As part of the foreclosure fraud settlement reached with the fifty state attorney general’s one name stands out, mainly because it’s a woman I’ve stood with for years working on these issues, my close and dear friend Lynn Szymoniak who will receive a well deserved $18 million as a lead whistle-blower.
I know the settlement has taken its lumps but now that it’s out there’s one point especially that needs to be highlighted.
First, a link to the settlement. Each of the Big Four banks has the same verbiage, but I’m focusing on Bank of America. The language is the same but they’ve been the worst, plus it gives me a chance to make fun of Brian Moynihan’s “hand-to-hand” combat comment. [Note to Brian: next time you decide to pick a fight in a rowdy bar think twice about how it might end up.]
Besides the long (long, long, long) list of exclusions this one stands out the most:
“For avoidance of doubt, this Release shall not preclude a claim by any private individual or entity for harm to that private individual or entity, except for a claim asserted by a private individual or entity under 31 U.S.C. § 3730(b) that is subject to this Release and not excluded by Paragraph 11.” Appendix F – Pg. 40.
So, what does that mean exactly? It means that except for whistle-blower claims already settled servicers remain fair game .. for everybody. Securities fraud claims? They’re still there. Criminal liability? Still on the table. Clouded titles? Who knows if they’ll win but anybody who wants to win the next $18 million has the right to try.
I know the settlement terms have been described as “broad,” and they look broad at first blush, but nobody pointed out that the exclusion list looks just as broad. This settlement is about government entities settling on very specific terms, terms so narrow when the exclusions are factored in that it’s not clear whether banks signed this as a release, or whether they signed it as a promise to basically move on and start behaving.
I still haven’t hard Moynihan retract the hand-to-hand combat phase and finally say “OK – that was ill advised and didn’t work out so well,” then admit that his bank has behaved recklessly, irresponsibly, and shamefully, then express a genuine desire to grow up followed through with action.
There’s some I know are hopeless. Infamous crook David J. Stern still has a license in good standing to practice law in FL thanks to the FL Bar; might be time for a ballot initiative to strip them of their disciplinary authority. Palm Beach County Judge Meenu Sasser, who pushed the disgraceful rocket-docket while proclaiming “I don’t see any widespread problem” documents (oh yeah, and while sitting on an enormous amount of bank stock) can now see how respectable judges react to the cesspool Stern and his ilk filled her courtroom with. FL Rep. Kathleen Passidomo — who tried to fast-track the fraud through the court system — is unlikely to say she was wrong (the same Rep. Passidomo who suggested an 11 year-old asked to be gang-raped because she was dressed like a “prostitute”).
But maybe there’s hope the banks themselves will realize it’s in their own best interest to start working in good faith.
Bankers are tired. Investors want the private MBS market to come to life again, and there’s no reason that it shouldn’t except for uncertainty on the part of other investors that they won’t be defrauded .. again. But now it’s been made clear there is a path to accountability; the settlement left no ambiguity that investor lawsuits are wide open.
Responsible banks run by responsible bankers should welcome this settlement, but also those lawsuits, because they provide a path to a return of confidence that the rule of law, and the fundamentals of the free market, rule the US. In much the same way that the first step to fixing an abandoned home is to rid it of rodents smart, responsible, respectable bankers have to realize ridding the system of human rodents is good for the banking system, good for the economy, and ultimately great for them.
I can’t stress enough how much I am not “anti-bank,” but I am anti-fraud. Real business people can’t compete with fraudsters because it’s impossible to beat Madoff’s returns. They should use this settlement as an excuse to step out of the woodwork and start to scream as loud or louder than Lynn has been over these past years.
For the sake of the economy, the banking system, and the families — and no, when you’ve done this for a few years it becomes impossible to forget the families, even when mired in financial and legal data — let’s hope banks take the opportunity they’ve been given to change their ways and clean up their mess.
Paul Krugman has a good column this morning, States of Depression, where he’s noticed that cuts at the state and local level are accelerating and becoming a burden on the overall economy. I don’t always agree with Krugman but he’s dead-on with this one.
I’ve been studying housing finance reports extensively lately and can’t help miss how few of the AAA-rated tranches have taken losses. According to official reports everything is peachy-keen with the overall majority of houses in subprimeville.
Except that it’s not.
I’ve written extensively that there are a myriad of indicators showing that those losses are very real, that they will have to be accounted for, and that they’re coming soon to our front door.
For those not in the know, mortgages were bundled together into big pools — called securities for legal reasons, though they look like bonds in the same way a Siberian Husky resembles a wolf — under the notion that if you combine enough the whole pile cannot collectively fail. They were then divided into three sections, or groups, and each group usually divided into further subsections called tranches.
As losses hit these portfolios they were supposed to come from the bottom up, wiping out the lowest tier of the bottom group, then the next, and so forth. Sometimes this was changed slightly so losses from each group were held within the group itself, but it’s the same basic notion.
Most importantly, the bottom tiers were supposed to insulate the top-tiers. In fact, there was so much “buffer” built in that the top tiers they were deemed as safe as US debt by the ratings agencies and rated AAA; actually safer, given our shiny-new AA rating.
However, much of that buffer has been eaten away. Now that it’s gone we should be realizing the losses to the AAA’s but, rather, it’s “Houston (or, in this case, every other American city), we have a paperwork problem.”
Thanks to reckless, illegal, and unethical practices by mortgage servicers we really do have much worse than a “paperwork problem,” we had a fraud-fest that slowed down the foreclosure factory and delayed the losses. But that excuse is wearing thin and we have to face the more basic problem: we’re broke.
In much the same way that pooling together all those houses was supposed to make sure the whole collection could not fail, it made a countrywide (yes, that’s intentional) decline in house prices push down the entire pool. Rather than mark the losses we changed the accounting rules so that those losses could be delayed. Reality has a way of catching up though, and we’re about there.
Who invested in these AAA’s? Pension funds, life insurance companies, city, county, and state governments, college endowments; organizations that either should or were legally required to make extremely conservative investments. Know those annuities your uncle Lew said would always pay .. the money’s likely supposed to come from the AAA’s.
The number of people hurt by the micro-economic effect of the housing bubble and ensuing foreclosure fiasco has been relatively small, thanks to the bailouts. Love them or hate them — and I have to admit, I’m not such a big fan though I am beginning to understand them better — they buffered a severe blow to the economy.
All that will change soon as the AAA’s topple. It’s not a question of if, just when .. and when comes closer every day.
Uber analyst Meredith Whitney famously predicted widespread municipal failures, and was famously “wrong” as muni bond prices declined thanks to some magic force propping up the market. That force is called fraud, accounting fraud, and those muni’s will melt to mush. Just like Jefferson County’s sewer system left the residents there in the financial crapper, so too will those AAA’s; they’re a cancer that’s being ignored (“Judge .. can we delay this sale a sixth time,” asks the bank lawyer).
I’m thinking of a comment I read a couple years ago from a man who said that he’s worked as a state government employee his whole life but who’s now retiring and moving to a different country to enjoy low taxes. Somehow this putz didn’t see the correlation between his cushy lifelong pension to those same taxes.
Hopefully he’s having fun because it won’t be long until those fat checks for the tax-hating fat-cat bureaucrat will take a Marine-style haircut.
It’s virtually certain that a large percentage of his checks, and those that fund and fuel local spending, are invested in those AAA’s, and that those losses have not been accounted for. At one point towards the end of last year Florida’s pension fund was reporting an 18% return, in a year when most hedge funds reports losses, thanks to the delusional way we account for AAA losses.
Maybe the people of the city, county, or state he “served,” with resentment will be willing to see their property and sales tax tripled to support sending pension checks to far-flung ingrate retirees like him. Somehow I doubt it, especially since the anti-government feelings he embraces are widespread, and taxpayers resent being taxed for retiree pensions they themselves don’t have. More likely are upcoming municipal bankruptcies to thrown him, and those like him, under one of the soon to be idled buses.
Whitney is right but, thanks to fraud, her timing was off. When those losses start to hit everybody will feel the pain. Schools will be shut-down, services slashed, and fees increased. Soon we’ll be Greece, with fewer islands and lousier food.
One day we’ll look back upon the last few years and wish we’d had an honest discussion about how to quickly push down those principal levels and put a real floor on the housing market — and the structured finance products behind it — rather than the dysfunctional dialog that’s been ongoing.
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.
“A lie told often enough becomes the truth.”
– Vladimir Lenin, adopted and reused by Joseph Goebbels
Every doctor knows the fastest way to stabilize a patient is to kill them, because there is nothing more stable than death. While that solution may be fast and inexpensive it’s also sub-optimal. Yet pundits repeatedly posit the fastest way to end the housing crisis is through mass foreclosures. In a strict sense they’re right, that will achieve stability, though so will other policies calibrated to cause less micro and macroeconomic damage .. and a lot less human suffering.
Honest economists explain their reasoning, which is that there is a need to find a market bottom. They argue that in a healthy market sellers should not compete with REO properties and buyers need not worry an oncoming glut of foreclosures will drive down the value of their house. These economists, who remain in the minority, usually preface this is a lousy solution albeit the only one they can think of.
More common are bankers and economists who paint a rosy picture at the notion of throwing millions of families to the street, and millions of homes to the market.
“Once distressed inventory comes down and all of a sudden there’s not enough homes, you’re going to have a real bounce,” said JP Morgan Chase CEO Jamie Dimon in a recent interview.
Dimon surely knows the 2010 Census reports 131.8 million residential housing units for 312.9 million people, including about 17 million empties, so I’m not sure where his housing shortage comes from.
Dimon’s bank is sitting on a powder-keg of $87.6 billion of mostly worthless second mortgages at the end of Q3, 2011, according to the FDIC, so I can see why he’s playing cheerleader for a housing renaissance. But treating people like chumps, by encouraging them to buy in this broken market, crosses the line from puerile to patronizing.
If Dimon’s bank is genuinely bullish on housing then let them show it by dramatically ratcheting up their non-GSE lending. It will be interesting to see how JPM investors react to what I’m sure will be Dimon’s forthcoming announcement that JP Morgan Chase plans to lower credit-standards, increase private mortgage lending, and retain the loans on their own balance sheet.
Every argument housing cheerleaders advance is easily debunked.
Dimon argues household formation is increasing. I argue that’s irrelevant because the new couples do not qualify for home loans. Bloomberg reports that student-loan debt is approaching a crippling $1 trillion, preventing young people from qualifying for mortgages.
Bloomberg’s story focuses on a pharmacist with $110,000 in student-loan debt and a steady job that pays $125,000 a year, but who doesn’t qualify for a mortgage. It isn’t only employed professionals: the Bloomberg article goes on to note the Federal Reserve reports the number of 29-34 year old’s who qualified for a first mortgage declined from 17 percent ten years ago to 9 percent in 2009-2010. That is, young people are forming rented households.
This meme, that it’s a great time to buy a house, is relentless.
In a Bloomberg story along the same lines, Potomac Gap Shows Court Foreclosures Delay Housing Recovery, former Fannie Mae chief economist Thomas Lawler compares Maryland and Virginia house prices to argue expedited foreclosures increase home prices.
Asking Fannie’s former chief economist his thoughts on housing is akin to asking Francesco Schettino, Captain of the domed Italian cruise ship, his thoughts on maritime safety. Let’s ignore that though and focus on Lawler’s conclusion, which the data doesn’t support.
Lawler argues that Virginia and Maryland have virtually identical characteristics, yet that house prices in VA rose .8 percent last year while MD prices fell 3.6 percent. Lawler attributes this to the fact that MD is a judicial foreclosure state — where foreclosures require court approval that move through the system slower — whereas VA is a non-judicial state, where banks can simply auction a house after a default.
I have a simpler answer: house prices in MD ran up considerably higher than those in VA during the bubble so prices in both states are now adjusting towards the mean.
Specifically, according to the FHFA’s Housing Price Index (HPI) data Maryland house prices rose 17.7% higher from Q1, 2000 to Q3, 2007, when prices in both state’s peaked. Prices in MD are still 10.8% higher than those in VA, even though, by Lawler’s reasoning, they should be the same.
If anything, the data suggests judicial foreclosure is dampening home price declines in MD, by slowing foreclosures and the drag they place on home prices.
Less foreclosure inventory in judicial foreclosure states, thanks to slower foreclosure processing, reduces supply and stabilized home prices is a simpler explanation, though it’s seldom explored. I’ll refer to it as the Linda Green House Price Stabilization theory.
Obviously, people cannot continue to live in houses they are not paying for forever. But crafting public policy to figure out how to work with these people, which has the least impact on both the economy and the families involved, requires an honest and forthright dialog that just isn’t happening.
My own home state of FL is an economic disaster zone thanks largely to foreclosures and other housing related dysfunction. I often find myself spending the evening discussing housing finance.
It is not uncommon for those current, or with paid-off houses, to launch into a harangue about their irresponsible neighbors and demand that they’re thrown to the street immediately. But when I ask these people to quantify how much they’re willing to pay to punish their neighbor the answer is always zero.
I explain there are two options. One option involves modifying their neighbors mortgage, arguably giving their neighbor a windfall but limiting their own home price decline to no more than 10-percent. The other option involves throwing their neighbor to the street, decreasing the person’s home value by more than 10-percent. Nobody has ever opted to throw their neighbor out if it will personally cost them anything.
Dimon argues “indiscriminate blame of both (economic) classes denigrates our society, destroys confidence .. and damages us.” I agree, though argue the relentless “break the borrowers bones,” theme, combined with less than honest discourse about economic reality, is more destructive than frustration-fueled barbs launched towards those like him who pocketed a $21 million paycheck last year while relying heavily on corporate welfare.
Depending on one’s understanding the 50-state Attorney General settlement is worth somewhere between about $5 and $40 billion. Let’s use the higher number: we still have about a half trillion gap to put a long-term floor on the housing market. It’s time for an honest, open, fact-based national dialog about how to make that happen.
[Originally posted on nakedcapitalism, Shocking Economic Insight - Mass Foreclosures Will Drive Down Home Prices.]
Arguably, the most important factor for the US economy is the number of shadow inventory loans, loans that are now or are likely to wind up in foreclosure.
Economists might argue the US debt matters more, or unemployment, or our trade deficit, but the US economy is driven by the middle-class and, for the overwhelming majority of that same middle-class, their house is their largest asset.
If the value of our homes is being artificially inflated by poor data the psychological effect once the invisible hand steps in to correct those prices could be devastating.
CoreLogic suggests there’s just over a million homes headed for the auction block. If they’re right, which I’m reasonably sure they are not, then we’ll probably be fine: it’d be a great time to buy a house. Laurie Goodman, of Amherst Securities, argues that figure is closer to 11 million homes. If Goodman is correct that same house becomes a terrible investment.
An increase by a factor of ten is referred to as an order of magnitude, so Amherst’s 11 million figure is about an order of magnitude higher than CoreLogic’s 1.2 million estimate. I’ve estimated, in coordination with others (especially Abigail Field), that there are about 9.8 million shadow properties.
As the size of a sample grows the amount of guesswork should shrink, especially if the sample is easily measureable. Estimates about the number of shadow inventory loans, from leading experts, should come nowhere close to differing by an order of magnitude.
It should be easy to compute the total number of houses with mortgages; these are large loans tied to real property. We’re counting elephants, not ants.
My shadow inventory analysis is based upon census data, which uses substantially different base figures than those released by other government agencies and relied upon by analysts as a base. According to the 2010 census, a $13 billion study, there are 76.4 million owner-occupied homes, and 52.2 million which have at least one mortgage.
While that sounds straightforward enough the Office of the Comptroller of the Currency (OCC) reports that there are about the same number of mortgaged homes total for first-lien residential mortgages.
During the real-estate boom it was common for ordinary people to become back-yard real-estate moguls; they’d buy and rent a house or condo or two while the loans were easy and cheap. Predictably, the census reports there are 37.5 million rentals. Further, there are 17 million vacant properties. Since it appears irrational that a person would abandon a property they own outright it’s fair to say that some number of those rentals and a large number of those abandoned properties are mortgaged.
If the OCC has been reporting only owner-occupied houses with mortgages as the total pool of mortgages, and if government agencies and financial analysts have been relying upon this figure, we’re in serious trouble.
When a property hits the auction block it does not matter whether the former owner lived there, rented it out, or even if the property was vacant. At auction, it’s just one more house vying for a limited number of buyers and a limited pool of capital. Increased supply and flat demand mean lower prices.
Something is profoundly wrong when government, consumers, and even the banks are left guessing about the most basic metrics used to gauge economic health.
Data is akin to a map, and the US continues to sail through dangerous waters. We can have intelligent and vehement debates about how we ended up here, and how best to navigate to a more sustainable place. However, the placement of rocks and the depth of the ocean should not be open for debate.
We know that the market for multi-family rentals is booming; constructions starts are up as investors rush to build apartment complexes, despite the high number of vacant properties. This rush to expand rental housing — the willingness of investors and bankers to bet money on an ongoing lack of willingness to purchase homes — speaks louder than the rosier forecasts.
Over the long-run the market is always right: the invisible hand is an unbeatable, unstoppable force of nature that can’t be tricked indefinitely.
Something is amiss if economists, bankers, and consumers have been using a map altered either by incompetence or politics while working in good faith to steer an already injured US economy to safer harbors. Conversely, there’s a different but probably equally dire problem if we spent $13 billion on the census and cannot accurately count the number of houses in the country.
This is a case where, for the sake of the economy, I hope that my analysis is incorrect, though I suspect that I am right. But since releasing those sky-high figures nobody has proffered any explanation, rational or otherwise, refuting the significantly higher figures or explaining the discrepancy.
Originally posted Jan. 11, 2012 on nakedcapitalism.com, here http://www.nakedcapitalism.com/2012/01/michael-olenick-10-million-shadow-inventory-says-housing-market-is-a-long-way-from-the-bottom.html
“Shadow inventory,” the number of homes that are either in foreclosure or are likely to end up in foreclosure, creates substantial but hidden pressure on housing prices and potential losses to banks and investors. This is a critical figure for policymakers and financial services industry executives, since if the number is manageable, that means waiting for the market to digest the overhang might not be such a terrible option. But if shadow inventory is large, housing prices have a good bit further to go before they hit bottom, which has dire consequences for communities, homeowners, and the broader economy.
Yet estimates of shadow inventory, and even the definition of what constitutes shadow inventory property, vary widely. For example, the Wall Street Journal published a Nov. 11, 2011 article, “How Many Homes Are In Trouble?” where values varied from 1.6 million (CoreLogic), to “about 3 million” (Barclays Capital), to 4 million (LPS Applied Analytic), to 4.3 million (Capital Economics), to LPS Applied Analytics, to between 8.2 million and 10.3 million (Laurie Goodman, Amherst Securities).
Why do these numbers vary so much? Even though CoreLogic is generally considered to have one of the best databases of loans, its estimates of loan performance and odds of default are based on credit scores, which is a badly lagging indicator. Laurie Goodman is seen by many as having the most carefully though out model, even though industry insiders are keen to attack her bearsish-looking forecast.
I have a large database of my own, and am familiar with housing and mortgage information sources. I’ve come up with my own tally of shadow inventory and have also tried to analyze — OK — take a stab at – what I call “shadow liability,” meaning the amount of money taxpayers, investors, banks, will be lose if those homes are liquidated. Assumptions using those terms are also in the attached spreadsheet. My analysis comes up with a total close to that of Goodman’s range, 9.8 million using a narrower definition than Goodman’s of what constitutes shadow inventory.
Put more simply, things are actually worse than any of the prevailing estimates indicates, although Goodman is very close to the mark. Current loss experience suggests that this figure is staggering, easily in the $1 trillion range.
Why aren’t those losses more visible yet? Well, evidence suggests that servicers are stalling the foreclosure process, not taking title to and selling these houses. For the lenders, such delay likely allows them avoid the write-offs of both the negative equity as well as the worthless second liens. More generally, it keeps the trillion dollar losses hidden. Lenders aren’t acknowledging their stall tactics, however. When people notice how slowly foreclosures are progressing from initial steps to resale, lenders point at their foreclosure fraud related dysfunction. Lenders conveniently don’t mention that such dysfunction was self-induced, instead blaming borrowers and courts.
My data comes from several sources. Default information is from the October, 2011 LPS Mortgage Monitor. Housing information, including the number of houses with mortgages, comes from the US 2010 US Census and the 2009 Statistical Abstract. Median home prices — the likely value of the loans that are either in foreclosure or will be soon, is from the FHFA; specifically the Q2, 2006 state-by-state median home prices, when many of the bubble loans were written. Note: these prices are used to approximate the principal value of the loans, not what the properties are currently worth.
Because not all this data overlaps entirely some extrapolation was necessary; when required to extrapolate I tried to do so conservatively. An example is how I arrived at the number of mortgages in the US, a step on the way to calculating the number of mortgages in default.
The first step was figuring out how many housing units with residential mortgages America has. According to the 2010 census, America is home to 131.7 million housing units. Of these, 76.4 million are owner-occupied, 37.5 million are rental units, and the remaining 17.2 million are vacant, and the remaining 600K are houseboats or other exotic housing. Of the 37.5 million rentals, some are in apartment buildings that would be financed with commercial mortgages, not residential ones. Commercial loans are structured differently than residential loans, and are easier to renegotiate, so they I’ve excluded from this analysis.
To be conservative—to exclude more loans as commercial than actually are, rather than risk leaving commercial loans in the analysis—I’ve assumed that any building with 5 or more housing units is in a building that either has a commercial loan or no mortgage at all.
According to the National Multi-Housing Council, using 2011 Census data, has determined that nationally, 42% of renters live in buildings with 5 or more units. Applying that percentage to the 37.5 million rental units, and subtracting that from total renters, I end up with 21.8 million rental housing units that could have residential mortgages.
In total, then, I have 76.4 million owner-occupied homes, 21.8 million residential rental units, 17.2 million vacant homes (which includes, among other things, vacation homes and abandoned ones) and 16.3 million other, mainly units in commercial properties. All in all I end up with just over 115 million homes that could have a residential mortgage on them. But how many of them? Well, the Census reports that in 2010, 68% of owner-occupied units had at least one mortgage. I used this same 68% for investment (residential rental) properties and vacant (primarily vacation and abandoned single family homes) properties.
I believe this 68% figure is appropriate for two reasons. First, a person who has a mortgage on their own home is unlike to buy a vacation house or an investment property with cash. Indeed, even a homeowner living free and clear in their own home might need a mortgage to buy second property. So assuming the mortgage rate for investment and vacation homes is the same as owner occupied surely understates the number of mortgages. Second, the mortgage rate on abandoned homes surely is nearly 100%; why abandon a home if it’s not in foreclosure?
Using that math, I came up with 78.6 million mortgaged properties. This figure is substantially higher than many other estimates, including Goodman’s Amherst study, though the likely reason is that the census data the analysis relies upon is relatively new. Goodman’s study uses 53.7 million mortgaged homes, though the census reports 52.2 million owner-occupied loans alone, in additional to rental properties, mobile homes, and vacant properties. Given that the census cost $13 billion to produce — an amount no private organization could afford — and 2010 results were not available at this level of granularity until relatively recently, I would not be surprised to see upward revisions to other base housing unit figures in the future.
To estimate shadow inventory, I used the delinquency data from LPS Analytics. They add up loans that are delinquent, loans that are in foreclosure, then come up with a state-by-state percentage of “non-current” — loans that are, or are likely, to end up in foreclosure. There is some ambiguity in LPS’ figures; specifically the definition of “delinquent,” and whether they are counting homes or loans.
To illustrate a potential problem with these assumptions, let’s take a theoretical example of 100 houses. Let’s assume 68% have mortgages, a figure from the census, so 68 houses have mortgages. Then let’s assume these homes are in FL and 22.9%, or 23 houses, are either in foreclosure or likely to end up there soon. I’m assuming this means that 45 houses are current, 23 houses in trouble, and 32 houses paid-off, though I concede that it could mean 12 houses with two mortgages are in trouble, 32 are paid off, and 56 are fine.
This methodology differs from Goodman’s, which relies upon predicting both likely defaults and re-defaults for non-sustainable modifications, as well as a small number of homes likely to strategically default as liquidations begin and home value plummets. Conversely, my model assumes all 90-day delinquent loans will result in foreclosure and liquidation — and I’ve yet to see enough good-faith modifications to assume otherwise — whereas Amherst’s believes the figure is likely to be 80-90%. However, I do not allow for strategic defaults, which more than offsets my skeptical assessment of the mortgage mods now begin offered (my assumption is that when people default suddenly, it is really an anticipatory default: the borrower could see he was going to hit the wall, but defaulted before he was completely broke. Given the job market costs of having a foreclosure or bankruptcy on your credit record, I don’t regard that as a bad assumption). Goodman has three buckets of current loans that she anticipates will produce defaults: badly underwater loans (loan to value ratios of over 120%), moderately underwater loans (LTVs of 100% to 120%) and loans with equity borrowers will default upon anyway (LTVs less than 100%). She estimated those three groups would produce eventual foreclosures of 2.8 to 3.7 million of her total. Thus my somewhat smaller tally is actually more dire, because it consists of borrowers who are having trouble making payments now, as opposed to borrowers who are anticipated to default at some undetermined point in the future.
That being said, except for the lower housing unit loan base Goodman’s analysis seems rock-solid, though it would mushroom if used with my higher base housing unit figures and more pessimistic view of servicer’s ability to mitigate defaults. Together they would paint a devastating picture of the future, so I won’t try to reconcile them .. at least not yet.
Using the assumptions above, and applying the LPS data state-by-state, there are 9,800,000 houses in shadow inventory.
If these loans were taken out for the median value of a state-by-state home price, using data from the FHFA, for Q2, 2006, there is $2.3 trillion of home values at near the market peak. The mortgage balances are going to be lower than that, but given how widespread equity extraction came to be (and it is probably that the most levered homes are hitting the wall), it is not unreasonable to assume LTV ratios relative to peak values of 80%. Loss severities on prime mortgages are running at roughly 50% and are 70% on subprime (note that with more borrowers fighting foreclosures, and given that loss severities on a contested foreclosure can come in at 200% or even higher, so using these assumption is certain to understate actual results). $2.3 trillion x 80% x 50% = $900 billion.
These losses will be distributed across the GSEs (meaning taxpayers), banks that have second liens (with the biggest losers being Bank of America, Citibank, JP Morgan, and Wells Fargo), investors in private label (non GSE) mortgage securities, and other US and foreign banks. Balanced against this liability is some amount figure for the underlying asset, the house. Given that servicer advances, foreclosure costs and servicer fees come close to and even exceed the value of the property, comparatively little of this $2.3 trillion will be recovered in property liquidations.
It is unclear where the money from these write-offs will come from, or whether they losses have been adequately budgeted. Obvious sources are Fannie Mae, Freddie Mac, European and US banks, none of which have reported anywhere near this level of reserves. We know that the Federal Reserve has been buying up MBS and related instruments in bulk; maybe the central bank plans to print more money to cover the losses and enable the foreclosures. Printing this much money, for this purpose, in this political environment, in secret, seems unlikely.
In support of the conclusion that banks cannot afford to recognize this shadow liability is the sharp decrease of foreclosure filings in 2011 and the seeming unwillingness of banks to move foreclosures through the system. They file foreclosures, then let them linger, not taking homes even when every possible borrower defense is exhausted. Some of this slowdown may be due to more scrutiny of foreclosure documentation, particularly in judicial foreclosure states, but there is clearly more at work. In the most obvious example, servicers are reluctance of banks to take title to the homes after obtaining a judgment; even after the judgment is a year old and cannot be challenged.
For example, filing volume in Palm Beach County, FL, started to increase towards the end of 2010 but judgments remained flat and certificates of title — where a bank actually takes title to a house, recognizing the underlying financial loss and evicting the family — actually slowed down despite an enormous backlog of judgments. This contrasts to the banks incessant complaints of a broken court system, because a judgment more than one year old in FL cannot be challenged for fraud. This leads to the conclusion that it is the banks — who are unwilling or unable to absorb the losses — rather than the courts or homeowners that are actually slowing down liquidations.
Let’s walk through these figures. In Palm Beach County, the number of Certificates of Title issued for Q1-4, 2011, was 1,594, 1,886, 1,413, and 1,299 respectively; the number of judgments was 289, 480, 281, and 367 respectively. Let’s compare that to 2010, when there were 3,105, 9,704, 7,259, 1,033 judgments in Q1-4 respectively and 1,534, 2,207, 3,065, and 2,738 titles transferred.
Many of these cases are uncontested; yet it is not uncommon in foreclosure court to see bank lawyers arguing vehemently for delays with nobody on the other side.
Let’s review more figures: in Palm Beach County there are 10,794 more final judgments of foreclosure that are at least a year old than there are certificates of title issued. Again, there is nothing anybody can do to challenge a judgment after one year. Servicers appear to be milking ongoing costs and fees from investors. Cross-referencing that to a softer data point I’m reminded of a worker, in my home state of FL, sent by a company I hired to perform a home repair. He’s a young man who said he purchased a condo, lost a prior job that paid better, and stopped paying for his condo for which, he noted, similar models were selling for at a 80% discount to what he owed. He filed no defense to his foreclosure whatsoever — he was positively clueless about the judicial system and did not hire a lawyer — but he ran to his truck to show me a Notice of Voluntary Dismissal of his foreclosure, asking what it meant. It’s clear that while some homeowners do their best to avoid the auction block, even those who do nothing all have a statistically good chance of staying put.
There is other anecdotal evidence suggesting banks do not want these houses or, more accurately, do not want the write-offs that actually taking the houses would force:
- Foreclosure defense lawyers have clients who have not paid their mortgage in years, but face neither a foreclosure nor even a negative mark on their credit report. I recently received a call from a man who said he had not paid his $1.6 million mortgage in two years but his servicer has not foreclosed, and he faces no derogatory information on his credit report; he was frustrated because he is retired and just wants to move to a cottage. This phenomenon, which apparently isn’t rare, might explain why shadow inventory reports that rely on credit reports to extrapolate shadow inventory are often dramatically lower than these calculations.
- Every year the Republican dominated Florida legislature introduces legislation to speed along foreclosures, and every year the legislation fails. I personally believe this legislation to be both immoral and arguably illegal. However, it is impossible to believe this bank beholden governmental body is willing to repeatedly bite the hand that feeds them .. unless their master makes it quietly clear that they do not actually wish to accelerate liquidations but cannot publicly admit as much.
- It is common for foreclosure mill lawyers to argue for delays in selling a home when nobody is representing a borrower. Judges, who want to clear their dockets, will rail at bank lawyers about the age of the case even while bank lawyers argue for yet another delay, while the other table — where the borrower, the defendant, is supposed to sit — is empty.
- Bank-instituted delay tactics are not limited to Florida. Not long ago I spent the day with Sean O’Toole, CEO of foreclosureradar.com. Sean knows the foreclosure world and his data is, literally, the best in the Western states he covers. He noted the same effect in CA; lender-initiated delay after delay after delay selling a home. In CA, after three delays both parties must approve a further delay but Sean said banks routinely file stipulated delays when, in fact, borrowers just want to literally move on.
- There is the well-known tendency of servicers to “lose” paperwork, where borrowers beg for mortgage modifications, short-sales, or deeds-in-lieu. These delay tactics — rather than just answering “no” to a request — make sense in this context because leaving a house in foreclosure limbo, forever, is the only solution that delays the inevitable balance sheet busting write-offs.
- Lastly is the unwillingness of banks to agree to principal reductions, or even modifications with principal balloon payments, which would yield more long-term money than a foreclosure. Servicers appear to want these homes in the higher-yielding default status, even if they are reluctant to actually push the homes to liquidation, to take title on behalf of investors.
We’ve written relentlessly about servicer abuses, but we’ve almost always contextualized these abuses through their effect on borrowers. Staring through data, especially data at this scale, complexity, and with strong economic ramifications, is like looking through a dirty window. But as we wipe away layer after layer of schmutz the picture is becoming clearer. Yes, servicers continue to prey upon ordinary Americans. But evidence suggests that they’re also preying on investors. Individual American families do not deserve to suffer these behaviors, that increase the losses while delaying the uncertainty, and neither do pension funds, European villages, municipalities, or other unsuspecting entities who actually funded these loans.
Few people are going to complain when they’re not paying their mortgage that there is no mark on their credit-report nor a foreclosure; a few of the more perplexed ones — or those that want to bring a bad mortgage to resolution — may speak out, but most remain silent.
Similarly, many investors, and surely the banks themselves, know about these figures. But as both sides spin their wheels, the problem continues to spiral out of control.
Finally, there is government behavior that makes no sense, especially from the Obama Administration. We have repeatedly seen federal intervention when it is inappropriate and unwelcome, and we’ve seen no intervention when it is warranted. For example, the Administration has actively intervened in the multistate Attorney General settlement talks even though this is, by definition, a state issue. However, they have done nothing to prosecute overt and clearly proven interstate crimes surrounding document forgery.
There is a strong argument that campaign donations are at work, but given the lopsided donations from the financial services industry to Republicans one would think Obama would send a message by taking firm control over the FHFA, the FDIC, the SEC, the OCC, the Treasury, the Justice Department, and strong-arming the Federal Reserve into offering substantive help to borrowers and investors. Yet, at every level, the President has failed ordinary Americans. Even the most egregious behavior results in dead silence .. we don’t even get a yawn. Every program has been an unmitigated disaster, especially HAMP. When Administration figures do intervene their influence is overtly skewed in favor of the banks.
Surely Obama and his advisers realize these problems. It seems inevitable that we will soon face either widespread bank failures and a staggering loss in home values (although arguably an increase in middle-class liquidity), or another much larger bailout; a fraud bailout. Either option is likely to sink President Obama’s popularity rating in much the same way it is likely to sink individual home values. Despite this, the president continues to play Kick the Can, presumably hoping these problems won’t be widely recognized prior to the election in November, while the banks continue to kick everybody else.
Market manipulation used to be illegal, especially in cases where there was asymmetrical information or unequal bargaining power. Pundits use the term “heads we win, tails you lose,” but that actually understates the problem because it implies that there still exists individual parties and counter-parties. Our more modern arrangement looks more like an aristocracy, where there isn’t a genuine market at all but rather a pseudo-market operating like a private ancient tax collector, demanding the increasingly poor peasants feed the monarchs and his cronies rather than feeding their own children.
I’m often told that people don’t care about deadbeats who haven’t paid their mortgages. But people fail to realize that this affects everybody. Ordinary Americans see the effects of this manipulation every day; it affects them profoundly, even if they don’t understand it. All but the most irresponsible aristocrats throughout history realized there were boundaries. Their motivations may have differed — some cared about the well-being of the peasantry while others feared the guillotine — but for millennia all but the stupidest acknowledged and avoided pushing the populace too far. If we’re going to live under an American Nuevo-Feudal system, the least we deserve are overlords at least as smart as the despots they’re trying to imitate.