Archive for category Real Estate
Economic Effect of Propping Up “Values”
Posted by Tom in Centrally Managed Economy, Congress, Deficit, Democrats, Economics, Financial Policy, Monetary Policy, National Debt, Real Estate on March 29, 2010
I’m not an economist but it seems to me that Obama’s strategy of propping up values is a wrongheaded diseconomy. Whether it’s the bailout of GM and Chrysler with its concomitant effect of propping up UAW wages and benefits or the HAMP program designed to avoid foreclosures of underwater home mortgages, the economic effects are negative in the long range. In each case an artificial value is “supported” with confiscated money in the form of increased taxes.
The results are several and all bad:
- Potential sales of these assets by economic buyers will be delayed because a market clearing price cannot be reached without foreclosure.
- Potential private market loans using these assets as security will be delayed for the same reason.
- Necessary valuations of these assets whether as security or for tax purposes will be artificial casting doubt on the results of the valuations. Shareholders or lenders have no real idea of the economic value of GM. County governments have no confidence the the assessment value of the underwater home and thus continue to over spend or commit tax revenues.
- Owners of these assets continue contributing to the support of these assets instead of choosing more economic alternatives, for instance renting instead of buying.
- Investment capital is reduced or destroyed by tax increases needed to support the government action.
- The credit of the government is damaged by the debt increases necessary to support the government action.
- And general economic uncertainty is created by the delay in the recognition of real market valuations.
Japan should present a lesson. Its bubble economy of the ’80s in real estate and equities was fostered by cheap money and the close relationship between businesses, banks and government bureaucrats. When the bubble burst in 1990 the valuations continued to be supported by the banks funding one bad loan to repay another. Write downs and write offs were avoided or deferred. Uncertainty prevailed. Business decreased and deflation ensued. All government attempts at rescue were premised on the hope that prices would recover, but they didn’t. Prices decreased with sustained deflation. Savings increased as money was more valuable than goods or services. Consumption obviously decreased. The decade of the ’90s is thus referred to as the lost decade.
So the equation of cheap expansionary monetary policy (Greenspan) and government supported value inflation (Fannie/Freddie subprime lending) created artificial values which government policy now hopes to sustain by avoiding foreclosures and real bankruptcies. Market clearing prices are avoided and economic activity is decreased.
Yesterday’s Democratic umbrage at major companies recognizing GAAP losses resulting from Obamacare betrays their attitude toward proper valuations. These ignorant socialists have put the nation well down the road to serfdom!
Underwater But Not In Default….Is That Good?
Posted by Tom in Economics, Financial Crisis, Law, Morality & Religion in the Public Square, Real Estate on March 12, 2010
Today’s WSJ front page trumpets, Americans Pare Down Debt, and proceeds to tout the economic benefits of the “de-leveraging,” to wit: the consumer will have more money with which to buy things, resuming its role as driver of the economy. U.S. household debt fell by 1.7% a first, but this occurred largely by default. Is that good? Certainly de-leveraging by prepaying is good, just as increasing savings is good. The bubbled consumer was, and still is, over-leveraged and under-saved! But is a raft of foreclosures and the concomitant drop in real estate values good?
The other side of the story is that 11.3 million homeowner mortgages, 24%, of the total are underwater. Nevada has 70% sucking for air, Arizona 51%, Florida 48%, Michigan 39%, and California 35%. (See CNNMoney report.) This will double to 22 million mortgages, 48% of the total by 2011 according to a Reuters report. This means that a lot of people are still paying the monthly payments on the underwater mortgages. Alternatively, it means that the lenders have not filed notices of default and started foreclosures. Is this situation good?
Under most state’s laws, borrowers can walk away from mortgages with no personal liability; hand the keys to the bank, which has no recourse against the borrower, and then go out and rent for less than the mortgage payments. Why aren’t more of the 11.3 million borrowers taking advantage of this?
Kevin Hassett penned an intriguing article in the March 8th edition of National Review, Mortgage Mortality, that attempts to answer that conundrum. He posits two alternatives:
First, in the long range it is uneconomic to default on that underwater mortgage. The default has immediate adverse consequences: the credit rating gets hammered raising the price of future loans, the loss of future equity and potential profit when housing values recover, and the loss of tax deductions on mortgage interest. These adverse consequences outweigh the benefit of default.
Second, there is a branch of economic literature which suggests that “Americans’ morality is driving their default decisions.” A recent survey by Guiso, Sapienza and Zingales of homeowners about their willingness to default found out that 80% said that it would be “morally wrong” to strategically default on their mortgages! But caution, these results reversed if the respondent already knew someone who had defaulted.
So maybe it’s not “morality” that keeps homeowners paying the underwater loans, but social stigma or the lack thereof. Hassett cites Dan Ariely’s tome, Predictably Irrational, to buttress this “social stigma” concept which goes back to Adam Smith. Ariely relates a controlled test taking experiment at MIT, where two groups take the same math test, with one given more of an opportunity to cheat by self-reporting results; however, in the self-reporting group, half had to also list 10 books they had read, and half had to list as many of the Ten Commandments as they could remember. The results: cheating occurred in the self-reporting group and to a greater extent in the non-Ten Commandment half of that group!
So do we have a growing ticking time bomb of underwater mortgages? Are the inflated values of those mortgages on bank and investor balance sheets going to create another financial crisis? Is our government doing all it can to hide the problem and support artificial values on the backs of people who can’t afford their mortgages? Should we forecast several Japan-like lost decades or hope that the bomb explodes?
I have no answers but it appears prudent to be well aware of the problems.
Tom Motherway
Government Competency–An Oxymoron!
Posted by Tom in Democrats, Financial Policy, Government Regulation, Real Estate, Wall Street on February 12, 2010
Government residential real estate finance is the subject. Whether that is a proper role for government is one question; another is whether government is the dumb patsy that makes the smart guys rich. Let’s start with a video Ron Tomsic sent me yesterday, The Indymac Slap in Our Face, on the Think Big Work Small website, which tells of the profitable, rent-seeking relationship between the Federal Government and a Goldman Sachs/George Soros bank, OneWest Bank. Since these fellows are playing fast and loose with your money, please link to the video before reading on.
To verify the government locked in profit given to these Obama fat cats, I checked with Mark Toomey, our real estate finance expert. Mark’s comment:
“I’ve seen this video at least twenty times this week. Sadly, it’s pretty accurate. The $75,000 note from the consumer may reflect a judgment against the borrower for a non purchase money second and if that’s the case, I highly doubt they’ll ever collect it; more than likely, it will be included in the inevitable BK the consumer is headed toward.”
Worse yet seems to be the regulatory snafu our bureaucrats at Fannie/Freddie, the Fed, and HUD have caused with conflicting regulations the incidental benefit of which will be to keep the trial lawyers in business. Another Democratic constituency!
Mark continues: “Honestly, I think the bigger story is one the media will not pick up on for another two weeks. Residential lending has been virtually shut down in the last week now that the new GFE regulations have been fully enacted. Three dueling regulatory bodies have merged in to the perfect storm. My weekly conference call with the fixed income guys at Blackrock have turned in to a death watch of sorts; the scenario’s I laid out to them in December (ones at which we all laughed) have now come to pass, and we may very well be looking at the last decent funding month for residential mortgages nationwide. The pre-pay speeds have dropped off the table in the last ten days, and it is getting worse. Kiss getting a VA loan good bye.”
(Definitions: “GFE” means good faith estimate typically dealing with all essential and non-essential elements of a real estate closing. “Pre-pay speeds” mean the anticipated rate of pre-payments assumed by secondary market buyers of mortgage pools.)
Mark concluded with his dark Irish humor: “Greece today, New York tomorrow. Guns and gold, Tom, guns and gold.”
When government gets into businesses it shouldn’t be in the opportunities for incompetency and fraud are multiplied exponentially. The favored fat cats of the liberal left, Wall Street, trial lawyers, unions, etc. profit and all from your tax dollars! Truly a wonderful system we have.
Tom Motherway
America’s Lost Decade(s)-Complements of Obama, Bernanke and Geitner
Posted by Tom in Deficit, Democrats, Economics, Fed, Financial Crisis, Financial Policy, Monetary Policy, Real Estate, Uncategorized on January 25, 2010
Japan’s “lost decade” was caused by hiding bad assets, inflating values, and failing to recognize losses. “Hide the problems.” “Kick the can down the street.” Bank capital was suspect because bank assets were suspect. This societal attempt not to “lose face” resulted in a stagnant decade and higher interest rates for Japanese borrowers.
Fast-forward to the U.S. today. Fannie and Freddie, the efficient government instigators of the subprime residential debt bubble, are government toxic waste dumps. Tim Geithner in a little publicized Christmas Eve surprise, removed the $400 Billion in federal bailout limits from Fannie and Freddie. Currently the government, that’s your tax dollars, are behind everything these toxic twins do, without limit!
Why worry? What do they do? One thing is HAMP, the Home Affordable Modification Program. This is the $75 Billion program to keep people in the over-leveraged, over-priced homes that they can’t afford. It supports the inflated values of mortgage assets on the books of the banks so they won’t be required to write down the value of these assets with the corresponding hit to capital. As previously reported, including Christmas Eve Time Bomb, the program is a dangerous tilt at windmills! It only postpones the inevitable day of reckoning.
What happens to the Fannie-Freddie mortgages once made? Well, the majority go into the secondary market in packages against which bonds are issued, mortgage backed securities, MBS. Well, you argue, the market should fairly price these instruments. Unfortunately the Fed is the market, at least the great majority of the market, 75-80%. Where does it get the $1.45 Trillion to do this? Well, it prints the money. Yes, the Fed has doubled the monetary base.
Why then don’t we now have runaway inflation? Most of that excess liquidity is sitting on the banks’s balance sheets as bank reserves. The banks have not started lending it into the commercial market. There is little increase in the velocity of money, little economic activity. When the economic recovery gathers steam, inflation will raise its ugly head–on steroids!
To control that inflation the Fed would normally sell assets sitting on its balance sheet, typically government bonds. Problem is that now a lot of the securities sitting on the Fed’s books are the Fannie-Freddie toxic waste. Who’s going to buy that crap? And, at what price?
In an intriguing NRO post today, Fed Hedge, Stephen Spruiell points out that whoever the next Fed chairman is he will fail. He will have no where to turn when the stuff hits the fan. We will face runaway inflation with no exit, no remedy. Defaults, foreclosures, double-digigt interest rates. Borrowing will stop, business will atrophy.
So it really doesn’t matter who the next Fed chairman is. This gives populist bent Senators cover to oppose Bernanke’s confirmation. When the inevitable explosion occurs, they will say “told you so!”
Tom Motherway
Barney Frank, a Reformed Crap Shooter?
Posted by Tom in Centrally Managed Economy, Deficit, Democrats, Financial Crisis, Financial Policy, Real Estate on January 22, 2010
I got all excited when I read this morning’s headline to the effect that Barney Frank would recommend replacing Fannie Mae and Freddie Mac. (Bloomberg January 22nd article here.) Recall that Barney was the Democrat arguing to “roll the dice” with Fannie and its foray into subprime loans. As it turned out this gambling with your tax money was a proximate cause of the financial debacle we are still feeling the effects of.
Well my excitement lasted about a nanosecond. “We’re going to look at the whole question of housing finance…sorting our the function of promoting liquidity in the market and also the secondary market in general but then also doing some kind of subsidy for affordability.” Frank continued, “I don’t know anybody who thinks Fannie and Freddie should continue!”
In other words we’re going to create a whole new government home finance scheme! To bring Fannie and Freddie “on budget” following the recent $291 Billion Fannie-Freddie bailout would cost another $99 Billion according to the CBO. Looks like our $1.4 Trillion 2009 deficit will only go up! A federal debt increase follows as sure as night follows day! (WSJ January 22nd article here.)
When will these socialists learn that government has no role in housing finance? This is not a proper function of government. The market can best handle capital allocation decisions, including home financing. The government has proven it can’t handle them, over and over again. Our children and grandchildren will suffer as a result!
Tom Motherway
Christmas Eve Time Bomb
Posted by Tom in Centrally Managed Economy, Deficit, Financial Policy, Real Estate, Statism on January 5, 2010
With Santa’s sleigh on course from the North Pole and Christmas spirits high, Obama’s Treasury Secretary removed the $400 Billion capital limit on Fannie/Freddie, effectively nationalizing the residential mortgage market.
Fannie Mae and Freddie Mac are GSEs, government sponsored enterprises, creatures of Roosevelt-Johnson forays to provide mortgages to low-income borrowers; they now have private ownership but public backing. In good times shareholders profit, in bad times taxpayers suffer, but the suffering is hidden because the support is off budget. With the Greenspan/Bernanke excess free money setting the stage, Fannie and Freddie plunged into the subprime market creating a gigantic international bubble which recently exploded. Recall Barney Frank’s “rolling the dice” on their subprime expansion. Both companies are under federal conservatorship, but now the taxpayers have issued a blank check, no limits—Fannie and Freddie can now roll the dice without restraint. And rolling dice they are by modifying mortgages to prevent foreclosures. Of course most of these fail:
So we have a perfect example of the leftist government at work interfering with the market. In this case the very gambling which caused the subprime bubble is being used to re-inflate the bubble. This results in bloated home values and bad assets on the balance sheets of the banks–foreclosures which should happen are forestalled. But the real gift to the taxpayers is the black hole of bad assets on the books of the GSEs. These understate the already gigantic deficit and translate into another layer on the unsustainable mountain of debt which will bury our future generations.
So we should thank our sneaky Santas for what the WSJ calls the “Christmas Eve taxpayer massacre” delivered on the light news day.
Tom Motherway
Are These Guys Nuts?
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Real Estate on December 2, 2009
Yesterday’s Reno Gazette-Journal front page shouted: “Mortgage industry pressed.” Turns out that the geniuses at the White House say the at-risk borrowers aren’t getting enough help. So, what are they going to do? Well, by golly, starting this week they are sending “three-person SWAT teams” to monitor the eight largest companies’ work and requesting ”twice-daily” reports on their progress!
OK, let’s say your 10 AM report shows that you are working on 10 Home Affordable Modification Program mortgages and that 8 of those HAMPs have potential. At your 3 PM meeting with the local SWAT team unfortunately 2 of the 8 potential HAMPs failed to make the third payment, or better yet, failed to get the paper work complete. Will the SWAT team then take out its SWAT weapons?
And what has the SWAT team done between the two meetings? How much of our money will the SWAT team receive in compensation for their hazardous duty on the team? Are they new hires, if not, what would they otherwise be doing? And, is that necessary?!
Finally, what is the purpose of all this? According to yesterday’s WSJ, HAMP would be a success if a large portion of trial mortgages in relief qualify for the permanent principal reduction and if the re-default rate on modified mortgages remains low. If HAMP fails, particularly because of the lenders-fearing the SWAT teams-become lax in approving the deals, it could still leave a large number of underwater mortgages ticking in the system! Sound familiar?
I can hear Barney Frank saying, “I want to roll the dice” on Fannie and Freddie!
But never fear at the other end of the spectrum the FHA which ostensibly wants tougher rules on mortgage lenders is propping up loans and extending its support of traditional real estate to upper-class buyers, that would be buyers in Speaker Pelosi’s own San Francisco. Those poor entitled liberals had no FHA supported loans two years ago, now the government is guaranteeing six mortgages a week!
And this largess even surprised its beneficiaries: Mike Rowland a 27-year old who with friends bought a million dollar duplex with little money down said, “It was kind of crazy we could get this big a loan!” Crazy…indeed!
John Stossel, a brilliant columnist at Real Clear Politics nails it in today’s post, Stop Insuring Mortgages. “Home ownership, all else equal, is a good thing. But when government lumbers into the market and subsidizes folly, that’s a very bad thing.” Seems we’re stuck with “very bad.” Japan was too, for the “lost decade!”
To cap things off, today’s WSJ reports that the FHA is short of capital and is looking for ways to boost reserves!
You know, it’s OK if Barney Frank wants to gamble with his own money, but in fact he’s gambling with yours! Taxpayers, get your checkbooks out…oh, and tell your great-grandchildren to get theirs out as well!
Tom Motherway