RSS Feed
Twitter
Facebook
Email
HomeHousing Plans Promote Long, Slow Decline
Posted by senseoncents on February 26th, 2010 9:32 AM |
Why do I remain overall bearish on housing?
All reports to the contrary, the pace of delinquencies will continue to steadily pressure housing — especially in selected markets.
While the Obama administration is dogged by the issues within housing, I continue to believe that their approach is more exacerbating the situation than improving it. What is the crux of the problem within housing? The law of unintended consequences which changes the behaviors of some, given the engagement with others.
Bloomberg provides some insights on Obama’s new proposals toward housing in writing, Obama May Prohibit Home-Loan Foreclosures Without Preview:
The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program. (more…)
Housing’s Catch-22
Posted by Larry Doyle on October 12th, 2009 9:28 AM |
What is the optimal policy to deal with our ongoing housing crisis? Should Uncle Sam continue to throw more money at mortgage modifications? Should banks be compelled to implement a principal reduction program? Should Uncle Sam step in and subsidize the principal writedown involved in a principal reduction program? Would that be the mother of all socialized housing programs? Let’s navigate and address these topics knowing full well that none of these questions have any easy answers.
I witness further evidence again this morning of a continued increase in home foreclosures amidst the prime mortgage space. The Wall Street Journal highlights this ongoing development in writing, Foreclosures Grow in Housing Market’s Top Tiers:
The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. “The slope of that curve in recent months is much sharper than it was recently,” said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.
Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.
The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren’t able to refinance out of these products because the drop in home values has left them with little equity in their homes.
Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.
Zillow estimated that nearly one in four homes with mortgages was worth less than the value of the property at the end of June. Mr. Humphries said he didn’t expect to see foreclosure volumes level off until later in 2010. (LD’s emphasis)
![[Moving Up chart]](http://s.wsj.net/public/resources/images/NA-BB100_TOPTIE_NS_20091011211658.gif)
With the waves of foreclosures not abating, Uncle Sam’s plans to merely modify mortgages is proving largely insignificant in supporting the overall housing market. Homeowners are clearly showing a strong inclination to default on their mortgages when they are ‘underwater.’ Thus, how does Uncle Sam help people get ‘above water?’ Compel banks to reduce the principal balance of the mortgage. Will they do it? Not quickly, as a principal reduction would imply an immediate hit to the banks’ capital. (more…)
U.S. Mortgage/Housing Market Has Split Personality
Posted by Larry Doyle on August 11th, 2009 11:52 AM |
To speak of the United States housing market in singular terms would be a huge mistake. The different regions of the country have their own housing dynamics. The strengths and weaknesses within the local economies have a huge impact on the strength or weakness of housing.
All this said, there is no doubt that the number 417 has the greatest impact on housing in the United States. Why and how? 417k is the cutoff for individuals looking to receive a conforming mortgage. Above that level, individuals enter the realm of the Jumbo market where rates are appreciably higher and credit standards are significantly tighter. Additionally, Jumbo product is not typically eligible to be underwritten or purchased by Freddie Mac or Fannie Mae. That restriction was waived and Freddie and Fannie have purchased some Jumbo product, but it has had no meaningful impact on the dynamics within the Jumbo space. Overall, the 417k level remains an enormous line of demarcation.
That line of demarcation is further defined by the ability to modify loans. Loan modifications for Jumbo mortgages are significantly more challenging to accomplish. On top of that, mortgage servicers are now under ENORMOUS pressure by Uncle Sam to produce increased numbers of mortgage modifications. Where is Uncle Sam targeting? Conforming mortgages.
While market analysts may believe housing is turning, they are not looking at the total picture. The Jumbo market remains under real pressure while the conforming market is showing signs of stability. Under the heading of ‘a picture speaks a thousand words,’ high five to our friends at 12th St. Capital (the leading mortgage broker-dealer on Wall Street) for providing an overview of the housing market in Los Angeles. One can see the ‘split personality’ based on sales volumes between the downtown neighborhoods and those in the upper incomes. Please click on the map to view year over year sales volumes in respective Los Angeles neighborhoods. A few miles makes a world of difference.
Would welcome insights and perspectives from people in other regions of the country on the split personality of their local housing markets as well.
LD
Is the Market Ever Wrong?
Posted by Larry Doyle on June 24th, 2009 8:00 AM |
The market is often wrong, right?
Human psychology, being what it is, drives individuals to believe they are always right, or at least most often right. What highlights this instinct? The fear of an actual loss. What do I mean?
Most individuals do not want to readily admit that they may be wrong, especially when it comes to money and finance. This human frailty leads individuals to make financial decisions which are often not in their best interest. Let’s navigate and address this psychological aspect of trading and investments.
During my trading career on Wall Street, I often encountered traders who were paralyzed by the market price action. This paralysis occurred during periods of significant volatility. Often, I would hear these individuals utter 4 simple words which should never enter the lexicon of finance: “the market is wrong.”
In response to that statement, I would ask them “if the market is wrong, then why aren’t you either buying or selling it to capture the difference in value between the market’s ‘wrong’ level and the ‘right’ level?” Those conversations were often short lived. Most traders would voice their opinion about the market — while not acting on it — in order to defend their ‘marks,’ that is, the price at which they were carrying trading positions/investments.
Nobody likes booking a loss or actually recognizing a loss. However, the reality of life is that many times we are faced with that unpleasant phenomena. The last two years provides a wealth of evidence on this front. I am reminded of it again this morning in a Bloomberg story, Home-Price Recovery in U.S. May Be Undermined by Appraisals:
There may be another culprit scuttling a U.S. housing recovery: low home appraisals.
Flawed appraisals are derailing real estate sales and depressing values across the U.S., the National Association of Realtors said yesterday as it reported that existing home prices declined 17 percent in May from a year earlier.
“It’s pointing to thousands of delayed or canceled transactions,” Lawrence Yun, chief economist of the Chicago- based Realtors group, said in an interview. “We’ve had a massive inundation from members saying this is a big problem.”
In so many words, Mr. Yun is ‘talking his position’ and indicating that the market is ‘wrong.’ A market may be deemed to be ‘oversold,’ ‘overbought,’ or otherwise ‘mispriced.’ However, those assessments are opinions and not fact. Very simply, a market is never wrong.
When home values come in below the sales price, that’s not the appraiser’s fault, it’s a reflection of the market, the Appraisal Institute, a Chicago-based professional group that represents more than 25,000 appraisers, said in a statement yesterday.
“We take offense with the notion that an appraisal is only good if it happens to come in at the sales price,” the group said. “That mentality helped cause the mortgage meltdown to begin with.”
Let’s look at this phenomena from the opposite standpoint, that being a rising market. Is the market right? Are you, the investor, as smart as you may think? Never confuse brains with a bull market.
As difficult as it may be, individuals should eliminate human emotion and psychology from financial decisions. The market is neither ‘wrong’ nor ‘right.’ The ‘market is the market.’
LD
Mortgage Magic or Mortgage Mayhem?
Posted by Larry Doyle on May 5th, 2009 7:02 AM |
Are the largest banks in the land ready to defy the rule of law and self-deal with Uncle Sam’s blessing in the name of providing mortgage relief to homeowners currently strapped by first and second mortgages? The WSJ reports How Big Banks Want To Game The Mortgage Mess.
Is this another game of chance in which Uncle Sam wants to prime the pump in hopes of luring private capital into the economy? No, anything but. In fact, this is no game at all. Uncle Sam is proposing legislation which would protect mortgage servicers from being sued for not performing their duty to protect the property rights of mortgage investors (including pension funds, mutual funds, insurance companies). What does all this mean?
Investors in mortgage securities backed by first mortgages are entitled and expect protection of their capital by the performance of mortgage servicers handling the monthly payment of mortgage principal and interest. In fact, if the mortgage servicers do not perform the investors will and should sue.
The investors or holders of second mortgages will only receive a return if and when the first mortgage is current on its payment.
Will Congress pass legislation which would unintentionally incentivize large banks, which also happen to be large mortgage servicers, to game the mortgage modification process for their own benefit but at the expense of investors holding the first mortgages? The WSJ highlights:
Given the current housing crisis, there is wide support for measures to make it easier for homeowners to modify their mortgages. That is understandable. Nobody likes seeing the wave of foreclosures. Plus, mortgage modifications may help stabilize home values.
But in the rush to do something, Congress is showing a regrettable willingness to adopt constitutionally suspect legislation that runs roughshod over the Fifth Amendment of the Constitution, which prohibits the taking of private property without just compensation. (more…)
Uncle Sam and State Brethren Are Now Mortgage Brokers
Posted by Larry Doyle on May 4th, 2009 11:56 AM |
Hat tip to KD for highlighting a recent article in the L.A. Times, States Taking Steps To Turn $8,000 Home Purchase Tax Credit Into Cash. I am a proponent of providing tax incentives for purchasing homes. Have Uncle Sam and his state brethren morphed into mortgage brokers, though, in the process?
My concern with this program is the discipline provided by lenders working with borrowers under this program. Is the government so desperate to support housing that it will forward a down payment in the form of a short term bridge loan to prospective buyers? If the borrower can not repay the bridge loan when receiving the credit next year, the loan becomes a second lien.
This program will support home purchases. However, irresponsible lending on behalf of unscrupulous lenders did the same. As the L.A. Times reports,
In recent weeks, at least 10 states say they’ve come up with ways to work this monetary magic. They have created innovative bridge-loan programs that advance credit-eligible buyers the cash they need for their closings. Generally the advances take the form of second mortgages — with or without interest charges — that become due and payable whenever buyers receive their credits in the form of refunds from the Internal Revenue Service.
In Missouri, which was the first state to create such a program, buyers can get a no-cost “tax credit advance” of up to 6% of the home price. The advance is actually an interest-free second lien that is repayable no later than June 2010, once the buyers have received their $8,000 tax credit.
If buyers can’t meet that repayment deadline, the advance morphs into a traditional second mortgage with a 10-year payback term and a fixed interest rate one-half a percentage point higher than their first mortgage rate.
The idea that a prospective borrower may need a second mortgage within 12 months of a home purchase strikes me as an immediate red flag.
As we enter the brave new world of moral hazard and government control of industry, I guess I am going to have to get used to accepting that fiscal discipline and responsible lending aren’t what they used to be.
LD
Mortgage Modification Guidance
Posted by Larry Doyle on March 14th, 2009 12:00 PM |
There is little doubt that there was massive fraud perpetrated by unsavory and unethical mortgage brokers during the housing boom. I do not mean to paint all mortgage brokers with the same brush. As with any industry, there are a tremendous number of highly ethical people working hard to make an honest living. Regrettably, not everybody falls into that camp.
Our economy would be well served if both local and federal authorities worked harder to expose the criminals in the system, indict them, prosecute them aggressively, and make them pay a very stiff price for their actions.
Not too surprisingly, some of the same ilk that wrote fraudulent mortgages are now populating the mortgage modification industry. People need to be exceedingly careful in engaging those who seem to want to help them modify their mortgage. (more…)
