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Posts Tagged ‘housing bust’

Water Finds Its Own Level

Posted by Larry Doyle on May 6th, 2009 5:15 AM |

If housing led us into this mess and is going to lead us out, then bring an extra pair of boots because we still have a long way to go.

Could the government intervention in the housing market promote short term support but also long term pressure? What do I mean? As I wrote yesterday in Mortgage Magic or Mortgage Mayhem, the government is providing real subsidies in terms of mortgage rates, guarantees, closing costs, and points. These subsidies are generating support to segments of the housing market. That said, housing in general remains under severe pressure in many regions. The higher priced markets with very limited government intervention are virtually stagnant.  

Pressure from the higher end is actually prompting some banks to allow for short sales in which the bank absorbs the loss from a home sold below the outstanding mortgage balance. Why would a bank do that? Very simply because the bank believes a sale now, even at a loss, is better than a foreclosure later generating an even greater loss.

I think we will see further downward pressure on prices and a delay in real improvement in housing due to the fact that more homeowners are now under water on their mortgages. The WSJ reports, House Price Drops Leave More Underwater. How many are underwater? Almost a third of American homeowners!!  

Government intervention is simply attempting to apply sandbags to this problem. While I fully empathize with the families impacted, these sandbags are no remedy or foundation for a long term fix. In fact, I think these sandbags are potentially causing pools of private capital to refrain from entering the market. Why is that? A market that is being artificially supported will always cause real money to wait in the wings. 

As the water finds its own level, the private capital will definitely enter. In so doing, it is very likely the private capital will ultimately push the market to levels even higher than current.

Any market participant knows, though, that a market that is manipulated may stay elevated for a short stretch but will move lower, find its natural clearing level, and then move higher. Housing is no different.     

LD

Uncle Sam Guaranteeing Sub-Prime Loans

Posted by Larry Doyle on May 4th, 2009 7:51 PM |

Is Uncle Sam creating another housing fiasco or merely forestalling some pain embedded in the current mess? Hat tip to bonddadddy for bringing my attention to the WSJ editorial today, The Next Housing Bust, which deserves further analysis and promotion.

This WSJ editorial focuses on the Federal Housing Administration (FHA) which insures mortgages via a 100% taxpayer guarantee. In the early part of the decade, the  FHA lost a significant percentage of its market share as borrowers who qualified for these mortgages shifted to “teaser” loans offered by sub-prime mortgage lenders. We all know how that ended.

FHA and VA (Veterans Administration) loans have traditionally been securitized by GNMA (Government National Mortgage Association) and were restricted to a maximum loan size of $362,500. Traditionally, these loans have experienced very low levels of defaults because many of the loans were of much smaller size. Oh, how times are changing! (more…)






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