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…)
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.
Posted by Larry Doyle on March 31st, 2009 11:42 AM |
While recent housing data has shown a pickup in home sales and housing starts, albeit from very low levels, data released this morning showed no stability in home prices. The WSJ reports:
Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine… falling more than 20% in the last year,” said David M. Blitzer, chairman of S&P’s index committee. Both composite indexes and 13 of the 20 metropolitan areas reported record year-over-year declines.
As of January, the 10-city index is down 30% from its mid-2006 peak and the 20-city is down 29%. The two indexes have fallen every month since August 2006, 30 straight.
The indexes showed prices in 10 major metropolitan areas fell 19.4% in January from a year earlier and 2.5% from December. The drop marks the 10-city index’s 16th-straight monthly report of a record decline.
In 20 major metropolitan areas, home prices dropped 19% from the prior year, also a record, and 2.8% from December. (more…)
Posted by Larry Doyle on March 23rd, 2009 9:22 AM |
An oversimplified view of the proposed private-public partnership for investors to purchase toxic assets from banks is as follows:
A couple (private investor) looking for a home finds a piece of property (toxic asset) that seems very appealing. A mortgage broker (the government) is indicating that he can preapprove some very attractive financing terms. The mortgage broker also indicates that he can fortuitously provide a large cushion against potential losses on the property. The buyers inquire how that cushion may work. The broker informs them that he has access to funds from all the other homeowners (taxpayers) in town to offer as incentive to sell this property and others like it.
The couple’s interest increases, but they start to wonder what’s the catch as the property has been on the market for a while.
Upon further review, the prospective buyer discovers that the property may have structural issues. In hearing that, they think about scaling back a potential bid on the property. The broker pressures them to the point where the couple starts personally disliking the broker. (more…)
Posted by Larry Doyle on March 18th, 2009 1:11 PM |
A week or so ago, I introduced two indexes that track the outlook for housing in our country. The S&P/Case-Shiller Indexis released on a monthly basis. The ABX is an index that can be traded daily by institutional money managers and thus allows them to reflect their opinions on the outlook for housing. The ABX is a very broadly defined index that tracks housing by the underlying year of origination of the mortgage.
Yesterday, the monthly housing starts number surprisingly jumped 22%. The government program TALF (Term Asset-Backed Lending Facility) to restart the consumer finance markets is set to launch next week. Hopefully that program will bring added liquidity to our consumer finance markets and support housing as well. The mortgage modification program to support housing is underway. (more…)
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…)
Posted by Larry Doyle on March 12th, 2009 7:07 AM |
At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents.
There are two indexes that have developed over the last few years and are enormously respected by market participants. One index, the S&P/Case-Shiller Home Price Indexes, is released on a monthly basis. This index tracks a variety of regions in the country but not every region. Still, all things considered, this index is widely watched as a reliable indicator of health in housing. The index is typically released toward the end of each month. The most recently released report was on February 24th, A Look at Case-Shiller Numbers, by Metro Area. In this report, all indications are that housing has yet to see any support. (more…)
Posted by Larry Doyle on March 10th, 2009 2:37 PM |
The stock markets are having a very robust, broad based rally today. All major market averages are up almost 5% or better. Gold is down approximately 3%. Foreign stock markets also had significant rallies. Can we put this pain behind us? Is it finally over?
In dealing with markets and the economy, it is never over. The critical, mental acuity in dealing with the markets and economy is understanding the dynamics at work and the associated risks. Along with a host of other goals, I firmly hope that my work here at Sense on Cents is able to help people understand those dynamics and the accompanying risks. It is a process, but I will keep after it and I hope you find it enlightening and informative. If so, please comment and share Sense on Cents with your friends. (In fact, you can share this piece, and any other piece here at S o C by using the “ShareThis” link underneath the title line of each story). Let’s assess today’s market action. (more…)
Posted by Larry Doyle on March 10th, 2009 5:50 AM |
I thoroughly respect Sheila Bair (see my list of Economic All-Stars in the left sidebar). Our Head of the FDIC has been an honest broker each and every time I have heard her speak. I looked forward to her interview with Paul Gigot of The Wall Street Journal.
Ms. Bair addresses the finer points of the Obama Foreclosure Mitigation Plan which is targeted at helping 9 million homeowners stay in their homes. Specifically she touches on:
1. how this program will not reward bad behavior; 2. how it can be viewed as helping people who have managed their finances appropriately; 3. expectations of redefaults given her experience with the failed institution Indymac.
As I initially mentioned, I believe Sheila Bair is an honest broker in an impossible position. Her seeming lack of enthusiasm does not strike me as not believing in the benefits of this program, but rather a subtle acceptance that this program can only go so far. Additionally, this type of program will have plenty of unintended consequences. Will people who are currently paying their mortgages on schedule start to become delinquent on their mortgages in order to gain the benefits of this program?
I think Ms. Bair will make the best of a bad situation. That said, no program will be totally effective. I am fully supportive of programs that will assist Americans, but don’t be fooled to think that we will get 100% return on all dollars spent.
Posted by Larry Doyle on March 9th, 2009 3:35 PM |
A great American and loyal reader (thanks FL) shared a report recently produced by not-for-profits Essential Information and The Consumer Education Foundation. This report, Sold Out: How Wall Street and Washington Betrayed America, has gotten little to no attention in the general media. What a shame. I find of particular interest the fact that a number of the currently discussed regulatory changes are directly addressing the points highlighted in this report. I personally view these proposed regulatory changes as substantiating this report and adding credibility to its effort. For the naysayers in the audience, I would ask you to review the report and reconsider your assessment.
I was struck a month ago by the incriminating statements put forth by Senator Chuck Hagel and CIA head Leon Panetta, which I highlighted on February 16th in Legalized Bribery. Those statements bluntly indict our massive system of lobbying, political fundraising, and the quality of those running for elected office! In light of that article, I am more and more convinced that our elected officials have turned their offices into massive for profit machines at the expense of our public well being.
I commend the authors of this report, Roger Weissman and James Donahue, for taking the time and making the extensive effort to expose the truth. The full report, 231 pages in length, spares no detail. In studying it, I found the information and analysis riveting. Let me try to summarize it for you. (more…)
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At the core of most, if not all, of our economic problems lies housing. I do not need to replay the tape of low rates, shoddy underwriting, and Wall Street securitizations that all played a dramatic role in creating a bubble the likes of which we have never seen and hopefully never will again. All that said, housing is an enormous market with a wide array of factors impacting it. How does one track it? Are we supposed to rely on our local brokers telling us things feel better? Should we ask contractors if they are bidding on jobs? Dare we rely on our local or national media outlets to provide their expertise and pandering? If we did, housing may have bottomed 14 different times in the last 10 months. In all seriousness, how can we track housing? Welcome to Sense on Cents. 
