April 28, 2013

A Repeat Crisis

Readers suggested a topic on the housing bubble. “How many of us are feeling like we time travelled back to 2006? I live in Long Beach, CA — lots of friends in their 30’s and 40’s talking about flipping homes, condo’s, and buying rental properties with low single digit cap rates because they are certain the prices will increase. Bonus flashback: AM radio news stations have been running ads for Rich Dad, Poor Dad seminars which will unveil the ‘new rules of money.’ Ohhh, boy, here we go again . . . .”

A reply, “I think its already run out of gas - since the true buyers (owner occupants or self-funded mom and pop investors) are gone, the PTB are trying to create new, marginal buyers to pick up the slack. It’s 2006 again pass the Coors.”

One asked, “What happened to the fraud? In all the debate over whether prices are actually rising or not in some places, everyone seems to be forgetting that much of the prior run up occurred because of fraud. Fraud on the applications, fraud in the comps, fraud by the banks lying to the eventual bag-holders. Now prices can rise back up to those bubble peak levels but there’s no fraud? Gimme a break.”

A reply, “Everyone in the RE business is in cahoots. When we bought our house last September, there was some worry that it would not appraise high enough. RE agent puts together a fancy shcmancy excel doc with comps that he gives to the appraiser. Voila! The house appraises for EXACTLY our offer price.”

And finally, “An entire generation of Americans have come to view <8% interest rates and 3% down on a mortgage as normal. When the economy inevitably readjusts and those 600K mortgage loans service at $6,000 a month (excluding taxes, maintenance, insurance et al), bubble-era prices will fall back into line with the historical norm."

The LA Times. “In the High Desert, separated from downtown Los Angeles by 65 miles and a mountain range, the housing market is finally gaining steam after the latest debacle. The reason is simple: Big new houses are selling in the $200,000 range, a mere fraction of home prices across much of the region. Cliff Neves is among the newest arrivals. The 36-year-old said he moved from the San Fernando Valley with his wife and children. He bought a new four-bedroom home in Palmdale last summer for about $190,000. ‘I am not paying $250,000 for a bucket,’ he said.”

“Behind Neves’ Palmdale home, rows of graded dirt lots flanked completed streets. The smell of wood filled the air one recent morning as a construction worker swung his hammer again and again on a wood-framed house, part of a new development by Harris Homes. The developer is being cautious, putting up about 10 to 15 homes at a time — and raising prices with each phase, said Andrew Fisher, the exclusive broker for Harris Homes.”

“Lancaster Mayor R. Rex Parris said residents’ long commutes concern him, adding that he knows hundreds of families who endure debilitating treks to the office. ‘The mother and father spend most of their productive hours on the freeway,’ Parris said. ‘You used to be able to afford to commute. Now you can’t. What good is it to have a cheaper house if you can’t afford to get there?’”

The State Journal Register. “Attorney General Lisa Madigan and Gov. Pat Quinn graced the same stage at different times Monday and talked about housing, not politics. Each addressed about 225 people attending the Illinois Housing Leaders Conference hosted by the Illinois Association of Realtors. ‘I will continue to fight for relief on behalf of Illinois homeowners to restore our housing market and ultimately to restore and revitalize our economy,’ Madigan said. ‘I look very much forward to continue to work with the Realtors to get this work done.’”

“‘We all know the key to economic recovery is making sure our housing market is operating at full speed, and I look forward to working with you on that this coming year,’ Quinn told the group. ‘…Realtors find creative ways to help everyday, hardworking people and families get that opportunity at the American dream. I really feel that your association is one of the most creative groups I’ve ever encountered. … You know how to make things happen.’”

“Phil Chiles of Springfield, president-elect of the Illinois Association of Realtors, said the appearance by the two statewide officeholders helps show the importance of housing and the group. ‘I don’t think there’s any doubt that housing is a crucial area in Illinois, and their coming shows that they feel like it’s important,’ Chiles said. ‘And I think that they understand that we’re a major player in the industry.’”

From CNBC. “The U.S. Treasury’s mortgage bailout is failing at an ‘alarming rate,’ according to a government watchdog, but architects of the four-year-old plan say that it is no worse than they expected. A new report from Special Inspector General for the Troubled Asset Relief Program points to disturbing numbers, but offers no reason for the high rates.”

“Treasury’s data shows that the longer a homeowner remains in HAMP, the more likely he or she is to redefault out of the program. As of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarter of 2009, are redefaulting at a rate of 46.1 percent and 39.1 percent. HAMP permanent modifications from 2010 also had high redefault rates, ranging from 28.9 percent to 37.6 percent.”

“Back in May of 2012, bank representatives complained that the back end debt-to-income ratios (DTI), (which include all debts upon which a borrower pays) for HAMP modifications were far too high. That is, borrowers were paying far too much of their incomes on debt, and the numbers were only rising. At the time, mortgage analyst Mark Hanson said, ‘A 64.3 percent DTI is so far out of scope with the pre-bubble years safe-and-sound 36 percent total DTI — and even typical bubble-years full-doc DTI’s of 50 percent — it is absolutely irresponsible. Servicers are pushing the envelope with respect to getting people to qualify.’”

“Today Hanson is the least surprised of anyone at the failure of HAMP modifications. ‘Because if you look at them structurally — sky-high DTI, LTV [loan to value] and low credit score — they make legacy Subprime loans look sane.’”

“‘People read headlines that ‘foreclosures are at 2005 levels’ and cheer. I say the high-risk distressed loans and foreclosures are still out there. They have just been called something different by banks and the government and kicked down the road a few years,’ says Hanson.”

The Desert Sun. “Some arguments are never over, even after the evidence is in. That’s the way it has been with the 2007-08 mortgage meltdown, and it could mean a repeat crisis. One side has persisted in blaming unscrupulous mortgage brokers and greedy investment bankers. The other side has struggled to point out that ‘affordable housing’ goals played a crucial role in the housing bubble that burst.”

“At a Sept. 25, 2003, committee hearing, Rep. Maxine Waters said: ‘Everything in the 1992 (Community Reinvestment) Act has worked just fine. In fact, the GSEs have exceeded their housing goals.’”

“Later testimony was re­inforcing. In a Dec. 9, 2008, hearing of the House Oversight and Government Reform Committee, former Freddie CEO Richard Syron said, ‘As the goals went up, and the goals were specified by HUD, you had to take more risk.’ Former Fannie CEO Franklin Raines testified that those goals compelled the companies ‘to entertain loans they would not have otherwise entertained.’”

“Fast forward to 2013. In January, the Consumer Financial Protection Bureau finalized a new Qualified Mortgage rule. It is heavy on monitoring the technicalities of loan origination, but permissive about small down payments, low credit scores and high debt-to-income ratios. This has been followed by an April 2 Washington Post report that ‘housing officials are urging the Justice Department to provide assurances to banks … that they will not face … recriminations if they make loans to riskier borrowers who meet government standards but later default.’”

“After the crisis we have sustained, it would seem that regulators would retreat to the traditional requirements for borrowing that make default unlikely. Instead, the old affordable housing goals seem to be the priority.”

Bits Bucket for April 28, 2013

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