The Housing Bubble

It’s Friday desk clearing time for this blogger. “2006 was a bad year for Josie Kay. Receipts at her bar dropped 50 percent, and last year, she lost the business and declared bankruptcy. Kay and her husband had built their house and lived there for 13 years. They didn’t want to lose that, too. She had heard about home loan modifications, such as the federal Home Affordable Modification Plan, and wondered if something like that might work for her. So she called her bank. And like an untold number of Americans, Kay was informed that to qualify for HAMP, she would need to be two months behind in her mortgage payments.”

“She had never missed a payment before, she says. It was a revelation. ‘What a thing to tell somebody who’s already sinking: ‘Don’t pay your mortgage for two months,’ she says. ‘You love it! You go for it!’”

“In hindsight, she wishes she’d never made that call. She has nothing in writing saying that her house is safe, and fears that any day, the sheriff will arrive with an eviction notice. That the ax will drop. Like it did on her son. In a perverse coincidence, Kay’s son, who had owned his home for five years, applied for a HAMP modification a month before she did. And like Kay, he went two months behind on payments and was rejected, then caught up only to have the bank foreclose.”

“The weekend before Easter, Kay helped him move his stuff into storage. ‘I am not a stupid person, but they took me,’ Kay says. ‘You are hoping beyond hope that a bank is going to do something good for you — because Obama made them. Now I understand why the old-timers hid their money. They didn’t trust the banks.’”

“The first statewide report on the Supreme Court’s foreclosure mediation program is out, and at least one South Florida judge says the program is neither helping homeowners nor clearing caseloads. ‘A lot of these folks are in foreclosure because they don’t have the incomes they had once upon a time, or the mortgage changed over time and they are realizing they just can’t afford it,’ said Tom Genung, courts administrator for the 19th circuit, which includes Martin and St. Lucie counties. ‘If they are seeing that it doesn’t make dollar sense to stay in the home, who can really argue with that?’”

“The Koutoubia mosque in Marrakesh takes its name from the sellers of manuscripts who once plied their trade in the shadow of its ancient walls. This iconic symbol of the former imperial capital prompted a Lebanese friend who has known the city for more than a quarter of a century to share his thoughts on more recent Moroccan history. ‘We too have had our Irish property bubble,’ my friend informed me. ‘This travesty is the result. And furthermore, in the ancient medina, there are now 300 riads for sale. These traditional houses were titivated by foreigners and now they want to abandon them because the property bubble has burst.’”

“A new report, written by former Finnish senior government official, Peter Nyberg, says reckless lending by bankers who were unchecked by regulators and politicians along with the national mania for property are all to blame for Ireland’s banking collapse. ‘As in most manias, those caught up in it could believe and have trust in extraordinary things, such as unlimited real wealth from selling property to each other on credit,’ said the 172-page report, published on Tuesday.”

“‘It appears now, with hindsight, to be almost unbelievable that intelligent professionals in the banking sector appear not to have been aware of the size of the risk they were taking. In order for a systemic crisis to happen, you will need a very large part of society to take part, not understand the risks or stay quiet,’ Nyberg, a former director general for financial services at the Finnish Ministry of Finance, told a news conference.”

“Speaking at a press briefing, Nyberg said banking boards, politicians, former regulators and external auditors had not realized the risks of concentrated lending. He said the blame for Ireland’s banking implosion is to be shared among thousands of people. He explained that this is the reason he did not name names in the report.”

“In his first-ever press conference after a monetary-policy meeting on Wednesday, Federal Reserve Chairman Ben Bernanke is expected to address his agency’s efforts to keep pumping a fortune into the U.S. economy, at least through June. You probably won’t hear him say, ‘Enough, already.’ That’s too bad, because America can’t keep robbing from the future to prop up the present. Anyway, it’s not working.”

“For proof, look at the housing market. After the previous economic downturn a decade ago, the Fed stepped in and kept the easy money flowing way too long. That helped create the residential real-estate bubble, which nearly took down the banking system when it popped.”

“During the boom years, houses were a dream investment. Prices only went up, and millions cashed in on those temporary gains. That game is over. There’s only one good way to establish prices and put buyers and sellers back together again: Let the market do its job. Every day, it seems, the government unspools more red tape aimed at the housing and banking sectors, not to mention all the misguided stimulus. It’s a huge distraction. The less interference from government, the quicker residential real-estate will begin to make the lasting comeback we all want to see.”

“If you live in Florida, ground zero for robo-signing and the nation’s fourth-highest foreclosure rate, you see the effects of collapse daily. If you’re in midtown Manhattan, where expense account restaurants are bulging, it’s more ‘crisis, what crisis?’ That’s why U.S. banking regulator Shelia Blair got attention when she told the group a meltdown could happen again.”

“‘I am not going to stand before you and claim that the inherent instability of financial markets can be regulated out of existence,’ said Bair, who runs the Federal Deposit Insurance Fund. Blair then went on to say that Dodd-Frank financial reform legislation could be used to mitigate the worst effects of another financial shock.”

“Two other U.S. officials tended to take more hands-off position. Charles L. Evans, president of the Federal Reserve Bank of Chicago, called the crash a ‘once in a lifetime crisis’ caused by a ‘myopic focus’ on short-term profits. Charles I. Plosser, president of the Philadelphia Fed, took the positon that no one could have detected the financial corruption.”

“But Texas economist James K. Galbraith, a former chief staffer of Congress’s Joint Economic Committee, read from testimony to the Financial Crisis Inquiry Commission noting that Fed Chairman Ben Bernanke was warned in detail by housing lenders in 2005 how corrupt lending was driving a severe collapse. ‘The Fed should at least have the courage to admit it knew but didn’t act. If government had followed the military’s rule all officials involved would have been removed from their positions and an official inquiry started to see what the knew,’ he declared.”

“In mid-conference, The New York Times came out with a package of stories explaining that federal prosecutors and the FBI were denied funds to pursue Wall Street mortgage investigations, unlike in the 1980s, when more than 1,000 savings and loan officials were convicted.”

“‘Of course bailouts can happen again,’ declared Phil Angelides, chairman of the Financial Crisis Inquiry Commission, noting that America’s four largest banks now control far more assets than they did in 2007. People ask, ‘Is the government just an insurance company for those with financial power? I think what we are grappling with now is far greater than the financial crisis. It is the eradication of trust.’”

“Some very specific lending, regulatory and planning changes need to be made to avoid another property crash in the years ahead. Given the damage caused to our competitiveness, economy and sovereignty, our banks, environment and to individuals’ finances, we must now erect strong defences against any continuing vulnerability to a similar future disaster.”

“This is not just a question of bashing bankers, burning bondholders, roasting regulators and punishing politicians. It goes far deeper. The relationships between the zoning and planning process and the profits to be made from development also influenced the intensity and duration of the bubble.”

“We must change fundamental beliefs and the way we organise much of our governance and decision-making. In addition we need independent structures for reviewing, auditing and reporting on the appropriateness of key policies and on the execution of those policies.”

“It may sound like heresy, but increasing house prices are fundamentally bad for the economy.”