August 21, 2015

A Radical Oversupply Of Mortgage Debt

It’s Friday desk clearing time for this blogger. “Debbie Cooley-Guy bought the home in a suburb west of Tampa for $637,000 in 2002. Seven years later, after the economy tanked, she sold it for less than she owed on her mortgage to avoid foreclosure. As a mortgage loan originator herself, she should have known the pitfalls, but she said she was caught up in the boom. ‘I used to look at people like me and think, ‘How did you let this happen?’ she said. ‘In hindsight, I had set myself up so well. Just because you can afford things, it doesn’t mean you should buy them.’”

“Just a few years later, she’s back in a new, smaller home, one of America’s growing ranks of ‘boomerang buyers.’ John Councilman, president of the Association of Mortgage Professionals, said a wide swath of people with past credit problems are seeking mortgages, not only foreclosures or short sales. ‘We have a lot of people with issues and many are coming back into the market.’”

“It is sizzling like never before, since the beginning of time — by which I mean since the 2009-2010 Arizona real-estate crash. So is an ‘exceptional’ real-estate market in a state wallowing in a so-so economic recovery a plain, old good thing? Or is it a harbinger, in some ways, of the return of conditions that caused the crash?”

“As reported by Stephen D. Oliner, a former associate director in the Division of Research and Statistics at the Board of Governors of the Federal Reserve System, 40 percent of government-backed mortgage loans go through programs that are not as firm about qualifying as Fannie and Freddie. The median credit score for borrowers going through the Federal Housing Administration, for example was in the lower third of all credit scores in the U.S. Stress tests indicate that in a crash similar to what happened six years ago, 25 percent of those FHA mortgages would go into default.”

“That’s not something to lose sleep over, of course. Not tonight, anyway. But some powerful voices are arguing for a loosening of qualifying standards.”

“The Bay Area’s summer real estate market is shaping up as the busiest in years. In Silicon Valley and the East Bay, however, median prices fell just enough to make some agents and buyers wonder if a seasonal cooling was on hand. Deals can be found if one just looks hard enough, said agent Jennifer Branchini, past president of the East Bay Association of Realtors. This summer she has helped some buyers to ‘negotiate below asking price, which is actually kind of fun for a change.’”

“Her explanation for the change: ‘You’ve got sellers that are overzealous and thinking they can price their house way above, because, hey, some other house sold for some high amount, so why shouldn’t theirs sell for even higher? And by the end of the day, the consumer, the buyer, is saying, ‘No! You’re already at the top of the market,’ so you’re seeing those prices come down a little bit.’”

“It’s a renter’s market in Calgary for mid- to higher-priced properties as demand for rental accommodation drops in a weakened economy. ‘If you want to drop your prices, just go ahead, don’t be scared, having a lower rent is better than no renter,’ said Bany Declair, who rented out her three-bedroom townhouse in Marda Loop for $2,950 per month last year. She’s had to drop the rent $700 and offer an incentive — the first month for free.”

“Landlords will have to lower their prices as supply goes up. ‘Especially the ones that had their prices stretched upward, because they could, because there was very limited supply for the past few years so those prices did increase,’ said Darren Paddock, who runs the website RentFaster. ‘if you look downtown there’s still a lot of cranes in the sky — there’s still a lot of units coming and they will be pushed into the rental market.’”

“Until the beginning of 2014, Dhruv Kumar had a decent real estate brokerage business in Noida, near New Delhi. Suddenly, things started to fall apart. ‘Today, bookings in the Noida market are down 70-80% and my business is in tatters,’ he said. ‘The days when a builder used to sell 500 or 1,000 apartments in a month are gone,’ said Kumar, who even after diversifying into three different businesses today makes only 50% of what he used to earn selling homes.”

“Unsold housing in the top eight cities rose to 1,017 million square feet in the June quarter from 942 million sq. ft. in the previous quarter. Unsold inventory in the NCR rose 7% year-on-year to 325.9 million sq. ft. and may take 68 months to be sold, based on the current pace of buying. Unsold inventory rose 20% in Mumbai to 201.1 million sq. ft. and will take 45 months to sell.”

“A mini debt crisis in northern China is exposing cracks in a financial pillar of the country’s economic revival plan: the $430 billion loan-guarantee industry. ‘We see a lot of these companies in China, and we worry about the underlying fundamentals,’ said Sally Yim, senior credit officer with Moody’s Investors Service in Hong Kong. ‘You are bound to see more of these defaults, or troubles from these type of small guarantee companies.’”

“If lenders suspect local governments will not bail out guarantee companies in times of trouble, the broader economy becomes the loser as businesses are starved of finance. ‘This is unbelievable,’ said an executive of a trust company. ‘Who would dare to believe in the guarantee industry in the future? What’s the point of having this industry?’”

“Between 2002 and 2015, the mortgage books of National Australia Bank, ANZ, Commonwealth Bank and Westpac grew by 388%, 435%, 475% and 554% respectively. Put another way, the big four’s mortgage books escalated from a combined $242bn to a whopping $1.13tn, surging at such a consistent rate it would make Bernie Madoff proud.”

“The next time you’re watching an auction in Sydney or Melbourne, wondering where all these buyers managed to muster up so much cash, chances are they have a domestic retail bank prepared to lend them a colossal sum of debt using new equity in their existing property portfolio as collateral that didn’t exist just 12 months ago.”

“By cutting the cash rate to the lowest point in a long time, the RBA has simply furthered the Ponzi scheme running rampant in Sydney and Melbourne, which dominates Australia’s housing market in terms of size and value. If either of these two major housing markets hits a brick wall, it will burst the national housing bubble. Policymakers and the public, unfortunately, will come to realise there never was a dwelling shortage – rather, a radical oversupply of mortgage debt being the real culprit for abnormally-high housing prices.”

“Bitter former homeowners sometimes leave properties in poor condition and take things such as appliances, pipes and even cabinetry with them when they leave, said Joanne Finochio of Better Homes and Gardens Rand Realty in New City. She recalled a foreclosure in New City where the homeowners had taken the heating system, the appliances, some bushes and even the front door.”

“Finochio predicted the current high rate of foreclosures will last at least another two years. ‘They’re not even counting the people who are behind on their mortgage; when does that hit?’ she said.”

Bits Bucket for August 21, 2015

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