The Housing Bubble

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-by the Mysterious Flying Miser

From Bloomberg:
“BlackRock Inc. Chairman Laurence Fink said Obama administration programs to help homeowners stave off foreclosure may hinder the recovery of the mortgage market while benefiting banks that own second loans on the properties. ‘I am just very worried,’ Fink said yesterday in an interview in New York. ‘How do we get a vibrant securitization market back when we are doing these things in the short run that are good for the banking system and good for the homeowner but not as good as it should be?’

Fink said policies introduced this year to reduce foreclosures are flawed because they don’t require home-equity loans to be wiped out before the mortgage is modified. Instead, in a break with the intentions of contracts, the second loan’s terms may also be revised, spreading the financial loss among lenders, he said.

“‘This to me is one of the biggest issues facing American capitalism,’ Fink said. ‘There is modification going on protecting our banks, protecting their balance sheets.’ With the right types of changes, he added, ‘the homeowner is better off, America is better off, and you could say the first lien holder is better off.’

Fink, who as a First Boston Corp. executive in the 1980s helped create securities known as collateralized-mortgage obligations, will lead the world’s biggest money manager when BlackRock completes its acquisition of Barclays Global Investors later this year. The New York-based company, which will oversee about $3 trillion, has emerged as a top adviser on distressed securities to governments and financial institutions since the credit crisis started in 2007.

Fink, who also serves as BlackRock’s chief executive officer, is the highest-profile investor to call attention to potential conflicts when banks that service mortgages handle loan modifications. One concern is that many servicers, which handle billing and collection for mortgage owners, also hold home-equity loans that would lose all value in a foreclosure.

“‘I am glad that a firm such as BlackRock believes these conflicts are serious and the lack of resolution has profound implications on the financial markets and our country,’ Bill Frey, head of Greenwich Financial Services LLC, a mortgage-bond broker and investor in Greenwich, Connecticut, said in an interview yesterday. ‘We have been working with a number of very large financial institutions and many hold the view.’

“Frey is suing Bank of America over modifications the bank agreed to make to settle charges of fraudulent lending by state attorneys general against Countrywide Financial Corp., which it bought last year. He said the investors he is working with want ‘to devise strategies to enforce their contractual rights.’ He declined to identify the firms or their potential tactics.

“The Treasury Department, responding to complaints from investors, said in April that when first mortgages are modified, participating banks with second liens would also have to revise terms. A department official said in July it hadn’t completed contracts with such requirements, and some banks said they might not sign them.

“Bond investors would prefer that more homeowners had loan balances reduced rather than payment terms eased, Curtis Glovier, a managing director at New York-based Fortress Investment Group LLC, told Congress in July. Such aid for consumers whose debt is greater than the value of their homes is being blocked because other loan changes allow second mortgages to be kept ‘on the books of the financial institution as a performing asset,’ he said.

“Bernanke has been working to revive securitization. The Fed’s Term Asset-Backed Securities Loan Facility, a program under which the central bank lends to buyers of asset-backed debt, ‘has shown early success in reducing risk spreads and stimulating securitization activity,’ he said on Aug. 21. The program has helped create demand this year for $124 billion of new securities backed by debt such as automobile leases, credit cards and small-equipment loans. No private securities have been created out of new commercial or residential mortgages since early 2008.

“‘If you really want to protect the homeowner, wipe out the second lien, modify the first lien,’ Fink said.”

From Black Enterprise:
“It’s crunch time for anyone looking to buy a home and capitalize on the federal government’s first-time home buyer tax credit. November 30, the deadline by which a home purchase has to close to qualify for the credit of up to $8,000, may seem a ways off but as anyone who’s jumped through the hurdles of buying a home lately can tell you, it not as far down the road as you might think.”

From the Mysterious Flying Miser:
Ha ha!

From the New York Times:
“California’s unemployment rate in August hit its highest point in nearly 70 years, starkly underscoring how the nation’s incipient economic recovery continues to elude millions of Americans looking for work.

“While job losses continue to fall, the state’s new unemployment rate — 12.2 percent, according to the Bureau of Labor Statistics — is far above the national average of 9.7 percent and places California, the nation’s most-populous state, fourth behind Michigan, Nevada and Rhode Island. Statistics kept by the state show California’s unemployment rate was 14.7 percent in 1940, said Kevin Callori, a spokesman for the California Employment Development Department.While California has convulsed under the same blows as the rest of the country over the last two years, its exposure to both the foreclosure crisis and the slowdown in construction — an industry that has fueled growth in much of the state over the last decade — has been outsized.

“Total building levels in California have fallen to $23 billion this year from $63 billion in 2005; home building this year is less than a quarter of what it was in 2005, according to the Center for Continuing Study of the California Economy. Roughly 500,000 of the state’s job losses have been in construction, finance, real estate and industries related to construction.

“‘We were at the epicenter of the housing bubble, and we are at the epicenter of the fallout,’ said Stephen Levy, senior economist and director of the center. ‘The reason we are doing worse in California than other states is construction.’

“While California has enjoyed some signs of a comeback in recent months, unemployment, which is often the last economic indicator to turn around in a protracted recession, is expected to remain high for the near future. For example, a recent study by the University of California, Los Angeles, predicted that while the state would enjoy 2 percent quarterly growth in 2010, the unemployment rate would remain above 10 percent.

“Such numbers have caused deep pain to a state overly reliant on personal income taxes to balance its budget. The near collapse of the stock market, which greatly reduced personal wealth in the state, and job losses related to the housing bust combined to sharply reduce that source of revenue.

“In July, Gov. Arnold Schwarzenegger signed a budget that closed a roughly $24 billion two-year gap with extensive cuts to social services, parks and education. This has left the state with large numbers of people without jobs seeking government services, which further strained its resources and hindered potential consumer spending among laid off and furloughed government workers.

“The governor seized on California’s grim unemployment milestone Friday to make a case for his current pet projects: revising the state’s tax system, fixing its broken water system, which has contributed to unemployment in the state’s farm regions, and tapping the federal government for all he can get.

“‘The latest unemployment numbers reinforce the importance of combining federal, state and local efforts to put Californians back to work and to help all those struggling in this difficult economy,’ Mr. Schwarzenegger said. ‘Immediately addressing our challenges, which include reforming the state’s antiquated tax structure and updating our water delivery system will move the state forward and build a stronger, more diverse economy. While I am pleased to see fewer jobs lost, my administration will not rest until job growth resumes and employment returns to normal.’

“Earlier this week, Ben S. Bernanke, the Federal Reserve chairman, proclaimed that the country was emerging from its protracted recession, and doubtlessly, California is showing its own signs of recovery. In Southern California, the center of the housing bust, home sales rose 11 percent in August from a year earlier, and prices have begun to tick up as well. In addition, the state’s exports are once again growing as international economics, particularly in Asia, have begun to recover and create demand for goods, and layoffs have slowed statewide.

“‘Any economist would tell you we’re in a recovery,’ Mr. Levy said. ‘Job losses are lessening, the G.D.P. is rising, the housing market is stabilizing, and have you looked at the stock market lately? But the unemployment rate is the thing families care about. They don’t care about G.D.P. or China coming back; they care about jobs.’”

And this from the National Bureau of Economic Research, sometime in the past:
“Rising foreclosures will not cause U.S. home values to plunge, despite widespread concerns to the contrary. That’s the conclusion of a new and first-of-its-kind study, The Foreclosure-House Price Nexus: Lessons from the 2007-2008 Housing Turmoil (forthcoming as an NBER Working Paper) by Charles Calomiris, Stanley Longhofer, and William Miles. Although the authors recognize that other factors not captured by their analysis could weigh on home prices, the effects of foreclosure shocks - which promise to grow over the next several months, and which have been a source of worry to homeowners and economists - seem to be smaller than many have feared. Even under their most extreme scenario, in which foreclosure rates would substantially exceed current forecasts, the resulting average drop in home prices between the national peak in the second quarter of 2007 and the fourth quarter of 2009 would be less than 6 percent.”

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