May 16, 2014

Greed Is A Powerful Force

It’s Friday desk clearing time for this blogger. “The federal agency overseeing mortgage insurance giants Fannie Mae and Freddie Mac signaled a robust federal involvement in the mortgage markets for the foreseeable future. But without waiting for Congress, Federal Housing Finance Agency Director Mel Watt did announce a number of policy shifts for Fannie and Freddie. Reversing a proposal it made last year, the agency will not reduce the size of mortgage Fannie and Freddie will back. Fannie and Freddie will continue to back loans even when the borrower misses two mortgage payments in the first three years after a lender acquires the loan.”

“Under current standards, Fannie and Freddie can force lenders to repurchase those mortgages, which made those lenders reluctant to make the loans in the first place. That, Watt said, ‘undermines the goal of improving access to mortgage credit for creditworthy borrowers.’”

“It is not surprising to see first-home buyers being squeezed out by investors and trade-in buyers in Australia as interest rates have fallen, but banks should not solve an affordability issue by lowering their standards, a central banker warned. ‘As experience overseas has shown, you do nobody a favour by trying to solve an affordability issue by making it easier for people to borrow more than they can reasonably service,’ said Luci Ellis, head of Financial Stability Department at the Reserve Bank of Australia.”

“Ellis also said while first-time home buyers will feel squeezed out, this is probably more a cyclical phenomenon than a structural one. ‘It is still probably quite disheartening for potential first home buyers,’ she said. ‘As such, it would not be a good outcome if they responded by overstretching themselves to try to get into the market during upswings. As well as being against first home buyers’ own long-run interests, that would increase risk in the financial system.’”

“Paul Sawyer is about to take a whirlwind tour of homes. He’s moving his family to Collin County from Florida. Sawyer has one day to make one of one the most important decisions he’ll ever face. Sawyer’s search had him checking out two of only 500 homes currently for sale in a city of 130,000. His guide, Lynn Slaney with Ebby Halliday Frisco, described a housing market where houses are selling before she can even show them. ‘You have to be a little bit aggressive,’ she said.”

“The situation has Sawyer looking at $500,000 custom homes under construction that he won’t even be able to customize. He said, ‘Even if a house isn’t finished you have to be ready to pull the trigger.’”

“The Allens share a 936-square-foot three-bedroom home in Tacoma. They’re ready for the next step in the life of their family. But the Allens, like about 54,000 other homeowners in Pierce County, are stuck. They owe more than their home is worth, and there is no good way out. The Allens bought in May of 2007, three months before the top of the Pierce County market. ‘It never occurred to us that equity could go down,’ David Allen said.”

“‘No one thought that,’ Michelle Allen said. ‘People who were wiser and older than us were saying, ‘Get in now or you’ll never get in.’ Michelle Allen calculated that selling at that price would mean they’ve lost about $60,000 during their seven years of homeownership. ‘That was as if we threw into the garbage $25 every single day that we’ve owned this house,’ she wrote in an email.”

“New Mexicans are losing big time in the housing market with $2.1 billion dollars in home foreclosures between 2009 and 2012. ‘In this area, people are losing money left and right,’ says Sen. Michael Padilla. It’s to the tune of $30,000 to $50,000 per home, according to Padilla. ‘If you’re paying your mortgage next door to a home that’s been foreclosed upon, you’re losing equity every night you go to bed,’ says Padilla.”

“Naseema Ahmed, a broker at Indus Real Estate LLC in Dubai, has been digging through her e-mails for leads after failing to sell a single home in the past month. She had been closing deals at a clip of about six a week since the market began recovering in 2012. Ahmed said buyers are pushing for lower prices and dropping out of talks when their bids are rejected by sellers. ‘Before, buyers would have negotiated and raised their prices,’ she said. ‘Now most are just dropping the whole thing and moving on.’”

“You know a property market is in trouble when developers stage long-jump contests to attract buyers. That’s what happened earlier this month in the eastern city of Nanjing. Looking to sell apartments in a new residential complex, a local newspaper reported that agents from the developer, Rongsheng Group, lined up potential customers behind a queue and asked them to leap forward. Those who jumped the farthest got the biggest rebates — up to $1,600.”

“Chinese newspapers these days are riddled with such tales of desperation. On May 9 in the central Chinese city of Changsha, pretty girls were enlisted to hand out 50,000 tea eggs to lure people into a housing fair. Developers in Shenzhen and Fuzhou are offering to sell apartments with no down payment. In Hangzhou in April, two real estate agents competing for buyers got into such a vicious fistfight that the police had to intervene.”

“Massive oversupply combined with a tightening of credit orchestrated by the government appears to be crushing the market. Falling apartment prices spell bad news for China’s economy. Real estate is one of the main drivers of China’s growth. Beijing’s leaders got themselves into this mess with their go-slow approach to reform.”

“Britain’s economy is booming again. House prices are rising at their fastest in a decade. So it is not surprising that the Bank of England predicts UK economic growth will soar to 3.8 per cent this year, and 3.2 per cent next year, faster than any other rich country. So, how fake is this growth? The sustainable long-term growth rate for a mature G7 economy like ours is nearer to just two per cent. Will any politician tell you about this yardstick? Or about any other key factor determining the real direction of economic success? Surprisingly, they don’t.”

“Our economic party is certainly back in the swing again after the authorities’ hair-of-the-dog remedy of rock-bottom interest rates and £375bn worth of virtual money-creation through quantitative easing. Cheaper mortgages – plus some ill-conceived policies to help people buy houses and to guarantee their loans – have created another housing bubble. It is all smoke and mirrors – 2007-08 all over again. We won’t get out of this without pain, and the longer that our financial and political authorities put off raising rates and cutting their spending, the worse the eventual hangover will be.”

“Will Washington never learn? Remember the housing bubble — people buying houses they couldn’t afford with money they couldn’t pay back on the faulty premise that the real estate market would just keep rising? And how when the bubble burst it took much of the U.S. economy with it? Well, anyone who saw those rows of “foreclosed” signs won’t soon forget the trauma. Not so the Beltway bureaucrats who want to bring back those golden days.”

“Not long ago the plan was to phase out mortgage giants Fannie Mae and Freddie Mac (still under federal conservatorship) and encourage more private investment. But Mel Watt, the new director of the Federal Housing Finance Agency, overseer of Fannie and Freddie, has other ideas. Efforts to make a 20 percent down payment once again the industry standard are likely to be the first to go. Plans to reduce maximum loan amounts eligible for purchase by Frannie and Freddie (currently as high as $417,00 and $625,00 in high cost markets) will be scrapped, Watts said. And he directed the two companies to triple to $90 billion sales of mortgage-based derivatives.”

“Isn’t that what got us into trouble in the first place?”

“A customer recently inquired about the price of our tulips. An intriguing question, for what price can we put on beauty? Did you know that there was a time when the price of a tulip was as much as a house or an entire farm? When a man would give up everything he owned for a single bulb? What’s that? Impossible, you say? Judging by today’s economic woes, it’s clear that the great tulip bubble has been long, long forgotten.”

“Sometime in the 1630s, Holland’s love and desire for the tulip had turned to mania. The demand for tulips grew, pushing the price to extraordinary levels. Evil speculators call ‘florists’ found they could buy bulbs and then sell them for huge profits. By 1634 tulip mania was at a fevered pitch. A $1,000 investment in tulips would yield $20,000 profit in just one month. The Dutch middle class got into the act, looking to make a quick fortune speculating in tulips. And as the frenzy heated up, the price continued to climb. Soon people were selling livestock, land, family farms, and entire life savings to acquire a single tulip bulb.”

“It was the epitome of irrational exuberance. The Dutch had lost control of their senses. The bubble burst in February 1637. Traders came to their senses and realized no matter how beautiful a tulip might be it could never hold the value placed upon it by greedy speculators. The sell-off soon turned to a panic and in a matter of days the tulip was worth a fraction of its former value. Investors who had squandered their life savings were left holding worthless bulbs. The Dutch economy plunged into an economic depression and would take years to recover.”

“You find all this hard to believe? How could a lowly flower bring down an economy? Greed is a powerful force and few humans, if any, are immune.”

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