were going to owner-occupants versus speculators, and how high the ratio was of the value of a loan to the value of the property.
Many of these securities included dodgy subprime and "Alt-A" loans, meaning the borrowers had low credit scores or provided little or no documentation to back up their claims. But Fan and Fred thought that by buying the triple-A tranche of these securities they would be the last ones stuck with the losses. The toxic twins were happy to enjoy the high yields while also fulfilling their federal affordable-housing mandates, even as they warned in securities filings that they were taking on more risk.
So to sum up the argument made by the FHFA: Fan and Fred were duped by banks because the two mortgage giants thought they were buying pools that included very risky mortgages, when in fact they included insanely risky mortgages.
Several of the bank defendants say that on their deals Fan and Fred could have studied the "loan tape," with detailed information on mortgage borrowers, if they had cared enough to make their own judgments on risk. On the question of property values, the government fed publicly available data into a computer model and decided that the properties were valued too highly during the real-estate bubble. No kidding.
But if there were fraudulent appraisals at the time, this would suggest a lawsuit against appraisers, unless one is simply looking for the deepest shareholder pockets. In any case, why didn't Fan and Fred use such a model before deciding to buy?
On the question of occupancy, if a buyer falsely claimed that he would occupy a given property, why is the bank any more liable than Fan and Fred are? The two mortgage giants had already agreed to buy pools of loans with little or no documentation of the borrowers' claims. Why? Because Fan and Fred's well-paid management and boards were enjoying the ride, and they knew that taxpayers would be there to pay the bill when it ended.
To be clear, not all of the loans went bad, and some of the securities mentioned in the suits are still paying on time and in full. So exactly how much harm are Fan and Fred alleged to have suffered at the hands of banks?
FHFA won't say. These look like lawsuits with a premise to be named later.
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Data Watch
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Housing starts fell 5.0% in August to 571,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/20/2011
Housing starts fell 5.0% in August to 571,000 units at an annual rate, coming in below the consensus expected pace of 590,000. Starts are down 5.8% versus a year ago.
The decline in August was mostly due to multi-family starts, which are extremely volatile from month to month and which fell 13.5%. Single-family starts declined 1.4%. Multi-family starts are down 14.0% from a year ago while single-family starts are down 2.3%.
Starts fell in the Northeast and South, but rose in the Midwest and West.
New building permits gained 3.2% in August to a 620,000 annual rate, easily beating the consensus expected pace of 590,000. Compared to a year ago, permits for multi-unit homes are up 7.8% while permits for single-family units are up 2.0%.
Implications: Home building was stuck in the mud in August, both literally and figuratively. Housing starts declined 5% and fell short of consensus expectations. In addition, the total number of homes under construction fell to a new record low (since at least 1970). However, the weakness in August was largely due to Hurricane Irene. In the face of reports about the on-coming hurricane as well as its actual landfall and aftermath, builders postponed breaking ground on new homes. Excluding the Northeast, which was the hardest hit region, single-family starts were unchanged in August, which pretty much sums up the state of single-family construction for the past couple of years. Multi-unit starts were down in August, but as the top chart to the right shows, are still in a general rising trend as more former homeowners become renters. The brightest news from today’s report was that permits to build new homes were up 3.2% and came in well above consensus expectations. Permits are now up 7.8% versus a year ago. Excluding the temporary burst in activity in late 2009 and early 2010, which was due to the homebuyer tax credit, this is the steepest climb in permits since 2005, back before the housing collapse began. The rise in permits is consistent with our view that housing is at or very close to an upward inflection point. Based on population growth and “scrappage” rates, home building must increase substantially over the next several years to avoid eventually running into shortages.
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B.S.
There is still a huge shadow inventory of homes yet to be foreclosed on. There is still air in the bubble and the market has not yet found the floor.
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"There is still a huge shadow inventory of homes yet to be foreclosed on. There is still air in the bubble and the market has not yet found the floor."
True. PP has documented that very well. Housing will recover only after more people start making significantly more money. Some say 20-30 years, some say never. I say the economic recovery will begin very quickly after our disastrous economic policies are corrected, and housing will always be a major part of household expense priorities.
In total, there is still an oversupply of homes and they are mostly still over-valued - for our economy and demographic. A bold change in economic policies will be extremely hard to achieve no matter who wins the next election.
But if we do turn the economy around and real incomes grow, along with the very likely and unfortunate onset of future inflationary growth, today's debts and sunken investments become trivial and a prosperous people will be busy buying, building and re-building homes again as their largest investment and expense.
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But if we do turn the economy around and real incomes grow, along with the very likely and unfortunate onset of future inflationary growth, today's debts and sunken investments become trivial and a prosperous people will be busy buying, building and re-building homes again as their largest investment and expense.
Agreed.
As has been said before, decline is a choice.
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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.
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PP,
Do you think mortgage rates will continue down?
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Existing home sales rose 7.7% in August To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 9/21/2011
Existing home sales rose 7.7% in August to an annual rate of 5.03 million units, easily beating the consensus expected pace of 4.75 million units. Existing home sales are up 18.6% versus a year ago.
Sales in August were up in all major regions of the country. Almost all of the increase in overall sales was due to single-family homes. Sales of condos/coops rose slightly.
The median price of an existing home fell to $168,300 in August (not seasonally adjusted), and is down 5.1% versus a year ago. Average prices are down 4.0% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 8.5 from 9.5 in July. The drop in the months’ supply was due to both the faster pace of sales as well as a smaller inventory of homes for sale.
Implications: Sales of existing homes rebounded sharply in August, coming in well above consensus expectations, and beating the forecast of all 74 economic groups that made predictions. What makes the 7.7% gain to a 5.03 million annual pace even more impressive is that it came in the face of financial volatility in August as well as a hurricane that hit the eastern seaboard late in the month. It would not have been surprising if these factors temporarily depressed sales, which are counted at closing. Lenders could have balked, asking for a larger down-payment or re-inspection to make sure the storm did not damage the home; buyers could have balked out of (in our view, unwarranted) concern about a double-dip recession. Despite these potential pitfalls, the strength in sales was widespread, increasing in all major regions of the country and for both single-family homes and condos/coops. While a large portion of sales came from distressed properties (such as foreclosures and short sales), this is necessary for inventories to continue to be worked off and for the housing market to ultimately recover. The inventory of existing homes is down 13.1% in the past year and homes available for sale this August were at the lowest level for any August since 2005. Despite today’s good news, strict lending standards continue to making access to credit difficult, so we don’t expect robust sales gains every month. In other recent news, the growth of chain store sales continues to show we are not in recession. Last week’s same-store sales were up 3.4% versus a year ago according to the International Council of Shopping Centers and up 4.1% according to Redbook Research.
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I hope PP weighs in, but it's my understanding that a good portion of those sales of existing homes were repos being bought for pennies on the dollar. If so, that's not exactly a recovery.
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http://www.zerohedge.com/news/youwalkawaycom-bringing-moral-hazard-deadbeat-near-you
YouWalkAway.com: Bringing Moral Hazard To A Deadbeat Near You
Submitted by Tyler Durden on 09/21/2011 00:19 -0400
default Demographics Fox Business Housing Market Moral Hazard Reality RealtyTrac RealtyTrac Unemployment
Tonight's feel-good story of our time is a desperate stroll through the reality of the US housing market for millions of individuals (as opposed to the hope-driven must-say-something-positive spin the home-builder CEOs have been spewing recently). Notices-of-default jumped 33% in August, a nine-month high and largest month-over-month increase since August 2007 and it is becoming increasingly acceptable to walk away from contractual agreements as strategic default becomes the New American Dream.
Fox Business runs the story: The New Face of Foreclosure: Strategic Defaults:
"There are 3 million to 4 million seriously delinquent mortgages that under normal circumstances would be in foreclosure but have been kept out by procedural delays and paperwork problems," says Rick Sharga, RealtyTrac senior vice president. The recent spike in foreclosure starts suggests lenders are "hitting the restart button" on cases that were delayed by documentation problems such as robo-signing, he explains.
YouWalkAway.com surveyed several hundred of its clients earlier this year, and just 23% said they had previously shirked a financial obligation. "The people we are now seeing are nearing retirement age, who never missed a payment on anything in their lives," says Jon Maddux, co-founder and CEO of the Carlsbad, Calif., firm. "They are trapped. They can't sell or get a modification and they need to downsize or move for a job."
Attitudes toward default have also shifted, Maddux says. "Back in 2008 people were very emotional, very scared, in disbelief or denial," he says. "Now they are simply fed up. It's a very calculated, black-and-white business decision. People feel very relieved."
A more widespread understanding of the consequences of default may be a factor, says Brent White, a University of Arizona law professor and author of Underwater Home.
And an example of the justification - for better or worse:
"I was looking for a way to get back to a larger city, and this was the only way I could get out of this house," says Kessler, who paid $800 to YouWalkAway.com to help guide him through the process known as strategic default.
"I don't feel guilty at all about walking away from the place," he says. "The banks really did it to themselves. They made a ton of money with me over the years. I owned four or five houses. But I don't think I'll ever buy another house. I'll probably just rent until they put me in a nursing home."
So, we have dramatically bad unemployment in the youngest age demographic, middle-age demographics have seen net worth crushed in the last few years and are lucky to have a job, and now the elder demographic is increasingly opting for strategic default. All-in-all, not such a rosy picture (but but corporate profit margins are at record highs).
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I'm back.
I do expect interest rates to go lower. I would expect that we shall see 3.5% par within a few months, and eventually see close to 3%. The problem is that the lower rates will not achieve what is hoped.
Traditionally, lower rates meant that home values would increase, so this would be a measure to try and prop up home values. Also, it is thought that lower rates would bring more buyers into the market. But for potential home buyers, on a $200k loan, a decrease of 1% in interest rates would change a monthly payment by $119 per month. This is an insignificant amount and will have little or no effect to home purchases.
Here is the real reason for decreasing rates. Right now, 75% of Fannie and Freddie loans are above 5%. Due to income issues, loan to value issues, and credit, these homeowners cannot refinance to lower rates currently in effect.
The new Refinance Program being pushed by Obama is aimed at eliminating this problem. There will be no income verification, no loan to value restrictions, and the only credit restriction is to be "up to date" on your mortgage for the last three months. If you meet the credit restriction, then you can qualify for the new program.
Dropping interest rates before the new program takes affect would offer an added benefit of lower rates. People in the 4's would consider refinancing as well. The end result is that this would be an "incredible" stimulas program for the economy. But, there are problems with this.
The bond investors are the ones who will take it in the shorts. Their bonds will be "retired" from the refinances. Instead of returns in the 4-5's, they will be faced with returns in the low 3's. Would they want to buy the bonds with such a rate of return?
Even worse for the investors, the refinances will be far riskier. No income verification, no loan to value restrictions, and no real credit review would eliminate the key to determining loan repayment ability. So the risk level is dramatically increased.
But, that is not all. 125% loan to values and above are not acceptable for normal GSE bonds. A separate bond issue must be done for those loans only. All the parameters for the loans are disclosed, so an investor knows what he is getting before he buys.
The government is banking on selling these bonds because they assume that there are buyers for riskier investments. But, how much return can reasonable be expected when interest rates are in the 3's.
125% and above loans are defaulting at 50% rates over time. That means these bonds are going to be incredibly risky and will suffer large default percentages, even with the lower interest rates and payments. Who would want these bonds without government guarantees of no losses.
Finally, this program would at some point in time be "opened" for non GSE loans that met GSE requirements at origination. When refinanced, they would be "new GSE loans". So, private investors are taken off the hook for these loans, and the government and taxpayers would be the ones to lose in any defaults.
See any problems with what is proposed?
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See any problems with what is proposed?
I'm sure it'll work out as well as all the other gov't interventions in the market...... :roll:
So what's your take on the alleged 7.7 % rise in existing home sales?
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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.
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thanks PP
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WSJ
State Attorneys General were shocked—shocked!—to discover sloppy foreclosure practices last year in the wake of the housing boom and bust, and they have used that revelation to try to squeeze billions of dollars out of the nation's largest banks. Here's a bigger scandal: Fannie Mae knew about the problem years ago.
In a report issued Friday to little media notice, the Inspector General for the Federal Housing Finance Agency (FHFA) found that "in 2005, Fannie Mae hired an outside law firm to investigate a variety of allegations referred by one of its investors regarding purported foreclosure processing abuses and other matters." The next year the law firm reported back that some practices, such as filing false paperwork, were "unlawful" and should stop, and it noted that Fannie was implementing a computer system to improve oversight of its foreclosure processing attorney network.
So far, so good—except for what didn't happen next. The IG says that neither Fannie nor its regulator FHFA acted on the 2006 report, and the computer system also didn't materialize. FHFA "examination officials" only learned of the report's existence in March after reading an article in this newspaper.
The IG's report again highlights the loose rules that Fannie and Freddie Mac operated under during the housing boom. Fannie "placed a higher priority on meeting specific earnings goals than it did on ensuring proper accounting, risk management, internal controls, and complete and accurate financial reporting," the IG report recalls from a prior review.
In a letter responding to the IG, FHFA Associate Director Elizabeth Scholz mused: "An effective operational risk program would not have prevented servicing personnel and licensed attorneys from engaging in improper, unethical or fraudulent practices." Maybe not, but since we're talking hypotheticals, wouldn't better oversight of foreclosure practices have helped mitigate the problem?
So far no one has uncovered evidence that banks kicked nondelinquent borrowers out of their homes, despite robo-signing and other sloppy paperwork. Surely the practices of Fannie and Freddie deserve equal scrutiny.
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"Uncle Sam is about to take a first tentative step out of the mortgage business by lowering the size of home loans that the federal government will guarantee."
Can someone explain to me why Uncle Sam is in the mortgage business in the first place? If you are not qualified for the loan without a government guarantee, maybe
you shouldn't borrow the money :-o
http://www.latimes.com/business/la-fi-loan-limits-20110927,0,7797548.story
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There is so much "disinformation" about the foreclosure crisis being propagated that it is not possible for the layman or even the "semi-versed" person to distinguish between fact and fiction. The legal issues involved, combined with the "sensationalism" of the stories, and the vocalism of the homeowner advocates, make for a breeding ground for all sorts of opportunists, AG''s included.
The AG's have taken up the legal battle only because of the 2012 elections coming up. They are all political animals that are looking towards reelection, or higher office. Much of their motivation also includes the money to be made by settlements that would go into government coffers.
Much of what has been alleged to be unlawful, is not so. MERS has agency relationships with lenders, and can execute documents legally. The assignments of MERS are lawful.
"Back-dated" assignments, as is alleged by many is simply not true. Claims are made that when the assignment is executed prior to foreclosure, it has been "back-dated" to the closing date of the Trust. This is simply a distortion of the truth, when one considers the Uniform Commercial Code, the Pooling and Servicing Agreement, and the MERS relationship. The problem is that even the lender's attorneys do not understand all the concepts and therefore, they fail in arguments before the Court, and in doing so, allows for some bad rulings from the court.
Some issues are certainly problematic. An example is that in the Judicial Foreclosure states, the person signing the Court Filing must have "personal knowledge" of the events to which he is signing for, i.e. the loan being in default. But, what is the standard for personal knowledge?
By the time the person is ready to sign the affidavit, the foreclosure status has been seen by the servicer, Trustee, and the law firm. Several people have looked at the documents related to the foreclosure. But if the person who signs for the law firm has not inspected the documents, then the foreclosure filing is fraudulent according to many.
Some courts have ruled that even viewing the servicing history on a computer screen or computer printout is not a factual basis for personal knowledge and therefore the filing is fraudulent.
The article notes that lenders have not foreclosed upon anyone but homeowners in default. (This is untrue. There have been a few recorded cases, but this is statistically miniscule, and when it happens, it is easily remedied.) This poses the question:
If a homeowner is in default, and he has not been financially harmed by the foreclosure "deficiency", then should the deficiency matter? Most courts take the viewpoint of "No Harm, No Foul". The homeowner has not paid the mortgage for several months, and therefore, making the foreclosure be redone will only benefit the homeowner by 3 months of extra time in the home without paying, and would not affect the ultimate foreclosure.
Homeowner attorneys actually sell their services by telling a homeowner that even if you do not win, we can stall the foreclosure for a year or more. (Of course, that means that the attorney is collecting monthly fees for the practice.) This is where much of the problem comes from.
You may have read about the new Foreclosure Program that the banks are implementing as a result of the OCC Consent Decree.
http://online.wsj.com/article/BT-CO-20110919-708947.html
Here is my analysis.
The OCC and the lenders are now preparing the “Foreclosure Review” process as dictated by the OCC Consent Decree. This allows any homeowner foreclosed upon in 2009-2010 to file a complaint for unlawful foreclosure and to have it reviewed by the selected Third Party. The foreclosure of the homeowner will be done to determine if the homeowner suffered financial losses through "errors, misrepresentations and deficiencies" in the foreclosure process, and what, if any damages are warranted. Each foreclosure would need to comply with specific state and federal laws.
The program will be a complete boondoggle, a total public relations nightmare for the lenders, servicers, and the OCC. If the results of a review are provided in detail to the homeowner, then this will lead to attorneys seeking remedies through the courts, if damages are not found for a deficient foreclosure process. The complaints will be endless.
Most of the problems will come from the homeowner having a “distorted” view of what is lawful and not lawful. The distortion is based upon media reporting, internet rants and homeowner advocates and attorneys.
Homeowners will be demanding foreclosure reviews based upon MERS, securitization, proof of legal standing, “Prove the Note” scenarios, and robo-signing. They will contest Assignments off Beneficiary, and Substitutions of Trustees. Most of their “arguments” will have no legal basis, and when the foreclosure is claimed to be lawful, the homeowners will not accept the ruling. Even when there are deficiencies found, usually of which will be Assignment or Substitution issues, the final ruling will come down to how the homeowner was financially “harmed”.
“Harm” and “damages” will be the most difficult part for the homeowner to understand, if deficiencies or defects in the foreclosure process are found. What conditions must be present to show “financial harm”? A homeowner assumes that they were “harmed” by the foreclosure and that will be their claim, but therein lies the problem for the homeowner.
Almost always, a defect or deficiency in the foreclosure process can be easily corrected. If the correction had been made during the foreclosure process, it would only have delayed a foreclosure from one to four months, in most cases. If a homeowner has not made a payment in six months or longer, has the homeowner suffered any “harm”?
One could say that the homeowner might have remained in the home longer, payment free, but would this meet the standard of harm? Would the lender have an obligation to “pay damages” in the amount of “housing costs” for the months that homeowner could have remained in the home, free of charge? My opinion would be that the homeowner was not harmed by the defect.
Where harm could be alleged is if the homeowner was foreclosed upon due to a "dual track" foreclosure process. If the homeowner was in the process of attempting a loan modification and a foreclosure occurred, (dual track foreclosure) then it is possible that harm has occurred.
Many homeowners are already engaged in legal actions caused by “dual-track” foreclosures. There have been good “initial results” in some cases, and there have been “lender friendly” results in many other cases. Results depend upon the circumstances of each individual case and the documentation to support the claims.
Addressing any “dual track” claims in the review process will prove to be problematic. One consideration will be whether the borrower could actually qualify for a modification. If it was obvious that the borrower could not qualify for a reasonable loan modification, was the borrower “harmed” by the foreclosure? And, what determines a “reasonable loan modification”?
Assuming that a reasonable loan modification could be made, what would the damages be? If equity existed in the home, there may be a claim for damages in the amount of the equity. If the home was underwater, then such a claim could not exist.
If a claim was made for the loss of the home and the resulting “rental payments”, then what claim would exist for rental payments that were less than the mortgage loan payments? Add in six months or more of defaulted payments on the loan, and an argument could be made for no damages due.
Perhaps the only damage claim possible would be for the trial payments made by the homeowner while he was trying to negotiate a loan modification when the foreclosure occurred.
Finally, what about the home that has not been resold after the foreclosure? If the home is still held by the bank, then there may be a chance of unwinding the sale, but would this even be worth doing if the home is underwater? Would a homeowner even want to try and move back in? Perhaps if damages could involve a substantial principal reduction, then there might be an advantage to unwinding the foreclosure, but this should not affect that many homes.
(There will be some “legitimate” unlawful foreclosures found, but these will represent a miniscule amount of the foreclosures being reviewed. Damages on those will be easy to determine and resolve. If the homeowner is not granted “satisfaction”, then the Review & Damages can be easily contested in court.)
As you can see, the Review Program is going to create an incredible amount of controversy. Homeowners who are convinced that they have been wrongly foreclosed upon will not accept the Review Program’s conclusions. They will simply claim that it is another “cover” for the lenders.
I predict that the program will only serve to further increase the controversy involving foreclosures, and more than likely, increased litigation. The public relations aspect will be a nightmare, leading to more poor media coverage, and increased anger at the banks.
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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.
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Case Schiller reports that home values are down to year 2000 levels. Using CPI, less shelter, 1999 levels. We have lost ALL appreciation for a decade, and more to come.
Corelogic reports 1.6m homes 90 days or more late and REO's.
Corelogic ignores the homes less than 90 Days late, which is approximately 5.6 million. 90% of these will be lost to foreclosure.
I will be in court testifying as an Expert Witness tomorrow and Thursday in a Predatory Lending case. Absolutely the worst case of Broker Fraud I have ever seen. Will give you details after this is over.
BTW, the defendent's attorney absolutely hates me. He tried to get me dismissed as a Witness after getting my Discovery documents. I absolutely nail the broker to the wall.
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BTW, and unrelated to what follows, foreclosures in CA are way up.
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Data Watch
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Housing starts surged 15.0% in September to 658,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 10/19/2011
Housing starts surged 15.0% in September to 658,000 units at an annual rate, coming in well above the consensus expected pace of 590,000. Starts are up 10.2% versus a year ago.
The gain in September was mostly due to multi-family starts, which are extremely volatile from month to month and which were up 51.3%. Single-family starts rose 1.7%. Multi-family starts are up 55.3% from a year ago while single-family starts are down 4.9%.
Starts rose in all regions of the country with the West seeing the biggest gains up 18.1%.
New building permits fell 5.0% in September to a 594,000 annual rate, coming in below the consensus expected pace of 610,000. Compared to a year ago, permits for multi-unit homes are up 11.3% while permits for single-family units are up 3.5%.
Implications: Home building soared 15% in September, bouncing back after the unusually harsh weather we saw in August, coming in at the highest level since April 2010. However, most of the increase was due to a 51.3% spike in multi-family units, which are volatile from month to month. The general trend in multi-family units should continue to go higher given the movement away from owner-occupancy and toward rental occupancy. To help show this, 5 or more unit completions were up 43.4% in September. Another positive from today’s report was that although single-family homes under construction hit a new record low, total homes under construction increased for the second time in three months. This is only the second time homes under construction have increased since 2006! What this shows is that the bottoming process is happening and home building should trend higher over the next couple of years. After a large rise in building permits last month, permits fell 5% in September, but remain up 5.7% from a year ago. Based on population growth and “scrappage” rates, home building must increase substantially over the next several years to avoid eventually running into shortages.
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Existing home sales fell 3.0% in September To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 10/20/2011
Existing home sales fell 3.0% in September to an annual rate of 4.91 million units, matching consensus expectations. Existing home sales are up 11.3% versus a year ago.
Sales in September were down in the Midwest, South, and West, but up in the Northeast. All of the decline in overall sales was due to single-family homes. Sales of condos/coops rose slightly.
The median price of an existing home fell to $165,400 in September (not seasonally adjusted), and is down 3.5% versus a year ago. Average prices are down 2.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) ticked up to 8.5 from 8.4 in August. The rise in the months’ supply was all due to a slower pace of sales. Inventories of homes for sale fell slightly.
Implications: Sales of existing homes came in right as the consensus expected, falling slightly after the large increase in August. Sales have seemed to stabilize around a 4.6 to 5.0 million annual rate. The National Association of Realtors said that cancelled contracts to buy existing homes increased to 18% in September from a more typical 9% - 10% over the past year. This might have been related to hurricane storm damage but also shows that credit conditions remain tough despite low mortgage rates. No wonder all-cash transactions accounted for 30% of sales in September, versus a traditional share of 10%. While a large portion of sales came from distressed properties (such as foreclosures and short sales), this is necessary for inventories to continue to be worked off and for the housing market to ultimately recover. The inventory of existing homes is down 13% in the past year and homes available for sale this September were at the lowest level for any September since 2005. In other news this morning, the Philadelphia Fed index, a measure of manufacturing activity in that region, increased sharply to +8.7 in October from -17.5 in September. The consensus had expected -9.4. We believe the index was beaten down in prior months because of negative sentiment, not an actual drop in activity. Now, with fears of a recession starting to decline, the index is getting back to normal, reflecting industrial growth. Also this morning, new claims for unemployment insurance declined 6,000 last week to 403,000. The four-week moving average is also 403,000, versus 440,000 in May. Continuing claims for regular state benefits increased 25,000 to 3.72 million.
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http://online.wsj.com/article/SB10001424052970203752604576641421449460968.html?mod=googlenews_wsj
HOMES OCTOBER 20, 2011.
Foreigners' Sweetener: Buy House, Get a Visa .
By NICK TIMIRAOS
The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S.
The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah), designed to spur more foreign investment in the U.S.
Supporters of the bill, co-authored by Sen. Charles Schumer, say it would help make up for American buyers who are holding back.
.
Foreigners have accounted for a growing share of home purchases in South Florida, Southern California, Arizona and other hard-hit markets. Chinese and Canadian buyers, among others, are taking advantage not only of big declines in U.S. home prices and reduced competition from Americans but also of favorable foreign exchange rates.
To fuel this demand, the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.
The measure would complement existing visa programs that allow foreigners to enter the U.S. if they invest in new businesses that create jobs. Backers believe the initiative would help soak up an excess supply of inventory when many would-be American home buyers are holding back because they're concerned about their jobs or because they would have to take a big loss to sell their current house.
"This is a way to create more demand without costing the federal government a nickel," Sen. Schumer said in an interview.
International buyers accounted for around $82 billion in U.S. residential real-estate sales for the year ending in March, up from $66 billion during the previous year period, according to data from the National Association of Realtors. Foreign buyers accounted for at least 5.5% of all home sales in Miami and 4.3% of Phoenix home sales during the month of July, according to MDA DataQuick.
Foreigners immigrating to the U.S. with the new visa wouldn't be able to work here unless they obtained a regular work visa through the normal process. They'd be allowed to bring a spouse and any children under the age of 18 but they wouldn't be able to stay in the country legally on the new visa once they sold their properties.
The provision would create visas that are separate from current programs so as to not displace anyone waiting for other visas. There would be no cap on the home-buyer visa program.
Over the past year, Canadians accounted for one quarter of foreign home buyers, and buyers from China, Mexico, Great Britain, and India accounted for another quarter, according to the National Association of Realtors. For buyers from some countries, restrictive immigration rules are "a deterrent to purchase here, for sure," says Sally Daley, a real-estate agent in Vero Beach, Fla. She estimates that around one-third of her sales this year have gone to foreigners, an all-time high.
"Without them, we would be stagnant," says Ms. Daley. "They're hiring contractors, buying furniture, and they're also helping the market correct by getting inventory whittled down."
In March, Harry Morrison, a Canadian from Lakefield, Ontario, bought a four-bedroom vacation home in a gated community in Vero Beach. "House prices were going down, and the exchange rate was quite favorable," said Mr. Morrison, who first bought a home there from Ms. Daley four years ago.
While a special visa would allow Canadian buyers like Mr. Morrison to spend more time in the U.S., he said he isn't sure "what other benefit a visa would give me."
The idea has some high-profile supporters, including Warren Buffett, who this summer floated the idea of encouraging more "rich immigrants" to buy homes. "If you wanted to change your immigration policy so that you let 500,000 families in but they have to have a significant net worth and everything, you'd solve things very quickly," Mr. Buffett said in an August interview with PBS's Charlie Rose.
The measure could also help turn around buyer psychology, said mortgage-bond pioneer Lewis Ranieri. He said the program represented "triage" for a housing market that needs more fixes, even modest ones.
But other industry executives greeted the proposal with skepticism. Foreign buyers "don't need an incentive" to buy homes, said Richard Smith, chief executive of Realogy Corp., which owns the Coldwell Banker and Century 21 real-estate brands. "We have a lot of Americans who are willing to buy. We just have to fix the economy."
The measure may have a more targeted effect in exclusive markets like San Marino, Calif., that have become popular with foreigners. Easier immigration rules could be "tremendous" because of the difficulty many Chinese buyers have in obtaining visas, says Maggie Navarro, a local real-estate agent.
Ms. Navarro recently sold a home for $1.67 million, around 8% above the asking price, to a Chinese national who works in the mining industry. She says nearly every listing she's put on the market in San Marino "has had at least one full price cash offer from a buyer from mainland China."
Corrections & Amplifications
Harry Morrison bought a four-bedroom vacation home in Vero Beach in March. He first bought a home there four years ago from Sally Daley, a local real-estate agent. An earlier version of this story incorrectly said Ms. Daley sold the four-bedroom home to Mr. Morrison in March.
Write to Nick Timiraos at nick.timiraos@wsj.com
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Research Reports
________________________________________
Housing At An Inflection Point To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/2/2011
Summary: The long awaited rebound in home building has finally started. Despite large remaining excess inventories, residential construction is poised to grow substantially over the next several years, just to get back to normal levels of building activity. In addition, home prices are at or very close to a bottom, at values that, relative to rents and construction costs, signal considerable appreciation in the years ahead.
The excess inventory of homes remains enormous. From 1987 through 2001, the number of residents per home hovered narrowly around 2.42. Getting back to that level today would require the elimination of two million homes.
If this were all we knew about the housing market, we would have to conclude that national average prices have large further declines ahead.
But knowing the size of the excess inventory is only part of the story. To determine future price movements we also have to know how quickly home builders are adding to or subtracting from inventories. The reason should be clear: an excess inventory that is growing would signal lower future prices than an excess inventory that is shrinking.
The US population age 25 and up is rising about 1.1% per year. (The overall population is growing slightly more slowly, about 0.9% per year, but residents below age 25 will not have much impact on the demand for homes in the next few years.) Applying the 1.1% to the 129 million homes we should have today suggests the underlying demand for new housing units is 1.4 million per year, for both owner-occupied and rented homes combined. In addition, the “scrappage” of homes due to disasters and “knock-downs” should create net demand of about 200,000 units per year, bringing annual total demand to 1.6 million.
By contrast, in the past year builders have started (and completed) fewer than 600,000 homes. The gap between total demand and the recent pace of construction puts us on track to eliminate the excess inventory in two years.
Click the link above to view the entire report.
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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.
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BTW, CD's posting was timely. I am currently doing a White Paper on just this subject. I have probably about 2 weeks left of work on it.
Here is my latest White Paper. It is sure to tick people off. But, it is needed. I make a compelling argument that recording processes in the US are hopelessly outdated, and that a MERS like entity, working in conjunction with recorder offices is sorely needed. But, the paper will not be received well by homeowners and attorney fighting foreclosures.
http://lfi-analytics.com/home/a-working-paper-recording-issues-and-mers/
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"Wesbury is an idiot."
Heh. :-D
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Housing starts fell 0.3% in October to 628,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 11/17/2011
Housing starts fell 0.3% in October to 628,000 units at an annual rate, but still came in above the consensus expected pace of 610,000. Starts are up 16.5% versus a year ago.
The slight decline in starts in October was all due to multi-family units, which are extremely volatile from month to month. Single-family starts were up 3.9%. Multi-family starts are up 88.6% from a year ago while single-family starts are down 0.9%.
Starts rose in all regions of the country except in the West, which fell 16.5%.
New building permits increased 10.9% in October to a 653,000 annual rate, coming in well above the consensus expected pace of 603,000. Compared to a year ago, permits for multi-unit homes are up 48.0% while permits for single-family units are up 6.6%.
Implications: The long-awaited rebound in home building has finally begun. In the past four months, the total number of homes under construction has increased three times. This is a major break from the recent past. From 2006 through four months ago there had been no increases at all. So far, the gains have been due to multi-family construction, particularly buildings with 5 or more units. However, we are now seeing signs that single-family construction is starting to stir. Although the number of single-family homes under construction hit a new record low in October, single-family starts were up 3.9%. Moreover, single-family completions increased 7.1%, which contributed to the drop in the number still under construction. Multi-family starts fell 8.3% in October, but given the general trend away from owner-occupancy and toward rental occupancy, multi-family units should continue to trend higher. Permits for multi-family construction are now the highest in three years. Based on population growth and “scrappage,” home building must increase substantially over the next several years to avoid eventually running into shortages. For more on the housing market, please see our recent research report (link). In other news this morning, new claims for unemployment insurance declined 5,000 last week to 388,000. The four-week moving average is 397,000 versus 440,000 in April/May. Continuing claims for regular state benefits fell 57,000 to 3.61 million. Looks like another month of respectable job growth in November.
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I'm betting Pat does not agree.
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I'll not take the other side of that bet :lol:
I have an email in to him asking for his comments.
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http://bottomline.msnbc.msn.com/_news/2011/11/17/8859967-foreclosure-crisis-only-about-halfway-over
Foreclosure crisis only about halfway over
Renzo Salazar, from Real Signs of Ace Post Holding Inc., places a bank owned sign on top of a for sale sign in front of a foreclosed home on November 10, 2011 in Miami, Florida.
By John W. Schoen, Senior Producer
If the U.S. foreclosure crisis were a baseball game, we’d probably be in the bottom of the fourth inning.
That’s roughly the message from the latest data on home foreclosures and delinquencies released by an industry association Thursday.
The pace of new home foreclosures edged up again in the third quarter and the number of borrowers falling behind on their payments eased a bit, according to the Mortgage Bankers Association. The good news was that the rate of borrowers who have fallen three or more months behind on their payments has dropped to about 3.5 percent of all mortgages. That’s down from a peak of 5 percent in late 2009. But it’s still three and a half times the “normal” rate of about 1 percent that prevailed before the mortgage meltdown hit in late 2007.
“If you look at the pace of improvement I think we’re three to four years away from the typical pattern of seriously delinquent loans," said Michael Fratantoni, MBA's vice president of research and economics.
Since the mortgage meltdown began in 2007, roughly six million homes have been lost to foreclosure. (Estimates vary somewhat because multiple foreclosures are often recorded on a given property as the homeowner and lender try to avoid it.) Another four million homes are estimated to be at some stage in the foreclosure process. New foreclosures are currently started at the rate of about two million a year.
That pace of new foreclosures may begin to ease more, though. The delinquency rate –- the number of borrowers who have fallen behind on their payments -- fell in the third quarter to the lowest level in nearly three years. For all loans, the rate fell to 7.99 percent from 8.44 percent in the second quarter. That’s down from 9.13 percent a year ago and the lowest level since the fourth quarter of 2008.
Borrowers with subprime adjustable mortgages saw the biggest jump in new foreclosures in the third quarter. Some 4.65 percent of those subprime loans entered the foreclosure pipeline. That's up from 3.62 percent in the second quarter, a 28 percent increase. The MBA said the rise was due in part to an increase in the number of loans that failed to get lender approval for a modification. Some states also ended their moratoriums on foreclosures during the quarter. Overall, the pace of new foreclosures for all loans edged up to 1.08 percent in the third quarter from 0.96 percent in the prior three month period. That’s down from 1.34 percent in the same period a year ago.
A lot depends on the outlook for the economy which, though showing gradual signs of improvement, is not creating jobs fast enough to put much of a dent in the unemployment rate, which is hovering at around 9 percent.
The uptick in the pace of foreclosures comes as the U.S. homebuilding industry is beginning to show a pulse three years after nearly shutting down. Though still on track this year to set a record low since 1960, when data were first collected, single family housing starts were up 3.9 percent, and permits jumped 10.9 percent. (Many economists believe permits are a better barometer of housing market strength because they are less affected less by weather and signal a pickup in future construction.)
“This was a good report," said Patrick Newport, an economist at IHS Global Insight. “It has supporting evidence that the single-family market is finally getting off the mat.”
Continued improvement in home sales and prices, though, will depend heavily on the volume of foreclosed homes coming back on the market. Thursday’s MBA data showed that lenders have barely made a dent in the overall backlog of foreclosed homes. Since it began rising in 2007, the foreclosure inventory rate -– the percentage of loans in foreclosure -– has remained stuck at roughly 4.5 percent. That’s four and a half times the “normal” rate of about 1 percent of all homes in the foreclosure pipeline.
Not all of those homes will eventually be seized. Some foreclosures can be “cured” with a loan modification or by a homeowner catching up on missed payments. But the remainder will sit on a lender’s books until they can find a new buyer, often at a “distressed” price. Each new home that enters the foreclosure pieline becomes part of that “shadow” inventory.
“The large number of homes still in the shadow inventory will cast a cloud over the housing market and the wider economy for a few years yet,“ said Paul Dales, a senior economist at Capital Economics.
Dales figures there were something like 4.2 million homes waiting to hit the market at the end of the third quarter. As they do, they’ll continue to depress home prices, which have begun falling again after stabilizing this summer. Falling prices put more borrowers at risk of foreclosing as they burn through the remaining equity in their home and end up “underwater,” owing more than their house is worth. Some 11 million homes, or about 22 percent of all mortgaged homes, are currently underwater. Another 2.4 million have less than 5 percent equity, according to CoreLogic.
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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".
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I will have more on the MBA report later for you. I agree with some of what is said, but the quoted numbers are off.
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http://reason.com/blog/2011/12/01/federal-housing-authority-poised-to-re-s
Federal Housing Authority Poised to Re-Sink the Economy
Tim Cavanaugh | December 1, 2011
Back in the innocent days of 2007 or so, it was customary for experts to say that housing had led the recession and housing would lead us out. Whatever measure of truth there may have been in that cliché, the reality is that by refusing to accept the real estate correction as the healthful and decades-overdue solution it is, America’s leaders have created a new dynamic: Housing led us into the recession, and it continues to lead us into newer, deeper and more destructive recessions.
Last month Wharton School real estate finance professor Joseph Gyourko warned that the Federal Housing Authority is shaping up as the next likely target for a bailout. Although the full report [pdf] is worth reading, Gyourko’s central argument is pretty simple:
(1) FHA has become a much larger and riskier government entity since the housing crisis began because it has increased its risk exposure without anything close to a commensurate scaling up of its capital base; (2) it is underestimating future default risk and losses on its single-family mortgage guarantee portfolio by at least $50 billion; and, (3) this should be corrected with an immediate recapitalization of FHA sufficient to compensate for the high risks it faces.
The FHA issued a rebuttal, noting that it had upped its assets by $400 million over the last year – a pittance, as Gyourko notes, compared to the $213 billion in new guarantees it issued over the same period.
We’ll just have to wait and see whether HUD Secretary Shaun Donovan ends up lassoing taxpayers to shore up the insolvent FHA, but one thing is for sure: Everything has gotten worse, and FHA’s policies have become even more reckless, since Gyourko’s report.
In the middle of the month, the Obama Administration even managed to walk back one of the few things it has done right: allowing the expanded conforming loan limit for “high-cost areas” to lapse. At the start of the real estate correction FHA upped its conforming loan limit (the mortgage amount the federal government guarantees) to $729,750. That emergency increase expired October 1, and the high-cost conforming loan limit dropped back to $625,500.
But in a tribute to the lobbying power of Realtors®, the conforming loan limit got jacked back up a few weeks ago. The move makes negative sense. (Why do you need to increase the subsidy when house prices continue to fall?) It’s also offensive to the broadly held belief that public assistance should be reserved for actual poor people: Presuming a 20 percent down payment, you’re talking about a house in the high $900k range being subsidized by taxpayers. Who mourns for the million-dollar starter home? Apparently we all do.
It gets worse, however. In an email this morning, AEI Senior Fellow Edward Pinto, who has done crucial work on figuring out how the GSEs Fannie Mae and Freddie Mac defrauded taxpayers during the boom, reported on FHA’s recent financial deterioration:
• In October 2011 17.02% of FHA loans were at some stage of delinquency.
– Comparing October to September, FHA’s total delinquency (17.02% vs. 16.78%), 60-89 day (2.42% vs. 2.3%), and serious delinquency rates (9.05% vs. 8.77%) were all higher.
• The increase in the 60-89 day rate is a leading indicator of future claims problems.
– At 9.05%, the serious delinquency rate is now 0.8% higher than the 8.2% rate in June 2011 (Source: HUD Neighborhood Watch and FHA Outlook Reports).
• The June rate was used to prepare the recently released actuarial report.
– As a result, there were about 75,000 more seriously delinquent FHA loans in October compared to June.
• The Actuarial Study notes that FHA’s forward single-family program has total capital resources of $28.2 billion offset by $27 billion in negative cash flows on its outstanding business (Study, p. 25).
– This sounds reassuring; however a private company would be required to set aside this amount plus $13 billion more to cover expected losses from known 60+ day delinquent loans:
• FHA is responsible for 100% of the losses on the loans it insures. As a result its loss severities are extremely high.
• In 2009 FHA experienced a 64% loss ratio (Study, p. E-2).
• In October FHA had over 836,000 loans 60+ days delinquent with an estimated total outstanding balance of $117 billion (October 2011 HUD Neighborhood Watch).
• FHA would incur losses of $41 billion if 55% of these loans eventually go to claim and losses average 64% (calculation based on private mortgage insurance company reserving practices).
• This is $1.5 billion more than a similar calculation made for September. 2011.
– FHA would need another $21 billion to meet its congressionally mandated 2% capital cushion.
Well maybe it’s darkest before the dawn. Or darkest before things go completely black. Or something. In any event, Lender Processing Services reports that the percentage of mortgages in foreclosure is at its highest level ever. “Foreclosure inventories are on the rise,” LPS writes, “reaching an all-time high at the end of October of 4.29 percent of all active mortgages.” LPS notes that lenders are still doing their best to drag out the foreclosure process:
The average days delinquent for loans in foreclosure extended as well, setting a new record of 631 days since last payment, while the average days delinquent for loans 90 or more days past due but not yet in foreclosure decreased for the second consecutive month.
That second part may actually be a small piece of good news if it indicates lenders are at least getting serious about getting foreclosures started. Housing won’t lead us out of the recession until the market hits rock bottom. Even Bob Shiller admits that we’re a long way from there. But we will get there eventually. It’s just a question of how long the feds want the torture to last.
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http://www.cnbc.com/id/45659547
Realtors: We Overcounted Home Sales for Five Years
Published: Tuesday, 13 Dec 2011 | 5:21 PM ET
Data on sales of previously owned U.S. homes from 2007 through October this year will be revised down next week because of double counting, indicating a much weaker housing market than previously thought.
The National Association of Realtors said a benchmarking exercise had revealed that some properties were listed more than once, and in some instances, new home sales were also captured.
"All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought," NAR spokesman Walter Malony told Reuters.
"We're capturing some new home data that should have been filtered out and we also discovered that some properties were being listed in more than one list."
The benchmark revisions will be published next Wednesday and will not affect house prices.
Early this year, the Realtors group was accused of overcounting existing homes sales, with California-based real estate analysis firm CoreLogic claiming sales could have been overstated by as much as 20 percent.
At the time, the NAR said it was consulting with a range of experts to determine whether there was a drift in its monthly existing home sales data and that any drift would be "relatively minor."
The depressed housing market is one of the key obstacles to strong economic growth and an oversupply of unsold homes on the market continues to stifle the sector.
Malony said the Realtors group had developed a new model that would allow frequent benchmarking instead of waiting 10 years for the population Census data to revise their figures.
**I'm waiting for the Wesbury spin on this.
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"All the sales and inventory data that have been reported since January 2007 are being downwardly revised. Sales were weaker than people thought," NAR spokesman Walter Malony told Reuters.
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We should keep a count of large stories people would already know if they read the forum. Something akin to the term bullsh*t comes to mind for what our expert thought of housing figures reported by the Realtors assn previously.
Nearly all economic data is wrong; people need to constantly look past and through data for the meaning. Often it is Wesbury pointing that out. Also Scott Grannis is excellent on that. Measures like unemployment, inflation, poverty, or housing can only be watched for trends in a flawed measurement, not accuracy.
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My latest economic indicator is anecdotal. A major residential window supplier, who sees investment into their existing homes as well as new construction, told me yesterday he has seen more improvement in the business in the last few months than in the last few years. Keep in mind we are talking minor growth from unimaginable lows and the unemployment rate here is closer to 5%, half of the rate of the troubled areas of the country. http://www.bls.gov/news.release/metro.nr0.htm
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I see the FMs themselves have managed to get a deal for no punishment , , ,
======================
By CHAD BRAY And NICK TIMIRAOS
The Securities and Exchange Commission has sued the former chief executives of Fannie Mae and Freddie Mac, accusing them of misleading investors about risks of subprime-mortgage loans.
The lawsuits, filed in Manhattan federal court, also accused four other former executives at Freddie Mac and Fannie Mae of making false and misleading statements about the firms' exposure. The government took over Fannie and Freddie in September 2008 as investors pulled back from the firms, which took heavy losses on souring mortgages they guaranteed. Taxpayers have since provided $151 billion of support.
Former Freddie Mac CEO Richard F. Syron and former Fannie Mae CEO Daniel H. Mudd, are among the six executives. None of them has reached settlement agreements with the SEC.
Earlier this year, the SEC had sent Wells notices, indicating it planned to pursue enforcement actions, to Mr. Syron, Mr. Mudd and several other former executives. Those other executives were: Fannie's Enrico Dallavecchia, a former chief risk officer, and Thomas Lund, a former executive vice president; and Freddie's Patricia Cook, a former executive vice president and chief business officer; and Donald Bisenius, a former senior vice president.
The move came as Fannie Mae and Freddie Mac entered into agreements with the securities regulator to avoid civil prosecution. In the civil non-prosecution agreements, the firms said they would accept responsibility for the conduct and not dispute the SEC's allegations, without admitting or denying wrongdoing, the SEC said.
As part of those agreements, the government-sponsored firms will cooperate in the securities regulators' litigation against the former executives, the SEC said. Neither firm is paying a fine.
"Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was," said Robert Khuzami, director of the SEC's Enforcement Division.
"These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. All individuals, regardless of their rank or position, will be held accountable for perpetuating half-truths or misrepresentations about matters materially important to the interest of our country's investors."
The SEC alleged that the Fannie Mae executives misled the public about the government-sponsored firm's exposure to subprime mortgages and so-called Alt-A loans between December 2006 and August 2008. Freddie Mac executives allegedly did the same regarding its exposure to subprime loans between March 2007 and August 2008.
Lawyers for Mr. Syron and Mr. Mudd couldn't immediately be reached for comment Friday.
In its complaint against the former Fannie Mae executives, the SEC alleged that Fannie Mae, when it began reporting its exposure to subprime loans in 2007, broadly described the loans as being made to "borrowers with weaker credit histories" and that less than one-tenth of its loans that met that description.
The allegedly misleading disclosures were made as Fannie Mae was seeking to increase its market share through increased purchases of subprime and Alt-A loans and gave false comfort to investors about the extent of its exposure to high-risk loans, the SEC said. Alt-A loans are riskier loans for borrowers with good credit, but little documentation of income or assets.
The firm also reported that its 2006 year-end single-family exposure to subprime loans was just 0.2%, or about $4.8 billion, of its single-family loan portfolio, the SEC said. This was done with knowledge, support and approval of Mr. Mudd and other executives, the SEC said.
In its report, Fannie Mae didn't include loan products that specifically targeted borrowers with weaker credit histories, including more than $43 billion of so-called expanded approval loans, the SEC said. Company executives also underreported Fannie Mae's exposure to Alt-A loans, saying its exposure in March 2007 was 11% of its single-family loan portfolio when it was actually 18%, the SEC said.
In its Freddie Mac lawsuit, the SEC alleged that former Freddie Mac executives led investors to believe that the firm was disclosing all of its single-family subprime loan exposure and Mr. Syron and another executive publicly proclaimed that the single-family business had "basically no subprime exposure."
However, the single-family business, as of Dec. 31, 2006, had exposure to about $141 billion of loans that were referred to internally as "subprime" or "subprime like," or about 10% the portfolio, the SEC said. That grew to about $244 billion, or 14% of the portfolio, as of June 30, 2008, the SEC said.
Separately, Mr. Dallavecchia has stepped down as the chief risk officer of PNC Financial Services Group Inc. and is on administrative leave, the Pittsburgh bank said. Mr. Dallavecchia was chief risk officer at Fannie Mae from June 2006 to August 2008. Michael Hannon, currently PNC's executive vice president and chief credit officer, will become interim chief risk officer, PNC said.
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I see the FMs themselves have managed to get a deal for no punishment , , ,
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Of course, in our two-tier justice system under Obozo/Holder.....
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Housing starts increased 9.3% in November to 685,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/20/2011
Housing starts increased 9.3% in November to 685,000 units at an annual rate, blowing away the consensus expected pace of 635,000. Starts are up 24.3% versus a year ago.
The large gain in starts in November was mostly due to multi-family units, which are extremely volatile from month to month. Single-family starts also rose 2.3%. Multi-family starts are up 145.4% from a year ago while single-family starts are down 1.5%.
Starts rose in all regions of the country, except the Midwest.
New building permits increased 5.7% in November to a 681,000 annual rate, coming in well above the consensus expected pace of 635,000. Compared to a year ago, permits for multi-unit homes are up 70.8% while permits for single-family units are up 3.6%.
Implications: Great news! The turning point in home building has clearly arrived. Homes were started at a 685,000 annual rate in November, while building permits hit a 681,000 annual rate. Both of these results easily beat consensus expectations and, except for one month affected by the homebuyer tax credit, are the fastest rates in three years. The gain in starts in November was mostly due to multi-family units, which soared 25.3%. These starts might fall back next month, but, given the general trend away from owner-occupancy and toward rental occupancy, multi-family should continue to generally trend higher. Meanwhile, single-family starts were also up in November and the six-month average for starts has been moving up. Except for the artificial homebuyer credit, this is the first consistent upward trend since the collapse of building activity started in early 2006. Gains in starts are beginning to filter through to the number of homes under construction, which have gone up three months in a row. This is a major break from the recent past. From 2006 through five months ago there had been no increases at all. Based on population growth and “scrappage,” home building must increase substantially over the next several years to avoid eventually running into shortages. For more on the housing market, please see our recent research report (link). In other good news this morning, last week’s (same-store) chain store sales were up 4.6% from a year ago according to the International Council of Shopping Centers and up 3.4% according to Redbook Research.
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I'll be eagerly awaiting Pat's deconstruction of this nonsense.
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Mixed news. Good for employment, but the housing market needed stronger demand not increased supplies.
When construction hit near zero, the percentage increases coming back look disproportionately dramatic. He is reporting a .093 /12 monthly increase. A 19 month high is in the context of more than 3 years at depression levels. Maybe Bernancke will call it irrational exuberance.
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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.
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As usual Pat a great post; we love having you here.
I now post another missive from Wesbury, not as a counter to what you say, but because I post him here as a rather constant point of reference so that we do not become an echo chamber.
Marc
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Existing home sales increased 4.0% in November To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 12/21/2011
Existing home sales increased 4.0% in November to an annual rate of 4.42 million units, well below the consensus expected pace of 5.05 million units. Existing home sales are up 12.2% versus a year ago.
Sales in November were up in all major regions of the country. All of the increase in overall sales was due to single-family homes; sales of condos/coops were unchanged for the month.
The median price of an existing home rose to $164,200 in November (not seasonally adjusted), and is down 3.5% versus a year ago. Average prices are also down 3.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 7.0 in November from 7.7 last month. The decline in the months’ supply was due to both a faster pace of sales and a drop in the inventory of homes for sale.
Implications: The big headline on existing homes is that sales were revised down 14 percent for the past few years because the National Association of Realtors made mistakes that apparently resulted in double counting. These revisions were well publicized, so it is strange that so many forecasters (but not First Trust) ignored this and continued to predict more than 5 million sales. So, while sales fell about 12 percent below consensus, the data also show that sales were up 4% in November and 12% from a year ago. Meanwhile the inventory of homes is down 18% versus last year and at the lowest level since 2005. This resulted in a 7 months’ supply of unsold homes, the lowest since 2009. The healing in the housing market is further along than previously thought. The pessimistic narrative you may hear elsewhere about how bad today’s report was and how ugly the revisions were is simply not true. Reported existing home sales never fell by as much as new home sales or home building the last few years. So, today's revisions fix the problem caused by over counting. In addition, existing home sales only measure a shift in assets from a buyer to a seller. They do not count as current production and will have no impact on our GDP forecast. As the inventory of existing homes continues to be whittled down, we expect a steady recovery in the housing market.
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Of course this piece needs to be read with its source of publication, Pravda on the Hudson, in mind. I remain unchanged in my assignment of blame to the FMs.
That said, I do think he raises an interesting point concerning the FMs concern about losing market share. IIRC this is correct. Indeed, IIRC one of the ways in which Baraq's buddy Franklin Raines (coincidentally not in trouble with the current prosecution) got into trouble was for accounting chicanery to accelerate profits so as to increase.
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So this is how the Big Lie works.
The New York Times
Joe Nocera
You begin with a hypothesis that has a certain surface plausibility. You find an ally whose background suggests that he’s an “expert”; out of thin air, he devises “data.” You write articles in sympathetic publications, repeating the data endlessly; in time, some of these publications make your cause their own. Like-minded congressmen pick up your mantra and invite you to testify at hearings.
You’re chosen for an investigative panel related to your topic. When other panel members, after inspecting your evidence, reject your thesis, you claim that they did so for ideological reasons. This, too, is repeated by your allies. Soon, the echo chamber you created drowns out dissenting views; even presidential candidates begin repeating the Big Lie.
Thus has Peter Wallison, a resident scholar at the American Enterprise Institute, and a former member of the Financial Crisis Inquiry Commission, almost single-handedly created the myth that Fannie Mae and Freddie Mac caused the financial crisis. His partner in crime is another A.E.I. scholar, Edward Pinto, who a very long time ago was Fannie’s chief credit officer. Pinto claims that as of June 2008, 27 million “risky” mortgages had been issued — “and a lion’s share was on Fannie and Freddie’s books,” as Wallison wrote recently. Never mind that his definition of “risky” is so all-encompassing that it includes mortgages with extremely low default rates as well as those with default rates nearing 30 percent. These latter mortgages were the ones created by the unholy alliance between subprime lenders and Wall Street. Pinto’s numbers are the Big Lie’s primary data point.
Allies? Start with Congressional Republicans, who have vowed to eliminate Fannie and Freddie — because, after all, they caused the crisis! Throw in The Wall Street Journal’s editorial page, which, on Wednesday, published one of Wallison’s many articles repeating the Big Lie. It was followed on Thursday by an editorial in The Journal making essentially the same point. Repetition is all-important to spreading a Big Lie.
In Wallison’s article, he claimed that the charges brought by the Securities and Exchange Commission against six former Fannie and Freddie executives last week prove him right. This is another favorite tactic: He takes a victory lap whenever events cast Fannie and Freddie in a bad light. Rarely, however, has his intellectual dishonesty been on such vivid display. In fact, what the S.E.C.’s allegations show is that the Big Lie is, well, a lie.
Central to Wallison’s argument is that the government’s effort to encourage homeownership among low- and moderate-income Americans is what led to the crisis. Fannie and Freddie, which were required by law to meet certain “affordable housing mandates,” were the primary instruments of that government policy; their need to meet those mandates, says Wallison, is what caused them to dive so heavily into those “risky” mortgages. And because they were powerful forces in the housing market, their entry into subprime dragged along the rest of the mortgage industry.
But the S.E.C. complaint makes almost no mention of affordable housing mandates. Instead, it charges that the executives were motivated to begin buying subprime mortgages — belatedly, contrary to the Big Lie — because they were trying to reclaim lost market share, and thus maximize their bonuses.
As Karen Petrou, a well-regarded bank analyst, puts it: “The S.E.C.’s facts paint a picture in which it wasn’t high-minded government mandates that did [Fannie and Freddie] wrong, but rather the monomaniacal focus of top management on market share.” As I wrote on Tuesday, Fannie and Freddie, rather than leading the housing industry astray, got into riskier mortgages only after the horse was out of the barn. They were becoming irrelevant in the most profitable segment of the market — subprime. And that they couldn’t abide.
(The S.E.C., I should note, had its own criticism of my column, saying that I conflated its allegations regarding the lack of disclosure of subprime mortgages, with an entirely different set of charges it has brought regarding disclosure of so-called Alt-A loans. I still maintain that the S.E.C.’s charges are weak, and that the agency brought the case in part for political reasons: how better to curry favor with House Republicans than to go after former Fannie and Freddie executives?)
Three years after the financial crisis, the country would be well served by a real debate about the role of government in housing. Should the government be helping low- and moderate-income Americans own their own homes? If so, is there an acceptable level of risk? If not, how do we recast the American dream?
To have that debate, though, we need a clear understanding of what role the government’s affordable-housing goals did — and did not — play in the crisis. And that is impossible as long as the Big Lie holds sway.
Which, now that I think of it, may be the whole point of the exercise.
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Your intro Crafty makes more sense than the story. It is fine and well to go after misdeeds in the packaging of the loans, but it was the product inside the package, not the gift wrapping, that was the root of the problem. It is quite a bit bone-headed to say that blaming government policies for this debacle is a 'The Big Lie'. OTOH it means they know their attempt to paint it some other way is failing.
Government policies caused lenders to make loans on criteria other than creditworthiness and likelihood of repayment. If you find a hundred or a thousand felonies in the securities business packaging these loans, that does not change the underlying fact that this crisis was about lenders making bad loans based on rules/ lack of rules coming down from underwriting - which had become 90% federal.
Go back to the basics, what is a down payment? It is skin in the game. Your own skin earned by setting an alarm, going to work, taking all the crap that often entails, having the government chop down what you earned into take home and then refraining from spending it all on everything else you want and need over an extended period of time so that you have 20% down to buy a house you can call your own. How do you get to 20%? By getting your savings up and by keeping the price down. The skin of your own in the game and the fact that it forces the price to be both competitive and affordable also creates the cushion to allow for short term value fluctuations without panic before the larger appreciation over time hopefully sets in.
The last time I borrowed against the purchase of a house, it was nominally 5% down, really 10%. I borrowed 95%, paid a highway robbery firm (AIG?) for PMI for years as insurance and penalty for the 'small' down, I had to bring 10% cash to closing to cover the down and the costs and I had to prove none of that money came from borrowed funds. I came out okay when it went up 750% over the next 20 years (and then down!), but at the start the borrower is clearly more likely to walk with a smaller down payment combined with a larger debt burden. The added cost of PMI only make the total cost worse and default more likely.
From 20% down, to creating exceptions to that rule, then we went all the way to people borrowing 125% of the purchase price(?)! I had originators calling me to clear the judgments that their borrowers still owe on the last place they couldn't afford and roll it all into the new loan they would never pay back, with no down payment and closing costs all rolled in with the other extras and maybe a free trip to boot. All they had to do was sign, but the lender already knows their signature / their word is no good from their awareness of the judgements of not honoring previous commitments.
What could possibly go wrong? Everything. The borrower has no likelihood of payback and the value, price and loan amounts are all pure, inflated fiction. Add to it that the same thing is happening all over the neighborhood, the city and the nation, all certain to fail. Not because of packaging, because of bad loans from bad lending practices.
What changed during this time in the underlying math and science of good lending practices? Nothing. Then why did lending practices change and make a U-turn? Government policies. Government pressure. Government rules. Nothing else.
The real followup to this should be to look at all the other policies of government enacted during this time to see what else they f*kced up that will continue to bring down our economy and our republic.
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(From Canada-US thread) JDN writes: "I agree, the government has no business being in the business of encouraging home ownership. Doug, are you therefore saying that the mortgage deduction (government intervention) should be immediately repealed?"
You don't have to guess my view (or put words in my mouth). I have a long record here and will be happy to post again.
The point over there was that banking regulators have no business being in the business of promoting larger home ownership borrowing at the expense of creditworthiness, regardless of anyone's view on home interest deductions. If we want a home ownership preference, it should done in plain sight - with spending or by continuing the existing deduction. That system has worked pretty well so it isn't one of the first thousand things I would change if suddenly my view mattered.
I don't like any deductions other than those that help calculate income accurately. The rest is social engineering. That said, home ownership is our best social engineering project. I would eliminate that only after eliminating every other wasted deduction and wasted spending program, when we are down to a small constitutional federal government with a low single digit tax rate - which means closer to never than immediate.
I supported the Perry plan as the closest serious political proposal to taxing all income the same no matter who earns it or how. He lowers the rate to 20% (instead of the then more popular 9% proposal) but keeps a personal deduction until you are above poverty level and keeps the mortgage and charitable deductions.
When I buy property, I require of myself that all purchases would have to make sense even if there was no tax deduction and no appreciation - or don't buy. I will not rely on a break from the government or an uncertain future value for a major investment to make sense. Not true for others. In the housing thread, Pat P. made clear that housing would go from crisis to collapse if we eliminate that deduction now. That would not solve any current problem. In housing people make long term decisions while government can change the rules on a whim. That is why proposals like Gingrich and Perry's maintain the taxpayers choice of using the old system.
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What we call 'encouraging home ownership' really should be called encouraging home 'borrowing'. I have no idea what a zero equity "purchase" lent at a variable rate to people ready to walk at the first sign of trouble has to do with owning a home or bringing stability to a neighborhood.
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I'm sorry Doug, I did not check your opinion on eliminating the mortgage deduction. I meant no disrespect.
Your quote, well put I thought was, "If the regulation is to “encourage home ownership”, that is government intervention in the market and, as we see from the economic chaos that has ensued from such policies it is NOT fine." I also agree with your thought, "What we call 'encouraging home ownership' really should be called encouraging home 'borrowing'. I have no idea what a zero equity "purchase" lent at a variable rate to people ready to walk at the first sign of trouble has to do with owning a home or bringing stability to a neighborhood."
I was merely pointing out that offering a deduction for personal home interest is "encouraging home ownership"; it is just another form of government intervention. Yet many of my Republican friends seem to like (since most of them own homes) that kind of government intervention. Convenient. Personally, I think the mortgage interest deduction should be eliminated; why should the government be involved in personal home ownership? Nearly all personal interest in general is non deductible; yet home ownership interest is exempt. Odd. Also, a personal residence is exempt from capital gains taxes if held for a few years, that seems like another form of "encouraging home ownership". Again, I think the government should not intervene in home ownership by offering special deals. Home owners seem to have their cake and eat it too.
Somehow Canada, England and most industrialized nations do not offer a personal residence mortgage deduction. Yet, overall their real estate has done fine - it seems to have little long term impact.
As a side note, concerning your property business, I think like in Canada (where this thread was started by you) the interest should be deductible, but then any profits are taxable. Like any business, that seems fair.
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JDN, no problem. Just to clarify, my opinion would be different if we were designing a tax system from scratch instead of discussing what changes we can make immediately to a deduction perhaps a hundred million people count on if you include the dependents in the home.
Crafty posted a story a short while back about high tax rates and everything people did to not pay them. Home mortgage interest is probably first on that list. If you are higher income and in a higher tax bracket, you can't afford to not be all consumed in home debt or you will killed with an income tax bill. That is an upside down incentive. What brings more financial security than the day you pay off your mortgage, instead we punish you. People would not have supported 70% or 90% tax rates back then if people really had to pay them. Today they wouldn't support 39.6% federal and a roughly 50% combined rate in states like yours or mine if they really had to pay all that. Cut spending first and then cut tax rates dramatically and maybe then people will accept and survive losing their favorite loophole.
Your first quote in the 2nd paragraph is Crafty's, not mine. I also found it very well put and agree wholeheartedly.
I did post the original piece on Canada; I like looking across the world and back through history for economic lessons. That doesn't mean I wish to emulate them, just learn all that we can.
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I'll try to be calm with my comment but I am thinking that after a fair trial I would hang these people for treason.
http://www.reuters.com/article/2012/01/05/us-usa-fed-housing-idUSTRE8031SE20120105
(Reuters) - The U.S. government-run mortgage finance firms Fannie Mae and Freddie Mac could play a bigger role in turning around the battered U.S. housing market, the Federal Reserve told Congress, a call that looks set to run into stiff political opposition.
The Fed, in a paper sent to lawmakers on Wednesday, outlined an array of steps that could be taken to help the housing sector, including allowing Fannie and Freddie to provide cheaper mortgages to a broader pool of homeowners.
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I'll try to be calm with my comment but I am thinking that after a fair trial I would hang these people for treason.
http://www.reuters.com/article/2012/01/05/us-usa-fed-housing-idUSTRE8031SE20120105
(Reuters) - The U.S. government-run mortgage finance firms Fannie Mae and Freddie Mac could play a bigger role in turning around the battered U.S. housing market, the Federal Reserve told Congress, a call that looks set to run into stiff political opposition.
The Fed, in a paper sent to lawmakers on Wednesday, outlined an array of steps that could be taken to help the housing sector, including allowing Fannie and Freddie to provide cheaper mortgages to a broader pool of homeowners.
This is why I'm going long on ammo and freeze dried food.
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Presidents can replace the chiefs of regulatory agencies for all sorts of reasons, from poor performance to misconduct. But Democratic braying for the head of Edward DeMarco marks the first time we can recall that politicians are demanding that someone be fired for the high crime of protecting American taxpayers.
Mr. DeMarco is acting head of the Federal Housing Finance Agency (FHFA), a regulatory agency created in 2008 that oversees the taxpayer-backed mortgage giants Fannie Mae and Freddie Mac that are now in conservatorship. In a letter to President Obama Tuesday, 28 House Democrats claimed Mr. DeMarco interprets FHFA's mandate "far too narrowly" and "failed to take adequate action to help homeowners."
They want Mr. Obama to install a new director over Mr. DeMarco using the recess-appointment powers that the President has suddenly discovered in the Constitution even when Congress is in session. (See above.) "We appreciate your recent appointment of Richard Cordray as the Director of the United States Consumer Financial Protection Bureau" over GOP opposition, they write, "and we urge that you take the same action to put in place a permanent Director to the FHFA."
This is a radical suggestion, so it's worth examining what the FHFA mandate is. According to the law, the agency is supposed to "preserve and conserve" Fan and Fred's assets for its current owners—taxpayers—and place them in a "sound and solvent condition" while Washington figures out what to do with them next. As Mr. DeMarco told the Senate in November, FHFA isn't authorized to use the public's money for "general support and uplift of the housing market."
Thus Mr. DeMarco has resisted calls for principal reduction programs, massive refinancings and other politically motivated brainstorms that would reduce the value of Fan and Fred's assets and add to the already $142 billion in losses the toxic twins have racked up. Instead, FHFA has strengthened underwriting standards, raised fees the companies charge to guarantee mortgages, investigated new ways to sell FHFA's foreclosed-home inventory, implemented better and more uniform disclosure, and more.
You'd think Congress would cheer these efforts, given the contributions that Fannie and Freddie made to the housing bubble and bust. But it's an election year, housing prices are flat or still falling in much of the country, White House initiatives to slow the pace of foreclosures have compounded the pain, and House Republicans won't spend more on "stimulus." Democrats therefore want to turn Fan and Fred into political piggybanks to buy support from homeowners who borrowed more than they could afford.
Sad to say, the ostensibly independent Federal Reserve is providing intellectual cover for this raid. Fed Chairman Ben Bernanke sent a white paper to Congress last week advocating actions "that might promote a faster recovery in the housing market." And Fed Governor Elizabeth Duke took a barely concealed shot at Mr. DeMarco by telling policy makers they shouldn't focus "entirely on minimizing losses" to Fan and Fred.
In contrast, Republican Senator Orrin Hatch of Utah did a public service this week by warning Mr. Bernanke in a letter that such lobbying "intrudes too far into fiscal policy advice and advocacy." The entire Senate GOP conference ought to deliver a similar brushback to the Fed's blatant election-year politicking.
The political clamor to replace Mr. DeMarco isn't about saving housing markets. It's about saving Democrats from having to explain why their housing policies have failed.
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http://www.theatlantic.com/business/archive/2012/01/when-will-housing-hit-bottom/252157/
When Will Housing Hit Bottom?
By Megan McArdle
Jan 27 2012, 3:54 PM ET123
The National Association of Realtors is (quelle surprise!) quite bullish on the future of the housing market. Not so fast, says Lance Roberts of StreetTalk Advisors:
He sees 2012 as another year of lagging sales, considering the average household debt for Americans over the age of 16 comes to $96,229 per person. In addition, the average income before taxes is roughly $54,110 and many Americans have a debt-to-income ratio of 177.8%, making it difficult for them to qualify for a home loan.
Roberts says the average median income for a family is $55,000, and the average median home sales price is $214,000. To afford such a home, the average American would have to put down 20%, or roughly $42,800. But, Roberts says that amount is nearly impossible to save, given the state of the economy and consumer debt levels.
"In today's credit constrained environment due to the financial crisis which has left the major banks saddled with millions of homes that are delinquent or in foreclosure -- there is little reason to lend money to borrowers who can't meet very stringent qualification requirements," Roberts wrote in a recent blog posting.
Still, his contrarian report arrives at a time when analysts are placing confidence in lower prices to spark a housing turnaround.
Even here in DC, which has been basically the only market to defy recent trends, housing prices stalled in the fourth quarter. And while housing starts had been finally recovering, new home sales fell in December, weakening what had started out as a strong quarter. Owner occupied sales rose, but all that does is eat up a wee bit of the outstanding inventory; it doesn't mean a return to growth. 2011 now stands as the weakest year for new home sales on record. And that's in a record low interest rate environment.
Of course, the general rule of recoveries is that things look really bleak until they don't. But still, let's ask the question: what if housing doesn't recover? Can the economy recover without it?
There are a lot of reasons to think that it can't. Underwater houses constrain consumer spending; they make people feel poorer; they depress labor mobility, because people who can't sell can't move elsewhere to look for a job. Since new businesses are often funded with personal credit--or even loans against the house--it probably depresses firm formation, and the resulting innovation. And of course, construction is normally a substantial component of GDP.
On the other hand, there's no iron law that says that we can't have a strong economy with a weak housing sector. We just never have had, before.
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"there's no iron law that says that we can't have a strong economy with a weak housing sector. We just never have had, before."
I believe that 99 weeks of unemployment slowed the jump of housing construction workers into other professions. The car doesn't run full speed with major engine parts removed from the vehicle.
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What other professions would those be? There is a serious lack of jobs out there.
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"What other professions would those be? There is a serious lack of jobs out there."
Keystone pipeline. Fracking. Rare earth mineral mining. Deep sea drilling. http://www.nytimes.com/2010/04/21/us/21ndakota.html http://www.denverpost.com/business/ci_18160248 More secretaries for Buffet? Here's an idea, repeal unnecessary and unhelpful regulations, make energy prices and property taxes globally competitive and then...build stuff here.
Who knew that killing off all job creating investment would affect jobs?
When we get the policies right, jobs will return and so will housing.
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I will ask our Pat to comment:
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Treasury Investigates Freddie Mac Investment
By SHAILA DEWAN
Published: January 30, 2012
The Treasury Department is investigating a report that Freddie Mac, the mortgage giant, bet against homeowners’ ability to refinance their loans even as it was making it more difficult for them to do so, Jay Carney, a White House spokesman, said on Monday.
The report came just as the Obama administration had been escalating its efforts to push Fannie Mae and Freddie Mac to ease conditions for homeowners, including those who owe more on their mortgages than their homes are worth.
Last Friday, the Treasury announced that it would offer increased incentives to lenders to forgive portions of homeowner debt, saying pointedly that for the first time the incentives would be offered on loans held by Fannie and Freddie.
But Fannie and Freddie, which said they would review the increased incentives, have long declined to allow debt reduction on the loans it holds or guarantees, saying that it would create unnecessary losses for taxpayers. The companies, which are financed by taxpayers, have also maintained barriers to refinancing, like risk-based fees for homeowners, even as mortgage interest rates have dropped below 4 percent.
In his State of the Union address last week, President Obama said a new refinancing program would cut through government red tape. He has yet to provide details of the program.
The Obama administration has tried, with scant results, to persuade Fannie and Freddie to ease refinancing restrictions and participate in debt forgiveness programs.
The Federal Reserve, which has made low interest rates a crucial part of its response to the financial crisis, has also objected to some of the barriers to refinancing, including fees it has said are unjustified.
On Monday, ProPublica and National Public Radio reported that Freddie Mac, which maintained slightly tighter restrictions than Fannie on homeowners’ eligibility to refinance, had a multibillion-dollar investment whose value hinged on borrowers continuing to pay higher interest rates.
Beginning in 2010, Freddie bought several billion dollars’ worth of “inverse floater” securities — essentially the interest-paying portion of a bundle of mortgages — for its investment portfolio while selling the far less risky principal portion. Fannie and Freddie are supposed to be decreasing the size of their investment portfolios.
There is no evidence that Freddie tailored its refinancing standards to its investing strategy, but “inverse floaters” make less money if the loans they cover refinance to a lower interest rate.
Freddie issued a statement on Monday defending its commitment to helping homeowners. “Freddie Mac is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates,” it said. The company said refinancing accounted for 78 percent of its loan purchases in 2011.
Christopher J. Mayer, a real estate professor at Columbia Business School who has been a proponent of mass refinancing, said he could see little reason for Freddie to use such a complex investment scheme. “Why are we three years into the crisis and some of the same kinds of complicated derivatives deals that brought down some of our biggest financial institutions are being done by Freddie Mac?” he said.
The Federal Housing Finance Agency, Freddie Mac’s regulator, also had problems with the deals. Late Monday, the agency said it had reviewed the inverse floaters last year and had identified “concerns regarding the controls, including risk management.”
Freddie Mac had already stopped conducting the transactions, and only $5 billion of its $650 billion portfolio was held in inverse floaters, the statement said. It said that the investments had no bearing on recent changes, announced last fall, to the Home Affordable Refinance Program, in which Freddie maintained stricter controls than Fannie on homeowners who owed less than 80 percent of their homes’ value.
Some have advocated principal reduction as a better way to restore equity to homeowners, though it is more expensive. The Treasury’s offer on Friday would triple the incentives paid to lenders that reduce principal, to 18 to 63 cents on the dollar from 6 to 21 cents on the dollar.
Proponents say that reducing principal is the most effective type of loan modification and that it would help the housing market and the broader economy by reducing the $700 billion in negative equity that is weighing down growth.
But Edward J. DeMarco, the acting director of the Federal Housing Finance Agency, has remained unconvinced that principal reduction is consistent with the goal of saving taxpayer money that was used to bail out Fannie and Freddie. Two weeks ago, he wrote in a letter to Congress that principal reduction would cost $100 billion if every single underwater government-backed mortgage were adjusted.
Mr. DeMarco noted that reducing principal could reduce losses not for taxpayers but for third parties, like the holders of secondary loans or providers of mortgage insurance. “F.H.F.A. would reconsider its conclusions if other funds become available,” he wrote.
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I have been buried in "trial prep" for the last month. I will try and post some things next week. (Trial starts then, with Pre-trial motions and Jury Selection, so the attorneys will not need me day and night.)
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Thank you Pat, we look forward to it. :-)
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As predicted by Pat:
By MIA LAMAR
U.S. home prices fell again in November, according to the Standard & Poor's Case-Shiller indexes, which reported Tuesday that the majority of metropolitan markets posted declines.
More
A Look at Case-Shiller by Metro Area
Sortable Chart: Home prices, by city
.The U.S. housing market has remained sluggish despite lower prices and interest rates due to a slowly improving economy, an abundance of foreclosures and tighter mortgage requirements.
For November, the Case-Shiller index of 10 major metropolitan areas and the 20-city index both fell 1.3% from the previous month. David M. Blitzer, chairman of the index committee at S&P Indices, also noted that 19 of the 20 major U.S. metropolitan markets covered by the indices in November saw prices decline from October.
"The only positive for the month was Phoenix, one of the hardest hit in recent years," Mr. Blitzer said. "Annual rates were little better as 18 cities and both composites were negative."
The 10-city and 20-city composites posted annual returns of negative 3.6% and negative 3.7%, respectively, versus November 2010. At negative 11.8%, hard-hit Atlanta continued to post the lowest annual return.
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http://www.washingtonpost.com/business/economy/house-prices-hit-post-bubble-low/2012/01/31/gIQAYBTEgQ_story.html
House prices hit post-bubble low
.
When it comes to the value of what many Americans consider their biggest financial asset, no such return appears in sight.
Data released Tuesday showed that seasonally adjusted housing prices have reached a post-bubble low, as the minor surge that began in 2009 fizzled, to be followed by the almost continuous slide of the past 18 months.
The housing bust, in other words, appears to be even worse than it was at the nadir of the recession.
For millions of homeowners, that’s an unsettling reality, and potentially an issue in the presidential campaign. But the damage may be far more widespread.
By making people feel less wealthy, according to economists, the decline in home values inhibits consumer spending and hampers the nation’s stop-and-start economic recovery.
“The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand,” said David M. Blitzer of S&P Indices. “I spent the weekend scratching my head and saying, ‘Isn’t there some good number in here?’ ”
The Standard & Poor’s Case-Shiller seasonally adjusted housing index for 20 cities dropped again in November, the last month for which data were available, falling to a level not seen since 2003.
In the Washington region, seasonally adjusted prices have been relatively flat since April 2010, according to the index, but they remain about 27 percent below their peak.
Of the 20 cities in the index, only three — Denver, Minneapolis and Phoenix — showed improvement from the month before.
“Looking forward, continued weakness in the housing market poses a significant barrier to a more vigorous economic recovery,” according to a Federal Reserve white paper issued in January.
The dip in home prices stems from an excess of supply, which has been made worse by foreclosures and tighter mortgage-lending standards, according to analysts at the Fed and elsewhere.
The depth and extended duration of the housing slide — it has been six years since national housing prices peaked — are astounding, even to many economists who have watched it closely.
“Housing starts have been at 60-year lows for 38 months — it’s incredible,” said Karl E. Case, emeritus professor of economics at Wellesley College and co-founder of the housing price index. “It’s a complete depression.”
Case noted, for example, the slump’s profound effect on the residential construction industry: Annual housing starts in the United States peaked at 2.37 million and have fallen to fewer than 700,000.
“Eighty percent of a major industry in the United States just disappeared,” he said.
More generally, economists differ on exactly how much the fall in housing prices has retarded the U.S. economy.
But in a paper last year, Case and colleagues John M. Quigley and Robert J. Shiller found that housing wealth has a “rather large effect” on how much households consume.
It is this lack of demand in the economy that has been one of the persistent problems in the U.S. recovery, according to economists. Consumer spending accounts for more than two-thirds of the U.S. economy.
The recent white paper from the Fed noted, for example, that housing prices have fallen an average of about 33 percent from their peak, erasing $7 trillion in household wealth. With that, according to the paper, comes a “ratcheting down” of what people buy.
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It was a bubble.
It burst.
Just like the NASDAQ, (now, ten years later, about 55% of what it was at the peak) it is not coming back.
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It was a bubble.
It burst.
Just like the NASDAQ, (now, ten years later, about 55% of what it was at the peak) it is not coming back.
I think we have yet to hit bottom.
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A bailout for people who bought houses they couldn't afford and had no business buying in the first place. :-(
If I bought a car I couldn't afford, and didn't make the payments, the bank would repo it. What's the difference?
I have absolutely no sympathy.
http://www.latimes.com/business/money/la-fi-mo-mortgage-settlement-20120209,0,7611524.story
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Quick! Get me my sunglasses lest I be blinded by the brilliant light eminating from this moment of utter lucidity! :lol: :-D
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:-D
Actually, if you read my previous posts, I have been consistently against any bailout for foreclosures; further I have shown absolutely no sympathy
for those that bought a house WAY beyond their means, didn't make the payments, lived in it in essence for free, and now expect to be bailed out
because it's in foreclosure.
I'm tired of seeing heart wrenching pictures of a mother and two children being evicted from the $800,000 home when she makes $25K per year.
She never should have bought the house in the first place. She had a free ride; she should say "thank you" and move on. It's like my checking into
the Ritz Carlton, paying only the first week, but staying for a whole year, then blaming the Ritz Carlton.
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Amen!!!
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One of my media issues but I saw a headline in our local paper about "Foreclosure Victims".
Who is the victim in a foreclusure. One party lends the money with the right to take back the house if timely payments are not made.
One party agrees to make timely payments or give back the house and gets full possession of the house for that period of time until paid in full or defaulted.
In either outcome, I fail to see a victim. They were maybe a victim of job or income loss perhaps, but a victim of foreclosure? How?
If you can't take the house back - in a timely and cost effective manner, who would ever lend? How many homeowners would we have then?
I will be attending the award ceremony for JDN on this issue!
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http://www.cnbc.com/id/46308436
Government Bailout Actually Hurt Housing Recovery: Zell
Published: Wednesday, 8 Feb 2012 | 8:56 AM ET Text Size By: Jeff Cox
CNBC.com Senior Writer
Government intervention has prevented the real estate market from healing, with the commercial sector hit especially hard, investor Sam Zell said.
As sales languish and prices continue to fall, the head of Equity Group Investments and numerous other ventures pinned the blame on policies that refused to allow market forces to take hold.
"Rather than let the elements of the business world take care of the problems, we basically stopped the process of creating market clearing," Zell said in a CNBC interview. "Had we allowed the market to clear without trying to stop reality...we would have a healthy housing market today."
Since the financial crisis began in 2008, Washington lawmakers and President Barack Obama have launched a counterattack against the housing market's collapse.
Most prominently, the administration implemented the Home Affordable Modification Program, aimed at helping as many as four million distressed homeowners refinance their mortgages at affordable terms. However, the program has reached only about one-fourth its original goal.
In his state of the union address, Obama pledged to expand the efforts to include even those buyers whose mortgages are not owned by government-sponsored enterprises Fannie Mae or Freddie Mac.
"It's putting off facing up to reality," Zell said in describing the efforts to halt foreclosures. "The longer we avoid clearing the longer we're going to be living with this problem."
Zell drew a distinction between the housing programs and the bailout efforts for big Wall Street financial institutions that he said were necessary to save the national economy.
"If our banking system didn't work, the calamity is almost immeasurable," he said. "So to try and equate coming in and in effect protecting the banking system with protecting the housing market is apples and oranges."
While the foreclosure robo-signing scandal is played out in the courts and the housing market languishes, Zell said banks should take action.
"The first thing I would do is I would encourage lenders to move forward and exercise their legal rights, literally — not so much to hurt anybody but to resolve the issues," he said. "Remember, we're different from any other country in the world. We are the only country in the world where you can borrow money on a house and walk away from it."
Zell said he likely won't be making any big investments in housing soon, as "execution" remains a problem when dealing with so many homes. Commercial real estate, meanwhile, remains problematic as well.
During the downturn in the early 1990s, Zell said he advised "stay alive until '95." Now, his mantra is "come clean by '13."
"Commercial real estate still has another couple years to get its act together," he said. "That's literally the point at which all of these extensions and other stuff get cleared out. Because otherwise you're going to have a commercial real estate market that doesn't work."
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"Government Bailout Actually Hurt Housing Recovery"
Yes. The real force of the crash came from the size of the bubble. every poicy I can think of was designed to slow or prevent the correction. All the underlying causes are still largely in place.
Housing comes back when employment and income comes back. Of course a big part of the employment problem is zero construction. If you artificially stimulate that, you re-inflate the bubble.
We learned from that problems of letting the mortgage industry become 90% federal government. Now it will be 100%. The Fed is holding interest at roughly zero. Savings interest is 0. Energy costs nearly double. Property taxes up. 5.5 million people left the work force. Young adults and old adults moving back ini with family. Fine, but no help for the demand for housing. Or the affordability.
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http://www.nytimes.com/2012/02/16/business/california-audit-finds-broad-irregularities-in-foreclosures.html?_r=1&nl=todaysheadlines&emc=tha2
An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday.
Phil Ting, the San Francisco assessor-recorder, found widespread violations or irregularities in files of properties subject to Anecdotal evidence indicating foreclosure abuse has been plentiful since the mortgage boom turned to bust in 2008. But the detailed and comprehensive nature of the San Francisco findings suggest how pervasive foreclosure irregularities may be across the nation.
The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership.
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Data Watch
________________________________________
Housing starts increased 1.5% in January to 699,000 units at an annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/16/2012
Housing starts increased 1.5% in January to 699,000 units at an annual rate, easily beating the consensus expected pace of 675,000. Starts are up 9.9% versus a year ago.
The increase in starts in January was all due to multi-family units, which are extremely volatile from month to month. Single-family starts dipped 1.0%. Multi-family starts are down 4.0% from a year ago while single-family starts are up 16.2%.
Starts rose in all regions of the country, except the Midwest.
New building permits increased 0.7% in January to a 676,000 annual rate, slightly below the consensus expected pace of 680,000. Compared to a year ago, permits for multi-unit homes are up 55.0% while permits for single-family units are up 6.2%.
Implications: More up-beat numbers on the housing market today. Housing starts easily beat consensus expectations for January and were revised up for prior months as well. Looks like the first quarter of 2012 will be the fourth straight quarter where home building boosts real GDP. Although the gains in January were all in the volatile multi-family sector and were likely boosted by unusually mild January weather, today’s figures reinforce the upward trend for home building. Single-family starts are up 16.2% from a year-ago and the top chart to the right shows the strength in multi-family construction. Meanwhile, permits for future construction continue to gain. Notably, the number of single-family homes under construction increased 2.1% in January, the largest gain since 2004. The number of single-family starts exceeded the number of completions by an annualized 119,000 in January, the widest gap since the peak of the housing boom back in early 2006. As we wrote a few months ago, the long-awaited turning point in home building has arrived. Based on population growth and “scrappage,” home building must increase substantially over the next several years to avoid eventually running into shortages. For more on the housing market, please see our research report (link). In other news this morning, the Philadelphia Fed index, a measure of manufacturing activity, increased to +10.2 in February from +7.3 in January. Once again, reports show both factories and home builders lifting economic growth.
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http://www.forbes.com/sites/realspin/2012/02/20/the-robo-signing-settlement-seeds-of-recovery-or-chaos/
The "Robo-Signing" Settlement: Seeds of Recovery, Or Chaos?
George Mason law professor Todd J. Zywicki fears that the “robo-signing” agreement will lead to further efforts to bleed the banks, all the while delaying the necessary clearing of the housing market. The U.S. economy will be the potential victim of continued uncertainty.
After over a year of wrangling, last week the Obama Administration and 49 state attorneys general announced that they had reached a comprehensive settlement with five large mortgage servicers over claims related to their infamous “robo-signing” foreclosure practices.
The settlement provides $25 billion to state governments and homeowners in the form of principal reductions and cash payments, a figure that would rise if other banks sign on. In addition to imposing punishment and providing recompense for alleged past misbehaviors, the settlement provides much-needed relief and a path to recovery for a housing market paralyzed by the continued uncertainty concerning the ability of lenders to foreclose on nonperforming loans.
Or does it?
No sooner had the long-awaited settlement been announced than activists were beating the drum for more litigation, more penalties—and more uncertainty in the housing market. New York State Attorney General Eric Schneiderman called the settlement a “down payment” on compensating foreclosed homeowners and vowed to press for continued civil and criminal prosecutions.
Similarly, Janis Bowdler of the Latino civil rights group the National Council of La Raza characterized the settlement as merely the “first installment” of continued demands against the mortgage industry. In fact, while the settlement releases participating banks from conduct related to mortgage loan servicing, foreclosure preparation, and mortgage loan origination services, it permits further civil and criminal government prosecutions and piling on by class action lawyers.
Here regulators should be cautious about efforts to bleed still further dollars out of the banking industry through endless and protracted litigation. Some critics doubt whether the $25 billion settlement reached last week is sufficient punishment for the misdeeds of the banking industry. Others argue—perhaps with even greater justification—that the settlement provides an unjustified windfall to delinquent borrowers who suffered no actual harm as a result of the banks’ shoddy foreclosure practices, and homeowners who are underwater (those who owe more than their houses are worth) often times because of their own decisions to make minimal downpayments or to suck out home equity at the top of the housing bubble (Oklahoma’s Attorney General Scott Pruitt was the lone holdout among state AG’s, refusing to sign the deal because it favors defaulters over those who have paid their mortgages).
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Existing home sales increased 4.3% in January to an annual rate of 4.57 million units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 2/22/2012
Existing home sales increased 4.3% in January to an annual rate of 4.57 million units. The monthly increase was larger than the consensus expected, but the level was lower because December was revised down significantly. Existing home sales are up 0.7% versus a year ago.
Sales in December were up in all major regions of the country. Most of the increase in overall sales was due to single-family homes; sales of condos/coops also rose for the month.
The median price of an existing home fell to $154,700 in January (not seasonally adjusted) and is down 2.0% versus a year ago. Average prices are down 2.2% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 6.1 in January from 6.4 last month. The decline in the months’ supply was mostly due to a faster pace of sales. The inventory of homes for sale also fell slightly.
Implications: Home sales are slowly but surely headed up. Existing home sales increased 4.3% in January to the highest level since May 2010. More importantly, the inventory of existing homes is down 21% versus last year and at the lowest level since 2005. As a result, the months’ supply of unsold homes is down to 6.1, the lowest since March 2005. Even with this great news the National Association of Realtors said cancelled contracts to buy existing homes remained at 33% in January, which is three times the normal level. These figures suggest that, despite record low mortgage rates, home buyers still face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 31 percent of purchases in January versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales any time soon, but, inventories are in decline and the housing market is on the mend.
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http://www.doctorhousingbubble.com/short-sales-foreclosures-pasadena-foreclosure-and-short-sale-shadow-inventory-2012/
Short sales and foreclosures made up 52 percent of all recent Southern California home sales – Lenders aggressively pricing lower-end properties to move. Two Pasadena examples.
The Southern California housing market is starting to have fewer places to hide in regards to zip codes immune to the correction. The latest data shows a fractured market where over 52 percent of all home sales in the last month were distressed properties. This is clearly not your father’s housing market. We are deep into uncharted waters and as the shadow inventory begins to leak out into the market, we are starting to get a sense of how lenders are approaching the clearing out of inventory. Much is being made about the recent jump in sales but put into context as you will see, is nothing more than bouncing along the bottom. Some tend to think that once a bottom is reached that we will somehow have another boom. That is highly unlikely unless the overall economy and more importantly, wages improve. No one is going to buy a McMansion with a McDonald’s income anymore. The boom lasted for a decade but was completely based on artificial mortgage products that no longer exist (and likely will never come back). We will also look at the low end of the correction in mid-tier cities like Pasadena.
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Actually ready to rebound by spring of 2013, this pretend optimism is another way of confirming what PP told us a year ago - to get ready for at least 2 more years of downward movement. So far, pp has been right on the money.
http://online.barrons.com/article/SB50001424053111904797004577281453828447714.html?mod=BOL_hpp_highlight_top#articleTabs_article%3D1
After falling 34% over the past six years, U.S. home prices will soon bottom. They could turn back up by spring 2013.
(nice ads at the link, try 4 weeks free!)
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My prediction was that the housing rebound is tied to the employment and income rebound which is inextricably tied to the Nov 6 election and the policies and expectations that come out of it.
Point of clarification: a 2 or 3% bump following a 40% collapse is not exactly a 'rebound'.
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http://reason.com/archives/2012/03/23/no-this-is-not-a-housing-recovery
No, This Is Not a Housing Recovery
Anyone who says we are in the midst of a housing recovery is wrong.
Anthony Randazzo | March 23, 2012
We have not reached the bottom of the housing market. I hate to say it. I really do hate to always be the pessimist. And I don’t say this because I’ve been steeped in a couple decades' worth of bitterness as a Red Sox fan. The numbers are just not adding up to recovery.
It is all the rage these days to talk about how we are finally seeing recovery in the housing market, and that pretty soon we’ll be back to home price growth. Analysts point to the decline in housing inventory, lower rates of unemployment, higher rates of affordability, increases in housing starts, and even growing stock values for publicly traded homebuilders.
But this optimism will disappear faster than the enthusiasm for Kony2012 once the next wave of downward home price pressure hits. Describing the current housing market situation as being in the eye of a hurricane is not exactly accurate, but it is fair to say there is another storm gathering that will hit housing hard in the next few years—and it is impossible to stop.
The storm is a mix of delayed pressure as a result of the quantitative easing of the shadow inventory, and a troubling historical trend.
The first pressure system comes in the form of rising mortgage rates. The Fed’s quantitative easing has succeeded in pushing down long-term interest rates and subsequently mortgage rates over the past few years. (QE1 had more to do with this than QE2, but who’s counting.) But whether you think this is a good thing or not, with mortgage rates in the 3 percent to 4 percent range, the only direction they really can go from here is up. A 30-year fixed-rate mortgage at 2 percent is just not worth the risk of lending. It might be several more years before the Fed eases off the quantitative gas pedal, but when it does so interest rates, and with them mortgage rates, will rise. And when mortgage rates rise that puts downward pressure on housing prices since more expensive mortgages mean reduced demand and the need to lower home prices to compensate.
The second element of the coming storm is that while today’s inventory of homes has indeed declined to a much more manageable level, the shadow inventory of homes remains high. While there are currently around 3 million homes for sale in America, once you factor in the homes that are in serious delinquency (i.e., more than four months past due), homes in the foreclosure process, and homes that banks have seized but not put on the market yet, the housing inventory is closer to 10 million homes. Estimates on this do vary, but even the most recent National Association of Realtors data shows a 35-months supply of homes in Florida, and a 41-months and 65-months supply of homes in New York and New Jersey, respectively. The challenge is that once all these other millions of homes hit the market, they will also add downward pressure to housing prices.
The third thing to consider is that history looks to be anti-recovery right now. It is true, as a number of analysts have pointed out recently, that real housing prices (meaning inflation adjusted) have fallen to their long-term trendline. If you discount the most recent housing bubble as fueled by a host of poor policy choices made in the 1990s (such as homeownership goals, Fannie Mae and Freddie Mac’s attempts at dominating the market and advancing taxpayer guaranteed mortgage-backed securities, and the Community Reinvestment Act of 1995), then the historical trend since World War II would suggest that housing prices should be where they are at today. But even if indicators say this should be the bottom, the historical trend has also featured multi-year long “over corrections” after housing bubbles.
In the below graph, you’ll notice that after a housing bubble peaked in 1978 it slowly declined and hit the historical trendline in 1981. But it continued falling and didn’t come back up to the trendline until 1986. Similarly, the housing bubble that peaked in 1989 declined a bit faster and hit the average trendline in 1991, but it wasn’t until 1998 as the massive 21st century housing bubble began to build that prices got back to their trendline.
**Read it all.
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http://www.reuters.com/article/2012/04/04/us-foreclosure-idUSBRE83319E20120404
(Reuters) - Half a decade into the deepest U.S. housing crisis since the 1930s, many Americans are hoping the crisis is finally nearing its end. House sales are picking up across most of the country, the plunge in prices is slowing and attempts by lenders to claim back properties from struggling borrowers dropped by more than a third in 2011, hitting a four-year low.
But a painful part two of the slump looks set to unfold: Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.
"We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010," said Mark Seifert, executive director of Empowering & Strengthening Ohio's People (ESOP), a counseling group with 10 offices in Ohio.
"Last year was an anomaly, and not in a good way," he said.
In 2011, the "robo-signing" scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.
Five major banks eventually struck that settlement with 49 U.S. states in February. Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.
Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January.
More conclusive national data is not yet available. But watchdog group, 4closurefraud.org which helped uncover the "robo-signing" scandal, says it has turned up evidence of a large rise in new foreclosures between March 1 and 24 by three big banks in Palm Beach County in Florida, one of the states hit hardest by the housing crash
Although foreclosure starts were 50 percent or more lower than for the same period in 2010, those begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo's rose 68 percent and Bank of America's, including BAC Home Loans Servicing, jumped nearly seven-fold -- 251 starts versus 37 in the same period in 2011. Bank of America said it does not comment on data provided by other sources. Wells Fargo and Deutsche Bank did not comment.
Housing experts say localized warning signs of a new wave of foreclosure are likely to be replicated across much of the United States.
Online foreclosure marketplace RealtyTrac estimated that while foreclosures dropped slightly nationwide in February from January and from February 2011, they rose in 21 states and jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).
RealtyTrac CEO Brandon Moore said the "numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed."
One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products -- with high interest rates where banks asked for no money down or no proof of income -- is that today it's mostly Americans with ordinary mortgages whose ability to meet payment have been hit by the hard economic times.
"The subprime stuff is long gone," said Michael Redman, founder of 4closurefraud.org. "Now the folks being affected are hardworking, everyday Americans struggling because of the economy."
"HARD TO CATCH UP"
Until December 2010, Daniel Burns, 52, had spent his working life in the trucking industry as a long-haul driver and manager. When daily loads at the small family business where he worked tailed off, he lost his job.
Unable to cover his mortgage, Burns received a grant from a government fund using money repaid from the 2008 bank bailout. That grant is due to expire in early 2013 and Burns is holding out on hopeful comments from his former employer that he might get his job back if the economy recovers.
"If things don't pick up, I will be out on the street," he said, staring from his living room window at two abandoned houses over the road in the middle-class Cleveland suburb of Garfield Heights, the noise of traffic from a nearby Interstate highway filling the street.
Underscoring the uncertainty of his situation, Burns' cell phone rings and a pre-recorded message announces that his unemployment benefits are due to be cut off in April.
A bit further up the shore of Lake Erie, Cristal Fell, who works night shifts entering data for a trucking company in Toledo, has fallen behind on her mortgage a second time because her ex-husband lost his job and her overtime was cut.
"Once you get behind it's so hard to catch up," she said.
Fell, a mother of four, hopes the economy will gather enough speed to help her avoid any risk of losing her home. Her ex-husband has found a new job and she is getting more overtime, so she hopes she can catch up on her mortgage by the fall.
Burns and Fell are the new face of the U.S. housing crisis: Middle class, suburban or rural with a conventional 30-year fixed mortgage at a reasonable interest rate, but unemployed or underemployed. Although the national unemployment rate has fallen to 8.3 percent from its peak of 10 percent in October 2009, nearly 13 million Americans remain jobless, meaning many are struggling to keep up with their mortgage payments.
Real estate company Zillow Inc says more than one in four American homeowners were "under water" or owed more than their homes were worth in the fourth quarter of 2011. The crisis has wiped out some $7 trillion in U.S. household wealth.
"We're seeing more people coming through who have good loans with reasonable interest rates," said Ed Jacob, executive director of non-profit lender Neighborhood Housing Services of Chicago Inc, which provides foreclosure counseling. "But in many households only one person works now instead of two, or they had their hours cut."
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New single-family home sales declined 7.1% in March
Data Watch
New single-family home sales declined 7.1% in March To view this article, Click
Here
Brian S. Wesbury - Chief Economist
Robert Stein - Senior Economist
Date: 4/24/2012
New single-family home sales declined 7.1% in March, but, at a 328,000 annual
rate, still beat the consensus expected pace of 325,000.
Sales were down in the West and Midwest, but up in the South and Northeast.
The months’ supply of new homes (how long it would take to sell the homes in
inventory) rose to 5.3. The rise in the months’ supply was all due to a
slower selling pace. Inventories declined to a new record low (dating back to 1963).
The median price of new homes sold was $234,500 in March, up 6.3% from a year ago.
The average price of new homes sold was $291,200, up 11.7% versus last year.
Implications: Please ignore the headline of a 7.1% drop in new home sales in March.
It’s very misleading. The reason for the drop is that February sales were
revised up substantially, to a 353,000 annual rate from a prior estimate of only
313,000. In this situation, it’s more important to look at the level of sales
in March (328,000 annualized), which narrowly beat consensus expectations (325,000)
and is up 7.5% from a year ago. The bad news for builders of single-family homes is
not completely over. Now that banks can move forward with foreclosures more quickly,
a large inventory of bargain-priced existing homes could temporarily attract some
buyers away from the new home market. But, the road ahead looks better than
it’s looked in years. The upward trend in home sales is only one piece of good
news for builders. Another is that the total inventory of new homes is at a new
record low (see lower chart to right). Notably, however, the inventory of new homes
where the builder has yet to break ground continues to climb, showing builders are
getting ready for what they believe will be more buyers. We think they’re
right. In fact, a lack of inventories is probably holding back sales. The other
piece of good news for builders is that new home prices are climbing, with the
median price of a new home up 6.3% from a year ago and average prices up 11.7%. In
other news on home prices, the FHFA index, a measure for homes financed by
conforming mortgages, was up 0.3% in February and is up 0.4% from a year ago, the
largest gain since 2006-07. The Case-Shiller index, which measures homes in the 20
largest metro areas around the country, increased 0.2% in February, the first gain
in ten months, but is still down 3.5% from a year ago. Twelve of 20 metro areas had
price increases, led by Phoenix. Atlanta had the largest decline. We expect the
Case-Shiller index to be up slightly for 2012. In manufacturing news this morning,
the Richmond Fed index, a measure of factory activity in the mid-Atlantic, increased
to +14 in April from +7 in March.
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Data Watch
________________________________________
Housing starts rose 2.6% in April to 717,000 units at an annual rate, well above consensus To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 5/16/2012
Housing starts rose 2.6% in April to 717,000 units at an annual rate, well above the 685,000 rate the consensus expected. Starts are up 29.9% versus a year ago.
The gain in starts in April was due to a 2.3% rise in single-family units and a 3.2% rise in multi-family units. Single-family starts are up 18.8% from a year ago, while multi-family starts are up 63.0%.
Starts rose in the South and Midwest, but declined in the Northeast and West.
New building permits fell 7.0% in April to a 715,000 annual rate, coming in below the consensus expected pace of 730,000. Compared to a year ago, permits for single-unit homes are up 18.5% while permits for multi-family units are up 35.6%.
Implications: The recovery in home building is definitely underway. Housing starts rose 2.6% in April to 717,000 units at an annual rate and are up 29.9% from a year ago. In addition, March housing starts were revised substantially higher from 654,000 to 699,000 units at an annual rate. The total number of homes under construction (started, but not yet finished) increased for the eighth straight month, the first time this has happened since 2004-05. Permits to build homes, although declining 7.0% in April, are up 23.7% from a year ago. Some people may see the April decline as a sign of weakness, but this weakness was all focused in multi-family permits which fell 20.8% in April after a 32.3% rise in March. Single-family permits actually rose 1.9% in April and are at the second highest level in two years, signaling continued gains in home building in the coming year. It looks like the second quarter of 2012 will be the fifth straight quarter where home building boosts real GDP. Multi-family activity – both starts and permits – has been leading the way and we expect that to continue, particularly now that a legal settlement means more foreclosures can move forward. Some people occupying homes they have not been paying for will now have to go elsewhere and rent. Based on population growth and “scrappage,” housing starts should eventually rise to about 1.5 million units per year (probably by 2016), which means the recovery in home building is still very young. For more on the housing market, please see our research report (link).
===========
here it is:
http://www.ftportfolios.com/Commentary/EconomicResearch/2011/11/2/housing-at-an-inflection-point
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Data Watch
________________________________________
Existing home sales rose 3.4% in April to an annual rate of 4.62 million To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 5/22/2012
Existing home sales rose 3.4% in April to an annual rate of 4.62 million units; basically matching the consensus expected 4.61 million units. Sales are up 10.0% versus a year ago.
Sales in April were up in all four major regions. Most of the increase in overall sales was due to single-family homes. Multi-family sales also rose.
The median price of an existing home rose to $177,400 in April (not seasonally adjusted), and is up 10.1% versus a year ago. Average prices are up 7.4% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 6.6 in April. Although sales rose, the increase in inventories of homes for sale rose faster.
Implications: The housing recovery is definitely underway. Existing home sales rose 3.4% in April, and are up 10% from a year ago. The median price of an existing home is up 10.1% from a year ago, the largest yearly gain since January 2006. A big reason for this gain was fewer distressed sales and more sales of larger homes, a good sign for the economy moving forward. It still remains tough to buy a home. Despite record low mortgage rates, home buyers still face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 29 percent of purchases in April versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales any time soon, but the housing market is definitely on the mend. In other news today, the Richmond Fed index, which measures manufacturing activity in mid-Atlantic states, fell to +4 in May from +14 in April. The decline came in well below consensus expectations of +11.
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"Housing starts rose 2.6% in April to 717,000 units at an annual rate, well above the 685,000 rate the consensus expected. Starts are up 29.9% versus a year ago."
Other than the previous years in this downturn and the deep recession years of 1981-1982, this is still the worst level of housing starts in more than 50 years! http://www.nahb.org/generic.aspx?genericContentID=554 http://www.urbanfutures.com/reports/BTN%20US%20Housing%20Starts.pdf
Up 29.9% from 2011? And that is still Fed-subsidized housing starts with interest rates close to zero. Put another way, it would take a 300-400% to come back to ordinary levels of the last half century.
The good news is that with personal income at these levels, we don't need any more houses or house payments.
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Beating Wesbury to his positive spin take on this, keyword with continued downtrend is "surprising".
http://www.reuters.com/article/2012/05/30/usa-economy-idUSL1E8GU3I220120530
US pending homes sales post surprise fall in April
Wed May 30, 2012 11:12am EDT
* U.S. pending home sales fall 5.5 percent in April
* Mortgage applications drop 1.3 percent in latest week
By Jason Lange
WASHINGTON, May 30 (Reuters) - Contracts to purchase previously owned U.S. homes unexpectedly fell in April to a four-month low, undermining some of the recent optimism that the housing sector was touching bottom.
The National Association of Realtors said on Wednesday its Pending Home Sales Index, based on contracts signed last month, fell 5.5 percent to 95.5, its lowest level since December, after a downwardly revised 3.8 percent increase in March.
...
"The drop in pending home sales is clearly disappointing," said Pierre Ellis, an economist at Decision Economics in New York. "It remains to be seen whether this is the beginning of a real downturn." - WHAT??
...
Wednesday's report showed contracts fell 12 percent in the western United States and 6.8 percent in the South. They edged lower in the Midwest and rose slightly in the Northeast.
...
The yield on 10-year U.S. Treasury notes sank to the lowest in 60 years.
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Housing is still roughly 100% subsidized by the Fed - what would interest rates and mortgage payments be if the Fed's job was to protect the value of the dollar?. Other than that, where is the recovery??
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Existing home sales fell 1.5% in May to an annual rate of 4.55 million units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 6/21/2012
Existing home sales fell 1.5% in May to an annual rate of 4.55 million units; basically matching the consensus expected 4.57 million units. Sales are up 9.6% versus a year ago.
Sales in May were down in the Northeast, West and South, but up in the Midwest. The fall in overall sales was due to declines in both single-family and multi-family home sales.
The median price of an existing home rose to $182,600 in May (not seasonally adjusted), and is up 7.9% versus a year ago. Average prices are up 6.4% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 6.6 in May. Although inventories fell, the overall pace of sales was slower, raising the months’ supply.
Implications: The housing recovery continues. Although existing home sales fell 1.5% in May, sales are still up 9.6% from a year ago. The median price of an existing home is up 7.9% from a year ago, the largest yearly gain since 2006 and the third consecutive month of year-to-year gains. Price gains were, at least in part, due to fewer distressed sales and more sales of larger homes, a good sign for the economy moving forward. It still remains tough to buy a home. Despite record low mortgage rates, home buyers still face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 28 percent of purchases in May versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales any time soon, but the housing market is definitely on the mend. In other housing news this morning, the FHFA index, a price measure for homes financed by conforming mortgages, was up 0.8% in April (seasonally-adjusted). Prices are up 2.4% in the past two months alone. This is the fastest 2-month gain anytime on record, going back to 1991, even including the housing boom! Today’s news on manufacturing was not as good. The Philadelphia Fed index fell to -16.6 in June from -5.8 in May. Some view this dip as a recession sign, but the Philly Fed Index fell to -20 in August 2011 and the Plow Horse Economy’s real GDP still grew at a 1.8% annual rate in that quarter, so it does not mean we’re in a recession. More likely, the report reflects concerns about Europe, rather than actual changes in activity. Meanwhile, new claims for unemployment insurance dipped 2,000 last week to 387,000 while continuing claims were unchanged at 3.30 million. These figures suggest tepid payroll growth in June: 45,000 nonfarm and 55,000 private. We think some firms are waiting for the health care ruling to decide how many workers to hire.
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30 yr now @ 3.66% - lowest on record!
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What would be the value of housing if not still subsidized by government?Significantly lower. Housing is distorted by govt - but tied to income. Housing can't recover until employment and personal income recovers.
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http://www.nytimes.com/2012/06/24/movies/the-queen-of-versailles-and-its-lawsuit.html
June 21, 2012
House of Cards
By JOE NOCERA
David and Jackie Siegel and their Orlando, Fla., dream home are the subjects of “The Queen of Versailles,” a film by Lauren Greenfield
“THIS won’t be a big part of my story,” I assured Lauren Greenfield. “But can you tell me a little bit about the lawsuit?”
It was the usual prerelease scene: a reporter and a filmmaker, sitting in a Midtown restaurant, talking about her forthcoming movie. Known primarily as a photographer, Ms. Greenfield, 45, had spent much of the last three years shooting and editing “The Queen of Versailles,” a documentary whose boilerplate description — a wealthy Florida couple tries to build America’s largest house in Orlando — doesn’t do justice to the jaw-dropping scenes of consumption and comeuppance that, writ large, strangely mirror the fortunes of less extravagant Americans. With her movie set for release on July 20, the time had come for Ms. Greenfield to promote it.
Most of the interview revolved around the film and, more broadly, Ms. Greenfield’s approach to both filmmaking and photography. Her photography, she said, was “sociologically themed,” with an emphasis on consumerism and cultural values. “The Queen of Versailles,” she added, was very much of a piece with her body of work: “What drew me to this subject was that I got interested in the idea of a house as the ultimate expression of the American Dream.” She said she hoped that audiences would see the film not so much as a case study in how the wealthy live but rather as a metaphor for how we all lived — and thought, and acted — during the giddy years of the housing bubble, and the painful ones that followed.
Ms. Greenfield raved about Jackie and David Siegel, the couple at the center of the movie. Jackie, a 46-year-old former model, is 31 years younger than David, the billionaire founder of Westgate Resorts, “the largest privately owned time-share company in the world,” as he says in the movie. They have eight children (including a niece of Jackie’s, whom they are raising), four dogs and, despite their wealth, very little pretension.
“One of the things that appealed to me about Jackie and David is that because they come from humble origins, they had a generosity of spirit that allowed me to get to know them,” Ms. Greenfield said.
Every few months Ms. Greenfield and her small crew would essentially move in for a few days, doing interviews and playing fly on the wall. She came to like Jackie very much, and to respect David.
So it was more than a little painful when, on the eve of the film’s premiere at the Sundance Film Festival in January — an event Mrs. Siegel attended — David Siegel sued Ms. Greenfield for defamation. His original complaint focused on the Sundance publicity materials, which inaccurately described his company as collapsing. But even after Ms. Greenfield and Sundance tweaked the language, Mr. Siegel didn’t drop the lawsuit. Instead he filed a broader complaint, alleging that “The Queen of Versailles” depicts Westgate Resorts “in an array of defamatory, derogatory and damaging ways.”
When I asked Ms. Greenfield about the lawsuit, she reiterated her fondness for her subjects, and then let out a small sigh. “You should probably talk to our lawyer about the details,” she said.
THE OPENING SCENES give no hint that “The Queen of Versailles” will have any message other than F. Scott Fitzgerald’s: The rich are different from you and me. While their 90,000-square-foot dream house is under construction, the Siegels make do with a 26,000-square-foot home. They employ a staff of 19. Opening her closet, Mrs. Siegel exclaims happily, “I have a $17,000 pair of Gucci crocodile boots.”
The source of the family’s wealth is Mr. Siegel’s time-share company, which operates more than two dozen resorts around the country and which, to be brutally honest, has much in common with the subprime mortgage industry, selling people vacation time shares many can’t really afford. Mr. Siegel has just completed his greatest resort yet, a 52-story property in Las Vegas called the PH Towers Westgate, in which he has invested more than $400 million of his own money.
As for Versailles — and yes, that’s what the Siegels call the enormous home they are building — it is half-finished when the movie opens. With the camera tagging along, Mrs. Siegel takes a friend on a tour. “Is this your room?” the friend asks as they walk toward a cavernous space. “It’s my closet,” she replies. She and her husband explain to Ms. Greenfield that they didn’t set out to build America’s biggest house, but after they’d included everything they both wanted — the bowling alley, the 10 kitchens, the health spa — it just turned out that way.
What then happens to the Siegels — and what gives the film its tension — is what happened to so many Americans: the housing bubble burst. Westgate Resorts is forced to lay off thousands of employees. Mr. Siegel has to halt construction on Versailles and put it on the market. Four months after PH Towers opens, the film notes ominously, the company that built it “sues Westgate for unpaid bills.”
So instead of being a movie about the building of a giant house, “The Queen of Versailles” instead focuses on the drip, drip, drip of a rich family trying to hold onto what it has — and its painful, sometimes comical, adjustment to changing circumstances. All but four of the household staff are laid off, and the Siegel home descends into a state of chronic, mild chaos. Ms. Greenfield lingers on the dog poop scattered around the house. (The dogs were never trained, she says, because the staff always quickly swept up after them.)
Ultimately the real plot revolves around Mr. Siegel’s desperate struggle to to keep the banks from taking over PH Towers, in which he has so much invested, both financially and psychologically. On Ms. Greenfield’s last visit she films him sitting on a couch, the TV on, surrounded by documents, barking at his family and sounding deeply depressed.
Even though the Siegels live in a different financial stratosphere from most Americans, Ms. Greenfield’s metaphorical conceit works: Mr. Siegel’s struggle to hold onto his resort — and his dream house — differs only in scale from the struggles of millions of Americans faced with foreclosure. People get depressed when they are about to lose something they care about. They lash out at the banks. They talk about changing their behavior. In one tragicomic scene Mrs. Siegel does her Christmas shopping at Walmart — but then overcompensates by practically buying the place out.
When I first interviewed Ms. Greenfield, that is mostly what we talked about, and, indeed, it is what I planned to write about. But then on a lark I called Mr. Siegel’s lawyer, who sent me the amended complaint. It is less a legal brief than the cri de coeur of a wounded man. I suddenly realized why Mr. Siegel was suing: An extremely wealthy man used to getting his way, he thought he was in control of Ms. Greenfield’s narrative. He assumed it would be a narrative of business success, which is how he views his life story. But when he saw Ms. Greenfield’s film, he realized that her narrative was a story of failure. He felt betrayed.
I also realized that despite what I’d said to Ms. Greenfield, I was suddenly more interested in this supposed betrayal than in the film I had been assigned to write about. I have to admit: I felt a little badly about it. But not that badly.
DAVID SIEGEL’S LAWSUIT claims that “The Queen of Versailles” is a fraud — “more fictional than real,” it charges, describing the film as a “a staged theatrical production, albeit using nonprofessionals in the starring roles (as themselves).” What he means is that what we see on screen — dramatic though it surely is, and metaphorical as we are likely to view it — is less a reflection of reality than a stringing together of out-of-context scenes designed to provide Ms. Greenfield her narrative arc.
He’s got a point. Take, for instance, those scenes in which the Siegels flaunt their wealth. Although they plainly give the impression of being shot before the start of the financial crisis, they were actually filmed a year later, as Ms. Greenfield acknowledged in an e-mail. Although it appears the Westgate layoffs took place long afterward, they had mostly occurred before she began filming. And that happy scene in which Mrs. Siegel gives the Versailles tour? It suddenly occurred to me that there wasn’t a hammer in sight. Construction, it turns out, had already halted.
These particular illusions didn’t bother Mr. Siegel in the least. They were the illusions he thought Ms. Greenfield had bought into. Rather, what drove him around the bend was the way the film ended: with the clear impression he was in a host of trouble. He insists that despite the PH Towers’ woes, that was never remotely true.
Ms. Greenfield makes no apologies. “The movie ends on Nov. 21, 2011, when he loses possession of the Towers,” she said. That is certainly an understandable choice. The Siegels’ seeming rise and fall is what propels “The Queen of Versailles.”
“David Siegel feels that since the film was made he is back on top,” Ms. Greenfield’s lawyer, Martin Garbus, said when I spoke to him. “He wants the film to end with music from Wagner and him coming out of the clouds. He would like a different film from the one she made.”
Mr. Garbus said he felt Mr. Siegel had virtually no chance of winning — not only is the First Amendment a stumbling block, but the Siegels agreed in writing to use arbitration to settle any dispute with Ms. Greenfield. I suspect that Mr. Siegel, who like many wealthy men, files lawsuits the way other people honk their horns, is smart enough to know that. But one also suspects that winning isn’t really the point. A lawsuit can cost his new foe money and cause her trouble — and it can hurt her feelings too, because she so clearly wants the Siegels to like the film, and to like her.
When I called Mr. Siegel, he at first said he couldn’t talk because of the litigation. But he couldn’t help himself — just as he probably couldn’t help himself when Ms. Greenfield’s cameras were rolling. “It was supposed to be a movie about building the largest house in America,” he groused. But it wasn’t, and he only had himself to blame “for letting these people intrude into my life.”
He had complaints large and small. His dogs didn’t regularly poop in the house, he said. (One of them was dying of cancer, he said, which caused the problem.) “She shows an empty call center where people have been laid off — right next door there was a full one, which she didn’t film,” he grumbled. Ms. Greenfield filmed his wife in a stretch limousine, getting lunch from McDonald’s. Mr. Siegel said that the filmmaker suggested his wife rent the limo. And that scene where he seems depressed? “It had nothing to do with the business,” he said. “I was depressed because I was sick of them showing up.”
Suddenly he had another complaint: “You’re as bad as she is,” he said to me. “You roped me into giving this interview.”
Before hanging up, he reiterated that Westgate Resorts was as profitable as it had ever been, and that Versailles, which he had never lost, was back under construction. “We didn’t hit bottom,” he insisted. “We just flattened out.”
When I repeated Mr. Siegel’s allegations to Ms. Greenfield, she swatted away most of them with ease. But she did acknowledge that on that last visit he was indeed agitating for the film crew to leave. She did not deny that his seeming depression was because she was still filming.
“We tried to capture that in our last interview,” she said.
Before we got off the phone, she too had one last thing to say. “I’m worried that the focus on this lawsuit is going to detract from the film.”
I didn’t miss a beat. “Don’t worry,” I replied. “I liked the film. I’m sure that will come through.”
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New single-family home sales increased 7.6% in May To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 6/25/2012
New single-family home sales increased 7.6% in May, to a 369,000 annual rate, easily beating the consensus expected pace of 347,000.
Sales were up in the Northeast and South, but down in the Midwest and West.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.7 from 5.0 in April. The fall in the months’ supply was all due to a faster selling pace. Inventories rose slightly.
The median price of new homes sold was $234,500 in May, up 5.6% from a year ago. The average price of new homes sold was $273,900, up 4.3% versus last year.
Implications: The market for new homes should be the last piece of the housing puzzle to recover and even that is now on the mend. New home sales easily beat consensus expectations, coming in at a 369,000 annual rate in May and are now up 19.8% from a year ago. The median price of a new home sold is up 5.6% versus a year ago. Although the inventory of homes rose slightly, the increase was due to the inventory of homes not yet started as well as homes still under construction; the inventory of completed new homes fell again, to the lowest level on record (dating back to 1963). The months’ supply of new homes, is now 4.7. This is below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The lack of availability of completed new homes is likely holding back sales, which will improve even more as builders finish some of the homes now under construction. We see the same phenomenon in the existing home market, where a lack of homes on the MLS is temporarily holding back sales (see the most recent Wesbury 101). The road ahead looks better than it has in years. Look for housing to continue to move higher, and to add to GDP for the fifth consecutive quarter.
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http://www.businessweek.com/news/2012-06-28/fha-underestimates-mortgage-delinquency-rates-study-says
FHA Underestimates Mortgage Delinquency Rates, Study Says
More than 40 percent of the U.S. Federal Housing Administration loans originated from 2007 through 2009 will be delinquent within five years and the agency’s data underestimate that risk, according to a study by the Federal Reserve Bank of New York and New York University.
The research published today used loan information from data provider CoreLogic Inc. (CLGX) (CLGX) to track FHA-insured mortgages and predict default rates based on borrower characteristics.
The FHA, part of the Department of Housing and Urban Development, underestimates risk because it counts refinanced mortgages as successful loan terminations, even though the same borrowers are refinancing into new mortgages backed by the government insurer, according to the paper published on the website of the National Bureau of Economic Research. The researchers computed the risk of default by linking all of the loans connected to each borrower.
“Having such a very large fraction of the people who borrow from you become delinquent could never be regarded as good public policy,” said Andrew Caplin, a professor of economics at New York University and one of the study’s authors.
The study is the latest in a series of critiques by Caplin and others of the way the FHA tracks its financial health. The agency, which took on more loans as private insurers left the market in the aftermath of the 2008 financial crisis, guarantees about $1.1 trillion in home loans.
HUD spokeswoman Tiffany Thomas Smith declined to comment in detail because the agency has not yet reviewed the study. The FHA has defended its financial performance data and stressed that the quality of its loans is improving.
‘Credit Quality’
“Credit quality of loans the agency has insured over the past two years is the highest it has ever been,” the agency said in a fact sheet posted on its website in March. “Early- payment default rates and current-period serious delinquency rates are a fraction of those seen in earlier books at the same point in their seasoning.”
Caplin said he is urging the agency to change its model for computing default risk.
“In the current method, we’re not building a future,” he said. “If you can’t even look at the data right, how can you possibly design the housing-finance institutions of the future?”
To contact the reporter on this story: Clea Benson in Washington at cbenson20@bloomberg.net or
To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net
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Second post, perhaps related to the first :wink:
http://www.cnbc.com/id/47736043
FHA Turns to Investors as Losses Continue to Rise
Faced with a rising number of severely delinquent loans, the Federal Housing Administration is taking a very small program to sell these loans to investors and ramping it way up.
The government's mortgage insurer came to the rescue of the mortgage market, when credit seized up at the start of the recent housing crash.
It's market share rose from barely 3 percent to upwards of 40 percent of new originations. Now it is saddled with over 700,000 bad loans, or 9 percent of the residential loans it insures.
"I'm not going to make any future predictions "bailouts", but we are working hard every day to ensure that we are protecting the taxpayers and the FHA," said FHA Acting Commissioner Carol Galante.
The initial pilot program was launched in 2010 and sold barely 3000 loans in all of last year. The newly renamed Distressed Asset Stabilization Program, will offer up to 5000 loans per quarter starting this fall. Borrowers must be at least six months behind on their payments for the loan to be eligible.
"If we can sell the mortgage sooner, we have the opportunity to do at least as good in terms of money back to FHA and potentially help the borrower, and the community," said Galante.
Since the FHA does not own, but insures mortgages, this would be a voluntary choice by the banks, but likely a popular one, as the FHA requires banks to go fully through the costly and time-consuming foreclosure process before handing off the properties to the FHA.
FHA also limits the types of modifications the banks can do. Big banks have already starting selling off some of their non-FHA other mortgages to private investors, like Connecticut-based Carrington Mortgage Holdings.
"If an investor has correctly analyzed and priced the NPL(non-performing loans) pools, and has the people, services and infrastructure in place to work with borrowers and manage the properties, these pools can be a very attractive investment," says Rick Sharga, a Carrington executive.
Investors in these pools, however, will face restrictions. They cannot foreclose on the property for six months after purchasing the loan, and they must guarantee that at least half the loans would be modified to a reperforming status and held for at least three years. That is designed to prevent immediate "flipping."
"We have a fairly straightforward approach to how we handle NPL (non-performing loan) pools. We attempt to keep the borrower in the home and keep the property cash flowing. In the long run, that should deliver the best results for our investors," says Sharga.
Investors are buying the loans at a discount and therefore can make more aggressive modifications than the banks might be willing to do. For the FHA, selling the loans, even at this discount, is stemming at least some of the bleeding simply by getting rid of them more quickly.
"We actually save money because we're not paying all the cost of holding that mortgage all the way through to foreclosure and managing and maintaining those properties over a long period of time," said Galante.
The program will offer some national loan pools and some pools in "hardest hit geographies," according to Galante. Those geographically specific pools will have additional restrictions in terms of how many of those properties could come to market as vacant REO (real estate owned, foreclosed homes).
FHA is not offering up all of its troubled loans for sale, because as the housing market improves, they are able to get increasingly better returns when selling the foreclosed homes it has.
"We're seeing our recovery dollars go up in some markets," adds Galante. "We have to have multiple tools.
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from our friend Pat:
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But don't forget to blame the FHA for their actions. Those of us in the industry knew that the FHA loans being done were nothing more than Subprime all over again.
• At this time, about 10% of all FHA loans are delinquent over 90 days.
• 16% of all FHA loans are at least 30 days delinquent.
• FHA has a minimum down payment requirement of 3.5%. 3% of this can be made by the seller "crediting" a portion of their "purchase price" towards the down payment. In other words, the sales price is increased by 3% to cover most of the down payment, same as subprime. Of all 2010 FHA loans done using the 3.5% down payment, the loans are now on average 7% underwater.
• Of all FHA loans that get modified, 49% are again delinquent after 12 months.
• 40% of FHA buyers are first time homeowners, with a greater risk of default.
• About 26 percent of the FHA-insured loans originated in 2007 are seriously delinquent, meaning overdue by 90 days or in foreclosure, according to a March 26 FHA report to Congress.
• For 2008 mortgages, the share is 24 percent.
• For 2009, the rate is 11 percent, for loans originated in 2010 it is 4.1 percent, and
• For 2011, it’s 1 percent.
• In September 2011, 638,000 FHA mortgages were in their second default, the agency said in a November report to Congress
• FHA in 2010 began mandating credit scores of at least 580 for borrowers who use its minimum down payment --which was raised to 3.5 percent from 3 percent in 2009.
• Buyers can cite income from future roommates to qualify for a loan.
• Cash reserves, required by Fannie Mae and Freddie Mac to show a borrower’s ability to pay a mortgage if a hot water tank bursts or if the roof leaks, aren’t required for many FHA loans.
• FHA loans are 35-40% of all current home sales.
• FHA loans are claimed to require 45% debt ratios, which are far to high. But, I have personally seen approvals in 2010 at 55% debt ratios.
So, when many people claim that housing is recovering, they are simply quoting "raw data" without looking at the underlying causes and problems.
Once again, the government is trying to prop up the housing market with unsustainable programs.
Pat
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Patrick comments: I am no fan of Yves Smith, but this time, she has gotten it right. This is one of the reasons why Housing appears to be recovering, but in fact is being manipulated.
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http://www.nakedcapitalism.com/2012/07/realtytrac-corelogic-confirm-housing-bear-thesis-85-90-of-reo-being-held-off-market-meaning-tight-inventories-are-bogus.html
RealtyTrac, CoreLogic Confirm Housing Bear Thesis: 85-90% of REO Being Held Off Market, Meaning “Tight” Inventories Are Bogus
We’ve been mystified with the housing bull argument that things really are getting better. While real estate is always and ever local, and some markets may indeed be on the upswing, there are ample reasons to doubt the idea that an overall housing recovery is in. For instance, the recent FHFA inspector general report stated:
Further, general distress in the housing sector will likely continue to result in elevated REO inventories. For example, the Enterprises’ financial data indicate that, as of the end of 2011, more than 1.1 million mortgages held or guaranteed by the Enterprises were “seriously delinquent,” i.e., were 90 or more days past due. At that time, the volume of seriously delinquent mortgages was more than six times the size of the Enterprises’ REO inventories
Reader MBS Guy noted:
My rough calculation of their REO and delinquency numbers would indicate that they will have about 300,000 new REOs (acquisitions, in their parlance) per year for the next three years, assuming their isn’t a surge in new defaulters from their portfolio (ie – just using the loans currently seriously delinquent). They also report 179,000 properties currently in REO (end of 2011).
If they maintain their 2011 rate of REO dispositions at 353,000, the pipeline would be largely cleared in about 3 years. If they are able to increase the pace a bit, perhaps the inventory clears in 2-2.5 years.
Either way, it is very likely that about 1 million REO properties will be disposed of by the GSEs over the next 2-3 years. Over the last 3 years, they have disposed of about 833,216 REOs.
What will the impact on home prices be in the rate of REO disposition in the next 3 years matches or exceeds the rate of disposition of the last 3 years? I’d expect that it will be pretty negative.
Remember, that’s ONLY Fannie and Freddie mortgages. Recall that 1.1 million figure, serious delinquencies in their portfolios. Top housing analyst Laurie Goodman puts the total across the market at 2.8 million.
So why are we seeing so much housing cheerleading? One big “proof” is that housing inventories are supposedly shrinking. If you recall the classic supply/demand chart, if a price is higher than the market price, you expect to see big inventories somewhere. Conversely, if inventories are falling below a “normal” level (there are always some buffers in a system), that’s a sign of strengthening demand.
But we’ve seen so much evidence that the inventories that the commentators are looking at are misleading it isn’t funny. Banks were attenuating foreclosures even before the robosigning scandal broke. In the states with real housing distress, banks will take foreclosures up to the stage of actually taking title from the owner, and let it sit in limbo for a protracted period. But in addition to delays in real estate being taken into REO, there is also evidence of banks simply not putting real estate owned by securitizations, the GSEs, or the banks themselves, on the market, thus keeping it out of visible inventories. For instance, numerous NC readers report they see vacant homes, want to make an offer, and can’t find out who to contact to do so. That is a pretty strong sign that those homes are also not in official REO inventories.
And let’s consider the implications of that chart, again: if there ARE large inventories, that’s means supply is being constrained and the resulting “market” prices are above where they’d be based on fundamentals. So any price improvement is based not on improving conditions, but the manipulation of supply.
We finally have some official confirmation of our thesis. From AOL’s Real Estate blog, “‘Shadow REO’: As Many as 90% of Foreclosed Properties Held Off the Market, Estimates Suggest“:
As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It’s a testament to lenders’ fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.
Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said.
Analytics firm CoreLogic provided an even lower estimate, suggesting that just 10 percent of all REOs in the country are listed by their owners, which include mortgage giants Fannie Mae and Freddie Mac as well as the Federal Housing Administration. As of April 2012, 390,000 repossessed homes sat in limbo, while about 39,000 were actually listed for sale, said Sam Khater, senior economist at CoreLogic.
Daren Blomquist, vice president of RealtyTrac, said that he was surprised by his company’s finding, especially since a similar analysis in 2009 found that banks were attempting to sell nearly twice as much of their REO inventory back then.
And the article presents the obvious conclusion, that keeping homes off the market is leading to higher prices than you’d see if they were put up for sale:
In fact, if lenders turn their REO release valve to full blast, the deluge of foreclosures cascading onto the market could plunge the country into a recession, said Thomas Martin, president of consumer advocacy group Americas Watchdog.
“If they let the dam essentially break. It could be a catastrophic disaster for the U.S. economy,” he said, predicting that some major banks would fail and home prices would nosedive by 20 percent.
That doomsday scenario has many industry professionals supporting lenders’ tactics of holding onto most of their REOs. Otherwise, they would be “causing the floor to fall out from underneath the entire market,” Faranda said. He added that banks don’t have the manpower to push the paperwork required to put all their foreclosures on the market.
Of course, the discussion focuses on how much price manipulation is justified, as opposed to the real problem: we have had, and continue to have, far too many foreclosures and far too few mortgage modifications. But the solution seems to be to zombify the housing market rather than make servicers change their ways.
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The chart in this article is completely bogus—whoever created it is not well trained in economics. Nobody can set the "price" of houses above a market clearing level, not when there are transactions taking place. There is plenty of evidence that the current price level of homes is a market clearing price. Now, there may indeed be a lot of REO that is being kept off the market. If so,that has the effect of shifting the supply curve to the left. If the demand curve is unchanged, that results in a higher market clearing price than you would see if REO was not being withheld. But what is completely ignored here is that the demand curve has shifted to the left as well; there are just tons of people who have shied away from the housing market because they fear a further price decline. It's even possible that the demand curve has shifted more to the left than the supply curve, and that explains why prices have declined so much.
In any event, what happens if more REO gets dumped on the market (because banks sense that the market is firming up and they want to dump their excess inventory of homes) at the same time that the supply curve shifts to the right (because people begin to sense that we've seen a bottom in housing)? Both curves can shift to the right without causing any reduction in price. It may even be the case that REO sales could fail to satisfy the increase in demand, resulting in higher prices even as REO is dumped on the market. Don't ignore the fact that the huge reduction in new housing starts has had the effect of greatly reducing the supply of houses.
Scott Grannis
http://scottgrannis.blogspot.com
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The first voice in the conversation:
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This market is being manipulated in many in many different markets, to keep inventory down and prices up. That is why there is not only a tremendous REO inventory withheld from market, but also why lenders are not foreclosing and adding to more inventory.
People are not buying for many reasons as I have outlined previous. Most of the people who are renters cannot realistically afford the homes, or they have lost homes and are now credit impaired. Those might go FHA, but look at the default rates for FHA. And they are going up.
There are over 6m homes that are 30 days late or more. Of them, 90% will default and end up in foreclosure. Modifications? LOL!!! 40% fail in the first year.
Lower housing starts reduce inventory? Well, from one aspect, yes. But, since there were 2.5m overbuilt units, it will take a long time to clear. (Per Laurie Goodman from Amherst Securities.)
Also, look at new family unit formations. Those are just barely above housing starts, so that will effectively eliminate inventory reduction until such family units begin again.
Don't forget the Baby Boomers and Pre Baby Boomers. Death rates are going up, so that will add to inventory. Factor in that from the Census Bureau data I posted previously that there are not enough replacement buyers for those who die, and what is going to happen?
And, don't forget the moveup buyer. This market is virtually non-existent. 52% total are in near equity or negative equity positions, so they can't sell and move up. Hence Boomers cannot downsize. (Near equity for me is a position whereby the seller must pay the 6% commission, 3% new loan for home costs, and 10% down payment. That means current LTV can be no greater than 81%. Good luck on many people meeting that standard.)
This stuff cannot be looked at one dimensionally. All factors must be considered and incorporated into a complete picture. It all plays a part.
BTW, I talk with banks on a routine basis, and I talk with top heads of Corelogic at least weekly, and have a meeting with them on the 24th. Privately, they admit that we are fucked for years.
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From Patrick:
http://www.zerohedge.com/news/so-much-housing-has-bottomed-shadow-housing-inventory-resumes-upward-climb
So Much For "Housing Has Bottomed" - Shadow Housing Inventory Resumes Upward Climb
Appropriately coming just after today's Housing Starts data, which captured MSM headlines will blast was "the highest since 2008" is the following chart from this morning's Bloomberg Brief, which shows precisely the reason why "housing has bottomed" - and it has nothing to do with organic demand rising. No, it has everything with excess inventory once again starting to pile up, which means that the imbalance in the supply and demand curves is purely a function of shadow inventory being stocked away, and that there is once again no true clearing price.
From Bloomberg:
The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. Accoring to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market.
Once one takes the number of homeowners 30- to 90-days late on their mortgage payments and includes the likely default of those that have negative equity on their homes, there is a strong possibility more than 6.5 million additional foreclosures will enter the pipeline. The addition of homes that banks may be holding back suggests a much larger number. Laurie Goodman of Amherst Securities Group has testified before Congress that it could be as high as between 8 and 10 million.
And scene.
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Zero Hedge's endorsement is not exactly a badge of honor. They are the best-known perma-bears in the financial blogosphere.
Scott Grannis
http://scottgrannis.blogspot.com
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"Sales of new U.S. homes unexpectedly dropped in June from a two-year high..."
"Unexpectedly", lol.
http://www.bloomberg.com/news/2012-07-25/sales-of-new-u-s-homes-unexpectedly-fall-from-two-year-high.html
Employment is down, incomes are down, wealth is down,growth is down, confidence is down, 62% say we are on the wrong track, why wouldn't new home sales be down?
Who buys the new homes that drive home construction employment, the lowest income quintile?
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http://housingwire.com/news/household-formation-among-young-adults-shows-no-sign-recovery-0
Household formation among young adults shows no sign of recovery
The rate at which Americans formed households fell sharply during the
Great Recession, with the greatest shortfall among young adults squeezed
financially by the weak economy, according to an economic commentary
from a Cleveland Federal Reserve official.
Tighter lending standards are further complicating the housing sector's
ability to recover by reducing access to mortgage credit, the commentary
said.
"This may have increased the incentive of individuals to delay household
formation in order to save for a down payment, build credit histories,
or repair tarnished credit scores," said Tim Dunne, a researcher at the
Federal Reserve Bank of Cleveland, who wrote the commentary.
Although household formation has recently picked up, it's not fast
enough to make up for the shortfall that occurred over the last several
years, he said.
The analysis shows the biggest dropoff in household formation occurred
among adults aged 18 to 34.
An additional 2 million younger adults now live in a household headed by
their parents, than did before the recession. Although these younger
adults make up a relatively small portion of household heads, they
account for almost three-quarters of the overall shortfall in household
formation.
Choice of housing has shifted, as well, for younger adults. Prior to the
recession, about one-third of individuals aged 18-34 headed households,
with roughly 40% of them in their own homes. In 2010, young adults'
homeownership rate declined to 35.5%. This shift into rental housing
continued into 2011 and early 2012, with little sign of any abatement.
The shortfall in household formation observed over the 2007--2010 period
is an outgrowth of the weak economy and should rebound further as
individuals who delayed forming households during the recession and
initial recovery set out on their own, Dunne said.
Still, he concludes that the sharp decline in home ownership rates for
younger adults shows little sign of recovering in the near term. When
young adults start forming more households, it may have a stronger
impact on the demand for rental properties than owner-occupied housing,
Dunne said.
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http://mhanson.com/archives/1027?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MarkHansonAdvisers+%28Mark+Hanson+Advisors%29
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Existing Home Sales Rose 7.8% in August to an Annual Rate of 4.82 Million Units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 9/19/2012
Existing home sales rose 7.8% in August to an annual rate of 4.82 million units, coming in way above the consensus expected 4.56 million. Sales are up 9.3% versus a year ago.
Sales in August were up in all major areas of the country. The rise in sales was due to increases in both single-family and multi-family home sales.
The median price of an existing home fell slightly to $187,400 in August (not seasonally adjusted), but is up 9.5% versus a year ago. Average prices are up 4.3% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 6.1 in August from 6.4 in July. The decline in the months’ supply was all due to a faster selling pace. Inventories rose in August.
Implications: There should be no doubt the housing market is in recovery. Existing home sales boomed in August rising 7.8%, coming in at the highest levels since mid-2010, when sales were artificially high due to the homebuyer tax credit. Some of the gain in August might be due to seasonal adjustment issues: sales also spiked higher in August 2010 and August 2011. However, sales are still up 9.3% from a year ago while home prices are up 9.5%. Higher sales and prices might be luring some sellers back into the market. The inventory of existing homes rose to 2.47 million in August from 2.40 million in July. Still, inventories are down 18.2% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 6.1. Just a year ago, the months’ supply was 8.2. A couple of factors explain the rise in existing home prices. First, the lack of inventory on the market is pushing up prices while demand is picking up for housing. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tough to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 27 percent of purchases in August versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales any time soon, but the housing market is definitely on the mend. Other recent economic news has been mixed. The NAHB index, which measures confidence among homebuilders, rose to 40 in September from 37 in August, the highest level since 2006. Meanwhile, the Empire State index, which measures the direction of manufacturing activity in New York, fell to -10.4 in September from -5.9 in August, the lowest level since the recession ended in 2009.
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Housing Starts Rose 2.3% in August to 750,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 9/19/2012
Housing starts rose 2.3% in August to 750,000 units at an annual rate, coming in below the 767,000 rate the consensus expected. Starts are up 29.1% versus a year ago.
The rise in starts in August was all due to a 5.5% increase in single-family homes. Multi-family units declined 4.9%. Single-family starts are up 26.8% from a year ago, while multi-family starts are up 35.2%.
Starts rose in the Midwest and South, but fell in the Northeast and West.
New building permits fell 1.0% in August to an 803,000 annual rate, still beating the consensus expected pace of 796,000. Compared to a year ago, permits for single-unit homes are up 19.3% while permits for multi-family units are up 34.7%.
Implications: Home building continued to recover in August. Although housing starts came in less than the consensus expected, they were still up 2.3% in August and up 29.1% from a year ago. The gain in August was all due to a 5.5% rise in single-family starts; multi-family starts, which are very volatile from month to month and which increased rapidly earlier in the summer, declined 4.9%. As the top chart to the right shows, both single-family and multi-family housing starts are trending higher. Although permits to build homes fell 1% in August, they still beat consensus expectations and are up substantially in the past year, 19.3% for single-family homes and 34.7% for multi-family units. The total number of homes under construction (started, but not yet finished) increased for the 12th straight month, the first time this has happened since back during the building boom in 2003-2004. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2016), which means the recovery in home building is still very young. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue to push higher. For a little more on housing, please see an interview this morning on Bloomberg TV here.
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Monday Morning Outlook
________________________________________
Housing Recovery Still Young To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 9/24/2012
The turnaround in the housing market is perhaps the brightest spot in an otherwise tepid economic recovery.
Home sales, home building, and even home prices are all headed up. In the past twelve months, sales of existing homes are up 9% while sales of new homes are up 25%. Housing starts are up 29%. The two most prominent home price measures, Case-Shiller and FHFA, are both up at about a 7% annual rate in the past six months.
This is not a dead cat bounce. As we pointed out almost a year ago, the US was at an upward inflection point where fundamentals would help propel the housing market into a recovery. (click here to view last year’s piece). Now, we think the stage is set for more advances over the next few years.
The number of existing homes for sale is down to the same level as 2003-04. Meanwhile, the US population has grown 8% and the homeownership rate is lower. In other words, with so many potential buyers and relatively few homes, we now have a shortage of homes on the MLS. The market for new homes is even more extreme, with fewer new homes for sale than at any time since at least the early 1960s
Although the total stock of housing – all rentals, vacancies, and owner-occupied homes combined – still looks lofty, we would not be surprised at all to find the Census Bureau revising these figures over the next few years as we find out many homes have to be substantially refurbished before they can be lived in, with problems like missing copper pipes and untended leaks, because they’ve been vacant too long.
On a national average basis, homes are still screaming “buy.” We track the price-to-rent ratio for homes based on data from the Federal Reserve and Commerce Department. In the past 30 years, home prices have averaged 15.8 times annual rent. Now, they’re only 13.6 times rent, or roughly 14% below the norm. The same thing happens when we compare home prices to replacement cost, where the ratio is about 16% below the average of the past 30 years. Given loose monetary policy, we expect both rents and construction costs to move up noticeably in the next several years. So, to get back to more normal ratios means home prices will have to go up even faster.
And despite the rise in home building in the past year, expect at least another few years of gains. To keep up with population growth and “scrappage” rates, builders should start about 1.5 million homes per year. This includes both owner-occupied and rental properties. (For scrappage, think fires, floods, hurricanes, tornadoes, plus voluntary knockdowns.)
Lately builders have been starting homes at about a 750,000 annual rate, only half of what’s needed. That makes sense if they still want to cut inventories. But they’re not going to do that forever. In a few years they’ll realize they can stop cutting inventories and the pace of construction that makes this possible is 1.5 million units per year. That may seem like a steep climb from here, but we can get there in three years if housing starts grow at a 26% annual rate, slightly slower than over the past year! No wonder the NAHB index, which measures homebuilder confidence, has rebounded so sharply, from 14 last September to 37 in August.
Notice how the housing recovery is happening well after previous rounds of homebuyer tax credits and when the theoretical support from quantitative easing was supposed to be falling. Instead, what we have is a free-market recovery when government support has been going away. If the politicians just stay out of the way, it will be a powerful force for a broader economic recovery and many more jobs in the next few years.
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Wesbury from yesterday:
"The two most prominent home price measures, Case-Shiller and FHFA, are both up at about a 7% annual rate in the past six months."
An artificial recovery, those homes were purchase at artificially low interest rates. In monthly payments, people are not paying more. Put interest rates at market levels or at levels Wesbury is calling for and what would home prices be?
"The number of existing homes for sale is down to the same level as 2003-04."
Interesting. I don't think the prices are back to 2003-4 levels. He doesn't say that.
"...we now have a shortage of homes on the MLS."
Housing markets are local but that is quite a stretch IMO. My properties are all for sale in my mind, but not at these prices.
"The market for new homes is even more extreme, with fewer new homes for sale than at any time since at least the early 1960s"
They didn't build new homes lately because of the glut of under-priced existing homes, contradicting IMO some of the above.
"In the past 30 years, home prices have averaged 15.8 times annual rent. Now, they’re only 13.6 times rent... Given loose monetary policy, we expect rents...to move up noticeably in the next several years. So, to get back to more normal ratios means home prices will have to go up even faster."
My view is that rents are more closely tied to income than to dollars printed. Rents and home prices will fully recover only if we pursue policies that enable a healthy business, investment and employment climate. Forecasting markets and prices without knowing that isn't particularly informative.
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I've asked our Pat to comment. He is deep in the trenches of real estate reality as usual, but if he can find a bit of time he will come share his thoughts.
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I've asked our Pat to comment. He is deep in the trenches of real estate reality as usual, but if he can find a bit of time he will come share his thoughts.
These are minor points of contention I have with Wesbury. I am really just saying that if this is strength I would hate to see weakness. Pat can probably tell us more about what the backlog of foreclosures and underwater properties still is.
Another point is that demand I think is shifting to smaller family sizes needing smaller units (with smaller incomes). It is not all about numbers of properties.
Grow the economy, get the real unemployment rate down from nearly 20% and home starts and home values will take care of themselves; that's my view. Most of what government intervention does in the housing market is to screw things up.
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U.S. home prices in July posted their largest year-to-date gain in seven years, according to a report Tuesday that offered the latest confirmation of a broad housing-market pickup that began this year.
The Case-Shiller index posted a 1.6% month-to-month increase in July; home prices reached their highest level in nearly two years. Nick Timiraos reports on Markets Hub. Photo: Reuters.
.
Prices rose by 1.2% from one year ago, according to the Standard & Poor's/Case-Shiller index of 20 major metropolitan areas, the largest year-over-year gain since home-buyer tax credits fueled a burst of sales two years ago. But prices were up by 5.9% for the first seven months of the year, which was significantly better than increases of 0.4% and 2.1% for the same period in 2011 and 2010, respectively. Prices rose in 16 of 20 metro areas tracked by the index when compared with one year ago, with the largest gains reported in Phoenix (16.6%), Minneapolis (6.4%) and Detroit (6.2%). Atlanta, Chicago, Las Vegas, and New York posted declines.
Home prices typically rise during the summer, when sales are strongest. The Case-Shiller index measures prices using a three-month average and is reported with a two month lag. The data released Tuesday covers prices recorded for the May-to-July period.
Prices still stand nearly 30% below their 2006 peak, but that is an improvement over the 35% peak-to-trough decline recorded in February. Data last week showed that sales of previously owned homes and construction of single-family housing units had reached their highest levels in more than two years.
"All in all, we are more optimistic about housing," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices.
Prices began rallying earlier this year amid sharp declines in the number of properties listed for sale, particularly foreclosed homes that sell at larger discounts. Inventories remain low because investors have been buying up homes that can be converted as rentals while traditional home-sellers have opted to keep their properties off the market. Many sellers may be unable to sell because they owe more than their homes are worth, while others could be holding out for better prices.
A separate home-price index released by the Federal Housing Finance Agency on Monday showed that prices rose by 3.7% from one year ago in July. Prices rose by 0.2% from June on a seasonally adjusted basis.
"The news on home prices in this report confirm recent good news about housing," said Mr. Blitzer. He said single-family housing starts are well ahead of last year's pace, existing-home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing. "All in all, we are more optimistic about housing," he said.
Mr. Blitzer also said that among the cities, Miami and Phoenix are both well off their bottoms, with positive monthly gains since the end of 2011.
On a year-to-year basis, the 10-city index and 20-city index were up 0.6% and 1.2%, respectively.
Separately, the Conference Board, a private research group, said its index of consumer confidence rose nine points to 70.3 this month from a revised 61.3 in August, first reported as 60.6. The latest index was far better than the 65.0 expected by economists surveyed by Dow Jones Newswires.
The gain echoes good September readings on how consumers view the economy reported earlier this month by the Royal Bank of Canada and Thomson Reuters-University of Michigan. Better consumer confidence should lead to stronger consumer spending, which accounts for the bulk of U.S. economic activity.
Within the Conference Board's report, the present-situation index, a gauge of consumers' assessment of current economic conditions, rose to 50.2 from a revised 46.5, originally put at 45.8.
Consumer expectations for economic activity over the next six months jumped to 83.7 from a revised 71.1, first reported as 70.5. The index is also at its highest since February.
Consumers were slightly more upbeat about current labor-market conditions, which is a positive indicator for September payrolls.
The board's survey showed 8.3% of respondents now think jobs are "plentiful," up from 7.2% thinking that in August. Another 39.9% think jobs are "hard to get" down from 40.6% last month.
The jump in the expectations index can be traced to consumers' outlook for future labor conditions. The results show 18.5% think there will be more jobs in the next six months, up from 15.8% thinking that in August. A similar 18.5% think there will be fewer jobs, but that is down from 23.7% saying that last month.
—Kathleen Madigan and Saabira Chaudhuri contributed to this article
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From the WSJ housing story: "Prices still stand nearly 30% below their 2006 peak"
That was my main complaint with the Wesbury analysis, it seemed to skip the context that Americans are still stinging from the loss of personal wealth, 17 trillion of dollars (?), roughly a year and a half of national income, in the housing collapse and it isn't being recouped with sales numbers and prices at these levels. It still looks like a slow moving, sputtering market to me.
Roughly speaking, all the people who had 30% or less equity in 2006 with all those equity loans who are still in their home are still at either zero equity or underwater. Zero equity or underwater to me means they are not really homeowners.
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Data Watch
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Home Building Soared in September, up 15% to 872K Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 10/17/2012
Housing starts soared 15.0% in September to 872,000 units at an annual rate, crushing the consensus expected 770,000 pace. Starts are up 34.8% versus a year ago.
The rise in starts in September was due to both an 11.0% gain in single-family homes and a 25.1% gain in multi-family starts. Single-family starts are up 42.9% from a year ago, while multi-family starts are up 19.6%.
Starts rose in the Midwest, South, and West, but declined slightly in the Northeast.
New building permits increased 11.6% in September to an 894,000 annual rate, easily beating the consensus expected pace of 810,000. Compared to a year ago, permits for single-unit homes are up 27.3% while permits for multi-family units are up 85.6% (no, that’s not a typo!).
Implications: Home building soared in September, not only crushing consensus expectations, but easily beating every single economic forecast for both housing starts and permits for future construction. Housing starts are up 34.8% from a year ago and builders are now starting homes at the fastest pace since July 2008. Even more impressive, the gains were not lopsided toward the volatile multi-family sector. The 11% growth in single-family starts accounted for about half of the increase in total starts. As the charts to the right show, both single-family and multi-family starts and permits are trending higher. The total number of homes under construction (started, but not yet finished) are up 21% from a year ago and increased for the 13th straight month, the first time this has happened since back during the building boom in 2003-2004. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015-16), which means the recovery in home building is still young. That may seem like a big leap over the next few years, but a gain of 20% per year for the next three years gets us up to that level. And that pace of increase is slower than the gains over the past twelve months. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher. In other recent housing news, the NAHB index, a measure of builder confidence, hit 41 in October, the highest level since mid-2006. For a little more on the housing recovery, please see an interview from a month ago on Bloomberg TV here.
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I'll leave the heavy lifting up to Pat, but my gut says that Wesbury is full of Krugman again.
Data Watch
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Home Building Soared in September, up 15% to 872K Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 10/17/2012
Housing starts soared 15.0% in September to 872,000 units at an annual rate, crushing the consensus expected 770,000 pace. Starts are up 34.8% versus a year ago.
The rise in starts in September was due to both an 11.0% gain in single-family homes and a 25.1% gain in multi-family starts. Single-family starts are up 42.9% from a year ago, while multi-family starts are up 19.6%.
Starts rose in the Midwest, South, and West, but declined slightly in the Northeast.
New building permits increased 11.6% in September to an 894,000 annual rate, easily beating the consensus expected pace of 810,000. Compared to a year ago, permits for single-unit homes are up 27.3% while permits for multi-family units are up 85.6% (no, that’s not a typo!).
Implications: Home building soared in September, not only crushing consensus expectations, but easily beating every single economic forecast for both housing starts and permits for future construction. Housing starts are up 34.8% from a year ago and builders are now starting homes at the fastest pace since July 2008. Even more impressive, the gains were not lopsided toward the volatile multi-family sector. The 11% growth in single-family starts accounted for about half of the increase in total starts. As the charts to the right show, both single-family and multi-family starts and permits are trending higher. The total number of homes under construction (started, but not yet finished) are up 21% from a year ago and increased for the 13th straight month, the first time this has happened since back during the building boom in 2003-2004. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015-16), which means the recovery in home building is still young. That may seem like a big leap over the next few years, but a gain of 20% per year for the next three years gets us up to that level. And that pace of increase is slower than the gains over the past twelve months. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher. In other recent housing news, the NAHB index, a measure of builder confidence, hit 41 in October, the highest level since mid-2006. For a little more on the housing recovery, please see an interview from a month ago on Bloomberg TV here.
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Considering that we have delayed foreclosures and the fought off a full correction in the housing market, and considering that we don't want to repeat the mistakes of the last decade namely a big bubble market in housing that had to burst, isn't the news of dramatically increasing housing starts in an artificial glut market actually bad economic news?
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Our Pat may be posting in the next day or two on this.
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a) Pat is working on how to post some charts here. Anyone here able to help him?
B) Wesbury
Existing home sales declined 1.7% in September To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Senior Economist
Date: 10/19/2012
Existing home sales declined 1.7% in September to an annual rate of 4.75 million units, exactly matching consensus expectations. Sales are up 11.0% versus a year ago.
Sales in August were down in the Northeast, Midwest and West but up in the South. The fall in sales was all due to a decline in single-family home sales; sales of condo/coops were unchanged.
The median price of an existing home fell slightly to $183,900 in September (not seasonally adjusted), but is up 11.3% versus a year ago. Average prices are up 9.2% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 5.9 in September from 6.0 in August. The decline in the months’ supply was all due to a drop in single-family inventories.
Implications: Although existing home sales fell slightly in September, they remain right near the highest level in over two years and there should be no doubt the housing market is in recovery. Sales are up 11% from a year ago while home prices are up 11.3%. Meanwhile, the inventory of existing homes fell to 2.32 million in September from 2.40 million in August, the lowest level since March 2005! Inventories are down 20% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 5.9, the lowest level since March 2006. Just a year ago, the months’ supply was 8.1. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The rise in median prices can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 28 percent of purchases in September versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, but the housing market is definitely on the mend. In other recent news, new claims for unemployment insurance increased 46,000 last week to 388,000. The week before, claims had dropped to 342,000. The true trend is likely somewhere in between; averaging the two figures gets to 365,000 which is very close to the four-week moving average of 366,000. The Philadelphia Fed index, which measures manufacturing sentiment in that region, increased to +5.7 in October from -1.9 in September. This is the first positive reading and the highest level since April.
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Data Watch
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New Single-Family Home Sales Rose 5.7% in September To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 10/24/2012
New single-family home sales rose 5.7% in September, to a 389,000 annual rate, coming in slightly above the consensus expected pace of 385,000. Sales are up 27.1% from a year ago.
Sales were up in the Northeast, South and West, but down in the Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.5. The decline was all due to a faster selling pace. Inventories of new homes rose 2,000 units.
The median price of new homes sold was $242,400 in September, up 11.7% from a year ago. The average price of new homes sold was $292,400, up 14.5% versus last year.
Implications: The housing market continues to recover. New home sales rose 5.7% in September and are now at the highest levels since April 2010. Sales are up a very robust 27.1% from a year ago. Meanwhile, as the lower chart to the right shows, overall inventories remain close to record lows. The months’ supply of new homes has now fallen to 4.5, the lowest since October 2005, well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The slight increase in new home inventories was all due to a rise in homes still under construction, showing that home builders are starting to ramp up activity. In the meantime, low inventories are helping push up prices. The median price of a new home was up 11.7% from a year ago in September, the second largest yearly increase since September 2005. One of the reasons for the increase in new home prices is that the high-end buyer is getting more active. Homes priced $400,000+ were 12% of the market in September 2011, but 18% in September 2012. In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.7% in August (seasonally-adjusted), is up 4.8% from a year ago, and is up at an 8.9% annual rate in the past six months. On the factory front, the Richmond Fed index, a survey of mid-Atlantic manufacturers, fell to -7 in October from +4 in September. Manufacturing reports have been mixed and are still consistent with mild plow horse-like growth in that sector and economy as a whole.
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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.
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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.
Thanks Pat.
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We eagerly await!
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http://www.reuters.com/article/2012/10/24/usa-economy-mortgages-idUSN9E8KD00S20121024
U.S. mortgage applications slump as borrowing rates riseNEW YORK | Wed Oct 24, 2012 6:59am EDT
NEW YORK Oct 24 (Reuters) - Applications for U.S. home mortgages fell sharply last week, registering the biggest percentage decline in a year as demand for both purchase loans and refinancings tumbled, data from an industry group showed on Wednesday.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell by 12 percent in the week ended Oct. 19.
The seasonally adjusted purchase index, which measures loan requests for home purchases, fell 8.3 percent over the previous week. Demand for purchase loans is a leading indicator of home sales.
The MBA's seasonally adjusted refinance index fell 12.9 percent from the previous week to reach its lowest level since late August. The refinance share of total mortgage activity decreased to 81 percent of total applications from 82 percent the prior week.
Fixed 30-year mortgage rates rose by 6 basis points to an average of 3.63 percent, the highest in a month.
The survey covers over 75 percent of U.S. retail residential mortgage applications, according to the MBA. (Reporting by Atossa Abrahamian; Editing by Leslie Adler)
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I have the first part ready, if I can figure out how to post some charts.
Help!!!!!! I am calling from Bengazhi!!!!!!
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I've emailed a capable friend asking him to help you.
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I have the first part ready, if I can figure out how to post some charts.
Help!!!!!! I am calling from Bengazhi!!!!!!
I've emailed a capable friend asking him to help you.
I'd be glad to help post the charts on this board. Just send me an e-mail with more info, or with the charts themselves. You can find out my e-mail by clicking on my name, as it appears here.
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Thank you Kostas :-)
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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.)
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Existing Home Sales
In the post on the Sep 12 Housing data, I reviewed Housing Starts and New Home Sales. In it, I postulated that Housing, at least at the New Home Construction stage, was not recovering as claimed, and was able to show that serious questions arise, especially when geographic areas are considered, and also when comparing Monthly Sales to Starts.
New Housing Starts is only one factor to consider when considering whether Housing is truly recovering or not. Many other factors must be considered as well. Now, it is time to look at the Existing Re-Sale Market and see how it is performing.
To begin, let’s review the Existing Sales Chart for Years 2005 through 2012.. The chart reveals that Sep 2012 sales dropped considerably from the previous Aug 2012 reading. This drop is approximately 100k units, 21% down Month over Month and 2.2% up Year over Year.
Monthly Sales 2005-2012
(http://lfi-analytics.com/s/cc_images/cache_3652735004.png?t=1351902615)
Now, we take a closer look at the last four years, which is typical of the Housing Market since the Housing Crash.
Monthly Sales Volume – 2009 to 2012
(http://lfi-analytics.com/s/cc_images/cache_3652735104.png?t=1351902615)
Surprisingly, 2009 was a much stronger year for home sales, than the following years. However, much of the sales increase was based upon the $8000 tax incentive offered to “first time” home buyers in 2009 and until Jun 2010. What happened is that the tax incentive “shifted forward” demand by first time home buyers to 2009 and 2010, and then subsequent years sales were poorly affected by lack of first time buyer demand.
Further analysis shows that the years 2010 to Sep 2012 had similar sales activity through the first part of the year, through Jun, and then activity would again fall in response to seasonal demands. August 2012 saw a significant uptick in sales, rising above the years 2009 and 2010, but in Sep 2012, it quickly returned to the seasonal averages for the previous two years.
Looking objectively at the chart would not suggest any real sales activity suggesting a recovering housing market.
The Sep 2012 Year over Year gain of 2.2% has been the latest month which pundits have claimed that the housing recovery is underway. However, even with the 2.2% increase Year over Year, the gain was the smallest gain recorded in 2012 to date. This gain was compared to the Sep 2011 reading, which was still reeling from the 2010 Housing Stimulus.
A drop in Sales typically occurs every Sep, and continues through the remainder of the year. Sep 2012 data is consistent with this pattern. The bottom line is that there is weak support for housing sales going into the winter months, and we should see significant additional drops in sales through the winter.
Re-Sales by Region
Now, we look at regional activity for Existing Sales from Sep 2011 to Sep 2012.
Monthly Existing Sales Sep 11-Sep 12
(http://lfi-analytics.com/s/cc_images/cache_3652735204.png?t=1351902615)
As with the New Housing Sales and New Housing Starts data, we find that the activity is once again led by the South. Activity is 50% greater than all other regions singularly. The Midwest and West Sales figures track almost identically and the Northeast is once again the laggard. All show the seasonal pattern again developing in Sep with dramatic fall offs in sales.
The end result is that comparing Regions and both Existing Home Sales and New Home Sales, if any one area is experiencing a Housing Recovery to any degree, it would be in the South, and nowhere else. But even then, going forward, we can expect that the South will experience a drop off in the winter.
What is causing the South to outperform other areas? We can only speculate, but like with new housing starts, it is reasonable to assume that Home Purchases may be a result of (1) people who lost homes in the tornado activity of 2010 and 2011 are buying instead of re-building and (2) the influx of people from the Rust Belt and other areas to the South are driving the market. Nothing else makes sense.
In Summary, as in the Housing Starts and New Home Sales data, there is nothing to indicate that Existing Home Sales is improving, leading to a general Housing Recovery.
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Folks:
IMHO this is some serious work that Pat is sharing with us.
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Folks:
IMHO this is some serious work that Pat is sharing with us.
Yup, I'd like to see a certain hack try to refute it
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I need to go through Pat's work in more detail to understand the specifics but one of the stunning first impressions is what a waste of time and money the intervening programs were. 2009 'improved' because we were paying public subsidies into the market to prevent a full correction. When the free money ended the program had no lasting beneficial effect. Same for cash for clunkers. In sum the $6 trillion or more of overspending is down the tube, with interest accruing forever, and the effects on the economy of these contrived measures were counterproductive, shielding markets from the real market forces of correction and recovery.
No lessons were learned because the people who didn't agree with market economics then for the most part still don't know about it now.
Housing corrects by allowing the market to operate as freely as it can and then growing national income so that people can pay what they choose to live where they want. Government intervention programs are designed mostly to do the opposite.
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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:
(http://lfi-analytics.com/s/cc_images/cache_3675185604.png?t=1352917824)
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:
(http://lfi-analytics.com/s/cc_images/cache_3675186104.png?t=1352917859)
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:
(http://lfi-analytics.com/s/cc_images/cache_3675186904.png?t=1352917929)
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
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Hat tip to Pat for this one:
http://wallstreetexaminer.com/2012/11/13/fed-announces-it-will-buy-35-billion-in-mbs-reinvestment-program-in-next-month/
Fed announces it will buy $35 billion in MBS Reinvestment Program in next month for total purchases of $85 billion
The NY Fed today published its statement of intended MBS purchases for the next month under the MBS Reinvestment Program. It plans to purchase a total of $35 billion in MBS from Primary Dealers. That’s $6 billion more than last month. It will bring the total of cash injected into Primary Dealer accounts for the month to $85 billion.
The MBS purchases are forward contracts normally with a 30 to 60 day settlement.
The Fed will publish the results of its purchases of the past month tomorrow. That will show the schedule of settlements for purchases made in the past month including purchases made under the new QE3 program. The first of the the new combined QE3 and MBS Reinvestment Program settlements, totaling $26.5 billion will come tomorrow. An additional $18.3 billion will settle next week. These purchases add funds to Primary Dealer accounts. They are the conduit for the transmission of monetary policy into the banking system.
Between the new QE3 purchases scheduled at $40 billion per month, the MBS reinvestment program at $35 billion for this month, and the $10 billion more in Treasuries that the Fed will purchase from Primary Dealers than it will sell to them in November under Operation Twist, the Fed will cash out the Primary Dealers to the tune of $85 billion this month. That’s the largest monthly amount of market boosting fuel since QE2 in the first half of 2011.
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Regarding the FED MBS Purchases
1. The total dollar amount of Mortgage Loan Originations for 2012 was expected to be $1.3 trillion.
2. 95% of all newly originated loans are Purchase Eligible.
3. The Fed buys $40b per month new money, for $480b per year.
4. The Fed Reinvestment Purchase is $35b for the month, $6b above the previous month. If we take an average of $30b per month reinvestment, that is $360b per year.
5. Total MBS buys per year by the Fed, $840k. That is 66% of the new loan originations for the entire year.
Fed MBS purchases are supporting the entire Mortgage market. Without Fed intervention, there would be little activity. Why is there little interest in private buying of MBS?
1. Current interest rates on mortgages are 3.34% for a 30 year fixed.
2. Servicing and other costs take .75% off the top, leaving a Rate of Return of 2.59% for a 30 year bond.
3. Bond yield does not even cover inflation, so why by such a low yield for 30 years.
4. Underwriting of loans are still deficient, and 30% of new FHA will default, so why take the risk?
5. Fed and bank actions are propping up values, but this is still inflated values for most homes.
What happens when rates begin to increase? The Death Spiral begins
1. Sales and refinance activity stalls.
2. Higher rates of consumer credit will drag down more borrowers, causing more defaults.
3. Higher rates = less affordability = lower sales = decreasing sales values.
4. Decreasing values = more defaults.
5. More defaults = greater inventory.
6. Greater inventory = declining values.
7. Declining values = more defaults
At some point, the housing market finally bottoms and stalls, and over years, eliminates inventory, financially stressed borrowers, and stabilizes values at a much lower rate. Homes are more affordable, and buyers come back into the market.
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Great post by PP!
Absurd to think we live in an economy mostly based on free enterprise when you look at energy, transportation, healthcare, agriculture or housing. Take just housing for the moment. What would the market interest rate be for mortgages if not for federal intervention? No one knows exactly.
Pat wrote: "3. Higher rates = less affordability = lower sales = decreasing sales values."
Illustrate that with a hypothetical example:
Assume a house has a 200,000 selling price today with all borrowed money (for simplicity) at 3%. The same payment would only yield a 140,000 price if/when interest rates jump to 6%, 96,000 at 10%, and 76,000 at 1980-83 interest rate levels (13%). Same house, same buyer, same payment, but 30-62% of the value is lost in some historically possible, rising interest rate scenarios.
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Great post by PP!
If you are unlucky enough to live in some place, like the PRK, you now have to worry about the capital controls and confiscatory taxes they'll tack on to anyone trying to flee. The PRK's politboro has now purged all counterrevolutionary elements from positions of power and the state debt grows hungrier every second.
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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 (ftp://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
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Just took on a new client. Interesting case.
She was in foreclosure. Trustee Sale scheduled. She files BK-13, and gets her automatic stay.
She properly notifies the Trustee and Lender who was Aurora. Trustee attorney tells her that it is only an Adversarial Proceeding, and that they would foreclose anyway.
The following day, they foreclose and Aurora takes the home.
The Trustee violated the Automatic Stay and thus BK statutes. To foreclose legally, they needed to get a Removal from Stay to foreclose.
Now, she goes into Civil Court with a lawsuit, and the court will overturn the foreclosure. The BK court can also do so, but since it is Aurora, she needed to get the TRO to prevent Aurora from selling the property to another person before the courts would otherwise rule. Any sale to another party would complicate her case, since courts are reluctant to rule against a foreclosure if their is a bonafide purchaser.
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The Latest Taxpayer Housing Bust
With the election over, we learn that the FHA is insolvent..
Vindication is overrated, especially in a losing cause, so it brings no satisfaction to have predicted that the Federal Housing Administration would sooner or later threaten taxpayers. That day has arrived. Safely past the election, the feds announced Friday that the FHA's liabilities exceed its assets by at least $16.3 billion—and the gap could reach $93.7 billion in the worst case.
Yet it's worth recalling that when we warned about FHA's troubles in September 2009, we got an accounting lecture from HUD Secretary Shaun Donovan and a letter from FHA Commissioner at the time, David Stevens, that we were "just plain wrong." He added that, "I can say undoubtedly that the FHA fund is playing a key role in the housing recovery and poses no immediate risk to the American taxpayer."
Taxpayers will "undoubtedly" be pleased to know that the threat wasn't "immediate" but arrived a mere three years later. Can taxpayers claw back the salaries of Messrs. Donovan and Stevens the way Congress has tried to do with those of financial CEOs?
The Administration is trying to spin the FHA's troubles as one more result of the housing bust, which is true but disingenuous. Fannie Mae FNMA +0.37%and Freddie Mac FMCC +3.17%went belly up in 2008 because of the housing boom and bust. At the time, the FHA was in relatively good shape because it had played a minor role during the housing mania.
The FHA got into trouble because it deliberately expanded in 2007-2009 even as the market was crashing. As Mr. Donovan likes to say, the FHA was steered to play "an important countercyclical role in the housing market." The point was to ramp up FHA's loan-guarantee business to prop up housing prices as much as possible during the bust.
While this helped the Obama Administration politically, it arguably prolonged the recovery by failing to let prices find a bottom. Meanwhile, FHA's boom put taxpayers on the hook for tens of billions worth of dubious loans made at the most dubious time. Those are the loans now going bust. According to the new HUD report, FHA loans insured between fiscal 2007 and 2009 "continue to place a significant strain on the [single-family mortgage insurance] Fund and are expected to reach a total of $70 billion in claims."
The ugly math: 25.82% of FHA's 2007 loans, 24.88% of its 2008 loans, and 12.18% of its 2009 loans were seriously delinquent as of June 30. The American Enterprise Institute's Ed Pinto, who also predicted the FHA debacle, estimates that 17.3% of all FHA loans were delinquent as of September 30. That's about one in six loans.
Most businesses would look at these losses and flee such a market. But the FHA, which responds to political rather than market incentives, has literally tried to make it up on volume. In recent years, the FHA has expanded to insure higher-quality loans that by law were supposed to be the preserve of private lenders.
While fewer of these loans are delinquent, the greater lending has caused the FHA's capital ratio to shrink below its 2% minimum mandated by law. In 2009, the agency had $685 billion insurance in force and a capital reserve of 0.53%. Today it has $1.1 trillion in force and capital reserves are a negative 1.44%.
The FHA says its risk models were broken, it was too optimistic about housing prices, and it didn't expect low interest rates to persist. (Low interest rates hurt FHA finances because good borrowers refinance.) If current low interest rates were used in HUD's model, the forecast losses in FHA's single-family business would be $31.1 billion, not $13.5 billion.
You will not be reassured to know that HUD claims that all of this is merely temporary. The FHA says it doesn't currently need a Treasury bailout because it will reduce its losses by raising insurance premiums, expanding short sales, selling some of its distressed loans and helping troubled borrowers modify their mortgages. That's nice, but why wasn't it doing this already?
In any case, this sunny HUD scenario will only hold if the economy grows faster and the housing market continues to improve. If there's another recession, taxpayers are looking at a Fannie Mae-level bath.
The FHA is another case study in how government programs sold with the best intentions are inevitably corrupted. FHA was founded in 1934 to help lower- to middle-income and first-time home buyers obtain a mortgage, but its mission expanded over the years as the housing lobby sought to channel ever more taxpayer-guaranteed money into housing. When the agency opened, its minimum down payment was a prudent 20%. In the 1960s, that number fell to 10%, and now it's 3.5%.
The other issue is accountability. As government program after government program fails, no one takes responsibility. Fannie and Freddie hit taxpayers for $138 billion, the Post Office loses $15.9 billion, and now the FHA is insolvent. We weren't kidding about those salary clawbacks.
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Vern McKinley: The Fannie Mae 'Wind Down' That Isn't
The mortgage assets they own are declining, but the overall value of mortgages on their balance sheet has remained about the same..
By VERN MCKINLEY
At the height of the presidential election campaign, the Treasury Department issued a press release called "Further Steps to Expedite Wind Down of Fannie Mae FNMA +0.37%and Freddie Mac FMCC +3.17%." It highlighted a new policy to scale back the pair's mortgage-investment portfolio at a rate of 15% per year, as opposed to their stated 10% rate. Reports from the Securities and Exchange Commission, however, suggest that these two government-sponsored enterprises—currently under federal conservatorship—may not be shrinking much at all.
The Treasury announcement, coming near the fourth anniversary of the September 2008 government takeover of the mortgage behemoths, was made during an election campaign with a heavy focus on the health of the economy. The impression it left was that the most expensive of the 2008 bailouts was not much of an issue, as the transition back to stability in the mortgage market is well under way.
We've since learned that the mortgage market is still troubled—given the report on Friday that the Federal Housing Administration, a government agency, faces high losses on its mortgage loans and may need to get billions from the U.S. Treasury to shore up its finances.
Forbes magazine referred to the August Treasury announcement as "Obama's Victory Lap." Fannie and Freddie's caretaker and regulator, the Federal Housing Finance Agency, chimed in that the "faster reduction in the retained mortgage portfolio will further reduce risk exposure and simplify the operations of Fannie Mae and Freddie Mac."
But these comments raise questions when you cross-check the claims against the annual and quarterly reports, Forms 10-K and 10-Q, that Fannie Mae filed with the SEC.
Fannie Mae, by far the larger of the two institutions, has a mortgage balance that has hovered at $2.9 trillion since early 2010, the reports show. Freddie Mac has managed to shrink its mortgages, but only slightly.
Exactly what 10% wind-down rate was the Treasury Department referring to in its press release? Once again, the SEC reports for Fannie are helpful as they explain the basis for some of the comments: "The senior preferred stock purchase agreement with Treasury includes a number of covenants that significantly restrict our business activities . . . the maximum allowable amount of mortgage assets [Fannie Mae was] permitted to own on December 31, 2011 was $729 billion."
In other words, when Treasury bailed out Fannie and Freddie, part of that deal was a cap on the mortgage assets they could "own." This cap has gone down 10% per year and will now go down 15%. At least in theory, this mandate could lead to sustained shrinkage in the assets and overall presence of Fannie and Freddie.
But the stated cap for "owned" assets, $729 billion in Fannie's case, represents only a small portion of the $2.9 trillion in mortgages on Fannie's balance sheet.
Fannie and Freddie have a great deal of risk exposure from "guaranteeing" mortgages. Measured as a proportion of Fannie's total mortgage assets, owned assets represent only a little more than 25%, while the bulk of its total mortgage loans fall into the category of loans it guarantees.
Treasury also failed to mention staff levels in its announcement.
Surely Fannie and Freddie are starting to rationalize and reduce their far-flung operations as fully private institutions after four years in government hands. They were placed in a legal conservatorship, after all; so what better way to conserve resources than to reduce excesses in payroll—especially when one considers Fannie's $16.9 billion net loss last year?
"Fannie Mae Laying Off Hundreds," read a Washington Post headline from early 2009, a few months after the government takeover. The headline focused on the Washington, D.C., office. Elsewhere, the article noted that Fannie's Dallas office was hiring, and overall staffing levels were expected to remain flat. Once again, cross-checking the SEC reports undermines any doomsday narrative about staff shrinkage.
Fannie Mae had 5,800 employees in late 2008, shortly after the government takeover. As of early 2012 it had bulked up to 7,000 employees. This was down from a peak of 7,300 employees in 2011, but still up 1,200 since the start of government conservatorship. Again, Freddie Mac has managed to reduce staff slightly, but the amount—about 90 total—pales in comparison to the 1,200-employee bump at Fannie.
These facts expose the Treasury announcement as misleading at best, and confirm that the wind-down mission has not been accomplished.
Certainly, the efforts to date don't deserve a victory lap, although Freddie Mac has made modest progress, which is more than can be said for Fannie Mae. If Treasury wants to trumpet shrinkage, Fannie and Freddie need to downsize their entire mortgage portfolio, owned and guaranteed, and scale back their army of employees.
Then, perhaps, a victory lap might be appropriate.
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Data Watch
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Existing Home Sales Rose 2.1% in October to an Annual Rate of 4.79 Million Units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/19/2012
Existing home sales rose 2.1% in October to an annual rate of 4.79 million units, coming in slightly higher than consensus expectations. Sales are up 10.9% versus a year ago.
Sales in October were up in the West, South and Midwest but down in the Northeast. The increase in sales was due to a faster sales pace in both single-family home sales and sales of condo/coops.
The median price of an existing home rose slightly to $178,600 in October (not seasonally adjusted), and is up 11.1% versus a year ago. Average prices are up 10.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 5.4 in October from 5.6 in September. The decline in the months’ supply was mostly due to a faster selling pace. Condo/coop inventories fell as well.
Implications: There should be no doubt the housing market is in recovery. Despite some negative effects from Hurricane Sandy in the northeast, existing home sales rose 2.1% in October and remain right near the highest level in over two years. Sales are up 10.9% from a year ago while home prices are up 11.1%. Meanwhile, the inventory of existing homes fell to 2.14 million in October from 2.17 million in September, the lowest level since December 2002! Inventories are down 22% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 5.4, the lowest level since February 2006. Just a year ago, the months’ supply was 7.6. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The rise in median prices can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 29 percent of purchases in October versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, and we may see slightly weaker numbers over the next few months as Hurricane Sandy wreaked havoc in the Northeast, but the housing market is definitely on the mend. In other housing news this morning, the NAHB Homebuilders index, a measure of confidence, increased to 46 in November from 41 in October. Confidence among homebuilders is now the highest in six years, another sign that the recovery in housing is gaining traction
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second post:
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Housing Starts Rose 3.6% in October to 894,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/20/2012
Housing starts rose 3.6% in October to 894,000 units at an annual rate, easily beating the consensus expected 840,000 pace. Starts are up 41.9% versus a year ago.
The rise in starts in October was due to an 11.9% gain in multi-family starts. Single-family starts declined 0.2% but are up 35.3% from a year ago, while multi-family starts are up 57.1%.
Starts rose in the Midwest and West, but declined in the Northeast and South.
New building permits fell 2.7% in October to an 866,000 annual rate, slightly beating the consensus expected pace of 864,000. Compared to a year ago, permits for single-unit homes are up 26.6% while permits for multi-family units are up 36.3%.
Implications: Housing starts increased to an 894,000 annual pace in October, crushing consensus expectations and beating the prediction of every single economic forecaster. The consensus expected drop had much to do with Hurricane Sandy affecting the Northeast. Looking at the data, the storm did drive down activity in the area, but the West and Midwest had strong gains in building activity, easily offsetting the loss in the Northeast. Housing starts are up 41.9% from a year ago and builders are now starting homes at the fastest pace since July 2008. All of the gain this month was due to the volatile multi-family sector. Even so, the charts to the right show, both single-family and multi-family starts and permits are trending higher. The total number of homes under construction (started, but not yet finished) are up 22% from a year ago and increased for the 14th straight month, the first time this has happened since back in 1997-98. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015), which means the recovery in home building is still young. That may seem like a big leap over the next few years, but a gain of 20% per year for the next three years gets us up to that level. And that pace of increase is half as large as the gains over the past twelve months. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher.
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All right, you trying to pull my chain.....
Once again, we have the pundits looking at things from a very narrow perspective.
(http://lfi-analytics.com/s/cc_images/cache_3684640104.jpg?t=1353435092)
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:
(http://lfi-analytics.com/s/cc_images/cache_3684640704.png?t=1353435122)
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.
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Pat:
Sometimes I give our GM the same loving tease; its just a way of encouraging you (and him) to take on here on this forum the conventional wisdom and propaganda to which we are all subjected.
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Interesting point from Pat that median price can tell more about which homes are selling than whether values going up or down. Median home price is not a fixed unit of measure like an ounce of gold, bushel of corn or barrel of oil.
Housing starts may help construction employment but lack of housing starts is what bolsters the value of existing homes. The two different charts seem to confirm that.
A sustained move to multi-unit construction might mean some existing homes will never face increasing demand or recovering values.
I wonder how much of multi-unit construction is driven by public investment and 'public-private partnerships' (meddling) rather than any indicator of a private sector recovery.
An aside, my last multi-unit went the way of a Kelo-style public taking from private ownership to new, subsidized, quasi-private ownership with the non-consensual transfer performed by the big city department of fascism. Liberals upscale the inner city by using government power and taxpayer funds to force out the working poor. Making investments that don't even pretend to pay for themselves. a.k.a. the housing 'market'.
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I know what you do CD.
You know how passionate I am about this stuff, and how much the b.s. ticks me off.
I actually get a kick out of your "gentle" nudgings.
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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......................
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That was very helpful Pat, we look forward to the article when you finish it.
Question:
"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.)"
I am not following this. How is this sector prevented from MUBs?
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Pat, good stuff - always. Even if the truth is bad news...
My view of housing is simpler. It is directly tied to personal and national income. The interventions of the various types may have delayed the correction and held values slightly up to some artificial level, but real recovery in housing comes after people start making more money. Not in the foreseeable future IMHO.
We just had an election where from my perspective we chose continued stagnation over growth. Rapid growth later, after 2 or 4 more years of failed economic policies, seems less and less likely if not impossible. (I'm always ready to be proven wrong!)
Uncertainty in its many forms, of the economy overall, of housing, of personal income, or take home income, of the deductibility of mortgage interest, also contributes greatly to the inaction of those who could be or should be the move up buyers right now.
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CD,
Those who are refinancing now into the lower rates are going to stay in their homes when rates go up. Why go from 3.34% up to 5 or 6%, which was typical during the 2000's? So, the refi market is doomed, and the MUB demographic severely degraded.
Another factor that I did not mention is that Property Tax considerations will also restrict mobility.
Here is a link to the Fed Paper which covers this in depth.
http://www.newyorkfed.org/research/staff_reports/sr526.pdf (http://www.newyorkfed.org/research/staff_reports/sr526.pdf)
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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.
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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.
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Here are the latest Foreclosure and Delinquency Stats from LPS.
LPS: Percent Loans Delinquent and in Foreclosure Process
Oct 2012 Sept 2012 Oct 2011
Delinquent 7.03% 7.40% 7.58%
In Foreclosure 3.61% 3.87% 4.30%
Number of properties:
Number of properties that are 30 or more, and
less than 90 days past due, but not in foreclosure: 1,957,000 2,170,000 2,219,000
Number of properties that are 90 or more days
delinquent, but not in foreclosure: 1,543,000 1,530,000 1,681,000
Number of properties in foreclosure pre-sale inventory: 1,800,000 1,940,000 2,212,000
Total Properties 5,300,000 5,640,000 6,111,000
My comments:
1. LPS only covers about 70% of all first mortgages in their data sets. So, these numbers are below the actual numbers present.
2. This only applies to 1st Mortgages. 2nds are not considered. And borrowers are not paying seconds in greater numbers than firsts, because seconds are not generally foreclosing.
The numbers in each category are certainly down. It would appear that the Foreclosure Crisis is beginning to abate. But when additional information is added to explain what is going on, then the perspective begins to change.
1. Alt A Adjustable Rate loans were tied to either the LIBOR or the MTA Index. They had Margins of 2.25% or 2.75%. This would be the lowest rate that the loan could have, when the fixed rate periods ended. For the 1 through 5 year loans, which represented over 90% of the loans, the Interest Rates are now down to 2.625% up to 3.25% in most cases. These loans have had defacto modifications with the Fed pushing rates lower. As rates increase, these loans will begin to default, unless the homeowners refinance into HARP 2. It is either foreclosure or no longer being a Move Up Buyer. Either way, these homeowners are out of the housing market in one manner or another......(foreclosure or Move Up Buyer.)
For right now, the foreclosures in this cohort have been "stalled".
2. HAMP and other modifications that have occurred, especially in the last year, have greatly reduced the number of delinquencies, lowering the numbers. But, it is statistical fact that 60% of the mods fail, so another delay has only occurred. When the 5 year fixed rate period for the mods expires, then as the loan rates increase, so will more defaults. For the first HAMP mods, that will begin in 2014.
3. Lenders are increasingly allowing short sales, which is further decreasing the number of delinquencies and foreclosures.
4. Compare the 90 plus delinquencies but not in foreclosure to those in foreclosure. Those loans should all be in foreclosure, but the banks are not foreclosing, either due to attempting loan modifications or short sales prior to initiating foreclosure, or waiting for more foreclosures to occur before initiating foreclosure. Most of the Non Foreclosure will end up in foreclosure.
Compared to two years ago, total delinquent properties are down about 1 million properties which is an impressive number, for sure. But the reduction must be taken in context with all of the foreclosure prevention programs that have been in place, either delaying foreclosures, or offering modifications to prevent foreclosures. When these programs are factored in, then the numbers are not nearly so impressive.
When/if the economy crashes further, interest rates increase, or Obamacare begins to get enacted, we can expect that foreclosures will again increase and prevention efforts will fail.
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Great posts, Pat. Very useful and valuable.
Thanks
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Indeed.
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Case Shiller reports Home Values increasing 3.00% Year over Year for Sept 2012. LPS said 3.6%. Monthly totals for year...........
Case-Shiller Composite 20 Index
Month YoY Change
Jan-12 -3.9%
Feb-12 -3.5%
Mar-12 -2.5%
Apr-12 -1.7%
May-12 -0.5%
Jun-12 0.6%
Jul-12 1.1%
Aug-12 1.9%
Sep-12 3.0%
This suggests that an improvement in home valuation is occurring, but it must be viewed with the following considerations.....
1. Total Inventory of Homes for Sale is 5.8 months of supply. This shows that there is a shortage of available homes for sale. Shortages drives prices up.
2. Interest Rates are at 3.34%, far below "reasonable rates" that should be about 7% to 8% in a "normal" environment. Lower Rates causes prices to increase.
3. 30% to 40% of home sales are FHA with 3.5% down payments, representing less stringent qualifying standards, and which adds demand that should not exist, which drives up prices.
The simple conclusion is that with all the "artificial" supports put into place by the Fed, and with restrictive inventory, that the Housing Market can only muster a 3% Year over Year increase shows that Housing is truly weak and not responding to efforts to stimulate.
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Previously, I posted about where new buyers must come from to stimulate housing sales. I expressed the view that the 24-29 cohort and 30-39 cohort would have to supply the growth. I was quite negative about hopes for this to happen.
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%
Here is new information coming from Zerohedge that places my concerns into a proper perspective.
The first chart shows how income has changed over a period of years.
(http://lfi-analytics.com/s/cc_images/cache_3697825204.png?t=1354031826)
For all cohorts except 65 and over, real income has dropped significantly. Income levels are back to levels seen in the 1990's, in all cohorts except the 19-24 group, which will not be buying homes in any big numbers. (Plus, income for the 19-24 cohort will not support homeownership in most cases.) Yet, average home values, based upon both LPS and Case Shiller suggest that values are at the 2003 level. 2003 home values were far higher that in the 1990's, so how will any of these cohort be able to increase ownership levels? It can't happen in any great numbers needed to stimulate housing demand.
The second chart breaks down income into real numbers
(http://lfi-analytics.com/s/cc_images/cache_3697831304.png?t=1354031853)
With this, we see the actual effects of the income loss. In the needed cohorts, income levels have dropped from $7k to $9k from peak levels seen in 2000.
For the 25-34 cohort, with income of $50k, and with the likelihood of high levels of student or consumer debt, there is probably very little to increase ownership rates in the near or intermediate terms. Only as this group ages, and hopefully achieves greater income growth, can we expect any increase in ownership.
The 35-44 cohort is already at 62% ownership rates. With decreasing income, how can this group be expected to grow further? (Ownership increases dramatically in this group as people age. Likely, the 39-44 subset is closer to 70% ownership, with 35-38 being much lower than 62%. Either way, it does not bode well for recovery.)
I ask: Where are the new buyers going to come from if we have limited Move Up Buyers and we have a younger cohort that cannot afford to buy, even at 2003 prices?
Can investors and foreign money fuel a housing recovery? That answer is "No Way".
I have no idea where housing support will come from. That is why I am in agreement with a previous article that said to let the Housing Market crash and quit trying to support it.
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Some really insightful stuff Pat.
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Waiting for CD to post the new Wesbury on Oct Home Sales..............it will be interesting to see what the Kool-Aid Drinker has to say..........
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Just to predict, Westbury will say that all is well.
But,
1. Sep 2012 new home sales were revised down by 20k to an annual rate of 369k, and not 389k as previously reported. Oct 2012 reported 368k, and expect that this number will be revised down in the Dec report.
2. Actual Oct 2012 Home Sales, not adjusted, was.....................(drum roll).........................29k. (Sep 2012 was actually 29k as well.) Multiple 29k by 12 and you have total yearly sales, unadjusted, of 348k. (See why I hate Adjusted Totals?)
3. Both the median and average new home price ($237,700 and $278,900) were at the lowest values since June.
4. The South had about 50% of all sales, at 14k. The Midwest was 5k, West at 9k, and the Northeast at 2k.
Where is the Housing Recovery? Am I blind? I can't see it!!!!
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New Single-Family Home Sales Declined 0.3% in October, to a 368K Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 11/28/2012
New single-family home sales declined 0.3% in October, to a 368,000 annual rate, coming in well below the consensus expected pace of 390,000. Sales are up 17.2% from a year ago.
Sales were down in the Northeast and South but up in the Midwest and West.
The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 4.8. The increase was mainly due to a slower selling pace, although inventories of new homes rose 2,000 units.
The median price of new homes sold was $237,700 in October, up 5.7% from a year ago. The average price of new homes sold was $278,900, up 8.0% versus last year.
Implications: New home sales dipped in October but are still in a general rising trend. Although new home sales fell 0.3% in October, and were revised down for last month, they still remain near the highest levels since April 2010. Sales are up 17.2% from a year ago. Meanwhile, as the lower chart to the right shows, overall inventories remain close to record lows. Although the months’ supply of new homes rose to 4.8, it remains near the lowest levels since 2005, well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The slight increase in new home inventories was mostly due to a rise in homes not started. Completed homes also added to inventories. The median price of a new home fell 4.2% in October, but still remains up 5.7% from a year ago, consistent with the positive year over year increases we have been seeing from other house price indices. Not only are prices up, but the median number of months a new home sits on the market before being purchased is now down to 5.9 months from 7.2 just one year ago. This is the lowest level in five years and shows demand is picking up. The road ahead for housing may be bumpy from time to time, but it looks better than it has in years. Look for housing to continue to move higher in 2013.
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We are getting better info here from PP on housing than Wesbury is getting from his sources, Brian Wesbury should join the list of famous people who read the forum. )
To repeat, the changing median value of new home sales tells us which types of homes are being built, more than it indicates a movement in value. You can't build low or mid value houses in populated areas because of the depressed value of existing homes for sale.
Sales volume figures get compared with another point in the crisis, a year ago, but the term recovery (not used in this Wesbury piece) means IMO to compare with pre-crisis levels.
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For the record, you can buy a 4 bedroom house in the nation's 4th richest metro (http://en.wikipedia.org/wiki/Highest-income_metropolitan_statistical_areas_in_the_United_States) today for $19,900 (http://www.minnesotarealestatesearch.com/mn-homes/listings/minneapolis-real-estate/3110-queen-ave-n/mn-mls-4161095) because of the continuing backlog of foreclosed properties.
We were warned here that "things will not get easier for housing for an extended period of time" more than a year and a half ago by PP: http://dogbrothers.com/phpBB2/index.php?topic=2167.msg46603#msg46603
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Just to add more fuel to the fire:
http://www.census.gov/construction/nrs/pdf/soldreg.pdf (ftp://http://www.census.gov/construction/nrs/pdf/soldreg.pdf)
If you go to this website, you will find Housing Sales data going back to 1963 on a Monthly Basis. It provides Adjusted and Non Adjusted Sales.
The data really shows just how bad the New Home Sales really are. Through most of the 2000's up to 2007, total units sold were over 1m. Even in 1963, Adjusted Sales Monthly were in the 500's most months. And, this is with a US population base of 189m.
In fact, if you look at all the data, the two worst years for Housing Starts ever recorded was 2010 and 2011. 2012 is the 3rd worst on record.
How can anyone be optimistic about a few monthly increases?
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Today, you will be hearing about Oct Pending Sales Index up by 5.04%. This means nothing to me.
Pending Sales come from NAR data. It covers signed and accepted Sales offers. The loans must still close at some point.
Dependent upon the source used, from 48% to 60% of all Pending Sales do not close at this time. Either the borrower cannot qualify in the end, or the Appraisal comes in too low and nixes the deal. And if it is a Short Sale, then the lender or investor must approve the deal, and this failure rate is far above 60%. (How many of the Pending Sales were the result of prior sales falling through, we do not know. Would be very interesting if someone kept track of the data.)
Mortgage Banker Association reports that Purchase Application are up, and Refinance Applications are down. Purchase Applications would be the result of the Pending Sales increase, but Refinance Applications are now driven solely by either Interest Rates, or Negative Equity refinancing into HARP.
Here is an interesting tidbit for all:
Ellie Mae is a Loan Processing Engine. Information about the proposed loan is uploaded for further processing, etc. Ellie Mae handles 20% of the entire lending market, so they have a representative sample of loans that can shed light on the quality of loan applicants. Here is some relevant information on borrowers.
MONTHLY ORIGINATION OVERVIEW FOR SEPTEMBER 2012 – ELLIE MAE
Sep 2012 Aug 2012 June 2012 March 2012
Closed Loans
Purpose
Refinance 65% 61% 54% 61%
Purchase 35% 39% 46% 39%
Type
FHA 19% 21% 23% 28%
Conventional 72% 70% 67% 64%
PROFILES OF CLOSED AND DENIED LOANS FOR SEPTEMBER 2012
Closed First Denied Loans
(All Types)
FICO Score (FICO) 750 704
Loan-to-Value (LTV) 78 88
Debt-to-Income (DTI) 23/34 27/44
Closed Loans
Sep-12 Aug-12
FHA–REFI
FICO 716 717
LTV 89 89
DTI 25/38 25/38
FHA–PURCH
FICO 701 700
LTV 95 96
DTI 27/40 27/41
Denied Applications
Sep-12 Aug-12
FHA–REFI
FICO 670 671
LTV 89 88
DTI 28/45 28/43
FHA–PURCH
FICO 665 670
LTV 95 95
DTI 31/47 31/47
Conventional Closed Loans
Sep-12 Aug-12
REFI
FICO 767 769
LTV 70 70
DTI 22/32 22/31
PURCH
FICO 762 763
LTV 79 79
DTI 21/33 21/33
Denied Applications
Sep-12 Aug-12
CONV–REFI
FICO 723 727
LTV 87 87
DTI 26/43 27/42
CONV–PURCH
FICO 729 734
LTV 81 81
DTI 24/43 25/42
Realtors, Brokers, and the media are all complaining about the tightened lending standards since the Crisis began. This information provides a good perspective of how much lending standards have tightened. Though these are averages, we can conclude the following:
For Conventional Loans
1. Lenders have tightened up on FICO Scores. Unless you have a large amount of a Down Payment or Equity, do not bother if your FICO is under 700.
2. Loan to Value is playing a large role again. LTV's over 85% will be extremely difficult to get approved. It will depend upon whether you can get PMI coverage.
3. The real key to approval is the Debt Ratio. Lenders are looking for 36% or less. No more 45% and above allowed.
For FHA loans
The differences between FHA and Conventional are stark, at the very least.
1. FHA will allow Debt Ratios up to 41%. This is regularly approved. At 38% being the average, it is far greater than the 31% for Conventional loans.
2. 95% LTV average, with 96.5% being commonly approved, far above conventional as well.
3. FICO of 700 average, with many loans down to 680 with equity present and lower Debt Ratios.
Looking at the differences in approvals, it is clearly evident why FHA has a current default rate of 16% plus, and is projected to reach 30%. Yet, the GSEs are under 5% generally.
The government has turned FHA into the GSE subprime. Loans that would have been approved 5 years ago by the GSEs, but would be denied today, are the loans being approved by FHA. Are these loans "credit worthy"? When you look at the approval parameters, especially DTI, then it is clearly evident that large numbers of these loans are not "credit worthy" and will default in the next 2-3 years.
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http://www.nytimes.com/2012/12/02/business/widows-pushed-into-foreclosure-by-mortgage-fine-print.html?nl=todaysheadlines&emc=edit_th_20121202
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second post
DO we have another Fannie or Freddie on our hands — another mortgage giant headed for a rescue?
Department of Housing and Urban Development
Carol J. Galante is the acting commissioner of the F.H.A.
Related
Times Topic: Gretchen Morgenson
Related in Opinion
Editorial | The Second Term: The Mortgage Challenge (December 2, 2012)
Like Fannie Mae and Freddie Mac before it, the Federal Housing Administration is suffering in a mortgage hell of its own making. F.H.A. officials say they won’t need taxpayers’ help, but we’ve heard that kind of line before.
The F.H.A. backs $1.1 trillion of American mortgages and, by the look of things, it’s in deep trouble. Last year, its mortgage insurance fund was valued at $1.2 billion. Today that fund is valued at negative $13.48 billion.
Granted, that figure, reported by F.H.A.’s auditor, doesn’t represent actual losses. It’s an estimate of the difference between future mortgage insurance premiums that the F.H.A. will collect and the expected losses on the mortgages that the agency is obligated to cover over time, combined with the agency’s existing capital resources.
But the upshot is this: If the F.H.A. were to stop insuring new home loans today, it wouldn’t have the money it needs to cover its expected losses in the coming years.
The F.H.A., a unit of the Department of Housing and Urban Development, is not about to stop insuring mortgages. Its officials say that without the F.H.A., people would have a tougher time getting home loans, and the housing market would suffer. (The F.H.A. insures loans of up to $729,750 in certain areas and requires down payments as low as 3.5 percent.)
But the sharp decline in the fund’s value is a stark reminder that the mortgage mess is still very much with us, even as the real estate market seems to be recovering. In November 2011, for example, the F.H.A.’s auditor projected that the fund’s value would climb to $9.5 billion this year.
The agency acknowledged that its financial position is a hostage to insured loans that still have “significant foreclosure and claim activity yet to occur.”
Whether the F.H.A. will have to turn to the Treasury for help, of course, remains to be seen. That step would be determined by assumptions used in the Obama administration’s 2014 budget proposal, due early next year, and not the auditor’s report.
But neither the F.H.A. nor its auditor has a great record when it comes to forecasting. Its current woes, F.H.A. officials say, stem largely from toxic loans that it insured between 2007 and 2009.
Loans insured since 2010 are performing well, according to the agency. The main reason is that it is essentially catering to a better class of homeowner. In 2008, a quarter of all the loans it insured were made to borrowers with credit scores below 600. (A score of 850 is the highest possible.) In 2010, that figure was 2 percent.
IN an interview on Friday, Carol J. Galante, the acting commissioner of the F.H.A., said that initial data from recent loans, like that for early payment defaults, is showing far superior results over older loans. “We see dramatic improvement that gives us some level of confidence that they are certainly performing much, much better than the older books of business,” she said. Ms. Galante added that higher credit scores also pointed to fewer losses on newer loans.
That may not last. Mortgage experts say it takes three to five years for loans to “season” and for reliable loss patterns to emerge.
Even Barry L. Dennis, the president of Integrated Financial Engineering, the F.H.A.’s auditor, says it is too soon to say with certainty how the recent loans will perform.
“So far, the delinquency statistics on those books are very encouraging,” he said. “But we haven’t gone long enough for the default statistics to prove that those books are better.”
The F.H.A. also predicts that the years ahead will bring fewer losses because the larger loans that it began insuring in 2008 are better performers. The agency insures loans of up to $729,750, well above the $417,000 cap on mortgages guaranteed or bought by Fannie Mae and Freddie Mac.
Whether these loans continue to perform well is another question, given that many are not yet seasoned.
“Our equations assign less risk to a larger loan,” Mr. Dennis said in an interview last week. “But that’s not to say across the board that larger loans are less risky, everything else constant.”
In addition, the F.H.A.’s limited experience with high-balance loans means that it has little data with which it can project losses accurately. Ms. Galante conceded this point, but added that recent increases in premiums levied on borrowers would help offset future losses at her agency. Initial fees rose this year to 1.75 percent of a loan balance, from 1 percent, while ongoing premiums are also going up.
A big question is whether the F.H.A.’s prehistoric technology undermines the accuracy of its data. In 2009, an independent auditor’s report found significant deficiencies in the agency’s aging information systems. Three years later, the agency is still trying to migrate from its creaky Computerized Home Underwriting Management System to a more modern one.
For example, the agency’s system cannot spit out an accurate history of modifications on the loans it insures. As a result, these histories have to be recorded manually.
“The systems are old and antiquated and are in the process of being updated,” Ms. Galante said. “But in terms of the underlying analytics of the performance of the portfolio, that’s not an element of concern.”
The F.H.A. is anticipating a better 2013 for itself and — who knows? — it may be right. But then, Fannie Mae and Freddie Mac played down their troubles for years, and we know how that ended.
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The problems of surviving spouses as mentioned in the article is a common problem across the US. But, as with anything housing related, one must look further into the issues presents.
When I read that only the husband was in on title in one case, this indicated that other problems existed not mentioned. When a spouse was omitted from the loan, but kept on the title, this indicated that there would usually be a problem with the spouse, either extensive debt that by not showing her on the loan, would "hide" the debt, or else that credit scores were very low, and would result in a loan denial. To get around this problem, the spouse would be left off the loan.
This option would work fine, until a death occurred. Then, by the requirements of the original Deed of Trust, anyone assuming the loan (the surviving spouse) would have to requalify. Of course, she could not do so, and then would come foreclosure. (This also applies to loan modifications.)
Servicers under different disclosure laws, would not be able to speak to the surviving spouse about the loan, since she was not on it. The only way that this problem would not exist is if the servicer had received an authorization from the borrower prior to death, to speak with the spouse.
In the "real world", the loan should never have been granted, and the couple forced to sell the home, and take the profit, rather than be in a home that they could not truly afford. (Yes, if the spouse had to be omitted, then the loan should not have been granted. Likely, for approval, it was also a stated income loan.)
What we see is a "legal trap", created by bad lending practices, and compounded by legal issues.
We see the same issues as above with Reverse Mortgages. On an RM, if only one of the two parties were 65 or older, then only the older could be on the RM. The under 65 person was left off. If the older dies before the younger turns 65, then under the terms of the RM, the RM must be paid off, or the home sold. Only if the younger has turned 65 can another RM be obtained to solve the problem, if enough equity exists in the home.
Always looke behind the story to find the rest of the story.
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Regarding the FHA article
1. Gretchen Morgenson has made a name for herself with the foreclosure crisis. But, she is a poor "researcher" when it comes to her articles or books. She makes fundamental errors in reporting that calls into question anything she does. For example, in one book she wrote which was a Times Best Seller, she writes that the GSE's were doing subprime mortgages as early as 1993. This was completely false. That one statement alone was significant to call into question all else that she wrote.
2. Morgenson has spoken with FHA people, and ones associated with FHA, for their views and comments. Of course, each are optimistic that with higher FHA standards, loans after 2010 will not default. She does not speak with others who really have different perspectives, instead of which she simply expresses "doubts". Here is what she has "missed".
- Early payment defaults are mentioned as "improved". It is not mentioned as to whether the Early Payment Defaults are on loans that default within 2 - 3 months of origination, or within the first year. This distinction is important, in that tightened standards should reduce EPD. But over the long term, it will not affect loan performance.
- Loan to Value of 96.5% is paid lip service. At 96.5%, there is a 16% default rate alone. Yet, FHA continues to use these guidelines.
- Debt to Income Ratios of 41%. The GSEs have lower default rates in the 3's at 36%. Yet FHA continues with 41%. What happens to FHA as income is further degraded?
- FHA is generally first time buyers. This poses a far greater risk because these types do not know the true costs of home ownership.
- FHA brags about the performance at the higher loan amounts of $729k. Of course this should be expected. The higher the income, the more the disposable income at 41% debt ratios. Performance should be better.
3. Morgenson does not even mention the FHA Study by Andrew Caplin, in conjunction with the NY Fed. This report was done using data from literally hundreds of thousands of FHA loans. The conclusion was that 30% of these loans will default within 5 years. (I agree fully with what I have seen and researched.)
Morgenson's article is like washing one window on the Empire State Building at the ground floor. You can see better from that window, but you really have no idea what is around you, or above you.
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"Always looke behind the story to find the rest of the story."
Which is why we are profoundly grateful to have you as part of our brain trust Pat.
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I try.................
Have some new info on the Baby Boomer cohort and their Property Investment behavior to post. It does not offer support for a Housing Recovery.
Plus, more data on First Time Home Buyers. I really believe that truly qualified First Time buyers are now a rarity, if we eliminate FHA buyers.
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It's so nice to have a real expert debunk Wesbury's garbage.
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Wesbury's record is better than yours or mine GM :evil: :-D
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Really? As the economy continues it's death spiral, Wesbury continues to have predicted at least 8 of the last 0 recoveries, if I recall correctly.
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And when the DOW was at 6500, you and I predicted 6000. Stating the matter baldly, one might say that you and I missed a 100% move that Wesbury did not. :evil: :-D
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Where was it at when I predicted 6000?
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I just tried searching for "6,000" but it is giving me some 9 pages of stuff the includes "000", "6" and the like.
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Foreclosure Starts are down for both the month, and Year over Year. Expect some to claim how things are improving. However, as the article suggests, there are reasons for the drop.
The National Mortgage Settlement (Feb 2012) and the OCC Consent Decree (Apr 2011) have severely reduced foreclosures over the past 18 months. Those in the business began to see significant drops in May 2011, with the Consent Decree. With the Settlement, it was expected that further drops would occur.
The Settlement requires that when a homeowner misses a payment, the lender must contact the borrower, or attempt to contact the borrower, about foreclosure alternatives. Only after a period of time, usually 14 days to 1 month, can the loan be sent for foreclosure. (The 14 days to 1 month time frame varies due to different state statutes that might require longer periods of time.) If a borrower responds to the lender contact, all foreclosure processing stops until a modification review is done. This can take from a minimum of three months, to literally a year or more, dependent upon whether the borrower provides additional information quickly or appeals any mod denial. (I am looking at one that has been ongoing since Jun 2010 and still no decision.) Only when a final decision is reached, and no more appeals allowed, can a lender foreclosure. So, it is easy to see why foreclosure starts are down, and will continue to be so for about 3-6 months.
What is really important to note in the chart is the repeat starts. Repeat starts are generally about 15% to 20% of the total number. These are modifications that have failed. The borrowers will have another attempt to modify, so these will not go immediately to a true foreclosure. But, almost all will end up in foreclosure.
LPS: Foreclosure starts drop 21.9% on mortgage servicing settlement
http://www.housingwire.com/news/lps-foreclosure-starts-drop-219-mortgage-settlement-news (http://www.housingwire.com/news/lps-foreclosure-starts-drop-219-mortgage-settlement-news)
The National Mortgage Settlement and provisions it outlined for mortgage servicers may have accounted for a steep 21.9% drop in foreclosure starts in October, according to Lender Processing Services' Mortgage Monitor.
Year-over-year, October's foreclosure starts were even lower, down 47.8% from the same month in 2011.
http://lfi-analytics.com/s/cc_images/cache_3714465304.png?t=1354723120 (ftp://http://lfi-analytics.com/s/cc_images/cache_3714465304.png?t=1354723120)
While it may be tempting to attribute the drop in starts to an improving housing market, LPS warns not to jump to conclusions about the decline in foreclosure starts.
The data firm attributes the steep drop to servicing changes outlined by the $25 billion mortgage-servicing settlement that took effect around the month of September. One of those changes was a requirement that servicers give borrowers a 14-day notice in writing before referring a loan to foreclosure. Those letters were first mailed in September and the steep drop in foreclosure starts came soon after, according to LPS.
With that in mind, LPS suggests the quick drop in foreclosure starts may be a temporary trend that is subject to change.
At the same time, prices are going up nationwide, with prices up 3.6% year-over-year in September and on track to gain 5% to 7% this year alone.
Still, the housing market is far from recovery, LPS points out. In fact, by the firm's own estimations, the market is now churning sales at half the pace established during the peak of the housing market.
There have been about 4.1 million sales over the past 12 months, compared to 8.2 million in the fall of 2005, LPS said. Furthermore, about a third of the sales in the past 12 months, approximately 1.3 million, were considered distressed. That is well above the 226,000 sales recorded in 2005. And prices, while improving, are still 23% below peak levels, according to LPS.
But LPS sees its latest mortgage monitor as somewhat of a mixed bag, with prepayment rates showing a possible rise in October originations and mortgage bond spreads performing better.
The percentage of delinquent mortgages in the U.S. hit 7.03% in October. The states with the highest percentage of non-current loans include Florida, Mississippi, New Jersey, Nevada and New York.
Those with the lowest percentage of non-current loans were Montana, Wyoming, South Dakota, Alaska and North Dakota.
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Here is the chart I was referencing..........
(http://lfi-analytics.com/s/cc_images/cache_3714465304.png?t=1354723120)
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For housing to recover, demographics plays a crucial role as I have tried to demonstrate. Here is an article from Business Insider, presenting a chart that tells it all.
http://www.businessinsider.com/matt-kings-most-depressing-slide-ever-2012-12 (http://www.businessinsider.com/matt-kings-most-depressing-slide-ever-2012-12)
CITI'S MATT KING PRESENTS: 'The Most Depressing Slide I've Ever Created'
Citi's Global Head of Credit Strategy, Matt King, has a knack for putting together useful illustrations.
Here, he examines one of the implications of one of the most powerful forces in all of economics: demographics.
King explained his charts to us like this:
It's what I like to call "the most depressing slide I've ever created." In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young).
In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children's generation. Unfortunately, that doesn't work so well when there start to be more pensioners than workers.
The slide:
(http://lfi-analytics.com/s/cc_images/cache_3718027804.jpg?t=1354898850)
If this chart is anywhere accurate, then it is simply more evidence of what is to come.
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File this in the "I know there is a pony in there" when a child sees a pile of horsesh*t file.
http://www.housingwire.com/content/first-time-homebuyer-demographic-finds-more-employment (http://www.housingwire.com/content/first-time-homebuyer-demographic-finds-more-employment)
First-time homebuyer demographic finds more employment
First-time homebuyers have played only a small part in the nation's housing recovery, with investors and cash buyers doing a lot of the buying in key real estate markets.
But Trulia's chief economist Jed Kolko is more positive about this age group. He sees them turning a corner on the jobs front, which is the first step towards growing homeownership numbers.
He notes the month of November brought forth more solid numbers on the jobs front, especially among the 25-to-34 year old age demographic. With this demographic generally in the prime age group for first-time home buying, Kolko is decidedly more optimistic about what this age group may do for the housing market in the coming years.
"The good news: among 25-34 year-olds, the prime age group for housing demand, 75.2% were employed in November, up from 75.1% in October and from 73.9% in November 2011," Kolko wrote.
The unemployment rate for this age group sat at 7.9% in November, which is high, but down from 9.2% a year earlier.
The student debt situation and employment numbers have weighed heavily on this group, keeping them from homeownership. But Kolko's assessment on Friday is more hopeful.
Will first-time homebuyers make a come back in the next few years? That's the looming question as we steer timidly into 2013.
My comments:
What type of jobs are they getting? How are they going to purchase a home when all their income will go to meeting living expenses and paying off student debt? Where is the Down Payment going to come from?
Oh.......FHA............yeah, right...........
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http://www.nytimes.com/2012/12/10/business/banks-face-a-huge-reckoning-in-the-mortgage-mess.html?nl=todaysheadlines&emc=edit_th_20121210&_r=0
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These type of actions are becoming more prevalent as time goes by.
I was contacted last month by a law firm representing investors going after the lender. The law firm is preparing a lawsuit, but has problems in that they do not have enough information regarding the actual loans. They only have Trust information about loan performance and basic loan level information. They believe that at this stage, they need more than what they have, but until the lawsuit survives the "dismissal stage", they cannot get access to the loan files.
Most analytic companies can do some work from the available information, primarily reporting the basic numbers and percentages of the loans in default. But that is generally all that they can do at this stage.
I can go much further, with my loan default analysis, taking the available information and using a predictive model that shows why each loan defaulted among other issues. This would allow for discovery which would end up with the actual loan files being provided for analysis.
If the firm retains me, I can finally put everything I know together in one "package", and really become the "key" to these type suits going forward.
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http://www.latimes.com/business/money/la-fi-mo-california-home-sales-20121213,0,5057854.story
By E. Scott Reckard
December 13, 2012, 2:28 p.m.
The California housing recovery boomed forward in November, with home prices reaching levels high enough to trigger questions about whether speculators are overdoing a spending spree.
The median price of all houses and condos sold in the Golden State was $291,000 last month, up 2.1% from October and 19.3% from $244,000 in November 2011, the DataQuick real-estate information firm said Thursday. The median is the point at which half the sales are for more and half for less.
The number of homes sold rose nearly 15%, to 37,481, according to the count by San Diego-based DataQuick. Sales of homes that had been foreclosed on made up 16.6% of the sales -- about half the percentage in November 2011 and the lowest level of foreclosure sales since October 2007.
Homes purchased for all cash remained at extremely high levels, mostly because of investors snapping up homes after the huge price declines of the housing bust. DataQuick analyst Andrew LePage said 32.5% of all November home sales in California were for cash, more than twice the long-term average.
The run-up in prices caught the attention of Dean Baker, co-director of the Center for Economic Policy and Research in Washington, who regarded the trend as “serious grounds for concern that these markets are being driven by speculation.”
Quiz: The year in business, 2012
“While some speculators buying up homes at a bottom can be positive, the sort of price rises that you are seeing there may be excessive,” Baker said in an email to The Times.
He noted that a big factor in the rising median price is increased sales of high-end homes, which skew the results to the upside. Indexes that track specific home resales, such as Case-Shiller, show far lower price appreciation.
Still, Baker said he thought the California market could experience “serious gyrations” because of the heavy purchases by investors hoping to sooner or later flip the homes at a profit.
“The speculators likely have pushed prices above where the market would put them in some markets,” he said.
Ed Leamer, director of the UCLA Anderson Forecast of the economy, had a more sanguine take on the trend than Baker.
“I am inclined to think that what he calls speculators know more about the market than he does,” Leamer said. “It’s a good thing for professionals to be putting a floor under home prices.”
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LA Times: "The California housing recovery boomed forward in November, with home prices reaching levels high enough to trigger questions about whether speculators are overdoing a spending spree."
Good news, maybe... Deeper in the story: "a big factor in the rising median price is increased sales of high-end homes, which skew the results to the upside. Indexes that track specific home resales show far lower price appreciation."
- Where have we heard that. Median over a short duration tells you which homes are selling, not price appreciation. No comparison to the peak, only to the trough.
"Homes purchased for all cash remained at extremely high levels..."
- Does this mean interest rates are too high, lol? Buying houses, especially at the high end, is a way to keep cash idle and unproductive in hard assets. It is the opposite of building or expanding a business and hire workers. High end cash sales, by nature, are unsustainable - all speculators have finite purchasing power. And sold off other assets (forestalling capital gains?) to buy these.
“It’s a good thing for professionals to be putting a floor under home prices.”
- Yes, get the correction stopped before working people raising families can afford them.
I am surprised calif doesn't pass a law to stop this sort of thing.
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I confess to being surprised that Pravda on the Beach (a.ka. The Left Angeles Times) actually noted the ambiguities underlying the headlined numbers.
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I confess to being surprised that Pravda on the Beach (a.ka. The Left Angeles Times) actually noted the ambiguities underlying the headlined numbers.
Yes, pretty good journalism. If this were a more partisan issue, I would ask why the headline is one thing and the important qualifiers are buried deeper.
On another thread, still looking for their coverage of that other story...
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I would add that the print edition article (i.e. longer, fuller) noted additional ambiguities.
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What is a federal government agency chartered to help people get into home ownership doing helping people get out of their homes? And then bungling it!
They don't know how far they misunderestimated, by a factor of 10, next we will give them healthcare??
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Housing and Urban Development Secretary told the Senate that the Federal Housing
Administration's once-modest reverse-mortgage program is the latest drain on taxpayers thanks to gross mismanagement.
FHA will lose $2.8 billion this fiscal year on reverse mortgages, and in the worst case $28.3 billion, with the losses stretching through 2019. The feds have no idea how big the pool of red ink might be.
At least FHA guarantees for home purchases foster Congress's professed goal of homeownership—though we've seen in the housing bust how that misallocates capital. But guarantees for reverse mortgages go to people who are already homeowners who want to cash out of a real-estate asset. That's fine if they want to do it at their own risk. FHA's guarantees are essentially a subsidy for older Americans to spend down their savings. FHA crowded out competitors and now accounts for 90% of outstanding reverse mortgages.
(more at the link) http://online.wsj.com/article/SB10001424127887324640104578165683785829580.html?mod=WSJ_Opinion_AboveLEFTTop
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The Reverse Mortgage is a unique product, to say the least. Homeowners 65 or over are allowed to take equity out of the home monthly, based upon the equity in the home.
Generally, to get an RM, one had to have sufficient equity in the home. No more than a 65% Loan to Value was allowed, if I remember correctly. Payments were based upon the equity, and upon the homeowner living to age 95. It was thought that this would protect the lender in the event of default.
The "suspect" loans were the loans taken out from 2004 through 2007, while home values were still inflated. When values fell, the Loan to Values were now 100%, but the homeowner was still able to take the money monthly. So these homes continue to go even more and more Negative Equity, each and every month that the homeowner still lives.
FHA and other reverse lenders cannot determine losses because they have no idea how long the homeowners are going to live. Some who die "quickly", the losses will be small. Those who die slowly, the losses will be quite severe.
To give you an example of how bad it is, I know one person who took out an RM at the peak. His home was valued at $550k, and he was 75 at the time. The loan was based upon $357k, at 65% loan to value. His home is now worth about $170k, a drop of $380k.
If this guy lives to 95, the losses are going to be incredible on this loan.
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PP, interesting. Like life insurance, it is a form of legalized gambling. Only the federal government could turn that into a big money loser.
"FHA and other reverse lenders cannot determine losses because they have no idea how long the homeowners are going to live. Some who die "quickly", the losses will be small. Those who die slowly, the losses will be quite severe."
I try to avoid products that give someone a motive to speed up my demise... :wink:
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Speed up the demise......................
Like wives and step sons? LOL? That is me.
Guess I should say something about the latest Housing Starts numbers.
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To provoke you further Pat here is today's Wesbury :-)
Data Watch
________________________________________
Existing Home Sales Rose 5.9% in November to an Annual Rate of 5.04 Million Units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 12/20/2012
Existing home sales rose 5.9% in November to an annual rate of 5.04 million units, coming in higher than the consensus expected 4.90 million. Sales are up 14.5% versus a year ago.
Sales in November were up in all major regions. The increase in sales was due to a faster sales pace for both single-family homes and condo/coops.
The median price of an existing home rose to $180,600 in November (not seasonally adjusted), and is up 10.1% versus a year ago. Average prices are up 10.3% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 4.8 in November from 5.3 in October. The decline in the months’ supply was due to a faster selling pace and lower inventories for both single-family homes and condo/coops.
Implications: There should be no doubt the housing market is in recovery. Existing home sales rose 5.9% in November, reaching the highest sales pace since November 2009, which was artificially boosted by the $8,000 home credit. Taking that one month out, this is the highest rate of sales since July 2007. Sales are up 14.5% from a year ago. Meanwhile, the inventory of existing homes fell to 2.03 million in November from 2.11 million in October, the lowest level since December 2001. Inventories are down 22.5% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 4.8, the lowest level since October 2005. Just a year ago, the months’ supply was 7.1. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The 10.1% gain in median prices versus a year ago can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 30 percent of purchases in November versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, but the housing market is definitely on the mend. In other housing news this morning, the FHFA index, which measures prices for homes financed by conforming loans, increased 0.5% in October and is up 5.6% from a year ago.
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The has not been as much publicity on Nov Single Family Housing Starts, and here is why.
Non Seasonally Adjusted Housing Starts were DOWN from Oct. They were:
Oct 2012 - 50,300
Nov 2012 - 40,000
A drop of 12,600 units
The Northeast fell 400
The South fell 3,500
The Midwest fell 3,200
The West fell 3,100
All total, Single Family is up 97,300 for the year to date. Total to date is 496,900.
I expect that Dec will show about 38,000 Single Family Starts.
The drop is exactly as expected. The winter always sees drops in activity. Dec should be even worse.
To put it in perspective, (Sorry that dates did not show up, but it begins in 1960
(http://www.forecast-chart.com/images/graph-monthly/housing-starts-november.gif)
The chart shows total housing start data since 1960. When you consider that population of the US at various times, you can really understand how bad housing is.
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PP, Your chart from 1960 shows what I have been asking or saying of Wesbury. The tail end of that chart showing very slight improvements from the near zero point of the collapse is all we hear, statements like 'up from a year ago' or 'highest level in 3 years', without showing the historical context of how bad things still are. Readers here are getting a better picture of it.
With all the health and energy efficiency improvements available, wouldn't everyone want a new home today if economic conditions allowed it?
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Doug,
You are absolutely correct about people wanting a new home over re-sales. And this is especially true with any move up buyer. Why purchase a re-sale when you can get/order a new construction home with all the extras that you desire, and you get to landscape a yard as you desire. Additionally, you do not have the problems of repairs needed in re-sales.
The first time buyers of new construction will be the ones to really be concerned with. A first time buyer has no true knowledge of the costs of home ownership. As they buy new construction homes, after closing, they must put in back yards, furnish and model the rooms, generally buy additional appliances, and who knows what else. The result is that most of this is done by use of more credit. Quickly, the homeowner becomes over extended, and runs into financial stress. (For first time buyers, re-sales are much more favorable to maintaining a better financial situation, since the work has already been done previously.)
One thing we saw quite often, actually commonplace, were new construction homes being foreclosed upon without having the normal needed upgrades, especially yards, drapery, etc. The first time buyers could not afford the upgrades, and never did them, unless the home value went up and they refinanced, pulling cash out to pay off debt, and do the needed work. Of course, this only increased their debt load. (Hmmm, one more factor I need to include in my Default Risk Analysis.)
One final thing............it is VERY common to see after buying a home, for the new homeowner to go out and buy a new car. This is because they were advised to hold off purchasing a car until after the home closed, otherwise they would not qualify due to debt ratios. But the second the loan closed, they were out buying a car.
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Another great PP insight:
"it is VERY common to see after buying a home, for the new homeowner to go out and buy a new car. This is because they were advised to hold off purchasing a car until after the home closed, otherwise they would not qualify due to debt ratios. But the second the loan closed, they were out buying a car."
Not to mention everything that goes in a new house, furniture, drapes, major appliances...
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New Single-Family Home Sales Rose 4.4% in November, to a 377,000 Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 12/27/2012
New single-family home sales rose 4.4% in November, to a 377,000 annual rate, very close to the consensus expected pace of 380,000. Sales are up 15.3% from a year ago.
Sales were up in the South and Northeast, but down in the West and Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.7. The decline was all due to a faster selling pace. Inventories of new homes rose 2,000 units.
The median price of new homes sold was $246,200 in November, up 14.9% from a year ago. The average price of new homes sold was $299,700, up 19.9% versus last year.
Implications: New home sales, which typically are the last piece of the housing puzzle to recover, rose 4.4% in November and are up 15.3% from a year ago. Meanwhile, as the lower chart to the right shows, although overall inventories remain close to record lows, inventories have risen for three consecutive months as builders are getting more confident in the recovery. Despite the recent upturn in inventories, the faster pace of sales drove the months’ supply of new homes down to 4.7, tying the lowest level since 2005. This is well below the average of 5.7 over the past 20 years and not much above the 4.0 months that prevailed in 1998-2004, during the housing boom. The median price of a new home is up 14.9% from a year ago, consistent with the positive year over year increases we have been seeing from other home price indices. In other news this morning, new claims for unemployment insurance declined 12,000 last week to 350,000. However, due to the extra federal holiday on December 24, many states estimated claims, making this week’s data less reliable than usual. Continuing claims for regular state benefits declined 32,000 to 3.21 million. Claims data and other figures suggest payrolls will be up about 155,000 for December while the jobless rate stays at 7.7%. (These forecasts may change based on next week’s ADP, Intuit, and claims reports.) In other recent housing news, the Case-Shiller index, which measures prices in the 20 largest metro areas around the country, increased 0.7% in October (seasonally-adjusted) and is up 4.3% from a year ago. Since the bottom in January, prices are up at a 7.3% annual rate. Recent price gains have been led by Atlanta, Las Vegas, San Diego, and Phoenix. In the factory sector, the Richmond Fed index, which measures manufacturing sentiment in the mid-Atlantic, came in at +5 in December versus +9 in November.
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Yeah, yeah, yeah..........Wesbury again spouting off.
Hey Wesbury! Why don't you admit that Sales are on an Annual Basis rate of $363k for the year. This would be an increase over last year of 18%......Wow!!!!!
The Fed started keeping stats on New Home Sales in 1963, when the population of the US was in the 160's million.
2012 will be the 3rd Worst Year since the stats began............only 2011 and 2010 were worse.
I don't think I want him for an advisor.
BTW, had a long talk this afternoon with a guy who has a company that does Portfolio Risk Analysis for the big banks. His partner used to be head of Risk Analysis in Bank of Canada, has done the same for the GSE's, and other US banks. His perspective is as mine.................everything sucks until we get Securitization of loans back on track, and lenders and investors know what they are buying.
Interesting possibilities for me with this call......................
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Just setting up the targets for you Pat :lol:
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Yeah, I know........and such easy targets.
BTW, for all.............
Jan 21, the Consumer Finance Protection Bureau is coming out with the new Residential Lending Guidelines for GSE loans. The guidelines will set the "standard" for new lending with what the GSE's will buy. It will also detail future restrictions on lending and lenders financial "duties" to borrowers.
The CFPB has been considering a few major changes that have been hotly contested. They are
1. Debt Ratios of 31% for housing and 36% total for GSE loans
2. Loan to Value of 80% or less
3. No simultaneous 2nd mortgage piggy backs
4. No FICO scores used. Only recent history to include no 60 day mortgage lates in the last two years.
5. Loans not sold to the GSE's requiring the lender to keep a 5% minimum partial interest in the loan.
6. A "Safe Harbor" provision whereby loans meeting the GSE requirements would not allow the borrower to have legal recourse against the GSE's except for TILA/RESPA violations.
7. A method for reducing and then eliminating the GSE's.
The American Securitization Forum and other entities have been trying to work with the CFPB and other groups to develop the new guidelines. These different groups have felt that the CFPB has been acting in good faith developing the new guidelines. I have been trying to tell the ASF that they are being set up.
The new regulations will do the following.
1. It will reinforce the GSE's position by making them the lender of first resort. Lenders will go to them for the Safe Harbor provision. The GSE's will cream the best of the loans, those having little risk.
2. It will not restart securitization. Enough lenders will not exist with the ability to absorb the 5% interest retention. Mortgage bankers will cease to exist. Only banks will be able to lend for securitization, and they will be reluctant to accept the 5% risk retention.
3. Non GSE loans will not have the Safe Harbor provision. All such loans will have the lender having a Fiduciary Duty to the borrower for ability to repay the loan. (I have already developed the analysis to show that a borrower could or could not afford the loan. With this, I could either show the Duty has been met, or I could provide the homeowner with the ability to file a legitimate lawsuit against the lender for a Duty violation. I am just waiting for things to happen.)
This whole thing is simply another power grab by the GSE's to maintain their position in the marketplace without fear of risk. They get the best loans, and with a provision that they cannot be sued when things go bad.
When the new regs come out, I will be doing a complete analysis for a couple of websites. I will also post here.
The idiots
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:-o :-o :-o
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The government and CFPB is seriously considering taking Privately Securitized Mortgages and allowing those over 125% LTV to refinance through HARP into the GSE's. For 5 years, the government would pay the difference between the new interest rate, currently about 3.25%, and what the previous rate was on each loan, usually above 6%. After 5 years, this guarantee ends and the investor gets the new rate.
There are some things about this article that are "puzzling".
1. If the GSE's are refinancing the loans, then why is the RMBS investors going to continue receiving both the new interest rate, and also the guarantee on the original rate? If it is a refinance, then the RMBS no longer have the loans on their books. The loans have been retired.
2. Why will the RMBS continue to receive the new interest rate after 5 years? Again, the loan was retired.
3. If the RMBS is keeping the new loan, why are the GSE's guaranteeing the loans? Why is the tax payer assuming all the risk on privately held mortgages?
It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans.
Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market.
http://www.cnbc.com/id/100340107 (http://www.cnbc.com/id/100340107)
Government Refi Idea Gets Chilly Reception
The Treasury Department is considering a plan to expand the government's refinancing program to help borrowers whose loans aren't backed by the government, but the idea is getting a chilly reception from a mortgage investor group.
The Making Homes Affordable Refinance Program, initiated in 2009, has helped more than a million borrowers stay in their homes by modifying their loans, but it only applies to borrowers who have government-backed loans through Fannie Mae and Freddie Mac. The Obama administration would like to expand the program by transferring loans controlled by private investors to those two government-sponsored mortgage firms..
Under the proposal eligible borrowers must be severely underwater, with a loan to value ratio of 125 percent or higher and must be current with their payment. These borrowers would be given current market interest rates, replacing the 6 percent rates they've been unable to refinance out of (because they don't have any equity in the home) and giving them a lower overall monthly payment. The Treasury Department, probably with leftover TARP funds, would pay investors the difference between the old interest rate and the new for five years.
But the American Securitization Forum, which represents investors in residential mortgage backed securities, is balking at the idea, arguing that while underwater borrowers are at greater risk for default it's not clear reducing their monthly payment will change that. It figures $120 billion worth of loan principal would qualify. Taxpayers would kick in $11.5 billion to make up for the reduced interest payments for the first five years and investors would subsequently lose $9.7 billion for the following years.
"The key question from the policy side for both investors and taxpayers is would providing this reduction in monthly interest payments provide any benefit either to the investors or to the public at large by reducing foreclosures? Our answer is we don't think it will appreciably reduce people walking away from their homes," said Tom Deutsch, executive director of ASF.
Investors have been unwilling to reduce interest amountswithout reducing the risk of default. "If they are getting a 6percent interest now, why would they want to turn that into a 3.5 percentif the borrower would still pay the 6%. It would seem wholly irrational toreduce their interest rate if it's not likely to prevent a walk-away borroweror a foreclosure," said Deutsch.
The latest proposal, first reported by the Wall StreetJournal, emerged as part of the "fiscal cliff" negotiations.
Home prices appear to be making a steady recovery, with the latest S&P Case Shiller report showing a 4.3% annual price increase in October on the 20-city composite. A survey of economists by Zillow expects home prices to keep moving up, with expectations for prices to rise 3.1 percent in 2013. But prices are still 30 percent off their June 2006 peak for the 20-city composite. And it's worse in areas hard-hit by the bust. While Phoenix has been a roll for the last year, with prices up 22 percent, prices are still 47 percent below the peak.
Even with higher prices nearly 11 million borrowers still owe more on their mortgage than their home is worth, according to real estate researcher CoreLogic. Many believe it's those homeowners and those with near-negative equity, borrowers who have some equity, but not enough to afford a move, that will keep the housing market from returning to something close to a normal market.
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Pat,
Is this an attempt at a stealth bailout of blue state disasters, like California?
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GM,
That is a part of the reasoning, but there is more to it than that. Imagine reducing people's house payment from 6% down to 3.25%. Imagine the increase in disposable income in a homeowner's pocket. That amounts to billions freed up.
Also, another reason exists. LTV's greater than 125% have a higher likelihood of default. So the new action would be expected to reduce defaults to some degree. But, this assumes that people are interested in keeping their homes when they are severely underwater, and that a payment reduction would make a big difference in default likelihood.
For large numbers of homeowners who are in such negative equity positions, this may not the case. Many are now recognizing that they will never be above water in their lifetimes. At that point, why not go into default, walk away, and then re-buy a better home in 3-4 years, at a much better price than what they were paying on the old home.
The people who are receiving the HARP offers, whether GSE or Private currently, are making their payments. Liquidity does not appear to be a problem for them. Why would the Feds offer them a break, except to either free up additional disposable income, or stop the potential strategic defaults?
Even more disconcerting for me is that the GSE's will guarantee these loans. It is further reason to believe that the GSE's are not going away. And when the new Underwriting Guidelines come out next month, it will be a clear indication of what we can really expect with the GSE's.
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Good thing we can magically keep making dollars, otherwise we'd be in big trouble!
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PP: "2012 will be the 3rd Worst Year since the stats began............only 2011 and 2010 were worse. "
The omission of this elephant in the room is what is wrong with nearly all current reporting on housing.
"expectations for prices to rise 3.1 percent in 2013"
"Sales were up in the South and Northeast"
"Sales are up 15.3% from a year ago"
"median price of new homes sold was $246,200 in November, up 14.9% from a year ago"
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Doug,
You couldn't be suggesting our revered professional journalists might be distorting the facts, could you? ???
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"Why is the tax payer assuming all the risk on privately held mortgages? It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans. Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market."
Amidst the witty repartee, I'd like to underline the preceding. As our Vice President would say "This is a BFD."
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Doug,
You couldn't be suggesting our revered professional journalists might be distorting the facts, could you? ???
Worse yet, they are reporting accurately without informing you whatsoever. Giving the right answer to the wrong question.
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"Why is the tax payer assuming all the risk on privately held mortgages? It sounds like the government is almost turning the loans into modifications and not refinances, and guaranteeing the loans. Again, I believe that Dodd Frank, the CFPB and the government is doing nothing more than trying to eliminate the Private Housing Market."
Amidst the witty repartee, I'd like to underline the preceding. As our Vice President would say "This is a BFD."
Like everything this administration does, it's only temporary until the crash.
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"Why is the tax payer assuming all the risk on privately held mortgages?... doing nothing more than trying to eliminate the Private Housing Market."
Yes, a Big Deal. Wrong on constitutional powers and limits, and as GM says, leading to a crash bigger than we have see.
If the people only knew the government was plotting a complete takeover of housing and healthcare and energy and transportation and agriculture and education, the vote would be... roughly 51-48 in favor.
Where in the constitution did the federal government get the power to do this? The Commerce Clause?? A house moves across state lines because money does?
Instead of asking what are the limits of this federal power, the supporters of big government ask the question backwards: Since we have all this power, control over mortgages in this case, how can we grow it further and use it to 'benefit' more people?
There is no S (savings) in S&L anymore. The top savings account pays 1/10th of one percent interest. Try illustrating the magical power of compound interest to your kid using that multiplier. There aren't people out there with combined, insured savings of $100,000 backing up every loan of $100,000. There is nothing there. Money is just printed, in bizarre amounts - billions and trillions, no exaggeration. There are technocrats making social engineering decisions using an increasingly diluted currency backed only with fiction and faith in technocrats and their ability to extend the fiction for another day. There isn't a private market for mortgages and there isn't a market interest rate anymore. It is all subsidized and manipulated.
"It's only temporary until the crash." And when it all fails, we blame the "free" market and intervene all the more.
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A chart from Scott Grannis' website yesterday tells the same story in context:
(http://i603.photobucket.com/albums/tt114/dougmacg/RealHomePriceIndex-1.jpg)
Your real estate investment, if you were able to hold it, had no appreciation over the last 13 years. Yet for every million you had invested at the start of the year 2000, you owe up to $162,000 (capital gains tax on inflationary gain) if you sell next year (New federal rate+state tax +surcharge) - on NO real gain or income! Worse than that by more than double if held by a taxable C-corp.
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That chart is amazing. :-o
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Yet I have gone blue in the face arguing with Scott. He believes that the housing market is recovering and no matter what I try to show otherwise, he does not accept it.
Of course, he does not believe that the Fed is creating money either, or is deliberately lowering interest rates. For him, it is all supply and demand. That is much to general of an argument for me. I want to know why there is no demand.
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Here is one thing to consider:
We know that house flipping has returned with a vengence. Even FHA allows for flipping to occur. No more 3 or 6 month limits.
One has to ask how many house flipping sales are occurring. Doesn't this artificially inflate home sales?
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Yesterday, the
Consumer Bank Finance Protection Bureau came out with its final rules on Ability to Pay.
The BFPB was set up to protect the Homeowner. Among its requirements would be the lender having a Fiduciary Duty to a borrower to determine the Ability to Repay a loan. For enforcement, the homeowner would have a Private Right of Action to sue the lender. Yesterday, we found out where that would go.
The new Debt Ratio Guidelines establishes a 43% maximum Debt Ratio for the Qualified Residential Mortgage. The income and other factors of the loan would have to be properly verified. If so, then by having a 43% or less Debt to Income, the lender has a Safe Harbor, whereby the homeowner has no Private Right of Action.
The 43% DTI is greater than what the GSE's and FHA are doing right now. The GSE's are at 36% and the FHA is at 41%. So in effect, the BFPB has given permission to the GSE's to increase their Debt Ratio allowances, to 43%. But it does not stop there.
The BFPB also stated that any loan, even above 43%, if bought by the GSE's would qualify for the Safe Harbor. So, the GSE's and FHA can go up to whatever Debt Ratio that they desire, and originating lenders would be protected from the Ability to Pay legal issues.
Note that at 41%, the FHA has a 16% delinquency rate at this time. Where is the sense of 43%?
Let's take a loan of $175k. Borrower is married with 2 kids in grade school. Here is reality
Loan Amount of $175,000
Interest Rate 3.25
Monthly Payment $761.61
Taxes/Ins $100.00
Total Payment $861.61
Total Income to Qualify $2000 per month
Take home per month - $1605
Disposable Income after Debt Service $734
Pray tell how a family of 4 will live off $734 per month, especially since they have coming out of this
Medical
Gas
Insurance
Food
Clothing
Utilities
Household Goods
Other expenses
The US Census for 2010 found that for a family of 2.5 people, living expenses average $1905 per month. How will these people make it at 43%
Now, what are the implications for lending in the future?
1. The GSE's and FHA will buy all Qualified Loans since the lenders will have the Safe Harbor provision on Ability to Pay.
2. Politicians will put pressure on the GSE's and FHA to up Debt Ratios because the housing market will not be growing enough.
3. Loan not meeting GSE or Safe Harbor requirements, including Stated Income, Interest Only, higher Debt Ratios, will only have either Private Securitization or Hard Money lenders for financing.
4. Private Securitization will only accept a few loans, the best, since there is no Safe Harbor.
5. Hard Money will only take loans with 65% or less Loan to Value.
The bottom line is that contrary to what is being said regarding the end of the GSE's in another 7 years, it will not happen. The GSE's will only cement their control of the Mortgage Market, maintaining their control of market share. Politicians will respond to the problem by allowing the GSE's to remain in business.
FHA will continue to grow, especially since they will continue to offer 3.5% equity loans. Never mind that these loans will fail in increasing numbers.
Private lending will continue to suffer.
Nothing changes.............
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:-o
This does not promise to end well , , ,
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PP, great post as usual. Let's make borrowers less able to handle their debt instead of letting prices fall to real affordability.
One sidenote: In your example property taxes at <100/mo. would be a dream come true (or put you in tax foreclosure) in some places. Your 'TI' would approach 3 times that in Minneapolis. http://www.lmc.org/page/1/property-tax-calc-iframe.jsp
Makes you wonder why we set national standards for local phenomenon.
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:-o
This does not promise to end well , , ,
Official slogan of the Obama era.
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Doug,
Of course, the Taxes/Ins is calculated into the 43%, so it does not really matter.
Let's assume a mortgage of $500k
Loan Amount of $500,000
Interest Rate 3.25
Monthly Payment $2176
Taxes/Ins $600.00
Total Payment $2776
Total Income to Qualify $6200 per month
Take home per month - $4500
Disposable Income after Debt Service $1824. (Still, the homeowner would likely be negative cash flow.)
So the higher the income, the more likely that a homeowner will be able to pay. Of course, as we all know, the higher the income and the more expensive the home, the greater the likelihood that the family will have far more expenses.
(Expenses grow to take up excess disposable income.)
BTW, I used the $175k loan amount because it more closely reflects the average home values across the US. One more reflection that first time buyers do not exist to pull the market out of the rut it is in. Additionally, the constraints on move up buyers is just as pronounced.
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Data Watch
________________________________________
Housing Starts Soared 12.1% in December to 954,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 1/17/2013
Housing starts soared 12.1% in December to 954,000 units at an annual rate, coming in well above the consensus expected 890,000 pace. Starts are up 36.9% versus a year ago.
The rise in starts in December was due to gains in both single-family (+8.1%) and multi-family starts (+20.3%). Single-family starts are up 18.5% from a year ago, while multi-family starts are up 91.0%.
Starts were up in all major regions of the country, led by the Midwest.
New building permits rose 0.3% in December to a 903,000 annual rate, almost exactly what the consensus expected. Compared to a year ago, permits for single-unit homes are up 27.3% while permits for multi-family units are up 31.6%.
Implications: Blowout strong numbers on home building and the job market today. Housing starts boomed in December rising 12.1% to a 954,000 annual pace, with robust gains in both single- and multi-family starts. Starts are now the highest since June 2008 and are up 36.9% from a year ago. The total number of homes under construction (started, but not yet finished) are up 26% from a year ago. Some of the building boom in December is probably due to unusually mild weather. The average temperature in the contiguous 48 states tied the highest level for any December since the 1950s. However, building permits also rose 0.3% in December to a 903,000 annual rate, the highest level since July 2008 and up 28.8% from a year ago. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015), which means the recovery in home building still has much further to go. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher. In other news today, initial claims for unemployment insurance fell 37,000 last week to 335,000, the lowest level in five years. The four-week moving average is 359,000. Continuing claims for regular state benefits rose 87,000 to 3.21 million. Combined with other data, we’re penciling in a trend-like payroll gain of 160,000 for January. The one piece of bad economic news was the Philadelphia Fed index, a measure of manufacturing sentiment, falling to -5.8 in January from +4.6 in December. This reinforces the soft reading from the Empire State index earlier this week. However, regional manufacturing surveys measure sentiment, not actual activity, and so may be influenced by negative news reports about the debt limit debate in Washington, DC.
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CD,
I have been waiting for you to yank my leash on this.............
Here is the link to the release
http://www.census.gov/construction/nrc/pdf/newresconst.pdf (ftp://http://www.census.gov/construction/nrc/pdf/newresconst.pdf)
Here are key elements:
Total Starts are DOWN from Nov at 66,500 to Dec at 64,200, a drop of 2300 units.
Single Family DOWN from 40,100 to 36,400, a drop of 3700
The Northeast Region remained steady at 3300 for the second month in a row. All other regions declined.
If you look close, Year over Year Seasonal Adjustments are quoted at 28%. They don't quote Year over Year non seasonal.
Zerohedge had good charts showing what is going on.
(http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/01/Housing%20Starts%20SA%20vs%20NSA_0.jpg)
(http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/01/Dec%20SA%20vs%20NSA%20Starts_2_0.jpg)
Kinda get the idea that someone plays games with the numbers?
Meanwhile, Calculated Risk continues to play the cheerleader
http://www.calculatedriskblog.com/2013/01/some-comments-on-housing-starts.html
And Scott Grannis carries the pom poms
[ftp]http://scottgrannis.blogspot.com/2013/01/housing-starts-on-fire.html] (ftp://[/ftp)http://www.calculatedriskblog.com/2013/01/some-comments-on-housing-starts.html
And Scott Grannis carries the pom poms
ftp://http://scottgrannis.blogspot.com/2013/01/housing-starts-on-fire.html
It is actually rather amazing. I spent most of Tuesday in conversations with the head of a major Risk Management and Consulting Firm, heavily involved in the Housing Market. Last week, the guy was in Vegas last week, having dinner with a top FHA official. Both fully agree with my opinions on housing.
The FHA guy said that all housing programs now, like over the past decade have not been about realistic housing policies. It is all political, influenced by the politicians in the White House and on Capital Hill. The Agencies know what will eventually happen, but no one has the cajones to do anything realistic about it.
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Glad Pat jumped in to pee in the Wesbury Koolaid. Let's see, massive un/underemployment, a spiraling nat'l debt that is mathmatically beyond our ability to repay, a political class and electorate utterly detached from reality. Nice there is still some statistical noise Wesbury can grab to spin.
Data Watch
________________________________________
Housing Starts Soared 12.1% in December to 954,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 1/17/2013
Housing starts soared 12.1% in December to 954,000 units at an annual rate, coming in well above the consensus expected 890,000 pace. Starts are up 36.9% versus a year ago.
The rise in starts in December was due to gains in both single-family (+8.1%) and multi-family starts (+20.3%). Single-family starts are up 18.5% from a year ago, while multi-family starts are up 91.0%.
Starts were up in all major regions of the country, led by the Midwest.
New building permits rose 0.3% in December to a 903,000 annual rate, almost exactly what the consensus expected. Compared to a year ago, permits for single-unit homes are up 27.3% while permits for multi-family units are up 31.6%.
Implications: Blowout strong numbers on home building and the job market today. Housing starts boomed in December rising 12.1% to a 954,000 annual pace, with robust gains in both single- and multi-family starts. Starts are now the highest since June 2008 and are up 36.9% from a year ago. The total number of homes under construction (started, but not yet finished) are up 26% from a year ago. Some of the building boom in December is probably due to unusually mild weather. The average temperature in the contiguous 48 states tied the highest level for any December since the 1950s. However, building permits also rose 0.3% in December to a 903,000 annual rate, the highest level since July 2008 and up 28.8% from a year ago. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015), which means the recovery in home building still has much further to go. Don’t expect a straight line recovery, there will be zigs and zags along the way, but the overall trend will continue higher. In other news today, initial claims for unemployment insurance fell 37,000 last week to 335,000, the lowest level in five years. The four-week moving average is 359,000. Continuing claims for regular state benefits rose 87,000 to 3.21 million. Combined with other data, we’re penciling in a trend-like payroll gain of 160,000 for January. The one piece of bad economic news was the Philadelphia Fed index, a measure of manufacturing sentiment, falling to -5.8 in January from +4.6 in December. This reinforces the soft reading from the Empire State index earlier this week. However, regional manufacturing surveys measure sentiment, not actual activity, and so may be influenced by negative news reports about the debt limit debate in Washington, DC.
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http://blogs.telegraph.co.uk/news/nilegardiner/100196709/128-million-americans-are-now-on-government-programs-can-america-survive-as-the-worlds-superpower/
128 million Americans are now on government programmes. Can America survive as the world’s superpower?
By Nile Gardiner US politics Last updated: January 8th, 2013
The economic future doesn't look bright for the US superpower
I have just read a staggering report written by my colleagues Patrick D. Tyrell and William W. Beach for the Heritage Foundation's Center for Data Analysis (I direct the Margaret Thatcher Centre for Freedom at Heritage.) It is a real eye-opener for anyone who cares about America’s future as the world’s superpower, on either side of the Atlantic. Ironically, Britain, through the tremendous determination of Iain Duncan Smith and his team at the Department of Work and Pensions, is starting to roll back the welfare state, precisely at the same time the current US administration is expanding it.
The United States isn’t just gliding towards a continental European-style future of vast welfare systems, economic decline, and massive debts – it is accelerating towards it at full speed. Or as Acton Institute research director Samuel Gregg puts it in his excellent new book published today by Encounter, America is already “becoming Europe,” with the United States moving far closer to a European-style welfare state than most Americans realize.
Tyrell and Beach point out in their Heritage paper, which is based on extensive analysis of the recently released March 2011 US Census Bureau Current Population Survey (CPS), that more than two in five Americans are now on government programs:
The number of people receiving benefits from the federal government in the United States has grown from under 94 million people in 2000 to more than 128 million people in 2011. That means that 41.3 percent of the US population is now on a federal government program.
Just as worrying is the rate of increase in spending on these federal government programmes:
Between 1988 and 2011, spending on dependence-creating federal government programs has increased 180 percent versus “only” a 62 percent increase in the number of people who are enrolled in federal government programs, and a 27 percent increase in the population. Not only are more people enrolled in government programs than ever before, but more US taxpayer dollars are being spent on each recipient every year.
This level of spending is simply unsustainable. “In 2010, over 70 percent of all federal spending went to dependence-creating programmes,” a figure which is likely to rise further in coming years, with the number of Americans enrolled in at least one federal programme growing “more than two times faster than the US population.” As the report’s authors argue:
The time to reform dependence-creating government programs is now. The problem is too much government subsidizing, and too much transfer of wealth from taxpayers to those who pay fewer and fewer taxes. After all, government does not create wealth by spreading it around.
Congress would do well to remember that there are no free subsidies and benefits. The government today is borrowing from future taxpayers to pay the current government program enrollees.
In terms of indebtedness, America is well on the way to financial ruin, with total national debt already exceeding 100 percent of GDP according to the OECD, with publicly held federal debt projected to exceed 100 percent of US GDP by 2024. America’s government debt as a percentage of GDP (109.8 percent) based on 2012 figures now exceeds that of the general Euro area (100.6 percent), as well as France (105.1 percent) and the UK (105.3 percent). Only Greece (181.3 percent), Iceland (124.7 percent), Ireland (123.2 percent), Italy (127 percent) and Portugal (125.6 percent) currently exceed the US in terms of government gross financial liabilities as a percentage of GDP.
Unless there is a dramatic reversal in the overall approach taken by the US government, with deep-seated entitlement reform, significant cuts in government spending and taxes, and a return to policies that advance rather than hinder economic freedom, the United States faces a bleak economic future, with devastating implications for American leadership on the world stage and the future of the free world.
It is simply unimaginable for US leadership to be replaced by that of China, with its callous disregard for liberty, human rights and democratic values. An America that ends up like much of the European Union, dominated by big government ideology, drowning in debt, over-regulation, heavy taxation and chronically high unemployment, combined with weak militaries and an unhealthy deference to supranationalism, is a nightmare scenario. Unfortunately the US presidency remains firmly stuck in denial, as it has been for the last four years. This latest report serves as another warning for an administration perilously sleep-walking America towards economic disaster. It is time for the White House to wake up.
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Existing Home Sales Declined 1.0% in December to an Annual Rate of 4.94 Million Units To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 1/22/2013
Existing home sales declined 1.0% in December to an annual rate of 4.94 million units, coming in below the consensus expected 5.10 million rate. Sales are up 12.8% versus a year ago.
Sales in December were down in the Midwest and South, but up in the West and Northeast. The decline in sales was due to a slower sales pace for single-family homes. Condo/coops sales rose slightly.
The median price of an existing home rose to $180,800 in December (not seasonally adjusted), and is up 11.5% versus a year ago. Average prices are up 10.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) fell to 4.4 in December from 4.8 in November. The decline in the months’ supply was due to lower inventories for single-family homes. Condo/coops inventories rose slightly.
Implications: Existing home sales fell 1.0% in December, but remain right near the highest sales pace since November 2009, which was artificially boosted by the $8,000 homebuyer credit. Sales are up 12.8% from a year ago. Meanwhile, the inventory of existing homes fell to 1.82 million in December from 1.99 million in November, the lowest level since January 2001. Inventories are down 21.6% from a year ago and the months’ supply of homes (how long it would take to sell the entire inventory at the current selling rate) fell to 4.4, the lowest level since May 2005 when we were in the height of the housing boom. Just a year ago, the months’ supply was 6.4. In the year ahead, higher prices and sales volumes should lure more potential sellers into the market. The 11.5% gain in median prices versus a year ago can be attributed to a couple of factors. First, a lack of inventory while demand is picking up. Second, fewer distressed sales and more sales of larger homes. This can be seen in the data as homes priced from $0-$100,000 were down 16.7% from a year ago while those $1,000,000+ are up 62.3% from a year ago. In general, it still remains tougher than normal to buy a home. Despite record low mortgage rates, home buyers face very tight credit conditions. Tight credit conditions would also explain why all-cash transactions accounted for 29 percent of purchases in December versus a traditional share of about 10 percent. Those with cash are able to take advantage of home prices that are extremely low relative to fundamentals (such as rents and replacement costs); for them, it’s a great time to buy. With credit conditions remaining tight, we don’t expect a huge increase in home sales anytime soon, but the housing market is definitely on the mend. In other news, the Richmond Fed index, a survey of mid-Atlantic manufacturers, fell to -12 in January from +5 in December. Regional manufacturing surveys have been coming in weaker so far in January, but this may be a head fake considering a lack of supporting evidence such as an increase in unemployment claims. Expect more plow horse growth ahead.
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The signs of a real estate rebound are emerging in all sorts of places. Over this past weekend, I participated in an all-cash offer for a house that went on the market a few days before at $450K. We offered $487.5K. There were 8 offers as of Sunday. It sold to someone with a better offer than ours, probably over $500K. The son of a good friend of ours made an offer on a just-listed home in Seattle last Friday. It went on the market for $420K and was sold to an all-cash buyer for over $500K after receiving over 20 offers.
Buyers are getting desperate. Inventory is low. Prices are moving up. A classic picture of a turnaround.
On Jan 16, 2013, at 8:22 AM, David M Gordon <davidmgordon@gmail.com> wrote:
And so it goes... Except, in the case of Seattle's commercial real estate, improves.
January 15, 2013
Amazon Drives Seattle Office Market Surge
By KRISTINA SHEVORY
If the strength of Seattle’s office market could be chalked up to one company, it would be Amazon.
Last year, the online retailer was responsible for the city’s biggest deal, its largest lease and the purchase of the only large chunk of downtown land to come on the market in decades. Amazon bought its 1.8-million-square-foot headquarters last month from Vulcan Real Estate for $1.16 billion, the biggest office sale nationwide and a bold departure for a company that had been content to rent space until last year.
And it’s not done yet. Although Amazon leases or owns 2.7 million square feet of space in Seattle, the online retailer plans to more than double that figure when it breaks ground on three office towers of its own on the northern fringe of downtown this year. Amazon did not return calls seeking comment.
Amazon’s flurry of activity has led to rent increases and a drop in office vacancy and has inspired confidence in the market. Other companies, largely led by technology firms, have shaved the vacancy rate to 10.7 percent at the end of last year, from 12.4 percent in the fourth quarter of 2011, according to Kidder Mathews, a commercial real estate brokerage.
The biggest vacancy decrease has been in South Lake Union, an area north of downtown where Amazon’s stake in the neighborhood has drawn other companies looking for large floorplates and new buildings. In the last three years, about half of Seattle’s net absorption, or the amount of space companies leased and occupied, was in South Lake Union, where the vacancy rate fell to 5.4 percent from 9.3 percent, according to CBRE, a commercial real estate brokerage.
“We’re seeing a lot of companies that want to be closer to Amazon and that synergy, whether they do business with Amazon or not,” said Jesse Ottele, a senior vice president at CBRE in Seattle.
A tighter office market has pushed up rents across the city. The average rent rose to $29.19 a square foot at the end of last year, from $27.80 in the fourth quarter of 2011, according to Kidder Mathews. With few large blocks of Class A office space available and little new space expected to reach the market soon, brokers expect rents to go even higher this year.
Developers are now talking about building again — even without a tenant. Eight million square feet of office space are in the works across the city, with more than half planned or under construction in South Lake Union, according to CBRE. Residential developers will also open 5,800 units this year, the most in decades, according to Dupre & Scott Apartment Advisors, a research firm.
Vulcan Real Estate is betting more companies will want to move to South Lake Union. Although the developer, which owns 30 percent of the land there, has built more than five million square feet of space in the last decade, it has up to seven million square feet of space left that it can build. This year, Vulcan is breaking ground on two office buildings leased to Amazon and a life-sciences research building. If the City Council raises height limits in the neighborhood this spring, Vulcan may move ahead with plans for two more office buildings and three 24-story residential towers.
“We’re now looking to position ourselves for a recovering economy and teeing up speculative buildings,” said Ada Healey, a vice president at Vulcan Real Estate. “We want to be in a situation to take advantage of 2013.”
Other developers are also moving ahead in anticipation of the height rezoning. After purchasing blocks in South Lake Union in the last year and a half, Touchstone and Skanska, a Swedish development and construction company, submitted permits for three office buildings, for a total of 1.1 million square feet, that would exceed current limits. Company executives said they would consider building without a signed tenant.
“Sometime around mid-2012, we saw rents for Class A office that justified new construction,” said Lisa Picard, executive vice president of Skanska USA Commercial Development in Seattle. “The project is ready to start. We’ll look at the supply and demand of the market and decide whether to go.”
Seattle appears to be at the top of many investors’ shopping lists. The Urban Land Institute ranked the city as fourth-best in the country for office buildings thanks to its projected job growth of 1.2 percent and its roster of expanding brand-name companies like Starbucks, Nordstrom and Boeing. Real estate investors, who are looking for steady returns, have flocked to Seattle for its stable and growing companies.
“The capital followed the fundamentals,” said Kevin Shannon, CBRE’s vice chairman in Los Angeles. “Seattle and San Francisco were the two stars in West Coast markets. A couple of years ago, I’m not sure Seattle would be on a core shopping list. We now have a lot of people looking at Seattle.”
The city’s investment market cemented its revival last year. The volume of deals skyrocketed 203 percent in 2012 over the previous year, to $5 billion, according to Real Capital Analytics, a research and consulting firm. Among the 14.5 million square feet sold, Amazon’s headquarters space is the largest.
The sale of the Russell Investments Center building early last year, though, was perhaps the most significant of the year because it showed the city’s investment market had fully recovered. When the 42-story office tower was put up for sale in late 2011, it attracted 34 buyer tours, an “incredible” number, said Mr. Shannon of CBRE, which handled the sale. It sold last spring for $480 million — more than four times its purchase price in 2009.
After its bid for the Russell building lost, Clarion Partners, an investment management company, looked for other buildings with the same “blue chip roster” and reliable rents, which it found at 1201 Third Avenue, the city’s second-tallest tower and a former headquarters of the failed Washington Mutual. Clarion advised on a deal to sell the 55-story tower for $548.8 million, the 10th-largest deal in the country last year, to a joint venture of MetLife and an unidentified institutional real estate investor.
“We expect it to continue to have blue chip tenancy and generate good, predictable cash flow,” said Steve Latimer, a managing director at Clarion Partners. “We’re not expecting spectacular headlines of tripling our money in three years, just steady growth.”
Seattle’s brisk sales pace may slow this year since so many office buildings have traded hands and there are few left.
“Were there other first-class properties, we’d be interested,” said Mr. Latimer, Clarion’s Seattle director. “Seattle is clearly a market that will continue to grow.”
Scott Grannis
http://scottgrannis.blogspot.com
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Interesting to hear of isolated improvements. This 'turnaround' comes is the context of zero net appreciation in the past 13 years. Source: Scott Grannis. These nominal gains, if they are gains, are (also) in the context of trillions of dollars injected, as mentioned with oil and stocks. We don't know right now what nominal gain in real estate you will need to break even with dollar dilution going forward.
Real estate is a hard asset. Instead of comparing with an ever-changing dollar, how is it doing compared with other hard assets?
(http://www.kitco.com/LFgif/au00-pres.gif)
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Scott and I have our differences on the Housing Market. In his comments, he states:
"Buyers are getting desperate. Inventory is low. Prices are moving up. A classic picture of a turnaround."
But with this comment, he ignores salient issues that have caused the above. The simple truth is that the inventory is low because banks are deliberately withholding inventory from market, either by not foreclosing, or not listing foreclosed properties on the MLS. Therefore, in most of CA, there is a one month inventory of homes for sale. Of course this will drive up prices. But this is not a turnaround.
The problem is when you go inside the numbers and what you see.
a. The growth in Housing Starts is generally confined to multiple unit, not single family. Multiple units are mostly apartments being built for renters who cannot afford anything else. In other words, investors who partake in housing construction see where the future is, and it is not single family.
b. Single Family Starts is misleading, especially when quoting the Seasonally Adjusted Numbers. Single Family for 2012 was the 3rd worst since 1963, when records began to be kept. And, 1963 had only 178m people in the US. (Three of the 5 worst years have been since the crash.)
c. Housing Starts are only occurring because of the reduced inventory available for sale. If the banks were doing foreclosures, then there would be much more inventory and prices would be much less.
d. There are over 6 million homes, delinquent or in foreclosure. 90% of the homes will eventually be foreclosed upon. They are only being delayed because of regulations from the Fed and States. Also, banks do not want to foreclosure because the added inventory will drive home values down.
e. 52% of homeowners are in either Negative Equity or Near Negative Equity positions, or haven't enough equity to sell and purchase a new home as a move up buyer. There is no Move Up Market to speak of, yet Move Up Buyers are the key to any recovery.
f. If home values decrease, whether from more foreclosures, or higher interest rates, more Negative Equity situations occur. When this happens, the more defaults than occur, especially as Negative Equity hits 125%. At that point, more defaults occur which drives prices down, causing more defaults. The "Housing Death Spiral".
g. If you look at the areas where home values are increasing, it is because inventory is down to about 1 month supply. Yet, the numbers of homes in foreclosure in each area is extremely high. (Las Vegas, Phoenix, CA, and elsewhere.) Let the foreclosures begin again, and values will begin to drop.
h. A large portion, over 30% are investors doing cash sales. In CA, from what I hear from realtors, up to 50% is money from China, and most of the rest is from REIT's. Homeowner investors are taking out seconds on their property, or investment properties that they own, to buy. (Surprise, surprise, surprise.) This is not representative of a healthy market.
i. The 25-35 age cohort simply does not have the income available to buy. They are debt laden and cannot afford anything. Homeownership rates in the cohort is dropping fast.
j. The 35-45 cohort is in a similar position, except that the ones owning homes haven't the equity or income to become Move Up buyers.
k. The homeowners that bought investment properties in the Boom Years were generally in the 55-65 age cohort. They are out of the market now, due to aging and equity issues. The ones replacing them in the cohort were the 45-55 group that lost out big in the collapse.
l. New family creation is stymied at about 600k per year. This does not even cover total Starts, Single Family & Multi Unit, even if they could afford to buy.
m. Immigration is about 800,000 legal per year. Unless they bring money, they cannot afford to buy.
n. Falling incomes and lack of jobs is creating less opportunity to buy, and more foreclosures.
o. The new Qualified Residential Mortgage Rules coming out still require no more than 80% loan to value and no piggy back 2nds, increasing the loan to value. If it is finally adopted in 2014, then that will preclude further buyers, unless they go FHA. Of course, FHA is now underwater itself, and is experiencing 16.7% default rates.
p. The Fed continues to buy $85 billion per month in mortgages, whether MBS ($40b) or New Originations, ($45b). Pull this out, and here comes the collapse.
q. New laws like the CA Homeowner Bill of Rights only serves to delay foreclosures further. In fact, it was solely because of lenders changing procedures for foreclosures and the drop in CA was so massive that it caused the slowdown across the country. Soon, CA will become almost all Judicial Foreclosure, and go away from Non-Judicial Foreclosure. That is because the Bill of Rights states that for every violation in the foreclosure process, the "lender/foreclosure firm" will pay $7500 to the state. And, if a foreclosure is concluded with defects, then the Homeowner has actual damages from $50k minimum up, whichever is greater. (I can find flaws with most foreclosures.) So, lenders will end up taking the foreclosures to court, instead of risking the fines.
I speak with very involved people who are active in the housing industry. Many are doing Portfolio Risk evaluations, and one was the former Risk Officer for Freddie Mac. Others are former Risk Officers of banks. All say that the "recovery" is a joke, and is not to be believed. Their time frames for an actual recovery, though at a slow rate, is from 10 to 15 years out.
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Outstanding as usual, Pat!
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Thanks Doug. Scott and I do have significant differences.
BTW,
My guess on Housing Starts coming out.
Adjusted Starts will be up by 10%, month over month, and 30% year over year.
Non Adjusted will be about 58k total, and about 34k single family. Just a WAG...............but we shall see.
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Quality work Pat!
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Scott mentions his experience on buying a piece of property. Where I live in the Bay Area, similar things are happening. Here are the facts behind what is happening here.
1. Inventory is down to one month's supply. An equal mixture of homes under 2000 sq feet and above 2000 sq feet.
2. Huge amount of foreclosures being held from market. It is nothing to see a year before they are listed.
3. Even greater number of delinquent homes over 90 days without Notice of Defaults filed.
4. Large numbers of homes in the mod process, taking 6 months or more for a decision.
5. 25% of purchases for cash, Asian buyers.
6. About 35% are REITS, buying straight from the lenders without listings.
7. 10% Move Up Buyers.
8. Rest FHA, about 30%, 3.5% down, usually Hispanic buyers.
9. Homes under 1900 sq ft are going for about $125 to $135 per sq foot, more than 20% above true market value, but going for that due to buyer bidding war for the properties, from lack of inventory.
10. Homes above 2300 sq ft generally going about $100 per sq ft. Above 3000 sq ft, about $90 per ft.
11. Investors buying homes no more than 1800 sq ft, and paying no more than $140k at the most. They try to keep purchase prices under $120k.
Does this sound like a healthy market? Or one that is recovering? The media and realtors say so, but I don't believe them.
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Excellent points, all of them. Singling this one out:
"A large portion, over 30% are investors doing cash sales. In CA, from what I hear from realtors, up to 50% is money from China, and most of the rest is from REIT's. Homeowner investors are taking out seconds on their property, or investment properties that they own, to buy. (Surprise, surprise, surprise.) This is not representative of a healthy market."
On other threads we have been discussing income tax rates in general and California in particular. Both federal and state tax rates just went up in Calif on high incomes, tending to chase away productive investment and new hiring. A surge of foreign cash coming in to buy existing homes may be a surprise, but not a contradiction to that theory. Wealth coming in is not taxed, just new income. Cash sales of existing home causes almost no new hiring for an investment that size, just a name change on the title. For the seller it is a tax free transaction because of the homestead exemption and decreased values, and selling the home can be a ticket to leave Calif. A surge of foreign cash buyers of existing homes in popular coastal areas does not in itself change the Calif employment situation. Unemployment is currently 9.8% and likely to get worse. Hard to wage a real recovery in housing when the most important underlying factors, business investment and employment, are so gravely ill. MHO.
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Housing Starts are in for January.
58k total Starts, Non Adjusted. Called it right.
Single Family ran 39.6, up 1900 from Dec 2012. Off by 5600. Surprise that these were up.
Key points
Northeast had 3k, down 800 from the previous month.
Midwest down 1200 to 4.1k
South up 3300 to 23.6k
West up 900 to 8.9k
Year over Year, there were 6500 more Single Family housing starts than last year. All areas had increases, with the South having 3900 more, the West at 2800 more, 400 for both the Midwest and the Northeast. An improvement, but it does not mean much.
Why are Housing Starts increasing? Could it have anything to do with the low inventory of homes on the MLS? Are people buying new homes over resales because of the "status" of a new home?
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Here is the Market Share of the GSE's, etc. Sure, this is a "healthy" recovery........
The reality is that with the CFPB and their new mortgage regulations, with the Safe Harbor for GSE loans, we will never be rid of the GSE's. They are and will be the only market for home loans.
http://washingtonexaminer.com/federal-government-controlled-99.3-percent-of-mortgage-market-in-2012/article/2522042
Federal government controlled 99.3 percent of mortgage market in 2012
Fannie Mae, Freddie Mac, and Ginnie Mae, the three major Government Enterprises created to control the U.S. housing market, issued 99.3 percent of all mortgage backed securities (MBS) in 2012, according to Freddie Mac’s 2013 Investor Presentation. As recently as 2005 these government agencies backed just 45 percent of all mortgages issued in the United States, although they did purchase vast quantities of the mortgages backed by private issuers.
Fannie Mae, created by President Roosevelt during the New Deal, and Freddie Mac, created by Congress in 1970, were both nominally private corporations before the housing bubble popped in 2008. Investors had long charged Fannie and Freddie less to borrow money since they were created by the federal government and it was assumed creditors would be bailed out if the companies ever went under. That is exactly what happened during the financially crisis costing U.S. taxpayers $154 billion so far.
Last year, Treasury Secretary Tim Geithner announced that the Obama administration would pursue legislation that would “wind down the GSEs and bring private capital back into the market, reducing the government’s direct role in the housing market.” That, of course, never happened. Instead, government control of the housing sector rose every year under Geithner’s watch from 95.2 percent in 2008 to 99.3 percent today.
Conservatives have long pushed for elimination of the housing Government Enterprises, arguing that the federal government’s role only enriches bankers at the taxpayers expense, distorts markets, and makes housing unaffordable. A recent Heritage Foundation study found the Fannie and Freddie could be completely privatized without any major disruption to the U.S. housing market.
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Housing Starts Fell 8.5% in January to 890,000 Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 2/20/2013
Housing starts fell 8.5% in January to 890,000 units at an annual rate, coming in below the consensus expected 920,000 pace. Starts are up 23.6% versus a year ago.
The decline in starts in January was all due to multi-family, which fell 24.1%. Single-family starts increased 0.8%. Multi-family starts are up 32.5% from a year ago while single-family starts are up 20.0%.
Starts were down in the Northeast and Midwest, but up in the South and West.
New building permits rose 1.8% in January to a 925,000 annual rate, slightly above consensus expectations. Compared to a year ago, permits for single-unit homes are up 29.2% while permits for multi-family units are up 47.0%.
Implications: Take the headline drop in housing starts with a huge grain of salt. Although housing starts fell 8.5% in January, that only partially offsets the 15.7% spike upward in December. As we noted last month, December’s weather was unusually mild, with the average temperature in the contiguous 48 states tying the highest for any December since the 1950s. As a result, a drop in January was expected. The decline in January was even steeper than the consensus (or we) expected, but all of it was due to the very volatile multi-family sector. Single-family starts hit the highest since 2008. Also, were it not for that tremendous surge in December, the level of starts in January would have been the highest since 2008, even including the drop in multi-family. In other words, the underlying trend remains strong. Single-family starts are up 20% from a year ago, while multi-family starts are up 32.5%. The total number of homes under construction (started, but not yet finished) were up 1.5% in January and are up 26% from a year ago. Building permits increased 1.8% in January and are up 35% from a year ago, signaling continued growth in home building in 2013. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015), which means the recovery in home building still has much further to go. In other recent housing news, the NAHB index, which measures confidence among home builders, slipped to 46 in February from 47 in January. The decline was due to less foot traffic among prospective homebuyers. Don’t get worked up about this dip, which follows nine consecutive increases. The bottom line is that housing – construction, prices, and sales – is well into recovery and will continue along this path for the next few years. That path will not be perfectly straight, there will be zigs and zags along the way. Just don’t let those temporary deviations distract from the trend.
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The next FHA bubble-- Morris
http://www.dickmorris.com/the-new-housing-crash-dick-morris-tv-lunch-alert/?utm_source=dmreports&utm_medium=dmreports&utm_campaign=dmreports
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Why don't people like Wesbury look behind the numbers to what is really occurring? At a certain point, this gets absurd.
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New Single-Family Home Sales Boomed 15.6% in January
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 2/26/2013
New single-family home sales boomed 15.6% in January, to a 437,000 annual rate, well above the consensus expected pace of 380,000. Sales are up 28.9% from a year ago.
Sales were up in all major regions of the country.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.1 in January from 4.8 in December. All of the decline was due to a faster selling pace. Inventories of new homes were unchanged.
The median price of new homes sold was $226,400 in January, up 2.1% from a year ago. The average price of new homes sold was $286,300, up 7.8% versus last year.
Implications: New home sales boomed in January rising 15.6% to a 437,000 annual rate, the highest level since July 2008. Sales are up 28.9% from a year ago. The new home market, which is typically the last piece of the housing puzzle to recover, is clearly improving. As a result of faster sales, the months’ supply of new homes -- how long it would take to sell the homes in inventory -- fell to 4.1, the lowest since 2005. This is well below the average of 5.7 over the past 20 years and roughly the same as the 4.0 months that prevailed in 1998-2004, during the housing boom. This means that as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders look like they're getting ready for that transition. Inventories have not fallen for five straight months. The median price of a new home is up 2.1% from a year ago, while average prices are up 7.8%, showing that higher priced homes are moving faster. In other housing news this morning, the FHFA index, a measure of prices for homes financed with conforming mortgages, increased 0.6% in December and is up 5.8% in the past year. The Case-Shiller index, a measure of home prices in 20 major metro areas, showed a 0.9% gain in December and is up 6.8% in the past year, the largest gain since 2006. Prices rose in 19 of the 20 areas, with only New York showing a year-over-year decline. In other news, the Richmond Fed index, a survey of mid-Atlantic manufacturers, rose to +6 in February from -12 in January. Manufacturing reports have been mainly positive in February and are consistent with moderate plow horse-like growth in that sector and the economy as a whole.
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Zillow ®, in partnership with Pulsenomics, recently released the winners of their annual “Crystal Ball Awards” for the top home price forecasters of 2012. From a panel of over 100 economists, investment strategists, and housing market analysts, the First Trust economics team led by Brian Wesbury and Bob Stein took first place for their forecast of home price gains in 2012. The full rankings and additional information regarding the survey can be accessed on the Pulsenomics website.
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Zillow ®, in partnership with Pulsenomics, recently released the winners of their annual “Crystal Ball Awards” for the top home price forecasters of 2012. From a panel of over 100 economists, investment strategists, and housing market analysts, the First Trust economics team led by Brian Wesbury and Bob Stein took first place for their forecast of home price gains in 2012. The full rankings and additional information regarding the survey can be accessed on the Pulsenomics website.
I'll put it this way, Wesbury deserves this award as much as Buraq deserved his Nobel Peace Prize.
(http://images.sodahead.com/profiles/0/0/2/8/3/2/9/1/3/free-nobel-69177837842.jpeg)
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Zillow is a home and real estate marketplace dedicated to helping homeowners, home buyers, sellers, renters, real estate agents, mortgage professionals, landlords and property managers find and share vital information about homes, real estate and mortgages. We are transforming the way consumers make home-related decisions and connect with real estate professionals.
It starts with our living database of more than 110 million U.S. homes* - including homes for sale, homes for rent and homes not currently on the market. Add to that Zestimate® home values, Rent Zestimates and lots of other useful information you won't find anywhere else, and as a result, consumers are given an edge in real estate.
In addition to Zillow.com, we also operate Zillow Mortgage Marketplace, where borrowers connect with lenders to find loans and get the best mortgage rates; and Zillow Mobile, the most popular real estate mobile platform today.
What's With the Name?
The Zillow name evolved from the desire to make zillions of data points for homes accessible to everyone. And, since a home is about more than just data - it is where you lay your head to rest at night, like a pillow - "Zillow" was born.
* Zillow Internal, February 2013
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By Diane Tuman
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It'll really work this time, I swear!
http://www.cnbc.com/id/100548913
No Money? No Worries. Home Lenders Ease Up Rules
Published: Wednesday, 13 Mar 2013 | 8:41 AM ET
By: Diana Olick
CNBC Real Estate Reporter
Mortgage Credit Show Signs of Thawing
Wednesday, 13 Mar 2013 | 8:18 AM ET
CNBC's Diana Olick reports banks and lenders are loosening up the purse strings. There's been a "noticeable increase" in the purchase of fixed-rate low down payment loans, some with as little as 3-5% down, but they may require mortgage insurance.
As housing heads into the critical spring market, credit is finally beginning to thaw. Lenders are increasingly approving low down payment loans, and government sponsored mortgage giant Fannie Mae is buying more of them.
It is a noticeable shift from the last four years, when 20 percent down on a home purchase loan was the only game in the neighborhood.
"In general lenders have been willing to do more than they may have been willing to do in the past," said John Forlines, chief credit officer for Fannie Mae's single family business. "Our requirements have not changed significantly, but other parties taking risk, the lenders and mortgage insurance companies in particular, have been more flexible than they may have been in the past."
Fannie Mae will buy loans with as little as 3 percent down payment, but these loans require private mortgage insurance. During the worst of the housing crash, when the private insurers were sinking under billions of dollars in claims on defaulted loans, that insurance was tough to get.
The only low down payment loan left was through the Federal Housing Administration (FHA)—the government's loan insurer. The FHA took on a huge share of the market, far more than it was ever meant to, and while that helped prop up the mortgage market in the short term, it was not sustainable, and the FHA took on huge losses.
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It'll really work this time, I swear!
http://www.cnbc.com/id/100548913
No Money? No Worries. Home Lenders Ease Up Rules
Published: Wednesday, 13 Mar 2013 | 8:41 AM ET
By: Diana Olick
CNBC Real Estate Reporter
Mortgage Credit Show Signs of Thawing
Wednesday, 13 Mar 2013 | 8:18 AM ET
CNBC's Diana Olick reports banks and lenders are loosening up the purse strings. There's been a "noticeable increase" in the purchase of fixed-rate low down payment loans, some with as little as 3-5% down, but they may require mortgage insurance.
As housing heads into the critical spring market, credit is finally beginning to thaw. Lenders are increasingly approving low down payment loans, and government sponsored mortgage giant Fannie Mae is buying more of them.
It is a noticeable shift from the last four years, when 20 percent down on a home purchase loan was the only game in the neighborhood.
"In general lenders have been willing to do more than they may have been willing to do in the past," said John Forlines, chief credit officer for Fannie Mae's single family business. "Our requirements have not changed significantly, but other parties taking risk, the lenders and mortgage insurance companies in particular, have been more flexible than they may have been in the past."
Fannie Mae will buy loans with as little as 3 percent down payment, but these loans require private mortgage insurance. During the worst of the housing crash, when the private insurers were sinking under billions of dollars in claims on defaulted loans, that insurance was tough to get.
The only low down payment loan left was through the Federal Housing Administration (FHA)—the government's loan insurer. The FHA took on a huge share of the market, far more than it was ever meant to, and while that helped prop up the mortgage market in the short term, it was not sustainable, and the FHA took on huge losses.
http://www.americanbanker.com/bankthink/problems-at-fha-too-big-for-congress-to-ignore-1057393-1.html
Problems at FHA Too Big for Congress to Ignore
Larry Taylor
MAR 12, 2013 9:00am ET
Recent blog posts from the House Financial Services Committee about the risks in the Federal Housing Administration indicate significant and growing political risk for the program. Clearly Chairman Jeb Hensarling (R-TX) and his fellow Republicans have some issues with the program, but even less partisan observers of the program recognize there are significant problems. Most recently, the U.S. Government Accountability Office identified the program as high risk and in need of reform.
The deteriorating financial condition of the FHA stems mainly from its slow response to changing market conditions and its attempts to prop up a rapidly deteriorating residential housing market. As the bubble began to burst, the FHA was slow to adjust its guarantee programs and Congress even significantly increased the size of loans the FHA could make in 2008, moving the FHA far beyond its original mission of providing home loans to low-income Americans. As a result, the dollar volume of new loans guaranteed by the FHA tripled between 2007 and 2008, then almost doubled again in 2009, to more than $330 billion. As of the end of FY 2012, the FHA insured $1.1 trillion of loans through its Mutual Mortgage Insurance Fund programs.
The FHA continued to increase the amount of loans it guaranteed despite not meeting its congressionally mandated capital threshold of 2%. According to the FHA, this was done to help prop up the housing market, which is plausible. A less charitable interpretation, however, is that the FHA continued to "double down" on the housing market in an attempt to keep its capital levels above zero, but ran out of room to keep doubling its exposure as its market share rose from less than 5% of originations in 2006 to almost 30% of all originations in the third quarter of 2008. The rapid addition of new loans, which had not yet had time to sour, allowed the FHA to offset the impact of its older insured loans with expected revenue from insurance on new loans.
The FHA has dramatically improved the credit scores of its borrowers in recent years, but continues to be a major source of mortgages to people with bruised or nonexistent credit histories. In the fourth quarter of FY2012, 44% of all FHA borrowers either had no credit score or a score of 679 or lower. In addition, the FHA's commitment to low down payment financing has not wavered through the depths of the credit crisis, as 95% or greater loan-to-ratio financing has continued to make up an overwhelming majority of the loans guaranteed by the FHA.
As a result, most FHA borrowers owe more on their home than they are likely to net on sale for at least several years after origination, assuming a stable housing market. Given the huge volume of loans guaranteed by the FHA in recent years, the preponderance of FHA borrowers who are mediocre to poor credit risks, and the likelihood of these borrowers owing more than their house is worth after factoring in sales costs, the FHA could continue to have the potential to incur huge losses in the event of future housing market downturns for the foreseeable future.
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Thought it was time to check in again, and see what was being posted. I have been heavily involved in Expert Witness work for a couple of homeowners and also further development of the Loan Default Risk Score.
Yesterday, I was in a meeting with people who are working on the Compliance Systems for lenders for Basel 3 risk issues. We were discussing different things, and of course FHA came up, as well as many different things. All present, even a former Fannie Mae Risk Expert, had the same view of FHA, "bury it".
The consensus of all was that the Housing Recovery is smoke and mirrors, especially in light of 50% of home sales now being cash offers. It is a propped up market, with much to fear, especially if the Fed can effect a 2% Inflationary effect as they desire. If that happens, Interest Rates would go to 4%, and there goes any Housing Recovery by the wayside.
A key issue that we are working on is related to Risk Evaluation of Existing Loans. Noting that not only are Living Expenses increasing, which drives up risk, but also with the costs that Obamacare will end up in reducing Disposable Income, we are trying to expand upon the Default Risk Model to reflect the added Default Probability Percentage that will certainly occur. A difficult task, but one that needs to be taken into consideration at the very least, it will go to the heart of Basel 3 needs.
The simple fact is that foreclosures are going to increase again, as Living Expenses rise, and as Obamacare and other regulatory costs increase. People cannot realistically meet needs now, for up to 50% of the population. How will they do it 5 years, or 10 years in the future?
The idiots in Washington, and in each State Capital, haven't got a clue what they are actually doing. The added costs from the b.s. programs that they are putting together will only serve to hasten collapse further, across all demographic divisions and divides. The strains that the Middle Class is feeling now is only going to increase, and at a certain point, is going to completely break in the next few years. Then, the Depression will seem like the Roaring 20's.
Sorry about the rambling thoughts, but it is very disheartening when you meet with people who have far greater understanding of the factors at play, than you do and they confirm your thoughts. Then, when you try and develop programs to stave off or lessen collapse, the idiots in Washington and elsewhere find new ways to destroy things in the name of "good".
Over the past decade I have really come to appreciate Thomas Jefferson and his comments about the "Tree of Liberty" needing to be replenished with the blood of patriots from time to time. And I can really accept his belief that this must be done every generation.
Time to have a glass of wine and prepare for tomorrow................Cheers!!!!!
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Good to see you hear Pat.
"the "Tree of Liberty" needing to be replenished with the blood of patriots from time to time."
I could be mistaken, but I remember it as being the blood of tyrants, not patriots; as Gen. Patton said, "The idea is not to die for your country, it is to make the other guy die for his country" or something like that , , , :-D
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You are probably right about the quote. My memory gets worse daily. If only I could "delete" memories and information to free up space like on a hard drive.
Reading the articles written by various commentators and financial analysts is so frustrating. They just look at the raw data, and make proclamations without any real understanding of what is going on in "backrooms" across the country. There are very well intentioned and knowledgeable people who are trying to develop the systems and the processes to restore not just the housing market, but lending in general. As well, they are engaged in creating the monitoring systems to evaluate risk across portfolios, and then determine true reserve requirements under various scenarios. Stress testing is a large part.
One of the things that we often read is how lending requirements are so tight, and they must be loosened. But they make no recommendations, and just assume it is easily done. That is not the case.
To create "loosened" lending standards is not simply a matter of reducing FICO Scores, or allowing for higher Debt Ratios, etc. Each loan must be looked at from its own unique perspective, taking into account a large number of different factors. My process looks at over 40 different factors alone and then the endless combinations that will affect default risk. Even then, it will be revised frequently to take account of changing economic conditions.
To give an example of how difficult loosening lending restrictions will be, we simply look at Fannie, Freddie and FHA. Right now, F&F have extremely high qualifying standards, but not to the extreme that the new Qualified Residential Mortgage is expected to impose. F&F defaults are at a semi-reasonable rate. FHA, which has looser standards, but is still greater than what was occurring during the Housing Boom, is running delinquency rates of about 17%, and default rates of 9%. Eventually, we expect to see defaults up to 30% over a 5 year time for FHA.
Qualifying for each of the programs are based upon FICO, Loan to Value and Debt to Income Ratios. These are loosely linked together.
The problem with this approach is that like with FHA, far too many bad loans are being funded, but also far too many good loans are being denied because the borrowers do not meet certain standards.
To loosen the qualifying standards means more than just reviewing FICO, Loan to Value and Debt to Income. One must also consider actual debt loads, family size, loan size, residual income, loan purpose, borrower behavior, and many other factors not currently considered and factored into the decision.
A person with a 780 credit score, debt to income of 41%, and loan to value of 80% might seem like a very qualified borrower. But, if we are looking at a first time buyer, new construction home, loan amount of $150k, 4 kids, payment shock and medical insurance costs, then this borrower is almost certainly going to default on the loan at some point. It is inevitable.
Yet, at the same time, you could have a borrower who wants a loan, 90% loan to value, cash out debt consolidation, 36% debt ratio, but has a FICO of 603, and may very well be a perfect candidate for a loan, especially if the loan amount was $500k, and no kids. But change the parameters to 45% debt ratio and a loan amount of $150k, and there is a significantly increased risk of default.
These are the types of problems that are being addressed, and we must resolve to allow for loosened qualifying standards. But even then, it does not end at that point.
How are the loans going to effect Basel 3 requirements for risk? Greater risk means greater reserve requirements. And if economic factors change, like increased costs from Obamacare, how is that going to affect borrower default risk? What about decreasing home values, based upon rising interest rates? What about exit strategies for loans going into default?
Then, how does one identify loans going bad, before they do, and how to institute loss mitigation procedures before it is too late?
Or, how does one create a good pool of mortgages for securitization, which needs to be done if there is going to be a wind down of F & F?
These are the types of questions being asked daily, and for which we are looking for answers.
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http://legalinsurrection.com/2013/03/the-real-estate-markets-demographic-problem-in-the-most-depressing-chart-ever/
The real estate market’s demographic problem in “the most depressing” chart ever
Posted by William A. Jacobson Monday, March 25, 2013 at 6:30pm
26
74
How low is low? Has real estate bottomed out?
Via @TheBubbleBubble, some advice about not thinking the real estate bubble is done imploding:
Jesse Colombo @TheBubbleBubble
I'd have no business whatsoever buying houses until this demographic tsunami is well underway, which years from now: http://www.businessinsider.com/matt-kings-most-depressing-slide-ever-2012-12 …
Via Business Insider, ‘The Most Depressing Slide I’ve Ever Created’ demonstrates that we are not generating enough of a next generation to buy our houses:
Citi’s Global Head of Credit Strategy, Matt King, has a knack for putting together useful illustrations.
Here, he examines one of the implications of one of the most powerful forces in all of economics: demographics.
King explained his charts to us like this:
It’s what I like to call “the most depressing slide I’ve ever created.” In almost every country you look at, the peak in real estate prices has coincided – give or take literally a couple of years – with the peak in the inverse dependency ratio (the proportion of population of working age relative to old and young).
In the past, we all levered up, bought a big house, enjoyed capital gains tax-free, lived in the thing, and then, when the kids grew up and left home, we sold it to someone in our children’s generation. Unfortunately, that doesn’t work so well when there start to be more pensioners than workers.
The slide:
(http://static1.businessinsider.com/image/50c0f7a269bedd770d000007-957-665-940-/matt-king-most-depressing-slide.jpg)
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GM,
The article you posted can be verified through US Census Data that breaks down home ownership by Age Cohorts. The data shows that there is not enough new potential Home Buyers coming up in the 19-24 age cohort, the 25-34 cohort, or the 35 to 44 cohort to stimulate housing purchases. This is because only the 35 to 44 cohort actually engages in buying behavior, and they are already at average highs. The lower cohorts haven't the income, and don't engage in the same buying behavior.
But, when I have pointed this out before elsewhere, I have been pooh-poohed...................
BTW, the GSE's have just announced a new Modification Program for their loans beginning in Jul 2013, and extending through Aug 2015. They will be No Income Doc and No Hardship Letter Streamline Programs. As long as you have made payments for 12 successive months on time, at any time in the past, but are now behind from 90 days up to 720 days, you are automatically eligible. You must also have Mark to Market LTVs greater than 80%. Principal Forbearance will be granted.
What does this mean? Essentially, the GSE's will be stopping foreclosures for those who chose to accept it. Just let us know and we will provide you the Interest Rate relief that you want, and forbearance relief as well. And, if we deny you a modification if you are up to date, then just stop making payments and we will modify your loan.
This is about nothing more than pumping more money into the economy by reducing homeowner monthly payments in one manner or another. Whether HARP, HAMP or the new program, the government is going to keep the economy going by reducing mortgage rates.
Now, here is something that I am wondering, but there are no answers to yet:
Since the GSE's are going to be "ended" (we hope) in about 5 - 7 years, is this designed to effective pump up the economy through the destruction of the GSE loans? Is the private lending going to be left to pick up the pieces of the Real Estate Industry from there? Or is this designed to ensure that the GSE's cannot stop their lending?
After the willful modification of these loans, essentially the GSE loans mean that this bulk of homeowners are out of the RE market, pretty much for life. That accounts for perhaps 50% or more of the entire market, and 95% of all loans done in the past 5 years.
Now you see why I was so depressed yesterday. It is plain b.s. what is being done. And we are left to create the new lending industry for the future.
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Well, the 20 somethings won't be buying homes or raising families, but they'll have lots of cool Obama swag and 100,000 in student loans, so it evens out....
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http://www.cnbc.com/id/100589622
Don't Get Snookered by Rising Home Prices, Shiller Warns
Tuesday, 26 Mar 2013 | 1:00 PM ET
Home prices see their biggest gains since 2006. Discussing whether housing will lift S&P to a new record, with economist Robert Shiller, Yale University; CNBC's Jackie DeAngelis; and the Futures Now Traders, Rich Ilczyszyn at the CME and Anthony Grisanti at the Nymex.Housing data released Tuesday was mixed, showing home prices jumped while new home sales dropped, prompting renowned economist Robert Shiller to call the housing recovery positive in the short-term, but not without many headwinds. There might even be a bubble, he said.
"One thing that makes it very hard to forecast home prices right now is that we're living in a totally artificial real estate economy," said Shiller, co-creator of the Standard & Poor's/Case-Shiller Index, a widely followed measure of housing prices.
Shiller pointed to the Federal Reserve, which last week reaffirmed its policies on bond purchases and record-low interest rates. In September, the Fed launched a third round of quantitative easing (QE), in which it has bought $40 billion of mortgage-backed securities per month, primarily in mortgage-backed bonds.
Meanwhile, Fannie Mae and Freddie Mac, the two largest U.S. home funding sources, remain in government conservatorship as Congress looks for ways to raise new tax revenues, Shiller noted.
"All of these things are weighing on the futures of housing," Shiller said on CNBC's "Futures Now," adding the recovery might even be a bubble. "One thing you learn from history is that bubbles can occur at any time."
The Case-Shiller Index on Tuesday soared 8.1 percent compared to a year ago, kicking off the year with the biggest year-over-year increase since 2006. Home prices in the 20 major U.S. cities tracked by the index gained 1 percent in January versus the month prior, topping estimates for a gain of 0.9 percent.
(Read More: Home Prices Up, Best Yearly Increase Since 2006)
Source: World Economic Forum
Richard ShillerTo Shiller, the Phoenix and Las Vegas housing markets have grown incredibly fast, suggesting the recovery might be a little frothy. Both markets joined the housing bubble in 2004, he noted, only to later crash by 50 percent. Today, home prices in both cities are rising "with some exuberance," which troubles Shiller.
Nevertheless, Shiller thinks a full housing recovery is a long way off. He thinks it could take 40 years before home prices rise to pre-2007 levels.
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But Wesbury says otherwise, so who is to argue?
The idiot................
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GM: If this is the same Shiller, he is an economic illiterate.
http://www.project-syndicate.org/commentary/balanced-budgets-without-austerity-by-robert-j--shiller#WZ4jrXA1EdQrgUH4.99
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GM: If this is the same Shiller, he is an economic illiterate.
http://www.project-syndicate.org/commentary/balanced-budgets-without-austerity-by-robert-j--shiller#WZ4jrXA1EdQrgUH4.99
Yes. Same Shiller. The piece begins: "With much of the global economy apparently trapped in a long and painful austerity-induced slump..." Austerity-induced slump??!!
"There is a way out of this trap...away from austerity...increasing taxes even more..."
As a Professor of Economics at Yale University, this is what we choose to teach our best and brightest. :-( Taking from Reagan, "it is not that they are ignorant, but that they know so much that isn't so."
Shiller continued: "This kind of enlightened stimulus (good grief!) runs into strong prejudices. For starters, people tend to think of taxes as a loathsome infringement on their freedom, as if petty bureaucrats will inevitably squander the increased revenue on useless and ineffective government employees and programs.
Yes we do!
With Prof. Case a fellow at Harvard and Prof. Shiller teaching at Yale, living in a bubble takes on new meaning. Thanks to PP and Crafty, I don't think I will quote a Case-Shiller index ever again except for taking any opportunity to discredit it.
For credibility(?), it is now called the S&P Case Shiller Index. Isn't S&P the group charged by the Eric Holder Justice Department with Fraud? http://business.financialpost.com/2013/02/12/obamas-5-billion-sp-lawsuit-a-culmination-of-four-years-of-investigation/
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If you look at Shiller from a year ago, he was much more optimistic about a Housing Recovery. Then about 6 months ago, he decided that recovery to 2007 prices might take up to 50 years.
At least he can change his mind a bit.
Tom Lawler is another one. After leaving Fannie Mae, he started a Real Estate Consulting business. He is extremely optimistic about recovery. Of course, he must be so he can sell his services.
I don't think that anyone other than those who are actually engaged in the mechanics of trying to create a stable lending environment, in conjunction with meeting Basel 3, and the restoration of Securitized Lending, understand what the actual difficulties present are.
Heck, I can barely get my head around the tiniest of basics on Basel 3. You can't believe how simple they have to make explanations for me. Even then, I only get about 10%.
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http://www.washingtontimes.com/news/2013/apr/2/are-housing-investors-creating-a-new-bubble/?page=all#pagebreak
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Is the Fed Blowing a New Housing Bubble?
Stagnant real incomes suggest that rising home prices reflect artificially low interest rates..
By EDWARD PINTO
Over the past year, the Federal Reserve has ramped up its policy of quantitative easing, with the result being new stock market highs and surging bond prices. Moreover, housing prices jumped 8%, the biggest annual gain since 2006.
The result is that more than a trillion dollars have been added to the market value of single-family homes. Homeowners are now wealthier and according to what economists call the "wealth effect," they should be willing to spend more, helping the economy.
But there is another, less sanguine view of the housing recovery. Recent data released by the Federal Housing Finance Agency (FHFA) suggest that the increase in house prices is not being driven by a broad-based improvement in the economy's fundamentals. Instead, the Fed's lower rates are simply being capitalized into higher home prices. This does not bode well for the future.
A comparison of FHFA's conventional home-financing data for February 2012 and February 2013 shows that borrowers bought newly built and existing homes in 2013 for 9% and 15% more respectively than in the previous year. Increases of this magnitude cannot be attributed to higher incomes, as these rose a mere 2% over the last year, just keeping up with inflation. It appears that home prices are being levitated by quantitative easing. Because interest rates were .625% and .90% lower on new and existing homes respectively this year compared with last year, the monthly finance cost to purchase a new home remained the same and went up only 3% for an existing home.
While a housing recovery of sorts has developed, it is by no means a normal one. The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world's largest buyer of new mortgage debt.
Thus, with real incomes essentially stagnant, this is a market recovery largely driven by low interest rates and plentiful government financing. This is eerily familiar to the previous government policy-induced boom that went bust in 2006, and from which the country is still struggling to recover. Creating over a trillion dollars in additional home value out of thin air does sound like a variant of dropping money out of helicopters.
Will history repeat? When it comes to interest rates, whatever goes down must go up.
The average mortgage rate during the first nine years of the 2000s was 6.3% compared with today's rate of less than 3.5%. If mortgage rates were to increase to a moderate 6% in three years, say, some combination of three things would have to happen to keep the same level of homeownership affordability. Incomes would need to increase by a third, house prices would need to decline by a quarter, or lending standards would need to be loosened even further.
The National Association of Realtors and the rest of the government mortgage complex can be relied on to push for looser lending. The Consumer Financial Protection Bureau recently came out with new rules that would grease the skids for relaxed lending standards, compliments of Fannie Mae, FNMA -4.12%Freddie Mac FMCC -4.32%and the Federal Housing Administration.
Given the continued subpar economic recovery and our past experience with the disastrous impact of loose lending encouraged by federal policies, homeowners would best be cautious about spending their new found "wealth." Americans have seen this movie before and know how it ends.
Mr. Pinto, a resident fellow at the American Enterprise Institute, was the chief credit officer at Fannie Mae from 1987 to 1989.
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Can We Afford Another Housing Boom?
With prices rising, now is the time to prevent over-investment..
WSJ
Fannie Mae FNMA -3.60%put an exclamation point on the housing rally with last week's announcement of its largest-ever annual profit. The news comes soon after Fannie's cousin, Freddie Mac, FMCC -4.40%announced its own record high. These results may seem like cause for celebration after years of losses at the two taxpayer-backed mortgage giants. But they also underscore the urgent need for reform to ensure that the next real estate boom doesn't end as badly as the last one.
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It's certainly good news that the very long housing recession is finally over, and that prices in most of the country are rising again. For the 12 months through January, the S&P/Case-Shiller index of 20 U.S. cities shows an annual increase in home prices averaging 8.1%. Prices in Miami were up almost 11% on the year, the Las Vegas market enjoyed a pop of more than 15%, and in Phoenix prices jumped more than 23%. Not a single one of the 20 metropolitan areas in the index suffered an annual price decline.
The healthy part of this revival is the normal adjustment of supply and demand after a painful recession. Foreclosures have been slowly working their way through the system, and the long dry spell in building means there are fewer new homes to buy.
But there's a less desirable side to this new boom: It is fueled by the same kind of government super-subsidy for housing that drove the boom and bust a decade ago. Through Fannie, Freddie and the Federal Housing Administration (FHA), the feds now underwrite some 90% of all mortgages.
Meanwhile, the Fed's rock-bottom interest rates and its QE policies are both intended to reflate the housing market. The Fed is buying $40 billion a month in mortgage securities, despite the housing rebound, plus an additional $45 billion in long-term Treasurys to keep mortgage rates low. This makes it cheaper for families to borrow to buy a home. But the Fed's goal is also to keep rates so low that investors will dive back into real estate in a search for yield they can't get from savings accounts or financial investments.
And sure enough, from Georgia to California, investors have been scooping up residential properties, often in foreclosure auctions. As the Journal has reported, large private-equity firms such as Blackstone Group BX -0.17%and Colony Capital have spent billions of dollars over the last year buying single-family homes.
Mom and Pop are also back buying property for investment returns, rather than for shelter. A software engineer looking to buy a house in California's Orange County as an investment property recently told the Journal, "Right now, it just seems like real estate is a good place to put cash."
It's true that many of today's investors are planning to be landlords collecting regular rent, not speculators betting on their ability to execute a quick flip. But the hard part is knowing how much an asset-price rally is rooted in genuinely rising prosperity and how much in government policies that can't last. One danger sign now is that prices are rising much faster than the economy, which isn't sustainable over time.
It's also worth keeping in mind that housing is not the secret sauce of economic prosperity. The anemic 0.4% GDP growth in the fourth quarter of 2012 would have been even worse without a 17.6% surge in real residential fixed investment. But even though the government calls it investment in GDP calculations, housing is substantially a form of consumption. A large home (assuming the occupant can afford it) is a manifestation of wealth, not a creator of it.
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A sold sign posted in front of a Phoenix home on in March.
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Every dollar of capital that policy makers drive into housing is a dollar that won't be spent creating the next great innovation in software or medicine or something else. Over the long haul, the economy grows when people invest in things other than housing—specifically in technologies that enhance productivity and allow all of us to achieve higher living standards. Housing does fine when people are employed and wages are rising. In other words, sustainable growth in real-estate values is a symptom of a vibrant economy, not a cause.
In the 2000s, America tried to use a debt-fueled real-estate boom as a substitute for real wealth creation. The Fed's loose money, government endorsement of private credit-ratings agencies and reckless promotion of homeownership created a housing bubble. The bursting of this bubble created a financial crisis. We do not want to repeat the experience.
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Yet there are signs that the politicians have failed to learn that lesson. Beyond the Fed, the Washington Post reported last week that "the Obama administration is engaged in a broad push to make more home loans available to people with weaker credit." The government is pressing banks to press borrowers to take advantage of FHA guarantees and other federal subsidies. That's the same thinking that gave us the Fannie Mae-Countrywide Financial subprime loan machine, the subprime bust and the $187.5 billion failure of Fannie and Freddie.
With prices rising again, now is precisely the time to begin reducing the federal subsidies that encourage over-investment in housing. In some areas of the country Fan and Fred still back mortgages of more than $600,000, while the FHA backs loans of more than $700,000. Reform-minded lawmakers may not be able to stop Fed Chairman Ben Bernanke from dropping money from helicopters, but they can begin reducing the conforming loan limits at Fan, Fred and FHA to put some guardrails around Washington's reckless credit policies
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Housing Starts Rose 7.0% in March to 1.036 Million Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Senior Economist
Date: 4/16/2013
Housing starts rose 7.0% in March to 1.036 million units at an annual rate, easily beating the consensus expected 930,000 pace. Starts are up 46.7% versus a year ago.
The increase in starts in March was all due to multi-family units, which surged 31.1%. Single-family starts declined 4.8%. Single-family starts are up 28.7% from a year ago while multi-family starts are up 85.3%.
Starts in March were up in the Midwest, South, and West, but down in the Northeast.
New building permits declined 3.9% in March to a 902,000 annual rate, lagging the consensus expected 942,000 pace. Compared to a year ago, permits for single-unit homes are up 27.7% while permits for multi-family units are up 1.3%.
Implications: Housing starts soared 7% in March, defying consensus expectations of only a small gain due to unusually cold March weather. At 1.036 million, the annual rate of starts is now the highest since mid-2008. However, the underlying details were not quite as strong as the headline. All of the gain in starts in March was due to the multi-family sector, which is extremely volatile from month to month; single-family starts declined 4.8%. As a result, we expect multi-family starts to drop back down next month, dragging down the top-line number as well. Still, the underlying trend in housing is upward and we expect large percentage gains for residential construction for at least the next two years, probably longer. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015). Housing permits were down in March but almost all of the decline was due to the multi-family sector. Single-family building permits were down only 0.5% in March and are up 27.7% from a year ago. In other recent housing news, the NAHB index, which measures confidence among home builders, slipped to 42 in April from 44 in March. However, the index for future single-family sales increased to 53 from 50. The key here is that the underlying trend in the housing industry is clearly upward and the gains have much further to go. Don’t get worked up over every zig and zag in the data. Sometimes one indicator ticks down, like the NAHB; other times an indicator, like housing starts, will surge up above the underlying growth trend. That’s what a recovery looks like.
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New Single-Family Home Sales Rose 1.5% in March, to a 417,000 Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 4/23/2013
New single-family home sales rose 1.5% in March, to a 417,000 annual rate, almost matching the consensus expected pace of 416,000. Sales are up 18.5% from a year ago.
Sales were up in the Northeast and South but were down in the West and Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) was unchanged at 4.4 in March. The slightly faster selling pace was offset by a 3,000 unit rise in inventories of new homes.
The median price of new homes sold was $247,000 in March, up 3.0% from a year ago. The average price of new homes sold was $279,900, down 1.3% versus last year.
Implications: The new home market, which is typically the last piece of the housing puzzle to recover, is clearly improving. Sales were up 1.5% in March and a whopping 18.5% from a year ago. In fact, Q1 of 2013 was the best quarter of new home sales since Q3 of 2008. The months’ supply of new homes -- how long it would take to sell the homes in inventory – remained unchanged at 4.4, but is still well below the average of 5.7 over the past 20 years and close to the 4.0 months that prevailed in 1998-2004, during the housing boom. This means that as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders look like they're getting ready for that transition. Inventories have increased in 6 of the last 7 months. The median price of a new home is up 3.0% from a year ago, and we expect prices to continue to move higher in the coming years. In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.7% in February (seasonally-adjusted) and is up 7.1% from a year ago. On the factory front, the Richmond Fed index, a survey of mid-Atlantic manufacturers, fell to -6 in April from +3 in March. Manufacturing reports have been mixed but are still consistent with mild plow horse-like growth in that sector and economy as a whole.
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MARKETSApril 19, 2013, 9:53 a.m. ET.Regulators Worry Mortgage REITs Pose Threat to Financial System .
By DEBORAH SOLOMON
WSJ
WASHINGTON—A panel of top financial regulators is targeting mortgage real-estate investment trusts as a potential risk to the U.S. financial system, the latest example of Washington's growing concern with market bubbles.
Next week, the Financial Stability Oversight Council, a panel comprising the top U.S. financial regulators, is expected to cite mortgage REITs as a source of market vulnerability in its annual report, according to people familiar with the matter, a distinction that could set the stage for stricter oversight of the industry.
Eager to avoid the mistakes of the past, regulators are attempting to identify overly frothy activity before it poses problems. Even though the economy continues to recover only slowly, regulators see potential bubbles forming in a range of financial markets, in part because of the Federal Reserve's easy-money policies, which have driven interest rates to near-record lows and prompted investors to seek higher returns elsewhere.
Mortgage REITs, which are publicly traded financial companies that borrow funds to invest in real-estate debt, have seen their assets quadruple to more than $400 billion since 2009. They differ from traditional REITs in that they invest in mortgage debt, rather than actual real-estate like office buildings or shopping malls. The firms take advantage of inexpensive, short-term borrowing to buy mortgage securities backed by Fannie Mae FNMA -0.25%and Freddie Mac, FMCC +0.90%and offer returns to investors of as much as 15%.
They join leveraged loans and money-market mutual funds as areas of risk cited by officials. Three Federal Reserve officials have singled out mortgage REITs in recent weeks, saying the industry merits watching.
Calvin Schnure, vice president of research and industry information at the National Association of Real Estate Investment Trusts, said that rather than a source of instability, mortgage REITs have been essential to the housing recovery.
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"Mortgage REITs have tripled their holdings of agency mortgages over the past couple of years because their access to public markets positions them to put new capital into the housing market," said Mr. Schnure.
The heightened scrutiny stems from the growth of such companies as Annaly Capital Management Inc. NLY +1.04%and American Capital Agency Corp., AGNC +1.46%whose assets have ballooned to more than $100 billion apiece over the past three years. The market capitalization of the industry has grown over the past three years from $22.1 billion to $59 billion, according to KBW Research.
"Mortgage REITs are bigger today, but they are bigger by virtue of an increased capital base," said Wellington J. Denahan, chairman and CEO of Annaly Capital. "Many of us have operated through challenging markets, including the financial crisis, and we continue to support and are helping to implement the regulatory changes that are being put in place to make the markets safer for all participants. This low-rate environment poses risks that investors in every market must be prudent about managing. In general, the mortgage REIT sector does so through a range of hedging tools, like interest-rate swaps, reducing leverage and conservative balance-sheet management activities."
The recipe behind their rapid growth is raising red flags in Washington, where regulators worry about the REITs' exposure to interest-rate spikes, reliance on leverage and short-term funding agreements that can dry up in times of crisis.
The companies take advantage of low interest rates to buy longer-term mortgage-backed debt with inexpensive debt. They then pledge those securities as collateral to secure additional short-term funding, or leverage, to boost returns. The companies make money on the difference between the low interest rate they pay on their debt and the higher rate paid on their mortgage assets. One reason regulators are worried is the REITs finance their holdings with very cheap short-term debt which they have to newly secure on a regular basis.
"Some of these companies are getting really big and there's a lot of interconnectedness between them and large investment banks," said Mark DeVries, U.S. consumer-finance analyst with Barclays PLC. BARC.LN +3.04%"The Fed has been concerned about any large financial company with leverage relying on wholesale financing."
The companies have acknowledged in filings the risks inherent in their business but say they are protected against much of the downside.
The firms say they use interest-rate swaps to hedge against rate swings and have raised more than $30 billion in equity over the past two years.
"I'm not convinced there's a big problem because these REITs are holding relatively liquid securities and represent a modest part of the mortgage market," said Stijn Van Nieuwerburgh, director of New York University's Stern Center for real estate finance research. Mr. Van Nieuwerburgh said the biggest risk is a sudden spike in interest rates, which would "torpedo the value of these mortgages" and hamper the firms' ability to repay loans.
As they ponder the risks, regulators must also weigh the impact of action, such as drying up one of the only sources of private-sector capital for housing.
The FSOC's labeling of mortgage REITs as a source of risk doesn't mandate changes but could set the stage for stricter oversight of the firms, which aren't subject to the capital standards or leverage limits that large banks face.
The Securities and Exchange Commission, whose chairman is an FSOC member, could opt to regulate mortgage REITs under the Investment Company Act, or the FSOC could designate an individual firm as a "systemically important financial institution," subjecting it to heightened capital standards and Fed oversight.
Fed officials have warned recently about the deterioration in underwriting standards for some corporate loans, and William Dudley, president of the Federal Reserve Bank of New York, recently cited mortgage REITs as an area deserving of "ongoing attention."
"There is a focus internally on trying to identify vulnerabilities early, before they become a problem," said Nellie Liang, director of the Fed's Office of Financial Stability Policy and Research.
Regulators are becoming more outspoken in part to help deflate bubbles by sending a word of caution to market participants who may be dismissing risks in order to keep up with other investors.
Write to Deborah Solomon at deborah.solomon@wsj.com
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New Single-Family Home Sales Rose 1.5% in March, to a 417,000 Annual Rate
Up, up, up... to an annual rate less than half of what is was in 2005. Other than the current crisis, this is the lowest rate of new home sales roughly since a time when this country had just 48 states, less than half the population and Harry Truman was President.
http://www.census.gov/econ/currentdata/dbsearch?program=RESSALES&startYear=1963&endYear=2013&categories=ASOLD&dataType=TOTAL&geoLevel=US&adjusted=1&submit=GET+DATA
When the new home sales rate fell in 2008 to a rate of 526,000 per year, a rate 26% better than now, it triggered a global financial meltdown. But now the glass is half full.
http://connection.ebscohost.com/c/articles/31845819/new-home-sales-plunge-526-000-annual-rate
Not mentioned also is that we tear down 300,000 homes per year so we are barely ahead of replacement demand.
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I'm baaaaaack!
To put housing into perspective, since I haven't had the time lately to do much of anything, here is a report that really talks about the Housing Recovery for what it is. I normally do not agree with Lee Adler on many things, but here I do.
http://wallstreetexaminer.com/2013/04/23/its-a-housing-recovery-in-orwellian-terms-heres-the-reality/
It’s A Housing “Recovery” In Orwellian Terms – Here’s The Reality
April 23, 2013
The Commerce Department today reported really good March home sales relative the the past 4 years of the housing depression. Media reports included only the seasonally adjusted annualized sales rate, which was 417,000 versus a consensus estimate of 415,000. PR flaks at the major financial infomercial outlets were breathless in their reports. Bloomberg proclaimed “A dearth of existing properties is encouraging builders to undertake new projects that will keep fueling the economy. Mortgage rates close to record lows, higher home values and rising household formation are helping lay the groundwork for increased buyer traffic in 2013.”
It’s mostly mindless bullshit as usual. The numbers were good relative only to the recent past, and with the tailwind of Benito Bernanke’s massive mortgage rate subsidy. Looking at the actual numbers from the Commerce Department surveys, not annualized and not seasonally adjusted, we get a better view of current reality.
New house sales rose by 7,000 units to 40,000 in March. This was better than last year’s March gain of 4,000 units to 34,000, and better than the March 2011 gain of 6,000 to 28,000. Sales are up 43% in two years. Wow.
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/newhousesaleszoom.png)
But let’s put this in perspective. It’s still below the 48,000 units that were sold in March 2008 in the middle of the housing market crash, the 120,000 units a month during the bubble years, and the 80,000 units per month typical before that.
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/newhousesales.png)
New house sales normally peak in April, so there may yet be another peak ahead, but the NAHB builder survey indexes for March and April suggest that sales have already peak. Builders reported lower sales and traffic from mid March to mid April. This may be as good as it gets in this cycle.
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/hmi.png)
Even with the Fed’s massive mortgage rate subsidy, sales have not surpassed 40,0o0 units per month. That’s half or less than half the peak levels reached from 1997 to 2007.
But builders are supplying enough houses to meet demand. The talk of inventory shortage is overblown. Demand is weak. New supply production is consistent with the level of demand.
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/housingstartstosales.png)
The talk of inventory shortage is overblown. Supply production is consistent with the level of demand. The inventory of new homes relative to sales is below the bubble years, but at normal levels relative to those seen in 2003-2005.
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/newhomesales.png)
Median reported new house sale prices have risen 20% since 2009. Effective sale prices may have risen even more than that as builders were giving large incentives, including extra amenities, or discounts not reflected in prices as late as last year. Effective sale prices at the 2009 lows were lower than reported prices. The discounts and incentives have ended or been reduced in many cases.
Meanwhile, the average sale price dropped back over the past year as the ratio of cheap to expensive houses sold rose
(http://wallstreetexaminer.com/wp-content/gallery/economic-chart-gallery/newhomesaleprice.png)
The so called recovery is mostly a recovery in prices. Thanks to the Fed mortgage subsidy, we have housing inflation, but not much recovery in housing activity relative to historical norms. The market has bounced back to around 50% of historically normal levels only with the help of the massive Fed subsidy. We have to wonder where the market would be without that, or rather what will happen when that subsidy is withdrawn. Knowing that removing this subsidy could devastate the so called housing recovery, it seems unlikely that the Fed would only do so under extreme pressure from the market in the form of consumer price inflation. The government has managed to keep those numbers suppressed.
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Rep Mel Watt being named to run the FHFA and therefore the GSE's. Among other things:
1. Took campaign donations from Fannie and Freddie
2. Supports more mortgage lending for low income borrowers
3. Supports more mortgage lending for blacks
4. Supporter of Community Reinvestment Act
5. Supporter of the GSE's
6. Opposed restructuring of the GSE's in 2003
7. Against making the Fed more "transparent" and more regulated
8. In favor of principal reductions on underwater loans and borrowers in default
9. Wants to keep the GSE's
And I thought Mark Zandi would be bad.........................
Welcome to socialized housing............not that it doesn't exist now.
Pat
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right up Brock's socialist alley.
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We are lucky the constitution only grants to the federal government authority over housing that is transported across state lines. Right?
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The gathering clusterfcuk , , ,
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Watt is going to do everything that he can to force Principal Reductions on GSE loans. Of course, that means two things.
1. Ginnie Mae bond holders (includes Fannie & Freddie) will suffer additional losses in income revenue from the reduced payments.
2. Taxpayers will be bailing out the GSE's for further losses.
Additionally, he is going to push lower lending standards for people who can't qualify at established standards, which means that we will be back to the standards that led to the Housing Crisis.
How will the market ever recover with these idiots in charge?
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http://www.housingwire.com/news/2013/05/03/more-move-buyers-are-going-miami
More move-up buyers are 'going to Miami'
Home sales in Miami rose year-over-year for the 11th consecutive month in March. The March report from DataQuick also revealed sizeable increases in mid- to high-end activity and a record level of sales to investors and other absentee buyers.
Miami’s median price paid for a home rose 14.1% year-over-year, marking the 15th consecutive month that the city saw a gain.
In March, there were 10,215 new and resale houses and condos closed in the metro area that encompasses Miami-Dade, Palm Beach and Broward counties. Sales in March rose 18.8% from February and 7.1% from one-year prior, according to DataQuick.
However, while a sharp gain between February and March is normal, the change between those two months has averaged 26.7% since 1997.
During the first quarter of 2013 — January through March — a total of 28,294 homes sold in the region, a 14.2% increase from the first-quarter of 2012.
Sales of homes that were priced below $100,000 dipped 11.2% year-over-year, while sub-$200,000 homes dropped 3.3%.
In Miami and other markets slammed by foreclosures in recent years, you tend to have the greatest inventory restraints in the most affordable areas — the bottom third or so of the market, says Andrew LePage, a spokesperson for DataQuick.
Supply can't meet demand. Why? Because typically there aren't as many homes being foreclosed on today compared with a year ago, meaning fewer foreclosed properties are up for sale.
"The more affordable neighborhoods are also where you have the highest concentration of folks who still owe more than their homes are worth. They can't afford to sell, further limiting the supply of homes on the market," said LePage, who notes that price appreciation has also pushed a number of homes out of the sub-$200,000 market and into a higher bracket.
Conversely, the number of homes sold between $200,000 and $600,000 increased 24.9% year-over-year, while the number of homes sold above the $800,000-mark jumped 27% from March 2012. This is where we’re seeing a lot of pent-up demand, LePage adds.
Over the past year we've seen more strength in the economy and housing market. Gradually more and more folks have gained enough confidence in their jobs, the economy and the housing market to buy a home. Meanwhile, mortgage interest rates fell to historic lows, yanking more people off the housing market sidelines, says LePage.
"Among buyers there's been a big shift in psychology in the span of a year, where fewer worry about prices falling and more worry they'll rise (making it harder to buy)," LePage said. "Also, keep in mind that price appreciation means that a greater portion of the housing stock will sell for more than $200K this year, helping to boost sales at the lower end of that $200,000-to-$600,000 range."
The multi-million-dollar luxury market in Miami saw 124 homes sold for $2 million or more in March, a 63.2% increase year-over-year. In 2013’s first quarter, 278 homes sold for $2 million or more, a 48.7% jump from the same period last year.
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Life is tough. It's tougher when we are stupid. Intelligence is the amount of time it takes to forget a lesson.
http://www.dickmorris.com/fha-the-new-fannie-mae-dick-morris-tv-lunch-alert/?utm_source=dmreports&utm_medium=dmreports&utm_campaign=dmreports
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PP has noted the unusually high proportion of housing sales that are all cash, indicating an investor rather than a homeowner. Who cares, right, a sale is a sale? That is, until the investors pull out, quit buying and unload. Rents just aren't high enough to justify big investors taking big risks on big investments.
http://www.zerohedge.com/news/2013-05-29/meanwhile-big-investors-quietly-slip-out-back-door-housing-stupid-money-jumps#ixzz2Uo2N5EwZ
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Some key points:
1. MBS Agency Purchases have fallen for the last two weeks. Last week
had $12.2 billion in purchases, and the prior week it was $15b. Two
previous weeks were $17b. No debt was sold last week.
2. Fed mentions last week about potential tapering off of Agency MBS
purchases, maybe beginning in Jun.
3. Freddie Mac Interest Rates shoot up 50 basis points over the last
couple of weeks.
Correlation?
Here are the fine points. If rates go up, more buyers are priced out of
the market that they are looking at. Entry level homes become even more
competitive for purchases. Medium priced homes, above $200k, lose
buyers. Values must fall to stimulate buyers.
As interest rates climb higher, it reinforces dropping values for
affordability, and only serves to bring back investors into the market.
But, more people go back into negative equity positions, destroying the
move up market even further.
More foreclosures begin to occur.
This is the "Death Spiral" that many of us expect to happen. Recovery
time from it. 10 years or more.
The Fed keeps "flucking" us.
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These people at the CFPB are the worst idiots. They implement a rule
whereby any loan with 43% or under Debt to Income will not have an
Ability to Pay requirement that ensures the lender will determine
Ability to Pay. Then, they allow that rule to be "exceptioned" by
having any loan eligible to be purchased by the GSE's not subject to
Ability to Pay.
Now, the CFPB will exempt other entities from the Ability to Pay rule.
These entities will be those who lend to low income people, so the
Community Reinvestment Act remains okay.
Last week, I did a presentation for the group that showed how 95% of all
loans under $175k, with a 36% or greater DTI, has negative cash flow
when Net Income after Taxes and Living Expenses are factored in with a
Cash Flow Analysis. Needless to say, they were stunned that such loans
were being done, and being bought by the GSE's and FHA and we are moving
to accelerate this part of the program for portfolio lending.
Doesn't the government ever learn a damned thing form its failures?
Never mind................don't bother to answer..........it was all
rhetorical anyway................
Pat
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http://www.bloomberg.com/news/2013-06-03/wells-fargo-cfo-says-mortgage-standards-keep-new-bubble-at-bay.html
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Technically, Sloan is correct when he speaks about Subprime lending in
2007. The loans being done were 100%, stated income, with only a warm
breath in the last hour needed to qualify.
He is also correct about Easy Money not fueling the "Frothy Market".
And yes, lenders are maintaining lending standards because the GSEs have
become more restrictive with what they buy. But that is not really the
story.
But a few comments:
1. Wells Fargo claimed that they never engaged in Subprime lending.
This is well known. However, I happen to have one of their Subprime
rate sheets, and it is entirely consistent with all other Subprime
lenders. So anything that WF says should be taken as "WTF?"
2. Sloan and others ignore the impact that FHA and VA loans are
having. FHA can be obtained with no more than 3.5% down, and VA at $200
down. Credit Scores are generally above 680 for qualifiers, and Debt to
Income around 43%. But there within lies the problem.
FHA and VA loans generally run at lower loan amounts. Usually, they are
under $200k. For almost any FHA loan under $175k, I can prove that at
above 36% DTI, there is not enough Cash Flow to service the loan, all
debt, and living expenses. Even at $200k, this is still a severe problem.
FHA is currently running at 16% delinquency rate, with 9.6% in default.
These numbers are greater than ever before with FHA, and are fast
approaching those of the worse Subprime Grades. (Subprime was not all
about bad credit scores. Great scores in the 700's defaulted all the
time.) That is why Caplin and others indicate that at least 30% will
default within 5 years, and I have absolutely no problem with that analysis.
Bubble? 10% year over year? Remember three years ago, after the bubble
burst and people were saying that the 10% and above increases should
never have been accepted as the new normal?
Right now, 91% of all new mortgage loans issues are government
"guaranteed". Of them, 46% are FHA and VA, with FHA being the
overwhelming bulk. Curious that the Minn Fed Chairman says that the Fed
is buying over 90% of all new originations. Where are the buyers for
this product if the Fed has to buy it all?
The other 9% of originations are being either held in portfolios, hard
money by private lenders, or a few are being done with Premium High
Grade Securitizations by companies like Redwood Trust. These are
generally sold to REIT's, etc.
The simply fact, if Sloan would admit it, is that without the Fed buying
the loan new originations, there would be little demand for the MBS.
Only by rates increasing would demand start again. (MBS demand that
Scott quotes is in the ranges for 5% and above coupons, which is also
what the Fed in Op Twist is now buying, trying to get off the market, so
that lower rates of new issuances will be desired.)
But if rates go up, refinance and new purchase activity suddenly drops,
as will be reported over the next few weeks as the Freddie Mac rates hit
4%. When the rates go up, prices will have to fall on homes to have
buyers, otherwise the buyers are priced out of the market.
Here is something to check out. I attached a rate sheet from today for
review. It is interesting in that you will notice the following:
1. There are no Non Agency loan programs represented. That is because
there are no Non Agency loans to be had.
2. The Adjustables are for 5, 7 and 10 years. Nothing under that which
was characteristic of lending prior to 2007.
3. When you look at a rate on any program, you see a number next to it,
positive or negative. These numbers represent "cost" to the borrower
on the loans in the inverse. So a negative number is in fact, what
excess is in the quote. But this number gets "eaten up" rather quickly.
Here is what I mean.
Page 7 and 8 are what is called "Risk Hits". What it means is that when
certain conditions are present, like higher LTV, lower Credit Scores,
type of property, etc., the loan costs more. So the number to the far
right of each applicable "Hit" is the amount of the hit.
As you can see, FICO and LTV are the two biggest factors for risk. Then
property type and Mortgage Insurance. Very quickly, the "excess" gets
eaten up. So the bottom line is that the greater the risk factors, the
greater the interest rate.
This is traditional underwriting and pricing of loans.
You can see from the rate sheets how increasing interest rates will
affect lending, making it more expensive, and pricing people out of the
market, until home values fall to meet the new increased rates.
Pat
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New single-family home sales rose 2.1% in May to a 476,000 annual rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Robert Stein, CFA - Dep. Chief Economist
Date: 6/25/2013
New single-family home sales rose 2.1% in May to a 476,000 annual rate, easily beating the consensus expected pace of 460,000. Sales are up 29.0% from a year ago.
Sales were up in the Midwest, Northeast and West, but down in the South.
The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 4.1 in May from 4.0 in April. The faster selling pace was more than offset by a 4,000 unit rise in inventories.
The median price of new homes sold was $263,900 in May, up 10.3% from a year ago. The average price of new homes sold was $307,800, up 9.6% versus last year.
Implications: The new home market, which is typically the last piece of the housing puzzle to recover, is clearly improving. New home sales came in at the highest pace since July 2008. A lack of inventory in the existing home market appears to be driving buyers to the new home market, where sales were up 2.1% in May and up 29% from a year ago. By contrast, existing home sales are up 12.9% from a year ago. The months’ supply of new homes – how long it would take to sell the new homes in inventory – rose to 4.1, but is still well below the average of 5.7 over the past 20 years and close to the 4.0 months that prevailed in 1998-2004, during the housing boom. As a result, as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders are getting ready for that transition. Inventories have increased in 9 of the last 10 months. Higher inventories aren’t something to worry about and are not leading to more vacant homes; the number of completed new homes still sitting in inventory is at a record low, as buyers swoop in quickly. No wonder prices for new homes are up 10.3% from a year ago. In other housing news this morning, home prices continue to gather steam. The FHFA index, which covers homes financed with conforming mortgages, rose 0.7% in April and is up 7.4% in the past year. The Case-Shiller index, which covers homes in the 20 largest metro areas, increased 1.7% in April and is up 12.1% from a year ago. Both indexes show price gains for 15 straight months. According to Case-Shiller, recent price gains have been led by San Francisco, Las Vegas, and Los Angeles, although all 20 areas have been rising. On the manufacturing front, the Richmond Fed index, a measure of manufacturing sentiment in the mid-Atlantic, increased to +8 in June from -2 in May, suggesting a solid gain the national ISM manufacturing index when that report comes out early next week. Looks like the Plow Horse economy is starting to trot. The fact that the Fed is considering tapering QE is a good thing, not bad. Equities will be noticeably higher at year end than they are today.
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Hat tip to our Pat for this one:
http://mhanson.com/archives/1324?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+MarkHansonAdvisers+%28Mark+Hanson+Advisors%29
7-5 Rates “Carage” Summary…Housing & Mortgage Significantly Impacted
by Mark on July 5, 2013
We have been raising red flags on the spike in rates for weeks now. But today, the back of the market was broken, as “real rates” used by the majority of buyers / refinancers — not the “bait & switchers” quoted in your local rag, by the GSE’s, or by organizations that don’t realize people don’t take out mortgages that cost 3 points — rates shot over 5% today with conviction…3% 10s and 5.75% mortgage rates look to be in the bag.
But even at today’s levels “the surge” was a significant “credit event” for housing and mortgage. It’s going to be an ugly Q3/Q4 for these sectors.
Below I quickly summarize the damage done to Existing Sales, house prices, builders, New Home Sales, home improvement, and the mortgage-centric regional and national banks:
1) To Existing Home Sales and macro house prices “the surge” takes the PE investor out of the equation. The PE “investor” was the cohort regularly paying 10% to 20% more than the appraised value or ask price looking at 1.5% UST and rental yields to guide them. They are responsible for pushing up the floor on housing, creating a new price bubble, and establish high “comparable sales” in every region they pounce. At a sub-3% cap-rate in the most popular “buy and rent” regions this “trade” looks rotten relative to a 2.7% 10-year note.
And remember, it only takes 3 sales to change the value of 300 houses using the comparable sales valuable method.
Moreover, it further sidelines First-Time buyers who have already been priced out of the market by PE firms…volume down up to 70% since 2010. Lastly, it greatly diminishes the ability for “move-up” organic buyers to complete their “contingent’ transaction as they just lost 20% purchasing power in the past 2 months…not able to sell their house and/or buy the new one.
2) To Builders / New Home “Sales” – at least half of which are not associated with a “locked-in” mortgage rate at the time the “sale” is counted as such — “the surge” will increase fall out of the past 6 months’ sales by 19%, I estimate.
There is no way for builders to make up for this large of Q3 and Q4 fall out through increased sales volume in a surging rate environment.
3) To home improvement/materials – although being highly levered to distressed resales, which are down 70% (artificially) in the important regions over the past 18 months — the spike in rates and subsequent fall in house sales volume on tap will weigh. This will happen right about the time the average investor (e.g., the real money sov wealth fund that owns HD etc) realizes how important to these firms’ sales “distressed” really was.
4) To the mortgage-centric regional and national banks, they now have a hole blown into earnings by the sudden loss of “mortgage banking”, which has driven top and bottom line earnings for since Q4 2011.
Certain banks we have identified as “overly reliant on mortgage banking”, as a percentage of top and bottom line revenue, just had a hole blown through their most stable revenue and growth channel. This is due to refi production that will be down 75% in Q3, a massive QoQ and YoY crash. Moreover, purchase money loans for existing and new home sales are also set for some fugly numbers on “the surge”. Lastly, by the end of Q3/early Q4 house prices will be on the decline as measured by every other index besides CS who lags real prices by 4 to 7 months.
The regional/national mortgage-centric banks in the US have been operating as little more than the gov’t mortgage brokers — refinancing everybody who could refi — each time rates drop another 100bps over the past 4 years. How exactly will a rise in “NIM” make up for the almost total loss of “Mortgage Banking” that has driven top and bottom line revenue for 2 years??
Obviously, these forecasts are open to velocity, duration, and depth revisions if rates suddenly plunge. However, based on what has happened over the past 6 weeks to rates there is no getting around a sharp “hiccup” to housing and mortgage banking in Q3/early Q4 on an absolute, QoQ and YoY basis.
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Once again, Mortgage Applications fall for the week.
• Total activity -4% decrease, adjusted rate, 23% non adjusted
• Refinance activity - 4% down
• Purchase activity - 4% down adjusted, 23% down non-adjusted
• Refinance down to 64% of total
• HARP rose to 35% from 34%. This only occurred before total activity decrease by 4%.
Clearly, the increase in rates are affecting all lending sectors. This bodes ill winds for the housing market in the future as rates increase further.
http://www.mortgagebankers.org/NewsandMedia/PressCenter/84990.htm
Mortgage Applications Decrease in Latest MBA Weekly Survey
Mortgage applications decreased 4.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 5, 2013. This week’s results included an adjustment for the July 4th holiday.
The Market Composite Index, a measure of mortgage loan application volume, decreased 4.0 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index decreased 23 percent compared with the previous week. The Refinance Index decreased 4 percent from the previous week. The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 23 percent compared with the previous week and was 5 percent higher than the same week one year ago.
The refinance share of mortgage activity decreased to 64 percent of total applications. The adjustable-rate mortgage (ARM) share of activity decreased to 7 percent of total applications. The HARP share of refinance applications rose from 34 percent the prior week to 35 percent.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 4.68 percent, the highest rate since July 2011, from 4.58 percent, with points increasing to 0.46 from 0.43 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,500) increased to 4.86 percent, the highest rate since July 2011, from 4.68 percent, with points decreasing to 0.37 from 0.38 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.37 percent, the highest rate since September 2011, from 4.27 percent, with points decreasing to 0.39 from 0.44 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages increased to 3.76 percent, the highest rate since July 2011, from 3.64 percent, with points decreasing to 0.41 from 0.44 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
The average contract interest rate for 5/1 ARMs increased to 3.40 percent, the highest rate since May 2011, from 3.33 percent, with points increasing to 0.54 from 0.31 (including the origination fee) for 80 percent LTV loans. The effective rate increased from last week.
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Housing Reform Breakout
The House GOP moves to revive the private home mortgage market.
One perverse result of the financial crisis is that Washington has nationalized housing finance. Taxpayers guarantee about 85% of new mortgages, some $5.1 trillion in mortgage credit and growing. So it's a big and welcome political breakthrough that House Republicans are taking steps to protect taxpayers and restore some rationality to housing markets.
On Thursday, House Financial Services Chairman Jeb Hensarling unveiled legislation to close down Fannie Mae FNMA -2.74% and Freddie Mac, FMCC -2.90% add much-needed discipline to the Federal Housing Administration, and clear away regulatory barriers to more private housing capital. Much like Paul Ryan's Medicare reforms, Mr. Hensarling is widening the Washington debate and giving Republicans a sensible reform position to rally around.
***
The Texas Republican starts by taking the White House up on its February 2011 offer to wind down Fannie and Freddie, which still owe taxpayers $187 billion for their bailouts. He'd do so over five years by shrinking their mortgage portfolios by 15% a year, gradually lowering their loan limits to $525,500 from $625,500, and eliminating their politicized "affordable housing" goals and slush fund.
This statement of intent is especially crucial as memories fade of the toxic duo's central role in the crisis. Amid rising home prices, the political temptation will be to give up the hard slog of reform and use Fan and Fred's renewed profits to finance other spending. Mr. Hensarling's reform is also superior to the Senate's Corker-Warner bill, which would wind down Fan and Fed but still give other private lenders a federal guarantee.
The House proposal also takes some useful steps to reform the Federal Housing Administration, if less ambitious than we'd prefer. Washington has used the crisis as an excuse to greatly expand FHA, which may still need a federal bailout. So the bill would try to limit mission creep by defining FHA's purpose as insuring first-time homebuyers and low- to moderate-income borrowers.
Mr. Hensarling would try to force FHA to act more like a private mortgage insurer by spinning it off from the Department of Housing and Urban Development and requiring it to be financially self-sufficient with GAAP-accounting and a minimum 4% capital cushion from 2%. Today, any mortgage loan worth $271,050 or less is eligible for FHA backing. The proposal would move that threshold to $200,000, thus reducing taxpayer risk.
The bill also would eliminate FHA's money-losing reverse mortgage business and gradually reduce FHA's taxpayer-backed coverage levels to 50% from today's 100%. We'd prefer 0% taxpayer backing, but that would have cost GOP votes and thus doomed the bill.
The housing lobby will still oppose this as a threat to the housing recovery, but don't believe it. All first-time borrowers will be eligible for FHA backing, regardless of their income. The bill would reduce FHA's loan limits to the lower of 115% of area median home prices, or 150% of high-cost area loan limit, with a maximum limit of $625,500 from $729,750 today. That's still tens of millions of home buyers.
The third leg of the bill aims to increase market competition with a hodgepodge of initiatives, notably easing Dodd-Frank's rules for "qualified mortgages." When fully implemented, these rules will limit the supply of mortgage credit without any reduction in taxpayer exposure.
Less admirable is the bill's proposal for a National Mortgage Market Utility that would set best practices for mortgage securitization and operate a clearinghouse to match loan originators with investors. This echoes Dodd Frank's creation of clearinghouses for derivatives that expand taxpayer risk. Many industries set best practices without government intervention, and mortgages should be no different.
The bill also institutes a three-year delay to the Basel III capital rules and creates rules for a "covered bond" market. Covered bonds are debt securities that stay on a bank's balance sheet and are backed by other mortgages. They can increase liquidity and make it easier for lenders to modify loans that run into trouble.
Covered bonds are new to the U.S., but they have been used for decades in Europe. This provision has been promoted by New Jersey Republican Scott Garrett in an effort to show that a robust private mortgage market can exist without government guaranteeing 30-year mortgages. They deserve a market trial.
***
As ever, the political opposition to all this will come from the housing industrial complex of Realtors, homebuilders and Wall Street mortgage lenders who don't want to give up their taxpayer guarantee. But they should understand that the same Dodd-Frank restrictions they loathe are the political price of that guarantee. Give up the guarantee, and after a transition they'd have a much more sustainable housing market going forward, one less subject to boom and bust and with less political interference.
House Democrats won't help Mr. Hensarling, so he'll have to count on GOP votes. Whatever its fate in the Senate, Mr. Hensarling's proposal is an important statement of GOP principles and intent. He deserves support if Republicans elected on the tea-party wave want to maintain credibility as reformers against crony capitalism.
Government favoritism for housing was one of the main causes of the crisis, and political control over mortgages will only lead to more misallocation of capital and future taxpayer bailouts. The housing markets need a private rescue.
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New Single-Family Home Sales Rose 8.3% in June to a 497,000 Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 7/24/2013
New single-family home sales rose 8.3% in June to a 497,000 annual rate, beating the consensus expected pace of 484,000. Sales are up 38.1% from a year ago.
Sales were up in the South, Northeast and West, but down in the Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 3.9 in June from 4.2 in May. The decline in the months’ supply was completely due to the faster selling pace of homes. Inventories rose by 2,000 units.
The median price of new homes sold was $249,700 in June, up 7.4% from a year ago. The average price of new homes sold was $295,000, up 8.5% versus last year.
Implications: For those of you worried about how the one percentage point jump in mortgage rates would affect the housing market, today is the first look at purchase contracts signed in June and, just as we expected, there was no impact. New home sales jumped sharply, coming in at the highest pace since May 2008. A lack of inventory in the existing home market appears to be driving buyers to the new home market, where sales were up 8.3% in June and up a massive 38.1% from a year ago. By contrast, existing home sales are up 15.2% from a year ago. The months’ supply of new homes – how long it would take to sell the new homes in inventory – fell to 3.9, well below the average of 5.7 over the past 20 years and even below the average of 4.0 months that prevailed in 1998-2004, during the housing boom. As a result, as the pace of sales continues to rise over the next few years, home builders will have room to increase inventories. After a large reduction in inventories over the past several years, builders are getting ready for that transition. Inventories have increased in 10 of the last 11 months. However, higher inventories aren’t something to worry about and are not leading to more vacant homes. The slight rise in new home inventories so far has all been for home where building has yet to begin. The number of completed new homes still sitting in inventory is at a record low, as buyers swoop in quickly. No wonder prices for new homes are up 7.4% from a year ago. In other recent housing news, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.7% in May and is up 7.3% from a year ago. On the manufacturing front, the Richmond Fed index fell to -11 in July from +7 in June. The report conflicts with gains in other regional factory surveys, such as the Empire State and Philly Fed, which showed better growth in July.
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And now, with his permission, some content from our Pat-- our regrets that the charts do not print here in the forum:
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Okay, in the interest of fair play, I have posted both sites review on Housing Sales, and I am going to explain why both articles are written by IDIOTS!!!!
1. Nowhere do I see where either party has written that these sales were based upon contracts written primarily in April, and then the first two weeks in May. It takes better than 30 days to close, so rates had been locked in prior to the big moves in most cases. So, interest rates did not have anything to do with the drop.
2. Investor Purchases fell sharply in both Month over Month and Year over Year. Bad news for the future. Where is that mentioned?
3. Existing Home Sales is much more important than New Home Sales. New Home is 7% of total sales, yet Broker Commissions on Existing Sales add up to 60% of Builder Residential Investments. (Bet you never heard that before.)
4. Add in the flipper or rental investor activity dropping from $30k to $70k or more in each home, and the dollar amount really increases for existing sales. Now, that is going to drop and affect the local economies.
5. Lowest rates on record have served to pull forward demand for homes, just like the 2010 Tax Credit. What happened after the Credit expired? Yep, housing crashed again. Just like what is going to happen again. (But wait.............this time is different..............yeah, right.)
6. It took years for rates to fall to levels in early 2013, and normally rates increase slowly. The May-Jun increases were virtually overnight. Not representative of normal conditions and only due to the threat of QE going away. Now, faith is lost in the Fed, so though rates are slowly dropping a bit (as my people predicted, and I said here), they will not drop back down to the previous low levels. (Have Faith in Fed............or else.)
7. Between 50-60% of the regular home buyer market is gone, due to either low or negative equity, or else due to credit/income restrictions, plus tighter underwriting. Where will new buyers come from? (Overseas?)
8. Low inventory is not as low as claimed, when one considers that 50-60% of "buyers" are out of the market. And if investors leave, then low inventory will be less consideration yet. (Anyone ever mention that aspect? Shows further proof of how REITs have screwed up the market.)
9. There is evidence that the REITs are scaling back purchases of homes due to costs, and also that rental returns are not as productive as first thought. This will get even more problematic. Also expect that REITs will begin to sell properties to take advantage of the temporary increase in values. (Blackrock is now establishing an "investor lending division" whereby they are going to loan $10m plus to investors looking to buy rentals. Think they are potentially considering bailing out of the housing market?)
10. There are reports that 50% of Wall Street rentals are vacant. If so, this bodes even worse for the future.
11. Watch values begin to decrease as all of the above takes effect.
12. First time buyers who had loan approval but not locked are now out of the market in many cases. Others who had not locked yet, but had contracts approved, are now screwed and will have to reenter negotiations to drop the price, or look for smaller homes. (I have talked with several who have quit looking due to the higher rates.)
13. Most first time buyers have been "used up" anyway. What is left cannot get approved.
See? That was not hard.
But no one wants to look inside the headline numbers.
http://www.calculatedriskblog.com/2013/07/comments-on-existing-home-sales-solid.html
Comments on Existing Home Sales: Solid Report, Inventory near Bottom
by Bill McBride on 7/22/2013 11:49:00 AM
First, the headline sales number was no surprise and not bad news (see Existing Home Sales: Expect Below Consensus Sales).
Second, I usually ignore the median price. The median price is distorted by the mix, and with more conventional sales - and more mid-to-high end sales - the median is increasing faster than actual prices (as reported by the repeat sales indexes).
The key number in the existing home sales report is inventory (not sales), and the NAR reported that inventory increased 1.9% in June from May, and is only down 7.6% from June 2012. This fits with the weekly data I've been posting.
This is the lowest level of inventory for the month of June since 2001, but this is also the smallest year-over-year decline since June 2011. The key points are: 1) inventory is very low, but 2) the year-over-year inventory decline will probably end soon. With the low level of inventory, there is still upward pressure on prices - but as inventory starts to increase, buyer urgency will wane, and price increases will slow.
When will the NAR report a year-over-year increase in inventory? Soon. Right now I'm guessing inventory will be up year-over-year in September or October.
Important: The NAR reports active listings, and although there is some variability across the country in what is considered active, most "contingent short sales" are not included. "Contingent short sales" are strange listings since the listings were frequently NEVER on the market (they were listed as contingent), and they hang around for a long time - they are probably more closely related to shadow inventory than active inventory. However when we compare inventory to 2005, we need to remember there were no "short sale contingent" listings in 2005. In the areas I track, the number of "short sale contingent" listings is also down sharply year-over-year.
Another key point: The NAR reported total sales were up 15.2% from June 2012, but conventional sales are probably up close to 30% from June 2012, and distressed sales down. The NAR reported (from a survey):
Distressed homes – foreclosures and short sales – were 15 percent of June sales, down from 18 percent in May, and are the lowest share since monthly tracking began in October 2008; they were 26 percent in June 2012.
Although this survey isn't perfect, if total sales were up 15.2% from June 2012, and distressed sales declined to 15% of total sales (15% of 5.08 million) from 26% (26% of 4.41 million in June 2012), this suggests conventional sales were up sharply year-over-year - a good sign. However some of this increase is investor buying; the NAR is reporting:
All-cash sales made up 31 percent of transactions in June, down from 33 percent in May; they were 29 percent in June 2012. Individual investors, who account for many cash sales, purchased 17 percent of homes in June, down from 18 percent in May and 19 percent in June 2012.
The following graph shows existing home sales Not Seasonally Adjusted (NSA).
Click on graph for larger image.
Sales NSA in June (red column) are above the sales for 2008 through 2012, however sales are well below the bubble years of 2005 and 2006.
The bottom line is this was a solid report. Conventional sales have increased sharply, although some of this is investor buying. And inventory is low, but the year-over-year decline in inventory is decreasing.
http://www.zerohedge.com/news/2013-07-22/existing-home-sales-fall-most-2013-biggest-miss-12-months
Existing Home Sales Fall By Most In 2013, Biggest Miss In 12 Months
Submitted by Tyler Durden on 07/22/2013 10:16 -0400
• New York City
Existing home sales dropped 1.2% month-over-month - the biggest drop in 2013 - against expectations for a 1.5% rise. Critically though, this is for a period that reflects closings with mortgage rates from the April/May period - before the spike in rates really accelerated. Inventory rose once again to 5.2 months of supply (vs 5.0 in May) and you know the realtors are starting to get concerned when even the ever-optimistic chief economist of the NAR is forced to admit that 'stunningly' "higher mortgage rates will bite." With mortage applications having collapsed since May, we can only imagine the state of home sales (especially as we see all-cash buyers falling) for July.
NAR chief economist, said there is enough momentum in the market, even with higher interest rates. “Affordability conditions remain favorable in most of the country, and we’re still dealing with a large pent-up demand,” he said. “However, higher mortgage interest rates will bite into high-cost regions of California, Hawaii and the New York City metro area market.”
...
Regionally, existing-home sales in the Northeast declined 1.6 percent to an annual rate of 630,000 in June but are 16.7 percent above June 2012. The median price in the Northeast was $270,400, which is 6.8 percent above a year ago.
Existing-home sales in the Midwest were unchanged in June at a pace of 1.21 million, and are 17.5 percent higher than a year ago. The median price in the Midwest was $170,100, up 8.9 percent from June 2012.
In the South, existing-home sales slipped 1.5 percent to an annual level of 2.03 million in June but are 16.0 percent above June 2012. The median price in the South was $186,300, which is 13.7 percent above a year ago.
Existing-home sales in the West declined 1.6 percent to a pace of 1.21 million in June but are 11.0 percent above a year ago. With ongoing supply constraints, the median price in the West was $282,000, a jump of 19.9 percent from June 2012.
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Interesting she notes that investors are leaving the market. Also that higher priced homes increased, when lower priced homes decreased in sales.
Foreclosure sales are dropping for different reasons:
1. Modification efforts are delaying foreclosures buy 6 months to a year or more. Extended foreclosure timelines are occurring in all 50 states.
2. More loans are being modified per HAMP. But after 5 years, the rates will go up, and then defaults begin again.
3. The way that certain servicers like Nationstar are handling foreclosures and the related sales to REITs are not showing up in normal sales stats. Incredibly, they are foreclosing in their own name, then adding the REIT to the Deed, and then Quit Claiming themselves off. This "hides" the transaction from normal reporting, though taxes are paid.
There is just so much going on, and so little time to report.
On 7/23/2013 6:07 AM, Rick wrote:
Actually, Diana Olick at CNBC reported more consistent with your analysis.
http://video.cnbc.com/gallery/?play=1&video=3000184657
Rick
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We having been hearing for two years plus about record interest rates.
Now that I have the GSE data, I have noticed something.
Though rates have been down in the 3's, typically, the borrower is not getting those type of rates. Much more likely are rates in the 4's, and even in the low 5's. The reason is based upon different borrower factors, LTV, FICO, DTI, and other "unknown" considerations not present in the data sets.
Also of note is that two different borrowers with the same characteristics of loan amount, FICO, LTV and DTI may see interest rates of 3.5% for one and 4.5% for another. This is not uncommon at all.
The data sets provided by the GSEs was for investors to use to evaluate GSE loans for consideration when buying MBS. This is for "greater transparency". B.S.
The data sets are woefully deficient in information and accuracy. 90 day lates for all vintages of GSE loans are currently 2.03%, and have been in past years as high as 5% or more. Yet, when I take the total performance of any vintage, or combined vintages, the highest I can get is 1.25%, and for most, it is .25%
The GSE's have scrubbed the bad loans from the data to such an extent, default rates and conditions cannot be accurately determined.
Furthermore, the ZIP Codes have been "altered" whereby one cannot get down to Zip Code level to determine defaults on a local basis.
The GSEs continue to play their games, like all government agencies do.
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About 4 weeks ago, I brought up the problem for banks with repo and hypothecation agreements and funding. It was summarily dismissed as not being of concern. The Fed and the SEC think otherwise.
Brought to you by the SEC, FED and Zerohedge:
http://www.zerohedge.com/news/2013-07-22/sec-warns-prepare-repo-defaults
SEC Warns: Prepare For Repo Defaults
As we warned here most recently, the shadow-banking system remains the most crisis-catalyzing part of the markets currently as collateral shortages (and capital inadequacy) continue to grow as concerns. In recent weeks, between The Fed, Basel III, and the FDIC, regulators have signalled the possible intent to change risk, netting, and capital rules that could have dramatic implications on the repo markets and now, it seems, the SEC has begun to recognize just how big a concern that could be. As Reuters reports, the SEC urged funds and advisers last week to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance.
A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities. Most repos, around 80%-90%, are against government-related collateral and it is the repo market which makes government securities relatively more liquid by allowing fast and efficient financing and short covering. It is not accidental that trading volumes in bond markets are so closely related to the outstanding amount of repos.
Via Reuters,
The U.S. Securities and Exchange Commission on July 17 quietly issued new guidance to money funds that spells out the risks they could face if borrowers in the tri-party repurchase market collapse.
"There are a variety of ways in which a money fund and its adviser may be able to prepare for handling a default of a tri-party repo held in the fund's portfolio," the SEC wrote. "Such advance preparation could be part of broader efforts by the money market fund and its adviser to follow best practices in risk management."
In a four-page document, the SEC urges funds and advisers to review master repurchase agreement documentation to see if there are any procedures to handle defaults, and if necessary, prepare draft templates in advance.
It also calls for funds to consider the operational aspects of managing a repo, and to contemplate whether there are any legal issues that could arise in the event of a repo default.
The SEC's guidance comes at a crucial time for the money fund industry. The SEC is weighing controversial new rules that seek to reduce the risk of runs on money funds by panicked investors - a scenario that took place during the financial crisis.
The Federal Reserve is separately eyeing a new rule that would force investment banks that rely on risky short-term funding such as found in the repo markets to hold more capital.
...
And as JPMorgan explains,
...Regulators have introduced a simple non risk-based leverage ratio framework, i.e. capital over un-weighted assets, as a complement to the risk-based capital framework. The Basel Committee’s revisions to the framework in the 26th of June release relate primarily to the denominator of the leverage ratio, the Exposure Measure.
The most significant impact is likely to be on repo markets. As with derivatives, the proposals do not allow netting of collateral, i.e. repos are accounted for on a gross basis in the calculations of the Exposure Measure. Effectively both derivatives and repos are accounted for as loans on a gross basis rather than a securitized net product. In fact the revised guidance is even more punitive for repo transactions as it not only forbids netting of collateral but it does not allow netting of exposure either, i.e. repos and reverse repos cannot be offset against each other.
Repos are a $7tr universe approximately across the US, Europe and Japan. This is equal to close to 10% of the $77tr of the reported assets of G4 commercial banks including US broker-dealers. However, off-balance repos as well as accounting reporting which allows for netting between repos and reverse repos under both IFRS and US GAAP as well as collateral netting under US GAAP, means that most of this $7tr of repos is not captured in reported balance sheets, i.e. it is not included in the above $77tr figure of commercial bank assets.
If we apply the same 10% to the whole of the $7tr of G4 repos, i.e. we assume that around $700bn is accounted via existing reporting of net repos in banks’ balance sheets, then under the revised Basle proposal which forces reporting of total gross rather than net exposures, the Exposure Measure would increase by more than $6tr.
Applying the 3% minimum capital requirement to this $6tr potentially results to additional capital of $180bn across the whole of the G4.
These new regulations are hitting repo markets at a time when they are struggling to recover from their post-Lehman slump.
A retrenchment in repo markets is unwelcome news for the liquidity of the underlying securities. Most repos, around 80%-90% are against government-related collateral and it is the repo market which makes government securities relatively more liquid by allowing fast and efficient financing and short covering. It is not accidental that trading volumes in bond markets are so closely related to the outstanding amount of repos.
Figure 4 shows that US repo amounts and overall bond trading volumes have been following a flattish pattern in recent years with no signs of a return to pre Lehman levels.
While we see a bigger on repo markets, the impact on derivatives markets should not be underestimated. Similar to repos, banks will have to reassess their derivative portfolios and businesses against higher leverage buffer.
At a time of rising 'fails', rising leveraged-carry-trades, and no real end in sight for Fed intervention, a repo default contagion could indeed be the self-inflicted wound to bring down the risk-markets in spite of Fed liquidity.
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Comments brainy friend Rick
I would argue that mortgage securitization has played a big role in hampering an efficient foreclosure process because the entity that possesses the contractual remedy of foreclosure has already been paid off by investors who purchased the defaulted mortgage as part of a debt security. These RMBS are usually sold without recourse to the investors except through specific buyback language that is very limited under the terms of the purchase agreement as disclosed in the prospectus. The investors assume the risks of default and prepayment. They become the actual creditors.
However, the creditors never sue the borrowers. The originators or servicers of the loans most frequently sue for foreclosure. But why should they be able to foreclose when neither of those parties has actually been injured by the borrowers’ defaults? A prime example of this mess and confusion is the bankruptcy of Residential Capital (aka GMAC and DiTech Mortgage). ResCap will be cramming down a settlement on its investors for about 10 cents on the dollar on unpaid RMBS liabilities. It sold most of its performing mortgages to Berkshire Hathaway which will collect the future payment streams. It transferred its non-performing loans to its recently formed successor called Ocwen (“Newco” spelled backwards). After screwing the RMBS investors through the bankruptcy, Ocwen will then foreclose on the bad loans and capture as profit all of the proceeds from the forced sales that RESCAP would have been required to pass back to the now-screwed investors.
Because of this and other similar deals on the securitization side, it becomes more understandable why foreclosures have slowed – especially in judicial foreclosure States. Equity (in a legal sense – not the equity in the secured asset) is not with the originators and servicers. Many have the appearance of double dipping – especially when their buyback obligations to the GSE’s or to the private RMBS are settled for pennies on the dollar.
Rick
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Pat responds:
Rick,
You have some common misconceptions about what has gone on and what can be done. Much of the misconceptions are the result of media pundits not knowing what they are talking about themselves. To note:
1. " the entity that possesses the contractual remedy of foreclosure has already been paid off by investors who purchased the defaulted mortgage as part of a debt security." The Contractual Remedy for addressing foreclosure is in the hands of the Servicer or the Master Servicer, per the Trust Master Servicing Agreement. This Agreement covers what is allowed and not allowed.
The Master Servicer and even the Servicer were not necessarily the Loan Originators. In fact, unless you are talking about Countrywide, Indymac, and Aurora originated loans, more often that not, the Originator was not the Servicer. So the "paid off entity" was not necessarily the Servicer.
2. the creditors (investors) never sue the borrowers. Presumably, with this statement, you are referring to going after the borrower for losses after the foreclosure has occurred. This is possible in "deficiency states", but not all states are "deficiency" states. Anyway, the homeowner has already lost the home, which is the biggest asset that they had. What do they have left? Usually nothing. You can't get blood out of a turnip.
If you are suggesting that the Investors sue for foreclosure, then you have the problem that the Investors: 1) Have no authority themselves as bondholders under the Agreements. 2) Who will pay for the actions? The bondholders will not throw in good money after bad. 3) Foreclosure processes are different in all 50 states. That creates issues in that bondholders would need to obtain legal representation in every state, often many different firms. The cost of this litigation would be increasingly expensive, especially with borrower defenses. 4) The investors do not have access to the paperwork that would allow for competent legal action. They would have to file a lawsuit against the Trustee to get the Trustee to obtain the Servicing Records for the foreclosure lawsuit.
3. The investors assume the risks of default and prepayment. They become the actual creditors. Your "investors" are bond holders of the income stream created through a Trust. The Trustee holds the loan in benefit of the Trust. Under the terms of any Agreement, the Investors need a majority of participants to engage in any action. Getting 50% of the investors involved is very difficult, as Patton Boggs has found out. Then, if you can get a majority of them to agree, a lawsuit must be filed against the Trustee to get the Trustee to act. The Investors, per the Agreement, have no authority to act upon their own.
(I asked one CFO of a bank about this situation. He said, and it was correct, that a Trustee would not sue borrowers because there was no money to recover. It would be a waste of resources.)
4. specific buyback language that is very limited under the terms of the purchase agreement as disclosed in the prospectus. I have read Agreements that have covered all the players, at one time or another, and I have consulted for a New York Law Firm attempting to file actions in two different cases, alleging Reps and Warranties issues, including fraud and ability to pay. There are several difficulties in this.
First, obtaining the loan files and having competent people review them is time extensive and costly, especially since Trusts can have from 100 to 8000 or more loans in them. Then, the difficulty exists in getting the loan files to review in the first place. Investors must sue the Trustee to get the Trustee to demand the files.
As to the Reps and Warranties being "limited", I can always find violations if I have access to the loan files. But even then, as Courts have ruled time and again, the Statute of Limitations has expired. More important, the Investors must again sue the Trustee for enforcement of the Reps and Warranties. As one Trustee remarked to me...."Are you nuts? There is no way that we will go after the Originator for Reps and Warranties. We win and we show the way for others to come after us!!!"
5. The originators or servicers of the loans most frequently sue for foreclosure. But why should they be able to foreclose when neither of those parties has actually been injured by the borrowers’ defaults? Again, you have to read the Trust Master Servicing Agreement. It gives the Servicer all rights and authority on behalf of the Trust in all matters concerning foreclosure as long as the actions do not violate IRS regulations. This Agreement includes a General Power of Attorney granting the authority.
6. Ocwen was not recently created as a successor to ResCap. Ocwen has been around since the 90's, funding loans and servicing loans. They only bought the Servicing Rights to the ResCap loans for $3b. Servicing is not ownership. The loans sold to Ocwen were owned by Trusts that ResCap serviced.
7. The Rescap RMBS portfolio were "bonds" that they held. The bonds being held were the result of ResCap securitizations whereby they, as with all lenders, would retain the lowest rated tranches of a Securitization as a "good faith" investment. The real reality is that no one wanted the tranches.
8. Berkshire bought the actual loan portfolio of 47k loans held by ResCap. These included both performing and non-performing loans. Berkshire should collect the payment streams. They now own the loan. Remember, the BK Court approved the transaction.
9. After screwing the RMBS investors through the bankruptcy, Ocwen will then foreclose on the bad loans and capture as profit all of the proceeds from the forced sales that RESCAP would have been required to pass back to the now-screwed investors. This is incorrect as well. Ocwen is subject to the terms of the Master Servicing Agreement as successor Servicer. They will either modify the loans, per the Agreement and a Net Present Value Calculation, or they will foreclose. If they foreclose, they then sell the property, and from the proceeds of the sale, they will deduct their own costs, including any Monthly Payments advanced to the Trust to ensure income flow, late fees payable to them, any and all foreclosure related costs, any property taxes advanced and forced placed insurance. The leftover funds go to the Trust for distribution to the different tranches subject to the different Agreements.
I know that this is true because I have documentation on the amounts of money paid to the Trusts for over 3000 loans. I have also created for my associates a Loss Given Default module so that the potential losses on a loan can be calculated not just at origination, but also on a monthly basis based upon changing borrower characteristics, property value changes, sales time, and foreclosure time, so as to predict potential recovery in line with this.
10. especially when their buyback obligations to the GSE’s or to the private RMBS are settled for pennies on the dollar. See all of the above to rebut this statement.
Pat
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Pat,
Yes, but the complexity of what you just explained gets in the way of an efficient foreclosure process because the equities are not entirely with the servicers and originators who received monetary consideration in return for their promise to pay the investors an income stream from the mortgages. The perceptions, even though they may be incorrect, cloud the process; hence, many of the interventionist policies find justification.
Rick
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No, it is not the servicers that are in the way. It is the government, at both the state and federal level that is causing the problems.
1. HAMP, initiated in 2009 is a huge problem. If a borrower goes into default, he can DEMAND consideration for a loan modification. The servicer cannot deny the consideration and must consider the person for a mod. The mod process takes several months, even for a denial.
2. Though Private Securitization has different requirements for modifications, HAMP still pushes that a Privately Securitized loan be reviewed and to promote this, it provides monetary for the loan to be considered.
3. Litigation by the Attorney Generals has caused more problems. Now, the processes are set in legal processes.
4. OCC interference with the complaints by homeowners and media has caused further problems.
5. State Statutes like the CA Homeowner Bill of Rights has caused even more problems.
Right now, it takes at least 3 months to evaluate a loan modification request. Two months are spent getting all the documents together is average. One month to review and approval or deny. If the mod is denied, then the borrower gets to appeal the denial, and has 30 days to appeal it. Then it goes back for further review, and the borrower is notified again of the denial. So, what happens then? The borrower submits a new package for review, starting the process over again. And to start it again, a material change must have occurred to change the circumstances of the borrower. This might be as little as getting a $50 per month pay raise, or the value of the home dropping by $10k. When it happens the entire process begins again. But the really sad part is that you only need to look at the Modification Application to know that the borrower will never be able to make the payments, no matter what type of modification occurred, but the whole process must begin again.
( I looked at one file where the loan amount was $450,000. The borrower had lost most of his income, with no hope of regaining it. He could only afford a loan payment at 2%, based upon $85k. Both he and the attorney were pissed that the mod was denied, and they were going to file a lawsuit to stop the foreclosure, and get a modification. To hell with the Investor who would lose in the end over $400k. The homeowner "deserved" his modification, and it was his "right" to have one. This is the b.s. going on stopping foreclosures.)
In 2008 and into 2009, foreclosures were occurring quickly. But homeowner advocates and media pundits used companies like Lender Processing Services, DocX, and MERS as targets to attack to stop foreclosures. This resulted in heavy litigation, and some of these businesses being put out of business. It also caused foreclosures to stop in many states.
One of the favorite arguments by advocates and the media was Robo Signing. I have read the documents in the Trusts which give servicers the right to sign the documents for the Trusts. I have read the MERS membership agreements which provides for the MERS Certifying Officers to sign the documents for MERS. I also have seen the different Power of Attorneys and Corporate Resolutions that allow for these actions. But the fact that the documentation existed which allowed for Robo Signing to occur meant nothing to the advocates because it did not meet their goals.
Yes, shortcuts were taken, but in almost EVERY case, except for a few random situations, the borrowers WERE in default. They had not been prejudiced in any manner. Yet due to various different factors, they were prevented from foreclosure of the properties.
Now, thanks to the government, HAMP loans are being modified, but for the first loans done in 2009, default rates are quickly approaching 50%. Every vintage since is seeing the same pattern occur, and this is before the loans begin to adjust upwards in payment starting in 2014.
Since the government got involved, foreclosures have fallen steadily, but timelines to foreclose has increased to up to three years. It is all because of the government.
Believe me, the servicers would prefer to foreclose and get rid of all the paperwork and files they are working. They would rather foreclose than to modify, because they know that most of the loans that get modified will redefault.
You want to stop defaults? Do principal reductions down to 80% loan to value, and then drop the interest rates on the loan to 2%. That will stop defaults, until the idiot homeowners spend themselves back into the hole, which will happen quickly. But who gets hurt with principal reductions? The Investors or the Taxpayers.
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The intelligent conversation continues:
Pat,
I believe that you misunderstand my point. I am not advocating widespread modifications. Nor am I arguing that securitization is the sole or primary reason for an inefficient foreclosure process. I am pointing out that securitization obscures the parties and the clarity of the loan contract because the originator (formerly known as the lender) transfers his risk to the owners of RMBS in order to leverage capital. Thus, at the time of many foreclosures, the originator is not really out any money by virtue of the borrowers’ defaults. The originator has a contingent liability to the investors that may or may not be guaranteed by a GSE. Or the GSE may be left holding the bag with only a buyback claim against the originator. There are many permutations to this situation.
Many outsiders balance the potential losses to creditors and investors against the benefits received by the creditor from securitization. Also, they balance those potential losses against the losses incurred by the homeowner who loses dollar for dollar any capital that he or she brought to the closing. And they balance them against the losses to an originator that has used the same capital 20 times to make 20 different loans most of which are still performing. This is what I mean by the equities not being completely with the party seeking foreclosure. And each case stands on its own facts. In many cases, fairness will require foreclosure. In some other cases, fairness should require modification or rescission. My only point is that one unintended consequence of securitization is that it obscures the real parties in interest and complicates what used to be a simple, straightforward transaction; i.e., a loan in which the borrower gives the lender a security interest (mortgage) in real estate as additional consideration for the loan and the lender’s sole assumption of the risk of default. Thus, I understand why many politicians and judges have tried to make it more difficult for all lenders to foreclose. The fact that I understand their reasoning does not mean that I agree with any of their policies.
Rick
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I very much appreciate Marc bringing in these discussions and I have learned to value the wisdom and knowledge that pp is bringing us on housing. One important point I would make that Pat already nailed:
"Existing Home Sales is much more important than New Home Sales."
When new home construction rebounds it is a positive factor in employment, in the the context that these increases come from a level of near zero during the crisis. In housing values, more new homes means more supply so it is actually a negative factor for existing home values. If construction is up based on artificially and temporarily low interest rates, that makes the so-called general recovery even more suspect.
A key point both Rick and Pat agree on: foreclosure blockage is a bad thing for the market. Posted by Pat previously, "If government would get out of the way and let "natural actions" clear the market, housing recovery would be shortened considerably."
Politically, it sounds so caring for the government to step in and stop the big bank lender from taking back the collateral that was offered as security on a defaulted loan. But for a free market to exist for housing, intervention tears down the foundation. Lending on housing happens because the loan is 'secured'. But when we demonstrate willingness to void the terms of a valid, private contract using a boldly, interventionist government based on economic conditions and political whim, up goes the risk and down goes the desirability of making those loans in the future.
Ask yourself, what was the difference between the US economy in its greatness and a third world country with no investment and zero growth and I think the answer is consistency in the rule of law. People could enter into long term contracts and investments with the expectation that money will still be money years later, and contracts will be enforceable. We keep chipping away at the cornerstones of our success without noticing the consequences.
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Here is some info to show all how screwed up things are. These are Default Percentages of Loans originated through the GSE's in 2008 and 2009. By that time, underwriting had tightened considerably, but there were still high LTV loans being done.
With the data, you can see the impact that low credit scores had on Default Percentages, but there are contrary indications that don't make sense at first. What I am doing is evaluating a 15m loan data base from Freddie to understand why the outliers exist, the causes of such, and how my new scoring model can account for those factors. Additionally, I and others are engaged in taking this data, using it to determine default risk probability, and then use the data to identify Tier 1 & 2 Capital requirements for banks under BASEL III. The bad part is that I am not getting paid for this yet. That only occurs when we roll everything out next month, and then start signing up banks. At that point, my Patents Rights and Royalties kick in. But until then, I am eating beans, without the ham hocks.
GSE Loan Default Rates 2008-2009 Loan Originations
Loan to Value 25% to 75%
FICO 350-639 640-679 680-719 720-950
DTI 20.1-25 14.80% 5.20% 3.00% 0.50%
DTI 25.1-30 16.70% 6.70% 3.50% 0.80%
DTI 30.1-35 17.60% 7.80% 4.30% 1.00%
DTI 35.1-40 19.90% 9.00% 5.60% 1.50%
DTI 40.1-45 22.20% 11.20% 6.40% 1.80%
DTI 45.1-50 23.00% 11.50% 7.20% 21.00%
With this data, notice the increase in Default % for the 720 bracket. This is purely a result of the high DTI. Probably, it also means that the loan amounts were lower than $200k and presents a small positive Cash Flow after living expenses are considered.
For the under 640 bracket, notice the consistent high default percentages. Typical of that credit profile.
This data shows the nexus of DTI to FICO, especially when loan amounts are smaller and not larger.
Loan To Value 75.% - 85%
FICO 350-639 640-679 680-719 720-950
DTI 20.1-25 17.50% 8.90% 5.40% 1.30%
DTI 25.1-30 19.00% 9.30% 5.90% 1.60%
DTI 30.1-35 22.20% 11.00% 7.20% 2.20%
DTI 35.1-40 24.20% 13.20% 9.20% 3.20%
DTI 40.1-45 27.10% 15.40% 10.90% 3.90%
DTI 45.1-50 27.60% 16.50% 11.40% 4.60%
At the 75-85% LTV, Defaults have increased across all cohorts. This is the stronger influence of the higher LTV at work. This is in line with studies that indicate the higher the LTV, the greater the risk. A likely reason in this case is that many of the homes dropped in value from origination, preventing an ability to "exit" the loan as finances got worse. Positive cash flow would be an issue with the DTI above 40%, for many of the loans.
Loan To Value 85.1% to 95%
FICO 350-639 640-679 680-719 720-950
DTI 20.1-25 17.40% 7.80% 5.00% 2.10%
DTI 25.1-30 19.40% 9.00% 5.50% 2.50%
DTI 30.1-35 22.40% 10.70% 6.70% 3.10%
DTI 35.1-40 25.00% 12.70% 9.40% 4.30%
DTI 40.1-45 27.20% 15.00% 11.10% 5.80%
DTI 45.1-50 28.20% 16.20% 12.10% 6.80%
This chart offers an interesting observation. With it, defaults from 719 and lower have remained reasonably steady. This suggests that that there might be a "Cap" at some level for increased default risk. (Means I have more research to do to figure this out. For the 720 and up group, we see that the influence of DTI is being felt more. Also, with the higher LTV, the possibility of exiting the loan through refinance or selling the property may have diminished, leading to a higher default rate.
Loan to Value 95.1 +
FICO 350-639 640-679 680-719 720-950
DTI 20.1-25 19.00% 6.80% 3.10% 1.30%
DTI 25.1-30 21.00% 7.40% 3.50% 1.40%
DTI 30.1-35 22.20% 8.50% 4.10% 1.70%
DTI 35.1-40 25.10% 10.10% 5.00% 2.10%
DTI 40.1-45 26.50% 11.60% 6.30% 2.80%
DTI 45.1-50 26.20% 12.70% 6.80% 3.60%
The 95 plus LTV group has thrown me for a complete loss. Default rates have fallen for the 640 and above credit scores. Yet, they essentially remain the same for the 639 and lower scores. From a risk viewpoint, we know that 95% plus LTVs have a much greater default rate than the 85-95 group, but this does not reflect that reality.
Different factors may come into play, from the volume of such loans being much lower, whether a purchase or cash out refinance, to even regional differences of where the homes are. But without in depth analysis, who the hell knows. Or there could be one or more of 28 other factors that play a role in default risk.
Additionally, has HAMP played a part as well? Or the offering of Short Sales before a person went into default?
The good news is that the number of defaults have fallen in the 2010 and 2011 vintages, but they have one to two years less performance to evaluate. Additionally, they were subjected to more stringent underwriting, than in 08 or 09. But defaults are surely going to rise, especially when the Fed quits QE, and also when HAMP loans begin to experience interest rate increases in 2014.
Understanding this data is critical for the banks. Under BASEL III, Loan Risk is a key factor in determining Capital (iow, shareholder equity) requirements for liquidity and loss purposes. Banks have to increase their Capital from 6 to 8%, based upon risk calculations. But the problem is quantifying risk, and that is what I am engaged in now.
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This article shows the unintended effects of the Fed pushing rates down. People have now come to expect low rates, especially those who have no experience with mortgage lending in the past.
Not only will this have a negative effect upon new home sales and also re-sales, but it goes towards supporting my previous points that the low interest rates so many homeowners currently enjoy will "enslave" them to their homes, removing them from the move up market.
Pat
http://www.businessweek.com/articles/2013-07-26/can-home-builders-teach-mortgage-history-to-wary-millennials
Can Homebuilders Teach Mortgage History to Wary Millennials?
What a difference a percentage point makes. A slight rise in U.S. mortgage rates—the average for a 30-year fixed mortgage inched from about 3.3 percent in May to 4.3 percent this week—is spooking would-be home buyers and complicating forecasts for builders. Much to the agony of those builders, younger consumers appear transfixed by the shockingly low rates of recent years without paying any mind to historical mortgage norms.
Skittish buyers have become more worried about rising rates than they are about surging home prices, according to a new survey from real-estate data company Trulia (TRLA). Some 41 percent of respondents cited interest rates as their top concern, compared with 37 percent who pointed to prices. “We did anticipate that it would be a big concern; we just didn’t realize quite how much,” says Trulia spokeswoman Daisy Kong. “Low interest rates were the one thing people were able to count on for a while.”
And financing jitters aren’t just showing up on studies—those anxieties were abundantly evident in a round of reports from big U.S. homebuilders this week. D.R. Horton (DHI) posted only a 12 percent increase in new orders for homes from the year-earlier period, less than half the amount expected, while PulteGroup (PHM) saw its orders drop 12 percent. “A lot of buyers were counting on trying to pick the low in the pricing and the low in the interest rates,” D.R. Horton’s chief executive, Donald Tomnitz, said on a conference call.
Executives have tried to downplay the fallout in their earnings presentations, arguing that a lot of things are worse than rising rates. A supply shortage, for one. A crummy economy, for another. “As an industry,” PulteGroup CEO Richard Dugas says, ”we can sell more houses if more people have jobs, even with modestly higher rates.”
Investors haven’t been reassured, sinking shares of both homebuilding companies. Barclays analysts this morning downgraded builders across the board, cutting its assessments of seven companies in all. “Interest rates will have a more significant effect on builder fundamentals than we had previously thought,” they wrote.
So what can homebuilders do? They can try giving their potential customers a history lesson. First-time buyers are far more likely to balk at interest rates, and those newbies probably have little idea how steep rates can get. When mortgages flirted with 20 percent in the early 1980s, these folks were watching He-Man and playing with Cabbage-Patch Dolls.
The whole industry needs to channel every crotchety grandpa who ever made a speech starting with “in my day,” only with a message that actually proves effective with millennials who might be on the market for a home. If done well, financing at 5¢ on the dollar will look like cheap money.
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For homeowners in a low interest rate loan, they really are "stuck" when rates rise. Consider that the interest rate differential between what so many refinanced into and what is considered normal is at least 2%. As rates go up to this level, the following occurs:
1. Buyers are priced out of the market, so sellers must drop their pricing to meet the new reality of what buyers can afford.
2. Drop in home values create a negative equity or near negative equity position for current homeowners so that they cannot sell. (Right now, combined, the near and negative equity homeowners are about 55%, if latest estimates are correct. Imagine what even a 10% drop in values will do to this number.)
3. If they can sell, they haven't enough money for a 20% down payment in most cases, and that will make the loan even more costly, with the addition of PMI. That increases the Debt Ratio significantly.
4. Then, if they can sell and buy, the drop in home values of the new property must be such that it offsets the higher interest rate.
To add to this mess, far too many homeowners have debt ratios that are far and above what is now considered acceptable, when consumer debt is added to the housing debt. They would not be able to meet the new guidelines, and thus would be denied.
What most people ignore, probably purposely, are the relationships between different factors that affect housing, whether borrower characteristics, lending issues, population demographics, etc. A change in one factor creates a "tidal wave" effect across the board. Just like a tidal wave begins with a 6 inch wave and grows, the same exists with housing.
Pat
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Hey, gotta reinflate the housing bubble! What could go wrong?
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What can go wrong? Try this!!!
Notice how the NAR is trying to spin the news. Especially the last paragraph. The lack of investors will lead to higher prices? What planet are they on? It has been the investors who have caused prices to increase. The whole article is about spin.
Rising interest rates constrain pending home sales
After reaching a six-year high, pending home sales fell in June.
The decline in pending home sales is attributed to rising mortgage interest rates, which are beginning to impact the housing market, the National Association of Realtors reports.
NAR’s Pending Home Sales Index edged down 0.4% to an index score of 110.9 in June, dropping from a downwardly revised 111.3 in May. From last year, the index is up 10.9%.
"Mortgage interest rates began to rise in May, taking some of the momentum out of contract activity in June," said NAR chief economist Lawrence Yun.
He added, "The persistent lack of inventory also is contributing to lower contract signings."
On the upside, pending sales have been above year-ago levels for the past 26 months.
Nationwide Insurance chief economist David Berson told HousingWire that although mortgage rates tend to dampen housing demand, stronger job growth, rising numbers of households and increasing household wealth can offset rising interest rates.
"Despite an increase of about half a percentage point for mortgage rates in June, however, the index remains at a high level (other than in May, the index is at the highest level since the end of 2006)," Berson stated.
He added, "This suggests that reported home sales will remain strong for the next couple of months (especially when combined with the large jump in the Index in May)."
Meanwhile, not all pending sales contracts are closing.
The issue is that there are some homebuyers who sign contracts with strong lender commitment letters, but have floating mortgage interest rates.
"Those rates can be locked as late as 10 to 14 days before closing, so some homebuyers may change their mind if the rate rises too much, which apparently happened with some sales scheduled to close in June," Yun explained.
As a result, closed sales are expected to edge down in the months ahead, but will stay above year-ago levels, according to NAR's chief economist.
The PHSI in the Northeast remained unchanged at 87.2 in June but is 12.2% above year ago levels.
In the Midwest, the index slipped 1% to 114.3 in June and is 19.5% higher than in June 2012.
Pending home sales in the South fell 2.1% to an index score of 118.3 in June, up 9.5% from a year ago.
Meanwhile, the index for the West jumped 3.3% to 114.2 and is 4.4% above year ago levels.
Existing-home sales are expected to rise more than 8% for the remainder of the year.
Additionally, investor shortages will lead the median home price to rise by nearly 11% this year, NAR concluded.
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Here we go again. Richmond, the Bay Area crime capital, murder capital per capita, haven for gangs and drug dealers, is now going to try Eminent Domain to take underwater properties and sell them back to the homeowners, after screwing the investors.
This is a scam being perpetrated by Mortgage Resolution Partners, former mortgage brokers who now have a group of investors. They and Richmond are essentially putting together a program whereby they will "steal" the properties from legitimate investors, and then earn a substantial profit when they take the home for 80% lf LTV, and then write down the underwater part of the original mortgage to 95%. Then the borrower refinances into a 95% ltv loan.
Outside of theft, here are the other aspects.
1. No defaulted loans allowed. The borrower must be current, and probably have good credit.
2. With 95% loan to value, the borrower must have cash to close to keep the 95% ltv. How many have the funds?
3. The loans would most likely be run through FHA. Most GSE products would probably decline the loans.
4. It is the original investors in MBS who get screwed. GSE loans will not be touched. Banks might also be on the target list.
5. Mortgage Resolution Partners make all the money.
Of course, the mayor of Richmond is a former school teacher. She has no clue about the law, and the consequences of such as action. You want to ruin Private Lending in the future, then watch what happens if Richmond succeeds.
Pat
A City Invokes Seizure Laws to Save Homes
The power of eminent domain has traditionally worked against homeowners, who can be forced to sell their property to make way for a new highway or shopping mall. But now the working-class city of Richmond, Calif., hopes to use the same legal tool to help people stay right where they are.
An abandoned home in Richmond, where roughly half of all homeowners with mortgages are underwater, meaning they owe more than their home is currently worth.
Scarcely touched by the nation’s housing recovery and tired of waiting for federal help, Richmond is about to become the first city in the nation to try eminent domain as a way to stop foreclosures.
The results will be closely watched by both Wall Street banks, which have vigorously opposed the use of eminent domain to buy mortgages and reduce homeowner debt, and a host of cities across the country that are considering emulating Richmond.
The banks have warned that such a move will bring down a hail of lawsuits and all but halt mortgage lending in any city with the temerity to try it.
But local officials, frustrated at the lack of large-scale relief from the Obama administration, relatively free of the influence that Wall Street wields in Washington, and faced with fraying neighborhoods and a depleted middle class, are beginning to shrug off those threats.
“We’re not willing to back down on this,” said Gayle McLaughlin, the former schoolteacher who is serving her second term as Richmond’s mayor. “They can put forward as much pressure as they would like but I’m very committed to this program and I’m very committed to the well-being of our neighborhoods.”
Despite rising home prices in many parts of the country, including California, roughly half of all homeowners with mortgages in Richmond are underwater, meaning they owe more — in some cases three or four times as much more — than their home is currently worth. On Monday, the city sent a round of letters to the owners and servicers of the loans, offering to buy 626 underwater loans. In some cases, the homeowner is already behind on the payments. Others are considered to be at risk of default, mainly because home values have fallen so much that the homeowner has little incentive to keep paying.
Many cities, particularly those where minority residents were steered into predatory loans, face a situation similar to that in Richmond, which is largely black and Hispanic. About two dozen other local and state governments, including Newark, Seattle and a handful of cities in California, are looking at the eminent domain strategy, according to a count by Robert Hockett, a Cornell University law professor and one of the plan’s chief proponents. Irvington, N.J., passed a resolution supporting its use in July. North Las Vegas will consider an eminent domain proposal in August, and El Monte, Calif., is poised to act after hearing out the opposition this week.
But the cities face an uphill battle. Some have already backed off, and those that proceed will be challenged in court. After San Bernardino County dropped the idea earlier this year, a network of housing groups and unions began working to win community support and develop nonprofit alternatives to Mortgage Resolution Partners, the firm that is managing the Richmond program.
“Our local electeds can’t do this alone, they need the backup support from their constituents,” said Amy Schur, a campaign director for the national Home Defenders League. “That’s what’s been the game changer in this effort.”
Richmond is offering to buy both current and delinquent loans. To defend against the charge that irresponsible homeowners who used their homes as A.T.M.’s are being helped at the expense of investors, the first pool of 626 loans does not include any homes with large second mortgages, said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners.
The city is offering to buy the loans at what it considers the fair market value. In a hypothetical example, a home mortgaged for $400,000 is now worth $200,000. The city plans to buy the loan for $160,000, or about 80 percent of the value of the home, a discount that factors in the risk of default.
Then, the city would write down the debt to $190,000 and allow the homeowner to refinance at the new amount, probably through a government program. The $30,000 difference goes to the city, the investors who put up the money to buy the loan, closing costs and M.R.P. The homeowner would go from owing twice what the home is worth to having $10,000 in equity.
All of the loans in question are tied up in what are called private label securities, meaning they were bundled and sold to private investors. Such loans are generally the most unfavorable to borrowers and the most likely to default, Mr. Gluckstern said. But they are also the most difficult to modify because they are controlled by loan servicers and trustees for the investors, not the investors themselves. If Richmond’s purchase offer is declined, the city intends to use eminent domain to condemn and buy the loans.
The banks and the real estate industry have argued that such a move would be unprecedented and unconstitutional. But Mr. Hockett says that all types of property, not just land and buildings, are subject to eminent domain if the government can show it is needed to promote the public good, in this case fighting blight and keeping communities intact. Railroad stocks, private bus companies, sports teams and even some mortgages have been subject to eminent domain.
Opponents, including the Securities Industry and Financial Markets Association, the American Bankers Association, the National Association of Realtors and some big investors have mounted a concerted opposition campaign on multiple levels, including flying lobbyists to California city halls and pressuring Fannie Mae, Freddie Mac and the Federal Housing Administration to use their control of the mortgage industry to ban the practice.
Tim Cameron, the head of Sifma’s Asset Management Group, said any city using eminent domain would make borrowing more expensive for everyone in the community and divert profits from the investors who now own the loan to M.R.P. and the investors financing the new program. “Eminent domain is used for roads and schools and bridges that benefit an entire community, not something that cherry-picks who the winners are and who the losers are,” he said.
Representative John Campbell, Republican of California, has introduced a bill that would prohibit Fannie, Freddie and the F.H.A. from making, guaranteeing or insuring a mortgage in any community that has used eminent domain in this way. Eminent domain supporters say such limits would constitute a throwback to the illegal practice called redlining, when banks refused to lend in minority communities.
Opponents have also employed hardball tactics. In North Las Vegas, a mass mailer paid for by real estate brokers warned that M.R.P. had “hatched a plan to make millions of dollars by foreclosing on homeowners who are current on their payments.”
In a letter to the Justice Department, Lt. Gov. Gavin Newsom of California complained that the opposition was violating antitrust laws and that one unnamed hedge fund had threatened an investor in the project.
But not all mortgage investors oppose the plan. Some have long argued that writing down homeowner debt makes sense in many cases. “This is not the first choice, but it’s rapidly becoming the only choice on how to fix this mess,” said William Frey, an investor advocate.
Mr. Frey said that the big banks were terrified that if eminent domain strategies became widespread, they would engulf not only primary mortgages but some $450 billion in second liens and home equity loans that are on the banks’ balance sheets. “It has nothing to do with morality or anything like that, it has to do with second liens.”
Many of the communities considering eminent domain were targeted by lenders who steered minority families eligible for conventional mortgages into loans with higher interest rates and ballooning payments. Robert and Patricia Castillo bought a three-bedroom, one-bathroom home in Richmond because their son, who is severely autistic, would anger landlords with his destructive impulses. They paid $420,000 for a home that is now worth $125,000, Mr. Castillo, a mechanic, said.
They have watched as their daughter’s playmates on the block have, one by one, lost their homes. But they are reluctant to walk away from the house in part for the sake of their son.
“We’re in a bad situation,” Mr. Castillo, 44, said. “Not only me and my family, but the whole of Richmond.”
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From David Gordon:
Real Estate Markets: Huge Geographic Differences
John Burns Real Estate Consulting
2 August 2013
The US housing market can no longer be painted with one brush, as the housing recovery is playing out very differently across the country. Here are some anecdotes gleaned from our consulting team...
Florida on sale to the world.
Investors, investors, and investors. From Russia to China to the UK to Brazil, Florida is attracting investors from all over the world. Domestically, the institutional single-family renters are competing with local flippers, too. Good finished lots are now at peak prices in several markets. The active adult/retiree markets continue to experience strong growth.
North Carolina slows after surge.
After a strong Spring housing surge, growing builder competition and a lack of fundamental economic growth are tempering local housing market recoveries. Dwindling lot supplies have also put pressure on builders to get ahead of the pipeline and self-develop communities to maintain volumes.
DC moving South and West.
New home sales have remained fairly steady since the March 1 start of sequestration. The sequestration impact has been less than expected with buyers still purchasing homes but choosing smaller units or spending less on options and upgrades. Entry-level builders in particular are working closely with buyers who think they may be impacted by budget cuts. Land inventories in the Washington, DC metro area are limited, and the market is expanding southward and westward.
Texas economy is growing big!
Entry-level buyers are struggling more here than other places, but that is always the case in Texas. The strongest economies in the country just seem to keep getting stronger, with a notable increase in license plates from other states. The continued economic growth and relocation demand has pushed land, lot and home prices to all-time highs. Apartment construction is booming. Houston is now the largest housing market in the country. In Austin, finished lots in A markets such as Cedar Park and west Austin are becoming more challenging to find, and residential development is migrating northward and westward into regions that had historically been considered B submarkets.
Midwest coming back to life.
Once the Midwest thawed out in April, the housing market thawed out as well. Job growth continues to improve, as do sale volumes. Pricing improvement is right around the corner. Builders in both Minneapolis and Chicago are now running out of desirable lots and are seeking viable development opportunities.
Phoenix temperature cooling.
The white-hot land market in Phoenix may be cooling off. Homebuilders in the A markets are pausing to carefully consider land prices, after 12 months of rapidly escalating prices. Builders are still pursuing deals but are mindful of the impact of rising mortgage rates and price increases on price sensitive buyers. With temperatures over 100 degrees, it is tough to ascertain true demand in Phoenix right now.
Vegas showing some rate sensitivity.
With most of the land around Vegas owned by the government, Las Vegas land supplies remain limited, and builders continue to search for finished lots. Prices for land continue to rise with public homebuilders dominating the Las Vegas market and aggressively bidding on residential land. In the last few weeks, we are starting to see a little pullback with rising cancellations.
Georgia joins the recovery.
The Atlanta housing recovery has officially begun this year, as soaring demand continues in the popular Golden Triangle of North Atlanta. Supply constraints in the north are driving up lot values, especially as the market begins to shift from distressed lot transactions in exurban sprawls to new development within core A and B submarkets. Foreclosure buyers have been big contributors to the recovery.
Northern California in sticker shock.
New home prices may have risen too much in the Bay Area, where consumers have pulled back due to sticker shock. While sales are still strong and price increases still common, rising mortgage rates and the remarkable appreciation of the last year-plus has left many potential buyers behind. Though the most desirable new home communities can simply move down their interest list with each new release, a general slowdown in appreciation is inevitable.
Riverside is again driven by coastal pricing.
Rapidly rising prices in Coastal Southern California markets are pushing more buyers back into the more affordable inland markets of Riverside and San Bernardino Counties, where sales are surging. Sales rates of 6 to 8 sales per project per month are common in A markets like Corona and Eastvale. Land prices are skyrocketing in the close-in markets, rising over 25% in just the last six months.
Orange County supply is rising.
The birthplace of large-scale small-lot masterplans is exploding, with a plethora of new home communities recently opening. Sales are strong and driven by a significant number of foreign buyers who are moving in.
Seattle expands outward.
Homebuilding is pushing out of King County. New home and lot prices in South Snohomish have soared over the last 12 months, and homebuilders are showing an increased appetite for land south of Seattle in Pierce County. As evidence, consider that Tehaleh in Bonney Lake, by Newland Communities, is now the best-selling masterplan in the metro area.
(c) John Burns Real Estate Consulting
www.realestateconsulting.com
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As I posted a response to the other site.
How can you trust a source that believes:
"At this pace, the Fed will soon accomplish their unstated goal of eliminating negative equity, which will allow for refinancing that will be great for the economy."
This is an absurd statement. HARP already allows for Negative Equity financing, so who needs to artificially inflate values to eliminate negative equity again. Inflating the values will only serve to prolong the housing crisis.
If you want to eliminate negative equity for refinancing, then you have to inflate to cover 25% of the homes with a mortgage. This means another 10-20%. But, that now means that you price buyers out of the market with the higher values.
This is a firm that does Real Estate Consulting? Sounds like they are an off shoot of the NAR.
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http://www.washingtontimes.com/news/2013/aug/6/obama-supports-senate-bill-to-kill-fannie-freddie/
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http://www.washingtontimes.com/news/2013/aug/6/obama-supports-senate-bill-to-kill-fannie-freddie/
Yes, he believes the private sector is the solution. The only indication that he is lying is that his lips were moving when he said that - and that everything he has done as President, Senator and community activist before that has been to the contrary.
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I was in a meeting yesterday when this came out and the comments were not positive. Everything he said was contradictory or worse.
1. He wants to replace Fannie and Freddie, but the legislation appears to support the creation of "smaller" entities that would act like the GSE's. Guess who would likely run them.
2. He wants to replace the GSE guarantees with a new Federal Guarantee program, that would step into play after certain investor losses had occurred. Just a "vague" notion with no flesh.
3. He wants to keep rates low like right now for "affordable housing" for the poor to buy, and with 30 year mortgages.
This is all smoke and mirrors. Investors will not purchase loans that have such low interest rates especially over 30 years with the high risk involved. The losses would wip them out from defaults, even if higher inflation did not.
Also, the GSE's have bought their way to power through campaign donations. They will continue to do so and will likely never disappear.
There is no system in place to replace the GSEs. Private investment which would have to supply the funds will not buy the loans without an ability to determine what they are buying. This ability does not exist at this moment because the lenders haven't the ability to determine default risk, probability of default, loss given defaults or ongoing risk assessment on products at this time. And banks cannot portfolio lend because of these same reasons, and also because of BASEL III requirements.
That said, things begin to change on Aug 24. (More to come on this.)
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IBD Editorial confirming what Pat just posted. If he is saying this, he is doing the opposite.
Another Obama Head Fake On Fannie, Freddie Reform 08/06/2013
Big Government: President Obama is renewing calls to reform Fannie Mae and Freddie Mac. But it's just another ruse to prevent these costly government failures from being privatized.
While outlining his plan Tuesday in a housing speech in Phoenix, Obama proved he's the master of talking out of both sides of his mouth.
In one breath, he encouraged the private market to take a bigger role in home lending, and even suggested the government's role should be limited.
Yet in the next, he argued the government still plays a vital role in the mortgage market by guaranteeing "affordable housing" for lower-income Americans.
Then he talked about how he wants to "strengthen" the Federal Housing Administration, by which he means expand its role in the affordable housing market. FHA has already picked up the subprime slack from Fannie and Freddie on his watch.
Now Obama seeks to further expose it to risky subprime loans by qualifying deadbeat borrowers with foreclosures and bankruptcies. Obama also prattled on about personal "responsibility," and making sure those who want a home can actually afford one.
Yet instead of making deadbeat borrowers wait three years to apply for another home loan, Obama is ordering FHA to back such high-risk loans right now, as long as the borrowers have a job and take credit counseling.
He also linked housing reform to immigration reform, arguing that immigration can stimulate the housing market. But in the run-up to the crisis, thanks to government pressure on Fannie and Freddie, millions of Hispanic immigrants — many here illegally — took out home loans with no down payments and weak or no established credit, and defaulted on those loans in droves.
We've heard this from Obama before. In February 2011 he put forth a plan to "reform" Fannie and Freddie. Then as now, he vowed to wind down the toxic twins in favor of a private market solution — with a big caveat.
"Any such changes should occur at a measured pace," the president said in his 30-page report to Congress, "that preserves widespread access to affordable mortgages." He also asserted: "The government still has an important role to play in housing finance."
Two-and-a-half years later, he's still dragging his feet.
Despite prespeech headlines trumpeting "an end to Fannie and Freddie," Obama did no such thing.
Indeed, he offered no specifics about how he would actually unwind the nationalized mortgage giants — which so far have cost taxpayers $190 billion in bailouts, thanks largely to federal affordable-housing mandates that drove them into the subprime market.
If Obama truly were serious about reforming housing finance, he wouldn't have tapped Democratic Rep. Mel Watt to be the nation's top housing finance regulator.
Watt teamed with Democratic Rep. Barney Frank to pressure Fannie and Freddie to underwrite high-risk loans to satisfy their affordable-housing social agenda.
Obama in his speech says he wants to lay a "rock-solid foundation" in home lending to prevent another crisis. But he really only cares about "affordable housing" and carrying out his social agenda.
http://news.investors.com/ibd-editorials/080613-666599-obama-fannie-freddie-affordable-housing-immigration.htm#ixzz2bJ7VqZqg
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Have you bought a foreclosure in CA? Do you think that you own the property? Think again! You may not.........
A case has been winding its way through the courts for several years. The case, Glaski v Bank of America, was contesting the legality of foreclosures in CA, based upon New York Trust Law, which cites that the loan must be assigned to the Trust prior to the closing date of the Trust, or it never made it into the Trust. If it never made it into the Trust, then the Trust has no legal standing to foreclose.
"We conclude that a borrower may challenge the securitized trust's claim to ownership by alleging the attempts to transfer the deed of trust to the securitized trust (which was formed under New York law) occurred after the trust's closing date. Transfers that violate the terms of the trust instrument are void under New York law, and borrowers have standing to challenge void assignments of their loans even though they are not a party to, or a third party beneficiary of, the assignment agreement."
http://www.jdsupra.com/legalnews/in-the-court-of-appeal-of-the-state-of-c-41345/[/b]]
http://www.jdsupra.com/legalnews/in-the-court-of-appeal-of-the-state-of-c-41345/ (ftp://[b)
CA courts are now split on this opinion and chaos is sure to reign until the 9th Circuit and eventually the US Supreme Court rules for or against. In the meantime, over 50% of all foreclosures, past, present and future are now affected by this. Here is what a mess it is.
The Investors have paid cash for the bonds, which was paid to the Depositor who organized the Trusts. Per agreements, they would be the owners now, but that poses issues.
1. Large numbers of Depositors are out of business.
2. If the Depositor is in business, they have been paid for the loan, so they are trying to foreclose on a property that they no longer have any financial interest in having been paid. How do you foreclose on a loan that you have been paid on?
3. All Servicing Agreements between the Servicers and the Trusts are now void, so Servicer actions are unlawful, and they have no ability to collect for the Trust. Assignments, Reconveyances, etc are void when executed by the servicer.
4. One could argue that the Sponsor who sold to the Trusts were the new owners, but most are out of business. Those left in business have been paid off as well.
5. Next, you look to the Originator, but they have also either gone out of business, or have been paid off.
6. If the Assignments are void, then half the foreclosures in CA are likely void. The buyers of those properties are now in limbo. They don't own the properties. And the liens securing the loans are void, so the Notes are unsecured.
7. Title companies are now completely at risk, providing title insurance on properties that are now clouded, and the companies may have to finally start paying out claims.
8. Foreclosure Homes Sales are now at risk.
I have been waiting for this type of ruling. I know how to defend against it, if given the opportunity.
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The small city of Richmond, California has some big ideas about seizing private property, and now it also has a big lawsuit on its hands. This is what happens when politicians use government power to help themselves and their private financial partners at the expense of others.
Last week the Bay Area city became the first in America to say it intends to use eminent domain to seize private mortgages whose value is higher than the current value of the homes they helped to buy. The city wants to force mortgage companies to sell loans on 624 properties, and if they refuse the city is threatening to seize the loans by brute government force.
Richmond wants to refinance the loans through the taxpayer-backed (and broke) Federal Housing Administration, pool them into a new security, and sell them to other private investors. Homeowners will get a free principal reduction, and the politicians will claim they eased the financial burden on borrowers.
The biggest winner will be Mortgage Resolution Partners, the San Francisco-based "community advisory firm" that came up with this idea, has been pitching it around the country, and will earn a fee on the repackaged mortgages. The losers will be investors who currently own the mortgages and are unlikely to receive fair-market value from the city. If the city does pay market value, Mortgage Resolution Partners might not make a profit with its loan rebundling.
Which is where the lawsuit comes in. Three mortgage-bond trustees sued on Wednesday in federal court to block the property seizure as unconstitutional. They have a good argument. The Constitution's Fifth Amendment says eminent domain must be for "public use," but in this case the property seizure would benefit private, often out-of-state investors.
Richmond claims the public purpose is to reduce the number of foreclosures and thus help neighborhoods battered by the housing bust. But the city can't know how many foreclosures there will be because more than two-thirds of the 624 are still current on their monthly payments. Other Richmond homeowners may also have to pay a premium for future home loans due to the new political risk to lenders imposed by Mayor Gayle McLaughlin.
All of this echoes the 2005 Kelo case when New London, Connecticut, seized private homes to clear land so Pfizer Inc. PFE +0.27% could build a research headquarters. Susette Kelo lost her home but Pfizer later abandoned the city. In a notorious 5-4 decision, the Supreme Court blessed the seizure, but we wonder if swing-vote Anthony Kennedy would do the same today. The lawsuit against Richmond says the city's claim to help the local economy is merely a pretext to benefit private investors, and such pretexts are a key issue in Fifth Amendment property-rights cases.
By the way, the plaintiffs include Fannie Mae and Freddie Mac, the government-run mortgage giants that buy mortgages in bulk and could be expected to lose big if other cities follow Richmond's lead. Several cities have expressed interest, including Seattle and Newark, N.J. So taxpayers who bailed out Fan and Fred have a stake in the lawsuit against Richmond.
The largest irony here is that the housing market is finally making a recovery. Last week's second quarter GDP report showed that investment in housing grew by 13.4%, following 12.5% in the first quarter. Leave it to politicians and their financial cronies to interfere with progress.
also see the WSJ video: http://live.wsj.com/video/opinion-how-to-derail-the-housing-recovery/B4B46EFC-1221-4595-B75D-E4864DDA4501.html?mod=opinion_video_newsreel#!B4B46EFC-1221-4595-B75D-E4864DDA4501
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"...This is what happens when politicians use government power to help themselves and their private financial partners at the expense of others."
- The only thing worse than totalitarian, oppressive government is when government pretends to keep a 'private' sector but engages in 'public-private partnerships'. Cringe and fight back when you hear any of these terms.
"Richmond claims the public purpose is to ... "
The rest of that sentence is lie, spin or just doesn't matter. It is not public use. It was the Supreme Court that violated the constitution. The public purpose now is that local authorities were granted the power to choose one private owner over another private owner anytime, any place, on any scale for any reason.
"All of this echoes the 2005 Kelo case when New London, Connecticut, seized private homes to clear land so Pfizer Inc. PFE +0.27% could build a research headquarters. Susette Kelo lost her home but Pfizer later abandoned the city. In a notorious 5-4 decision, the Supreme Court blessed the seizure, but we wonder if swing-vote Anthony Kennedy would do the same today. The lawsuit against Richmond says the city's claim to help the local economy is merely a pretext to benefit private investors, and such pretexts are a key issue in Fifth Amendment property-rights cases."
- That's right!
Even if we had no constitution that had been tromped all over here, does no one believe anymore that a free market with free people making free choices is better than central government control where the powerful can transfer property and advantages to cronies with no limits?
In our town, besides the takings against me, the big project was the Best Buy headquarters where they chased out smaller, independent private businesses in favor of Fortune 500 fame and clout. Now the story is losses, layoffs and closures. The point isn't that the government was wrong with Pfiser in New London, Best Buy in MSP or a GSE buyout in Richmond, it is that they are always wrong to pretend central planners know economic need better than letting scarce resources flow to their most productive use in a free market.
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Mortgage Bubble Investigation Needs Investigating
In another Friday night news dump, the Obama Justice Department admitted that it cooked the books on its mortgage fraud investigation. A year-long initiative run by the Mortgage Fraud Working Group sought to get to the bottom of some of the fraud that caused the mortgage bubble. It claimed it had charged 530 people with mortgage fraud, which allegedly victimized 73,000 people. After Bloomberg reporters dug deeper, however, the Justice Department was forced to admit that they grossly overstated the numbers. It wasn't 530 people charged, it was 107; and it wasn't 73,000 victims, it was 17,185. Naturally, they chose Friday night to correct the record.
Columnist Ed Morrissey wrote, "As it turns out, the original figure included people prosecuted or just sentenced in the same fiscal year, even though they had been charged with crimes long before the MFWG came into being. The victims were not limited to distressed homeowners, as the DoJ had originally claimed, and as Eric Holder himself bragged." Nor was this Eric Holder's first time in book-cooking class -- a similar thing happened in 2010 with the president's Financial Fraud Enforcement Task Force called "Operation Broken Trust."
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"As it turns out, the original figure included people prosecuted or just sentenced in the same fiscal year, even though they had been charged with crimes long before the MFWG came into being. The victims were not limited to distressed homeowners, as the DoJ had originally claimed, and as Eric Holder himself bragged." Nor was this Eric Holder's first time in book-cooking class -- a similar thing happened in 2010 with the president's Financial Fraud Enforcement Task Force called "Operation Broken Trust."
"Operation Broken Trust." We've found the real slogan for the Obama administration.
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http://online.wsj.com/article/SB10001424127887323423804579022672911329450.html?mod=WSJ_hpp_LEFTTopStories
WASHINGTON—Of all the temporary patches the U.S. government slapped onto the sinking financial system in September 2008—from pumping money into banks to rescuing insurer American International Group Inc. AIG -1.01% —none was more urgent to then-Treasury Secretary Henry Paulson than saving mortgage giants Fannie Mae FNMA +0.81% and Freddie Mac FMCC -0.88% .
[image]
"It was the single most important thing we did to prevent disaster—real disaster," said Mr. Paulson in a recent interview. But five years later, he adds, "it didn't occur to me that we'd be here with nothing done."
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"Rep. Jeb Hensarling, a Texas Republican who chairs the House Financial Services Committee, is moving forward a bill to wind down Fannie and Freddie over five years and cede their roles to the private sector."
Good to hear there is such a proposal. Too bad that the do nothing alternative has all the momentum.
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http://hensarling.house.gov/news/jeb-in-the-news/2013/08/dmn--hensarling-a-taxpayer-friendly-alternative-to-fannie-mae-and-freddie-mac.shtml
A Taxpayer-Friendly Alternative to Fannie Mae and Freddie Mac
By: Rep. Jeb Hensarling, Dallas Morning News, August 28, 2013
Soon we will mark the fifth anniversary of the financial crisis that wrecked our economy, left millions of Americans unemployed and from which we have yet to recover.
From a public policy perspective, the great tragedy of the financial crisis was not that Washington failed to prevent it, but that Washington helped lead us into it. The crisis largely started with a noble intention: Every American should own a home. The result was that well-meaning but misguided policies — principally the “Affordable Housing Goals” of Fannie Mae and Freddie Mac — either strong-armed or enticed financial institutions into loaning money to people to buy homes they sadly couldn’t afford. In fact, over 70 percent of the nontraditional mortgages that led to the crisis were backed by Fannie, Freddie and other taxpayer-subsidized programs.
In typical fashion, Washington responded to the crisis by passing a 2,000-page bill that did more to exploit the crisis than solve it.
Today, because it did not solve the problem, taxpayers have been forced to pay for the mother of all bailouts — nearly $200 billion for Fannie and Freddie. That’s unimaginable.
Today, taxpayers remain on the hook for more than $5 trillion in mortgage guarantees, roughly $45,000 per American family. That’s unconscionable.
Today, the federal government has a virtual monopoly on the housing finance system, enabling Washington elites — similar to those at the IRS — to control who can qualify for a mortgage. That’s unfair.
Americans deserve better.
We deserve a system that protects current and future homeowners so every American who works hard and plays by the rules can have opportunities and choices to buy homes they can actually afford to keep.
We deserve a system that protects hardworking taxpayers so they never again have to bail out big government-sponsored corporations like Fannie Mae and Freddie Mac or even those who irresponsibly bought expensive homes they couldn’t afford.
We deserve a system that finally breaks the Washington-induced destructive cycle of boom, bust and bailout.
That’s why the House Financial Services Committee, which I chair, recently approved the PATH Act — the Protecting American Taxpayers and Homeowners Act. The PATH Act creates a sustainable housing finance system by limiting government control, putting private capital at the center of the mortgage system and giving homebuyers more informed choices about their mortgage options.
With the PATH Act, we end the bailout of Fannie and Freddie and phase out their failed taxpayer-backed business model.
The PATH Act also protects the Federal Housing Administration, which is so overextended that it is heading for its own bailout. Today, FHA can use taxpayers to insure mortgages for millionaires and homes valued as high as $729,750. We return FHA to its traditional mission: serving first-time homebuyers and those with low and moderate incomes, as well as ensuring it will be able to insure loans to any qualified borrower if ever faced with another economic crisis.
Finally, the PATH Act removes artificial barriers to private capital to attract investment and encourage innovation.
Others, including some who profit from the status quo, have discussed different reform plans. I welcome them, but all of us must be careful. We cannot allow a plan to become law that simply puts Fannie and Freddie in the federal witness protection program, gives them cosmetic surgery and new identities, then releases them upon an unsuspecting public. We can no longer allow Wall Street investment firms to offload their credit risks on Main Street taxpayers under the guise of promoting homeownership.
No, America needs real reform and a healthier economy. The best housing program is not a subsidy, guarantee or tax credit; it is a good job in a growing economy. The PATH Act will strengthen our economy. It is our path toward real reform and a truly sustainable housing finance system that’s built to last.
- Rep. Jeb Hensarling, R-Dallas, represents the 5th Congressional District and is the chairman of the House Financial Services Committee. He may be contacted through hensarling.house.gov.
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I posted previously my (wrongful) belief that housing values will not rebound until incomes go up. But this 'recovery' is happening without accompanying increase in income. As housing again becomes unaffordable, maybe we can start some more new federal programs to help the lower 98% borrow what they can't afford, instead of growing the economy...
http://finance.townhall.com/columnists/politicalcalculations/2013/09/08/the-first-anniversary-of-the-second-us-housing-bubble-n1694264/page/full
Chart: http://3.bp.blogspot.com/-yTQshr0MHjU/UifhYuR4lnI/AAAAAAAAI3c/LikSgMAI9Kc/s1600/US-median-new-home-sale-prices-vs-median-household-income-1999-2013.png
In looking at the current trend, since July 2012, the median sales price of a newly constructed home in the United States has gone up by just over $25 for every $1 that median household income in the United States has increased. That's almost 20% faster than the $21-to-$1 rate that the first U.S. housing bubble inflated on average from November 2001 through September 2005.
...
Since 1967, median new home sale prices in the U.S. have typically increased by anywhere from $3.37 to $4.09 for every $1 increase in median household income in the absence of any periods of bubble inflation or deflation in U.S. housing markets.
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Fannie Mae Revivalist
The Obama Administration tries again to turn on Fan's easy money spigots.
Oct. 30, 2013 7:20 p.m. ET
The Obama Administration has tried for years to oust career employee Edward DeMarco from the helm of the Federal Housing Finance Agency (FHFA), the chief regulator for Fannie Mae FNMA -8.68% and Freddie Mac. FMCC -9.40% The idea is to get a loyalist in charge who is more willing to take political orders. The latest White House nominee is coming up for a Senate vote as early as Thursday, and Republicans have good reasons to block him.
President Obama wants North Carolina Congressman Mel Watt to run the FHFA, an obscure institution with enormous discretionary power. Since 2008 the agency has acted as the conservator for Fannie and Freddie and overseen the 12 Federal Home Loan Banks. FHFA oversees 48% of all outstanding U.S. mortgages and 77% of those issued last year—all taxpayer guaranteed—and Fan and Fred have $5 trillion in mortgage business.
Mr. DeMarco has interpreted the FHFA mandate to "preserve and conserve" the agency's assets to include protecting taxpayers. He has tightened underwriting standards, doubled guarantee fees, shrunk Fan and Fred's mortgage portfolios and prohibited the mortgage giants from entering new businesses.
He has also championed the return of a private mortgage insurance market and—most important—refused Obama Administration calls for mass writedowns on loan principal. Democrats favor the writedowns as a political sop to some homeowners, but Mr. DeMarco rightly says this would be unfair to borrowers who pay their bills on time as well as to taxpayers who would underwrite the losses.
Meanwhile, Fannie and Freddie are minting money again because of their market oligopoly, and the political impetus to reform is diminishing. Last year Congress used the agencies to pay for an extension of a payroll tax cut, and the Administration has seized Fan and Fred's profits.
Wall Street hedge funds betting on a revival of Fan and Fred have also re-emerged as champions of the toxic titans. They want to recreate the Wall Street-Washington nexus that made the giants so politically untouchable before the panic.
As for Mr. Watt, he's spent 20 years in the House encouraging the practices that got Fannie and Freddie into trouble. As a senior member of the Financial Services Committee, he followed Barney Frank in supporting Fan and Fred's affordable housing goals and lax underwriting, as well as taking campaign contributions from the toxic twins.
Mr. Watt is also notably coy about how he'd manage Fan and Fred while Congress figures out what to do with them. In an interview with this newspaper in May, Mr. Watt said he "didn't know" what the biggest differences would be between his approach and Mr. DeMarco's, what the mission of FHFA was, nor what are the biggest challenges facing the agency.
This isn't surprising because Mr. Watt is a civil-rights lawyer who lacks the minimum experience required by the FHFA conservator statute. The Housing and Economic Recovery Act of 2008 says the conservator shall "have a demonstrated understanding of financial management or oversight, and have a demonstrated understanding of capital markets, including the mortgage securities markets and housing finance." The word "demonstrated" does not suggest on-the-job training.
On June 24, 2010, Mr. Watt asked at a Congressional conference committee: "Can somebody explain to me what's in Tier 1 capital?" and "I just don't have enough knowledge in this area to understand." In December 2011 he said that, despite his Financial Services slot, "I didn't know a damn thing about derivatives. I am still not sure I do."
One reason Fan and Fred went belly up is that they didn't hire experts in finance. They deliberately hired CEOs who were experts in politics to protect their government guarantee. That's Mr. Watt. As recently as last December, he joined other Members of Congress in writing to House leaders urging that budget talks include "assistance to homeowners who are currently underwater on their mortgages," including the Fan and Fred principal writedowns that Mr. DeMarco has resisted. Mr. Watt now says he'd have different obligations at FHFA, but he has refused to rule out writedowns.
As FHFA director he'd also have the power to steer Fan and Fred profits to a new affordable housing "trust fund" created in 2008. Mr. DeMarco has never done so, preferring to repay taxpayers first. But Mr. Watt has pointedly refused to commit himself on the trust fund, which Mr. Frank designed to channel cash to left-wing groups like Acorn and its cousins.
Congress may finally try to pass housing-finance reform in the coming months, including Fan and Fred. If Republicans confirm Mr. Watt, they'll reduce the negotiating incentive for Democrats who will figure they can accomplish their political goals through Mr. Watt. The least GOP Senators should do is keep Mr. DeMarco on the job until a reform is passed. It's bad enough putting an amateur in charge of a $5 trillion business, but it's worse when that amateur's main expertise is politics.
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I post two different articles regarding the Housing Pending Sales, one from Calculated Risk and one from Zerohedge. Notice that CR does not provide his usual commentary that he will have more to say later, or that as he customarily does, makes a positive prediction about the year to come. This is a major deviation from what he normally does. Has CR seen the coming collapse?
Zerohedge takes an opinionated view, comparable to what I have been saying for so long.
The NAR continues its misleading marketing campaign in this report. They apply restricted inventory issues and affordability issues for the drop, but still attempt to put a positive spin on it. This is a croc!
In Northern CA, the changes in Housing Sales is becoming clearer each day. Multiple bids are disappearing. Home values in many areas have started to fall again. Higher priced homes are not getting bids now, and homeowners are dropping the asking price by $100k or more. I am hearing that this is also beginning to occur in Southern CA. If so, this would completely contradict what the NAR is saying about the influence of restricted inventory.
For Sales next year, the CFPB still has not come out with final QM rules. The banks have no idea what to do, and cannot plan. The CFPB cannot simply state on Jan 1 that the new rules will be such and such, and that lenders can immediately begin to lend on the new standards. It takes months to implement the changes.
Banks are also very concerned about the DOJ and the new "disparate impact" strategy. With this, a lender can deny a loan on a perfectly valid reason, and the DOJ can claim a racial bias because an ethnic group member was denied the loan. It matters not that racial bias did not exist. It only matters what DOJ wanted to do.
You can't lend when you don't know what the new regulations are, and you can't lend when you have a rogue agency or two looking to screw you at every turn.
http://www.calculatedriskblog.com/2013/11/pending-home-sales-index-declines-06-in.html
From the NAR: October Pending Home Sales Down Again, but Expected to Level Out
The Pending Home Sales Index, a forward-looking indicator based on contract signings, slipped 0.6 percent to 102.1 in October from an upwardly revised 102.7 in September, and is 1.6 percent below October 2012 when it was 103.8. The index is at the lowest level since December 2012 when it was 101.3; the data reflect contracts but not closings.
...
[Lawrence Yun, NAR chief economist said:]“The government shutdown in the first half of last month sidelined some potential buyers. In a survey, 17 percent of Realtors® reported delays in October, mostly from waiting for IRS income verification for mortgage approval,” he said.
The PHSI in the Northeast rose 2.8 percent to 85.8 in October, and is 8.1 percent above a year ago. In the Midwest the index increased 1.2 percent to 104.1 in October, and is 3.2 percent higher than October 2012. Pending home sales in the South slipped 0.8 percent to an index of 114.5 in October, and are 1.5 percent below a year ago. The index in the West fell 4.1 percent in October to 93.3, and is 12.1 percent lower than October 2012.
emphasis added
Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in November and December
Pending Home Sales Collapse At Fastest Pace Since April 2011, Drop To December 2012 Levels
Despite the downtick in rates for a month or two, the housing 'recovery' appears to have come to an end. This is the fifth consecutive monthly decline in pending home sales and even though a smorgasbord of Wall Street's best and brightest doth protest, it would appear the lagged impact of rising rates is with us for good (as the fast money has left the flipping building). This is the biggest YoY decline since April 2011 as NAR blames low inventories and affordability for the poor performance. Perhaps more worrying for those still clinging to the hope that this ends well is the new mortgage rules in January that could further delay approvals.
Via NAR,
“The government shutdown in the first half of last month sidelined some potential buyers. In a survey, 17 percent of Realtors reported delays in October, mostly from waiting for IRS income verification for mortgage approval,” he said.
“We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions. Job creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors,” Yun said.
Yun said there are concerns heading into 2014. “New mortgage rules in January could delay the approval process, and another government shutdown would harm both housing and the economy,” he said.
So the Fed provided the liquidity that bid prices up to a point that makes it unaffordable for the average joe and uneconomic for the average free-money-riding hedge fund. The Fed has made any recovery entirely dependent on extremely low rates and now is suggesting that taper is coming... and still... Strategists exclaim that rates are low by historical standards and so it won't matter!! come on!
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"affordability issues"
Yes. Besides all the inside housing issues, sales and values don't keep going up when employment, disposable income and affordability are all headed down. If your family's healthcare cost just doubled or your job or hours were eliminated because of the healthcare law, do you have more or less to spend on the new house?
It is an inter-connected economy.
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http://money.msn.com/home-loans/news.aspx?feed=OBR&date=20131126&id=17143860
Insight: A new wave of U.S. mortgage trouble threatens
November 26, 2013 6:29 AM ET.
By Peter Rudegeair
(Reuters) - U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks.
The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along.
More than $221 billion of these loans at the largest banks will hit this mark over the next four years, about 40 percent of the home equity lines of credit now outstanding.
For a typical consumer, that shift can translate to their monthly payment more than tripling, a particular burden for the subprime borrowers that often took out these loans. And payments will rise further when the Federal Reserve starts to hike rates, because the loans usually carry floating interest rates.
The number of borrowers missing payments around the 10-year point can double in their eleventh year, data from consumer credit agency Equifax shows. When the loans go bad, banks can lose an eye-popping 90 cents on the dollar, because a home equity line of credit is usually the second mortgage a borrower has. If the bank forecloses, most of the proceeds of the sale pay off the main mortgage, leaving little for the home equity lender.
There are scenarios where everything works out fine. For example, if economic growth picks up, and home prices rise, borrowers may be able to refinance their main mortgage and their home equity lines of credit into a single new fixed-rate loan. Some borrowers would also be able to repay their loans by selling their homes into a strengthening market.
ONCE USED LIKE CREDIT CARDS
But some regulators, rating agencies, and analysts are alarmed. The U.S. Office of the Comptroller of the Currency, a regulator overseeing national banks, has been warning banks about the risk of home equity lines since the spring of 2012. It is pressing banks to quantify their risks and minimize them where possible.
At a conference last month in Washington, DC, Amy Crews Cutts, the chief economist at consumer credit agency Equifax, told mortgage bankers that an increase in tens of thousands of homeowners' monthly payments on these home equity lines is a pending "wave of disaster."
Banks marketed home equity lines of credit aggressively before the housing bubble burst, and consumers were all too happy to use these loans like a cheaper version of credit card debt, paying for vacations and cars.
The big banks, including Bank of America Corp, Wells Fargo & Co, Citigroup Inc, and JPMorgan Chase & Co have more than $10 billion of these home equity lines of credit on their books each, and in some cases much more than that.
How bad home equity lines of credit end up being for banks will hinge on the percentage of loans that default. Analysts struggle to forecast that number.
In the best case scenario, losses will edge higher from current levels, and will be entirely manageable. But the worst case scenario for some banks could be bad, eating deeply into their earnings and potentially cutting into their equity levels at a time when banks are under pressure to boost capital levels.
"We just don't know how close people are until they ultimately do hit delinquencies," said Darrin Benhart, the deputy comptroller for credit and market risk at the Office of the Comptroller of the Currency. Banks can get some idea from updated credit scores, but "it's difficult to ferret that risk out," he said.
What is happening with home equity lines of credit illustrates how the mortgage bubble that formed in the years before the financial crisis is still hurting banks, even seven years after it burst. By many measures the mortgage market has yet to recover: The federal government still backs nine out of every ten home loans, 4.6 million foreclosures have been completed, and borrowers with excellent credit scores are still being denied loans.
NO EASY WAY OUT
Banks have some options for reducing their losses. They can encourage borrowers to sign up for a workout program if they will not be able to make their payments. In some cases, they can change the terms of the lines of credit to allow borrowers to pay only interest on their loans for a longer period, or to take longer to repay principal.
A Bank of America spokesman said in a statement that the bank is reaching out to customers more than a year before they have to start repaying principal on their loans, to explain options for refinancing or modifying their loans.
But these measures will only help so much, said Crews Cutts.
"There's no easy out on this," she said.
Between the end of 2003 and the end of 2007, outstanding debt on banks' home equity lines of credit jumped by 77 percent, to $611.4 billion from $346.1 billion, according to FDIC data, and while not every loan requires borrowers to start repaying principal after ten years, most do. These loans were attractive to banks during the housing boom, in part because lenders thought they could rely on the collateral value of the home to keep rising.
"These are very profitable at the beginning. People will take out these lines and make the early payments that are due," said Anthony Sanders, a professor of real estate finance at George Mason University who used to be a mortgage bond analyst at Deutsche Bank.
But after 10 years, a consumer with a $30,000 home equity line of credit and an initial interest rate of 3.25 percent would see their required payment jumping to $293.16 from $81.25, analysts from Fitch Ratings calculate.
That's why the loans are starting to look problematic: For home equity lines of credit made in 2003, missed payments have already started jumping.
Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That's a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.
This scenario will be increasingly common in the coming years: in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.
The Federal Reserve could start raising rates as soon as July 2015, interest-rate futures markets show, which would also lift borrowers' monthly payments. The rising payments that consumers face "is the single largest risk that impacts the home equity book in Citi Holdings," Citigroup finance chief John Gerspach said on an October 16 conference call with analysts.
A high percentage of home equity lines of credit went to people with bad credit to begin with — over 16 percent of the home equity loans made in 2006, for example, went to people with credit scores below 659, seen by many banks as the dividing line between prime and subprime. In 2001, about 12 percent of home equity borrowers were subprime.
Banks are still getting hit by other mortgage problems too, most notably on the legal front. JPMorgan Chase & Co last week agreed to a $13 billion settlement with the U.S. government over charges it overstated the quality of home loans it sold to investors.
TIP OF THE ICEBERG
Banks have differing exposure, and disclose varying levels of information, making it difficult to figure which is most exposed. The majority of home equity lines of credit are held by the biggest banks, said the OCC's Benhart.
At Bank of America, around $8 billion in outstanding home equity balances will reset before 2015 and another $57 billion will reset afterwards but it is unclear which years will have the highest number of resets. JPMorgan Chase said in an October regulatory filing that $9 billion will reset before 2015 and after 2017 and another $22 billion will reset in the intervening years.
At Wells Fargo, $4.5 billion of home equity balances will reset in 2014 and another $25.9 billion will reset between 2015 and 2017. At Citigroup, $1.3 billion in home equity lines of credit will reset in 2014 and another $14.8 billion will reset between 2015 and 2017.
Bank of America said that 9 percent of its outstanding home equity lines of credit that have reset were not performing. That kind of a figure would likely be manageable for big banks. But if home equity delinquencies rise to subprime-mortgage-like levels, it could spell trouble.
In terms of loan losses, "What we've seen so far is the tip of the iceberg. It's relatively low in relation to what's coming," Equifax's Crews Cuts said.
(Reporting by Peter Rudegeair in New York; Editing by Daniel Wilchins, Martin Howell and Tim Dobbyn)
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Consumers can expect to pay more to get a mortgage next year, the result of changes meant to reduce the role that Fannie Mae FNMA -1.45% and Freddie Mac FMCC +0.78% play in the market.
The mortgage giants said late Monday that, at the direction of their regulator, they will charge higher fees on loans to borrowers who don't make large down payments or don't have high credit scores—a group that represents a large share of home buyers. Such fees are typically passed along to borrowers, resulting in higher mortgage rates.
Fannie and Freddie, which currently back about two-thirds of new mortgages, don't directly make mortgages but instead buy them from lenders. The changes are aimed at leveling the playing field between the government-owned companies and private providers of capital, who are mostly out of the mortgage market now. Fannie and Freddie were bailed out by the government during the financial crisis but are now highly profitable.
The Federal Housing Finance Agency last week signaled the fee increases but didn't provide details. The agency's move came one day before the Senate voted to confirm Rep. Mel Watt (D., N.C.) as its director. It isn't clear whether Mr. Watt, who hasn't yet been sworn in, weighed in on the changes. An FHFA spokeswoman declined to comment on any discussions with Mr. Watt, who also declined to comment.
Mr. Watt will face heavy pressure by consumer groups and the real-estate industry to reverse course, industry officials said Tuesday. "There will be significant opposition very quickly once people understand what is actually being implemented," said Martin Eakes, chief executive of the Center for Responsible Lending in Durham, N.C., a consumer-advocacy nonprofit.
The changes take effect in March but will be phased in by lenders earlier. The fee increases come as the Federal Reserve contemplates an end to its bond-buying program, which has kept mortgages rates low, and as new mortgage-lending regulations take effect next month.
Related
J.P. Morgan Sues FDIC Over WaMu
"The timing of it is impeccably bad," said Lewis Ranieri, co-inventor of the mortgage-backed security. "The question becomes: how much can housing take?"
In updates posted to their websites on Monday, Fannie and Freddie showed that fees will rise sharply for many borrowers who don't have down payments of at least 20% and who have credit scores of 680 to 760. (Under a system devised by Fair Isaac Corp. FICO -1.75% , credit scores range from 300 to a top of 850.)
A borrower seeking a 30-year fixed-rate mortgage with a credit score of 735 and making a 10% down payment, for instance, would pay fees totaling 2% of the loan amount, up from 0.75% now. The 2% upfront fee could raise the mortgage rate by around 0.4 percentage points.
Borrowers with larger down payments could also be affected. Fees for a loan with a 690 credit score and a 25% down payment would rise to 2.25% from 1.5%.
Executives at Fannie and Freddie said last month that the fees they have been charging are enough to cover expected losses, but that those fees might need to rise in order to allow private investors, which target a higher rate of return, to compete. An FHFA official Tuesday said that even with the latest changes, Fannie's and Freddie's fees would be considered low relative to private firms'.
Mr. Ranieri, who runs a mortgage-investment firm, predicted that the move would backfire and hit the economy. Because the private sector isn't strong enough to lend more, "all this will do is tighten credit. You're just making housing less affordable," he said.
Industry executives also said the magnitude of the increases was a surprise. "It's like Beyoncé's album: It all of a sudden hit the market," said David Stevens, chief executive of the Mortgage Bankers Association.
In recent months, some large banks have been offering "jumbo" mortgages, which are too large for government backing, at rates below the conforming mortgages that are eligible for purchase by Fannie and Freddie for borrowers with the best credit. The higher fees could make conforming mortgages even more expensive than jumbos.
The changes follow other announcements in recent weeks that could raise loan costs for some borrowers. The Federal Housing Administration, a government agency that guarantees loans with down payments as small as 3.5%, said earlier this month that it would drop the maximum loan limit in around 650 counties. In San Bernardino, Calif., for example, the loan limit will fall to $335,350 next month from the current level of $500,000.
Separately, the FHFA said Monday it would study reducing the loan amounts that Fannie and Freddie guarantee by around 4%, bringing the national limit to $400,000 from its current level of $417,000. Those changes won't take effect before October 2014, the agency said.
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Housing Starts Increased 22.7% in November to 1.091 Million Units at an Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 12/18/2013
Housing starts increased 22.7% in November to 1.091 million units at an annual rate, coming in well above the consensus expected 955,000 pace. Starts are up 29.6% versus a year ago.
The rise in starts in November was due to gains in both single-family and multi-family units, which were up 20.8% and 26.8% respectively. Single-family starts are up 26.2% from a year ago while multi-family starts are up 36.8%.
Starts in November increased in the Midwest, South, and West, but declined in the Northeast.
New building permits declined 3.1% in November to a 1.007 million annual rate, but came in above the consensus expected 990,000 pace. Compared to a year ago, permits for single-unit homes are up 10.5% while permits for multi-family units are up 3.9%.
Implications: Home building boomed in November, coming in at the highest level in more than five years. Despite recent volatility, the housing recovery is still strong. As the chart to the right shows, housing is clearly improving: single-family starts are up 26.2% from year-ago levels, while multi-family starts are up 36.8%. Those who are looking for signs of a slowdown will jump on the previous few months’ volatility and the weather-induced pattern. But we believe this is a mistake. Overall, the underlying trends for home building continue to rise and should remain in that mode for at least the next couple of years. The total number of homes under construction (started, but not yet finished) is up 28.3% from a year ago. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably by 2015). This is the level of construction that keeps the inventory of homes for sale at a stable level. Most of these homes will be owner-occupied but a large share will also be occupied by renters, which explains why multi-family construction has rebounded more sharply than the single-family sector over the past few years. Housing permits declined 3.1% in November but this was all due to a decline in volatile multi-family permits. Single-family permits rose 2.1%, are at the highest level since mid-2008, and are up 10.5% from a year ago. The bottom line is that no one should get worked up over every zig and zag in the data. Sometimes one indicator ticks down, like building permits; other times an indicator, like housing starts, will boom. It’s important to focus on the trends, and all trends point to further housing gains in the years ahead. In other positive housing news, yesterday, the NAHB index, which measures confidence among home builders, came in at 58 in December, up 4 points from November, and besides August, is at the highest level in eight years.
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New regulator Watt signals shift in U.S. housing policy
BY MARGARET CHADBOURN
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Representative Mel Watt testifies before the Senate Banking, Housing and Urban Affairs Committee confirmation hearing to be the regulator of mortgage finance firms Fannie Mae and Freddie Mac on Capitol Hill in Washington June 27, 2013.
CREDIT: REUTERS/YURI GRIPAS
(Reuters) - Mel Watt, who was sworn in on Monday to head the agency that regulates mortgage finance firms Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), has signaled a new approach to U.S. housing policy that will put more of an emphasis on ensuring access to credit.
Watt, a 68-year-old North Carolina Democrat who spent more than two decades in Congress, is the first permanent director of the Federal Housing Finance Agency in four years.
"Today's housing finance system is one of the keys to our economic recovery," Watt said in a statement after being sworn in. He said he hoped to "develop a strong foundation for moving this system forward for the benefit of all Americans at this critical point in our nation's history."
Even before taking office, Watt had said that he would delay a series of Fannie Mae and Freddie Mac loan-fee hikes that were announced by the FHFA a day ahead of his confirmation by the U.S. Senate in December. Industry and consumer groups decried the increases as driving up the cost of borrowing. Jaret Seiberg, a senior policy analyst at Guggenheim Securities, said there were high hopes that Watt would "focus on expanding the mortgage credit box. The open question is how effective he will be and how strongly he will endorse that role," he said. "The first few months are likely to tell the market a lot about his tenure."
As the overseer of government-controlled Fannie Mae and Freddie Mac, Watt has authority over two companies at the heart of the U.S. housing finance system. The companies, which back about 60 percent of U.S. home loans, buy mortgages from lenders and package them into securities on which they guarantee payments of principal and interest. In doing so, they serve as major sources of funding for hundreds of banks.
Fannie Mae and Freddie Mac were seized by the government in 2008 as mortgage losses mounted. They have received $187.5 billion in taxpayer funds to stay afloat, while paying about $185.2 billion in dividends to the government for that support.
As the head of the FHFA, Watt will be able to influence how much mortgage credit consumers can access.
Watt's predecessor, Edward DeMarco, had faced a barrage of criticism from both housing groups and consumer advocates for blocking Fannie Mae and Freddie Mac from slashing mortgage balances for troubled borrowers. The move, however, won praise from Republicans for protecting the interest of taxpayers.
In contrast, Watt is expected to consider a targeted principal forgiveness program.
The mortgage industry also anticipates that he will expand federal programs that allow borrowers with loans backed by Fannie Mae and Freddie Mac to lower their interest rates even if they owe more on their loans than their homes are worth.
Mortgage-bond investors worry such a step and other efforts Watt may make to support the housing market could make the securities they hold less valuable.
Watt was nominated by Obama in May, but his confirmation hit a snag when Senate Republicans threatened to filibuster his nomination. Senate Democrats later changed the rules to make it possible for Watt and other presidential nominees to overcome filibusters on a simple majority vote; previously it took 60 votes in the 100-seat chamber.
He was confirmed on a 57-41 vote. All 55 members of the Democratic caucus supported Watt, while only two Republicans backed him.
Republicans have argued that Watt, a lawyer who served in the House of Representatives from 1992 until his resignation to take the FHFA job this year, lacks the expertise to oversee the mortgage giants. Some worry he will be unable to resist White House pressure to pursue the administration's policy goals.
The FHFA director is selected by the president, but serves as an independent regulator for a five-year term. With a veteran Democrat in the post, the agency's policies are expected to more closely align with initiatives by the Democrat-controlled Senate and the White House to overhaul the nation's $10 trillion mortgage market.
Obama and his fellow Democrats in Congress have started the reform process and are building bipartisan support to replace Fannie Mae and Freddie Mac, but they want to ensure some government support for housing remains.
A final bill could take years.
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"New Bubble" Talk, Premature To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 1/13/2014
That was fast. A little over two years ago, we declared that housing had not only bottomed, but was about to start its first real growth spurt since the bubble (Housing At An Inflection Point 11/2/2011). While some agreed, others expressed polite disagreement or, in some cases, incredulity.
While we may not get everything right, this time we couldn’t have timed it better. Housing starts are up about 65%, new home sales are up more than 50%, existing home sales have turned the corner, and national average home prices are up around 15%. But now, instead of admitting they were wrong, the naysayers have immediately jumped on the “new bubble” bandwagon. In essence, the are saying, “if it’s good, it can’t be real,” and “anything good, must end in another crash.”
We don’t doubt that another bubble could eventually develop. After all, the federal government is still too heavily involved in housing. Twenty-two percent of mortgage borrowers are making down-payments of less than 10% (thanks to the FHA), while Fannie and Freddie are providing long-term financing at very attractive rates.
Meanwhile, the Fed is holding rates too low, and “tapering” doesn’t mean “tightening,” it just means the Federal Reserve is adding to banks’ excess reserves at a slower rate.
None of this is lost on us. We understand the implications. But, just because a few players on the team are cheating, that doesn’t always mean that a victory was all due to those players. In other words, there’s no clear evidence that home prices are already out of line with fundamentals.
One measure of a bubble is price-to-rent ratios, calculated using the Fed’s quarterly report on the market value of owner-occupied real estate versus the Commerce Department’s estimates of rent. Since 1959, the typical Price/Rent ratio has been 15.
At the peak of the 2003-2008 housing bubble, in early 2006, the P/R ratio hit an all-time high of 20.8. This means that national average home prices were about 40% higher than rents said they should be. The ratio then bottomed at 12.8 in late 2011, with home prices 15% below normal.
After the price gains of the past two years, the P/R ratio was back up to 14.7 in the third quarter of 2013, the most recent for which we have data and we estimate it ended last year at 15, with home prices fairly valued. In other words, there is no evidence of a bubble in housing.
Although the pace of home building is up substantially from a few years ago, this is necessary to keep up with population growth. And, more supply should hold the lid on home price gains. We look for home prices to continue to rise in the year ahead, but more moderately than last year, while rents rise as well. In other words, while conventional wisdom moves from “no recovery possible,” to “new bubble” territory, we see a market functioning reasonably well.
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Hat tip to our Pat:
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I realize that I don’t have the competency to evaluate the housing market and purchases, and I just don’t understand the effects of weather on housing. Of interest, I must assume that Wells Fargo is equally incompetent.
Not mentioned in the article is why WF is dropping underwriting standards……………..they have said that home sales are decreasing and will continue to fall, and they will go more in with FHA to replace the drop.
Of course, I have said many times that there were no more really qualified borrowers left, so lenders would drop standards again. So here it goes.
BTW, FHA, depending upon how they report is suffering from 10% to 20% delinquency rates. (Do to how they report, it is difficult to calculate and that is probably part of a planned action.) Dropping to 580 and 600 will only increase defaults, especially at a 96.5% LTV, which has a Default Percent Rate of 16.9% on average. Factor in dropping values and reduced income, this will rise at some point to 25% or greater.
Can anyone say subprime?
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Another ‘Subprime’ Adventure? Behind Wells Fargo’s Move To Ease Mortgage Lending
http://blogs.wsj.com/economics/2014/02/20/another-subprime-adventure-behind-wells-fargos-move-to-ease-mortgage-lending/
Wells Fargo & Co. announced this month it would reduce minimum credit scores for certain mortgages eligible for government backing, prompting some declarations that subprime mortgages were making a comeback. After everything the mortgage industry has gone through, why would Wells Fargo want to go there again?
The short answer: It doesn’t.
Part of the issue is confusion over what actually constitutes a subprime loan. Unlike a prime mortgage, there isn’t a simple definition of a “subprime” loan.
Originally, subprime referred either to the borrowers taking out these loans—borrowers with credit scores below 620, for example—or to lenders that specialized in higher-priced mortgages. (The Federal Reserve bank of St. Louis produced a handy primer in 2007.)
Over time, mortgages made by subprime lenders or mortgages made to subprime borrowers became lumped together as “subprime mortgages.” During and after the housing crisis, subprime took on an ever-more-sweeping (and loaded) definition. Today, many assume that subprime mortgages are irrationally risky loans made to borrowers who have little to no chance of paying them back.
So what exactly is Wells Fargo doing? The bank announced earlier this month that it would drop its minimum credit score for loans backed by the Federal Housing Administration to 600 from 640. The change applies only to purchase loans, not refinances, taken out through its retail channel. (Under a system devised by Fair Isaac Corp., credit scores range from 300 to 850.)
True, Wells is extending loans to borrowers with subprime credit, which means they could be called, technically, subprime mortgages. But FHA-backed mortgages are fully documented, fixed-rate mortgages—not the crazy loans that fueled the subprime mortgage crisis.
The FHA wasn’t a major player in the subprime boom because its standards were considered too strict. The agency’s market share tumbled until the subprime market disintegrated in 2007, after which it returned as a major player.
The FHA requires minimum down payments of just 3.5%, making it an attractive option for first-time buyers; borrowers with credit scores below 580 have to put down 10%. Many lenders stopped making FHA-backed loans to borrowers with credit scores below 620 or 640 in 2009 as defaults soared, but in recent months, a handful of lenders have said that they’re willing to go as low as 580.
In 2011, Wells said it would make FHA loans to borrowers with 580 credit scores, though it later raised those minimums to 600 and then to 640.
Wells Fargo’s latest announcement followed discussions with housing regulators and other policymakers who are concerned about potentially creditworthy borrowers being shut out of the housing market, according to people familiar with the matter. Some of these borrowers may be “good credits, but they have trashed credit from the recession,” says Guy Cecala, publisher of Inside Mortgage Finance.
The FHA, in particular, has been encouraging lenders to roll back so-called “credit overlays” that banks enacted five years ago.
Before the bubble of the last decade, subprime loans typically required borrowers to make larger down payments and charged them much higher rates to make up for their spotty credit histories. Over time, a market for this type of subprime lending is likely to return, and there are already some green shoots—though Wells isn’t likely to be involved in this business anytime soon.
Moreover, the return of subprime lending could be slowed by new mortgage-lending regulations that provide stronger legal protections to borrowers if lenders don’t satisfy certain criteria verifying a borrower’s ability to repay a loan.
A handful of specialty lenders have expressed interest in making loans that fall outside of these standards, but so far, the actual production of these products is minimal.
“It’s like sex in middle school,” says Mr. Cecala. “Everyone is talking about it, but nobody is doing it.”
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Polar Vortex hits California housing market: California home sales fall over 10 percent on an annual basis. 2014 off to a drought in real estate.
The blame game is now out in full force for the slow start to housing in 2014. Nationwide, we’ve
been hearing about the polar vortex impacting real estate. Unfortunately it cannot be applied to California given that we’ve been in a full on drought. Winter never came to SoCal. I can’t remember a year with such little rain but hey, who needs water when you can purchase a World War II Cracker Jack box for $750,000 right? Like in most manias, the folks on the ground are the last to get the memo and many are still going out for ARMs to stretch their already impaired budgets. In 2004 one thought that was inescapable to me was the incestuous nature of real estate that was unfolding. That is agents, brokers, banks, builders, home owners, home buyers, Wall Street, tax collectors, and everyone tied to the machine got a mega-boost thanks to ever accelerating prices hikes. Few thought about what happens when a reversal occurred especially since incomes were not going up. The same has happened over the last few years in more subtle ways. The economy is weak and a big boost has come from home prices going up. Yet much of this is now driven by Wall Street and hedge funds. Housing is off to a slow start in 2014 and you can’t blame it on the polar vortex, especially here in a sunny and drought hit California.
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New Single-Family Home Sales Boomed 9.6% in January to a 468,000 Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 2/26/2014
New single-family home sales boomed 9.6% in January to a 468,000 annual rate, coming in well above the consensus expected pace of 400,000. Sales are up 2.2% from a year ago.
Sales were up in the Northeast, West and South, but were down in the Midwest.
The months’ supply of new homes (how long it would take to sell the homes in inventory) declined to 4.7 in January from 5.2 in December. The decline in the months’ supply was all due to a faster sales pace. Inventory remained unchanged.
The median price of new homes sold was $260,100 in January, up 3.4% from a year ago. The average price of new homes sold was $322,800 up 5.2% versus last year.
Implications: Well, that was a pleasant surprise! Despite terrible weather and what most economists thought was going to be a drop, new home sales surged 9.6% in January, coming in at a 468,000 annual rate, the highest level since July 2008. Although we still believe weather has been suppressing both home construction and sales, today's report also supports our theory that some of the recent weakness in existing home sales can be attributed to a lack of inventory, causing potential buyers to look more in the new home market. The surge in new home sales also undermines the theory that higher interest rates are holding back sales. The US had a bubble in housing during 2003-07, when 30-year mortgage rates averaged 6.1%. Today they are 4.4%. Adjusted for inflation, real mortgage rates are actually a little bit lower today than they were back in 2003-2007. The months’ supply of new homes – how long it would take to sell all the new homes in inventory – declined to 4.7 in January, well below the average of 5.7 over the past twenty years. As a result, as the pace of sales continues to recover in the years ahead, homebuilders still have plenty of room to increase both construction and inventories. Another way to think about it is that the construction of new homes can outpace a rising pace of sales. On the price front, the median sales price of a new home was up 3.4% from a year ago, while average prices are up 5.2%. In other recent housing news, the Case-Shiller index, which measures home prices in the 20 largest metro areas, increased 0.8% in December and was up 13.4% in 2013. Recent price gains have been led by Miami, Detroit, and Atlanta. The FHFA index, which measures prices for homes financed with conforming mortgages, also rose 0.8% in December and was up 7.7% in 2013. The annual increase in the Case-Shiller index and the FHFA index were both the largest since 2005. On the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic manufacturing activity, fell to -6 in February from +12 in January. We see this as weather-related and not a reason to worry, unless negative readings continue into the Spring.
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Interesting take here on housing policy. By favoring housing with our policies, we screw up the market for housing and hurt the people we are trying to help. Sounds familiar, just like government interventions in nearly everything else.
Michael Milken: How Housing Policy Hurts the Middle Class
Many buyers decided that the largest-possible house was a better idea than a retirement fund or a child's education
WSJ March 5, 2014 Opinion, (link below)
The American dream traditionally meant that anyone could get ahead based on ability and hard work. But over the past few decades, the United States government created incentives through housing programs and the tax code that changed the dream for many Americans. Middle-class families began to think of homes as investments, not just shelter. When the housing market crashed, everyone suffered—homeowners, investors, wage-earners and taxpayers.
Aggressive housing programs have not always helped the poor and middle class. The median net worth of American adults is now one of the lowest among developed nations—less than $45,000, according to the Credit Suisse CSGN.VX +1.32% Global Wealth Databook. That compares with approximately $220,000 in Australia, $142,000 in France and $54,000 in Greece. Almost a third of American adults have a net worth of less than $10,000. Those statistics don't convey the pain endured by millions of American families who lost their homes.
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As recently as 1980, government-sponsored Fannie Mae FNMA +10.08% and Freddie Mac FMCC +8.18% held, guaranteed or securitized fewer than 10% of U.S. mortgages or less than $100 billion. Today, it's $4.7 trillion. Add Ginnie Mae's mortgage guarantees, and the number exceeds $6 trillion. Since 2008, these agencies have been involved in more than 95% of all new mortgages. This massive exposure has been justified by clichés: Housing should be affordable; ownership creates financial independence; government programs sustain the economy by increasing ownership. But did ownership increase?
According to the Census Bureau, 65.6% of households owned a home in 1980. More than three decades and trillions of dollars later, the needle hasn't budged—it's still about 65%. Subsidized mortgages did create three things, none of them good:
1. The largest housing price bubble in American history. Research by Nobel economist Robert Shiller shows that U.S. housing prices declined in about half of the years since 1890. While U.S. stocks during those years enjoyed an average real rate of return of about 6% a year, the annual inflation-adjusted return on houses was a meager 0.18%. Factor in real estate's heavy transaction costs and that number turns negative. Nevertheless, in the housing-boom decade before 2007, many buyers decided that the largest-possible house (with an equally large mortgage) was a better idea than a retirement fund or their children's education.
By contrast, according to CLSA Asia-Pacific Markets, middle-class households in 11 Asian nations spend an average 15% of income on supplemental education for their children—nearly as much as the 16% spent on housing and transportation combined. Americans spend only 2% on supplemental education and 50% on housing and transportation. For American home buyers taking on big loans, there was no margin for error if they lost their job or the roof leaked.
2. Misguided economic priorities. Uniquely among nations, the U.S. gives mortgage borrowers a trifecta of benefits: extensive tax advantages, no recourse against the borrowers' nonresidential assets if they walk away, and typically no protection for the lender if the borrower prepays the loan to get a lower rate.
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Getty Images
These policies long seemed like a great deal for borrowers, but they wreaked havoc on the financial system. People with marginal credit were encouraged to finance more than 90% of the purchase price with 30-year mortgages. If interest rates later fell, they could refinance. If rates rose, they could congratulate themselves for locking in a low rate. If prices rose, they enjoyed all the upside and could tap the equity. If prices fell and they faced foreclosure, their other assets were protected because the loans were usually non-recourse.
The Consumer Financial Protection Bureau now wants to tip the scale even more against lenders by asserting the legal theory of "disparate impact." Consumers can sue if the volume of loans to any racial group or aggrieved class differs substantially from loans to other groups. No intent to discriminate is required, and it's illegal for a mortgage application to ask the borrower's race. Financial institutions trying to avoid making bad loans by implementing prudent underwriting practices can inadvertently get in trouble. A bank forced to pay a fine one year because it irresponsibly made "predatory" loans to people with bad credit can be fined the next year for not making similar loans.
3.Damage to the environment and public health. As the nearby chart indicates, the size of the average American house grew by more than half—about 900 additional square feet—over the past three decades while the number of people in the average house decreased. Larger houses need larger lots that are usually farther from the home owner's job. Construction, heating, cooling, landscaping and extended commutes consume more natural resources. Because breadwinners spend more time in cars, they have less time for their families.
As someone who helped finance several of the nation's leading residential builders, I understand the important role the industry plays in the economy. Homebuilders didn't create the problems. Policies made in Washington distorted the banking system and discouraged personal responsibility by subsidizing loans that borrowers couldn't otherwise afford. This encouraged housing speculation supported by financial leverage. Ultimately, taxpayers got the bill.
Housing's 2008 collapse led to the U.S. Treasury takeover of Fannie's and Freddie's obligations even as the Federal Housing Administration increased its guarantees to more than $1 trillion and the Federal Reserve stepped up purchases of mortgage-backed securities. Federal debt surged.
Americans will eventually have to pay for that through some combination of inflation, higher taxes, higher interest rates or reduced benefits and services. For now, the Fed is doing what the savings and loan industry did in the 1980s: borrowing short term while lending long term. When interest rates rise, the value of the government's mortgage holdings will decline.
Many housing experts believe that the solution is to reduce the government's role by attracting private capital. That's the centerpiece of proposals presented to the Senate Banking Committee last fall by Phillip Swagel, a senior fellow at the Milken Institute's Center for Financial Markets. Rather than hold or securitize mortgages, Fannie and Freddie would retain only a limited role as secondary guarantors. With the government as a backstop and private capital risking the first loss, mortgage interest rates would undoubtedly rise. But the taxpayer subsidy would fall. It's a reasonable tradeoff to transfer risk from taxpayers to investors and let the market determine rates. Congress appears to be moving in that direction as it debates various proposals.
Fortunately, the private sector is well-positioned to assume much of the government's role. Thanks to booming capital markets and accommodative central banks, there is tremendous liquidity worldwide. Fannie and Freddie have now paid the Treasury more in dividends than they received in the bailout. Private capital already plays a substantial role in commercial real estate and has the capacity to make comparable residential commitments.
Investments in quality education and improved health will do more to accelerate economic growth than excessive housing incentives. That will give everyone a better chance to achieve the real American dream.
http://online.wsj.com/news/articles/SB10001424052702304610404579401613007521066?mod=WSJ_Opinion_LEADTop&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304610404579401613007521066.html%3Fmod%3DWSJ_Opinion_LEADTop&fpid=2,7,121,122,201,401,641,1009
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Gentlemen,
Long time no post from me. I have been extremely busy with the development of new products for lenders and servicers to solve the problems that they are currently facing.
CD sent me a post from Wesbury, knowing it would piss me off. Here was the post.
Existing Home Sales Declined 0.4% in February to a 4.60 Million Annual Rate To view this article, Click Here
Brian S. Wesbury - Chief Economist
Bob Stein, CFA - Deputy Chief Economist
Date: 3/20/2014
Existing home sales declined 0.4% in February to a 4.60 million annual rate, coming in exactly as the consensus expected. Sales are down 7.1% versus a year ago.
Sales in February were down in the Northeast and Midwest, but were up in the South and West. The decline in sales was due to slightly lower sales of both single-family homes and condos/coops.
The median price of an existing home rose to $189,000 in February (not seasonally adjusted) and is up 9.1% versus a year ago. Average prices are up 7.4% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) rose to 5.2 months in February. The increase in the months’ supply was mainly due to a 120,000 increase in inventories.
Implications: Existing home sales declined 0.4% in February to the slowest pace since July 2012. However, this was exactly what the consensus expected and should not change anyone’s impression about the economy. Existing home sales are counted at closing, and given harsh winter weather in December and January, when prospective buyers would have been placing contracts on homes, it makes sense that sales were weak in February. Besides the weather, another reason for slower sales is a lack of inventory, which could lead some buyers to purchase a new home instead. The good news was that inventories increased by 120,000 units in February and this suggests that the pace of sales will pick up in March and April, as contracts signed in February will show up in March and April sales. Expect more inventory to come onto the market in 2014 as home prices continue to move higher (median prices for existing homes are up 9.1% from a year ago). Also, credit remains tight, making it hard to get a loan to buy a home. This explains why 35% of all sales in February were all-cash transactions. However, we do not believe higher mortgage rates are noticeably holding back sales. The US had a bubble in housing during 2003-05, when 30-year mortgage rates averaged 5.8%. Today they are 4.3%. We remain convinced that the underlying trend for housing remains strong. Also, remember, existing home sales contribute almost zero to GDP, so there will be no noticeable negative effect to GDP from the temporary slowdown in sales. In other news this morning, initial claims for unemployment insurance increased 5,000 last week to 320,000. Continuing claims increased 41,000 to 2.86 million. On the manufacturing front, the Philly Fed index, a measure of factory sentiment in that region, rose to +9.0 in March from -6.3 in February.
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My comments:
Once again we see a steaming pile of excrement shoveled out by the National Association of Realtors, doing their best effort to meet the quality of spinning that is regularly done from D.C. Then people like Wesbury take the data and perform “projectile regurgitation of numbers vomit” and put their own spin on the data, and without doing any independent and in depth analysis.
1. Sales were down because of weather is a major reason according to the NAR. You stupid fools!!!! What do you think Seasonal Adjustments are about? The Seasonal Adjustment corrects for weather and other factors. Why then when things are worse does the NAR continue to blame the weather even after the seasonal adjustments are accounted for?
2. Did Wesbury even look at the real data? Since Jun 2013, Seasonally Adjusted Sales have fallen from 5.38m to 4.6m. This is a clear trend line that cannot be spun to the good, even though SA is designed to do just that.
3. Non SA dropped from 519k to 283k, but that is a number no one wants to report. You can’t spin raw data so easily.
4. All four regions, North, South, East and West are dropping in sales volume over the last 9 months. No one area is increasing. Year over Year and Month over Month will not report that.
5. The West dropped by 3000 units in the raw data, but it increased 60,000 in the SA data. 57k in SA adjustments? Does this make sense? Or is this just pure data manipulation?
6. For the first time, the NAR blames Student Debt as a contributing factor to lower sales. I have been screaming about this for three years, and the media for one year. The NAR and Wesbury only recognize it now?
7. The NAR now references slowing Investor Sales as a problem, but expects increasing inventory to offset the slowing sales through increased homeowner purchases. (Blackrock has decreased their purchases by 70% over last year.) After all, without the inventory buyers were “forced to buy” new homes. Hasn’t anyone told the NRA or Wesbury that new home construction is still at the lowest levels since data started to be kept in 1963? If inventory increases and people can buy existing homes again, then what happens to new home construction?
8. Wesbuy does not believe that the increase in rates that has occurred will pose a problem. He cites the higher rates in 2003-2005 and the sales volume as proof. The STUPID FUCKING IDIOT!!! 2003-2005 also saw the Stated Income products and the Option ARMs that heavily influenced sales volume. Those products no longer exist. Existing sales compared to the increase in rates show the change and slow down.
9. The higher interest rates also affect homeowner affordability. Higher rates and prices mean less affordability and less affordability, especially among the first time buyers who are already priced out of the market to due high Student Debt and low income.
10. What about the Qualified Mortgage and its restrictions? Lenders now have a fiduciary duty to a borrower to approve Ability to Repay the loan. If the borrower goes into default, they can sue for fees, all interest paid up to 3 years in length, attorney fees and damages. Lenders have no idea what the liability is and as a result, they are being very restrictive in lending. Furthermore, non QM loans will be subject to such scrutiny that most will not get done.
I could go on and on but you should probably realize by now the absurdity of what is being reported. What we see here is Empirical Analysis only where “observations” are made in the existing sales and then excuses are made for the results. No real analysis of the data is made. As a result, Empirical tells us nothing about what is really going on.
Fundamental Analysis is needed to improve upon the QA. FA requires in depth review of the different regions, looking at the various economic conditions, geographical conditions, demographics and other relevant factors that have an influence on sales. Then Quantitative Analysis is done to determine what is really going on.
The NAR and others don’t engage in the FA and QA Analysis. That is because it is costly, time consuming to set up the models, require personnel knowledgeable in Applied Mathematics, Statistics, Lending, Demographic Analysis and a variety of other disciplines to evaluate the data and models. More important, the results will more often than not, reveal the true underlying weakness in the positions that they regularly take about how the real estate market is improving.
What you do not hear are the people who are involved day to day in the real estate and lending industry and what they are reporting. Nor do you hear from the people who are truly evaluating the market, and who do not have a vested interest in reporting “good and improving” markets. The true experts know that the whole “real estate recovery” is nothing but propaganda trying to keep a failing market from tumbling further.
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From Morgantown, WV:
:-D
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I am hugely appreciative of PP's truth telling on housing.
http://dogbrothers.com/phpBB2/index.php?topic=1830.msg79894#msg79894
"Non SA dropped from 519k to 283k." (non seasonally adjusted [actual] home sales)
As one of many who are invested in housing, the rosy scenario spinning of Wesbury [hummed to the melody of The Plowhorse Trot] is appealing but I am better off knowing the truth.
As people's favorite expense, housing is an indication of how well people are doing economically. It has great appreciation in great economic times. But more so than gold, I value it as something people still need and value no matter how low it goes and no matter how badly our economy disintegrates.
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DougMacG,
Look carefully at Housing appreciation. The truth is that Housing as an investment is greatly overstated. Housing over the long run appreciates at 2-3% per year and nothing more. The years of 2002-2006 were an aberration, and 2012-2013 will turn out to be similar.
My sources, and they are one hell of a lot better than Wesbury and the National Association of Realtors, are now "hunkering down". The so called recovery is over, as they will tell insiders. The recovery only existed due to Fed actions and Regulatory Agency actions, and that is being phased out. 2014 is expected to be a "change" year, and unless the Fed steps in again to try and support interest rates, home prices, and MBS values, the recovery is now again in free fall in 2015.
You might have seen Existing Sales reported this week. It is down Year over Year, just like New Home Sales, but you would have to look hard to see where that was reported. Home values are also beginning to fall, but it will be several months before that is reported officially.
Even worse, the new Qualified Mortgage Lending Standards are paying havoc with the industry. No one knows yet how the courts will interpret the first lawsuits by homeowners, nor even what constitutes "compliance" with the statutes, so they have been slow to act so far. In the next few months, they will act, loosening standards because they assume that they are protected under the new QM Safe Harbor provision. Little do they know what awaits...............there is a hole in QM that if it had been the Super Bowl, Manning could have RUN for 5 90 year TD's in the first quarter alone.
Also,trends to be aware of when thinking of investing in real estate.
1. The 24-35 age cohort have a completely different view of real estate than previous age groups. They no longer see it as an investment opportunity and recognize it to be likely drag on investments in the future.
2. Firms who buy homes are "arbitrage" traders. They look for the difference in "spreads", the difference in what they make and what they pat. As spreads decrease, they bail out, which is what is happening now with Blackstone. Best way to describe them is a "cloud of locusts" who sweep in from the skies, rape, pillage and plunder, and then move on. Right now, they are moving on.
3. The so called drop in foreclosures is artificial as well. It is going to be increasing again soon, especially as Obamacare hits families over the next year or two.
There is much, much more I could write about, but the important thing to remember is that Housing, just like most things, is not existing as a stand alone function. Far too many factors affect housing and must be considered in any evaluation of what is to come. But the NAR, Wesbury and others ignore those factors because it would contradict what they want to believe.
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"1. The 24-35 age cohort have a completely different view of real estate than previous age groups. They no longer see it as an investment opportunity , , , ."
Particularly when they can't get a job more than 29 hours a week to pay off their college loans.
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"1. The 24-35 age cohort have a completely different view of real estate than previous age groups. They no longer see it as an investment opportunity , , , ."
Particularly when they can't get a job more than 29 hours a week to pay off their college loans.
But they get to subsidize everyone else through obamacare, so they got that going for them.
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"Look carefully at Housing appreciation. The truth is that Housing as an investment is greatly overstated. Housing over the long run appreciates at 2-3% per year and nothing more."
I like to assume zero appreciation and zero tax benefit when I buy. The 2-3% appreciation quoted is above and beyond rent collected and debt potentially paid down.
"The years of 2002-2006 were an aberration,"
Since the houses did not change, I just assume the dollar buying them was worth less. Then your loos was to hold anything that did not move with the dollar.
I find that broken houses can be bought for 50 cents on the dollar and then repaired with free labor and relatively small materials costs. (I paid as low as 15 cents on the dollar of the previous sale in the current down cycle.) This is not for everyone. If you are able to repair and restore efficiently, you are in for the cost of your free labor plus maybe a little over 50% of the value. For me, this takes out most of the risk for major market corrections.
On the upside, good real estate at least keeps up with inflation, and when the dollar is done and gone, people will still need a place to live.
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http://m.startribune.com/news/?id=253651451&c=y
Foreclosures way down. In Hennepin County (Mpls, suburbs) foreclosure rate is now 0.68%.
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http://m.startribune.com/news/?id=253651451&c=y
Foreclosures way down. In Hennepin County (Mpls, suburbs) foreclosure rate is now 0.68%.
Why?
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http://m.startribune.com/news/?id=253651451&c=y
Foreclosures way down. In Hennepin County (Mpls, suburbs) foreclosure rate is now 0.68%.
Why?
The Plowhorse Trot - ? )
The Titanic had fewer drownings in the 6th year after the crash as well.
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LOL!
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Several reasons they are down all over:
1. Increased values allow for selling before foreclosure.
2. Automatic GSE mod approvals for loans that are from 90 days to 270 days late.
3. Private Label MBS is down to about 25% of volume in 2007. Those loans left tend to be stronger borrowers.
4. Adjustable Rate loans have defacto modifications, thanks to the low interest rates. Current rates are about 2.75% to 3.25% in most cases.
5. GSE new loan originations have since 2009 been to very strong borrowers. Default rate is .0025% for those loans.
6. HARP refinances of negative equity loans reduced rates to 3.5% and saved borrowers hundreds per month.
7. Low income and poor credit borrowers, i.e. Community Reinvestment Act loans, have been greatly reduced, hence less foreclosures.
Watch out for FHA though. It is going to get real messy soon.
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BREAKING NEWS: Newark Votes, Approves Use of Eminent Domain to Fight Foreclosures–First Domino Falls
6
Newark, New Jersey has become the first city in the country to officially approve a controversial plan that uses eminent domain to fight foreclosures and neighborhood blight.
Newark’s new mayor, Ras Baraka, introduced the resolution and the Newark Municipal Council, which passed it unanimously, according to a press release issued today by New Jersey Communities United (unitednj.org), which describes itself as a progressive grassroots community organization committed to building power for low and moderate income people, predominantly in Newark.
According to the release…
“Newark Council Unanimously Approves Resolution Supporting Local Principal Reduction Program for Families Facing Foreclosure
Mayor-Elect Ras Baraka Leading Fight Against Foreclosure Crisis in Newark”
The program would allow homeowners trapped in certain type of mortgage, known as a Private Label Security or PLS Loans, to voluntarily participate in a program where the City purchases these mortgages from investors and repackages them at terms homeowners can afford. For most of the estimated 1,200 homeowners with these types of loans in Newark, the policy would save them from losing their homes to foreclosure.
Mayor-Elect Ras Baraka…
“Newark families have been absolutely devastated by the foreclosure crisis. Unless we take decisive action now, the situation will only get worse. As Mayor of Newark, I will aggressively move forward to implement the resolution passed by the Council. It will send a clear message that we will no longer accept the predatory lending and questionable foreclosure practices by banks. More importantly this policy will keep families in their homes and begin to reverse the blight created by vacant and abandoned houses that have already been lost to bank foreclosures.”
Trina Scordo, executive director of NJ Communities United, said…
“Newark voters elected the right candidate to lead the City in a new direction. Mayor Baraka’s vision for a better Newark begins with putting the people’s needs above the interests of Wall Street. His leadership on this issue and his ability to work with Council leaders to move innovative policies like this bode well for the future of Newark.”
The release also points out that according to a recent report published by the Haas Institute at the University of California, Berkeley titled: “Underwater America: How the So-Called Housing Recovery is Bypassing Many Communities,” New Jersey is at or near the top of the list of states hardest hit by the foreclosure crisis.
The study found that New Jersey cities, Newark, Elizabeth and Paterson are ranked second, third and fourth in the country for the percentage of homes with “underwater mortgages,” the term used when homeowners owe more than the value of their properties.
Underwater mortgages lead to foreclosure because when homeowners are hit with a life event, such as divorce, illness, injury or job loss, they can’t sell their homes or borrow against them to get through the rough patch. If that happens and the bank won’t modify, it’s a foreclosure. New Jersey’s high percentage of underwater mortgages means, “there are thousands of homes at the brink of foreclosure,” the release explains.
Lenders and servicers have resisted approving principal reductions as a preventive measure or in any broad based way, the argument being that as long as borrowers are making their payments there’s no need to provide any assistance. As I recently wrote, it’s clear to me that from the beginning of the foreclosure crisis, it’s been a matter of not wanting to leave any money on the table, and a sort of baseless optimism that says: “Hey, maybe property values will come back and we won’t have as great a loss.”
Let’s face it… that sort of thinking has resulted in almost 8 million homes lost to foreclosure since 2008, and cities in New Jersey like Newark, and in California like Richmond, are clearly tired of waiting for some imagined turnaround in the housing market that has failed to materialize for six years while they’ve watched their communities continue to pay the price of inaction by the holders of these mortgages.
So today, I would have to say that Newark is to be commended for having the courage to draw the line and take control of their city’s destiny by becoming the first American city to say yes to the use of eminent domain as a way to deal with underwater loans and urban blight caused by the ongoing foreclosure crisis. But in addition, since there are reportedly some 26 other cities across the country that have been considering the plan, I would also have to imagine that Newark only represents the first domino to fall, in what could potentially become a long line of dominoes.
And I suppose that’s really why the banking industry lobbyists have tried so hard to scare cities away from the use of eminent domain… they simply don’t want to cede control… I understand.
But, at this point cities like Newark have endured six years of a housing market’s collapse, and they still have thousands of homes underwater by 50 percent and more. What would you do if you were mayor of such a city… if you pledged an oath to protect that city… what else could you do.
ONE MORE THING: The opposition will no doubt say that investors will lose money as a result of using eminent domain in this instance, but that’s just not true. Investors must receive “fair market value” for the properties being seized by the city, which is more than they’d be able to get were they to foreclose. In fact, in New Jersey, where it takes something like 1,000 days to foreclose, the investors would be lucky to net half the home’s fair market value by foreclosing.
A Lesson From the 1930s…
During the 1930s, we lost 50 percent of the homes in the country to foreclosure, and by the middle of that decade, states started passing moratoria that banned foreclosures for five years. Of course, that’s the worst possible answer to the problem, because it encourages more to default, and it only puts off the problem.
So, investors… look at it that way… would you rather see eminent domain used and receive fair market value, or see a five-year prohibition on all foreclosures? Because that’s your real choice… the city of Newark is saying that the status quo is simply not an option.
Stand by, lots more to come. You might even think of this as being the shot heard round the world.
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Monday Morning Outlook
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Housing Recovery Still on Track To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/2/2014
Just a couple of months ago the pessimists were saying the housing recovery was on the ropes. Home sales were down and housing starts had dropped.
But barely more than a month later this looks like just another head-fake. Existing home sales grew 1.3% in April and, given data on pending home sales, look like they rose another 2% in May. (Existing home sales are counted at closing; pending sales are contracts on existing homes.) Meanwhile, new home sales bounced back in April as well.
What the pessimists keep missing is that based on population growth and “scrappage” (voluntary knock-down, fires, floods, hurricanes, tornadoes,…etc.) the US needs about 1.5 million new homes per year, about 60% higher than the 943,000 started in the last twelve months. These include both single- and multi-family homes as well as owner-occupied homes and rentals. The US has not hit that level in over seven years. Building is still poised to grow much further.
Yes, existing home sales remain relatively slow. But, like used car sales, these homes sales barely contribute anything to GDP. Also, inventories have been low, which has held back sales. That's changing.
Yes, new home sales have been stuck in the same range for the last eighteen months. But official data on new home sales don’t include condos and coops. And, given the shift in construction toward multi-family units, it stands to reason that condos and coops make up a larger share of sales as well.
We’d be worried if new homes were piling up in inventories, but the months’ supply of new homes – how many months it would take to sell all inventory at the current pace of sales – is below long-term averages. In other words, if anything there’s a shortage of new homes, not a surplus.
And a lack of inventory is probably behind much of the strong price gains we’ve seen. The Case-Shiller index, which tracks home prices in 20 key markets, is up 12.4% from a year ago; the FHFA index, which tracks nationwide prices for homes financed by conforming mortgages, is up 6.5%.
As a result of these gains, we estimate that after the huge boom and bust, national average home prices are finally at fair value. This doesn’t mean home prices are suddenly going to stop going up. They’ll just go up more slowly in the next couple of years than they have in the past couple of years, more in-line with increases in rents and construction costs.
Regardless, housing is volatile from month to month, so don’t be surprised when, later this year, the pessimists latch onto some other reports and claim the housing recovery is done. And don’t be surprised when the data prove them wrong again.
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Thought I would make a couple of comments...........
1. Wesbury continues his"rah rah" real estate projections, without any real analysis of what is going on. He argues that the 1.3% existing sales gain in April was a sign of this, and expects May to be 2% increase.
Anyone in the industry with a desire for accuracy will say that Month to Month means nothing. It is Year to Year that matters, and YOY is down sharply. But if he wants to argue that Month to Month is important, Spring is the most important selling season, and only 1.3% increase occurred? That is so far below historical norms that it is pathetic.
And 2% in May will be just as bad.
He also claims that existing home sales provide little to GPD. What a friggin idiot? Existing home sales should be comprised of two types of prgianic buyers.......first time buyers and move up buyers. Correct me if I am wrong, but don't first time buyers go out and buy home furnishings, decorate and engage in landscaping to their own desires. Move up buyers engage in even more of this behavior. But I guess that it means nothing to Wesbury because it goes against his beliefs.
First time buyers are down to less than 25% of sales. This is close to a 50% drop. The reason is that there are few qualified buyers and what do exist are buying FHA.........the wonderful FHA with 96.5% LTV loans, and credit scores down to 580. Great buyers there, no wonder they have a minimum 15% default rate.
Move up buyers are mostly non-existent as well. When Negative Equity, Low Equity and other factors like FICO are factored in, between 60% and 70% of the potential move up buyers are now out of the market. What remains are borrowers with significant equity who have no desire to move, or others with very low interest rates and will not want to buy anew as rates begin to increase again.
The Investor market is shrinking. Blackrock is decreasing its sales for the year by 70%. Other firms are doing the same. The "new" investors are the Homeowner Wannabees who are buying investment properties now. Dumbshits missed the boat and are going to get screwed again!
Don't even consider the 25-34 year old cohort. They haven't the income to buy homes, and the college grads are out of the market for a decade due to student debt. But hey, maybe Obama will take his pen and wipe that out......
Wesbury talks about the need for new homes in the 1.5m range. Hasn't anyone told him that new household creation has dropped by 66%? Who needs 1.5m units when up to 1m household creation units have disappeared.
When he talks about the 943k units started over the past year, look at the numbers. The growth is occurring mostly in Multi Unit properties, in other words rentals. The home builders know the market has changed.
Oh yes, the housing inventory for sale is increasing and is up to about 6 months so sales are going to increase. This number has been increasing for months and over the last few months, has been from 4 months up. Wesbury.......where are the sales that should be occurring? 1.3% increase with 6 months inventory? What is he going to say when it gets up to 8 or 9 months?
Also, contrary to what Wesbury says elsewhere, foreclosures are increasing again. There are 4m homes delinquent or in foreclosure, and 90% will end up foreclosed upon. What is that going to do to the market?
The Fannie 3rd Qtr 2013 SEC filing says that 31% of the GSE loans will default. 67% of their subprime will default. What about this?
I am in contact with Mortgage Bankers all the time. They now do 46% of all new loan originations. They are all reporting significant drop offs in both refi's and new loan originations. This is only going to get worse as the year continues. Many of them are going to end up closing. (Profit on loan originations for 1qtr 2014 was only $1,223. Not much in it for a Mortgage Banker to continue operating.)
I DESPISE people who look at the monthly reports, don't do any real looking into what is going on, and yet proclaim all is improving.
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Eminent Domain.........expect more new forthcoming on ED. More cities are going to take it up.
Disclosure: I was originally opposed to the idea of ED. I have since changed my mind and find that it is going to be the only possible way to begin to resolve what is going on in many cities in the US. In fact, I expect that ED will begin to create a complete "sea change" in how foreclosures and modifications are handled if the first ED action is properly done.
Crafty,
This should hopefully provoke some response.
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I'm really surprised at your new position! Care to flesh it out?
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Lol......I thought that would provoke a response............
For those who do not know, I have been heavily involved in this entire mess since 2007, working on all sides. I understand the problems and processes in far greater detail, and the issues involved.
In the last 7 years, there have been all types of programs developed to try and resolve the crisis, HAMP, HARP, Hope 4 Homeowners, National Mortgage Settlement, CA AG actions against Wells/World and the Countrywide settlement among others. What do they all have in common? THEY HAVE ALL FAILED!!!!
Nothing has worked. Trillions have been spent, and the problems continue. Foreclosures are postponed so that it now takes years to foreclose on a property. Modifications can take from 6 months to years to get done and when done, all but a few end up re-defaulting.
The Fed buys MBS to promote a housing recovery. They buy because no one else wants the return that even good loans provide, and no one want the crap still out there. In fact, if you look at the MBS purchases, the Fed buys 95% of all new issues. Why are they tapering? Look at the numbers of new issuances, and the taper tracks with that.
Home values are up........only because of Wall Street hot money. You have a city of 30000 housing units, 10 home sales per month all cash driven driving prices up by 20% for the year. Yeah, right......does anyone really believe that the crap homes have appreciated.......or is it just market manipulation?
What is the definition of insanity? Continuing to do the same thing over and over again, expecting the outcome to be different the next time.
The truth is that if we had let the market crash, the "hurt" occur, and housing to bottom, we would be on the way to the beginnings of a recovery. Instead, we have played games, delaying the pain, and in the end only made things worse for when the crash comes.
Everything is being viewed as a zero sum game, when it comes to the housing crisis. No one wants to give up a thing, and this attitude is only hurting the entire country.
Key points:
1. Servicers have no desire to modify loans in a beneficial manner. They get 25 bps on the total dollar portfolio for servicing performing loans. When the loan goes into default, they get from .50 to 1.25 bps per loan, plus all late fees and other charges they can impose. Plus they can get up to $4200 for ultimately modifying a loan from the government. If they modify a loan in a timely manner, they lose money. In they do principal reductions, they really lose money.
2. If servicers get sued for foreclosure and modification issues, they don't get harmed. It is the Investor who pays.
3. The Master Servicer, think Wells Fargo in most cases, gets 10 bps on the servicing. They do not want to do principal reductions due to losing servings dollare either.
4. The Trustee for the loans who controls the Trust and the Investors, have no reason to perform in a manner that would cut loses for Investors. That is because most of them also originated Trusts. If they go after the servicers, then they could be also be the recipient of the same attacks on their own servicing actions.
5. The Investors have no real power to act. To challenge the Servicer or Trustee, they must obtain 50% of the investors in the Trust to join in on any actions. Then they must file lawsuits, and fight to get the documents to prove their arguments. Ultimately, they settle out of court for pennies of what they could have had for losses incurred. BFD.......
6. Homeowners are either getting "stalled" by the servicers until a foreclosure presents a negative Net Present Value so as to deny a mod, or are given a mod with no ability to perform so the loan will go back into default. They continue to get no relief.
7. Cities are suffering immense harm. Richmond Ca is the perfect example. The city literally sits across the bay from another coastline, that of Tiburon/Belevedre. That area is the most expensive real estate in the country, outside of downtown New York. Yet Richmond is one of the worst cities for foreclosure in the country.
12% of homes are in default, and a 20% vacancy rate. Incomes under the national average by 20%. Crime rate is only surpassed by 5% of all cities in the US. 45% Negative Equity position. Gang and drug activity. Businesses are leaving and not coming into the city. The city has to let go critical servicers like the police to meet depleted budgets.
The servicers are doing nothing to assist the city. The GSEs do nothing. So everyone suffers.
I have seen the agreements on MBS and what can be done or not. The simple fact is that by invoking ED and taking the homes for fair market value, and then getting them refinanced by willing parties, and they do exist, the Investors will actually suffer less losses than if the homes are foreclosed upon. But that makes too much sense for the Servicers, Banks, MBA and other parties.
ED, if done right, can be used as a model across the US, helping cities and homeowners everywhere. Furthermore, it can change the adversarial relationship between all parties, and in turn, creative a cooperative relationship where everyone seeks to resolve the problems.
The threat of using ED can accomplish this. It can change the way that foreclosures and modifications are being handled for the better.
Many argue that ED is unlawful. Those are the same parties that oppose any meaningful efforts because it costs them money. There is no reason to believe that ED would be anything other than in the best interests of the public domain, which is the legal standard for invoking it. The threat of invocation after the first successful ED action would serve to begin the process of having all parties work together to resolve the problems.
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"The simple fact is that by invoking ED and taking the homes for fair market value, and then getting them refinanced by willing parties, and they do exist, the Investors will actually suffer less losses than if the homes are foreclosed upon. But that makes too much sense for the Servicers, Banks, MBA and other parties."
1) Umm isn't one of your key points that no one knows what the hell FMV is?
2) Perhaps more to the point-- is this Constitutional? and what precedent does it set?
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Post reply ( Re: Housing/Mortgage/Real Estate )
Re: Housing/Mortgage/Real Estate
The answer to Fair Market Value is
Yes. FMV can be determined. Furthermore Loss Given Default can be determined also.
Prior to coming to this position, I have looked at the property situation in Richmond carefully. I found that based upon the relevant factors, it actually makes sense to either modify the loans with Principal Reductions, or allow Short Refinances with payoffs of Fair Market Value. But the servicers are preventing this.
You have to look at things from the Loss Given Default perspective.
1. Loans that go into default and are foreclosed upon are not going to recover the principal due. The property gets sold at a price that the market is willing to bear, but the price will also involve sales commission and other factors as upkeep removed from the proceeds. The ultimate result is that under the best of cases, the proceeds received with be about 90% of perceived FMV. All loan amounts and arrearages above the FMV are also lost.
2. Take, Richmond, Newark or other cities considering EC. Who the hell wants to live in those shitholes with extensive crime, poor policing, bad economic conditions, etc. Buyer for the properties are few and far between and would involve steep discounts. Look at Detroit where they can't even give away properties.
3. So the properties sit vacant and as vacancies increase, values go down further. Or, the properties become the targets of gangs, drug dealing, squatters, and ultimately are damaged to the point where they are worthless anyway.
Under this scenario, ED makes sense.
As to legal, this has been the subject of hot debate. Lenders, investors and advocates are saying that it would not be legal. However, others are coming up with legal arguments in support of ED.
ED is accomplished with the Public Interest in mind. Use of ED in this scenario is definitely within the Public Interest. More
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Color me real doubtful here. No doubt YOU could do it well, but A) you are not likely to be put in charge B) those put in charge are likely to be idiots AND subject to tremendous corrupting pressures C) the meaning of the ED clause of the Constitution would become meaningless against fascist and corrupt state interventions from here forward.
What am I missing?
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Mortgages are already highly regulated by government and 90+% of them have government backing. Yet...
The originator, appraiser, servicer and master servicer have no interest in seeing the loan succeed and the investors have no power to act. Every key player in the process has either an upside down incentive or is powerless to act.
The government's 'solution' to the foreclosure crisis has been to delay and stall off the solution, the foreclosure process, making it harder and harder for the lender to recover the securing asset from the defaulted loan.
I forget the exact timing but a friend of mine lived in his house maybe 4 years after he quit paying. This is because of tangled up rules coming out of government, state, federal and local, not lender choice. The no consequences environment didn't help him either. He was just trying to quit an over-borrowed situation.
Not all upside down owners paid too much for their property. Some borrowed it up after the fact. In either case, these were consensual transactions, even the foreclosure clause is consensual. Takings are not.
The best way to get new loans made is to secure the loans; that is the point of a mortgage and the mortgage industry, as opposed to unsecured loans. But a loan is not secured if the lender cannot repossess the property in a timely manner before it is destroyed. And as pp suggests in the macro sense, these lenders can't repossess even before the city is destroyed.
The answer to government power gone awry is not to give the government far greater power, to right many wrongs with more and more wrongs. Like Crafty, I don't buy it. The way you fix it is to simplify the rules, clean up the existing laws. If you don't meet the terms of your mortgage, you lose your home. The law should allow a reasonable delay to clear up misunderstandings, check lost in mail, give a short time to find a different funding source, but not years and years of delays.
Defaulted loans and foreclosed properties are part of a continuous correction that keep the market at market value. It is a positive thing that makes widespread home ownership possible. A market prevented from correcting is not a market. It is a quagmire.
This takings idea is made 'legal' by the Supreme Court Kelo decision. It was a wrongly decided, 5-4 decision. Public taking for private use unconstitutional and wrong. As Crafty suggests, local governments are not smarter than free markets and Nazi-Soviet-style central planning is not better than free people making free choices. Let's just go back to what worked before all the government over-meddling.
One example of where public taking for private use did not work out is the Kelo property in New London.
http://dogbrothers.com/phpBB2/index.php?topic=1850.msg78906#msg78906
Eminent domain by definition does not pay the amount that a willing seller and a willing agree to, fair market value.
When cities start taking up properties in default to 'improve' neighborhoods, they will not limit their takings to defaulted properties.
A mortgage with a right to take back the property in the event of default is a contract. Places where ordinary contracts are not enforceable are called third world countries. Yes, I would include Detroit and Obama's vision for America in that category.
Where in the constitution does it say government shall not take private property for other than compelling public use? Perhaps in the 9th, 5th and 2nd amendments.
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CD,
There are VERY competent people involved in the ED considerations from what I have seen and heard. If the process is started, the first city must be done efficiently and in a realistic and short time period, or it will fail. If it works, it will sweep across the country.
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I agree with Doug and Crafty. If it sweeps the country, it'll be graftapalooza on an epic scale.
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DougMac,
What if the ED action actually improves the position of the Investor? What if the Investor gets more in return that could be expected by foreclosure? That is the bottom line.
Government programs and interventions have failed miserably in stemming the crisis. Right now, 8m homes have had completed foreclosures, and untold others with Deed in Lieu's or Short Sales. 4 million more are currently delinquent and other 2 million plus modifications have occurred in which 66% will redefault. That is 14m homes in trouble, or 28j% of all homes that had first mortgages. Greater than 1 in 4!!!
Even worse, FHA and the GSE's expect that 30% or their current loans will default in the future, and of the subprime done by the GSEs, 67%.
Also, there are large numbers of ARM's just waiting for interest rates to increase and when that happens, kiss half of those loans goodbye in the first couple of years.
Can the country really afford this?
Absolutely nothing has been accomplished in the past 7 years to resolve the crisis except to delay the problems. The delays are done through phony attempts to modify loans, foreclosure regulations that stop the ability to foreclose, artificial increases in home values designed to "hide" the problems and delay, and programs like HARP designed to lower payments and interest rates to stimulate a consumer driven economy that is otherwise moribound.
None of the parties involved in the loans are working together to resolve the problems. They are at cross purposes. To give you an idea of the problems:
1. Homeowners have no trust in the lenders and servicers. Those in trouble feel that the serrvicers are out to steal their homes unlawfully. Most of this belief is based upon idiots like the media and Liz Warren expounding ideas that are not true or factual like: 1) The loans were sold multiple times. 2) Robo signing. 3) Poor and stupid modification practices.
2. It is no longer subprime driving the defaults either. It is Prime loans, people who have lost jobs or income, now forced into default. This has been the case since 2010.
3. Modification departments that are nothing more than "loss centers" for servicers. They contribute nothing to the bottom line for a non-bank owned loan, unless servicing fees, late fees and other things can be charged. Additionally, antiquated processes for doing mods. Then you have the problems of homeowners who cannot even follow simply instructions for getting in the paperwork for doing mods, committing fraud, strategic defaults, etc.
4. Basel III which has caused bank servicers to be forced to sell servicing rights to the non-bank servicers, which screws up loan mods in process. If they don't sell the loan servicing rights, increased Basel III capital requirements are implemented.
5. Regulatory agencies like the CFPB which have taken the position that literally says, "If you are doing something right, but you think it is wrong, then it is wrong". The CFPB has decided that if you are a lender or servicer, and they come in to audit you, if you have an attorney present, the attorney cannot say a thing or represent you. You have no legal rights!.
6. Investors who have NO INPUT on what to do regarding a delinquent loan. The Servicer has all the power to decide.
The entire system is completely broken. No one is talking to another. Even within the lenders and servicers, the departments have no cross communication and no one knows what the other is doing.
ED is actually a "threat" to use the process to bring the parties together to try and workout solutions. It will not work in a city like San Francisco with few foreclosure problems, but for cities that have been severely damaged and the process does not improve, ED could help.
What has to happen is a plan of action put into place that will bring the parties together to work towards a common cause. This requires both the involved parties and independent parties capable of properly evaluating the situation and bring about resolution.
If all parties can work together to resolve a problem like in Richmond or Newark, it will prove that the involved parties can work together for the common good. Then, one can see the beginnings of them working together in a non ED environment.
The strategies are being developed now. The processes and methodologies are being put together.
I came to this decision reluctantly. When first hearing about ED, my thoughts were "Fuck ED and Richmond". Over time, I have reviewed and evaluated things and have come to the conclusion that ED may provide an ability to bring the parties together.
At this time, it is either ED, or another 10 years of doing again and again, what has failed in the past time and again.
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GM,
If the government is involved, yes. But the plans are to keep the governments out of this at both the state and federal level. It is private enterprise coming together to solve a problem that cannot otherwise be solved.
There is another solution.........do what was done during the Depression........a 5 year moratorium on foreclosures. Would that be any better?
There have to be better solutions and if the threat of ED can be used to bring the involved parties together to work towards a solution, so much better.
What people read in the papers or on the internet or airwaves is misrepresenting what is really going on. Foreclosures are not recovering. People are not improving their financial situations. The Housing Market is not recovering. People are representing otherwise, but going into the numbers reveal an entirely different understanding.
We are talking about another 20% of the country facing foreclosure in the next decade, if nothing is done. What happens when the economy crashes, which it will. What happens when interest rates rise?
The government actions to date have destroyed the refinance industry. Does anyone really think that with interest rates on loans at 3.5%, people will refinance again for other purposes? Will they want to move up into "better" homes, when they will be paying 6% or greater?
The banks have been laying off residential lending employees by the thousands. The Mortgage Bankers are doing so as well. Even worse, their loan volumes have decreased by 70% from one year ago. Add to this that they made $1,200 per loan origination in first quarter 2014, and they are in real trouble. By the end of the year, expect that 50% of them will be gone.
Think the new mortgage regulations and QM loans are going to be an improvement? Think again. Lenders now have a duty of care to the borrower, and under the UDAP (Unfair and Deceptive Acts and Practices) codes, it will likely go to a fiduciary duty. So new loans originated in 2014 and beyond that default will likely go to litigation.
QM? There is a huge loophole in it which only a few people are aware of yet. When word gets out, lenders will have little or no defense to defend against the lawsuits.
Safe harbor for QM? That is a joke. Imagine that 30% of all loans originated under QM are at great risk of default at time of funding. (We have the proof.)
You cannot believe who fucked up the entire situation is, whether from the foreclosure side, the current lending practices, regulatory oversight, or anything else. We cannot just continue to do things as we are now. New and extreme measures must be taken.
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Angel Oak Funding loan guidelines
1 day out of short sale or foreclosure
Credit Scores beginning at 500 up to 80% ltv and 50% Debt to Income
Bank Statement documentation for Self employed
And people wonder why I am so negative? Here we go again......
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New Single-Family Home Sales Rose 18.6% in May To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/24/2014
New single-family home sales rose 18.6% in May to a 504,000 annual rate, coming in well above the consensus expected pace of 439,000. Sales are up 16.9% from a year ago.
Sales increased in all major areas of the country.
The months’ supply of new homes (how long it would take to sell the homes in inventory) fell to 4.5 in May from 5.3 in April. The decline in the months’ supply was all due to a faster sales pace. Inventories were unchanged.
The median price of new homes sold was $282,000 in May, up 6.9% from a year ago. The average price of new homes sold was $319,200, up 1.7% versus last year.
Implications: The housing recovery continues. New single-family home sales boomed in May to a 504,000 annual rate, blowing away consensus expectations and coming in at the highest pace in six years. There has been a lot of volatility over the past year, but we can take some of this volatility out by taking a 12-month moving average, which is tied at the best level since February 2009. Still, at this point in the housing recovery we expected this number to be higher – but, a few factors are weighing on sales. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. Second, buyers have shifted slightly from single-family homes, which are counted in the new home sales data, to multi-family homes (think condos in cities), which are not counted in the report. Third, financing is still more difficult than it has been in the past. Perhaps the best news in today's report was that the months’ supply of new homes – how long it would take to sell all the new homes in inventory – declined to 4.5 in May, well below the average of 5.7 over the past twenty years. The inventory of new homes remains very low and as the pace of sales continues to recover in the years ahead, homebuilders still have plenty of room to increase both construction and inventories. Another way to think about it is that the construction of new homes can outpace a rising pace of sales. In other housing news this morning, the Case-Shiller index, which measures home prices in 20 key metro areas, increased 0.2% (seasonally-adjusted) in April and is up 10.8% in the past year. Price gains in the past year have been led by Las Vegas and San Francisco. The FHFA price index, for homes financed with conforming mortgages, was unchanged in April and is up 5.9% from a year ago. As inventory continues to come onto the market, price gains will continue but not as fast as in the past two years. In other news this morning, the Richmond Fed index, a measure of factory sentiment in the mid-Atlantic region, dipped to +3 in June from +7 in May, signaling continued manufacturing growth, but perhaps not as fast as in May.
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Strange how he quotes such good sounding news. Headline is up 18.6%, but sales are up 16.9% from a year ago (meaning they were down year to year just one month ago) and average price is up 1.7% from a year, then he couches it in caveats, "There has been a lot of volatility over the past year...a few factors are weighing on sales. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. Second, buyers have shifted slightly from single-family homes... Third, financing is still more difficult than it has been in the past." My guess is pp will not be highly impressed with this news.
Housing is regional and neighborhood by neighborhood as much as it is a national market. Along with all the weaknesses pointed out by pp, I certainly see pockets of strength in our area. Even in strength, they are only back to one decade ago levels.
"a larger share of the population is deciding to rent rather than own" (This is not bad news in the rental property business!) What it means though is that housing is tied to people's incomes. Fewer people have good jobs and good credit after all the economic disruption and the Obama non-recovery. It also means there is upside potential in the housing market if and when we finally turn our economic policies around.
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You also have to look where all the activity was.......
Total increase in actual units sold...........9000 for the month
Increase in the South .....6000 units
Increase in the West ......3000 units
Midwest.....broke even
Northeast.......1000 units
Now, these numbers are rounded............501 is rounded up and 499 is rounded down. We don't know actual numbers so this could be very deceptive....Law of Small Numbers....
These are also Sampling Surveys with estimated numbers.........could this be subject to the same frauds as the Employment reports on surveys?
Additionally, the "sale" is either contract signed or deposit taken. That is a lot of room for the sale to "fall out".
Relative Standard Error Rates for
Northeast.....25
Midwest.....20
South.....12
West.....12
Would you put money on such Error Rates?
Confidence levels are just as pathetic.
BTW, the banks own internal studies are not optimistic.
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While looking through Scott Grannis today I notice this chart showing the new homes 'recovery' in perspective:
http://4.bp.blogspot.com/-fqMBZcvT7JA/U6oVBE1reXI/AAAAAAAAQ8Q/sDyr93uxZHs/s1600/New+Home+Sales.jpg
http://scottgrannis.blogspot.com/2014/06/steady-and-slow-improvement-is-boring.html
From that other source we keep hearing how good housing is since hitting rock bottom instead of how poor it is compared to better economic times. Highest in 5 years is still down 60% from pre-crash levels.
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The "pre-crash levels" are also known as "the bubble".
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The "pre-crash levels" are also known as "the bubble".
Okay, then down 50% from the previous 50 year average.
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DougMacG
Let's take Scott's chart and long at it a bit further.
1. Notice the upsurge in Purchases in 2009 and 2010, and then the fall back? That was due to the Obama Tax Credit of about $8500 per home purchase, if I remember the amount correctly. It simply brought housing demand forward, and the second the incentive stopped, housing sales fell again.
2. Sales start rising again in 2011 with the introduction of QE 2 and QE 3. Now they are bouncing again as QE is pulled back with year over year sales dropping.
3. Interest rates during this latest increase were at the lowest that they have every been on mortgages, and yet you only get that little push upwards. What happens as rates increase. (BTW, a 2% increase in rates will drop home values about 18%, as historical research has shown.)
4. With existing inventory as low as it was in 2011 - 2013, buyers went to purchasing new homes............and this is all they got as increases?
5. BTW, even last year, it was about the 6th lowest year on record..........even worse that when the US population was under 200 million.
Now, you really have to look at the report each month to understand something else going on, and that is the methodology used to arrive at these numbers. They use statistical sampling from different regions. The reports have a 90% confidence level, meaning that there is huge room for errors.
More important, they round off the numbers. In each of the 4 regions, they take the estimate sales and round to the nearest thousand. So, if you have 501 sales, they round to 1000. How accurate is that?
Plus, the error rates per region are from 12.5% to about 25%. This means the data is statistically "worthless". Yet, we are to believe that this is a "successful" recovery.
Right now, the lending standards are so screwed up, it is pathetic. One of my partners does mortgage loans still. He has a client wanting to buy a home, and it will have a 60% LTV. Debt to Income is 25%. His and the wife's income is VERIFIED at $423k per year. 823 Credit Score. $800k in the bank after the loan closes. He cannot get a loan because he does not have three credit lines over 2 years old. He pays cash for everything but this, but that is not being credit worthy.
Meanwhile, FHA is giving out loans at up to 55% Debt to Income, with credit scores as low as 600. And that is credit worthy?
Unless people pay attention to this stuff daily, and are really in the industry, they have not a clue what is really going on.
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Always glad to get Pat's insights on this.
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Amen.
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Likewise!
It is quite frustrating and disappointing that so many economic measures are loaded with so many errors, even before the people with an agenda add their spin.
How do they tout the recent growth in new homes sales without mentioning that other than the other hope and change years, we are building at about half the rate of the last half century?
PP spells it out so well (as usual). The 'surge' in growth was when the feds were paying for part of your house. Incentives like that create dependency, not wealth, and they artificially bumps up prices making them less affordable. The rest of the growth comes from low interest rates. But the rates don't just happen to be low but are artificially low based on unsustainable and destructive policies. Why do we want unsustainable growth?
Some might say homebuilding and the hiring of plumbers and cabinet makers peaked and will never return to previous levels because nearly everyone now has a home. But ask people like Bill and Hillary Clinton or john and Theresa Kerry, what is the right number of homes per 'household'? http://www.snopes.com/politics/kerry/homes.asp
If we all built 5 homes worth $30 million, that would stimulate more employment than we have people. And it would only take less than a third of the money Bill Clinton has made out of office giving speeches. Maybe (another) government program could solve this; if the homeless gave speeches under equal pay laws and the Fed accommodated that, we could have endless wealth!
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I am going to throw out some industry actions that are simply impossible to believe, but absolutely true. This part concerns Mortgage Bankers.
A Mortgage Banker is not a bank, but is a lender who generally funds on a Warehouse Line of Credit and which will be sold to the GSEs in the end. Prior to funding, the loans will be run through the GSEs automated approval systems. Once approved, they are funded. These are the QM loans that you hear about.
A QM loan comes with a Safe Harbor provision whereby a lender is "protected" from Ability to Repay and Duty of Care provisions in Dodd Frank. So the perception is that the loans have no problems.
The key Ability to Repay component is the Debt to Income Ratio. As long as Debt to Income is 43% or less, or the loan is GSE approved, the Ability to Repay provision is presumed to be met.
Since the QM regs came out, I have been studying the 43% DTI extensively. Turns outs that DTI is effective only 53% of the time in predicting defaults. Further research revealed that with a 43% DTI, more than 25% of all loans will have a Negative Cash Flow, so unless a borrower changes habits, they will likely experience first year defaults. (Think FHA with 10% rates.)
Now, Safe Harbor is not really Safe Harbor. Under Dodd Frank, a lender can be sued for Unfair and Deceptive Acts and Practices (UDAP). UDAP can be used even if a practice is legal.
We created a model to identify the Default Risk on any loan, and it has an 82% reliability right now, without having access to a complete loan file. We have been presenting the model to Mortgage Bankers. Here is the response.
They argue that if they know the risk of any one loan, then their liability increases. But with Safe Harbor, as long as they don't know the risk, they are protected. So they don't want to use the model.
Here is their real problem. Under UDAP, if they fund the loan and it defaults, the borrower can sue them regardless of Safe Harbor. But, if it defaults, they must buy the loan back from the GSEs. And the CFPB and DOJ can come after them for funding loans a borrower could not repay. However, if they deny the loan, since the loan was approved by the GSEs, they could be sued by the borrower for discrimination or under Fair Lending Laws and also UDAP. And the DOJ and CFPB can go after them for discrimination and Disparate Impact.
IOW, they are screwed if they do, or if they don't fund the loan.
But here is what we knew and were recently able to confirm. The Mortgage Banker is going to fund the loan no matter the risk. If they don't fund the loan, they decrease their earnings. (Each loan generally makes about $1500 in total profit.) So it is do the loan whatever the risk, and make the money. And pray that the loan does not default.
BTW, the banks are of the same attitude.......and the GSEs as well.
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Hey Wesbury and you other
idiots bulls:
What happened to Housing Starts? Here was the most positive spin I could find to post. Maybe Wesbury can use it to draw up his latest report.
Apr, May and Jun are supposed to be the best months for housing, and this is all we get? Interesting that this happens as housing inventory is increasing, existing sales are down year over year, pending sales are weaker than expected and new home sales are not that great. Maybe Obama can restart housing by offering all the new illegal children new homes free to live in, and then bring the families in.
Going to be a fun second half of the year.
Housing starts hit slowest pace in nine months
WASHINGTON - U.S. home construction fell in June to the slowest pace in nine months, a setback to hopes that housing is regaining momentum and will boost economic growth this year.
Construction fell 9.3 percent last month to a seasonally adjusted annual rate of 893,000 homes, the Commerce Department said Thursday. That was the slowest pace since last September and followed a 7.3 percent drop in May, a decline even worse than initially reported.
Applications for building permits, considered a good indicator of future activity, were also down in June, dropping 4.2 percent to a rate of 963,000 after a 5.1 percent decline in May.
The worse-than-expected June performance reflected a big drop in activity in the South, where construction plunged by 29.6 percent last month.
Analysts, however, said that the June decline in construction may have been influenced by temporary factors such as heavy rain in parts of the South which could have held back housing starts in that region.
Jennifer Lee, senior economist at BMO, said it was too soon to conclude that the housing recovery has stalled. "After all, job growth continues, mortgage rates are near their lows for 2014 and homebuilder confidence has been increasing," she said in a research note.
"In short, much weaker than expected, but the data are volatile and the plunge in starts was all in one region. We view the homebuilder survey as more of trend-setter over time -- it suggests that the weakness in this report be discounted," said Jim O'Sullivan, chief U.S. economist at research firm High Frequency Economics.
The overall weakness reflected a 9 percent fall in construction of single-family homes, the biggest part of the market, and a 9.9 percent drop in construction of apartments and other multi-family units.
All of the June weakness was confined to the South, where about 40 percent of home construction occurs. Construction was up 14.1 percent in the Northeast, 28.1 percent in the Midwest and 2.6 percent in the West.
Home construction has struggled to gain traction this year, limiting its ability to contribute to economic growth. Part of the weakness reflected an unusually severe winter which hampered construction. But rising home prices, a rise in mortgage rates from historically low levels and tighter lending standards imposed since the financial crisis have also been a barrier, especially for potential first-time buyers.
There still is hope that housing will perform better in the second half of the year although Federal Reserve Chair Janet Yellen told Congress this week that the slowdown in housing is one of the concerns at the Fed and that its forecast for an economic rebound may prove to be too optimistic.
The National Association of Home Builders, however, reported Wednesday that homebuilder confidence surged in July, reflecting heightened expectations that the second half of the year will see rising sales. The builders' sentiment index rose to 53, up four points from a revised reading of 49 in June. Readings above 50 indicate more builders view sales conditions as good rather than poor. The July reading was the first month above 50 since January when the index stood at 56.
New home sales surged 18.6 percent in May to a seasonally adjusted annual rate of 504,000, the highest level in six years, while sales of previously owned homes rose 4.9 percent, the biggest one-month gain in nearly three years, to a rate of 4.89 million homes.
Even with the big May increases, sales of new homes are still running at just about half the pace of a healthy real estate market.
Economists expect there is a lot of pent-up demand for homes after many potential buyers put off purchases during the 2007-2009 recession and the weak recovery since that time. Job growth has accelerated in recent months, with an increase of 288,000 jobs in June. That has helped to push down the unemployment rate to a nearly six-year low of 6.1 percent in June.
There is optimism that employers will step up their hiring further in the second half of this year as they respond to a rebound in overall economic growth following a weak winter.
The economy shrank at an annual rate of 2.9 percent in the January-March quarter but analysts believe growth rebounded to around 3 percent in the April-June quarter and will remain around that level for the remainder of this year.
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Don't give him any ideas Pat.
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I am sure he has already thought of it.
Here is another article about what is happening with mortgages. In this piece, the writer is speaking about the mortgage banker. In 2007, the mortgage bankers were the companies who failed because they could not repurchase all the defective mortgages. So, the potential for the same pattern exists again.
Combine this with what I wrote about having their heads buried in the sand on QM mortgages and not wanting to know the risk, and things will heat up quickly.
I have already prepared the homeowner arguments to be filed in lawsuits alleging that lenders did not adequately consider ability to repay the loan. The way the arguments are set up, Safe Harbor will not protect the lenders. I will be releasing this to attorneys in the next couple of weeks.
The banks and the GSEs are not going to change their practices. I have reached the point where I now believe that the only way they will respond is to make it truly painful for them. The Regulatory Lawsuits being settled do not offer pain. When you look into the details, the pain is actually on the investors who own the MBS. The required principal reductions and modifications are where the bulk of the fines go.
Fannie, Freddie making risky deals with small lenders: watchdog
WASHINGTON (Reuters) - U.S. housing finance companies Fannie Mae and Freddie Mac are making riskier deals as they increasingly purchase mortgages from smaller lenders, a federal watchdog said on Thursday.
The government-owned companies do not lend money directly, but underpin the U.S. housing market by guaranteeing most new mortgages in the country.
The Federal Housing Finance Agency Office of Inspector General said in a report that the purchases from smaller lenders raises the exposure of the two companies.
"Smaller and non-bank lenders may have relatively limited financial capacity," the watchdog said. "The enterprises face an increase in the risk that those counterparties could default on their financial obligations."
Fannie Mae and Freddie Mac, which were seized by the U.S. government in 2008 during a housing market implosion, purchase loans from lenders and package them into securities that are then sold to investors.
In the past, the two companies bought most of their loans from the country's largest banks. Small lenders generally dealt with larger banks, who in turn sold them to Fannie and Freddie.
However, tighter regulations have made big banks such as Bank of America Corp and Wells Fargo & Co reticent to buy loans from other lenders, so more small banks and non-bank enterprises now sell directly to Fannie and Freddie.
Freddie Mac's top five mortgage sellers provided 70 percent of its loans in early 2011, but only 44 percent in late 2013, according to the report.
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FWIW, here is Wesbury's take on the June numbers:
Housing Starts Declined 9.3% in June To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/17/2014
Housing starts declined 9.3% in June to a 0.893 million annual rate, coming in well below the consensus expected 1.020 million. Starts are up 7.5% versus a year ago.
The decline in starts in June was due to a drop in both single-family and multi-family units. In the past year, single-family starts are down 4.3% while multi-family starts are up 38.3%.
Starts in May fell in the South, but rose in the Midwest, Northeast, and the West.
New building permits declined 4.2% in June to a 963,000 annual rate, coming in below the consensus expected 1.035 million pace. Compared to a year ago, permits for single-units are up 0.6% while permits for multi-family homes are up 6.8%.
Implications: Housing starts fell substantially in June, with declines in both single-family and multi-family starts. However, don’t read too much into the drop in the headline number. Starts data tend to be very volatile from month-to-month and last month housing starts dropped 29.6% in the South, the steepest decline ever for any single month in at least the last 50 years for that key region. But, starts increased in all other regions of the country. To find the underlining trend and get rid of monthly volatility we look at the 12-month moving average, which just hit its highest level since October 2008. And, even though starts fell, the total number of homes under construction, (started, but not yet finished) increased 1.1% in June and are up 20.5% versus a year ago. The one conclusion we can make from today’s numbers is that multi-family construction is taking the clear lead in the housing recovery. Single-family starts have been essentially flat for almost the past two years, while the trend in multi-family units has been up (although volatile). In the past year, 35% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year (probably around the end of 2015). Although building permits declined in June, it was all due to the volatile multi-family sector; single-family permits rose 2.6%. We expect a rebound in building permits next month. In other news this morning, new claims for unemployment insurance declined 3,000 to 302,000. Continuing claims for jobless benefits dropped 79,000 to 2.51 million. It’s early, but plugging these figures into our models suggests a nonfarm payroll gain of 206,000 in July, another solid month.
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At least Wesbury admits that Single Family have been flat for the last two years.......
But single family is the key to housing recovery. Multi units are apartments and condos for the most part. They do not stimulate Single Family actions in any meaningful manner, except for condo purchases which are generally people who could not buy single family.
BTW, Chase is bailing out on FHA lending. Too much risk as I have been saying all along. Chase represents just over 2% of FHA lending and dropping down to probably 1.5%.
Mortgage bankers are now up over 50% of all lending activity, if current reports are correct. But that is in an environment where mortgage lending has dropped 72% from last year levels.
First time buyers are now about 20% of activity, down from traditional levels of 35-40%. And most are FHA, of course. Moveup buyers are lacking in traditional numbers like first time buyers. And with the hot money investors leaving the market, watch out.
Pay attention to Phoenix. The party is over there.....again.....Homes sales are down considerably and home values are falling again. Vegas will be next.
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Happy times are here again. NAR cites Existing Home Sales up
2.6% Month over Month
Seasonally Adjusted Rate of 5.04 million homes per year. (Of course, take the Seasonally Adjusted Rate for Jun and multiply by 12. Ignore what the amounts were in previous months because that would offer a different set of facts.)
I am probably not allowed to say this according to NAR rules, but Year over Year Sales are down again, for the 8th month in a row. (Damnable facts.)
If we take actual sales for the first 6 months of the year, it is 2,319,000 total sales. Seems that this number is much under the 5.04 annual rate that NAR cites.
And don't forget that the Buying Season is pretty much over and total sales monthly will begin to decline again no later than August. Guess that 5.04 rate is not going to hold up for the year.
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Will Wesbury and others start to believe that the party is over? Or is this the result of potential buyers deciding to go on a June vacation after school ended. Waiting with baited breath for the excuses.......
New Home Sales Plummet
WASHINGTON (AP) — Sales of new U.S. homes plunged in June, a sign that real estate continues to be a weak spot in the economy.
New home sales fell 8.1 percent last month to a seasonally adjusted annual rate of 406,000, the Commerce Department said Thursday. The report also revised down the May sales rate to 442,000 from 504,000.
Buying of new homes fell 20 percent in the Northeast, followed by less extreme declines in the Midwest, South and West. The modest sales caused the inventory of new homes on the market to increase to 5.8 months, the highest since October 2011.
The median sales price was $273,500, up 5.3 percent over the past 12 months.
Home sales had been improving through the middle of 2013, only to stumble over the past 12 months due to a mix of rising prices, higher mortgage rates and meager wage growth.
The pressures from mortgage rates have eased since the start of 2014 and the pace of price increases have slowed. Still, other indicators suggest that home-buying has stalled after rebounding from lows reached during the Great Recession.
The National Association of Realtors reported that sales of existing homes increased 2.6 percent in June to a seasonally adjusted annual rate of 5.04 million homes. It marked the first time that sales have been above the 5 million-mark since October.
Economists were encouraged by the second straight monthly gain in existing home sales, though those sales are still hovering below the recent peak of 5.38 million sales hit last July.
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New Single-Family Home Sales Declined 8.1% in June To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/24/2014
New single-family home sales declined 8.1% in June to a 406,000 annual rate, coming in well below the consensus expected pace of 475,000. Sales are down 11.5% from a year ago.
Sales declined in all major areas of the country.
The months’ supply of new homes (how long it would take to sell the homes in inventory) rose to 5.8 in June from 5.2 in May. The increase in the months’ supply was due to a slower sales pace along with an increase in inventories.
The median price of new homes sold was $273,500 in June, up 5.3% from a year ago. The average price of new homes sold was $331,400, up 8.3% versus last year.
Implications: Forget about new home sales for a minute. New claims for unemployment insurance dropped 19,000 last week to 284,000, the lowest since February 2006, which was at the peak of the housing boom. The Labor Department said there was nothing unusual about last week’s reports from the states, but noted the data are often volatile this time of year due to summer-related auto plant shutdowns. This suggests there were fewer shutdowns than normal last week. Continuing unemployment claims declined 8,000 to 2.50 million. Plugging these figures into our payroll models, which are rated #1 by Bloomberg for the past two years, suggests nonfarm payrolls increased 218,000 in July, while private payrolls grew 216,000. These forecasts will likely change next week as we get data from ADP and Intuit, as well as one more week of unemployment claims. On the housing front, new single-family home sales dropped steeply in June and were revised substantially lower in May. Today’s report came in well below even the most pessimistic forecast for sales in June. This does not mean we are back in a housing recession; home construction remains in an upward trend and new homes sales have been hovering in the same range for the past two years. There are a few key reasons why new home sales remain so low. First, the homeownership rate remains depressed as a larger share of the population is deciding to rent rather than own. Second, buyers have shifted slightly from single-family homes, which are counted in the new home sales data, to multi-family homes (think condos in cities), which are not counted in the report. Third, financing is still more difficult than it has been in the past. The inventory of new homes rose in June, but still remains very low and most of the inventory gains are for homes not started, instead of homes completed. Homebuilders still have plenty of room to increase both construction and inventories. Once again, the housing recovery remains intact, despite the fits and starts which are to be expected when the overall economy is a Plow Horse, not a Race Horse.
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:lol:
Such rubbish from Wesbury.
Why are people deciding to rent rather than buy?
1. They can't afford the homes and the loans.
2. Income growth is stagnate except for the upper class.
3. 50% of current homeowners cannot sell due to low or negative equity.
4. 25-34 age group doesn't have the money to buy thanks to student debt.
5. Home construction is bouncing on the bottom still, even with poor analytics to derive the numbers.
6. Homeownership is still higher than traditional norms. We should be no more than 63% and not the current 65%.
Yes, financing is still more difficult that the past, but does anyone seriously want to go back to the go-go lending of 2005? Also, check out FHA. 15-20% default rates within the first two years of origination. That is huge. And that is what idiot Wesbury wants to go back to.
Wesbury, you are out of the game. Go to the locker room and play with your buddy Krugman.......
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AP: 35 PERCENT IN US FACING DEBT COLLECTORS
US Home ownership rate in 2013 was 65%
Labor Force Participation Rate for 25-29 Year Olds Hits Record Low,
As a landlord I can tell you it is tough as hell collecting rent in the Obama economy.
Areas of US facing record rates of evictions. Blacks, women and children are hit hardest.
Just some random, unconnected thoughts.
http://hosted.ap.org/dynamic/stories/U/US_DEBT_STUDY?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2014-07-29-00-12-33
http://www.aei.org/article/economics/financial-services/housing-finance/long-term-home-ownership-trends-the-us-england-and-canada/
http://valleywag.gawker.com/rising-rents-shot-san-francisco-eviction-rates-up-170-1459058928
http://usatoday30.usatoday.com/money/economy/housing/2010-07-27-1Aevictions27_ST_N.htm
http://cnsnews.com/news/article/ali-meyer/labor-force-participation-rate-25-29-year-olds-hits-record-low
San Francisco eviction map:
(http://www.sfbg.com/sites/default/files/imagecache/Full_325_wide/430ellis.jpg)
Meanwhile, DOW is over 17,000. Crisis? What crisis?
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Plow horse!
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DougMacG:
To go with your Collections post about the 35%, here is some more numbers to put things into a better perspective. Per the Fed
33% of all people have no revolving debt.
33% of the people have less than $1000 in revolving debt.
The remaining group has all the rest of the revolving debt.
Dependent upon the source, the "average" revolving debt in the country is from $8k to $15k. (The differences are based upon what is considered revolving debt.) So if 66% of all people have $1000 or less in revolving debt, imagine what the real numbers are for those who hold all the debt.
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http://www.latimes.com/business/la-fi-home-sales-20140814-story.html?track=rss&utm_source=PANTHEON_STRIPPED&utm_medium=PANTHEON_STRIPPED&utm_campaign=PANTHEON_STRIPPED
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Housing Starts Surged 15.7% in July To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/19/2014
Housing starts surged 15.7% in July to a 1.093 million annual rate, coming in well above the consensus expected 0.965 million. Starts are up 21.7% versus a year ago.
The increase in starts in July was due to strong gains in both single-family and multi-family units. In the past year, single-family starts are up 10.1% while multi-family starts are up 44.7%.
Starts in July rose in the Northeast, South, and West, but fell in the Midwest.
New building permits increased 8.1% in July to a 1.052 million annual rate, coming in above the consensus expected 1.000 million. Compared to a year ago, permits for single-units are up 3.9% while permits for multi-family homes are up 14.1%.
Implications: Great news on home building. Housing starts boomed in July, soaring 15.7%, and were revised up substantially for June. The upward trend should continue. Building permits also soared in July, up 8.1%, as single-family and multi-family permits rose 0.9% and 21.5% respectively. Starts can be volatile from month to month, so to find the underlying trend we look at the 12-month moving average, which now stands at the highest level since October 2008. The total number of homes under construction, (started, but not yet finished) increased 2.9% in July and are up 22.8% versus a year ago. No wonder residential construction jobs are up 116,000 in the past year. Multi-family construction is taking the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up (although volatile). In the past year, 35% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will eventually rise to about 1.5 million units per year. In other recent housing news, the NAHB index, which measures confidence among home builders, rose two points to 55 in August, the best reading since January. Looks like a broad pick-up in both sales and foot traffic around the country.
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Once again, Wesbury is promoting a poor analysis. Here is why.
1. Raw data has Multi Unit up by 11.6k units for the month. Multi units are mostly apartments. This does not help single family which is the real area of importance for a housing recovery.
2. Single Family increased 2.9% over the Jun numbers.
Jun was 606k seasonable adjustments (for the year)
Jul was 656k
Stupid dumbshit is basing it on numbers with seasonable adjustments.
3. Real Single family number show
62.2k for Jun
61.6k for Jul
So let's promote the seasonably adjusted numbers while we ignore the raw data which does not meet the message we want to project.
What a joke........
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Now, for the comments on housing from a guy I am starting a joint venture with.....for much better understanding of reality, you read this guy and not Wesbury.....
http://mandelman.ml-implode.com/ (http://mandelman.ml-implode.com/)
http://mandelman.ml-implode.com/2014/08/i-dont-care-what-the-media-says-housing-market-is-horrible-and-homeowners-still-suffering-through-the-loan-mod-process/ (http://mandelman.ml-implode.com/2014/08/i-dont-care-what-the-media-says-housing-market-is-horrible-and-homeowners-still-suffering-through-the-loan-mod-process/)
I Don’t Care What the Media Says, Housing Market is Horrible, and Homeowners Still Suffering through the Loan Mod Process
I know what sorts of headlines run rampant through the media these days. It’s nothing new… it’s been going on non-stop since at least 2008. It’s also utter and complete nonsense.
Housing market horrors…
Now, I said this would happen so many times last year, that it’s annoying to have to repeat myself, but the housing market has been hit by yet another foreseeable perfect storm. To begin with, ever since the president’s Making Home Affordable program was announced, we’ve been refinancing the same people over and over again, this last time around at rates as low as 3.5 percent fixed.
So, that ended last July and won’t return because even the almost-all-powerful Fed can’t get rates low enough to pull the same trick again, so although there will always be some that refinance, any sort of refi boom is DOA.
And then there’s all them new-fangled rules, supposedly put in place to right the wrongs that caused the mortgage and housing meltdown… Dodd Frank, the CFPB, TILA, RESPA… and anyone who thought these new rules wouldn’t suppress home sales was simply delusional.
Of course, all of these things are on top of the rest of the problems we’ve neglected to fix for the last six years. Underwater homes are still a huge problem.
The national average is only 20 percent, but no one sells their home to break even, so when you factor in sales commissions, moving expenses and the need for a 20 percent down payment, the percentage of homes underwater is… I don’t know… HIGH. Like, it wouldn’t surprise me to find out it’s over 70 or 80 percent, not that anyone has any incentive to find out. And most of whoever is left probably likes their home and doesn’t want to move.
The evidence is abundant…
During the fourth quarter of 2013, Black Knight reported that origination volume dropped below 400,000 mortgages for the first time since 2011. And by year-end, we were at the lowest point since mid-2008 when volume plummeted to around 300,000, and it felt like the world might not make it through the bloodletting.
However, mortgage originations during the first quarter were pathetic, down some 70 percent year-over-year at Citi and Chase, and its safe to assume elsewhere as well. Then the second quarter was similarly bad… originations were down 66 percent year-over-year at the end of Q2.
Now, the American Enterprise Institute (AEI) has reported that, “potential default rates remain nearly double the 6 percent maximum AEI says is conducive to a stable market, suggesting there’s been no “discernible impact from QM [Qualified Mortgage] regulation.”
Unnamed AEI researchers were quoted in DS News as saying: “Risk in the mortgage marketplace remains perilously high.”
So, that’s all very encouraging in terms of pointing to the obviously bright future ahead, as I’m sure you’d agree.
All done waiting for the kids to come home?
Zillow and Puulseonomics, whoever they are, just published the results of their study of why “millennials” are still not buying homes like no one thought they would.
Apparently, “a panel of economists, real estate experts, and market strategists” has finally found the courage to agree publicly that “the median age of first-time homebuyers is likely to keep moving up in the next decade,” because they’ve all concluded at long last that the millennials have decided to sit out the carnage and not buy homes until later in their lives.
You know, later in their lives… like maybe the times of their lives when they have jobs, can qualify for loans, and aren’t still watching their parents, aunts and uncles losing homes every year, because those sorts of times would seem to be worth waiting for as far as house hunting is concerned.
Hey, maybe some of the millennials are simply waiting to buy their own parent’s home after foreclosure as an REO. What? It could happen.
The National Association of Realtors said that the typical first-time homebuyer in 2013 was 31 years old, but a significant number of “experts’ sais they think the average age will go up to 34 or even older in the years to come.
Homeownership in the United States today is at a 20 year low, and the Zillow/Pulse study reported that the largest declines are among “younger and early middle-aged Americans,” which could mean that many of the older folks have already lost homes to foreclosure, like maybe over the last six years, or that the older homeowners have become too much of a pain in the neck to foreclose on, I’m not sure which is more likely.
Of course, student loan debt and bleak prospects for good jobs were cited as the only culprits, which just shows me that they think that collectively we’re dumber than a stump.
Household formation is still down at levels never before seen in this country, and there’s simply no need to buy a home until you’ve got a household to put in it. And household formation is likely to be down in part because of student loan debt, but also because fewer people want to get married when they’re poor.
And as to the big picture, the survey concluded that, “it’s way too soon to conclude that the market has healed and returned to the old normal,” thus establishing for all to see that it is they who are dumber than stumps. (Does that last sentence make me something less than a serious journalist, or just someone who tells truth to power?)
Triple Celebrity Foreclosurcide…
And speaking of power, Burt Reynolds has lost his motion in a Florida court to have his foreclosure thrown out, instead the judge told Bank of America to proceed with the foreclosure on his waterfront Hobe Sound home known as Valhalla. Merrill Lynch filed the foreclosure action in 2011, after Burt fell behind on his payments.
Witnesses on the scene said that Burt, asking that the court call him “Lewis,” turned to them and said: “Sometimes you have to lose your house ‘fore you can find anything.”
Actress Mischa Barton, former star of “The O.C.” is officially in foreclosure, after the bank filed a Notice of Default this week on her Beverly Hills property. Barton is said to have bought the place for $6.4 million in 2005, when presumably she was still a famous movie star. Now $100,000 behind, TMZ.com reported that she’s been trying to unload the place since 2010.
Her mortgage is approximately $4.25 million, so it would seem that she’s down over $2 million since she bought it, and couldn’t sell it for what she owed. She even tried renting it out for $35,000 a month, but couldn’t find another member of the nouveau riche crowd to over-pay to live in the place.
Just further evidence of how red hot the Beverly Hills housing market has gotten over the last couple years as home prices have reportedly skyrocketed to 2006 levels… apparently everywhere but in the 90210.
Rounding out the celebrity trifecta is former heavyweight boxing champion, Evander Holyfield, whose failed business ventures, two divorces and hefty six-figure annual child support bills, have lad him to recently lose his 54,000 square foot mansion complete with 109 rooms, bowling alley and in-home theater, to foreclosure.
It took nearly four years for JPMorgan Chase to take ownership of the shopping mall size home in Fairburn, Georgia for $7.5 million. Holyfield reportedly owed north of $14 million. So, is that another example of home prices recovering? Georgia mansions are still down by 50 percent? How low were they?
Sources say that Holyfield never applied for a loan modification, but if he had, my advice to Chase would have been that they place armed guards, motion sensors, and video surveillance all around the Holyfield file 24 hours a day in a fire proof environment in order to make sure that his paperwork could not be lost under any circumstances. I would not want to be the guy that lost his paperwork, would you?
Loan modification madness…
With all of this swirling around us every day, the news continues to report only that economic recovery is sweeping the nation. That anyone still listens to such fanciful tales, let alone believes them, is amazing to me. The only explanation I can come up with is that optimism is a very hard thing of which to let go.
But we all know the real deal, we can feel the truth about the economy, we know what recovery feels like and this is not it.
Every month, foreclosures are supposedly down or coming to an end, until they’re up in Illinois, or breaking records in Connecticut… the numbers are always manipulated, and there’s no money in telling the truth about the whole mess, so no one does.
Although I couldn’t prove it, because I don’t keep track of the specific numbers, I think Mandelman Matters is a valid barometer for what’s going on with foreclosures and loan modifications. I hear from homeowners everyday from all over the country and those I can help in some way, I help. So, if the news about foreclosures were true, I’d know it.
Yes, for some homeowners loan modifications are easier to get than they have been in the past, but that’s not to say the process is easy or fun by any means. The people who have it the easiest are those with W-2 income and one home, who aren’t more than a year behind.
But, for the self-employed with a rental property who are more than a year behind… it’s like playing Pin-the-Tail-on-the-Donkey barefoot in a pitch black room filled with dangerous objects and broken glass all over the floor. It’s not impossible, by any means, I see these sorts of cases get approved every week, but it’s next to impossible without some sort of real expert guidance.
I wish I could do more to help more people, but I’m just one person and I can’t really afford to do what I do now. And the problem is, it’s obvious that our government, both state and federal, have essentially given up on doing anything more to make anything better. So, I fear this is it.
If you’re reading this and need help, especially if you’re with Bank of America or Ocwen, but also if you’re with Chase and/or a few others like SPS, SLS… maybe even Nationstar, you can contact me at Mandelman@mac.com. And if I can help you in some meaningful way… I certainly will.
People ask me why I continue to do what I do all the time now… and I wonder about the same thing myself every few hours on some days. The reasons are below… from one homeowner I spoke with just a few days ago… and another I’ve never spoke with, but who I apparently helped anyway.
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Did Wesbury see this coming? (No) Investors pull back. Who saw that coming? (Our PP)
Why do they say "Unexpectedly"? Housing is tied to incomes and employment. Were we doing something right on that front? (No)
http://www.reuters.com/article/2014/09/22/us-usa-economy-housing-idUSKCN0HH1WY20140922
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DougMacG,
I have a confusing puzzle for you. You probably saw this. (Remember, this comes from the Census Dept)
Sales of US new homes soar in August
WASHINGTON (AP) — U.S. sales of new homes surged in August, led by a wave of buying in the West and Northeast.
The Commerce Department said Wednesday that new-home sales climbed 18 percent last month to a seasonally adjusted annual rate of 504,000. The report also revised up the July sales rate to 427,000 from 412,000.
Newly constructed homes sold at the fastest clip since May 2008. It's a clear sign of improvement for a real estate market that has been muddled in recent months, as the rebound in sales following the housing bust began to slow.
Sales of new homes are up 33 percent over the past 12 months. Median prices for new homes have risen nearly 8 percent during the same period to $275,600.
"All is not perfect in the housing market but things are certainly better today than they were about one year ago," said Dan Greenhaus, chief strategist at BTIG brokerage.
In the West, August purchases of new homes soared 50 percent compared to the prior month. Off the sharp August increase, sales in the West have nearly doubled in the past 12 months.
Between August and July, sales grew 29.2 percent in the Northeast. Buying increased 7.8 percent in the South and remained flat in the Midwest.
The housing market has been sputtering for much this year. A nascent recovery in sales and prices began to struggle toward the middle of 2013. Ferocious winter weather delayed construction and limited sales at the beginning of 2014. Buying did pick up over the summer. Yet the pace of sales has been depressed by sluggish wage growth and the price surge last year that put homes out of reach for many Americans.
While new-home sales did show greater strength in August, they are significantly below the 1990s pace of more than 700,000 sales a year, said Tom Showalter, chief analytics officer at Digital Risk, a mortgage analyst company.
"We're well below historic norms," Showalter said.
There are signs that another housing uptick may be in the works.
The National Association of Home Builders/Wells Fargo builder sentiment index climbed in September to 59, the highest reading since November 2005. Readings above 50 indicate more builders view sales conditions as improving.
But greater builder confidence has yet to translate into more construction.
In August, homebuilding fell 14.4 percent compared to the prior month to a seasonally adjusted annual rate of 956,000 houses and apartment complexes, according to the Commerce Department.
Much of that decrease was in the volatile apartments sector. Homebuilders started single-family houses at an annual rate of 626,000 last month, slightly below the pace of 631,000 in August 2013.
Existing home sales have also eased back compared with last year's pace.
Purchases of existing homes fell 1.8 percent to a seasonally adjusted annual rate of 5.05 million in August, the National Association of Realtors said this week. Sales fell from a July rate of 5.14 million, a figure that was revised slightly downward. Overall, the pace of home sales has dropped 5.3 percent year-over-year.
Here is the puzzle for you.
seasonally adjusted
Total Total Northeast Midwest South West
July Sales 427k 24k 58k 243k 102k
Aug Sales 504k 31k 58k 262k 153k
non seasonally adjusted
Total Total Northeast Midwest South West
July Sales 38k 2k 5k 22k 9k
Aug Sales 41k 3k 5k 20k 13k
Interesting Puzzle, isn't it? The South has decreased sales, but adjusted numbers show a 19k gain. Total Actual Sales across the country increase by 3k, but perthe adjusted numbers, this amounts to yearly gains of 77k and not 36k.
Once again, we see the government manipulating the data to make things look better than what they are. Wesbury and others will claim how great things are, but will not have even enough sense to look at the raw numbers.
Can anyone explain?
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Thought I would post the Pending Home Sales for Sept. Once again, we see it falling. Some key points:
Approximately 35-40% of the Pending Sales will be cancelled due to either Appraisal Issues or else loan denials, etc.
Yan states: “Fewer distressed homes at bargain prices and the acknowledgement we’re entering a rising interest rate environment likely caused hesitation among investors last month,” he said. “With investors pulling back, the market is shifting more towards traditional and first-time buyers who rely on mortgages to purchase a home.”
Distressed homes are down only because of government modification programs that are only temporary fixes for up to 5 years, at which time when payments increase the problems begin anew for those homeowners which number about 7 million loans. Plus 4 million loans are currently delinquent or in default. 2.5 million 2nd Lines of Equity are beginning to reset with payments hundreds of dollars higher, and when interest rates increase, this gets even worse. 2 million plus adjustable rate mortgages left over from the crisis which when rates increase, those loans will begin to re-default.
Add to home conditions that higher interest rates will depress home prices which creates more Neg Equity loans and which increases likelihood of default. Add in the fact that incomes have fallen for people with mortgages, (though Yan says otherwise) the financial stresses will lead to more defaults.
First time borrowers have been falling to about 22%. Increased interest rates will cause further decline in the ability to qualify until values begin to drop. Even then, this will not significantly impact purchases except to drive investors back into to market.
It is being reported that among first time buyers, over 50% are having down payment help from family members. Over 30% of down payment assistance loans default. FHA is the haven for first time home buyers with and without down payment assistance. Expect defaults to increase.
The major lenders are pulling back on FHA due to the risk of defaults and buybacks, even with QM standards. Many lenders are running from QM loans as well for the same reason, as well they should. There is an "unseen" trap with QM that is waiting to nail lenders doing QM on defaulting loans.
BTW, how does Yan expect first time buyers, or others for that matter, to be able to afford 5% yearly increases in home values if they can't afford homes now? Also, how can he ignore the current delinquency conditions of homeowners, the re-default risk on modifications, and the 2nds and Adjustable Rate loans that will default?
It is nice that one can live in a "tunnel vision world" where you can ignore any negative factors that do not support the perspective that you want to sell. For this, Yan earns the idiot of the day award, which will then go to Wesbury when he comments on this.
BTW, when I mentioned above about the banks walking away from QM and FHA loans, the shift is to Mortgage Bankers doing the loans instead. Their goal is to do the loans as long as they have QM approval. They do not care about the Ability to Repay provision. As defaults occur with the riskier loans, many of the MB will fail because they do not have the asset base to repurchase defaulted loans. (When a loan defaults, it loses approximately 50% of its face value minimum, unless it is severely modified. Add in the legal costs and borrower damages, and it is not going to be "pretty".)
Pat
Pending Home Sales Fall Slightly in August
WASHINGTON (September 29, 2014) – Pending home sales slowed modestly in August but contract signings remain at their second-highest level over the past year, according to the National Association of Realtors®. All major regions experienced declines except for the West, which rose for the fourth consecutive month.
The Pending Home Sales Index,* a forward-looking indicator based on contract signings, fell 1.0 percent to 104.7 in August from 105.8 in July, and is now 2.2 percent below August 2013 (107.1). Despite the slight decline, the index is above 100 – considered an average level of contract activity – for the fourth consecutive month and is at the second-highest level since last August.
Lawrence Yun, NAR chief economist, says contract signings are holding steady and fewer distressed sales and less investor activity is likely behind August’s modest decline. “Fewer distressed homes at bargain prices and the acknowledgement we’re entering a rising interest rate environment likely caused hesitation among investors last month,” he said. “With investors pulling back, the market is shifting more towards traditional and first-time buyers who rely on mortgages to purchase a home.”
According to NAR’s Profile of Home Buyers and Sellers, 81 percent of first-time buyers in 2013 who financed their purchase obtained a conventional or FHA loan. Overall, first-time homebuyers have been less prevalent from the housing recovery, representing less than a third of all buyers each month for the past two years.
Yun says first-time buyer participation should gradually improve despite tight credit conditions and the inevitable rise in rates. “The employment outlook for young adults is brightening and their incomes finally appear to be rising,” he said. “Jobs and income gains will help repay student debt and better position first-time buyers, setting the stage for improved sales growth in upcoming years.”
The PHSI in the Northeast slipped 3.0 percent to 86.5 in August, but is still 1.6 percent above a year ago. In the Midwest the index fell 2.1 percent to 102.4 in August, and is 7.6 percent below August 2013.
Pending home sales in the South decreased 1.4 percent to an index of 117.0 in August, unchanged from a year ago. The index in the West rose for the fourth consecutive month (2.6 percent) in August to 102.1, but still remains 2.6 percent below August 2013.
Existing-home sales are expected to be stronger in the second half of the year behind improved inventory conditions, continuously low interest rates and slower price growth. Overall, Yun forecasts existing-homes sales to be down 3.0 percent this year to 4.94 million, compared to 5.09 million sales of existing homes in 2013. The national median existing-home price is projected to grow between 5 and 6 percent this year and 4 and 5 percent next year.
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http://www.ftportfolios.com/blogs/EconBlog/2014/9/30/is-housing-healthier-than-it-appears--are-mortgage-lenders-loosening-up
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Notice that Wesbury does not mention his data sources............just that the sources are believed to be accurate and reliable. I would suggest that he look at other measures to determine whether Mortgage Credit is loosening or not. The MBA has one such measure. it does not show any real change in overall.
Also, the MBA Purchase and Refinance Index continue to reflect poor finance activity. Here is the link to it.
http://www.mortgagenewsdaily.com/09302014_application_volume.asp
IMO, Webury remains full of shit...
Mortgage Credit Availability Index (MCAI)
Mortgage Credit Availability Unchanged in September
(http://www.mbaa.org/images/MCAI%20Chart.png)
Higher Index=More Credit Available
Lower Index=Less Credit Available
Mortgage credit availability remained unchanged in September, according to the Mortgage Credit Availability Index (MCAI), a report from the Mortgage Bankers Association (MBA), which analyzes data from the AllRegs® Market Clarity® product.
The MCAI remained unchanged at 116.1 in September. A decline in the MCAI indicates that lending standards are tightening, while increases in the index are indicative of a loosening of credit. The index was benchmarked to 100 in March 2012.
NEW CONVENTIONAL AND GOVERNMENT COMPONENT INDICES
Last month, MBA began reporting on two additional measures of credit availability as part of the monthly MCAI release: the Conventional Mortgage Credit Availability Index and the Government Mortgage Credit Availability Index, with historical data back to 2011.
(http://www.mbaa.org/images/MCAI%20ConGo%20Chart.png)
The Conventional and Government MCAIs, which are component indices of the Total MCAI, are constructed using the same methodology, and are designed to show relative credit risk/availability for conventional and government (FHA/VA/USDA) loan programs. The difference between the component indices and the total MCAI is first, the population of programs they examine, and second, the "base levels" to which they are calibrated. Using data from the MCAI and our Weekly Applications Survey, MBA calibrated the Conventional and Government indices to better represent where each index might fall in March 2012 (the "base period") relative to the Total= 100 benchmark.
Although the Government MCAI decreased slightly and the Conventional MCAI increased slightly, both the Conventional MCAI and Government MCAI changed less than one percentage point.
EXPANDED HISTORICAL SERIES
The Total MCAI has an expanded historical series which gives perspective on credit availability going back 10 years (expanded historical series does not include new Conventional or Government MCAI). The expanded historical series covers 2004 through 2010, and was created to provide historical context to the current series by showing how credit availability has changed over the last 10 years - this includes the housing crisis and ensuing recession. Data prior to March 31, 2011, was generated using less frequent and less complete data measured at six-month intervals and extrapolated in the months between for charting purposes.
(http://www.mbaa.org/images/MCAI%20Historical%20Chart.png)
MBA has partnered with AllRegs® to produce monthly MCAI, which feeds current mortgage underwriting parameters into a single index number to capture whether overall mortgage credit is more or less available from month to month.
The MCAI provides the only standardized quantitative index that is solely focused on mortgage credit.
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Workforce participation rates started falling sooner than this.
(http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/10/Homeownership%20Rate%20Q3%202014_0.jpg)
The peak of this chart is the day before Pelosi-Reid-Obama-Hillary-Biden took the majorities in congress, then it slides further and further during the first 6 years of the Obama presidency.
Our country is better off than the day I took office? - Really?
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California Leads Housing Slowdown As Case-Shiller Home Prices Decline For 4 Months In A Row
Case-Shiller data for August confirmed once again that US housing is rapidly slowing down, when the Top 20 Composite Index (Seasonally Adjusted) posted another decline in August, its fourth in a row, declining by -0.15% and missing expectations of a modest 0.2% rebound (following last month's -0.5%) decline.
S&P's David Blitzer: "The deceleration in home prices continues... The Sun Belt region reported its worst annual returns since 2012, led by weakness in all three California cities -- Los Angeles, San Francisco and San Diego."
- But who cares what the birth (and death) place of every housing bubble is doing, right?
http://www.zerohedge.com/news/2014-10-28/california-leads-housing-slowdown-case-shiller-home-prices-decline-4-months-row
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Housing Starts Declined 2.8% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/19/2014
Housing starts declined 2.8% in October to a 1.009 million annual rate, coming in below the consensus expected 1.025 million annual rate. Starts are up 7.8% versus a year ago.
The decline in starts in October was all due to a sharp 15.4% drop in multi-family units; single family starts rose 4.2%. In the past year, single-family starts are up 15.4% while multi-family starts are down 6.0%.
Starts in October declined in the Midwest, Northeast and West, but were up in the South.
New building permits rose 4.8% in October to a 1.080 million annual rate, coming in above the consensus expected 1.040 million. Compared to a year ago, permits for single-units are up 2.4% while permits for multi-family homes are down 0.5%.
Implications: Home building has been very volatile over the past few months but the underlying trend remains upward and we expect that to continue. The best news from today’s report was that building permits rose 4.8% in October, as single-family and multi-family permits rose 1.4% and 10% respectively. Permits now stand at the highest level since June 2008, signaling future gains in home building in the months to come. October’s drop of 2.8% for home building was all due to multi-family units, which were down 15.4% in October and have caused large swings in overall housing starts over the past few months. Single-family starts have been steadily rising over the past three months. So, the multi-family volatility over the past few months has masked slow underlying improvement in the housing sector. To smooth out the volatility we look at the 12-month moving average. This is now at the highest level since September 2008. The total number of homes under construction, (started, but not yet finished) increased 1.4% in October and are up 20.1% versus a year ago. No wonder residential construction jobs are up 131,000 in the past year. Although multi-family construction has slowed over the past few months, it has still taken the clear lead in the housing recovery. Single-family starts have been in a tight range for the past two years, while the trend in multi-family units has been up steeply. In the past year, 36% of all housing starts have been for multi-unit buildings, the most since the mid-1980s, when the last wave of Baby Boomers was leaving college. From a direct GDP perspective, the construction of multi-family homes adds less, per unit, to the economy than single-family homes. However, home building is still a positive for real GDP growth and we expect that trend to continue. Based on population growth and “scrappage,” housing starts will rise to about 1.5 million units per year over the next couple of years.
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New home sales are so great per Wesbury and others .............this really shows the truth.
(http://www.mortgagenewsdaily.com/cfs-file.ashx/__key/CommunityServer.Blogs.Components.WeblogFiles/jann/2014_2D00_12_2D00_23-nhs.gif)
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Pat:
A question: The previous peak is a bubble yes? So, by what measuring stick should we evaluate how well things are doing?
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Pat:
A question: The previous peak is a bubble yes? So, by what measuring stick should we evaluate how well things are doing?
450,000 today compares with an average of 700,000 over the last 50 years. So if we grow 3 - 4% per year, we will back to where we were ... almost never.
(http://static.seekingalpha.com/uploads/2008/5/29/newhomesales527_1.png)
http://static.seekingalpha.com/uploads/2008/5/29/newhomesales527_1.png
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So, for 30 plus years we were essentially flat and around '97, the time of the Clinton Gingrich cap gains tax rate cut we went onto a new trajectory, but at present we are above the lows of '66, '70, '75, and '82? Yes?
"Down 42% year over year" includes the numbers from the bubble years, yes?
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So, for 30 plus years we were essentially flat and around '97, the time of the Clinton Gingrich cap gains tax rate cut we went onto a new trajectory, but at present we are above the lows of '66, '70, '75, and '82? Yes?
"Down 42% year over year" includes the numbers from the bubble years, yes?
The chart I posted shows new home sales only through 2008, an extreme year. PP's chart overlaps this covering 2005 to the present. Agreed that the comment 'down 42% year over year' mostly tells us the peak values were artificially high. If you want to ignore the peaks of the bubble, what years should we ignore? Not all the way back to 1997, IMHO. It seems to me the excessive push of easy money began in the aftermath of 9/11/2001, not showing up until the recovery kicked in during 2003. Nonetheless, even if you go all the way back to 1997, it looks like the average, historic, new home sales figure is still over 600k compared with 450k now. Hardly a full recovery, we are still running short by about 33%.
It begs the question, is the Obama economy with workforce participation at a 40 year low and food stamp and disability participation at all time highs the new normal?
The answer to that is a matter of opinion or conjecture. My view is that we could put the growth and greater participation back into this economy any time we choose that. Home affordability varies artificially with CRAp, QE, and mortgage rates, etc., but otherwise is a pretty simple function of family income. Under Obama, family income is not up. The income and GDP growth has been largely concentrated in the top 1% of earners, equities investors and S&P 500 type companies.
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Well, the cap gains tax rate cut ('97?) would seem to justify a secular change, but IIRC there was big concern over computers having a giant brain fart on 1/1/2000 and so the Fed pumped pre-emptively- to be followed by the 9/12/01 flood of money so perhaps '99 should be our SWAG baseline?
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Just a few comments:
Where the housing pundits miss the boat is that they just look at charts and graphs and then make assumptions. There is no underlying analysis of the factors that contribute to the housing "recovery" nor analysis of factors that will affect it in the future.
1. With DougMacG’s graph, notice that about 1991 the beginning of the upward trend. Coincidently, that is when Bush 41 began the idea of increasing homeownership from about 64% to 70% or more. Clinton then followed that up with programs designed to get maximum ownership.
2. 1993 saw a huge push by the GSE’s to begin to control the mortgage market. Banks, especially after the S&L crisis were considered risker for loans than the GSE’s.
3. 1991 saw the first real successful MBS issuance since about 1985 with Ameriquest securitizing a $61m offering. By 1993, other Wall Street firms and Mortgage Bankers began to approach the MBS market. The target loans were those that the GSE’s would not buy.
4. 1993 saw the creation of a “working group” to create the methodologies that would be needed for future lending. The Banks, Wall Street, GSE’s and Mortgage Banker Associations were the major part of the working group. In 1995, its findings were complete and led to the creation of MERS. 1996 saw the first loan registered under MERS. The beginning of large scale securitizations was set in place.
5. About 1993 and later began the loosening of Leverage Ratios for Wall Street firms.
6. 1998 saw the repeal of Glass Steagall and now commercial banks could now engage in Wall Street type actions.
7. Mid 1990’s saw greater emphasis on the Community Reinvestment Act. DOJ and other regulatory actions to promote “Fair Lending”.
8. With the 2000 Market Crash and then 9-11, the Fed actions to loosen credit which promoted greater housing sales.
9. Jun 22, 30 year interest rates hit 4.25% for one day, and the following day the Fed announces that they will begin to increase rates again. Jul 2005 saw the market top in "sales activity" with values falling in many areas and in some areas, continuing to increase at about a 5% yearly increase until the summer of 2006, when things went "dead".
10. Dec 2006, the first Mortgage Bankers begin to fail. "Say goodnight to housing and hello to foreclosures."
When you look at the combined history of what occurred to facilitate the Housing Boom, then it becomes readily evident that what the Fed and the government has done since has been a total failure.
Fed actions have not been about stimulating a recovery. It has been about keeping the banks afloat with QE, getting the toxic assets off the books of the banks and out of Investor hands. Right now, 75% of all Private MBS have been retired or else foreclosed. What is left is probably mostly held by the Fed.
Much of the hot money used to provide investors the ability to buy foreclosures and at risk homes was a deliberate action to prop up values. The reason is that Negative Equity was a key determinate in foreclosures when it hit 120% LTV or greater. At 120%, stressed homeowners began to look at home ownership as a negative. Why be finally stressed if values would not recover for years? As the stresses mounted, a homeowner was more likely to default.
At 140%, default became much more likely for stressed homeowners. Additionally, 140 saw a new motivation for default to occur. Homeowners who could make the payments began to buy more desirable homes, paying less than what they owned on their "smaller" and "less desirable" home. After the purchase, they moved into the new home and let the old home go into default.
At 160%, wholesale strategic defaults occurred.
The Fed needed to prop up values, so they have lowered rates, engaged in QE and attempted many other things to prop up values by stimulating housing. It has not worked.
Now, the GSE's and FHA are going to 97% LTV and lowering credit requirements. They are also allowing more down payment assistant programs. At 97% LTV, default rates are 15.96% from the 2002 to 2008 years. They know that defaults will increase, but at one banker told me, if 85% of the loans do not default, then they are ahead of the game. 15% is not a big deal if they have reserves for losses. (BTW, 81% LTV is the "break even point" for foreclosures. Above 81% and lenders begin to lose money on foreclosure sales.
What happens when rates increase? Payments go up, so to offset the payments, home values will drop. Oops, that means more Negative Equity which will lead to more defaults. Also, credit lines increase in payments, living expenses increase, and disposable income goes negative. More defaults follow.
Currently 4m loans are delinquent. 800k plus loans have been modified by HAMP and the payments are beginning to increase. (400k other HAMP have already re-defaulted.) 2.5m lines of credit are now "resetting" with higher payments. ARM loans will have payment increases again when interest rates increase. More delinquencies and foreclosures to follow.
How is the Fed going to counter this?
BTW, I am no longer involved with the people I had been working with to bring to market new Underwriting and Ability to Pay evaluations. What happened is that we were told by Mortgage Bankers and Banks that using my model, they would have to either decline loans, or else the sellers would have to accept less of a sales price to sell the home, or else the buyer would have to find cheaper homes to buy. Additionally, they did not want to know the risk of default with borrowers because it increased their liability if borrowers defaulted under the new Dodd Frank.
The solution for my "partners" was to take the system and "hide" the risk. Risk evaluations would be done and the lender could turn them on or off as desired. However, our system would still record it. At this point I left them. They are now marketing the system as they revised it, and apparently have a couple of trial clients.
What the idiots do not realize is that by hiding the risk and allowing it to be turned or off by the lender, for every loan that is funded and sold to the GSE's or FHA, or any other party, they and the lenders are now "engaging in a conspiracy to commit fraud". These fools never learn........
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Very interesting Pat. Thank you.
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Yes, great history and analysis! What a meddled market! The Fed is still propping things up with money and the government still has too many intervention programs. As PP suggests, what happens to values when mortgage rates go up (and incomes are flat)? It won't be pretty. And the only reason rates aren't going up is because demand is so soft in the economy. The policy makers have not allowed housing to correct (proven in pp's figures).
The financial crisis is over, stop the emergency programs. Cut back on these efforts to get people to buy a home without saving for the down payment. 3% down is not a commitment or security against value fluctuation. Allow interest rates to right-size. People need to save, not just borrow. There is no balance to it. Most of all, housing affordability is a function of income, not about houses. We need to grow the economy and grow incomes if we want people to afford homes.
I agree with PP that they are "engaging in a conspiracy to commit fraud". We still have too big to fail and live in a bailout world. Values are still inflated. If knowing about risk causes them to lose out on a profit, then covering their eyes works just fine, from their point of view. If they miscalculate, fail, and collapse, it won't be the first time. It's not like they will lose their house. They might not even lose their bonus.
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Building Toward Another Mortgage Meltdown
In the name of ‘affordable’ loans, the White House is creating the conditions for a replay of the housing disaster
By Edward Pinto
WSJ
The Obama administration’s troubling flirtation with another mortgage meltdown took an unsettling turn on Tuesday with Federal Housing Finance Agency Director Mel Watt ’s testimony before the House Financial Services Committee.
Mr. Watt told the committee that, having received “feedback from stakeholders,” he expects to release by the end of March new guidance on the “guarantee fee” charged by Fannie Mae and Freddie Mac to cover the credit risk on loans the federal mortgage agencies guarantee.
Here we go again. In the Obama administration, new guidance on housing policy invariably means lowering standards to get mortgages into the hands of people who may not be able to afford them.
Earlier this month, President Obama announced that the Federal Housing Administration (FHA) will begin lowering annual mortgage-insurance premiums “to make mortgages more affordable and accessible.” While that sounds good in the abstract, the decision is a bad one with serious consequences for the housing market.
Government programs to make mortgages more widely available to low- and moderate-income families have consistently offered overleveraged, high-risk loans that set up too many homeowners to fail. In the long run-up to the 2008 financial crisis, for example, federal mortgage agencies and their regulators cajoled and wheedled private lenders to loosen credit standards. They have been doing so again. When the next housing crash arrives, private lenders will be blamed—and homeowners and taxpayers will once again pay dearly.
Lowering annual mortgage-insurance premiums is part of a new affordable-lending effort by the Obama administration. More specifically, it is the latest salvo in a price war between two government mortgage giants to meet government mandates.
Fannie Mae fired the first shot in December when it relaunched the 30-year, 97% loan-to-value, or LTV, mortgage (a type of loan that was suspended in 2013). Fannie revived these 3% down-payment mortgages at the behest of its federal regulator, the Federal Housing Finance Agency (FHFA)—which has run Fannie Mae and Freddie Mac since 2008, when both government-sponsored enterprises (GSEs) went belly up and were put into conservatorship. The FHA’s mortgage-premium price rollback was a counteroffensive.
Déjà vu: Fannie launched its first price war against the FHA in 1994 by introducing the 30-year, 3% down-payment mortgage. It did so at the behest of its then-regulator, the Department of Housing and Urban Development. This and other actions led HUD in 2004 to credit Fannie Mae’s “substantial part in the ‘revolution’ ” in “affordable lending” to “historically underserved households.”
Fannie’s goal in 1994 and today is to take market share from the FHA, the main competitor for loans it and Freddie Mac need to meet mandates set by Congress since 1992 to increase loans to low- and moderate-income homeowners. The weapons in this war are familiar—lower pricing and progressively looser credit as competing federal agencies fight over existing high-risk lending and seek to expand such lending.
Mortgage price wars between government agencies are particularly dangerous, since access to low-cost capital and minimal capital requirements gives them the ability to continue for many years—all at great risk to the taxpayers. Government agencies also charge low-risk consumers more than necessary to cover the risk of default, using the overage to lower fees on loans to high-risk consumers.
Starting in 2009 the FHFA released annual studies documenting the widespread nature of these cross-subsidies. The reports showed that low down payment, 30-year loans to individuals with low FICO scores were consistently subsidized by less-risky loans.
Unfortunately, special interests such as the National Association of Realtors—always eager to sell more houses and reap the commissions—and the left-leaning Urban Institute were cheerleaders for loose credit. In 1997, for example, HUD commissioned the Urban Institute to study Fannie and Freddie’s single-family underwriting standards. The Urban Institute’s 1999 report found that “the GSEs’ guidelines, designed to identify creditworthy applicants, are more likely to disqualify borrowers with low incomes, limited wealth, and poor credit histories; applicants with these characteristics are disproportionately minorities.” By 2000 Fannie and Freddie did away with down payments and raised debt-to-income ratios. HUD encouraged them to more aggressively enter the subprime market, and the GSEs decided to re-enter the “liar loan” (low doc or no doc) market, partly in a desire to meet higher HUD low- and moderate-income lending mandates.
On Jan. 6, the Urban Institute announced in a blog post: “FHA: Time to stop overcharging today’s borrowers for yesterday’s mistakes.” The institute endorsed an immediate cut of 0.40% in mortgage-insurance premiums charged by the FHA. But once the agency cuts premiums, Fannie and Freddie will inevitably reduce the guarantee fees charged to cover the credit risk on the loans they guarantee.
Now the other shoe appears poised to drop, given Mr. Watt’s promise on Tuesday to issue new guidance on guarantee fees.
This is happening despite Congress’s 2011 mandate that Fannie’s regulator adjust the prices of mortgages and guarantee fees to make sure they reflect the actual risk of loss—that is, to eliminate dangerous and distortive pricing by the two GSEs. Ed DeMarco, acting director of the FHFA since March 2009, worked hard to do so but left office in January 2014. Mr. Watt, his successor, suspended Mr. DeMarc o’s efforts to comply with Congress’s mandate. Now that Fannie will once again offer heavily subsidized 3%-down mortgages, massive new cross-subsidies will return, and the congressional mandate will be ignored.
The law stipulates that the FHA maintain a loss-absorbing capital buffer equal to 2% of the value of its outstanding mortgages. The agency obtains this capital from profits earned on mortgages and future premiums. It hasn’t met its capital obligation since 2009 and will not reach compliance until the fall of 2016, according to the FHA’s latest actuarial report. But if the economy runs into another rough patch, this projection will go out the window.
Congress should put an end to this price war before it does real damage to the economy. It should terminate the ill-conceived GSE affordable-housing mandates and impose strong capital standards on the FHA that can’t be ignored as they have been for five years and counting.
Mr. Pinto, former chief credit officer of Fannie Mae, is co-director and chief risk officer of the International Center on Housing Risk at the American Enterprise Institute.
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Ed Pinto is a sharp guy. He nails it with this article. For a timeline of events with the GSEs leading to their fall, check out the following link to a pdf.
http://www.aei.org/wp-content/uploads/2013/08/-pinto-bailout-america-timeline-government-mortgage-complex_1305029805.pdf
Pinto also does a Monthly National Mortgage Risk Index where he evaluates the Risk of loans defaulting. The methodology was similar to what I have developed in Phase 1 of my work, using FICO, LTV and DTI to determine default but he used 180 days late as the default measure. Using these measures, he finds that default risk for GSE 2014 originations is at 11%, and for FHA, about 23%.
http://www.housingrisk.org/wp-content/uploads/2015/01/Housing-Risk-NMRI-methodology-1-8-15.pdf (This is the pdf link to describe how he does it.
This is the link to the current report. http://www.housingrisk.org/wp-content/uploads/2015/01/01.26.15-NMRI-data-download.xlsx
I do have problems with his methodology.
1. He uses 180 day delinquency for his measure, a Basel 3 designation. I would use 90 days. The reason is that 90 days is the standard for a loan being considered and in default. Once a loan goes 90 days late, the cure rate without any type of modification is less than 5%. So, using 180 days results in rates that are much less severe than 90 days, and in my opinion, are misleading.
2. He used DTI for the income portion of the risk measurement. I used it initially and found problems with DTI when I started to consider actual cash flow and ability to pay/residual income measures.
What happens with DTI is that borrowers who have larger loan amounts have a greater residual income that lessens default risk. For example, a $400k loan, 43% DTI, would feature a guy with much greater income and ultimately larger residual income after all debt service and living expenses, than those who have a 43% DTI on a loan amount of $200k or less. In fact, the guy who has the $200k loan amount or less, dependent upon family size, could have a negative residual income. And if your are talking about a family of 4, with 43% DTI and a loan amount of $150k or less, negative cash flow becomes an almost certainty.
The problem for Pinto calculating Residual Income is that the available data did not have the data needed, so assumptions on income, debt and living expenses had to be calculated. I did so, and then ran the statistical analysis and found that the use of Residual Income for default was much more effective as a default indicator than using DTI.
Of course as I mentioned previously, lenders would have to deny loans using my methodology, so they did not want it.
The great part is that the new QM loans have ability to pay determination requirements. They can use either DTI or ability to pay, and will jump on using DTI so they do not have to deny doing loans and earning that profit. Meanwhile, I sit waiting for the defaults to mount, especially with FHA. Then I hit them hard.
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Make that 5 - 6% defaults on the GSE loans based upon 180 day defaults.
BTW, the reason that Basel went 180 days is that when a loan defaults, the lender has to carry greater amounts of regulatory capital and loan loss reserves. So using 180 instead of 90, the lender reduces reserves on these type loans by about 50%.
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There's a standard and widely shared explanation of what caused the bubble. The villains were greed, dishonesty and (at times) criminality, the story goes. Wall Street, through a maze of mortgage brokers and securitizations, channeled too much money into home buying and building. Credit standards fell. Loan applications often overstated incomes or lacked proper documentation of creditworthiness (so-called no-doc loans).
The poor were the main victims of this campaign. Scholars who studied the geography of mortgage lending found loans skewed toward low-income neighborhoods. Subprime borrowers were plied with too much debt. All this fattened the revenue of Wall Street firms or Fannie Mae and Freddie Mac, the government-sponsored housing finance enterprises. When home prices reached unsustainable levels, the bubble did what bubbles do. It burst.
Now comes a study that rejects or qualifies much of this received wisdom. Conducted by economists Manuel Adelino of Duke University, Antoinette Schoar of the Massachusetts Institute of Technology and Felipe Severino of Dartmouth College, the study — recently published by the National Bureau of Economic Research — reached three central conclusions.
First, mortgage lending wasn't aimed mainly at the poor. Earlier research studied lending by Zip codes and found sharp growth in poorer neighborhoods. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn't true. They were much richer than average residents. In 2002, home buyers in these poor neighborhoods had average incomes of $63,000, double the neighborhoods' average of $31,000.
Second, borrowers were not saddled with progressively larger mortgage debt burdens. One way of measuring this is the debt-to-income ratio: Someone with a $100,000 mortgage and $50,000 of income has a debt-to-income ratio of 2. In 2002, the mortgage-debt-to-income ratio of the poorest borrowers was 2; in 2006, it was still 2. Ratios for wealthier borrowers also remained stable during the housing boom. The essence of the boom was not that typical debt burdens shot through the roof; it was that more and more people were borrowing.
Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. In 2006, the wealthiest 40 percent of borrowers represented 55 percent of new loans and nearly 60 percent of delinquencies (defined as payments at least 90 days overdue) in the next three years.
If these findings hold up to scrutiny by other scholars, they alter our picture of the housing bubble. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 percent of borrowers accounted for only 17 percent of new mortgage debt. This seems too small to explain the financial crisis that actually happened.
It is not that shoddy, misleading and fraudulent merchandising didn't occur. It did. But it wasn't confined to the poor and was caused, at least in part, by a larger delusion that was the bubble's root source.
During the housing boom, there was a widespread belief that home prices could go in only one direction: up. If this were so, the risks of borrowing and lending against housing were negligible. Home buyers could enjoy spacious new digs as their wealth grew. Lenders were protected. The collateral would always be worth more tomorrow than today. Borrowers who couldn't make their payments could refinance on better terms or sell.
This mind-set fanned the demand for ever bigger homes, creating a permissive mortgage market that — for some — crossed the line into unethical or illegal behavior. Countless mistakes followed. One example: The Washington Post recently reported that, in the early 2000s, many middle-class black families took out huge mortgages, sometimes of $1 million, to buy homes now worth much less. These are upper-middle-class households, not the poor.
It's tempting to blame misfortune on someone else's greed or dishonesty. If Wall Street's bad behavior was the only problem, the cure would be stricter regulatory policing that would catch dangerous characters and practices before they do too much damage. This seems to be the view of the public and many "experts."
But the matter is harder if the deeper cause was bubble psychology. It arose from years of economic expansion, beginning in the 1980s, that lulled people into faith in a placid future. They imagined what they wanted: perpetual prosperity. After the brutal Great Recession, this won't soon repeat itself. But are we forever insulated from bubble psychology? Doubtful.
http://www.jewishworldreview.com/0215/samuelson020215.php3#ijGVxZpIZFR66jOi.99
http://www.nber.org/papers/w18868 (?)
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DougMacG,
I have problems with this analysis. Here is why:
1. The authors cite Debt to Income being a 2 and use the formula of Gross Debt to Gross Income. This alone shows that they know not what they speak. Debt to Income is Monthly Debt Payments to Monthly Gross Income. This is the standard calculation for mortgages. Under traditional guidelines DTI would be no more than 28% for housing and for total 36%. During the Housing Boom, it became 45% and then up to 55% or more.
2. There was another method that was always considered optimal and was similar to what the authors said, and that was a 3.5 ratio, Price to Income. Using that formula, everyone under bought in their scenario.
3. They write that "First, mortgage lending wasn't aimed mainly at the poor". True, but it was aimed at non qualified borrowers after 2003. By late 03, qualified borrowers no longer existed that loans could be sold to. So lenders dropped standards, issued state income loans, and if you had a detectable breath in the last 24 hours, you were qualified.
4. Borrowers were assumed to reflect the average characteristics of residents in these neighborhoods. But the new study examined the actual borrowers and found this wasn't true. Comparing borrowers to residents.....did they account for the fact that in poorer neighborhoods investors were heavily buying?
5. Third, the bulk of mortgage lending and losses — measured by dollar volume — occurred among middle-class and high-income borrowers. True, but they are looking at people buying much more expensive homes. The reality is that homes in the Midwest, South and most areas were far less expensive than in the Sand States. So this would distort things measurably.
6. Specifically, they question the notion that the main engine of the bubble was the abusive peddling of mortgages to the uninformed poor. In 2006, the poorest 30 percent of borrowers accounted for only 17 percent of new mortgage debt. At this point, I get totally pissed off. The reason is that the homes they bought were far less expensive than in Ca and elsewhere.
I have reviewed over 5000 defaulted mortgages in depth. I have also done statistical analysis on over 10 million GSE loans. I can tell you that lower middle and lower income people bore the brunt of the damage (think $50k or less). They were targeted with products that they did not understand, and could not afford.
As I learned in the past two years with people I was working with, statistical analysis is only as good as the assumptions you make. And when you go into a project with preconceived ideas, the work you do will have a bias towards the conclusions that you are trying to determine.
Damned academics should go back to their ivory towers and hide. They should not be seen or heard.
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I am now heavily involved in a False Claims FHA action regarding HAMP modification issues. We are looking for people who have:
1. Been in active modification processing or an actual modification or trial modification and who were foreclosed upon.
2. People who have been in active modification efforts for over 2 years and keep getting denied.
3. People who were given Trial Modifications and after making the payments, were denied for modification.
4. People who were given modifications, but began missing payments shortly after because the terms were so bad.
All applicable cases will go to the Department of Justice to be used as evidence of wrongdoing. The DOJ is targeting the largest servicers, including Nationstar, Ocwen, B of A, Chase, Wells, IndyMac, SPS, SLS, HMSI. I will be personally reviewing the facts and documents of each case to determine whether it meets the parameters of what we are looking for.
There is no guarantee that it will benefit the specific homeowner. However, each case sent to DOJ by me will show evidence of wrongdoing. Worst case, a homeowner could use the DOJ having the case to influence the servicer to consider modifying the loan.
This evaluation is of no cost to the homeowner. If you know of anyone that could be applicable, they can email me at patrick@lfianalytics.com for more details.
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Regarding the academic authors and analysis, Pat, I agree with you on all those points.
In addition to all of the policy blunders, fraud, deception, and monetary flooding, etc. I would agree with Samuelson that there was a bubble mentality at work. People were buying, selling, lending, borrowing and appraising things for more than they were worth.
I was buying in Mpls after the crash for 15 cents on the dollar of what they sold for in the peak years. The previous sales weren't homeowner or investors. They were what we used to call pigeons. People just doing transactions, borrowing up to false value (criminally IMO) with no intent of ever living there or holding the property.
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Absolutely Bubble Mentality at work.
BTW, see the Housing Starts for Jan and also the Existing Home Sales. Certainly there is no Housing Recovery ongoing, contrary to what people think. Looks like a downward trend from Jun on. And looks like levels are equal to 1999 activity. (Don't forget, these are seasonally adjusted.)
(http://4.bp.blogspot.com/-pKyAIzXaNTA/VOuPjqcA5gI/AAAAAAAAiYg/GfWoSGMYg1g/s1600/EHSNSAJan2015.PNG)
(http://1.bp.blogspot.com/-DGI-wTb0kJM/VOtDDvAkUII/AAAAAAAAiYA/7JCpwQbj5F0/s1600/EHSJan2015.PNG)
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Wow.........I am impressed with the New Home Sales Recovery
(http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2015/02/20150225_home2.jpg)
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Existing Home Sales Increased 6.1% in March To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/22/2015
Existing home sales increased 6.1% in March to a 5.19 million annual rate, coming in above the consensus expected 5.03 million annual rate. Sales are up 10.4% versus a year ago.
Sales rose in all major regions of the country. The increase in sales was due to gains in both single-family homes as well as sales of condos/coops.
The median price of an existing home rose to $212,100 in March (not seasonally adjusted) and is up 7.8% versus a year ago. Average prices are up 5.1% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) declined to 4.6 months in March from 4.7 months in February. The faster selling pace more than offset an increase in inventories.
Implications: Sales of existing homes rebounded nicely in March, coming in at a 5.19 million annual rate, the best level since September 2013. Sales are up 10.4% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 14% a year ago. All-cash buyers are down to 24% of sales from 33% a year ago. As a result, even though total sales are up 10.4% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up 25.3%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. Another good sign is that the inventory of existing homes increased 100,000 in March, the largest for any March since 2006. More supply should help sales growth in the months ahead. The median sales price of an existing home rose to $212,100 in March, up 7.8% from a year ago. In other housing news this morning, the FHFA price index, which measures homes financed with conforming mortgages, increased 0.7% in February and is up 5.4% from a year ago. That’s a mild deceleration from the 7.1% price gain in the year ended in February 2014. Expect more of the same in the year ahead, with price gains continuing at a slower pace as more home building increases supply.
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Data Watch
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Existing Home Sales Declined 3.3% in April To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 5/21/2015
Existing home sales declined 3.3% in April to a 5.04 million annual rate, coming in below the consensus expected 5.22 million annual rate. Sales are up 6.1% versus a year ago.
Sales declined in all major regions of the country except the Midwest. The decrease in sales was due a drop in single-family homes while sales of condos/coops remained unchanged in April.
The median price of an existing home rose to $219,400 in April (not seasonally adjusted) and is up 8.9% versus a year ago. Average prices are up 5.5% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) increased to 5.3 months in April from 4.6 months in March. This was due to an increase in inventories as well as a decline in the pace of sales.
Implications: Lets hold off on housing for a moment. The most exciting news today was that initial claims for unemployment insurance came in at 274,000, bringing the four-week moving average to 266,000, the lowest level since April 2000. This, paired with a decline in continuing claims to the lowest level since November 2000, signals greater strength in the labor market and further supports the Fed raising rates sooner rather than later. Sales of existing homes took a breather in April; however this marks the second consecutive month of sales above an annual rate of 5 million units. Sales have now increased year over year for seven months, showing that demand continues to grow. Sales are up 6.1% from a year ago, and the underlying trend suggests more solid gains in the year ahead. Sales of distressed homes (foreclosures and short sales) now account for only 10% of total sales, down from 15% a year ago. All-cash buyers are down to 24% of sales from 32% a year ago. As a result, while total sales are up a moderate 6.1% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 18.6%. What this means is that when distressed and all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. So even though credit (but, not liquidity) remains relatively tight, we see evidence of a thaw, which suggests overall sales will climb at a faster pace in the year ahead. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. The inventory of existing homes increased 10% in April, however it remains 0.9% lower than a year ago. Lack of supply is one of the main drivers behind continuing price increases and houses on the market selling faster in April (39 days) than at any time since July 2013 (32 days). The median sales price of an existing home rose to $219,400 in April, up 8.9% from a year ago. In other news this morning, the Philadelphia Fed index, a measure of strength in East Coast manufacturing, declined to 6.7 in May versus 7.5 in April, signaling continued Plow Horse growth in that sector.
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Listen to Wesbury, the economy is back! Yes!
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Existing Home Sales Increased 3.2% in June To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/22/2015
Existing home sales increased 3.2% in June to a 5.49 million annual rate, beating the consensus expected 5.40 million. Sales are up 9.6% versus a year ago.
Sales rose in all major regions of the country. The increase in sales in June was mostly due to single-family homes, but sales of condos/coops were also up in June.
The median price of an existing home rose to $236,400 in June (not seasonally adjusted) and is up 6.5% versus a year ago. Average prices rose 4.6% versus last year.
The months’ supply of existing homes (how long it would take to sell the entire inventory at the current sales rate) declined to 5.0 months in June from 5.1 in May, as a faster sales pace more than offset an increase in inventories.
Implications: The market for existing homes continued to heat up in June, hitting the fastest sales pace in over 8 years despite tight supply and record high prices. Sales of previously owned homes increased to a 5.49 million annual rate in June, beating consensus expectations and representing the fastest sales pace since February 2007. Sales were up in every major region of the country and should continue to trend upward. All-cash buyers accounted for 22% of sales in June, down from 32% a year ago. As a result, while total sales are up a healthy 9.6% from a year ago, non-cash sales (where the buyer uses a mortgage loan) are up a more robust 25.7%. So when all-cash sales eventually bottom out, total sales will start rising at a more rapid pace. The gain in mortgage-financed sales suggests a long-overdue thaw in lending. What’s interesting is that the percentage of buyers using credit has increased as the Fed tapered and then ended QE. Those predicting a housing crash without more QE were completely wrong. In fact, rising rates appear to be increasing the pace of sales, as buyers look to lock in terms before the looming fed rate hikes push borrowing costs higher. The details of today’s report were solid as well. Rising prices are bringing sellers to market (inventories rose for a fifth consecutive month in June), but supply hasn’t been able to keep pace with demand. In fact, the average time it took to sell a home in June decreased to 34 days from 40 in May, the fastest pace since recording began in 2011. Look for more inventory to come to market in the year ahead as “on-the-fence” sellers move to take advantage of higher prices. In other housing news this morning, the FHFA index, which measures prices for homes financed with conforming mortgages, increased 0.4% in May and was up 5.7% from a year ago.
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Hopefully Pat will drop by to correct the distortions.
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By
Art Patnaude and
Peter Grant
Updated Aug. 12, 2015 8:00 p.m. ET
13 COMMENTS
Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating.
The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year, on a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics.
Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier to $225.1 billion, ahead of the pace set in 2006, according to Real Capital. In Europe, transaction values shot up 37% to €135 billion ($148 billion), the strongest start to a year since 2007.
Low interest rates and a flood of cash being pumped into economies by central banks have made commercial real estate look attractive compared with bonds and other assets. Big U.S. investors have bulked up their real-estate holdings, just as buyers from Asia and the Middle East have become more regular fixtures in the market.
The surging demand for commercial property has drawn comparisons to the delirious boom of the mid-2000s, which ended in busts that sunk developers from Florida to Ireland. The recovery, which started in 2010, has gained considerable strength in the past year, with growth accelerating at a potentially worrisome rate, analysts said.
China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. ENLARGE
China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. Photo: Brendan McDermid/Reuters
“We’re calling it a late-cycle market now,” said Jacques Gordon, head of research and strategy at Chicago-based LaSalle Investment Management, which oversees $56 billion of property assets.
While it isn’t time to panic, Mr. Gordon said, “if too much capital comes into any asset class, generally not-so-good things tend to follow.”
Regulators are watching the market closely. In its semiannual report to Congress last month, the Federal Reserve pointed out that “valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly.”
Historically low interest rates have buoyed the appeal of commercial real estate, especially in major cities where economies are growing strongly. A 10-year Treasury note is yielding about 2.2%. By contrast, New York commercial real estate has an average capitalization rate—a measure of yield—of 5.7%, according to Real Capital.
By keeping interest rates low, central banks around the world have nudged income-minded investors into a broad range of riskier assets, from high-yield or “junk” bonds to dividend-paying stocks and real estate.
Lately money has been pouring into commercial property from all directions. U.S. pension funds, which got clobbered in the aftermath of the crash, now have 7.7% of their assets invested in property, up from 6.3% in 2011, according to alternative-assets tracker Preqin.
Foreign investors also have been stepping on the gas. China’s Anbang Insurance Group in February paid $1.95 billion for New York’s Waldorf-Astoria, a record price for a U.S. hotel. Another Chinese insurer, Sunshine Insurance Group Co., in May purchased New York’s glitzy Baccarat Hotel for more than $230 million, or a record $2 million per room. China Life Insurance Group Co. and Ping An Insurance Co. in April bought a majority stake in a $500 million development project in Boston.
China is looking to other markets as well. Last month, its sovereign-wealth fund bought nine office towers in Sydney and Melbourne, as well as 10 shopping centers in France and Belgium.
“What has been fascinating has been their speed of deployment,” said Iryna Pylypchuk, director of global research at global real-estate services firm CBRE Group Inc.
In Europe, buyers are venturing into markets like Madrid and Dublin, where property values haven’t regained precrisis peaks. U.K. firm M&G Real Estate last month made its first investment in Spain, paying €90 million for a vacant 35,000 square meter (376,740 square feet) office building in central Madrid that it will refurbish and rent to U.K. advertising agency WPP PLC.
“We’re still buying at the low point in Spain,” said Simon Ellis, manager of M&G’s European core property fund, which has spent €360 million in Denmark, Italy, Germany and France since March.
The turbocharged activity is a far cry from the depths of the bust. Commercial real-estate prices and sales volume plummeted after the 2008 crash. They began to rebound in a few office markets like New York City and Washington, D.C. in 2010. Investors also began buying multifamily buildings on the correct assumption that the carnage in the housing market would result in surging demand for rental apartments.
RXR Realty, which began buying Manhattan office buildings in 2009, earlier this year sold a roughly half of its stake in six buildings to Blackstone Group LP in a deal that valued the buildings at $4 billion, more than twice what RXR paid for them.
A valuation index compiled by Green Street Advisors fell to 61.2 in 2009 from 100 in 2007. It crossed 100 again in 2013. Last week it was at a record 118.
Analysts warn that property values could fall if interest rates rise sharply. The Federal Reserve has signaled it’s moving toward interest-rate increases later this year. A surge in rates could have repercussions throughout global financial markets, especially if falling prices trigger a wave of defaults on mortgages.
But bulls counter that even if interest rates rise, property values might not necessarily be hurt if higher interest rates are accompanied by higher inflation, which typically allows landlords to raise rents. They also point out that so far this cycle hasn’t seen the kind of overbuilding that has destabilized real-estate markets in the past.
The Fed and others have noted that banks have been loosening their lending standards. In all, banks had $1.7 trillion worth of commercial real-estate loans outstanding at the end of the first quarter of this year, just 2.6% shy of the record hit in the first quarter of 2009, according to Trepp LLC, a real estate data service.
New issues of commercial mortgage backed securities are on pace to clock in at about $110 billion this year, a postcrash high and a 17% jump from 2014, according to Commercial Mortgage Alert, an industry publication.
Moody’s Investors Service also has sounded the alarm about loosening credit standards.
“We would have hoped the lessons from the financial crisis would have been more durable,” said Tad Philipp, Moody’s director of commercial real-estate research.
Write to Art Patnaude at art.patnaude@wsj.com and Peter Grant at peter.grant@wsj.com
Corrections & Amplifications:
The value of U.S. commercial real-estate transactions in the first half of 2015 totaled $225.1 billion. An earlier version of this article misstated the amount. Also, valuations of office buildings reached post-2009 highs in New York, Los Angeles, Berlin and Sydney. An earlier version of this article incorrectly said post-1999 highs. (Aug. 15, 2015)
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"Low interest rates and a flood of cash being pumped into economies by central banks..."
That's right, self inflicted wounds and unintended consequences. Who has been warning about that?? (All of us here.) How about quit doing that which is harming us instead of worrying about the value of real estate.
More dollars (or euros, yuan) chasing a stagnant amount of goods and services... they have a term for that... Maybe the real estate that hasn't changed didn't go up in value. Maybe the currency we measure it with went down in value.
“if too much capital comes into any asset class, generally not-so-good things tend to follow.”
A bubble means that values are too high and will come down. But if you believed in free market dynamism, who cares if values go up or come back down as they seek their correct level.
"Regulators are watching the market closely..."
And who is watching the 'regulators'?
Of course we are afraid of the consequences of weening ourselves (and other countries) off of QE, deficit spending, welfare abuse, corporate welfare, and everything else. Someone is going to get hurt.
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Hi GM,
Finally “dropping by”. Been engaged in several projects of late that are taking considerable time, not including the normal attorney consulting business on foreclosures that I do.
I can’t tell you just how “tired” I have grown of trying to correct the idiots like Wesbury. I just cannot believe that they write the crap that they do and in fact believe what they write.
For Wesbury, his comments on the Jun Existing Sales is just plain taken out of context. To cite that Existing Sales are up without consideration of what the May and Jun markets have done in Pending Sales is just plain irresponsible.
Existing sales are home resales that have closed for the month cited, in this case Jun. Yes, they were up 3.2% over the previous month and 9.6% year over year, but that is not representative of the issue.
Existing Sales is a lagging indicator of Pending Sales. Pending Sales are when the contracts are written and Existing Sales are when they close. So in this case, Existing Sales reflect contracts written in Apr and May, with most being in Apr and fewer in May. (A few Feb or Mar contracts might be included and some Jun contract cash sales as well.) Since Apr & May Pending Sales were up, then Jun Existing Sales were going to be up. But to see the trend, we have to look at Pending Sales for Jun.
After 5 months of increases during the hottest part of the selling season, Jun Pending Sales dropped 1.2% over May. And the drop can be expected to continue in Jul and Aug, then really falling off in the autumn and winter months.
Additionally, the rate of Existing Sales is at 5.49 million per year, seasonally adjusted. Pray tell, how is it possible that with such improvements, we are still under 6 million Existing Sales per year when the normal prior to the crash was over 1 m, and at times 1.5m? These numbers continue with interest rates at record lows, and sales have not reached a breakout point. So if the Fed increases rates, then sales will again drop. (BTW, an increase in interest rates will cause less affordability issues, leading to more potential buyers being priced out of the market. Then values will again fall, from 10 to 15% after about a 1% to 1.25% interest rate increase. That means more negative equity and less sellers.)
We having been hearing regularly from Wesbury and others about how the market continues to improve with new home starts. Why are Housing Starts still stumbling along with most of the increases in multi-unit and apartments and not Single Family homes? Why haven’t they reached a breakout point as well? They remain at historical lows like Existing Sales do. (When there are “rapid” increases in monthly Housing Starts, you have to look at the area where the increases have occurred. Each time, you find that the month before has shown some type of event and reduction in starts that has then caused the following month to be greater than normal which caused the “increased”.
Here is something that is very telling and is occurring with Home Sales each month, yet no one is bringing it up:
21% of all home sales are vacation/second home sales. These are levels last seen in 2006. And during that period of time, the vacation homes were largely fraudulent. They were investment property purchases which were claimed to be second homes for the lower interest rates and add ons. (The percentage growth over the past three years is 21%, 57%, and 140%, unheard of before.) In other words, occupancy fraud has returned again.
To understand this, one looks at two criteria. The first is the all cash sales in vacation homes. It has dropped from 50% to 30% in just 4 years. Why pay cash when you can finance, just like from 2002 to 2007?
By itself, an argument can be made that this is not relevant, but then one must look at the mileage difference in vacation homes from the owner occupied property. With this, we see that the Median Distance in 2014 has plunged in three years from 435 miles to 200 miles. (In 2006, median distance was 200 miles, down from 390 miles in 2003.)
Next, we look at the Median Price of vacation homes. In 2014, it was $150,000, down from $168,700 in 2013. This was at a time when home prices were rising 5% or greater nationally.
The NAR is making excuses for these numbers and the drop in prices of vacation homes, but they are the same excuses as in 2006, and we saw what happened there.
I could get into the real technicals at this point, but the bottom line is that once again, the small time homeowner is buying investment properties cloaked as second homes. This will not end well for them.
Wesbury and others fail to look at the inside numbers to make a true evaluation of what is going on in the industry. Maybe they don’t have the time to spend in truly evaluating the situation, or they just don’t understand housing with its many components that affect its. When one dwells down into the many factors, all is not well and no improvement is really going on.
One of the projects that I have been working on is the writing of a book on the Housing Crash and what caused it. I am trying to take into account the significant factors that contributed to the Crash, not just blaming it on lenders, sub-prime borrowers or the Community Reinvestment Act. Someone must tell the story of why things occurred as it did, and why it was inevitable that such would occur.
Also, I am trying to present the causes of why the Foreclosure Crisis remains, the failure of HAMP and other programs, and why Housing is not recovering and why it won’t for another decade at the very least and likely two decades. (A major reason is that the move up buyers no longer exists. With HARP and the low interest rates, the majority of people now have loans from 3 to 4% and are happy to remain in the homes that they currently own. Who the hell would buy a home with the inflated prices again occurring and expecting another fall in values, and if the Fed increases rates, with interest rates that will be substantially higher than what they have now?)
Finally, I will end with what needs to be done to revitalize the housing and lending industry, beginning with the repeal or reform of Dodd Frank.
Just more fun and more things to do........
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DougMacG,
The Fed "had" to worry about the value of real estate from their wrong headed perspective. Here are the reasons why:
1. Homeowners underwater by 125% or greater had higher rates of default. Over 140%, strategic defaults became the norm.
2. Banks who held the loans in portfolio lost money on underwater foreclosures. To break even, Loan to Values had to be under 80%.
3. Using Mark to Market, banks were insolvent as long as values remained depressed.
4. Without Equity in the homes, there was no Move Up Market, which is the key factor in resales.
5. Without Equity, PMI groups would lose more money on foreclosures.
6. No refinance market existed for underwater homes until HARP.
7. The loans and properties that supported MBS were held by Wall Street and Investors. Underwater loan foreclosures resulted in greater losses to those entities.
8. Positive Equity provides hope to homeowners that housing will recover, so they try to keep the home payments current.
Pundits are proclaiming about how great it is that home values are almost back to 2007 values. What a bunch of crap! Home values are once again outstripping the ability of the middle class to buy in the Sand States and the West. As well, the increased values drive up rental rates which makes the lower income groups that much more disposable income restrained.
Keep a watch out. After the 2016 election, Foreclosure Crisis 2.0 begins. Defaults, recession, job loss, dropping values, increased interest rates on adjustable rate 1st and 2nds, credit cards and lines of equity, modification re-defaults, increased living expenses, inflation for food and utilities, obamacare and medical and who knows what else is going to return us to 2008 and 2009.
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Let's see...........Existing Home Sales were the "highest" since Feb 2007. Up 2% at an annualized rate of 5.59m. Am I supposed to be impressed by this?
For cripes sake...........interest rates are still the lowest on record and sales cannot get above 5.59m or cannot get higher prior to the Crash? (The Crash actually began in 2007 with the collapse of subprime lending in Jan 2007 and then with Alt A in Mar 2007.) Also, most of the contracts for Jul were written in May, a high month for pending sales, with the NAR reporting that the "Index" was at 112.3, up from Apr at 111.6. Since the Jun Index was 110.3, think that Aug will show a significant decline? I do......
U.S. Existing Home Sales Hit Prerecession Pace
Sales rose 2% in July, highest since February 2007, National Association of Realtors says
WASHINGTON—Existing home sales in July climbed for the third straight month to hit their highest pace since before the recession, buoyed by strong sales in single-family properties.
The pace of existing home sales increased 2% last month from June to a seasonally adjusted rate of 5.59 million, the National Association of Realtors said Thursday. Last month’s sales pace was the highest since February 2007, and 10.3% higher than a year earlier.
Sales for June were slightly revised down to 5.48 million from an initially reported 5.49 million.
Economists surveyed by The Wall Street Journal had expected July sales would dip 0.7% to a pace of 5.45 million.
Tight inventories have driven prices up, keeping some buyers out of the market. Lawrence Yun, NAR’s chief economist, noted that first-time buyers declined to 28% of all buyers, the lowest share since January. Rising rents across the country are also eating into the savings that people might put toward a down payment.
“We have to recognize that we have a broad-based housing shortage,” said Mr. Yun. “Home builders have been essentially out of the game or underproducing for the past decade.”
According to mortgage company Freddie Mac, the average rate for a 30-year fixed-rate mortgage rose in July to 4.05% from 3.98% in June.
Mortgage rates are still low by historical standards, but could rise in the fall if the Federal Reserve raises interest rates.
Sales of existing homes account for roughly 90% of all purchases in the U.S. At the current pace of sales it would take 4.8 months to exhaust the supply of homes on the market, down from 5.6 months a year ago, the NAR said Thursday. Total housing inventory fell 0.4% at the end of July to 2.24 million existing homes available for sale, 4.7% lower than a year ago.
The median sale price for a previously owned home slipped slightly to $234,000 from June’s $236,300, but it is still 5.6% higher than a year earlier. July’s prices mark the 41st straight month of year-over-year price gains.
Distressed property sales fell to their lowest share of the market since October 2008, when the NAR started tracking them. They comprised 7% of the market, a fall from 8% in June.
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BTW,
Notice that the NAR never reports actual Pending Sales numbers? They only do it on an Index. That is because they do not want to report how many Pending Sales cancel, or how long the sales take to close. This way, they can continue to manipulate the numbers.
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See the GREAT NEWS about New Home Sales? Up 5.4% over Jun and 25.8% Year over Year!!!!
507k yearly vs 480k in Jun. And 507k vs 403k Year over year!!!!
These are Seasonally Adjusted Numbers. Let's see what the non-manipulated numbers say.
43k Sales in Jul 15 vs 45k in Jun 15. (Can't be right! If so, then there were less sales in Jul than in Jun. Where did the 5.4% increase come from? Common Core Math?)
43k in Jul 15 vs 35k in Jul 2014. (That is "better". 23% up.)
Fun with Seasonally Adjusted Numbers. But let's take a look at a couple of graphs from Calculated Risk......
(http://2.bp.blogspot.com/-1jtM72mXTtM/Vdx27bqQIqI/AAAAAAAAkvw/jFeGFjvj694/s1600/NHSJuly2015.PNG)
Doesn't look like much of a recovery to me. Now let's look at the Non Seasonally Adjusted Monthly numbers from 2005 on.
(http://2.bp.blogspot.com/-hWJQY5365p8/Vdx3CrYKw6I/AAAAAAAAkwI/MtQwtw5QdJs/s1600/NHSNSAJuly2015.PNG)
This did not impress me either. Maybe I don't know how to read graphs..........
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Before anyone posts Wesbury and Pending Home Sales, I thought that I would get this in.
Seasonally Adjusted Index Non Seasonally Adjusted Index
Jun 2015 110.04 136.8
Jul 2015 110.09 121.0
Increase 0.5% -11.5%
Let's manipulate the data with Seasonal Adjustments so that it looks better than what it is.
It will be "fun" to see what Existing Sales for Aug & Sep show. Pending for Jul will show up in those months.
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HOPE NOW is the government program for "stopping" foreclosures. Every month, they put out the current "statistics" of Home Retention. Key points:
1. Since 2007, 24m workout plans and 6m proprietary mods. Another 6m in foreclosures occurred. Here is the problem with this. In 2007, there were 51m homes in the US with 1st mortgages. That would be 70% of all homes with mortgages in the country. Being really conservative, lets assume that 50% of the plans were on 2nd mortgages. That is still 35% of all homes with mortgages. Oops.......
2. There have been about 1.5m HAMP mods. Add this to the 6m proprietary mods, that is 7.5m. Already, HAMP has had about half of all mods re-default, and this is before the Mod Interest Rates begin to increase after 5 years. So of the almost 900k HAMP mods still in effect, how many are going to re-default? Most expect that more than 75% will do so. Another oops...
3. The proprietary mods, 6m, have already had at least 40% to re-default. The rest are going to fail when Interest Rates increase also.
4. Non-foreclosure solutions of 411k v 89k in foreclosures. 137k were short sales or mods. The rest, except for a handful of "repayment plans" were homes that were "lost" and the homeowners ended up losing the home. Most distortion.
(BTW, repayment plans are a joke. I have two that are going to litigation done by WF. The first plan required that the homeowner pay $78k the first month, and then $5k for the 2nd and 3rd month of which both were equal to the regular monthly payment. The borrower had only $26k in his business account, most of which would cover business expenses. There was $500 in personal accounts. He had no ability to make the $78k first payment since he did not have the income or savings, yet Wells made this offer. What a joke. And this is typical of repayment plans.)
I could go on and on about all the issues involved in the full report, but this gives you an idea of how the government HOPE data is manipulated to make things look better than what is actual. Just like what the NAR and Census Bureau do in reporting Sales and Start numbers.
HOPE NOW: Mortgage industry achieves 24M solutions and 6M loan mods
411,000 non-foreclosure solutions for homeowners during 2Q
In the second quarter of 2015, approximately 411,000 homeowners received non-foreclosure solutions from mortgage servicers, according to HOPE NOW, the voluntary, private sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors.
Since 2007 the mortgage industry has completed a total of 24 million workout plans and six million proprietary loan modifications for homeowners — reaching another milestone in its efforts to assist families with troubled mortgages.
This compares to just over six million foreclosure sales completed in the same time period.
From April through June 2015, non-foreclosure solutions outpaced completed foreclosure sales by a margin of more than four to one (411,000 solutions, vs. 89,000 foreclosure sales). For every one foreclosure sale, mortgage servicers offered 4.6 solutions.
This is due to the fact that there are several long term and short term solutions available to at-risk homeowners when facing delinquency or foreclosure.
Permanent loan modifications in the second quarter of 2015 totaled approximately 113,000 and short sales totaled 24,000. Other non-foreclosure solutions (including repayment plans, deeds in lieu, other retention plans and liquidation plans) made up the rest of the total number. When homeowners do not qualify for long term permanent loan modifications, mortgage servicers continue to look for short term options that, in many cases, lead to a permanent solution.
Of the 113,000 loan modifications completed for the second quarter of 2015, about 78,000 homeowners received proprietary loan modifications and 35,738 homeowners received loan modifications completed under the Home Affordable Modification Program.
Q2 2015 vs. Q1 2015 – Loan Mods Decrease 2%, Serious Delinquencies Decrease 6%, Foreclosure Sales Decrease 7%
During the second quarter of 2015, there were an estimated 113,000 loan modifications completed, compared to 116,000 during the previous quarter – a slight decrease of
2%.
Serious delinquencies of 60 days or more declined from 1.85 million in Q1 2015 to 1.74 million in Q2 2015 – a 6% decline. (Delinquency data is extrapolated from data
received by the Mortgage Bankers Association for the Q2 2015)
Foreclosure sales also decreased from the previous quarter – 89,000 in Q2 2015 vs. 96,000 in Q1 2015, a decrease of 7%.
Comparing the second quarter to the first quarter of 2015:
Total non-foreclosure solutions were approximately 411,000 in Q2 2015, compared to 444,000 in Q1 2015 – a decrease of 7%.
Foreclosure starts were approximately 176,000 in Q2 2015, compared to 212,000 in Q1 2015, a decrease of approximately 17%. ?Q2 2015 vs. Q2 2014.
The 89,000 foreclosure sales in the second quarter of 2015 compares to an estimated 117,000 completed during the second quarter of 2014, representing a significant decline
year over year.?Here are some other key metrics for Q2 2015 vs. Q2 2014:
Total solutions for Q2 2015 were approximately 411,000 vs. 456,000 for Q2 2014 - a decline of 10%. ?
Loan mods for Q2 2015 were approximately 113,000 vs. 125,000 for Q2 2014 – a decline of 10%. ?
Foreclosure starts for Q2 2015 were approximately 176,000 vs. 203,000 for Q2 2014 – a decrease of 13%. ?
Short sales completed for Q2 2015 were approximately 24,000 vs. 35,000 for Q2 2014 – a decrease of 31%. ?
Deeds in lieu for Q2 2015 were approximately 5,400 – a decrease of 28% from Q2 2014 (7,500). ?
Delinquencies of 60+ days were approximately 1.74 million for Q2 2015, compared to 1.98 million for Q2 2014 – a decline of 12%. ?
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Great to have you back with us Pat!
BTW, for the record, often I post Wesbury and Grannis because we need to make sure that we do not become an echo chamber. IMHO, agree or disagree, I think both Grannis and Wesbury are excellent economists; they give data and pose questions we need to consider.
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CD,
Of course you do!! We know better.....every time Webury writes, you read and then do a purchase on Ameritrade....lol.
Some of the things that I will be posting will be done so as to formulate my own thoughts for the book. I can use this as a sounding board to either make things clearer, or to refine my ideas and statements.
There is just so much going on in the industry that people would be shocked. Now that the crisis has "passed", things have returned to business as usual. For example:
http://www.wsj.com/articles/fannie-mae-unveils-mortgage-program-to-help-minority-borrowers-1440522064?mod=rss_Politics_And_Policy (http://www.wsj.com/articles/fannie-mae-unveils-mortgage-program-to-help-minority-borrowers-1440522064?mod=rss_Politics_And_Policy)
Fannie is going to allow non-occupant co-borrowers on high Loan to Value loans. And also income from "boarders". I can see it now. The new fraud is going to be rampant. There will be people "renting" rooms for $1000 per month, and Fannie will approve the loans. Yet, there will be no real people boarding.
These will be some of the highest default risk loans made.
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Hey! For the record I no longer do much of anything in the market. :cry:
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Hey! For the record I no longer do much of anything in the market. :cry:
You should put your house on the market and gtfo of California while you can. Pocket the equity and own something nice free and clear.
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So you are buying homes as rental properties because home values always go up? Correct rents and appreciation? :evil:
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So you are buying homes as rental properties because home values always go up? Correct rents and appreciation? :evil:
That was aimed at Crafty I think, but I always bought rental property assuming they would never go up in value and the government would take the tax benefit away. In some cases, I was right.
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Yep, I am yanking CD's chain for the fun of it..
Had two cases today that I have been working on, trying to bail an attorney and a homeowner out of trouble.
1. Borrower is given a modification. The attorney files a lawsuit that alleges violations in CA Homeowner Bill of Rights and other allegations for processing the modification. The problem is that once the modification was given, all violations no longer applied. Even worse, he missed that 3 months after the mod was given, the servicerr changes the terms, entailing a breach of contract.
2. A homeowner with three properties contacted me two months ago. He has not made payments in 5 years on one property. Now he is engaged in a lawsuit with his brother and a known scammer. Allegations include Elder Abuse. Anyway, he got his Notice of Trustee Sale this week. Now he wants me to come to the rescue, but he wanted to set up a payment plan. Screw him, all upfront or nothing. And being a rush job, it is even more money.
Homeowners are their own worst enemies.....
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Hey, I can take it , , , and dish it out too :wink:
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Like Jeb Bush? :-D
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Look everyone, this forum needs to remember all the times we have been wrong, even though they are far less than we have been right.
For example,
a) for years we have predicted mass inflation;
b) we missed a near tripling of the Dow, even as most of us rag on Wesbury and Grannis who essentially got it right
and, ahem,
c) though the predictions of doom may well ultimately prove to be right, years of price growth have been missed.
The search for Truth to which this forum is dedicated requires that we too continuously re-examine our premises and consider worthy points of view other than only ones with which we already agree.
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Agreed CD. But if not for the massive manipulation of Interest Rate, QE and other Fed programs, where would we be?
Sure, the Stock Market is up, but only because of the Fed actions. Yet, the middle class is not getting better.
The Housing Market is "up" only after massive amounts of QE buying MBS, both Private Label pre-existing toxic loans, and then most of the new GSE originations. Add in the low interest rates and this is all it got?
Home values have "increased" but this is only the result of a housing market that is on life support. Values have increased solely because of the lack of inventory and "hot money" buying up inventory. Now that the hot money has gone, values are increasing at a much lower rate. (Hmmm, something else to add to the "recovery" chapter. That money is replaced by private investors, often engaging in occupancy fraud.
What happens when Interest Rates increase? Home values fall. Loans become more expensive. The ARMs being taken out now and the legacy ARMs will go nuts and drive more foreclosures. Home Sales will fall because of the higher payments needed.
BTW, why is inventory so low in many of the hardest hit foreclosure states? It is because lenders are still not foreclosing. Loans are being modified with terms that will cause re-default within a year or two. Lenders are not listing their foreclosure inventory because it would be like China dumping products in the US. Lower prices, hence more losses.
Sorry, but I don't "buy" artificial manipulation of market factors as being a "meaningful" recovery of either Housing, the Market, or other parts of the economy.
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Here we get into David Gordon's distinction between making a profit and being a prophet.
I suspect and fear we will be proven right over time, but in the meantime we have left a lot of profit on the table. Missing a near tripling of the DOW and NAZ is no small thing. Looking in the rear view mirror, we see the near zero interest rate policies of the Fed puffing up the markets-- why did we not see this in advance?
Also, we were dead wrong about the Fed's injection of reserves into the banking system causing inflation. Scott Grannis was right.
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CD,
My only remark to inflation is this....
Does anyone really know how to calculate inflation? The government uses an inflation measure designed to show low inflation so as to keep down Cost in Living raises, SS increases and much else.
Ask any middle class person who has to work for a living and worries about where the money will come from to meet costs and expenses monthly whether they believe that inflation is under 2%. Ask them about food costs, utility costs, health care and all the other things that they have to buy. They certainly have another viewpoint that is NEVER considered by anyone.
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I agree.
That said, whatever is the true level, it is far less than the runaway inflation regularly predicted here for years.
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One of the key issues facing Mortgage Lending is the risk of new Mortgage Loans defaulting. The CFPB and Dodd Frank took action to "reduce" risk by approving new Mortgage Lending rules.
Ed Pinto of the American Enterprise Institute and formerly Credit Risk Officer of Fannie Mae, created a Mortgage Risk Index for new loans being approved. The Index rates the risk of default of both GSE and FHA/VA loans. The methodology he used was similar to what I used with my former partners, though ours was much more "advanced" in metrics. However, the results were similar in nature.
The most recent look at Mortgage Risk for new loans originated in Jul 2014. I have highlighted in bold key points. (The percentages quoted are the percentage of High Risk Default loans for the month.)
National mortgage risk index up slightly in July
Risk has increased every month since January 2014
The composite National Mortgage Risk Index for Agency purchase loans stood at 12.09% in July, down 0.2 percentage point from the average for the prior three months, but up 0.6 percentage point from a year earlier.
The monthly composite, produced by the American Enterprise Institute’s International Center on Housing Risk, has increased year-over-year in every month since January 2014.
Agency loan originations continued to migrate from large banks to nonbanks in July.
This shift in market share has accounted for much of the upward trend in the composite NMRI, as nonbank lending is substantially riskier than the large bank business it replaces.
“Historically low mortgage rates, an improving labor market, and loose credit standards especially for first time buyers, combined with a 35-month-long seller’s market for existing homes, continue to drive up home prices faster than income growth,” said Edward Pinto, codirector of the Center.
Increasing leverage in a seller’s market is pushing up real home prices, now 12.5% above the trough reached in the second quarter of 2012, moving the goal post further away for many aspiring low- and middle-income homebuyers.
The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.
In July, the NMRI data included 264,000 such purchase loans, up 12% from a year earlier. With the addition of these loans, the total number of loans that have been risk rated in the NMRI since November 2012 increased to 6.7 million.
Other takeaways from the July NMRI include:
The NMRI for first-time buyers hit 15.40%, up 0.9 percentage point from a year earlier, and well above the Repeat Buyer NMRI of 9.68%.
The Spring homebuying season has been very strong, buoyed by robust first-time buyer volume driven by an improving job market and increasing leverage.
About 140,000 purchase loans for first-time buyers were added in July, up almost 16% from a year earlier, bringing the total number of first-time home buyer loans in the NMRI to 3.0 million (April 2013 – July 2015).
A non-stop seller’s market since September 2012 has been fueled by historically low mortgage rates and high, growing leverage. As a result, real home prices have been increasing since 2012:Q3, far outstripping income growth and crimping affordability.
Credit standards for first-time home buyers are not tight.
In July, 71% had down payments of 5% or less, 25% had DTIs greater than the QM limit of 43%, and the median FICO score was 709, a bit below the median for all individuals in the U.S.
20.7% of first-time buyers in July had subprime credit (a FICO score below 660), up from 18.9% in July 2014
The reduction in FHA’s mortgage insurance premium cut has boosted its market share to 29.1% in July from 23.7% in July 2014.
This increase has come at the expense of its most direct competitors: Fannie Mae (July market share at 33.5% down from 36.7% in July 2014) and the Rural Housing Service (July market share at 3.3% down from 5.1% in July 2014).
Riskier FHA loans have been used to purchase higher priced homes.
The collapse in large-bank market share continued in July, offset by nonbanks, which have a much higher MRI.
“FHA’s premium cut does not appear to have achieved its goal of increasing access to homeownership,” said Stephen Oliner, codirector of the Center. “Rather, FHA largely has stolen business from other government agencies and has enabled borrowers to buy more expensive homes.”
My comments:
The percentages represent all of the loans. Broken down:
Fannie Mae High Risk Loans were 14.49%
Freddie Mac High Risk Loans were 9.83%
FHA High Risk Loans were 86.77% (No, that is not a mistake)
VA High Risk Loans were 40.85%
(Medium Risk loans add another 27% to Fannie/Freddie, 32% to VA, and 10% to FHA.)
High Risk loans are based upon three factors
Loan to Value
Credit Score
Debt to Income Ratio
These numbers are frightening to say the least. Yet they are consistent month over month and year over year. That is not to say that all of these loans will default, but given another financial crisis, one could expect that most would do so. (VA is different. Though high risk, VA loans default in record loan numbers. It is likely because VA underwriters using actual Disposable Income and likely also represents the "discipline" that military service installs in a person."
These numbers are generated using comparable loans originated in 2007. What must be remembered is that the first part of 2007 saw lending standards beginning to be tightened, but were still similar to 2006 loans originated.
Given another financial crisis, recession, or other economic event, it is expected that these loans would default in high numbers. That is why, besides the Modification and Delinquent loan data information I post explaining why the crisis has not been alleviated, i expect things to crash again. This is a view shared with many others in the industry.
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Very good post Pat. Thank you.
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On VA, I should have said that the defaults are lowest of all.
Now, with all of this, you also have to add in Baby Boomer demographics. At least 65% of boomers have mortgages. Few will be paid off by their retirement. As they retire, income drops and ability to pay decreases significantly. Additionally, they have equity problems and many remain underwater. Unless the Boomer can downsize to a home that they can afford or else obtain a reverse mortgage, the Boomers will be increasingly "financially stressed" to the point whereby defaults will increase.
For too many Boomers, the Greenspan years were criminal. Greenspan advocated using the home as a personal ATM, spending on toys and not paying off loans. Now this is going to bite the Boomers badly.
Add in another housing collapse which is going to happen within the next handful of years, (I expect beginning somewhere in 2017) and things will get ugly again, and very quickly.
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I have mentioned many times about New Home Sales and the population issue, and how Sales do not match population. Here is a graph that I found perfectly illustrating my point.
People discuss a recovery occurring, but this really shows the "depth" of any recovery. With interest rates at the lowest point in history, this is "all" we get? Add in the lack of home affordability, artificial increase in values due to lack of inventory and increasing living expenses with income declines, there is no way that a real "organic" recovery can occur.
(http://www.advisorperspectives.com/dshort/charts/indicators/Home-Sales-New-Growth.gif)
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Here is something relevant to the Foreclosure issue. Fannie Mae just extended foreclosure timelines for all of their loans. Also, the GSEs and FHA are promoting how their foreclosures are down. They omit two pieces of data.
1. Under the new modification rules, if a borrower is between 90 and 720 days late, they ask for a modification and they get it automatically. They do not need to submit any documentation, etc. No one is checking to see if they can afford a modification.
2. Loans over 720 days late are being sold to private investors.
So of course foreclosure rates are falling.
http://www.housingwire.com/ext/resources/files/Editorial/Documents/foreclosure-timeframes-compensatory-fees-allowable-delays.pdf (http://www.housingwire.com/ext/resources/files/Editorial/Documents/foreclosure-timeframes-compensatory-fees-allowable-delays.pdf)
Fannie Mae extends foreclosure timelines in 33 states
Fannie Mae announced that it is increasing the maximum number of allowable days for “routine” foreclosure proceedings for much of the country.
In total, Fannie Mae increased the maximum number of allowable days for a foreclosure sale for 33 states, effective for foreclosure sales on or after Aug. 1.
Fannie Mae made the announcement Thursday in an email to its servicers.
According to the announcement, Fannie Mae increased the maximum number of allowable days for the following jurisdictions: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Kansas, Kentucky, Louisiana, Maine, Maryland, Michigan, Nevada, New Mexico, New Hampshire, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin, and Wyoming.
As part of its servicing guide, Fannie Mae establishes time frames under which it expects routine foreclosure proceedings to be completed.
According to Fannie Mae, the maximum number of allowable days takes represents the maximum allowable time lapse between the due date of the last paid installment and the completion of the foreclosure sale.
The allowable time frame also signifies the time typically required for what Fannie Mae calls a “routine, uncontested” foreclosure proceeding.
The allowable time frame reflects the legal requirements of the applicable jurisdiction, and takes into consideration delays that may occur outside of the control of the servicer, Fannie Mae said.
If the number of days to complete a foreclosure sale exceeds stated maximum number of allowable days and the servicer does not provide an adequate explanation to Fannie Mae as to the reasons for the delay, Fannie Mae requires the servicer to pay a “compensatory fee.”
According to Fannie Mae, the list of “reasonable explanations” includes:
Bankruptcy
Probate
Military indulgence
Contested foreclosure
The mortgage loan is currently in review for HAMP
The mortgage loan is in an active mortgage loan modification trial plan or unemployment forbearance
Recent legislative, administrative, or judicial changes to existing state foreclosure laws, provided that the servicer is diligently working toward resolution of the delay to the extent feasible
Fannie Mae noted in its announcement that there is currently a compensatory fee moratorium for Washington D.C., Massachusetts, New York and New Jersey and stated that the moratorium will last, “at a minimum,” until Dec. 31.
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:-o
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Didn't mean to "shock you".
Wonder what Wesbury would say?
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:-D
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This is absolute incredible. I am shocked, I tell you....just shocked... Here is the real story of what is going on, but the reporter was too stupid to understand.
http://www.bloomberg.com/news/articles/2015-09-08/liar-loans-redux-they-re-back-and-sneaking-into-aaa-rated-bonds][url]http://www.bloomberg.com/news/articles/2015-09-08/liar-loans-redux-they-re-back-and-sneaking-into-aaa-rated-bonds (http://[url)[/url]
Liar Loans Redux: They're Back and Sneaking Into AAA Rated Bonds
The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.
But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.
Years after the great American housing bust, mortgages akin to the so-called liar loans -- which were made without verifying people’s finances -- are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.
Today’s versions bear only passing resemblance to the ones that proliferated in the mid-2000s, and they’re by no means as widespread. Still, they reflect how the business is starting to join in the frenzy that’s been creating booms in everything from subprime car loans to junk-rated company bonds.
The Manhattan Beach story -- how the mortgage on that house was made and subsequently packaged into securities with top-flight credit ratings -- recalls a time when borrowers, lenders and investors all misjudged the potential danger.
The story begins earlier this year, when a TV producer bought the cream-colored home. His lender, Velocity Mortgage Capital LLC, says it writes mortgages for people buying homes only for business purposes, such as renting them out, and requires all customers to sign documents stating their intentions.
Soon Velocity was bundling the $1.92 million mortgage and hundreds of other loans into securities through Wall Street’s securitization machine. Kroll Bond Rating Agency featured a picture of the house in a report on the $313 million deal, most of which was rated AAA. Marketing documents for the offering, which was managed by Citigroup Inc. and Nomura Holdings Inc., characterized the buyer as an “investor.”
No Rental Plans
But when a reporter recently knocked on the door in Manhattan Beach, the buyer answered and said he never planned to rent out the place. Nor, he said, had he signed documents stating he would. He was living in the house with his family.
The apparent discrepancy isn’t nearly as worrisome as the kind that first brought liar loans to widespread attention. During the housing bubble, countless borrowers fibbed about their income, often with lenders’ encouragement. For lenders and investors -- let alone knavish borrowers who might get in over their heads -- the potential for trouble is real this time, too.
That’s because federal regulations put in place following the crash effectively outlawed liar loans. Under so-called ability-to-pay requirements, lenders must take specific steps to ensure homebuyers actually can afford the mortgages. If they don’t, homeowners can sue and potentially win damages that can dwarf the value of the homes.
Avoid Paperwork
But in a throwback to subprime times, Velocity and other specialty lenders routinely offer certain mortgages with limited reviews, if any, of borrowers’ finances. That’s because the rules exempt mortgages made for “business purposes.” The setup lets borrowers avoid typical paperwork, in return for paying higher mortgage rates.
Velocity, for instance, sends mortgage brokers e-mails with subject lines like, “Stated? Really??” -- a reference to stated-income loans, which became known as liar loans.
Chris Farrar, Velocity’s chief executive officer, says his company takes steps to ensure customers really are buying homes for business purposes. These include having every borrower hand write and sign letters testifying to their plans.
“Our goal is to never make a consumer loan,” Farrar said. Velocity’s lawyers have advised the company, previously known as Velocity Commercial Capital, that its processes would put it on solid ground even if it somehow failed to weed out inaccurate applications, he said.
First to Suffer
Velocity, based in Westlake Village, California, also keeps skin in the game by retaining the parts of its bond deals that would be the first to suffer losses, Farrar said. He declined to comment on the buyer in Manhattan Beach, citing privacy laws.
As Velocity and others hunt for profits, the question is also how carefully these lenders are vetting customers and loan brokers.
In Velocity’s recent bond deal, an outside due-diligence company reviewed about 30 percent of the loans. The post-crisis standard in residential transactions has been at least 90 percent. The review revealed at least one other questionable loan, and Velocity removed it from the deal.
In assigning AAA grades, Kroll partly relied on Velocity’s promise to buy back any loans that fell short of the standards, said Nitin Bhasin, a Kroll managing director.
“That’s a question for Velocity, I think: How do they make sure when they’re making a loan that it’s not owner-occupied,” Bhasin said.
Representatives for Nomura and Citigroup declined to comment.
Other players in this game include Citadel Servicing Corp. and Athas Capital Group Inc., both based in California.
Fair-Lending Rules
At Athas, the company has discovered less than a handful of instances in the past eight years when buyers moved into homes after saying they wouldn’t, CEO Brian O’Shaughnessy said. But he also suggested that fair-lending rules can make it risky to turn down customers “because I think you’re a liar.”
Dan Perl, the CEO of Citadel Servicing, said savvy underwriters and careful documentation will protect lenders and investors. Like the others, his company demands borrowers put their intentions in writing.
“If they say, ‘you should have known what my intent was,’ we’re going to hold up that document,” Perl said. “It’s a sad state of the world, but we’re looking to make sure we’re not going to be harmed on it.”
It’s difficult to say how far the problems might go, but industry experts agree that mortgage lending is nowhere near as sloppy as it was during the last go-round, which created a bust that produced about 6 million foreclosures.
Even so, the costs could be significant. If a homeowner sues and wins, claiming lenders violated ability-to-pay rules, lenders might have to pay three years of finance changes, legal costs and “actual damages,” which could include down payments and myriad other costs, according to Jeffrey Naimon, a partner at BuckleySandler LLP.
As in the past, some borrowers might claim -- rightly or not -- that they misunderstood documents or were hoodwinked by mortgage brokers or lenders.
“The consumer could argue, ‘They told me I had to mark that box or I wouldn’t get that loan,”’ said Scott McNulla, a vice president at Clayton, a unit of Radian Group Inc. that does diligence work for lenders.
To Naimon, the real danger would be if unscrupulous mortgage brokers once again encouraged homebuyers to get in over their heads.
“I’m much more worried about a case involving unsophisticated borrowers that get tricked by a broker into doing it,” he said.
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Here is the skinny on Velocity.
1. The loans are being done as "business loans".This is a crock. They claim that the loans are business loans because such loans are exempt under TILA/RESPA and Dodd Frank. But they do not have a clue what they are doing. Rentals avoid certain disclosures, but they do not meet the business standards in most cases when residential properties are involved. (Velocity is doing a lot of 1-4 unit residential properties. This will not fly.)
2. Stated income would not be covered by a business loan, so they can try to avoid verifying income. But if it is a regular rental, then TILA/RESPA and Dodd Frank should apply, requiring verification of income, etc. There is no way I would want to try and defend it as commercial.
3. The issue of people buying to rent and then moving in can be easily attacked. The lender claims that they get the borrower to sign "intent letters", but that will not protect the lender. They want protection, do a residency check 2 months after the purchase to show whether the occupancy fraud was committed or not. And if the investor checks and finds more than a couple of occupancy fraud loans, then Velocity has their ass hanging out to dry.
4. As to the homeowner saying he never signed the occupancy documents, bet there is fraud present, either by the homeowner, or by the broker.
5. The goal is to never do a residential loan. LOL. Then they had better stick with retail or commercial properties. How I would also defeat their arguments? Look at the zoning for the property. If it is for residential, then I got them nailed.
6. The company doing the due diligence is paid by Velocity. Anyone think that they are going to do real due diligence and risk losing the business? Also 30%? We learned long ago about those problems.
7. So Velocity is taking "first loss" position on the Tranches. Ask Lehman Bros how that worked out for them.
Velocity is scamming and trying to see how far they can push the regulations. They will probably be okay up until the time that the loans begin to default in significant numbers. Then here comes the Investors and the CFPB.
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So it is insufficient supply of new home building that is causing higher prices in addition to lack of distressed properties and lack of turnover (move up buyers). And construction is not keeping up with the improving job growth.
1. Job growth sucks. Look at all the people out of work and no longer looking. Plus all the people who have now gone to Part Time due to Obamacare. Then there is the Job Growth mostly being in Part Time positions to make up for all the Full to Part Time positions.
2. Move up buyers don't exist because no one trusts the market, or cannot afford to move up. Many don't have enough equity to sell, pay the commission and have enough left over to buy a new home with 20% down..
3. The higher prices are caused by all the Hot Money from Wall Street and Fed actions. That has priced people out of the market.
4. Wages are not growing with the jobs. In fact wages are declining overall.
5. Home builders will not build if they cannot sell.
But to Yan, it is all about inventory and being able to build new homes whether a market exists or not.
http://www.realtor.org/news-releases/2015/09/nar-study-new-home-construction-trailing-job-growth-in-majority-of-metro-areas (http://www.realtor.org/news-releases/2015/09/nar-study-new-home-construction-trailing-job-growth-in-majority-of-metro-areas)
NAR Study: New Home Construction Trailing Job Growth in Majority of Metro Areas
WASHINGTON (September 9, 2015) — Despite positive improvements in the labor market in recent years, new home construction is currently insufficient in a majority of metro areas and is contributing to persistent housing shortages and unhealthy price growth in many markets, according to new research from the National Association of Realtors®.
NAR measured the volume of new home construction relative to the number of newly employed workers in 146 metropolitan statistical areas1 (MSAs) throughout the U.S. to determine whether homebuilding has kept up with the steadily improving pace of job growth in the past three years2. The findings reveal that homebuilding activity for all housing types is underperforming in roughly two–thirds of measured metro areas.
Lawrence Yun, NAR chief economist, says low inventory has been a prevailing headwind to the housing market in recent years. "In addition to slow housing turnover and the diminishing supply of distressed properties, lagging new home construction — especially single family — has kept available inventory far below balanced levels," he said. "Our research shows that even as the labor market began to strengthen, homebuilding failed to keep up and is now contributing to the stronger price appreciation and eroding affordability currently seen throughout the U.S."
NAR’s study analyzed job creation in 146 metro areas from 2012 to 2014 relative to single–family and multifamily housing starts over the same period. Historically, the average ratio for the annual change in total workers to total permits is 1.2 for all housing types and 1.6 for single–family homes. The research found that through 2014, 63 percent of measured markets had a ratio above 1.2 and 72 percent had a ratio above 1.6, which indicates inadequate new construction.
According to Yun, with jobs now being added at a more robust pace in several metro areas, the disparity between housing starts and employment is widening. In 2014 alone, the average ratio of single–family permits to employment jumped to 3.7, while the ratio for total permits increased 50 percent to 2.4.
"Affordability issues for buying and renting because of low supply are already well–known in many of the country’s largest metro areas, including San Francisco, San Diego and New York," says Yun. "Additionally, our study found that limited construction is a widespread issue in metro areas of all sizes."
The markets with the largest disparity of jobs versus home construction (single–family) and currently facing supply shortages are San Jose, Calif., at 22.6; San Francisco, 22.4; San Diego and New York, at 13.9; and Miami, 11.1.
"While construction is limited in some markets — such as Trenton–Ewing, N.J. and Rockford, Ill. — they aren’t facing inventory shortages despite having high ratios because their job gains are more moderate," adds Yun.
Single–family housing starts are seen as nearly adequate to local job growth (a ratio of 1.6) in Jackson, Miss.; Colorado Springs, Colo.; Chattanooga, Tenn.; Amarillo, Tex.; and St. Louis.
Looking ahead, Yun says there’s no question the homebuilding industry continues to face many challenges, including rising construction and labor costs, limited credit availability for smaller builders and concerns about the re–emergence of first–time buyers. However, the strong job growth seen so far in 2015, and only muted gains in single–family housing starts, suggests that sustained price growth will continue to put pressure on affordability.
"The demand for buying has drastically improved this year and is propelling home sales to a pace not seen since 2007," says Yun. "As local job markets continue to expand, the pool of homebuyers will only increase. That’s why it’s crucial for builders to begin shifting their focus from apartments to the purchase market and make up for lost time. If not, severe housing shortages and faster price appreciation will erode affordability and remain a burden for buyers trying to reach the market."
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I just got asked about this website and if what is written is correct. I get calls or emails about this crap a couple of times per month. You will get a kick about the conspiracies out there regarding mortgage lending and then foreclosure. The pathetic part is this guy is making money off of people and just causing them to lose their homes.
http://stopthepirates.blogspot.com/ (http://stopthepirates.blogspot.com/)
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This is the absurdity of the Housing pundits. The author is the President of homes.com. In the article, he cites the reasons that Housing is only set to improve, prices are up near or over 2007 levels and going to rise further; for sellers, it means equity to sell and buy another property; for buyers, confidence in future appreciation.
The President took over in Sep 20144. The company sells information and valuation services. His prior jobs had nothing to do with real estate. So he is obviously well prepared to evaluate housing.
http://www.housingwire.com/blogs/1-rewired/post/35037-were-about-to-reach-the-halfway-point-of-recovery-but-whats-next (http://www.housingwire.com/blogs/1-rewired/post/35037-were-about-to-reach-the-halfway-point-of-recovery-but-whats-next)
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Back in August, I posted about the Pending Home Sales report for Jul. Here is what I did.
Before anyone posts Wesbury and Pending Home Sales, I thought that I would get this in.
Seasonally Adjusted Index Non Seasonally Adjusted Index
Jun 2015 110.04 136.8
Jul 2015 110.09 121.0
Increase 0.5% -11.5%
Let's manipulate the data with Seasonal Adjustments so that it looks better than what it is.
It will be "fun" to see what Existing Sales for Aug & Sep show. Pending for Jul will show up in those months.
Notice that the report showed Pending as .5% up, Seasonally Adjusted, and 11.5% down, Not Seasonally Adjusted. Just what I expected occurred.
For Aug, Existing Sales ended up 4.8% down, apparently seasonally adjusted numbers. Non Adjusted numbers would be much worse. This shows that paying attention to the Non Adjusted numbers is critical to understanding what is going on.
Yan tries to blow it off, stating that tight inventory was likely the problem, but the good news is that Price Appreciation is moderating from unhealthier rates of growth earlier in the year. What? Earlier in the year, he was orgasmic over the increasing rates of price appreciation.
Now, he is saying that when the Fed begins rate increases, it will not affect sales because the public will be able to handle slowly increasing rates due to future wage increases, and new home starts increasing. Duh.....where is the wage growth? What about builders not adding too much to housing stock and that we are now entering the slow down phase of the year for building.
And people wonder why I hate Economists, Politicians, Realtors, Pundits and just about everyone else.................
From the NAR:
Following three straight months of gains, existing–home sales dipped in August despite slowing price growth and a positive turnaround in the share of sales to first–time buyers, according to the National Association of Realtors®. None of the four major regions experienced sales increases in August.
Total existing–home sales, which are completed transactions that include single–family homes, townhomes, condominiums and co–ops, fell 4.8 percent to a seasonally adjusted annual rate of 5.31 million in August from a slight downward revision of 5.58 million in July. Despite last month's decline, sales have risen year–over–year for 11 consecutive months and are 6.2 percent above a year ago (5.00 million).
Lawrence Yun, NAR chief economist, says home sales in August lost some momentum to close out the summer. "Sales activity was down in many parts of the country last month — especially in the South and West — as the persistent summer theme of tight inventory levels likely deterred some buyers," he said. "The good news for the housing market is that price appreciation the last two months has started to moderate from the unhealthier rate of growth seen earlier this year."
The median existing–home price for all housing types in August was $228,700, which is 4.7 percent above August 2014 ($218,400). August's price increase marks the 42nd consecutive month of year–over–year gains.
Total housing inventory at the end of August rose 1.3 percent to 2.29 million existing homes available for sale, but is 1.7 percent lower than a year ago (2.33 million). Unsold inventory is at a 5.2–month supply at the current sales pace, up from 4.9 months in July.
"With sales and overall demand higher than a year ago and supply mostly unchanged, low inventories will likely continue to limit options for those looking to buy this fall even with the overall pool of buyers shrinking because of seasonal factors," adds Yun.
The percent share of first–time buyers rebounded to 32 percent in August, up from 28 percent in July and matching the highest share of the year set in May. A year ago, first–time buyers represented 29 percent of all buyers.
"When the Federal Reserve decides to lift short–term rates — likely later this year — the impact on mortgage rates and overall housing demand will likely not be pronounced," says Yun. "With job growth holding steady, prospective buyers can handle any gradual rise in mortgage rates — especially if today's stronger labor market finally leads to a boost in wages and homebuilding accelerates to alleviate supply shortages and slow price growth in some markets."
(http://4.bp.blogspot.com/-FNU5JUFACT8/VgAQTPIIuWI/AAAAAAAAlCU/N_lHvRTKcAE/s1600/EHSAug2015.PNG)
(http://4.bp.blogspot.com/-FNU5JUFACT8/VgAQTPIIuWI/AAAAAAAAlCU/N_lHvRTKcAE/s1600/EHSAug2015.PNG)
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Harvard just came out with a study of the Housing Industry at this time. It confirms many of the issues that I have pointed out for several years, everything from demographics, to move up buyers, lack of equity and poor affordability.
Well work the read, if you are interested in the Housing Market.
http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-full.pdf (http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/jchs-sonhr-2015-full.pdf)
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New Home Sales just released.
Sales of new single-family houses in August 2015 were at a seasonally adjusted annual rate of 552,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 5.7 percent (±16.2%)* above the revised July rate of 522,000 and is 21.6 percent (±18.7%) above the August 2014 estimate of 454,000.
Non Seasonal Adjusted Sales
Jul 2015 - 44k in sales
Aug 2015 - 45k in sales
1000 additional sales...............bfg.
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Here is a good article for you on Housing and Lending from the well known political pundit, Steven Moore.
http://www.washingtontimes.com/news/2015/aug/23/stephen-moore-mortgage-woes-of-the-middle-class/ (http://www.washingtontimes.com/news/2015/aug/23/stephen-moore-mortgage-woes-of-the-middle-class/)
In this, Moore is bemoaning the fact that he got denied for a mortgage loan from PNC and then Wells Fargo. He blames it on the new Lending Regulations, since 8 years ago you could have got approved with 25% down.
From the article:
The main reason I was denied a loan was because of a below-average credit score. This was infuriating on several levels. First, I have had two previous mortgages and in 25 years I’ve never missed a payment. How can I be a high-risk borrower? The answer is twice in 30 years I was 30 days late paying my credit card bill — and paid the hefty late fee. Even more ridiculous, I, Steve Moore, have $300 of unpaid parking tickets. The horror. How does that data point provide any useful information to a bank about whether I’m going to pay my mortgage?
This prompts another obvious question: Why in the world does any financial institution put any credence in credit rating agencies today? They were the most derelict institutions of all during the housing meltdown. These were the buffoons who were giving triple A credit ratings to mortgage-backed securities only weeks before the whole house of cards collapsed. They were the ones who ignored every warning of the subprime overload. They were the ones who gave Enron, Countrywide, Bear Stearns and others a clean bill of health right before these institutions famously crashed. And banks still listen to their advice on which homeowners are likely to pay off their loans?
But here is why I really want to pull my hair out. While I’m making a 25 percent down payment, the government insurance underwriters — the Federal Housing Administration (FHA), Fannie Mae and Freddie Mac — are backing with taxpayer dollars hundreds of thousands of low down payment loans of as little as 3 percent. These are the loans that will likely default. And taxpayers are on the hook for hundreds of billions of more loans.
My comments:
If Moore is as knowledgeable in politics as he is in mortgage lending and credit, he should find another career. He knows nothing about lending and credit.
1. Moore was denied for a below average credit score. He blames the low score on 2 credit card lates over 30 years. Either he does not understand credit scoring, or he is a liar.
Any credit card late drops off after 7 years. Before that, after even 2 years, it has very little effect upon the score. So if we assume that only 1 late was reported, this would only have dropped his score about 20-30 points at the first reporting, and within 2 years, there would likely be no effect.
Something else is going on to have such a low score. Probably, he is totally maxed out on his credit lines, which would drop the score significantly.
2. Moore mentions $300 in late parking tickets, and blows it off. What do you want to bet that he had a lien placed upon him for those tickets? This would have driven down his credit score as well.
3. To show how stupid he is, he equates his credit scores and the bureaus with the Rating Agencies for doing Mortgage Backed Securities, etc. They are separate companies with separate products. The Rating Agencies do not supply credit scores, etc.
4. Moore rails against the GSEs and FHA for 3% down payments, when he was putting up 25% down. He has a point with FHA risk on the low down payments, but for the GSE's, at this point, credit standards and other credit criteria are keeping down default risk to under 6.5%. (I would raise standards even further to get it down to 2-3%.)
5. And his 25% down, I have done analysis on loans that default with various down payments. The simple fact is that the loan under normal circumstances must have at least 19% down payment, or the lender suffers losses in foreclosure. And the longer the foreclosure continues before resolution, the greater the down must be to prevent losses. And this does not include a drop in home values.
6. Moore finally rails about how with the GSE's and FHA, the taxpayers are on the hook for the 100's of billions being lent, assuming that losses will be that high. Again, he is way off base. For the GSE's, the less that 20% down loans carry PMI which the homeowner pays for and which pays the losses up to the 20% down payment. FHA does "self insurance" which the homeowner pays through increased fees, but that offsets most losses.
As I said, I hope that Moore is a lot smarter with politics than he is with lending. If not, he is a real idiot of the first magnitude.
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Thought I would give people some idea of what I am getting on the Modification front.
1. One person who has not made a payment in 8 years just got modified. 3.5% interest rate. New 40 year term. Loan to Value 147%.
2. One person who has not paid in 5 years just got modified. 3.5% rate. Had 5% equity in home.
3. One person got denied. 6 months late, all caused by the modification process. If he got 3.5% for an interest rate, he could make the payment. Currently at 6.75%. Had under 80% Loan to Value and was told that because he had 20% plus equity, he would be denied.
So if you don't make payments for years and are underwater, you can get modified. But if you are only a few months late, caused by the Mod process, and you have equity, you do not get a mod.
This stuff is so screwed up.......
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Rewarding bad behavior will get you more....
Thought I would give people some idea of what I am getting on the Modification front.
1. One person who has not made a payment in 8 years just got modified. 3.5% interest rate. New 40 year term. Loan to Value 147%.
2. One person who has not paid in 5 years just got modified. 3.5% rate. Had 5% equity in home.
3. One person got denied. 6 months late, all caused by the modification process. If he got 3.5% for an interest rate, he could make the payment. Currently at 6.75%. Had under 80% Loan to Value and was told that because he had 20% plus equity, he would be denied.
So if you don't make payments for years and are underwater, you can get modified. But if you are only a few months late, caused by the Mod process, and you have equity, you do not get a mod.
This stuff is so screwed up.......
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Of the two loans that were modified, the one that had not been paid for 5 years called me to find out how they could file a lawsuit for a Predatory Modification. They wanted better terms than what they got. It took about 20 minutes to get them convinced that they had no case, and if they wanted to appeal the mod, they would lose. BTW, their payment dropped from $850 per month to $690 per month. They also wanted to see if they could file a lawsuit based upon Truth In Lending violations from the loan origination in 2004. They were not happy when I told them about the Statute of Limitations.
The one that had not paid for 8 years just wanted me to determine whether there were any loopholes in the Modification Agreement where the servicer could deny making it permanent. They were happy with what they got. And, they will be able to repay from here.
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Just got a call from a client about his mother. She went into default and was threatened with foreclosure. She got the money together and paid off the loan entirely. (It was a small amount.) This happened several months ago. The lender still does not acknowledge that the loan was paid off.
Tomorrow, the lender is holding the Trustee Sale, meaning that the home is being foreclosed on tomorrow, come hell or high water. Client wanted to know options.
This is clearly a case of unlawful foreclosure. Told the client to have his mother contact the Trustee doing the sale, and send them the cancelled check. They can stop the Sale and contact the lender to resolve. If this does not work, to protect her home, she goes to the courthouse for the sale, and when the property is announced, scream at the top of her lungs that the loan has been paid off, provide the person conducting the sale a copy of the cancelled check and then have him call the Trustee right there. This does two things:
1. Puts the company doing the auction and the Trustee on constructive notice that it is an unlawful foreclosure.
2. Puts any bidders on notice that the loan was paid off, the foreclosure is unlawful and that they would not be "bonafide purchasers" so they are not protected, and can be included in any lawsuit for unlawful foreclosure.
Just another normal day for me.............................
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http://www.zerohedge.com/news/2015-10-16/theyre-back-own-0-money-down
I'm sure this will end well.
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The zero money down option must be either VA or else non GSE/FHA lending.
I want every one of these no VA type loans for a client when they default. They are non Qualified Mortgages and will be subject to far greater liability than the QM loans. Each default lawsuit will be a slam dunk if the default occurs within 18 months. Underwriting standards will have to be very restrictive, making qualifying very difficult to avoid defaults.
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A zero money down purchase would make sense IF the title could automatically revert back to the lender quickly and cheaply upon default. What if we had enforceable contracts voluntarily entered into by consenting adults?! In other words, not possible in an over-regulated, litigation-happy, non-free market America.
There used to be a car dealership ad running up in the suburb where Jess Ventura became mayor that went something like this:
"Bad Credit?" "We don't care."
"No Down Payment?" "We still don't care."
"Miss a payment??" A pro wrestler body slams the poor buyer right through the hood of the car on the TV. "Now we care."
How about a having consequence for default on a collateralized loan, like losing title in a matter of days/weeks, not years or litigation, unless the facts are in dispute.
In a Colorado eviction (as I understand it), the Landlord files and serves the allegation of owing rent. The Tenant must deny the allegation and file a response in order to get his or her day in court. If you don't deny the facts alleged, what is the point of a hearing?
If you promised to pay for something and do not pay, then it isn't yours! If you want partial credit for making partial payments, put that in the contract.
The further we get away from free markets, the more screwed up things get, until it brings down the whole economy.
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What you are talking about with regards to a quick and easy reversion of the property to the lender is actually the basis for Non-Judicial Foreclosures. With Non-Judicial Foreclosures, there is a "set timeline" that exists for a foreclosure action. This process is codified in law.
For California, this is Civil Code 2924. It describes how foreclosures will be done. A homeowner misses three payments and is 90 days late, then the servicer files a Notice of Default. If the borrower does not reinstate, then after another 90 days, the Notice of Trustee Sale is filed. The borrower has 20 days to reinstate. On the 21st day, the foreclosure auction is held. If no one bids, then the property reverts to the lender. At least, this is how it works in theory and did so up to 2007.
(BTW, different states have different time lines, but all are essentially using similar processes for Non Judicial Foreclosures.)
When you have a Mortgage and not a Deed of Trust, it is a different process. The lender files a lawsuit to foreclose. The homeowner responds to the lawsuit, and then the Court rules either yes or no. Then, a Right of Redemption exists whereby the homeowner can reinstate if possible. If not, then at some future date, the foreclosure occurs.
Under these various schemes, foreclosures can take place in anywhere from 5 months to a year.
The problem is that when the crisis began in 2008, two things happened.
1. The government decided to slow foreclosures through HAMP and other type prevention programs. New regulations were created that mandated a homeowner be considered for a modification. This has led to literally years to foreclose.
2. The internet and crooked attorneys came up with all types of allegations of improper actions. This included things like securitization was illegal, MERS had no authority to act, robosigning, and the note and deed were split so a foreclosure could not occur. It has taken years to sort this mess out legally, and even now, courts are still dealing with MERS and Securitization lawsuits, of which they all end up in the appeals court whereby the homeowner claims are finally declared invalid.
What is important to understand is that the government did not want to resolve the foreclosure crisis. They only wanted to delay it. Tim Geithner admitted that HAMP was not designed to save homes. Instead, the government believed that over 10 years, the lenders could absorb about 10 million foreclosures without significant harm to the country. So they set up a plan that would stretch out foreclosures over 10 years to resolve the problem. And once again, the government screwed up.
Also, look at HAMP and the National Mortgage Settlement. Each of these programs mandated that servicers take specific steps in modification and foreclosure actions. Certain actions were banned. But what the programs did not do is provide the homeowner a "right of private" to litigate for violations. So the lenders and servicers could do what they wanted without fear of homeowner reprisal.
This problem could have been resolved years ago. Simply it would have made sense to evaluate the loan and if the homeowner could not handle the payments even if modified, then foreclose fast.
With the GSEs, offer to sell the loans to private investors for discounted rates and let them handle modifying the loans or foreclosing. This would have been far cheaper than QE and other programs that have cost the government trillions.
For bank held loans, use the Good Bank/Bad Bank scenario from the S&L crisis. But the government did not want to do that either.
Much of what has gone on has been about propping up the banks. Engaging in actions whereby the loans would not have to be written off, no mark to mark accounting, QE buying of toxic mortgage assets, heavy Fed Reserve Accounts have all been about keeping the banks "solvent" has been the real reason behind the actions.
We have another 15 years minimum of this mess at the least. And with Foreclosure Crisis 2.0 around the corner, look out.
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In anticipation of CD posting a Wesbury comment on New Home Starts, I present the following.
From the Census Report
Single-family housing starts in September were at a rate of 740,000; this is 0.3 percent (±9.6%)* above the revised August figure of 738,000. (Seasonally Adjusted)
Non Adjusted, meaning actual Monthly results were
Aug 2015 - 66,800 single family units
Sep 2015 - 64,800 single family units
Looks to me like this was a 3% drop over the previous month and not .03% increase. (Notice the ±9.6% error rate)
Wesbury is going to proclaim that all is well and moving forward.
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The visual evidence of our wonderful housing recovery.
(http://4.bp.blogspot.com/-ahz38h7xJXo/ViY1QOrp7UI/AAAAAAAAlWo/6u7_zPM2Uw0/s1600/StartsSept2015.PNG)
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Very telling graphic. I am very tired of hearing about the slight uptick since rock bottom as part of how great things are.
If we ever engineer another economic growth period, watch how small these Obama era numbers look in comparison.
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Doug,
If only somehow I could explain all the things I have heard and experienced since 2007 and the beginning of the collapse, it might go to explain why I have given up and resorted to Trump.
The conversations I have had and/or listened in on have been frightening. Whether it is the banks, Wall Street firms, CFPB or Treasury, the attitudes are frankly "I don't give a frick about anything but myself". It is all about the money.
The housing industry was doomed from the time that Lewis Ranieri was tasked with creating the Mortgage Bond Trading Desk with Salomon Bros in the late 70's. Ranieri and those he brought in to create the market were the worst sharks of all time. When they created the bonds by buying loans from the S & L's, they lied, cheated, misrepresented and stole to do nothing but make commissions. There was no concern for their clients and the harm that they would cause to others. They set the stage for crash in 2007 because the attitudes never changed.
When I was working with the other group two years ago, the former Bank Chief Risk Officer told me time and again about how the bank traders were the worst sharks of all. They would cut throats to make even 5 basis points in commissions. Over a period of time, I began to understand what he was talking about, but did not realize that he was one of those same traders, hiding behind a facade.
When we went into meetings with our products designed to actually help out the lending industry, reducing risk and defaults, I experienced just how bad things were and then realized that the banks and Wall Street would never change. These firms did not want to reduce or eliminate risk of default. Doing so meant that they would lose business denying loans. Then when they went to do securitizations, the risky loans that were included and even misrepresented in the bonds allowed them to make even more money.
I am torn right now. IMO, the GSEs must be disbanded and lending practices totally changed. The 30 year loan should be discontinued and instead replaced with 5 or 10 year loans only, similar to the system in Canada. But this cannot be done without bringing either portfolio lending back into play or else Wall Street securitizations back. Yet bring back Wall Street, and in another 15 years, we will experience another financial crisis.
IMO, all we can hope for is a complete financial collapse and complete rebuilding of the system. But that will fail because the same people who caused the problem and then enabled it will be the same people to "rebuild it".
Sorry for rambling but I just don't have the words to really explain it all. But I am sure you can read the frustration that I am experiencing......
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Okay, more stupidity from Fannie Mae. Let's loosen standards so more unqualified people can qualify.
1. Use Equifax data to verify employment and income. And who expects Equifax to have correct data? What about changes in hours and other things? That will not reflect on Equifax data. The data will be a lagging indicator and not up to date. Income is dynamic and changes all the time. What b.s.
2. Ease the qualifying for people without a credit score. People don't have a credit score for a number of reasons. Mostly this is because either they are not credit eligible or else in the past they have lost their credit in some manner and never applied again. I have seen people who don't have credit scores for another reason, they are illegal and can't get it. Show me a person with no credit and the risk of default goes up tremendously.
3. Use income from non-borrowers living in the household. In other words use kids income, grandparents, other family members, etc. Another absurd program that increases risk significantly. (Probably to be used by ethnic groups who have several families living in the same home.
We never learn....
http://www.wsj.com/articles/need-a-home-mortgage-fannie-says-forget-the-pay-stubs-1445333580?mod=yahoo_hs (http://www.wsj.com/articles/need-a-home-mortgage-fannie-says-forget-the-pay-stubs-1445333580?mod=yahoo_hs)
Fannie Mae on Monday said it would allow lenders to use employment and income information from a database maintained by credit bureau Equifax to verify borrowers’ ability to handle a loan, rather than relying on the traditional documentation process of collecting physical copies of pay stubs and tax data.
Fannie announced other changes it said could broaden mortgage access for some borrowers. The mortgage giant will ease the lender process for granting loans to borrowers who don’t have a credit score, a key issue for advocates for certain minority groups that are less likely to have traditional credit histories. Likewise, Fannie in mid-2016 also will require lenders to begin collecting “trended” credit data from Equifax and TransUnion, which includes longer-term borrower credit histories.
In August, Fannie rolled out a new program that let lenders count income from nonborrowers within a household, such as extended family members, toward qualifying for a loan.
In August, Fannie rolled out a new program that let lenders count income from nonborrowers within a household, such as extended family members, toward qualifying for a loan.
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Posting this also to 'Housing' thread
Share of First-Time Homebuyers Falls in U.S., Now at 28-Year Low
http://www.bloomberg.com/news/articles/2015-11-05/share-of-first-time-homebuyers-falls-in-u-s-now-at-28-year-low
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This is not good news for the market. First timers support the market and provide the impetus for move up buyers. Eliminate first time buyers and move up buyers are similarly affected. Now, add in the expected beginning of rate increases in Dec, and it gets even worse.
I did not post the latest sales figures, but I will do so now.
From the National Association of Realtors
Total existing–home sales, which are completed transactions that include single–family homes, townhomes, condominiums and co–ops, increased 4.7 percent to a seasonally adjusted annual rate of 5.55 million in September from a slightly downwardly revised 5.30 million in August, and are now 8.8 percent above a year ago (5.10 million).
While current price growth around 6 percent is still roughly double the pace of wages, affordability has slightly improved since the spring and is helping to keep demand at a strong and sustained pace."
Additional Notes:
58% of sales have prices below $250k.
30% between $250 and $500k.
Using Non Seasonal Adjustments, Sales fell 6.5% from Aug to Sep.
Seasonal Single Family Starts for Oct were up 4%
Actual Single Family Starts dropped from 66,800 to 64,800
The bottom line is that Housing Starts and Existing Sales remain in a bouncing along the bottom mode. There is no "break out" yet to indicate any chance of a real Housing Recovery. Instead, if rates begin to increase, expect Starts and Sales to drop further.
On the loan origination front, though the GSEs are loosening standards, there are still no indications that any significant increases in originations is occurring. In fact, as rates increase, expect originations to fall based upon a lack of affordability.
The reality is that the low interest rates over the past five years have totally screwed up the market and made refinances a thing of the past as rates increase. Purchase originations will fall as well.
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http://www.nytimes.com/2015/11/08/nyregion/real-estate-shell-companies-scheme-to-defraud-owners-out-of-their-homes.html?emc=edit_th_20151108&nl=todaysheadlines&nlid=49641193&_r=0
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CD,
This has been going on across the country since 2008. The fraudulent deeds are actually just a small percentage of the various schemes that have been utilized by these criminals.
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Great article, though general in nature, about Housing and its coming end. Fully agree with the author.
http://www.theburningplatform.com/2015/11/11/housing-bubble-part-deux/ (http://www.theburningplatform.com/2015/11/11/housing-bubble-part-deux/)
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http://scottgrannis.blogspot.com/2015/12/strong-mortgage-applications.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+blogspot%2FtMBeq+%28Calafia+Beach+Pundit%29
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You trying to get me going again? You know Scott and I disagree totally on this. You are so :evil:
Here is an industry website that covers Mortgage Apps on a weekly basis. Seems that they are not so excited about things.
http://www.mortgagenewsdaily.com/12092015_application_volume.asp (http://www.mortgagenewsdaily.com/12092015_application_volume.asp)
My comments:
1. Why are the apps up over the last couple of weeks? Try the consensus opinion that the Fed will increase short term rates next week. Each time this threat has presented itself, applications immediately shoot up, people jumping in for loans and getting the last of the lower rates.
2. Securitized Mortgages have increased by about 10% in the past two years after being flat from 2009 to 2013. Duh, does anyone think that the "increase" in home values and financing had anything to do with this increase? Look at the last two years, and average increased was just about that number. Also, don't forget increases in allowable LTV.
3. Yes, mortgage debt has pretty much bottomed for now. But that is a result of foreclosures having bottomed for the moment. New foreclosures are increasing again, and after a year, the first of these will end in foreclosure and mortgage debt will begin to drop again.
4. Why is mortgage debt increasing a great thing? Especially when the new QM loans have a huge defect that will bite the lenders in a couple of years. And why are Chase and the other larger lenders bailing out of mortgage lending, especially FHA, and leaving the business to Mortgage Bankers? They know what is about to happen.
5. Financial markets are lending again? Only in GSE and Ginnie Mae loans where government guarantees exist. Is this "good" lending? Private lending will once again be less than $10 billion for this year.
6. Single Family Housing Starts are still pathetic. They remain among the 10 worst years since 1963 and even then, the population was 178m. Multi units are holding up the rest of the Construction Market, but even then the numbers are pathetic for the population growth.
7. Loan demand might be the result of returning confidence and prosperity of homebuyers? Wow, I can give Scott a list of a hundred realtors just out of memory who will argue with him on this point. Confidence? People don't expect things to hold, especially with increasing rates. (Most are expecting a full 1% over the next year.) Prosperity? 50% of the people have less buying power than the early 1990's. And with rising costs of goods and medical insurance, this will go much higher. Add in the increasing rates and prices of homes, and everything worsens.
8. 5m new jobs? Okay, but where are those jobs? Service sector, and with large numbers of them part time.
The reality is that most people in the industry, the realtors, loan officers, banks, all will tell you off the record that things suck and they are going to get worse before they get better.
But then, I am not a PHD economist..........
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Pat, I am in sunny south Florida this week (actually cloudy) studying the condo market close to the water. An older guy in the hot tub last night explained to me why the values stay so flat. People are dying. Older people, often younger than us, come down here to enjoy the good weather, live out their years, and don't reproduce. When they die, and all do, the heirs put it on the market. (Oops, guilty.) The housing along and near the Ocean in this area is almost one continuous city; the developments are large and seem to go on forever.
This market is odd to me. Every kid my age in my neighborhood growing up lived there all of k-12. No one moved in and no one moved out. As you grow older you see a larger time frame, things are very much changing. Immigrants and migrants come in and the demographics keep changing.
Without immigration, this area would have to replace every aging person lost with a new aging person leaving the midwest and northeast. Besides escaping the cold and the income tax they can escape Minneota's ruthless estate tax. But for every American migrating, south Florida (or Scottsdale or wherever) covers for one thy lost, the state up north has lost a person and all his money.
I'm not heading to some profound point, just saying the birth rate in a lot of places is not covering for the people we are losing, and most of the people coming in can't afford the housing where the people at the top of their economic life were living. (End the good immigration and we are REALLY screwed.)
Your advice on housing here: Sell? Hold, then sell? I'm not even getting rental ad responses.
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Housing is local for sure. And that dictates what to do.
I did an article in about 2011 on factors facing the Housing Recovery and Age Demographics was a key part of what I wrote. It went straight to what you are saying. (Florida where you are is different for their demos.)
1. For people over 65, about 50% have mortgages with most having very little equity. When they retire, most do not have the funds to pay the mortgage and other expenses as they age. For them, it is sell, downsize and use the equity to live out their days.
The lucky ones can get a reverse mortgage to have added cash. The mortgage will be paid out until they die, but they will still have insurance and tax payments. So for many, this is not an option.
2. For those who have a home with no mortgage, they can continue to live well. But there is a certain segment where health events will occur and at that point, it is assisted living which would require selling the home. So it is another stress on home ownership.
3. Legal immigration has run typically about 720k per year, up to over 800k. Since this includes family members, there is very little offset to the loss of homeownership of the elderly.
4. The Boomers was the largest generation seen, except maybe it has been outdone by now. Add in the WW2 generation and living longer, there exists a huge demographic of homeowner "ending" over the next 20 years.
The Gen X generation is in its peak buying years. But Gen X did not have near the population of the Boomers. So replacement homeowners have been lacking. Add to this that Gen X was probably the hardest hit age demographic in the foreclosure crisis, and replacement homeowners are severely restricted.
5. The Millennial Generation suffers a different fate. 1/3rd of all are living at home. They can't afford homes with what they are making. Add to that the lack of well paying jobs, and the replacements just don't exist. Then factor in housing costs, and it is even worse.
Millennials have also seen what happened in the foreclosure crisis. So they are very leary of going forward with owning a home.
What is the solution? Therein lies the real problem.
1. Home values and affordability are just not "good". Prices have risen again and priced 50% of the people out of the market. And until values drop, this segment cannot rebuy.
2. 8 million people were foreclosed upon. Another 6m have had modifications, so their credit is suspect as well. That is 14m removed from ownership, probably permanently. It does not seem like much, but there are 50m homes with mortgages and about 21m without. So taking that into consideration, 14m is a significant problem.
3. Low interest rates have kept mortgage payments down on ARMs and on LOE's. As these rise, potential up to 15m loans again are at risk of default. And as defaults go up, home values go down causing more negative equity positions. And as Neg Equity and Money Crunch issues hit, foreclosures increase, which causes more Neg Equity and more defaults. This is the Housing Death Spiral that we just managed to avoid last time by dropping rates to nothing.
4. Decreasing income and increasing living expenses just exacerbate the problem.
5. Private lending no longer exists. It is all GSE and Ginnie. Until Private Lending resumes, then nothing will improve.
So what do we do?
I have been considering this since Oct 2010, trying to develop a strategy to bring back housing. Unfortunately, there are few people who even want to consider what needs to be done. Here is my solution.
1. Homeowner defaults must be stopped. This involves early intervention and true attempts to mitigate the defaults. It involved principal reductions, forbearance and other changes to the note to make payments affordable. Each and every loan must be evaluated with a true Ability to Repay Model and Default Risk Scoring System. (I have the thing built, but no one so far wants to use it. Though I may have my first customers coming in the next month or so.)
Many will argue that the homeowners got themselves into trouble as so they should lose the homes, but at a certain point of lender and servicer malfeasance and government stupidity, and with the problem not going away, then this argument has little validity left.
2. Homeowners who defaulted must be "rehabilitated". This involves putting them into programs that will solve problems, whether it is heavy debt, credit scores or other problems that prevent them from returning into the housing market in the future. Incredibly, the needed programs are available but no one has indicated an interest in working a comprehensive program. (I also have that developed.)
3. Many former homeowners are actually in a position that they could afford to make mortgage payments again and they have reduced Default Rates with their new circumstances. But they are prevented from getting back in because the new guidelines still penalize them since most have reduced credit scores. This is the Good Loan/Bad Loan Scenario or False Positives and False Negatives.
A False Negative Loan is a loan that appears in underwriting to be "bad" but is actually a good loan. A False Positive Loan is one that looks good, but is bad. Identify which is which and the buyer market can be significantly increased. Plus it brings back in the Private Lending Market for the False Negatives. But no one has an ability to determine which is which. (Except me. I have spent since 2012 perfecting the model. It may get used finally in the next couple of months on some litigation issues.)
This addresses the homeowners who have lost homes, but we also have to look at how else to stimulate the market.
1. We have to return rates to a market normal. 3.5% on a 30 year loan is absurd. That is why the GSEs exist. They are the only ones who will accept that return. Let the rates go to a market level and let home values fall to meet an equilibrium. This will create more affordability and open up more first time buyers.
2. We have to create viable and transparent methods for evaluating loans in MBS pools. This provides an incentive for Private Lending to resume.
3. We have to establish a true methodology for determining default risk and ability to pay. (Again, I have it ready.) This eliminates the False Positives and False Negatives.
4. 30 Year programs must be changed. We need to go back to pre Depression lending. Loans were done for then as Interest Only or even regular amortization, but they would be from 5 to 15 years maximum. The loans would be refinanced or paid off upon maturity. (Canada uses this system.)
5. Dodd Frank must be repealed and new regulatory practices created.
6. The TBTF banks need to be broken up. Get rid of the problem and get more regional and local banks back into business.
7. Stop the Homeownership programs like CRA. These "warp" the system and do no good. Good underwriting practices and guidelines would solve this problem.
8. Eliminate the GSEs.
9. Turn loan officers into Financial Professionals and hold them to a Fiduciary Duty. A home is the biggest purchase of a person's life. It is not realistic to have "used car" salesmen selling loans to unprepared buyers. Make them hold to a true standard like CPA's, etc.
10. Reimpose Glass Steagal. Make Commercial and Wholesale Banks different again. Don't let them intermingle.
There is much more needed, but this would go a long ways towards solving the problem. We still have the elderly demographics to deal with, but that will be reduced since we are building upon the buyer market.
As to Florida, I just don't know enough about it. I would not want to advise what to do because since I am usually wrong about things, I would probably put you in the homeless lines. Of course, you can join me there......we can drink our pruno and get pleasingly wasted.
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But look at all the great commentary I got out of you :evil: :-D
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It begins!!!
Fed raised .25%. I shall be watching the 30 Year Fixed.
If she continues, rate could be at 5% by end of 2016.
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It begins!!!
Fed raised .25%. I shall be watching the 30 Year Fixed.
If she continues, rate could be at 5% by end of 2016.
Fed raised rates and mortgage rates dipped (slightly).
http://hosted.ap.org/dynamic/stories/U/US_MORTGAGE_RATES?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT&CTIME=2015-12-24-10-07-04
The drop (to 3.96%) is a reminder that the Fed has only an indirect influence on long-term mortgage rates, which more closely track the yield on the 10-year U.S. Treasury note. And that rate, in turn, tends to stay down as long as inflation remains low...
Some say Feds don't set interest rates; it is more like they follow them. Economics at this point in history is an inexact science.
But PP's prediction above still seems reasonable and likely to me.
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10 Year bill is at 2.24, which was about equal to what it was prior to the rate hike. So there is little change in the 30 year market. More increase will be needed there.
For the ARMs and Lines of Equity, that is where the first impacts will be felt. Most Lines of Equity were tied to the Prime Index. Prime has been raised by .25% to reflect the rate hike. So over the next couple of months, LOE's will see the first increase.
Most ARM's are tied to the 6 Month LIBOR, 12 Month LIBOR, CMT and MTA Indexes. These indexes take the monthly Index average for the last 6 or 12 months to calculate what the Index is at any one time. So it will take a full year for the complete effect of the rate hike to apply and increase the ARM rates.
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:-D :-D :-D
Zerohedge just caught the Commerce Department and their "fun with numbers" on Housing Sales. Home Sales are not as good as claimed. (Commerce learned for the NAR how to play the game.)
http://www.zerohedge.com/news/2015-12-23/housing-recovery-was-just-cancelled-again-due-5-months-downward-revisions (http://www.zerohedge.com/news/2015-12-23/housing-recovery-was-just-cancelled-again-due-5-months-downward-revisions)
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https://www.youtube.com/watch?v=Yga7TlsA-1A
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Some good facts in here along with liberal bias. Inequality causes high prices?
(The 'conservative' answer too high rent and unaffordable homes is to put a 16% tax on rent and houses. ??
Perhaps smart economics, but dumb politics.)
http://www.thedailybeast.com/articles/2016/02/08/this-is-why-you-can-t-afford-a-house.html
Maybe if Trump wins New Hampshire, Pat will come back... )
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Previous post in this thread: Maybe if Trump wins New Hampshire, Pat will come back...
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I heard Dem economist Austan Goolsbee argue that CRAp did not factor in the crash and that banks don't make mortgages.
http://mediamatters.org/video/2016/03/29/listen-to-an-economist-shut-down-hannity-for-bl/209611
Now this:
Obama administration pushes banks to make home loans to people with weaker credit
https://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_story.html
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Putting this in housing but thinking of cognitive dissonance of his glibness and the left. Who did they say they want to help and who did they hurt the worst. Same groups.
Homeowners are thriving while renters are struggling, year 8 of the Obama administration, year 10 after Democrats took over Washington.
The richer get richer and the poor, the working and the struggling get squeezed under their policies. Just extly what they accused Republicans when they were in charge, except then homeownership and incomes were increasing.
http://www.realclearpolitics.com/articles/2016/06/20/decade_after_housing_peaked_owners_richer_renters_hurting_130937.html
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Freddie Mac Starts Pilot Program With Looser Standards
Changes designed to boost mortgage originations among first-time buyers, applicants with low-to-moderate incomes
By AnnaMaria Andriotis
Sept. 19, 2016 5:12 p.m. ET
9 COMMENTS
Mortgage-finance giant Freddie Mac and two nonbank lenders are loosening income and documentation requirements for mortgage applicants in a new pilot program.
The changes announced Monday are designed to help boost mortgage originations among first-time buyers, applicants with low-to-moderate incomes and those who live in underserved areas.
The moves come nearly a decade after the start of the mortgage meltdown, as many consumers remain shut out of the housing market largely because they can’t meet the underwriting criteria that most lenders require. Under the Freddie program, applicants will be able use the income of people who will live with them but aren’t going to be on the mortgage to qualify.
In addition, income from second jobs that borrowers have held for a relatively short period will be factored in. The pilot also doesn’t require bank statements that would show a paper trail of how some borrowers save for their down payments.
Many of the pilot’s features are similar to what Fannie Mae currently allows on some mortgages it purchases but are new for Freddie Mac, which is among the largest purchasers of mortgages in the country. Freddie Mac says it purchases one in every four mortgages originated by lenders in the U.S.
The changes, which went into effect on Monday, will apply to people who sign up for a mortgage with Las Vegas-based Alterra Home Loans or Tustin, Calif.,-based New American Funding. The companies’ specialties include lending to low-income and Hispanic borrowers. The lenders will sell the mortgages they originate to Freddie Mac.
The partnership has been in the works since late last year and will be in effect for at least 12 months. Freddie Mac will determine whether to expand it beyond pilot phase if performance meets expectations. It declined to discuss any numbers it has as goals for loan volume or the delinquency level it would like to stay below.
The pilot isn’t lowering down payment or credit score requirements. Rather it is loosening income criteria, including for applicants who have two jobs. Until now, Freddie Mac has required that borrowers who show their income from a second job when applying for a mortgage demonstrate that they have held that job for at least 24 months, a period that in the pilot is reduced to 12 months. Separately, self-employed borrowers will have more options to prove their business exists to the lenders.
In addition, borrowers who will be living with family or other individuals for at least 12 months after they purchase the home will be able to use those non-borrowers’ income to get approved for the mortgage. The income will be factored in to help improve the borrowers’ debt to income ratio, a key figure that compares borrowers’ monthly debt obligations to their gross monthly income.
Paperwork requirements will also loosen up for some borrowers who don’t have bank statements to show how they have saved for their down payment.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
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The Mortgage Market Is Changing Fast
The remaking of U.S. politics is likely to upend the nation’s mortgage market; interest rates and regulation are the reasons why
By AnnaMaria Andriotis
Updated Nov. 14, 2016 10:49 a.m. ET
42 COMMENTS
The remaking of U.S. politics also is likely to upend the nation’s mortgage market. There are two reasons why: interest rates and regulation.
Changes in these areas could affect the course of the housing recovery, the availability of credit to borrowers and the extent to which lenders are willing to take on new risk. It may also affect the current structure of the mortgage market, in which banks mostly have focused on plain-vanilla and jumbo loans while nonbank lenders have targeted riskier borrowers, sometimes with more exotic mortgage products.
Interest rates are the most immediate concern. Donald Trump’s victory has led to a surge in bond yields and, in turn, mortgage rates. In the two days following the election, the average rate on 30-year fixed-rate conforming mortgages spiked a quarter of a percentage point to 3.87%, according to MortgageNewsDaily.com.
Mortgage rates are still incredibly low by historical standards; the average over the past 45 years is 8.26%, according to data from Freddie Mac. But the quick rise in the 10-year Treasury yield has lenders worried mortgages could become more expensive far sooner than they had anticipated.
Depending on how far that runs, higher rates could arrest further gains in home prices. While prices have shot up in many U.S. housing markets over the past couple of years, superlow mortgage rates have kept higher prices within reach of many borrowers.
“The ultimate problem is the impact of rising rates on home values,” said Stu Feldstein, president at SMR Research Corp., a mortgage-research firm. “We’re back into a bubble condition in part because of low rates that have enabled people to buy houses much more expensive than their incomes could afford.”
He said his firm expects that by the end of 2017 rising rates will have contributed to home values declining in about one-third of the U.S.
The speed and size of any increase in rates will depend in part on Mr. Trump’s fiscal policies and whether markets believe that could lead inflation higher. “We have a new narrative,” said Chris Whalen, senior managing director at Kroll Bond Rating Agency Inc., noting that markets, not just central-bank actions, will play a role in the direction of mortgage rates. “We’re back to a situation where what investors think matters again and that’s very important for mortgages.”
The second point lenders are considering is whether a more bank-friendly regulatory environment is on the way. In part, that will depend on how the administration approaches any rollback of the Dodd-Frank regulatory overhaul law.
In an interview with The Wall Street Journal on Friday, Mr. Trump said of Dodd-Frank: “We have to get rid of it or make it smaller.”
The law resulted in a number of safeguards for mortgages, including requirements for lenders to make sure borrowers can afford mortgages they sign up for. Risky mortgages including those with balloon payments and with little verification of applicants’ income or assets largely became much harder to find. A looser lending environment would result in conflicting developments: More borrowers would get approved, while raising the risk of more foreclosures to come. Analysts say most lenders would be unlikely to return to practices and products that burned them during the housing crash.
Bryan Sullivan, chief financial officer at nonbank lender LoanDepot Inc., said the “hangover” from the crisis persists, making lenders wary.
But the new regulations also made lenders more risk averse. Banks have increasingly targeted only the most creditworthy borrowers or those taking out jumbo loans—mortgages that exceed $417,000 in most parts of the country.
Along with regulatory risk, banks have faced greater legal peril over mortgages in recent years. The biggest banks, in particular, have paid tens of billions of dollars in settlements and fines related to soured mortgages.
So the appointment of a new attorney general, and the approach of the Justice Department toward lending transgressions, will have a big impact on how lenders assess legal risk. Big banks, for example, have largely abandoned making loans that are insured by the Federal Housing Administration for fear of being penalized when risky mortgages go bad.
“A more reasonable attorney general…would be a great outcome,” said David Stevens, president and chief executive of the Mortgage Bankers Association.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
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Housing Starts Rose 25.5% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/17/2016
Housing starts rose 25.5% in October to a 1.323 million annual rate, easily beating the consensus expected 1.156 million. Starts are up 23.3% versus a year ago.
The rise in starts in October was due to gains in both single-family and multi-family units. In the past year, single-family starts are up 21.7% while multi-family starts are up 26.5%.
Starts in October increased in all major areas of the country.
New building permits rose 0.3% in October to a 1.229 million annual rate, beating the consensus expected 1.193 million. Compared to a year ago, permits for single-family units are up 5.1% while permits for multi-family homes are up 3.8%.
Implications: Housing starts soared to a 1.323 million annual rate in October, the fastest pace since 2007 and easily beating the most optimistic forecast by any economics group. The huge gain fully offset a large unexpected drop in September, so the average of the two months (1.189 million) is probably closer to the underlying trend. Still, this a volatile series and the 25.5% increase in October was the largest percentage gain for any month since the early 1980s. The hyper-volatile multi-family sector, grew 68.8% in October after a 38.9% plunge in September. Meanwhile, single-family starts rose 10.7% in October, hitting the highest level since 2007, and are up 21.7% from a year ago. Even though we saw a massive gain in multi-family construction in October, the "mix" of construction is still shifting toward single-family building. When the housing recovery started, multi-family construction generally led the way. But the share of all housing starts that are multi-family appears to have peaked in 2014-15 and single-family construction has slowly, but erratically, been regaining its lost ground. The shift in the mix of homes toward single-family units is a positive sign because, on average, each single-family home contributes to GDP about twice the amount of a multi-family unit. Based on population growth and "scrappage," housing starts should rise to about 1.5 million units per year, so much of the recovery in home building is still ahead of us; the general rise in home building that started in 2011 is far from over. It won't be a straight line higher, but expect the housing sector to keep adding to real GDP growth in 2017. In other news this morning, initial unemployment claims fell 19,000 last week to 235,000, the lowest level since 1973 and the 89th consecutive week below 300,000. Meanwhile, continuing claims declined 66,000 to 1.977 million, a new cycle low. Plugging these figures into our models suggests another month of solid payroll growth in November, although the first report on November is often revised up in subsequent months. Either way, we think the Fed is firmly on track for raising rates in December. Also today, the Philly Fed index, a measure of sentiment among East Coast manufacturers, slipped to +7.6 in November from +9.7 in October. That still signals growth, however, and it looks like real GDP is growing in the 2.5% to 3% range in Q4.
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http://www.housingwire.com/articles/38746-fhfa-makes-it-official-fannie-freddie-required-to-open-credit-box-to-underserved?eid=311686393&bid=1614273
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some opinion on the real estate market and how to buy property in the coming Trump-era
https://tranio.com/world/news/what-trumps-victory-means-for-the-us-property-market_5219/
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From tax issues, GM: "Between this and California's new and exciting single payer, Crafty is going to have to think real hard about where to live."
Crafty's not going anywhere but if I had to leave beautiful ocean views behind, I would insist on beautiful mountain views. Train at 10,000 ft. Or 14k when you hike up. My 2nd home town. Views of the two highest peaks, 37 acres, <$200k. Colorado taxes.
https://www.zillow.com/homes/for_sale/Meredith-CO-80461/fsba,fsbo_lt/pmf,pf_pt/house,land_type/2106188201_zpid/93408_rid/150000-200000_price/552-736_mp/globalrelevanceex_sort/39.492913,-105.733796,39.035719,-106.858521_rect/9_zm/
(https://photos.zillowstatic.com/p_h/ISe0xd1dmlftw31000000000.jpg)
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Not bad. How long is the drive into Denver?
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Not bad. How long is the drive into Denver?
About 3 hours, if the roads are clear. I actually have ancestors that settled in that area.
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Not bad. How long is the drive into Denver?
90 miles, 90 minutes to the edge of Denver, same as Vail, mostly freeway crossing the continental divide twice. Snow in winter, crisp nights, beautiful summers, 300 days/yr of sunshine. Near Turquoise Lake, surrounded by national forest, mountain peaks, hiking trails.
(http://www.pigseye.com/mm/4corners/leadville2.jpg)
http://www.pigseye.com/mm/4corners/leadville2.jpg
http://thewanderingchick.com/images/colorado-first/colorado%20116.JPG
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A man could go further and do worse.
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Is that by Hwy. 24 to I-70? I was thinking down to "Buenie" and up 285.
Not bad. How long is the drive into Denver?
90 miles, 90 minutes to the edge of Denver, same as Vail, mostly freeway crossing the continental divide twice. Snow in winter, crisp nights, beautiful summers, 300 days/yr of sunshine. Near Turquoise Lake, surrounded by national forest, mountain peaks, hiking trails.
(http://www.pigseye.com/mm/4corners/leadville2.jpg)
http://www.pigseye.com/mm/4corners/leadville2.jpg
http://thewanderingchick.com/images/colorado-first/colorado%20116.JPG
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quote author=G M
Is that by Hwy. 24 to I-70? I was thinking down to "Buenie" and up 285.
Colo 91. Coming from Denver, I-70 then exit at Copper Mountain/Leadville/Independence Pass. Hwy 91 for 20 miles.
From Leadville you can travel the Top of the Rockies Scenic Byway to Vail Valley over the Eagle River (below) or to Aspen over Independence Pass .
https://www.codot.gov/travel/scenic-byways/south-central/top-rockies\
(http://www.losapos.com/pics/42/rocky05.jpg)
Do the drives in daylight!
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Important piece about "affordable housing". This is not rocket science but it is very seldom reported on accurately or helpfully. Almost all we ever hear about is a government imposed solution to a government imposed problem. This makes sense.
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How to Think about Low-Income Housing by KEVIN D. WILLIAMSON June 9, 2017
The problem is on the supply side. Well, raise my rent! Here’s a great big Muppet News Flash from the Washington Post: Average-priced goods are relatively expensive for low-wage consumers. Seriously.
Today’s entry in the great national stupidity sweepstakes comes from Tracy Jan, who is relaying the findings of the latest report from the National Low-Income Housing Association. The report’s basic claim takes a familiar form that falls somewhere between intellectual sloppiness and intellectual dishonesty: People earning the minimum wage cannot afford the average one-bedroom apartment without spending more than 30 percent of their incomes . . . pretty much anywhere in the country. There are some variations on the theme: Sometimes, the rent considered is for a two-bedroom apartment, and sometimes the income considered is the federal poverty line or some figure related to it.
All of these so-called studies — they are not really “studies” in the true sense of the word — suffer from the same error: comparing a low wage to an average rent.
The NLIHA paper Jan relies on is methodologically slightly better than most entries in this genre, but only slightly. The usual technique is to consider minimum wage vs. median rent, as in this much-cited report from Zillow: “Zillow analyzed median rents and the income necessary to afford them in 15,099 cities and towns nationwide. In the least expensive city — Beecher, Michigan — a single renter would need to earn $10.64 per hour to afford the city’s median rent of $532 per month without exceeding the 30 percent limit, significantly above both the federal minimum wage and the Michigan state minimum wage of $8.15 per hour.”
The median rent is the rent at the 50th percentile, i.e. the price point at which half of all rents are lower and half are higher. If you consider the median rent, then you just saw off the cheaper half of the market in its entirety. You know where low-wage people go looking for rental properties? In the half of the market that is below the median, most often. Why ignore the actual rents on the actual apartments that actual minimum-wage workers actually rent? For one thing, acquiring that data is hard work. For another, it does not produce nearly enough angst and hysteria.
The NLIHA paper makes almost the same error, but instead of the median rent in various communities it uses a “fair market rent” calculated by the Department of Housing and Urban Development. That number, according to the report, “is typically the 40th percentile of rents that a family can be expected to pay” when that family is moving today, “not what all current renters are paying on average.” That is significant because, according to HUD’s own reporting, families moving to a new rental property with a relatively short timeline for securing new housing typically pay slightly higher rents than do families that haven’t moved in a while, typically about 6 percent more. So the 40th percentile of rents for families paying a 6 percent premium — that won’t be the dead median, but it will be in the neighborhood. It’s the same basic problem: Comparing the incomes of minimum-wage workers against an average rent that includes all families moving into new rental properties, i.e. putting exclusively low wages on one side of the scale and weighing them against the expenses of households with incomes across the spectrum.
Needless to say — but the report does say it — these comparisons do not “reflect the rent variation within a metropolitan area or nonmetropolitan county.” Which is to say: They’re basically useless. Which you might begin to suspect when you consider the fact that low-income people who can’t afford to live anywhere mostly manage to live somewhere.
How does that happen? Hippie magic? Low-income people who can’t afford to live anywhere mostly manage to live somewhere.
One of the remarkable things about people who don’t have very much money is that they have so much money — which is to say, individuals and families with relatively low wages may not have tons of economic power as individuals, but as a market they are enormously powerful. America’s largest private employer, Walmart, represents a truly enormous accumulation of capital organized to address the problem of providing low-cost goods to people who want or need them. Walmart doesn’t keep its prices low because it loves low-income people, but because low-income people spend a great deal of money, and if Walmart doesn’t give them what they want at the price they want, somebody else will.
How this works in the real world is obvious to everybody who doesn’t write for the Washington Post: The median cost of a new car in the United States is about $34,000, which is well out of reach for most minimum-wage earners. You know how minimum-wage earners get around that problem? They buy cars that cost a heck of a lot less than the median — or they buy used cars, share cars, take the bus, etc. Minimum-wage workers solve the problem of relatively high rents by choosing accommodations that are well under the 50th or 40th percentile — or by having roommates, living with their families, etc. The relationship between the minimum wage and the median or near-median rent is an entirely artificial problem cooked up by organizations that want more federal spending on low-income housing (NLIHA) or by politicians arguing for a higher minimum wage. The latter is especially popular during campaign season.
But there is much more to this than a pliant Washington Post reporter getting taken by an intellectually sloppy propaganda “study.” That happens all the time. There’s a much more interesting aspect to all this that’s worth considering. If you drive around most American cities and their suburbs, you might conclude that there seems to be a fair amount of apartment construction going on. You’d be wrong: Multi-family construction hit a six-year low in May. And the construction that is going on is not, for the most part, meant for the lower-wage end of the rental market. From NLIHA: “Household income has not kept up with the rising cost of rental housing. From the housing crisis of 2007 to 2015, the median gross rent for a rental home in the U.S. increased by 6 percent, after adjusting for overall inflation, while the median income for renter households rose by just 1 percent.”
Why aren’t we building more housing for low-income people?
It’s not because there’s no money to be made selling goods and services to low-income consumers: I doubt the French Laundry does as much business in a year as McDonald’s does in an hour, and Honda makes a lot more money selling economy cars to regular folks than Lamborghini does selling exotic cars to guys with yachts. Walmart makes a heck of a lot more money than Hermes or Louis Vuitton. Somebody out there would love to be the Walmart of low-income housing. What’s stopping them? It isn’t, strictly speaking, an economic of technological problem: Mobile homes (which start around $30,000 new), trendy “tiny houses,” and low-income housing developments abroad all show that we can build decent housing at prices within the reach of those with more modest incomes. But construction is moving toward the higher end of the market.
The basic problem is that politicians won’t let developers build housing for poor people. They don’t put it that way, but that’s what they do. Restrictive zoning and development rules in places such as New York City and San Francisco artificially restrict the supply of housing, often for purely aesthetic reasons. The old housing “covenants” were racial; the new ones are economic, with nice rich liberals in Pacific Heights basically saying: “We like things just how they are, thanks, so why don’t you poors beat feet on down to Stockton or wherever it is we warehouse you, right after you’re done cutting my grass?”
The only way to make housing more plentiful is to make housing more plentiful. What that implies, especially in the case of our big cities, is denser development. But our big-city governments — which are almost exclusively under Democratic control — will not allow that. New York City’s population density is less than half that of comparable European cities (and much less than many comparable Asian cities) and, in spite of its reputation as a city of skyscrapers, fewer than 2 percent of its residences are in buildings 20 stories or taller, much lower than the figure for comparable cities globally. In New York, the progressives aren’t working to allow denser development and, hence, cheaper housing: They’re doing the opposite, proposing to cap the number of tall buildings in the city. Forget New Jersey — there are a fair number of New Yorkers who commute from Pennsylvania. San Francisco, Austin, Los Angeles, the parts of Chicago or Philadelphia you might actually want to live in . . . similar story. They’ll call it historic preservation or “defending the character of the neighborhood” or whatever, but it’s basically economic segregation, which, it’s probably worth noting, is still a pretty good proxy for racial discrimination: San Francisco’s black population has decreased by one-third in recent years, and diversity-loving Portland saw its black population shrink by 11.5 percent in just four years. The only way to make housing more plentiful is to make housing more plentiful.
By way of contrast, our friends at the Los Angeles Times were surprised to learn that Houston, way down in right-wing Texas, is the most diverse city in the United States. Everybody knows what Houston has what people want — jobs — but part of the attraction is something that Houston doesn’t have: zoning laws — not very much, anyway. That makes housing in Houston relatively cheap, which makes the area attractive to all sorts of people, including young people, immigrants, and others earning relatively low wages.
At this point, our progressive friends will ask an inevitable question: “Instead of making the whole country look like Houston, which is a horrifying prospect, why not make it more like lovely San Francisco, and then just raise the minimum wage so that people can afford to live there?”
That really isn’t a caricature. Here are the nice Bernie Sanders enthusiasts at feelthebern.org making basically that argument. There’s some high-test, weapons-grade economic illiteracy built into that question, the short answer to which is: “Raising the minimum wage will not magic more housing into existence, it just sends a larger pool of money chasing the same quantity of goods, which is the classical formula for inflation.”
But the fundamental error at work here informs so much misguided progressive economic thinking that it is worth considering at some length, starting with the basic economics.
There is in economics something called Say’s Law, which could be summarized as: “People produce in order to consume.” What does that really mean? Consider the most basic and primitive economy, a small band of hunter-gatherers at the dawn of mankind. (The date of which we have just moved back by about half again, apparently.) Why did those hunter-gatherers hunt and gather? It was not for the love of hunting and the thrill of gathering, but for a much more obvious reason: to eat. The basic facts of economics are far removed from abstraction: The point of fishing is fish, and the point of picking coconuts is eating them. That holds true until the level of production and social organization is high enough to allow for the emergence of our old friends specialization, the division of labor, and comparative advantage, all of which is another way of saying that once Throg has more fish than he wants to eat and Grug has more coconuts than he wants to eat, they start swapping fish and coconuts between them. And then Warg figures out how to make useful tools out of flint, which is good for a lot of fish and coconuts, and Yawr learns that she’s better at making thorns into fishing hooks than anybody else in the caveman clan, which is of great interest to Fisherman Throg, and eventually you get Corvettes and Google.
It’s the money that confuses people.
Money is basically information technology. It is a record-keeping system. One of the interesting implications of Say’s Law — that we produce in order to consume — is that there are not really any objective economic values: Everything that is produced and consumed is valued relative to everything else that is produced and consumed. If one mackerel is worth six coconuts or four fishing hooks or one-tenth of a flint chopper, then that can get to be a lot for your average caveman to keep up with. But it’s even more complicated than that: Not only is everything that is produced and consumed valued relative to everything else that is produced and consumed, everybody has different preferences, meaning that there are as many economic-value hierarchies as there are people — and those preference hierarchies can change from day to day or second to second. Again, this is easier to understand if you stick to the physical world rather than get mired in abstraction: You know whose kids get sick of apple pie? Those of the guy who owns the apple orchard. There’s no metaphysically “correct” exchange rate between apples and oysters and shoes and arrowheads — everybody likes what he likes and wants what he wants and — here’s the part that gets overlooked — has what he has.
Because we produce in order to consume, we value what we have in terms of the things we want. The emergence of money as a record-keeping technology makes that a lot easier to think about, but money is not the point: The things that money gets are the point.
This is important to understand because those valuations exist independent of money. That’s how inflation happens: We value what we value just the way we value it, and introducing more money into the system does not change those value judgments; it just makes money worth less in terms of fish or coconuts. Conversely, taking money out of the system (less of a problem, usually) doesn’t change those value judgments, either: It just makes money worth more in terms of fish or coconuts. You do not change the underlying value relationships by changing the record-keeping system.
That is where so much progressive economic policy goes wrong. Ignoring the physical facts of supply and demand in the real world, progressives attempt to game the record-keeping system in order to produce advantages for politically favored clients or disadvantages for politically disfavored rivals. That’s what raising the minimum wage is all about: The guy who owns your local Burger King franchise values one hour of 17-year-old fry-guy labor just the way he values it. That calculation is inescapably complex — so complex that it never ends up being an actual calculation — taking into account what the product of that hour’s labor can be traded for and the value of that trade relative to the price of the labor. What an hour’s fry-guy labor is worth is bound up in a vastly complex web of value judgments, and the boss’s value judgment isn’t necessarily the most important one: Customers have a say, too. So does the guy who wants your job and is willing to do it for a little less money or who is able to do it a little bit better for the same money. So does the guy who figures out how much interest to charge the boss on the loan with which he buys his new BMW. All of those things are, for lack of a better word, real.
Money is just how we keep track of them.
Passing a law that says you have to pay the fry-guy x + y instead of x does not change the value of the fry-guy’s labor relative to everything else that is produced and consumed. Not really. Ultimately, it is just a change to the record-keeping system. You could pass a law that says we have to pay 15-year-old baby-sitters eight times what we pay hedge-fund managers or brain surgeons, but that is not going to change how we actually value their respective labor. Government can get pretty aggressive about this stuff, which results in fairly predictable market distortions: When the federal government instituted wartime wage controls, employers looking to get the labor they actually valued on terms consistent with their actual valuation of that labor started paying employees in health insurance and company cars instead of paying them in money. The modern practice of offering “fringe benefits” in the form of paid sick leave, vacation time, and other employee perks is a direct response to the policies of the War Labor Board in the 1940s. (It is a big part of why our health-care system stinks.) The lesson: Even in times of war and the heavy-handed economic interventions associated with them, reality finds a way of sneaking around the record-keeping system.
People who earn low wages don’t just have labor that is lightly valued in terms of money: They have labor that is lightly valued in terms of everything for which money can be traded. That includes, among other things, housing. But it also includes education, health care, cars, shoes, food — and fish and coconuts and flint caveman axes, too. You can mess with the money, but those underlying value hierarchies will reassert themselves, sometimes in obvious ways, sometimes in unexpected ones.
With that in mind, let’s reconsider the question: If we are unhappy about the relationship between the price of certain kinds of labor and the price of renting an apartment, what should we actually do about that? We could try changing the price of labor through legislation, or we could try changing the price of renting an apartment through regulation and subsidies — meaning that we could try messing around with the record-keeping system.
Or we could build more apartments.
— Kevin D. Williamson
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http://www.latimes.com/business/la-fi-associations-squatters-20170715-story.html
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At Ben Carson's HUD it is business as usual:
http://www.nationalreview.com/article/455292/ben-carson-secretary-housing-urban-development-unimpressive-start
:cry:
he wonder if he is too kind hearted to ruffle feathers
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Please post on Bureaucracy and Carson threads
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Existing Home Sales Declined 3.2% in January To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 2/21/2018
Existing home sales declined 3.2% in January to a 5.38 million annual rate, below the consensus expected 5.60 million. Sales are down 4.8% versus a year ago.
Sales in January fell in all the major regions. The drop was entirely due to single-family homes. Sales of condos/coops rose in January.
The median price of an existing home fell to $240,500 in January (not seasonally adjusted) but is up 5.8% versus a year ago. Average prices are up 4.7% versus last year.
Implications: Existing home sales fell for the second straight month in January, as a lack of options for buyers continued to weigh on activity. Sales of previously-owned homes fell 3.2% in January to a 5.38 million annual rate. Going forward it is important to remember that home sales are volatile from month to month. Despite January's weak headline number, sales in 2017 posted their best year since 2006, an upward trend we expect will remain intact. That said, the major headwind for existing homes has been inventories, now lower on a year-over-year basis for 32 consecutive months, and down 9.5% from a year ago. In fact, inventories hit their lowest level for any January since at least 1999, when records began. It's no wonder then that January also posted the largest annual drop in sales since 2014. The months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – rose to a still extremely low reading of 3.4 months in January (from December's record low reading of 3.2 months) as inventories rose and sales slowed. According to the NAR, anything less than 5.0 months (a level we haven't breached since 2015) is considered tight supply. Despite the lack of choices, demand for existing homes has remained remarkably strong, with 43% of homes sold in January remaining on the market for less than a month. Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up median prices, which are up 5.8% from a year ago. The strongest growth in sales over the past year is heavily skewed towards the most expensive homes, signaling that supply constraints may be disproportionately hitting the lower end of the market. Tough regulations on land use raise the fixed costs of housing, tilting development toward higher-end homes. Although some analysts may be concerned about the impact of tax reform on home sales, few homeowners exceed the new thresholds for deductibility. Finally, though mortgage rates may be heading higher, it's important to recognize that rates are still low by historical standards, incomes are growing, and the appetite for homeownership is starting to move higher again.
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Okay, posting this chart into a third thread, my current industry - housing. During the mass-theft of our language, Leftists re-named any housing that is unaffordable - affordable housing. It means subsidized, free or legislated housing. Government interfered housing. Exactly the opposite is true, all housing was affordable to its owners BEFORE the government got involved. Everything that government does to make housing more 'affordable' makes it less affordable for all but the ones who are having someone else (taxpayers and other homeowners) pay for it. The combination of over-regulation and massive money infusions just drive the cost further up and the theft of those resources from the private economy compounds the problem.
(http://www.mauldineconomics.com/images/uploads/newsletters/180303-02.jpg)
Notice in the chart below that it is the high-inflation items that are most influenced by government. The items that are not growing in price are more purely market-driven.
http://www.mauldineconomics.com/frontlinethoughts/inflation-and-honest-data
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New Single-Family Home Sales Increased 4.0% in March To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/24/2018
New single-family home sales increased 4.0% in March to a 694,000 annual rate, easily beating the consensus expected 630,000. Sales are up 8.8% from a year ago.
Sales rose in the West and South, but fell in the Northeast and Midwest.
The months' supply of new homes (how long it would take to sell the homes in inventory) fell to 5.2 months in March from 5.4 months in February. The drop was due entirely to a faster sales pace. Inventories remained unchanged in March.
The median price of new homes sold was $337,200 in March, up 4.8% from a year ago. The average price of new homes sold was $369,900, down 3.8% versus last year.
Implications: New home sales surprised to the upside in March, beating even the most optimistic forecast by any economics group to post the second highest sales pace since 2007. Sales of new homes rose 4.0% in March, and are now up 8.8% from a year ago. Significant upward revisions to prior months also helped pull the Q1 sales pace into positive territory, now up at a 7.1% annualized rate versus the Q4 2017 average. Note that the gains in new home sales have been made in spite of rising mortgage rates over the past year, which many analysts claimed would derail the housing recovery. Looking forward, prospects remain good for further growth over the next few years, though month-to-month volatility is to be expected. Prior to the end of the housing bubble, sales of new homes were typically about 15% of all home sales. They fell to around 6.5% of sales at the bottom of the housing bust, and now have recovered to 11%. In other words, there's plenty of room for growth in new home sales, which means room for home building to grow as well. At first glance, inventories sitting at a post-crisis high would seem to refute this. However, completed units are now at their lowest portion of inventories since recording began back in 1999. And jobs continuing to grow at a healthy pace, wages accelerating, and the tax cut taking effect all support optimism about home building in the years ahead. Although the new tax law trims back the mortgage interest deduction for some high-end homes, the value of the mortgage interest deduction was affected more broadly by the marginal tax rate reductions in the 1980s, during which housing did well. Yes, the new tax law also trims back state and local tax deductions, including the property tax, but we think that's going to affect where people live, not overall home building nationwide. The US economy is looking up, and home sales will continue to trend higher. In other housing news this morning, the national Case-Shiller index reported home prices were up 0.5% in February and are up 6.3% versus a year ago, an acceleration from the 5.6% gain in the twelve months ending February 2017. In the last year, price gains were led by Seattle and Las Vegas. Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.6% in February and is up 7.2% versus a year ago, an acceleration from the 6.7% gain in the twelve months ending February 2017. Finally, on the manufacturing front, the Richmond Fed index, a measure of mid-Atlantic factory sentiment, fell unexpectedly to -3 in April from +15 in March, its first negative reading since late 2016. Look for a rebound into positive territory in the months ahead.
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"Note that the gains in new home sales have been made in spite of rising mortgage rates over the past year, which many analysts claimed would derail the housing recovery."
That works both ways. The Fed says there will 3-4 increases this year so some of these are people motivated to jump ahead of those increases. No slowdown now, but it could still could be after the scheduled increases.
"New single-family home sales increased 4.0% in March to a 694,000 annual rate, easily beating the consensus expected 630,000. Sales are up 8.8% from a year ago."
7-10% of those are built to replace a home by tearing one down, meaning 90+% of the new homes go toward increasing the supply of housing. Housing stock increases at 8%/yr. The population is increasing at 0.7%. Paraphrasing liberals, that's unsustainable.(?) It looks to me like we are (eventually) heading into another (downward) turn in the government tampered, housing market.
http://eyeonhousing.org/2018/03/new-nahb-estimate-58600-single-family-tear-down-starts-in-2017/
https://www.nytimes.com/2016/12/22/us/usa-population-growth.html
Only consistently good economic growth can delay the next housing downturn. Half the market is already declining: "Sales rose in the West and South, but fell in the Northeast and Midwest."
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https://www.youngresearch.com/researchandanalysis/real-estate-researchandanalysis/america-records-fastest-home-price-inflation-since-2006/?awt_l=PWy8k&awt_m=3XAKAav3Z6zlu1V
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Housing Starts Increased 5.0% in May To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/19/2018
Housing starts increased 5.0% in May to a 1.350 million annual rate, easily beating the consensus expected 1.311 million. Starts are up 20.3% versus a year ago.
The gain in starts in May was due to both single-family and multi-unit starts. In the past year, single-family starts are up 18.3% while multi-unit starts are up 25.1%.
Starts in May rose in the Midwest, but fell in the Northeast, West, and South.
New building permits declined 4.6% in May to a 1.301 million annual rate, below the consensus expected 1.350 million. Compared to a year ago, permits for single-family units are up 7.7% while permits for multi-family homes are up 8.6%.
Implications: Housing starts rebounded sharply in May, easily beating consensus expectations to reach the highest level since 2007. Starts rose 5.0% in May to a 1.350 million annual rate, and are now up 20.3% in the past year. The Midwest was entirely responsible for the gain, surging 62.2%, while other regions had declines. This May was unusually strong relative to the trend, while May 2017 had the slowest pace for housing starts in all of 2017 - that pushed the year-over-year gain above trend. We expect further gains in the year ahead, although we expect the pace of gains to slow. One way to cut through the monthly noise is to compare the first five months of 2018 versus the same period in 2017. By that measure starts are up 10.2% from a year ago. New single-family construction continues to be the main driver of trend growth, as the chart to the right demonstrates. We expect further strength from single-family starts in the years ahead, and a continued transition to more growth in single-family construction from multi-family will be good news for the overall economy. On average, each single-family home contributes to GDP about twice the amount of a multi-family unit. The worst news in today's report was that permits for future construction fell 4.6% in May, as both single-family and multi-unit permits showed declines. That said, overall permits are still up a healthy 8% in the past year. Further, the horizon is brightening, with the number of units currently under construction at the highest pace since 2008. Developers are also completing units at the fastest pace since the recession, freeing them up to start construction of new homes. Housing starts are still up in spite of a significant uptick in mortgage rates, which some analysts claimed would derail the housing recovery. As we have argued, higher interest rates can be sustained as long as jobs and incomes are rising. Based on population growth and "scrappage," look for housing starts to rise to an average of about 1.5 million units per year by late 2019. And the longer this process takes, the more room the housing market will have to eventually overshoot that mark. That said, there are a couple factors that seem to be holding this process back. The National Association of Home Builders claims 84% of developers cited labor shortages and the rising cost of building materials as one of their biggest problems in 2018. Both these issues seem set to continue as an increasingly tight labor market keeps the number of job openings in construction elevated and tariffs on lumber, steel, and aluminum drive up input costs. Highlighting these issues, the NAHB index, which measures homebuilder sentiment, fell slightly to 68 in June from 70 in May, primarily reflecting concerns about rising lumber costs that have added an estimated $9,000 to the price of a new home since January 2017. We understand why some would look at this as a negative, but the Homebuilder Index is still at a high level and we remain bullish on housing in the year ahead.
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Housing Starts Increased 0.9% in July To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 8/16/2018
Housing starts increased 0.9% in July to a 1.168 million annual rate, well below the consensus expected 1.260 million. Starts are down 1.4% versus a year ago.
The gain in starts in July was due to both single-family and multi-unit starts. In the past year, single-family starts are up 2.7% while multi-unit starts are down 11.6%.
Starts in July rose in the Midwest and South but fell in the West and Northeast.
New building permits increased 1.5% in July to a 1.311 million annual rate, just above the consensus expected 1.310 million. Compared to a year ago, permits for single-family units are up 6.4% while permits for multi-family homes are up 0.2%.
Implications: Hold off on housing starts for a moment, and take a look at this morning's reading on initial jobless claims which fell last week to 212,000, just 4,000 above the lowest reading since December 1969. Meanwhile, continuing claims fell 39,000 to 1.72 million. These are the types of fundamentals we focus on – rather than prognostications from the pouting pundits of pessimism – to determine if the current "trade war" is really hurting the US economy. With that said, on to housing starts, which eked out a small gain in July, but continue to disappoint. Following June's decline to the slowest pace of starts since the disruptions caused by Hurricanes Harvey and Irma, new construction rose a tepid 0.9% in July, coming in below even the most pessimistic forecast. That said, we don't think this is the beginning of the end for the housing recovery, and it's important to remember that data on housing starts are very volatile from month to month. One way to cut through the noise is to compare the year-to-date pace of starts in 2018 to the same period in 2017. By that measure starts are up 5.9% from a year ago. Now, some analysts are blaming the recent weakness on higher mortgage rates, but if that were the truly the case, the faster pace of starts so far in 2018 wouldn't have happened. But, there are some real headwinds that may temper growth. The National Association of Home Builders said 84% of developers cited labor shortages and the rising cost of building materials as their biggest problems in 2018. And both these issues look set to continue as an increasingly tight labor market keeps the number of job openings in construction elevated and tariffs on lumber, steel, and aluminum drive up input costs. Cost and labor concerns were also echoed in yesterday's NAHB Index, but were offset by strong buyer demand, leaving builder optimism at historically elevated levels. One additional reason to be optimistic going forward is that the pace builders are receiving permits for new construction continues to surpass the pace of actual groundbreaking. This is the reverse of what you would expect if builders saw demand for new units as likely to dry up in the future. Together, the data points towards a trend higher in homebuilding in the year ahead. On the manufacturing front this morning, the Philly Fed Index, a measure of East Coast factory sentiment, fell to +11.9 in August from +25.7 in July, remaining in positive territory and signaling continued optimism from manufacturers, although not as much as in July.
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Make no mistake, it was not a financial crisis. It was all about government intervention preventing markets from working.
Read.it.all.
https://www.realclearmarkets.com/articles/2018/09/11/dont_be_fooled_there_was_nothing_financial_about_the_2008_crisis_103409.html
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Existing Home Sales Rose 1.4% in October To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 11/21/2018
Existing home sales rose 1.4% in October to a 5.22 million annual rate, narrowly beating the consensus expected 5.20 million. Sales are down 5.1% versus a year ago.
Sales in October rose in the West, South, and Northeast, but declined in the Midwest. Sales of both single-family homes and condos/coops rose in October.
The median price of an existing home fell to $255,400 in October (not seasonally adjusted) but is up 3.8% versus a year ago. Average prices are up 2.3% versus last year.
Implications: Existing home sales finally rose in October following six consecutive months of declines. While the hurricane season shifted the timing of activity over recent months, we are now moving towards a more "normal" environment, and the months ahead will give us a clearer picture of housing market health. That said, the biggest problem for existing home sales has been a lack of supply. The months' supply of existing homes – how long it would take to sell the current inventory at the most recent sales pace – declined to 4.3 months in October and has been below 5.0 since late 2015 - the level the National Association of Realtors (NAR) considers tight. The good news is that inventories may finally be turning a corner, rising on a year-over-year basis for the third month in a row after 38 straight months of stagnation and declines. If sellers really are changing their behavior, a reversal in the steady decline of listings we've seen since mid-2015 would be a welcome reprieve for buyers, boosting supply and sales, as well. Even with the current lack of choices, the demand for existing homes has remained remarkably strong, with 46% of homes sold in October remaining on the market for less than a month. Higher demand and a shift in the "mix" of homes sold toward more expensive properties has also driven up the median sales price, which is up 3.8% from a year ago. Many analysts are suggesting rising mortgage rates are signaling the end for the housing market recovery. However, continued strength in the job market, rising wages, and a turnaround in housing inventory should offset higher financing headwinds going forward. It won't be a straight line higher, but any fears that the housing recovery is over are overblown.
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y Kate Davidson and
Andrew Ackerman
Updated Dec. 10, 2018 11:26 a.m. ET
WASHINGTON—The White House is preparing to pick a vice presidential aide and critic of Fannie Mae and Freddie Mac to the post responsible for overseeing the housing-finance companies.
The Trump administration is expected to soon announce that it plans to nominate Mark Calabria to become the director of the Federal Housing Finance Agency, the regulator for the two companies, according to people familiar with the matter. Mr. Calabria currently serves as chief economist to Vice President Mike Pence.
If nominated and confirmed by the Senate, Mr. Calabria would replace Mel Watt, an Obama-appointed official whose term is up in January. The FHFA post will be the final post overseeing the financial sector to turn over to Trump administration control.
No final decision has been announced and President Trump has been known to change his mind when it comes to high-level appointments.
A White House spokeswoman declined to comment. Mr. Calabria didn’t immediately respond to a request for comment.
Mr. Calabria has been critical of some of the basic foundations of the U.S. mortgage market, advocating for elimination of the 30-year fixed-rate mortgage and for banks to hold more of the loans they originate. He would play a pivotal role over the biggest unresolved legacy from the financial crisis: what to do with the failed mortgage-finance companies a decade after their government takeover at the height of the financial crisis.
Mr. Calabria’s nomination would be a loss for the housing industry, which had been pushing the White House to consider someone other than Mr. Calabria, who might advocate for more incremental steps to reduce the companies’ footprints in housing.
The housing market is experiencing its longest slump in four years, weighed down by a combination of rising mortgage rates, higher home prices and a new tax law that reduces incentives for homeownership. Housing industry officials fear abrupt policy changes from Washington could further dampen the industry’s performance.
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White House officials separately have told industry groups they are fleshing out a proposal for how the administration plans to overhaul the companies. Mr. Calabria would likely have the power to implement parts of that plan administratively if Congress doesn’t act with legislation to revamp the companies. Congressional efforts to overhaul housing finance have repeatedly sputtered, most recently this year, and split control of Congress next year makes a deal unlikely.
As FHFA chief, Mr. Calabria could raise the fees the companies charge lenders to guarantee loans, potentially making it more expensive for borrowers to complete a loan backed by Fannie or Freddie. He also could decrease the maximum size of a loan that the companies could purchase, reversing increases during Mr. Watt’s tenure that allowed larger loans to get Fannie and Freddie’s backing.
Such moves could drive more of the mortgage-finance business to the private sector and impact expensive coastal states such as California and New York, according to housing experts.
Mr. Calabria has in the past called for abolishing Fannie and Freddie and has also rejected piecemeal changes to the companies. “If we choose to retain the current system or make only cosmetic changes, we guarantee a repeat of the recent recession,” he told House lawmakers in 2013.
Though recent efforts to overhaul housing finance have centered around maintaining the traditional 30-year fixed-rate mortgage at low rates, Mr. Calabria has said such loans are inherently risky and urged greater reliance on loans that have far shorter maturities.
Mr. Calabria also has questioned the legality of the current arrangement by which the Treasury Department collects the profits of Fannie and Freddie in exchange for its nearly open-ended support of the mortgage-finance giants since the 2008 crisis. That position sides with shareholders of the firms who have challenged in court the FHFA’s administration of the companies.
A housing-policy expert, Mr. Calabria was previously director of financial regulation studies at the libertarian Cato Institute. He also served as a senior staffer on the Senate Banking Committee from 2001 to 2009.
—Peter Nicholas contributed to this article.
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https://www.bloomberg.com/news/features/2019-02-14/zillow-wants-to-flip-your-house?srnd=businessweek-v2
Zillow is part of a new breed of high-tech home flippers, sometimes called “iBuyers,” that also includes Silicon Valley startups and a small group of adventurous real estate brokerages that have instant-offer operations. Armed with Wall Street and Silicon Valley capital and algorithms designed to make granular predictions about home prices, these investors are buying homes on a massive scale
[Where is our PP for comment?]
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Let's see if we can lure him back! I just emailed him.
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I didn't realize FHA still requires only 3 1/2% down, Fannie Mae 3% down. The same government made savings obsolete says you need no equity to own a home. What happens after periods where home prices are driven up artificially for too long? Did we learn nothing from the last real estate crisis?
The government starts with 97% ownership of your house and your share quickly goes to zero if there is any downward fluctuation or trend. You and a whole lot of your neighbors are upside down in your mortgage with the slightest downward move and real estate values fluctuate all the time.
These fluctuations aren't always in random directions; downward movement can be systemic. The Fed and other parts of the government actually want home values to drop, if you judge them by their actions. The Fed wants interest rates up and has been actively increasing them. When that hits mortgage rates, home prices go down (assuming all other things remain equal). Federal taxation put limits on so-called SALT deductions, directly increasing the cost of housing many with potential to knock down values in some markets and price ranges. It is economically dangerous to federally insure mortgages and make (near) zero equity loans in a market widely described as "cooling".
The only thing that made values go up beyond recovery from the previous crash is increasing wages and prosperity. Voters signaled in 2018 they want an end to that.
"HomeReady™ [Fannie Mae] applies to certain low-income census tracts; and areas with high minority concentrations. ... The Conventional 97 program is meant to help homebuyers who might other qualify for a loan but lack the resources to make a five percent down payment."
https://themortgagereports.com/16976/97-mortgage-low-downpayment-3-mortgage-rates
What could possibly go wrong?
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of individualism self reliance and responsibility VERSUS the endless victom, race , expecting big brother to do all the paternal care on display:
https://townhall.com/tipsheet/cortneyobrien/2019/05/22/ben-carson-hearing-n2546669
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https://www.theepochtimes.com/moving-out-chinese-investors-flee-us-real-estate_3011329.html?utm_source=Epoch+Times+Newsletters&utm_campaign=b3ef5a181f-EMAIL_CAMPAIGN_2019_07_22_09_19&utm_medium=email&utm_term=0_4fba358ecf-b3ef5a181f-239065853
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https://www.theepochtimes.com/moving-out-chinese-investors-flee-us-real-estate_3011329.html?utm_source=Epoch+Times+Newsletters&utm_campaign=b3ef5a181f-EMAIL_CAMPAIGN_2019_07_22_09_19&utm_medium=email&utm_term=0_4fba358ecf-b3ef5a181f-239065853
As the article says, Chinese currency is declining, investment money is disappearing and US house prices are increasing, so they buy less. That reflects on weakness in China and strength in the US.
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US existing-home sales spike to a 5-month high, bucking signs of an impending recession
https://markets.businessinsider.com/news/stocks/us-existing-home-sales-increase-5-month-high-recession-implication-2019-8-1028463924
1st month of Q3, housing spiked upward. WHO KNEW? All the news is that Trump and his advisers are being pressured to admit a recession that hasn't happened.
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"The federal government has dramatically expanded its exposure to risky mortgages, as federal officials over the past four years took steps that cleared the way for companies to issue loans that many borrowers might not be able to repay. Now, Fannie Mae, Freddie Mac and the Federal Housing Administration guarantee almost $7 trillion in mortgage-related debt, 33 percent more than before the housing crisis, according to company and government data. Because these entities are run or backstopped by the U.S. government, a large increase in loan defaults could cost taxpayers hundreds of billions of dollars."
https://www.washingtonpost.com/business/economy/federal-government-has-dramatically-expanded-exposure-to-risky-mortgages/2019/10/02/d862ab40-ce79-11e9-87fa-8501a456c003_story.html
"A growing number of homeowners face debt payments that amount to nearly half of their monthly income, a threshold many experts consider too steep. Roughly 30 percent of the loans Fannie Mae guaranteed last year exceeded this level, up from 14 percent in 2016, according to Urban Institute data. At the FHA, 57 percent of the loans it insured breached the high-risk echelon, jumping from 38 percent two years earlier."
"The binge in high-risk lending"...?? - What the hell are we thinking? Have we learned absolutely nothing - again?? PP: comment?
My view: Govt should focus on making way for private income growth. If they did, housing would take care of itself.
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https://geopoliticalfutures.com/wp-content/uploads/2019/11/WG_US-Farm-Bankruptcies.png?utm_source=newsletter&utm_medium=email&utm_term=https%3A%2F%2Fgeopoliticalfutures.com%2Fwp-content%2Fuploads%2F2019%2F11%2FWG_US-Farm-Bankruptcies.png&utm_content&utm_campaign=PAID+-+Everything+as+it%27s+published
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OK Boomer, Who’s Going to Buy Your 21 Million Homes?
Baby boomers are getting ready to sell one quarter of America’s homes over the next two decades. The problem is many of these properties are in places where younger people no longer want to live.
https://www.wsj.com/articles/ok-boomer-whos-going-to-buy-your-21-million-homes-11574485201
The U.S. is at the beginning of a tidal wave of homes hitting the market on the scale of the housing bubble in the mid-2000s. This time it won’t be driven by overbuilding, easy credit or irrational exuberance, but by an inevitable fact of life: the passing of the baby boomer generation.
The Boomer Bubble
Seniors are expected to vacate roughly 21 million homes over the next two decades. That’s more than the amount of new properties sold during a previous two-decade period that ended with a housing boom.
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https://www.revealnews.org/article/unmasking-the-secret-landlords-buying-up-america/
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"Healthy, vibrant communities aren’t created by the ghosts of offshore bank accounts. Americans deserve to know who their neighbors are."
Something I never knew or thought about.
I wonder how many are foreigners ?
Yet it is public record to look up my name when I lived in my house and how much I paid....
I agree that this is a problem .
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https://www.revealnews.org/article/unmasking-the-secret-landlords-buying-up-america/
"All-cash transactions have come to account for a quarter of all residential real estate purchases,"
- All-cash transaction means the buyer is one property ahead in terms of debt. Borrow against what you already own and you negotiate the price with cash. Cash is the only way to buy below market and 'market' prices right now in many areas seem to me to be too high to make sense.
"nearly 3 million U.S. homes and 13 million apartment units are owned by LLC, LLP, LP or shell companies – levels of anonymous ownership not seen in American history. "
- LL* means 'limited liability'. Everyone should do that. Costs $155 in MN, $50 in Colo. Yes you can list the mailing address as an attorney's office but I have never found the owner hard to find. People find me pretty easily. I don't know how you assert your ownership without publicly listing that you own the underlying company.
If you rent it out (in Mpls) you must disclose, person of responsibility, birth date, address (not a PO Box), email, cell phone of that person, etc. Not exactly anonymous.
http://www.minneapolismn.gov/www/groups/public/@regservices/documents/webcontent/wcms1p-143382.pdf
"First-time homebuyers are denied the opportunity to buy affordable homes with bank loans because those properties already have been scooped up by shell companies."
- Oh good grief. One buyer gets a 30% discount for cash as is and another 'buyer' doesn't have the money or even a significant down payment, offers a myriad of contingencies including buyer's inspection (rigged to lower the price), contingent on appraisal and securing the loan, and has about ten cents in "earnest" to hold the property through a long, difficult process. The market can't sort that out the difference?
"Tenants can’t figure out to whom to complain when something goes wrong. Local officials don’t know whom to hold responsible for code violations and neighborhood blight. ... With anonymity comes impunity, and, for vulnerable tenants, skyrocketing numbers of evictions."
- Those points are contradictory. You can't evict anonymously, you must list a plaintiff. Cities CAN and do hold landlords accountable. The CITY is the landlord's biggest fear, (along with the IRS). Most evictions are caused by non-payment of rent. That skyrockets in a welfare mentality where people think they shouldn't have to pay and cities and states think it should be really hard to get your property back in default.
“It reminds me of Moldova after the fall of the Soviet Union: oligarchs running wild, stashing their gains in buildings,”
- What?
“Among the tenants Hannity’s property managers sought to evict,” The Post reported, were “a double amputee who had lived in an apartment with her daughter for five years but did not pay on time after being hospitalized; and a single mother of three whose $980 rent check was rejected because she could not come up with a $1,050 cleaning fee for a bedbug infestation.”
- Tough situation - and tough journalism. Is double amputee hospitalized with bed bug infestation indicative of the housing problems in America?? Circumstances remove the obligations of a contract? Eviction papers actually help people to get the financial assistance they need from agencies and charitable organizations. Must it all come from the landlord? I just evicted a tenant who ran into hard times. I let her fall 3 years behind and pay nothing at all her last 3 months before I filed. Every time I called her she just had another surgery "yesterday". Could be true but she looked pretty good in court. How long should you wait? Forever or else you are a money grubbing ogre if you ever want your property back? In what other business can you steal the merchandise and keep coming back and steal more and the law prevents the proprietor from stopping you?
The attack on Sean Hannity is unwarranted. He has people responsible and accountable for all facets of running his properties. With the law and the press 100% against the landlord, why would you put up a banner that says 'sue me here'? Like any other incorporated business, your claim against a company is generally limited to the assets of the company. What is so unique about that? Did we get to sue each individual owner of Boeing, Delta, United, when the airplane went down? Who would invest if you could?
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"- LL* means 'limited liability'. Everyone should do that. Costs $155 in MN, $50 in Colo. Yes you can list the mailing address as an attorney's office but I have never found the owner hard to find. People find me pretty easily. I don't know how you assert your ownership without publicly listing that you own the underlying company."
Heh. Tell me who really owns "Skinwalker Ranch" in Utah and I'll buy you a steak dinner. The person, not the shell company.
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I am not sure I understand
All of a sudden Sean Hannity is named at the end of article
Is he the one who owns the properties used as an example in the LLC talked about?
https://www.celebritynetworth.com/richest-politicians/republicans/sean-hannity-net-worth/
Got to admire his salesmanship skills...... he could sell an eskimo an ice cream cake.........
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Yes, There Was a Housing Bubble, But Not Now To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 2/24/2020
One of the worst bipartisan policy decisions in the past generation was the aggressive government push in the 1990s and 2000s to promote homeownership, beyond what the free market could handle. Policymakers encouraged Fannie Mae and Freddie Mac to gobble up lots of subprime debt, in turn boosting lending to borrowers who couldn't handle their loans.
But now a bizarre idea is making the rounds that, looking back on it, maybe there wasn't a housing bubble at all!
The theory is that home prices are already up substantially from where they were at the prior peak during the "bubble," so maybe those "bubble" prices were not that high after all. Compared to the prior peak in 2007, the national Case-Shiller index is up 15%, while the FHFA index, which measures the prices of homes financed with conforming mortgages, is up 24%.
But a great deal has changed since the prior peak, which makes it much easier to justify the higher prices of today. To assess the "fair value" of homes, we use a Price-to-Rent (P/R) ratio, which compares the asset value of all owner-occupied homes (calculated by the Federal Reserve) to the "imputed" rental value of those homes (what owners could fetch for their homes if they rented them, as calculated by the Commerce Department). Think of it like a P/E ratio: the price of all owner-occupied homes, compared to what those same homes would earn if they were rented.
For the past 40 years, the median P/R ratio is 16.0. At the peak of the housing bubble, the ratio hit a record-high of 21.4. In other words, prices were 34% above fair value. During the housing bust, the ratio plunged to 14.1, meaning national average home prices were 12% lower than you'd expect given rents. Temporarily, that made sense: prices had to get below fair value to clear the excess inventory.
Today, the P/R ratio stands at 17.0, which means home prices are 6% above their long-term average relative to rents. That's well within the normal historical range, and no reason to sell.
Comparing home values to replacement costs shows a similar pattern. That median ratio in the past forty years has been 1.58, compared with 1.59 today (almost exactly fair value) and 1.94 at the peak in 2005 (23% above fair value).
Either way you slice it, bubble era home prices really were far in excess of what you'd expect given rents and replacement costs, while prices today look reasonable.
We expect home prices to keep moving higher, but not as fast as in the last few years. Meanwhile, the climb in average home prices will diverge at the local level. Due to the limit on state and local tax deductions, expect high tax states to show flat home prices (on average), while low-tax states experience stronger price gains.
One of the reasons we remain optimistic about economic growth in general is the continued recovery in home building.
Housing starts bottomed in 2009, when builders began just 554,000 homes, 73% below the 2.073 million pace at the peak of the housing boom in 2005. Since 2010, the number of housing starts has increased in every year, hitting 1.300 million in 2019.
Starts have been much higher in recent months due to the unusually mild winter weather throughout much of the country. And while we may see a pullback in the coming months as weather patterns return to normal, we anticipate at least a few more years of gains in home building. Given population growth and scrappage (knock downs, fires, floods, hurricanes, tornadoes...etc), builders have simply started too few homes since the bust. Now it looks like they need to overshoot to make up for lost time. In turn, expect new home sales to follow starts higher.
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https://moneymaven.io/mishtalk/economics/as-unemployment-claims-rise-so-do-missed-mortgage-payments-dws51EfOMEWsaayJG7OY1A
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Data Watch
________________________________________
New Single-Family Home Sales Declined 15.4% in March To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 4/23/2020
New single-family home sales declined 15.4% in March to a 627,000 annual rate, below the consensus expected 644,000. Sales are down 9.5% from a year ago.
Sales fell in all major regions.
The months' supply of new homes (how long it would take to sell all the homes in inventory) rose to 6.4 months in March from 5.2 months in February. The increase was due to both the slower pace of sales and an increase in inventories of 9,000 units.
The median price of new homes sold was $321,400 in March, up 3.5% from a year ago. The average price of new homes sold was $375,300, up 0.7% versus last year.
Implications: Forget about new home sales for a minute. Workers filed 4.43 million new claims for unemployment insurance last week, continuing the trend of catastrophically high readings we've seen since government shutdowns of the economy to fight the Coronavirus began a little over a month ago. The (semi-)good news is that initial claims fell 810,000 from the week prior and it looks like we saw the peak three weeks ago at 6.87 million. Continuing claims, data which lags initial claims by one week, hit a record high of 15.98 million and are likely to rise again in next week's report. Plugging these figures into our models suggests the unemployment rate for April will be in the vicinity of 18.0%. Turning back to the housing market, new home sales posted the largest monthly decline since 2013 as the effects of shutdowns and social distancing began to hit activity. We expect sales to continue to weaken in April as well as buyers stay home, followed by an eventual rebound as the case curve continues to bend and strict public health measures are gradually rolled back. One piece of good news for potential buyers is that Fed liquidity measures have helped reverse the spike in mortgage rates that happened in aftermath of the US virus outbreak, boosting affordability. The inventory of homes for sale rose by 9,000 units in March, probably the result of potential buyers backing out of planned purchases as the economic fallout began. However, there is no significant overhang of finished new homes waiting for buyers. In fact, all the increase in unsold new homes in the past year has been for homes where construction has yet to start. The inventory of unsold homes that are either under construction or finished is still down from a year ago. Given the downward pressure that lockdowns and social distancing are having on construction, we do not expect an oversupply of housing anytime soon. In other recent housing news, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.7% in February and is up 5.7% from a year ago. Finally, on the manufacturing front, the Kansas City Fed index fell to -30 in April from -17 in March, hitting its lowest level on record going back to 2001. This mirrors other regional Fed surveys, which are signaling continued pain for the factory sector.
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The Mortgage Market Never Got Fixed After 2008. Now It’s Breaking Again.
Many mortgage companies are nonbanks that don’t have deposits or other business lines to cushion them amid the coronavirus pandemic
As big banks have refocused their mortgage operations on wealthier borrowers, nonbanks have stepped into the void, often representing the only path to a mortgage for buyers of lesser means. Homes in Leander, Texas. ILANA PANICH-LINSMAN FOR THE WALL STREET JOURNAL
By Ben Eisen
Updated May 9, 2020 5:30 am ET
Ann Winn called her mortgage company to see about pausing payments in late March, soon after she had to shut down the salon she owns in a suburb of Austin, Texas.
What followed, she said, were hours of tense calls and emails with Freedom Mortgage Corp. The company agreed to let her skip a few payments—but only if she would repay them all in a lump sum this summer. Ms. Winn didn’t know when she would be back at work, so she declined.
Nonbank share of mortgage market
Sources: Urban Institute (servicing); Inside MortgageFinance (origination)
%
Servicing
Origination
2006
’08
’10
’12
’14
’16
’18
0
10
20
30
40
50
60
Originationx2015x47.6%
“I’m just not going to pay my other bills,” she said, “because I don’t want to lose my home.”
The coronavirus pandemic has delivered a gut punch to the economy and the mortgage market is particularly exposed. The virus has forced millions of homeowners to suddenly stop making payments. At the same time, many mortgage companies aren’t built to handle an economic collapse or help their customers through it. Many of them are nonbanks that don’t have deposits or other business lines to cushion them, and they have raised concerns that fronting payments for struggling borrowers such as Ms. Winn will quickly drain them of capital.
Years ago, the financial crisis revealed the folly of churning out “liar loans.” Regulators cracked down, and mortgages made today are generally more conservative. What regulators didn’t focus on was the strength of the mortgage companies themselves. Though the loans are sturdier, the infrastructure largely didn’t change.
Ann Winn, at her home in Leander, Texas, didn’t know when she would be back at work, so she declined an offer by her mortgage company to skip a few payments and repay them all in a lump sum this summer.
FOTO: ILANA PANICH-LINSMAN FOR THE WALL STREET JOURNAL
Over the past decade, the business of originating and servicing mortgages has moved back toward nonbanks such as Freedom Mortgage. Nonbanks made 59% of U.S. mortgages last year, the highest level on record, according to industry-research group Inside Mortgage Finance. They also made a large proportion of U.S. mortgages before 2008 but many went bust when the crisis hit.
Many nonbanks, like United Wholesale Mortgage and loanDepot.com LLC, are barely known outside the industry but dominant inside it. Quicken Loans Inc., one of the few with wide name recognition, ranked as the largest mortgage lender by originations for the first time this year, elbowing out Wells Fargo WFC -2.58% & Co. and JPMorgan Chase JPM -2.94% & Co.
As big banks have refocused their mortgage operations on wealthier borrowers, nonbanks have stepped into the void, often representing the only path to a mortgage for buyers of lesser means. Their retreat could lock many would-be borrowers out of homeownership and make it harder for the economy to bounce back.
Nonbanks also have expanded in the crucial business of servicing mortgages. They now service roughly half of them, five times their share from a decade ago, according to the Urban Institute.
Nonbank share of mortgage originations byloan type, monthly
Source: Urban Institute
%
Fannie
Freddie
Ginnie
2013
’14
’15
’16
’17
’18
’19
’20
10
20
30
40
50
60
70
80
90
100
In good times, that task involves collecting payments from borrowers and handing them to investors that own the loans, plus handling odds and ends such as taxes. In exchange, the servicer gets a slice of the interest. In bad times, servicers are supposed to create new payment plans for struggling borrowers, which takes much more work and expense. When all else fails, servicers initiate foreclosures.
For years after the crisis, regulators, mortgage executives and consumer advocates discussed how to improve this market. They floated ideas about changing the way servicers are paid so they collect a bigger fee when a loan becomes delinquent. They also considered having the servicers fund a central utility to handle defaulted mortgages. But those ideas never gained much traction, according to people involved.
“There was a big focus on the consumer experience,” said Michael Bright, the former head of government mortgage corporation Ginnie Mae, which backs Federal Housing Administration loans. “But there wasn’t much focus on the quality of a servicer.”
About 7.5% of borrowers had obtained forbearances as of April 26, according to a survey by the Mortgage Bankers Association. Homes in Leander.
PHOTO: ILANA PANICH-LINSMAN FOR THE WALL STREET JOURNAL
The structure of the U.S. mortgage market is much the same as it was before the crisis. Pools of mortgages are packaged and sold to investors around the world. When a borrower stops paying, servicers are caught in the middle, forced to front payments to the investor, even though they aren’t receiving money from the borrower.
The servicer will eventually get reimbursed if the mortgage is one of the roughly two-thirds guaranteed by Fannie Mae, FNMA -0.59% Freddie Mac FMCC -0.93% or Ginnie Mae. But that is a slow process and in some cases can take years.
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Lawmakers recently outlined how struggling borrowers can request so-called forbearance plans, by which they pause their monthly payments. If the mortgage is government-backed, then companies are generally supposed to grant the request.
That has thrust both banks and nonbanks into the position of cushioning the blow for their customers. Nonbanks, which depend on short-term bank loans to fund their daily operations, are struggling to do so.
“This is a systemic problem,” said Karan Kaul, a senior research associate at the Urban Institute.
About 7.5% of borrowers had obtained forbearances as of April 26, according to a survey by the Mortgage Bankers Association, or MBA. That means about 3.8 million homeowners are skipping their monthly payments with permission.
How Fannie and Freddie Prop Up America's Favorite Mortgage
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How Fannie and Freddie Prop Up America's Favorite Mortgage
Fannie Mae and Freddie Mac back about half of new mortgages in the U.S. Now, talks are heating up about reshaping or shrinking the two companies, a move that could impact millions of Americans. Photo: Heather Seidel/The Wall Street Journal
If forbearance rates reach the mid-to-high teens, few servicers are expected to have the cash to meet their advance obligations, according to Warren Kornfeld, who covers nonbank mortgage companies at Moody’s Investors Service. As a result, many are now trying to gain access to additional cash.
Mortgage servicers, both banks and nonbanks, were on the hook for about $4.5 billion a month in servicing advances on government-backed loans because of forbearances as of Thursday. That is roughly 25 times more than they were on the hook for at the end of February, according to Black Knight Inc., BKI 1.22% a mortgage-data and technology firm.
Ms. Winn and her husband bought their Leander, Texas, home in 2014 using the FHA loan program, which is meant for first-time and modest-income buyers. Later, they learned their lender had passed the servicing rights to Freedom.
Nick Swartz, left, Ann Winn and their daughter, Jasnie, take their dog and cat for a walk in the neighborhood, Thursday.
PHOTO: ILANA PANICH-LINSMAN FOR THE WALL STREET JOURNAL
Ms. Winn had little interaction with Freedom until calling in March. A representative told her she could skip payments for April, May and June, but would then have to pay four months all at once. Another representative told her that she could later ask to tack the missed payments onto the end of the loan, but that there was no guarantee she would be approved.
In late April, she received a letter saying she had been automatically opted into the first plan. She intends to keep making her monthly payments anyway, since she doesn’t want to pay for four months at once.
Chief Executive Stanley Middleman said in a statement that Freedom is “managing a great deal of unplanned activity” but plans to fix any issues that arise.
“We are doing the best we can and will continue to do so,” Mr. Middleman said.
The stimulus bill provided little detail on when borrowers would have to make up deferred payments. But the regulator that oversees Fannie Mae and Freddie Mac, the government-sponsored mortgage companies that back conventional loans, clarified recently that its homeowners won’t have to make up their missed payments all at once. The FHA program has made similar comments.
Industry representatives say that forbearance plans were rolled out on a vast scale very quickly, which led to confusion among both servicers and borrowers. Bob Broeksmit, CEO of the MBA, acknowledged that there have been issues between servicers and borrowers but said that recent guidance is likely to bring more clarity.
Number of nonbank mortgage companies
Source: Conference of State Bank Supervisors
2012
’14
’16
’18
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
The borrowers the nonbanks serve are often the ones that most need help. Last year, nonbanks made 86% of FHA mortgages. As of Thursday, roughly 13% of FHA loans had forbearances, according to Black Knight.
Nonbanks say they have spent significant time bolstering their businesses for a downturn. Some said in recent earnings reports that they now expect the coronavirus fallout to be smaller than they initially feared. Still, Ginnie Mae has set up a lending facility to help companies that are out of options. Fannie Mae and Freddie Mac are only requiring servicers to advance four months’ worth of payments.
The health of nonbanks ultimately depends on keeping their funding. Worried about the surge in borrowers seeking relief, some banks have recently curtailed this lending.
Index of mortgage-credit availability
Source: Mortgage Bankers Association
Note: March 31, 2012 = 100
2013
’14
’15
’16
’17
’18
’19
’20
80
100
120
140
160
180
200
Mortgage companies, both banks and nonbanks, are also pulling back on some lending to borrowers. Credit availability in April fell to its lowest since 2014, according to the MBA.
Lenders are cutting back in particular for borrowers with lower credit scores, according to the Urban Institute. But the contraction in credit is spreading to all types of loans—from jumbo mortgages to cash-out refinances.
Beverly Harris was in the process of buying a home in the Palm Springs, Calif., area in March when the type of unconventional loan she had been pre-approved for suddenly became unavailable.
The retiree, who has a high credit score and was planning to put 20% down, was expecting to use a loan that qualifies the borrower based on assets rather than income. She estimates she checked with 15 different mortgage companies and banks. All of them had stopped making those types of loans.
For now, Ms. Harris is staying put in her rental.
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New Single-Family Home Sales Increased 0.6% in April To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 5/26/2020
New single-family home sales increased 0.6% in April to a 623,000 annual rate, easily beating the consensus expected 480,000. Sales are down 6.2% from a year ago.
Sales rose in the Northeast, Midwest, and South, but fell in the West.
The months' supply of new homes (how long it would take to sell all the homes in inventory) fell to 6.3 months in April from 6.4 months in March. The decline was due to both the faster pace of sales and a decrease in inventories of 6,000 units.
The median price of new homes sold was $309,900 in April, down 8.6% from a year ago. The average price of new homes sold was $364,500, down 5.4% versus last year.
Implications: New home sales surprised to the upside in April, easily beating consensus expectations and surpassing even the most optimistic forecast by any economics group. The headline gain of 0.6% might not look impressive, and at any other time it probably wouldn't be, but remember that April was the height of lockdowns and social distancing nationwide. That said, sales are still down 19.5% from January and 6.2% from a year ago, so the housing market is clearly still feeling some pain, though today's report signals it may be beginning to stabilize earlier than expected. Affordability is probably the main factor putting a floor under activity. Fed liquidity measures have helped fully reverse the spike in mortgage rates that happened in aftermath of the US virus outbreak, and rates now once again sit near a record low. Meanwhile, the median sales price for a new home has been falling the past two months and is now down 8.6% versus a year ago. However, this doesn't seem to be due to a significant overhang of finished new homes waiting for buyers. In fact, all the increase in the inventory of unsold new homes in the past year has been for homes where construction has yet to start. The inventory of unsold homes that are either under construction or finished is still down from a year ago. Given the downward pressure that lockdowns and social distancing are having on construction, we do not expect an oversupply of homes anytime soon. As a result, home prices bounce upward in the next several months. In other recent housing news, the Case-Shiller national home price index, which measures prices for existing single-family homes, rose 0.5% in March and was up 4.4% from a year ago. In the past year, prices are up the fastest in Phoenix and Seattle, while up the slowest in Chicago and New York. Meanwhile, the FHFA index, which measures prices for homes financed by conforming mortgages, increased 0.1% in March and is up 5.9% from a year ago.
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https://youtu.be/aFvf66HHIYA
It keeps getting more complicated the more I try to simplify.
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Australian rural property booms as homebuyers flee cities
https://asia.nikkei.com/Business/Business-trends/Australian-rural-property-booms-as-homebuyers-flee-cities
Manhattan vacancy rate climbs, and rents drop 10%.https://www.nytimes.com/2020/08/18/nyregion/nyc-vacant-apartments.html?action=click&module=Top%20Stories&pgtype=Homepage
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https://youtu.be/aFvf66HHIYA
It keeps getting more complicated the more I try to simplify.
Let me know what you figure out.
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https://youtu.be/aFvf66HHIYA
It keeps getting more complicated the more I try to simplify.
Let me know what you figure out.
I like the idea of the representative contact being a law firm, making the connection fall under attorney client privilege. Doing that out of state doesn't seem to add a layer of separation because of the need to register the company to do business in my state.
I also need to be licensed by the City. I can pay someone else to do that for me but then they need to be instantly reachable and pass on to me.
Part of my business is to be reachable, by tenants, by service people, by suppliers, and by the City. This is a step where privacy is lost. I can hire that out to an agent to list as contact, but still, I'm the one running the business, responding to the messages.
Homeowner property needs to be in your own name to all the tax benefits. Between that and the City licensing, becoming invisible is not looking easy.
https://www.irs.gov/taxtopics/tc701#:~:text=If%20you%20have%20a%20capital,Home%20provides%20rules%20and%20worksheets.
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There are still steps you can take to avoid the lovely street festivities that are becoming popular in Minnetroit's metro area.
https://youtu.be/aFvf66HHIYA
It keeps getting more complicated the more I try to simplify.
Let me know what you figure out.
I like the idea of the representative contact being a law firm, making the connection fall under attorney client privilege. Doing that out of state doesn't seem to add a layer of separation because of the need to register the company to do business in my state.
I also need to be licensed by the City. I can pay someone else to do that for me but then they need to be instantly reachable and pass on to me.
Part of my business is to be reachable, by tenants, by service people, by suppliers, and by the City. This is a step where privacy is lost. I can hire that out to an agent to list as contact, but still, I'm the one running the business, responding to the messages.
Homeowner property needs to be in your own name to all the tax benefits. Between that and the City licensing, becoming invisible is not looking easy.
https://www.irs.gov/taxtopics/tc701#:~:text=If%20you%20have%20a%20capital,Home%20provides%20rules%20and%20worksheets.
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Commercial properties hit by the economic effects of coronavirus could have lost as much as one-quarter of their value or more, laying bare the scale of the damage being wrought across American malls, hotels and other commercial buildings. Evidence emerging in the commercial mortgage-backed securities (CMBS) market from recent appraisals also raises questions over the value of the collateral backing commercial mortgages throughout the financial system. Properties that have gotten into trouble are being written down by 27 per cent on average, data from Wells Fargo shows. New appraisals are triggered when a commercial property owner starts to have trouble paying the mortgage, and the loan is handed to a “special servicer” that could eventually seize the property on behalf of CMBS holders. “It’s a big number,” said Lea Overby, an analyst at Wells Fargo. “This is material.”
- via Financial Times
As the virus goes on, this can only get worse. (?)
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Uh oh , , ,
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https://www.powerlineblog.com/archives/2020/11/fort-apache-minneapolis.php
I'm going to guess down.
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When do foreclosures begin again? Once in a while I check for this market changing event.
"The ban has now been extended to March 31, 2021. Before extensions, the original order expired on Jan. 31, 2020. Pres. Joe Biden pushed the CDC to extend the deadline, but further changes could be made."
It's sort of like rightsizing interest rates. We know what we are doing is wrong. We know that the longer we go without fixing this, the greater the carnage will be when we do. So we put it off, forever?
At some point, if you can't foreclose, you can't offer new loans. If you can't evict, you can't put a property up for rent. If you can't do either, the housing market as we know it ends.
Foreclosure situations don't go away. If you are behind, most likely you only fall further behind by waiting. Lenders and homeowners only go further underwater. The longer everyone is banned in the country, the greater the rush is when they do restart. When they all go at once, the price gets knocked down. In the last foreclosure crisis I was buying property at 15 cents on the dollar to their previous sale. Look forward to doing it again, but this is no way to govern or manage a market.
Current moratorium ends March 31. At that point it has been on for more than one year. That means maybe 500,000 to 2 million homes will be in foreclosure status (in the context of 5.5 million total homes sold per year). Foreclosed homes generally get sold for cash, not mortgage, further driving their price down. If delayed again, this only gets worse.
https://www.cdc.gov/coronavirus/2019-ncov/more/pdf/CDC-Eviction-Moratorium-01292021.pdf
https://www.statista.com/statistics/798766/foreclosure-rate-usa/
https://www.statista.com/statistics/226144/us-existing-home-sales/
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It is in third world countries where you can't legally enforce a contract. More importantly, it's Fascist governments that dictate what private businesses must and can't do.
https://www.news4jax.com/money/2021/03/29/the-federal-eviction-moratorium-has-been-extended-whats-that-mean-to-you/
With an estimated 4 million Americans behind on rent, the Centers for Disease Control and Prevention has extended the eviction moratorium imposed during the pandemic until the end of June.
The moratorium, which halted evictions for people unable to make their rent payments, was set to run out on Wednesday. But the CDC said it felt families across the country needed more time and relief.
The extension was aimed at avoiding having people move in with loved ones or into homeless shelters as the risk of transmission of COVID-19 remains high.
If a tenant meets criteria laid out by the federal government, they’re protected from being evicted.
While the moratorium keeps landlords from forcing tenants out of their homes, it does not stop landlords from filing eviction paperwork in court.
The moratorium isn’t letting tenants off the hook. Once it’s lifted, back rent will still be owed.
Even though the federal moratorium has been extended for almost a year now, [source in the story said] "this will likely be the last time it happens".
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"With an estimated 4 million Americans behind on rent, the Centers for Disease Control and Prevention has extended the eviction moratorium imposed during the pandemic until the end of June."
Where in the US Constitution or federal statute does the CDC derive this authority?
It is in third countries where you can't legally enforce a contract. More importantly, it's Fascist governments that dictate what private businesses must and can't do.
https://www.news4jax.com/money/2021/03/29/the-federal-eviction-moratorium-has-been-extended-whats-that-mean-to-you/
With an estimated 4 million Americans behind on rent, the Centers for Disease Control and Prevention has extended the eviction moratorium imposed during the pandemic until the end of June.
The moratorium, which halted evictions for people unable to make their rent payments, was set to run out on Wednesday. But the CDC said it felt families across the country needed more time and relief.
The extension was aimed at avoiding having people move in with loved ones or into homeless shelters as the risk of transmission of COVID-19 remains high.
If a tenant meets criteria laid out by the federal government, they’re protected from being evicted.
While the moratorium keeps landlords from forcing tenants out of their homes, it does not stop landlords from filing eviction paperwork in court.
The moratorium isn’t letting tenants off the hook. Once it’s lifted, back rent will still be owed.
Even though the federal moratorium has been extended for almost a year now, [source in the story said] "this will likely be the last time it happens".
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"Where in the US Constitution or federal statute does the CDC derive this authority?"
Exactly right, nowhere of course.
States like mine will extend their moratorium based on "the science", and state law generally governs evictions. Still, what gives states the power to ban evictions rather than regulate them?
The Left can find a right to justify the killing of the unborn but can't find a right to legally remove someone doing economic harm to you from your property?
Back to the third world country point, being able to enforce a contract through the legal system is how we minimize having disputes settled other ways.
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https://rumble.com/vf85dj-wall-to-wall-debbie-bloyd-on-surging-home-prices.html?mref=6zof&mc=dgip3&utm_source=newsletter&utm_medium=email&utm_campaign=One+America+News+Network&ep=2
So, with higher taxes, higher inflation, and higher interest rates coming, what happens to housing prices?
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https://rumble.com/vf85dj-wall-to-wall-debbie-bloyd-on-surging-home-prices.html?mref=6zof&mc=dgip3&utm_source=newsletter&utm_medium=email&utm_campaign=One+America+News+Network&ep=2
So, with higher taxes, higher inflation, and higher interest rates coming, what happens to housing prices?
What about all the foreclosures that haven't been foreclosed on?
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https://rumble.com/vf85dj-wall-to-wall-debbie-bloyd-on-surging-home-prices.html?mref=6zof&mc=dgip3&utm_source=newsletter&utm_medium=email&utm_campaign=One+America+News+Network&ep=2
So, with higher taxes, higher inflation, and higher interest rates coming, what happens to housing prices?
What about all the foreclosures that haven't been foreclosed on?
Then there is this:
https://www.zerohedge.com/political/americas-cities-are-being-turned-crime-ridden-war-zones-murder-rates-are-way-again-2021
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I'm guessing housing prices are not going up there , , ,
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Previously:
https://rumble.com/vf85dj-wall-to-wall-debbie-bloyd-on-surging-home-prices.html?mref=6zof&mc=dgip3&utm_source=newsletter&utm_medium=email&utm_campaign=One+America+News+Network&ep=2
"home prices rose 11.2 percent in January. That's the fastest annual price increase since 2006"
"So, with higher taxes, higher inflation, and higher interest rates coming, what happens to housing prices?"
"What about all the foreclosures that haven't been foreclosed on?"
"Then there is this:
https://www.zerohedge.com/political/americas-cities-are-being-turned-crime-ridden-war-zones-murder-rates-are-way-again-2021"
"Unless you have a death wish, there are certain parts of Los Angeles, Minneapolis, Chicago, Philadelphia and Baltimore that you should never enter night or day. "
--------------------------------------
1. At least in Minneapolis, I think there is a big difference between night and day. I've only witnessed one murder lately in north Minneapolis in daytime and I rarely go there in night.
2. Besides the crime and home value questions, I'm finding tradesmen like electricians who won't come there anymore. That creates another layer of danger and buyer avoidance.
3. We have a home for sale in the area now, wanted it sold before the trial. Will keep you posted. Home values up but people are fleeing the city.
4. The problem isn't 'the neighborhood', it's the people and their behaviors. When those people move outward, the problems move outward.
5. Yes the foreclosures! How do you disrupt the entire market that severely and not pay a price when it ends?
6. Interest rates: Is there an end to artificially low interest rates? If so, guess what? A house bought with leverage at 3%interest loses 1/3 of that value when interest rates go to just 4.5%, (all other things equal).
7. "fastest annual price increase since 2006' What does that year remind you of? Another time when the House and Senate went to the Democrats with the White House sure to follow, and markets coming out of 51 consecutive months of growth - imploded.
8. Wage growth. What people will pay for housing is tied to their income. We had the greatest wage growth in 20 years in 2018. 2019 was a record economic year. 2020 was interrupted by covid, but the emphasis out of that is on the home. But now the policies causing the income surge are being reversed.
What could go wrong.
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OTOH if inflation gets going , , ,
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OTOH if inflation gets going , , ,
Real Estate, bought right, makes a nice hedge against inflation.
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https://www.zerohedge.com/personal-finance/mom-and-pop-landlords-dying-vine-un-evictable-tenants-enjoy-pandemic-protections?utm_campaign=&utm_content=Zerohedge%3A+The+Durden+Dispatch&utm_medium=email&utm_source=zh_newsletter
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https://www.nationalreview.com/news/federal-judge-tosses-national-eviction-moratorium/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=23750489
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https://www.nationalreview.com/news/federal-judge-tosses-national-eviction-moratorium/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=23750489
"...finding that the COVID-19 pandemic policy exceeded the authority of the Centers for Disease Control and Prevention."
- An unelected, quasi-government "Center" making all contracts in the country related to one of the largest industries unenforceable - exceeded their authority? 'ya think? What is their authority?
This of course helps me not one bit. The Governor here duplicated the order. What is his authority?
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color has nothing to do with .
yet as like everywhere we look it is turned into that
https://www.yahoo.com/news/jersey-governor-signed-executive-order-142305326.html
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https://www.cnbc.com/2021/06/25/the-eviction-moratorium-is-killing-small-landlords-says-one.html
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https://www.cnbc.com/2021/06/25/the-eviction-moratorium-is-killing-small-landlords-says-one.html
I don't think it's accidental.
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It's like the oil industry. They get all tough with taxes and regulations. Force out all the low cost suppliers until the price doubles, triples, quadruples. Then complain about about Big Housing Inc. owning all the housing and charging so much. Monopolists need teams of lobbyists and lawyers on a scale no new entrant or low cost supplier can handle. Only the consumer gets screwed.
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I am late to the story of the surfside condo collapse. Prayers for the victims and families!
Facts are also slow to emerge. The engineering and maintenance side of this story would apply to all tall buildings, many are office buildings, but this one falls under housing, and in housing, a 1:30am collapse means people are home.
Here is the most comprehensive story I have seen so far including video of the collapse:
https://www.dailymail.co.uk/news/article-9743079/Video-shows-Miami-condo-garage-strewn-concrete-debris-water-pouring-minutes-collapse.html
I don't understand what holds up tall buildings - but somebody should. I jacked up a house once. First thing you do is estimate the weight of the building, then accommodate that is the strength of everything used to hold it up.
I get badgered to death (bad metaphor) by housing regulators over trivial housing issues. Once in a long while they real ideas that are helpful for structural safety.
Then THIS happens.
In our cynical society, everyone (including me) looks for a political implication. Was this global warming? Was it because Florida is Republican controlled and has laissez faire regulation enforcement? Is government too small? Can they finally break the rising popularity of the governor?
Meanwhile, like the I-35 bridge collapse in Minneapolis, real facts emerge slowly. Same for blame and lessons learned.
If these are condos, then the individual units have owners and the condo association is the controlling entity, other than city, county, state and federal government. I wonder what trivial matters were on the agenda of the last HOA meeting and what life and death issues were not.
More to come, no doubt.
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Global warming, structural racism and Trump and/or DeSantis caused the collapse.
I am late to the story of the surfside condo collapse. Prayers for the victims and families!
Facts are also slow to emerge. The engineering and maintenance side of this story would apply to all tall buildings, many are office buildings, but this one falls under housing, and in housing, a 1:30am collapse means people are home.
Here is the most comprehensive story I have seen so far including video of the collapse:
https://www.dailymail.co.uk/news/article-9743079/Video-shows-Miami-condo-garage-strewn-concrete-debris-water-pouring-minutes-collapse.html
I don't understand what holds up tall buildings - but somebody should. I jacked up a house once. First thing you do is estimate the weight of the building, then accommodate that is the strength of everything used to hold it up.
I get badgered to death (bad metaphor) by housing regulators over trivial housing issues. Once in a long while they real ideas that are helpful for structural safety.
Then THIS happens.
In our cynical society, everyone (including me) looks for a political implication. Was this global warming? Was it because Florida is Republican controlled and has laissez faire regulation enforcement? Is government too small? Can they finally break the rising popularity of the governor?
Meanwhile, like the I-35 bridge collapse in Minneapolis, real facts emerge slowly. Same for blame and lessons learned.
If these are condos, then the individual units have owners and the condo association is the controlling entity, other than city, county, state and federal government. I wonder what trivial matters were on the agenda of the last HOA meeting and what life and death issues were not.
More to come, no doubt.
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Head of the condo committee resigned in 2018 or 2019 because continuously blocked from dealing with this by residents dicking around with process and complaining about repair costs.
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https://www.politico.com/news/2021/07/05/biden-housing-dilemma-low-income-497921
From GM, Political Economics discussion.
If they really wanted housing to be more affordable :
a. End government policies that drive the price up unaffordably, and
b. Bring back the widespread wage growth of the Trump administration policies.
Won't happen without regime change.
People are buying homes like guns. Buy them while they're still legal. Maybe you'll get grandfathered in to private housing before our Castro like revolution has the government decide what housing you'll live in.
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https://www.washingtontimes.com/news/2021/jul/23/eviction-moratorium-exceeds-cdc-authority-federal-/
My snarky subject line apart, it is a good thing to establish this.
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https://www.theepochtimes.com/mkt_morningbrief/new-home-sales-drop-6-6-percent-median-house-price-falls-5-percent-in-june_3918943.html?utm_source=Morningbrief&utm_medium=email&utm_campaign=mb-2021-07-27&mktids=a51020e17a5a4209835beaa3e12a0f0c&est=3hI%2B1pflwJCK9okK3KpF9qtoonvsDM9QUUZkBMF%2FVkjQd%2ByQVo3nbwQ6Oz2btjPXitIH
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https://www.theepochtimes.com/mkt_morningbrief/eviction-moratorium-set-to-expire-after-congress-fails-to-extend-it_3927379.html?utm_source=Morningbrief&utm_medium=email&utm_campaign=mb-2021-08-01&mktids=c55c03d083b5f19ff706249766cfa7f9&est=Z434G9FdI42BIkYGfAx9blhSDKyjowu7y5OagIFIxNyuIadnwOSUPPNOSE8r70t4ByaL
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https://www.theepochtimes.com/mkt_morningbrief/eviction-moratorium-set-to-expire-after-congress-fails-to-extend-it_3927379.html?utm_source=Morningbrief&utm_medium=email&utm_campaign=mb-2021-08-01&mktids=c55c03d083b5f19ff706249766cfa7f9&est=Z434G9FdI42BIkYGfAx9blhSDKyjowu7y5OagIFIxNyuIadnwOSUPPNOSE8r70t4ByaL
Hallelujah. Praise God. We don't really want to become a Marxist third world country.
Beware of lagging provisos in blue states.
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https://storage.courtlistener.com/recap/gov.uscourts.dcd.224305/gov.uscourts.dcd.224305.70.1.pdf
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https://www.theepochtimes.com/mkt_morningbrief/eviction-moratorium-set-to-expire-after-congress-fails-to-extend-it_3927379.html?utm_source=Morningbrief&utm_medium=email&utm_campaign=mb-2021-08-01&mktids=c55c03d083b5f19ff706249766cfa7f9&est=Z434G9FdI42BIkYGfAx9blhSDKyjowu7y5OagIFIxNyuIadnwOSUPPNOSE8r70t4ByaL
Hallelujah. Praise God. We don't really want to become a Marxist third world country.
Beware of lagging provisos in blue states.
Too late.
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https://www.youtube.com/watch?v=u9alsxM8SOM
Why are no Democrats and no moderates offended by this?
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(https://i0.wp.com/www.powerlineblog.com/ed-assets/2021/09/Screen-Shot-2021-08-31-at-10.51.03-PM.png?w=1000&ssl=1)
https://i0.wp.com/www.powerlineblog.com/ed-assets/2021/09/Screen-Shot-2021-08-31-at-10.51.03-PM.png?w=1000&ssl=1
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Pretty technical, and damn important
The Democrats’ Tax Plan Would Sink Real Estate
We’ve seen it before. The 1986 reform led to the savings-and-loan crisis and the 1990-91 recession.
By Dan Palmer and David Williams
Oct. 25, 2021 1:45 pm ET
The most lasting effects of government policies are often the unintended consequences. Americans learned this lesson the hard way in the aftermath of the 1986 Tax Reform Act. The tax proposals in the Democrats’ $3.5 trillion budget-reconciliation bill have the potential to kick off economy-crippling events similar to the savings-and-loan crisis of the late 1980s.
The landmark 1986 Tax Reform Act reduced the top personal income-tax rate from 50% to 28%. The politically divided Congress paid for these cuts, in part, by raising the rate on capital gains from 20% to 28% and limiting the deductibility of real estate losses for passive investors. The unintended consequences were many and profound.
As the new rules were phased in, investment capital dried up and asset values collapsed. Rents rose as landlords refused to pay their mortgage interest with nondeductible cash. Many other landlords “mailed back the keys” to the S&L associations holding their mortgages. The lack of investment capital, sharply lower valuations, and the resulting flood of foreclosures and “deeds in lieu” took down the S&L industry.
Before the 1986 act, the S&Ls were the primary source of loan capital for local property owners, developers and builders. After 1986, 747 institutions with assets of more than $394 billion (about $1 trillion in today’s dollars) collapsed into the federal Resolution Trust Corp. When the S&Ls failed, community-based lending and much of the local home-building industry vanished. The fallout was ultimately felt up and down Main Street during the recession of 1990-91.
Even before the 1990-91 recession, Congress knew it had blundered, and reinstated real-estate tax benefits for genuine professionals only. Those benefits still don’t apply to a casual investor who buys a small apartment block or enters a real-estate partnership. The lesson? The capital-gains tax rate has a larger effect on real-estate investment than limiting deductions does, but increasing rates and limiting deductions at the same time is deadly.
Wall Street was the big winner, filling the void left by the S&Ls with commercial mortgage-backed securities, or CMBS. Today, most commercial and multifamily real-estate funding is done by CMBS loans. All major financial institutions—including banks, insurance companies and pension funds—participate heavily in CMBS markets. Consequently, we are all in this together. When the CMBS market collapsed in 2008, it plunged the global economy into the Great Recession. Taxpayers funded huge bailouts.
Real estate is a long-term, risky and labor-intensive investment compared with stocks and bonds. Without tax incentives, real estate can’t compete with other investments for essential capital. Currently, real-estate professionals get depreciation deductions against taxable income, and long-term capital-gains rates when they sell. When an owner dies, his heirs get a free step-up in tax basis—that is, they don’t pay taxes on appreciation during the decedent’s lifetime.
Under the House bill, taxation of real-estate operating profit would soar from 29.6% (37% less 20% business deduction) to nearly 46.4% (39.6% basic maximum plus 3.8% investment tax plus 3% surtax for some, with no business deduction), and real estate capital gains would spike from 20% to 31.8% (25% basic capital gains maximum plus 3.8% investment tax plus 3% surtax for some). For a successful investor, that’s an extra 16.8% tax on operations and an extra 11.8% tax on capital gains. At the same time, new limitations are phasing in to reduce mortgage-interest deductions and depreciation. Increasing rates while limiting deductible losses is the same deadly recipe as in 1986.
Adding to the toxic brew, President Biden proposes a radical change to the way real-estate assets are treated when an owner dies. He proposes to tax the step-up in basis on death that has been a tax-code constant for a century. It is a foundational reason why families make multigenerational, long-term property investments. Taking away the free step-up in basis creates a disincentive to invest for the long term and ensures even less capital flowing to real estate.
Whether a generational property transfer is taxed at death at the proposed 31.8% capital-gains rate or the higher proposed ordinary-income rate of 46.4%, it may also face a proposed 45% death tax. And that is before state taxes. The huge aggregate tax bill on death will force estates to sell properties to cover what they owe. As 1986 and 2008 proved, forced selling in real-property markets creates havoc in financial markets.
What Congress did in 1986 to real-estate tax shelters was deliberate. What it did to S&Ls, community lending, investors, capital markets and Main Street was unintended. This time, it’s much the same, but the effect will be broader. Everyone is directly or indirectly exposed to the CMBS market, and sharply declining real-estate values are highly disruptive. Total CMBS loans today are approaching $4 trillion.
If passed, the Democrats’ real-estate tax proposals will tank property values. This sudden, broad decline will be recessionary. Recessions hit all Americans, not the few that Congress and the president are targeting with this legislation. Washington is at serious risk of replaying a historic economic blunder.
Mr. Palmer is a Republican strategist, activist and fundraiser and founder of Palmer Investments Inc., a real-estate investment firm. Mr. Williams is a tax attorney, certified public accountant, real-estate manager and investor.
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At this point, I want them to do it. Let it burn.
Pretty technical, and damn important
The Democrats’ Tax Plan Would Sink Real Estate
We’ve seen it before. The 1986 reform led to the savings-and-loan crisis and the 1990-91 recession.
By Dan Palmer and David Williams
Oct. 25, 2021 1:45 pm ET
The most lasting effects of government policies are often the unintended consequences. Americans learned this lesson the hard way in the aftermath of the 1986 Tax Reform Act. The tax proposals in the Democrats’ $3.5 trillion budget-reconciliation bill have the potential to kick off economy-crippling events similar to the savings-and-loan crisis of the late 1980s.
The landmark 1986 Tax Reform Act reduced the top personal income-tax rate from 50% to 28%. The politically divided Congress paid for these cuts, in part, by raising the rate on capital gains from 20% to 28% and limiting the deductibility of real estate losses for passive investors. The unintended consequences were many and profound.
As the new rules were phased in, investment capital dried up and asset values collapsed. Rents rose as landlords refused to pay their mortgage interest with nondeductible cash. Many other landlords “mailed back the keys” to the S&L associations holding their mortgages. The lack of investment capital, sharply lower valuations, and the resulting flood of foreclosures and “deeds in lieu” took down the S&L industry.
Before the 1986 act, the S&Ls were the primary source of loan capital for local property owners, developers and builders. After 1986, 747 institutions with assets of more than $394 billion (about $1 trillion in today’s dollars) collapsed into the federal Resolution Trust Corp. When the S&Ls failed, community-based lending and much of the local home-building industry vanished. The fallout was ultimately felt up and down Main Street during the recession of 1990-91.
Even before the 1990-91 recession, Congress knew it had blundered, and reinstated real-estate tax benefits for genuine professionals only. Those benefits still don’t apply to a casual investor who buys a small apartment block or enters a real-estate partnership. The lesson? The capital-gains tax rate has a larger effect on real-estate investment than limiting deductions does, but increasing rates and limiting deductions at the same time is deadly.
Wall Street was the big winner, filling the void left by the S&Ls with commercial mortgage-backed securities, or CMBS. Today, most commercial and multifamily real-estate funding is done by CMBS loans. All major financial institutions—including banks, insurance companies and pension funds—participate heavily in CMBS markets. Consequently, we are all in this together. When the CMBS market collapsed in 2008, it plunged the global economy into the Great Recession. Taxpayers funded huge bailouts.
Real estate is a long-term, risky and labor-intensive investment compared with stocks and bonds. Without tax incentives, real estate can’t compete with other investments for essential capital. Currently, real-estate professionals get depreciation deductions against taxable income, and long-term capital-gains rates when they sell. When an owner dies, his heirs get a free step-up in tax basis—that is, they don’t pay taxes on appreciation during the decedent’s lifetime.
Under the House bill, taxation of real-estate operating profit would soar from 29.6% (37% less 20% business deduction) to nearly 46.4% (39.6% basic maximum plus 3.8% investment tax plus 3% surtax for some, with no business deduction), and real estate capital gains would spike from 20% to 31.8% (25% basic capital gains maximum plus 3.8% investment tax plus 3% surtax for some). For a successful investor, that’s an extra 16.8% tax on operations and an extra 11.8% tax on capital gains. At the same time, new limitations are phasing in to reduce mortgage-interest deductions and depreciation. Increasing rates while limiting deductible losses is the same deadly recipe as in 1986.
Adding to the toxic brew, President Biden proposes a radical change to the way real-estate assets are treated when an owner dies. He proposes to tax the step-up in basis on death that has been a tax-code constant for a century. It is a foundational reason why families make multigenerational, long-term property investments. Taking away the free step-up in basis creates a disincentive to invest for the long term and ensures even less capital flowing to real estate.
Whether a generational property transfer is taxed at death at the proposed 31.8% capital-gains rate or the higher proposed ordinary-income rate of 46.4%, it may also face a proposed 45% death tax. And that is before state taxes. The huge aggregate tax bill on death will force estates to sell properties to cover what they owe. As 1986 and 2008 proved, forced selling in real-property markets creates havoc in financial markets.
What Congress did in 1986 to real-estate tax shelters was deliberate. What it did to S&Ls, community lending, investors, capital markets and Main Street was unintended. This time, it’s much the same, but the effect will be broader. Everyone is directly or indirectly exposed to the CMBS market, and sharply declining real-estate values are highly disruptive. Total CMBS loans today are approaching $4 trillion.
If passed, the Democrats’ real-estate tax proposals will tank property values. This sudden, broad decline will be recessionary. Recessions hit all Americans, not the few that Congress and the president are targeting with this legislation. Washington is at serious risk of replaying a historic economic blunder.
Mr. Palmer is a Republican strategist, activist and fundraiser and founder of Palmer Investments Inc., a real-estate investment firm. Mr. Williams is a tax attorney, certified public accountant, real-estate manager and investor.
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Contrary to comment expressed by my friend G M:
No, we don't want Democrats to implement the worst of their radical policy ideas and destroy our country, destroy my life's work, for what benefit? To prove they were wrong?
They've already been proven wrong, across the world, throughout history.
Ibn Khaldun saw it and wrote about it in the 1300s. See economics thread. See Thomas Sowell.
What's happening today is not radicals being radical. That's a given. The rise of this bullshit comes from the sane and responsible people being weak, ignorant, passive and silent about this EASILY AVOIDABLE DEMISE.
IMHO.
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The country you grew up in is deader than canned tuna. TPTB have plans for us, and the end state is slavery at best.
Contrary to comment expressed by my friend G M:
No, we don't want Democrats to implement the worst of their radical policy ideas and destroy our country, destroy my life's work, for what benefit? To prove they were wrong?
They've already been proven wrong, across the world, throughout history.
Ibn Khaldun saw it and wrote about it in the 1300s. See economics thread. See Thomas Sowell.
What's happening today is not radicals being radical. That's a given. The rise of this bullshit comes from the sane and responsible people being weak, ignorant, passive and silent about this EASILY AVOIDABLE DEMISE.
IMHO.
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http://ace.mu.nu/archives/396170.php
Plan accordingly.
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Relevant here, but better yet in the Money thread.
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To do whatever you can do to try to protect your real estate holdings. I figure Manchin and Sinema will sign off on the Amerikan Socialist transformation bill.
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To do whatever you can do to try to protect your real estate holdings. I figure Manchin and Sinema will sign off on the Amerikan Socialist transformation bill.
https://media.gab.com/system/media_attachments/files/088/773/909/original/0a966d7813ce494a.png
(https://media.gab.com/system/media_attachments/files/088/773/909/original/0a966d7813ce494a.png)
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https://www.breitbart.com/economy/2021/10/26/home-prices-jump/
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https://www.breitbart.com/economy/2021/10/26/home-prices-jump/
Since the house didn't move or change, they could just say your dollar went down 20% with all the new printing.
Keep printing money and what was 200k becomes a billion, and under new unconstitutional law they can just take the assets of the wealthy, meaning everyone.
Meanwhile we are told it is fruitless to campaign against all this and 'voat harder".
I don't buy it.
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https://www.breitbart.com/economy/2021/10/26/home-prices-jump/
Since the house didn't move or change, they could just say your dollar went down 20% with all the new printing.
Keep printing money and what was 200k becomes a billion, and under new unconstitutional law they can just take the assets of the wealthy, meaning everyone.
Meanwhile we are told it is fruitless to campaign against all this and 'voat harder".
I don't buy it.
Ask Governor Elder how that works.
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https://www.dgccpa.com/perspectives/the-biden-tax-proposals-impact-on-the-real-estate-industry-1462
https://www.morningstar.com/news/dow-jones/2021042821301/biden-proposal-would-close-longtime-real-estate-tax-loophole
To do whatever you can do to try to protect your real estate holdings. I figure Manchin and Sinema will sign off on the Amerikan Socialist transformation bill.
https://media.gab.com/system/media_attachments/files/088/773/909/original/0a966d7813ce494a.png
(https://media.gab.com/system/media_attachments/files/088/773/909/original/0a966d7813ce494a.png)
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https://files.americanexperiment.org/wp-content/uploads/2021/10/Rent-Control-Report-Njolomole.pdf
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https://www.nationalreview.com/news/st-paul-rent-control-initiative-backfires-unleashes-chaos-in-housing-market/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=25698466
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https://www.nationalreview.com/news/st-paul-rent-control-initiative-backfires-unleashes-chaos-in-housing-market/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=25698466
Paywalled, but I doubt I need to read it to know that rent control actually hurts the people it was supposed to help.
Science!
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https://www.nationalreview.com/news/st-paul-rent-control-initiative-backfires-unleashes-chaos-in-housing-market/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=25698466
“We said this would happen. This should be no surprise,”
Likewise on the forum.
https://files.americanexperiment.org/wp-content/uploads/2021/10/Rent-Control-Report-Njolomole.pdf
From the NR article:
St. Paul Rent-Control Initiative Backfires, Unleashes ‘Chaos’ in Housing Market
By RYAN MILLS
November 14, 2021
Democratic leaders in Minnesota’s capital city are scrambling for solutions after developers put several large projects on hold across St. Paul in the wake of last week’s election, when residents approved what may be the strictest rent-control policy in the country.
The rent-control ballot initiative in St. Paul was overshadowed nationally by an effort in neighboring Minneapolis to disband that city’s police force. But while the Minneapolis police initiative went down in flames, left-wing activists on the eastern bank of the Mississippi River succeeded in their effort to cap rent increases at 3 percent annually, including on new construction, a step most communities that have imposed rent-control policies have specifically avoided out of concern that it would discourage future investments.
The St. Paul initiative passed last week with 53 percent support.
Opponents of St. Paul’s rent-control initiative warned before the vote that developers and financial investors would pull the plug on projects if the ballot measure were to pass. And that appears to be exactly what’s transpired over the past week. Large developers who spoke to the Minneapolis Star Tribune and the St. Paul Pioneer Press told reporters that they’re pausing their projects across the city, and they are “re-evaluating what – if any – future business we’ll be doing in St. Paul.” Lenders are pulling out of new projects, they say, worried about the impact of the new policy.
Attempts by National Review to reach those developers for comment were unsuccessful.
B Kyle, president and CEO of the Saint Paul Area Chamber of Commerce, said her organization is in the process of cataloguing all of the projects killed or put on hold because of the measure. It’s not just new development projects at risk, she said. Kyle said she’s already been told of dozens of buildings that have had 2022 rehabilitation projects stopped. She said there’s now “chaos” across St. Paul because of the rent-control measure.
“We said this would happen. This should be no surprise,” Kyle said, noting that opponents of the initiative were accused of being hyperbolic and pushing a “disaster narrative.”
“The truth is, we’re seeing it. This isn’t about emotion,” she said. “This is about how does a deal get financed, how does a project cash-flow, can you make a fair profit on a deal?”
“Developers will do deals where it makes sense for them to do deals. Our goal in St. Paul is to make this as inviting an environment as possible, so investors . . . want to bring their projects here, because St. Paul desperately needs more housing across the entire spectrum.”
Proponents of the rent-control initiative said it was desperately needed to offer predictability to both tenants and landlords and to advance racial justice in the city. St. Paul would “lead the nation in rewriting the outdated and unfair rules that give landlords unlimited power to economically exploit their tenants,” one rent-control supporter wrote in the online MinnPost.
Proponents acknowledged that annual rent increases in the Twin Cities have averaged less than 3 percent over the past two decades, but “BIPOC renters are the most likely to experience egregious rent spikes well above 3 percent.” They dismissed warnings that rent control would imperil new developments and disincentivize property owners from improving the quality of their buildings, uncontroversial opinions among the vast majority of economists. They argue that the developers are bluffing about pulling the plug on projects, and all they’re really trying to do is scare residents and city leaders in order to change the ordinance.
But Kyle said the concern about the future of those projects is very real. Even nonprofit and senior-housing developers fear their financial models won’t work under the new policy.
It’s not about greed, or good people versus bad landlords, Kyle said. “It’s about math.”
Investors naturally are inclined to pump money into communities where they have a better opportunity to make a return, and into communities that offer them more flexibility.
“New construction will not go where it is harder to do business, and rent control will stop new investment that comes in from outside this market,” Kyle said, noting that a recent Minnesota housing task force report found that the state already is well off the pace of building the 300,000 new homes that will be needed by 2030. St. Paul needs to elevate its image to continue attracting investors, Kyle said, and “this does not help.”
“We in St. Paul do not have the luxury of being cavalier about our housing market,” she said. “We need to be as earnest and inviting and participatory as possible.”
In addition to curbing the development of new homes, Kyle noted that the rent-control initiative also threatens the stock of existing rental homes and the quality of those homes.
St. Paul property owners already are facing a 7 percent property-tax increase next year. Add in 6.2 percent inflation – a 31-year high – employee wage increases, and a 3 percent cap on rent increases, and there are plenty of incentives for owners to sell their single-family rentals and to convert their apartments into condominiums. That’s happened in other cities, and it could happen in St. Paul, too, said Joe Hughes, a local businessman who owns about 20 small apartment buildings in the city
“When these houses that are rented sell, that’s going to be a net loss for the BIPOC community,” Hughes said. “I think there will be a higher percentage of white people buying them than there are living in them now.”
Hughes is critical of another aspect of the rent-control initiative that he says threatens his business. Hughes said he and most of his friends in the rental-property business typically try not to impose significant rent increases on their tenants. “The vast majority of rent increases that we did are $10-, $15-, $20-a-month increases,” he said. As a result, after several years, some tenants end up with monthly rents that are well under market value.
Typically, he said, owners would bring the units up to market when the tenants moved out. But that’s not allowed under the new rent-control policy: The 3 percent limit applies even when turning over a rental home to a new tenant. Proponents of the measure said that was necessary to disincentivize landlords from giving tenants the boot simply so they could jack up rents. Hughes said it will instead force landlords to adjust their business models, potentially passing on larger increases than they normally would to all their tenants.
“I think in the next couple years we’re going to have higher rent increases than we had the last few years,” he said.
Property owners who don’t sell their rental units also will have little incentive to improve their properties beyond keeping them up to code, and small investors looking to buy and refurbish older buildings may think twice if there is no guarantee they can charge a high enough rent to make the math work. The ballot language does direct the city to create a process for landlords to file for an exception to the 3 percent rent-increase limit to allow for “a reasonable return on investment.” But, Hughes said, “we don’t know anything about what that’s going to look like.”
“If you’re looking to buy a building that needs improvement, are we going to know what we’re going to be able to charge before we buy it, what we’re going to be able to charge for rents after the renovations?” he asked. “A lot of these old buildings need a lot of work.”
Hughes said it’s been “super frustrating,” because many proponents of the rent-control initiative don’t understand his business, and they often came to the debate thinking that property owners and other opponents of the rent-control initiative had bad motives.
“We thought the people that voted for it were well-intentioned and were trying to do the right thing, whereas they looked at us as just being non-compassionate, greedy people. That was a frustrating debate to have,” Hughes said. “To think that they’re at a different level morally and ethically and stuff like that is just ridiculous.”
In response to the news that developers are pausing projects and that lenders are pulling their money, St. Paul mayor Melvin Carter has urged the city council to work with him to exempt new construction from the rent-control mandate. The ballot language is silent on new construction, though advocates of the rent-control initiative were clear that it would apply to new construction. Because it was a citizen-driven ballot initiative, there is doubt among some city leaders that they have the legal ability to amend it.
“The opposition was concerned about this very detail. Now that it’s passed, our understanding is the language stands,” City Council president Amy Brendmoen told the Pioneer Press. “We can’t make changes that are substantive, and I think this would qualify as substantive.”
Kyle said that according to the chamber’s reading of the ordinance, she doesn’t think the city council can simply amend the policy to exempt new construction.
“I leave that to the city attorney to figure that out” before May 1, when the policy takes effect, she said. “I would say the mayor and the city council have a lot of work ahead of them to figure out what this looks like between now and then. And all I can tell you for sure is there is chaos right now.”
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“It’s about math.”
Math is racist and totally cisgendered and heteronormative!
https://www.nationalreview.com/news/st-paul-rent-control-initiative-backfires-unleashes-chaos-in-housing-market/?utm_source=email&utm_medium=breaking&utm_campaign=newstrack&utm_term=25698466
“We said this would happen. This should be no surprise,”
Likewise on the forum.
https://files.americanexperiment.org/wp-content/uploads/2021/10/Rent-Control-Report-Njolomole.pdf
From the NR article:
St. Paul Rent-Control Initiative Backfires, Unleashes ‘Chaos’ in Housing Market
By RYAN MILLS
November 14, 2021
Democratic leaders in Minnesota’s capital city are scrambling for solutions after developers put several large projects on hold across St. Paul in the wake of last week’s election, when residents approved what may be the strictest rent-control policy in the country.
The rent-control ballot initiative in St. Paul was overshadowed nationally by an effort in neighboring Minneapolis to disband that city’s police force. But while the Minneapolis police initiative went down in flames, left-wing activists on the eastern bank of the Mississippi River succeeded in their effort to cap rent increases at 3 percent annually, including on new construction, a step most communities that have imposed rent-control policies have specifically avoided out of concern that it would discourage future investments.
The St. Paul initiative passed last week with 53 percent support.
Opponents of St. Paul’s rent-control initiative warned before the vote that developers and financial investors would pull the plug on projects if the ballot measure were to pass. And that appears to be exactly what’s transpired over the past week. Large developers who spoke to the Minneapolis Star Tribune and the St. Paul Pioneer Press told reporters that they’re pausing their projects across the city, and they are “re-evaluating what – if any – future business we’ll be doing in St. Paul.” Lenders are pulling out of new projects, they say, worried about the impact of the new policy.
Attempts by National Review to reach those developers for comment were unsuccessful.
B Kyle, president and CEO of the Saint Paul Area Chamber of Commerce, said her organization is in the process of cataloguing all of the projects killed or put on hold because of the measure. It’s not just new development projects at risk, she said. Kyle said she’s already been told of dozens of buildings that have had 2022 rehabilitation projects stopped. She said there’s now “chaos” across St. Paul because of the rent-control measure.
“We said this would happen. This should be no surprise,” Kyle said, noting that opponents of the initiative were accused of being hyperbolic and pushing a “disaster narrative.”
“The truth is, we’re seeing it. This isn’t about emotion,” she said. “This is about how does a deal get financed, how does a project cash-flow, can you make a fair profit on a deal?”
“Developers will do deals where it makes sense for them to do deals. Our goal in St. Paul is to make this as inviting an environment as possible, so investors . . . want to bring their projects here, because St. Paul desperately needs more housing across the entire spectrum.”
Proponents of the rent-control initiative said it was desperately needed to offer predictability to both tenants and landlords and to advance racial justice in the city. St. Paul would “lead the nation in rewriting the outdated and unfair rules that give landlords unlimited power to economically exploit their tenants,” one rent-control supporter wrote in the online MinnPost.
Proponents acknowledged that annual rent increases in the Twin Cities have averaged less than 3 percent over the past two decades, but “BIPOC renters are the most likely to experience egregious rent spikes well above 3 percent.” They dismissed warnings that rent control would imperil new developments and disincentivize property owners from improving the quality of their buildings, uncontroversial opinions among the vast majority of economists. They argue that the developers are bluffing about pulling the plug on projects, and all they’re really trying to do is scare residents and city leaders in order to change the ordinance.
But Kyle said the concern about the future of those projects is very real. Even nonprofit and senior-housing developers fear their financial models won’t work under the new policy.
It’s not about greed, or good people versus bad landlords, Kyle said. “It’s about math.”
Investors naturally are inclined to pump money into communities where they have a better opportunity to make a return, and into communities that offer them more flexibility.
“New construction will not go where it is harder to do business, and rent control will stop new investment that comes in from outside this market,” Kyle said, noting that a recent Minnesota housing task force report found that the state already is well off the pace of building the 300,000 new homes that will be needed by 2030. St. Paul needs to elevate its image to continue attracting investors, Kyle said, and “this does not help.”
“We in St. Paul do not have the luxury of being cavalier about our housing market,” she said. “We need to be as earnest and inviting and participatory as possible.”
In addition to curbing the development of new homes, Kyle noted that the rent-control initiative also threatens the stock of existing rental homes and the quality of those homes.
St. Paul property owners already are facing a 7 percent property-tax increase next year. Add in 6.2 percent inflation – a 31-year high – employee wage increases, and a 3 percent cap on rent increases, and there are plenty of incentives for owners to sell their single-family rentals and to convert their apartments into condominiums. That’s happened in other cities, and it could happen in St. Paul, too, said Joe Hughes, a local businessman who owns about 20 small apartment buildings in the city
“When these houses that are rented sell, that’s going to be a net loss for the BIPOC community,” Hughes said. “I think there will be a higher percentage of white people buying them than there are living in them now.”
Hughes is critical of another aspect of the rent-control initiative that he says threatens his business. Hughes said he and most of his friends in the rental-property business typically try not to impose significant rent increases on their tenants. “The vast majority of rent increases that we did are $10-, $15-, $20-a-month increases,” he said. As a result, after several years, some tenants end up with monthly rents that are well under market value.
Typically, he said, owners would bring the units up to market when the tenants moved out. But that’s not allowed under the new rent-control policy: The 3 percent limit applies even when turning over a rental home to a new tenant. Proponents of the measure said that was necessary to disincentivize landlords from giving tenants the boot simply so they could jack up rents. Hughes said it will instead force landlords to adjust their business models, potentially passing on larger increases than they normally would to all their tenants.
“I think in the next couple years we’re going to have higher rent increases than we had the last few years,” he said.
Property owners who don’t sell their rental units also will have little incentive to improve their properties beyond keeping them up to code, and small investors looking to buy and refurbish older buildings may think twice if there is no guarantee they can charge a high enough rent to make the math work. The ballot language does direct the city to create a process for landlords to file for an exception to the 3 percent rent-increase limit to allow for “a reasonable return on investment.” But, Hughes said, “we don’t know anything about what that’s going to look like.”
“If you’re looking to buy a building that needs improvement, are we going to know what we’re going to be able to charge before we buy it, what we’re going to be able to charge for rents after the renovations?” he asked. “A lot of these old buildings need a lot of work.”
Hughes said it’s been “super frustrating,” because many proponents of the rent-control initiative don’t understand his business, and they often came to the debate thinking that property owners and other opponents of the rent-control initiative had bad motives.
“We thought the people that voted for it were well-intentioned and were trying to do the right thing, whereas they looked at us as just being non-compassionate, greedy people. That was a frustrating debate to have,” Hughes said. “To think that they’re at a different level morally and ethically and stuff like that is just ridiculous.”
In response to the news that developers are pausing projects and that lenders are pulling their money, St. Paul mayor Melvin Carter has urged the city council to work with him to exempt new construction from the rent-control mandate. The ballot language is silent on new construction, though advocates of the rent-control initiative were clear that it would apply to new construction. Because it was a citizen-driven ballot initiative, there is doubt among some city leaders that they have the legal ability to amend it.
“The opposition was concerned about this very detail. Now that it’s passed, our understanding is the language stands,” City Council president Amy Brendmoen told the Pioneer Press. “We can’t make changes that are substantive, and I think this would qualify as substantive.”
Kyle said that according to the chamber’s reading of the ordinance, she doesn’t think the city council can simply amend the policy to exempt new construction.
“I leave that to the city attorney to figure that out” before May 1, when the policy takes effect, she said. “I would say the mayor and the city council have a lot of work ahead of them to figure out what this looks like between now and then. And all I can tell you for sure is there is chaos right now.”
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https://www.theepochtimes.com/mkt_breakingnews/biden-plan-to-combat-corruption-includes-new-real-estate-rules_4141205.html?utm_source=newsnoe&utm_medium=email&utm_campaign=breaking-2021-12-06-3&mktids=984e76d1f1bdd783310950c2307e581d&est=xzjBF7AcvQhQxxt0B1ymrjdloWmIxLtfCNJyuJ6HEdyzeSQZSh4P8zgJXRa5GPKkTitm
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There is an elderly couple living in the middle of three two acre lots. They have the lot on each side of them for sale. Let's say they are in Lot B. We are interested in buying Lot A and perhaps when they move/pass away, Lot B with the house on it. Maybe Lot A as well. The elderly couple is willing to give us an option to buy/right of first refusal on their house/Lot B.
Any thoughts on how to write this up?
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There is an elderly couple living in the middle of three two acre lots. They have the lot on each side of them for sale. Let's say they are in Lot B. We are interested in buying Lot A and perhaps when they move/pass away, Lot B with the house on it. Maybe Lot A as well. The elderly couple is willing to give us an option to buy/right of first refusal on their house/Lot B.
Any thoughts on how to write this up?
Very interesting. First I would insist use a local, top notch R.E. attorney. You would have to pay for the option for it to be binding. Then you would have to pay market price to get the property when the time comes. Let's say you pay a thousand for the right of first refusal and something goes wrong. You don't want your 1000 back, you want the deed. State law governs that so only a good local attorney would know how to make it enforceable.
Another idea comes to mind. Buy it now (on a contract for deed?) and lease it back to them.
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I was hoping to avoid the $500 I was quoted for a RE lawyer, but you are making good sense.
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I was hoping to avoid the $500 I was quoted for a RE lawyer, but you are making good sense.
I could help you find a template of wording for a contract but I would hate to see something go wrong.
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"A right of first refusal is valid in North Carolina upon the fulfillment of two requirements: (1) the right must be exercised within 30 years of its creation; and (2) the price is linked to fair market value or the price is what the property owner is willing to accept from the third party."
https://mrglawfirm.com/archives/2013/First%20Refusal.htm#:~:text=A%20right%20of%20first%20refusal%20is%20valid%20in%20North%20Carolina,accept%20from%20the%20third%20party.
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It could help me evaluate what the lawyer would put in front of me so it would be greatly appreciated. (i.e. no reliance upon you)
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Commentary
A handful of years ago, you could be forgiven for thinking that the Chinese were taking over the U.S. real estate market.
Reports abounded of Chinese buyers pouring tens of billions of dollars per year into American property, seeking a safe haven for their wealth by snapping up everything from luxury condos in downtown Los Angeles to colonial homes along the affluent North Shore of Long Island, New York.
The COVID-19 crisis brought much of that activity to a standstill, but Chinese investment actually peaked around 2017 and started to slump long before the virus entered the scene. Thanks to increased regulatory scrutiny and a web of cross-border restrictions, Chinese purchases of American homes may not recover anytime soon. That’s probably good news for the U.S. housing market.
The Biden administration’s drive to combat money laundering in real estate underscores how the environment is changing for Chinese homebuyers. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, on Feb. 3 renewed its call for public comment on a proposed rule that would ramp up oversight of all-cash home purchases.
Under current regulations, title insurance companies must identify the individuals behind shell companies that make all-cash purchases of residential real estate in 12 major metropolitan areas if the transaction exceeds $300,000. FinCEN seeks to expand these reporting requirements as part of a broader crackdown on money laundering and other illicit activity.
“Our real estate markets are at risk of becoming a safe haven for criminals, kleptocrats and others seeking to park corrupt profits,” Deputy Secretary of the Treasury Wally Adeyemo said last December, when the proposed rule change was first announced.
Although the Treasury isn’t singling out Chinese homebuyers, it’s widely believed that many high-ranking officials of the Chinese Communist Party (CCP) launder illicit funds by purchasing expensive real estate in the United States.
For example, former Chinese official Jianjun Qiao and his ex-wife Shilin Zhao have both pleaded guilty to federal charges related to a scheme in which Qiao allegedly stole millions of dollars as the director of a grain storehouse in Henan Province. The funds were used, among other things, to buy two properties in Monterey Park, California, and a half-million-dollar house in the Seattle suburb of Newcastle, Washington.
seattle washington
A general view of the Seattle Skyline and Mount Rainier from Kerry Park in Seattle, Washington, on June 9, 2019. (Donald Miralle/Getty Images for Rock’n’Roll Marathon)
There’s no reason to think that most Chinese cash buyers are involved in money laundering, but enhanced federal scrutiny would likely snag more transactions. According to a report by think tank Global Financial Integrity, of the 23,659 real estate sales reported under FinCEN rules as of August 2019, 37 percent involved a person who was the subject of a Suspicious Activity Report, a tool that real estate professionals can use to flag potential money laundering or fraud.
Chinese homebuyers (and those from Hong Kong and Taiwan) also tend to pay in cash far more often than American homebuyers and to buy pricier homes than other foreign homebuyers, so stricter rules on large cash transactions would create yet more friction for a group already shackled by domestic capital controls.
The main bottleneck is on the other side of the Pacific. The CCP, through new currency controls imposed in 2017 and 2019, has made it dramatically harder for citizens to move their money overseas to buy real estate. Perhaps not coincidentally, Chinese investment in U.S. housing peaked at $31.7 billion during the 12 months ending March 2017, according to data from the National Association of Realtors (NAR).
By 2019, annual investment by this group—which NAR defines to include buyers from Hong Kong and Taiwan—had tumbled to $13.4 billion. The COVID shutdowns slashed that number to $4.5 billion in the year ending March 2021—a plunge of 61 percent from the previous year. Chinese-speaking buyers remained the leading foreign homebuyers measured by dollar amount, a title they’ve held since 2013.
Some hoped that the U.S. government’s lifting of COVID-era travel restrictions on dozens of countries, including China, last November would bring eager Chinese homebuyers back to the U.S. market. But the crusade against a respiratory virus continues to strangle global travel.
The United States tightened COVID testing requirements just a month after it dropped the travel ban, while China virtually stopped issuing new passports last August. Onerous testing and quarantine rules await any traveler that returns to China. How long these types of restrictions will continue to weigh on international travel is anyone’s guess.
It’s easy to exaggerate the impact of foreign homebuyers, who at last count made up only 2.8 percent of America’s nearly $2 trillion in annual home sales. Still, the long retreat of Chinese house hunters removes a potential source of pressure on the overheated U.S. market, where home prices have surged more than 30 percent since 2019 and inventory is at a record low.
For the time being, America’s would-be homeowners have bigger worries than competing with cashed-up Chinese buyers, but conditions could worsen if Chinese capital surges back.
A 2020 paper by Caitlin Gorback and Benjamin Keys of the Wharton School of Business found that U.S. home prices grew 8 to 15 percentage points more in zip codes with high numbers of foreign-born Chinese after 2011, a trend that fell sharply since 2018 amid tightening capital controls and the U.S.-China trade war.
“From an affordability standpoint, these neighborhoods are less accessible to existing U.S. residents as prices rise due to foreign investment,” the authors noted.
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.
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Excerpt only, subscribe or read at Financial Times ft.com.
Establishment, non-panic analysis, my comments here and below.
One of my assessments went up 40% this year. One HOA cost went up 50%. What do they mean by "unsustainable"? (Doug)
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FT: Until recently, mortgage holders across advanced economies seemed safe in the knowledge that interest rates would stay put for some time. For the entirety of some of their lives as homeowners, there has barely been a hint of problematic inflation, let alone a suggestion that central banks would raise rates quickly to stop it. The worry was not unmanageable repayments, or falling prices, but finding enough money for a deposit to keep up with a market that showed no signs of slowing.
Many now find themselves revising these expectations. The Bank for International Settlements — the so-called central bankers’ central bank — has warned that rising interest rates could make existing debt burdens difficult to cope with and cause house prices to fall. Some have wondered whether housing debt represents the next “Minsky moment”: a term used to denote the point at which debt-fuelled asset bubbles unwind to cause economic collapse.
Much ink has been spilled in an effort to explain the long housing boom in advanced economies. The availability of cheap money with which to buy property has undoubtedly been a significant factor. Rates have been kept low in an effort to boost wages and growth. The side effect of these measures has been turbocharged demand for housing which ran head-on into supply constraints in many big cities.
If this boom is about to meet its own “Minsky moment”, an out-and-out crisis should be avoidable. While some banks could be overexposed to housing, regulators have not been ignorant to this risk. Stricter capital requirements should better insulate banks — unlike in 2008 — while some authorities have also been on the front foot, restricting the ability of households to become too highly leveraged.
Still, regulators cannot afford to be sanguine. Many mortgage borrowers who purchased over the course of the boom will be in significant debt — keeping up with house price inflation has been costly. While these high-leverage loans may not make up a large proportion of banks’ books, they are the kind that could go bad as borrowers struggle to keep up with higher rates, record increases in energy prices and other cost-of-living pressures.
Even if broader financial turbulence can be avoided, falling prices would not pass by without any impact. Economists have long speculated that households’ willingness to spend has some relationship to wealth as well as income. If house prices fall markedly, some decline in consumption is likely. Any shortfall in spending due to this so-called “wealth effect” may also be exacerbated by individuals devoting a greater proportion of their income to debt repayments as rates rise, and less to purchasing goods and services in the broader economy. Unwinding housing bubbles can also have deep ramifications in communities where defaults, or mortgage stress, may be more concentrated.
There are more benign possibilities. If inflation is brought under control, increases to long-term rates — which tend to inform mortgage rates — may be tempered. Many households could cope in this situation by using the buffer of savings they accrued during the pandemic. House prices may not fall as far as feared, or even at all.
(Doug: or prices may fall - drastically, for the reasons stated above and below.)
That does not mean the risks are not real. Supporting growth and staving off economic crisis through years of “cheap money” was an understandable choice. As a new age of monetary tightening dawns, central banks and governments alike must hope that the housing debt built up in the previous era does not weigh too heavily on the prospects of the next.
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(Doug)
Simple math. Majority of home purchases are mortgage-based. In a mortgage-based purchase, a person or couple (hopefully) have savings and income, often large but almost always limited. The price is constrained by down payment and monthly, which is mostly interest, and affected by the psychology of how these constraints are hitting other buyers. Skyrocketing property taxes are another payment constraint, PITI, which are no longer FULLY income tax deductible.
What could go wrong.
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https://www.dallasfed.org/research/economics/2022/0329?utm_source=cvent&utm_medium=email&utm_campaign=dfe
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https://www.dallasfed.org/research/economics/2022/0329?utm_source=cvent&utm_medium=email&utm_campaign=dfe
First rule of bubbles: They ALWAYS pop.
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Doug:
That seems like a calm, measured analysis.
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"to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”
https://www.based-politics.com/2022/04/13/st-paul-rent-control-scheme-totally-backfired-and-hurt-the-poor-study/
It was shocking front-page news in San Francisco when the courts ruled recently that landlords had a right to stop renting property they owned, despite local rent-control laws to the contrary. Needless to say, there are rumblings of an appeal.
One San Francisco supervisor lamented a "shortage of even semi-affordable housing" in the city, which is "a real crisis." There was no indication of any awareness that rent-control laws have caused housing shortages wherever they have been imposed, whether in Hong Kong or Paris, New York or Melbourne.
Sometimes, rent-control advocates claim that there was already a housing shortage and that rent-control laws were enacted to keep landlords from taking advantage of the situation by "gouging" tenants. But history says otherwise.
New York City had a high vacancy rate when rent-control laws were first passed, early in World War II. A housing shortage then developed and became a lasting part of the New York way of life.
Housing shortages, like other shortages, are too often thought of as a physically inadequate amount, either absolutely or relative to the population. It is neither. It is an inability to obtain the desired amount at the current price.
Ordinarily, in a free market, such a situation leads to a rise in price, which simultaneously reduces the amount demanded and encourages an increase in the amount supplied, until the two come into balance. Price controls prevent that rise in price from changing the behavior of suppliers and demanders, so the shortage persists.
Rent control in Sweden was a classic example of a price-induced shortage without any greater physical scarcity. After rent-control laws were enacted during World War II, Sweden began having housing shortages - and began a massive program of government-sponsored building of housing. At one time, Sweden had the most rapidly growing housing stock in the world - and yet the waiting lists for applicants for housing grew longer.
There was more housing per person but, at the artificially low price of housing, rising incomes allowed increasing numbers of people to afford ever-increasing amounts of housing space. For example, many young adults who would normally be living with their parents rented their own rent-controlled apartments instead.
In short, the amount of housing space demanded at artificially low prices vastly exceeded even the rapidly increasing housing supply. The fact that there was plenty of housing in Sweden was dramatically revealed when the rent-control laws were repealed. Immediately there was a housing surplus.
As rents rose to levels determined by supply and demand, private builders found it profitable to start constructing housing. Since privately constructed housing was built to suit the tastes of tenants and homeowners, rather than government planners, many people moved out of the government-built housing, leaving vast numbers of vacancies.
Like other laws keeping prices below the level produced by supply and demand, rent control leads not only to a shortage of the product but also to a deterioration in its quality. This has happened not only with housing but also with cable television service, medical care and other goods and services.
Yet it always seems to come as a big surprise to politicians, journalists and others for whom indignation is a way of life. Across the Bay from San Francisco, Oakland officials are waxing indignant at landlords for neglecting maintenance on rent-controlled apartments. Inadequate maintenance of course speeds the deterioration of the existing housing stock, while rent control discourages building replacements. The net result can be a declining housing stock and higher rents in the long run. But who in politics worries about the long run?
California prides itself on being on the cutting edge of new advances. Unfortunately, many of these new advances are in fact retreats to old ideas that have failed repeatedly - but whose failures are unknown to those who are so modern that they disdain to study history. Two thousand years ago, when Roman emperor Diocletian issued a sweeping edict controlling the prices of innumerable goods, "people brought provisions no more to markets," as a contemporary put it.
What is happening in California's rent-controlled housing is as predictable as the swallows returning to Capistrano - but not nearly as attractive
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That wasn’t real rent control!
"to the extent that rent control is intended to transfer wealth from high-income to low-income households, the realized impact of the law was the opposite of its intention.”
https://www.based-politics.com/2022/04/13/st-paul-rent-control-scheme-totally-backfired-and-hurt-the-poor-study/
It was shocking front-page news in San Francisco when the courts ruled recently that landlords had a right to stop renting property they owned, despite local rent-control laws to the contrary. Needless to say, there are rumblings of an appeal.
One San Francisco supervisor lamented a "shortage of even semi-affordable housing" in the city, which is "a real crisis." There was no indication of any awareness that rent-control laws have caused housing shortages wherever they have been imposed, whether in Hong Kong or Paris, New York or Melbourne.
Sometimes, rent-control advocates claim that there was already a housing shortage and that rent-control laws were enacted to keep landlords from taking advantage of the situation by "gouging" tenants. But history says otherwise.
New York City had a high vacancy rate when rent-control laws were first passed, early in World War II. A housing shortage then developed and became a lasting part of the New York way of life.
Housing shortages, like other shortages, are too often thought of as a physically inadequate amount, either absolutely or relative to the population. It is neither. It is an inability to obtain the desired amount at the current price.
Ordinarily, in a free market, such a situation leads to a rise in price, which simultaneously reduces the amount demanded and encourages an increase in the amount supplied, until the two come into balance. Price controls prevent that rise in price from changing the behavior of suppliers and demanders, so the shortage persists.
Rent control in Sweden was a classic example of a price-induced shortage without any greater physical scarcity. After rent-control laws were enacted during World War II, Sweden began having housing shortages - and began a massive program of government-sponsored building of housing. At one time, Sweden had the most rapidly growing housing stock in the world - and yet the waiting lists for applicants for housing grew longer.
There was more housing per person but, at the artificially low price of housing, rising incomes allowed increasing numbers of people to afford ever-increasing amounts of housing space. For example, many young adults who would normally be living with their parents rented their own rent-controlled apartments instead.
In short, the amount of housing space demanded at artificially low prices vastly exceeded even the rapidly increasing housing supply. The fact that there was plenty of housing in Sweden was dramatically revealed when the rent-control laws were repealed. Immediately there was a housing surplus.
As rents rose to levels determined by supply and demand, private builders found it profitable to start constructing housing. Since privately constructed housing was built to suit the tastes of tenants and homeowners, rather than government planners, many people moved out of the government-built housing, leaving vast numbers of vacancies.
Like other laws keeping prices below the level produced by supply and demand, rent control leads not only to a shortage of the product but also to a deterioration in its quality. This has happened not only with housing but also with cable television service, medical care and other goods and services.
Yet it always seems to come as a big surprise to politicians, journalists and others for whom indignation is a way of life. Across the Bay from San Francisco, Oakland officials are waxing indignant at landlords for neglecting maintenance on rent-controlled apartments. Inadequate maintenance of course speeds the deterioration of the existing housing stock, while rent control discourages building replacements. The net result can be a declining housing stock and higher rents in the long run. But who in politics worries about the long run?
California prides itself on being on the cutting edge of new advances. Unfortunately, many of these new advances are in fact retreats to old ideas that have failed repeatedly - but whose failures are unknown to those who are so modern that they disdain to study history. Two thousand years ago, when Roman emperor Diocletian issued a sweeping edict controlling the prices of innumerable goods, "people brought provisions no more to markets," as a contemporary put it.
What is happening in California's rent-controlled housing is as predictable as the swallows returning to Capistrano - but not nearly as attractive
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"the nationwide average rate on 30-yr fixed rate mortgages. It has surged from 3% to now 5.25% in a very short period" - Scott Grannis
Take the median mortgage at 400,000. 3%, 30 year fixed Principle plus interest = 1700
Now take the same monthly payment with mortgage interest rates at 6%. The loan amount is only 280,000.
Rough calculation: The value of real estate in mortgage-based transactions needs to drop 30% to reach the same affordability.
Now note that property taxes are going up by 10% per year and more. That affordability level drops further and further - unless and until wage gains keep up with everything else rising.
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I hear a bubble popping.
"the nationwide average rate on 30-yr fixed rate mortgages. It has surged from 3% to now 5.25% in a very short period" - Scott Grannis
Take the median mortgage at 400,000. 3%, 30 year fixed Principle plus interest = 1700
Now take the same monthly payment with mortgage interest rates at 6%. The loan amount is only 280,000.
Rough calculation: The value of real estate in mortgage-based transactions needs to drop 30% to reach the same affordability.
Now note that property taxes are going up by 10% per year and more. That affordability level drops further and further - unless and until wage gains keep up with everything else rising.
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https://www.theepochtimes.com/beware-the-popping-of-the-housing-bubble_4457719.html
just in time to refute this joke from the NYT:
https://www.nytimes.com/2022/05/10/business/economy-boom-times.html
time to sell when NYT points it out
to boost Biden.
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https://www.zerohedge.com/markets/us-builders-warn-significant-shift-housing-market-amid-affordability-crisis
https://www.theepochtimes.com/beware-the-popping-of-the-housing-bubble_4457719.html
just in time to refute this joke from the NYT:
https://www.nytimes.com/2022/05/10/business/economy-boom-times.html
time to sell when NYT points it out
to boost Biden.
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https://thehill.com/news/administration/3489453-white-house-releases-plan-to-boost-housing-supply/?fbclid=IwAR06T0mm51sbqjKjQeemNR4WiXii5ziD4wKGSUlEvXyYuQxEjNOOx6rvkIM
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https://www.zerohedge.com/markets/blackstone-prepares-record-50-billion-snap-real-estate-during-coming-crash?utm_source=&utm_medium=email&utm_campaign=801
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https://www.cbsnews.com/news/rent-apartments-rising-housing-market-us/
(The more government messes with housing, the less affordable it gets.)
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https://americanmind.org/salvo/rent-forever-and-love-it/?utm_campaign=American%20Mind%20Email%20Warm%20Up&utm_medium=email&_hsmi=223998568&_hsenc=p2ANqtz--p2x7Fd_3adpp2w-VTRYw_i80p-_jxByRzsDC5yDNXsJOKVLGFgiYLbOFJEONlPk4cY5vr5xNsHoNVahvMlQVJfjtJWg&utm_content=223998568&utm_source=hs_email
Rent Forever and Love It
Joel Kotkin
The globalized commodification of housing will destroy democracy.
Housing is an industry, but it is also where people live, raise families, and stake their future. Yet increasingly, all around the world, housing has increasingly become just a commodity to be traded, often by foreigner investors, notably from China, as well as by large well-capitalized financial institutions who plan to cultivate a generation of lifelong renters. In the notorious words of the World Economic Forum, “You will own nothing, and love it.” Well, you may not love it, but the first part is coming true.
This shift has been taking place for decades, as the superrich and large investment companies buy up much of the land. In the United States, the proportion of land owned by the one hundred largest private landowners, reports the New York Times grew by nearly 50 percent between 2007 and 2017. In 2007, this group owned a total of 27 million acres of land, equivalent to the area of Maine and New Hampshire combined; a decade later, the one hundred largest landowners held 40.2 million acres, more than the entire area of New England.
In much of the American West, billionaires like Jeff Bezos, Bill Gates, and Ted Turner have created vast estates that systematically make the local population land-poor. Landownership in Europe, too, is becoming more concentrated in fewer hands. In Great Britain, where land prices have risen dramatically over the past decade, less than 1 percent of the population owns half of all the land. On the continent, farmland is being consolidated into larger holdings, while urban real estate has been falling into the hands of a small number of corporate owners and the mega-wealthy. Amidst instability in commodity and stock markets, this trend of big capital investment in housing may be expected to accelerate.
A profound threat to the future of the middle class
The implications of the current land grab are profound, threatening the future of democratic institutions and the middle class. These trends are distressingly common across the higher income countries. The Organization for Economic Cooperation and Development (OECD) reported in Under Pressure: The Squeezed Middle-Class that the future of the middle-class is threatened by house prices that have been growing “three times faster than household median income over the last two decades.” The pandemic drove prices even further, and, in the U.S., housing affordability is at the lowest level since 1989.
On both sides of the Atlantic, large financial institutions like Britain’s Lloyds Bank and BlackRock have placed multi-billion dollar bets on buying homes for the rental market. In the first quarter of 2021, investors accounted for roughly one out of every seven homes bought, a marked increase from previous years. The popular notion is of a “rentership” society where people remain renters for life, enjoying their video games or attending to their houseplants, never knowing the pleasure of having a real garden or backyard of their own. It might assure a steady profit for the landlord class, but would destroy the dream of ownership for the average person.
High home prices are the key driver of reduced social mobility. Matthew Rognlie, of Northwestern University, found that most of the increased inequality in Western countries was attributable to increased house values. In the United States over the past decade the proportion of real estate wealth held by middle class and working owners fell substantially while that controlled by the wealthy grew from under 20 percent to over 28 percent. In the last decade, high income households enjoyed 71 percent of all housing gains while the shares of middle and lower income families declined precipitously.
Property and democracy
Ownership has long been a critical issue for democratic institutions, from the Greek city-states to Rome to the Dutch Republic and North America. Aristotle saw a large class of middling owners as critical to Athens and its democracy, while warning, correctly, about the dangers of an oligarchy that would control both the economy and the state.
During the great democratic revolutions that swept western Europe, and later to the New World and Oceania, aristocratic and ecclesiastical landownership gave way to a more “individualistic” concept of property rights. By the thirteenth century, the Netherlands, a country short in natural resources, began to expand its territory by draining swamps and building dikes. The new lands made valuable by Improvements in agricultural methods fueled a widely spread economic “takeoff” driven by a new class of property owners. As the economic historian Jan de Vries observed, “capitalism grew out of the soil in Holland.”
After the Second World War, wider home ownership created unprecedented middle-class stability, broad social benefits, and helped subsidize comfortable retirements. Democracy grew stronger with the growth of a stable middle rank with a natural stake in economic progress and an interest in the political system. Property also remains key to financial security. Homeowners have a median net worth more than 40 times that of renters, according to the Census Bureau. As the radical social theorist Barrington Moore said a half century ago, “no bourgeois, no democracy.”
The great betrayal
Sadly, the next generation likely will have a far more difficult time buying property than their parents and grandparents. After 1940, U.S. homeownership rates grew rapidly, from 44 percent to 63 percent thirty years later. Now, the trend is in the opposite direction. Millennials are less likely to be homeowners than baby boomers and Gen Xers. The homeownership rate among millennials ages 25 to 34 is 8 percentage points lower than baby boomers and 8.4 percentage points lower than Gen Xers in the same age group. Their chances of buying now have been made more problematic by the rapid rise in interest rates.
Similar trends are seen in other high-income countries, including Australia, Ireland, and the United Kingdom. Australia historically has had high rates of homeownership, but the rate among those between 25 and 34 years old dropped from more than 60 percent in 1981 to only 45 percent in 2016. The proportion of owner-occupied housing has dropped by 10 percent in the last 25 years. A trend toward long-term “rentership” is also seen in Ireland. In the United Kingdom, only a third of millennials own a home, compared with almost two-thirds of baby boomers at the same age. At least one-third of British millennials are likely to remain renters for life.
High housing costs are particularly burdensome for middle- and working-class families. According to a recent AEI survey, high priced California is home to six of the nation’s worst markets for first time homebuyers; a recent study by economist John Husing found that not one unionized construction worker can afford a median priced home in any coastal California county. Oligarchs may favor more housing in principle, but certainly not near to where they live. In Houston, $350,000 buys you a new 1800 square foot home; in San Francisco, it barely buys a 350 foot studio. No wonder that, as MIT’s David Autor has suggested, dense core cities have become toxic to working class aspirations.
Policies that make things worse.
In many countries, government policy seems designed to accelerate the trend toward long-term tenancy. Australia, California, the United Kingdom, and New Zealand, all cite environmental concerns to impose a large regulatory noose around new developments, particularly in the periphery. Overall, far fewer Californians, notes demographer Wendell Cox, can afford to buy a median-priced home today than in 2000, even though nationally the percentage of people who can afford homes has actually increased.
The price spike has been worsened by well-funded investors and speculators, who see artificially high prices, guaranteed by regulatory restraints, as a sure bet. All-cash buyers have grown to nearly 23 percent, more than twice the percentage in 2006, according to the California Board of Realtors.
These investors have powerful allies both on the right and left. Libertarians generally favor policies that limit single family zoning, even at the expense of working- and middle-class people. Randall O’Toole, who had been Cato Institute’s land use expert since 2007, notes that libertarians have been working hand-in-hand with left-wing groups in “to force” Californians “to live in ways in which they didn’t want to live.“ That is, in small apartments.
One oft-celebrated driver for eliminating middle-class, family-friendly housing are the so-called YIMBYs (“Yes in my backyard”). YIMBYs, notes an investigation in the leftist In These Times, enjoy fevered support from Wall Street and the tech elite. They also have strong ties with green progressives, like the Democratic Socialists of America. These groups disdain suburbia, promote dense apartment living, and have little interest in expanded homeownership. Indeed some are open collectivists who reject the very idea of individual ownership and would welcome the prospect of a massive expansion of public housing.
The future battle over ownership.
In the coming decade, the decline in mass ownership of property will have profound implications. For one thing it will remove for most of the current generation—most of whom still believe in creating wealth through ownership—the incentive of capitalist accumulation, owning their own home. They certainly may “own nothing,” as some architects of the “great reset” dream, although this will leave them dependent on finance, or the state, for virtually everything from rent to transportation and furniture.
This may not be the future preferred by most people, most of whom are out of the market due to costs, but still seek to own a home. Yet the reduction in the chance of ownership is already shaping the politics of the future, particularly among the permanently propertyless young, who naturally opt for socialist policies—like those of Bernie Sanders or France’s Jean Luc Melenchon—that promise subsidizes and control their rents. All this suggest a future where economic autonomy, the key to bourgeois democracy, will barely exist for most families besides the most affluent. Ultimately the battle over land and property will define our future and whether we provide hope to the next generation, or force them to accept a lifetime of rental serfdom and permanent subservience to the state, or big capital, or both.
Joel Kotkin is a Washington Fellow at the Claremont Institute Center for the American Way of Life and the Presidential Fellow in Urban Futures at Chapman University and executive director of the Urban Reform Institute. His new book, The Coming of Neo-Feudalism, is out now from Encounter.
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here we go again :roll: didn't we already do this and it failed miserably.
"free shit " for votes :
https://republicbrief.com/this-new-plan-by-bank-of-america-cant-possibly-be-legal/
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Apply for one of these loans. If they turn you down then you have standing to sue.
here we go again :roll: didn't we already do this and it failed miserably.
"free shit " for votes :
https://republicbrief.com/this-new-plan-by-bank-of-america-cant-possibly-be-legal/
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https://www.revolver.news/2022/09/chart-shows-the-worst-housing-markets-this-summer/
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https://www.vox.com/policy-and-politics/2022/9/4/23326772/housing-market-mortgage-rate
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https://nypost.com/2022/10/18/us-housing-market-in-free-fall-as-builder-confidence-suffers-disastrous-drop-economist/
Builder confidence has plunged to the lowest level since 2012 - when Barack Obama was President.
People had more confidence under Trump in a lockdown than they do with Biden post-covid.
Make no mistake, interest rates rising are the result of Dem's inflationary policies.
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It's just bad luck!
https://nypost.com/2022/10/18/us-housing-market-in-free-fall-as-builder-confidence-suffers-disastrous-drop-economist/
Builder confidence has plunged to the lowest level since 2012 - when Barack Obama was President.
People had more confidence under Trump in a lockdown than they do with Biden post-covid.
Make no mistake, interest rates rising are the result of Dem's inflationary policies.
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"Make no mistake, interest rates rising are the result of Dem's inflationary policies" as well as the conceptual failure to see price increases due to supply fragmentation playing a major role.
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"Make no mistake, interest rates rising are the result of Dem's inflationary policies" as well as the conceptual failure to see price increases due to supply fragmentation playing a major role.
When you get a chance, could you expand on what you mean by this in this context.
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Jude Wanniski, in his brilliant book (according to the WSJ one of the 100 most important books of the 20th century) "The Way the World Works" there is a chapter in which he takes on theories of the crash of '29 and the Great Depression (e.g. "Speculation on Wall Street", Milton Friedman's monetarist analysis, etc) and instead places it on the fragmentation of the world economy due to anti trade policies such as tariffs and competitive exchange rate devaluations. His analysis of the movement of the market in '29 tracking the movement of the Smoot Hawley Tariff Act is positively brilliant (bill locked up in Committee, the market surges, comes out of Committee, the market dives, etc)
What we are seeing now with the disruptions to the fragile supply chain lines that could exist during the American leg global order but now no longer can, is IMHO quite analogous.
Thought experiment: What would happen to the standard of living in America were each of the 50 states have to stand in autarchy?
Does this help?
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Jude Wanniski, in his brilliant book (according to the WSJ one of the 100 most important books of the 20th century) "The Way the World Works" there is a chapter in which he takes on theories of the crash of '29 and the Great Depression (e.g. "Speculation on Wall Street", Milton Friedman's monetarist analysis, etc) and instead places it on the fragmentation of the world economy due to anti trade policies such as tariffs and competitive exchange rate devaluations. His analysis of the movement of the market in '29 tracking the movement of the Smoot Hawley Tariff Act is positively brilliant (bill locked up in Committee, the market surges, comes out of Committee, the market dives, etc)
What we are seeing now with the disruptions to the fragile supply chain lines that could exist during the American leg global order but now no longer can, is IMHO quite analogous.
Thought experiment: What would happen to the standard of living in America were each of the 50 states have to stand in autarchy?
Does this help?
We are already plunging into 3rd world standards of living.
It's only going to get worse.
Plan accordingly.
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In this video Michael Saylor, billionaire and prominent Bitcoiner, compares the 18 defects of Real Estate with BTC. Eye opener.
https://youtu.be/mP0f2s39GDs
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Jude Wanniski, in his brilliant book (according to the WSJ one of the 100 most important books of the 20th century) "The Way the World Works" there is a chapter in which he takes on theories of the crash of '29 and the Great Depression (e.g. "Speculation on Wall Street", Milton Friedman's monetarist analysis, etc) and instead places it on the fragmentation of the world economy due to anti trade policies such as tariffs and competitive exchange rate devaluations. His analysis of the movement of the market in '29 tracking the movement of the Smoot Hawley Tariff Act is positively brilliant (bill locked up in Committee, the market surges, comes out of Committee, the market dives, etc)
What we are seeing now with the disruptions to the fragile supply chain lines that could exist during the American leg global order but now no longer can, is IMHO quite analogous.
Thought experiment: What would happen to the standard of living in America were each of the 50 states have to stand in autarchy?
Does this help?
Yes. Thank you.
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YA, I have high regard for what you think important, but lack the 55 minutes of concentration to watch. Any chance you could give us a summary?
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I too typically avoid long videos, but this one is probably worthwhile. Saylor thinks BTC is digital property, he compares real estate with BTC's properties that you may or may not be aware off. Ofcourse, the assumption is BTC is not going to zero.
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A homebuyer must earn $107,281 to afford the $2,682 monthly mortgage payment on the typical U.S. home, up 45.6% from $73,668 a year ago. That’s due to mortgage rates that have more than doubled over the last 12 months, combined with persistently high home prices. The average U.S. hourly wage grew by about 5% over that same period, and inflation is also cutting into would-be buyers’ budgets
http://redfin.com/news
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"The problem is largely, if not exclusively, the result of the country not permitting enough homes where people want them."
https://www.msn.com/en-us/money/realestate/america-s-housing-gap-is-too-huge-to-measure/ar-AA14mqJ3
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How many new housing units would need to be built before housing becomes affordable?
No one even considers the idea of letting a free market decide that.
The controversy in Vail showcases the issue. Vail Resorts can't build 'affordable housing' for employees on 5 acres they own by the freeway because it would be the end of Bighorn Sheep as we know them:
https://abc17news.com/news/2022/11/14/in-vail-housing-shortage-threatens-americas-ski-wonderland-2/
Without employees there is no business and without housing there are no employees. All because of what Thomas Sowell pointed out decades ago, government and voters apparently don't want housing built on 99% of the land. Once you have yours, don't let anyone else in. Prices skyrocket. How does that help the poor and the working people?
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https://nypost.com/2022/11/26/nyc-landlords-could-soon-be-denied-criminal-background-checks-for-tenants/
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A couple of comments: 1) What happena in NYC (or Calif) does not stay there; it tells you what leftist liberals who govern all our other large cities are thinking and likely to do soon, cf. Minneapolis:
https://reason.com/2019/09/17/minneapolis-doesnt-want-landlords-to-check-tenants-criminal-history-credit-score-past-evictions/
2) Definitions vary but communism is when the government owns the means of production (no private sector) and Fascism is when ownership in name only is private sector but all key decisions are dictated by government, which is what is happening here. Who you rent to is the key decision in housing. Laws protecting race, gender, etc are matters of rights.
Laws protecting convicted felons and known bad tenants of recent past violent behaviors and other issues make a mockery of tenant screening, the heart of the housing business.
If the government makes all the decisions, isn't it just government housing?
All that's left is for private owners to get out of ownership but they have laws blocking that as well.
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"2) Definitions vary but communism is when the government owns the means of production (no private sector) and Fascism is when ownership in name only is private sector but all key decisions are dictated by government, which is what is happening here"
THIS!!!
Doug, it makes sense to me that you post your preceding post in the Fascism thread as well.
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https://reason.com/volokh/2022/12/09/virginia-governor-glenn-youngkin-seeks-to-expand-housing-by-curb-zoning/
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https://confoundedinterest.net/2023/06/22/living-la-vida-biden-us-existing-home-sales-down-23-16-yoy-in-may-as-fed-pauses-and-prices-tumble-most-since-2011-inventory-for-sale-still-missing-in-action/
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https://www.breitbart.com/politics/2023/07/07/illinois-to-require-landlords-rent-to-illegal-aliens-as-housing-costs-surge/
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FK.
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Big buildings for sale, not selling.
Big buildings for lease, not leasing.
Good thing the commercial real estate market is not tied to the rest of the economy, just kidding, because it's going to crash.
https://nypost.com/2023/07/17/no-takers-on-san-franciscos-big-tech-buildings-for-sale/
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https://finance.yahoo.com/news/loan-officer-m-seeing-middle-000641114.html
More here:
https://thehill.com/business/4107748-rising-prices-mortgage-rates-push-monthly-payments-to-all-time-high-report/
Real wages down, energy prices up, credit card debt up, national debt up, housing costs skyrocketing, what could possibly go wrong?
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https://www.breitbart.com/politics/2023/07/27/nolte-property-value-collapse-shows-democrat-destruction-of-baltimore-is-nearly-complete/
Seattle, Portland, Minneapolis, take note.
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Those numbers would seem to mean a lot of owners are seriously underwater.
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Rent Control Is Constitutionally Vulnerable
New York’s 2019 law is so onerous that the Supreme Court may revisit the issue for the first time in years.
By Alexander Talel
Aug. 15, 2023 6:10 pm ET
Is rent control constitutional? To look at the case law, the answer would appear to be yes. The Supreme Court “has consistently affirmed that States have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular,” as Justice Thurgood Marshall put it in Loretto v. Teleprompter Manhattan CATV Corp. (1982).
But the justices have also acknowledged that the rules have to be “appropriate” and that “if regulation goes too far, it will be recognized as a taking for which compensation must be paid,” as Justice Oliver Wendell Holmes wrote in Pennsylvania Coal Co. v. Mahon (1922). New York state’s Housing Stability and Tenant Protection Act of 2019 amended New York City’s rent-stabilization regime in a way that makes it ripe for a constitutional challenge.
New York’s Rent Stabilization Law, originally enacted in 1969, compels certain city landlords to accommodate de facto permanent tenancies at well below-market rental rates. Before 2019, however, landlords could exit the rent-stabilization scheme under certain conditions. The 2019 law eliminated those exceptions.
A group of landlords sued and lost. In February, the Second U.S. Circuit Court of Appeals affirmed the trial court’s decision that rent stabilization, even in its 2019 version, isn’t a government taking, which would require compensation under the Fifth Amendment. The landlords have petitioned the justices to hear an appeal.
The 1969 law was followed by the Emergency Tenant Protection Act in 1974, which allowed the state to renew rent stabilization on declaration of a housing “emergency.” The state has since regularly made that declaration, preventing rent stabilization from expiring, although 1993 amendments allowed landlords to escape rent stabilization when an apartment became vacant or a tenant’s income and the monthly rent both rose above a certain threshold. The 2019 law effectively eliminated both deregulation and the “sunset provision”—the date by which rent stabilization expires absent an “emergency” declaration—thereby ensuring that rent stabilization will apply forever to every covered apartment.
After several unsuccessful legal challenges to previous iterations of the law, Community Housing Improvement Program v. City of New York challenged the 2019 version. The Second Circuit applied Penn Central Transportation v. New York City (1978), a Supreme Court decision involving a challenge to the city’s landmarks-preservation law. Penn Central encourages courts reviewing a takings claim to engage in “essentially ad hoc, factual inquiries” by considering several factors, including the statutory scheme’s economic impact on a landowner, the extent to which the scheme interferes with a landowner’s investment-backed expectations, and the character of the governmental action. The Second Circuit held that rent stabilization doesn’t invariably do economic harm to landlords and that the Legislature’s judgment was entitled to broad deference.
But that formulaic determination gives short shrift to the economic harm of rent regulation—which other policies implicitly acknowledge. New York state offers a tax abatement for residential construction developers who have allowed a portion of new units to be rent-stabilized. If government is compensating property owners who voluntarily provide below-market rental apartments, how can it refuse to compensate those it compels to do so? The onerousness of the taking effected by rent stabilization undermines its stated purpose of increasing the availability of affordable housing units. Owners of buildings with rent-stabilized apartments have begun “warehousing” them—keeping them vacant to prevent permanent occupation by commercially damaging tenants.
Instead of Penn Central, the appellants had urged the Second Circuit to apply a more context-specific standard set out by Justice Antonin Scalia. Writing in Pennell v. San Jose (1988), Scalia argued that where a price regulation designed to cure a social ill encumbers a property whose owner has neither created nor contributed to that ill—in this case the hardship to which a market rent subjects a tenant—the regulation amounts to a taking. Scalia’s opinion in Pennell was joined only by Justice Sandra Day O’Connor.
The Second Circuit’s opinion cites Scalia’s proposed standard in a lengthy footnote, which concludes as follows: “We decline to employ a test that has never been adopted by the Supreme Court.” That was the right thing to do; appellate courts are obligated to follow the precedents of the Supreme Court. The petition for appeal is an opportunity for the justices to take another look.
Scalia’s standard cuts against the notion that a legislature’s “broad authority” to regulate the landlord-tenant relationship insulates such regulation from serious constitutional scrutiny. “The fact that government acts through the landlord-tenant relationship,” he wrote, “does not magically transform general public welfare, which must be supported by all the public, into mere ‘economic regulation,’ which can disproportionately burden particular individuals.”
Scalia further pointed out that the “traditional manner in which American government has met the problem of those who cannot pay reasonable prices for privately sold necessities—a problem caused by the society at large—has been the distribution to such persons of funds raised from the public at large through taxes, either in cash (welfare payments) or in goods (public housing, publicly subsidized housing, and food stamps).”
New York’s rent-stabilization scheme is at heart a public-welfare program. It may be a worthy one. But it uses private property for a public purpose. The Constitution therefore requires its cost to be borne by the general public, whether through a tax benefit or some equivalent compensation applicable to all affected buildings.
Mr. Talel is an attorney in private practice. He served as law clerk to Judge Jon O. Newman of the U.S. Court of Appeals for the Second Circuit and to Judge Sidney H. Stein of the U.S. District Court for the Southern District of New York.
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Real Estate Industry in Panic Mode:
"45% Drop in Home Purchases – Bigger Than '08! Home sales are now down 31% in 2023.
Without transactions, many jobs that are commission oriented are seeing huge declines in incomes. Real estate agents, mortgage brokers, title insurance, home inspectors. All of the various categories are entering a depressions from lack of transactions."
https://twitter.com/WallStreetSilv/status/1698794904338546711
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Sorry people, all the borrowing went to government. Nothing left for homes and businesses.
What's the campaign slogan going to be, more of the same? Stay the course? Morning in America?
Who are these people that think everything is fine with what they're doing to our country? Wake the bleep up.
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https://confoundedinterest.net/2023/09/07/bidenomics-strikes-again-us-mortgage-purchase-mortgage-demand-lowest-in-28-years-as-bank-deposits-down-4-yoy-purchase-demand-down-28-yoy/
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https://finance.yahoo.com/news/housing-expert-8-mortgage-rate-does-not-seem-unlikely-after-rates-remain-at-23-year-high-160009869.html
Mortgage rates were 3% under Republicanomics.
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Hat tip Instapundit
https://www.dailymail.co.uk/yourmoney/property-and-mortgages/article-12620145/downsizing-cost-homeowners-prices-elevated-mortgage-rates.html
Why downsizing will cost homeowners MORE: Soaring house prices and elevated mortgage rates mean retirees can no longer afford to move.
Downsizing has traditionally made sense for retirees looking to settle down and shore up their nest eggs for their later years.
But moving to a smaller home may no longer be a way for Americans to save money in the current market, experts warn.
The average 30-year fixed-rate mortgage has soared to 7.49 percent, according to latest data from lender Freddie Mac, while many homeowners are locked into much cheaper 2 or 3 percent deals on their current homes.
Meanwhile the number of smaller houses for sale has diminished in recent years, according to listing website Realtor.com – pushing up the price of the limited inventory on the market.
The number of properties for sale that measure 750 to 1,750 square feet – the size range people who are downsizing tend to purchase – has dropped by more than 50 percent since 2016, according to Realtor.com.
…
Downsizing is most expensive for those who are locked into historically low mortgage rates – and who would need to take out a loan on a smaller home.
They might not be able to afford to stay, either, as property taxes go nowhere but up on their appreciating homes.
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(Doug). What a mess! It didn't have to happen this way.
A characteristic of general trend of prosperity should be that the basics for living keep getting more and more affordable. Characteristic of a first world country is that the future is on a trend line somewhat predictable. Instead real wages are falling and prices of most basic things are rising.
Interest rates were too low for too long, now have more than more than doubled in less than three years, with nothing other than policy malfeasance to blame.
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Rate of foreclosure increasing under Biden:
https://nypost.com/2023/10/20/foreclosures-continue-to-surge-are-they-a-threat-to-the-housing-market/
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https://www.msn.com/en-us/money/realestate/it-now-costs-52-more-to-buy-a-home-than-rent-one-never-been-a-worse-time/ar-AA1iHLov
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Haven't looked at the updated site yet, but years ago I had a fascination with geodesic domes.
These here seem wildly overpriced (perhaps IIRC because they are in NY?) but the concept continues to intrigue.
https://ekodome.com/about-us/
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https://tippinsights.com/the-commercial-real-estate-sectors-struggles-get-worse/
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https://confoundedinterest.net/
https://confoundedinterest.net/2023/11/15/bidens-mortgage-market-mortgage-purchase-demand-falls-0-3-since-last-week-and-12-since-last-year-stocks-bitcoin-booming-gold-enters-contango-mortgage-rates-up-172-under-biden/
Mortgage Rates UP 172% Under Biden
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A question to ask and answer: What should they have been when he took office? And what should they be now?
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A question to ask and answer: What should they have been when he took office? And what should they be now?
No one knows the perfect rate, but I think we all can agree interest rates were way low for way too long. Same people who were wrong then are in charge now, using the wrong tools to fix the same wrong problems. So in addition to dealing with abruptly higher rates we also have a loss of confidence in the Fed and in the econom. Borrowing, lending and investing end without confidence.
During the time interest rates were too low I wrote on these pages, the economy has three flat tires and we are trying to fix it by putting a larger carburetor on it. We created an additional time bomb while fixing nothing - and the chickens have come home to roost.
Inflation is too much money chasing too few goods. Both sides of that are equally important. The Fed adjusts the money supply but no one (during the Obama Biden years) addresses the supply side except to add even more government impediments to production.
We are (still) spending 40% more than we take in. It caught up with us and runaway inflation resulted. Instead of addressing the known causes, the Fed raises interest rates to intentionally slow economic activity, consumption in particular. Former Sen. Fritz Hollings famously said some (decades ago) , "there's too much consumin' goin' on out there." (That wasn't the problem then or now.)
But you can't smack down consumers with higher interest rates without also hitting producers with higher rates. Ironically, fewer goods and services produced is a cause of inflation.
Were interest rates too low before, yes. Are interest rates too high now? Debatable. What will they be tomorrow? No one knows.
Uncertain future is the centerpiece of a third world economy.
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Yes.
How about a rule of thumb for the theoretical ideal of 3% above inflation?
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Yes.
How about a rule of thumb for the theoretical ideal of 3% above inflation?
That's about right - for mortgage rates.
Problem is measuring the inflation rate - for the next 30 years.
Current interest rates (roughly) :
Mortgage 7.8
Credit card debt 24%. (Why is this so high?!)
Small business loans 9%?
Savings account interest. 0.58% (Why is this so low?!)
https://www.bankrate.com/banking/savings/average-savings-interest-rates/
T-bills 5%
Current inflation rate 3.2% per "nerdwallet".
If you believe that, mortgage rates should be closer to 6% instead of closer to 8. To me, that
would be much closer to normal and far less disruptive to housing, to people and to the economy.
It is not the private sector that is mismanaging the budget, the dollar and the economy.
Like the oil shock of the 1970s, why does it all have to be so abrupt?
In sailing (or any other sport), you do not move from the wrong place to the right place on the boat as the wind and conditions change. You move as needed to always be in the right place. Our spenders, controllers and regulators could learn something from that.
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More doom and gloom. They call it a prediction but isn't it already happening?
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Economist who predicted 2008 housing crash says commercial real estate bubble is about to burst
https://www.msn.com/en-us/money/realestate/economist-who-predicted-2008-housing-crash-says-commercial-real-estate-bubble-is-about-to-burst/ar-AA1kfmYd?ocid=hpmsn&cvid=79045948274248f58f7c304fa3b4cb1d&ei=31
Home Sales Fell to a New 13-Year Low in October
High prices and interest rates combine to cause purchases to plunge
https://www.wsj.com/economy/housing/october-2023-home-sales-fall-ec6b3164
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(Doug) At some point after sales plunge and real incomes drop and stagnate, don't prices plunge? It's hard to say what could go right in this scenario, a spurt of economic growth in an anti-growth environment? I don't see it. When values plunge, loans default, commercial and residential. When loans default, banks are in trouble. And so on.
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https://www.cnn.com/2023/12/15/business/homelessness-highest-reported-level-rents-up/index.html
(Doug) In a nutshell, we have literally thousands of laws, federal, state and local, against housing being affordable, and then we go "OMG! I can't believe people are homeless!"
Their definition of "affordable" (cf. Affordable Care Act) is that someone else pays for it. But what did Margaret thatcher say about socialism. At some point you run out of other people's money. We spend 40% more than we take in at the federal level, plus $4 trillion in quantitative expansion and still run out of money. Maybe there's a better way...
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from article above:
"The biggest numerical growth in people experiencing homelessness was among Latinos. There were 28% more Latinos who were unhoused in 2023 than the year prior. This population made up 55% of the total increase in US homelessness, with 39,106 additional Latinos without housing this year."
thanks Joe.
where did all these Latinos come from ?
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https://nypost.com/2023/12/16/metro/li-squatters-abuse-the-system-to-stave-off-eviction-court-docs/
I am at a loss for words
as I cannot comprehend how this is possible.
Can't they have swat go in and throw them in jail?
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https://confoundedinterest.net/2024/02/14/bidens-mortgage-market-mortgage-demand-down-2-3-from-last-week-purchase-demand-down-12-from-last-year-mortgage-rate-up-151-under-bidenomics/
Hey Krugman and the rest of the cherrypicking sycophants, is housing not part of the economy.?
What other parts of food, clothing, shelter don't they study at the Princeton school of partisan economics?
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https://www.powerlineblog.com/archives/2024/02/the-daily-chart-housing-bubble-2-0.php
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Simpleton question: How can their both be a shortage and a bubble?
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The squatter buster. This gent has made a business out of legally removing squatters from homes; states it’s a growing national crisis:
https://www.foxnews.com/media/handyman-turned-squatter-hunter-atlanta-squatter-crisis-terrorist-act-calls-national-guard
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Far out!
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https://twitter.com/EndWokeness/status/1770117016482947458?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed%7Ctwterm%5E1770117016482947458%7Ctwgr%5E242c5a7493254373c901a227a4b709d75a1e754e%7Ctwcon%5Es1_&ref_url=https%3A%2F%2Fwww.paragonpride.com%2Fforum%2Fthreads%2Frandom-thoughts-thread.568%2Fpage-2403
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The Realtors Stage a $418 Million Tactical Retreat
The NAR’s ballyhooed legal settlement is less than meets the hype.
By The Editorial Board
March 19, 2024 4:57 pm ET
The press is heralding the settlement announced Friday by the National Association of Realtors (NAR) as a revolution in what brokers charge to sell homes. Don’t be so sure. On closer inspection, the settlement appears to help the Realtors get out of a legal jam more than it helps home buyers.
The jam is the jury verdict last autumn in a class action by Missouri home sellers (Burnett v. NAR) that resulted in a $1.8 billion judgment against the Realtors for price-fixing. The plaintiffs alleged that the NAR violated the Sherman Act in part by requiring seller agents to provide a blanket offer of compensation to a buyer’s broker in order to list a home on NAR’s affiliated multiple-listing services (MLS).
This rule is one reason Realtor commissions have averaged between 5.5% and 6% for decades, split evenly between buyer and seller agents. Overall commissions are substantially lower in most developed countries, including the U.K. (1.3% average fee), Norway (1.8%), Netherlands (2%) and Australia (2.5%). Few buyers outside the U.S. even use brokers.
Many buyers these days search for homes online. Yet buyer agents earn a 2.5% to 3% commission no matter how little or how much they help their client. They also have no incentive to obtain the best deal for their client because they pocket larger commissions on higher-priced homes.
Empirical evidence also shows that buyer brokers steer clients away from homes whose sellers paid them less than 2.5% to 3%. Ninety percent of transactions on the Missouri MLSs offered buyer agents exactly 3%. The NAR claimed its policies benefit consumers, but the jury disagreed.
After the Missouri verdict, dozens of other class-action suits hit NAR across the country. Plaintiff attorneys and the NAR appear to have settled the suits on a nationwide basis for practical reasons. Plaintiffs knew they couldn’t squeeze more money out of the NAR, which had only $1 billion in assets as of 2022. The NAR wanted to live to fight another day, and it smells victory in this tactical retreat.
“Two critical achievements of this resolution are the release of most NAR members and many industry stakeholders from liability in these matters and the fact that cooperative compensation remains a choice for consumers when buying or selling a home,” the NAR said in a statement. “Cooperative compensation” is the cartel’s code for the seller paying the buyer broker.
Under the settlement, the NAR will pay $418 million over roughly four years. It has also agreed to bar seller agents from advertising a blanket offer of compensation to buyer agents on an MLS. But the settlement notably doesn’t bar seller agents from advertising buyer broker commissions on other home-selling platforms, including those operated by its members. Nor does it forbid buyer brokers from steering clients away from homes whose sellers pay lower or no commissions.
This may not be the end of the legal challenges to the NAR business model, and it shouldn’t be. The Justice Department last month objected to a similar rule change in a different settlement between home sellers and a regional MLS. Justice said that settlement “makes cosmetic changes” that will perpetuate “stubbornly high broker fees” because it “still gives sellers and their listing brokers a role in setting compensation for buyers’ brokers.”
Justice could still intervene to stop last week's ballyhooed settlement. since collusion may be less obvious but still exist in many markets. The savings for consumers may be far less than meets the media hype. There’s a reason the NAR boasted in a statement that Friday’s settlement will “protect our members to the greatest extent possible.”
The Realtors have prospered for decades from a rigged game that pads their pockets at the expense of consumers. They have then parlayed those profits into lobbying to preserve and expand government subsidies for housing. Whenever these columns pointed out the truth, the Realtors reacted with outrage, as if their commissions are a birthright.
The jury verdict and settlement prove the critics were right. Legal scrutiny should continue until there is a genuine free market in the buying and selling of homes.
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https://www.americanthinker.com/articles/2024/03/outsquatting_the_squatters.html
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Ran across this:
https://www.doorloop.com/laws/alabama-squatters-rights
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If not mentioned in the article, housing insurance also going crazy. Property taxes up 10 fold since I've been here.
Just like the war on poverty, everything the government has tried to make more "affordable" has instead made it more subsidized, making it less affordable for everyone not getting it paid for by the government, cf. college costs, health care, and of course housing.
So, you can't buy housing because of the high cost and you can't sell housing you don't want because of the punitive tax on inflation. Exact opposite of what economists call a free market. Other than that it's all going swimmingly.
https://confoundedinterest.net/2024/04/03/bidenomics-is-on-the-highway-to-hell-for-housing-affordability-mortgage-demand-applications-down-13-from-last-year-while-home-prices-are-up-39-2-under-biden-and-powell/
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https://reason.com/volokh/2024/04/07/new-nber-study-finds-covid-eviction-moratoria-increased-racial-discrimination/
I can say landlords left places empty when government took away all ability to enforce a contract. I called the policy 'third world' at the time.
Turns out the misguided policy hurt the people it was intended to help.
Always does.
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According to CBRE data, the average monthly payments on a new home soared to $3,322 in the third quarter of 2023. This marks a sharp 90% increase from late 2020, when it stood at just $1,746 before Biden took office. Rising rent and the end of pandemic-era protections are contributing to the homelessness crisis.
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https://www.foxbusiness.com/economy/commercial-real-estate-foreclosures-jumped-march-trouble-looms
Foreclosures up 117%.
The banks can just find another buyer. Oh wait, if there was another buyer it wouldn't have gone into foreclosure.
Last foreclosure crisis I bought homes for 15 cents on the dollar of previous sale. That was for homes. People need homes. People don't need office buildings.
Not enough new businesses starting up and growing into successes is a hard thing to measure, until all commercial real estate is vacant. Then you start to see it.
Of the last 16 years counting this year, 13 were either under either Obama, Biden or Covid. Of the three remaining Trump years, 2 were under the Russian collusion delusion and then Pelosi retook the House. The private sector has had a hard run, masked by markets doing okay as 5 or 6 huge companies took all the business. But apparently Google, Apple and Amazon don't want or need your local office building.
What do the construction workers and construction firms that build office buildings do when 30% of the existing ones are vacant. Build more? Why? With whose money? Maybe they can learn to code.
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Important measuring sticks there.
Saw an article yesterday that RE prices in Humbolt County CA (pot cultivation territory) have crashed. If someone buys, there are responsible for the tax liens pending.
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https://kiowacountypress.net/content/governor-polis-signs-cause-eviction-bill-law
Non-consensual contract is an oxymoron.
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"The average U.S. home value is $353,748 while the average for the best district in every state is 86% higher at $651,662, the study said."
https://www.usatoday.com/story/money/personalfinance/2024/04/22/states-home-price-premiums-top-public-schools/73377109007/?tbref=hp
There are so many implications to this, time permitting I'd like to dive deeper on the education side of it.
Expensive neighborhoods are more likely to have intact families, two parents of higher intelligence and achievement, and kids advantaged by both nature and nurture. The lower end schools and neighborhoods tend to have the opposite.
They say for investment value, buy the lowest priced house in the best neighborhood. I did. A lot of good came out of that, my daughter went to the best public schools, value went up 10-fold (over a long period, ttime flies). Taxes also went up 10-fold (but the house is still what builders call 'teardown') so now I can't rebuild because taxes would then be up 20-fold.
I wish it was the humble community it once was.
And now the good public schools are getting worse with wokeness etc.