The Housing Bubble’s ‘Unfortunate Reality’
Danielle DiMartino writes at the Dallas News. “For an idea whether the housing market is in for a soft landing or something a lot nastier, take a look at the performance of home equity loans. Last week, Moody’s Investors Service reported that the delinquency rate in the home equity loan market rose 11 percent for the quarter ended in April from the same period a year earlier.”
“‘This is the 11th consecutive month that the home equity delinquency growth rate has risen,’ Moody’s Ben Garber said.”
“To give you an idea how quickly the market turned, the delinquency growth rate was falling at a 27 percent annualized rate in the quarter ended May 2005. In the space of 11 months, we’ve rotated from vast improvement to sharp deterioration. According to Moody’s, delinquent loans now represent nearly 7 percent of the total existing pool of home equity loans.”
“For homeowners who are missing payments on their home equity loans, it boils down to what home prices have done for them lately. The biggest irony is that the rampant borrowing will exacerbate home price declines.”
“‘The home price drop-off has been aggravated by the rising inability of current and potential homeowners to fulfill loan obligations,’ Mr. Garber said. ‘The rising rates of these delinquencies portend a period of nominal home price deflation, the extent of which will determine whether or not the U.S. economy will be able to experience a soft landing.’”
From Bloomberg. “Fannie Mae and Freddie Mac have enjoyed an advantage over other financial institutions because of their government ties. Their charters give the Treasury the authority to buy as much as $2.25 billion of their securities in times of distress.”
“Fannie Mae and Freddie Mac ‘were on pace to basically absorb the entire mortgage market,’ said Scott Simon, at Pimco.”
“Competitors complained about the preferential treatment. Fannie Mae and Freddie Mac fought back, hiring 46 lobbying firms in 2003 to influence Congress, more than any other company or group, a nonpartisan group in Washington that tracks spending. The money helped stall legislation in 2003, 2004 and 2005 that would have created a tougher regulator.”
“The ‘old political reality was that we always won, we took no prisoners and we faced little organized political opposition,’ Daniel Mudd, then Fannie Mae’s chief operating officer, wrote to then CEO Franklin Raines in November 2004.”
“U.S. ‘financial markets would be safer if these asset and associated risks were broadly redistributed,’ said Emil Henry, the Treasury’s assistant secretary for financial institutions. ‘Past history reminds us that serious financial problems at’ Fannie Mae and Freddie Mac ‘are not only a possibility but an unfortunate reality,’ said Henry.”
The New York Times. “Default rates are inching up, credit ratings agencies have become more cautious and regulators have threatened to crack down on loose lending standards. Yet investors increased their exposure to the securities.”
“Mortgage-backed securities, the biggest sector of the bond market, have been critical in fostering the long housing boom. But there is the potential for growing strain in the close relationship between homeowners and their financial patrons.”
“In June, default rates on subprime mortgages, loans made to people with poor credit, increased to 6.88 percent of securitized loans from 5.49 percent a year earlier. Another report released yesterday showed that in the second quarter home prices rose at their slowest pace since the fourth quarter of 1999.”
“‘If something really bad happens, you are not going to take any U.S. financial institutions out,’ said Scott Simon at Pimco. ‘What you will have is you will lose liquidity in the mortgage market.’ And ‘that could happen at a time when the homeowner needs it the most,’ he added.”
“Guy Cecala, president of Inside Mortgage Finance, worries that investors may not be fully prepared for what could be coming. ‘We have never had a mortgage-backed market where a third or more of the product is subprime or has potential credit problems. If something does go wrong, you will see a lot of things being impacted.’”
‘The growing use of ‘arm’s length’ debt financing may support more consistent spending over time, but it also may make economies more vulnerable to price drops for real estate and other assets, according to the International Monetary Fund. Arm’s length financing - relatively common in the U.S., U.K., Canada, the Netherlands and Australia - involves borrowing, lending and investment based on publicly available information, rather than close individual relationships between borrowers and lenders.’
‘Households in countries where arm’s length finance predominates “appear to be more vulnerable to swings in asset prices, implying larger effects on demand from major asset price booms and busts,’ says an excerpt from Fund’s World Economic Outlook.’
“we faced little organized political opposition”
exactly. both political parties can say while in office that the rates of homeownership went up. what’s more american than that? politicians love that stuff.
It’s amazing that Government Companies face little political opposition. I’m shocked!!
gov clerks getting millions - great country !
Housing Horror Show - This is a beauty:
http://www.financialsense.com/fsu/editorials/jain/2006/0906.html
it be compelted
yo
Who wants to live in that crap, anyway?
E con whores, I love that phrase.
Now take this incident (link to video below) and replace the characters with a person who has just been told by their real estate agent that their house isn’t worth what they think it is; that it has dropped 45% in value. And the poor real estate agent that had to share the bad news and folks, this may be the horror show in six to nine months.
Video Headline: Reporter Attacked!
Copy and paste this link into your browser. Worth watching if you haven’t seen this already.–
http://www.foxnews.com/video2/launchPage.html?090606/090606_of_reporter&Reporter%20Attacked%21&OReilly_Factor&Video%20captures%20beating%20of%20local%20FOX%20reporter%20during%20TV%20investigation&National&-1&Reporter%20Attacked%21&Video%20Launch%20Page&News
Wow. Just wow.
Interesting stats.
http://www.safehaven.com/article-5841.htm
Here is the Times quote that to me summarizes the problem:
“Still, there is a slim premium, or spread, between the returns earned by the higher-rated portions of mortgage bonds and the subordinated classes. For instance, bonds backed by subprime mortgages are offering yields of 5.48 percent for the AAA class, 6.33 percent for the BBB class and 7.23 percent for BBB– rated bonds…By comparison, a 10-year Treasury note had a yield of 4.78 percent on Monday.”
So in the first lost tranche on a subprime portfolio, a 1/3 loss gives you the zero-risk treasury rate. Anyone want to guess what the loss will be in the first loss tranche? My guess is — 100 percent. There just is no compensation for risk in any asset right now, even with inflation rising. Savers are still losers, and some are doing desperately stupid things.
“no compensation for risk”
That is the essence of the Greenspan conundrum, which is beginning to look like it has outlived his tenure at the Fed.
According to Moody’s, delinquent loans now represent nearly 7 percent of the total existing pool of home equity loans.
Hahahaha!!! Fry lenders, fry!! I hope they all go belly up. The system is beyond repair, bring on the pain!!
Looking for some feedback on this one. It just occured to me that many involved in the profession of real estate (i.e., real-whores, mortgage bankers, etc.), may come out the end of this disaster as busy and enriched as they went in. It seems to me that this Meixican stand-off between buyers and sellers will ultimately end with sellers finally lowering their prices because their own personal economic standings necessitate this or because the flood gates finally open and fear rules the day. In the mean time it’s as if a dam is holding back this building swell of inventory. My point is eventually, these homes (a record high inventory of them) must sell, albeit at discounted prices. Someone will need to get these deals done (i.e., whores and bankers). Ultimately, a lot of homes may start to move again, and anyone assisting in these treansactions will become busy again. What the hell do they care how much a homeowner has to lower their price? As long as they get busy again, and eventually they should get busy. I’m rambling, but can any of this blog concur with this point or educate me as to what I’m missing here. It just seems to me that maybe Lereah is occastrating this thing with the understanding of the kinetic energry he is building up by the rising inventory which is resulting from a lack of sales in a market high on fear and low on brains.
To a certain degree I think you are correct. When the Have-To-Sells finally cave there will be a cascade of sales which in turn will force others into the Have-To-Sell condition. But after that I think will be a slow steady grind down for years with those that weren’t forced out riding it down.
A multi-year period of stagnation as people attempt to rebuild their savings, where cash will be king.
This period of forced sales could be more enriching to agents, etc. then the past four years has been. There are 40,000 homes on the market on Long Island alone right now. Two years ago, there were 10,000. That’s a lot of sales. If these s#%mbags make money on the way up and down with this thing as inane homeowners go broke, there might be hell to pay. Not defending the homeowners (loanowners) at all, but agents will be selling the same home they already sold twice again.
My prediction: Agents won’t do well at all.
Reason: There’s a lot of resentment around that “industry standard” 6% commission relative to the amount of work agents do to earn it. Which means that we’re going to see the online travel booking/stock brokerage business model extended to real estate. Also look for a huge increase in the number of “flat fee” real estate agencies.
Especially if homeowners are underwater already on the sale it is “real” money you have to shell out as commission rather than just a piece of “profit” as RE went up. The lack of money will pose the biggest threat to the 6% commission. If you are scraping the bottom of the barrel then no matter what the service, better marketing etc that a realt-OR would provide has to face the reality that there is no money
selling RE yourself is easy- did many deals up and down and it’s mindless -price right and sit tight
So the only way realtors lose is if no one is selling and no one is buying.
You should check out some articles from the early 90s to see how realtors fared that time.
Some sellers will be forced to attempt to sell by forsalebyowner.com because they dont have enough equity or money to pay a commission or they will need to get a reduced commission charged .
In other words, thanks to the Internet, it will be even worse this time around for realtors than in the 90s.
Internet can’t do short sales.
I expect the many people that are buying through people with agents will use services like buysiderealty.com that give you 75% of the commision as a kickback.
The problem with your thesis is that “Have to sells” don’t have a counterpart. There are no “Have to buys”, as the blood of FBs runs in the street ALL potential buyers will evaporate.
They are SHEEPLE, but they will eventually figure it out. Why buy when prices are dropping? In a few years nobody will even be thinking of buying homes.
With the present state of over building (excess housing) we really dont need to build another new home for 15-20 years!!!!
I do agree that the RE industry will again be busy, but those now in the business may have to starve for 3-10 years. Being and agent I can tell you that few of my peers can survive this level of business for more than 2-3 years. This is expecially true for the biggest agents with huge advertising budgets and 3-6 people on their “Staff”.
I think the busy days will return from a rection in the number of RE players, not from an increase in the overall number of transactions. A 50% reduction in competition is the same as a doubling of sales.
If you are interested in a HUD repo don’t forget to consult with your local HUD qualified Realtor®. Hahaha!!!
or like lots of intermediaries the net will crush them
who needs realwhore or mort brokers
just click and BANG it’s done
Don’t forget though, a lot of the speculators are in the biz, i.e., realtors and mortgage types.
Yeah. Looked at a house that some realtor / investors picked up for 1mill+ as a tear down late last year only to find out they weren’t aloowed to tear it down.
Now it sits with all their other projects
What ever happened to conducting due diligence BEFORE you close on the deal?
Comment by txchick57
2006-09-06 10:27:40
Don’t forget though, a lot of the speculators are in the biz, i.e., realtors and mortgage types.
They deserve to me in the BIZ! I hope the blowhart’s love no sales. No income and the 20 100% finaced ” investments” they have. I have met more that one.
Boy there are a lot of realtors, mortgage brokers, etc in the business now. I think it will be much harder for the average to do well.
The brokers I have met consider themselves players - and steer the profitable deals to themselves or business partners. The only way multifamily property would make it to the open market was if the price was so high that you could not profit from it.
The six percent commissions were there to keep the lights on and the rent paid for the office. The real profit was in their deals on the side.
yes, I noticed something similar in my country. There are often ’silent’ deals where properties are passed between several buyers and go up by huge amounts within a very short time. Usually a realtor (or his/her business partner or family) is in between and keeps most of the profits. Officially they aren’t even allowed to do that over here but who cares …
Other example: until a few years ago you had to pay huge amounts of money just to get on a ‘waiting list’ for ’special deals’, properties that had a realistic asking price, were in a desired location etc. All of this had to be paid ‘under the table’ to the realtors (and of course, still no guarantee that you would get a good/better deal). All tax free and no work required. Customers didn’t care as long as prices kept rising.
TH.
Very true and predictable considering human nature. I’ve always said that the only properties that make it to the MLS are the marginal ones or ones that have already been flipped interoffice.
When the dust settles in this standoff, there will be many more sellers than buyers. The simple economic law of supply and demand will dictate sales price and volume.
irrespective of what is going to happen in the next years, most of the RE mob has been taking home superfat paychecks over the last years (in Europe that is in the last 15 years or so). If things go REALLY wrong, their companies will fold and they still keep their huge profits. Same for the banks: if things to really wrong they go bankrupt and the savers (not the banksters) loose all their money, or they get bailed out and the taxpayers loose a lot of money. These RE criminals simply cannot loose.
I hope all of them have put their money where their mouth was but probably most of it is in a more secure place by now
Over here (USA), I know of many in the RE biz who decided to “up their standard of living” when their commission checks started looking huge. In other words, for many of them, the money is already spent.
And for those who decided to “save” their excess, an ungodly number have invested their excess in real estate…I believe in Vegas this is called “doubling down”.
The oversupply of homes may lead to some being bull dozed and hauled away. It happened in Houston in the early 80’s.
“Some of the biggest buyers of Fannie Mae and Freddie Mac debt are foreign central banks, which have purchased about $116 billion of agency bonds this year, almost three times the $44 billion Treasuries they acquired, according to Fed data.”
wouldn’t we rather have them in treasuries? if they lost a lot of money in the agenices and sold, wouldn’t that hit the housing market the most? the liquidity would shut off. they are exposed to more risk than they realize. at least they’d be a little safer in treasuries. this isn’t good.
Fannie Mae and Freddie Mac bonds have the implicit guarantee of the US Treasury. That is why the bonds are rated AAA by S&P and Moodys. The two Government sponsored enterprises (GSEs) have a direct line of credit from the US Treasury department and Federal Reserve. The two GSE market trillions of dollars in debt securities to foreign central banks especially in Asia. The GSE are primarily responsible for the credit bubble in Housing.
Nope, they have an explicit policy of making it absolutely clear that there is no guarantee. Call it implicit if you wish.
Given that they have flaunted the rules for publicly listed companies to produce accurate financial statements or be delisted, its not surprising that people would assume that they are protected by the government. No matter how many times the gov denies it.
Yep, they play both sides. “No gaurantee” wink, wink. I honestly think the NYSE is going to get successfully sued for continuing to trade these dogs in violation of their own rules.
From what I research I can find, the only loans Freddie or Fannie are holding guaranteed by the goverment are FHA or VA loans
It’s their money. They can invest in what they want. Foreigners already own about 45% of our publicly traded debt. They own a ton of Treasuries. China’s interest in buying our debt is this: Keep rates low, allow Americans to spend away their assets, buy Chinese goods. China owns assets. Americans own SUVs and granite counter tops.
China’s interest in buying our debt is this: Keep rates low, allow Americans to spend away their assets, buy Chinese goods. China owns assets. Americans own SUVs and granite counter tops.
Exactly. Suzanne-fu researched this.
YUP!!! Notice how perfect everything seemed when the bubble inflated, and how stupid it all seems now? This is going to end in a very ugly fashion.
I marvel every day that the Morning Snooze publishes Danielle’s columns. Their advertisers must be purple in the face.
7% of home equity loans are delinquent?? Can that be right? Credit card delinquency runs around 2%-3% at any given time. We are truly F*** if, in this generally strong employment market, the delinquency rate is that high. What will happen in a recession?
I too saw this and went… WHAT?!?
If HELOC’s are already at a 7% rate (Please be a typo, we don’t want this to happen THAT fast)… Oh man, the labor day massacre is truly here.
I’ve already decided to buy my Christmas gifts late… If this is even partially true, high end Christmas items will sit on the shelf. My parents are going to get a HDTV from me and my siblings, but not Christmas day. We’ll hit the “after Christmas” sales for that big ticket item… Any guesses to the disounts?
Oh… this is going to spread and spread *fast*. Yikes.
Now it takes 4 to 6 months for foreclosures to get back onto the market…
This implies a *very grim* summer selling season in 2007.
As to those who dislike the 6% commision… I plan to buy with a realtor that refunds 2/3rds of the commision. The seller… should be smart and also use a discount realtor. I 100% agree that realtors are going the way of travel agencies; with the internet, who really needs them to buy a home? A fee based selling system makes much more sense to me too…
We live in interesting times.
Neil
After-Christmas sales don’t apply to cool TV’s. Retailers keep the prices high until after the Superbowl.
You’ve got to see this…
The Real-Estate-Scam attack in San Diego… discussed last night down inside one of the threads here, where a San Diego man was engaged in fraudulent RE activities attacks an investigative reporter… has made national news on Fox News.
look for the video on the lower left.
http://www.foxnews.com/
look for the video story under the “Today’s Features” heading
jeffinaz,
THAT is some pretty shocking stuff! And the wife? Class acts, the both of them. This is actually pretty common during a RE downturn. Types that became accustomed to easy money during the upside are reluctant to give up “the life” and resort to “straw buyer” scams on the downside. We will see more of this.
And what’s with the “Do you like Tijuana or Ensenada?” comment from “Rosa” the wife? She said something like she’s going to put the reporter in “that part” of the country? What’s this? Some kind of death threat? Hope they look good in orange jumpsuits.
How stupid do you have to be to commit battery and criminal threatening on television while being investigated by the DA for RE fraud? All you’re doing is putting a big fat bonus check in the pockets of the reports and the cameramen. Good thing that the reporter had that big beefy guy along with him. The cameraman did a great job hanging in there.
‘Hedge funds have been particularly active in the ARM mortgage trade, buying risky loans directly from banks and cutting out the middle men.’
‘These hedge funds are willing to buy risky loans, as they can set their own terms that help insulate them from losses. And the banks make up the difference by taking more from the buyers, many of whom qualify for lower rates based on their credit histories.’
Ben some hedge funds are buying this crap, but also remember many hedge funds have taken the other side of the trade and are shorting.
Indeed, the ultimate losers will probably be the pension funds and endowments who have bought CLO and CDO funds to augment flailing fixed income returns.
The hedge fund industry will pack up bags and move onto the next big thing.
hedgefundanalyst,
who are the biggest bagholders for this paper? also, do you forsee a step shift in yields on this stuff if there is a crisis (ie 100-300bps overnight)?
I am not sure on the investment base of leveraged credit products, but in addition to hedge funds, I know a lot of the prop desks are involved as well as more ambitious corporate pension funds that are trying to augment poor equity/bond returns.
I am not “smart” enough to challenge the credit work done by these guys buying leveraged products. These guys are well insulated from systemic risk, IMO. It’s the idiosyncratic, one-off event that will cause the disaster. When you’re leveraged that much, being priced for perfection is an understatement.
Don’t forget how “smart” the Nobel-prize winning advisors to LTCM were…
FB attacked TV reporter.
http://cbs4boston.com/video/?id=23935@wbz.dayport.com
ha ha — the intro “ad” on the clip when I viewed it was for lowermybills.com offering to refinance your home and save you money. classic.
(Indeed, the ultimate losers will probably be the pension funds and endowments who have bought CLO and CDO funds to augment flailing fixed income returns.)
Not public employee pension funds, I hope. Taxpayers are getting creamed by these as it is.
“Fannie Mae and Freddie Mac have enjoyed an advantage over other financial institutions because of their government ties. Their charters give the Treasury the authority to buy as much as $2.25 billion of their securities in times of distress.”
What’s that, .1% of their portfolios? I wonder if that figure is correct. That would be like having a $400 insurance policy on a $400,000 house. Am I missing something?
robert komikasi’s laetest bit says you have to work to get wealthy-wow, things are different
I’ve got a couple of friends who are purchasing non-perfoming seconds right now at a discount, then foreclosing on the properties in order to then flip them. They just started, and I guess the whole process from purchase to end of foreclosure takes about 3-6 mos…according to them. They are sure this is their path to instant riches, and are trying to get a bunch of us in on this in order to purchase more. I think it’s too early to start doing this as the market could get REALLY REALLY ugly REALLY quick. In six months who knows where we’ll be, and they could lose $$. But they don’t want to hear it. I think as we near the bottom of the market and you can get stuff in this manner at pennies on the dollar it may be a great investment, but right now there is way too far to fall in my opinion.
Oh and they are financing all of this from a quick withdrawal from their housing ATMs!!!
Bunch o’ dodos. That’s hard work. Just because you buy the property at a foreclosure sale doesn’t mean you get the deadbeats out! I hope they’ve got Bruno and Guido on the side to help them with the eviction, and then a couple of really good handymen to fix the destruction that’s often left by those people who kno they’ll be tossed out.
In the past, one of my dad’s friends would buy places like that, but that was years ago when he was one of the few bidders — and he and his burly sons would take care of fixing the place afterwards. And the reason he got them at a reasonable price is because the economy stank, so they couldn’t sell them; they’d rent them, which brings its own set of fun problems. They made good money (in the long run) but they worked their tails off.
These days, the same guy says he has no interest in foreclosures. (He’s even sold many of his rentals off.) According to him, there’s too many of what he calls “office fags” (no offense intended by me, please) bidding against each other for properties that would be money-losing pits even if they were in great shape ,which they are not.
It’s way too early to go pouncing on those foreclosures, especially with borrowed HELOC money.
Way too early for that. I had an encounter a week or two ago with someone suggesting this strategy. That’s the fastest way to Skid-Row that I know of right now. Not a good move.
Interesting that Kiyosaki is now promoting work in order to get wealthy. That certainly wasn’t the message I read in his books. It was your money that was supposed to be doing the work for you. Funny, I’ve never had any money that showed that kind of initiative. Seems like I was the one who had to keep working to earn more.
can we get a clarification on the &5 heloc number - could be exciting
I posted the Dallas Morning News article on a Chicago board. The response I got sounded like it was blaming the media for a biased view against housing…
http://yochicago.com/forums/showthread.php?t=374
Pretty ignorant guy if he doesn’t think there’s a connection btwn HELOC delinquencies and the housing market.
Ha, the attitude in those responses doesn’t surprise me much at all. I live in Chicago, and as a graduate student I am doing my thesis research on real estate speculation in one particular Chicago neighborhood. That research has revealed a general sense of denial among all the RE actors that would have everyone on this board clutching their chests from laughter. As a native of the city I can say that Chicagoans, and Upper-Midwesterners in general, have always been a little slow on the uptake. So, as they go on ignoring what is happening EVERYWHERE else they are only making it more certain that the heartland will rot to its core when this poop hits the fan.
Well, at least they will have their granite countertops - which incidentally can be easily converted into some pretty longlasting tombstones!
John,
Which Chicago neighborhood? I’d be interested to see it when you finished if you’re willing to share.
From an article in today’s NY Times: “Ms. Chen [of Moody's] noted that the [OFHEO] index showed that prices were still rising in much of California, Arizona and Florida, states that experienced some of the biggest rises during the recent boom. But that may be in part a result of the fact that the government’s home price measure does not include homes with mortgages greater than $417,000.”
http://tinyurl.com/mp6oe
Need to keep this in mind whenever looking at OFHEO numbers - they don’t include any mortgages over $417K, which would basically take out over half of California’s properties.
The article also notes that “Price declines are spreading to more parts of the country. The 89 areas affected in the second quarter compares to 66 metropolitan areas where prices fell in the first three months of the year. In the fourth quarter last year, only 29 areas reported such declines.
“But that may be in part a result of the fact that the government’s home price measure does not include homes with mortgages greater than $417,000.”
I guess that would exclude large parts of San Diego, Los Angeles, the Bay Area, Santa Barbara, Monterey, and SLO from the data sample? Luckily not many Californians live in those places…
In todays Internet world and 24 hour cabl enews, a government report on the 2nd quarter numbers, ending June 30, 2006 is like ancient history. Anyone on this Blog can easily find the Sales figures for July and even August numbers. Remeber July and August are a couple of the prime buying months, and the fall months get worse, follwed by the non-buying winter. Except, this year it will be different.