Blown Mortgage

“Housing Markets Will Roar Back in 2009”

constantine — Thu, 08 Jan 2009 16:07:52 +0000

At dire times like these, we can all use a laugh or two. So our thanks to the author of the report, “Housing Markets Will Roar Back in 2009.” At least I’m supposing that it’s brilliant satire because the only other explanation is out and out lunacy. Always hard to tell because as Spinal Tap’s David St. Hubbins said, “It’s such a fine line between stupid, and clever.”

The nation’s foreclosure hemorrhage has finally slowed and 2009 should see a significant decline in foreclosures as buyers return, pushing home prices up and fueling a real estate recovery, according to the 2009 Outlook from ForeclosureS.com.

“Recovery is underway. Affordable is back in the housing market,” says Alexis McGee, real estate expert, educator, and president of ForeclosureS.com. “In 2009, housing will not only recover, but we’ll see buyers leap into this market in droves, depleting our housing oversupply, and actually put higher price pressures on the market.”

“With 4.5% fixed mortgage rates, housing prices lower than they were ‘pre-housing bubble’, commodity prices lower, tax credits available for homebuyers, and the government eager to stimulate our economy, for the first time in years I can see prices rising again in 2009” adds McGee. “This is a great time to buy properties for investors — to buy properties at wholesale prices below today’s already low prices — rent them out for positive cash flow and then sell them for big profits in late 2009 once price appreciation kicks in.”

Let us then ignore two stories in the news: Mortgage applications dip despite low rates and Pending home sales sink to 7-year low

As the song goes, who are you going to believe – me or your lying eyes?

Given that 77% of Americans blame the media for over-hyping the current economic mess a lot of people do seem to doubt their own eyes.

Post by Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Americans unwilling to bail each other out

jhammond — Thu, 08 Jan 2009 00:41:29 +0000

“As a new Federal foreclosure policy unfolds in the months to come, public opinion will certainly play a central role. It’s clear that people have strong opinions and a candid and vigorous debate will improve the chances for a successful outcome. The outcome could shape the real estate markets for many years to come,” said David Lereah, president of Reecon Advisors Inc., an independent real estate economics and information company that recently conducted a national survey of Americans’ attitudes about how the $700 billion bailout ought to be spent.

The results of the poll, released on Tuesday, indicate that a majority (51 percent) of Americans responding oppose using bailout funds to help pay the mortgages of homeowners in default. Men, seniors and those living in the Northeast region treated defaulting homeowners the harshest. More than 58 percent of men and more than 56 percent of both the elderly and Northeast residents participating in the survey indicated they opposed bailing out homeowners. Support for extending a helping hand to homeowners in default was strongest among young people and those with annual earnings of less than $20,000. Among young people between the ages of 18 and 24, 69.1 percent support aiding homeowner in default as do 60.1 percent of those earning less than $20,000 annually.

The survey also revealed that consumer confidence in real estate is significantly higher than in the stock market despite declining property values. More than 53 percent of those surveyed believe real estate is a better long-term investment than the stock market while only 30.8 percent think the stock market is the better long-term investment given the current state of the economy. Those in in South (58.6 percent), West (58.4 percent) and young people in the 18 to 24 age group expressed confidence in real estate. Confidence in the stock market was highest (63.9 percent) among those between 35 and 49 years of age.

When asked which will recover first the stock market or real estate markets, 46 percent chose the stock market and 43.2 percent chose real estate. These results were within the survey margin of error and are therefore not statistically significant.

“These findings indicate that there are significant political barriers to proposals now being drafted in Congress to use some of the remaining $700 billion of bailout funds to help stem foreclosures by helping defaulting homeowners with their mortgages,” said Lereah.

The poll is the first in a series of opinion surveys on issues critical to real estate markets to be conducted by Reecon Advisors, Inc. for the Reecon Advisory Report, a weekly newsletter launched in January 2009. The telephone survey was conducted December 19-21, 2008 by GFK Custom Research. A total of 1,004 interviews were completed, with 524 female participants and 480 male participants. The margin of error on weighted data is +3 percentage points for the full sample. All completed interview are weighted to ensure accurate and reliable representation of the total population, 18 years and older. Reecon Advisors, Inc. is a leading independent real estate economics and information company in the real estate industry.

Gaming Home Values and Their Consequences

Morgan — Wed, 07 Jan 2009 11:07:32 +0000

The plummeting Case-Shiller Index, which showcases the free fall that has become the housing market got me thinking about the bubble inflation during the preceding years and the role that house valuation played in this implosion. It also got me thinking about the difference between Case-Shiller price drops and actual price deflation for those people who manipulated (or were manipulated) their housing price during the boom.

Pushing Appraisals

Let’s start with the problem. In residential lending the broker or lender is the one who orders the appraisal of the property. Whether they pay for it or the borrower pays for it is moot. In theory, the appraiser is hand-selected by the lending institution to deliver a fair value of the property. However, in practice this process often works in reverse. The lending institution already has a number that they “want” for the property to make the financing “work” under bank guidelines. This creates a rather massive conflict of interest. The broker or lender originator is trying (for all intents and purposes) to find the maximum reasonable value of the home to secure either the lowest interest rate or the maximum cash out (on a refinance) for the loan. The bank on the other hand (one would think, but often be wrong) should be looking for the lowest reasonable value of the property to protect their position. This conflict played a major role in fueling the bubble.

A Positive Feedback Cycle

Home property values exist in a positive feedback cycle (no matter if the price is going up or down), that is, the current direction of the prices tend to reinforce that present direction. The effect builds on itself. For instance you have 5 homes of similar characteristics (bedrooms, lot size, make, materials, ammenities, etc.) and they all have a 2006 value of $400,000. These homes are called comparables or “comps”. If two of those homes sell in foreclosure or short sale for $320,000 (a 20% drop) then these will influence the price of the remaining three homes that were previously valued at $400,000. These new comps drag down the price of the surrounding homes. The converse is true as well, and it was this positive feedback cycle that fueled the massive escalation of home prices in the frothiest of markets. Each new comparable sale that came on to the market at a slightly higher price established a new “comp” which helped set the market price in the area higher.

Throwing Gas on the Fire

This positive feedback cycle was reinforced by originators trying to make loan terms work for their borrwer. Using automated underwriting or by hand with published underwriting matricies, they worked to fit loans in to approvable packages. Meanwhile, banks and their risk managers sought to “protect” themselves by making it easier to qualify at lower loan to value ratios (LTV). The key assumption there being that if a bad credit risk defaults the bank has a greater likelihood of recovering their investment the more equity is protecting their position. With that assumption in-hand they built their guidelines to allow for more risk the lower the LTV. The higher the LTV the “better” the borrower had to be in terms of credit scores, income, etc. These guidelines were banded so that there were very clear breaks that significantly changed at each tier. For example if you had a credit score of 580 you might be able to get financing up to 70% LTV ($70,000 on a $100,000 house) but if your LTV was 72% the borrower would have to qualify at the 80% LTV band, which could dramatically change the terms of the loan, such as jumping the interest rate by 1 or 2%, changing the monthly payment dramatically. It also might change other ratios required by the guidelines that would “kill” the deal.

And, conversely each 5% (typically) that you were able to drop the LTV of a loan the lower the interest rate would be for the borrower. So you can see there was immense pressure in an uber-competitive environment to get the “best” value for the customer to win the business. Best always meaning highest.

Competition and Gaming LTV Ratios

This led to increased competition among loan originators to get the highest value of the house because that often resulted in the lowest interest rate, or maximum cash-out of a refinance, and the lowest or the most would win the business. A typical borrower talking to 3 or 4 mortgage originators would of course go with the lowest rate or max cash, so the originators would try to find the highest value of the home to make their quote the best. For example if you were an originator and the borrower needed an $80,000 loan. If an originator thought that your home would only be appraised at $100,000 (80% LTV) they would quote the borrower on the terms and conditions and rates associated with an 80% LTV loan. However, if the originator thought that the house could be appraised at $107,000, the LTV is now 75% and the terms, conditions and rates improve dramatically. You can see the problem. With 3 people competing for the loan, the lowest loan to value means the most favorable terms (and usually a new customer).

How are the originators getting these new values precisely? They’re getting the recent comparable sales data from title reports for homes that have recently been financed in the area. They look at 10-12 homes, find ones that are comparable and estimate the value of the home. Then they assume that in a rising market that prices are naturally going up and build their assumption from there. Since they’ve never seen the property or the neighborhood this is all the information they go on. But it makes for a thinly plausible guess and that’s the number they work with.

Delivering the Value

Now comparable sales from title reports do not an appraisal make. The originator needs to “hire” the appraiser (even if they have the borrower pay for it they’ve chosen the appraiser to do the work (in most instances)). They send the appraiser a request for appraisal. On that request for appraisal they note the estimated value of the property. This is the number that they “need” to make the loan work at the terms they’ve quoted their recently-won customer. If this value doesn’t come in the terms of the loan changes and the customer walks (or is extremely upset about the bait and switch). This value while not explicitly stated as the needed value definitely has that need implied. Often the originator will talk to an appraiser about the value before even ordering the appraisal, just to make sure the appraiser can “get it.”

Rock and a Hard Place

This puts appraisers in an extremely difficult situation. Appraisers, often sole-propreitors or small shops, need business to feed their families, etc. They don’t get paid unless they complete an appraisal. And they often don’t get an appraisal order unless they can confirm that they can get the value requested ahead of time on the phone. While this is certainly illegal and not the way it is supposed to work (because the appraisal is supposed to be an independent valuation) it is a common practice. Now laws are going in place so that brokers and other folks can’t have business relationships with their appraisers for just this reason to eliminate this conflict. Additionally, if the appraiser goes out and assigns a value to the property that does not meet the “needed” value by the originator that appraiser will never (likely) receive another order from that company. If it’s a large company that appraiser will likely be noted in the system as “difficult” or “can’t get value” and they lose tons of business as the company goes with other appraisers in the area who are more “flexible” or those that “can get max value”.

Banks Worked to Protect Themselves

This is not rocket science. And banks and underwriting departments knew this. Often underwriters and appraisers had to bear ugly confrontations from originators and sales managers when the value didn’t “come in” as anticipated and the deal was lost. At my company I was responsible for running Automated Valuation Models on each of our banked loans to ensure that we weren’t being hung out to dry by aggressive appraisals. These AVMs were sophisticated models that tried to put a price on a property through all sorts of data. If the appraisal and the AVM were outside of 10% of one another we ordered a drive by appraisal or a desk review from a certified appraiser to ascertain a realistic value of the property. This double-checking did not make the sales people happy - as often, surprise, surprise, appraised values would be modified downward.

But no system is perfect and eventually we got burned on one appraisal on one loan. To the tune of about $70,000 when all was said and done.

Pushed Appraisals and the Effect of Falling Home Prices

Where this really gets interesting to me though (because malfeasance and greed-driven actions of the industry have been well-documented) is the plight that these home owners with “pushed” appraisals face today. Assume your home was worth $300,000 in 2005 and you decided to take out a loan of $180,000 to fix some things up and redo your higher-interest rate first mortgage. You’re at 60% LTV. If the value of your home over the course of the last two years has fallen 20% your LTV is now is now 75% (property $240,000 loan approx still $180,000). This means that if you had to you can still sell, or even refinance in to a lower rate, an FHA loan or some other type of program (say if your ARM loan was adjusting). However, assume that the $300,000 was really pushed 5% (so the actual value was $285,000. Now with home prices dropped 20% (plus your pushed ghost equity wiped out) you’re effective property value is now $228,000 which gives you a LTV of 79% (still a “doable” loan but very close). And if property values fall greater than 20% you’re basically stuck in a loan as underwriting guidelins get exceptionally difficult above 80% on refinances.

Getting Screwed

So the folks that bought or refinanced in the bubblicious markets are now duly screwed, because their home value was so jacked up that their properties are outliers to the average price value in the area. This means that for them a 20% drop in prices is really something like 22-25% or higher loss in their value. This reduces their options and may eliminate the chance at refinancing. I wonder how many homes out there are like that. When they see a 20% drop in home values but know that they are far worse off than that? It must be a nightmarish feeling. Because in going for the “best” they ended up in a situation far more damaging then if they had received the proper valuation in the first place.

Mea Culpa

Right now I’m saying that it’s late at night while I’m writing this, I have no internet access, I’m terrible at math and the math above is a little fuzzy. Also, I’ve been out of the industry for almost two years now, so I don’t know the guidelines for refinancing today. Maybe it’s still easy to get financing above 80% and this is all a worthless exercise. So apologies if the math or the severity of the changes is off. You’ve been warned, but hopefully you still catch my drift.

Financial crisis timeline: how did we get here?

jhammond — Wed, 07 Jan 2009 03:49:35 +0000

In June 2003, the Federal Reserve lowered the prime rate to 1 percent. It was the lowest prime rate in 45 years. It was also the starting point for the financial crisis that has led to hundreds of billions of dollars in bailouts and the demise of investment banks in the U.S., turmoil in emerging markets around the world and a global credit crisis responsible for trillions of dollars in losses. Yet people still ask “How did we get here?”

The University of Iowa (UI) Center for International Finance and Development (UICIFD) has attempted to answer that question by creating a detailed timeline of the events leading up to the economic collapse. The 87-page timeline, which is available in PDF or HTML format at www.uiowa.edu/ifdebook/timeline/timeline1.shtml uses news reports to document struggling investment banks, failing mortgage companies, worsening housing reports, shrinking dividends and earnings, and other factors that were warning of the impending financial collapse. The success of the effort is demonstrated by the popularity of the website which surpasses all other search engine results for credit crisis timeline.

“The timeline is pretty gripping reading for those who have an interest in the worst financial and economic crisis since the Great Depression,” said Enrique Carrasco, a UI law professor and director of Center.

Carrasco started the UICIFD in 1998 to objectively analyze complex global financial and development issues for an audience who are not financial experts.

“Our research is specifically designed for people who aren’t experts in these issues,” agrees HeeJin Lee, a third year law student, one of the UICIFD researchers and its managing editor. “It’s easier to understand than most people think, and this is a way we can present the core of it for people who aren’t financial experts to comprehend.”

The timeline was compiled by Jason Cox, a law student. It follows the economic waves around the globe linking news stories both within and beyond U.S. borders. It includes small stories that may have been missed in the flood of bad news as well as the big headlines. The attempts of other governments and organizations such as the European Union (EU), International Monetary Fund (IMF) and World Bank trying to slow the collapse are also explored.

The financial meltdown is not the first research project for the UICIFD. Past topics include reforming the World Bank and IMF, the economic future of Cuba, the impact of the North American Free Trade Agreement (NAFTA) and China’s relationship with the World Trade Organization. In normal years, the Center’s student researchers spend the bulk of the year working, publishing most of the work on the UICIFD website when it is complete. The students’ research is compiled in an e-book that has grown to more than 300 pages in the past 10 years. The Center is co-hosting a symposium with the law school’s International Law Journal about the global credit crunch and economic crises on February 20 in the Boyd Law Building on the University of Iowa campus in Iowa City.

Someone’s finally starting to tell the truth about the “recession”

constantine — Tue, 06 Jan 2009 16:12:34 +0000

Three cheers for two economists for telling it like it will be.

Harvard’s Kenneth Rogoff and Carmen Reinhart of the University of Maryland have published a paper outlining how long the “recession” will be and what it will entail. Their projections are based on what happened to 22 economies that went through financial crises since 1929.

Conclusions:

Housing downturns last six years — so we’re still at least three years away from bottoming out.
Unemployment increases around 7% after a major financial crisis; hitting its peak four years after the crisis. November jobless numbers 6.7%. That means unemployment will hit at least 13% if that’s where you start measuring from. Also this is based on the tweaked unemployment stats which do not include the under-employed or those no longer collecting benefits.
Stock declines last three and a half years and total 55%. If true, that means DJIA would be under 6500 (which is the number I have in our office pool).
Government debt = 86% of GDP –- or $12 trillion.

(Another fine assessment of the report can be read at the WSJ Real Time Economics blog here.)

All of which sounds a lot more likely than any of the official pronouncements which suggest it turns around by 4Q of 2009.

Q. Were you wrong to be so bullish?

A. I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts. The difference was that I put a positive spin on it. It was easy to do during boom times, harder when times weren’t good. I never thought the whole national real estate market would burst.

Q. The NAR’s latest forecast calls for a slight increase in home prices next year. Thoughts?

A. My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It’ll take a long time to get back to the peak prices we saw in many markets.

Q. Any regrets?

A. I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

It is clear that telling the truth and leaving out the spin would have served the NAR better. They could have established themselves as a trustworthy source of information. Instead they lived up to expectation as just another generator of bovine fecal matter. Shame on them.

Constantine von Hoffman, is a veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Darwin Didn’t Say Quite What You Thought He Did

MG Dungan — Mon, 05 Jan 2009 11:05:51 +0000

What Darwin actually said was a lot more inspirational considering where we are now. “It is not the strongest of the species that survives, or the most intelligent that survives. It is the one that is the most adaptable to change.” ***sigh, my hero***

Although I have never worked in retail anything, some of my best friends are retail customers and a few have asked for my opinion on others’ advice, most recently Suze Orman’s.

Ms. Orman’s seminal work “The Dangers of doing nothing in 2009″, Costco Connection Magazine January 9, 2009, is now available without charge at the checkout counter. In it she recommends loading up on stocks to be positioned to ride the wave up, which she’s sure is coming, along with the spaceship, I guess.

IMO, her recommendation is irresponsible. However, she’s not alone in advising retail customers to stay in stocks, the large brokerage departments (as you remember, all the big ones went bankrupt, were absorbed by banks, or restructured and became banks themselves to get on-going bailout money) are making the same recommendation for 2009. As a matter of fact, it was their recommendation for 2008 also, which they repeated so persuasively and with such wrong-headed confidence that I’d cringe at their humiliation if I thought they felt any.

Here’s how their advice worked out:

Courtesty of Bloomberg

Caption: After the 1987 crash the Dow finished up about 2% for the year, so 2008 was far, far worse.

We see that the market finished the year up off November lows. This could be due to a bear market rally, the fourth wave up according to Elliott Wave Theory, or some other technical pattern that will correct soon. Or, according to retail brokers and advisers, it’s because the bottom is in and stocks are about to zoom up because . . . because of what? . . . because corporate profits are about to soar. ***that must be it***

Also, note that each time there’s been a substantial uptick, it’s off lower highs.

Apparently, the Fed and Treasury would like to bail out every entity listed on any of the exchanges, including the foreign banks and central banks they’ve been slipping money to under the table. They can’t save them all, for one, and for two, the money they’re giving away has to be paid back at some point. None of this benefits the economy, corporate prospects, or the stock market. After each multi-billion dollar bailout, the stock market stabilizes briefly then resumes its decline. So, stocks will continue trending lower and if prices don’t fall fast enough to reflect reality, the markets will settle things up and crash.

For investors who thought they were well diversified by owning foreign stocks, here’s what happened to their portfolios:

Courtesy of the Wall Street Journal

Whoops, they forgot the Russian stock exchange, which was down 72% and it wasn’t even open every trading day:

Caption: It’s the oil, ??????.

OMG, the humanity. . . I mean, would you look at those skid marks.

This is the worst performance since the first depression and reflects a very unhealthy world economy. There is no beneficial event of sufficient magnitude within the realm of imagination that could turn this around anytime soon.

mg dungan

What We’re Reading 1/4/09

Morgan — Mon, 05 Jan 2009 03:20:25 +0000

A few selections including two massive pieces in the NY Times about the meltdown:

The End of the Financial World as We Know It (NY Times)
How to Repair a Broken Financial World (NY Times)
Madoff Paraphernalia, of All Sorts, Landing on EBay (NY Times)
44 States Face Huge Budget Shortfalls (Global Economic Trend Analysis)
Woefully Misleading Piece on Value at Risk in the New York Times (naked capitalism)

What We’re Reading 1/3/09

Morgan — Sat, 03 Jan 2009 16:33:55 +0000

Here’s some of the interesting articles we’re reading from around the Web:

What’s With All the Auto Dealers (The Big Picture)
Skaters Jump In as Foreclosures Drain the Pool (NY Times via Transistor Blog)
The fall of AIG. (WaPo Pt 1., Pt. 2, Pt. 3)
They saw it coming (The Daily Beast)
Drop in Conforming Limits Means More Jumbo Mortgages (Housing Wire)
Spit When You Say “Madoff” (Slate)

What We’re Reading 1/2/09

Morgan — Fri, 02 Jan 2009 19:46:58 +0000

I love Paul Kedrosky’s daily reading list. So we’re going to try to do that occasionally over here. I go through so much news that obviously I can’t share an opinion on, but it may be something that you would like to read as well.

So thanks Paul and here we go!

Hale “Bonddad” Stewart: The Great Depression, Pt. II (HuffPo)
Video-o-rama: Ring out the old, ring in the new (The Big Picture)
Hybrid Car Sales Fell Sharply in November (Naked Capitalism)
Jacki Zehner: Dear Hank (A Letter to the Departing Treasury Secretary) (HuffPo)
As trade slows, China doesn’t rethink its growth strategy … (Brad Setser, Follow the Money)
The Aftermath of Financial Crises* (Reinhart & Rogoff, PDF)

Let me know how you like this feature and what you’d like to see covered. Happy New Year to you and yours!

Your Tax Dollars Hard at Work

Morgan — Fri, 02 Jan 2009 07:54:54 +0000

I love this stuff. Hat tip to Jeff, who runs the awesome NADA Guides blog (for you gearheads), for sending this in.

Where are your TARP funds going? And they are yours, you know. Those $700 billion will be financed on your behalf for stuff like this, instead of the school, hospital, roads and lower taxes you were probably hoping for.

From Gawker:

Where is the government’s bank-bailout money going? In part to pay for Wall Street banker Peter Kraus’s $37 million Park Avenue spread.

Kraus had excellent timing. He signed on as a top executive at Merrill Lynch in May, negotiating a $50 million pay package, with much of that guaranteed if the company was sold. He didn’t officially start until September. A couple of days later, Merrill CEO John Thain sold the company to Bank of America for $50 billion, triggering a $25 million payout under Kraus’s contract.

Bank of America got a $25 billion capital injection from the government. Kraus resigned and collected his cash, taking a job as CEO of AllianceBernstein, a money-management firm. And then he bought, for an estimated $37 million, an apartment at 720 Park Avenue from Democratic fundraisers Carl Spielvogel and Barbaralee Diamonstein-Spielvogel.

If you haven’t thrown up yet, you can read the rest of it here. Or better check out some of the atrocious interior decorating choices made by the Kraus’s (one below, more in the Gawker article).

Courtesy of Gawker

Now, bankers need bonuses. We need smart people to be incented to work hard to figure this out. However, the people that got us in to this mess should be foregoing any bonuses and rewriting their contracts to take a much more humble salary than what they were used to when they were fleecing investors around the world.

It just amazes me that we can have a bailout package with very little oversight, remember this gem?,

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” — the Treasury Department’s proposed Emergency Economic Stabilization Act, September 2008.

just doling out billions of dollars to the buddies of Hank Paulson and whomever else is a squeeky-enough wheel. A perfect “Why I hate My Industry”.