September 1, 2018

The Problem Of Having Banks Too Big To Fail

A report from Kenneth Harney. “When the Federal Reserve polled senior bank executives last month on whether they’ve been loosening credit criteria for home-mortgage applicants, most bankers said, ‘no way, not us.’ They’ve kept their rules tight to avoid the problems the lending industry experienced in the housing bust of the last decade. But there’s new statistical evidence that, at least in some areas, standards have been easing. A study conducted by credit-score developer FICO and released earlier this month found that credit scores for new mortgages have been dropping.”

“‘As we get further away from the Great Recession,’ FICO researchers said, ‘underwriting criteria seems to have eased and a broader section of consumers are obtaining mortgages as a result.’ The study did not specify which type of loans exhibited the most easing.”

“New loans with FICO scores below 700 — including some in the rock-bottom 400s and 500s — have increased from 21.9 percent of the market in 2009 to just under 30 percent (29.7 percent) last year, according to FICO researchers. (FICO scores range from 300, indicating severe credit history problems and high risk of default, to 850, where the probabilities of missed payments or default are extremely low.)”

“So where’s the easing been occurring? Conventional mortgage approval requirements haven’t budged much at the giant investors Fannie Mae and Freddie Mac. But Federal Housing Administration (FHA) insured loans appear to be a strikingly different story. During January through March of this year, the average credit score for new home purchase loans was 672, according to FHA data. By contrast, the average was 701 during the same period in 2011. Refinancings where borrowers replace their existing FHA loans with new ones carried average FICO scores of 709 in mid-2012; earlier this year that had plummeted to 661.”

“There’s also been a big increase in FHA loans with high debt-to-income ratios (DTIs) within the past several years. DTIs are a crucial measure of home buyers’ ability to repay their loans. Between January and March of 2018, one of every four FHA loans had a DTI ratio of more than 50 percent, according to the latest data available from FHA. As recently as 2013, just 12.7 percent of approved new FHA applications carried such a high debt load. Between January and March of this year, almost 30 percent of new FHA borrowers had DTIs between 43 percent and 50 percent.”

“Your FICO score may meet FHA’s easing standards, and your DTI may pass the test. But if you have to spend half or more of your income on your mortgage and other credit payments, you need to ask: Can we really handle this?”

The Star Tribune. “Part of the fun of going every year to the Minnesota State Fair is seeing what’s new — and this year that included Federal Reserve Bank of Minneapolis President Neel Kashkari talking about the Federal Reserve and economic issues. Patience also seems to be required for another Minneapolis Fed priority: a proposal to solve the problem of having banks too big to fail, meaning banks so big and important to the economy that the taxpayers have no choice but to bail them out if they got themselves into trouble.”

“Not that many people know as much about this topic as Kashkari, who 10 years ago this week was at the U.S. Department of the Treasury and on the front line of trying to contain the damage of the unfolding financial crisis.”

“Kashkari has said, and repeated this week at the fair, that the idea to pursue this is a research project came from colleagues at the Minneapolis Fed, who had been working on the problem of too big to fail for years. Their solution, dubbed the Minneapolis Plan, includes requiring the biggest banking companies to hold a lot more equity capital to absorb losses. Kashkari likened it to the way mortgage companies reduce their risk by requiring a 20-percent down payment to get a mortgage.”

“‘The banks are safer than they were 10 years ago,’ Kashkari said. ‘So I use that 20 percent as the number we want to get too, for their skin in the game. They are at about 10 percent today. Ten, 12 years ago there were at about half that. So they are safer. But by our analysis, they’re not nearly safe enough.’”

The Title Report. “Foreclosure starts increased in 44 percent of the nation’s metropolitan statistical areas (MSAs), according to ATTOM Data Solutions. ‘The increase in foreclosure starts is not just a one-month anomaly in many local markets given that July represented the third consecutive month with a year-over-year increase in 33 metro areas, including Los Angeles, Miami, Houston, Detroit, San Diego and Austin,’ ATTOM Senior Vice President Daren Blomquist said.”

“‘Gradually loosening lending standards over the past few years have introduced a modicum of risk back into the housing market, and that additional risk is resulting in rising foreclosure starts in a diverse set of markets across the country,’ Blomquist added. MSAs posting year-over-year increases in foreclosure starts in July included Los Angeles (up 20 percent); Houston (up 76 percent); Philadelphia (up 10 percent); Miami (up 29 percent); and San Francisco, (up 10 percent).”

The Tampa Bay Times in Florida. “While checking on August foreclosure auctions, Peter Filippello found a townhouse in Largo he liked. He did ‘a little digging’ and discovered that the company foreclosing and the company being foreclosed were headed by the same person — Clearwater lawyer Roy C. Skelton. ‘I smelled a rat so I got out,’ Filippello said. ‘The plaintiff was one and the same as the defendant. How can somebody sue themselves or put a judgment on themselves?’”

“Filippello wasn’t the first person to have issues with a foreclosure auction involving Skelton-connected companies. Last year, a judge threw out the $458,100 sale of a Redington Beach condo because of what he called an ‘unscrupulous’ scheme by Skelton to trick bidders. The Florida Bar confirmed it has a pending case against Skelton but would give no details. He said the Bar asked him to describe his actions in the Redington Beach auction.”

“In 2015, his Outbidya took title to the Redington Beach condo with a bid of $157,800 at an HOA auction. Shortly after Wells Fargo began foreclosing on the first mortgage, Skelton created Deutsche Residential Mortgage and issued a second mortgage to Outbidya. Last year, with the bank’s case moving slowly, Deutsche got a final judgement of foreclosure on its mortgage At auction, Orlando Realty Group bid $458,100. Only later did the company’s owner, John Houde, discover that the bank had a first mortgage and could foreclose.’

“That would have left Orlando Realty with no condo and out almost half a million dollars — money that would have gone to Skelton’s mortgage company. With all three auction sales falling through, Skelton’s companies still have the Largo townhome and the Redington Beach condo. Skelton, through his Deutsche Residential Mortgage, has appealed the judge’s order vacating the sale of the three-bedroom, two-bath gulf-front condo. He’s been renting it out for $2,5000 a month after trying to sell it for $623,000.”

“The first mortgage for the condo is now held by a Delaware firm, which recently got a final judgment. The foreclosure sale is set for Oct. 19. Skelton has never rented out the Largo townhome. ‘I’m just waiting,’ he said, ‘for the bank to foreclose.’”

The Mountain Journal in Montana. “My town, Bozeman, is the fastest-growing in Montana and one of the fastest growing ‘rural cities’ in the country. Since a huge percentage of people here are from somewhere else, most citizens are familiar with the perils of explosive, unplanned, unscrutinized growth without vision, and it’s a reason why many probably left that for the Gallatin Valley.”

“I guess we will never know the number or percentage of folks who have come here to participate in the growth of this immediate area from the ground up, so to speak. As I read in the morning paper the current average price of a home here is $420,000 as of July 2018, apparently there isn’t much ground to get in on the floor of.”

“Every year, Bozeman citizens and soon those in the Gallatin Valley shell out more in taxes to pay for expanding services, school and infrastructure needs. Together, we’ve generously complied but there is growing angst and tax burnout happening because while we’re paying more, it’s obvious that we’re subsidizing those who are directly profiting off the boom. ”

“The lie that growth pays for itself is promoted by those who benefit from it—developers, bankers, realtors, building suppliers, construction workers and their ancillary support vendors. It is an endless fiscally-defeating cycle based on the premise that cities can grow their way out of growth-related problems when what really was needed is fiscal discipline and the notion that if you want to play the game of boom, you need to pay your way and not foist your costs of doing business on someone else.”

“Those who have the means to focus a good percentage of their waking hours on decisions involving how much they will play, where they’ll get their massage, gourmet lunch sandwich and glass of $20 Pinot Noir are not bothered by the thought of those working two or more jobs to keep food on the table for their kids.”

The Reality Of A Level Of Sanity Returning

A report from Bizwest on Colorado. “To quote a recent article, it’s been a ‘remarkable’ run for the American economy. At 110 months of growth since the end of the last recession, we’re experiencing the second-longest economic expansion on record. And in Northern Colorado, like much of the country, we’ve watched home prices climb right along with it. Now there are signs that both the economy and home prices may soon moderate. We’re beginning to see a return to stabilization in the housing market. What’s that mean if you expect to be a seller or buyer in the coming months?”

“Above all, pricing takes center stage. Sellers who could optimistically set lofty list prices are beginning to temper their expectations, both locally and around the country. For instance, Zillow reported at least one price reduction on 14.2 percent of all its listings during June, up from 13.4 percent the year before. And Zillow’s chief economist thinks price cuts could be even more common.’

“In addition to more price reductions, we see fewer cases of sellers receiving multiple offers on their homes. Listings will spend more time on the market, and overall housing inventory — which has been scant in Northern Colorado — will begin to grow slowly.”

“As we see prices ease overall, here are some noteworthy statistics that reflect what’s happening in the communities that make up Northern Colorado’s regional housing market: Housing inventory for the region totaled 1,704, similar to the 1,705 homes listed in June but still a healthy increase (13.7 percent) over the 1,499 homes on the market in May.”

From Go Erie in Pennsylvania. “If you watch home prices in our area, you’ll find some of the price reductions are pretty dramatic. The reasons vary. Some homeowners don’t want to hang onto their homes and are willing to drop prices to move the house after a specific number of days. Others may have chosen a price point that’s a little too high or overcrowded with homes. And others want a closing before the weather gets cold.”

From Forbes on California. “Looks like there was a summer slowdown in Beverly Hills and neighboring real estate, both in pricing and sales volume. Summer in Beverly Hills was certainly hot this year with temperatures above average. Not so for real estate, especially in the $3 million-plus range. According to Selma Hepp, chief economist at San Francisco-based Pacific Union International, July numbers in that Beverly Hills, Bel Air, Holmby Hills golden triangle show a decline in the number of homes sold by 26%, year to date. As sales slipped, it’s no surprise prices were down 11%. ‘I think buyers are a bit more skittish compared with how well Beverly Hills and those areas did over the last few years,’ Hepp said.”

“Last year Beverly Hills did well with sales of higher priced homes above $5 million. Many of those properties went above asking price with multiple offers. ‘Now that pool of buyers has been reduced somewhat,’ Hepp observes. ‘Although, I do see more price reductions in Beverly Hills in that price range and up than other areas in Los Angeles, I see it as buyers and sellers rebalancing expectations to more realistic levels,’ Hepp adds.”

“In today’s beyond fast-paced market, when we see fewer sales, it’s the reality of a level of sanity returning, a good thing for buyers and sellers. ‘When you look at sales above $3 million and you see a slowing compared to last year, that change does eventually reflect on the median price,’ Hepp explained.”

“Another interesting stat from Hepp is inventory of homes priced above $3 million increased by 93, with most of that additional inventory in the West San Fernando Valley, Beverly Hills and West Los Angeles. It’s also clear some sellers and their real estate agents are adjusting pricing strategies to reflect the current market. There were more price reductions compared with last July in areas with a larger share of homes priced between $2 million and $3 million. Look to Malibu, Hollywood Hills and Brentwood for those cuts.”

“Stephanie Anton, president of the Chicago-based Luxury Portfolio International, a network of independent luxury real estate brokerage firms has a global view on luxury markets. ‘Look at the data in many luxury markets and the price increases have been a little crazy. I think what we are seeing here is a summer slowdown and a slight correction.’”

The Problem With One-Time Money

A report from the Marin Independent Journal in California. “The median price paid for a home in Marin County in July climbed to $1.1 million, up 14.9 percent from the $957,500 median posted a year earlier. At the same time, CoreLogic also reported that the number of new and resale homes and condos sold in Marin in July dipped to 291, down 14.4 percent from the 340 homes sold in July 2017. Marin real estate professionals said they are seeing buyers dropping out in the low end of the Marin market under $1 million due to either fatigue from failing to find a home that has both value and a lower price point, or simply being priced out of the market due to low inventory in the lesser price ranges.”

“‘Some people who thought they could afford to buy last year now suddenly are feeling they can’t afford to buy,’ Blaine Morris, a broker with Pacific Union International real estate in Kentfield. ‘The mix of properties still creates disproportionate illusion of price increases, as the mix is very tight under $1.25 million and especially under $1 million. People in those categories simply aren’t moving.’”

“Barry Crotty, a broker with Coldwell Banker Realtors in Greenbrae, said buyers seem to be wary after hearing news of interest rate hikes announced earlier this year by the Federal Reserve Bank. He has been seeing a decline in ‘over-asking’ offers, meaning buyers offering higher-than-the-asking price, and also less multiple offers.”

“Both Morris and Crotty said they are seeing less homes being purchased in Marin with all-cash offers and more with mortgage loans being granted by banks. CoreLogic analyst Andrew LePage said similar trends are evident across the Bay Area. He said the cumulative increase in mortgage interest rates over the past year was significant across the region. ‘The combination of price increases and higher mortgage rates, which have climbed more than half a percentage point over the past year, means the mortgage payment on the median-priced home in the San Francisco Bay Area has risen about 19 percent over the past year,’ he said.”

The Sacramento Bee. “Sacramento’s once hot housing market continued its cooling trend in July, with median prices dipping slightly in five of the six local counties. The local numbers mirror those in the Bay Area, where sales numbers and prices have begun to flatten in recent months in what some observers say is a natural plateau. Price increases over the last seven years have left most households statewide unable to afford a median-priced home.”

“In Sacramento County, the median price for home sales, including used and new, dropped marginally in July to $360,000 from $362,000 in June, according to CoreLogic. The recent flattening has fueled some speculation that home prices in Sacramento will face a dropoff. Placer was the only local county that saw its median price increase, going from $495,000 in June to $498,000 in July. El Dorado County’s median price dipped as well from $499,000 to $485,000. In the Bay Area, the median price dropped to $850,000 in July, down from the record high of $875,000 in May and June. The number of homes sold dipped 10.2 percent from the previous month.”

“Jordan Levine, an economist for the California Association of Realtors, said he sees a ‘market shift’ toward a slower growth period, where home prices will continue to rise but at a more pedestrian rate. On one hand, he said, mortgage interest rate increases can dampen buyer enthusiasm. But the economy overall remains solid. ‘We are at a 40-year low in unemployment and we are starting to see wage and income growth after a long hiatus.’”

“Builders in Sacramento, burned during the construction frenzy of the mid 2000s, remain cautious about adding new stock to the market.”

The Turlock Journal. “The City of Turlock’s sales tax revenue has continued to steadily decline for nine consecutive months according a recent report, replicating numbers that haven’t been seen since the Great Recession. Turlock’s sales tax revenue has consistently fallen since mid-2017 — a sharp decline which was last seen in 2008 and 2009, according to Maryn Pitt, assistant to the city manager for housing and economic development.”

“According to Pitt, the City has seen the greatest decrease in the building materials wholesale economic segment, which comes during a time when home construction across the country is beginning to slow down, as well as auto sales for both new and used vehicles. ‘The different segments can go up and down. When the economy was not so great, the restaurant segment fell off, and now we see that construction is way down,’ Pitt said.”

“Without consistent development, whether industrial or residential, sales tax revenue can take a hit. ‘It’s not the fact that we’re going to get sales tax every quarter from Target — we’ve been successful with that — but the problem is with the one-time money,’ Pitt said. ‘In the manufacturing sector, no one is buying equipment where we can actually collect that.’”

“While the City’s sales tax revenue numbers may look foreboding, they are ever-changing and unpredictable, Pitt reminded. Improvement is essential, as some of the City’s most critical services, like police and fire, hang in the balance. ‘We’ll get those numbers in September and see where we are,’ Pitt said. ‘If it’s down again, then that’s obviously a huge concern.’”