How to Fix The Water Problem….

What?  Are we now talking about plumbing problems here on Straight Talk?   Nope.

We’re talking about underwater mortgages.    You know, the situation where people owe more than what their house is worth.

So what’s the scoop and how do we deal with it?

• The scoop – the property values were vastly over inflated by the housing bubble of the last 5 years.
• Many people took advantage of the low downpayment programs and bought houses with little or no money down.
• Those people are now looking at a situation where they owe more on their house, in many cases substantially more, than their house is worth.

So what are the options?

Frankly, none of them are good, but there are some options:

• A government bailout – like it says in the article from the Free Press – the only thing people dislike more than bailing out the banks is bailing out their neighbors.   So, using substantial amounts of taxpayer money to reduce the principal amounts of the mortgages for underwater borrowers would be politically extremely challenging to get through.
• Do Nothing – let the markets work things through.   What would that mean?   A couple of things:  1) a long slow protracted recovery for the housing market.  2) additional pressure on the banking and mortgage environment with additional losses for the banking world and tightening mortgage guidelines.   3) an ongoing drag on the overall economy – the housing market typically leads the economy out of the woods but if it’s going to linger in the doldrums, that will be a drag on the economy  4) An ongoing drag on the jobs market – why a drag on the jobs market?   Geographic mobility will be limited because people can’t sell their houses to pursue jobs in other locations.
• A “combination” bailout – this is an idea that I’ve discussed before and I’ll attempt to write more on it some additional time.   I call it a combination bailout because it would allow for a couple of different things.

What’s a combination bailout?

• An acknowledgment that the mortgages on the books of the banks, Fannie Mae, Freddie Mac and the other financial institutions are not worth their “book value.”    A $100,000 mortgage on a $70,000 house is not worth $100,000.   The sooner this fact is faced, the better off we’ll be.
• So, I’m proposing that the financial institutions take an immediate 15% adjustment to the value of their mortgage backed securities and mortgage loans.   How did I come up with that number?  I pulled it out of a hat but it’s somewhere close to 10% less than the amount that property values have actually fallen.
• At the same time that happens, all mortgages (first and second liens that are NOT credit lines) will see both the principal balance and the corresponding payment reduced by the same 15%.     This will provide both monthly payment relief for all borrowers and will also allow many of them to sell who couldn’t otherwise.
• The reduction in values will significantly impact many financial institutions balance statements.   Some of them will be weakened to the point of needing to be “merged” into other organizations.    Some will close.     That’s painful but it’s okay.
• At the same time, all homeowners will benefit because they will see a drop in their monthly payments and they will have reduced monthly payments.
• What about non-homeowners?   Or people who have their houses paid for?   They would receive a tax credit (not a deduction) equal to 15% of the median house price in their state.

So what would that give us?

• A smaller banking system but one with a more realistic valuation of it’s assets and therefore a healthy banking system.
• Homeowners who are in a better shape financially because they have either less negative equity, they have enough equity that they can move if they want or need to, and their monthly cash flow is better.
• Those who don’t have mortgages will see a boost to their cash flow so they can either: 1) Save the money and help the banking system or 2) Spend the money and stimulate the economy.

How much would it cost the government?

Frankly, I don’t know but I expect that it wouldn’t be as much as many of the bailout things that have been proposed in the past for a couple of reasons:

1. If we are removing the assets from the banks books and at the same time removing the debt from the consumer’s side, that should balance out.   The only thing it would require is FDIC money to cover any banks that go under because of the falling of their book values.
2. The tax credit would cost some substantial dollars but at the same time, the money would spur the economy and would therefore increase tax revenues.

So, what do you think?  I know the logistics of it have a lot to be worked out but it seems to me that this would work better than giving the banks and the sellers $1000 each on a short sale (see the next post I’ve got going up for some thoughts about that).

Let me know your thoughts….

TV

Solutions aren’t easy for underwater mortgages | freep.com | Detroit Free Press

If there is anything the American public dislikes more than bailing out the bank, it’s (bailing out) their neighbor,” Gordon said.

Still, she said, the problem of underwater mortgages — where the homeowner owes a lender more than the house is worth — should concern everyone. “If your neighbor goes into foreclosure, it brings your home value down,” she said.

Some experts advocate for a federal bailout for underwater mortgages. That would cost about $801 billion, more than the original 2008 bank bailout, according to First American CoreLogic, a real estate data firm.

It will take time, money to heal housing market

In Michigan — where home prices have dropped more than 35% from their 2005 peak — home values are expected to fall another 22% statewide over the next five years.

In the same period, they’re forecast to drop 30% in metro Detroit, according to Dennis Capozza, a University of Michigan finance professor. Capozza also is a principal in University Financial Associates, a mortgage-risk advisory firm in Ann Arbor, which sells quarterly house price forecasts to its clients, including lenders and rating agencies.

Technorati Tags: Underwater Mortgages, Straight Talk About Mortgages

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Kenny H.

National Association of Home Builders Index

Okay, a couple of things about this chart:

• Thanks to Calculated Risk for the great chart again.    Bill, you do great stuff!
• Yes, the chart is “off the bottom” compared to a year a go.  
• But anything less than 50 means that more builders think the market is tough than think the market is good.

So, that means that basically over 80% of the builders survey say it’s tough out there.Why?’  A number of issues, but one of them is the withdrawal of the “easy credit” drug that was fueling the housing boom.

More later,

”Sean”

Jobs, Jobs and More Jobs

I got this chart from Calculated Risk (my favorite chart master).    It shows the relationship between house prices and the unemployment rate over the last years.   A couple of points to make about this chart:

• In the past, there has been a “general trend” linking unemployment and house prices.
• The current “bubble” shows that almost exactly when unemployment started rising is when house prices started falling.

Now a case could be made for the “chicken and the egg” question (which came first – a drop in house prices or an increase in unemployment?)   But to me, it’s pretty clear that the unemployment is the driving force in the equation.   Why?   It’s pretty simple – if you don’t have a job, it’s pretty hard to make your mortgage payments.   If you can’t make your payments, you end up either selling your house or the bank ends up owning it.   An increase in inventory pushes prices down.

So, what do we need in order to turn the housing market around?   Do we need more artificial tax credits and unbelievably low interest rates?   Nope.   What we need is jobs.   Plain and simple, we need jobs that people can feel comfortable with and that allow them to keep making their payments and to keep living their lives.

That will solve the housing problems and stabilize house prices, not at the inflated “bubble” prices but at a price that is in line with current wages.

What do you think?

Tom Vanderwell

Technorati Tags: House Prices, Unemployment

10-12% Further? Housing Prices – and ratings agencies….

A couple of thoughts about this report:

• It’s a national report and while national reports tend to show “averages,” remember the old saying, “All Real Estate is Local.”
• Credit Rating Agencies don’t exactly have the best record in “predicting” this mess.

With that being said, I have to admit, that their projections seem definitely in the range of “feasible.”

Tom Vanderwell

Deutsche Sees House Prices Falling Another 10 Percent : HousingWire || financial news for the mortgage market

When the credit crisis began, credit rating agencies created models predicting how bad things may actually get, in terms of how far down home prices would fall in America. At that time, mortgage finance players assumed this was a worst-case scenario, with an outside chance of coming true.

Today, Deutsche Bank researchers say these predictions will likely become a reality, with the total peak-to-trough decline of US home prices hitting nearly 40%. In the current outlook, they say home prices will drop a further 10 to 12% from current levels.

The results are part of a nationwide projection that represents a weighted average across 100 individual metropolitan statistical areas (MSAs).

The projections come from the securitization arm of the investment bank and is the first forecast expanded to include more factors that impact home prices overall as well as a variety of ranges (month-to-month, peak-to-trough).

“A change in market psychology (which can both cause, and be caused by, recent home price increases), some signs of labor market stabilization and various government programs aimed at easing the housing crisis have all been constructive for housing,” write the researchers. “These changes may have helped abate the freefall in prices we saw in early 2009, and the “overcorrection” we started to see in home prices.”

Calculated Risk: Bank Failure #139: Imperial Capital Bank, La Jolla, California

From the FDIC: City National Bank, Los Angeles, California, Assumes All of the Deposits of Imperial Capital Bank, La Jolla, California

Imperial Capital Bank, La Jolla, California, was closed today by the California Department of Financial Institutions, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. …

As of September 30, 2009, Imperial Capital Bank had approximately $4.0 billion in total assets and $2.8 billion in total deposits. …

The FDIC estimates that the cost to the Deposit Insurance Fund (DIF) will be $619.2 million. …. Imperial Capital Bank is the 139th FDIC-insured institution to fail in the nation this year, and the sixteenth in California. The last FDIC-insured institution closed in the state was Pacific Coast National Bank, San Clemente, on November 13, 2009.

Technorati Tags: House Prices

Housing Won’t Collapse – Oh good, I feel better now…..

The article by Housingwire.com has some good information in it but also some big IF’s in it…..

Housing values could significantly recover in the spring of 2010 as low prices attract a blend of owner-occupiers and investors. Heated bidding pushes up prices at foreclosure auctions, and the supply of new and existing homes is declining, according to the report.

They could significantly recover, but I don’t see how this report makes a solid claim that they will.

“Thanks to federal bailout money and a general improvement in their financial health, banks have been relieved of the urgent need to liquidate their assets. As a result, lenders and government entities like Fannie Mae and the FDIC have been able to curtail sales to raise prices and avoid recording losses on properties,” according to the report.

Okay, but this fails to address a couple of things:  1) The Federal Bailout Money is ending.  Don’t know for sure when but it is.   2) Have the banks been relieved of an urgent need to liquidate assets or are they attempting to make it look better than it really is by dragging the process out further and further?   3) Avoid recording losses or put off the losses and kick the can down the road?

If the government and the banks can effectively solve the puzzle of mitigating foreclosures, Radar Logic says that home values could even go up in 2010.

IF they can solve the puzzle and we all know how well that has happened so far.

I’m not predicting a collapse in 2010, but I think that we all need to be much more concerned and careful about the “ifs” and “buts” and “coulds” in reports.

Tom Vanderwell

Housing Won’t Collapse in 2010, says Radar Logic

By JON PRIOR
December 17, 2009 12:02 AM CST

The US housing market could be in for some serious trouble in 2010, but predictions of a second collapse are “exaggerated,” according to a report from Radar Logic, a real estate data and analytics company.

Of course, before calling an end to the recession, everyone will keep an eye on unemployment. Many believe the rates will peak in the next two or three quarters and decline. Once that happens, according to the report, housing demand with strengthen even more.

“While we are not out of the woods yet, our view is that housing is showing signs of stability, markets are showing signs of rational behavior and everyone is starting to understand the fundamental problems that brought us here,” according to the report. “As such, we think the bears are overdoing it.”

Five Years – Gulp….. What does that mean for the housing market?

Let’s take a look at what this means for the housing market:

• If it takes 5 years before we see sustainable growth, then it’s going to be a very slow rebound to the jobs market.
• If it’s going to be a slow rebound to the jobs market, then delinquencies on mortgages will continue to climb and will remain an ongoing problem for Fannie, Freddie and FHA.
• If delinquencies continue to climb, then we’re going to see continued tightening of underwriting guidelines.
• If we see continued tightening of underwriting guidelines, then we’re going to see continued pressure on house prices.
• If we see continued pressure on house prices, we’re going to see a continued lack of inflation and potential deflation.
• As we see continued lack of inflation and potential deflation, we’re going to see interest rates remain lower.   Not as low as they are now, but still in the lower ranges.

If you had asked me 3 months ago, I was telling people that I thought we had 12 to 18 months until we started seeing significantly higher interest rates.   I was also telling people that I expected that most markets would see property values bottom in 2010 and start a gradual rise from there.

If the 5 year time frame is accurate, both of those time frames are going to extend outward significantly.   Rates will stay lower for longer and it’s going to be longer until we see a bottom in house prices.

So what’s it going to take to turn it around?   I’m working on some ideas, but I’ll be honest with you, the only ways that I can see are frankly quite radical.    How to describe it?   Three words:

Massive Systemic Deleveraging.

Hey, I didn’t start Straight Talk about Mortgages because I wanted to sugar coat things.   I started it because I believe people need to know the truth as I see it.   And that truth isn’t pretty right now.

Tom Vanderwell

FOMC Sees Sustained Growth Five Years Away : HousingWire || financial news for the mortgage market

It will be at least five years before the economy experiences a sustainable rate of growth and levels of unemployment and inflation acceptable to the Federal Reserve, the Federal Open Market Committee said in its Nov. 4 meeting.

Meeting participants, including members of the Fed Board of Governors and the presidents of the Federal Reserve banks, believe economic recovery will be gradual, with real gross domestic product (GDP) growing at a moderate pace and the unemployment rate declining slowly over the next few years. During this time, inflation will remain subdued, the committee said.

The committee increased its projections for real GDP growth for this year, after the second half of the year outperformed its original June projections.

The committee also agreed to maintain the current 0 to 0.25% federal funds rate, noting economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The committee affirmed its intent for the Federal Reserve to purchase a total of $1.25trn of agency mortgage-backed securities and about $175bn of agency debt.

Technorati Tags: The Fed, House Prices, Mortgage Rates

Underwater Housing – Your Mileage May Vary…..

Like I was saying early, the underwater housing report was on a national scale and the mileage may vary.   Here’s proof that it does:

Technorati Tags: Underwater Housing, House Prices

23% Underwater – your results may vary…..

The Wall Street Journal reports that 23% of all US homeowners are underwater.   A couple of thoughts about that statistic:

• Your results may vary – I’m certain that it’s higher in some areas (Michigan, Florida, California…..)   But it’s also lower in some areas (North Dakota etc.)
• This doesn’t specify whether it’s of ALL homeowners or just of the homeowners who have mortgages.   I expect it’s of just the homeowners who have mortgages.
• 5.3 Million households have mortgages that are 20% higher or more than what their houses are worth.

I think we are going to see the “move up” buyer market remain significantly constrained for quite a while because those who want to sell and relocate or just buy a different house (bigger, smaller, in town, out in the country, whatever) can’t do so due to their financial position on the current home.

Tom Vanderwell

Calculated Risk: Mortgages: 23% of Borrowers have Negative Equity

From the WSJ: 1 in 4 Borrowers Under Water

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23% …

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value …

[N]egative equity “is an outstanding risk hanging over the mortgage market,” said Mark Fleming, chief economist of First American Core Logic. “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.”

A History of Home Prices

Just take a few minutes and really look at it.   Really look at the dates, the direction of the charts and what we’re dealing with……

Technorati Tags: Case Shiller, House Prices

I agree with what Lawrence says but not what he means…..

In a report issued by the National Association of Realtors, they talk about how housing prices are still falling compared to last year (year over year).   I don’t think that really surprises anyone, so I’m not going to talk about that.

What I’m going to pick on is what Lawrence Yun, the  choir boy for NAR said.   See below and then I’ll tell you I agree with what he says but not what he means…..

Home Prices Fell Further In Most Parts of US in 3rd Quarter – Real Estate * US * News * Story – CNBC.com

“The decline in the national median price has moderated recently, and a shrinking supply of unsold inventory suggests we are getting closer to price stabilization in many areas, ” said Lawrence Yun, the group’s chief economist, in a statement. “But we need a steady stream of financially qualified buyers to further reduce inventory and get us to a self-sustaining market.”

The part in bold is what I’m talking about.   Yes, if we have a steady stream of financially qualified buyers, that will help reduce inventory and get us to a self sustaining market.    But, if you or the reporter from CNBC pushed him further on what it takes to get a steady stream of buyers, I’d be willing to say that he’s going to come up with something along this line:

• We need banks to be more flexible with their underwriting requirements.   They are turning too many borrowers away.
• We need to expand and further extend the home buyer tax credit.   $15,000 minimum.
• We need to lower downpayment and cash reserve requirements.

Lawrence is missing the point.   What we need is not those type of “reinflate the bubble” policies.   Instead, let me propose a couple of other alternatives:

• Let’s lower the tax rates so that everyone has more money to spend and invest.   History has proven that actually stimulates growth and increases tax revenues.  Oh and growth creates jobs which creates……
• Let’s develop foreign trade policies that create US jobs not ones that cost jobs.
• Let’s clean up, reform and deleverage the banking and financial system so that healthy banks can actual do what they were supposed to.    Exactly what do I mean by that?     That’s a topic for another day and another story – the reform of the banking system could be a 12 hour webinar.   Big topic.

We need jobs and until we can solve the unemployment mess, we’re not going to see a truly self sustaining housing market.

I’ll have more later, in the mean time, let me know if I can be of help.

Tom Vanderwell

Technorati Tags: Lawrence Yun, Tax Credits, Jobs

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