Archive for the ‘Housing Crisis’ Category
Posted by Larry Doyle on October 14th, 2009 4:17 PM |
Could the S in USA be changing from ‘states’ to ‘socialist?’ Maybe that is overly aggressive, but why do I ask?
If the markets are an indication of an incipient rebound in economic health, then why would certain Federal Reserve governors want to increase the Fed’s quantitative easing program? Is that accurate? Is the Fed actually looking to inject even more capital and liquidity into our housing market over and above the $1.25 trillion commitment they have already made? Recall that the Fed informed the markets that it would extend the current purchase program of MBS (mortgage-backed securities) until the end of the 1st quarter 2010, while not increasing the dollar commitment.
Also recall that there had been an increase in Fed-speak by certain Fed representatives (Kevin Warsh, Thomas Hoenig) about the need for an increase in rates ‘sooner rather than later,’ along with the need for a defined exit plan by the Fed from its massive injection of liquidity into the markets.
Well, take those comments with a large grain of salt. Why? Today we learn that there are ‘doves‘ within the Fed who believe the Fed should commit even more money to support our housing market. Bloomberg provides insights on this topic by writing, Fed Says Some Officials Were Open to Buying More MBS:
Some Federal Reserve policy makers were open last month to boosting the central bank’s $1.25 trillion mortgage-backed securities purchase program to stimulate the economy amid concerns the recovery may fade.
“Some members thought that an increase in the maximum amount of the committee’s purchases of agency MBS could help to reduce economic slack more quickly,” according to minutes of the Federal Open Market Committee’s Sept. 22-23 meeting released today in Washington. One member said the improvement in the outlook could warrant a reduction in purchases, the minutes said, without identifying the policy maker.
Having read and reviewed more Fed statements than I care to remember, each and every word in a Fed statement is very carefully chosen. Why? The Fed is attempting to manage market expectations. The fact that the Fed chose to release these comments about mortgage purchases is an indication that the Fed will not only keep the liquidity spigot on for an ‘extended’ period but also may increase the flow of liquidity into the economy via increased purchases of mortgage securities. What does that mean? They view the economy as still having real weakness, especially in housing. And what does that mean? Little concern of inflation in general and likely deflationary pressures within housing.
To fight the deflationary pressures, the Fed will continue to pump liquidity. Are there any costs to this increased liquidity? The equity markets are rallying so it must be good. Well, not so fast. Actually, the costs are in the form of ongoing weakness in the dollar. The U.S. Dollar Index moved lower by another .65% today.
When you truly look at the economy and the markets, think of things in terms of purchasing power. The dollar is now down approximately 7% on the year. I would encourage people to more actively assess the value of the dollar in terms of asset returns and incorporate that into the cost of products.
Those dollar weighted returns and dollar weighted costs in the context of a global market and global economy are truly the proper perspective.
LD
Tags: decline in value of dollar, deflation, dollar, doves, exit plan, Fed, Fed doves, Fed Says Some Officials Were Open to Buying More MBS, fed statements, Fed's quantitative easing, Federal Reserve, FOMC meeting September 22-23, housing, Housing Crisis, injection of liquidity, kevin Warsh, market expectations, MBS, quantitative easing, Thomas Hoenig, U.S. Dollar Index
Posted in Federal Reserve, General, Home Loan, Housing Crisis, quantitative easing | No Comments »
Posted by Larry Doyle on October 13th, 2009 2:40 PM |
Despite hundreds of billions of dollars in support of Freddie Mac, Fannie Mae, the Federal Housing Association, and mortgage modifications, our housing market continues to be swamped with an ever increasing wave of foreclosures. The shadow supply of homes overhanging the market is estimated to be in the realm of 15 month’s worth. Last week, I wrote that Washington needed to address this issue in my post “Washington Needs a New Housing Model.”
Thanks to our friends at 12th Street Capital, we learn today that Treasury will release a new plan next week to stem the wave of foreclosures. How might this work? Let’s navigate a release which came from the Mortgage Banker’s Association convention currently ongoing in San Diego. Housing Wire reports, Treasury to Announce New Program to Avoid Foreclosure:
The United States Department of the Treasury is launching, with an official announcement expected next week, a new program to help ailing borrowers escape foreclosure.
The Chief of the Homeowner Preservation Office at the Treasury, Laurie Maggiano, released information on the Home Affordable Foreclosure Alternatives (HAFA) while speaking at the MBA’s 96th Annual Convention going on in San Diego. The official launch is expected in the next week or so.
HAFA already holds the support of Fannie, according to a VP at the agency, Eric Schuppenhauer, who believes the new program allows borrowers in imminent default to “make a graceful exit” from their home. HAFA will keep the stigma associated with foreclosure away from the borrowers, he added, and help keep communities intact.
Maggiano adds that HAFA will offer financial incentives to both servicers and borrowers, and associated secondary investors, in order to facilitate a short sale or deed in lieu of the property.
Borrowers will need to be Home Affordable Modification Program (HAMP)-eligible and Maggiano released some stats for the crowd’s consumption. 2,484,783 homeowners have requested information on HAMP. 757,955 HAMP plans were offered. 487,081 trials are underway.
Other additional [1] incentives to the short sale industry are nearly developed. The IRS will soon offer a 4506EZ form that will enable servicers to pre-fill out the information so that it only requires a borrower’s signature. It also will include softer language so as not put potential participants off.
For those unaware, a “short sale” entails a home being sold for less than the balance of the mortgage. The homeowner is not held responsible or liable for making up the difference between the proceeds generated by the sale and the mortgage balance. That difference is eaten by whomever ‘owns’ or is holding the mortgage. The owner or holder could be the originator if that entity never sold the mortgage. The owner or holder could be a trust on behalf of investors if the loan had been securitized.
What is the motivation to promote short sales rather than allowing the foreclosure process to run its course? Short sales may be short in terms of proceeds although they are not necessarily short in terms of time. That said, short sales typically do expedite the sale of a home. Short sales have typically occurred at a 10-20% discount to the market. Why? The homes have not been prepared for sale, meaning ‘dressed up.’
The monetary incentive provided to mortgage servicers to promote short sales will likely have a similar impact as the monetary incentive provided to modify mortgages. What has that impact been? Not much.
While many of Uncle Sam’s programs have been designed to buy time and allow the market and economy to recover, that approach has proven not to work so far in housing. Will this short sale program work to support housing? I doubt it.
I think what this program will look to achieve is to actually lessen the negative stigma associated with the term foreclosure. If Uncle Sam can say foreclosures are declining, he can then wave the flag as making progress on housing. What he will be doing, however, is merely ‘redefining’ foreclosure or in other words, ‘putting perfume on a pig.’
This program theoretically will negatively impact bank capital as banks will be forced to take a loss sooner rather than later on those mortgages they hold which are involved in short sales.
Aside from that development, real integrity in this process would include:
>> Add short sales to foreclosures as a more robust measure of housing supply stemming from delinquent mortgages.
>> Assess home prices along with rental rates to measure overall cost of housing.
LD
Tags: 12th Street Capital, Eric Schuppenhauer, foreclosures, HAFA, HAMP, Home Affordable Foreclosure Alternative, Home Affordable Modification Program, housing, housing supply, Housing Wire, Laurie Maggiano, MBA, Mortgage Bankers Association, mortgage delinquencies, mortgage modification, Mortgages, short sales, Treasury, Treasury to Announce New program to Avoid Foreclosures, Washington's housing policy
Posted in Banking Institutions, foreclosures, General, Housing Crisis, Moral Hazard, Mortgage Cram-Down, Mortgage Crisis, refinancing, Wall Street | No Comments »
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)
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…)
Tags: foreclosures, Foreclosures Grow In Housing Market's Top Tiers, foreclosures of prime loans increasing, home foreclosures, housing, Housing Crisis, interest only mortgages, Mortgage Bankers Association, Mortgage Crisis, mortgage defaults, mortgage modification, option adjustable rate mortgages, option ARMS, principal reduction, principal writedown, rising foreclosures, socialized housing, Stan Humphries of Zillow, Swedbank, Swedbank Hits Out at Latvia's Mortgage Plan, Thomas Backteman of Swedbank
Posted in Banking Institutions, General, Home Loan, Housing Crisis, Mortgage Cram-Down, Mortgage Crisis, Mortgages | 1 Comment »
Posted by Larry Doyle on October 9th, 2009 9:21 AM |
Who in Washington will give you a straight answer? Elizabeth Warren.
Who is Elizabeth Warren? Her Wikipedia bio reads:
Elizabeth Warren
Elizabeth Warren (born 1949) is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program. In 2007, she first developed the idea to create a new Consumer Financial Protection Agency, which President Barack Obama, Christopher Dodd, and Barney Frank are now advocating as part of their financial regulatory reform proposals.
In May 2009, Warren was named one of Time Magazine’s 100 Most Influential People in the World.
Ms. Warren consistently takes no prisoners or provides no pandering in making honest assessments of the interaction between Washington and Wall Street. She has called the banks on the carpet. She has called Secretary Geithner on the carpet. She has called Congress on the carpet. Why? A general lack of honesty, integrity, and transparency in dealing with the American public.
When she speaks, I listen.
What did she have to say this morning? In commenting on a recently released report on the effectiveness of government programs to support housing, Warren questioned the scalability and the permanence of the impact of the TARP funding. Bloomberg provides further color in writing TARP Oversight Group Says Treasury Mortgage Plan Not Effective. The report highlights:
“Rising unemployment, generally flat or even falling home prices and impending mortgage-rate resets threaten to cast millions more out of their homes,” the report said. “The panel urges Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”
New programs or program enhancements? Yesterday I opined “Washington Needs a New Housing Model” and wrote:
While the administration swims upstream on this issue, bank policy of tight credit and restrictive lending only further exacerbates the housing market. Make no mistake, though, banks are taking that approach to tight credit at the behest of regulators who know the level of losses in the banking system and are trying to preserve the industry as a whole.
I like a rallying equity market as much as anybody, but I wouldn’t spend any paper gains just yet. Why? The new housing model is displaying that:
“As defaults become more common, the social stigma attached with defaulting will likely be reduced, especially if there continues to be few repercussions for people who walk away from their loans,” concluded Sapienza. “This has an adverse effect on homeowners who do pay their mortgages, and the after-effects of more defaults and more price collapse could be economic catastrophe.”
This model needs some quick-dry crazy glue, which could only be applied in the form of a serious principal reduction program. Banks would take immediate and massive hits to capital which they clearly won’t accept.
So how can we generate some support for housing?
Aside from a principal reduction program, the penalty for those who would strategically default on their mortgage needs to be far more onerous.
The principal reduction would negatively impact bank earnings. Too bad. The banks are currently feeding at the taxpayer trough and would not be here without the bailouts. The individuals who are capable of making their payments need to accept the moral responsibility that is embedded in a contract.
Given the massive violation of moral hazards and breaking of contracts by Uncle Sam, that old man does not have a lot of credibility on that front.
What do we really learn here? Ultimately, the market is the market and efforts to manipulate or support a falling market will only be temporary. The market needs to find the clearing level where private money will purchase properties. That private money will wait while Uncle Sam continues to try to prop the market.
In the meantime, do not expect any meaningful support for housing.
LD
Tags: Bailout, bank credit, banks, Elizabeth Warren, Geithner, home prices, housing, Housing Crisis, housing model, mortgage defaults, mortgage delinquencies, mortgage foreclosures, principal reduction, strategic mortgage defaults, TARP, TARP Oversight Group Says Treasury Mortgage Plan Not Effective, Unemployment
Posted in Elizabeth Warren, General, Housing Crisis, TARP | 4 Comments »
Posted by Larry Doyle on October 8th, 2009 12:04 PM |
Traders, strategists, analysts, economists, and politicians will always review models of past behaviors in an attempt to forecast future developments. In the process, the models are only as robust as the inputs. Many of the aforementioned individuals will become overly dependent on models. The risk in that process is that the models ‘work until they don’t work.’ As a result, programs, policies, and procedures are implemented that perhaps exacerbate rather than amend a situation. I believe this scenario is playing out in our housing market.
The breakdown in Washington’s housing model revolves around the newly developed phenomena known as “strategic mortgage defaults.” I highlighted this topic a few weeks back in writing, “Strategic Mortgage Defaults Have Major Implications for Markets and Economy.” We see more evidence of this new extension on our housing model in a report released by Reuters, The Flood of Foreclosures Shows No Sign of Ebbing:
The Center for Responsible Lending says foreclosures are on track to wipe out $502 billion in property values this year.
That spillover effect from foreclosures is one reason why Celia Chen of Moody’s Economy.com says nationwide home prices won’t regain the peak levels they reached in 2006 until 2020.
In states hardest-hit by the housing bust, like Florida and California, the rebound will take until 2030, Chen predicted.
“The default rates, the delinquency rates, are still rising,” Chen told Reuters. “Rising joblessness combined with a large degree of negative equity are going to cause foreclosures to increase,” she added.
Anyone doubting that the recovery in U.S. real estate prices will be long and hard should take a look at Japan, Chen said.
Prices there are still off about 50 percent from the peak they hit 15 years ago.
(more…)
Tags: 12th Street Capital, California housing market, Celia Chen of Moody's Economy.com, Center for Responsible Lending, defaults, delinquencies, Financial trust Index, Florida housing market, foreclosures, home prices, home values, housing, housing market, housing models, Japan economy vs United States economy, joblessness, Luigi Guiso, Luigi Zingales, Moral and Social Restraint to Strategic Mortgage Defaults, Paola Sapienza, property values, strategic mortgage defaults, The Flood of Foreclosures Shows No Signs of Ebbing, Unemployment
Posted in Economy, foreclosures, General, Housing Crisis, markets, regulation, Wall Street | 1 Comment »
Posted by Larry Doyle on October 6th, 2009 11:42 AM |
You do not need to take Economics 101 to understand that an increase in supply of any asset will almost always lead to a decline in prices. This ‘tremendous grasp of the obvious’ in regard to housing runs right in the face of assertions put forth by many real estate brokers and housing experts.
High five to our friends at 12th Street Capital for bringing attention to The Wall Street Journal‘s writing, Apartment Glut Expands:
Signs advertise apartments for rent in San Francisco in July. Rents declined during the third quarter, usually a strong period for rentals. (Getty Images)
Apartment vacancies hit their highest point since 1986, surging in cities from Raleigh, N.C., to Tacoma, Wash., as rising unemployment continued to chip away at demand during the traditionally strong summer rental months.
The U.S. vacancy rate reached 7.8%, a 23-year high, according to Reis Inc., a New York real-estate research firm that tracks vacancies and rents in the top 79 U.S. markets. The rate is expected to climb further in the fall and winter, when rental demand is weaker, pushing vacancies to the highest levels since Reis began its count in 1980.
(more…)
Tags: 12th Street Capital, apartment supply, apartment vacancies, economics, Economy, Foresight Analytics, housing, Housing Crisis, housing technicals, housing vacancies, Moral Hazard, Real Estate, rental demand, rental housing, Unemployment, unemployment impact on housing, vacancy rates in housing, WSJ Apartment Glut Expands
Posted in General, Housing Crisis, Real Estate | No Comments »
Posted by Larry Doyle on September 28th, 2009 8:43 AM |
Is there any doubt that the heart of our economic crisis centered on the mispricing of risk in a wide array of mortgage products? If that is in fact the case — and it is — then why does Uncle Sam continue to go down this road? In so doing, the ‘old man’ will only prolong the current housing crisis and likely promote another one as well. Why? A borrower’s ability to access funding at levels not correlated with that borrower’s ability to repay serves as an enormous incentive for the borrower to take undue risk. Inevitably, these greater risks will lead to greater losses. Who will absorb the losses? Ultimately, you and me. Where do we witness more of this socialized housing? Let’s navigate our way into the world of municipal housing finance.
Bloomberg details growing developments on this topic in writing, State Housing Agencies in U.S. Said Slated for Treasury Help:
State housing agencies in the U.S. would get help in providing mortgages to low-income borrowers under a U.S. Treasury Department program to provide new liquidity and purchase mortgage bonds, Treasury officials said.
The program would provide as much as $15 billion in fresh liquidity for as long as three years and would purchase as much as $20 billion in tax-exempt mortgage bonds issued by state- sponsored housing finance agencies through the end of this year, a person familiar with the matter said. The program may be announced as early as Sept. 30, said the person, who didn’t want to be named because the plans haven’t been made public.
A few questions, answers, and comments:
1. Given the enormous rally in the equity and bond markets, where is the private capital to support this initiative? There is plenty of private capital along with excess capital sitting at banks, BUT that capital would only lend itself at rates commensurate with the risks embedded in the value of the real estate and the borrowers.
2. The housing finance agencies’ inclination to ask Uncle Sam for financing and Uncle Sam’s willingness to provide it is nothing more than a socialization of this segment of the domestic housing market. How do we know? What entities will purchase the debt backing these financings?
Bloomberg highlights:
The Treasury effort would be administered by federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, which would also purchase the bonds, the person said. Those purchases would provide enough financing to restart and to fund the state home loan programs through the end of next year, according to the person.
Oh what fun. Uncle Sam will continue to bury more mispriced debt in the books of the current wards of the state, Freddie and Fannie.
3. Why would private investors be reluctant to more aggressively provide financing to these municipal housing finance agencies? We only need to revisit the fact that virtually all of these agencies utilized a form of auction-rate security known as a VRD (variable rate debt note), which in layman’s terms is nothing short of a form of Ponzi-type financing. Investors remain stuck with a tremendous amount of this debt.
If a borrower burned you on a financing, wouldn’t you increase the rate for future borrowings?
One final comment. Socialized housing finance will certainly dissuade private enterprise from entering any part of this market for a protracted period.
Capitalism remains under assault.
LD
Related Commentary
$35 Billion Slated for Local Housing
by Deborah Solomon
Wall Street Journal; September 28, 2009
Tags: Bloomberg writes State Housing Agencies in U.S. Said Slated for Treasury Help, borrowers ability to repay not correlated with risk, debt issued by municipal housing finance, financing for municipal housing, Freddie Mac and Fannie Mae will buy municipal housing debt, housing, increased risks in housing, issues in municipal housing, mispricing of mortgage risk, municipal housing finance agencies, Ponzi type financing, private capital is correlated with embedded risks, residential housing, socialized housing finance will bring greater losses, socialized housing programs, socialized housing will prolong housing crisis, socialized housing will promote another housing crisis, U.S. Treasury will purchase municipal houisng finance debt at Freddie and Fannie, variable rate debt notes, variable rate debt obligations, why won't private capital lend itself to municipal housing finance agencies at more aggressive rates, WSJ $35 Billion Slated for Local Housing
Posted in General, Housing Crisis, Moral Hazard, Mortgages | No Comments »
Posted by Larry Doyle on September 21st, 2009 11:29 AM |
The Brave New World of the Uncle Sam economy has brought our economy and markets into realms very rarely seen or experienced. One of those realms which has received very little coverage, but will have major implications for the economy and markets going forward, is “strategic mortgage defaults.” What are strategic mortgage defaults and what will be the growing impact of this phenomena? Let’s navigate.
High five to KD of 12th Street Capital for bringing this development to our attention. The Los Angeles Times profiles this very troubling slope on our economic landscape in writing, Homeowners Who ‘Strategically Default’ on Loans a Growing Problem:
With foreclosures, delinquencies and loan losses at record levels, strategic defaults and walkaways are among the hottest subjects in residential real estate finance. Unlike in earlier academic studies, Experian and Wyman could tap into credit files over extended periods to identify patterns associated with strategic defaults.
The number of strategic defaults is far beyond most industry estimates — 588,000 nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in last year’s fourth quarter.
Strategic mortgage defaults are nothing more than a very calculated financial maneuver primarily by people with high credit scores. These people are literally walking away from their homes – and the mortgages on those homes – with little to no warning or indication of stress typically identified by increased delinquencies on the mortgage payment or other credit payments.
Why are people doing this? To fully understand the reasoning behind people strategically defaulting, we need to understand why people bought these homes and took out these mortgages in the first place. Over the last decade, many people purchased homes, including their primary residence, for investment purposes as much as for shelter and protection. As with other investments, these high credit and financially savvy people are assessing the market value of their home relative to their carrying costs (mortgage payments, taxes, utilities, etc) and making the decision that they are financially better off walking away from the property and mortgage than continuing to make the payments.
Is there a moral failure in this practice, especially on behalf of those individuals who do have the financial wherewithal to make their payments? Perhaps, but we should not kid ourselves that people bring their morals – or lack thereof – into their financial affairs. (more…)
Tags: 12th Street Capital profiles growing strategic mortgage defaults, are peopel better to walk away from homes and mortgages, did Bank Stress tests incorporate strategic mortgage defaults into models, Experian and Wyman can not identify likelihood of strategic mortgage defaults, HELOC losses, high credit scores and strategic mortgage defaults, home values relative to carrying costs, Homeowners Who Strategically Default on Loans a Growing Problem in Los Angeles Times, housing, impact of strategic mortgage defaults, is there a moral failure in strategically defaulting on mortgage, peopel who purchased homes more as investments than for shelter and protection, strategic mortgage defaults, vicious cycle of housing both on way up and down, waht are strategic mortgage defualts, was likelihood of strategic mortgage defaults factored into loan process and underwriting, what will strategic mortgage defaults mean for housing economy and markets, where will strategic mortgage defaults be felt, who loses on strategic mortgage defaults, why are people strategically defaulting on mortgages
Posted in foreclosures, General, helocs, Home Loan, Housing Crisis, Mortgage Crisis, Mortgages | 12 Comments »
Posted by Larry Doyle on September 16th, 2009 9:26 AM |
What does one do when your bank is the largest mortgage originator in the country, has outsized exposure to an array of toxic mortgage loans (pay-option ARMs and the like), and is located in the heart of the weakest real estate market nationwide? Call Ghostbusters . . . that is, call on Washington to further tap the wards of the state known as Freddie and Fannie in an attempt to offload this risk and future risk on the American taxpayer. Of whom do I speak? Wells Fargo, led by CEO John Stumpf, called for just such actions in a recent interview with the Financial Times, Wells Fargo Urges U.S. to Boost Mortgage Market.
The FT writes:
The US government should help revive the moribund market for big mortgages by getting Fannie Mae and Freddie Mac to buy large home loans from banks, the chief executive of the lender Wells Fargo urged on Tuesday.
In an interview with the Financial Times, John Stumpf, whose bank originates a quarter of all US mortgages, called for an increase in the size of loans purchased by Fannie and Freddie, the troubled finance groups controlled by the authorities.
Mr Stumpf said such a move would help reduce the interest rates charged by banks on so-called “jumbo” mortgages and revive a market for higher-end housing that has been devastated by the credit crunch.
Fannie and Freddie can currently buy or guarantee mortgages worth up to $417,000. The stimulus plan approved last year set the companies higher limits of up to $729,750 in certain high-cost areas such as California until the end of 2009. Congress has to approve any extension of those higher limits.
Be mindful that Freddie and Fannie have already been approved to purchase conforming loans with loan-to-value ratios of up to 125% and are also purchasing jumbo mortgage product in certain regions of the country. The simple fact is our domestic mortgage finance market can now be defined as nothing short of socialized finance.
CEO Stumpf’s call for a further extension of this socialized housing finance is nothing more than a veiled attempt to offload risk from Wells Fargo onto the American taxpayer. In the process, risk based pricing for Jumbo mortgages will not be properly aligned and the American taxpayer will eat larger losses now and in the future.
At what point will capitalism actually be given a chance?
LD
Related Sense on Cents Commentary:
Barack and Barney Look to Further Plunder Freddie and Fannie (June 22, 2009)
Tags: Financial times Wells fargo Urges U.S. to Boost Mortgage Market, housing, John Stumpf calls for Freddie and Fannie to buy Jumbo product, John Stumpf wuld like to offload Wells fargo risk onto American taxpayer, mortgage market does not represent capitalism, socialized housing finance, Wells fargo mortgage exposure and call to support Jumbo mortgage market, Wells Fargo's CEO John Stumpf calls for support of Jumbo mortgage market, will freddie and fannie buy Jumbo mortgage product
Posted in General, Housing Crisis, Wells Fargo | 2 Comments »
Posted by Larry Doyle on September 3rd, 2009 12:22 PM |
What happens when a bank forecloses on a home? It has to book a loss. How are banks dealing with the rapidly increasing rates of delinquencies and subsequent foreclosures? They are forestalling the losses by allowing homeowners to remain in the home for a protracted period. Are they doing this out of generosity? Don’t be that naive. The banks are utilizing the ‘hope’ hedge. That is, they ‘hope’ the economy and housing market will rebound so the values of these homes increase and the loss is mitigated.
Over many years of trading and investing, the ‘hope’ hedge is a recipe for further losses. Why? Please refer to my Rule #1 from yesterday’s “LD’s Rules of Trading”: The Market Goes in the Direction Which Hurts the Most People.
Homes that would otherwise be in foreclosure create a massive overhang of supply in the shadow housing inventory. Do banks believe that buyers do not appreciate this? That would be even more naive. The excess supply will keep a lid on home prices and consumer wealth which directly impacts retail sales.
High five to MC for sharing a recent report from American Banker addressing this phenomena. Kate Berry writes Postponing the Day of Reckoning, which I am able to access from Bank Investment Consultant. Ms. Berry shares some very sobering insights:
“The goal is to hold off on foreclosures and take losses as slowly as possible to keep balance sheets up,” said Deborah Voelz, the chief financial officer of National Asset Direct Inc., a New York buyer and servicer of distressed loans. “Everyone is looking at what the ultimate loss is going to be and whether it makes sense to hold off another year or two and mitigate the results.”
The foreclosure process — and it is a process — now takes, on average, 18 months to two years, up from 15 months a year ago, according to Amherst Securities Group LP. Backlogs in county courts and at servicing companies, along with local government moratoriums, have contributed to the delays. But plenty of signs indicate that the mortgage companies themselves are in no hurry to seize their collateral.
Rick Sharga, a senior vice president at RealtyTrac Inc., an Irvine, Calif., company that monitors foreclosure filings, said banks often start proceedings but then decide “they don’t want the property” and suspend the process indefinitely.
Of the 2.3 million homes that received foreclosure notices last year, one-third had been repossessed by yearend, according to RealtyTrac.
Banks also “are allowing borrowers to be delinquent for longer and longer periods of time before initiating foreclosures,” Sharga said.
These perspectives are totally consistent with those of John Lounsbury, my guest this past Sunday on NQR’s Sense on Cents with Larry Doyle. John pointedly detailed that only 10% of homes being sold currently entail ‘willing sellers.’
What are the implications for this forestalling?
>> Continued pressure on housing overall.
>> Continued pressure on bank earnings from these mortgages.
>> Continued underwhelming trends in retail sales by consumers.
>> Prospective home buyers, especially in the higher price ranges, can remain patient.
Regardless of what bank analysts or others may want to say, these forestalled homes are not going away.
LD
Tags: Amherst Securities comments on housing overhang, bank foreclosures, banks are postponing foreclosures, banks are using hope hedge, banks hope economy and housing rebounds, Deborah Voelz of National Asset Direct comments on housing supply, forestalled homes v foreclosed homes, hope is a lousy hedge, housing, housing supply impacts consumer retail sales, impact of overhang of housing supply, John Lounsbury comments on willing home sellers, Kate Berry Postponing the Day of Reckoning, market goes in direction which hurts most people, Rick Sharga comments on housing supply and foreclosure process, shadow inventory of homes, supply of homes, supply overhang of homes, what is hope hedge, why are banks postponing foreclosures
Posted in foreclosures, General, Housing Crisis | 3 Comments »
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Banks Are Forestalling Rather Than Foreclosing
Posted by Larry Doyle on September 3rd, 2009 12:22 PM |
What happens when a bank forecloses on a home? It has to book a loss. How are banks dealing with the rapidly increasing rates of delinquencies and subsequent foreclosures? They are forestalling the losses by allowing homeowners to remain in the home for a protracted period. Are they doing this out of generosity? Don’t be that naive. The banks are utilizing the ‘hope’ hedge. That is, they ‘hope’ the economy and housing market will rebound so the values of these homes increase and the loss is mitigated.
Over many years of trading and investing, the ‘hope’ hedge is a recipe for further losses. Why? Please refer to my Rule #1 from yesterday’s “LD’s Rules of Trading”: The Market Goes in the Direction Which Hurts the Most People.
Homes that would otherwise be in foreclosure create a massive overhang of supply in the shadow housing inventory. Do banks believe that buyers do not appreciate this? That would be even more naive. The excess supply will keep a lid on home prices and consumer wealth which directly impacts retail sales.
High five to MC for sharing a recent report from American Banker addressing this phenomena. Kate Berry writes Postponing the Day of Reckoning, which I am able to access from Bank Investment Consultant. Ms. Berry shares some very sobering insights:
These perspectives are totally consistent with those of John Lounsbury, my guest this past Sunday on NQR’s Sense on Cents with Larry Doyle. John pointedly detailed that only 10% of homes being sold currently entail ‘willing sellers.’
What are the implications for this forestalling?
>> Continued pressure on housing overall.
>> Continued pressure on bank earnings from these mortgages.
>> Continued underwhelming trends in retail sales by consumers.
>> Prospective home buyers, especially in the higher price ranges, can remain patient.
Regardless of what bank analysts or others may want to say, these forestalled homes are not going away.
LD
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