December 14, 2016

A Rot At The Heart Of American Democracy

Some housing bubble news from Wall Street and Washington. David I. Kranzler, “The yield on the 10-yr Treasury has blown out 109 basis points since July 3rd – 70 basis points since October 30th. 30yr fixed rate mortgage rates for 20% down payment buyers with a credit score of at least 720 are up 90 basis points since October 1st. Interestingly, the Dow Jones Home Construction has diverged from the S&P 500. While the DJUSHB index is up since election night, it has been lagging the S&P 500 since the beginning of the year. The DJUSHB has been in a downtrend since late August, almost as if stock investors were anticipating the big spike in interest rates that started about 6 weeks later. Through December 2nd, mortgage application volume – both refinance and purchase – has been negative to highly negative in 9 of the last 12 weeks.”

“Mortgage delinquency rates are quickly rising: Black Knight Financial Services, which provides data and analytics to the mortgage industry, released its Mortgage Monitor report for October. It reported that the 30+ day delinquency rate had risen ‘unexpectedly’ by nearly 2%. The overall national delinquency rate is now up to 4.35%. It also reported a quarterly decline in purchase mortgage lending. The highest degree of slowing is among borrowers with 740+ credit scores. The 740+ segment has accounted for 2/3’s of all of the purchase volume.”

“Even more interesting, it was reported by RealtyTrac last week that home foreclosures in the U.S. increased 27% in October from September. It was the largest month to month percentage increase in foreclosures since August 2007. Foreclosures in Colorado soared 64%, which partially explains the rising inventory I’m seeing (with my own eyes). Foreclosure starts were up 25% from September, the biggest monthly increase since December 2008.”

“Finally, again just like the mid-2000’s housing bubble, NYC is showing definitive signs that its housing market is crumbling very quickly. Landlord rent concessions soared 24% in October, more than double the 10.4% concession rate in October 2015. Typical concessions include one free month or payment of broker fees at lease signing. Days to lease an apartment on average increased 15% over 2015 in October to 46 days. And inventory listings are up 23% year over year. Note: in the big housing bubble, NYC was one of the first markets to pop.”

From Quartz. “The left-leaning Center for American Progress compared real estate data with election results, finding that counties that voted Republican tended to have higher median rates of negative equity—homeowners paying off loans that are worth more than the market value of their house, a warning sign for potential foreclosure. Counties that had voted for the Democratic candidate in 2012 and switched parties in 2016 had even higher rates of negative equity.”

“Areas where mortgage markets yet to recover from the financial crisis and economic weakness are particularly found in rural areas, in states like Michigan and Wisconsin that Democratic political strategists had counted on as reliable electoral college votes. Instead, Trump would end up with surprising victories thanks to turnout in rural districts.”

“Sarah Edelman, the director of housing policy at the Center for American Progress, cautions that the connection between underwater mortgages and Trump votes are ‘correlation, not causation,’ but highlights ‘an important factor in the lives of Americans that has gotten very little attention.’”

“Many people date the start of the ‘Tea Party,’ in many ways a predecessor to Trump’s base, to a televised rant by CNBC personality Rick Santelli in February 2009. Less well remembered is what Santelli was so upset about: An Obama administration plan to convince banks to renegotiate mortgages with customers who owe more than the their house is worth, rather than foreclose on them.”

“The economic recovery helped many Americans get past the foreclosure crisis. But the recovery was not well-shared, as Edelman and her team documented last year. Their observations of counties with high numbers of underwater homeowners became the basis of their new electoral analysis. ‘While most of our housing market has recovered, there are pockets of the country have not,’ Edelman says. ‘One of the mistakes we make regularly in DC is pretending that the foreclosure crisis or the housing crisis is over everywhere, and it’s clearly not.’”

The Atlantic. “‘In My President Was Black’, Ta-Nehisi Coates ably documents the material and representational advances of the past eight years. But any rendering of Barack Obama’s legacy is incomplete without including his failure to arrest the foreclosure crisis, or to hold anyone accountable for the widespread damage it inflicted. In fact, reading Coates’ hymn to the Obama era, I couldn’t stop thinking about a different Chicago resident I met this year.”

“I was in St. Louis, giving a talk for a book I wrote about the foreclosure crisis. The skies erupted minutes before the event, and few battled the rainstorm to join the audience. But when I opened it up for questions, Andy Williams Jr., dreadlocks scraping his shoulders, stood up and said, ‘David, you are a hard man to find.’ Williams drove five hours that day, from Chicago to St. Louis, to tell me about his 11-year foreclosure ordeal, initiated, he claimed, after his loan servicer misapplied his payments, charged illegal fees, and fraudulently placed him into homeowner’s insurance when he already had it.”

“A paralegal, Andy started collecting stories of the servicer’s tactics, compiling them into an as-yet-unpublished 200-page book. He not only fought his own case—it’s still in federal court—but he helped grow six law firms in the Chicago area, to protect others at risk of dispossession. It’s an uphill battle. ‘I just don’t think a borrower will ever have a real chance of justice or leveling the playing field,’ Andy told me last week.”

“Should Andy exhaust his appeals, he’d join over 9.3 million American families who have lost their properties since the housing bubble collapsed, either to foreclosure or an associated transaction. Given the average household size in the United States, that likely represents more than 20 million people, forced to uproot their lives and find shelter.”

“This had a particularly gruesome effect on people of color, who stored more of their wealth in home equity and were targeted for subprime loans. Coates points out that white households now hold seven times as much wealth as black households; he doesn’t mention how that statistic grew worse under President Obama, mostly because of foreclosures.”

“If Obama ever reads this critique, I suspect he’d mutter under his breath, as he disclosed to Coates he does habitually when confronted with activist demands. ‘Where I got frustrated at times was the belief that the president can do anything if he just decides he wants to do it,’ Obama grumbles. Nothing is sadder than a man who disclaims his power to preserve his reputation. The presidency is subject to countless veto points and constraints, but the foreclosure disaster was unique; Congress had already given the incoming president the authority to act.”

“Obama the candidate ran on allowing bankruptcy judges to cut balances on primary mortgages; Obama’s administration actively whipped against the policy. Obama’s transition team earmarked up to $100 billion in funds appropriated through Bush’s bank bailout to mitigate foreclosures; eight years later only around $21 billion has been spent. Obama the president promised 4 million mortgage modifications; to date less than a million have been successfully achieved.”

“No Republican sign-off was necessary for Obama’s Home Affordable Modification Program (HAMP). The Treasury Department alone decided to run it through mortgage companies that had financial incentives to foreclose rather than modify loans. Treasury never saw the program as a relief vehicle, but a way to ‘foam the runway’ for the banks, allowing them to absorb inevitable foreclosures more slowly. Homeowners were the foam being crushed by a jumbo jet in that scenario, squeezed for as many payments as possible before ultimately losing their homes.”

“Worst of all, most of these foreclosures were executed fraudulently. When this came to light in fall 2010, the leading mortgage companies stopped foreclosing because they could no longer do so legally. But Obama’s Justice Department did not use this newfound leverage to obtain equitable solutions for struggling families. It didn’t prosecute those responsible for fraud. It reached a series of bank settlements that provided little meaningful relief. Fraudulent documents still get used in foreclosures today. And of course, no high-ranking executive saw the inside of a jail cell.”

“This past year has made clear that America’s social fabric is fragile. When you let private companies distort a government program into a foreclosure-creating machine, when you allow the largest consumer fraud in American history to occur without sanction, you tear at that social fabric. You create a rot at the heart of American democracy. You teach the public the rules don’t apply to the wealthy and powerful. And people respond with cynicism and rage.”

“Coates squarely blames racism for the rise of Trump. But the destruction of faith in institutions also plowed that pathway. Obama sapped that faith when he could have restored it. And now his party, the one that believes government can act to protect its citizens, is at its lowest ebb in 90 years.”

Back In Great Recession Territory

A report from the Wall Street Journal. “With rent growth flattening out and home prices continuing to shoot up, renting is starting to look like a better choice than buying for the first time in years. Home-price appreciation is outpacing rent growth in all 23 of the metropolitan areas tracked by a national index produced by Florida Atlantic University and Florida International University faculty. When home-price growth outpaces rent growth, that can be a sign of a bubble because it indicates people are paying more than necessary merely to find a place to live. In a few key markets the index is moving into alarming territory. In Dallas, Denver and Houston, renting is the most favorable it has been in the history of the index, suggesting significantly overheated housing markets there.”

From Slate Magazine. “In October, the share of New York City rentals that took a price cut, according to the listing tracker Streeteasy, topped 42 percent—the highest level since December 2010. The real estate firm Citi Habitats, which draws data from its own listings, reports that the vacancy rate in Manhattan has climbed to 2.1 percent, its highest level since 2009. Both of those indicators, in other words, are back in Great Recession territory. ‘It’s a renter’s market right now,’ says Chris Lee, the director of sales at Triplemint, a real estate startup.”

“And because the problem of high rents is so general to American cities right now, if New York’s rental bubble is about to pop, it may offer a lesson to places like Los Angeles. Urban wonk Stephen Smith has been collecting some of these listings. A Williamsburg one bedroom down to $2,500 from $3,500 in 2014—with a free month’s rent. An East Village one bedroom at $2,695—same as its rent in August 2009—and still unrented. A Hell’s Kitchen one bedroom, rented in 2014 for $3,750, down to $3,250, and still unrented.”

“A two bedroom in Downtown Brooklyn down 30 percent since July—with two free months. A two bedroom in Williamsburg down $600 from last year, with two months free. A brand-new apartment overlooking Prospect Park, down more than $600 to $2,940 since it was first listed in July—and still available. A studio in the West 30s listed for less than it rented in 2013. A three bedroom on the Upper East Side that, after eight price chops, is back to its 2010 rent—and down more than $1,000 since 2013. Oh, and the apartment comes with two free months—on a 16-month lease.”

The Washington Post. “With one month to go, the D.C. region’s housing market is about to close out one of its strongest years since the housing boom. Housing prices have moderated since hitting a record high earlier this year. Arlington County and Alexandria saw their median prices decrease dramatically. Arlington’s median price sank to $525,000 from $569,000. Alexandria’s median price slid to $499,000 from $545,000.”

The Daily Camera in Colorado. “This weekend, the Lilly family will be moving into their brand-new Longmont home for the second time this year. John and Edie Lilly, their two daughters and two dogs have spent the past three months in a two-bedroom apartment after leaks in their newly built house caused a health-threatening mold contamination and forced half the family to sleep in a tent on the back porch for the summer.”

“Despite the home being under a 12-month warranty, the Lillys allege builder Meritage Homes Corp., based in Scottsdale, Ariz., failed to properly mitigate the damage when it first became apparent in June and refused to take further action when confronted with the family’s ongoing issues. So far, the Lillys say the problem has cost them nearly $50,000 in doctor bills, mold inspections and removal, lawyer fees, and rent and mortgage payments as the 6,000-square-foot home sat empty on its lot in the Renaissance subdivision in southwest Longmont.”

“‘We bought a new house because we wanted it to be hassle free,’ said John Lilly. ‘Instead, we got a lemon.’”

From MarketWatch. “The Dallas Police and Fire Pension Plan has received a lot of press attention recently. My view is that the situation is extraordinary and says little about what is going on with state and local pensions generally. It is a story of wild investments that produced large losses and a very large Deferred Retirement Option Plan (DROP).”

“As a result of poor investment policy and consistent underfunding, the Dallas Police and Fire fund went from having enough assets to cover 72 percent of its liabilities in January 2011 to having only 45 percent in January 2016. Subsequently, in 2016, when the DROP participants caught wind of talks to reduce their benefits, they took notice of the steep decline in asset values and started withdrawing their money, exacerbating the problem. The funded ratio at this point probably stands at around 35 percent.”

“The investment problems stem from 2006 when the Board decided to diversify its investment strategy to reduce the risks associated with equities. These diversified investments included luxury homes in Hawaii, student housing in Texas, and raw land in Idaho and Colorado. A Dallas Morning News expose in 2013 describes one of the Hawaiian homes as consisting of six buildings, a championship golf course, two infinity pools, a sculpture garden and a large entertainment pavilion. In 2013, it had been on the market for five years with no one willing to pay the asking price of $22 million, so the fund – which managed these investments internally – started renting it out for as much as $15,000 per night to recoup some of its operating costs.”

“Returns initially looked good, in large part because the properties had not been regularly appraised and, in some cases, improvements and operating costs had been added to their original value. Once the assets were revalued, the losses were evident.”