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We're All Going to Pay For the Housing Mess
Adam Brochert
Goldversuspaper.blogspot.com
September 21, 2009
The citizens of the United States will be paying to clean up the collapse of the real estate bubble. It doesn't matter if one participated in the housing boom or not - we are all going to pay and pay dearly for this mess. Renters, owners and speculators are all equally on the hook if they are taxpayers (did you know that 40% of people living in the U.S. pay or owe no federal income tax?). http://www.taxfoundation.org/news/show/1410.html
Now it is true that those who go through a foreclosure or bankruptcy will have much stress and will take a big hit on their credit score. Those who avoided the bubble, have paid off their house in full and/or don't look at their home as an investment but rather a place to live won't have to deal with these stressors, assuming they don't become a victim of unemployment in the months ahead.
But make no mistake about it, a big chunk of the losses from the housing bubble are going to be put on the taxpayer's tab. The first round of the "bailout ball" was forced upon the unsuspecting American citizenry by Hanky Panky Paulson and his crew to "save the world" from a certain and horrible economic death. The second and third rounds will involve similar sums of money but will come from different angles.
First and most obvious is the number of bank bailouts that the FDIC, and thus the American people, will need to fund. The FDIC will absolutely tap its new $500 billion line of credit from the U.S. Treasury http://online.wsj.com/article/SB125328162000123101.html . To pretend otherwise is silly and/or dishonest, as hundreds of additional banks are going to fail before this fiasco is over. In the linked article above, Sheila Bair is quoted as saying:
"Marking banking assets to market prices doesn't make sense."
No, of course it doesn't make sense. Telling the truth and doing the rational and responsible thing would immediately bankrupt our entire banking system overnight. It is much better to pretend that you haven't lost any money on any of the assets you have and instead tell people that they are still worth what you paid for them, even if their value has been reduced to zero. This is our government-banker keiretsu hard at work discouraging reality, honesty and integrity. If the head of the FDIC feels this way, there is no hope for improved transparency of bank balance sheets and no realistic way to fairly value these banking firms (Stay away! Sell!).
In the mean time, these bank "assets" are trending towards zero or less than zero (in the case of some derivative instruments and homes that have gone through severe "trash outs"), which means that when the FDIC finally does step in, it will cost U.S. taxpayers much more than biting the bullet and bailing out these banks now. All the profits for bankers are and will remain privatized but any and all of the big losses will be put on the taxpayer's tab as much as possible. The larger banks are not stupid and have found a way to try to salvage some extra profits out of this mess (in addition to being able to stay in business) by asking their pre-bought bureaucrats to jump into the shark pool.
This is where the second of the two remaining big components of the government housing bailout comes into play. This is even more nefarious than the direct bank bailouts. It has to do with Freddie Mac, Fannie Mae, the FHA and Ginnie Mae. These institutions are now guaranteeing 90% of new home loans generated in this country, including the refinancing and modification of loans gone bad. Why make lots of loans in the middle of a real estate collapse? Oh yeah, I forgot - it's because all the inevitable losses will just be put on the taxpayer's tab, so who cares?
This is, in essence, a transfer of toxic loans from private balance sheets to the government balance sheet. Underwriting standards have been subprime and lax for these new government-sponsored loans. Private mortgage originators are going hog wild signing up anyone with a pulse who still wants to buy a house (Don't buy - rent!) if they can meet the government standards because these originators know they can turn around and pass the hot potato onto the government, making a profit/commission in the process.
In the mean time, these loans are already going bad at a alarming rate akin to subprime loans. Capital reserves are dangerously low at the government sponsored entities and rapidly declining, which means more taxpayer money will be needed down the road to bail these quasi-companies out (don't believe articles like this where officials say they won't need extra funding - they will). The low down payments and lax lending standards required for many home loans are what helped get us into trouble in the first place and I would hazard a guess that many of the home owners partaking of these new toxic government loans are going to be close to underwater by the time the ink dries on the final loan documents.
This scheme is also why private banks are ignoring overdue debtors for up to 2 years without finishing the foreclosure process. Not only have Sheila Bair and other apparatchik ilk encouraged private banks to avoid taking losses by allowing banks to keep home loans on the books as assets with an inflated and unrealistic value to bolster their balance sheet and make them look vaguely solvent, but the other part of the plan for banks is to stall while trying to find a way to get their toxic loans onto the books of Uncle Sam and the American taxpayer. They will find a way, believe me.
The private, non-federal, for-profit federal reserve corporation is warming up to the scam and moving things along nicely by purchasing large amounts of commercial and residential mortgage debt. This, of course, will all be foisted onto the taxpayer tab at the opportune time. When this occurs, it will sold as "an investment," but this will be yet another cruel joke on the American people.
So, in the end, it's all coming together for many bankers. The housing and commercial real estate collapse continues unabated and the bill is increasingly going to be put on the U.S. taxpayer's tab, allowing many bankers to get off scot-free and pocket some dough in the process. This moral hazard Uncle Sam is creating ensures more risk-taking and speculation in a real estate market the government has no business encouraging people to speculate in right now. It also absolutely guarantees an even bigger disaster down the road for Uncle Sam's balance sheet. Privatizing gains and socializing losses - damn it feels good to be a banksta!
Such moral hazard also encourages debtors to just walk away from any bad housing debts. When people aren't paying their mortgage, they rarely will make property tax payments, so this federal government interference/moral hazard and willful banker neglect of past due loans will also impact local governments tremendously. It is likely that these local governments will try to squeeze some blood out of a stone by asking those left standing who either own their homes or still pay their mortgage to pay higher property taxes. Being financially responsible increasingly means being asked to bend over and accept higher taxes and/or currency debasement while feeling "left out" of the debtor party.
Many citizens support the government "stabilizing" housing prices based on self interest. Yet such folks don't realize that government can only waste money while making things worse for the whole country and not doing anything but prolonging the pain that has to happen to allow the market to heal. Bad debts must be liquidated, not hidden or subsidized. Government cannot "stabilize" housing, but they can put lots of toxic liabilities on the taxpayer tab while the real estate market proceeds lower to the same levels it was going to go anyway.
Unfortunately, all of this government interference does mean that housing will take longer to find its true bottom - I think we're looking at 2014 or later. It also means that the government debt load is going to increase astronomically over the next few years (what's a few extra trillion, eh?), almost ensuring a serious currency dislocation at some point down the road. Be sure to watch with feigned amusement when the apparatchiks tell you in a year or two that no one saw it coming as the next bailout is announced or a currency crisis/capital flight rears its ugly head. Home sweet home, yeah right. We're all going to pay for the housing mess - one way or the other.
http://www.financialsense.com/fsu/editorials/brochert/2009/0921.html
The Bounce in the Housing Market, Interest rates and the Economy
Sol Palha
Tactical Investor
September 18, 2009
Science is a first-rate piece of furniture for a man's upper chamber, if it has common sense on the ground floor.
~ Oliver Wendell Holmes 1809-1894, American Author, Wit, Poet
Stories such as the one listed below are going to increase in the months to come; indeed since that story came out in June, we have seen articles of a similar nature advocating that real estate has put in a bottom and that its time to buy. At some point even the most sceptical will feel inclined to believe that the housing sector has put in a bottom.
For June, the Realtors group said its pending home sales index rose 3.6 percent to 94.6, from an upwardly revised reading of 91.3 in May. The last time there were five consecutive monthly gains was July 2003. The results were far better than analysts expected. Economists surveyed by Thomson Reuters expected the index to come in at 91.2. The report tracks signed contracts to purchase previously owned homes and is considered a barometer for future home sales. Typically there is a one- to two- month lag between a sales contract and a completed deal. The jump in pending home sales coincides with other positive trends in the residential real estate market.
For the first time in five years, home resales have risen for three months in a row, increasing almost 4 percent in June. Low prices, attractive mortgage rates and a first-time homebuyer’s tax credit of up to $8,000 have kick-started sales. "Because housing is so affordable in today's market, job security and the first-time buyer tax credit are bigger factors in influencing home sales," said Lawrence Yun, the Realtors group's chief economist, in a statement. Also Tuesday, homebuilder D.R. Horton Inc. said its fiscal third-quarter losses shrank from the year-ago period, as it took smaller charges against the falling values of its land and unsold homes. Yun said he expects existing home sales to gradually rise over the balance of the year, with conditions varying around the country. Full Story
Under normal conditions, we would also be inclined to believe that the housing sector has put in a bottom. However, conditions are far from normal, and we would like nothing more than to see the housing sector put in a long term bottom as soon as possible. In life what one wants and what one gets are always different, and as such there are too many factors that suggest a sustainable bottom cannot take hold now.
Some reasons behind the increase demand for homes
1) First time home buyers are being offered a credit of 8,000 which is fully tax deductible on the purchase of their first home.
2) Many individuals felt priced out of the market for the last few years and now that prices have fallen considerably they feel that they are getting a bargain.
3) To add to the allure of buying a house, low interest rates are being promoted and when combined with the above factors it can make for a very convincing story.
Regardless of the rosy picture so many experts are now painting, the factors that provide the foundation for a strong economy and in turn a strong housing sector are not there:
Unemployment numbers continue to rise. In addition the number of individuals who have been looking for a job in excess of 6 months continues to rise.
Salaries are not increasing or keeping up with inflation (do not believe the fake numbers that are put out, all one has to do is look at the cost of many necessities to see that inflationary forces are alive).
Even the post office is now ready to take drastic measures to cut down expenses (possibly closing up to 1000 branches). Almost every state in the US is facing rather large budget deficits, IRS tax receipts are down and while many companies are not firing as many employees as they were a few months ago, they are not aggressively hiring either.
Thus it is hard to imagine how this sector can make a strong come back if the Job market is sour. People spend money when they make money, but if they are not making as much or not making any, then going out and making a large purchase such as home is not an option. Let's not forget that most banks have now placed restrictions on how new loans are approved; gone are the days when you could just walk in and all you had to say was “ I want to buy a home” and then scratch your name on the contract and walk out with an approval. The trading desks of many large banks are now accounting for over 50% of their revenue; this illustrates that banks do not think the real estate sector is going to make a come back soon for they would rather risk playing the market than lend money to the consumer.
The one year housing index chart looks very bullish and if one looks just at this chart one would think that the good times are here to stay. From its low in March the index is up almost 100%, by any measure that is a stunning rally. It is now running into resistance and based on the current pattern it will most likely overcome this resistance after a few attempts.
The 3 year chart, however is very revealing and the rally does not look quite as impressive as it does in the 1 year chart. It is still trading a long way of its highs in the 250 plus ranges. We are not trying to throw cold water onto the scene and spoil the party. We would like nothing better than to join the party but cannot find any long term reasons to do so. The housing index could rally significantly higher from its current levels and the long term outlook would still remain bearish. If it manages to trade past 120 for 5 days In a row, the next target becomes 150; a weekly break past 150 and it could trade as high as 180 before resuming its long term downward trend.
The deficits are simply too high and the U.S. instead of putting the money, they print to good use (if there is such a thing as they don't really own the money in the 1st place), the government is instead spending money at an unsustainable rate. One does not rehabilitate a drunk by substituting cheap beer for expensive cognac; the only way to rehabilitate this chap is to cut his supply of booze and offer him treatment. The U.S. seems to think that the answer to our debt problems is taking on more debt.
Let's assume for some strange reason (one that we have missed or cannot locate) the real estate market actually recovers and starts a new long term up trend. The massive amount of money the Fed is creating is going to result in foreigners demanding significantly higher rates for the risks they are taking in purchasing US debt. The national deficit is at a stunning 11.68 trillion and rising. The year is not even over, and we have already added 1.4 trillion dollars to it, next year, we are going to add a minimum of another 1.2 trillion dollars and that's assuming things don't get worse. These figures do not include unfunded liabilities such as Social security, which is set to run out of money by 2029. The debt has continued to increase at an average rate of 3.96 billion dollars every single day since Sept 2007; the keyword is average for clearly we are running well above average this year.
Initial projections now are for the deficit to increase by an additional 9.3 trillion in 10 years; at the rate we are going, it's going to occur at a much faster pace. Soon annual deficits will account for 4% of the overall economy; a figure that history has proven to be unsustainable. In less than 10 years the total deficit will most likely exceed 82% of the overall economy and from there it there would be very little time left before the US crumbles. The big question going forward is how are we going to be able to pay the interest on this deficit, plus all the other unfunded programs that need capital, the biggest of which is Social security without going bankrupt?
Since 1969 Congress has spent more money than its income and people wonder why the average Americans spends more than he makes; the leaders are saying its okay to do so. Now for the kicker, the interest paid on the national debt is the third largest expense in the Federal budget. Defence is still the number one but one wonders how long it will hold this position. In 2006 interest payments totalled 405 billion, for 2007, they came in at 429 billion, for 2008 the figure was 451 billion and as of June 2009, total interest payment are 320 billion dollars. In comparison the budget at NASA is 14 billion, the education budget is 61 billion and Dept of transportation has a budget of 56 billion only. It makes one wonder what the government is thinking. One would think that congress would start spending less but as each year passes, they spend more. We are soon going to arrive at a point where the interest payment alone will exceed 1 trillion dollars; many nations’ economies do not even account for half of this amount, and yet they remain solvent. The US with the world’s largest economy cannot live within its means. Given the current rate at which the US is printing money, the unthinkable might just become a reality. The U.S might be pushed into bankruptcy. History is a wonderful subject, it provides a clear guideline of not only what was done but will occur again. History always repeats itself.
The U.S. has two options, declare bankruptcy, or start to implement massive budget cuts and raises taxes; there are no other options. The cuts will have to be huge for they will wait until the end to implement them; every administration wants to look good and simply passes the buck to the next administration.
We do not know how the things will unfold exactly, but any person with simple common sense understands that something will have to give otherwise the whole system will fall apart. The debt is now 11.68 trillion, in a few years it will hit 15 trillion, and in less than 10 years it could be well over 19 trillion. Overseas investors are already questioning the logic of investing in a nation that has no regard for its currency whatsoever; how long will they continue to buy this debt when interest rates are so low? They are going to start screaming for higher rates and as the US creates more money, they will demand even higher rates and so a vicious cycle will unfold. Rates could eventually hit the 20-25 percent mark.
This is why we find it very hard to believe that the real estate sector has put in a long term bottom, for the top players are doing everything in their power to debase the US currency. Real Estate does not perform well in a high interest rate environment.
Conclusion
The housing sector and the financial sectors are the back bones of this country's economy and if both are still in trouble, it becomes very hard to make a good argument for a long term bounce in the real estate sector. This does not mean that the real estate sector cannot experience a pretty strong bounce in the short term time frames, but it does mean that this bounce is not sustainable.
The interest payments on our national debt are staggering and anyone with a bit of common sense can see that this trend is not sustainable. The government bickers when it has provide extra funding to local programs but they have no problems almost spending close to half a trillion dollars annually on the interest that is due on our national debt.
The world at large has entered into the phase of extremes; the situation is either very good or very bad. Look when the markets were crashing early this year they crashed hard, when they started to rally, they mounted an incredibly strong rally. There is no in between stage; the same trend is pushed to the limit until it is completely unsustainable and the correction or the move upwards is usually extremely explosive. These movements are reflective of the world we will live in today.
Fed funds rate is trading at multi decade lows; this market has been in a bear market for almost 27 years. This is a very very long time and thus once a new trend starts, one can expect it to last for a very long time; it’s just a matter of time before this market experiences a trend change as it is now trading at a very extreme point. Extreme conditions never last forever. From a long term perspective, one has to start preparing for a high interest rate environment.
The bond market has rallied towards super bubble proportions, and it is therefore, destined to mount an equally strong correction. A foretaste of what lies in store was seen this Jan when the bond market mounted a very strong correction. From its high to its recent low in the middle of June the bond market experienced a 20% correction. This is a very large move considering that it took place in just a span of 6 months.
Interest rates will probably test their lows once more and bonds, on the other hand will test their highs one more time before putting in a multi year top formation. Interest rates are at historic lows, and as such they cannot stay at these levels forever, especially when the Fed is printing new money at a mind boggling rate.
Additional Negative Development
Consumers cut down debt levels by a whopping 21.6 billion in July; this amounts to annual decline of 10%. Economists were expecting credit to drop by 4 billion. For an economy that only expands when more debt is taken on (76% of our GDP is based on consumer spending) the long term growth prospects appear to be rather dim.
The story below also highlights how this economic down turn is affecting the entire world. Under normal conditions such a massive drop in real estate prices coupled with a weak dollar would attract droves of overseas investors but instead the opposite has occurred.
Interest in U.S. real estate by international buyers declined due to the worldwide recession and severe credit crunch, according to the 2009 National Association of Realtors® Profile of International Home Buying Activity.
The share of Realtor® clientele who are foreign buyers is smaller than in previous years, but among those purchasing nearly half paid all cash – bypassing the mortgage process. Twenty-three percent of survey respondents served at least one international client in the 12-month period between the end of May 2008 and the end of May 2009, down from 26 percent in the 2008 study. During this period an estimated 154,000 homes were sold to foreign nationals, which is down from approximately 170,000 international transactions during the previous 12 months. Full Story http://www.realtor.org/press_room/news_releases/2009/09/crunch_international
Finally, a very funny thing occurred in Zimbabwe before hyperinflation struck that nation. Individuals started to purchase treasuries driving yields (interest rates) lower and then out of no where they were hit with inflationary forces which later morphed into hyperinflation. Is not the exact same thing taking place in the United States? From Nov to Dec 08, individuals poured money into the bond market even though their rate of return when adjusted when adjusted for inflation was zero at best and negative at worst. History sadly always repeats itself. In 1980 one Zimbabwe dollar was roughly equivalent to one US dollar; today it takes almost 6 trillion Zimbabwe dollars to buy 1 USD.
No market can remain in a bullish or a bearish phase forever; at some point, the trend will change. Investors who are still holding onto adjustable rate mortgages or who have fixed rate mortgages that were obtained at much higher rates should re finance and lock in these low rates now. If you can sell for a profit or break even, then your best bet would be to get out now as prices are destined to fall much more in the years to come.
Use Strong pull backs in the Gold, Silver and Palladium markets to add to your bullion positions. Individuals willing to take on a bit more risk can purchase a basket of stocks connected to the commodity's sector; use strong pull backs to open up new positions or add to your current ones.
http://news.goldseek.com/TacticalInvestor/1253293200.php
Housing Suffering Relapse Confronts Bernanke Credit Conundrum
Kathleen M. Howley and Rich Miller
Sept. 21, 2009
Bloomberg
The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.
The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.
Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25 percent short-term rates the Fed has engineered, said economist Thomas Lawler. A weaker housing market would likely dampen the economic recovery and undercut shares of builders including Fort Worth, Texas-based D.R. Horton Inc. and Miami-based Lennar Corp., that have risen 40 percent this year, based on the Standard and Poor’s Supercomposite Homebuilding Index of 12 companies.
“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”
Major Test
This is the first major test of policy makers’ ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts.
They have already acted separately, with the administration ending its $3 billion “cash-for-clunkers” automobile trade-in program on Aug. 24 and the Fed starting to wind down its purchases of Treasury debt, which totaled $285.2 billion between March 25, when the initiative began, and Sept. 16.
The 55-year-old Bernanke and his colleagues, who meet tomorrow and Wednesday to map monetary strategy, discussed “tapering” off the Fed’s purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting. No decision was made by the central bank’s policy-making Federal Open Market Committee.
Mortgage-Backed Securities
Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter.
A trio of Fed presidents -- Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta -- has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.
New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious.
“The market expects us to complete these programs,” he said Aug 31. “To contradict that market expectation is a pretty high hurdle.”
Abrupt Stop
An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off -- by reducing weekly purchases and stretching them beyond the end of the year -- would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week.
Mortgage rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17, down from 5.07 percent the previous week, according to McLean, Virginia-based Freddie Mac, a government-controlled mortgage-finance company.
Borrowing costs for home buyers are relatively high based on the historical relationship with the Fed’s target rate for overnight loans between banks, currently at zero to 0.25 percent.
The yield on the benchmark 10-year Treasury note is 3.22 percentage points more than the federal-funds rate, compared with an average of 1.45 percentage points during the past 20 years, according to data compiled by Bloomberg. Thirty-year mortgage rates average 1.69 percentage points more. While that is down from 3.19 percentage points in December, it is still above the average of 1.4 percentage points for this decade before the credit markets seized up in the second half of 2007.
Fed Purchases
The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.
Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said. The spread now is about 140 to 145 basis points, down from around 215 at the start of the year.
“One of the key linchpins to the restabilization of our economy is getting housing back,” said Laurence Fink, chairman and chief executive officer of New York-based BlackRock Inc., the largest publicly traded U.S. money manager. “There is a great need” for the Fed to “continue to invest in the mortgage market right now,” added Fink, 56.
Crucial Extension
A number of Washington-based organizations -- the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association -- say an extension of the buyer’s tax credit is also crucial.
Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers.
Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market “very encouraging” and told reporters on Sept. 17 that the Obama administration will take a “careful look” at extending the credit.
Congress may not pass an extension; the chances “seem slim,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee. Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.
Fastest Pace
The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years, according to the nonpartisan Congressional Budget Office.
In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending.
The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.
“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”
Housing Starts
Single-family housing starts fell 3 percent in August to a 479,000 annual rate -- the first decline since January -- according to seasonally adjusted figures in a Sept. 17 report from the Commerce Department.
Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Real-estate sales fuel consumer spending, which historically accounts for about 70 percent of gross domestic product, he said.
“Housing has been the sector of the economy with the largest multiplier effect,” said Berson, former chief economist at Fannie Mae. “Whether buying new homes or existing homes, people tend to fill them up with things: new furniture, new appliances, new window coverings.”
To be sure, some economists are betting the housing recovery is here to stay. The market has “clearly bottomed,” said Dean Maki, chief U.S. economist for Barclays Capital in New York.
Even some of the optimists are hedging their bets given how dependent the market has been on government and central bank support.
“I’m right in there with the rest of the cheerleaders, but there are no historical anecdotes, no historical data points to use for this,” said Lewis Ranieri, the 62-year-old mortgage- bond pioneer who is chairman of New York-based Hyperion Partners LP. The U.S. housing market is “still very fragile.”
To contact the reporters on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.netRich Miller in Washington rmiller28@bloomberg.net
http://search.bloomberg.com/search?q=Peter+Hooper&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1
fw: FORECLOSURES: They're Not Just For Breakfast
From: Jack Harper (jack.harperxxxx)
Sent: Thu 9/10/09 7:41 PM
To: xxxxxx
Hey! I'm working on the solution to this MEGA-PROBLEM.
Jack
World Freeman Society Public Forums....
Re: How to drive the banker crazy....
by charlesGGG » September 10th, 2009, 3:25 am
Hello All,
I would like to give many thanks to JackieG for the help and assistance accorded me and my sister a few months ago....and I now come back with the latest update.
My case is still yet to get to court (october period) but my sister's case has happened and is what i will comment on....Shady dealings.
As instructed, we sent off the prerequisite letters (based in UK) and visited 3 solicitors and 2 barristers all refused to take on the case some even said the legal arguement was sound but we should still "just comply" and pay the arrears on the mortgage and get-off with only a suspended court order and not full possession/forclosure.
So we decided, to hell with those cowards and went into court as litigates in person...THEN....THEN....THEN the most craziest hearing took place.
the original solicitor for the mortgage company withdrew and he was replaced with a new person (I think barister) who then admits that they've sold the mortgage - which is what we've been saying all along and therefore, they have no standing in court. And also they haven't produced the info we requested in the letters we sent previously and as such are in dishonor.
The criminal judge first of all refused to let me speak on the threat of being in contempt of court (property in my sisters name) and agreed to change the claimant/plaintiff right there and then from the old mortgage company to the new one, and by default rendering all the letters and all the evidence we submitted null and void. At this point I protested to not excepting their proof of new ownership without verification from the land registry etc and that the case should be adjourned for new evidence being introduced to court, but no joy. Thrown out of court and told to carry on paying the illegal mortgage to the so-callled new owner
"suspended possession order" ---Bastards.
Was advisd to have an informal discussion with another barrister (we wanted to appeal) but after he said alot of bollucks mainly about the costs, it kind of drained my energy especially knowing that I had to refresh for the next round in october.
So back at it sending off the letters---they are again not responding, telling them they are in dishonor etc etc and if they don't comply then i will consider the matter settled but all they will do is wait till they get to court and pull something sneaky again.....SO currently looking for methods to f@...ck them up legally if they try it. More coward solicitors still not wanting to take the case, those that do find it interesting also want large amount of MONEY upfront....don't trust them.
So far the score is 2-1 to them.
We will not go silently into the night.....!!!!!
For Commercial Real Estate, Hard Times Have Just Begun
TERRY PRISTIN
September 1, 2009
As the commercial real estate market heated up earlier in the decade and lenders competed feverishly to issue ever-riskier mortgages, hundreds of bankers, investors, lawyers, brokers, appraisers, accountants and analysts flocked to an investors’ conference in Florida each January to celebrate their good fortune with lavish beach parties featuring bikini-clad models and popular entertainers.
But in what a Prudential Real Estate Investors report described as “a move of near-perfect symbolism,” the conference sponsor, the Commercial Mortgage Securities Association, recently announced that next year’s event would be relocated from South Beach to Washington, where the industry has been lobbying strenuously for federal assistance.
These days, the people who buy and sell office buildings, shopping centers, warehouses, apartment buildings and hotels are hardly in a festive mood, despite some recent encouraging signs relating to the job and housing markets and a recent increase in sales of small office buildings.
Even though industry lobbyists were able to persuade Congress to extend a loan program aimed at prodding the stalled securitization market back to life, several analysts said it was unlikely to head off a spate of defaults, foreclosures and bankruptcies that could surpass the devastating real estate crash of the early 1990s. “It will prop up a few deals, but you can’t stop the wave that’s coming,” said Peter Hauspurg, the chief executive of Eastern Consolidated, a New York brokerage firm.
The distress is still in its early stages, analysts said. “We are between the first and second inning,” said Richard Parkus, who directs research on commercial mortgage-backed securities for Deutsche Bank. “We’re going to have to get through a very difficult period.”
Mr. Parkus said that vacancy increases and rent declines already mirrored what happened in the 1990s, and until new jobs were created, generating an increase in demand for commercial space and more retail spending, this was not likely to be reversed.
Building values have declined by as much as 50 percent around the country, and even more in Manhattan, where prices soared the highest. As many as 65 percent of commercial mortgages maturing over the next few years are unlikely to qualify for refinancing because of the drop in values and new stricter underwriting standards, he said.
Fitch Ratings recently reported that $36.1 billion in securitized loans — mortgages pooled, sliced into different categories of risk and sold to investors — have been transferred so far this year to a “special servicer,” an agency that handles troubled loans. Such a transfer is prompted by a bankruptcy, a 60-day delinquency or the prospect of an imminent default. In all, some 3,100 loans representing $49.1 billion, or 6.1 percent of the total, are currently in special servicing, an amount that could grow to nearly $100 billion by the end of the year, Fitch said.
But the damage is expected to be even greater for banks, which are holding $1.3 trillion in commercial mortgages (including apartment buildings) and $535.8 billion in construction and development loans, said Sam Chandan, the president of Real Estate Economics, a New York research company. About $393 billion worth of mortgages are scheduled to mature by the end of next year alone, and an estimated $39 billion more were due to expire this year but have been extended, he said.
By midyear, Real Capital Analytics, a New York research company, had identified $124 billion worth of distressed property. Less than 10 percent of the distress had been resolved through loan modifications or sales.
The downturn in commercial real estate is already having repercussions for local governments. New York City’s general fund, to cite an example, collected $2.1 billion from transfer and mortgage recording taxes at the peak of the market in the 2007 fiscal year, according to Frank Braconi, chief economist for the comptroller’s office. This fiscal year, it is expected to receive only $767 million, he said.
In New York, with its concentration of tall office towers, commercial mortgage-backed securities play a bigger role than they do elsewhere. The brokerage firm CB Richard Ellis estimates that about half the transactions in recent years involved securitized financing.
The mechanism set up to manage problems with the underlying mortgages is being put to the test for the first time. Some longtime real estate investors who profited from the ready access to mortgages made possible by securitization now complain that the system is impersonal and rigid. Instead of negotiating directly with a lender sitting across a table, Norman Sturner, a partner at Murray Hill Properties, a New York real estate company, said he had been forced to deal by telephone with “a third party sitting out in the Midwest” who seemed indifferent to his problems.
Since the master servicer, which handles the routine servicing of the loan, has no authority to restructure it, the landlord has no way to tackle anticipated problems before it comes into the hands of a special servicer and is already in trouble. “What’s going to happen when billions of dollars can’t be repaid?” said Mr. Sturner, who owns and operates five million square feet of office and apartment buildings.
Mr. Sturner, a 39-year industry veteran who bought aggressively during the real estate boom, would not comment on any specific loans. But a Manhattan real estate executive, who declined to be identified commenting on another’s business dealings, said that Mr. Sturner recently stopped paying his mortgage on One Park Avenue, a 20-story Art Deco building between 32nd and 33rd Streets, which he bought for $550 million in 2007, so that he could have the loan transferred to a special servicer.
Last year, one tenant, the Segal Company, a company specializing in employee benefits, said it would move at the end of this year to West 34th Street, leaving three floors at One Park Avenue vacant when new tenants are hard to come by and rents have fallen significantly. Fitch downgraded the securities backed by this loan in August.
The rising incidence of delinquencies and defaults has cast a spotlight on the special servicers, who are chosen by the investors who hold the riskiest bonds, and, in most cases, are part of the same firm. Six companies control 85 percent of the business, according to Fitch.
One source of conflict is that pension funds, endowments and other institutional investors with the most protected securities are often eager to liquidate their positions as quickly as possible, and those with the riskier portions resist taking an immediate loss.
Patrick C. Sargent, the president of the Commercial Mortgage Securities Association, said that despite an apparent conflict of interest, the servicers are accountable to all classes of bondholders and are required to maximize the proceeds for the investment as a whole. Falling short can lead to a lawsuit or a ratings downgrade. “They are in a fishbowl,” he said. “They are going to be watched.”
Critics say the special servicers are overwhelmed by the current workload. “The people we are dealing with are swamped beyond any measure,” said Paul M. Fried, a managing director of Traxi, a New York consulting company, who is advising borrowers with securitized loans.
But one executive at a special servicer whose employer would not allow his or his company’s name to be used said that his firm had tripled its staff in the last two years, and that other companies were also hiring asset managers.
Despite the criticism, Stephanie Petosa, a managing director at Fitch, which rates special servicers, said they were equipped to handle the workload. “I think they are moving at a reasonable pace, given the current environment,” she said.
http://www.nytimes.com/2009/09/02/business/economy/02office.html?_r=1&partner=rss&emc=rss
$1.1 Trillion in Toxic Loans: $908 Billion in Interest Only and $198 Billion in Option ARMs. The Zombie Loans that Simply Don’t Die.
Dr.HousingBubble.com
Sept 10, 2009
Two years of a deep and prolonged recession and we still can’t seem to get a hold of the toxic assets plaguing the books of banks. Much of this comes from the scamming and blood sucking from banks on the taxpayer. How can $13 trillion in backstops and commitments not resolve the problem? First, the banking system operates as a crony operation looking to serve its own interest even if it comes at the detriment of the entire economy. News coming out this week simply reaffirms what we have been saying for the entire year. The Alt-A and option ARM wave is imploding right on schedule.
When I wrote about the Alt-A loans back in May of this year, we put a ballpark figure of $1 trillion for toxic mortgages. So after all the gimmicks and money being thrown at the system it turns out that we still have over $1 trillion in junk mortgages. A recent analysis by First American CoreLogic put the amount of Interest Only mortgages at $908 billion with 2.8 million loans active. Fitch Ratings came out this week showing that there are still $189 billion in option ARMs in the system. For all you folks who thought that all the option ARMs were modified, the data shows only 3.5 percent of the nearly 1 million loans have been modified. And those that have been modified still re-default at incredibly high rates.
So let us put this into perspective with current data:
Now a couple of things to mention. There is overlap between a few categories. For example, a large number of the option ARMs fall under the Alt-A category. Many Interest Only loans are also Alt-A loans. A better estimate is the specific category of Option ARMs and Interest Only and that is a combined total of $1.097 trillion. This is the number of loans out in the system currently. Plus, there are still many active subprime loans. These loans are part of the zombie bank balance sheet.
Yet the reason these loans will be so problematic is how borrowers are viewing the future:
“(NY Time) With many of these homes under water — worth less than the loans against them — many interest-only mortgages will soon become unaffordable, as the homeowners have to actually start paying principal. Monthly payments can jump by as much as 75 percent.
The Mollers owe so much more than their house is worth, and have so few options, that they are already anticipating doom.
“I’m praying for another boom,” said Mr. Moller, 34. “Otherwise, we’ll have to walk.”
Keith Gumbinger, an analyst with HSH Associates, said: “This is going to be the source of tomorrow’s troubles. The borrowers might have thought these were safe loans, but it turns out they bet the house.”
Praying for another epic housing bubble is highly unlikely. The Mollers by the way bought in over priced and over hyped San Diego. San Diego, just like Los Angeles and Orange counties has a legion of people that are praying for another boom to come along. Forget about jobs or income, they conveniently ignore the 11.9 percent unemployment rate and the reality that the state has had to budget some $60 billion in budget cuts. If we use a better measure of unemployment and underemployment, the state has a rate above 22 percent:
What does this data tells us? First, these loans are doomed to fail. It isn’t a question of whether they will fail but how bad will they fail. The issue of shadow inventory is important because many of these banks are simply not moving on homes and ignoring the foreclosure process completely. Not true? Well look at some examples across the country:
“(Cleveland) Renetta Atterberry thought she had lost her East 102nd Street house. So she was shocked to learn in January — five years after her mortgage company filed for foreclosure — that it was still in her name.
Worse, the long-vacant rental home had been vandalized and she faced a raft of housing code violations. Since then, she has been saddled with debts of about $12,000 to pay for demolition and back taxes.
“I thought I had nothing else to do with that home,” said Atterberry. “I was so embarrassed and humiliated by this.”
Her mortgage company didn’t buy the house and never took it to sheriff’s sale to see if somebody else would, leaving Atterberry the legal owner, responsible for upkeep and taxes.
These so-called “bank walkaways” are another troubling development in the foreclosure crisis, particularly in cities like Cleveland with weaker housing markets, say housing advocates and government officials.”
In many other areas, banks are simply walking away from homes. In fact, it is a cold and calculating move. If they take possession of a property, they are responsible for taxes and maintaining the property according to city ordinances. Instead, they do nothing. In their calculus, they figure legal fees and handling the foreclosure process correctly outweigh doing absolutely nothing. You would think with trillions in bailouts banks would have a structured system in place after two long years into the crisis but they are as incompetent as they ever were. That is why it is maddening to entrust the people that created this mess to get us out of it. We need a new group and a new way of thinking. A first easy step is to eliminate the CEOs of every single top bank in the country. Also, we should claw-back any bonuses and compensation from these scammers.
If you think it couldn’t get any more ridiculous, the U.S. Treasury on their FAQ actually tells you how you can contribute to help pay down the national debt! Bwahahahaha! You must have cajones the size of watermelons to ask for something like that.
But back to the toxic loans, the clock has now stopped ticking:
“The interest-only periods, which put off the principal payments for five, seven or 10 years, are now beginning to expire. In the next 12 months, $71 billion of interest-only loans will reset. The year after, another $100 billion will reset. After mid-2011, another $400 billion will reset.”
So much for these loans being resolved. You might be asking, what have banks been doing with all this money? Well first, they haven’t done much to stop nationwide foreclosures:
So not much is being done there. Maybe they’re lending more money. Nope:
“(MarketWatch)- U.S. consumers reduced their credit burden by a record amount in July, the Federal Reserve reported Tuesday. Total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July to $2.47 trillion. This is the sixth straight monthly drop in consumer credit. Consumers have retrenched since the financial crisis hit the economy in full force last September. Credit has fallen in every month since then except January.”
This really leaves you scratching your head. If they aren’t helping on the foreclosure front and aren’t lending, then what are they doing? How about paying out massive profits to their cronies:
“(Bloomberg) — Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.
Second-quarter net income was $3.44 billion, or $4.93 a share, the New York-based bank said today in a statement. That surpassed the $3.65 per-share average estimate of 22 analysts surveyed by Bloomberg and was 65 percent higher than last year’s second quarter.”
So that’s where the money is going. The pretense that the money was to help the average American consumer was a gigantic stinking load so they could continue paying one another massive amounts of money. Incredibly for bringing the country near the brink of another Great Depression they are rewarded. We still haven’t seen a comparable Pecora Investigation. We have a committee looking into the causes as if we need to understand anymore! The banking system is corrupt to the core! It produced a minion of greedy short sighted thinkers that paper pushed this country into believing flipping homes to one another and sticking on granite countertops to every home was the ultimate sign of success. A massive and epic fraud. This is something we already know. Yet here we are allowing these same players to continue to game the system while 26.3 million Americans are unemployed or underemployed seeing the middle class evaporate like a drop of water in the Mojave Desert.
Leave it to California to have these same players proclaim that the bottom is here. Where do you think most of the $1.1 trillion in loans sit? California, Florida, Nevada, and Arizona own 75 percent of the option ARMs. Alt-As? California holds 42 percent of all loans categorized as Alt-As. Yet here people are thinking it won’t impact them in Pasadena, Culver City, or other semi-prime areas.
And guess what? There is this naïve notion that somehow these areas are populated by rich households able to withstand any economic hardship. Right on time to eliminate that wrong perspective:
“(Bloomberg) Wealthy Families Face Bankruptcy on Real Estate Crash
Wealthy individuals’ Chapter 11 bankruptcy filings jumped 73 percent in the second quarter from a year earlier, according to the National Bankruptcy Research Center, a research firm in Burlingame, California.
More individuals or families with at least $1,010,650 in secured debt and $336,900 unsecured are using Chapter 11 of the U.S. bankruptcy code typically associated with business reorganizations. Falling U.S. home prices leave them unable to refinance or sell properties when they drop below the value of the mortgage, said Joseph Baldi, a Chicago bankruptcy attorney.
Chapter 11 is more expensive and time-consuming for debtors and creditors than a Chapter 7 liquidation of assets. Wealthier people filing for bankruptcy typically have large homes, two car payments and children in private schools, said Leslie Linfield, executive director of the Institute for Financial Literacy in Portland, Maine, a credit-counseling and research group.
“You’re living on the edge, you’re juggling those financial balls,” Linfield said. “When one ball goes, they all fall down.”
People forget that a vast majority of people live on the financial edge. If you live in keeping up with the Joneses areas like Orange County, if you make $150,000 many times you are spending $175,000. Make $300,000? Some spend up to $400,000. That is the issue. Americans from poor to rich spend more than they make. This is now fundamentally changing by force. People forget that a million dollar mortgage carries enormous costs. In some areas like Irvine you saw million dollar homes going to people that made $200,000! Maybe this is out of the realm of most people. Take a look at this sample option ARM case:
“(NY Times) Mr. Clavon, 63, was planning to sell the home in a few years and retire to Palm Springs. So he got a loan called an option adjustable rate mortgage, or option ARM, which allowed him to pay less than the interest for the first five years.
On his annual salary of $100,000 as a television camera operator, he could afford the $2,200 initial mortgage payments. And he planned to sell the home before the mortgage reset.
Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000.”
Mr. Clavon is in good company. As it turns out 94 percent of option ARM borrowers made the minimum payment.
His payment is scheduled to go over $4,000 in two years. In fact, it might go much higher since he has paid zero to his principal. Let assume he refinances his mortgage to a 30 year fixed jumbo:
Given Mr. Clavon is 63, what bank is going to offer him a 30 year loan on a home that is underwater by $280,000? According to our numbers, he will pay off the home at 93 if he goes with a 30 year fixed mortgage. Why not go for the 40 year loan mods and be done at 103? The home is located in California (of course). Look at the above though, even with a refinance his principal and interest payment alone is $4,298. Add in insurance and taxes and his payment goes up to $5,000! That will virtually eat 100 percent of his net pay.
You might ask why banks have not dealt with these loans. Easy, that loan of Mr. Clavon is still on the bank balance sheet at face value. Do you think they want to lower it to $400,000 and eat the loss? They will go under. Shadow inventory is here and only those who are blind choose to ignore it.
This case isn’t unique. You can rummage through the multiple Real Homes of Genius examples and you will realize California is littered with these mortgages. People and banks praying for another boom so they can off load these homes to other suckers. Sounds like a fantastic strategy to me.
http://www.doctorhousingbubble.com/1-1-trillion-in-toxic-loans-908-billion-in-interest-only-and-198-billion-in-option-arms-the-zombie-loans-that-simply-dont-die/
Banks Load Up on Mortgages, in New Way
David Enrich
Sept 11, 2009
Banks have been silent partners in the meteoric rise of the Federal Housing Administration.
In the past year, the nation's financial institutions have snapped up securities backed by Ginnie Mae, a government-owned agency that guarantees payments on mortgages backed by the FHA. That helped drive demand for Ginnie securities and created an outlet for billions of dollars of FHA-backed loans made to borrowers who in many cases couldn't afford big down payments.
As of June 30, the roughly 8,500 federally insured banks and thrifts were holding $113.5 billion of Ginnie securities, compared with just $41 billion a year earlier, according to a Wall Street Journal analysis of bank financial disclosures. It is the largest amount that banks have reported holding since at least 1994.
Banks, sometimes with the blessing of federal regulators, have been loading up on Ginnie securities for one main reason: They make their balance sheets look healthier. Since the securities are guaranteed by the government, federal banking regulators have deemed them risk-free, meaning that adding them to a bank's investment portfolio, or replacing assets deemed riskier, lowers the overall risk of the portfolio in the eyes of regulators.
Some banks have used government cash infusions under the Troubled Asset Relief Program to buy Ginnie Mae bonds.
Having an eager buyer for its securities has made it easier for Ginnie Mae to increase the amount of debt it issues, though there appears to be no connection between the banks' increased appetite and the increasing supply of Ginnie Mae securities.
Because Ginnie Mae can issue significant amounts of securities, the FHA can back more loans and the high demand helps keep interest rates low. The irony is that banks that are reluctant to lend and are trying to unload their own mortgage holdings are at the same time helping to prop up the housing market by buying up securities backed by mortgages.
Through August, Ginnie had backed $298 billion of mortgage-backed securities in 2009, the most in its 41-year history and nearly double the amount in the same period last year. That represents about 20% of total new mortgages in the U.S. In addition to FHA-backed loans, Ginnie also guarantees securities comprising mortgages backed by the Department of Veterans Affairs and other federal agencies.
Ginnie and the FHA, units of the U.S. Department of Housing and Urban Development, have become two of the most powerful mortgage financiers in the U.S. When banks make home loans, the FHA insures them against default. Then the mortgages are pooled together and packaged into mortgage-backed securities. Ginnie guarantees that buyers of those securities -- including banks and other investors -- will continue to receive interest and principal payments on the debt, even if borrowers start to default.
FHA Paying the Price ?
Over the past year, FHA has played a key role in supporting the struggling housing market by buying up mortgages made to home buyers who can't afford big down payments or homeowners who want to refinance but have little equity in their homes. The FHA may be paying a price for all its lending. Rising losses on the mortgages have drained the agency's reserves.
Holding Ginnie bonds help banks look better because federal bank-capital guidelines give the Ginnie securities a "risk weighting" of 0%. That means banks don't have to hold any cash in reserve to protect against losses. By contrast, securities backed by Fannie Mae and Freddie Mac, the two mortgage giants seized by the government, carry a 20% risk weighting, meaning some cash needs to be set aside to hold them, even though most banks and investors think there is scant risk of Fannie or Freddie securities defaulting. Privately issued mortgage-backed securities can receive risk weightings of 50%, while many other types of debt carry 100%.
Because of the different risk weightings, bankers say they are selling relatively safe assets like Fannie securities and replacing them with Ginnie securities. The move doesn't shrink banks' balance sheets or remove their troubled assets. But it reduces their total assets on a risk-weighted basis. That is important because risk-weighted assets are the denominator in some key ratios of bank capital.
"With the pressure for capital, that's really made the Ginnie Maes more attractive," said John C. Clark, chief executive of First State Bank in Union City, Tenn. The bank's holdings of Ginnie securities jumped to $66 million at June 30 from less than $4 million a year earlier.
Like some peers, First State bankrolled those purchases partly with taxpayer dollars that were intended to stabilize the banking industry and jump-start lending. The 32-branch bank used a "significant portion" of the $20 million it received through TARP to buy Ginnie securities, Mr. Clark said.
Mr. Clark credits the strategy with helping First State preserve its capital ratios even as loan defaults swelled to $9.5 million on June 30 from $1.6 million a year earlier. During the same period, its total risk-based capital ratio climbed to 11.3% from 10.7%. That gave First State some breathing room above the 10% ratio regulators require for banks to be deemed "well capitalized."
This spring, executives from Warren Bancorp Inc., a small Michigan lender struggling with rising losses, sat down with examiners from the Federal Reserve to discuss the bank's dwindling capital. Bank officials pitched the idea of buying millions of dollars of Ginnie securities
"The examiners thought it was a good strategy for us to use," said Kim Keeling, the six-branch bank's chief financial officer. She called it "the quickest and the least costly option" for addressing the bank's depleted capital ratios.
Ms. Keeling acknowledged that the strategy doesn't ease the bank's underlying problems. "The whole capital ratio can be manipulated ... in many ways to make it appear better or worse," she said.
A Fed spokeswoman declined to comment.
Some bankers and other experts criticize the strategy's benefits as largely cosmetic, saying it is an example of how the federal rules governing bank capital are prone to manipulation. Buying Ginnie securities "helps alleviate some of the pressure but doesn't address the problem at large," said Ken Segal, senior vice president with Howe Barnes Hoefer & Arnett, a brokerage firm that advises small and midsize banks. "There's still the endemic problem" of bad loans.
Others say bank purchases of Ginnie securities are a prudent risk-reduction strategy. Bankers rightly perceive Ginnie securities as safer than almost any other investment, said Roger Lister, chief credit officer for financial institutions at bond-rating firm DBRS. "It may not just be for regulatory-capital arbitrage," he said.
Prosperity's Buying
In St. Augustine, Fla., Prosperity Bank increased its holdings of Ginnie securities tenfold over the past year. The lender, with 20 branches and $1.2 billion in assets, simultaneously dumped most of its Fannie and Freddie securities, even though they seemed safe.
"There's no more risk in Fannie and Freddie securities than in a Ginnie security," despite the different capital treatments, said CEO Eddie Creamer.
Mr. Creamer worries the capital rules could inadvertently make mortgages harder to come by. As banks dump Fannie and Freddie securities, their prices are likely to come under pressure. That inflates their yields, which translates into higher interest rates on the mortgages that they finance.
"It has a broader implication on the availability of those mortgages and the costs of those mortgages," Mr. Creamer said.
—Maurice Tamman contributed to this article.
Write to David Enrich at david.enrich@wsj.com
http://online.wsj.com/article/SB125253192129897239.html
Failing loans for commercial real estate threaten small banks
By Pallavi Gogoi, USA TODAY
Updated 12h 48m ago
Bank stocks have roared back from a near-death experience, which might be diverting attention from a new threat looming for the industry: commercial real estate.
The speed at which loans on commercial properties such as office buildings and malls are souring is "unprecedented," a recent report from Deutsche Bank said. The delinquency rates on these loans reached 4.1% in June, more than double the March rate. Banks are most vulnerable because they hold about $1 trillion of commercial real estate loans and an additional $530 billion in construction loans.
Job losses have led to rising office vacancies. Tight-fisted consumers have helped close retailers such as Circuit City, forcing mall landlords to default on loans. That is having a tiered effect on the banking industry:
•It is especially noxious for the smallest banks, which have very large portions of their loan portfolios exposed. That's the chief reason bank failures have hit 89 this year, vs. 25 for all of last year. For instance, one of the latest banks to fail, Affinity Bank, had 46% of its $805 million in loans to commercial properties. That compares with 33% for all banks, says Keefe Bruyette & Woods.
•Regional banks are also highly exposed and are a bigger worry for the economy because many are large. United Commercial of San Francisco is first on the "top potential concerns" list of Barclays Capital research. The bank, with assets of $12.7 billion, missed a regulatory deadline for filing its second-quarter report and is restating its 2008 financial statements. Tuesday, it named a new CEO. United Commercial wouldn't comment.
•The very largest banks, those with at least $1 trillion in assets, are less exposed. JPMorgan Chase has about 5.4% of such loans, and Citigroup has 3.4%, according to government filings. Among them, Wells Fargo has the largest exposure, with about 16.5%of its $821 billion loan portfolio made up of commercial mortgages or construction loans.
Meanwhile, bank stocks, as measured by the Financial Select Sector SPDR exchange traded fund, which suffered big losses previously, are up about 150% since the March low, more than double the broad market's gains. Yet the potential danger to the banking industry could grow, because the losses will likely get worse.
The National Association of Realtors projects that retail vacancy rates will increase from 11.7% in the second quarter of 2009 to 12.9% in the same period of 2010, the highest vacancy rates since 1991. And office building vacancy rates are expected to rise from 15.5% to 18.8%. "Who knows how long it will take to fill the building with employees again?" says Fred Cannon, chief equity strategist at Keefe Bruyette & Woods.
http://www.usatoday.com/money/industries/banking/2009-09-09-commercial-real-estate-loans_N.htm
Shadow Inventory Proof and Banks Delaying Losses for another Day. Banks Employing the Stick Your Head in the Sand Solution for the Financial Crisis
Dr.HousingBubble.com
Sept. 10, 2009
Apparently acknowledging shadow inventory is like holding onto childhood superstitions like believing in Santa Clause or the financial Easter Bunny. Over the last week, many of you have sent me articles where many authors both amateur and professional have started attacking shadow inventory and started proclaiming that it was a myth. Shadow inventory does not exist according to these new articles. Some of these authors went ahead and made up their own definitions of shadow inventory which in itself is curious since this inventory supposedly does not exist. The problem of course is that there are many definitions of what shadow inventory is so I will try to reiterate what I have been talking about for months.
Here is how I define this category of inventory:
“(Doctor Housing Bubble) What is shadow inventory? First, shadow inventory is housing units that are not making it onto the public market for one reason or another. There is speculation surrounding why this is happening. Lenders are overwhelmed and simply do not have the human capital to handle the glut so goes one theory. Others speculate that lenders are simply too incompetent to have a system in place to handle the mess they created.”
This is rather clear and many people when referring to shadow inventory are discussing it by this definition. Essentially shadow inventory encompasses housing inventory that isn’t viewable by the public or measured in more historical standards. Calculated Risk does an excellent job breaking down some of the categories:
“(Calculated Risk) There are several categories of shadow inventory:
REOs. There are bank owned properties that have not been put on the market yet. Several sources have told me the number is growing – no one knows why except possibly for accounting reasons (the banks might have to take an addition write down when they sell the property).
Foreclosures in process. The delinquency rate has continued to rise, and this will probably lead to many more foreclosures later this year. The number of foreclosures depends somewhat on the success of the modification programs. Last year many delinquent homeowners listed their homes as “short sales” – so those homes were not shadow inventory, however fewer delinquent homeowners are listing their homes now as they try to work with their lenders on a modification. Some percentage of these homes are shadow inventory.
New high rise condos. These properties are not included in the new home inventory report from the Census Bureau, and do not show up anywhere unless they are listed.
Homeowners waiting for a better market. This was the group mentioned in the Reuters story (the article also mentioned foreclosures). These are homeowners waiting for better market conditions to sell.
Inventory is usually the best metric to follow for the housing market – and according to recent releases inventory is declining for both new and existing homes – however shadow inventory clouds this picture.”
I would also add homeowners that have stopped paying but banks are simply not contacting them. In fact, according to Amherst Securities Group LP the foreclosure process now takes 18 months to 2 years, up from 15 months only a year ago. 2 years! I have had many e-mails from people telling me they have been in their homes without making a payment for 12 months. Amazing. Others have stopped making payments and the banks have yet to contact them. The bottom line, there is shadow inventory. These are homes that in every other time in history would have been on the market as additional inventory. I am open to debating the amount of shadow inventory but to say it is a myth is non-sense. In fact, to think there is no shadow inventory is to believe in banking data and give the crony capitalist the benefit of the doubt that they are handling things correctly.
In addition, the crux of the argument for those stating the non-existence of shadow inventory is narrow in focus. What they are arguing is basically one angle of the story. Their point is that banks are not hoarding REOs and there will be no flood of inventory in the next few months. On this point, they are correct. That however does not mean there is no shadow inventory or that somehow it is a myth.
to continue reading extensive article go here:
http://www.doctorhousingbubble.com/shadow-inventory-proof-and-banks-delaying-losses-for-another-day-banks-employing-the-stick-your-head-in-the-sand-solution-for-the-financial-crisis/
Housing sales come back, led by first-timers
Posted Aug 23rd 2009 11:10AM by Tom Johansmeyer
Filed under: Housing, Recession
It looks like the housing market is coming back, but there's still reason to be careful. In July, home resales had their highest monthly increase in at least a decade. The rush is driven in part by a tax credit that expires on November 30, 2009. The rate of sale grew 7.2%, ahead of expectations.
Last month, sales hit a seasonally adjusted annual rate of 5.24 million in July -- up from a 4.89 million in June. This is the fourth month in a row in which seasonally adjusted sales increased, and it was the strongest growth rate since August 2007. A Thomson Reuters survey had forecast 5 million, but the reality exceeded that.
Of course, the good news is clouded by fears that further job cuts, an increase in mortgage rates, and the expiration of the tax credit could lead to another drop in sales and home values, especially for all the recent first-time homebuyers who would see their initial forays into home ownership sink underwater. First-timers are picking up one of every three homes sold.
So, there's a sign that the economy is recovering, but there are still pressures from several fronts that could turn the trend. Again, the sentiment is: "proceed with caution."
Tags: home prices, home sale trends, home sales, home values, housing bubble, housing market, housing prices, housing sales, housing sector, inthenews, mortgage rates, mortgages
Bernanke: Economy On Verge Of Recovery
http://www.wwj.com/Bernanke--Economy-On-Verge-Of-Recovery/5056804
Federal Reserve Chairman Ben Bernanke declared Friday that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression.
Economic activity in both the U.S. and around the world appears to be "leveling out," and "the prospects for a return to growth in the near term appear good," Bernanke said in a speech at an annual Fed conference in Jackson Hole, Wyo.
Major stock indicators, which were up moderately before his comments, surged more than 1 percent. Bernanke's remarks energized investors after a choppy week of trading amid mixed signals on the economy.
The upbeat assessment was consistent with the Fed's observations earlier this month. The central bank has taken small steps toward pulling back some emergency programs to revive the economy.
Still, Bernanke stressed Friday that despite much progress in stabilizing financial markets and trying to bust through credit clogs, consumers and businesses are still having trouble getting loans. The situation is not back to normal, he said.
Restoring the free flow of credit is a critical component to a lasting recovery.
"Although we have avoided the worst, difficult challenges still lie ahead," Bernanke told the gathering. "We must work together to build on the gains already made to secure a sustained economic recovery."
Strains in financial markets worldwide persist. Financial institutions face "significant additional losses" on soured investments and many businesses and households are experiencing "considerable difficulty" in getting loans, he said.
Elsewhere at the conference, European Central Bank President Jean-Claude Trichet responded to a research paper on the origins and the nature of the financial crisis by saying he was a "little bit uneasy" about talk of a return to normalcy.
"We know that we have an enormous amount of work to do and we should be as active as possible," Trichet said.
The remarks by Bernanke, Trichet and others come two years after the financial crisis broke out and nearly one year after it had deepened to the point of sending the nation into a near meltdown.
The bulk of Bernanke's speech was a chronicle of the extraordinary events of the past year. Financial markets took a turn for the worst starting last September and into October, nearly shutting down the flow of credit. The crisis felled storied Wall Street firms and forced the government to take over mortgage giants Fannie Mae and Freddie Mac, as well as insurance titan American International Group Inc.
Despite efforts to save it, Lehman Brothers failed. It filed for bankruptcy on Sept. 15, the largest in corporate history, which roiled markets worldwide.
To prop up shaky banks, the government created a $700 billion bailout fund, a program that proved wildly unpopular with an American public suffering fallout from the recession.
The Fed swooped in with unprecedented emergency lending programs to fight the crisis. It eventually slashed a key bank lending rate to a record low near zero. And Congress enacted programs to stimulate the economy, the most recent coming in February with President Barack Obama's $787 billion package of tax cuts and increased government spending.
"Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major firms would have failed and the entire global financial system would have been at serious risk," Bernanke said.
In recounting actions by the Fed and the government to battle the crisis, Bernanke didn't acknowledge any missteps by the central bank and other regulators. Critics have argued that the Wall Street bailouts in particular sent a message that companies that take reckless gambles will be rescued by the government. There's also the concern that the rescues put taxpayer's dollars at risk.
The public and lawmakers on Capitol Hill were incensed by the repeated taxpayer bailouts of AIG, totaling more than $180 billion, and outraged after the company paid hefty bonuses to employees who worked in the very division that brought down the firm. The $700 billion taxpayer-funded bailout program used to prop up banks, AIG, General Motors, Chrysler and other companies also drew criticism from the public and politicians.
But unlike in the 1930s, Washington policymakers this time acted aggressively and quickly to contain the crisis, said Bernanke, a scholar of the Great Depression.
"As severe as the economic impact has been, however, the outcome could have been decidedly worse," he said.
Global cooperation in battling the crisis was crucial, with central banks slashing interest rates and the U.S. and other governments delivering fiscal stimulus, he noted.
"The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge," the Fed chief observed.
Sponsored by the Federal Reserve Bank of Kansas City, the conference draws a virtual who's who of the financial world - Bernanke's counterparts in other countries, academics and economists. This year's forum focused on lessons learned from the crisis and how they can be applied to prevent a repeat of the debacles.
To that end, Bernanke again called a rewrite of the U.S. financial rule book - something Congress is currently involved in. He again pressed for stricter oversight of companies - like AIG - whose failure would endanger the entire financial system and the broader economy. Obama would tap the Fed for that job, something many lawmakers in Congress don't like.
Bernanke also said the U.S. needs a process to wind down big, globally interconnected companies, much like the Federal Deposit Insurance Corp. does for failing banks.
"Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again," he said.
Earlier this month, the majority of economists polled by the Wall Street Journal expressed support for Bernanke, saying the Fed chairman should get another term. Most of the economists said the 20-month-old recession is now over and gave Bernanke much of the credit.
Existing Home Sales Up for Fourth Straight Month in July
Friday, August 21, 2009
http://www.foxbusiness.com/story/markets/industries/real-estate/july-existing-home-sales-th-straight-month/
Existing home sales rose 7.2% in July as buyers took advantage of historically low prices as first-time buyers took advantage of a tax credit, the National Association of Realtors said on Friday.
The annual rate was 5.24 million units, versus an estimate of 5 million and up from 4.89 million units in June.
“There is no question that the housing market is showing continued signs of bottoming but this is the busy season, and the $8,000 credit has been a big help to the lower end of the housing market,” said Peter Boockvar, managing director at Miller Tabak.
The national median home price in the month was $178,400, 15.1% lower than the same month last year. The increase was driven by sales in condos and co-ops, which rose 12.5%, in the month.
Inventories in July rose 7.3% to 4.09 million existing homes for sale. That represents a 9.4-month supply, unchanged from June.
“Since it’s now taking longer to complete a home sale, first-time buyers who want to take advantage of the $8,000 tax credit should try to make contract offers by the end of September,” said NAR President Charles McMillan. “Otherwise, they may miss the November 30 closing deadline.”
Details about the first-time home buyer tax credit can be found here.
Housing stocks, such as Lennar (LEN: 14.5, 0.46, 3.28%), D.R. Horton (DHI: 12.595, 0.355, 2.9%) and Toll Brothers (TOL: 22.712, 0.832, 3.8%), were higher in the wake of the report.
July home sales surge more than 7 percent
Home resales soar 7.2 percent in July; largest monthly increase in 10 years
http://finance.yahoo.com/news/July-home-sales-surge-more-apf-979372194.html?x=0&.v=4
By Alan Zibel, AP Real Estate Writer
On Friday August 21, 2009, 2:17 pm EDT
Buzz up! 0 Print.WASHINGTON (AP) -- The U.S. housing market is rebounding faster than expected. The question is, can it last? Home resales in July posted the largest monthly increase in at least 10 years as first-time buyers rushed to take advantage of a tax credit that expires Nov. 30. Sales jumped 7.2 percent and beat expectations, the National Association of Realtors said Friday.
"We've got tens of thousands of homes perfect for the first-time homebuyer and we've taken advantage of that," said George Hackett, president of Coldwell Banker Real Estate in Pittsburgh.
Sales hit a seasonally adjusted annual rate of 5.24 million in July, from a pace of 4.89 million in June. It was the fourth-straight monthly increase and the strongest month since August 2007. Sales had been expected to rise to an annual pace of 5 million, according to economists surveyed by Thomson Reuters.
The risks to that healthy pace, however, are job cuts, mortgage rates and the looming end to the homebuyer tax credit. And the last one could be a doozy because first-time buyers are snapping up one out of every three homes.
First-time buyers get a credit of 10 percent of the purchase price of a home, up to $8,000. The credit phases out for singles earning more than $75,000 and couples earning more than $150,000. The real estate industry is lobbying to have the credit extended but its unclear if Congress will be swayed.
"I would not be at all surprised to see a dip at the end of the year once the tax credit expires," said Robert Dye, senior economist with PNC Financial Services Group.
The home sales report was another sign that the U.S. economy is on the verge of a long-awaited recovery after enduring a brutal recession and the worst financial crisis since the Great Depression.
Economic activity in both the U.S. and around the world appears to be leveling out and "the prospects for a return to growth in the near term appear good," Federal Reserve Chairman Ben Bernanke said Friday.
But fallout from the recession will linger for some time. Unemployment rose in July in 26 states and fell in 17, the Labor Department said Friday. That is driving up foreclosures, which are not expected to level off until sometime next year.
Sales of foreclosures and other distressed properties made up about a third of all transactions last month, down from nearly half earlier this year. In places like San Diego and Orlando, buyers are snapping up foreclosed properties at deep discounts, and inventories are low.
Those sales helped drag down the national median sales price by 15 percent to $178,400.
Stephen Stoyko hunted off-and-on for two years before he bought a four-bedroom, two-story foreclosure this week for $320,000. The home in Roswell, Ga., north of Atlanta, was initially priced at $335,000.
Stoyko expects to spend about $7,000 to replace missing kitchen appliances and light fixtures -- a cost will be at least partially offset by the first-time homebuyer tax credit. "It's bigger than I needed, but the price was right," he said.
The inventory of unsold homes on the market rose to 4.1 million, from 3.8 million a month earlier as buyers who had held their homes off the market in the past decided to list them for sale. That's a 9.4-month supply at the current sales pace, unchanged from June.
AP Real Estate Writers Adrian Sainz in Miami and J.W. Elphinstone in New York contributed to this report. AP Economics Writer Jeannine Aversa contributed reporting from Jackson Hole, Wyo.
a couple of charts exposing SubPrime & Alt-A Meltdown
(using CA as the model most other stares will follow)
Mortgage Delinquencies Rise as U.S. Home Prices Fall
Kathleen M. Howley
Aug. 20, 2009
Bloomberg
Americans fell behind on their mortgage payments at a record pace in the second quarter as job losses and falling real estate prices thwarted government efforts to stabilize the housing market.
The share of loans with one or more payments overdue rose to a seasonally adjusted 9.24 percent of all mortgages, an all- time high, from 9.12 percent in the first quarter, the Mortgage Bankers Association said in a report today. The inventory of homes in foreclosure increased to 4.3 percent, the most in three decades of data, and loans overdue by at least 90 days, the point at which foreclosure proceedings typically begin, rose to 7.97 percent, the highest on record.
“We’ve seen a significant drop in the problem with subprime loans and we’ve moved now to a problem with prime fixed-rate loans,” Jay Brinkmann, the Washington-based trade group’s chief economist, said in an interview. “Job losses are driving it, and we expect that to continue into next year.”
Homeowners fall behind on their mortgage payments when they lose their jobs, and declining prices mean they can’t sell to pay off loans, Brinkmann said. Companies have shed 5.7 million jobs since January 2008, the biggest employment loss since the Great Depression. The median U.S. home price fell 16 percent in the second quarter from a year earlier, the steepest drop on record, according to the National Association of Realtors.
Prime Loans
The percentage of loans on which foreclosure actions were started was 1.36 percent, down from 1.37 percent in the first quarter, driven by the decline in subprime loans. New foreclosures on prime loans increased to 1.01 percent from 0.94 percent, while subprime loans dropped to 4.13 percent from 4.65 percent, Brinkmann said.
The delinquency rate for prime loans rose to 6.41 percent from 6.06 percent, and the share of prime loans in foreclosure increased to 3 percent from 2.49 percent.
The number of people filing claims for jobless benefits unexpectedly rose last week, the Labor Department said today in Washington. Applications increased to 576,000 from a revised 561,000 the week before. Economists had forecast claims would fall to 550,000 from a previously reported 558,000, according to the median of 39 projections in a Bloomberg News survey.
U.S. banks raised requirements for all types of loans in the second quarter and said they expect to maintain strict criteria on lending until at least the second half of 2010, according to the Aug. 17 Federal Reserve Senior Loan Officer survey.
Lending Standards
None of the 51 respondent banks eased standards on prime mortgages in the latest survey, while 39 said demand for home loans was about the same, moderately stronger or substantially stronger.
The average rate for a 30-year fixed mortgage is 5.12 percent this week, the lowest level since May, down from 5.29 percent in the prior week, Freddie Mac, the McLean, Virginia- based mortgage buyer, said today in a statement. The rate reached a record low of 4.78 percent in April.
President Barack Obama has pledged to spend $275 billion to help keep as many as 9 million Americans in their homes by refinancing properties that are worth less than their mortgages and offering incentives to companies that modify terms for delinquent borrowers. The government also is offering a tax break of as much as $8,000 for first-time homebuyers.
Housing starts unexpectedly fell in July, pulled down by multifamily dwellings, while single-family starts that make up 75 percent of the industry rose to the highest level since October, a Commerce Department report showed this week.
The 1 percent decline in starts to an annual rate of 581,000 was the first drop in three months and followed a 587,000 rate in June. Construction of single-family houses rose 1.7 percent to a 490,000 rate.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aV1OhnG3_bhI
MORE Banking Fraud (Foreclosure Stats)
Karl Denninger at 11:06
August 20. 2009
When does the willful blindness in terms of bank fraud taking place daily in the so-called "marks" on housing-related loans stop ?
The Mortgage Bankers Association released its latest update:
The non-seasonally adjusted delinquency rate increased 64 basis points from 8.22 percent in the first quarter of 2009 to 8.86 percent this quarter.
and
The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey. http://tiny.cc/rLKCv
That's right folks. That means that of all mortgage loans 13.16% are not in "accrual" status - that is, they're not performing in that interest and principal are not being paid. This is no longer about "subprime" - it is now all about prime loans; the claim that this was going to be "contained' is now proved false.
That our banks are not being forced to take the marks associated with these delinquencies is an outrage. It is the cause of the FDIC's losses, it is the cause of our credit system remaining locked up, and it is the cause of our continued moribund economy, as without a functioning credit system there can be no actual economic recovery.
These institutions are being protected by our Congress and the willful, intentional blindness of The Federal Reserve, FDIC, OTS and OCC.
These agencies and persons have the same data that is being released to the market. The stock market continues to rally not based on improving economics but based on the federal government and The Federal Reserve continuing to allow institutions to LIE about their financial condition and the expectation that the LIES will be permitted to continue!
This is exactly akin to me going to buy a new car, telling the dealer that I have no money, no job, no assets and no hope of gaining any of the above, but the dealer writes me a loan anyway and lets me drive off so he can claim he made a sale, with full knowledge that there is no chance in Hell I can afford to pay for what just "purchased." He does so because he believes he can (and has been allowed to!) lie about my financial condition for more than two years by the government thus far, and he thus expects he will be able to so do going forward indefinitely.
But any so-called "economic recovery" based on such a thing is in fact false, as I can't pay and thus won't. The cash flow that my payments should generate will not materialize and both the car dealer and government know it.
The system is bankrupt and we MUST clear it of these non-performing loans. We have spent two years playing "extend and pretend", believing that somehow the economy will imminently turn and thus all these "bad assets" will suddenly become good, even though statistically once you miss two payments the odds of you "curing" that delinquency - due to the fact that you would have to come up with BOTH overdue payments plus the current one - are near zero.
This is an intentional act of fraud up and down the line and it MUST STOP or we will face an economic catastrophe far worse than anything that was believed to be at our doorstep last fall as the production that has occurred but cannot be paid for WILL cause a massive economic dislocation in the near future.
http://market-ticker.org/archives/1355-MORE-Banking-Fraud-Foreclosure-Stats.html
Hitting Bottom ?
An Updated Analysis of Rents and the Price of Housing in 100 Metropolitan Areas
Danilo Pelletiere, Hye Jin Rho, and Dean Baker
August 18, 2009
It has been two years since the housing bubble began to deflate. In this time, home prices in major metropolitan areas have fallen more than 32.3 percent and the woes in the housing sector have spread to the broader economy. Where is the housing market today ? Have we hit bottom?
This paper, written by researchers from CEPR and the National Low Income Housing Coalition, finds that while most of the nation’s metropolitan housing bubbles have deflated and many markets never had one to contend with, there is the possibility of a persistent housing slump in the years ahead. An appropriate response to this situation involves 1) stimulating demand for housing by acting to lower unemployment and raise wages, 2) recognizing a leading role for rental housing in federal foreclosure mitigation and neighborhood stabilization policy, including allowing foreclosed homeowners to remain in their homes as renters (Right to Rent), and 3) adequately funding the National Housing Trust Fund.
Press Release
http://www.cepr.net/index.php/publications/reports/hitting-bottom-100-city/
A Trickle of Hope for Housing
Where buyers, builders, sellers, and lenders are starting to see improvement
Dean Foust and Christopher Palmeri
August 13, 2009
The real estate bears have plenty of fodder. There's the $230 billion in variable-rate home loans that will reset between now and 2012—a wave that could trigger another round of defaults. And more problems are brewing in commercial real estate, which some experts believe will generate $375 billion in losses on top of the $1.1 trillion hit from housing.
But, as the saying goes, all real estate is local. And amid all the Sturm und Drang, small signs are emerging that the housing market is starting to stabilize, even in such hard-hit areas as Las Vegas, Washington, D.C., and coastal Florida. For the first time since 2004, sales of existing homes have risen for three straight months. At the same time, the inventory of unsold homes has decreased. Equally important, more homeowners are selling their properties at or near their asking prices. Here's a look at the four groups that make the housing market go: buyers, homebuilders, mortgage lenders, and sellers.
BUYERS
Earlier this year, Angie Hunter, 34, got a call from her landlord. The owner of the Las Vegas property was being foreclosed upon, and Hunter—whose husband, Craig, 33, is on active duty in the U.S. Air Force—was going to have to move out. "I have four children, and my husband's in Iraq," she told the landlord. "Are you joking?"
But with Las Vegas awash in foreclosed properties, the Hunters realized they could afford to buy a place rather than rent one. In June, they snapped up a four-bedroom ranch house for $204,000—nearly half what the last owner had paid for it back in 2005. And while their previous neighborhood was littered with vacant houses, the couple's new home is in a gated community with parks, a recreation center, and golf course. And if the military transfers her husband to a new city, Angie feels confident they can rent out their house for more than their monthly mortgage payment. "I think we got a great deal," she says.
HOMEBUILDERS
Like many other builders, KB Home (KBH) is deep in the red, with analysts forecasting the Los Angeles-based company will lose $209 million this year. But CEO Jeffrey T. Mezger is upbeat. The company reported a 60% jump in new-home orders in the second quarter. And Mezger says he expects KB to show year-over-year increases in sales for the current quarter. The company now has orders for 3,800 homes worth around $800 million. He attributes the spike in part to a new build-to-order model adopted late last year that lets buyers pay for just the amenities they want.
To cut its construction costs and make its homes affordable to a broader pool of buyers, KB also reengineered how it builds. It now uses prefab floor and wall panels. It also designed new floor plans to give buyers the same number of rooms in less square footage by shrinking the size of hallways and stairways.
Still, prices are weighing on profits. KB Homes' average sale price was $216,000 in the second quarter, vs. $295,000 in the same period three years ago. But the design changes may enable KB Homes to do well even if prices don't rise dramatically.
Right now, more than three-quarters of its current orders are coming from first-time buyers, many of whom say the mortgage payments for KB Homes' new models are less than what they were paying in rent. Says Mezger: "We're pulling people out of apartments."
LENDERS
Banks and other lenders have been criticized during the downturn for selling tricked-out mortgages to millions of borrowers with little due diligence—and now they're being vilified for refusing to modify the loans with new terms homeowners can afford. But one lender has withstood the mortgage meltdown relatively unscathed and could serve as a model for others: the North Carolina State Employees' Credit Union (SECU).
Commercial bankers grumble that credit unions such as SECU enjoy an unfair advantage because of their tax-exempt status and the fact that they don't have to deliver ever-higher profits to Wall Street.
http://www.businessweek.com/magazine/content/09_34/b4144056832890.htm?chan=rss_topEmailedStories_ssi_5
The unemployment figures mean carnage for the property market
David Stevenson Aug 13, 2009
Associate Editor
Bloomberg
Britain's dole queues just got a lot longer. Another 220,000 people were added, according to yesterday's official stats. That takes the total to 2,435,000, or a rate of 7.8%, the highest since 1996.
What's more, the number of people without work is set to increase much further. And even if you still have a job, the chances are that your pay packet's hardly growing.
And that spells more trouble for house prices…
The unemployment numbers are horrifying
Yesterday's jobless figures were truly awful. The percentage of the population without work hit its highest for some 13 years, while the nation's dole queues reached their longest for 14 years.
Further, the actual number of employed Britons fell by a record 271,000 in the three months to June, as even more people left the workforce than claimed benefits. Many of these 'non-signers' are now relying on their partner's income, redundancy payments or savings, says Howard Archer of HIS Global Insight. He also points out that although the 'claimant count' only rose by some 25,000, that's probably down to the 'student effect' – i.e. college or school leavers who can't get a job, but aren't eligible for benefits.
Meanwhile, for those still with jobs, the pay picture isn't looking too bright either. Unless you're one of those bankers back on the mega-bonus trail, your income is unlikely to be growing. UK annual average earnings growth, excluding bonuses, rose by just 2.5% in the three months to June, the lowest since the data series began in 2001.
Gloomy enough. But even worse is the likelihood of Britain's dole queues getting a lot longer… for a while longer, too.
Technically, the recession may be ending, though any recovery is set to be sluggish at best. And there's every chance of a double dip, as we talked about in Money Morning the other day (How savers could derail a recovery). But either way job losses won't stop rising.
Even a recovery brings job losses
Back in the 1990s, unemployment rose for 18 months after the economy bottomed out. That's likely to happen again – for two reasons:
Firstly, companies who've had to slash their costs to stay afloat will keep cutting their workforces while the economic outlook stays unclear.
And secondly, many firms simply won't survive.
Ed Stansfield of Capital Economics has forecasted that Britain's jobless total is heading for 3.5m, i.e. over 11%, by 2011.
We're often told that unemployment is a 'lagging' indicator, i.e. it reacts to what's going on in the economy rather than leading it. And we're also told that it doesn't matter if our pay packets aren't expanding very much because consumer prices are now falling.
That may help homeowners with tracker home loans to feel flusher while interest rates stay low. But if hundreds of thousands are being laid off, and those with jobs aren't able to wring much more out of their employers, the amount of money sloshing around the economy is going to be severely curbed.
Away from the City-fuelled London and the South East, as Matthew Lynn says in last week's magazine: Britain's about to become two nations once again (if you're not a subscriber, get your first three issues free here), it means less spending in the shops. And we'll all need to pay more tax to pay for the extra welfare benefits the government will have to fork out. The cost to the Exchequer of someone out of work, based on benefits claimed and tax revenues lost, is £9,000 a year, says John Philpot of the Chartered Institute of Personnel and Development.
The threat to house prices
But the real damage of a further job loss surge is likely to be a flood of home loan defaults. Stansfield reckons the number of residential property borrowers who fall behind with their payments could climb even higher than the 350,000 level reached in the 1990s recession.
He's expecting that 375,000 families will run into arrears. That's unless the dole queues lengthen even more than he thinks, in which case up to 400,000 could hit trouble.
This will lead to a spurt in forced selling, and also repossessions. At the same time, the pay squeeze will make life tougher for borrowers if loan rates start rising again – and fixed rates are already up to a ten-month high.
Why housing bulls are Wrong
Right now, most commentators appear to have turned bullish on British house prices. And my inbox is full of messages from estate agents citing lack of supply, i.e. not many sellers around.
But that could be about to change. A vicious downward house price value spiral could now start to develop as more borrowers are forced to unload their properties at fire sale prices.
Just look at the chart below:
The red line shows Britain's unemployment rate, the blue line the Nationwide average house price. Note how, despite all the talk that they'd been overvalued for ages, home values only nosedived when job losses really began kicking in during 2008.
As Edmund Conway points out in the Telegraph, in the early 1990s prices climbed quite sharply in some months, but over a three-year period still fell more than they rose.
If Britain's dole queues reach 3.5m this time round, the housing market will bear the brunt. And if some of the gloomier job predictions turn out to be right, outright carnage could be just around the corner.
http://www.moneyweek.com/news-and-charts/economics/uk-economy-unemployment-house-prices-93308.aspx
Three Ways to Predict the End of the Housing Bounce
Andrew Jeffery
Aug 13, 2009
The only question that really matters in the housing market right now is the following: Does the recent strengthening in sales data signal an imminent bottom, or are we smack in the middle of a dead-cat bounce?
The answer, of course, is complicated. And as I've discussed in the past, the concept of a “bottom” in the housing market is meaningless, as stabilization and eventual recovery will happen on a localized, market-by-market basis.
Nevertheless, there are some key factors to watch that will provide clues as to how long this rally’s legs really are, and what could trigger a reversion in the miserable state of the market we’ve become accustomed to over the past 4 years. Here are, in my mind, the top 3 “tells” to watch when it comes to the direction of the housing over the next 6-12 months:
1. Jobs
In the words of HousingWire’s Paul Jackson, “If housing is central to recovery, and jobs are central to housing, and jobs aren’t doing very well -- what’s the real forecast for housing?”
Despite jobs data that appears to have stopped getting worse, the employment outlook in the US remains dismal. Government-backed loans through the Federal Housing Administration (FHA), Fannie Mae (FNM), and Freddie Mac (FRE) dominate the mortgage market right now, all of which have strict requirements for job stability. This means that even if companies start hiring again, recently laid-off workers will still have a hard time qualifying for a mortgage.
Furthermore, even though layoffs have slowed, the majority of firings that occurred in the past year haven't yet resulted in mortgage delinquency. As struggling homeowners gradually succumb to the pressures of losing a job, default and eventual foreclosure can occur many months after the layoff itself. We're yet to see any material improvement in default data, especially in high end markets.
2. The FHA
The FHA offers taxpayer-backed insurance for mortgages that are underwritten to their specific guidelines. Originally intended to provide home loans for low-income borrowers by requiring minimal down payments and overlooking blemished credit records, by the end of 2008, FHA loans accounted for almost 40% of all new loans -- up from less than 5% at the beginning of 2007, according to data compiled by Lender Processing Services (LPS).
In distressed markets, where ongoing foreclosure moratoria are keeping bank-owned homes off the market to artificially limit supply, FHA borrowers make up the vast majority of buyers. This has helped the likes of Wells Fargo (WFC), Bank of America (BAC), and Citigroup (C) unload foreclosures at higher prices, but it has prolonged the eventual recovery as banks slowly bleed out distressed homes into the market.
To help alleviate the housing crisis, Washington upped FHA limits so that in some areas, buyers can get an FHA loan for as much as $719,000. This widening of FHA’s lending criteria has helped buoy many mid-tier markets, as borrowers can now buy $500,000 or $600,000 homes with a paltry 3% down. (Just ask Toll Brothers (TOL) if the FHA helped boost sales in the past 6 months.)
If the FHA tightens its guidelines or lowers its loan limits, look out below, as a huge source of liquidity for the housing market will evaporate.
3. November 30, 2009
This November, the $8,000 first-time homebuyer tax credit expires. If I were a betting man (which I'm not), I’d wager if the market stumbles even slightly between now and the end of the year, a new tax credit will be issued in some form. (They may extend it regardless of how the market performs.) Even if the credit is extended, many first-time homebuyers are already scrambling to make purchases while they can still get a check from Uncle Sam.
Circle November 30 with a big red pen, because first-time buyers now account for fully one-third of purchase transactions according to the National Association of Realtors. If this demand dries up, sales could resume their downward spiral.
The bottom line is this: The outlook for housing is murky, at best.
Low-end markets are benefiting from government support on both the supply side (foreclosure moratoria) and demand side (tax credits, FHA) of the equation. Meanwhile, high-end markets -- as defaults on prime mortgages keep rising and the job market remains lousy -- are seeing steep home-price declines.
Anyone touting housing's so-called "bottom" is likely trying to sell you something -- namely, a house.
http://www.minyanville.com/articles/bac-fre-fnm-wfc-LPS/index/a/24028
U.S. Foreclosure Activity Up 32 Percent from July 2008
RealtyTrac Staff
August 13, 2009
Over 360,000 Households Receive Foreclosure Filings, Setting New Record
IRVINE, Calif. — August 13, 2009 — RealtyTrac® (www.realtytrac.com), the leading online marketplace for foreclosure properties, today released its July 2009 U.S. Foreclosure Market Report™, which shows foreclosure filings — default notices, scheduled auctions and bank repossessions — were reported on 360,149 U.S. properties during the month, an increase of nearly 7 percent from the previous month and an increase of 32 percent from July 2008. The report also shows that one in every 355 U.S. housing units received a foreclosure filing in July.
“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” noted James J. Saccacio, chief executive officer of RealtyTrac. “Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”
View U.S. foreclosure heat map and comment on this report.
[bNevada, California, Arizona post top state foreclosure rates
For the 31st consecutive month Nevada documented the nation’s highest state foreclosure rate, with one in every 56 housing units receiving a foreclosure filing in July — more than six times the national average. Initial default notices (NOD) in Nevada decreased 18 percent from the previous month, likely the result of a new state law requiring lenders to offer mediation to homeowners facing foreclosure. The law took effect July 1. Meanwhile, scheduled auctions (NTS) and bank repossessions (REO) in Nevada both increased more than 20 percent from the previous month, boosting overall foreclosure activity in the state by 4 percent on a month-over-month basis.
Initial defaults (NOD) in California spiked 15 percent from the previous month, and the state registered the nation’s second highest state foreclosure rate for the third month in a row. One in every 123 California housing units received a foreclosure filing in July, nearly three times the national average. Scheduled auctions (NTS) in California were down 1 percent from the previous month, but bank repossessions (REO) were up 4 percent — leaving overall foreclosure activity up nearly 7 percent on a month-over-month basis.
One in every 135 Arizona housing units received a foreclosure filing in July, the nation’s third highest state foreclosure rate and more than 2.5 times the national average. Scheduled auctions (NTS), the first public record in the Arizona foreclosure process, jumped 25 percent from the previous month while bank repossessions stayed flat.
Other states with foreclosure rates ranking among the nation’s 10 highest were Florida, Utah, Idaho, Georgia, Illinois, Colorado and Oregon.
Four states account for more than half of total foreclosure
activity
The top four state foreclosure activity totals in July were reported by California, with 108,104 properties receiving a foreclosure filing; Florida, with 56,486 properties receiving a foreclosure filing; Arizona, with 19,694 properties receiving a foreclosure filing; and Nevada, with 19,535 properties receiving a foreclosure filing. Together these four states accounted for nearly 57 percent of the nation’s total foreclosure activity.
Although Florida bank repossessions (REO) decreased 8 percent from the previous month, the state’s overall foreclosure activity was still up 7 percent from the previous month because of a 9 percent month-over-month increase in both initial default notices (LIS) and scheduled auctions (NFS).
Illinois registered the fifth highest state foreclosure activity total, with 14,524 properties receiving a foreclosure filing during the month. Overall foreclosure activity in Illinois increased nearly 35 percent from the previous month, boosted by an 86 percent surge in default notices (LIS), which bounced back from low levels in May and June. A state law enacted April 5 gave delinquent borrowers an extension of up to 90 days before the start of the foreclosure process.
Other states with totals among the 10 highest in the country were Texas (12,077), Georgia (11,136), Ohio (11,021), Michigan (8,257) and New Jersey (6,467).
Foreclosure activity in Michigan dropped 39 percent from the previous month, mostly due to a 66 percent decrease in scheduled auctions (NTS. A state law that took effect July 6 requires lenders — before scheduling a foreclosure auction — to provide delinquent borrowers a uniform default notice with contact information for approved housing counselors who can assist in loan modification. The law freezes foreclosure proceedings an extra 90 days for homeowners who commit to work on a loan modification plan.
Four states dominate top 10 metro foreclosure rates
Foreclosure filings were reported on 16,798 Las Vegas properties in July, one in every 47 housing units — more than 7.5 times the national average and the highest foreclosure rate among metro areas with a population of at least 200,000. The city’s foreclosure activity increased nearly 6 percent from the previous month and 89 percent from July 2008.
Seven California metro areas documented foreclosure rates among the top 10 in July. Stockton posted the nation’s second highest metro foreclosure rate — one in every 62 housing units received a foreclosure filing — followed by Modesto at No. 3 (one in 63), Merced at No. 5 (one in 66), Riverside-San Bernardino-Ontario at No. 6 (one in 67), Bakersfield at No. 7 (one in 76), Vallejo-Fairfield at No. 8 (one in 83), and Sacramento-Arden-Arcade-Roseville at No. 10 (one in 105).
Other cities with top 10 metro foreclosure rates were Cape Coral-Fort Myers, Fla., at No. 4, with one in every 64 housing units receiving a foreclosure filing, and Phoenix-Mesa-Scottsdale, Ariz., at No. 9, with one in every 103 housing units receiving a foreclosure filing.
Report methodology
The RealtyTrac U.S. Foreclosure Market Report provides a count of the total number of properties with at least one foreclosure filing reported during the month — broken out by type of filing at the state and national level. Data is also available at the individual county level. Data is collected from more than 2,200 counties nationwide, and those counties account for more than 90 percent of the U.S. population. RealtyTrac’s report incorporates documents filed in all three phases of foreclosure:
Default — Notice of Default (NOD) and Lis Pendens (LIS);
Auction — Notice of Trustee Sale and Notice of Foreclosure Sale (NTS and NFS); and
Real Estate Owned, or REO properties (that have been foreclosed on and repurchased by a bank).
If more than one foreclosure document is filed against a property during the month, only the most recent filing is counted in the report. The report also checks if the same type of document was filed against a property in a previous month. If so, and if that previous filing occurred within the estimated foreclosure timeframe for the state the property is in, the report does not count the property in the current month.
http://www.realtytrac.com/ContentManagement/PressRelease.aspx?channelid=9&ItemID=7192
10 Cities Facing the Next Real Estate Bust
Rick Newman
Tue Aug 11, 2009
The worst of the housing bust might finally be over, but another real estate tsunami is about to swamp many American cities. This time, it will be office buildings and retail space going vacant and facing foreclosure.
Like housing, commercial real estate goes through booms and busts, and the coming wipeout is likely to be a doozy. Commercial developers went on their own spending spree earlier this decade, racing to cash in on the hot economy with new office towers, hotel complexes, and retail projects. Banks supplied hundreds of billions of dollars in loans, often assuming that rents paid by tenants would keep going up. "The assumption was that the good times would go on forever," says Victor Calanog, director of research for REIS, a real-estate-research firm.
If that mistaken assumption sounds familiar, so will the ramifications. Instead of going up, commercial rents have begun to plunge as companies downsize, warehouses empty, merchants go out of business, and huge retailers like Starbucks and Macy's close underperforming stores and demand rent reductions. Office and retail vacancy rates are near record levels and going higher, and developers are about to face crunch time as billions in loans come due for repayment or refinancing over the next three years. Like homeowners who are "under water" on their mortgages, many of those developers owe more than their buildings are now worth.
The commercial crunch won't hit consumers as directly as the housing bust, but they'll still feel it. A resurgence in construction spending is often the springboard out of a recession, but in dozens of overbuilt areas, it won't be. Many shopping centers could close completely. Urban development projects have been put on hold or canceled, giving blight a reprieve instead of chasing it out of town. As many as 3,000 banks may face significant losses on commercial real estate loans, according to economist Gary Shilling, which could crimp other lending and even threaten the banks' solvency as losses start to pile up.
To determine which cities are most vulnerable, U.S. News analyzed data from REIS covering retail and office vacancy rates in the 79 biggest metro areas. At our request, REIS combined its retail and office data into a single commercial vacancy rate for each city, for several time periods. The research firm also provided its 2010 projections for each city.
To gauge the impact on each city over the coming year, we measured the difference between the commercial vacancy rate in 2008 and the projected rate in 2010. So the cities that landed on our list won't necessarily have the highest vacancy rates next year, but they'll experience the biggest increase over a two-year period. In most of these cities, commercial real estate woes are likely to hamper a recovery. In a few, they'll compound a set of problems that's already profound. Here's where the next real estate bust is likely to hit hardest:
Las Vegas (projected commercial vacancy rate, 2010: 18.1 percent, up 6.8 percentage points from 2008). What happens in Vegas depends on the rest of the American economy, and until Americans start to feel wealthy again, travel (and gambling) budgets will remain crimped. Southern Nevada already suffers from one of the worst housing busts in the nation and a 12.3 percent unemployment rate. Vegas had a hot hand earlier this decade, which led to lots of commercial construction. But nearly one fifth of Sin City's commercial space will stay vacant until tourists, conventioneers, and their cash start to return.
Baltimore (15.8 percent, up 6.5 points). Several large universities and proximity to recession-resistant Washington, D.C., have propped up Baltimore's economy, but the city is still exposed to many economic strains. With the nation's retail sector in a tailspin, shipments in and out of the Port of Baltimore have tanked, leaving acres of vacant warehouses. Other development programs have stalled as businesses have cut back on spending. Mayor Sheila Dixon has also been indicted for suspicious dealings with area developers, casting a pall over Baltimore's business climate.
Detroit (24.8 percent, up 6.3 points). What else could go wrong in Motor City? Two of the area's biggest employers, General Motors and Chrysler, declared bankruptcy this year, and the whole auto industry is undergoing severe cutbacks amid the biggest sales plunge in decades. So many companies have left Detroit that there's barely a rush hour in this once bustling metropolis. If there's any good news, it's that prime office space is cheap: Rents have fallen eight years in a row and are likely to drop an additional 13 percent through 2010, according to REIS.
San Bernardino/Riverside, Calif. (15.9 percent, up 6.3 points). The availability of land once made Southern California's "inland empire" a housing hotbed, with hundreds of mortgage brokers and a booming retail sector. No more. A vicious housing bust could ultimately drive home prices down 65 percent from peak values, and the unemployment rate could hit 16 percent next year. That's knocked many of the mortgage brokers out of business and devastated the area's ubiquitous strip malls. Even government jobs have been disappearing, thanks to California's budget crisis.
Hartford, Conn. (20.2 percent, up 6 points). A recent survey identified Hartford as one of the first cities to bounce back from the recession, but local economists are doubtful. Many of the city's insurance firms have slashed jobs in response to the financial meltdown. Aircraft-engine maker Pratt & Whitney may close two local plants, and the Obama administration's push to end production of the F-22 fighter jet would hurt defense contractors in the area. With little new construction over the past year, most of the increase in vacancies is coming from businesses scaling back or shuttering their operations completely.
Dayton, Ohio (22.8 percent, up 5.9 points). After 125 years in Dayton, NCR is closing up its headquarters and moving to Georgia, taking 1,300 jobs with it and leaving more than a million square feet of office space behind. The collapse of the auto industry has also hurt the area, with several local parts suppliers dependent upon the Detroit automakers. In a survey of the 100 biggest cities, the Brookings Institution ranks Dayton near the bottom in terms of lost jobs and economic output.
New York (12 percent, up 5.9 points). Those lavish Wall Street bonuses you've been hearing about are going to a lot fewer bankers. The financial industry, Manhattan's mainstay, has contracted by about 7 percent over the past year. Other industries have lost even more jobs, causing a sharp reversal in what used to be one of the world's hottest real estate markets. Office rents skyrocketed in 2006 and 2007, when Wall Street was at its peak, but REIS expects them to fall 28 percent between 2008 and 2010. REIS's vacancy data for New York include only office space, so the combined vacancy rate including retail space is probably higher than 12 percent.
Charleston, S.C. (16.6 percent, up 5.8 points). The antebellum charm has worn thin as this low-country mecca hopes for tourists to return and trade at its port to pick up. Several ambitious downtown hotel and redevelopment projects have stalled while developers wait for the economy to revive. Elsewhere in the state, manufacturing, retail, and construction companies have shed thousands of jobs, many of them gone for good. When not addressing his extramarital affair, Gov. Mark Sanford attempts to woo new businesses to the state.
Tacoma, Wash. (13.6 percent, up 5.8 points). Shipments are down at the city's port, one of the nation's biggest, which has left warehouses vacant and hammered the many area businesses that depend on trade. And many of the region's most prominent companies, including Microsoft, Boeing, Starbucks, and Washington Mutual--taken over last year by JPMorgan Chase--have been laying off workers, helping push Tacoma's unemployment rate higher than the state average.
New Haven, Conn. (17.2 percent, up 5.8 points). Education and healthcare have helped stabilize New Haven's economy, but even Yale University has scaled back development plans and laid off workers, after its famed endowment dropped by $6 billion because of stock market losses. And a long-term shift away from manufacturing toward financial services and other white-collar industries has left the city exposed to the financial meltdown. That means New Haven's recovery will probably lag the nation's.
http://news.yahoo.com/s/usnews/20090811/ts_usnews/10citiesfacingthenextrealestatebust
The Next Fannie Mae
Wall Street Journal
August 11, 2009
Ginnie Mae and FHA are becoming $1 trillion subprime guarantors.
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.
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.
http://online.wsj.com/article/SB10001424052970204908604574334662183078806.html?mod=googlenews_wsj
Specialist says foreclosure flood ahead
Tom Bayles
August 10, 2009 at 1:00 a.m.
Convinced there is a larger tsunami of foreclosures poised to hit the Southwest Florida housing market, Keller Williams Realty of Greater Manatee is opening an office in downtown Sarasota led by the seven-member Troy Funk Team.
Funk -- a distressed-property specialist -- said he and his team have sold more than 100 properties in the last seven months and have done just under $20 million during the last year, despite the poor housing market, by focusing on foreclosures and short-sales.
"I've been in the business here going on 23 years," Funk said. "I was involved in foreclosures during the last down cycle we had, so it was easy for me to reconnect with those people."
Funk said he is tight with 18 lenders, representatives of which have told him they are sitting on massive numbers of foreclosures and short sales.
"The banks have been stalling the short-sale and foreclosure process and it's a dam that can't hold," he said. "They have pretty much all said the same story: Get ready. Get ready. That next wave, it's coming."
Funk predicts that the number of distressed properties on the market will increase three-fold in short order. "The banks can't hold onto all those properties and they are going to start flooding the market, we've been told."
After what seemed like a reprieve earlier in the year, the rate of foreclosures in Southwest Florida picked up speed in June, with both Charlotte and Manatee counties posting increases of 50 percent or more.
In percentage terms, Sarasota County was far behind its neighbors, with a 2 percent increase from this time last year. But its 1,153 filings far outstripped either Charlotte's 829 or Manatee's 890.
Funk has spent 23 years in the region's real estate market, the last 16 years with Re/Max Alliance Group. He and his team left last month to join Keller Williams specifically to open the downtown Sarasota office.
His team consists of two buyer's agents; a contract coordinator; a financial-services specialist; a field-service representative who handles evictions, repairs and maintenance; and a staff member who specializes in properly filling out the myriad bank forms involved in distressed properties.
"I'm the rain maker," Funk said. "I'm that one that brings in the business and delegates it to my team."
The Keller Williams franchise based in Palmetto also is using the occasion of its expansion into Sarasota County to rename itself "Keller Williams On The Water."
Joanne Owens, the broker of the Manatee County Keller Williams franchise, said the name change was a natural because she has been using an "On The Water" in her company's logo since it opened at the end of the housing boom in 2006.
Funk said his goal is to recruit as many as 30 sales agents with experience in distressed properties by the end of the year after getting the Sarasota office up and running by the end of this month.
"This is enabling us to expand our team to ultimately become a dominant real estate company in the Sarasota market," Funk said. "We need to be in downtown Sarasota."
Keller Williams Realty Inc., founded in 1983, is an international real estate company with more than 600 offices in the U.S. and Canada. The company began franchising in 1991.
http://www.heraldtribune.com/article/20090810/ARTICLE/908101010/2055/NEWS?Title=Specialist-says-foreclosure-flood-ahead
Shattered Housing Dreams and the Painful Process of Household Deleveraging
Mike "Mish" Shedlock
August 10, 2009
Inquiring minds are reading a Comstock Special Report on
Deleveraging the U.S. Economy.
We are in the process of deleveraging the most leveraged economy in history. Many investors look at this deleveraging as a positive for the United States. We, on the other hand, look at this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years.
We, however, don't believe that the U.S. massive stimulus programs and money printing can solve a problem of excess debt generation that resulted from greed and living way beyond our means. If this were the answer Argentina would be one of the most prosperous countries in the world. This excess debt actually resulted from the same money printing and easy money that we are now using to alleviate the pain.
The attached chart of total debt relative to GDP shows exactly how much debt grew in this country relative to GDP (it is now 375% of GDP). The total debt grew to over $52 trillion relative to our current GDP of approximately $14 trillion. This is worse than the debt to GDP relationship in the great depression (even when the GDP imploded) and greater than the debt to GDP that existed in Japan in 1989. Even if you took the debt to GDP when the U.S. entered the secular bear market in early 2000 and compared that to 1929 and Japan in late 1989, our debt to GDP still exceeded both (by a substantial margin relative to 1929). The approximate numbers at that time were about 275% in the U.S. in early 2000, 190% in 1929, and about 270% in Japan in 1989.
In fact, the similarities between Japan's deleveraging and the U.S. presently are eerie. Japan's total debt to GDP increased from 270% when their secular bear market started to just about 350% 7 years later (1998) before declining to 110% presently. The U.S. increased their total debt to GDP from 275% of GDP when our secular bear market started (in our opinion) to 375% presently (10 years later), and we suspect the total debt to decline similar to Japan's even though the Japanese govenment debt tripled during their deleveraging.
We expect that the U.S. deleveraging will follow along the path of Japan for years as real estate continues to decline and the deleveraging extracts a significant toll from any growth the economy might experience. We also expect that, just like Japan, the stock market will also be sluggish to down during the next few years as the most leveraged economy in history unwinds the debt.
Is Deleveraging a Positive or Negative Thing ?
Comstock's opening gambit was:
"Many investors look at this deleveraging as a positive for the United States. We, on the other hand, look at this deleveraging as a major negative that will weigh on the economy for years to come and we could wind up with a lost couple of decades just as Japan experienced over the past 20 years."
Given the longer we go without deleveraging the worse things get in the long run, I would suggest that deleveraging is a very positive thing as well as a necessary adjustment for the United States.
However, if one is talking about the effect on the stock market, it will not feel like a good thing because it will lower earnings.
I have talked about the concept of the lost decades and deleveraging many times myself, most recently in Effect of Household Deleveraging on Housing, Consumption and the Stock Market.
Peak Credit and Peak Earnings
Not long ago, the US was once a nation of savers. Now that the housing bubble has crashed and the stock market along with it, the US is poised to become a nation of savers again.
Peak Credit and her twin sister Peak Earnings have arrived. Here is a snip from the former.
... That final wave of consumer recklessness created the exact conditions required for its own destruction. The housing bubble orgy was the last hurrah. It is not coming back and there will be no bigger bubble to replace it. Consumers and banks have both been burnt, and attitudes have changed.
It took nearly 80 years for people to get as reckless as they did in 1929. 80 years! Few are still alive that went through the great depression. No one listened to them. That is the nature of the game. The odds of a significant bout of inflation now are about the same as they were in 1929. Next to none.
Children whose parents are being destroyed by debt now, will keep those memories for a long time.
Deflation or Inflation ?
The raging debate now is when (not if) the Fed's massive printing is going to spark a huge round of "inflation" forcing up interest rates. The fears are unfounded.
The key to sorting this endgame out is simple: Financial deleveraging constitutes deflation by definition.
Household debt via bankruptcies, foreclosures, credit card defaults, and walk-aways is falling faster than the Fed is "effectively printing". I use the term "effectively printing" because the Fed can print all it wants and if the money just sits as excess reserves, the velocity of that money will be zero and it will not affect the economy or prices.
Moreover, savings are rising, and banks have little impetus to lend, and consumers and businesses are reluctant to borrow.
Excess Reserves
The above chart is proof enough of banks' unwillingness to lend and/or credit worthy individuals and businesses unwillingness to borrow.
Shattered Housing Dreams
In the long run, consumption cannot grow faster than income. Borrowing to support consumption only works as long as asset prices are rising. Consumers were willing to go deeper in debt and banks were willing to lend based on the now-shattered dreams of forever rising home prices.
In aggregate, consumers are now unable to service their debt, and the deflationary deleveraging process has started. Consumers will either default on debt, pay their debt down very slowly over time, or some combination of both.
Thus, the most likely result of Bernanke's printing press operation will be to drag the "job loss recovery" out for another decade, just as happened in Japan.
http://globaleconomicanalysis.blogspot.com/2009/08/shattered-housing-dreams-and-painful.html
Entering the Greatest Depression in History
More Bubbles Waiting to Burst
Andrew Gavin Marshall
August 10, 2009
Introduction
While there is much talk of a recovery on the horizon, commentators are forgetting some crucial aspects of the financial crisis. The crisis is not simply composed of one bubble, the housing real estate bubble, which has already burst. The crisis has many bubbles, all of which dwarf the housing bubble burst of 2008. Indicators show that the next possible burst is the commercial real estate bubble. However, the main event on the horizon is the “bailout bubble” and the general world debt bubble, which will plunge the world into a Great Depression the likes of which have never before been seen.
Housing Crash Still Not Over
The housing real estate market, despite numbers indicating an upward trend, is still in trouble, as, “Houses are taking months to sell. Many buyers are having trouble getting financing as lenders and appraisers struggle to figure out what houses are really worth in the wake of the collapse.” Further, “the overall market remains very soft [...] aside from speculators and first-time buyers.” Dean Baker, co-director of the Center for Economic and Policy Research in Washington said, “It would be wrong to imagine that we have hit a turning point in the market,” as “There is still an enormous oversupply of housing, which means that the direction of house prices will almost certainly continue to be downward.” Foreclosures are still rising in many states “such as Nevada, Georgia and Utah, and economists say rising unemployment may push foreclosures higher into next year.” Clearly, the housing crisis is still not at an end.[1]
The Commercial Real Estate Bubble
In May, Bloomberg quoted Deutsche Bank CEO Josef Ackermann as saying, “It's either the beginning of the end or the end of the beginning.” Bloomberg further pointed out that, “A piece of the puzzle that must be calculated into any determination of the depth of our economic doldrums is the condition of commercial real estate -- the shopping malls, hotels, and office buildings that tend to go along with real- estate expansions.” Residential investment went down 28.9 % from 2006 to 2007, and at the same time, nonresidential investment grew 24.9%, thus, commercial real estate was “serving as a buffer against the declining housing market.”
Commercial real estate lags behind housing trends, and so too, will the crisis, as “commercial construction projects are losing their appeal.” Further, “there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency's Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing.” In May it was reported that, “Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans,” and that, “we may face double-bubble trouble for real estate and the economy.”[2]
In late July of 2009, it was reported that, “Commercial real estate’s decline is a significant issue facing the economy because it may result in more losses for the financial industry than residential real estate. This category includes apartment buildings, hotels, office towers, and shopping malls.” Worth noting is that, “As the economy has struggled, developers and landlords have had to rely on a helping hand from the US Federal Reserve in order to try to get credit flowing so that they can refinance existing buildings or even to complete partially constructed projects.” So again, the Fed is delaying the inevitable by providing more liquidity to an already inflated bubble. As the Financial Post pointed out, “From Vancouver to Manhattan, we are seeing rising office vacancies and declines in office rents.”[3]
In April of 2009, it was reported that, “Office vacancies in U.S. downtowns increased to 12.5 percent in the first quarter, the highest in three years, as companies cut jobs and new buildings came onto the market,” and, “Downtown office vacancies nationwide could come close to 15 percent by the end of this year, approaching the 10-year high of 15.5 percent in 2003.”[4]
In the same month it was reported that, “Strip malls, neighborhood centers and regional malls are losing stores at the fastest pace in at least a decade, as a spending slump forces retailers to trim down to stay afloat.” In the first quarter of 2009, retail tenants “have vacated 8.7 million square feet of commercial space,” which “exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.” Further, as CNN reported, “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008.” Of significance for those that think and claim the crisis will be over by 2010, “mall vacancies [are expected] to exceed historical levels through 2011,” as for retailers, “it's only going to get worse.”[5] Two days after the previous report, “General Growth Properties Inc, the second-largest U.S. mall owner, declared bankruptcy on [April 16] in the biggest real estate failure in U.S. history.”[6]
In April, the Financial Times reported that, “Property prices in China are likely to halve over the next two years, a top government researcher has predicted in a powerful signal that the country’s economic downturn faces further challenges despite recent positive data.” This is of enormous significance, as “The property market, along with exports, were leading drivers of the booming Chinese economy over the past decade.” Further, “an apparent rebound in the property market was unsustainable over the medium term and being driven by a flood of liquidity and fraudulent activity rather than real demand.” A researcher at a leading Chinese government think tank reported that, “he expected average urban residential property prices to fall by 40 to 50 per cent over the next two years from their levels at the end of 2008.”[7]
In April, it was reported that, “The Federal Reserve is considering offering longer loans to investors in commercial mortgage-backed securities as part of a plan to help jump-start the market for commercial real estate debt.” Since February the Fed “has been analyzing appropriate terms and conditions for accepting commercial mortgage-backed securities (CMBS) and other mortgage assets as collateral for its Term Asset-Backed Securities Lending Facility (TALF).”[8]
In late July, the Financial Times reported that, “Two of America’s biggest banks, Morgan Stanley and Wells Fargo ... threw into sharp relief the mounting woes of the US commercial property market when they reported large losses and surging bad loan,” as “The disappointing second-quarter results for two of the largest lenders and investors in office, retail and industrial property across the US confirmed investors’ fears that commercial real estate would be the next front in the financial crisis after the collapse of the housing market.” The commercial property market, worth $6.7 trillion, “which accounts for more than 10 per cent of US gross domestic product, could be a significant hurdle on the road to recovery.”[9]
The Bailout Bubble
While the bailout, or the “stimulus package” as it is often referred to, is getting good coverage in terms of being portrayed as having revived the economy and is leading the way to the light at the end of the tunnel, key factors are again misrepresented in this situation.
At the end of March of 2009, Bloomberg reported that, “The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.” This amount “works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation. The nation’s gross domestic product was $14.2 trillion in 2008.”[10]
Gerald Celente, the head of the Trends Research Institute, the major trend-forecasting agency in the world, wrote in May of 2009 of the “bailout bubble.” Celente’s forecasts are not to be taken lightly, as he accurately predicted the 1987 stock market crash, the fall of the Soviet Union, the 1998 Russian economic collapse, the 1997 East Asian economic crisis, the 2000 Dot-Com bubble burst, the 2001 recession, the start of a recession in 2007 and the housing market collapse of 2008, among other things.
On May 13, 2009, Celente released a Trend Alert, reporting that, “The biggest financial bubble in history is being inflated in plain sight,” and that, “This is the Mother of All Bubbles, and when it explodes [...] it will signal the end to the boom/bust cycle that has characterized economic activity throughout the developed world.” Further, “This is much bigger than the Dot-com and Real Estate bubbles which hit speculators, investors and financiers the hardest. However destructive the effects of these busts on employment, savings and productivity, the Free Market Capitalist framework was left intact. But when the 'Bailout Bubble' explodes, the system goes with it.”
Celente further explained that, “Phantom dollars, printed out of thin air, backed by nothing ... and producing next to nothing ... defines the ‘Bailout Bubble.’ Just as with the other bubbles, so too will this one burst. But unlike Dot-com and Real Estate, when the "Bailout Bubble" pops, neither the President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another.” Celente elaborated, “Given the pattern of governments to parlay egregious failures into mega-failures, the classic trend they follow, when all else fails, is to take their nation to war,” and that, “While we cannot pinpoint precisely when the 'Bailout Bubble' will burst, we are certain it will. When it does, it should be understood that a major war could follow.”[11]
However, this “bailout bubble” that Celente was referring to at the time was the $12.8 trillion reported by Bloomberg. As of July, estimates put this bubble at nearly double the previous estimate.
As the Financial Times reported in late July of 2009, while the Fed and Treasury hail the efforts and impact of the bailouts, “Neil Barofsky, special inspector-general for the troubled asset relief programme, [TARP] said that the various US schemes to shore up banks and restart lending exposed federal agencies to a risk of $23,700bn [$23.7 trillion] – a vast estimate that was immediately dismissed by the Treasury.” The inspector-general of the TARP program stated that there were “fundamental vulnerabilities . . . relating to conflicts of interest and collusion, transparency, performance measures, and anti-money laundering.”
Barofsky also reports on the “considerable stress” in commercial real estate, as “The Fed has begun to open up Talf to commercial mortgage-backed securities to try to influence credit conditions in the commercial real estate market. The report draws attention to a new potential credit crunch when $500bn worth of real estate mortgages need to be refinanced by the end of the year.” Ben Bernanke, the Chairman of the Fed, and Timothy Geithner, the Treasury Secretary and former President of the New York Fed, are seriously discussing extending TALF (Term Asset-Backed Securities Lending Facility) into “CMBS [Commercial Mortgage-Backed Securities] and other assets such as small business loans and whether to increase the size of the programme.” It is the “expansion of the various programmes into new and riskier asset classes is one of the main bones of contention between the Treasury and Mr Barofsky.”[12]
Testifying before Congress, Barofsky said, “From programs involving large capital infusions into hundreds of banks and other financial institutions, to a mortgage modification program designed to modify millions of mortgages, to public-private partnerships using tens of billions of taxpayer dollars to purchase 'toxic' assets from banks, TARP has evolved into a program of unprecedented scope, scale, and complexity.” He explained that, “The total potential federal government support could reach up to 23.7 trillion dollars.”[13]
Is a Future Bailout Possible ?
In early July of 2009, billionaire investor Warren Buffet said that, “unemployment could hit 11 percent and a second stimulus package might be needed as the economy struggles to recover from recession,” and he further stated that, “we're not in a recovery.”[14] Also in early July, an economic adviser to President Obama stated that, “The United States should be planning for a possible second round of fiscal stimulus to further prop up the economy.”[15]
In August of 2009, it was reported that, “THE Obama administration will consider dishing out more money to rein in unemployment despite signs the recession is ending,” and that, “Treasury secretary Tim Geithner also conceded tax hikes could be on the agenda as the government worked to bring its huge recovery-related deficits under control.” Geithner said, “we will do what it takes,” and that, “more federal cash could be tipped into the recovery as unemployment benefits amid projections the benefits extended to 1.5 million jobless Americans will expire without Congress' intervention.” However, any future injection of money could be viewed as “a second stimulus package.”[16]
The Washington Post reported in early July of a Treasury Department initiative known as “Plan C.” The Plan C team was assembled “to examine what could yet bring [the economy] down and has identified several trouble spots that could threaten the still-fragile lending industry,” and “the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks.”
Further, “The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources.” The article elaborated in saying that, “The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises.” In particular, the near-term challenge they are facing is commercial real estate lending, as “Banks and other firms that provided such loans in the past have sharply curtailed lending,” leaving “many developers and construction companies out in the cold.” Within the next couple years, “these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.”
However, as a result of the credit crisis, “few developers can find anyone to refinance their debt, endangering healthy and distressed properties.” Kim Diamond, a managing director at Standard & Poor's, stated that, “It's not a degree to which people are willing to lend,” but rather, “The question is whether a loan can be made at all.” Important to note is that, “Financial analysts said losses on commercial real estate loans are now the single largest cause of bank failures,” and that none of the bailout efforts enacted “is big enough to address the size of the problem.”[17]
So the question must be asked: what is Plan C contemplating in terms of a possible government “solution”? Another bailout? The effect that this would have would be to further inflate the already monumental bailout bubble.
The Great European Bubble
In October of 2008, Germany and France led a European Union bailout of 1 trillion Euros, and “World markets initially soared as European governments pumped billions into crippled banks. Central banks in Europe also mounted a new offensive to restart lending by supplying unlimited amounts of dollars to commercial banks in a joint operation.”[18]
The American bailouts even went to European banks, as it was reported in March of 2009 that, “European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG,” as “Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG.” Among the European banks, “French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank.” Other banks that got money from the US bailout include HSBC, Wachovia, Merrill Lynch, Banco Santander and Royal Bank of Scotland. Because AIG was essentially insolvent, “the bailout enabled AIG to pay its counterparty banks for extra collateral,” with “Goldman Sachs and Deutsche bank each receiving $6 billion in payments between mid-September and December.”[19]
In April of 2009, it was reported that, “EU governments have committed 3 trillion Euros [or $4 trillion dollars] to bail out banks with guarantees or cash injections in the wake of the global financial crisis, the European Commission.”[20]
In early February of 2009, the Telegraph published a story with a startling headline, “European banks may need 16.3 trillion pound bail-out, EC document warns.” Type this headline into google, and the link to the Telegraph appears. However, click on the link, and the title has changed to “European bank bail-out could push EU into crisis.” Further, they removed any mention of the amount of money that may be required for a bank bailout. The amount in dollars, however, nears $25 trillion. The amount is the cumulative total of the troubled assets on bank balance sheets, a staggering number derived from the derivatives trade.
The Telegraph reported that, “National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors - particularly those who lend money to European governments - have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.”[21]
When Eastern European countries were in desperate need of financial aid, and discussion was heated on the possibility of an EU bailout of Eastern Europe, the EU, at the behest of Angela Merkel of Germany, denied the East European bailout. However, this was more a public relations stunt than an actual policy position.
While the EU refused money to Eastern Europe in the form of a bailout, in late March European leaders “doubled the emergency funding for the fragile economies of central and eastern Europe and pledged to deliver another doubling of International Monetary Fund lending facilities by putting up 75bn Euros (70bn pounds).” EU leaders “agreed to increase funding for balance of payments support available for mainly eastern European member states from 25bn Euros to 50bn Euros.”[22]
As explained in a Times article in June of 2009, Germany has been deceitful in its public stance versus its actual policy decisions. The article, worth quoting in large part, first explained that:
Europe is now in the middle of a perfect storm - a confluence of three separate, but interconnected economic crises which threaten far greater devastation than Britain or America have suffered from the credit crunch: the collapse of German industry and employment, the impending bankruptcy of Central European homeowners and businesses; and the threat of government debt defaults from loss of monetary control by the Irish Republic, Greece and Portugal, for instance on the eurozone periphery.
Taking the case of Latvia, the author asks, “If the crisis expands, other EU governments - and especially Germany's - will face an existential question. Do they commit hundreds of billions of euros to guarantee the debts of fellow EU countries? Or do they allow government defaults and devaluations that may ultimately break up the single currency and further cripple German industry, as well as the country's domestic banks?” While addressing that, “Publicly, German politicians have insisted that any bailouts or guarantees are out of the question,” however, “the pass has been quietly sold in Brussels, while politicians loudly protested their unshakeable commitment to defend it.”
The author addressed how in October of 2008:
[...] a previously unused regulation was discovered, allowing the creation of a 25 billion Euros “balance of payments facility” and authorising the EU to borrow substantial sums under its own “legal personality” for the first time. This facility was doubled again to 50 billion Euros in March. If Latvia's financial problems turn into a full-scale crisis, these guarantees and cross-subsidies between EU governments will increase to hundreds of billions in the months ahead and will certainly mutate into large-scale centralised EU borrowing, jointly guaranteed by all the taxpayers of the EU.
[...] The new EU borrowing, for example, is legally an ‘off-budget’ and ‘back-to-back’ arrangement, which allows Germany to maintain the legal fiction that it is not guaranteeing the debts of Latvia et al. The EU's bond prospectus to investors, however, makes quite clear where the financial burden truly lies: “From an investor's point of view the bond is fully guaranteed by the EU budget and, ultimately, by the EU Member States.”[23]
So Eastern Europe is getting, or presumably will get bailed out. Whether this is in the form of EU federalism, providing loans of its own accord, paid for by European taxpayers, or through the IMF, which will attach any loans with its stringent Structural Adjustment Program (SAP) conditionalities, or both. It turned out that the joint partnership of the IMF and EU is what provided the loans and continues to provide such loans.
As the Financial Times pointed out in August of 2009, “Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the world’s most sensitive political fault-lines. They are the European Union’s frontier states, bordering Russia.” In July, Latvia “agreed its second loan in eight months from the IMF and the EU,” following the first one in December. Lithuania is reported to be following suit. However, as the Financial Times noted, the loans came with the IMF conditionalities: “The injection of cash is the good news. The bad news is that, in return for shoring up state finances, the new IMF deal will require the Latvian government to impose yet more pain on its suffering population. Public-sector wages have already been cut by about a third this year. Pensions have been sliced. Now the IMF requires Latvia to cut another 10 per cent from the state budget this autumn.”[24]
If we are to believe the brief Telegraph report pertaining to nearly $25 trillion in bad bank assets, which was removed from the original article for undisclosed reasons, not citing a factual retraction, the question is, does this potential bailout still stand? These banks haven’t been rescued financially from the EU, so, presumably, these bad assets are still sitting on the bank balance sheets. This bubble has yet to blow. Combine this with the $23.7 trillion US bailout bubble, and there is nearly $50 trillion between the EU and the US waiting to burst.
An Oil Bubble
In early July of 2009, the New York Times reported that, “The extreme volatility that has gripped oil markets for the last 18 months has shown no signs of slowing down, with oil prices more than doubling since the beginning of the year despite an exceptionally weak economy.” Instability in the oil and gas prices has led many to “fear it could jeopardize a global recovery.” Further, “It is also hobbling businesses and consumers,” as “A wild run on the oil markets has occurred in the last 12 months.” Oil prices reached a record high last summer at $145/barrel, and with the economic crisis they fell to $33/barrel in December. However, since the start of 2009, oil has risen 55% to $70/barrel.
As the Times article points out, “the recent rise in oil prices is reprising the debate from last year over the role of investors — or speculators — in the commodity markets.” Energy officials from the EU and OPEC met in June and concluded that, “the speculation issue had not been resolved yet and that the 2008 bubble could be repeated.”[25]
In June of 2009, Hedge Fund manager Michael Masters told the US Senate that, “Congress has not done enough to curb excessive speculation in the oil markets, leaving the country vulnerable to another price run-up in 2009.” He explained that, “oil prices are largely not determined by supply and demand but the trading desks of large Wall Street firms.” Because “Nothing was actually done by Congress to put an end to the problem of excessive speculation” in 2008, Masters explained, “there is nothing to prevent another bubble in oil prices in 2009. In fact, signs of another possible bubble are already beginning to appear.”[26]
In May of 2008, Goldman Sachs warned that oil could reach as much as $200/barrel within the next 12-24 months [up to May 2010]. Interestingly, “Goldman Sachs is one of the largest Wall Street investment banks trading oil and it could profit from an increase in prices.”[27] However, this is missing the key point. Not only would Goldman Sachs profit, but Goldman Sachs plays a major role in sending oil prices up in the first place.
As Ed Wallace pointed out in an article in Business Week in May of 2008, Goldman Sachs’ report placed the blame for such price hikes on “soaring demand” from China and the Middle East, combined with the contention that the Middle East has or would soon peak in its oil reserves. Wallace pointed out that:
Goldman Sachs was one of the founding partners of online commodities and futures marketplace Intercontinental Exchange (ICE). And ICE has been a primary focus of recent congressional investigations; it was named both in the Senate's Permanent Subcommittee on Investigations' June 27, 2006, Staff Report and in the House Committee on Energy & Commerce's hearing last December. Those investigations looked into the unregulated trading in energy futures, and both concluded that energy prices' climb to stratospheric heights has been driven by the billions of dollars' worth of oil and natural gas futures contracts being placed on the ICE—which is not regulated by the Commodities Futures Trading Commission.[28]
Essentially, Goldman Sachs is one of the key speculators in the oil market, and thus, plays a major role in driving oil prices up on speculation. This must be reconsidered in light of the resurgent rise in oil prices in 2009. In July of 2009, “Goldman Sachs Group Inc. posted record earnings as revenue from trading and stock underwriting reached all-time highs less than a year after the firm took $10 billion in U.S. rescue funds.”[29] Could one be related to the other?
Bailouts Used in Speculation
In November of 2008, the Chinese government injected an “$849 billion stimulus package aimed at keeping the emerging economic superpower growing.”[30] China then recorded a rebound in the growth rate of the economy, and underwent a stock market boom. However, as the Wall Street Journal pointed out in July of 2009, “Its growth is now fuelled by cheap debt rather than corporate profits and retained earnings, and this shift in the medium term threatens to undermine China’s economic decoupling from the global slump.” Further, “overseas money has been piling into China, inflating foreign exchange reserves and domestic liquidity. So perhaps it is not surprising that outstanding bank loans have doubled in the last few years, or that there is much talk of a shadow banking system. Then there is China’s reputation for building overcapacity in its industrial sector, a notoriety it won even before the crash in global demand. This showed a disregard for returns that is always a tell-tale sign of cheap money.”
China’s economy primarily relies upon the United States as a consumption market for its cheap products. However, “The slowdown in U.S. consumption amid a credit crunch has exposed the weaknesses in this export-led financing model. So now China is turning instead to cheap debt for funding, a shift suggested by this year’s 35% or so rise in bank loans.”[31]
In August of 2009, it was reported that China is experiencing a “stimulus-fueled stock market boom.” However, this has caused many leaders to “worry that too much of the $1-trillion lending binge by state banks that paid for China's nascent revival was diverted into stocks and real estate, raising the danger of a boom and bust cycle and higher inflation less than two years after an earlier stock market bubble burst.”[32]
The same reasoning needs to be applied to the US stock market surge. Something is inherently and structurally wrong with a financial system in which nothing is being produced, 600,000 jobs are lost monthly, and yet, the stock market goes up. Why is the stock market going up?
The Troubled Asset Relief Program (TARP), which provided $700 billion in bank bailouts, started under Bush and expanded under Obama, entails that the US Treasury purchases $700 billion worth of “troubled assets” from banks, and in turn, “that banks cannot be asked to account for their use of taxpayer money.”[33]
So if banks don’t have to account for where the money goes, where did it go? They claim it went back into lending. However, bank lending continues to go down.[34] Stock market speculation is the likely answer. Why else would stocks go up, lending continue downwards, and the bailout money be unaccounted for?
What Does the Bank for International Settlements (BIS) Have to Say ?
In late June, the Bank for International Settlements (BIS), the central bank of the world’s central banks, the most prestigious and powerful financial organization in the world, delivered an important warning. It stated that, “fiscal stimulus packages may provide no more than a temporary boost to growth, and be followed by an extended period of economic stagnation.”
The BIS, “The only international body to correctly predict the financial crisis ... has warned the biggest risk is that governments might be forced by world bond investors to abandon their stimulus packages, and instead slash spending while lifting taxes and interest rates,” as the annual report of the BIS “has for the past three years been warning of the dangers of a repeat of the depression.” Further, “Its latest annual report warned that countries such as Australia faced the possibility of a run on the currency, which would force interest rates to rise.” The BIS warned that, “a temporary respite may make it more difficult for authorities to take the actions that are necessary, if unpopular, to restore the health of the financial system, and may thus ultimately prolong the period of slow growth.”
Of immense import is the BIS warning that, “At the same time, government guarantees and asset insurance have exposed taxpayers to potentially large losses,” and explaining how fiscal packages posed significant risks, it said that, “There is a danger that fiscal policy-makers will exhaust their debt capacity before finishing the costly job of repairing the financial system,” and that, “There is the definite possibility that stimulus programs will drive up real interest rates and inflation expectations.” Inflation “would intensify as the downturn abated,” and the BIS “expressed doubt about the bank rescue package adopted in the US.”[35]
The BIS further warned of inflation, saying that, “The big and justifiable worry is that, before it can be reversed, the dramatic easing in monetary policy will translate into growth in the broader monetary and credit aggregates,” the BIS said. That will “lead to inflation that feeds inflation expectations or it may fuel yet another asset-price bubble, sowing the seeds of the next financial boom-bust cycle.”[36]
Major investors have also been warning about the dangers of inflation. Legendary investor Jim Rogers has warned of “a massive inflation holocaust.”[37] Investor Marc Faber has warned that, “The U.S. economy will enter ‘hyperinflation’ approaching the levels in Zimbabwe,” and he stated that he is “100 percent sure that the U.S. will go into hyperinflation.” Further, “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”[38]
Are We Entering A New Great Depression?
In 2007, it was reported that, “The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.” Further:
The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.
[...] In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.[39]
In 2008, the BIS again warned of the potential of another Great Depression, as “complex credit instruments, a strong appetite for risk, rising levels of household debt and long-term imbalances in the world currency system, all form part of the loose monetarist policy that could result in another Great Depression.”[40]
In 2008, the BIS also said that, “The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point,” and that all central banks have done “has been to put off the day of reckoning.”[41]
In late June of 2009, the BIS reported that as a result of stimulus packages, it has only seen “limited progress” and that, “the prospects for growth are at risk,” and further “stimulus measures won't be able to gain traction, and may only lead to a temporary pickup in growth.” Ultimately, “A fleeting recovery could well make matters worse.”[42]
The BIS has said, in softened language, that the stimulus packages are ultimately going to cause more damage than they prevented, simply delaying the inevitable and making the inevitable that much worse. Given the previous BIS warnings of a Great Depression, the stimulus packages around the world have simply delayed the coming depression, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the depression worse than had governments not injected massive amounts of money into the economy.
After the last Great Depression, Keynesian economists emerged victorious in proposing that a nation must spend its way out of crisis. This time around, they will be proven wrong. The world is a very different place now. Loose credit, easy spending and massive debt is what has led the world to the current economic crisis, spending is not the way out. The world has been functioning on a debt based global economy. This debt based monetary system, controlled and operated by the global central banking system, of which the apex is the Bank for International Settlements, is unsustainable. This is the real bubble, the debt bubble. When it bursts, and it will burst, the world will enter into the Greatest Depression in world history.
http://www.globalresearch.ca/index.php?context=va&aid=14680
ARMs may set off 2nd foreclosure wave
Josh Brodesky
Arizona Daily Star
August 9, 2009
Thousands of adjustable-rate mortgages made to risky borrowers in Tucson are on the verge of resetting to higher interest rates, potentially launching a second wave of foreclosures. If a second wave comes — and there is plenty of debate about whether it will — home prices could drop further and new home construction could continue to suffer.
Adjustable-rate mortgages were popular during the housing boom, and it's easy to understand why. They offer artificially low payments for the first few years, letting people buy more expensive houses than they might normally afford. The loans typically reset to higher monthly payments after three or five years or when certain preconditions are met.
More than 15,000 adjustable-rate mortgages in Tucson have yet to reset, although nearly 77 percent of those involve borrowers with good credit.
What concerns analysts, though, are adjustable-rate loans held by Alt-A borrowers, who have decent credit but are considered higher-risk than prime borrowers. Nearly 3,000 of them in the Tucson market have yet to reset, numbers from Santa Ana, Calif.-based First American CoreLogic show.
Alt-A loans can be risky if they have high loan-to-value ratios or if borrowers did not provide proof of income when they got their loans.
"I am scared to death of the five-year and Alt-A mortgages that are going to come due in 2010," said John L. Strobeck, a Tucson real estate analyst. "We've had punch No. 1, and we've got punch No. 2 coming. We cannot ignore that."
Despite the looming presence of adjustable-rate mortgages in the marketplace, there is no consensus about what effect they may have on the housing market. Some analysts — citing low interest rates, modifications and refinancings — say there will be almost none.
Others predict huge problems because of higher payments and many borrowers owing more than their homes are worth.
"Some of those might get refinanced — maybe they already have since interest rates have been low. Maybe the people who own those have sufficient resources so it won't matter," said University of Arizona economist Marshall Vest, who falls into the optimist category.
The Option ARM
There are many adjustable-loan types, but the product that analysts fret about most is the option ARM or "pick-a-pay" loan.
With this kind of loan, borrowers have four payment options each month: 30-year fixed, 15-year fixed, interest-only or a minimum payment.
This last option is usually at a payment rate of less than 3 percent, maybe even 1.5 percent, so it can be appealing to a cash-strapped borrower.
But there's a catch: The minimum payment does not cover the monthly interest owed, so the difference is attached to the balance, said Mark L. Ross, president of Prime Capital Inc.
Tacking on the difference in interest to the end of the loan — something called negative amortization — can have disastrous effects in a down market.
Option loans typically recast, or adjust, after five or 10 years or when the balance reaches 110 percent or 125 percent of the original loan value. That means a borrower who has made minimum payments for five years will owe more money, while having less time — 25 years instead of 30 — to pay back the loan. Payments skyrocket.
These kinds of loans made sense when values were rising and borrowers could simply sell their homes for more or refinance into new loans, said Mark Fleming, chief economist for First American CoreLogic.
But in a declining market where borrowers may already owe more than their homes are worth and it's impossible to refinance or sell, then foreclosure looms.
There are signs that option ARM borrowers are going into default even before their loans recast. As of this spring, nearly 40 percent of such loans were more than 60 days in default, First American CoreLogic has reported. About a fifth of the loans were in foreclosure.
Strong Appeal
Maria Wikfors refinanced her Avra Valley home with an adjustable rate mortgage 4 1/2 years ago, and now she's on the verge of losing it to the bank.
"The reason why we got the ARM was not to avoid paying principal but because it was cheaper, and then we ended up paying off everything else we owed," she said.
After buying their home in 2000 for $83,500, the Wikforses' payments were about $630 a month. The boom happened, values went up, and they refinanced. Early on, their payments were $850 or so a month, but they felt they could handle the jump because they could pay off other debts.They also bought stuff.
"Toys, we bought toys," she said. "We paid off our horse trailer, quads, toys, credit cards."
Then gas prices hit $4 a gallon, and the three-year window on their loan closed. Their payments jumped again to about $1,080.
"The problem was the way home values were inflated, and so our egos were inflated as far as where we stood financially," she said. "I mean, we went out and bought a boat. ... That was the first to go."
Wikfors said an auction on her home is scheduled for October, and she's working to get her home loan modified.
Their loan was a three-year adjustable-rate mortgage, but what concerns some analysts is that a similar formula will play out with the five-year versions.
"This could go on for a long time," Strobeck said.
But Ross, of Prime Capital, said he thinks the effect of five-year adjustable mortgages will be nominal. The indexes used to set adjustable rates are low, so the jump won't be that big.
"The traditional adjustable-rate mortgage is probably not going to create too big of a havoc in the next year when they reset," he said. "There is not going to be huge increases in rates."
Unless, that is, interest rates kick up because of rising inflation. Then some borrowers may find themselves overextended, he said.
One more troubling sign: Ross said few borrowers with adjustable mortgages are refinancing.
"If they haven't significantly improved their financial picture, it is going to be difficult to qualify today. That's why we haven't seen a lot of borrowers refinancing these kinds of products. ... If they could have, they would have."
http://www.azstarnet.com/business/304220
Prime loan borrowers may be poised to face home foreclosures-
Local foreclosure crisis expected to worsen
HUBBLE SMITH
LAS VEGAS REVIEW-JOURNAL
August 9, 2009
Las Vegas real estate agent Frank Nason has read numerous reports about Nevada leading the nation in foreclosures and the "phantom inventory" of foreclosures coming down the pike.
He's yet to see it. Where are all of these foreclosed properties in Las Vegas?
In analyzing the first six months of Clark County Assessor records, Nason found that banks are shedding single-family properties at a much faster pace than they've been acquiring them through foreclosure.
Through June, financial institutions acquired 6,472 real estate-owned properties and sold 11,254, the broker-owner of Residential Resources reported. He defines an REO, or bank-owned property, as any transaction in which the lender acquired the property through a trustee sale.
Las Vegas-based SalesTraq showed REO inventory declining from nearly 16,000 in January to 13,200 in June.
The banks' voluntary foreclosure moratorium, combined with increased investor activity in Las Vegas, may explain the drop in foreclosure inventory, Nason said.
That's about to change. After the moratorium was lifted in March, bank-owned acquisitions jumped 55 percent in May and nearly 40 percent in June.
"If this trend continues and the amount of properties disposed of stays relatively constant, then we can expect to see a new glut of REOs on the market in the third quarter and, most likely, continued downward pressure on pricing," Nason said in a blog posted at residentialresources.com.
He's heard that Fannie Mae and Freddie Mac foreclosures could increase by 400 percent to 500 percent by the end of the year.
"I don't see the huge wave, but we hear about the inventory being held back," said Mercedes Tan, owner of Preservation West, a local business that cleans and maintains foreclosed homes. "It's a property tax issue. The banks don't want to take on property tax."
Tan said she gets about 15 homes a week, primarily from Wells Fargo. She takes over a lot of homes that are facing homeowners' association fines for dead lawns and health department notices for green water in swimming pools.
Although the first two waves of foreclosure losses came from subprime loans and borrowers who defaulted when their adjustable-rate mortgages reset -- many of them speculators -- the next wave will be prime loans, said Whitney Tilson, principal of New York-based investment firm T2 Partners.
These defaults will be due to job losses and home price declines that have left one-fourth of homeowners "underwater," owing more on their mortgage than their house is worth.
"What we're seeing in housing is prime borrowers and people who weren't speculating now starting to default," Tilson told the Review-Journal. "There are sobering implications for expected defaults, foreclosures and auctions in 2009 and beyond, which promise to drive home prices down further."
Christine McNaught of Windermere Realty said bank-owned properties are still getting multiple offers in Las Vegas, which is exactly what the banks want. She wrote 50 offers in one week and only 10 percent went through. They were cash closings in 10 to 20 days.
Her office is being assigned about five foreclosures a month from Wells Fargo and other banks.
"You're not getting a huge influx of foreclosures on the market right now," McNaught said. "I doubt if they're going to flood the market with 20,000 foreclosures. We haven't seen it."
Her data for June showed 12,545 properties for sale in Las Vegas and 12,821 properties in escrow, awaiting closing. Of those for sale, 3,266 are bank-owned and 5,296 are short sales, homes offered at less than the mortgage balance and requiring lender approval.
The actual number of homes available for sale in Las Vegas, including foreclosures and short sales, is much smaller than the 20,613 units reported by the Greater Las Vegas Association of Realtors, industry observers say.
Las Vegas-based business advisory firm Applied Analysis is showing 13,028 properties listed as available for sale, down 9,224 units, or 41.5 percent, from a year ago. About 5,100 units are identified as short sales, which leaves about 7,900 units available for sale in a normal transaction.
The number of units in contracted status -- either contingent or pending -- has risen dramatically in recent weeks to 13,456, Applied Analysis reported. Contingent sales (9,681) are contingent upon some other action taking place, while pending sales (3,775) are awaiting customary closing procedures.
Las Vegas continues to rank as one of the nation's most distressed areas for foreclosures.
For the first six months, Clark County foreclosures rose 84.3 percent to 23,588 from 12,800 in the year-ago period, Sacramento, Calif.-based investment advisory firm Foreclosures.com reported. Preforeclosures increased 34.8 percent to 47,467 from 30,922 a year ago.
Estimates for the next wave of foreclosures in Las Vegas range from 20,000 to 30,000 homes, though nobody has been able to verify those numbers, said Richard Lee, public relations director for First American Title Co. of Nevada.
He hasn't seen much of an increase in foreclosure activity.
"I don't know, it's kind of a lull," Lee said. "Banks are holding back and trickling it into the market a little at a time to sustain value. That is what's happening."
Lee said he thinks the foreclosure crisis in Las Vegas will worsen, but he added that nobody can accurately predict where the market is going.
"Anybody who says they have a handle on this is smoking something," he said.
The Obama administration's $75 billion Making Homes Affordable Plan and lenders' commitments to loan modifications have accomplished little to stem the tide of foreclosures, statistics show.
Since 2007, fewer than 500,000 loan modifications have been completed, according to the Center for Responsible Lending. Meanwhile, 60-day mortgage delinquencies surpassed 2.5 million and total foreclosure starts are approaching 3.5 million.
Keith Ernst, the center's director, in testimony before Congress, said that 1.5 million homes have already been lost to foreclosure, and that's just the tip of the iceberg. Another 13 million foreclosures are expected over the next five years.
"Many industry interests object to any rules governing lending, threatening that they won't make loans if the rules are too strong from their perspective," Ernst said. "Yet it is the absence of substantive and effective regulation that has managed to lock down the flow of credit beyond anyone's wildest dreams."
For years, mortgage bankers told Congress that subprime and so-called "exotic" mortgages were not dangerous. Regulators not only turned a blind eye, but aggressively pre-empted state laws that sought to rein in some of the worst subprime lending, Ernst said.
Ernst has a relatively simple idea to get loan servicers to implement the loan modification plans: Create a mediation program that would require servicers to meet with borrowers and evaluate their loan modification eligibility.
Nevada isn't the only state with a backlog of foreclosures. Egbert Oostburg of San Diego-based Project HomeWatch said banks are also holding back REO inventory in California and Arizona.
"It's that hidden wave you keep hearing about. When is it coming? That's the question," he said. "We're going to hit bottom eventually, but as long as the state and federal government put in these false bottoms, we're not going to move forward and reach the true bottom."
Oostburg said Congress recently passed a plan that allows banks with the Federal Deposit Insurance Corp. to lease foreclosed homes back to former owners for a five-year period, turning a nonperforming asset into cash flow while they ride out the market.
It will amount to a "land grab" by the banks, Oostburg said, when they kick owners out after the value returns and they can sell the home for a profit.
http://www.lvrj.com/business/52828477.html
Choosing Bankruptcy to Avoid Foreclosure
Elizabeth Razzi
August 6, 2009
Even though you cannot get rid of your mortgage payments through bankruptcy, about one in five people who went through mandatory pre-bankruptcy credit counseling said they were doing so to avoid losing their homes to foreclosure, according to Consumer Credit Counseling Services of Greater Atlanta. That organization provides counseling throughout the United States.
From April through June, they counseled 50,385 people who planned to file. Each month, just over 20 percent said they were seeking bankruptcy protection to avoid foreclosure. According to the American Bankruptcy Institute, filing a bankruptcy petition creates an automatic stay against debt-collection efforts, which stops foreclosures -- if only temporarily. If the owner doesn't continue to make payments, the foreclosure process can resume.
But relief from other debts could create enough room in the budget for a strapped homeowner to make mortgage payments. That's something borrowers can ask about when they go through the mandatory pre-bankruptcy counseling with an organization like CCCS.
http://voices.washingtonpost.com/local-address/2009/08/choosing_bankruptcy_to_avoid_f.html
Commercial Real Estate Woes Far From Over, Survey Shows
PRNewswire-USNewswire
Aug. 5, 2009
WASHINGTON
Debt Markets Dysfunctional, Property Values Still Falling
Despite signs that the global economic free fall may be over, conditions in the commercial real estate sector remain extremely stressed. A financing drought and declining property fundamentals are pushing up both "maturity" and "performance" defaults on commercial mortgages, threatening to undermine the economy's longer term ability to create jobs and grow, according to The Real Estate Roundtable's latest quarterly survey of senior commercial real estate executives.
Of the 120 CEOs, chairmen, presidents, board members and other top executives participating in the Q3 "Sentiment Survey," 93 percent said asset values are lower than they were a year ago, while 82 percent expect values to remain roughly the same or to erode even further in the next 12 months.
Debt markets, while reportedly back "from the brink of historic collapse," remain highly dysfunctional. Seventy-one percent of respondents said credit availability is worse today than a year ago, while 41 percent characterized it as "much worse." Not surprisingly, given the degree of current weakness, a majority of respondents (62 percent) expect credit conditions to be at least "somewhat better" by this time next year.
"The vast challenges facing commercial real estate today are far from over. Continued comprehensive policy action is called for to bring liquidity back to the market and avoid a cascade of negative repercussions for the economy," said Roundtable President and CEO Jeffrey DeBoer. "A sick commercial real estate sector means less revenue for local governments; layoffs and cutbacks for construction, hotel and retail workers; and an even smaller retirement nest egg for millions of investors."
The new overall sentiment index reading of 49 remains significantly below the ideal of 100 -- a reflection of the extreme weakness in current market conditions. The overall index is measured on a scale of 1 to 100 and is based on an average of the "Current Conditions" and "Future Conditions" indices. To attain an overall index of 100, all survey respondents would have to answer that conditions are "much better" today compared to one year ago, and will also be "much better" 12 months from now.
The Current Conditions index now stands at 36 and the Future Conditions index at 62. The Roundtable cautioned that the slight increase in the indices should not be taken as a sign of "improvement" in commercial real estate markets, but rather that the sense of a free fall in the markets had subsided. As one survey respondent said, "I felt until recently like we were running in quicksand, but we're not doing that anymore."
In his July 9 testimony before the congressional Joint Economic Committee, DeBoer urged a number of policy steps including extending the Term Asset-Backed Lending Facility (TALF) until year-end 2010; creating a federal program to facilitate origination of new loans (potentially, along the lines of a loan guarantee model cited by Fed Chairman Ben Bernanke); and temporarily easing tax restrictions governing commercial real estate loans that have been securitized, so that borrowers and servicers can begin discussing potential work-outs before the point of default. [Visit www.rer.org for the testimony and the full set of Roundtable recommendations in this area.]
Bernanke on July 22 signaled that further governmental action might be appropriate to support the commercial real estate debt market -- including a possible extension of TALF and some kind of federal guarantee program for commercial mortgages.
The quarterly Sentiment Survey seeks to capture feedback from a broad range of real estate industry segments, asset classes, ownership vehicles and capital structures, including owners and asset managers, financial services firms and operators. It is administered for The Roundtable by FPL Advisory Group of Chicago. A PDF of the entire report is available online at www.rer.org. The next set of survey results, covering Q4 2009, will be released in October.
About The Real Estate Roundtable
The Real Estate Roundtable brings together leaders of the nation's publicly held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members' portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 1.3 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.
SOURCE Real Estate Roundtable
http://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/08-05-2009/0005072435&EDATE=
How To Make A Bad Mistake Worse (FNM/FRE)
Karl Denninger
August 6. 2009
It has been reported that the administration is mulling over splitting Fannie and Freddie into a "good bank/bad bank" structure, or otherwise "taking" the bad part of their book onto the government directly (rather than implicitly):
The bad debts the firms own would be placed in new government-backed financial institutions -- so-called bad banks -- that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate. http://tiny.cc/xnOOO
I cannot possibly over-emphasize how bad of an idea this is.
These two institutions currently hold some $6 trillion of mortgages - some 40% of the market. They have been riddled through with fraudulent accounting and outrageously-thin capitalization for years, and now, with defaults on so-called "prime" mortgages going parabolic, they threaten to exhaust even their "enhanced" $400 billion (combined) credit line through Treasury.
Fannie and Freddie need a permanent resolution. Unfortunately the government seems to think that the most logical form of that resolution is to protect those who invested in the trash paper issued by these institutions when they were engaged in dubious (at best) lending and underwriting by transferring the risk (and realized losses) to the taxpayer.
This is dead wrong, and perhaps disastrously so.
The Government needs to approach this in the following way:
1. Cut the existing firms loose including their debt. That is, leave it to the market. These firms never had an explicit backstop or guarantee, and providing one now is to reward the outrageous behavior of the firms and those who purchased recklessly from them.
2. Restructure and make possible enhanced issue from Ginnie Mae, the only GSE with an explicit government guarantee.
3. Force all loans issued through Ginnie to be limited to no more than 80% LTV, 36% DTI (or "back end" ratio), fully-documented for income and assets.
4. If the private market wishes to support high-LTV and high-DTI loans, let it - without any government support or backstop.
Yes, I realize this will cause the housing market to immediately correct to a rational price point in every market area in America. It will also cause those who purchased Fannie and Freddie paper without doing their own due diligence on their underwriting practices to recognize losses - quite possibly (for those who bought recent issues) very large losses.
So what?
Capitalism requires that you lose when you do foolish or even criminal things; without the market punishing bad decisions we don't have capitalism, we have kleptocracy.
Further, the CBO has already agitated to consolidate Fannie and Freddie onto the Federal Balance Sheet, so far without success. A formal program to take assets onto the Federal Government will trigger such a consolidation with certainty and will likely have a nasty impact on borrowing costs across the curve, and may even extend to a sovereign debt downgrade aimed at The United States.
IF the economy is truly improving then it is time for the market to recognize proper pricing for houses and mortgage money. Indeed, it is quickly becoming impossible for the outcome to be otherwise.
Should government attempt to continue to play "stuff the bad debt under the rug" through some sort of hybrid bad/good bank scheme the outcome is likely to be a breakout north in the longer end of the Treasury Curve, which will instantly trash mortgage pricing, irrespective of attempts to do otherwise, and inexorably tighten credit across the spectrum, instead of containing the damage to the housing market.
Government's approach to housing so far has been "extend and pretend" in the hope that housing would bottom first in 2008 and now in 2009. This strategy is now known to have failed, and it is time for our government to accept that housing prices must correct to historical mean values in order for our economy to recover on a durable basis.
We are quickly reaching the end of our rope as "bailout nation."
http://market-ticker.org/archives/1301-How-To-Make-A-Bad-Mistake-Worse-FNMFRE.html
About half of U.S. mortgages seen underwater by 2011.
By Al Yoon
NEW YORK (Reuters) – The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.
Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.
"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.
Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.
Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,
Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.
Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
"For many, the home has morphed from piggy bank to albatross," the analysts said.
U.S. foreclosures spreading to regions formerly spared
Alan J. Heavens
Inquirer Real Estate Writer
Jul. 31, 2009
The U.S. foreclosure crisis is spreading, and areas that previously appeared immune are now seeing the numbers rise, according to a report yesterday from RealtyTrac Inc., of Irvine, Calif., which tracks filings nationwide.
Some high-foreclosure states (California and the Midwest) saw their numbers drop. But states relatively untouched in the past (Oregon, Idaho, Utah, and South Carolina) experienced increases in foreclosure filings, which RealtyTrac chief executive officer James J. Saccacio suggested may be more directly related to growing unemployment than fallout from subprime and adjustable-rate loans.
Nationally, one in every 84 homes had a foreclosure notice filed against it in the first six months of the year, RealtyTrac said. In the Philadelphia region, it was one in every 168 houses.
The Philadelphia metropolitan area, into which RealtyTrac tucks Wilmington, remained well below national averages for the first half of 2009, ranking 121st of 203 metro areas monitored.
Foreclosure filings in the region were down about 6 percent from the same period a year earlier, and were almost 8 percent lower than in the last six months of 2008.
By contrast, filings nationally rose almost 15 percent over the January-to-June 2008 level and were 9.5 percent higher than the last six months of 2008, RealtyTrac said.
The worst metro areas continued to be in California, the Southwest, and Florida. Las Vegas led the list with foreclosure filings for one in every 13 houses, followed by Cape Coral-Fort Myers, Fla., with one in every 14.
Of the 282 home sales in the Cape Coral-Fort Myers area in June, 130 were either short sales or post-foreclosure bank-owned homes, said Jay LaGace of LaGace & Whitt Partners. A year ago, distressed properties made up 9 in 200 sales.
Though the Philadelphia region has not suffered as much as other parts of the country since the foreclosure crisis began in late 2006, concerns about rising unemployment have moved officials to action.
This week, Mayor Nutter began a major public-relations push for Philadelphia's mandatory mortgage-foreclosure diversion program, which successfully modified 1,400 home loans in its first year.
Public-service announcements, paid for by foundations and private contributions, will appear on TV and throughout the transit system. Notices will include a number to call, 215-334-4663.
The city's program is being emulated elsewhere as the Obama administration's Make Home Affordable effort, launched in February, has not made much of a dent.
So far, the voluntary national program, which promised relief for up to nine million at-risk borrowers through modification or refinancing, has completed only 200,000 "trial" modifications. The administration wanted to be at the half-million mark by November.
To make mortgage servicers who signed on to the program more accountable, HUD Secretary Shaun Donovan said that public reporting of results for each of the servicers would begin Tuesday. HUD also will measure the performance of each servicer. Freddie Mac will audit refused modifications, to see if a second look is necessary.
Hope Now, a voluntary modification program run by the mortgage industry, said Wednesday that more than 1.5 million homeowners had been helped since January.
The foreclosure and credit crises have changed the way homeowners are refinancing their mortgages, Freddie Mac reported yesterday.
Of the mortgages refinanced in the second quarter, 62 percent of prime borrowers either kept the same principal balance or reduced it, said deputy chief economist Amy Crews Cutts.
"Credit standards are quite strict today for cash-out [refinancings], and borrowers need a significant equity cushion to contemplate equity extraction," she said. "That's why cash-out volumes are 35 percent lower now than a year ago, even though interest rates are so low."
Those rates reached 5.25 percent yesterday, and Freddie Mac said it believed that was where the fixed 30-year rate would remain for the rest of the year.
http://www.philly.com/philly/business/20090731_U_S__foreclosures_spreading_to_regions_formerly_spared.html
Commercial Real Estate Meltdown
Ian Cooper
The Wealth Daily
August 1, 2009
Why Your Nearby Mall Could Soon Close. Well. . . better late than never.
Sure, the Dow broke out, catapulting stocks from the summer doldrums. . . but what those with short attention spans forgot is the other side of the "hurricane-like" storm wall: commercial real estate.
Everyone's coming out, claiming there's an end to the recession. . . that we're having a "V" shaped recovery. . . but they're about to get walloped.
Yep, it's time to get out of the water, folks. . . and fast (just as Steve and I have been warning readers).
Heck, Bernanke. . . even Janet Yellen, president of the San Francisco Fed, are nervous wrecks over it.
That's because they know that $2.2 trillion of U.S. commercial properties bought or refinanced since 2004 are worth less than original prices. They also know that prices have fallen so much that about $1.3 trillion of properties either lost down payments or are close to losing it.
And that just includes office, industrial, multi-family, and retail properties. Tack on hotels, and you can add billions more to those figures.
Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks).
Says Yellen:
The next area of significant vulnerability for the banking system, particularly for community and regional banks with real estate concentrations, is income-producing office, warehouse and retail commercial property. . . Our biggest concern now is with maturing loans on depreciated commercial properties.
Borrowers seeking to refinance will be expected to provide additional equity and to have underwriting and pricing adjusted to reflect current market conditions. In some cases, borrowers won't have the resources to refinance the loans.
Over the next five months alone, troubled U.S. commercial real estate loans could double to $100 billion, as delinquencies rise and financing remains tough to secure.
The next crisis that's just now in the first innings of a disaster is commercial real estate — a $6.7 trillion market supported by $3.5 trillion in debt. And it's best to get out of its way now. . . with short positions for protection.
As this story unfolds, it'll read much like Part 2 of the residential market debacle.
And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren't exactly jumping up to refinance deals.
Even Steve Christ will tell you that all of this is a recipe for disaster. . . and that industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will close their doors over the next year.
That means that we're maybe only in the second inning here as this crisis unfolds.
So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, you have to wonder how it will all get done, says Steve.
The brutal answer: it won't.
For more on this and the Option ARM "time bomb," click here: http://www.angelnexus.com/o/web/14220
http://www.wealthdaily.com/articles/commercial-real-estate-meltdown/1920
New-Home Sales Up 11%, Most Since 2000
Courtney Schlisserman and Bob Willis
July 27, 2009
Bloomberg
Purchases of new homes in the U.S. climbed 11 percent in June, the biggest gain in eight years, underscoring evidence that the deepest housing slump since the Great Depression is starting to stabilize.
Sales increased to a 384,000 annual pace, higher than every forecast in a Bloomberg News survey and the most since November, figures from the Commerce Department showed today in Washington. The number of houses on the market dropped to the lowest level in more than a decade.
Deutsche Bank Securities Inc. and Goldman Sachs Group Inc. economists said today’s figures signal an end to the slide in home construction and sales. While that means the drag on economic growth will turn to a stimulus in the second half of the year, property values are likely to continue falling and rising unemployment will temper the recovery, analysts said.
“We’re barely past the housing bottom, this thing is still fragile,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. “It’s not premature to talk about home prices bottoming -- it’s somewhere in the next three to six months. There is light at the end of the tunnel.”
Builders’ stocks jumped, with the Standard and Poor’s Supercomposite Homebuilding Index gaining 4.4 percent. The broader S&P 500 Stock Index was up 0.3 percent to close at 982.18. Treasuries, which fell earlier in the day, remained lower, with benchmark 10-year note yields rising to 3.72 percent at 4:37 p.m. in New York from 3.66 percent at last week’s close.
Construction Recovers
The Commerce Department earlier this month reported that builders began work on 582,000 residential properties at an annual rate in June, the most since November. Home construction has subtracted from U.S. gross domestic product every quarter since the start of 2006.
The jump in sales signals the U.S. economy is on the way to recovery, said Rebecca Blank, under secretary for economic affairs at the Commerce Department.
“Across the board this is good news,” Blank, formerly a fellow at the Brookings Institution in Washington, said in an interview. “It’s what you would expect to see at the beginning of a recovery.”
Standard Pacific Corp., the U.S. homebuilder that gets most of its revenue from California, is among companies seeing stabilization. It’s net loss, the 11th consecutive drop, narrowed to $23.1 million in the second quarter from $249 million a year earlier, the Irvine, California-based company said last week. Revenue fell 29 percent.
Smaller Losses
“While we still obviously have not achieved the level of profitability that we ultimately need, we are a lot closer than we were a couple of quarters ago and believe that we are in pretty good shape in the short run,” Chief Executive Officer Ken Campbell said in a July 22 statement.
While prices continue to fall, the pace of the decline is easing. The S&P/Case Shiller index of 20 major metropolitan areas tomorrow may show property values fell 17.9 percent in May from a year earlier, according to the median forecast in a Bloomberg survey. The measure was down 18.1 percent in the 12 months ended April.
“In terms of residential investment and home sales and housing starts, I think it has” bottomed, said Jan Hatzius, chief U.S. economist at Goldman Sachs in New York, referring to the housing slump. “We still have a period of declines ahead of us” in prices, he also said.
The decline in prices and a drop in mortgage rates have started to lure buyers even amid the surge in unemployment, which reached a quarter-century high of 9.5 percent in June.
Economists’ Forecasts
Economists had forecast new home sales would rise to a 352,000, according to the median of 62 projections in a Bloomberg News survey. Estimates ranged from 335,000 to 377,000. Commerce revised May’s reading up to a 346,000 rate from a previously reported 342,000.
The median price of a new home decreased 12 percent to $206,200 from $234,300 in June 2008. Last month’s value compares with $219,000 in May.
Builders had 281,000 houses on the market last month, down 4.1 percent from May and the fewest since February 1998. The number of unsold properties fell a record 36 percent from June 2008. It would take 8.8 months to sell all homes at the current sales pace, the lowest level since October 2007.
Foreclosure filings reached a record in the first half of the year, providing competition for homebuilders and pushing down the value of all houses. Also, rising unemployment, which economists forecast will top 10 percent by early 2010, threatens to restrain any recovery in housing.
Fed Efforts
Federal Reserve policy makers have committed to a $1.25 trillion program to purchase securities backed by home loans in an effort to put a floor under the housing market and lower borrowing costs. Those purchases, as well as direct government purchases of Treasuries, drove the rate on 30-year mortgages to a record-low 4.78 percent in April, according to figures from Freddie Mac. Rates have since hovered around 5 percent.
Fed Chairman Bernanke said July 21 that the economy is showing “tentative signs of stabilization” and the “decline in housing activity appears to have moderated.”
Another incentive is the $8,000 tax credit for first-time buyers that is part of the Obama administration’s economic stimulus plan. Purchases have to be completed before Dec. 1.
High-dollar foreclosures spike
Bill Hethcock Staff writer
Dallas Business Journal
July 25, 2009
Dearth of financing putting commercial properties in peril
The rash of commercial property foreclosure postings in North Texas is spreading into higher-priced buildings, and real estate experts say they expect more upscale properties to be in the mix in the months ahead.
Eight commercial buildings with an assessed value of $10 million or more were posted for sale in the upcoming August foreclosure auction, compared to none in that price range a year ago, according to an analysis prepared by Addison-based Foreclosure Listing Service at the request of the Dallas Business Journal.
The FLS analysis shows a marked increase in the number of foreclosure postings on buildings assessed at $10 million or more in June, July and August of this year.
“The quality of commercial properties being posted for foreclosure is starting to change,” said George Roddy, president of Foreclosure Listing Service. “We are starting to see some of the better properties being posted.”
Across all price ranges, the total number of commercial building foreclosure postings for the upcoming August auction was 271, an 83% increase from the 148 buildings posted in the same month last year.
For the first seven months of the year, a total of 1,245 foreclosure notices were filed on all commercial real estate, including undeveloped land, in Dallas, Collin, Tarrant and Denton counties. That’s up 12% from the 1,116 notices served in the same period last year, FLS research shows.
Investor/developer Bill Cawley, CEO of Dallas-based Cawley Partners, said he expects to see more high-value buildings foreclosed on as the recession and credit crisis drag on and more refinancings fail.
“Most people who are playing in the bigger-valued properties are just starting to feel the stress,” Cawley said. “There’s no credit to go replace existing debt with. If you have a lender that won’t work with you, you pretty much have no option.”
John Alvarado, managing director of commercial property sales for Jones Lang LaSalle’s office in Dallas, said he expects the overall number of foreclosures and those affecting larger, higher-quality properties to continue to rise for the next six to 18 months.
“It’s almost inevitable,” he said.
The biggest issues landlords face are maturity defaults, caused by an inability to find new financing when a commercial mortgage expires, Alvarado said. Other foreclosures are being caused when commercial real estate loans convert from interest-only to interest-and-principal, similar to what happened in residential real estate with teaser rates, he said.
“We’re starting to see those (interest-only periods) burn off,” Alvarado said. “Sometimes that will trigger a default because when the payment increases to include the principal, the property is unable to pay the debt service.”
The only chance to stave off even more widespread foreclosures is government intervention that gives relief to lenders or somehow jump-starts the commercial mortgage-backed securities market that has historically financed the majority of office, retail, apartment and industrial buildings, Alvarado said. The intervention would allow lenders to clear their balance sheets of nonperforming and nonsellable real estate, allowing them to issue new loans for refinancing, development and investor purchases, he said.
The FLS commercial postings of higher-priced buildings in North Texas include shopping centers, office buildings and apartment complexes.
One of the most high-profile postings is the Broadstone Parkway mixed-use development on Inwood Road just north of Interstate 635, west of the Galleria. It’s one of several North Texas properties built by Opus West Corp., the Phoenix developer that is in bankruptcy.
The project’s assessed value is $33.2 million and it has $45.85 million in debt, according to FLS records.
Other high-end commercial properties posted for foreclosure include One Hanover Park, a 205,0000-square-foot office building at 16633 Dallas Parkway in Addison that’s assessed at $28.2 million and has $22.85 million in debt. A 417,000-square-foot apartment complex at 2000 E. Arapaho Road in Richardson, valued at $35.9 million with $30.4 million in debt, also made the list.
Even with the increase in higher-end postings, the vast majority of the foreclosure postings in North Texas have been filed on commercial buildings valued at less than $10 million, Roddy said.
For the first five foreclosure auctions of the year, an average of 2.2% of the commercial buildings posted for foreclosure had an assessed value of $10 million or more. That number jumped to 5.5% of the total postings in June, before inching down to 3.5% and 3% for July and the upcoming August foreclosure auctions, respectively.
Roddy also points out that the number of foreclosures is a small percentage of what North Texas experienced in the real estate bust in the late 1980s and early 1990s.
Cawley said he expects the North Texas market to experience a comparable collapse to that time period, and expects the crash to be even worse nationally.
The commercial real estate downturn will last another couple of years, he projected.
“As we go deeper into this, with the CMBS (commercial mortgage-backed securities) loans coming due, you’re going to see bigger and bigger foreclosure amounts and larger commercial projects being affected,” Cawley said.
“I actually think we’re at the tip of it,” he added. “I think it’s just starting. I think we’ve got all of 2010 (of commercial real estate declines), all of ’11, and 2012 will be a recovery.”
http://www.bizjournals.com/dallas/stories/2009/07/27/story1.html?b=1248667200^1866532
Are banks skewing South Florida real estate market?
MONICA HATCHER
The Miami Herald
July 27, 2009
South Florida home and condo prices appear to be bottoming out. Some say that banks are controlling the release of foreclosures -- the lowest-priced homes -- to the market as a way to shore up prices.
On the surface, South Florida's home prices appear to be bottoming out, but a dip in the number of bank-owned properties for sale is leading analysts to conclude that lenders may be slowing the flow of foreclosures to the market as a way of stanching further price declines.
Monthly numbers from the Florida Association of Realtors show that South Florida existing-home sales continued to rise in June, as bank-owned homes and short-sales attracted bargain hunters from across the country. Figures released Thursday showed single-family home sales were up by 54 percent in Miami-Dade and 35 percent in Broward, compared to last year.
Median single-family home prices were down again since June of last year, falling 28 percent in Miami-Dade and 33 percent in Broward. But they have strengthened from April prices. The median price is the point at which half the homes sold for more and half for less.
The apparent leveling out of prices is being attributed to two things: a shrinking number of distressed homes entering the market and a larger share of high-priced homes changing hands, according to real-estate analysts and brokers.
Condo sales were up in both counties, too -- by 19 percent in Miami-Dade and 58 percent in Broward. Median condo prices, however, fell by 49 percent in Miami-Dade to $141,000 from $275,600 the previous year and by 46 percent in Broward to $83,900 from $156,200 a year ago.
Over the past six months, however, intriguing trends have begun to emerge in the month-to-month numbers.
The median single-family home price in Miami-Dade has, in fact, risen for the past three months, climbing from $177,000 in April to $194,700 in May and $211,400 in June. In Broward, the median in April was $191,300, followed by $190,000 in May and $204,800 in June.
BENEATH THE SURFACE
On the condo front, the median price in Broward has bounced between $85,000 and $80,000 since January and between $149,000 and $140,000 in Miami-Dade, a trend that would appear to suggest prices may be hitting a bottom.
However, listings of bank-owned homes and short-sales -- in which a home is sold for less than the mortgage owed -- fell from 44 percent in May to 39 percent in June, according to Ron Shuffield, a Coral Gables-based real-estate analyst and president of Esslinger Wooten Maxwell Realtors.
And sales of these so-called distressed properties dropped from roughly 60 percent in May to 54 percent in June.
Brokers say fewer well-priced foreclosures on the market are now routinely sparking bidding wars. Bank-owned homes in hot condos and neighborhoods are going under contract within days.
Anthony Askowitz, a real-estate broker in Kendall, said his bank-owned listings had fallen from about 150 last June to just 37 today.
``I am getting less foreclosure listings, but, at the same, time, I am selling them so much faster. I can't replace them as fast as I am selling them,'' said Askowitz, adding that he had listed a unit in the Club at Brickell Bay at $174,900 on Thursday and received an all-cash offer the same day.
Lenders, some real-estate lawyers and analysts believe, may be behind the trend as they either inadvertently drag out the foreclosure process or hold back the release of foreclosures for sale to the public.
Either way, the smaller numbers could be curbing further price declines, since analysts say home prices will not recover until the high numbers of distressed properties are cleared from the market.
Lenders repossessed 756 homes in Miami-Dade in June, up from 434 in May, according to foreclosure tracking firm RealtyTrac. In Broward, they took back 1,365 homes last month and 738 in May. But properties don't necessarily hit the market immediately.
``There is less distressed inventory being distributed to brokers for sale,'' said Doug DeWitt, a Miami-based real-estate broker. ``I think they are trying to establish a bottom by not flooding the market, which seems to have worked a little bit.''
Julian Dominguez, owner of Foreclosure Information Systems, a company that publishes reports about foreclosure auction sales in Miami-Dade, said he is seeing the hold-back firsthand.
``They are canceling a lot of sales at the auction. That's mainly because they don't want to take title,'' said Dominguez, who has been attending the now thrice-weekly auction sales.
Ross Toyne, a Miami-based lawyer who represents condo associations in disputes with lenders, said he thinks lenders are deliberately dragging their feet -- both in the foreclosure process and in bringing the properties to market for resale.
``They are doing themselves a favor. They're afraid they would have to drop the price not enormously, but ginormously to get the market to clear,'' Toyne said.
Condo associations have alleged that the feet-dragging is a ruse to avoid having to assume the maintenance cost of properties -- including association fees.
SPECULATIONS
Ken Thomas, a Miami-based banking analyst, said it all makes sense. Once a bank takes back a home at the end of the foreclosure process, it has to value the property at its current market value -- and take a hit to its bottom line. Some banks, he said, may be holding off that day of reckoning.
``Some of them simply can't afford to recognize the loss,'' Thomas said. He also said there was no rule or law requiring banks to immediately sell a property once it had been taken back through foreclosure.
Not everyone is convinced that's the case.
Mark King, an attorney with the Miami office of Jones Walker who represents banks in commercial foreclosures, attributed any decrease in bank-owned inventory more to the inability of lenders to effectively manage the huge volume of homes being reclaimed through foreclosure. They don't have the manpower or know-how to handle the volume.
``To say banks have a devious, brilliant strategy for controlling the market is probably giving them more credit than they deserve,'' King said, adding that it may differ from lender to lender. ``Maybe some are doing it for strategic reasons. When you digest so many of these assets so quickly, inevitably there will be some indigestion and you may not want to continue consuming at the same pace.''
But foreclosures certainly haven't been worked out of the system. Rising unemployment will only exacerbate the trend, analysts predict.
There are more than 750 auction sales scheduled for the first two weeks in August.
``We just put out our [foreclosure listing] book for August and it has 216 pages; normally, it's 170 pages long,'' Dominguez said.
http://www.miamiherald.com/business/economy/story/1155164-p2.html
A second foreclosure storm brewing?
Scott Van Voorhis
July 24, 2009
Home sales were up again yesterday nationally, rising 3.6 percent over June.
It was the third straight, month-over-month increase, and the latest sign that life of some sort may be finally returning to a sector that was all but dead few months ago. (Of course, prices just keep on falling, with the median sale price nationally of $181,500.)
But just as the real estate market appears to have pulled out of its nose dive, more trouble appears to be brewing on the foreclosure front.
The latest Massachusetts foreclosure numbers show fewer homes being disposed of at bank auctions, but a spike in the number of foreclosure petitions.
That’s the first step in a month’s long process that can eventually lead to a foreclosure sale or auction.
What’s happening here is that the baton is being passed. Many of those homeowners we’ve been reading about for years with those crazy subprime loans have been swept to the street.
Taking their place in the foreclosure line are homeowners who have lost their jobs and are now falling behind on their payments.
No Massachusetts oddity, the same pattern can be seen in newly released foreclosure stats in California.
Will another wave of foreclosures swamp signs of a budding recovery in the housing market?
Your guess is as good as mine but it sure doesn’t look good.
http://www.boston.com/realestate/news/blogs/renow/2009/07/a_second_forecl.html
Bernanke Says Commercial Property May Pose Risk for Economy
Scott Lanman
July 22, 2009
Bloomberg
Federal Reserve Chairman Ben S. Bernanke said a potential wave of defaults in commercial real estate may present a “difficult” challenge for the economy, without committing to additional steps to aid the market.
Bernanke, testifying before the Senate Banking Committee today, urged lenders to modify “problem” mortgages to avert defaults. Christopher Dodd, the Connecticut Democrat who chairs the panel, told Bernanke that “some have suggested” the commercial market “may even dwarf the residential mortgage problems” in the U.S.
The state of commercial real estate was one of the most- asked-about subjects in questioning by lawmakers so far in Bernanke’s two days of testimony on the economy. Bernanke said today in the Senate and yesterday at the House Financial Services Committee that it’s too early to tell how effective the Fed’s main initiative in the area will be.
The Term Asset-Backed Securities Loan Facility, a Fed emergency program that lends to investors to purchase securities backed by consumer and business loans, began accepting commercial mortgage-backed securities as collateral last month.
Fed policy makers will extend the TALF, currently scheduled to expire Dec. 31, should they judge financial markets are still “some distance from normal operation,” Bernanke said today.
TALF Extension
“We will certainly be monitoring the situation, and if markets continue to need support, we will be extending the final date of that program,” Bernanke said.
It “may be appropriate” for the government and Congress to consider “fiscal” steps to support the industry, Bernanke said today. Ideas for fresh support for the market could include government guarantees for commercial mortgages, Bernanke also said today, while noting no proposal on the subject has emerged.
U.S. commercial property prices fell 7.6 percent in May from a month earlier, bringing the total decline to 35 percent since the market’s peak, Moody’s Investors Service said in a report this week. Commercial properties in the U.S. valued at more than $108 billion are now in default, foreclosure or bankruptcy, almost double than at the start of the year, Real Capital Analytics Inc. said earlier this month.
Yesterday, more than a half-dozen members of the House panel mentioned or asked Bernanke about the topic, with Chairman Barney Frank saying there’s a “great deal of fear” that a wave of commercial defaults will produce economic problems similar to those caused by residential mortgages.
“As the recession’s gotten worse in the last six months or so, we’re seeing increased vacancy, declining rents, falling prices -- and so, more pressure on commercial real estate,” Bernanke said yesterday. “We are somewhat concerned about that sector and are paying very close attention to it. We’re taking the steps that we can through the banking system and through the securitization markets to try to address it.”
One of the main issues for the industry is that the market for debt backed by commercial mortgages “has completely shut down,” the Fed chief said yesterday.
http://www.bloomberg.com/apps/news?pid=20601068&sid=a2mAhkgbWDXc&refer=economies
Negative Equity Nation for 1 out of 5 Homeowners: The Psychology of the 10 Million American Homeowners with Zero Equity
MyBudget360.com
July 19, 2009
Recent data suggests that the number one factor for walking away from a home is negative equity.
For us to understand this dynamic, it is important to understand why someone would leave a home with a mortgage. According to the U.S. Census Bureau some 51.6 million owner occupied homes have a mortgage. This is data from late 2007 so we should be getting the updated data in the ACS that comes out in September of 2009. Another third of homeowners have paid off their mortgage. But with 26,000,000 unemployed and underemployed Americans, paying the mortgage has become more challenging.
We recently discussed the rise in bankruptcies which comes even with the stricter guidelines put in place in 2005. A recent Freddie Mac report found that 17 percent of the mortgages in their portfolio had negative equity while another 11 percent had equity of 10 percent or less. Now if you think about it, selling costs can be 6 percent so even those with 10 percent or less equity stand to lose money in a home sale. If we put this together, some 28 percent of Freddie Mac loans if they were sold today may yield the borrower zero or will cost them thousands. This is a recipe for disaster.
First let us take a look at the Freddie Mac world:
At the end of 2008 some $11.9 trillion in mortgage debt was outstanding. Between Fannie Mae and Freddie Mac, a total of $5.3 trillion was in their portfolios. The massive rise in debt followed in line with the multi-decade long housing bubble. Now Freddie Mac and Fannie Mae serve virtually the same role in the mortgage market. They provide so-called liquidity in the secondary arena. What this means is no one else would buy these mortgages now that they know Wall Street virtually turned many loans into casino like instruments. Now, the two giant government agencies are virtually the only game in town. But what is in the report should be of concern. Let us pull out the Freddie Mac data by itself:
Freddie Mac has a mortgage portfolio worth $1.96 trillion. Of this portfolio 13 percent is made up of option ARMs, ARMs, and interest only products. These are toxic loans. This may not seem like much but this is equivalent to $254 billion in toxic loans. Keep in mind those 30-year fixed mortgage are also seeing rises in defaults. Assuming 17 percent of the borrowers are underwater, some $333 billion in mortgages are severely at risk.
Yet the risk is much deeper since the unemployment situation is causing even those with 30-year fixed mortgages to default. The problem with being underwater is that the owner has little motivation to keep paying the mortgage. For most people, they buy homes to live in but also to build up a steady stream of equity. Yet in this decade, we have seen something that hasn’t occurred since the Great Depression. We have seen a nationwide housing market decline. And now, with websites like Zillow and also, local county assessors offices going online many people can check the “value” of their property with very little hassle. So what this creates is an obsessive real estate culture. Let us take a look at what occurred in this decade:
Since the 1980s for nearly 30 years housing prices have been on a tear. Now that the bubble has burst equity levels are now back to 2001. The peak was reached with zany valuation while the debt still exists. That is why on the chart above you’ll notice housing prices declining while mortgage debt levels are still near their peak. It is interesting to note that Freddie Mac assumes booming mortgage debt again:
Yet the losses are going to continue mounting as home prices continue to decline. Freddie Mac figures some 1 out of 5 homeowners with mortgages are underwater. Yet we know that there are still many more Alt-A loans that will have much higher default rates. Freddie Mac is probably as conservative of a portfolio as we will get.
Here is some of the data on walking away:
“(WSJ) The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default - even if they could pay the mortgage - when the equity shortfall hits 50% of the house’s value, they found.
…
“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”
And here is another point. If you live in area with high defaults the stigma may not be there for a strategic default. Take a look at the rising losses in certain states:
In California the negative equity rate is much higher. So losses are starting to mount and virtually all Alt-A and option ARM holders in the state are underwater. This is going to increase the walking away phenomenon. Even a map of the U.S. will tell us where most of the foreclosures will occur:
With 1 out of 5 homeowners with negative equity, we have a fleet of 10 million Americans being tempted to walk away from their mortgage. With unemployment rising, the default may occur because of necessity. Keep in mind these are people who are still current on their mortgages and not in a stage of default. Unfortunately housing prices still have a way to go on the downside thus pushing more homeowners underwater.
http://www.mybudget360.com/negative-equity-nation-for-1-out-of-5-homeowners-the-psychology-of-the-10-million-american-homeowners-with-zero-equity/
Bottom-scraping prices for foreclosed-upon and bank-owned homes mean bargains for savvy buyers
By Hubble Smith
LAS VEGAS REVIEW-JOURNAL
July 19, 2009
Investors snap up homes, looking to beat possible price turnaround
How low can it go?
Some real-estate market watchers predict Las Vegas will reach bottom when home prices match those in Detroit, one of the nation's hardest-hit cities for foreclosures and unemployment.
Homes are reportedly selling for just a few thousand dollars there.
Las Vegas is getting close. The Greater Las Vegas Association of Realtors reports that the cheapest single-family detached house for sale on the Multiple Listing Service is $10,000.
It's an 1,160-square-foot, single-story home with three bedrooms and a bath, built in 1957, at 1389 Lawry Ave., near Martin Luther King and Lake Mead boulevards.
The bank-owned home lacks amenities such as a pool and spa, built-in backyard barbecue and custom landscaping, and needs repairs. However, it features decorative wrought-iron bars over the windows and reinforced-steel dead bolts on the doors.
What do you expect for $8 a square foot?
There are 10 homes listed for sale in Las Vegas for less than $25,000. Most are fixer-uppers in older parts of town, Realtor Robin Camacho of top10realestatevalues.com said.
Interested in a condominium?
She found 12 units on the Multiple Listing Service between $11,000 and $20,000, again not in the most desirable areas. At the bottom is a 776-square-foot, two-bedroom unit at 1720 W. Bonanza Road for $11,500.
Her best deals are found primarily in the east and north areas of Las Vegas. They've been built since 2000 and are priced from $55,000 to $100,000.
Some need work and some are ready for move-in, like the 1,400-square-foot, two-story home near Sam Boyd Stadium that's listed for $62,000. All it needs is a fresh coat of paint -- maybe just wash the walls -- and the carpets cleaned and it could be rented tomorrow, Camacho said.
The home sold new for $217,000 in 2007 and will probably get bid up to $85,000, she said.
Tim Sullivan of San Diego-based Sullivan Group Real Estate Advisors said some home prices may fall even more.
"I think you will find that a few poorly located homes may see further price drops," he said. "But the best stuff may be leveling soon."
The key to price stability in Las Vegas is jobs and foreclosures, he said.
Camacho uses about 70 different factors to determine her top 10 deals, including price, taxes, amenities, condition and location of the home. Homes rotate in and out of her Web site almost hourly as new homes come on the market, she said.
"We're looking to show houses that are the best value for our client's money," Camacho said, "not just the best price."
Investors are snapping up some of the deals for rentals, looking to beat any possible price turnaround, she said. The median price of existing single-family homes in California turned up 4.2 percent in May to $267,570.
The median price in Las Vegas was $130,000 in May, unchanged from the previous month, Home Builders Research reported. It's down 43.5 percent, or $100,000, from a year ago and has returned to the same level of December 2000.
Home Builders Research President Dennis Smith said he's hearing from Realtors that real estate-owned assignments from the banks are increasing dramatically. Some of those are tentatively going to be listed at $40,000 to $50,000, he said.
How long it takes the marketplace to absorb these homes will help signal when we can expect to see the bottom of the resale housing segment, Smith said.
"The reason prices, especially resales, continue to go down is because that's all that's selling," he said. "Why is that? Because the lending environment has changed to where it's difficult to obtain a new loan on anything but (Federal Housing Administration) FHA and (Veterans Affairs) VA."
An excess supply of homes on the market -- many of them vacant and in foreclosure -- continues to put downward pressure on prices, economist Keith Schwer of the Center for Business and Economic Research said.
Nevada has been identified as one of four housing bubble states and has experienced the highest rate of foreclosures in the nation.
The Case-Shiller Home Price Index followed a tight trend line for Southern Nevada from 1987 to 2002, followed by a modest increase in 2003. From 2004 to 2006, the index took off vertically, peaking in 2006, then descending steeply into March. It's now dipped below the trend line, signaling a return to housing affordability in Las Vegas.
Sellers have slowly and reluctantly lowered home prices, but not enough to soak up excess inventory, Schwer said.
"We have seen housing price declines over time," he said. "Housing markets invariably adjust slowly to an excess supply, but rapidly to excess demand."
Housing analyst Smith doubts that median prices in Las Vegas will ever go as low as Detroit.
"Detroit is home to GM," he said. "How many people are moving from Detroit to Las Vegas and how many people are moving from Las Vegas to Detroit? I don't know any."
http://www.lvrj.com/business/51132887.html
White House's $50B foreclosure plan a bust so far
By Victoria McGrane
July 17, 2009
Barack Obama's $50 billion program
to curb foreclosures isn't working,
and the White House knows it. Photo: Reuters
The Obama administration’s $50 billion program to curb foreclosures isn’t working, and the White House knows it.
Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution. Whatever the reason, the program hasn’t stopped the rising tide of foreclosures: Experts predict that at least another 2 million homes will be lost this year, and the administration’s plan has so far reached only about 160,000 of the 3 million to 4 million homes it was supposed to protect over the next three years.
That’s bad news for the economy — and bad news for the Democrats.
The Democrats’ political and policy fortunes rest on their ability to persuade voters that they’re fixing the economy. But experts say that rising foreclosures will only exacerbate the nation’s economic woes, pushing down home prices, slashing state and local tax revenues and imperiling consumer confidence.
“Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in unusually harsh words for a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.
“It’s just hard to explain to the working families in America how it is we could move so fast with extraordinarily complicated deals with the huge financial institutions, and we are moving so incredibly slowly, mired in paperwork, in rules, in talking to banks back home,” said Sen. Jeff Merkley (D-Ore.).
The foreclosure listing service RealtyTrac Inc. reported Thursday that the number of homeowners in foreclosure in the first six months of 2009 was up 15 percent from the same time period a year ago.
The Center for Responsible Lending, a nonpartisan research and policy organization, projects at least 2.4 million additional foreclosure starts this year, causing nearly 70 million surrounding households to lose a combined $500 billion in property value.
The group estimates there will be 9 million foreclosures through the end of 2012, at the cost of $2 trillion in lower home values — enough to pay for the House Democrats’ health care plan, twice.
The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better.
The servicers were told to designate a liaison with the administration who will meet with Treasury and HUD on July 28. The servicers have to tell the administration by July 23 what specific steps they’re taking to improve performance.
In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.
“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.
But assurances that the administration is paying attention were not enough to satisfy senators on either sides of the aisle — and Republicans are ready to make the case that slow progress on the foreclosure front is just one more example of the Obama administration overpromising and overspending.
“I see these extravagant promises in just about everything that happens here, ... and then I see this terrible execution,” said Sen. Mike Johanns (R-Neb.). “The stimulus money isn’t getting out, you’re not getting on top of the foreclosure numbers, you know, and that has nothing to do with what you inherited. Execution is what you do every day.”
I’m not happy where we are at, and I think there is a lot more to be done,” Republican Sen. Mel Martinez, whose home state of Florida has the third-highest foreclosure rate in the country, told the Treasury and HUD officials there to testify.
“What’s your Plan B?” he asked later.
That’s exactly what some outside experts are asking; they say that the situation requires more drastic action than the modifications the White House is pursuing.
Many housing advocates argue that Obama’s plan was fatally flawed from the start because Congress refused to pass a controversial measure to allow bankruptcy judges to modify primary residential mortgages — recommended by the White House as the one stick in its plan, which is chock-full of carrots for servicers and borrowers.
“You have got to have some leverage, something to hold people’s feet to the fire,” said CRL spokeswoman Kathleen Day. “If you tell the industry this [judge] can do the loan mod if you don’t, that is going to get their attention.”
Andrew Jakabovics, a housing expert with the left-leaning Center for American Progress, believes revisiting bankruptcy is a political nonstarter. But he says there are other sticks the administration could consider, including taking away the tax advantage enjoyed by the trusts that hold mortgage-backed securities if the investors refuse to allow modifications.
“That’s a pretty big stick,” he said.
And while it was the Senate that killed the bankruptcy measure, the White House took flak for not spending a single cent of its political capital on getting it through the upper chamber.
Economist Mark Zandi — whose advice congressional Democrats relied upon during the stimulus debate — has argued that the Obama plan was too complicated. His recommendation for a Plan B: a simple program that covers any homeowner who took out a mortgage between 2005 and 2008 that was clearly unaffordable when it was made, with straightforward criteria to determine that.
Zandi and others argue that the modifications should focus on reducing struggling homeowners’ outstanding principal on homes that have lost much of their value. A major criticism of the Obama housing plan was that it failed to aggressively encourage principal write-downs, focusing instead on reducing homeowners’ monthly payments, largely through interest rate cuts.
But other experts say there’s not a whole lot the administration can do directly on the housing front anymore — and that might be the worst news of all for the White House.
Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said that while the Obama plan was well-crafted for the issues at hand in February, the cause of foreclosures has changed. Now they are less about the creative, variable-rate loans that buried many homeowners and more about an unemployment rate that has even those with fixed-rate loans struggling to keep up.
“The issues have changed, and in some ways the solutions haven’t kept up with the problems,” Retsinas said. “The most effective intervention would be to put people back to work.”
http://www.politico.com/news/stories/0709/25095.html
After the Foreclosure: Downsizing and Doubling Up
Greg T. Spielberg
BusinessWeek
July 17, 2009
Moving in with roommates and family: It's what happens to folks who lose their homes, and it ain't pretty
Downsizing their living spaces and doubling up with roommates and relatives: The housing collapse has left many victims of foreclosure looking for a place to call home. For many investors, the once-solid decision to invest in real estate has turned into a financial blunder, leaving the market awash with extra inventory and further depressing prices.
In 2006, 4 out of every 10 homes sold were investments or second homes, according to Alex Charfen, CEO of the Distressed Property Institute, an Austin (Tex.) company that teaches real estate agents how to deal with foreclosed properties. In the ensuing crash, that 40% now represents a wave of foreclosures by lenders.
Chris Henning, 66, actually lived in her investment property, a $150,000 South Palm Beach (Fla.) condo overlooking the Atlantic. Despite a solid job and good pay in the 1990s, Henning has refinanced her condo three times since 2002. During the boom, Henning subscribed to the conventional wisdom that housing prices couldn't slide. "Looking back, I thought, 'How naive could I have been?' " she says. Now, after her boyfriend's death and a lack of revenue from a cookbook she co-authored, Henning is unemployed and her condo is on the short-sale block. In the case of short sales, lenders shave money off the loan balance in order to more quickly sell the house and recoup debt money.
Sliding Down the Ladder
"So, here I am, after having a successful career making a six-figure income," Henning says on the telephone from her smaller, cheaper condo in Cocoa Beach. To cover costs, Henning is renting out the Palm Beach property until a buyer materializes. Still, she hasn't found a job—and if she can't secure one soon, she plans to move in with her son and his family to cut costs. "I would much rather help people, vs. them helping me!" she says.
Henning is part of a larger trend of moving in with others that has softened the rental market, which was once expected to strengthen during the wave of foreclosures. According to a survey by Rent.com, an eBay (EBAY) unit that lists apartment rentals, at 40 large property owners representing more than 850,000 units across the country, almost half the vacancies are the result of people doubling up to save money. Bridge Property & Asset Management, a division of Salt Lake City-based Bridge Investment Group, manages more than 9,000 units across nine states and has seen one-bedroom vacancies skyrocket as more renters seek two- and three-bedroom apartments. "I certainly believe that many people are now moving in with someone else, whether a family member or not, and that this is having a significant effect on the demand for apartment residences," Mark Obrinsky, chief economist and vice-president of research at the National Multi Housing Council, said in a news release. The NMHC is a Washington-based rental advocacy group.
Henning would have a few additional months of rent money if she had gotten the few thousand dollars she expected to bring in from selling off her belongings. In the end, she pulled in $355 for two vanloads of furniture and collectibles, accumulated over the past 40 years. Downsizing to the condo meant divesting herself of a lot of her possessions, including a cane rocking chair from the '20s and a signed Steuben art glass, a popular antique decoration. Henning says she sold her belongings to an estate liquidator but isn't sure she was compensated fairly. "I didn't ask enough questions because I was overwhelmed," she said.
California: Foreclosure Epicenter
Like Henning, many people going through foreclosure have to leave behind belongings or sell them on the cheap. Real estate agents typically recommend their clients find another residence before foreclosure filings adversely affect their credit to the point that they can't rent. "Clients are doing the right thing [trying] to move out as quickly as they can," says Valerie Torelli of Torelli Realty in Orange County, Calif., the U.S.'s foreclosure epicenter. California had some 500,000 foreclosures in 2008, 115,000 more than Florida, second on the list. In her work, Torelli sees lots littered with furniture and, sometimes, pets still locked in their owner's former home. Many people leave their belongings because they can't afford to move them, she says.
Charlotte Jensen and her husband, Dennis, of Glen Allen, Va., declared bankruptcy in May 2008, about a year after they borrowed against the house to consolidate debt. That added an extra $900 onto their monthly mortgage payment. Almost immediately, Jensen says, the housing bill became too much to manage and they were forced to move to an apartment. "Truth be told, we should have never been allowed to refinance," she says. "It put all our eggs in one basket, and it was a very expensive basket we couldn't undo." The couple agonized over the decision to sell their grill and riding mower, two signature representations of homeownership for many people. "It was like some big symbol of our failure," says Jensen.
The Jensens enrolled their 8-year-old son in a new school and say they try to shield him from the reality of the family's bleak financial situation. To protect herself and her husband from the raw emotions that bleed into discussions about economic hardships, Charlotte Jensen says she began referring to her family as Jensen Inc. "As you can imagine, we had to make some very painful decisions," she says. "It is an approach I still use, and I am convinced it has kept my marriage together." Jensen admits that moving in with her father would help Jensen Inc.'s bottom line, but she's concerned about her son and his schooling. "He has two smart parents with good careers who made poor decisions," she says. "It is not fair or healthy to him to shuffle him around." There's also the issue of their two golden retrievers. Her father extended an open invitation for her family, but not to the pooches. She hopes to avoid a merger of households,
Squatting at the Realtor's Place
Making the transition from ownership to renting—and the new strictures that can bring—can be tough. For example, the foreclosure crisis is also spawning a severe abandoned pet problem in many areas. "No one is going to rent with three dogs," says Torelli, who often has to put pets up for adoption after they've been abandoned by foreclosure victims. The Arizona Humane Society, which covers the hard-hit Phoenix-Scottsdale metro area, saw a 100% increase in abandoned pet calls between 2007 and 2008, and is on pace to match the 2008 numbers.
Animal abandonment falls under the animal cruelty umbrella, and 3,046 of the 7,979 cruelty calls last year were for abandonment, society spokeswoman Kimberly Searles says. While not every abandonment call is tied to foreclosure, "you can tie the numbers in," Searles says. "There's a correlation, obviously." In August 2008, California amended its animal abandonment law to require that anyone who finds a discarded animal in a foreclosed property report the pet to animal control.
On the other side of a pinched homeowner, Jason Stevenson, 27, and his girlfriend Kristin Garrison, 28, of Las Vegas, have been relatively lucky. On May 28, the bank foreclosed on their landlord's single-family house, which they were renting month-to-month. The couple was waiting to close on a short-sale property of their own, but by mid-June the landlord kicked them out and they were essentially homeless—and still waiting to learn whether the short sale will happen. "We started packing boxes with nowhere to go," Stevenson says. With the only other option being the street, the couple's realtor—who is helping them purchase the short-sale—is letting them stay for free at her former home, which she is now trying to sell.
Spielberg is a reporter for BusinessWeek.
http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db20090717_930614_page_2.htm
TARP Special Investigator Says Bailout Total May Reach $23.7 Trillion
Mike "Mish" Shedlock
July 20, 2009
Some numbers are so large they simply become incomprehensible.
Remember when costs of the bailout were projected to be $0.5 Trillion, then $1 Trillion, then $3 Trillion.
Now, Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program says U.S. Rescue May Reach $23.7 Trillion.
U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.
The Treasury’s $700 billion bank-investment program represents a fraction of all federal support to resuscitate the U.S. financial system, including $6.8 trillion in aid offered by the Federal Reserve, Barofsky said in a report released today.
“TARP has evolved into a program of unprecedented scope, scale and complexity,” Barofsky said in testimony prepared for a hearing tomorrow before the House Committee on Oversight and Government Reform.
Costs include $2.3 trillion in programs offered by the Federal Deposit Insurance Corp., $7.4 trillion in TARP and other aid from the Treasury and $7.2 trillion in federal money for Fannie Mae, Freddie Mac, credit unions, Veterans Affairs and other federal programs, he said.
Barofsky offered criticism in a separate quarterly report of Treasury’s implementation of TARP, saying the department has “repeatedly failed to adopt recommendations” needed to provide transparency and fulfill the administration’s goal to implement TARP “with the highest degree of accountability.”
As a result, taxpayers don’t know how TARP recipients are using the money or the value of the investments, he said in the report.
Banks Fail to Make Adequate Loan-Loss Provisions
Moody's says Banks Fail to Make Adequate Loan-Loss Provisions.
Banks have failed to make adequate provision for the losses on loans and securities they face before the end of next year, Moody’s Investors Service said.
U.S. banks may incur about $470 billion of losses and writedowns by the end of 2010, which may cause the banks to be unprofitable in the period, the ratings company said in a report published today. “Large loan losses have yet to be recognized in the banking system,” Moody’s said. “We expect to see rising provisioning needs well into 2010.”
Banks and financial firms worldwide have reported losses and writedowns of $1.5 trillion since the credit crisis began in 2007, according to data compiled by Bloomberg. New York-based Citigroup Inc. has reported $112 billion of writedowns, more than any other firm, the data show.
“The fundamentals of financial institutions are still traveling on a downward slope,” Moody’s said. “No-one should consider recent improvements as assurance that the current rebound can be sustained.”
Fed's Game is Delay and Pretend
In spite of writing off $112 billion, Citigroup is still sitting on $800 billion in SIVs, off its balance sheet, not marked to market. What's that worth? No one really knows and the Fed does not want anyone to find out either. That is why mark-to-market accounting is still suspended.
Geithner's PPIP also masks price discovery (on purpose) given the public is on the hook for 93% of the losses. The PPIP encourages speculation (at best), and at worst is a purposely fraudulent scheme to dump assets on the backs of taxpayers to benefit bondholders.
The Fed's game is to delay discovery and pretend things are getting better. Things might be for some assets. In the meantime however, data suggests more foreclosures, more credit card writeoffs, and more commercial real estate losses. Is the Fed winning or losing the battle? On the surface, with no price discovery, it's hard to know. However, if you give any credence to Neil Barofsky, the Fed may be losing a $23.7 trillion battle.
http://globaleconomicanalysis.blogspot.com/2009/07/tarp-special-investigator-says-bailout.html
no,...i won't delete now. so post as you like,...the purpose of the forum has already been fulfilled,...
when i started this forum it was the inception of what we all now know as the real estate bubble busting. i was collecting articles for my own purpose and didn't want any banter to upset the chain of information i was gathering.
time to exchange opinions and points of view and perspectives on both the real estate market and on financial/banking sector,...
up-down how r u ? long time no moderation? heheh1 houing start figures good for june 09.. are you investing any gems, or momentum play trendy stocks..
GL2A
Wealthy Homeowners Primed to Suffer Major Pain
Posted Jul 13, 2009 03:00pm EDT
by Henry Blodget in Investing, Recession, Housing
I recently had the chance to do some first-hand investigative reporting on the crash of the Nantucket real-estate market. Here's what I found.
In case you don't give a damn about Nantucket--most people don't--think of Nantucket as a microcosm of the next segment of the real-estate market that's poised to collapse: The super-expensive fabulously wealthy communities at the high end who heard for years that they were immune.
Some analysts think the high-end will be the next segment of the real-estate market to crash. And the situation on Nantucket certainly supports this view.
As everywhere else, real-estate prices in Nantucket went vertical about five years ago. In the early 1990s, the average house on the island sold for about $200,000. Two years ago, the average house sold for well over $1 million (and you still have to work hard to find houses listed below that). Your basic 3-bedroom, 2-bath with a tiny lawn in the middle of town costs $1.5 million. Dozens of houses listed at more than $10 million. The ex-president of Goldman Sachs recently listed his for $55 million.
But, of course, that's all fantasy, because right now houses just aren't selling at all.
Why not?
Because sellers are still engaged in a mass-hallucination, helped along by encouraging noises from desperate real-estate agents who will say and believe anything to retain clients until the market finally recovers.
In other words, on Nantucket, as elsewhere, the current mantra of most owners is: "We'll just rent for a year until the market comes back."
In fact, the general feeling on the island is that the 5X+ price appreciation in the dozen years from the early 1990s was just the normal rate of wealth-creation that a Nantucket homeowner can expect and that prices will surely soon bounce back to the peak levels they hit a couple of years ago and then rocket higher.
Meanwhile, would-be buyers feel differently. They look at the prices Nantucket sellers are asking, and they wonder what on earth has been dumped into the island's water supply. They also look at all the rental vacancies this summer, and the willingness of many homeowners to negotiate on rent, and observe that they would be nuts to buy now when renting is so relatively cheap.
(For a still-steep $2,500 a week, you can get a house that would list for $2 million right now. Assuming the homeowner rented the house at that rate for 12 weeks, the homeowner would gross $30,000 for the summer. If a renter were to buy the house, meanwhile, the renter would pay about $100,000 a year in financing cost--assuming a 100% mortgage at 5%--plus taxes, insurance, etc. So you could rent for 12 weeks on the island instead of buying and save yourself at least $80,000 a year.)
The rare bear on Nantucket real-estate, meanwhile, observes that many of the folks who bought in in the boom years from 2003-2006 need to rent their houses for a chunk of the summer at huge prices. And some of those folks have since been fired.
So, the rare bear predicts, this fall will finally mark the sellers' capitulation, as Nantucket sellers cut their losses and dump their houses for what the market will bear. That level is likely at least 50% below peak prices, or another 30% below most asking prices today.
And how about the Nantucket economy?
It has been clobbered. Thanks to the building boom of recent years, the economy became highly dependent on construction. One resident says unemployment hit 16% this winter and that more than a thousand families had given up and left the island.
This resident also reports that the low end of the Nantucket real-estate market has already crashed: Some teachers in the local school system had listed their modest house for the island-average selling price of about $1.2 million... and ended up selling it for about $600,000. So that's a 50% decline. And there's likely a lot more where that came from.
http://finance.yahoo.com/techticker/article/279536/Nantucket-Report:-Wealthy-Homeowners-Primed-to-Suffer-Major-Pain
good reading on the realestate bubble board. nightln, the mod, will delete your post however (and this one too no doubt) because he wants substantive posts only, no one line chit-chat posts allowed, lol.
I can't wait for obamma to get out the big stick and use it to get the banks to rewrite millions of mortgages. I know one guy, 52 boat builder carpenter, who only has 2 weeks left of unemployment checks. He's been in his house for 18yrs, wife and 2 kids, and hasn't been able to find any work. he's about to go belly up on his mortgage. No loan rewrite will help him and I'll wager there are many millions like him.
ouch!
I love this board
FWIW I'm going to buy a $500,000 home for $250,000 cash
2010
From Treasury to Banks, an Ultimatum on Mortgage Relief
NY Times
Published: July 10, 2009
Remember that infamous meeting last October at the Treasury Department, the one where then-Secretary Henry Paulson locked the chief executives of the nation’s nine largest financial institutions in a room, and wouldn’t let them out until they agreed to accept billions of dollars in government bailout money — whether they wanted it or not?
Monica Almeida/The New York Times
Foreclosures in the United States could hit 3.5 million in 2009.
O.K., that’s a bit of an exaggeration. But I was reminded of that meeting on Thursday night when I was shown a letter that the administration had just sent out calling for yet another big meeting at Treasury with yet another sector of the financial industry. Signed by Treasury Secretary Timothy Geithner and Shaun Donovan, the housing and urban development secretary, the letter demanded that representatives from the top 25 mortgage servicers assemble in Washington on July 28. It is likely to be every bit as painful for them as that Paulson meeting last October was for the bank C.E.O.’s.
The subject of the meeting is going to be loan modifications. Specifically, the government is going to be asking — in none-too-friendly fashion — why the nation’s big servicers aren’t doing more to modify loans for homeowners who are in danger of defaulting on their mortgages. Back in the spring, after all, they all signed onto the administration’s new Making Home Affordable program, which uses a series of incentives — not the least of which is $1,000 to the servicers for every mortgage they modify — to help keep people in their homes and prevent foreclosures.
And yet, five months later — and two years into the housing bust — the rising tide of foreclosures remains the single biggest threat to economic recovery. In 2005, at the height of the bubble, there were some 800,000 foreclosures. This year, sadly, we are on pace to see 3.5 million foreclosures, with no end in sight. “On Main Street, the recovery will begin when foreclosures stop,” said Senator Jack Reed of Rhode Island, who has been pushing the Treasury Department to get mortgage relief more quickly to homeowners at risk of foreclosure.
“It’s not just California and Florida anymore,” said Mark Zandi of Moody’s Economy.com. “Foreclosures are taking place coast to coast. They’re high-end homes, low-end homes, prime mortgages, jumbo loans, you name it. Foreclosure mitigation needs to be front and center.” As of March, according to Mr. Zandi, some 15 million homes were “under water,” meaning that their owners’ mortgage balance was higher — often considerably higher — than the value of the homes. Not all of those people will default on their mortgages. But many will.
Inexplicably, the Bush administration ignored the mounting foreclosure threat. The Obama administration came to office promising to do better; within a month it had announced the Making Home Affordable program, aimed at prodding the nation’s big mortgage servicers to start modifying loans in large numbers. In addition, Congress passed a law immunizing the servicers from lawsuits that might arise for modifying mortgages.
So far, however, the results have been disheartening. As of July 6, according to some internal Treasury data I was given a peek at, a total of 131,030 mortgages had been modified under the program, on a three-month trial basis (the Obama program calls for three-month trials before the new loan terms are locked in). That may sound good — but it’s a drop in the bucket compared with those 3.5 million potential foreclosures this year.
What’s more, the anecdotal evidence strongly suggests that homeowners looking for assistance face enormous frustration, and even resistance, from servicers. A few weeks ago, this newspaper published a startling front-page story documenting the difficulty borrowers faced just getting basic information from their servicers. It’s not uncommon to have to wait several months just to get a phone call returned.
“We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share,” wrote Mr. Geithner and Mr. Donovan in their letter.
Having spent some time this week looking into the program, I’d have to classify that as the understatement of the year.
“Servicers are just not equipped to do this,” said William Kelvie, the chief executive of Overture Technologies, a company that sells underwriting software. If you want to understand why loan modifications have been so slow in coming, that’s a pretty good place to start.
For most of its history, the mortgage servicing industry — which is dominated by big banks like Bank of America, Wells Fargo, and JPMorgan Chase — did relatively simple tasks: it collected mortgage payments, paid taxes on the properties and so on. Yes, it dealt with borrowers who were in arrears — which usually amounted to no more than 2 or 3 percent of their portfolio at any one time — but mainly it either prodded people to get current on their payments or initiated foreclosure proceedings.
Modifying loans — thousands upon thousands of loans, amounting to as much as 25 percent of a servicer’s portfolio — is a much more complex task. For some servicers, the sheer numbers can “overwhelm the system,” said Larry B. Litton Jr., the chief executive of Litton Loan Servicing, which is owned by Goldman Sachs — and which has long specialized in loan modifications. That is at least part of the reason why borrowers are having so much trouble getting their servicers to take their calls: many servicers can’t cope with the volume.
More important, loan modification requires a lot of work. They can’t be done in a blanket, one-size-fits-all fashion. Rather, loan modification is a one-on-one process that requires servicers to do something that should have been done in the first place: actually underwrite the loan.
Many of these mortgages, remember, were never properly underwritten, drawn up as they were back in the heyday of no money down and no income verification. Even mortgages that were originally underwritten properly have to be underwritten again; quite often the homeowner is in trouble because he has lost his job or because the recession has cut deeply into his savings and income. The servicer has to figure out whether he’ll be able to handle even a modified loan.
“Servicers have to become full-blown underwriting shops,” said Mr. Litton. Alas, most of them so far are not.
I wish I could say that was the only reason the loan modification machinery is grinding so slowly. But the more I looked into it, the more I began to suspect there is another, darker reason. Although it would seem obvious that mortgage relief makes more sense than foreclosure for everyone concerned, the holders of the loans don’t always see it that way. Many banks have less incentive than you’d think to sign off on large-scale loan modifications.
For instance, many times, when a mortgage holder falls behind, he will “self-cure” (as it’s called in the trade) — and eventually get current with his mortgage. So the bank, or the servicer, often has a reason to simply wait him out. In addition, the rate of re-default on modified mortgages can be as high as 50 percent, especially if the modification is not underwritten carefully. In which case, the servicer hasn’t avoided a foreclosure, but merely postponed it.
Many institutions also are reluctant to do large-scale mortgage modifications because they will hurt the balance sheets. After all, if a loan is modified, the bank has to take a write-down on the portion of the loan it is swallowing. If lots of loans are modified, that means a lot of write-downs.
At this moment in the financial crisis, banks are trumpeting their new-found profitability and racing to return bailout money to the Treasury. They’ve been able to do so in part by pretending that their loan portfolios, across the board, are healthier than they actually are. The government’s willingness to ease the rules surrounding mark-to-market accounting have helped this effort. (This is not true of every bank, I should note: JPMorgan Chase, the healthiest of the big banks, has also been the most aggressive about modifying mortgages.)
Sure, foreclosure ultimately costs the bank more money than a modification would. But foreclosures these days take a long time — as much as 18 months in some states. And all that time the banks can keep the loans on their books at inflated values. Daniel Alpert, the managing partner of Westwood Capital, calls this practice “extend and pretend.” In fact, he said, he has been hearing that banks aren’t even willing to conduct so-called short sales anymore. Those are sales where the borrower asks the bank to sell the house for whatever it can get, and the bank in turn lets the borrower walk away from the loss that results from the sale.
“Banks are saying no because they don’t want to take the loss,” said Mr. Alpert. “They would rather foreclose. That is just wrong.”
In truth, servicers and banks don’t yet have powerful enough incentives to do large-scale mortgage modifications. The servicers and modification experts I spoke to this week all agreed that the $1,000-per-modification being dangled by the government was pretty meaningless, given the amount of time, money and effort they require.
So now that the >u>carrot hasn’t worked especially well, the government is taking out the stick. That letter the administration sent out on Thursday did not mince words. It demanded that the servicers begin “adding more staff than previous planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received, bolstering training of representatives, developing extra online tools, and sending out additional mailings to borrowers who may be eligible for the program.”
And the laggards? Starting next month, the government plans to begin publishing data showing which servicers are doing well and which are doing poorly, thus trying to shame them into doing the right thing. And, of course, there is that July 28 meeting, in which all these points will be made, I suspect, rather forcefully.
Apparently, the only incentive left is a good swift kick in the rear.
http://www.nytimes.com/2009/07/11/business/11nocera.html
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I created this forum link so I could post various news articles on the coming Real Estate Bubble Burst and its affect on the Economy. There were so many articles and opinions that I wanted to have a place to collect them and watch the catastrophe unfold.
Encased in this catastrophe is a trickle-down effect that is now extending to the banking sector produced by irresponsible unregulated sub-prime lending practices. Those articles are also included in this forum.
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