The Housing Bubble

Some housing bubble news from Wall Street and Washington. CNN Money, “More than one million homes are now in foreclosure, the highest rate ever recorded, according to a trade group which warned Thursday that number will continue to climb. The Mortgage Bankers Association’s first quarter report showed that a record 2.5% of all loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes.”

“There are 431,000 prime loans in foreclosure, a seasonally adjusted rate of 1.2% that is more than double the 0.5% rate a year ago. The report showed about 1.2 million prime mortgages are now a month or more past due.”

“According to Jay Brinkman, MBA’s VP for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn’t require income verification for buyers with good credit.”

“California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have nearly 400,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.6% of all of the loans in these states are now in foreclosure.”

“‘Clearly things in California and Florida are going to get worse before they get better,’ said Brinkman.”

From Reuters. “U.S. home builders, struggling under sinking demand and a credit crisis, now face a fresh obstacle: competition from a flood of homes in foreclosure.”

“‘In some regions, the supply coming to the market from home builders is now smaller than the supply coming from foreclosures,’ Deutsche Bank senior economist Torsten Slok said.”

The Kane County Chronicle from Illinois. “Rich Guerard prefers not to buck the market. That’s why he and his business partners have decided to hold off on building the Settlements of LaFox.”

“For years, Guerard and his partners have waited to sell the first of the 1,275 homes they are planning to build in their large development between Geneva and Elburn. If all had gone according to plan, the first homes could have been built this summer. But a slumping housing market has persuaded the developers to wait a little longer, Guerard said.”

“‘We believe the market is reaching the bottom,’ he said. ‘But it needs to improve from where it is before we go forward with this.’”

“Builders are under a tremendous amount of strain, said Ray Budde, executive VP of the Homebuilders Association of the Greater Fox Valley. In North Aurora, for instance, several lots are set to be auctioned later this month in the Tanner Trails subdivision as part of Neumann Homes’ bankruptcy plans.”

“And in Sugar Grove, Kimball Hill Homes is selling all undeveloped lots in the subdivision as that company seeks to reposition itself after seeking bankruptcy protection earlier this year.”

The Australian Broadcasting Corporation. “New South Wales Opposition Leader Barry O’Farrell has used his Budget reply speech to announce a Coalition state government would co-invest in a house or unit for some first-home buyers.”

“Mr O’Farrell says the Coalition would fund up to 40 per cent of a property priced under $400,000 for people with a $90,000 maximum household income. ‘A shared equity scheme could provide access for as many as 4,000 singles, couples and families to buy their own home,’ he said.”

“BankWest found housing prices had risen by two-thirds across Australia since 2002. The average income had increased by less than half that amount over the same time.”

The Lancaster Guardian from the UK. “According to government statistics, 100 mortgage repossession orders were made at Lancaster County Court between January and March - a massive 163 per cent rise from the same period in 2007.”

“Mike Fisher, partner at Fisher Wrathall estate agents, said: ‘I think there’s been quite a lot of hypocrisy within the lending organisations over the last few years. “They have constantly wrung their hands about the affordability issue for younger people but their answer has been to come up with more and more innovative products which have been more and more expensive. That has fuelled house prices to a less affordable level, which has left the local housebuyer behind.’”

“Mr Fisher said many of the properties repossessed could be from the buy-to-let market. ‘If people are coerced into buying over-priced flats to let and then fail to carry out their financial obligations, it leads to problems,’ he said. ‘This is purely down to ill-judged excursions into the property market.’”

The Independent. “Many of Britain’s biggest housebuilders could be forced into deeply discounted emergency rights issues before the end of the year. More than £300m was wiped off the value of the country’s six largest housebuilders yesterday, with investors panicked into a sell-off by a doom-laden report on the sector from investors at UBS.”

“‘The speed of the collapse in April and May has been astonishing,’ said Mark Stockdale, UBS’s lead housing analyst. ‘This is as bad as 1991 - without a doubt. And the big difference is that I have never seen a housing market fall as fast as in the last eight weeks.’”

The Scotsman. “Housebuilders yesterday issued a call for a ‘drastic’ 0.5 per cent cut in interest rates from the Bank of England today as new analysis from investment bank experts revealed ‘extreme weakness’ in the housing market.”

“Home Builders’ Federation director of economic affairs John Stewart said: ‘We just cannot rely on lessons learnt and solutions based on past downturns as this is a completely new situation in which we find ourselves.’”

From Business Week. “Robert Toll and other builders suffering through the downturn think that homeowners need extra incentives to get off the sidelines.”

“Their pitch goes like this: If the government simply bails out people whose home values have dropped below their mortgage amount, or spends hundreds of billions of dollars on Federal Housing Administration loans, prices will continue to drop, and those government-subsidized loans also will end up under water. Better to urge potential home buyers off the sidelines and back into the market, so prices can stabilize.”

“‘I believe that this is the way to stabilize the economy,” Toll, CEO of Toll Brothers, said in an interview on June 4. ‘Before trying to straighten out the credit market, you need to straighten out the basis of the problems in the credit market. You want to look at the asset that backs up that credit.’”

“The problem for homebuilders is that few people are buying much of anything today, and builders say they can’t cut prices much more than they already have. ‘I think homebuilders have been lowering prices to the point where they are just trying to recapture some of the land costs,’ Toll said.”

“Of course, the government already subsidizes home ownership in numerous ways, to the chagrin of economists like Laurence Kotlikoff at Boston University. He calls the subsidies ‘distortionary.’”

“The government also encourages home buying through oufits like Fannie Mae and Freddie Mac, as well as the FHA, which attempt to expand the market for housing credit. Government regulators pressure banks to make affordable loans available to home buyers.”

“But is it up to U.S. taxpayers to stop the slide? Tomasz Piskorski, an assistant professor at Columbia Business School, calls the tax-credit proposal ‘an implicit subsidy to homebuilders’ that would keep home prices artificially high when they probably ought to be falling.”

“If builders and sellers would drop their prices, houses would start to move again, he said. A tax credit might briefly prop up the market but ultimately may just prolong the agony until real demand and supply find equilibrium.”

“‘Let home prices fall to a level where they become really affordable,’ he said. ‘Once the prices are sufficiently low, there will be no problem selling homes, there will be no problem getting decent mortgages. Maybe it’s better that home prices fall faster.’”

“When Wachovia CEO Ken Thompson sealed a $24 billion deal to buy Golden West Financial in May, 2006, he bragged that he had bagged “a crown jewel” of the mortgage business. Two years later it’s painfully clear that Thompson bought the nation’s second-largest S&L at the peak of the housing bubble, a misstep that led to his ouster on June 2.”

“In most mergers, it’s the acquirers that exert their will. But right after Wachovia bought Golden West, executives from the S&L took control of all mortgage lending. And according to former brokers, they began pushing Wachovia’s sales force to steer applicants into its signature ‘Pick-A-Payment’ loans.”

“Analysts note that Golden West focused too much on appraisals and too little on verifying the income and assets of applicants. While this tactic helped ensure that Golden West could recover the full value of homes that went into foreclosure during up cycles, it didn’t anticipate that borrowers would simply walk away if a plunge in home prices left them underwater.”

“Analysts figure Wachovia could end up incurring losses of as much as $11 billion on Golden’s West $122 billion mortgage portfolio. ‘You’d be hard-pressed to find anything good out of this acquisition,’ says Terry Maltese, president of Sandler O’Neill Asset Management.”

From Bloomberg. ” MBIA Inc. and Ambac Financial Group Inc. may give up attempts to retain the Aaa credit ratings of their bond insurance units after Moody’s Investors Service put them under review for a second time this year.”

“The world’s largest bond insurers, which have raised $4.1 billion combined in the past six months, said they won’t seek more capital after Moody’s yesterday said the most likely result of its examination would be a downgrade of the companies’ top insurance financial strength rankings.”

“‘The ability of MBIA and Ambac to continue as viable ongoing companies is highly in doubt,’ according to a note from analysts at debt research firm CreditSights Inc. in New York. ‘How can a triple A be justified for a company that cannot sell its product, is facing mounting losses and has no access to the capital markets?’”

“Financial markets are in disarray. The global economy is throwing a tantrum that could spell recession for some nations. Central banks are publicly pumping billions of dollars into the money markets to keep the banking system afloat, and privately doing God knows what to avert the next Bear Stearns Cos. or Northern Rock Plc.”

“The importance of the finance sector to the global economy has swollen along with the bonuses it awards itself. Standards of behavior, however, have failed to mature at anything like the same pace. And, so far, nobody in banking has apologized for the chaos caused by lax lending standards and monumental hubris.”

“‘One of the innumerable problems with Wall Street and the City is that they never do seem to learn from their mistakes,’ says Tim Price, director of investments at PFP Wealth Management in London.”

“‘Finance is supposed to be a service industry, an aid to the business of genuine wealth creation,’ says Sean Corrigan, who oversees more than $8 billion in Lausanne, Switzerland. ‘Once we accord banks the sort of overblown importance they have enjoyed this past quarter of a century, we become hostage to the megalomania of their executives and head traders.’”

“Richmond Federal Reserve Bank President Jeffrey Lacker said the lending to securities firms that the central bank introduced in March may lay the seeds of further financial crises.”

“‘The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking,’ Lacker said in a speech to the European Economics and Financial Centre in London. That ‘in turn could give rise to more frequent crises,’ he said.”

“Lacker, heads a district that is home to two of the four biggest U.S. banks. A former head of research at the Richmond Fed, he alone dissented in interest-rate votes at the Fed in late 2006, wanting to continue raising them to stem inflation.”

“‘Establishing a new set of boundaries for central-bank lending is a high priority,’ Lacker said in the interview. ‘You would expect that’ the limits ‘aren’t going to be credible unless we let somebody fail in a costly way that is beyond that scope,’ he said.”

“Lacker in his remarks distinguished between ‘fundamental’ runs on financial institutions where creditors have good economic reasons to question their investments, and ‘non- fundamental’ runs typified by panics.”

“U.S. household wealth fell in the first quarter by the most in more than five years and borrowing slowed as home values and stock prices plunged and lenders restricted credit, Federal Reserve figures showed.”

“Net worth for households decreased by $1.7 trillion from the previous three months, the second straight decline and the biggest since the third quarter of 2002, according to the Fed’s quarterly Flow of Funds report today. Real estate-related assets dropped by $328.9 billion, the most since records began in 1952.”

“‘Households continue to face significant headwinds, including falling house prices, a softer job market, tighter credit, and higher energy prices,’ Fed Chairman Ben S. Bernanke said in a speech this week. ‘Until the housing market, and particularly house prices, shows clearer signs of stabilization, growth risks will remain to the downside.’”

The Associated Press. “The equity Americans have in their most important asset - their homes - has dropped to its lowest level since the end of World War II.”

“Homeowners’ portion of equity slipped to 46.2 percent in the first quarter from a revised 47.5 percent in the previous quarter. That was the fifth quarter in a row below the 50 percent mark, the Federal Reserve said Thursday.”

“The total dollar value of equity also fell for the fourth straight quarter to $9.12 trillion from $9.52 trillion in the fourth quarter, while Americans’ total mortgage debt rose to $10.6 trillion from $10.53 trillion.”

“A homeowner’s equity is the market value of a property minus the mortgage debt. And homeowners’ percentage of equity has declined steadily even as home values surged during the housing boom due to a jump in cash-out refinancing, home equity loans and an increase in 100 percent financing.”

“At the end of March, nearly 8.5 million homeowners had negative or no equity in their homes, representing more than 16 percent of all homeowners with a mortgage, according to Moody’s Economy.com Chief Economist Mark Zandi.”

“By June 2009, he estimates that will increase to 12.2 million, or almost one out of every four homeowners with a mortgage.”

“But to put that number in perspective, one out of every three homeowners own their properties free and clear, with no mortgage at all.”

“Still, Zandi said, ‘For most, their home is their key asset. If they have no equity in their home, likely their net worth is negative too. Their entire balance sheet will be underwater.’”

“Prices nationwide are at levels not seen since the third quarter of 2004.”

“Homeowners with no or negative equity are more likely to fall behind on their mortgage payments or, in frustration, mail the keys to the lender and walk away from their mortgages, a phenomenon more lenders are seeing. This will only increase foreclosures, which have been surging the last two years, and further exacerbate the housing downturn.”