Posts filed under 'Mortgages'
he big banks have gotten plenty of help with their debts. But what about struggling households and non-financial institutions? Roosevelt Institute Braintruster Marshall Auerback investigates.
Once all the TARPs are tidied up and the quarterly profits no longer a revelation, American consumers will still be swaddled in debt. What’s to stop them from just walking away from it–and who’s to say, if the banks keep this kind of behavior up, we don’t want them to?
In The Holy Grail of Macroeconomics, an account of post-bubble Japan, Richard C. Koo illustrates that highly-indebted corporations with depressed asset holdings and a positive cash flow will embark on sustained debt repayment until their balance sheets are healthy once again. He argues that this happened in Japan over the last two decades and also happened in the U.S. over the four years of the Great Depression. This ongoing debt repayment created decades of economic stagnation, particularly because the fiscal response was so fitful and inconsistently applied.
But does it follow that sustained debt repayment will be the response of a household sector in the U.S. with destroyed asset holdings and high debt? To our way of thinking, it is unclear. This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.
Public opinion polls reveal that Americans are angry about the current economic, healthcare, housing and environmental crises. Polls also document that a significant majority of Americans want the federal government to do something to fix these problems. But you’ve also got the makings of a huge neo-populist anger brewing, largely because (in the words of Frank Rich), “What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.” In other words, even the feds might not be able to help.
The approach to financial reform that the Obama Administration has hitherto adopted is a classic illustration of this problem. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. Yet, they have received commitments from the taxpayer totaling $23.7 trillion.
Marshall Auerback argues that a debtor’s revolt would be a good thing.
H/T to Naked Capitalism
January 18th, 2010
The mortgage fraudsters are back, but this time they’re preying on people struggling to keep their homes out of foreclosure. Kelsey VanOverloop looks at how the “Foreclosure Rescue” come-on works and what homeowners can do to avoid the serious consequences of dealing with an unethical lender. Read more »
August 22nd, 2009
Just yesterday, for instance, the Commerce Department reported that new-home sales grew at an annualized rate of 11 percent last month, which was much better than people were expecting.
And if you look under the covers, the annualized rate actually understated the sales pace of 36,000 new dwellings that were bought last month.
Sales of previously owned homes are also improving, although, in the case of both new and used homes, prices are suffering a dramatic drop.
But whether housing is really making a comeback still carries a very big question mark.
What people are failing to realize, says Chris Whalen, who tracks the banking industry for Institutional Risk Analytics, is something that’s being called the “shadow inventory” of homes.
Put simply, these are the homes on which banks and other mortgage holders have foreclosed but which still haven’t worked their way through the courts.
Whalen says that it takes from three to four months for a house to be out of the foreclosure process and ready for sale.
In the case of New York State, he says, the length could be six months.
Experts are apparently concerned that houses are being taken away from delinquent homeowners in much larger numbers than what is now being put up for sale.
In other words, there’s a logjam of foreclosed properties that should hit the market next fall.
And when those properties do come up for sale, banks will unload them as quickly as possible and at whatever price they can get.
That’s where the question (and the question mark) comes in — if the number of houses sold in the fall increases dramatically because of this shadow inventory, is that really a good thing?
And what effect will this flood of foreclosed properties have on solvent people who might just want to move to a different residence?
Will solvent homeowners suddenly be more willing to put their homes on the market at a reduced price?
And banks will feel the shadow’s effect, too — they will finally have to admit that mortgages they are holding aren’t nearly as valuable as they are letting on.
Banks would then have to take additional writedowns.
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“Smoooch!!”
President Obama used a lot of words yesterday when he talked about the relationship between China and the US. He was kicking off an economic summit between our two countries.
But what Obama was really doing was planting a big fat rhetorical kiss on the cheek of China’s President, Hu Jintao.
President Hu seems like a sweet guy, but the niceties probably had more to do with the fact that the guy owns the US.
Our president told their president that our two countries need each other. This co-depend ence goes something like this — China has a lot of money it needs to get rid of, and we’ll gladly take it.
“If we advance those interests through co operation, our people will benefit and the world will be better off . . ,” said our president.
No tirade on human rights? No speech on free elections? How about a little lesson on how China should allow people to protest?
Nope, President Obama was the perfect gentleman and gracious host. He even called China a “great country” without even a smirk.
And why not? This is the busiest week for US debt sales in 24 years.
The US Treasury is selling more than $235 billion in various government securities, and we’d certainly like our friends, the Chinese, to buy more than their fair share even if Beijing has been a little nervous about the lack of fiscal responsibility in Washington.
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We are coming up to the month’s end, when professional traders try their best to get stock prices higher.
The same thing happens during options expiration week — the week that contains the third Friday of the month.
Same old story, same old scam. Don’t get trapped.
Analyzing Those Great Housing Figures – John Crudele, New York Post
July 29th, 2009
Homeowners are turning to the “strategic default” — walking away from a mortgage even when there are funds available to keep paying. “Increasingly, the determination of when to default is not guided by the moral question: Is this the right thing to do? It is guided by the pragmatic concern: Am I too far underwater on my mortgage?” writes Kelsey VanOverloop. Read more »
July 25th, 2009
To read “Our Lot: How Real Estate Came to Own Us” is to relive, in painful, anecdotal detail, the real estate bust that brought our economy low. Through Alyssa Katz, a journalism professor at New York University and the former editor of the magazine City Limits, we remeet the exploited homeowners and the naive investors, and we cringe again at the blundering politicians and opportunistic lenders.
But “Our Lot” is also a reminder that our memories are short, and that the same mix of hope, greed, good intentions and bad policy has been inflating and popping real estate bubbles since the days of LBJ. Behind it all is a conviction shared by nearly all Americans, be they Democrats or Republicans, Wall Streeters or the ARMed and desperate masses, that home ownership is a good thing — good for the neighborhood, the country and the average citizen holding the deed and the debt. “Our Lot’s” long view is perhaps most unnerving for the doubt it casts on that timeworn belief. Salon interviewed Katz by phone.
Isn’t homeownership actually good for you? I thought it was the panacea for almost all social ills, it drove the crime rate down, educational achievement up, and so on.
Yes, well, homeownership is only as good as the amount of home you actually own, and I think the big problem in the last generation or so is that Americans have turned to more and more and more debt to reach for the American dream.
There’s a lot of great examples out there — the Nehemiah homes that transformed East New York in Brooklyn from a really devastated and dangerous place to someplace that’s still really poor and has a high crime rate but has an opportunity to really grow and have a stable bunch of families really invested in building a home there. So all that’s great. Certainly there’s a lot of evidence that homeowners do tend to stay in one place for longer, their kids perform better in school. They tended to be more involved in local politics, community affairs, and block cleanups. The problem is, it’s very hard to separate out the effects of homeownership itself from the fact that people who have a certain economic or social standing are more likely statistically to be homeowners in the first place.
Does this mean that we shouldn’t actively encourage homeownership, using government money or government policy?
I think there’s nothing wrong with using government money, policy, pressure, all those tools to make homeownership more of a possibility than it would otherwise be in the marketplace, simply because the market left to its own devices discriminates aggressively. It rewards people who already have wealth, who have already had a leg up economically, and it’s great to give other people the opportunity as well.
The problem is that homeownership is the only housing policy that this country has ever shown any commitment to. Renters are treated miserably.
And that’s one big distinction you see between the U.S. and European countries that also had very loosely regulated mortgage-security markets and have had problems there. I think one reason you’re not seeing mass foreclosures on quite the scale that you had in the U.S. is that for large proportions of the population in many European countries, including the Netherlands, Germany, France, Switzerland, renting is supported through government policies that, for instance, protect tenants so that they don’t have to worry about getting kicked out at the end of the year.
Whereas in the U.S., homeownership was always the only option. And anyone who can afford to, or thought they could afford to, would choose that option. So that’s really the problem here.
Whose fault is the mess that we’re in now? And how far back do we need to go to start tracing the blame?
I think the message of my book, unfortunately, is that it’s to some degree everybody’s fault, including, I should say, liberal activists, with whom I’m extremely sympathetic, and think were right.
But what we really had was a collision of ideologies over this question of: How do we make it possible for everyone to be a homeowner? How do we eradicate this horrible legacy of discrimination, which had left the homeownership rate for whites much, much higher than that for blacks and Latinos? There was real work that needed to be done there. So I think we really have to go back to the 1970s, when we started to see pretty aggressive policy measures on the part of the federal government to try to level the playing field.
You talk about another real estate bubble in the early ’70s, when everybody who wanted one could get a mortgage. The wreckage that was left behind looks totally familiar.
Yes. Rather infamously, the federal housing administration, which is the government agency that insures mortgages — it’s what built Levittown and all those 1950s suburbs after the war — discriminated very aggressively, on the basis of what was thought to be sound statistical evidence, that the insurance fund would only be safe if it were to insure suburban and overwhelmingly white areas.
So what happened in ‘67 and ‘68 was that federal housing officials reversed that entirely. They proclaimed, initially just in the riot areas and then more broadly across cities, that FHA, the Federal Housing Administration, would now be open everywhere! And in fact, as I note in the book, the only circumstances under which HUD did not insure mortgages is if the house is literally falling down.
Real estate agents and loan brokers descended on inner cities, trying to find borrowers who would be unlikely to pay their mortgages back, because the real-estate speculator would get paid in full by the federal government, and paid more quickly and more generously, because of forgone interest that they would get compensated for. The sooner that borrower went into foreclosure the more generously that entrepreneur would get paid.
When was that mess cleaned up?
About ‘73, ‘74. There were tens if not hundreds of thousands of abandoned houses all over the country as a result of the FHA debacle, and it got a lot of attention at the time and was almost forgotten to history after that.
And then we have the Reagan presidency and — correct me if I’m wrong — but that’s when the securities market for mortgages really blossoms, right?
Absolutely. Mortgage-backed securities had existed since about 1970. They existed in the ’20s too, and that was part of why the Depression happened — they had been made illegal after that. But they came back as a government product in 1970. As I recount in the book, Lewis Ranieri of Salomon Brothers, which was trading in government-backed securities, thought, “Couldn’t we just do this ourselves? Why do we need to have Freddie Mac or Fannie Mae in the middle, why don’t we create these securities?”
In order to do that, they needed to rewrite all those laws that had been passed following the crash in 1929 and thereafter, which was as much a housing and real estate bubble crash as it was a stock market crash.
Who’s to Blame For the Housing Crash? – Mark Schone, Salon
July 2nd, 2009
Falling home prices have eroded the equity that American homeowners have in their homes, as David Wessel observes in his Capital column.
More than half of American home equity is in homes for which there are no mortgages; there never was one or it has been paid off. Of the remainder, the bulk isn’t in homes with high-end jumbo mortgages or in homes with subprime mortgages, it’s in homes with conventional mortgages, the sort backed by Fannie Mae and Freddie Mac.
The situation may have to get worse before it gets better. Most economists in the latest Journal forecasting survey expect home-price declines to continue at least through this year.
Here are the numbers, courtesy of Greenspan Associates, the former Fed chairman’s consulting firm.
Value of Equity in Homes
Total: $8 trillion
Without mortgages: $4.4 trillion.
With mortgages: $3.6 trillion
Subprime negative $0.1 trillion
Alt-A $0
Prime Jumbo $0.6 trillion
FHA/VA $0.1 trillion
Conventional/conforming $2.9 trillion
First lien home-equity loan $0.1 trillion
Source: Greenspan Associates
Where’s the (Remaining) Housing Wealth? – David Wessel, RT Economics
June 29th, 2009
A growing number of American homeowners are falling into financial limbo: They’re badly behind on payments, but their banks have not yet foreclosed.
The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation’s housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown.
“It just means foreclosure rates are going to keep rising,” said Patrick Newport, an economist for IHS Global Insight.
Rising mortgage delinquencies were at the root of the recession, and many economists say an economic recovery will be difficult until the housing market recovers and home prices stabilize.
And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.
“I have even begged them for a foreclosure,” delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn’t save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.
During the first quarter of this year, the share of all homeowners seriously delinquent on their mortgage but not yet facing foreclosure more than doubled to 3.04 percent, or about $227 billion in loans. There was a total of $97 billion in such loans during the same period in 2008, according to Inside Mortgage Finance. In more prosperous times, the rate is much lower — it was less than 1 percent in the first quarter of 2007, according to the industry publication.
Not Paying the Mortgage, Yet Stuck With the Keys – Washington Post
June 28th, 2009
It’s not working. The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis is a huge bust. The financial moguls, while tickled pink to have $1.25 trillion in toxic assets covered by the feds, along with hundreds of billions in direct handouts, are not using that money to turn around the free fall in housing foreclosures.
Foreclosure Fiasco: Obama Does Banks’ Bidding – Robert Scheer, The Nation
June 26th, 2009
Subprime is done. All the teaser rates are over, the interest rates have reset and the writing is on the wall.
But in the coming quarters, the scenario will play out with other exotic mortgages, Option ARM (pick-a-pay), Alt-A, etc. The homebuyers may have had better credit, but they had the same strategy: Get a low interest rate upfront, and then deal with the reset down the road, by either refinancing or selling the home. But, whoops, home values are way lower and the economy sucks. Plan derailed.
The subprime mortgage issue is largely past, here comes the Option ARM and Alt-A mess. (Clusterstock)
May 27th, 2009
From Bloomberg:
Foreclosure filings in the U.S. rose to a record for the second consecutive month in April as banks increased efforts to seize homes from delinquent borrowers.
A total of 342,038 properties received a default or auction notice or were seized last month, RealtyTrac Inc. of Irvine, California, said today in a statement. One in 374 households got a filing, the highest monthly rate since the property data service began issuing such reports in 2005.
“What you’re seeing is the inevitable result of severe job losses,” Nicolas Retsinas, director of housing studies at Harvard University in Cambridge, Massachusetts, said in an interview. “Until we stem the job losses, we can expect to see continuing foreclosures.”
Unemployment is hampering the housing market as property prices fall. The U.S. jobless rate rose to 8.9 percent, the highest in more than a quarter century, the Labor Department said May 9. Home prices fell the most on record in the first quarter to a median $169,000 amid sales of foreclosure properties, the National Association of Realtors said yesterday.
Foreclosure filings jumped 32 percent from the year-earlier period, RealtyTrac said. Filings were little changed from March as some states delayed seizures. Ten states accounted for three- quarters of all foreclosures in April, with California leading the nation.
Declines Slowing?
U.S. Housing and Urban Development Secretary Shaun Donovan and former Federal Reserve Chairman Alan Greenspan said yesterday there are signs the real estate market is recovering.
“Since January we’ve seen both home sales moving up and down around a relatively stable number and we are seeing the first signs that the rapid decline in home prices is starting to abate,” Donovan said at an NAR conference in Washington.
March prices fell less than in February and 17 states showed sales increases, yesterday’s NAR report showed, as buyers took advantage of mortgage rates below 5 percent. The Federal Reserve is purchasing mortgage-backed securities to spur lower rates.
While price declines are slowing, it’s likely bank seizures will increase in the coming months, RealtyTrac Chief Executive Officer James Saccacio said.
“Lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria,” Saccacio said.
California was No. 1 in April with 96,560 filings, a 42 percent increase from a year earlier, RealtyTrac reported. Florida climbed 75 percent to 64,588, Nevada rose 111 percent to 16,266 and Arizona rose 40 percent to 16,245.
State Rankings
Illinois ranked fifth in filings with 13,647, up 54 percent from a year earlier. Other states among the top 10 were Ohio with 12,324, Georgia with 11,521, Texas with 11,314, Michigan with 10,830 and Virginia with 6,254.
Nevada had the highest foreclosure rate as one in 68 households there received a filing, more than five times the national average. Bank seizures dropped 44 percent from the previous month, RealtyTrac said.
Florida had the second highest rate at one in 135 households, almost three times the national average, and bank seizures fell 7 percent from March. California ranked third at one in 138 households, and Arizona was fourth at one in 164.
Utah, Georgia, Illinois, Colorado and Ohio were among the other with the 10 highest foreclosure rates.
Connecticut had the 19th highest rate, one in 662 households. Filings rose 25 percent from a year earlier to 2,174.
New Jersey’s Rate
New Jersey had the 22nd highest rate, one in 695 households, and filings fell 4 percent to 5,034. New York ranked 36th at one in 1,420 households, and filings fell 1 percent to 5,591.
Las Vegas had the highest rate for metropolitan areas with populations of 200,000 or more. A total of 14,073 properties, or one in 56 households, received a filing, almost seven times the national average, RealtyTrac said.
Cape Coral-Fort Myers in Florida ranked second at one in 57 households. The city also had the steepest price decline in the first quarter, down 59 percent from a year ago, the NAR said yesterday. Miami and Orlando ranked ninth and tenth.
California cities ranked third through eighth: Merced, Modesto, Riverside-San Bernardino, Bakersfield, Vallejo- Fairfield, and Stockton, according to RealtyTrac, which collects default data from 2,200 U.S. counties representing about 90 percent of the population.
“The housing problem is now an economic problem,” Retsinas said. “On the margins you have some investors who think they may have found the bottom, but on the other side are foreclosures.”
May 13th, 2009
Politicians will also like it. They will be able to claim that they are helping their constituents.
And they will be able to say that the banks and lenders, and not the taxpayers, will pay for it (even if those same banks are being kept alive with taxpayer money). One has to wonder, did the investigation look at the actual loan files?
From the NYT:
The net of this story is that Goldman has agreed to pay the state of Massachusetts $60 million to settle a dispute regarding Goldman’s “predatory lending” practices in and around Boston. $50 million will be made available to reduce the loan principle on 714 individual mortgages. Of note is that the agreement called for reductions in principal of as much as 30% for traditional mortgages and up to 50% on second mortgages. Also of note is that the State of Massachusetts gets to keep $10mm for their efforts. Not bad for Attorney General Martha Coakley.
This means next to nothing for Goldman Sachs. However, a very dangerous precedent has been set. In the critical years 2005-2007 Goldman was ranked 15th in the League Tables for sub prime and Alt-A origination/securitization. Goldman’s management must be pleased as punch with that poor showing today. Those that ranked high on that list are no doubt consulting with their attorneys.
If Goldman gets its hand slapped for $60mm over 714 mortgages what does this mean for Countrywide Financial? They were very big in Boston. Merrill Lynch was at the top of those securitization tables. That is what got Stan O’Neal fired. If the settlement in Boston is representative of what will be forthcoming then Bank of America is going to be facing a very big number. And that is just Massachusetts. The AGs in the all of the other states, especially Florida, Nevada, Arizona and California must be licking their chops at this news.
One hears a lot about loan modifications these days. So far there are two basic approaches.
I) The borrower is given relief in the form of a lower interest rates and stretched-out maturities. The homeowner stays in the home.
II) The bank will accept a deed in lieu of the mortgage. The homeowner is out of the home.
There have been very few cases where a homeowner is allowed to stay in the home and achieve a principal reduction. The Boston settlement opens the floodgate for principal reduction. It is the essence of the agreement. All 714 borrowers are now eligible for principal reduction and the money is just sitting there waiting to be collected.
One can imagine the conversations between neighbors in Boston:
A: “Good news finally! I just got 35% net off my first and second mortgage.”
B: “Wow! How did you manage that?”
A: “I was lucky enough to get my mortgages through Goldman Sachs. They did a deal with the Mass AG and I win the lotto!
B: “I have my mortgages with Indy Mac Bank can I get reduction too?
A: Sure. Here is the number to call. Now lets party!
This is lining up badly for the banks. The States are broke. They will see this as a source of revenue. Politicians will also like it. They will be able to claim that they are helping their constituents. Word on this will spread quickly from borrower to borrower. Every one of them will be looking for a break.
The settlement makes an important distinction between first and second mortgages. The rights of the second mortgages are clearly subordinated in the deal. This is how a bankruptcy court would treat the two classes of debt. This provides a clue on how these ‘seconds’ will be treated in the future.
One of the largest sources of these second mortgages is the Mortgage Insurance Industry. They provide a guaranty of payment on the first loss of 20%. This product competed with the second mortgage industry. It created the same result for the borrower, the ability to buy a home with no money down. Precisely what Goldman is paying up for. In this case what quacks, walks and swims like a duck is likely to be treated like a duck.
Fannie Mae and Freddie Mac hold tens of billions of these insured or ‘enhanced’ mortgages. FHFA recently reported that the Agencies collectively held or guaranteed 30.2 million mortgages. Of that amount 16%, or 4.8 million are identified as “Non Prime”. Put differently, the Agencies hold 6,000 times more non-prime mortgages then Goldman originated in Boston.
At this point it is not at all clear what the broader implications of the Goldman settlement will be. This development has put the issues of lender liability and principal reduction on the table. It is unlikely they will come off the table anytime soon.
May 13th, 2009
