Category: home ownership

Housing recovery?

Over the past year, more and more of the housing pundits, circa 2006, have resurfaced on Bloomberg and CNBC.  Many claim the bottom in housing is in as the US recovery continues due to low interest rates and a healing consumer.  Like any story, the devil is in the details so let’s parse the facts and make our own diagnosis.

Beginning in 2009 the new administration, assisted by the new wards of the state Fannie Mae and Freddie Mac (thank you Hank Paulson), began a series of mortgage moratoriums -aka “mortgage modifications.”  Essentially, the government would entertain a variety of mortgage defaults/delinquency cases with the intention of keeping bodies in their homes.  Can’t let the home ownership (or should I say “lease”) program go to waste now.  Since then we note the following facts provided by housing analyst Mark Hanson:

Mods are greater in number by 50% than legacy Sub prime loans in 2006. And they are worse in structure.

– There have been 9.953 MILLION loans “tampered with” through trials, mods and workouts based on OTS data through Q4 2012.  

– Bank “proprietary” Alt-A, high-risk mods outnumber HAMP (Home affordable modification program) mods by over 200%.   Banks have had a field day re-leveraging millions of bad loans into structures that would make Angelo Mozillo blush.  

– Mods are why banks brought back $10s of billions in loan loss reserves as revenue. And why they will have to add back reserves.  

– Mods are where all that housing “supply” went.

– Mods are why foreclosures are at pre-crisis lows.

– Mods turn people into underwater, over-levered renters of their own house.

– Mods prevent the deleveraging process needed for housing to achieve a “durable” recovery with “escape velocity”. 

– Mods compete fiercely with all those new-era buy and rent “investors” (Blackrock, Och-Ziff, Tom Barrack) whose top demand theme when raising opportunity capital a couple of years ago was all of the “millions of homeowners displaced through foreclosure who will need a place to rent until they can buy again”. 

If you look at mods structurally — sky-high DTI, LTV, CLTV and low credit score — they make legacy Subprime loans look sane.  People say “banks aren’t lending”. I say ‘go look at their loan mods volume’.  Loan mods are nothing more than low rate, exotic refi’s for people who can’t do a traditional refi. But they are so exotic they make Pay Option ARMs look structurally sound.  

To put this in context there were only about 4 million legacy Sub-prime loans in existence in 2007 when the wheels came off the sector spurred by the ‘Sub-prime Implosion”.

– Four million Sub-prime loans ignited the mortgage meltdown. So, six million or more ‘worse-than-Sub-prime’ loans hanging over housings’, banks’, and MBS investors’ heads probably isn’t a great thing. 

-HAMP mod redefaults are surging…but banks and servicers have been making much more risky “proprietary” mods than HAMP in much larger volume.   Thus, expect redefaults across ALL loan mods to increase significantly over the next year.  Obviously, this means more distressed supply and for many banks this could mean higher loan loss reserves, etc.  See picture below:

My Comment: So one should ask the question “How long can the government continue to hide inventory from the public”?  Or as importantly, since the public bailed out the banks shouldn’t they be entitled to purchase homes at reasonable price levels, not the artificially inflated kind?

The subprime crisis: scofflaws & scapegoats

Last week the people at Institutional Risk Analytics hosted “Subprime Crisis: Scofflaws & Scapegoats”. Here are some of the comments from several panelists.

Josh Rosner, managing director of independent investment firm Graham Fisher & Co., spoke about two decades of “home ownership” hysteria:

Regarding the origins of the subprime disaster, Rosner provided a fascinating history of the policy roots in Washington. “The reason for the boom in housing in the past decade [was] the result of structural changes in the housing industry over a decade before. I would argue that most of these changes were a result of the 1980s recession. We came out of the 1980s recession and a lot of the industry players had lost their shirts in the S&L crisis. We saw Fannie Mae (NYSE:FNM) insolvent on a mark-to-market basis in 1986 and that was largely because of the OREO portfolio. We saw housing in 1993 and 1994 with home ownership rates stagnant, exactly where they were at the beginning of the 1980s.

Home ownership rates have consistently ranged in this country between 62 and 64 percent during the post-WWII period, and yet affordability had actually locked people out.” “So what we saw actually was the largest public-private partnership to date, started as the National Partners in Home Ownership in 1994. It was signed onto by the realtors, the home builders, Fannie, Freddie, the mortgage bankers, HUD. It was a massive effort, with more than 1,500 public and private participants, and the state goal was to reach all time home ownership levels by the end of the century. And the stated strategy proposal to reach that goal was, quote: “to increase creative financing methods for mortgage origination.” Those seeds were sown in 1994. Those policies were put in place in 1994.”

…the role of the GSEs:

Rosner continued: “By 1995 we saw home prices start to rise and home ownership levels also start to rise. How did we do that? There was no private label [mortgage] market at that point. We were really dealing in a world of enterprise [GSE] paper. We saw most of the features [of CDOs and structured assets] that we are now looking at as having been atrocious or irresponsible or poor risk management having started in the enterprise markets. We saw changes in the LTV, changes from manual underwriting to automated underwriting. The approval models used were easy to game. We saw reductions in documentation requirements. We saw changes for mortgage insurance requirements. We saw the perversion of the appraisal process and a move to automated appraisals. All of these features which we now look at and point our fingers at the subprime originators and say ‘you bad boys,’ all started in the enterprise market. This, by the way, is why I believe there is still significant risk [in the GSEs].

…the trouble with forbearance:

Rosner argues that besides low interest rates c/o of Alan Greenspan and the FOMC, mortgage lenders “began to see loss mitigation as a very valuable tool. So whereas in 1998, about 77 percent of 90-day plus borrowers ended up loosing their homes, by 2002 the measure had dropped to only 16 percent did. There is very little disclosure. Most investors don’t know [when a default has actually been] cured because when you modify you go from ‘delinquency risk’ to ‘current’ without putting out a penny. And this [example] actually suggests where we are going because there is still no transparency, still no standards for disclosure. Loss mitigation is becoming the next biggest predatory lending problem out there. When you speak to servicers, they tell you that the first thing they consider when entering into a loss mitigation is how much more capital they can drain out of the borrower before he blows up again. You have to wonder. When re-default rates on modified loans are 20-25 percent within two years, you have to ask if there is a social benefit of saving those remaining 80 percent of borrowers or not?”

…and speculators looking to front-run the home ownership drive:

“The structural change [put in place in the 1990s] drove housing to be a speculative asset,” continues Rosner. “Historically, investor share in the housing market was only about 8-9 percent. In the past three years, roughly 40 percent of sales have been for investment purposes. That creates what I call phantom inventory, usually in the fastest appreciating markets. These homes were purchased for speculative purposes with the most risky loan structures which required the least documentation… There is a lot of inventory that is not showing in the official numbers. At some point, that [inventory] gets thrown into the market.”

My Comments: 1500 public/private entities financed with below market interest rates generating tens of billions of dollars annually for the Wall Street structured finance crowd-priceless! According to a fellow credit bear I was wrong about the third inning so please stand for the national anthem.

Homeowner preservation assistance

We’re the government and we’re here to help! So says the state of Pennsylvania who created a mortgage refinance product deemed REAL, Refinance to an Affordable Loan. The program has been adopted by 67 lenders including Countrywide Financial Corp., Sovereign Bank, GMAC Financial Services and JPMorgan Chase. Borrowers generally must not make more than $120,000, among other conditions. The state will lend up to 100 percent of the mortgage.

Joining the forbearance party was none other than Angelo Mozilo and his ARM’s dealers at Countrywide. According to the Countrywide announcement over 35,000 “homeowners” have received assistance by contacting the mortgage retention center.

In addition to direct outreach, Countrywide’s efforts include working with non-profit and community groups across the country to create grassroots efforts to contact and counsel distressed borrowers, particularly in communities that are experiencing unusually high foreclosures. “There is an unprecedented effort among lenders, investors, community groups and the industry to work together to help homeowners,” said Bailey. “No one benefits from foreclosure, and counseling and intermediary support from these groups can be fundamental to the success of our borrowers.

Of course this press release by Moodys may have something to do with the press releases above:

Lenders did little to help subprime borrowers with adjustable-rate mortgages stay in their homes, even as it became clear many homeowners would struggle to keep up with their payments, a study released on Friday shows.
Moody’s Investors Service said banks eased borrowing terms on just 1 percent of subprime mortgages with interest rates that reset higher in January, April and July. It said that “only recently” have servicers begun to modify more loans to help homeowners avoid foreclosures, “despite much industry dialogue and heavy press attention” on the problem.

My comments: We’ve seen this movie before. During the 1930s numerous state and local governments intervened with forbearance programs which inevitably failed for obvious reasons. This grand experiment will also fail as wages continue to decline, adjusted for inflation while the financial obligations ratio hits an all time high.

The trouble with lending to the poor

An op-ed titled, “A Wall Street Trader Draws Some Subprime Lessons: Michael Lewis,” appeared on Bloomberg today:

So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don’t get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It’s not personal when a guy cuts your grass: that’s business. He does what you say, you pay him. But you don’t pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor.

After the subprime debacle, a small, but growing minority is questioning the wisdom of two decades of public policy promoting home ownership for low-income families. In an August 22 WSJ op-ed titled, “Payback,” Holman W. Jenkins, Jr. recalls how a number of these bad seeds were planted during the Clinton administration:

Everybody talks about moral hazard. A wisp of memory came to mind last week. Then-Fannie Mae chief Franklin Raines visited The Journal years ago and entertained himself by mocking editorial writers who assume that establishing that a policy is economically inefficient is enough to establish that it’s unwise.

He yukked it up quite a bit, in fact, noting that voters are perfectly entitled to assert values other than those of the market, namely that homeownership is a social blessing and should be encouraged with subsidies. And so we’ve done with tax subsidies, lending subsidies and a concerted set of policies by Bill Clinton’s HUD to move low-income people out of rental units and into homes they own. His goal, which was achieved, was to lift the homeownership rate from 64.2% to 67.5% of households.

This brings to mind an interview of Raines that appeared in the June 30, 2003 issue of BusinessWeek:

What Fannie Mae does is important to the country and to home buyers. And we do it, I think, very well.

(Btw, the interview is a classic with such quotes as “We are compulsive about managing risk,” right before fessing up to an accounting mess that cost over a billion dollars to clean up, three years of financial statements not provided investors, and eventually Franklin Raines his job. Don’t shed any tears for Raines: For his troubles he made nearly $100 million in 8 years of running the ship at Fannie Mae.)

In “Payback,” Jenkins goes on to cite a study questioning the wisdom of a policy that ignores basic economics:

A home financed by a mortgage is not just an asset. It’s also a liability. We owe thanks to Carolina Katz Reid, then a graduate student at University of Washington, for a 2004 study of what she dubbed the “low income homeownership boom.” She considered a simple question — “whether or not low-income households benefit from owning a home.” Her discoveries are bracing:

Of low-income households from a nationally representative sample who became homeowners between 1977 and 1993, fully 36% returned to renting in two years, and 53% in five years. Suggesting their sojourn among the homeowning was not a happy one, few returned to homeownership in later years.

Even among those who held on to their homes for 10 years, the average price-appreciation gain was 30% — less than if their money had been invested in Treasury bills. This meager capital gain was about half that enjoyed by middle-income homeowners.

A typical low-income household might spend half the family income on mortgage costs, leaving less money for a rainy day or investing in education. Their less-marketable homes apparently also tended to tie them down, making them less likely to relocate for a job. Ms. Reid’s counterintuitive discovery was that higher-income households were “twice as likely to move long distance if they’re unemployed.”

Almost needless to add, the great squarer of circles for middle-income homeowners, the mortgage-interest deduction, won’t turn a house into a paying proposition for those with little income to shelter.

His conclusion:

Bottom line: Homeownership likely has had an exceedingly poor payoff for millions of low-income purchasers, perhaps even blighting the prospects of what might otherwise be upwardly mobile families.

Yet in the political realm, bad ideas never seem to die, but instead are embraced and expanded by future politicians. President Bush took ownership of the “American dream” concept with the euphemism “ownership society.” And when that dream turned to nightmare, he pandered to the peasants with bailouts and an increased role for Fannie Mae and Freddie Mac. As Jenkins wrote in a September 5 WSJ op-ed:

You’ll know Washington is doing for housing what it did for New Orleans (subsidizing uneconomic decisions) if it now heeds countless pleas to expand the mandate of Fannie Mae and Freddie Mac to refloat the housing market and refinance underwater loans. Their lending already has grown much faster than the economy, much faster than housing demand, channeling a current $1.5 trillion in artificially cheapened capital into the housing market.

The underlying problem in the housing market is that, after two decades of easy credit funnelled into the home, prices are too high for the expanded pool of homeowners to afford. More of the same – promoting home ownership at any cost for those least able to afford it – can only exacerbate the current mess.

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