Today’s Courier Herald Column:
While the weather was warm to welcome Spring this week, new statistics on the housing market indicate that the real estate sector of the economy remains in a deep chill. New Home sales for February, projected to show a slight year over year increase, were instead down over 16%. Worse, after years of falling sales, the seasonally adjusted annual transaction number is now down to just 250,000 units, the lowest number since records began being kept during the Kennedy administration.
Sales of existing homes show little life as well, as Americans are still working through the after effects of the real estate bubble, now compounded by an economy with 9% unemployment. Worse, a new report shows that nationally almost a quarter of homes have negative equity, meaning homeowners owe more to the bank than the home is worth. The number for Georgia is even worse, with just under one third of all Georgia homeowners upside down in their homes. With home prices still dropping, the problem is only getting worse.
And thus, not only is this Spring’s projected housing recovery now on hold, but economists are starting to talk about the economy entering a “double dip” recession, largely because of the inability of the housing sector to create jobs, and because of the negative wealth effect of those stuck in homes they cannot sell because they owe more than the potential sales prices.
There have been several government attempts to stabilize the housing market with mixed success. A homebuyers’ tax credit championed by Senator Johnny Isakson spurred some activity while it was in place, but momentum fell off after it expired. Meanwhile, Congressman Lynn Westmoreland is attempting to have Congress stop a program which diverted $8 Billion of TARP funds to a FHA refinance program, which after a year of having funds available, has only assisted the refinance of 44 homes, after receiving only 245 applications. The $50 Million disbursed thus far under this program represents a cost of over $1 Million per house.
Several states’ Attorneys General – Florida, South Carolina, Virginia, Texas, and Iowa – are attempting to force lenders to accept principal writedowns for those with underwater mortgages, as reported yesterday by CNBC’s housing correspondent Diana Olick. This move would be part of a settlement for the recent “robo-signing” scandal for foreclosures undertaken without following proper state laws, including practices such as faking notary public witnesses or failing to prove the lender even had the proper interest in the property being foreclosed.
Olick rightly points out that, by having these AG’s get lenders to agree to give principal writedowns to troubled loans, they are creating a “moral hazard” whereby only those not paying their mortgage as agreed are helped, while those who do pay their mortgage in full as agreed get no relief.
The fact is that almost every problem tried thus far has some sort of moral hazard and/or benefits those currently paying their mortgages as agreed the least. Banks leveraged the housing market into unregulated derivatives were bailed out. Those who can’t pay their mortgages in full have multiple assistance programs available to them. But those who make their payment every month despite the fact they owe more on their home than it is worth just get the thanks for being “Great Americans”, as Shawn Hannity would say.
Any future government attempts at fixing the housing market must be done to help those who are paying, not continuing to enable and extend the problem loans. My recommendation remains as it has for 3 years. Given that through FHA, VA, Fannie Mae, and Freddie Mac, the US taxpayer already has liability for 70% of the mortgages in this country, the fed should be able to painlessly adjust these mortgages through a no-documentation refinance to interest rates significantly below market.
Many homeowners have not been able to refinance because of their appraisal and loan to value issue. A lower payment means these folks are more likely to pay their mortgage, and frees up extra cash to stimulate the economy via consumer purchases. Even better, the feds could keep the payment the same, but reduce the term via lower rates so that the negative equity within the housing market is absorbed much sooner.
We need to quit making the solutions to the housing problem harder than they are. The start to solve the problem is to help the much larger number that have played by the rules, made their payment, and watched the value of their investment plummet. It’s their turn for a bailout. And in turn, the rest of us all benefit because the overall economy will benefit.
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If you thought the moral hazards mentioned above were bad, here’s today’s news:
http://www.cnbc.com/id/42265558
“People who attended the meeting, chaired by the Federal Deposit Insurance Corporation on Monday, said the industry-wide “cash for keys” program would involve the biggest servicers, led by Bank of America [BAC 13.431 -0.049 (-0.36%) ], paying borrowers as an incentive to leave their homes.
Banks would pay borrowers who are more than 90 days behind on mortgage payments up to $1,000 to seek independent financial advice and up to $20,000 in cash as a “fresh start” payment towards living costs in a new home. They would have to vacate their properties quickly and leave them in good condition. “
Note to self – stop paying for home that I am now upside down in.
Amazing! Imagine this scenario. Bank gives poor sucker this ‘wheel of fortune’ deal. Gets the House. Decides to sell the house at bargain basement price. Previous owner plunks the 20 grand as down payment on the home and has it back, with lower, now affordable monthly payments.
Probably not going to happen. Do the Banks really think they can sell these empty houses?
Charlie,
Well said. Government intervention, like Isakson’s program, is hurting the recovery. Buyers keep waiting for a lower or subsidized price and mega-banks look for ways to manipulate the Feds for profits. It is too complex for me but I see the big banks on every corner (2 more have recently gone in near me & the little ones closed), the Feds loaning them $$$ at artificially low rates which they use for anything but a real estate loan. That they leave to the Feds.
There has to be an angle to drive folks to homes in the control of interest rates – particularly if other rates get back to historic levels – but whatever it is, it is going to take a lot of time to absorb the easy money mess. What if Fed to bank rates were 300 basis points spread if used for real estate loans – betcha the banks would figure out a way to make some bucks……not my bag – just guessing…..
Correct. I can’t help but think we would have found the bottom by now were it not for $8000 homebuyer credits and the like.
I like Charlie’s idea however.
Haven’t carried a mortgage on a primary residence in forever but would jump on a 3% one for being responsible !!! Never saw the logic of highly leveraged debt, even if discounted via tax deductions, on a non-cash producing property. Real estate is a long term asset and for many short term owners would have yielded poor returns without corporate moving expense reimbursements. Few folks include the costs to carry when calculating profits.
I used to think that folks that walked away from mortgages were deadbeats but now see that many of them were sucked into the game with the easy money, you have to act now, prices will never go down, that every real estate company, bank, broker, chamber of commerce declared….for years !
I appreciate the efforts to keep homes occupied for the benefit of the community. It does suck that I’m one of those paying a mortgage, which I should have refinanced when things bottomed out. I’ll gladly take a free refinancing and lowering my interest rate by 3% as my reward for being a ‘great American.” Where do I sign up?
I have seen reports that we have up to 8 years of inventory. A real supply and demand problem via values, with unemployment high and real wages falling that is not a good environment for fixing the problem.
That is why we must look at the problem with attacking multiple fronts. Homeowners having real incentive to stay who can afford the house while increasing employment and real wages. That is why this idea has merit.
Finally we also must understand the relationship of healthcare cost rising out of control and energy prices spiking also being a major part of the equation ie less wages for housing driving values down.
BTW interesting link below about D to E issues with real-estate.
http://mhanson.com/blog
At some point folks that have rejected the leveraging up myth will see a value to homeownership equity with manageable debt. As the rent/own ratios get on the own side and the anticipation of better gov’t induced deals dry up, the inventory will too.
There are factors other than interest rates that affect what is affordable, maybe not taken seriously enough, property taxes, utilities, insurance, maintenance……
Do not expect lenders to become fully accountable for irresponsible loans.
Charlie has it about right. We are paying the price for years of Wall Street investment bankers creating mortgage investments that ignored the basic rule that real estate values go both ways. The sad part is the heads of those groups new it, but were making too much money off the CDO’s and other vehicles to reign in their wunderkind employees that had never experienced a real estate recession. 100% adjustable rate no doc loans? Only excessive greed can explain that. It wasn’t the fault of the loan officers or mortgage companies, they were just selling a product made available to them by Wall Street. Sure, the genesis might have been CRA, and Congressional efforts to increase homeownership among less qualified borrowers, and FNMA made it worse by buying into the game, but the buck stops at Wall Street, and some of those top executives ought to go to jail, along with the folks at AIG that “insured” those loans with a product that required no reserves but supposedly acted like insurance. They all knew better, they were just making too much money to jump off that gravy train. I’m also waiting to see someone publish a paper on credit scoring and whether it worked as a predictor of defaults. Bottom line, people with no skin in the game will walk away more often than not.
Derivatives. Putting about 75 high paid Wall Street execs in jail may be the only deterrent. Obama hasn’t helped. He appointed more industry execs on oversight boards and federal positions. Weasels guarding the hen house, so to speak.
@rsmith. Did you know the Community and Housing Redevelopment Act 1993 authorized GNMA to issue Collateralized Mortgage Obligations (CDO) and funded Fannie Mae and Freddie Mac to buy up bad mortgages. There is a reason for this …
When the government forced the banks to lend to those who could not afford the mortgages, they needed a failsafe to protect themselves from government intervention. They came up with CDO’s to offset the risk. Banks could sell these bundles to recover some of the downside on the extra risk they were taking on themselves at the insistence of the government.
Another way the banks were covered was Fannie Mae and Freddie Mac. The government agreed to buy up the really bad mortgages and take them off the balance sheets of the banks. This is why BJ Clinton put in Franklin Raines, his former budget director as head of Fannie Mae.
Franklin made millions, BJ Clinton got his utopian homeownership world, the banks were bailed-out, and the taxpayer foots the bill. You family will be paying the tab for 100 years if we survive that long as a nation.
@salty
Thank YOU! There is plenty of ‘fault’ in the ugly end of an economic ‘greed cycle’. Lenders are a part of, but not all, to blame. For those unfamiliar with the term ‘greed cycle’ economists often describe markets as having four cycles.
Starting at the “greed cycle’ we crash into a trough, where are are currently. We see the economy trying to enter the recovery cycle, to be followed by ‘growth cycle’ whereby, economic markets end up again in the greed cycle. Current thinking is that our economic woes will disappear ‘when the economy improves’. That is dangerous and shortsighted thinking.
There are many factors that contribute to these cycles, and they usually take years. The last set of cycles took over thirty years, so naturally younger folks only remember the ‘good-times’ fully expecting everything to keep on, keepin’ on. There in lies the the rub.
Lenders, brokers, appraisors, etc. all contributed to the ‘stupid money’ end days of the ‘greed cycle’, but the borrower is both the victim and perpetrator of the hoax. So many folks looked at ‘mini-manses’ or redeveloped homes in high crimes areas, and said, “Wow”. Others, perhaps more risk-averse investors said, “Oh heck NO!’
I visited the Alabama Gulf coast after Hurricane IVAN, with friend who wanted to fulfill his lifelong dream of a house on the beach. Since he lived in ‘Bama (sadly), he wanted to buy there. That State has about 30 miles of coastline, so demand is always high. So we trekked about looking at offerings.
An example of ‘stupid money’ could be defined as looking at 2BR/2BA beach condo’s, built in the 80′s, pretty ragged inside, outside area wrecked a hurricane selling for $500K. The Gulf coast market was beyond red hot, it was white hot. Yet, appraisors, brokers, and banks would lend to the ‘next greatest fool’ who could step up and take the deal.
In a free marketplace those loans, we concurred, were ‘irresponsible’, yet legal, fungible, and commonplace. Now take this one example and apply it to the bedrock of institutional investment, Class A commercial real estate. (CRE)
In CRE, the ‘last greatest fool theory really played out as the CAP rate descended to about 4-5%. A good, solid investment in commercial real estate has a 10% CAP rate. (Don’t worry about what a CAP rate is, just stick with me here.)
‘You think having a residence ‘underwater’, think about a major pension fund (yours?) or insurance titan, with a $3.4Bn CRE portfolio worth $2.5Bn.
Lawmakers, lenders have all been quietly ‘handling’ the equity ‘hole’ by passing laws to allow banks to participate in profits (in addition to making money on interest) and allowing lenders to legally ‘pretend’ the book value of the asset match the loan to value ratio.
Lenders extend the loan to the investor, and so there is no default. This is what Japan did, and they have had 20 years of economic malaise, because world banks know their asset values do not match reality.
Coupled with the troubling commercial real estate reality, we enter the ‘Danger Zone’. A current economic phase where our national debt situation will alter the traditional economic cycles tremendously. I hear terms like ‘bifurcated recovery’, and ‘double dip’. Fact is, until the US drastically and fundamentally changes the underlying debt issue, all bets are off, as to a ‘normal’ recovery.
And that fundamental change, my friends, is going to occur in the very near term. This ‘Great Recession’ is the first wave in a very sobering new normalcy that will define our political, social, economic decision-making for many years to come.
The truth is Clinton used the irrational unregulated leverage to get us out of the Tech bubble and than Bush 2 put the plan on steroids to pay for us being the policemen of the world forging policy.
The real issue is the mind set of to many Americans who think we can have the entitlements and government services without paying for them, go to war without paying for it…….
As I said years ago Americans and the government were using assets like an ATM machine to keep up and the government was using the fuel to pay services that we could not afford while making future promises with no real reserves.
When I first starting speaking out about this many on both sides got angry wanting to think they could keep the above shell game going without paying for it. And they would rather debate how we should spend the money we did not have on social programs, war, entitlements, education…..
It is like two kids fighting over an inheritance of a house only to find out the property was leverage farther than it is worth.
“…Americans and the government were using assets like an ATM machine…”
In a nut shell, Konop has put the current real estate bubble bust and the economy in a way that each of us should be able to understand because it is true and it is simple truth.
Each of us should ponder for a while on the simple truth, “Americans and the government were using assets like an ATM machine…” and ask ourselves have we turned on each other, scapegoated other groups not like us, bought into the radio talk show banter, etc., to our own demise?
Will we demand the government act appropriately? Will we demand Americans act appropriately? How do we determine what is appropriate American and government behavior to get us out of this mess?
How foolish are we? Why do we continue to be of the mentality of “hey, look over yonder” and not see?
For those around in the 60s and 70s and remember the turmoil, in previously recorded words, “You ain’t seen nothing yet” unless it’s turned around and soon.
And so,one cannot say, “But, nobody told us.”
It is hard when everyone around you is proving you wrong…for years. Tried to talk a relative out of beach property in ’06 with a “this can’t go on, I just bought right a long time ago”. His friends were flipping properties, pocketing $100K plus. He bought, it is now wrecking his finances and marriage.
My neighbor had brokers working for him making over $1 mil. a year selling mortgages and encouraged all to get a 100 %+ interest only loan, sell later, retire early. Soon unemployed.
Backing up, Wachovia/Evergreen salivated looking at money waiting for a home I was building in ’99 & put together a fat proposal to invest with them and earn up to 20% while paying back 7%. When I told them I wanted to keep investments seperate and my home clear they told me I was stupid (really !). The recommendations (passed on) crashed in 2000.
Wachovia believed their story so well, leveraged the bank into hell, thought Goldman Sachs and financial instruments too complex to understand and the no regulations crowd were their allies and real estate would always be stable……they are gone and many good friends lost a lot of money.
Putting banks & investment businesses together might not be a good idea.
It isn’t an ATM machine analogy, it’s an unlimited credit card that gets cut off or interests raised with a pile of money owed.
Read Michael Lewis’ best seller The Big Short if you haven’t.
Contrarians to the herd mentality are pariahs until the bottom falls out. Regret to hear about your friends hardships. It’s everywhere, I have neighbors declaring bankruptcy. This is Great Recession is far from over.
I get calls every week wanting to engage my services in pursuing a “strategic default.” Friday a borrower came in wanting to find a way out of a first and second that has him upside down by$100,000. Very few of these folks have a way out short of default and/or bankruptcy. The damage to their credit will take years to repair, and it takes the patience of Job to get through the hours on hold to try and get help from the lender. Without a new home construction industry pulling the train, the possibility of a real recovery is illusory at best. Each new home provides the equivalent of three jobs for a year and generates $90,000 in tax revenues. Until the glut of foreclosures makes it through the system, there will be a huge drag on any recovery.
rsmith,
In my opinion the problem with the economy is the lack of production ie trade deficit. On a macro we are consuming way more than we produce. Warren Buffet has warned about this problem for years and now Donald Trump is on the band wagon.
The housing market was fueled during the recent bubble via irrational use of leverage not production. We must focus on the following to get of the mess:
1) Decrease imports of foreign oil and increase U.S production via energy efficiency products, public transportation, energy grid updated, new energy production ie natural gas, wind……..
2) Fix the cost curve issues with healthcare would spur job growth
3) Fix the entitlement with belt tightening measures
4) Renegotiate trade deals that stop currency manipulation, respects IP laws……would spur job growth
5) Stop the policemen of the world foreign policy
6) Break down the walls in education and expand concepts like joint enrolment with colleges, voc/tech…..and the k thru 12 system to lower drop out rate and produce a work ready students with skills after graduation
And if we did the above the deficit problem would fix itself overtime and the housing market would come back with real production not smoke and mirrors.
Stop smothering small business with ridiculous over regulation.
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