David Streitfeld in the NY Times gets around to a topic I've addressed multiple times on these virtual pages already: letting home prices fall to afforable levels which will attract new buyers.
"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."
As I said, I've written about this before, so I don't feel the need to dwell on it, but needless to say, I agree that home prices should be allowed to settle to their natural levels.
This really shouldn't be a monster surprise - it's been discussed at length how the tax credit pulled demand forward, how crappy the economy really is, and how home values are still too high.
Bloomberg:
"Aug. 24 (Bloomberg) -- Sales of U.S. previously owned homes slumped more than forecast in July and the number of unsold houses swelled, evidence the market is depressed by foreclosures and limited job growth.
Purchases of existing homes plunged 27.2 percent to a 3.83 million annual rate, figures from the National Association of Realtors showed today in Washington. The pace compares with the median forecast of a 4.65 million rate, according to a Bloomberg News survey.
A tax credit of up to $8,000 boosted sales earlier in the year, pulling forward demand and indicating additional advances will prove difficult. Mortgage rates at record lows have provided scant relief to the industry as unemployment hovers close to 10 percent, foreclosures hold near record-highs and the economy cools.
“To have a full recovery in the housing sector we need a full recovery in the job market,” Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, said before the report. “The low mortgage rates normally would help quite a lot but we really need to see the job growth pick up for housing to improve.”
The pace of existing home sales is the slowest since comparable records began in 1999.
Economists projected sales would fall from June’s previously reported 5.37 million pace. Estimates in the Bloomberg survey of 74 economists ranged from 3.96 million to 5.3 million. Previously owned homes make up about 90 percent of the market. "
Now remember - I do not have a PhD in Economics, yet apparently the 74 economists surveyed by Bloomberg didn't gain some sort of magic insight from their PhDs in Economics either - as every single one of them was too high with his estimate (with the MEDIAN estimate being off by over 21%! Of course, that means that half of the economists had a more than 21% error in their estimate).
"Despite dropping home values, Massachusetts property tax bills continued to rise last year."
Again - property taxes need to be proportioned to town spending. Many of us have been somehow conditioned to think about property taxes as a percentage of our home value - but that's an irrelevant benchmark. The amount of revenue the town needs to collect is not a function of the paper value of all the homes in town - it's a function of how much the town spends.
If you want lower taxes, you need lower spending. Lower home values do not, and should not imply lower taxes.
Several readers have mentioned that a reason "we" need home prices to remain elevated is because property taxes depend on home values. That's true in some areas, and irrelevant in others. In my town, for example, we don't have a cap on property taxes as a % of home value. In other words, the town needs X dollars to fund its budget. It needs these dollars regardless of what the property values of the town are.
I made the mistake, when I was looking at my home before I bought it, of assuming that since I was paying 15% below the assessed value, that when I bought my house and got it reassessed, my taxes would go down by 15% of what was listed on the old sheet. Instead, all the houses in town got reassessed at the same time as mine, with mine actually getting assessed correctly to the price I paid for it. Hence, my taxes actually went up - because the town still needed to collect its X dollars.
If this doesn't make sense to readers, think about it like this: my house can be thought of as owing 10 tax units (I picked 10 as a random number) in my town, where as other houses owe fewer tax units, and some houses own more tax units. That number of "tax units" doesn't change with home values - unless my home's value changes out of proportion to the average home value in town, since the town still needs to collect the revenue to fund its budget. (I keep saying this, but the bottom line is, even if home values went down 50%, as long as we don't cut spending, we still have to fund our budget. The budget has nothing to do with property taxes.)
Now, in some towns, that's not true - because they've instituted laws that make it so that the property taxes can't be more than a certain % of the home's value. This may have seemed like a good idea at some point - with a desire to keep taxes low, but of course, as I've mentioned in previous posts, I feel that the better way to fix this equation is to work on the spending side.
Towns that have legislated max property tax ratios have now handcuffed themselves as home values fall, and they cannot collect enough property taxes to fund their budgets.
So - how does your town do it? Do you live in a capped town? Is it working?
Basically, I live in an "uncapped" town, and it actually makes sense to me. We don't slash the town budget in proportion to home valuations, so we shouldn't expect property taxes to fall in proportion either. Property taxes are (or at least, in aggregate, should be) a function of municipal spending - not home values.
Karl Denninger nails it in his post today about the housing market, responding to Bill Gross's recent comments (Gross said that as a private investor, he'd require purchasers to put 30% down, which, he clarified, isn't feasible for most first time homebuyers).
I could cut and paste and blah blah blah, but hey - go read Denninger's post. Here's the bottom line (my words, not Denninger's):
The reason that people can't afford to make real (that is: in the neighborhood of 20%) down payments is because, and I've said this many times before, home prices are too high - not because home prices need more stimulus/support/propping up.
Ok, now I'll give you the Denninger cut & paste:
"In point of fact the government should encourage prices to contract to affordable and stable levels, from which they should not vary materially on a forward basis. This then turns homes into a place to live, instead of a speculative asset class.
Bill Gross says that the "cost" of a private system could be 300 basis points over Treasuries. So what?
He says this makes housing "unaffordable." My retort is at what price?
Notice what's not being talked about here: actually deflating the bubble, and returning homes to a price where Americans can actually afford them."
Now, why don't we do this? Why don't we let home prices fall to lower levels? Why do we want home prices to stay inflated? Well - that's another question, and I think it gets back to the whole issue of pretending that the Big Banks are still solvent. If home prices fall, borrowers walk away, and banks get hosed on the loans they've written against bad collateral... Hence, policy is designed to prevent this reality.
"WASHINGTON – The Obama Administration today announced additional support to help homeowners struggling with unemployment through two targeted foreclosure-prevention programs. Through the existing Housing Finance Agency (HFA) Innovation Fund for the Hardest Hit Housing Markets (the Hardest Hit Fund), the U.S. Department of the Treasury will make $2 billion of additional assistance available for HFA programs for homeowners struggling to make their mortgage payments due to unemployment. Additionally, the U.S. Department of Housing and Urban Development (HUD) will soon launch a complementary $1 billion Emergency Homeowners Loan Program to provide assistance – for up to 24 months – to homeowners who are at risk of foreclosure and have experienced a substantial reduction in income due to involuntary unemployment, underemployment, or a medical condition."
Here are the parts I found interesting, emphasis mine:
“This is part of the Administration’s comprehensive housing policy that has helped to stabilize a fragile housing market and allows responsible homeowners the chance to reduce their monthly mortgage payments to affordable levels.
What is the program exactly? emphasis mine:
"The program will work through a variety of state and non-profit entities and will offer a declining balance, deferred payment “bridge loan” (zero percent interest, non-recourse, subordinate loan) for up to $50,000 to assist eligible borrowers with payments on their mortgage principal, interest, mortgage insurance, taxes and hazard insurance for up to 24 months."
Then later, the qualifications:
Under the program, eligible borrowers must:
Be at least three months delinquent in their payments and have a reasonable likelihood of being able to resume repayment of their mortgage payments and related housing expenses within two years;
Have a mortgage property that is the principal residence of the borrower, and eligible borrowers may not own a second home;
Demonstrate a good payment record prior to the event that produced the reduction of income.
And the method for dividing the money amongst the 18 states qualifying (by having unemployment above the national mean):
" The states eligible to receive funds through this additional assistance, along with allocations based on their population sizes, are as follows"
You can see the table with the allocations in the HUD link above. But why is the money allocated based on population? Why isn't it allocated based on the number of responsible homeowners who are currently unemployed and at least 3 months behind who will be likely to resume payments within two years? Are they really equally distributed? Seems unlikely...
I want to point out one thing, in relation to the post I wrote earlier about how expectations change - the problem with this solution, along with most of the kick-the-can (delay and pray, extend and pretend) solutions we've come up with so far, is that is presumes that things will get better in two years. Note that the reason we currently have 99 weeks of unemployment benefits is because things have NOT gotten better. I'll say again that we are returning to normal times - THIS is normal - the bubble era was abnormal, and hoping for some magical return to prosperity seems illogical to me.
Somehow I can't shake the feeling that this is reminiscent of another post I wrote several months ago about how what appears to be a homeowner bailout is actually another bank bailout in disguise. Shouldn't these loans be recourse loans, so that, since the homeowner will use the funds to pay the bank, if the homeowner eventually defaults the bank has to pay back the government? In other words, this "homeowner aid" prevents the banks from losing more money - shouldn't they participate in the costs? Seems reasonable to me...
"The federal homebuyer tax credit shifted demand in the U.S. housing market without having a lasting impact on prices, according to Douglas Duncan, chief economist of Fannie Mae, the largest mortgage financier.
“Temporary tax credits change behavior temporarily,” Duncan said today at a National Association of Real Estate Editors conference in Austin, Texas. “It’s simply shifted demand forward...”
“It actually created some price appreciation that’s not supportable long term,” Duncan said of the tax credit."
"The 35-story Lexington Park, near Michigan Avenue and Cermak Road, was surrendered last week by its Irish developer through a deed-in-lieu of foreclosure. The private-equity venture that now owns the property acquired Corus Bank’s the distressed condo loans after the Chicago-based lender failed last fall.
Just three buyers have closed on Lexington Park’s 333 units, according to property records. The tower, 2138 S. Indiana Ave., was supposed to be ready for occupancy in 2008."
and then:
"About 55% of Lexington Park’s 333 units are under contract, according to data from Appraisal Research Counselors. But some of those units were bought by speculators when sales kicked off in 2006. The speculators are sure to walk away now rather than close, given the dramatic fall in condo values. Others buyers probably will no longer qualify for mortgages."
"Through the end of April, MGM Mirage and Dubai World, the owners of the project, have closed on 78 of 1,543 units at the Vdara condo-hotel, according to SalesTraq. Closings started in March at Vdara but CityCenter had announced earlier this year it had sold 698 units there.
At the ultra-luxury condominium tower Mandarin Oriental, where 205 of 227 condos were reported sold as of earlier this year, 32 units closed between January and the end of April, according to SalesTraq.
CityCenter just started closing units in the two Veer Towers in mid-May so those numbers won’t be available until the end of June. MGM had reported that 480 of the 670 units had been sold earlier this year.
Through Thursday, MGM counted 110 closings at Vdara, 38 at Mandarin Oriental and 16 at Veer."
"Hue, the multicolor building that is the largest condo project ever attempted in downtown Raleigh, closed its sales office without ever selling a unit.
Signs posted on the building's doors, as well as a message left on the sales office's answering machine, say Hue will be closed until further notice."
Again, this is why housing inventory data needs to be taken with a grain of salt. As Calculated Risk puts it (talking specifically about the Chicago article above), "Unless listed for sale, these units are not included in the new or existing home inventory reports - real shadow inventory!"
My friend Ted sent me two data points today: Canada GDP + 6.1% and India GDP + 8.6%.
Wow. Steamy. I immediately realized that I'd recently read a story about not the overheating economy, but ACTUAL overheating in India (temperatures in excess of 120 degrees!), and out of control forest fires in Canada. Talk about bringing the metaphor of the "overheating economy" to the real world...
"Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable."
"The trend is likely not sustainable...." Understatement?
There's definitely an interesting comparison between Detroit and Vegas - both of whom have housing markets which I think could accurately be described as "languishing."
Detroit is finally chipping away at a glut of abandoned homes that has been piling up for decades, and intends to take advantage of warm weather and new federal funding to demolish some 3,000 buildings by the end of September.
Mayor Dave Bing has pledged to knock down 10,000 structures in his first term as part of a nascent plan to "right-size" Detroit, or reconfigure the city to reflect its shrinking population.
When it's all over, said Karla Henderson, director of the Detroit Building Department, "There's going to be a lot of empty space."
Mr. Bing hasn't yet fully articulated his ultimate vision for what comes after demolition, but he has said entire areas will have to be rebuilt from the ground up. For now, his plan calls for the tracts to be converted to other uses, such as parks or farms.
Pretty amazing. Not really totally crazy, if you think about it - they'll get Federal funds, and create jobs, to knock down houses no one wants, which will also help values of remaining homes hold steadier. Then, in a few years, they'll (probably - assumption on my part!) get more Federal funds and create more jobs when they rebuild these homes - if the situation recovers. Creation by destruction. Bizarre at the core, perhaps - or maybe bizarre on the surface and totally logical at the core.
"The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”
Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.
Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.
Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe."
Never mind the talk of "the next housing boom" when you live in one of the worst real estate markets in the country (yeah - SEVENTY percent of Nevada mortgage holders owe more than their homes are worth!)... Contrary to what my friend Yangabanga emailed me, I explained that this was the same plan as Detroit, just in a different order. While Detroit is demolishing unwanted inventory now, and will rebuild in the future, Vegas is doing the rebuilding without first disposing of the excess inventory, and they'll have to get rid of the excess inventory later - barring a miracle recovery to peak bubble levels. I'm surprised, as I'd think that the Detroit model would be easier to pull off, logistically.
A Vegas builder elborated on the phenomenon in the NYT article:
“We’re building them because we’re selling them,” Mr. Anderson said. “Our customers wouldn’t care if there were 50 homes in an established neighborhood of 1980 or 1990 vintage, all foreclosed, empty and for sale at $10,000 less. They want new. And what are we going to do, let someone else build it?”
So Vegas simultaneously has a surplus of supply and a surplus of demand. Again, amazing.
It's possible that I'm misinterpreting this (anyone disagree with my math? it seems pretty simple) - let's look at the story:
"WASHINGTON (AP) -- The Federal Deposit Insurance Corp. has sold $490.7 million in troubled mortgage loans from 19 banks that failed between August 2008 and March 2009 as it works through an inventory of assets from the institutions it has taken over.
The FDIC said Thursday that the winning bidder in its auction, Charlotte, N.C.-based Roundpoint Mortgage Servicing Corp., paid $34.4 million for a 50 percent stake in a new company set up to hold the home mortgage loans. The FDIC has the other 50 percent."
I whipped out my HP-12C (yeah mofo's - I still have it!) and did some math.. If $34.4MM bought 50% of the holding company, that implies that the total value is $68.8MM. If the face value of the assets is $490.7MM, then $68.8MM is 14c on the dollar! Also known as 14%.
Now what's the point? For me it's this: the crisis was never about liquidity - it was about SOLVENCY! If it had been a (temporary) liquidity problem, these loans would be worth a whole lot more than 14c on the dollar now, two years later. So called temporarily dislocated "fire sale prices" that people were blaming for driving financial firms to bankruptcy were not fire sale prices. They were real, true, prices.
So, the article notes that these loans in question were mostly in Arizona, Florida and Georgia, some of the worst areas of the housing bust, with the highest numbers of failed banks. Again, I interpret two things: 1) I find it impossible to believe that banks have taken all the losses they will need to take on real estate loans and 2) I can't imagine we've seen the bottom in home prices.
"Arizona is one of five states that, with money from Washington, hopes to help at least some of these people hold on to their homes. Under a new, federally financed pilot program for the hardest-hit housing markets, state officials will decide who will get a homeowner bailout, and who will not.
The idea is as controversial in Washington as it is here. Do the neighbors next door who lived beyond their means — the ones who, say, bought that house they could not afford, or who binged on home equity loans to buy new cars and flat-panel TVs — really deserve to be bailed out with taxpayer dollars? Do they deserve to have some of their debts forgiven? And is that fair to the cautious ones who paid their mortgages?"
Well, my position is clear on that question: the answer is NO. But let's not get bogged down in an idealogical battle: if you believe that homeowners who borrowed and spent beyond their means should be bailed out, we really have nothing to discuss - I strenuously disagree. I do, however, ask those who are pro-bailout to refrain from using the "hey - banks were bailed out, why shouldn't we be bailed out too?" argument. After all, we all learned by age 5 the old adage: two wrongs don't make a right.
There is also a key point that lots of people seem to gloss over when talking about homeowners who are having trouble paying their mortgages: there are millions of others on the sideline waiting, saving, and hoping to prudently buy houses of their own! For every imprudent borrower we aid, we are impeding a prudent saver from buying a home they can afford - because we are keeping home prices inflated, and preventing house prices from falling to affordable levels where new savers can finally purchase them.
Since the NY Times gives us some actual data, let's look at one of the troubled homeowners who had to throw in the towel before this bailout program:
"Ms. Carter, at 4344, arrived in 2005, as the bubble was inflating. She took out tens of thousands of dollars in home equity for repairs and other items, and by this year, she was underwater on her mortgage by $86,000. A single mother, she moved out this month, days before her home was sold in a short sale, which meant her mortgage lender allowed her to sell for less than the value of her mortgage and the lender took the loss."
I'm a compassionate guy, but if you expect me to sympathize, I don't (and to her credit, I don't think she's asking for sympathy - as we'll get to in a minute). The Times, in the attached graphic, gives us some more data on Ms. Carter:
original mortgage: $207,920
current mortgage: $307,000
purchase price: $259,000
current value: $221,000
It seems that the "tens of thousands of dollars in home equity" that Ms Carter withdrew from her home is closer to $100,000. Her current mortgage is $86,000 underwater. If she hadn't spent her paper profits (perhaps on the Mercedes and the expensive lawn we'll encounter in a moment?), she wouldn't be underwater!
Now, I don't mean to pick on Ms. Carter, in fact, she is honest about her situation:
"Years ago, she considered filing for bankruptcy but then changed her mind. She said she was accountable for her actions and was making what amounted to a business decision to leave her home.
“I had to take emotion out of it,” said Ms. Carter, 36. “If I had a business, and every single month I was losing money, would I keep on paying? No, I wouldn’t.”
Sitting at her dining room table, before a large tank of fish, she recalled how she had made this a perfect home. It is one of the few on East Montgomery Road with grass in the yard, an expensive proposition in the desert. A Mercedes sits in the driveway.
She said she did not feel she deserved to have her debts forgiven, but added that if her mortgage had been lowered, she would have tried harder to stay."
This "homeowner bailout" program will certainly be difficult to implement morally. The director of the program is quoted in the article as saying:
"he was reluctant to help homeowners with “self-inflicted wounds,” like those who overspent or cashed out the equity in their homes during the bubble years. He wants the banks to match the public money being used for debt forgiveness, and he is focusing on people whose incomes have fallen but who still hold jobs."
And here is the key epiphany that I've been marching toward: guess what - this isn't really a homeowner bailout at all. It's ANOTHER bank bailout! Remember - just like Ms. Carter made the "business decision" to leave her home, banks can make the business decision to adjust the outstanding mortgage balance (lower) on borrowers who cannot pay and will otherwise default and induce foreclosure. There's one huge problem with that, though: I've written at length about the deadly game of extend and pretend we're playing with our debts. The banks are carrying so many of these mortgages at the full loan value, even though they know that in reality they will not be getting the full mortgage value back. If they do a mortgage principal writedown (reduce the amount the homeowner owes), however, they have to write down the value of the loan too - and take a loss.
What's the solution? Extend and pretend... close your eyes and pretend the losses don't exist by refusing to acknowledge them. That's why you see articles like this from Calculated Risk, describing home "owners" who haven't made a payment for three years and still haven't been foreclosed on!
Think about it - the banks know that the real estate market sucks. They don't want to take your house from you and have to sell it themselves - that is expensive, AND it requires them to take the actual loss on their books. On the other hand, they don't want to lower the mortgage balance to an amount the borrower can actually pay, because that ALSO requires them to take the loss on their books. So, they just delay and pray.
Which brings us back to the "homeowner bailout." Do you see, now, who the end beneficiary is? Homeowners don't need a government subsidy - what they really need is for banks to make sensible business decisions and write down mortgages to levels where homeowners are willing to pay (side note: of course, the banks could also foreclose, but that's more expensive for the bank. Despite biases individual bystanders may have on homeowner responsibility, it's probably a better business decision for the banks to do a principal writedown than a foreclosure). As we've just established, if banks do these principal writedowns, they have to recognize losses which further decimate their already fragile (insolvent??) balance sheets - so they avoid the writedowns.
Solution? The government comes in and essentially subsidizes the writedown! The government could send the money to the bank on behalf of the homeowner and get the mortgage balance reduced accordingly, which would be a wash for the bank, or it could allow the bank to keep the mortgage balance as is (also a wash for the bank), and aid the homeowner directly. Either way, banks avoid the reality of marking their bad assets (mortgage loans) to market.
Mr. Traylor, the director of the Arizona housing department, said that he wants banks to match the public money. We will have to wait and see how the program actually plays out, but either way, the banks are getting a subsidy here.
More importantly: if a lender doesn't foreclose on a delinquent borrower, and thus the non-forclosure isn't counted in official foreclosure numbers, does it mean things are better?
"Using LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.
Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage."
We can ask the same question about employment data: if an unemployed worker stops looking for work and is no longer counted as unemployed, have we fixed the problem?
No, on your house. Do you have a mortgage?
Oh, yes, we refinanced.
Oh, perfect. When?
About 5%. A couple of months ago.
Good time.
Yes.
We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."
ummm.... silence...cricket... cricket... Let me recap:
"We had to do it because we had an adjustable rate mortgage and it exploded, so we had to."
That's from Time Magazine Person of The Year Ben Bernanke, Chairman of the United States Federal Reserve, who has bought roughly a TRILLION dollars worth of mortgage backed securities to keep mortgage rates artificially low, and has kept short term interest rates at zero in an effort to continue to stimulate the economy and the housing markets.
WTF is going to happen when these subsidies stop??? To the bomb shelter!!!! The ARMs are exploding!!!
Thanks to Calculated Risk for pointing out this remarkable NYT story about FHA insured loans in California. Now, obviously, we have to be careful drawing conclusions and condemning a program based on one example - but this is not a one of a kind story. Let me summarize my view up front, in the paraphrased words of Mike Shedlock: "You cannot keep home prices from falling by selling homes to people who cannot afford them." Some excerpts from the NYT article:
"In January, Mike Rowland was so broke that he had to raid his retirement savings to move here from Boston. A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.
“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”
In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default."
High five! Sold to you SUCKA!
"Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling. Others, like Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.
“We were resigned to waiting another year,” said a second partner, Michael Bedar, 31. “Then we read about the F.H.A. I had never heard of it before, and couldn’t quite believe it. But it was the answer to our problems.” They put down about $33,000, split among the three of them."
Lever it up, bayyyy-beee! Of course, with a 3.5% down payment, they could be underwater in no time, and then disincented from actually having to pay back their mortgage. Wait a second - isn't this what caused the housing crisis in the first place? Banks making reckless, highly levered loans to individuals who couldn't afford the homes? Now, it's possible that these three gentlemen each make hundreds of thousands of dollars a year, but the article makes it sound unlikely, explaining "Mr. Kurland and Mr. Bedar, who are employed full time, are the buyers of record. Mr. Rowland, a freelancer, will have his interests protected by a legal agreement." Note - I clearly cannot judge the ability of these three 3 guys to cover the mortgage - but my point is that it's irrelevant - 3.5% down mortgages are like playing with nitroglycerin. If borrowers can afford a real downpayment, they shouldn't be given government sponsored leverage, and if they can't afford the downpayment, they shouldn't be given government sponsored leverage!
"“Is this going to be the next wave of the housing downturn?” asked Eileen Bermingham, an agent with Pacific Union. “With such a minimal down payment, how do we make sure people don’t get in over their heads?”"
Good question, Eileen - almost by definition, anyone who can only put down 3.5% is already in over their heads.
"The F.H.A. commissioner, David H. Stevens, said recently that its loans were relatively safe because the buyer was required to live in the property. They “are for shelter. They aren’t speculative-type investments,” Mr. Stevens said.
But the idea of a house as an investment dies hard. Mr. Bedar, Mr. Rowland and the third partner in their property, Jordan Kurland, are all in the technology field, but their dreams of wealth do not feature stock options.
“We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”
Aiyahhhhhhhhhh!!!! The bubble is still alive!
"A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750."
Oy vey. And when the real estate market crashes again as a result of this attempted double down strategy (MARTINGALE!), Barney Frank will say that he was against giving these loans, and blame the Bush Administration. I mean - really - why do we need to have the F.H.A insure $800,000 mortgages?!?!? Isn't the point of the F.H.A to help poor buyers who can't afford a down payment - maybe we should have them buy MORE AFFORDABLE homes! As the article notes: "F.H.A. insurance was created for minority and low-income families who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets." The F.H.A. limits should be LOWERED, not RAISED!
"Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that’s who.
Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area schoolteacher’s recurring “dream of homeownership” could not come to pass. Shimon’s down payment was a tiny 3.5 percent.
This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about, not surprisingly, the sad shape the FHA finds itself in."
"With nearly a quarter of FHA loans insured in the last two years now in trouble, you’d think that the agency would show more discretion in deciding which homebuyers to help. And you’d think that Democrats running the House Financial Services Committee would be more upset over the way the FHA still hands out taxpayer guarantees.
But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to “keep prices from falling too fast.”
Then he explained the absurdity:
"Home prices are falling precisely because houses people bought homes they could not afford.
Note however, the thought process of Barney Frank: We have to keep selling houses to people who cannot afford them in order to keep home prices from falling.
That mentality all but assures a bailout of the FHA is coming"
This is proof to me that we have not seen the bottom in housing.
-KD
full disclosure - I just bought a house - which is FURTHER evidence (based on my contrary indicator nature) that we have not seen the bottom in housing
I wish the government would explicitly say that no firm that pays back TARP monies will get a second chance at a bailout in the future. Perhaps this would quell some of the populist anger that's going around at Wall Street right now, under the logic that the big boys are still gambling with taxpayer dollars. Even if firms have paid back TARP money, there is still the impression amongst the public that these firms are willing to continue to take significant risks because the government will always be there for them again if the shit hits the fan. The populist anger is justified - and it's absurd that the Administration didn't install some rules (like: no second chance for you!) for the guys paying back the TARP dollars.
Unfortunately, it's probably also an impossibility that the authorities could make such a promise that they'd let firms fail. Since we haven't really reformed systematic risk modulation, the government can't tell Goldman that they're on their own if they fuck up.
Here's what I've been reading for the past few days:
"About a week ago Calculated Risk wrote "I'd like a doctor who never gave up trying for a cure, but I'd prefer someone with better diagnostic skills."
Indeed.
Praising Bernanke now is like praising a doctor for nearly killing your son because he finally guessed right on the fourth guess (in this case assuming that the right medicine has finally been prescribed, which is debatable)."
"Second-quarter results were driven primarily by $18.8 billion of credit-related expenses, reflecting the ongoing impact of adverse conditions in the housing market, as well as the economic recession and rising unemployment...We are experiencing increases in delinquency and default rates for our entire guaranty book of business, including on loans with fewer risk layers. Risk layering is the combination of risk characteristics that could increase the likelihood of default, such as higher loan-to-value ratios, lower FICO credit scores, higher debt-to-income ratios and adjustable-rate mortgages. This general deterioration in our guaranty book of business is a result of the stress on a broader segment of borrowers due to the rise in unemployment and the decline in home prices."
"It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage"
Finally - good news for my long time readers: I'm going to Vegas this weekend for Big Show's bachelor party! I haven't been since the day Lehman went bust - so I'm due, and it's almost guaranteed that I'll have a blogworthy trip report next week.
Last night I had the task of infiltrating an octogenarian liberal rally which was disguised as a town hall meeting with Barney Frank. For a young former Wall Street trader who is a fiscal conservative, this was basically the equivalent of being thrown to the wolves - if the attendees at this meeting had an image of the person behind the fiscal crisis, he certainly looked like me. Fortunately, I figured if things got ugly, I could dodge the false teeth being thrown at me, or outrun their motorized carts. Also, it is clear from the fact that commenters on my blog are getting into arguments, that I have made it big in the blogging world, so I went undercover - dressed casual with my blue Boston Red Sox sweatshirt and yellow legal notepad in tow.
Here's the running diary of the evening - in general I will paraphrase Frank's comments and audience questions. I am confident that my summations are fair and accurate. When I use quotations the reader can assume that the actual quote was very close to what I wrote, although I do not have a transcript, so the verbiage may not be identical:
7:35pm: Welcome to Weston High School, where tonight's topic is "Global Economic Disaster Crisis"- heeeeeeere's Barney
7:36pm: Barney Frank: "This is a very important time... Partisanship is an undervalued part of a Democracy... The differences between the parties today is the deepest it's been since the Civil War." Frank went on to explain that there was some poll done of who were the most partisan and least partisan Congressmen, and he was very proud to have been the only person to show up on both lists. I found this intriguing, since I think the partisan nature of our political system is its worst feature - the way congressmen largely end up voting via party lines is utterly absurd and a condemnation of educated free thinking.
7:41pm: Frank makes a joke about Obama suffering "Post Partisan Depression," and the room full of octogenarians laughs like a Seinfeld laugh track. I am not exaggerating when I say that in the room of roughly 200 people, the median age was in the range of 68-70 years old.
7:43pm: BF: "The role of the public sector is to formulate rules to allow us to get the benefit from private sector innovation without generating harm." This was a solid point, but Frank ruined it by citing the creation of the SEC as an example of this public sector regulation in action. I'd hardly use the SEC, who is masterful at catching small time manipulators, but failed miserably in detecting Bernie Madoff'sPonzi scheme even after they'd been given a heads up by whistle blower Harry Markopolos, as the definition of public sector regulatory involvement as intended. Then there's the SEC's division of broker-dealer oversight that had to be closed because ALL of the firms it was charged with regulating ceased to become active broker dealers... but let's move on.
7:48pm: BF: "Securitization is a good thing if it's done right." Frank then explained that he was working to ban 100% securitization - because people needed to have "skin in the game." Basically, he's hoping that if mortgage lenders were not able to sell off all of the risk in the loans they were making (by selling securitizedMBS products) - then the lenders would have been more prudent. He is probably correct, but that doesn't make the argument relevant. Our capital markets are all designed to transfer risk from those who are not willing to take it, to those who are. There were people willing to take the lending risks in all of these cases - for whatever reason (complete misunderstanding of the transactions, blind faith in incompetant ratings agencies, abundant capital seeking a pickup in yield). It's clear to me that securitization isn't the problem.
Frank then made the audacious claim: "People made loans they didn't expect to be paid back on." I figured he must have again been referring to the mortgage lenders who had sold off their risk via MBS. It so happens that in this case I consider the buyer of the MBS to be the lender: they are the one ultimately providing the capital to the home buyer. However, I didn't want to get too hung up on this point - it's quite clear to me that no one would ever argue that buyers of MBS didn't expect to be paid back.
However, Frank's next comment was that money was lent to people who clearly couldn't repay, and that the lenders didn't care because they would be able to foreclose on a home that was rising in value, and then sell the home to someone else for a profit! My jaw dropped and I looked around to see if anyone else was surprised at this comment. Apart from a suspicious raised eyebrow from my father, all I saw was a sea of gray hair nodding in approval. Look - this point can't even be argued. Lenders do not lend money with the intention of foreclosing on houses. Furthermore, if the homes in question were rising in value, the homeowner would have positive equity and there would be no default and no foreclosure. This statement was simply a blatant falsehood by Barney Frank.
Additionally, I wrote on my pad at this point: "For each of these villainous securities you mention (MBS, CDO, CDO squared) there was a willing buyer!"
7:50pm Frank discusses CDS: "Sellers of CDS thought they were selling life insurance on vampires," with the point being that they thought they'd never have to pay out on the policy, because vampires never die.
7:59pm: Frank summarizes the partisan views: from the liberals: "The problem was a lack of regulation." From the conservatives: "Liberals forced lending to poor people." Frank then went on to address the Community Reinvestment Act, which is often cited by conservatives as a leading cause of the sub prime crisis. Frank explained that the CRA was a qualitative (subjective) rule that merely required that banks be active within their local community, and that furthermore, if banks did not comply, there was nothing that the legislation could do to punish them. I don't want to get into a debate about the CRA, but there was a paper published today by the Minnesota Fed on the topic that is a good summary. One of Frank's other points on the CRA was that it only applied to banks - and that a key problem in the crisis was that while banks used to make the vast majority of home loans, that morphed into the majority of loans being made by non banks (via securitized products).
This is a sticky point, because Frank wants to say "hey - we couldn't regulate these non-banks," but my point is "hey - you don't have to - you let the non banks fail." The problem isn't making bad loans - if investors bought bad products and lost money, that doesn't cause systematic risk to our financial system. The problem was that banks were allowed to lever up massively, and own these same securitized products where the risk was completely mis-estimated and misunderstood.
8:05pm: We enter the bizarro world. Frank blames G.W. Bush for pushing home ownership for the masses. In the early part of the 21st century, he says, the percentage of FNM/FRE loans used for lower income housing was raised from 42% to 56%. Barney Frank claims he objected to this. The thought of Big Bad Bush scheming behind his Wizard of Oz curtain "I have an idea - we'll try to get all these poor people into houses - the Democrats will HATE that," while the Barney Frank screamed in the streets: "You Nazi!!! How could you suggest something so outrageous! We certainly do NOT want more people to own homes! That's a terrible idea!" Is so absolutely insane that it wouldn't even be funny if it was a story in The Onion.
Again, I looked around to see if anyone else was shocked at this claim that the liberals were fighting against home ownership while the conservatives were promoting it - but all I saw was a sea of heads nodding in response to the word they'd been conditioned to associate with evil: "Bush."
This morning, it took me all of 90 seconds on the internet to find this video of Frank speaking on the floor of Congress in 2005:
I took the liberty of transcribing the key portion: "Obviously, speculation is never a good thing, but those who argue that housing prices are now at the point of a bubble seem to me to be missing a very important point. Unlike previous examples where you've had where substantial excessive inflation of prices later caused some problems, we are talking here about an entity- home ownership - homes- where there is not the degree of leverage that we have seen elsewhere. This is not the dotcom situation - we had problems with people investing in business plans for which there was no reality...Homes that are occupied may see an ebb and flow in the price at a certain percentage level but you're not going to see the collapse that you see when people talk about a bubble and so those of us on our committee in particular will continue to push for homeownership."
I am quite certain this is exactly what readers were talking about when they called Barney Frank a hypocrite and a lier. His statement that he was against home ownership and that promoting home ownership was a tool of the evil Republican administration is the most shameful type of partisan politics.
Frank than explained that preventing foreclosures was a goal of enlightened self interest - to keep prices of neighboring homes from declining. Clearly, I disagree with this point - as manipulating home prices to keep them higher makes them less affordable, not more affordable.
8:10pm Frank outlines his 5 point plan for preventing a repeat of the financial crisis
1) Protect financial products at the retail level - ban products such as negative amortization loans. Somehow, during this point, Frank made a point of saying that he was in favor of gambling, and uttered, "I'll bet 1000 flowers bloom as long as I don't have to be in the garden." anway... I agree with this point, and I think that if we want to protect people from themselves we should require them to get educated and earn a "mortgage license" just like a drivers license - that way no one can claim after the fact that they were taken advantage of during the borrowing process.
2) Executive comp: "Say on pay" where shareholders have a vote on executive pay. Frank segued again into the perverse incentives he accused Wall Street Traders of having, where it was a case of "heads I win, tails you lose." Again - I don't think the issue is compensation and perverse incentive (although there is SOME of that) - the problem was a complete failure to accurately account for risk - not a willingness to ignore the downside risk. If banks are regulated by limiting leverage, the banks cannot blow themselves up. Cutting compensation doesn't reduce risk - cutting leverage DOES.
3) Regulators require some risk retention: this is back to the bank on 100% securitization - requiring people to keep some "skin in the game."
4) Give some federal regulators the power to takeover non-banks (like the FDIC has the power to takeover banks). By takeover, I mean "intervene and wind down if the shit really hits the fan."
5) Give federal regulators the power to regulate systematic risk: regulate CDS, have hedge funds register with the SEC. This is probably actually the most ambitious goal - it's easier said than done, but it's certainly a good goal.
8:26pm: Frank: "Because of technology, capital is mobile - we need coordinated international regulation," so that capital won't flow to nations with lax regulatory environments.
At this point, Frank opened the floor for questions, where I quickly got in line to ask mine. You'll have to tune in for Part Two for all the Q/A details.
-KD
Full Disclosure: short partisan politics, short pandering lies, short mis-education of ignorant constituents
Believers in Obamanomics are telling us that things are getting better and that we've already begun to see the signs of a turnaround in the economy. It's patently obvious that I tend to disagree with that rosy view, and I found some comments out of Fannie Mae on Friday that also seem to throw doubt on the validity of the turnaround claims.
"Fannie Mae issued a grave warning about its future on Friday, saying it needs $19 billion in additional government aid as job losses grow and risky loans made during the housing boom go bad at an unnerving pace... The government, which seized control of Fannie Mae and its sibling Freddie Mac last September, has already spent about $60 billion to prop up the two companies. Fannie Mae's request Friday brings the total to $79 billion. Freddie Mac is expected to release its first quarter results next week. The Obama administration's estimates the taxpayer bill for Fannie and Freddie will hit $147 billion out of a potential $400 billion by the end of September 2010."
Ok, detectives - see if you can figure out where the problem is here (hint: I boldfaced the key numbers!)... Let's take it piece by piece: with this latest request for moolah, the total given to FNM/FRE is up to $79Billion. The administration estimates that this total will hit $147Billion within 15 months. But wait - help me out here: I'm confused. I've already been told that the housing market has bottomed, that the economy is turning, and that "toxic assets" are only toxic because no one wants to buy them, NOT because they are actually worth less than people think.
WHY THEN, are Fannie and Freddie expected to lose another $70 Billion in the next fifteen months? In poker terms, I'd say we just caught the Obamanomics team in a bluff: they KNOW that home prices haven't bottomed, that the economy isn't bouncing off a bottom, and that mortgage backed securities are not properly marked, all of which adds up to at least another $70B in projected aide to FNM/FRE. Why they continue to run the 3-barrel bluff of blind hope, optimism, and deceit instead of facing up to the problems and trying to fix them (convert bank bondholder positions to common equity!) - is a mystery to me.
Ok, so the Obama Administration released their housing bailout. Check out the details here. The White House also published a good list of FAQ's here. I'll ignore the fact that the title of the plan (which is the title of this post) is pretty bizarre, in that any plan which aims to keep home prices from falling by definition makes them less affordable for those looking to buy homes.
So the plan has a few parts. The first part deals with people who want to refinance into a lower interest rate, but are unable to do so because it's almost impossible to refinance if you owe more than 80% of your home's value. The Plan ups this ratio to 105% - those who owe up to 105% of their homes value will be eligible to refinance into new, lower rate fixed rate mortgages. There are some examples illustrated here.
This is good - allowing people to refinance into a more reasonable interest rate is a fine goal.
The second part of the plan is basically aimed at incentivizing "at risk" borrowers and lenders to avoid foreclosure. In other words, if there are borrowers who are borderline foreclosure candidates, the government is offering to share part of the burden with the lender if the lender aims to restructure the loan so that the borrower has a less burdensome monthly payment. The government set 31% of monthly income as the goal for maximum mortgage payments. Although, according to the example worksheet I linked above, the outstanding principal balance of the loan will not change, the government will subsidize the interest rate to a below market rate to achieve the lower monthly payment.
In addition, the government offers incentives to both the borrower and the lender to remain current on the mortgage - $1k reduction in principal for the borrower for every year (up to 5 years) they remain current, and $1k per year (for 3 years) to the lender for enabling borrowers to remain current! Finally, they offer $500 incentives to mortgage servicers and $1500 incentive to mortgage holders who modify mortgages before they become delinquent. Again, they are disualifying those borrowers who own more than 105% of the value of their home.
Now, this part of the plan is a little dicier. Instead of looking at it as the absolutely absurd idea of both subsidizing and paying people to pay their mortgages, which goes against every value I have, I believe the goal is to reach a better outcome for all parties involved (lender, borrower, other homeowners in the neighborhood) who would do worse if the lender went through with foreclosure (which is expensive for the lender, obviously not good for the borrower, and lowers surrounding home values.)
The final part of the plan is more money dumped into Fannie Mae and Freddie Mac to continue to buy mortgages, as well as an increase in the maximum allowable size of their portfolios. I'll just ignore this part of the plan, since there's no use complaining about how we were supposed to be winding down FNM and FRE's heft, not increasing it - as was stated when the government bailed THEM out.
Now, one reason I'm not outraged as a fiscally conservative free markets American is that I don't think this plan is egregious. Unfortunately, because it's not egregious I don't believe it will be transformational. At best, the plan will allow borderline foreclosure cases to restructure into mortgages they will be able to pay off. At worst, it will delay their foreclosures for a few years. What it won't do, I PRAY, is bail out the morons who have no hope of paying back their debts.
Obama is not an idiot. He knows he cannot and should not bail out everyone. Unfortunately, I think there are a lot more people in the "shouldn't and cannot be bailed out" category than the President estimates, and that this housing plan will be like a finger in the dike (the retaining wall kind, not the lesbian kind).
I have thoroughly enjoyed reading the comments from NY Times readers on the Housing Plan. When there is so much outrage from an audience as supremely liberal as the Times', you know The People are getting mad. The link to the comments is sorted by ones which NY Times readers most approved of. I strongly agree with the sentiment of many of the comments, which basically revolves around the common theme of "Why are we rewarding fiscal irresponsibility?" My two most liberal colleagues continue to argue with me that we need to bail out these at risk homeowners because we cannot allow the housing market to just collapse and face armageddon in our society. I strongly disagree with this notion of homeowners being essentially "too big to fail." Millions of Americans were given a taste of a life they could never afford as a result of a bubble of massive proportions. Now they will need to go back to the life they had before they were given $700k houses on $50k incomes. It can be undone, and there are millions of other families waiting to buy these houses when they are allowed to be priced at normal market prices.
Part of the problem is that my friends don't sympathize with me because they know I'm still well off, even if I'm getting raped on my massive rent each month because I was responsible and didn't buy an apartment at the top of the market. Even though it's unfortunate that my wife and I will probably leave NYC shortly because this cost of living is ridiculous, I still have options.
I explained to these liberal friends that they shouldn't think about me - they should think about my sister and her husband, who are both teachers living (renting) in suburban Boston. How will my sister be able to afford a home if the government acts to inflate home prices artificially (and I dare anyone to explain to me how any sort of government subsidy can be viewed as anything other than artificially keeping home prices higher.) My step-sister also lives (rents) outside of Boston. Her husband drives to Providence before dawn every morning to work a temp job to earn money for the business he is working on developing. How can they ever hope to afford a house if the government is attempting to keep home prices higher - rewarding those who took on mortgages they couldn't afford?
I tried to explain to my bleeding heart liberal friends that by helping one (imprudent) family, the irresponsible borrower family, the government is hurting another (prudent) family - the "saving and waiting for AFFORDABLE housing" family. It's quite clear to me which way that scale should tip.
I leave you first with a NY Times comment from "Jessica in Brooklyn," which I think illustrates my point:
In other news, I am barely making enough to pay my student loans, rent, food, insurance and save for a down payment. To me, mortgage is a privilege. Nobody is helping folks pay their rent, so why should we spend so much money to help those who purchased too much house. I don't want to see families become homeless, but this all very frustrating for someone who is trying to purchase a home the right way. Hey Obama, I didn't get a good return on my law school education. Can you help me out with my bills?
and then with today's outburst from CNBC's Rick Santelli, who is one of the most reasonable and well informed reporters they have. This was immediately dubbed "The Chicago Tea Party."
Bloomberg: Fannie Mae, the mortgage-finance company under U.S. government control, will loosen rules for homeowners seeking to lower their loan payments by refinancing.
Fannie Mae will drop some credit-score requirements, reduce income-documentation standards and waive the need for appraisals in some cases, according to a notice yesterday to lenders posted on the Washington-based company’s Web site. The changes apply to loans that the company owns or guarantees.
I mean - wow. Dejavu? I already touched on this when GMAC lowered credit standards: it seems the problem may not be so much a lack of capital to be lent by banks, but a lack of qualified borrowers. This FNM statement is especially shocking since it's basically EXACTLY what caused the mortgage bubble in the first place.
At some point someone is going to have to break it to the American people and the world that there is no magic pill. It seems apparent that not even the likes of Helicopter Alan or Helicopter Ben possess the needed capital- even with the printing presses running wide open. Rewriting accounting rules to create the appearance of wealth, buying up nuclear waste at above fair value and trying to re-pump the beach ball of mortgage lending is wishful thinking. The sooner the current administration comes to grips with that, and starts resetting the impossibly high expectations they won the election with, the better. Painful? Yes. But less painful than the fall from grace that will accompany any other path.
As I've said many times: it's a matter of time. You cannot grow or wait your way out of a debt bubble.
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