Update (Sept 2, 2011 11:50pm):
From the NY Times:
The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.
The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.
The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.
Sep 022011
Guest post by Lois Beckett ProPublica, Aug. 25, 2011, 3:28 p.m.August 22, 2011
With housing prices dropping sharply [1], and foreclosure filings against more than 1 million properties [2] in the first half of this year, the Obama administration is scrambling for ways to help homeowners.
One place they won’t be looking: an estimated $30 billion from the bailout that was slated to help homeowners but is likely to remain unspent.
Instead, Congress has mandated that the leftover money be used to pay down the debt.
Of the $45.6 billion in Trouble Asset Relief Program funds meant to aid homeowners, the most recent numbers available show that only about $2 billion has actually gone out the door.
The low number reflects how little the government’s home loan modification and other programs have actually helped homeowners [3] deal with the foreclosure crisis.
The programs have been marked by poor oversight [4] and consistent under-enrollment [5]. Homeowners have been forced to navigate an often bewildering maze at banks marked by slow communication, lost documents and other mistakes [6].
The amount of money spent is also low because the government pays out its incentive over a number of years. As of July, according to a Treasury spokeswoman, the government is on track to eventually spend $7.2 billion helping homeowners enrolled in its main loan modification program. That number doesn’t factor in other homeowners who may enter the program before it ends in December 2012, but it does assume that all homeowners currently in the program will be able to continue making payments.
In November, the Congressional Budget Office lowered their estimate of the total amount of money the government would spend on its foreclosure relief programs from $22 billion to $12 billion. (The New York Times reported today that the government has “spent or pledged” $22.9 billion of the TARP money so far [7], a figure that’s dramatically higher than ours and that the Treasury spokeswoman said was the Times’ own number.)
According to the original TARP legislation, unused funds should be returned to the Treasury and used to reduce the debt [8]. While Congress has the power to re-route those funds into new programs, Republicans seem unlikely to endorse such a plan [9].
An Obama administration statement noted that they were continuing to look for ways to “ease the burden on struggling homeowners” through new proposals and reconsidering old ones.
The other ideas the administration is looking at have received mixed reviews. Among them: turning foreclosed homes into rental properties [10] or allowing homeowners to refinance their mortgages at today’s lower interest rates, an old idea that may not actually help a large new segment of homeowners [11].
“We have no plans to announce any major new initiatives at this time,” the statement noted.
From the New York Times:
The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.
The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.
In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.
Have the tables finally turned for American real estate?
Trulia Summer 2011 Rent vs. Buy
View more presentations from Trulia
| Rank | Metropolitan Area | Median Price | Median Household Income | Ratio |
|---|---|---|---|---|
| 1 | Atlanta-Sandy Springs-Marietta, Ga. | $102,100 | $58,355 | 1.75 |
| 2 | Minneapolis-St. Paul-Bloomington, Minn.-Wis. | $145,000 | $66,404 | 2.18 |
| 3 | Las Vegas-Paradise, Nev. | $126,200 | $56,294 | 2.24 |
| 4 | Rochester, N.Y. | $118,900 | $52,971 | 2.24 |
| 5 | Phoenix-Mesa-Scottsdale, Ariz. | $126,000 | $55,548 | 2.27 |
| 6 | Cleveland-Elyria-Mentor, Ohio | $108,500 | $47,761 | 2.27 |
| 7 | Cincinnati-Middletown, Ohio-Ky.-Ind. | $127,300 | $54,534 | 2.33 |
| 8 | Buffalo-Niagara Falls, N.Y. | $113,000 | $48,199 | 2.34 |
| 9 | Saint Louis, Mo.-Ill. | $129,000 | $54,386 | 2.37 |
| 10 | Kansas City, Mo.-Kan. | $137,000 | $57,363 | 2.39 |
Source: Huffpo
Aug 152011
by Lois Beckett ProPublica, Aug. 12, 2011, 3:20 p.m.August 11, 2011
Earlier this week, the federal government put out a request for ideas [1] on how to transform some of the roughly 250,000 [2] government-owned foreclosed homes into rental properties.
The goal is to create more options in an increasingly expensive rental market [3], while dealing with the glut of foreclosed homes dragging down the housing market.
In the first six months of this year, more than 1 million properties [4] had foreclosure filings against them. About 800,000 foreclosed properties are owned by banks, and roughly a third of those belong to the federal government through Fannie Mae and Freddie Mac and the Federal Housing Administration.
About 20 percent of those 800,000 properties are on the market, according to RealtyTrac [5], a foreclosure data service. Each month, 50,000 to 60,000 foreclosed properties are sold, according to RealtyTrac, but a slightly higher number are added to the market. In other words, sales aren’t making a dent in the total inventory of foreclosed homes, and in high-foreclosure-areas, empty houses are doing damage to neighborhood property values.
Meanwhile, according to a recent Harvard study, 10 million Americans are paying more than 50 percent of their income [3] in rent.
The government is looking for win-win solutions for taxpayers, renters, investors and neighborhoods, but there’s plenty of skepticism about the foreclosure-to-rental concept.
Here’s our guide to some potential problems with the idea — and responses from an economist who supports the program.
Problem 1: If this is a good idea, why isn’t it being done already?
The government is looking to investors who might want to buy foreclosed homes in bulk and transform them into rental properties. But, as blogger Kevin Drum [6] of Mother Jones asked, if the plan were profitable, wouldn’t investors be doing it already [7]?
One answer: The government doesn’t make this process easy or cost-efficient for investors but is looking for ways to do so. Enabling bulk sales of government-owned, foreclosed homes, which is not currently standard practice, would be one incentive [8] for investors. Providing bulk-price discounts would likely be another. The government’s call for ideas is an opportunity for investors to lay out exactly what incentives would make the foreclosure-to-rental plan attractive.
One real-estate investor from Phoenix told The Wall Street Journal [9] that a crucial incentive for small businesses would be better access to loans that would allow them to take out multiple mortgages at the same time.
Problem 2: If investors benefit from the deal, taxpayers lose?
Government-owned properties are ultimately owned by taxpayers, so if the government gets a low price for homes in foreclosure-to-rental deals, taxpayers ultimately lose out.
Because foreclosed homes are selling steadily in one-off deals, real-estate executive Richard Smith called the foreclosure-to-rental plan “the stupidest idea I’ve ever heard in my life [10].”
“Foreclosed homes sold by government entities are already providing the taxpayer with a pretty lousy return,” economist Jared Bernstein [11], a former member of Obama’s economic team and a proponent [12] of the foreclosure-to-rental idea, said in a phone interview. “Will that return get lousier? It probably will.”
But economists argue that the booming market in foreclosures is having a negative impact on the housing market in general.
The Wall Street Journal’s Nick Timiraos [13] explained how this process works [14]:
You agree to pay $200,000 for my house. You are making a 20% down payment and are approved for a $160,000 mortgage. But a vacant, shabbier house down the street just sold for $150,000 to an investor in a foreclosure. When an appraiser tells the bank how much my home is worth, they use that foreclosure as a “comparable” sale and tell the bank that my house is only worth $150,000. Now, to sell my house, I’ll either have to lower my price, or you’ll need to double your down payment.
Foreclosed homes “may be selling like hotcakes,” but “that’s contributing to lower prices, and that in itself is actually a non-trivial cost to taxpayers,” Bernstein argued. Because government agencies — and thus taxpayers — own a giant pool of mortgages, it’s in their interest to stabilize the housing market, rather than allowing home prices to spiral downward and releasing more and more foreclosed houses onto the market.
It’s a tradeoff, Bernstein said. “You’re selling a bunch of foreclosed properties for less than you otherwise would if you sold them as one-offs, but you’re ultimately reducing your credit risk with your outstanding properties.”
Problem 3: Can investors be trusted to maintain rental properties across the U.S.?
Even if the government finds investors willing to buy up big chunks of foreclosed properties to transform into rentals, or invest in a joint effort with the government to do so, there’s some concern that the process could lead to whole neighborhoods of shoddily maintained rental properties.
Richard Smith, the same real-estate executive who expressed skepticism about the value of renting rather than selling foreclosed homes, told The Wall Street Journal that investors in a bulk-rental plan would face the daunting expense of managing rental properties [9] in many areas of the country.
“The hedge-fund approach to this is a pipe dream. It’s not going to happen,” he told the Journal. “The marketplace would much prefer that these go to small investors who manage them in their own backyard.”
Regarding the problem that “investors buying foreclosed properties in bulk make lousy landlords,” Bernstein wrote on his blog [12], “It’s a valid concern, but there’s a policy wrinkle in the FHFA/admin’s plan that should help: the proposal — the RFI noted above [15] — should include requirements regarding property management and the Feds should reject proposals that aren’t convincing in that regard.”
The bottom line:
It’s true that the government doesn’t have a great track record in dealing with foreclosures. But Bernstein called it a “nothing-ventured-nothing-gained” situation.
“If it doesn’t work, it’s not going to hurt the budget. It just means that another idea didn’t work,” he said.
“At some level, the worst that can happen is this is another underwhelming government housing program.”
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Question: you have an extra $200 per month…do you pay down your mortgage or invest in the markets?
This is a controversial issue with no *right* answer. But let me tell you how I approach this question by first explaining my frame of reference.
I value independence, control and security. I recognize that the markets have provided roughly 6-10% pre-tax returns (depending on asset allocation) over the long run. My mortgage cost runs at a post-tax 4.05% (in some countries mortgage interest is tax deductible and the rate should be adjusted accordingly).
First, it’s helpful to calculate expected after tax returns on my particular asset allocation, given my marginal tax rate. Let’s say those returns are still higher than the cost of my mortgage. Does it make sense then for me to invest the money?
(Of course, there are other tax considerations, such as tax sheltered accounts, when evaluating after tax returns on a portfolio. The point of this article is not to show how to calculate after returns…the point is to help you make a decision once you know what numbers you’re dealing with. Whatever you estimate your expected after tax returns on your investments to be it is critical not to compare this number directly with your after-tax mortgage interest rate.)
** Comparing apples with oranges
As with any investment opportunity, I consider returns and risk. An ‘investment’ in my mortgage is a guaranteed 4.05% return (really, its the avoidance of a 4.05% loss). What alternatives provide a guaranteed return anywhere close to 4.05%? (…and I wouldn’t consider a 30 year Treasury bond to be risk free.)
Sure, over the long run markets have provided a return above 4.05%, but one must understand these averages smooth out major volatility over the years. And that volatility could temporarily or permanently impede my ability to meet mortgage payments (explained in the section below called ‘Income Shortfall Risk’).
When comparing options I should also distinguish between average market returns and my average personal returns. Research shows that the average investor actually performs far worse than the market averages. This is because the average investor is emotional and tends to buy-high and sell-low. Market averages are meaningless if I’m only achieving 2-3% personal returns on my investments.
**Income shortfall risk
Exacerbating the problem with comparing a mortgage interest rate with expected returns is the mis-match between incoming and outgoing cash-flows, something those in the actuarial world are familiar with. Essentially, when a fixed liability is paid using an unknown variable cash flow risk is introduced into the equation.
The 4.5% mortgage expense (plus principal repayment) must be paid every month of every year – there’s limited flexibility to adjust the payment with the fluctuations of income derived from assets. In practice, I’m using income generated from assets, which includes intellectual capital (i.e. my job), to meet my debt service obligations. While my average income from all sources throughout my life may be well above the amount required to meet my debt payments, a single bad year (or bad few months) could lead me to default on my mortgage. When evaluating my ability to pay debt, I should look at worst case portfolio returns and income (e.g. during a bear market or period of unemployment – which, unfortunately often happen at the same time) rather than long term average income.
Wait, there’s more.
**Loss of control
Debt isn’t only about the hard numbers. Even if the numbers favor the investment, should I? While some are entirely comfortable with being in debt others aren’t. Personally, I don’t feel comfortable living with a contract that controls my financial – and indirectly, my non-financial – life. ‘Mort’ ‘gage’ is French for death pledge; somewhat telling of the gravity of default. Although debtors prison (or worse) is no longer recourse for lenders, terms and conditions of most loans are such that the borrower is in a weak position. While everyday practice is usually less sinister, the possibility that my family could get thrown out on the street is alone cause for my ‘mortgage-aversion’.
Others may not be as paranoid. I’ve never personally had a negative outcome to my personal indebtedness, but I partly blame my aversion to my childhood experiences. When I was young I never had a sense of financial security. Because of this, I’ve spent a good portion of my working life squirreling away money and paying down debt. Perhaps I’m an extreme example, but I believe everyone can benefit from adopting a little prudence.
Some will contradict what I’m saying by pointing to research out there suggesting many millionaires made their fortunes by using debt. True, one way to make a fortune is to find a profitable idea and use other people’s money to execute it. But research that shows this is how millionaires made their money suffers from survivorship bias. For every millionaire that borrowed his way to success, the are many others that lost everything because they remortgaged their house for a dream that failed. (By the way, its a myth that an entrepreneur can limit liability by incorporating. Anyone lending to a small business – incorporated or not – will ask for a personal guarantee from the owner.) Contrary to what some research implies, the stories I’ve heard suggest that most successful entrepreneurs avoid debt financing in the early stages, only to borrow when their idea has proven itself.
**When not to pay down debt?
The current US housing fiasco outlines the case for not paying down debt under certain circumstances. While borrowers have a moral and contractual obligation to their creditors, there comes a point when paying an underwater mortgage simply doesn’t make sense. Of course, there’s the obvious question of why someone would borrow extensively to buy a vastly overpriced asset in the first place. Ah, but that’s the point…it isn’t obvious at the time, proving my original argument about the perils of debt. A mortgage was once considered ‘good debt’ – a no-lose proposition. Not so much anymore.
After a couple years of declining home prices, once homeowners realized their homes were worth far less than was owed on the mortgage, many stopped paying their lenders back. Without getting into the specific nuances of the US mortgage market, I’ll summarize by saying that people simply don’t want to pay for something they’re not getting.
Getting back to the original question…what should you do with an extra $200 per month (pay down mortgage or invest)? I’ll shrink my answer into bite sized portions:
1. Apples with oranges risk: First understand that the tradeoffs must be evaluated in terms of risk and reward.
2. Shortfall risk: Realize that debt payments aren’t flexible, whereas returns are. Don’t let long run averages hide the true variability of cash flows from investments, including your investment in yourself.
3. Control risk: Remember that, for most of us, loan contracts work in the lender’s favor. By being in debt you give up a portion of your freedom.
4. Most importantly, determine and face your true comfort with, and capacity for, risk. What losses on your investments could you handle, given your indebtedness. What if you lost your job? Do you have dependents? Are you comfortable moving to a tiny apartment or inviting renters if you had to?
Bottom line: nobody ever went broke by being debt free.
I really, really want to try this…
In a nutshell, here’s what PIMCO thinks about housing:
- It appears that limited mortgage availability and vulnerable consumer health are restraining demand.
- Also weighing on the market is regulatory uncertainty over the future structure of mortgage finance and the resolution of foreclosure overhang.
- We believe the housing market, considered to be a key driver of the economic recovery, will generally remain weak for the foreseeable future.
And there you go folks…the fuel tank for the US economy remains empty. More from Pimco.
Jul 152011
29% drop in foreclosure activity a mirage:
“We believe the drop off in foreclosure activity is being caused largely by paperwork and procedural delays along with a dose of government intervention and we think the numbers still have a ways to go before they get better on their own.”
Gary Shilling – Housing may cause a 2012 recession:
Housing to remain a drag on the consumer:
Jul 152011
The smartest man in Europe…
On US Debt:
“The United States is destroying its currency. You cannot keep borrowing from abroad at the rate you are doing it and expect the dollar to maintain its value. America has been living beyond its means for a long time. Most people think that means that consumers have been spending too much and borrowing to do it, but that’s not what bothers me. The government has been spending seriously beyond its means. It has 150 military bases around the world and is involved in three wars. How does that make sense when you are running a deficit of $1.5 trillion?”
On his investment portfolio:
“Right now my portfolio is invested in gold and Swiss francs. Every once in a while a special situation appears that interests me. Last year I made a real estate investment in Baghdad. I remember the look in your face when I told you about it. After I had owned the property for less than a year, the Iraqi government wanted to buy it and I got out with almost a 100% profit. I like to seek opportunity in places everyone else is avoiding.”
On India, Brazil, Africa and Mongolia:
“I am also positive on India. Everything is going forward there also. They are a low-cost producer with plenty of momentum, but that doesn’t mean that the stock market will rise. I think direct investments in private companies may do better. I am also positive on the long-term prospects for Brazil. Many proven investors outside of Europe and the United States are buying in Africa. Mongolia, with three million people, has vast resources in copper and coal. Corruption is part of the way of life there, but remember, until about 1920, corruption was part of the way of life in America.”
Source: Blackstone
Max Keiser interviews Steve Keen, economist and author of the book Debunking Economics.
He says that debts have spiraled out of control and the reason is shadow banking system. The program touches on the correlation between the US-EU debt crisis and the worsening Greek economy.
Highlights from the recent Colony Capital memo:
- Until housing gets better, nothing will really get better
- Negative home equity equals negative sentiments in general
- China sitting on a bubble and over steering
- …“class warfare” is on the horizon
- Normal working people all struggling and defaults and delinquencies in housing are increasing
- Debt is still a better risk adjusted return in the sector – Debt is the new equity
- Interest rates are at a historic low which has created an addiction to any “yield”
- Risk premiums have once again vanished and are back to a 2007 level
