Changing The Animal Spirits With Drunken Sailor Money
Readers suggested a topic on housing policy. “I hope everyone enjoyed the debate last night. I wanted to differentiate between D or R while making a vote next month as regards to following topics and would make a decision accordingly. I think one is Pepsi and other is Coke, both same but different flavors but I still wanted to see the differences: Who will Outsource more or keep jobs in US? Who will give more visas and Greencards? Who will control spending? Who will control the fiscal deficit? Who will be good for Medicare/SS? Who will bring jobs back and get the economy going? Who will keep a lid on Wall Street? Who will not promote principal reduction on mortgages? Who will bring shadow inventory out? Etc..etc..”
Another asked, “While we’re on the subject, what policies, laws, etc. would put an end to this miserable housing bubble debacle? Not that any of the weasels on Capitol Hill would actually implement any of them. With a few exceptions, of course.”
A reply, “That is an easy question. Get government OUT OF THE MORTGAGE industry. Make banks keep their loans and EAT their losses. Require 20% down-payment. No loans above 30% of take home pay. Proof on income/job for a loan. Or - how the housing/mortgage industry used to be pre-1990 BEFORE GOVERNMENT got involved AND DESTROYED IT.”
To which was said, “So…massive government regulation of banks. Will you also forbid non-bank loan origination and mortgage backed securities? Your plan involves forbidding the banks (and presumably all other possible lenders) from continuing in business in the way that they choose. Securitizing loans was an old business when I worked on those deals (mostly cars, industrial equipment and just starting to be credit card receivables) in the 90’s. I didn’t do the mortgages, but other teams did.”
“Forbidding a business practice that has been standard in an industry for over 20 years is a lot of government regulation. I’d say a reasonable analog would be making SUVs illegal.”
The Guardian. “Poinciana sits in the heart of the vote-rich Interstate-4 corridor where the battle for Florida – and quite possibly the White House itself – will soon be fought. This is the ultimate swing region, in the ultimate swing state, with Latino voters holding their fingers on the scale. For now, the economy is the top issue on the minds of residents, whether it be concerns over decreased home values or an unemployment rate above the national average.”
“‘In 2006 we were the fastest-growing development community in the nation with waiting lists for houses and unbelievable growth. But during the 2008 recession Poinciana literally became the poster child for the financial crisis,’ resident Keith Laytham said.”
“The growth was spurred on by a boom in the tourism industry around Orlando in the early 2000s. But people stopped taking expensive vacations when the economy deflated, leaving many of these new Latino arrivals without a job. Many are also under water on their housing, having bought homes at inflated prices that can now not be recouped.”
“Poinciana has some of the highest rates of housing strife in the country – a quarter of its 24,000 homes have fallen into foreclosure in the last four years. ‘You had people buying $250,000 homes at the height of the boom even though the median income in the county was $28,000,’ said Osceola County Commissioner Brandon Arrington.”
“Poinciana resident Roberto Sanchez, whose parents are from Puerto Rico, moved to the community eight years ago after losing his job in New Jersey. He was laid off from another construction job at the height of the unemployment crisis but has managed to find work as a quality control technician for an asphalt company. He is frustrated with the stalled economy. ‘We don’t think the government represents us. I have issues with both sides – the Democrats because of the unfulfilled promises and the Republicans because it seems they only care about rich, white people.’”
From CNBC. “Thanks to the Federal Reserve, JPMorgan Chase CEO Jamie Dimon, and the Obama administration, the U.S. economy is ‘bleeding,’ John McCain, the Republican Senator from Arizona and former presidential candidate, told CNBC. McCain told CNBC that Wall Street had taken precedence over Main Street during much of the financial crisis and he hit back at Dimon, head of JPMorgan Chase (JPM), who said on Wednesday that the acquisition of Bear Stearns during the 2008 collapse had done the Federal Reserve a ‘favor.’”
“‘I don’t owe Mr. Dimon anything,’ McCain said. ‘Mr. Dimon has done very well as have major financial institutions, and the American people are very unhappy and dissatisfied with it, as they should be.’”
“McCain also said he was not sure he’d support Fed chief Ben Bernanke for another term and he criticized the central bank’s decision to buy $40 billion in mortgage debt a month, as part of its next round of quantitative easing. ‘I’d have to think about it. … But I’m very unhappy with his performance and what’s happened to the economy when he’s announced all these measures and all the easy money. Who gets the benefit of the easy money? The big businesses on Wall Street.’”
From Breakout. “Mega-bank JP Morgan (JPM) reported record profit of $5.7 billion in the third quarter, up 34% year-over-year . With the size of JPM and the diversity of its business lines, the company can report almost whatever it wants on any given quarter. The most salient takeaway for investors as a whole was something CEO Jamie Dimon said in the management discussion portion of the press release: ‘Importantly, we believe the housing market has turned the corner. In our Mortgage Banking business, we were encouraged that credit trends continued to modestly improve… Despite this improvement, the absolute level of charge-offs remains elevated. We also expect to see high default-related expense for a while longer.’”
“Dimon didn’t exactly issue the all-clear but a steady improvement in housing would be exactly what the doctor ordered for the country.”
The Associated Press. “A former bank executive working to hasten a resolution to hundreds of foreclosure disputes in Rhode Island’s federal courts calls the mortgage crisis a ‘Gordian knot’ and says debt forgiveness needs to be part of the solution. Former Bank Rhode Island CEO Merrill Sherman said in her special master’s report to U.S. District Judge John McConnell last week that the best approach to fixing the mortgage crisis is reducing struggling homeowners’ loan amounts — an approach that has garnered significant resistance from mortgage giants Fannie Mae and Freddie Mac despite pressure from the Obama administration.”
“Sherman called it ‘economic folly’ for defaulting homeowners to stay in homes that are underwater by means of other loan modifications, including stretching out payments over a longer period of time and reducing interest rates. Sherman said ‘nothing could be worse’ for Fannie Mae and Freddie Mac than if homeowners stopped fighting their foreclosures and handed over the deeds to the homes. In that case, she wrote, Fannie and Freddie ‘would be TOAST.’ ‘All they would have is the present (reduced) value of the property, marketing and maintenance expenses and a worthless claim against the borrower(s),’ she wrote. ‘That would mean immediate and worse losses.’”
“Sherman said Fannie Mae and Freddie Mac have already cost taxpayers billions of dollars in part because their lawyers ‘have the capacity to litigate indefinitely.’ ‘So our taxpayer dollars are being utilized to fund a significant amount of lawyering that may not be productive from a business standpoint,’ she wrote.”
“The financially troubled mortgage agencies were taken over in 2008 by the U.S. government. Edward DeMarco, head of the agency that oversees them, has insisted that writing down mortgage amounts isn’t in taxpayers’ best interests. He said some homeowners could abuse the process and fall delinquent to reap the benefits of principal forgiveness.”
The Statesman Journal. ” Tracey Weedman works for Gorilla Capital, a Eugene-based company that’s one of the nation’s largest purchasers of homes sold at foreclosure auction. Weedman pulls up in front of a newer house on track for foreclosure. This one is also a tough sell. On a tiny lot, the home is wedged between two other houses. The property has no off-street parking or garage. The front yard is a narrow strip of turf.”
“‘Any place they could get a cheap piece of dirt, they were cramming in a house, and people were buying them,’ Weedman said.”
“In fall 2006, housing developments with more than 5,000 lots were under review by Salem’s planning and public works department. Then, the frenetic pace of building stopped. ‘There are countless examples of lots in town that banks have unloaded at fire-sale prices,’ said Mike Erdmann, CEO of the Home Builders Association of Marion and Polk Counties. Housing lots that once sold for as much as $150,000 have sold for as little as $30,000 to $40,000, Erdmann said.”
“Dean Kaufman, a 38-year veteran of the home building industry, sensed the market was overheated and began changing the company’s strategy. ‘I saw people building spec houses who really weren’t builders,’ Kaufman said.”
“Some made the mistake of treating their home purchase as an investment strategy. As Weedman puts it, consumers were paying ‘drunken sailor money’ under the assumption that real estate prices would continue to soar. On Dewpoint Street SE, the Lay family is concerned about real estate prices in their neighborhood. The Lay family bought their home in 2005, just a year or so before the housing bubble burst, for $270,000. One nearby home, recently placed on the market, is priced at $189,900.”
“‘When I see that number, it scares me,’ Greg Lay said.”
“Floyd Bennett works for foreclosure trustees, a go-between for the bank and the mortgage holder. He read his scripts, a legal requirement in the foreclosure process. ‘Two weeks ago, I sold three houses in a row, but a lot of times it goes back to the bank,’ Bennett said.”
“Recently, two women stood by and watched Bennett sell their foreclosed home. Bennett admits times like that hurt, even though the women had no animosity toward him. ‘Some of them are happy to see it go,’ he said of those losing their homes. ‘It’s so underwater.’”
“The Federal Reserve can’t spark a recovery in the housing market by itself because mortgage rates don’t predict where home prices are going, economist Robert Shiller told CNBC. The Fed’s latest stimulus plan involves buying up mortgage-backed securities to keep rates low and help spur home buying, which the central bank sees as key to an economic recovery. But Shiller said Fed Chairman Ben Bernanke only has one policy tool and ‘doesn’t have a way of changing the ‘animal spirits’ that a full-fledged housing recovery will depend on.”
“Shiller also said it’s too soon to call a reversal in the housing market. Home prices could also remain stagnant for while still, the economist said. ‘If you look at the last housing cycle, it peaked in the 1990s and took a decade to turnaround,’ Shiller noted. This housing downturn is in only its sixth year.”
