A Little Bit Of A Self-Fulfilling Prophecy
Some housing bubble news from Wall Street and Washington. Chicago Tribune, “Neumann Homes, one of Chicago’s largest home-building companies, said Monday that it plans to file for bankruptcy. Neumann, based in Warrenville, said it closed all of its sales, production and customer service offices. Neumann said the downturn in Michigan had hurt his company significantly, adding that it had lost $60 million in the last two years in the Detroit market alone.”
“‘In the process of trying to make [that market] work, we saw property values on lots alone go from over $100,000 to $30,000′ since late 2004, said CEO Ken Neumann. ‘Homes that would have gone for $400,000 sold for $250,000.’”
“As for the homes under contract but not under way, Neumann said the company placed those customers’ deposits in escrow and will seek court approval to cancel their contracts and return those funds.”
“‘As we saw our lenders start to go through the turbulence in the financial markets over the last several months, we started having serious concerns in September and held off on releasing other homes for construction,’ he said.”
The Sun Times. “‘The market downturn in the Chicago and Denver housing markets [is] now in excess of 50 percent, with home prices dropping from 10 percent to 25 percent in some sub-market,’ Kenneth Neumann commented in the fax. ‘Even after the significant help we have received from our lenders this year, the company can no longer weather this storm.’”
The Daily Herald. “‘They were too aggressive at a time when we knew the boom of ‘03 to ‘05 couldn’t be sustained,’ said Tracy Cross of Tracy Cross & Associates.”
“Of its current inventory of 5,485 single and multi-family homes in the Chicago area, 2,619 have been sold, according to Tracy Cross. Its Chicago area inventory reached 5 years worth of unsold homes, according to Cross. Neumann Homes has 46 developments active in 18 Chicago area towns, according to Cross.”
“As for Neumann customers with complaints or partially built homes, Cross has little advice. ‘I’m in the industry and if I was (in that spot), I wouldn’t know what to do,’ Cross said. ‘Call my lawyer of course.’”
From Reuters. “Countrywide Financial Corp, the largest U.S. mortgage lender, on Tuesday offered to refinance or restructure up to $16 billion of adjustable-rate mortgages through the end of 2008.”
“Like many rivals, Countrywide has faced criticism that it fed the housing slump by putting Americans into mortgages they could not refinance once home prices stopped rising. Congress is considering legislation to require lenders to put borrowers in loans they can afford, rather than loans that are more profitable, and to let homeowners sue Wall Street banks that package loans that should never have been made into securities.”
“‘Unprecedented times call for unprecedented remedies,’ Chief Operating Officer David Sambol said in a statement. ‘We are determined to assist borrowers who have the willingness and wherewithal to remain in their homes, but need a little help.’”
“Countrywide made $468.2 billion of mortgage loans in 2006, including $40.6 billion of ‘nonprime’ mortgages.”
“The company is now emphasizing smaller, higher-quality loans. It stopped making most subprime mortgages, and adjustable-rate loan fundings slid 76 percent in September. Overall mortgage volume that month fell 44 percent.”
“It also services $1.46 trillion of mortgages, and said that as of June 30, payments were at least 30 days late on one in five nonprime loans it serviced.”
From CNN Money. “Countrywide is expected to announce a deep loss when it reports results Friday, along with a sharp drop in its business levels in the third quarter. It has announced it will have to take charges of between $125 million and $150 million to lay off staff and close offices.”
From USA Today. “Chetera Miller, a credit counselor for Neighborhood Housing Services of Chicago, has noticed that lenders are becoming more willing to cut deals with delinquent borrowers. There’s just one problem: That’s only about half the number of financially strapped clients she’s working with.”
“Larry Litton Jr., head of Litton Loan Servicing, restructured 2,000 loans last month to help subprime borrowers. ‘We are modifying more loans than we ever have, and despite that, the foreclosure volume continues to increase,’ he said.”
“Normally, his company, which collects mortgage payments and handles late payments, helps about 60% of homeowners avoid foreclosure after they fall behind on their subprime mortgages. But with tougher lending standards, falling home prices in many areas and a lot of poorly underwritten loans, he said he can modify only about 45% of the bad loans he has on his books.”
“The housing crisis, Litton says, ‘is bigger than what people had originally thought. Youre probably looking at a peak in these defaults in the third or fourth quarter of 2008.’”
“Katrina Vizinau of Community Housing Development of North Richmond, Calif., says about 90% of the people who call her group for help aren’t able to refinance, because lenders say they have little or no equity in their homes. Further, many of her clients are late on their mortgage payments, meaning their credit scores have taken a hit.”
“She sees some older borrowers who were persuaded to refinance to tap into home equity. ‘They’ve used all the cash that they took out. They’re just stuck, and they’re just waiting. … They can’t refinance because they’re on a fixed income,’ she says.”
“Sheila Bair, chair of the Federal Deposit Insurance Corp, wants lenders to take a more sweeping approach, instead of painstakingly reassessing each individual mortgage. Some loan servicers, including Litton Loan Servicing, say Bair’s plan would expose them to lawsuits from mortgage investors if the servicers reduce the interest rates on loans that aren’t at serious risk of default.”
“‘The loan servicer has to walk the line of having a fiduciary duty to the investor and, at the same time, help homeowners stay in their house,’ Litton says. ‘We are required to look at each loan individually.’”
“Countrywide’s CEO of Loan Administration Steve Bailey says, many people forget that job loss or a reduction in income, followed by illness and divorce, are the most common reasons why people default on mortgages.”
“But Michael Kanef of Moody’s says the increase in payment puts more stress on the borrower and raises the risk that the borrower will default in the future.”
“Bailey counters: ‘If the primary driver of foreclosures is a significant reduction of income, and property values do not continue to appreciate, that is going to make foreclosures continue to rise, and there really isn’t anything to fix that.’”
The Wall Street Journal. “Some lenders are now making it tougher for borrowers in softening housing markets to get a mortgage. The policy is designed to keep lenders from holding the bag if home prices in those markets continue to fall. But the tighter standards, by discouraging home buyers, could add to downward pressure on home values in already weak markets.”
“Lenders such as J.P. Morgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are cutting the maximum amount some borrowers can finance in counties or states where home prices are declining. Mortgage companies are also taking a tougher look at appraisals in housing markets with falling prices.”
“Among the areas being hit by the tougher standards are parts of California, Florida and Michigan.”
“With house prices falling, lenders are looking to control their risk, says Doug Duncan, chief economist of the Mortgage Bankers Association. But ‘there’s a little bit of a self-fulfilling prophecy,’ he adds. ‘If you tighten standards, fewer people can qualify [for a mortgage]. Effective demand is going to be lower, resulting in lower house prices.’”
“Wells Fargo has expanded a program begun earlier this year that tightened standards in certain ‘declining’ markets. The list includes more than 50 counties in seven states, including parts of California, Florida and Michigan. It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia. A spokesman says the company is monitoring credit conditions on a ‘day to day’ basis.”
“Bank of America Corp. says it is asking for more detailed appraisals in markets with falling prices. In many cases, appraisers are being told to drive by the property to get a better estimate of its value instead of just running information about the home through a computer model.”
“In October, SunTrust Banks Inc. published a list of roughly 50 metro areas in 16 states and the District of Columbia that it designated as ‘declining markets.’ The declining markets list ‘was issued to make sure that appraisers in those markets are taking that into account and explaining how it figures into their valuation,’ a SunTrust spokesman says.”
“‘The lenders are being way more conservative than they were a year or two ago,’ says John Rooney, an appraiser in Phoenix. In some cases it can be tough to find enough comparable properties that meet lenders’ criteria, particularly for higher-end homes, he says.”
“A county in Washington state emerged as the most recent casualty from the financial-market turmoil caused by complex securities known as SIVs when Standard & Poor’s Corp. said yesterday it may downgrade debt of King County because of investments in debt issued by SIVs.”
“King County invested in a risky form of SIVs known as SIV-lites that typically invest more than SIVs in securities tied to residential-mortgage securities, including subprime loans.”
“Ken Guy, King County’s finance director, said county officials saw the SIV-issued commercial paper as a safe investment that would provide slightly higher yields than U.S. government bonds, and relied on the high ratings given the commercial-paper investment vehicles by S&P and Moody’s. ‘That is the frustrating aspect about all this: you have these highly rated investments that have been downgraded simply overnight,’ he said.”
From MarketWatch. “The world’s top banking overseer has reservations about the $100 billion rescue package planned by U.S. banks.”
“Nout Wellink, the chairman of the Basel Committee on Banking Supervision who is also president of the Dutch central bank and a member of the European Central Bank’s Governing Council, discussed the recent credit-market turmoil with Joellen Perry of The Wall Street Journal and Damian Paletta of Dow Jones Newswires. WSJ/Dow Jones: What are your thoughts about this new superconduit that’s been proposed?”
“Wellink: For the time being, I have mixed feelings. …What is exactly the idea behind it? Is it a way of escaping your fate? Because if there is no market, at a certain price, then you’re confronted with losses. Take these losses. As long as it’s meant to create an orderly process, okay. But if these artificial elements are involved, then immediately the supervisor and the central banker uses the phrase moral hazard.”
“European banks are not the least interested to participate in this project. This is an American initiative, and it’s the banks who created, themselves, these mortgage problems. So the European banks, they look from a certain distance.”
From Bloomberg. “Ivy Zelman’s view of the U.S. housing market is gloomy, but it’s probably the most realistic. A veteran Wall Street analyst, Zelman, CEO of the research firm Zelman & Associates, says it’s unlikely the U.S. housing market will recover before 2009.”
“‘I’ve never seen the market as bad as this,’ Zelman said. ‘And it could get worse. The home-price decline could range from 16 percent to 22 percent.’”
“‘These are the worst inventories we’ve seen as a nation,’ she says. Zelman’s words carry some weight because she was one of the few major Wall Street analysts to warn of a housing decline months before it began late last year.”
“She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime.”
“Meanwhile, builders are stuck with thousands of new homes they can’t sell, and potential buyers are canceling in droves or are unable to get a mortgage.”
“‘Builders are desperate now and blowing through inventory,’ says Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’”
From Businesss Week. “After three decades of stability, the national rate of homeownership suddenly began rising around 1995. The rush to buy homes fueled an enormous surge in housing construction and home prices. Experts differed on the cause of the increase in homeownership, from 64.2% of households in early 1995 to 69.1% in early 2005.”
“Surprising new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by innovations in the mortgage market. Young families with little savings flocked to those loans to buy first homes.”
“Trouble is, lenders aren’t making many of those loans anymore because default rates on the smaller, second loans have been extremely high. That means that one of the main props of the housing market has been kicked away.”
“If the homeownership rate drifts back to where it was in 1995, the outlook for housing construction and home prices could turn out even worse than the pessimistic projections.”
“One Wall Street economist who has studied the Atlanta Fed working paper, Jan Hatzius of Goldman Sachs, wrote on Oct. 18 that ‘the implications could be dramatic.’ Wrote Hatzius: ‘Our current forecast calls for a decline in new home sales to a trough level of 650,000 by the first quarter of 2008, which we believe is one of the lowest estimates on Wall Street. However, the simple arithmetic [implied by the Atlanta Fed paper] suggests that this estimate could still prove much too optimistic.’”
“But could the homeownership rate actually decline? Yes. In fact, it already has begun to.”
“But could the homeownership rate actually decline? Yes. In fact, it already has begun to.”
I think homeownership is great, if you don’t pay bubble prices. But there is no reason for anyone who does not reasonably expect to live in one place for at least five years to buy. That isn’t a home, it is speculation in rising asset values.
I bought because I live in a place where I expect to stay for a total of at least 20 years, maybe forever — if we move it will be to a smaller place nearby. But that isn’t the choice most Americans make. They’ll move to a new neighborhood just to get a different house, or move to a different metro just to get a different job.
We have combined one of the most mobile populations in the world with a high rate of ownership. That doesn’t make sense.
A reasonable ownership rate for this country is probably well below 64%, particularly if rented homes in places with decent schools and multi-year leases with buyout provisions were to become common.
Sounds like the FED is changing its tune. This is what the head of the NY FED said to Time Magazine in Aug 2006 (and my email to him back then):
Mr. Peach-
You stated the following in the current Time Magazine article:
“My view is that the run-up of home prices has been driven by the fundamentals,” says Dick Peach, an economist with the Federal Reserve Bank of New York. He figures we’ll have a soft landing.”
“Surprising new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by innovations in the mortgage market. Young families with little savings flocked to those loans to buy first homes.”
_______________________________________________
Can someone reconcile these two statements??
The FED is a total joke!
Each Federal District district bank has a group of research economists.
And each is an equally clueless set of statistic-manlipulating buffoons who do not understand fundamental principles of behavioral finance.
“Research economists.”
Clearly, they are incompetent. Time for them to rejoin the faculty of George Mason University, where economic stupidity is a longstanding tradition.
If this is true, then the appreciation after the bottom of 1991-1993 was artifical and 1997-98 prices which many look as the “norm” needs to be revaluted. Prices dropped over 25-35% in many metros from 1988 to the bottom several years later.
Me thinks the real prices of homes may be more akin to the the bottom of 1991-92 adjusted forward for inflation.
I think SoCal prices bottomed in 1996 or 1997, and I’ve been predicting and continue to predict that it is to those levels (in real dollars) that they will retreat once again. And prices will probably overshoot on the way down, so there should be a good buying opportunity at that point.
I agree. In many respects, while some larger metros-aka- the Bay Area where I live now might have strong tech related economies, it comes at a cost where most of us rarely stay for more than a year or two. I would argue to say that tech is highly volatile and that employees are less and less integral. I’ve had 6 jobs in 5 years. If I had bought a house, I doubt I would have climbed as high as I did. I also do not have much faith in the local or perhaps even national economy to provide any long period economic stability in any single region. Simply put, tech might be here today, and gone to either another region or another country tomorrow. I’m not even sure if I would equate homeownership in California as adding stability, but more rather placing yourself into a questionable realm of liability. A vast majority of the people I know working here have no plans on staying long term. In essence, the economy in many metros is becoming a big churning machine where the workforce simply gets younger and younger. It bodes well for business, but not so for the individual worker whom must make the best of their situation but be unable to make their earnings work for them in an increasingly expensive local market-aka- housing costs.
Same here Jetson. In the SF South Bay. Actually high home prices are adding to the instability of in the workforce.
RE: In essence, the economy in many metros is becoming a big churning machine where the workforce simply gets younger and younger.
In an age of “disposable cheap”, why wouldn’t this new American paradigm filter down into the employment sector?
WTF…Now everybody and everything is disposable.
Here today-gone tomorrow.
Very insightful comments. Due to high mobility and stagnant to falling prices, combined with ruined credit cases and a newfound love of the carefree rental lifestyle by people who lost their homes, you could see home ownership ratio decline and stay down.
I don’t see any problem with a high rate of ownership and a high rate of mobility, provided the transaction costs come down and lenders require substantial down-payments and a demonstrated ability to pay. Paying a 6% commission is as outdated as $50 brokerage fees for a stock trade.
I see the current problems as two fold. First prices are plain and simple too high. Second, the parasites suck way too much funds from their hosts. If all real estate is local why is there an “NAR”? When prices come down and the sacred 6% falls to more like 3% things will be a lot better for everyone.
I’ve lost money on 2 of the 3 houses I’ve sold. But, they were reasonably priced and I didn’t lose any more than I could comfortably afford.
Greenspan’s merry money lending machine stinks.
Pretty soon the 6% commision will be a thing of the past. Look at companies like Redfin. There will be more and more of these in the future because the barriers to entry are relatively low in the areas that it is legal. And they are finding ways to make inroads into new territories.
I wouldn’t want to a RE agent right now.
Bingo! Remember when the rule of thumb for breakeven was five years? (much longer now, I suspect).
Yeah.. Like 20 years…
Or like NEVER, if you adjust for inflation.
And don’t forget about opportunity cost. Rather than depreciate, other investment vehicles can provide a steady rate of real returns in addition to being much, more more liquid.
“Never” is a reasonable answer. Did Dutch tulips ever regain their inflation-adjusted prices from the 17th century? Nope. Nor can I see why buying a house will ever again cost twice as much as renting one.
Of course there is a lot of negativity here about home ownership, but owning a home is a pretty cool thing. Having the bank own your home and paying them interest for the privilege of doing upkeep and living there may be a different story. A home is generally a good hedge against inflation (generally appreciates at a similar pace as inflation). I’m a big fan of paid for real estate, but I get irritated when I hear people talk about a home as an investment. Anyone who has had to do maintenance on their home year in and year out knows that if you totaled up the costs of said maintenance+taxes+insurance that house is a LIABILITY. Again, I love my house, but if it’s something you live in it’s not an investment. It’s only an investment if you are renting it out or something like that as a business.
“But could the homeownership rate actually decline?”
Not only could homeownership decline, but it should decline as a natural course of history. Population increases, and land area does not. Eventually either:
a) We’ll own postage-stamp-size homes, or
b) Only the wealthiest will own homes, while the rest will rent high-rise apartments.
See Hong Kong, Japan, Manhattan, etc. for examples of b).
I suppose he could be including hi-rise condos as part of “home ownership” but I wouldn’t it. Perhaps this is pretentious - but I don’t consider it home ownership when you share walls, plumbing, noise, etc. with neighbors on 5+ sides. (above, below, left, right, and across the hall)
it’s definitely not homoanership when you’re effectively renting from the HOA (as well as from the government, from whom every putative homoaner rents anyway)
This is an excellent point. I don’t feel stable in my career in today’s as part of the contingency workforce of the new economy. I currently only rent with no more than a 6 month lease at this point.
Going deep into debt (assuming you intend to pay it back) is presumptious in my opinion. The housing bubble people were presumptious that housing would go up forever and got nailed when the game of musical chairs ended.
You need to be able to move quickly in today’s job market and the baggage of trying to unload a leveraged and depreciating property sounds like a nightmare.
If the job market sours as the economy recedes from this housing crap this will be ever more important given so many jobs were housing related.
That isn’t a home, it is speculation in rising asset values.
The American people were fooled into believing the rising asset values from books that were published such as the one by David L. formerly of the NAR.
My late father used to tell me back in the early 80’s, that property is only worth as much as someone is willing to pay. Right now it looks like there are not too many people who are willing to pay these grossly inflated prices, myself included!
A concept of home ownership as viewed by politicos is utter rubbish. If I own something, then i can sell it at any point at any price I damn feel like it as long as I have a buyer. This mans that nothing that is used as security for any liability is truly owned.
http://investorsinsight.com/otb.aspx
No one else commented but that Stephen Roach is great. He should be the new head of Morgan Stanley. How about the Fed Chief?
Stephen Roach has had his eye on the ball through this whole situation. I agree its high time for someone level headed like him to run the show. I’m sick and tired of the Greenspan, Bush and Bernanke show.
He’s not enigmatic enough, like Green-spun. Wouldn’t qualify.
Good stuff.
A great article but note at the end he sticks his neck out and predicts only a 3% rise in world GDP in 2008. We are staring at a canyon.
Box canyon, for many.
I’m not sure if you understand the way economics works. If the world slips to a 3% rise in GDP then it is a HUGE problem because we as a society are banking on around 5%. Do you think that 2% is going to be spread nice and evenly like hot butter around the world? No, more likely areas that have had 0 are going to drop to -5% and other areas that were increasing at 5% will stay the same. It’s like my macro economics professor once stated. When unemployment is 3% then that’s a good thing, unless you are in the 3%, then your household unemployment is 100%. Right now the rich are getting richer and the poor are getting richer just more slowly (note the number of low income houses with nice cars, and big screen TV’s. I personally deliver Christmas toys to the needy to many “poor” people with nicer cars and TV’s than me). If we drop 25% or so of our growth then the rich will stay as rich, and the poor will most likely get poorer.
good stuff,
indeed, sir.
“Wells Fargo has expanded a program begun earlier this year that tightened standards in certain ‘declining’ markets. The list includes more than 50 counties in seven states, including parts of California, Florida and Michigan. It also cut by five points maximum financing in more than 125 other counties in a total of 22 states and the District of Columbia. A spokesman says the company is monitoring credit conditions on a ‘day to day’ basis.”
This is definately going to help an already destroyed market. How long before there is just NO buying a home in most of these markets without 20% down (which, I believe, will spell the quick end to this bubble)? Got to love how they single out certain markets. What they should really say is:
Listen, if you’re stupid enough to want to buy into a falling market; that’s fine. But you’re not doing it with OUR money, you’re putting some significant skin in this game, which, more then likely, you will lose.
I think that would be more effective for the Sheeple to understand.
It means there will be a SERIOUS over-correction on the down side. Vulture capitalists, you’re buying properties in places like Florida now, you’re buying WAAAAYY too soon.
that’s “IF you’re buying now you’re buying WAAAYY too soon.”
Well, it can only go to zero..
Actually, if neglected long enough the McMansion will become a run-down shack requiring removal. In which case it’ll be worth less than zero. There was a lot I was keeping my eye on to put a nice medium sized house on where the previous home had burned down some years previously. The frame had been removed but the spalled, pitted and cracked foundation was still there. When I called the realtor and was told the lot could be mine for a mere $65k (in a neighborhood where the homes were around $120k) I laughed and told her how much it would cost to remove the trashed foundation, and how much more expensive the new foundation would have to be to get down to compacted soil. The lot was worth $5k at most.
But that’s good for us real people. The more funny money and big money that gets wiped out now won’t be there to support prices in 2-3 years when I buy.
The banks aren’t the only ones who have been identifying declining markets. I was told that for a while now around here (Michigan) appraisals for Fannie/Freddie have been coming back to lenders with the term “property is located in a declining market” (or something to that effect) on it. As a result Fan/Fred is automatically requiring an additional 5 percent taken off the LTV, which of course requires the borrower to come up with another 5 percent down to do the deal. Last I heard this was killing off quite a few deals because the borrower couldn’t come up with any more cash.
RE: Last I heard this was killing off quite a few deals because the borrower couldn’t come up with any more cash.
Must be lottsa newbie appraisers out there committing business suicide.
Get a rep for killin’ deals and your appraisal request in-box will quickly become empty.
This is one reason why a crooked appraiser is so important in greasing the skids for the mortgage L/O’s to do their deals.
The noose tightens.
This is just what the doctor ordered. The sooner they pop this pimple the sooner it heals.
I wish they’d ad VA and MD to that list. The DC Metro area needs a good kick to the nuts, and when institutions require I higher down payments, that drives home prices down faster and harder.
I just want to be able to afford a nice detached SFH in NoVA. Actually, I’d like more than that: I’d like a nice stable neighborhood where I know that my neighbors can afford and maintain their homes. Buying a home on a lier-loan with a big teaser-rate does not count as “affordable”.
Oh, we’ll get there. Be patient.
I talked to a Wells Fargo rep today and he has 100% financing at 6.75%. That is the equivalent of 80% first at 6.25% and a 20% second at 8.75%. I told him it did not make sense for me, since putting 20% down would “net” me 8.75% on my downpayment,
“‘Builders are desperate now and blowing through inventory,’ says Zelman of homebuilders who are doing anything they can to sell homes. ‘Their revenues are shrinking so fast, they can’t keep up.’”
Some builders actually believed this boom would last forever, idiots!
“Some builders actually believed this boom would last forever, idiots!”
Yep. These shortsighted morons are still loading up on rural land in poverty stricken western WA. It’s unbelievable that they cannot see what’s coming. They believe the hype that things are great in the PNW. That couldn’t be further from the truth. Inventories are up more than 50% over the past year with prices softening, and they are out there paying premium prices for land in areas with few jobs, if any, none well paying. The level of greed in this society is sickening.
Another idiotic statement -
“She was alarmed that home prices far outpaced personal-income increases during the boom, which is how the economic disconnect began. A bubble created artificially high demand that had to deflate sometime.”
It’s idiotic because how can you be alarmed by something that has been as plain as the nose on your face to see for some time now. How is it that they are just now coming to this conclusion when we’ve been screaming it for years. Alarming indeed!!
I don’t know if I would call her an idiot. She was telling us there was a bubble for years.
Ivy is no idiot.
Ms. Ivy Zelman is one of the good guys.
I will attempt to describe how information is received on the street. And why there is alarm as well as shock and awe.
Before I got to see any report, the report was parsed by mopes. The mopes would remove statistical aberrations. (e.g. Not as many houses sold in Detroit as was projected. More layoffs in Pittsburgh than projected.) The data was shifted to fit the model. The reports were then handed to super mopes who will write up a 2 -3 pg synopsis of the various economic factors in our model and the divergence between the compiled reports and the model was the basis for investment decisions.
Sheer luck that the model worked so well for so long. Few questioned the validity of removing aberrations.
Ms. Zelman received the collated reports and was not likely to review the removed data points. After years of widening divergence between reality and collated reports, she screamed. I know, because I was at that point in 2004. It was a moment of revelation. I screamed.
The removed data points when placed back into the model changed the entire projections.
I am absolutely sure Ms. Zelman was alarmed. Almost all models included higher incomes for homeowners.
Nice analysis…
Ivy isn’t poison, she knows what she’s doing~
Ivy knew what was coming, she was only “alarmed” for effect. She’s the one who asked Bob Toll if she could have some of the Kool-Aide he was drinking, and she was one of the main authors of “Mortgage Liquidity Du Jour; Underestimated No More”, from which we get the famous Credit Suisse loan reset chart (page 47):
http://www.billcara.com/CS%20Mar%2012%202007%20Mortgage%20and%20Housing.pdf
Ivy rocks! Good to see she’s started her own business.
Yup, there it is on page 47, our favorite picture. I remember a couple of weeks ago PB/GS referring to it as “Ivy Zelman’s chart,” and I realized he was talking about my “Credit Suisse chart,” but I didn’t know her name at that time. I also remember that 90% shill show, Nightly Business Report, actually reporting in mid-2006 that Credit Suisse was forecasting “a hard landing [for RE] that may take several years to develop.”
Just quoting selective comments:
From USA Today. “Chetera Miller, a credit counselor for Neighborhood Housing Services of Chicago, has noticed that lenders are becoming more willing to cut deals with delinquent borrowers. There’s just one problem: That’s only about half the number of financially strapped clients she’s working with.”
“Larry Litton Jr., head of Litton Loan Servicing, restructured 2,000 loans last month to help subprime borrowers. ‘We are modifying more loans than we ever have, and despite that, the foreclosure volume continues to increase,’ he said.”
…The housing crisis, Litton says, ‘is bigger than what people had originally thought….
…“Katrina Vizinau of Community Housing Development of North Richmond, Calif., says about 90% of the people who call her group for help aren’t able to refinance, because lenders say they have little or no equity in their homes. Further, many of her clients are late on their mortgage payments, meaning their credit scores have taken a hit.”
…“Bailey counters: ‘If the primary driver of foreclosures is a significant reduction of income, and property values do not continue to appreciate, that is going to make foreclosures continue to rise, and there really isn’t anything to fix that.’”
“‘In the process of trying to make [that market] work, we saw property values on lots alone go from over $100,000 to $30,000′ since late 2004, said CEO Ken Neumann….”
Oh, the humanity! That’s a 70 pct decline in land value. Does that qualify as a NASDAQ like speculative bubble bust?
Get Snaith on the line. Give him a taste of reality.
“Countrywide made $468.2 billion of mortgage loans in 2006, including $40.6 billion of ‘nonprime’ mortgages.”
Are those the ones that turned out to be “double un-good”?
They’re now unmortgages. And if they’re in San Diego, they may be on unhouses.
Welcome to the unbubble.
That’s it, my keyboard is toast…:-)
is this where I get my loan “modified”?
latest from cfc
“Countrywide made $468.2 billion of mortgage loans in 2006, including $40.6 billion of ‘nonprime’ mortgages.”
“The company is now emphasizing smaller, higher-quality loans. It stopped making most subprime mortgages, and adjustable-rate loan fundings slid 76 percent in September. Overall mortgage volume that month fell 44 percent.”
“It also services $1.46 trillion of mortgages, and said that as of June 30, payments were at least 30 days late on one in five nonprime loans it serviced.”
Wow - assumed that it would be more than 20% of nonprime folks that were 30 days late. People are holding on - even against the inevitable.
Breaking News: Countrywide Financial REO’s Off The Charts! 195,495
http://countrywide-foreclosures.blogspot.com/2007/10/countrywide-financial-reos-off-charts.html
Wow, just wow.
That’s got to be wrong…right?
At $300,000 per house, that is $58 billion in housing. Why is that so unbelievable? The forecast is for 2,000,000 houses lost to foreclosure. This is just 10% of them and CFC is the largest lender in the US.
Those are the ones that are cleared…what’s coming?
Uh oh,
Leigh
Ok, just a thought…but should and if CW goes belly-up - and the receiver says liquidate NOW - and these homes are offered at sell-em-now prices… 195K homes will make a dent.
Well Fridays numbers should add to the fun…
The way the financial industry is about to pay for the shenanigans of the past few years reminds me of the story of the underwater subcontractor who loses money on each job, and when asked how he’s going to make up the shortfall replies,”Volume”.
I want to give a shout out to Ivy Zelman! She’s the one who clued me in to the effective option that builders were giving cilents — builders would presell, but the buyer could walk away if prices didn’t keep up with expectation. This was a recipe for massive bankruptcies among homebuilders when the bubble burst.
Greenspin is flapping his yapper again…
“Former Federal Reserve Chairman Alan Greenspan said credit markets are in a “state of fear,” instead of a “state of euphoria” where investors are buying.
“We’re now in a state of fear,” Greenspan said in Chicago at the Midwest ACG Capital Connection conference, a gathering of investment bankers and private-equity companies. Greenspan was discussing commercial paper and structured investment vehicles.”
Bloomberg
http://tinyurl.com/2vbg6f
Hey, the worse things are under Benanke, the better his tenure looks!
Greenspan certainly seems to be working towards a revisionist history of his time at the helm — the more bloviation = better smokescreen approach.
When is someone going to shut him up ? He didn’t have a clue when he was running the show and now he speaks publicly on a weekly basis ?
Ah, it’s called a “Book Tour.” He won’t be shutting up for some time.
Greenspan, the Polyanna. The glass is always half full.
“Bank of America Corp. says it is asking for more detailed appraisals in markets with falling prices. In many cases, appraisers are being told to drive by the property to get a better estimate of its value instead of just running information about the home through a computer model.”
I nearly burst out laughing when I read this in the dead tree edition. “OMG, you mean I have to actually drive by and look at the property I am appraising? I can’t just mark to model? Gag me with a Spoon!”
There may be jobs out there for honest appraisers after all. In fact, the good ones will have plenty of work in the near future as they actually (gasp) go out and *look* at the property!
Are you suggesting that certain appraisers did not even physically travel to the subject property? I know that for HELOC’s that was sometimes the case, but not for purchase and sales.
And here I thought I was lazy because all my appraisals are just (me) driving by. Of course I don’t have the benefit of a super duper trailer-park computer model.
How about an appraiser doing more than just “driving by”? It would help if appraisers actually check out the condition of the house inside and out. A house we almost bought had mold in the crawl space. It turned out to be a pool of water 4 ft in diameter and 4 inches deep covered by mold so thick our inspector, whom we hired ourselves, originally thought was dirt.
I saw a house sell last month for $890,000 with 95% financing from WAMU. The utilities were disconnected in April. A joke by whoever did the appraisal….
Yeah, I had to laugh at that one as well!
Then again, I shouldn’t be surprised. When I refi’d a few years ago, the charge for the appraisal was $15. Yes, fifteen. You know that couldn’t even pay for a drive-by.
when my wife’s inherited house was working its way through probate, the lazy court appointed appraiser (in his 70’s) gave it a sight unseen value in the $400k range based on computer model comps. I had to call him, many times, telling him this house was not a typical estate, and leave messages threatening to complain to the probate judge about his lack of due diligence in this matter.
My so-called lawyer was worthless, as all the players in probate are in on the feeding trough & wont say anything in court to upset the judge or each other, as they have to play in their closed arena for many more years.
Mind you, this house has had very little maintenence over 30 years. My father in law was a hoarder who just sat in his barclounger throwin empty cheetos bags on the ground while letting pets run wild. It literally should have been condemmed! I had to send pictures of the condition over to the lazy appraiser to get him to PERSONALLY come by; when he did he was …. duhhh… SHOCKED at the condition, and later lowered it to $240k. (my rough est also)
(you have to raise bloody hell to get anyone in govt to just do their job. Nothing fancy or extra, no, just do their effin basic job !!!)
I can relate to what you are saying. Few in Government want to do anything other than showing up for their pay check and with direct deposit today many do not even show up.
“Axon Financial Funding Ltd. LLC, a SIV with $9.8 billion of debt, had its credit ratings cut by Moody’s Investors Service today after its net asset value fell by more than half. The SIV, set up by New York-based hedge fund TPG-Axon Capital Management LP, had the rankings of its medium-term notes lowered by 12 steps to Ba3, three levels below investment grade, from Aaa, the highest-possible rating.”
Bloomberg
http://tinyurl.com/2pa8hj
Reach for the spam and don’t forget the pineapple. Bunker down!
“‘Unprecedented times call for unprecedented remedies,’ Chief Operating Officer David Sambol said in a statement. ‘We are determined to assist borrowers who have the willingness and wherewithal to remain in their homes, but need a little help.’”
I would think that if someone truly had the “willingness and wherewithal” to remain in their home, then they would not need help. So who are you going to in-fact help?
“‘In the process of trying to make [that market] work, we saw property values on lots alone go from over $100,000 to $30,000′ since late 2004, said CEO Ken Neumann. ‘Homes that would have gone for $400,000 sold for $250,000.’”
Maybe if they had not tried to sell houses for $400,000 in the Detroit area which has been hit by globalization driven downturn for decades, they might have done better. I know that not all of the Detroit area is poor but it certainly does not make sense to build high prices RE in an area which is not financially strong.
“A county in Washington state emerged as the most recent casualty from the financial-market turmoil caused by complex securities known as SIVs when Standard & Poor’s Corp. said yesterday it may downgrade debt of King County because of investments in debt issued by SIVs.”
Lawsuits will fly. The blowback will be harsh. Calls for tighter regulations will increase. Persecution of the Pig Men starts now.
Actually, what is really going to happen as one who lives in Seattle - is that we will have to increase taxes/fees so that we can cover pension requirements for the Civil Servants
Logitech, King County,…
When the banks finally acknowledge their losses, we are going to hear about all sorts of strange entities that took on some risky mortgage debt for 0.5% extra annual interest.
It is quite a conundrum how so many GFs could take on so much extra risk for such a paltry risk premium.
No, it’s not a mystery. The ratings agencies said these assets were AAA and governments championed the innovation. Plus, they had good sounding names like Master Liquidity Enhanced Conduit.
Master sounds like it’s the best of the best. It’s superior. Liquidity is good too. Everyone wants liquidity during a credit crunch? Enahanced — that’s just icing on the cake. What can go wrong with that? That’s even better than Master.
So, what was once illiquid magically becomes a Liquid Enhanced version of the best of the best. Slap some AAAs, a dash of Treasury approval, and conundrum no more.
I think it was very possible to see the risk (despite the rating), but to do so required one’s making an independent judgment that the housing boom was anomalous. Maybe that’s asking too much of county financial officers?
OT: Late yesterday, Autozone (AZO) filed both its proxy and 10-K, giving those who follow the company 126 pages to sift through. But it was something in a footnote to the proxy statement that caught my attention: the Memphis-based company spent $250K to bail out CFO William T. Giles from his home. …
http://www.footnoted.org/perk-city/on-new-jerseys-sinking-real-estate-values/
I’ve seen that on at least two houses I’ve been watching in NoVA (Vienna/Oakton area). Places sold to a relocation company (e.g. $800k). Relocation finds a buyer at $650k. Company hiring relocation company takes a hit of $150k.
When will Ben start Episode One of Flashback Theater? I’d expect to see quotes from last fall (’06) about $1bn worth of losses expected, total, industry-wide. Today: Countrywide with one in five of $1.46 trillion in servicing in late payment status = $292 billion - just at Countrywide.
My suggestions from last fall of over $100bn in losses may have been too conservative.
We’ve had the October surprise now, and waiting for Election Week for the other boot to drop.
My guess is $2.5 trillion losses when it’s all over…
We need “Housing Bubble Blog Classic”, where been reposts stuff from 2005 and the 30 or so of us who posted here at the time are the only ones on the planet who think something’s wrong.
On the subject, I’d love to see “CNBC Classic” where they just run broadcasts of entire trading days from 1999.
“been reposts” = “Ben reposts”
“Neumann Homes, one of Chicago’s largest home-building companies, said Monday that it plans to file for bankruptcy.”
Is that part of the newfangled business plan these homebuilders are allegedly using?
“Is that part of the newfangled business plan these homebuilders are allegedly using?”
Yes, privatize the profits, socialize the risk. The suits made their money, now it’s time to watch the ship sail into the iceberg, from the comforts of the dingy.
‘The suits made their money, now it’s time to watch the ship sail into the iceberg, from the comforts of the dingy.’
The problem is, that dingy isn’t really that comfortable.
And it’s still tied to the ship. Cast off! Cast off!
Remember, it doesn’t take effect until you yell: “I DECLARE BANKRUPTCY !!!”
“You know, you can’t just say the words . . .”
LOL! That was a great scene.
Money for nothing time.
hoz,
are the chicks for free?
phhffttt..I grew up in Amarillo. Lets tell stories of the urban chicken.
Neumann!
I looked at the list of their developments. They’re all in BFE. No surprise they were the first to go belly-up.
There’s a market in Detroit? Really? The few times I visited lately I didn’t see anything. It wasn’t quite as bad as Buffalo, NY, but I was shocked at the lack of anything moving or operating.
Neumann Homes builds real spitboxes here in Illinois. I can’t believe what some of my “friends” paid for their cookie cutters.
Yeah, which MBA’ed brainiac said, “Hey, I’ve got a great idea! Let’s really focus on Detroit!”
“European banks are not the least interested to participate in this project. This is an American initiative, and it’s the banks who created, themselves, these mortgage problems. So the European banks, they look from a certain distance.”
This is funny. Denial at it’s best. Euro banks are in this DEEP
But that is an important distinction: They are in deep, but are resolving not to get any deeper in. That is a poor outcome for those American bankers looking for additional support.
The European banks are being far more honest about their failed investments than their Yankee counterparts.
We’ll see. Their RE bubble is as bad or worse than ours
“Countrywide Financial Corp, the largest U.S. mortgage lender, on Tuesday offered to refinance or restructure up to $16 billion of adjustable-rate mortgages through the end of 2008.”
How nice of Countrywide to chip in to the SoCal disaster relief effort…
“As long as it’s meant to create an orderly process, okay. But if these artificial elements are involved, then immediately the supervisor and the central banker uses the phrase moral hazard.”
As in ‘Nope — I don’t see any moral hazard in this plan.’
“Surprising new research published by the Federal Reserve Bank of Atlanta concludes that the bulk of the increase was caused by innovations in the mortgage market. Young families with little savings flocked to those loans to buy first homes.”
Oh yeah, sure…surprising-NOT! They needed to do “research” to figure this out? Sigh….
Yeah, and how much federal tax money did they waste doing said “research”? Did they not listen to their esteemed chair greenspin in 2004 on “innovative products in the mortgage market”?? Are we to believe that everyone employed by the federal reserve is as stupid and incompetent as the folks at fema?
A new article on the FED and the housing debacle:
Paulson’s $100 Billion Bankers’ Bankruptcy Bailout Fund: The Big Squeeze
http://www.counterpunch.org/whitney10232007.html
America needs to put its own house in order before it gives advice to anyone else.
i think this says it all!
Does anyone know where I can find a nice picturesque photo of a Joshua tree for my computer desktop?
Angelo Mozillo’s pants?
here ya go…
http://www.luminous-landscape.com/1photo-pages/j/joshua.shtml
perfect
http://images.barnesandnoble.com/images/11320000/11322276.jpg
(Sorry, I can’t resist.. everytime I hear “Joshua Tree” all I can think is… Sunday Bloody Sunday!
“Sheila Bair, chair of the Federal Deposit Insurance Corp, wants lenders to take a more sweeping approach, instead of painstakingly reassessing each individual mortgage. Some loan servicers, including Litton Loan Servicing, say Bair’s plan would expose them to lawsuits from mortgage investors if the servicers reduce the interest rates on loans that aren’t at serious risk of default.”
Another freeloading bureaucrat. tell her how you feel about her shilling proposals.
chairman@fdic.gov
These guys are crooks. The FDIC was supposed to “protect” depositors, but it’s just a sham set up to facilitate reckless spending and inflation. Sure your “money” is “guaranteed”, it’s just not going to be worth much when you finally try to spend it.
In light of the way the FDIC totally ignored the risk to my savings I’d suggest we make sweeping changes in who is employed at the FDIC. Instead of evaluating each employee’s record we should just fire them all!!! I suppose she’d call that “unfair”.
I would tell her to shutup. As an investor, I bought the loans at a certain payment. If they are going to default then do something about it but don’t give that to everyone!
(not, I am not an investor).
Just sent this Blair character an email. I presume she is another dishonest bush appointee. The only person who seems to care about the state of the country’s finances is Walker, the Comptroller, and he seems to have little juice with the admin.
“One Wall Street economist who has studied the Atlanta Fed working paper, Jan Hatzius of Goldman Sachs, wrote on Oct. 18 that ‘the implications could be dramatic.’ Wrote Hatzius: ‘Our current forecast calls for a decline in new home sales to a trough level of 650,000 by the first quarter of 2008, which we believe is one of the lowest estimates on Wall Street. However, the simple arithmetic [implied by the Atlanta Fed paper] suggests that this estimate could still prove much too optimistic.’”
_________________________________________
And we’re all gonna help this nightmare come true.
are appraisers forced to recognize short sales and foreclosures ?
I take your use of the term foreclosure references the lender taking title. Such a title transfer is not a sale and therefore is not a transaction for a “comparable” property. Short sales are market transactions and should be used by appraisers. Sales of REOs should also be used by appraisers but they should adjust the price upward if the bank quickly dumps the property, or if the property is in poor condition.
The rule for comparables is knowledgable sellers and buyers, arms-length transaction, no fraud, and no duress.
–
“One Wall Street economist who has studied the Atlanta Fed working paper, Jan Hatzius of Goldman Sachs, wrote on Oct. 18 that ‘the implications could be dramatic.’ Wrote Hatzius: ‘Our current forecast calls for a decline in new home sales to a trough level of 650,000 by the first quarter of 2008, which we believe is one of the lowest estimates on Wall Street. However, the simple arithmetic [implied by the Atlanta Fed paper] suggests that this estimate could still prove much too optimistic.’”
My estimate is for 500K (this is for SFH) some time in 2008.
Jas
Is there some new proposal that says houses > 3000 sqft will not qualify for mortgage interest deduction?
It’s being floated by Sen. John Conyers that as a “carbon tax” owners of McMansions should be progressively docked the interest deduction as the house increases.
1000 points of SIV-lite
“King County invested in a risky form of SIVs known as SIV-lites that typically invest more than SIVs in securities tied to residential-mortgage securities, including subprime loans.”
I keep reading the same comments. I keep reading the same threads.
I need to wait until Ben posts the imfamous California thread.
Its like that everyday but today I’m weed whacked.
Lady on T.V. said to get ready to evacuate if they come to your door. After I did a “burb spitup” I ran around grabbing shoes, photos, paintings, dog stuff and bills.
All the places I used to live in , Solana Beach, Carlsbad, and Encinitas are being evacuated and the place I moved to is the evacuation center. Tripped Out.
My heart goes out to everyone affected.
Never lived in San Diego, but I’ve had some good times there and it’s one of the best places on Earth.
From my new perch overlooking Eternal Hills Camp ground.
Neumann is NOT a small builder in the Chicago area.
From the Daily Herald article:
“Of its current inventory of 5,485 single and multi-family homes in the Chicago area, 2,619 have been sold, according to Tracy Cross. Its Chicago area inventory reached 5 years worth of unsold homes, according to Cross, when 30 to 36 months is an average time for new homes to remain on the market.
The company had sales topping $500 million in 2005, according to Hoovers.com, and more than 400 employees.
Neumann Homes has 46 developments active in 18 Chicago area towns, according to Cross.”
5 years worth of inventory. Gulp.
They also build for the middle of the road market. Also from the Daily Herald article:
“Neumann Homes’ average home cost ranged from $170,000 to $370,000, with an average of $272,000, according to Cross research.”
If these “affordable” houses aren’t selling, what is happening to the more expensive market? No wonder Toll is getting crushed right now.
Many of Neumann’s developments were on the outlying fringes of Chicago (where they have the land to build the big developments.) So they were in Grayslake, North Aurora and the like.
This bankruptcy is a warning shot across the bow. They are still putting up at least two dozen new highrises in downtown Chicago- some that are only about 50% “sold.” Inventory is also very high downtown already.
I don’t know how we go into 2008 without seeing some serious price declines. So far, the sellers haven’t really blinked in the Chicago area (even though inventory continues to rise.) The builders are really discounting now though.
Sabrina
The various corporate homebuilders are probably already dead, but vampires linger on, longer than you think…
Like many rivals, Countrywide has faced criticism that it fed the housing slump by putting Americans into mortgages they could not refinance once home prices stopped rising.
Why would Americans NEED to refinance if they took mortgages at record low interest rates? The root problem is that “refinance” has become a euphemism for “increase the mortgage balance,” not “decrease the interest rate.” If we use the correct words rather than obfuscating the issue with a misnomer, the flaw in the borrowers’ strategy becomes obvious to a child. If you keep borrowing money against paper capital gains, then you won’t HAVE any capital gains.
Countrywide is expected to announce a deep loss when it reports results Friday, along with a sharp drop in its business levels in the third quarter. It has announced it will have to take charges of between $125 million and $150 million to lay off staff and close offices.
That’s all? I thought they were burning through billions of dollars every week.