Over the past few days Obama announced a plan to Stick It To The Man, except the former community organizer has apparently become confused about who “The Man” is. El Presidente plans to hand defaulted landlords a potentially massive government subsidy at the expense of already stressed-out renters.
Before I go on, a disclaimer. I’ve been on one of those marathon programming session, the kind you see in movies. I’m working with one of my most ambitious data projects ever. Good data comes from large record-sets and large record-sets come from tedious aggregation algorithms. Working on housing and foreclosure data sounds fun and glamorous, especially when it’s featured in the news, but like anything glamorous behind-the-scenes the work is often mind numbing. I suppose that’s a good thing though, or more people would focus on collecting the data rather than speculating what data collected by others might mean.
While I’ve been on the compilers, President Obama has been on the airwaves, and he appears to have lost his his mind given some of the announcements I’ve seen rolling through my email inbox over the past couple days.
Personal confession: I’m a Democrat. I was an early and active Obama supporter, buying into the whole Hope & Change shtick right up until Rahm Emanuel labeled Democrats that disagreed with the President “retarded.” Later he apologized .. for using the word “retarded,” because it’s politically incorrect. Looking at Geithner’s sneer, Emanuel’s words, and Obama’s actions I came to the epiphany that I’d been had.
At the back of my mind, or sometimes the tip of my lips, comes Reagan’s line, “I didn’t leave the Democratic Party,” sayeth the Gipper. “The party left me.” My girlfriend put the slogan on a t-shirt telling me “take the hint, Olenick.” I still haven’t had the heart to wear the shirt.
OK – enough of that and on to those announcements from our Bank Panderer In Chief.
The first, and worst, is Obama’s plan to enable back-yard landlords to refi to lower rates, Boom-Era Property Speculators to Get Foreclosure Aid: Mortgages. Obama has worked out a plan to refinance landlords. There’s Corporate Welfare, then there’s corporate welfare, then there’s .. this. Except for ramping up Fannie and Freddie, then telling investors their bonds were a surrogate for the 30-year Treasury, it’s hard to think of a more poorly devised public policy move related to housing.
I don’t need data to rate the chance of defaulted landlords passing on their windfall by reducing rent or improving the properties they “own” .. zero. These are landlords that collect rent while the property sits in foreclosure, leaving the tenant unsure what will happen to them once the bank takes the property.
I’ll ignore that there are laws to protect tenants after foreclosures, because the banks routinely ignore those same laws. Tenants face the same problems as a person losing their home to foreclosure, except they oftentimes made every payment and just had the misfortune to rent from a crook. If you think getting a damage deposit back from your college-era landlord was difficult try a foreclosed landlord pocketing the rent.
I can make a strong moral argument that the value of the notes, the mortgage loans, would have plummeted but-for bailouts and argue the free market is not operating for owner-occupiers. But people renting are entirely different because the price of housing, including rents, would have dropped had those notes been liquidated in bulk. Therefore, there is a very real economic and moral issue demanding rent from somebody while not paying anything to the bank, externalizing the stress of what will happen when a foreclosure is complete to a third-party that is paying every month.
I met a couple not long ago who were renting a FL house that went into foreclosure. They wanted to purchase it but their landlord, who made it clear he’d ruin their credit by moving to evict them if they stopped paying rent, would not cooperate on a short-sale offer. At the same time he also made it clear they were on their own for maintenance.
Their lease expired and they purchased a home around the corner. They know that there’s still enormous market volatility but didn’t care; they love the neighborhood, can afford their house, and have no plans to move. Their former neighbors watched as their former house, sitting empty, deteriorated and was eventually sold as an REO for a fraction of what they paid for a similar house less than a block away.
Subsidizing their landlord, at the expense of these people who never missed a payment is, quoting Obama’s former Chief of Staff, retarded. It’s morally and economically unjustifiable.
Tenants who are current should be given an option to make a short-sale offer to the mortgage holder anytime a property goes into foreclosure, with or without the cooperation of their landlord. If accepted, and the landlord doesn’t cooperate to close the deal, the house would be fast-tracked through the foreclosure system — put at the front of the line — and REO’d to the people living there. State government could even allow the renter to divert their rent to pay the legal fees for the expedited process, and ban credit bureaus from reporting them as “delinquent.”
Obama announced two other policies. One is a plan allowing people to refi bubble-era FHA loans, reducing mortgage insurance premiums and interest rates. I’ll ignore the question of who took out an FHA loan back when pulse-loans were available at cheaper prices and cut to the point: how does this help revive the private label MBS market? It doesn’t.
If the Administration was willing to take a gamble on mortgage insurance why not offer it to private lenders willing to refi on the same or better terms? As long as these plum government programs are available, private lenders will not be able to compete and, until they do, we’ll be holed up in housing purgatory forever.
Finally is the Service Members Civil Relief Act settlement, where wrongfully foreclosed service members were given a strong settlement, usually a free house and a six-digit check. This is reasonable compensation to military personnel, and a justifiable penalty to the banks, but Obama had nothing to do with it: most major banks offered this months ago. There’s nothing new.
I worked on some of the data related to military foreclosures and don’t remember much of a push from the Obama Administration. Congressional Democrats were justifiably fierce about the issue but Obama was MIA. I don’t remember any involvement at all by the White House. If anything, people who knew people who knew people said that those people were interested in other things. I guess that meant crafting more bailouts while labeling members of their own party “retarded” for caring about the subject the White House now boasts about.
OK, my test data run is finished so now my blog post is too. 19,477,672 pieces of digital data sitting about where they belong. I can see there are a few hiccups — they need to be sitting exactly where they belong — so I’m back to the compilers.
I wish the Administration would work on fixing housing and the underlying economy in the same way I collect my data; maybe we really would see some hope, and we’d definitely see some change. Even if they worked as hard as I do when making my morning coffee would be an improvement. But putting yet another tiny bandage on the gory mess that is the modern US housing market is, again repeating Obama’s Chief of Staff .. OK; even bleary eyed from programming I can’t sink to his level and write it again.
Cross posted from nakedcapitalism.com.
The normally astute Bill McBride of Calculated Risk has joined the chorus of cheerleaders to argue that an alleged decrease in housing inventory means that house prices are near their ethereal bottom.
Living in W. Palm Beach, FL, the epicenter of the foreclosure crisis, it seems more likely that analytical ethics related to housing finance is the only element nearing a bottom, and only then because the home price pundits on which people like McBride rely can’t go much lower.
McBride uses data from the National Association of Realtors (NAR), analysis by Goldman Sachs, trends in completed foreclosures, and traditional seasonal housing patterns to make his case.
My first inclination was to cross-reference whether the NAR data McBride relies on is before or after the NAR’s massive adjustment late December, when the real estate group admitted to overstating home sales by over one million in some years.
However, when I went to do preliminary research I found the NAR revised their post revision December sales estimate from +.5 percent to -.5 percent. I could almost hear them playing “Oops, we did it again,” as they wrote the press release. This group is so devoid of credibility nobody should use their estimates except maybe scholars writing about business ethics.
I’m one of the very few borrower-friendly analysts who somewhat admires Goldman Sachs, though in the same way I also admire a Bengal Tiger: they’re somewhat ruthless. But GS staffers, when faced with public policy versus morality issues, are like the characters in the movie Idiocracy who find the only thing they have in common is that they all “like money.” Their analyst may be correct, or they may be working — to quote prior internal email — on pumping another “shitty deal” like exploding CDO Timberwolf, structured-to-fail Abacus, or the financial destruction of Greece. Their reputation is better than the NAR, though their motives are not always clear.
Then there are those completed foreclosure figures. Yes .. they’re down. But only because the foreclosure processing packing-house came to a virtual stop, especially in high-volume states, thanks to a fraud-fest unlike any ever seen in US history.
Finally there is the argument that seasonal trends show a slight decrease in January inventory, which will nudge inventories higher (as in the some of the fall in inventories in January may be due to factors like sellers taking homes off the market, which means some of the reported improvement may not reflect fundamentals). I agree with this point: banks tend to ratchet down evictions during the holiday season and buyers tend to avoid moving in the middle of winter. But this seasonal adjustment will just make inventories higher. As the snow begins to melt away, and the unofficial foreclosure moratoriums end due to the AG settlement, if the banks open the floodgates inventory stands to spike.
I don’t want house values to fall through the floor. I own a house in Florida and expect the value to take a massive hit if the rocket-docket judges resume their reckless quest to throw fellow Floridians to the street. I stand to personally benefit on the tiny chance this relentless drive to deceive people into buying homes in an unstable market succeeds and stabilizes prices. But I’m neither delusional nor dishonest: there is not a single credible data point I’ve seen that home prices will increase anytime soon. They may stabilize if banks control inventory, but by definition that means buyers can wait to see what actually happens rather than what’s predicted to happen.
Cheerleaders should bet with their own money rather than just encouraging others to do so. There are many beautiful Florida houses for sale or in foreclosure within walking distance from my own home. If Jamie Dimon genuinely believes it’s a great time to buy a home then JPM should fund these loans, and retain the loans on their own books. If Bill McBride believes the same, he should come buy one.
Only government-owned Fannie Mae and Freddie Mac, the GSEs, are funding home loans, and they’re charging steep market risk premiums regardless of personal credit. Every borrower pays a quarter-point “Adverse Market Delivery Charge” regardless of his risk profile. Borrowers with, say, a FICO score of 810 and a loan-to-value ratio of 65% are going to pay an extra quarter-point in interest just because the GSEs say they cannot predict a market bottom, even if Bill McBride can.
Besides the GSEs there is the private secondary loan market. I’d argue it doesn’t exist but I searched EDGAR and it does: I found one publicly registered private MBS last year. That’s not a typo: Sequoia Mortgage Trust 2011-1 bundled 303 loans, the only apparent new publicly listed MBS. In comparison Countrywide had some months during the bubble where they’d create an MBS each month, usually for thousands of loans.
It’s noteworthy that the second densest population in Sequoia’s MBS is New York, NY, which has, by far, the longest foreclosure period anywhere in the country. So much for the theory that prolonged foreclosures, as opposed to anticipated housing gluts and uncertain markets, alienate investors.
As long as the private secondary market remains effectively dead and the gavels continue to slam on the foreclosures home prices will sway like a Banyan tree in a hurricane. Like that tree prices may go up a little, or down a little, but the real question is whether that tree, and the price of the house next to it, will be planted in the ground or floating in the Atlantic when the storm passes.
Alpha housing analyst Laurie Goodman of Amherst Securities estimates shadow inventory is about ten times higher than does housing data provider CoreLogic. Having worked through my own study of shadow inventory, comparing state-by-state delinquency rates cross-referenced to housing stock volume I concluded Goodman’s analysis makes more sense. However, there’s almost no point arguing because the fact that they are so far apart is a strong indicator that nobody has a good grasp on these vital metrics needed to call a market floor.
Warren Buffet noted in his 2011 roundup letter that last year he predicted “a housing recovery will probably begin within a year or so.” He goes on to note “I was dead wrong,” showing a level of self-confidence seldom seen in this field. Buffet predicts “housing will come back,” and he goes on to illustrate some positive trends, but declines to call out a specific timeframe.
As I’ve written in my own shadow inventory analysis the OCC reports there are about 52.25 million US homes with a first mortgage. But the 2010 US Census reports there are 74.8 million owner-occupied homes and that that 50.34 million of those have a mortgage. There are 131.8 million “housing units” to shelter about 313 million people. These housing figures simply cannot be reconciled except to the conclude that a) the US has an enormous number of post-bubble houses, b) many of those were mortgaged during an enormous housing bubble, and c) far too many American’s remain overleveraged with housing debt, and d) young people who could and should be forming houses are buying are saddled with too much student loan debt to do so.
For buyers who want a home, not a house — that is, if your primary purpose is to shelter your family rather than your money — and you don’t want to rent because you plan to make improvements, don’t plan to move for a decade or longer, and can purchase with cash, it may not be a bad time to buy.
But for all other buyers, which includes virtually everybody, heed the hindsight of those who purchased homes at every other phantom market bottom and who are now underwater. Wait until you see price appreciation, in the region you want to purchase, for a quarter or two. Your house may cost a few thousand dollars more in the short-term than at the genuine bottom but, in the long run, it’s a safer bet than losing tens of thousands of dollars in an unstable market.
In two stories Pro Publica follows up on their Monday non-story about Freddie Mac’s decision to increase retention rates of the interest-only (IO) arm of pools they bundled in 2010.
Yesterday Pro Public released two more stories on the subject. Rather than admit any problem with the original they doubled down, or more accurately, tripled down.
The first of the two stories, Why Fannie and Freddie Are Hesitating to Help Homeowners, was released at 4:10pm. After a few hours initial authors Jesse Eisinger and Chris Arnold released Frddie Mac’s Regulator Says Trades Were Shut Down Because They Were “Risky.”
Both stories contain the same theme. Senators from both parties are shocked — shocked! — that Freddie Mac decided to keep the IO arm, putting itself in a position where the GSE stood to lose money if borrowers refi’d into lower interest mortgages.
Quoting Pro Publica’s “why they’re hesitating to help homeowners” story: “Sen. Barbara Boxer, D-Calif., told NPR she was shocked by a recent meeting with DeMarco. ’It was the worst meeting I’ve ever had in my life,’ said Boxer. ‘His interest is making sure Fannie and Freddie do well financially.’”
I can’t imagine why DeMarco would think such a thing: maybe it’s because by law he’s obligated to? Specifically, the Housing and Economic Recovery Act of 2008 (HERA) mandates that the GSE’s attempt to make a profit to pay back the US for the damage their pre-meltdown recklessness caused. Boxer voted in favor of the legislation, along with 84 of her Senatorial colleagues including Sen. Robert Casey, D-Penn., who also criticized Freddie’s behavior.
As I’ve already written it’s far from clear that Freddie’s decision to retain the IO coupons can be construed as harmful to American borrowers for a number of reasons, the most compelling being that by owning the paper Freddie can more easily modify mortgage rates downward without investor liability or interference.
But there’s one point I missed: even if the decision to retain the coupons wasn’t in the best interests of borrowers — even if Freddie Mac was simply trying to make money at the expense of the American Homeowner — that’s exactly what they’ve been ordered to do under the law.
Under laws passed by a Democratic Congress and signed into law by a Republican President Fannie Mae and Freddie Mac must try to make money and pay back the American taxpayer.
There’s a legitimate debate about the best way to help American homeowners. For example, I strongly believe that principal reductions, while politically unpopular, would likely put a floor on the market and — assuming we can figure out a way to address the enormous amount of shadow inventory without torpedoing the market — save the GSE’s more long-term money than they’d cost. Somebody, either at Fannie, Freddie, or the FHFA obviously disagrees.
I don’t entirely understand their reasoning but at least I recognize the constraints that they’re under and, I’m hopeful, that they recognize and understand the argument in favor of principal reduction. Principal reduction is one element that has sharply reduced 12-month re-defaults in the private market, with its lousier borrowers, lowering it below the GSE 12-month re-default rate. In a report they wrote IT problems were partly to blame but I’m sure there’s something deeper than that (if that is the case here’s a short-cut: enter the principal reduction as a one-time negative “fee” in existing systems).
It wasn’t long ago that Fannie and Freddie were running around touting their “affordable housing” initiatives. In cooperation with “strategic partners” to serve as originators, the most notable being Countrywide’s Angelo Mozillo, lots of people purchased lots of houses. They achieved the “American Dream” of home-ownership .. only to see it ripped away when the bubble burst.
Private banks built and financed most of the half-million dollar Chinese drywall 3BR house that went on to rot hopes and dreams the same way they did the house’s wiring. But it was Fannie and Freddie that laid the political, legal, and moral foundation that allowed those banks to put people into homes bankers knew they could not afford.
In Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, Gretchen Morgenson and Josh Rosner spell out this argument better than I could. Their hypothesis and narrative is substantively different than the normal “Fannie and Freddie did it” oversimplification we’ve become familiar with, and a lot more compelling. Fannie and Freddie really did do it, just not in the way most people understand.
Pro Publica and certain members of Congress are veering dangerously close back to the notion that there is something positive about selling houses to people who cannot afford them, and that the GSE’s should be aiding in that goal. There isn’t, and they shouldn’t.
DeMarco has been described as steely or icy. Given his history, his mandate, and those he has to work with that’s understandable. All things considered he arguably has one of the worst jobs in government. Love him or hate him he should be commended, not condemned, for following the law. If Congress has changed their mind about that law they should revise that law rather than attacking the agency head working to enforce it.