What's Going To Happen To Freddie And Fannie? What Does It Mean For Mortgage Rates?

Yesterday RealtyTrac published a good article talking about the debate currently going on in Washington D.C. about Freddie Mac and Fannie Mae. There are several moving parts in this whole ordeal that investors should be aware of. Rather than trying to regurgitate those for you here, we suggest you read the article from RealtyTrac.

It's mind boggling how much money the government is pulling in from Frannie and Freddie now. However, at the same time it feels like we've been down this road before. Mortgage rates can't stay this low forever, can they? Everything is rosy now, but what happens if this new real estate bubble that seems to be forming pops? As soon as mortgage rates start to go back to a normal range, what's going to happen to the housing market?

Housing values are being inflated thanks to historically low interest rates. When that 3.75% 30 year fix mortgage goes to 5%, all the sudden instead of being able to afford a $300,000 house, that same homebuyer will only be able to afford a $260,000 home. The housing market simply won't be able sustain current values once this rate increase happens. Then, just like we saw before, the snow ball effect will come into play and things will get exponentially worse.

If the government shuts down Freddie and Fannie, you can be that rates are going to increase a lot faster than they would otherwise. At the same time, though, this current model is not sustainable either, at some point it is going to crash, and the government is going to be on the hook. I suppose at least this time around the government gets to participate in the upside. Too bad they don't do a a better job of managing the profits.

US Housing Market Finding Bottom?

Economy watchdog Tim Iacono touts Bill McBride’s blog, Calculated Risk, as a reliable resource for housing market predictions, and McBride’s latest post – “The Housing Bottom Is Here” – has Iacono’s attention. Iacono notes that McBride’s blog was one of the few that identified and provided warning for the 2004-05 housing bubble that lifted Southern California home prices only to watch them plummet, giving supposed credence to more current predictions. Much like McBride in his own blog, however, Iacono stops short of suggesting that he, McBride or anyone else can predict what will happen in today’s U.S. housing market. For more on this continue reading the following article from Tim Iacono.

While the debate about whether the U.S. housing market has hit bottom is certainly heating up, hopefully it won’t rise to the current temperature of the brouhaha over whether last Friday’s labor market report was good, bad, indifferent, or just an outright fabrication by the Obama administration in an increasingly contentious election year.

I don’t know about you, but I can’t tell the politics from the statistics when trying to make sense of last Friday’s monthly jobs report and, at this point, I don’t care anymore.

As for the housing market, none other than Bill McBride at the wildly popular Calculated Risk blog weighed in on the subject yesterday declaring The Housing Bottom Is Here, a view that you find out at the end of the article isn’t quite as strongly held as you might think from just reading the title.

Bill notes there are two housing markets – new home construction and existing home sales – and, while the former has clearly made a bottom, the latter is likely to do so next month, though he qualifies that prediction with words like “I think that house prices are close to a bottom” and there being “a reasonable chance that the bottom is here”.

Now, caveats notwithstanding, this is still a big deal since Calculated Risk isn’t just an ordinary offering out there in the blogosphere. This particular blog happened to be calling the US housing market a bubble back when few had an inkling of the trouble to come and, for that reason alone, his is an opinion worth listening to.

It was back in late-2004 and early-2005 that a few people in Southern California – one of the many “ground zeros” for the late, great housing bubble – started writing about the remarkable rise in home prices and how it could not be sustained.

Yours truly was one of them and I’ve learned much from Bill over the years.

I recall reading commentary by Bill and Mish over at Silicon Valley insider as they set about creating what are two of the most influential financial blogs in the country today, so, it’s not as if any of us are “Johnny-come-latelies”.

Another of the original housing bubble bloggers was Rich Toscano at Piggington.com and, as long as we’ve begun to gather data points, it’s worth noting that Rich is in the process of buying a home in the San Diego area, something he characterized as Jumping the Shark.

Recall that San Diego was ahead of the crowd, housing-bubble-wise, over last decade and, today, it’s certainly no Las Vegas, where home prices just keep falling month after month, year after year.

According to the latest data from Case-Shiller, San Diego home prices are four or five percent above their recession lows in early 2009, and, when factoring in the Federal Reserve’s freakishly low interest rates and the reality that, to most people, it’s not the house price, but the monthly payment that is most important, a home purchased there at this time would seem to make good sense.

Of course, my wife and I purchased a home here in Montana just over a year ago, so, actions normally speaking louder than words, you have a pretty good idea about how we feel about property prices in this part of the country.

And if you go a few hundred miles or so east of here to where the shale energy boom is underway in North Dakota, you’d think it’s 2005 again.

In the Bay area, there’s Patrick Killelea of Patrick.net fame who has yet to fall in line with some of the other capitulating 2005-era housing bubble bloggers and, given his proximity to what appears to be another inflating Silicon Valley tech bubble, I wouldn’t expect him to do so anytime soon.

It’s funny to think back to about 12 years ago when I was working in Southern California and was visited by co-workers from Northern California who told tall tales of run-of-the-mill 1,000 square foot homes selling for a half million dollars.

Little did we know that large portions of the rest of the country would experience that same phenomenon just a few years later. As it turns out, Northern California seems to get a new bubble every five years or so, something that makes it particularly hard to call a housing market bottom there due to the spill-over effect of these non-housing bubble bubbles.

I don’t know – conditions are different depending on where you are and, in most cases, national home price trends have little meaning for an individual contemplating a home purchase.

Surely, with a couple years of home price history now in the books, housing bubble spotter Dean Baker was right to buy a house near Washington D.C. a few years back since the market there seemed to make a bottom just as the freshly printed and borrowed money started gushing from the nation’s capital.

One thing is certain, I’d much rather be writing about whether the housing market has hit bottom than whether the labor market has turned a corner as the November elections draw nearer because that discussion has become way too toxic for my tastes.

This blog post was republished with permission from Tim Iacono.

Aussies Enjoy Housing Market Bubble

Tim Iacono comments on how recent news of Australia’s seemingly never-ending positive housing market streak reminded him of America’s own housing heyday five years ago. Both Australia and Canada have enjoyed sustained runs of promising house prices, and home prices down under are expected to see even more growth by 2013, according to a report from MarketWatch. For more on this continue reading the following article from Tim Iacono.

Admittedly, I don’t follow the Australian housing market closely, however, along with Canada, two of the world’s never-ending housing bubbles do show up in the news from time to time and, upon reading this report at MarketWatch, I couldn’t help but think back to the similar housing market optimism expressed in the U.S. about five years ago.

House prices fell 2.4% in the September quarter of 2011, accelerating from a drop of 2% in the June quarter, according to a survey by National Australia Bank, released Wednesday.
…
The September survey indicated that Australian house prices are likely to remain subdued near-term and fall by a further 1% over the next 12 months.
…
By September 2013, house prices are expected to be back in positive territory overall and showing growth of 0.5%, according to the survey. Western Australia is expected to lead the growth, with prices forecast to rise by 3.4%.
…
National Australia Bank economists said that they believe the expectations contained in the survey are overly pessimistic.

“A structural shortage of housing remains nationally, commencements are down, interest rates are expected to stay on hold for some time, and the unemployment rate is low, contributing to high job security. These factors are expected to maintain a floor under house price growth, which we see resuming at below 4% in 2012 after drifting down in 2011,” they said.

Well, at least they didn’t say that home prices have never declined nationally since the Great Depression, as Fed Chief Ben Bernanke did right at about the time that the U.S. housing bubble reached its maximum inflation.

This blog post was republished with permission from Tim Iacono.

Housing Market Showing Another Sign Of Recovery, But Can We Believe This Time?

New building permits were up considerably last month - typically a sign of good things for the housing market. However, it feels like we have been down this path before at various points the last couple years. Can we truly believe that the recovery is in full swing? James Picerno from The Capital Spectator tackles this topic in the following post.

The housing market has shown signs of recovery before, but to date it’s come to naught. Is there any reason to think that the latest rise in new building permits issued offers real hope this time? Unlikely, but the trend bears watching just the same.

New building permits ticked up sharply last month, the Census Bureau reports. The 16.7% rise in December is the highest monthly percentage increase in more than two years. Permits are considered a leading indicator that offers clues about the future. Permits, howver, aren’t a perfect measure of things to come. We’ve been here before, only to find disappointment. In June 2008, housing starts surged by nearly 19%. It turned out to be a statistical glitch, and the housing market resumed its descent in the months ahead.

But that was then. What’s changed since 2008? For one thing, the Great Recession isn’t raging as an all-out force of darkness. The blowback from the contraction still hobbles the housing market and other corners of the economy, but growth has a stronger footing, at least compared with 2008. Will that be enough to overcome the real estate’s markets various headwinds? Maybe, although it’s going to take a lot more digging to climb out of this hole. And even if permits have started to climb, that's only one statistic in an otherwise gloomy marketplace

As the chart above reminds, new housing starts continued to slump in December. In fact, starts continue to bounce around near all-time lows. This forward-looking measure of the housing market isn’t dead, but it’s still deep in slumber.

Some analysts say that housing is in the throes of an outright depression that will last for years. That’s probably going too far, but not by much. Nonetheless, the breadth of the headwinds in housing inspires the expectation that last month’s surge in newly issued permits is simply statistical noise rather than a sign of an impending turnaround.

“With sales still near record lows and a lot of unsold properties in the market, there’s very little reason for builders to add more homes to the supply,” Sal Guatieri, a senior economist at BMO Capital Markets, tells Bloomberg. “Housing remains a key downside risk to the economy.”

The challenge of housing is compounded by the still-weak growth in the labor market. Then again, compared with housing, it’s easier to be optimistic on the outlook for job creation. The Fed certainly is. According to the central bank’s Beige Book report released last week, “Labor markets appeared to be firming somewhat in most Districts, as some modest hiring beyond replacement was said to have occurred and/or was planned in a variety of sectors.”

Finding similarly optimistic observations for housing is quite a bit tougher these days, even after a five-year bear market in real estate. The best you can say with any confidence is that the housing correction appears to have stabilized, albeit at sharply lower levels compared with the pre-2006 era.

As for the upturn in permits, that’s encouraging, as far as it goes, but it’s going to take a lot more to convince the crowd that the housing market’s ready to grow again on a sustainable basis. Don’t hold your breath. With foreclosures still running high, job creation sluggish, and excess inventory keeping a lid on prices, this industry is still looking at a long, slow recovery—and that’s the optimistic view.

"We wouldn't be shocked to see home prices drop another 5% this year before starting to rebound," says Rick Sharga, a senior vice president at RealtyTrac via TheStreet.com. "Really, until you start to see the inventory levels start to become more manageable, it's going to be difficult to see the housing market come back appreciably."

This article was republished with permission from The Capital Spectator.

Is The Government Facilitating The Next Housing Bubble?

Moses Kim from Expected Returns discusses the government intervention in the housing market which could be facilitating a new housing bubble. The artificially low interest rates and tax credits may be artificially inflating homes above what they would be in a purely-free market. See the following post from Expected Returns.

The ongoing economic crisis has brought about massive government intervention in the free markets- intervention which, if history is any guide, will cause more harm than good.

There is a prevailing view that the housing bubble has popped for good, and that clearer skies lie ahead. The thought that housing can once again reach bubble valuations after such a steep decline seems laughable. However, bubbles are formed on the foundation of low interest rates and excessive credit, which promotes an unrealistic illusion of prosperity. These are the conditions the government is currently actively supporting.

Government support of the housing market, if left uncontained, will eventually lead to bubble-like conditions. From Marketwatch, Mortgage Bubble Warning:

The government's $700 billion bank bailout bill has met its goal of helping bring the financial markets back from the brink, but has so far failed to increase lending from the banks who received the taxpayer assistance, a key government overseer reported Sunday in a generally critical review of the program.

The report, which was authored by TARP's Special Inspector General, Neil Barofsky, also warned that the Obama administration's and the Federal Reserve's policies to support the mortgage market could in fact be creating another dangerous housing bubble.

"Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," said the report.

Bubbles aren't necessarily characterized by prices way above historical norms, but merely valuations that are significantly above what they would be in a purely free-market system. Without the direct purchase of MBS debt, which effectively lowers interest rates, many more homeowners would be out of a home. As is, the government is simply delaying the inevitable readjustment in home prices that will come as a result of the lack of employment.

The report charges that high prices for homes between 2004 and 2007 were the result of unrealistic expectations for house values, low interest rates, in-accurate high ratings for mortgage securities, lax standards by lenders for mortgages.

It argues that that the Federal Reserve could be creating another housing bubble with its response to the crisis by keeping short-term and long-term interest rates low, setting up programs to support the mortgage market that also keep rates low, as well as a first-time homebuyer tax credit and a program near completion to purchase $1.25 trillion in mortgage-backed securities.

"Because increasing access to credit increases the pool of potential home buyers, increasing access to credit boosts home prices," the report wrote. "The Federal Reserve can thus boost home prices by either lowering general interest rates or purchasing mortgages and mortgage-backed securities."

"Both actions, which the Federal Reserve is pursuing, have the effect of lowering interest rates, which increases demand by permitting borrowers to afford a higher home price on a given income. Similarly, the administration is boosting home prices by encouraging bank lending and by instituting purchase incentives such as the First-Time Homebuyer Tax Credit. All of these actions increase the demand for homes, which increases home prices," said the report.

I would argue that many of the same conditions that led to the housing bubble are currently present, albeit on a smaller scale. It is quite amazing that we are not seeing a more powerful snap back rally in home prices given interest rates at 0%, sub-5% mortgage rates, and tax incentives.

The Inevitable Hangover

However, critics argue that long-term interest rates could increase in response to the Fed's decision to wrap up its $1.25 trillion mortgage-backed securities purchase program by March 31, along with other federal actions, could result in higher interest rates at a time where many regions continue to experience a depressed housing market and record foreclosures.

The coming double-dip in our economy will likely be led by a resumed decline in national home prices. Home prices still have a ways to fall, as price to rent ratios and price to income ratios have not adjusted to a point where one would be comfortable calling a bottom in housing.

I sense we are very close to a key inflection point in our economy. Sentiment will likely nosedive and hopes of a quick recovery will disappear. Keep an eye on housing, bond rates, gold and the dollar.

This post has been republished from Moses Kim's blog, Expected Returns.

Who Is Most Responsible For The Housing Bubble?

Despite Bernanke's attempts to avoid blame for the housing bubble, economist Mark Thoma explains why it was a combination of failures by the Fed and regulators that led to the bubble and crash. The Fed fueled the fire by providing excessive liquidity in the financial system, while regulation failed to recognize systemic risk and control the spread of the damage. See the following post from Economist's View.

In response to the question of whether the Fed's low interest rate policy is responsible for the bubble, most respondents point instead to regulatory failures of one type or another. Ben Bernake has also made this argument. However, I don't think it was one or the other, I think it was both. That is, first you need something to fuel the fire, and low interest rates provided fuel by injecting liquidity into the system. And second, you need a failure of those responsible for preventing fires from starting along with a failure to have systems in place to limit the damage if they do start.

Bank regulators didn't have the systems in place to prevent bubbles, they didn't see the bubble developing until it was too late to prevent major damage, and the systems needed to limit the damage were inadequate, e.g. there were insufficient limits on leverage and other protections in the system. By analogy, the Fire Department's inspections were inadequate and there was much more fire risk than anyone thought, they didn't notice the fire until it was already out of control (even though Dean Baker and others had tried to alert them), when they did notice and respond they were initially confused and didn't have the tools they needed to fight the fire or prevent it from spreading, and they hadn't thought to require protections such as automatic sprinkler systems that might have limited the damage.

What fueled the housing bubble? There were three main sources of the liquidity that inflated the bubble. First, the Fed's (and other central banks') low interest policy added cash to the financial system, second, the high savings in Asia, particularly China, along with cash accumulations within oil producing nations, and third, some of the cash was generated endogenously within the system (e.g. by increasing leverage or by diverting other investments into housing and mortgage markets).

Once the fuel was present, something had to allow the bubble to inflate and then do widespread damage, and that's where the regulatory failure comes in. But I don't think the regulatory failure matters much without a large amount of liquidity within the system, and I don't think the large amount of cash in the system is problematic without the regulatory failures.

I've been making this argument for some time, so is there any support for the idea that bubbles are fueled by excessive liquidity? In the video embedded below of Nobel prize winning economist Vernon Smith that posted today at Big Think (http://bigthink.com/ "Dissecting the Bubbles"), he notes that in the experiments he has conducted that reproduce bubbles in the lab, the existence and size of bubbles depends critically upon the amount of "cash slopping around in the system."

In the video, he also notes that if you ask a different question, why was this bubble so devastating as compared to the dot.com bubble even though the initial losses were smaller -- $10 trillion in 2001 compared to $3 trillion in the housing bubble collapse -- you get a different answer: a failure of regulation. Here, he points to a failure to impose sufficient margin requirements as the key difference between the two episodes (I agree that leverage should be limited through margin requirements, and this would have helped to contain the damage, but I would have focused on the markets for complex financial assets rather than down payments on homes).

So I think the bubble itself was driven by "cash slopping around in the system" that originated from several sources, the Fed being one, and the regulatory failures (such as failing to provide sufficient transparency so that the smoke from the fire could be spotted in time, and failing to limit leverage) allowed the fire to spread rapidly and do major damage.

This post has been republished from Mark Thoma's blog, Economist's View.

Lessons From The Housing Boom And Bust

In an article by Harvard economics professor Ed Glaeser, he discusses the takeaways from the recent boom and bust in the housing market. He also outlines some policy changes that could help prevent future bubbles, if we can learn from our past mistakes. See the following post from Economist's View for more.

Ed Glaeser explains some of the lessons he's learned from the recent crash of housing markets:

What We’ve Learned: Ugly Truths About Housing, by Edward L. Glaeser: ...What have we learned from the great housing bubble and crash of the aughts? Most obviously, we have learned that housing prices can be extraordinary volatile. This was less obvious from previous housing cycles. ...

So let no one ever again say foolish things like housing prices never fall. In the current drop, eight of the 20 Case-Shiller areas had housing price drops of 40 percent of more. ... Buyers and bankers should never again think that an area’s recent price increases are the sign of a strong market where prices have nowhere to go but up. In the long run, price increases are followed by price drops, and special caution, by regulators as well, needs to be taken in booming markets.

In places like Las Vegas and Phoenix, there are no fundamental constraints on building new homes — like a shortage of land or onerous restrictions on construction... I once thought that this obvious lack of limits on building meant that such open areas would sit bubbles out,... but I was wrong. The logic of supply and demand can be ignored for longer than I thought, but it ultimately reasserts itself.

The second lesson of the housing debacle is that there is extraordinary pain in both housing price busts and booms. When housing prices soared, ordinary Americans found it increasingly hard to afford a house. ... [This] logic pushed me to boo when housing became outrageously expensive. During the boom, I hoped that housing prices would stop rising and even decline.

Yet I didn’t understand the terrible impact that declining housing prices would have on our financial sector. While rising housing prices weren’t particularly good for America, declining housing prices were particularly bad for the country. The lesson seems to be that large swings in housing prices, in either direction, can be extremely painful.

The third lesson is that American housing policy has been monumentally foolish. We have used public resources to encourage ordinary Americans to bet all they could on highly risky housing markets. Fannie Mae and Freddie Mac, the home mortgage interest deduction, even the willingness to bail out financial firms..., can all be seen as policies that encourage ordinary people to risk it all on real estate.

I had once thought that these policies were misguided, but not terrible. We now know that encouraging buyers and lenders to bet on housing can impose vast costs on the country. ...

I think that we have not yet fully faced the fact that our tax code encourages people to finance their homes with as much debt as possible, and that our financial regulations abet irresponsible lending.

Now that we have backed away from the abyss, we can consider making much-needed reforms, like reducing the upper cap on the home mortgage interest deduction, that could depress housing prices in the short run, but make future housing bubbles and crashes less likely.

I don't think much of the blame for the crisis can be placed on the home mortgage interest deduction, there was no big change in this deduction that corresponds to the start of the bubble. As for eliminating the deduction, though it's possible to make an argument that there are positive externalities to home ownership such as taking better care of the property, something that benefits surrounding properties, or having more involvement in the community, I don't think the case is very strong, particularly when the inequity between owners and renters is taken into consideration.

This article has been republished from Mark Thoma's blog, Economist's View.

Yale Economist to Housing Optimists: Not So Fast

There has been a lot of optimism of late about the housing market showing signs of price stabilization with many investors looking forward to a rebound. But Yale economics professor explains why the housing decline may not be over. See the following post by Tim Iacono from The Mess That Greenspan Made.

In this NY Times op-ed, Yale economics professor and housing market guru Robert Shiller splashes some cold water on the recent housing market fervor in such places as Arizona.

Why Home Prices May Keep Falling
Home prices in the United States have been falling for nearly three years, and the decline may well continue for some time.

Even the federal government has projected price decreases through 2010. As a baseline, the stress tests recently performed on big banks included a total fall in housing prices of 41 percent from 2006 through 2010. Their “more adverse” forecast projected a drop of 48 percent — suggesting that important housing ratios, like price to rent, and price to construction cost — would fall to their lowest levels in 20 years.

Such long, steady housing price declines seem to defy both common sense and the traditional laws of economics, which assume that people act rationally and that markets are efficient.

A national home price decline of 48 percent would imply a decline of, what, about 80 percent in Phoenix? That may be a very efficient and rational market.

He goes on to explain why home price declines go on for much longer than most people really understand, especially those who think they're snapping up such bargains today.

Several factors can explain the snail-like behavior of the real estate market. An important one is that sales of existing homes are mainly by people who are planning to buy other homes. So even if sellers think that home prices are in decline, most have no reason to hurry because they are not really leaving the market.

Furthermore, few homeowners consider exiting the housing market for purely speculative reasons. First, many owners don’t have a speculator’s sense of urgency. And they don’t like shifting from being owners to renters, a process entailing lifestyle changes that can take years to effect.

Among couples sharing a house, for example, any decision to sell and switch to a rental requires the assent of both partners. Even growing children, who may resent being shifted to another school district and placed in a rental apartment, are likely to have some veto power.

In fact, most decisions to exit the market in favor of renting are not market-timing moves. Instead, they reflect the growing pressures of economic necessity. This may involve foreclosure or just difficulty paying bills, or gradual changes in opinion about how to live in an economic downturn.

This dynamic helps to explain why, at a time of high unemployment, declines in home prices may be long-lasting and predictable.

It used to be conventional wisdom that, unless you were financially strapped, once you became a homeowner you would forever be a homeowner. If you were transferred from one town to another, you'd put your house up for sale, go out to the new place, look around for a few days, buy a house, and move in.

That seems to be changing and one of the most important reasons is that people can't sell their existing houses - at least not at the price they want.

It will be interesting to see if the U.S. housing bust fundamentally changes the way Americans think about home ownership.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Phoenix Real Estate Market Showing Signs Of Life

The Phoenix real estate market was one of the hardest hit when the housing bubble popped, and it looks like it might be one of the first to rebound. Buyers are beginning to show heightened interested in the market, with one of the most attractive features being that buying is basically as cheap as renting. Typically when buying is cheaper than renting, people will buy — if they are able. However, with a tightened lending market, millions out of work and many with tarnished credit, the buyer pool is seemingly shrinking. Despite that, the Phoenix market appears to be on the right track, though, Tim Iacono cautions that this could be a small boom created by artificially low interest rates. Foreclosures are continuing to flood the market, and once interest rates go back up the new quasi-bubble could pop.

Evidence is mounting that when home prices tumble by more than 50 percent and the Fed keeps mortgage rates at freakishly low levels, people will buy houses. This report from the LA Times talks of a resurgence in home buying where prices have fallen the furthest.

After four years of renting because they were priced out of the real estate market, Jamia Jenkins and Scott Renshaw concluded the time had arrived for them to buy.

They saw that home prices had dropped so fast here -- faster than in any other big city in the nation -- that mortgage payments would be less than the $900 they paid in rent. The city is littered with foreclosed houses, so the couple figured they could easily snatch up something in the low $100,000s.

Three months later, they're still looking. They have submitted 13 offers and been overbid each time. "It's just pathetic," said Jenkins, 53. "Investors are going out there and outbidding everyone."

While many now cheer the arrival of a housing market bottom this year - more likely in real estate sales than in prices paid - you have to wonder what's going to happen in another year or two when long-term interest rates are much higher.

For example, at today's artificially low mortgage rates, you can get a 30-year loan of $170,000 for about $900, similar to what the couple above is planning. But at the far more typical rates of seven or eight percent, that payment moves up by one-third to about $1,200.

Stated another way, that same $900 payment only buys $130,000 worth of housing - not the $170,000 as indicated above - absent the freakishly low interest rates, something that is a near certainty in the years ahead.

Naturally, that doesn't stop people from buying, as the 2006 fever seems to have returned...

Phoenix's housing bust has turned into a quasi-boom, a sign that its market may have hit bottom and a sneak preview of what a national housing recovery could look like.

More homes are selling than at any time since 2006. Prices are slowly stabilizing. Buyers are once again finding themselves in frantic bidding wars -- only this time over foreclosed houses selling at deep discounts rather than ranch homes listing for vast sums.

"The free market is at work," said Shannon Hubbard, a real estate agent and blogger here. "Prices got driven down so much that people said, 'I'm going to come out and play.' "
Home prices continue to plummet or tread water in much of the nation, but there have been tentative signs of life. Pending home sales rose 3.2% nationally in April, the second month of increases after a record low in January.

John Burns Real Estate Consulting in February identified Phoenix as "the most unique market in the nation," where affordability was better than at any time since 1981 and buying a house was once again cheaper than renting.

It should be an interesting summer as waves of new foreclosures battle waves of new buying interest from a bargain hunting public that is still fearful of more job losses.

This post can also be found on themessthatgreenspanmade.blogspot.com.

New York Post Writer Goes Off On Greenspan And NAR

As we talked about a couple of days ago, Greenspan's speech for NAR was obviously biased, and no weight whatsoever should be given to what came out of Greenspan's mouth. That being said, it is disturbing to see the depths that NAR has fallen to — as well as Greenspan. This display was so ugly that a writer from the New York Post had to publicly condem it. Tim Iacono looks at this writer's article — and adds some input of his own — in the blog post below.

John Crudele of the New York Post goes off on both the National Association of Realtors and former Fed chairman Alan Greenspan in this commentary from yesterday.

WHO the hell would be stupid enough to pay to hear Alan Greenspan's opinion of anything!

Notice, that isn't a question because I already know the answer. Rather, it's a statement with one of those exclamation points to show that my voice is being raised in a mix of bewilderment and anger.

The National Association of Realtors, which is probably suffering from combat fatigue, asked the former Federal Reserve chairman and the chief suspect in the destruction of the US economy, to address its Washington conference Tuesday and tell real estate people what they want to hear -- that things are getting better.

So Greenspan did just that.

Did anyone see the video clip of this speech that CNBC had up yesterday? I watched about the first minute or so and began feeling nauseous.

Apparently, so did Mr. Crudele...

"We are finally beginning to see the seeds of a bottoming" in the housing industry, Greenspan told the gathering. Adding, according to Bloomberg News, that the US is "at the edge of a major liquidation" in the stock of unsold houses.

Applause, applause. Here's your check, Alan.

I figured it was worth knowing how much Greenspan gets these days for defending his own indefensible actions at the Fed while also trying to pull the wool over the eyes of would-be homeowners.

So I asked someone named Lucien Salvant, managing director of the NAR's public affairs department.

His answer in an e-mail: "None of your business. How much is the NY Post paying you to ask that question?" Whoa! Calm down, Lucien.

It gets a little ugly from there, the NAR rightly accused of "shoveling crap to the press" which gets passed along to unsuspecting potential home buyers all for the greater good of the real estate profession.

And, of course, there's another litany of errant predictions from the Maestro.

This is just sad in so many ways - like two zombies embracing each other.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

NAR Calling For Expansion Of First-Time Homebuyer Tax Credit

The National Association of Realtors (NAR) is pushing lawmakers — yet again — to expand the first-time homebuyer tax credit. NAR hopes that lawmakers will make the tax credit available to everyone, rather than just first-time homebuyers — among other things. For more on this, read the following article from HousingWire.

NAR today called for expansion of the $8,000 first-time home buyer tax credit to include all home buyers at all income levels.

The push for a broadened tax credit comes after US Department of Housing and Urban Development secretary Shaun Donovan announced home buyers pursuing Federal Housing Administration-insured mortgages may soon use the tax credit as a down payment at the closing table.

An expanded tax credit, combined with HUD’s initiative to make the credit available at the closing table for down payment purposes — called ‘monetization’ of the tax credit in the industry — would make federal assistance available to anyone pursuing a government-insured mortgage.

NAR, from its legislative summit this week, also urged Congress to make the ‘08 loan limit increase formula and loan limit caps permanent, and to “fortify” mortgage giants Fannie Mae (FNM: 0.7867 +2.17%) and Freddie Mac (FRE: 0.8166 +2.08%) to ensure the continued availability of capital for mortgage lenders.

“Housing is the engine of economic growth, and real estate is the road to economic recovery,” says Charles McMillan, NAR president and Dallas-based broker, in a statement today. “With many of the country’s current problems resting on a wobbly foundation of declining home prices, rampant foreclosures and increasing job loss, our members will be asking Congress to pass further legislation that moves the housing market forward.”

This article can also be viewed on housingwire.com.

Why You Can't Listen To Greenspan Or NAR On Housing Prices

Greenspan opened up his mouth again and told the world that the U.S. is nearing a bottom for the real estate market. Those who remember back to 2006, might remember that Greenspan made another market bottom call, and he turned out to be horribly mistaken. In both accounts his statements were backed by the National Association of Realtors (NAR) who offer up all sorts of real estate data. Investors can't listen to anything that NAR says, for obvious reasons, and history shows us that we should give much more weight to what comes out of the former Fed chief's mouth either. For more on this, read the following blog post from Tim Iacono.

Should anyone be surprised that former Fed chairman Alan Greenspan reaffirmed his "early-2009" housing market bottom call yesterday before the National Association of Realtors?

From Bloomberg:

Former Federal Reserve Chairman Alan Greenspan said that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve.

“We are finally beginning to see the seeds of a bottoming” in the housing industry, Greenspan said today during a conference of the National Association of Realtors in Washington. The U.S. is “at the edge of a major liquidation” in the stock of unsold properties, which may help to stabilize prices, Greenspan said.

At "the edge of a major liquidation"? What newspapers has he been reading? The headline in my newspaper today says "Foreclosure filings hit record for second month".

Back to the Bloomberg story:

While the housing bottom may not be obvious in prices, it is becoming clear in “significant regional differences,” where some of the hardest-hit areas are starting to show signs of improvement, he said.

While it is certainly true that, in some of the hardest hit areas, home prices just can't go much lower (think Detroit), there are lots of other areas where the descent is ongoing and moving up the socio-economic ladder as Option-ARMs and Alt-A loans sour in record numbers.

Ironically, the realtors' trade group had reported earlier in the day that home prices had just declined by a record amount during the first quarter.

A quick search on housing market predictions during 2008 shows that the former "Maestro" made a few very public calls for a housing market bottom in early-2009, so you'd have to think that, with six weeks left to go, the odds are working against him at the moment.

Despite all the recent cheerleading, it is doubtful that the "seeds" of a bottoming in housing that are now seen will turn into the required "green shoots" in the near-term.

Interestingly, when the NAR joined forces with the former Fed chairman back in November of 2006, this is what they produced:
The advice DON'T DELAY was offered two and a half years ago.Wow! Homebuyers who heeded these words back then would be down about 30 percent today, according to the latest data from the Case-Shiller Home Price Index.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Bank Demolishes Foreclosed Homes In Victorville

You know things are bad when it makes more sense for banks to demolish foreclosed homes than to keep them. In the case of the Texas bank who destroyed 16 homes in Victorville California, the homes were not yet finished, but the loss the bank is taking on these has to be outrageous regardless. For more on this, read the following blog post from Tim Iacono.

The story about a Texas bank deciding to demolishing foreclosed homes in California was everywhere yesterday, but it shouldn't be that surprising - they needed a lot of work.

When they start bulldozing finished houses into the ground because they just can't sell them, then that will be real news.

Some details are provided in this report at the Wall Street Journal:

A Texas bank is about done demolishing 16 new and partially built houses acquired in Southern California through foreclosure, figuring it was better to knock them down than to try selling them in the depressed housing market.

Guaranty Bank of Austin is wrecking the structures to provide a "safe environment" for neighbors of the abandoned housing tract in Victorville, a high-desert city about 85 miles northeast of Los Angeles, a bank spokesman said.

Victorville city officials said the bank told them the cost of finishing the development would exceed what they could sell the homes for.

The bank also faced escalating city fines as vandals and squatters took over the sprawling housing project, leaving behind graffiti and drug paraphernalia, city officials said.

"It's unfortunate," said George Duran, the city's code-enforcement manager. "We would have hoped for these houses to be finished. But it's up to the owner to see what is best for them."

We've driven through that area many times on the way from Southern California to Las Vegas, a few times when the bubble was at its peak, and almost every time we wondered why anyone would ever pay $300,000 or more to live in Victorville.

There's also a related story in the LA Times.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

"Historically Low" Fails To Adequately Describe New Home Sales

New home sales were down again last month, but people are under appreciating just how bad these numbers are. Once you factor in population growth into the mix — new home sales have fallen off a cliff compared to past economic downturns. Tim Iacono looks closer at this latest report, and offers some insight, in his blog post below.

The Census Bureau reported that new home sales fell 0.6 percent last month, from a seasonally adjusted annual rate of 358,000 in February to 356,000 in March, still at a level that the phrase "historically low" fails to adequately describe.
Though the current sales level is up from the January low of 331,000, to put the March sales rate in its proper historical context, consider that the pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000.

The March total is still a full 23 percent below this pace!

While a bottom may indeed be forming after the relative stability of the last four months, these are the lowest levels of sales in the 46 years since this data series began and an improvement of some 29 percent from the current level is required just to equal the worst reading since JFK was sitting in the White House.

You can almost see the headlines later this year - New home sales surge 20 percent.

What will most likely be omitted from the story is that sales will have to increase by almost another ten percent just to better the level seen at the depths of the economic downturn in Ronal Reagan's first term.

Lower mortgage rates and tax credits for first time home buyers spurred sales in March helping to reduce builder inventory as the months of supply metric fell from 11.2 months to 10.7 months. This is down from a high of 12.5 months in January but still almost triple what would be considered normal.

Still highly distorted by sales incentives and other give-aways by increasingly desperate homebuilders, the median price fell from $208,700 in February to $201,400 in March, down 12.2 percent on a year-over-year basis, and is now at its lowest level since late-2003.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Why Dropping "Mark to Market" Rules Won't Solve Anything

In an effort to shore up the balance sheets of banks the government decided to drop the "mark to market" rules that have been causing so much trouble in the financial industry. As Peter Schiff points out in his article, though, this won't solve anything. The rule was created in order to give investors a better idea of the true value of bank assets — basing the valuations on market activity rather than arbitrary assessments by the bank's accountants. Letting the banks decide how much their assets are worth, rather than the market, is a recipe for deception and ultimate failure. Read about what Schiff has to say in the article below from Money Morning.

When elementary school kids want to escape the confines of their circumstances, they pretend to be pirates, princesses and Jedi knights. Now, with the relaxation of "mark to market" valuation rules announced by the accounting trade’s self-regulatory body, our bankrupt financial institutions can escape their own reality by pretending to be solvent.

The unraveling of our fairytale economy over the last few months has not yet convinced us that the time has come to put away childish things. The applause that greeted the Financial Accounting Standards Board’s (FASB) ruling on Wall Street is a clear sign that we still have some growing up to do.

The imaginative conceit that lies behind the accounting change is that the toxic assets polluting bank balance sheets are not really toxic at all. They are in fact highly valuable assets that for some irrational reason no one wants to buy.

Using the "mark to market" accounting method, mortgage-backed securities were valued relative to the latest prices fetched by the sale of similar assets on the open market. Currently, those bonds are being sold at deep discounts to their original value. By "marking" their unsold bonds down to those prices, the insolvency of our financial institutions had been laid bare. But the new accounting changes will allow the nervous owners to assign more "appropriate" (i.e. higher) values. Problem solved.

It is important to note that the FASB made its rule modifications only after both Washington and Wall Street applied intense pressure. In their heart of hearts, I can’t imagine that there are too many bean counters happy with the outcome.

The banks and the government have argued that the assets should be valued based solely on current cash flow. Most mortgages, after all, are not delinquent. Therefore, a few bad apples should not spoil the whole bunch, and those that are not yet delinquent should be valued at par. This method assumes we have no ability to look into the future and make assumptions about what is likely to happen, which is presumably what the market is already doing by valuing the assets lower than the banks wish.

All kinds of bonds (corporate, government and municipal, etc.) that are not in default frequently trade at discounts. In fact, the reason agencies such as Moody’s Corp. (MCO) and Standard & Poor’s rate bonds is to assess the probability of default. The higher that probability, the lower the value placed on the bonds, regardless of their current cash flow.

For example, General Motors Corp.’s (GM) 10-year bonds currently trade for only 8 to 10 cents on the dollar, despite the fact that GM is current on all interest payments. The 90% discount reflects investor awareness that GM will likely default long before the bonds mature. By the new logic, financial institutions with GM bonds on their balance sheets should be able to ignore the market and value these bonds at par.

Some argue that the comparison is invalid because GM’s bonds are liquid while mortgage-backed securities are not. However, if sellers of GM bonds were holding out for 70 or 80 cents on the dollar, those bonds would be illiquid too. The reason GM bonds are trading is that sellers are realistic.

The same should apply to bonds backed by mortgages. To assume that a 30-year, $500,000 mortgage on a house that has declined in value to $300,000 has a high probability of remaining current to maturity is ridiculous. The borrower could lose his job, his adjustable-rate mortgage (ARM) might reset higher, or he may simply tire of paying an expensive mortgage for a house that is unlikely to be sold at a profit.

Any bond investor with half a brain will factor in these probabilities and look for deep discounts. The only way to accurately assess a real present value is to let the market discover the price.

Despite the pleas from bankers and politicians, mortgages are not plagued by a lack of liquidity but a lack of value. If sellers would be more negotiable, there would be plenty of liquidity. Who knows, at the right price I might even buy a few. The problem is that putting a market price on these assets would render most financial institutions insolvent, which is precisely why they do not want to let that happen.

Simply pretending that all these mortgages will be repaid does not solve the underlying problems. It may keep some banks alive longer, but when they ultimately do fail, the losses will be that much greater. In the meantime, solvent institutions are deprived of capital as more funds are funneled into insolvent "too big to fail" institutions - hiding their toxic assets behind rosy assumptions and phony marks.

Going from the sublime to the completely ridiculous, in a speech at the just-concluded Group 20 summit in London, President Barack Obama urged Americans not to let their fears crimp their spending. It would be unwise, he argued, for Americans to let the fear of job loss, lack of savings, unpaid bills, credit card debt or student loans deter them from making major purchases.

According to the president, "we must spend now as an investment for the future." So in this land of imagination (where subprime mortgages are valued at par), instead of saving for the future, we must spend for the future.

I guess Ben Franklin had it wrong too – apparently a penny spent is a penny earned.

This post can also be viewed on moneymorning.com.

Banks Believed To Be Holding Around 600,000 Foreclosure Properties Off Market

RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

The Fundamental Problem Behind The Housing Crash

To understand why we got into this housing mess, there is no need to look further than the recent findings from the "Future of Finance Initiative." It took awhile for these geniuses to figure it out, but they found that in order to avoid mass foreclosures — lenders to make sure borrowers can actually pay back the loans. Wow, just think, if they could have figured that out sooner we never would have ended up in the situation we have today. I guess we know for next time, right? Tim Iacono looks closer at the report and adds some insight in his blog post below.

There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.

No, former Fed chief Alan Greenspan was not included.

Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.

This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).

It's pretty simple - borrowers must be able to repay loans from income.

Gussied up a little bit for the paper it looks like this:

Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.

Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.

What were they saying five years ago and why did it take them so long to have this epiphany?

Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?

In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:

All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.

What does it say about policymakers that they couldn't see this simple truth?

When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?

Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

The Mess That Is The State Of California

California is an absolute mess right now — there really is not any other way to put it. Unemployment is incredibly high — and getting higher — the real estate market has fallen off a cliff, and of course their government is completely inept — to put it nicely. If you thought there was a lot of doom and gloom going around in regards to the U.S. economy as a whole, it is even worse in the state of California. The truth is the U.S. badly needs California to get better — and soon. The state owns the largest economy in the union, and so goes California so goes the country. Tim Iacono looks at a recent Forbes article that details out some of the issues facing California in his blog post below.

This report in the current issue of Forbes Magazine is chock full of aphorisms about the tarnish now building up on the Golden State. Importantly, more than just the weather moves eastward from California - economic and social trends head that way as well.

There has been many a time in California's history when it seemed to outsiders to be barreling toward a cliff and to insiders as a place for unbounded optimism. A favorite Silicon Valley bumper sticker says, "Dear God, one more bubble before I die."

Is it just me or is it fast becoming conventional wisdom that we need a new bubble to take up the slack created by the bursting of the last two?

Despite the rhetorical flair of the new President on the subject of future bubbles, it seems clear to me that, given the deleterious effects of the current bubble's demise, the entire nation would jump headlong into a new bubble of any kind if some asset prices somewhere would start to rise and if job losses would ebb.

Anyway, back to the troubles in California.

Tent cities of displaced homeowners have sprung up in the state's Central Valley--even in the capital, Sacramento. Anthony Sanders, a professor of real estate finance at Arizona State, terms the huddles Mozilovilles, after the former Countrywide Financial chief executive. "Fresno is a nuclear wasteland. I wish there were a nicer way to say it," says Patrick Lashinsky, chief executive of ZipRealty in Emeryville.
The squatters living in abandoned homes are a greater threat to the economy than unemployment and crashing housing, Lashinsky says. "The damage done to the homes makes the ultimate resolution of foreclosed properties even more expensive to investors and banks." In Riverside suburb Lake Elsinore, families of bobcats have taken up residence in vacant homes. The cats miss just as many mortgage payments, but at least they don't steal copper pipes.

Not all businesses are struggling. Bank Repo Bus Tour, whose red-topped buses cruise the Central Valley's foreclosed-home cul-de-sacs, is doing a land-office business selling tickets to people looking for speculative buys. Thanks to sales of statuettes of Saint Joseph, the patron saint of home sellers, revenue from California customers is up 25% from a year ago at Catholic Supply, a firm in St. Louis, Mo.

Santa Cruz, along with larger cities like Los Angeles, San Diego and San Francisco, helped lead the screwball state to its worst performance ever in our annual rankings of Best Places for Business and Careers. Without Flint, Mich. competing, California would have had a stranglehold on the bottom six positions on our list. High business costs, negative job-growth projections, high unemployment and high crime make this a scary place. California has 36 million people and 480 incorporated cities and as recently as two years ago fielded four metro areas in the top 100. This year only Riverside cracked the top half.

"If I even mention California, they throw me out of the office," says Ronald Pollina, president of relocation firm Pollina Corporate Real Estate in Park Ridge, Ill. "Every company hates California."

The airwaves are full of advertisements urging residents to make that automobile purchase before next Wednesday when the sales tax goes up by a full percentage point - in some parts of the state, the tax will top 10 percent.

If all goes well, we'll be leaving California on a permanent basis in exactly two months.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

New Home Construction Starting To Pick Up

Yet another piece of good news relating to the housing sector was released this week. This time we learned that housing starts were up considerably last month. Again it is way to soon to call an end to the housing crisis, but the sliver of good news is welcomed by the real estate industry. For more on the report, read the following post from OverseasPropertyMall.com.

Latest reports from the US show a renewed sense of hope in the housing starts department as figures showed a 22 percent rise in February from the month of January. New work on some 583,000 homes is seen to be a positive sign and indication that maybe the worst of the US housing slump is over.

While the warmer weather is partially responsible for the jump in new construction, analysts do not believe this new rate will be sustained in the future. Most of the new housing starts are apartments and condominiums.

Plus, there still are hundreds of thousands of unsold properties on the market, keeping the recession tight. Despite the non shifting property market, economists think that “the worst of the contraction may have passed.”

Another indication that the US decline has come to a slowdown are the increased retail figures for the month of February.

Narimah Behravesh, chief economist at IHS Global Insight was saying: “You get the sense from a lot of the data coming out now that we’re beginning to get to a bottom. We’re not quite there yet.”

However, despite these positive signs, future construction might not be taking off like a rocket as new building permits weren’t increasing as much as the new starts. They rose by 3 percent.

Projected figures indicate that starts are thought to be around the 450,000 houses annually.

The Northeast is Leading the Pack

A powerful 89 percent surge was seen in the US Northeast in new housing starts, giving them the run of the pack for sure. With low interest rates and plans to further reduce mortgage cost to help resurrect the US property market, the Obama administration is working hard on putting systems in place to make this happen in the near future.

As long as US banks can keep the credit flowing there might be hope. Since the recession start there were some 4.4 million job losses in the country.

Obama’s pledge of a $275 billion rescue plan is supposed to help current home owners keep their houses in order to avoid foreclosures.

In February alone foreclosures increased by a whopping 30 percent from the year previous. Since foreclosures are cheap properties to attain by investors, property developers are finding it hard to raise their capital for new development.

This post can also be viewed on overseaspropertymall.com.

The Circle Of Blame For The Housing Crisis

There are a lot of people who deserve blame for the housing crisis, but who are these people exactly? Dateline recently took it upon themselves to expose the key individuals that they feel are behind the mess. Some are easy to see, while others are a little more abstract in their involvement. Scott Wilson looks closer at the Dateline piece, and adds some of his own input in his blog post below from Your Mortgage or Your Life.

Sunday March 22, 2009, Dateline NBC aired a piece called “Inside the Financial Fiasco,” in which Chris Hanson finally takes a break from exposing sexual predators to take a closer look at the current housing mess.

NBC attempts to assign blame for the mortgage meltdown, and also tries to make it seem like they have finally identified the handful people who were the “only ones who knew” what lay in store for the economy when Wall Street embarked on the derivatives end-run that fueled the crisis.

So let’s go down the list of people that are prime candidates in the vicious circle of blame, and what their role where in the making of this fiasco.

Let’s start at the top. Back in the mid ‘90’s, The Government loosened credit guidelines and required lenders to make mortgages available to more to minority buyers.

By doing this, they gave the lenders an open check book to write questionable loans, all the while knowing that they would be able to sell them on the secondary market (Wall Street).

This was the creation of the infamous “Subprime” loans which later morphed into Alt-A and Expanded Approval loans.

Next, let’s look at the Product Managers who wrote the underwriting guidelines for the toxic loans known as SISA’s and NINA’s, which required little or no documentation of income and assets. The SISA loans are highlighted in the Dateline piece.

Do you think that these product managers had no idea that these types of loans may be misused, or did they only see the underlying profit that was possible from billions of dollars of loan fees collected by creating millions of loans that were virtually just ticking time bombs?

Yes, there are some cases where these loans were appropriate, such as for the business owner who had a lot of write offs, or the borrower whose spouse may not have the best of credit, but will nonetheless contribute towards the monthly mortgage payments.

But the types of borrowers who where actually put into these loans were completely unqualified, as mentioned in the NBC piece.

People like Delores Parker Jackson, who took out multiple loans on four condos totaling over $1.3 million with a negative (-$6000) shown on her tax returns.

Mrs. Jackson, who claims to have run a profitable daycare, and says that she is not to blame, but is actually the victim of predatory lending.

REALLY? She took out multiple mortgages on four different properties totaling over a million dollars with a payment of more than $10k a month, and she claims she had no idea that she could not afford the terms. Now she wants to pretend that she is not culpable, and that the mortgage company committed fraud?

Come on, do seem we that stupid?

Thirdly, let’s look at another “innocent” party: The CEO’s of all the banks and mortgage companies.

These people should have overseen the product managers and acted as the final line of defense by looking out for the company’s long term interests by saying “Hey, stop! These loans may be too risky.”

But the CEO’s saw only a “pot of gold” in the form of billions in loan fees, and where slaves to the corporate bottom line.

Do you think that Angelo Mozilo, the former CEO of Countrywide who earned over $400 million during his last five years at the company, had absolutely no idea that SISA and NINA loans with zero money down would backfire?

Chris Hansen attempts to talk to Mr. Mozilo, but to no avail.

Since he quit Countrywide and the mortgage mess started to blow up, Mozilo has been hiding out at his palatial estate in Southern California, ala Howard Hughes. Chris tried to get the guard at Mr. Mozilo’s gate outside his house to let him in, but was turned away.

Also to blame are the former CEO’s at places like Bear Stern’s and Lehman Brothers, who ended up driving their companies into the ground by buying up these toxic securities. And none of these guys saw the writing on the wall?

I think they did, but also saw big dollar signs in the racket, and choose to ignore the hazards.

Next up for their heaping of blame are The Borrowers. I was an LO for 15 yrs, and used Countrywide as a purchaser for many of my loans.

I knew that some of my borrowers were “less than qualified,” but the underwriting said to “make the loan.”

Like when I would be working for a builder, and a borrower would come to me and asked what loan amount they qualified for, my reply often was, “How much can you afford?”

I told them that I could tell them all day how much they can and cannot get approved for, but only they could tell me how much they really afford.

I could tell them on paper or with calculator that you could qualify to pay, but only the borrower could tell me if they could actually maintain that payment.

I cannot tell you how many times I was told by borrowers, “Don’t worry about me affording it. You just write that mortgage.”

This is where I move on to include the next culprit in this mess, The Loan Officers.

How many LO’s wrote loans for people that they knew would end up in foreclosure?

Many borrowers who I turned down for a mortgage would come back to me later to say, “See, I knew I could get approved. Thanks for nothing.”

At the height of the bubble, there were so countless mortgage brokers who were willing to do anything to write a loan and collect a fee.

They would falsify the numbers to make them work if they had to.

In the Dateline piece, they showcase a woman who was employed as a personal trainer, and who claimed to of told the LO at People’s Choice that she only made $1600/mo.

She was approved for a $259k loan.

Even after she was told that the payment would be over $2100/mo, she figured that she would just have her sister move in and help with the payment.

Do you think that the LO at People’s Choice had any idea that she may NOT be able to make the payment on this house? When Chris Hansen looked at the original paperwork, it stated that she made $7300/mo, which surprised the woman.

She claims she never provided that figure to the LO.

How many LO’s committed fraud because the commissions that they were going to make on each loan they closed could be well into the tens-of-thousands of dollars?

Even though my job was commissioned based, I only made loans if I had some degree of certainty that the borrower had both the ability to pay the mortgage payment and that they completely understood why I was giving them a SISA or NINA loan product.

I did not want a former borrower hunting me down in the parking lot some night after work because I put them in a loan that that left them flat broke.

Next in line is a major player, one who no one seems to put much blame on or even mention much, The Appraiser’s. I believe these guys had a huge impact on the housing explosion, and no one seems to want to bring them up.

As the appraisers continued to inflate the values of the properties, the mortgage companies continued to write mortgages to cover the obscene appraisals.

I knew that if a borrower told me that they were short on funds to close, I could call the appraiser and ask him to “bump up” the value of the property a bit, so that I could give the borrower the money cover closing costs.

This was considered a legitimate practice because real estate only increases in value, remember? But in reality, the value of that house did not go up $5k in the 2-3 weeks since they had done the actual appraisal.

I also found out the hard way how much of an “opinion” an appraisal really was.

Prior to working for the builder, I worked for a short time as a mortgage broker. I only did one loan at the place. , and it was for a gentleman who was doing some renovations on his house, but did not have enough money to finish the project.

Less than a year earlier, the value of the house came in at $85k. When he wanted to do another cash-out refinance a year later, but the new appraisal came in again at $85k. So when I went to my boss and told him that I did not have the value to support the loan, he handed me a business card and said, “Call him.”

Two weeks later, I had an appraisal for $115k, enough to cover the loan.

Was there that much movement in the values of the house? Did it really go up $20k in three weeks, or did the new appraiser just want more business?

What do you think? I know when I worked for one of the big mortgage companies and did a ton of refi’s, every time I had to put an initial value of a home on an application (which typically came from the borrower) nine times out of ten, the appraisal came back with the exact same value.

Curious.

Another big part of the mess, the people who were supposed to catch any fraud or mistakes, were The Underwriters.

They were the final check points in the mortgage process, and when they were presented with a SISA loan that showed that a “house cleaner” made $12k/mo, they should have sounded the alarm.

Like the appraisers, the underwriters are merely mentioned in the piece on Dateline.

Ilene Lanacano, who worked for “People’s Choice,” says that when she brought up some of these problems with the questionable loans, she was often overruled by the CEO of the company.

She states that she was often offered “incentives” by loan officers (money, jewelry, even a car) to approve loans. Ilene says that she never took any of these incentives.

She also claimed that there was harassment and intimidation if you did not approve loans, such as flattened tires and physical threats.

Ilene finally left “People’s Choice” for a consulting firm whose business was to analyze the loans to be pooled in Mortgage Backed Securities (MBS’s). When she raised some flags, she ended up getting in trouble by management.

Next, let’s look to good old Wall Street. You would think that one of the supposed guru’s of Wall Street could have seen the possibility that at least some of these loans were destine fail. But they too, only saw the bottom line, and they sold these MBS to everyone: investors, pension funds, municipalities and other countries.

And then there is China, who bought up trillions of dollars in MBS in an attempt to control the US. By owning all these MBS, China has a huge stake in our mortgage meltdown.

They were only briefly mentioned in the “Dateline” piece, and no real repsonsibility was levied on them. If China had not been so greedy, there wouldn’t have such a demand for MBS, which would have cut down the toxic loans being written.

And the Chinese are smart, shouldn’t they have seen some of the signs?

Next ones to heap some blame on are the Bond Rating Agencies, such as Standard and Poors, who was also briefly mentioned in NBC’s piece.

As Dateline explained, they were hired to give credit ratings to these MBS, which are supposed to indicate their level of risk to investors. “AAA” was the highest rating that they could give a security, and 80% of MBS received that top stamp of approval.

They suggested that most MBS would perform well, despite the fact that the agencies did not have any historical data to back the ratings up. Richard Gufliota of S&P, stated that they were so over inundated with securities to rate that most were not examined to the extent that they should have been.

It should also be mentioned that they made their money in volume too. More quantity over quality.

Finally, a lesser acknowledged culprit of this financial fiasco is The Media itself.

If it wasn’t for the greed of the media (TV, Radio and Newsprint), rolling out with advertisement after advertisement for these mortgage companies and their products, borrowers would not have been so encouraged to accept some of these toxic loan.

In years leading up to this mess, there wasn’t a commercial break that did not produce a mortgage ad.

Often advertised were the No Closing Cost, Stated Income, No Income Verified, and so forth.

There wasn’t a Radio host in the nation who didn’t have at least one mortgage company in their back pocket paying them to be their spokesperson.

Did any of them look into the products that they were pitching to their listeners? Nope. I think they just laughed all the way to the bank.

And what is strange about the media’s role, is that I have yet to see anyone try to add them into the equation. Now, all you hear out of radio talk show hosts spewed crap about how everyone else is to blame. None have come forward to say, “Hey, I guess I had a hand in it too.”

All in all, it is going to be a vicious circle of blame.

There is plenty of blame to go around, and I think when it comes down to it, we can sum it all up with one little word: “GREED;” the Greed of the Government, the greed of the Product Managers, the greed of the CEO’s, the greed of the borrowers, the greed of the Loan officers, the greed of the Appraisers, the greed of the Underwriters, the greed of Wall Street, the greed of China, the greed of the Bond Raters, and greed of the media.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.