Tag Archives: ARM Mortgage Crisis

How Many New Homes are “Considered” Healthy?

Sometimes, I find myself getting my Dean Baker on. Not that I’m that smart, you understand: I clearly am not. But busting the language used by the media is occasionally fun.

Take for example the following NPR news article about the falling housing market which includes this curiously unqualified statement:

Housing Starts Dive; Food Boosts Wholesale Prices : NPR.

The building pace is far below the 1.2 million units a year that economists consider to be healthy.

Considered by whom, I wonder? By the Commerce Department? If so, why not say that? And what is the normal pace of new home building, per capita, over the history of the United States? Since WWII? Is that what “healthy” means, or is there some other criteria not discussed in the article?

The thing is: we went through ten years of a constantly-climbing housing market which was the result of entirely fictitious loan approvals aimed at supporting a financial investment shell game of monumental, world-wide scope and scale. Every year, we were told that this was a sign of a “healthy” economy. I am not an economist, but may I respectfully submit that perhaps its time that we used another benchmark?

Foreclosure Messes and Where We Are Now: A Quick Recap

… Well, ok. A recap, if not altogether quick…

I wanted to flag this story for my readers and give you a basic update of where things stand in the Subprime/ARM Mortgage/Foreclosure/Oblation of Fake Wealth story that’s dominated our economic landscape for lo, this past four years.

Bank of America holds a few trillion dollars (that’s right, trillion) in mortgage-backed securities it is responsible for, and the paperwork on the original mortgages is such a mess that there is dispute as to who actually owns what. Now the Fed is looking to force BofA to buy back some of the TARP assets it gave away during the 2008 bailout. All of this new scrutiny comes as the result of the foreclosure mess of late, where once again, the shoddy paperwork – in some cases, the non-existent paperwork – on mortgages led to even shoddier paperwork for the foreclosures.

What?

Ok, here’s what happened. Back when things were ostensibly stable, banks were selling off more and more dubious mortgages to less and less qualified people. Many of those people didn’t even know there was a problem – after all, generally most of us take it on faith that banks not in the business of giving away money they don’t expect back. But behind the scenes, many mortgages were getting approved even when basic paperwork was either not filed or not checked. So, basically, there’s no particularly compelling evidence to suggest that anyone at all owns that mortgage, much less who should be held responsible when it goes into default.

Then the bottom fell out. And banks rushed to the Federal Government to get bailouts. And the government did bail them out, buying the “troubled” or defaulted-upon, assets in what became known as TARP. But they did so under the assumption that these mortgages were at least viable mortgages. Viable mortgages, even those in default, can be sold off and stabilized.

But now that banks are rushing to foreclose on more mortgages that didn’t fall under the auspices of the TARP bailout, they’re finding that lo and behold, they’re having terrible legal troubles doing it. Because, of course, they don’t have the proper paperwork. Because it never existed.

So, if you don’t have the paperwork to prove that someone owned the mortgage in the first place, you can’t file the paperwork to have that mortgage foreclosed upon. So, the banks have begun falsifying the foreclosure paperwork to cover for the falsified mortgage paperwork. And now that both investors and mortgage holders are suing for injunctions – and winning – the Fed has begun taking a closer look at the mortgages that it holds. Guess what? They’re crap, too.

Once again, we have come full-circle. Its back to the basic question of irresponsible lending and its back to the “troubled” mortgages that began the fallout three years ago.

There is, of course, another way to look at it: what’s really happening right now is banks, investors and the Federal Reserve all pushing the check around the table. In truth, what has happened over the last decade is that banks and investors – who include individuals and organizations alike – have made money off these CDO’s or Mortgage-Backed Securities. That money was entirely fictional, based on selling and buying back the same basic assets in ever-more complicated structures. A shell game, one might say, but one investors played on each other, generally with full knowledge that the ball had long since vanished.

The money was never there in the first place, but our entire economy has been operating as though it was. Everything that’s happened in the last three years – TARP, the Stimulus Package, the foreclosures, the layoffs, the vacant malls and stores – are all as a result of this monumental disappearance of fake wealth. That money is not coming back; we are not going to “recover,” in that sense. And banks will continue to try to push assets from place to place, holding off paying the piper as long as possible. And in the meanwhile, the economy will have to do the best it can without that money. Who can say for how long?

Reason to Appreciate Rochester’s Flat Housing Market

There are positive things to be said about the stodgy old Eastern U.S. states like ours, including our venerated cities such as Rochester. I’ve been saying for a while now that one saving grace our city has over many others across the country is the fact that, while individual families are certainly hurting across the metro area, overall the market in Rochester has seen significantly less damage from the housing bubble. A harder-hit market would compound the already-heavy toll of a down economy in ways too numerous to mention.

Here is a quick chart, taken from the National Association of Realtors website, of Rochester’s median home price as a function of its relative value to the U.S. national average. You can see just how much harder the nation is being hit by underwater homes and high unemployment. I know of at least one person who moved to Rochester for a fresh start, which is not something you hear about often.. and they can’t sell their house where they’re from.

* taken from Realtor.org: Metropolitan Median Prices

Dawning on the Obvious

The Pew Research Center’s People Polling website shows that an increasing majority of Americans are becoming aware that the country’s serious slide into recession may end up being a slide into a Depression. Among the more interesting statistics are that four times the number of people report joblessness as the most serious issue facing us right now, a clear indication that the economic problems once shoved off by the media as simple a poor and irresponsible people issue in the Subprime Mortgage Crisis has hit home for a plurality of Americans.

And it is with this as a backdrop that Republicans choose to fight against the stimulus package. Bravo! Fight on, noble dipshits.

Why a Financial Bubble is Worse Than Usual; Why We Need to Reform Lending

When the Dot Com Bubble was still considered a safe investment, not a bubble, it manifested itself in the production of a few physical things: more computers, more cables, more stores and more employees to handle all those things. When the bubble burst, materials to produce things dried up, investment dried up, companies when under and people lost their jobs. All very painful, but all very common in a well-capitalized and robust economy, especially one on the brink of technological breakthrough.

When this financial bubble started, it began in the housing industry. But the bubble does not concern itself with the building of houses as you might think, though new homes were of course inevitable. Rather this bubble concerned itself with the creation of mortgages, which is literally creating something from nothing. Yes, economists will tell you that there is sound theory behind all of it – and perhaps they’re even right – but at the end of a day, banks borrow from other banks so they can lend you money they don’t have to buy a house you can’t afford.

Then those loans of no-money get rolled into superfunds which pay their investors dividends based on interest earnings on the money lent but never owned. Investors buy shares of superfunds made up of fake money at a profit, thus still more banks are making more money off of fake loans of no-money for people who can’t afford to pay cash for houses.

And what happens when there are not enough good-credit customers to continue creating new fake loans of money you don’t have? Well, you start dipping into the bad-credit customers, of course. And once you’re there, you’ve already forfeited any claim to a moral or ethical business justification for what you’re doing. Now, you’re just slumming.

And we’re all supposed to be pissed at Bernie Madoff? Seriously?

But the elephant in the room that no media outlet wants to touch, no Congressman is going to raise and I doubt very much if even Barack Obama’s going to have the balls to handle – after all, his Veep is in bed with his credit card buddies in Connecticut – is that we need to drastically overhaul any regulations we have on lending and even install some new ones. No, it won’t get us past our current crisis. The damage is done and we need to deal with that separately. But we got here in part because of lending laws that were repealed under the Clinton Administration and they need to be put back in place.

There needs to be penalties for a company who lends to a borrower without full disclosure and without proper documentation – some banks were giving out loans without even bothering to fill out credit checks. Banks aught to be required to provide full details of any mortgage including credit checks and negotiation. There needs to be a minimum and maximum interest rate set by the bank on any loan or mortgage and it needs to be advertised right along with the current deal. Penalties for late payment on loans aught to be loss of credit, not an increase in interest rates on the loan, which benefits the bank and leads to predatory lending. If interest rate penalties are imposed, they aught to be imposed on a temporary basis, not in perpetuity.

We also need to encourage a “Credit Economics” class in high schools across America. We would be less susceptible to the scams and machinations of creditors if more of us knew what we were dealing with.

But will such measures be introduced in the next few years? Perhaps, but probably not until such time as the recession we’re in gets bad enough for people to start demanding answers.

Suprime: How Small Minded Journalism Yeilds Small Minded Policy

It remains an enduring frustration of mine that journalists seem to feel the need to ask politicians questions which are “on the minds of voters,” without respect to whether or not those questions are at all reasonable to the situation. Typically, I find such excuses as “what’s on the minds of voters,” to be small minded ways of injecting the journalist’s own viewpoint into the discussion. Surely, if the journalist thought it, someone else must have thought it as well, therefore it is “on the minds of voters.”

The best current example of this is the discussion of the ARM mortgage crisis which has been the underpinning of so much of our current economic crisis. When ever someone wants to discuss ways to help home owners struggling with either Subprime or other ARM mortgages which are sapping their personal economics, the first question someone asks is one of the two as follows:

  1. “But what about Joe the Irresponsible Person, who is living in a $500,000 home, but is only making $50,000? Why should the American taxpayers pay for his irresponsibility?”
  2. “Well, what happens when one house on the block gets financial assistance from the government? What stops everybody else on the street from taking a vacation from paying for their mortgages? What stops them from just becoming another welfare mortgage home?”

My answer to both of these question is: show me a concrete example of either of these two things happening anywhere, and then show me what percentage of the problem these examples represent. Then, we’ll talk.

The truth is that in terms of price to income ratio – the relationship between the average home price and the income of the owner – is overvalued by an average of 10%. 10% of your income is quite a bit of money, but it’s not ten times your income, which is the example cited in #1 above. That would be 1000%. Certainly, an average can include a huge range of values and we do know that such excesses as our example do exist. But just as certainly, they must necessarily be a slim minority to fit into the relatively narrow average.

Meanwhile, the second question is basically a way to say, “I’d never do anything like that, but my neighbors are total dicks.” It’s an abstraction for which there is – to my knowledge – no concrete example.

But journalists seem compelled to ask those questions anyway. This lends some credibility to what is clearly an otherwise silly concept and forces our policy to reflect concerns over phantom problems. It is not a sound basis for policy making. It is not the seed of an intelligent, effective discussion of substantive issues.

But it sure seems that way, doesn’t it?

Speed.

I’ve not been reporting or analyzing on the current state of the financial meltdown very much in the last week.  That’s at least in part because things are moving so fast at the moment and statements are coming from so many different quarters, it’s difficult to keep up with in a meaningful way.  I don’t see any reason to add to the din unless I can provide something on the order of a coherent statement, which at the moment is difficult.

But one thing I can say for certain is that the speed of the recovery effort is more troubling than the speed of the crisis, at the moment.  There’s lots of big headlines and breathless discussion in the media, but let me say that no one in a position of authority should have been surprised by what is happening now.  The subprime/ARM mortgage meltdown has been going on for eight months and it is on the basis of commoditized mortgages that a lot of wealth has been built which is now disintegrating.  Where were all these leaders while Secretary Paulson was handing out bailouts?  Where were the big questions that might have provided us a more organized solution?

And now that we’re trying to come up with a national solution to a problem, I am drearily unsurprised to see that the problem at hand is largely rich people losing money.  No one cared when some grubby poor people were losing thier homes, but now that large bank executives are in danger of losing their yachts, it’s all hands on deck.  So, now the Congress is expected to hand over $700bn dollars to the White House that brought us Katrina and Iraq without strings.

Here’s a question that’s worth asking: what, precisely, is the purpose of all these billions of dollars?  Irrespective of what we do in the short run, there is nothing more fundamental to this crisis than the fact that all of the wealth accumulated in the last ten years or so was built on an entirely false pretense: the notion that these mortgages were going to be paid off.  No matter what we do in the next three months, a breathtakingly large portion of global wealth is about to evaporate.  Irrespective of whom does the selling – the government or the banks – the bad debts which are the basis of the problem will necessarily be sold at fire-sale prices.

The plan as far as I can tell is that the White House wants to buy up bad debt – whose value is in free-fall – from banks at a fixed price.  Guess whom that benefits?  If you guessed “the banks,” you’re spot-on.  Because we’re never going to get our $700bn back from selling those assets.  It’s like buying a bag of over-ripe bannanas.

I think Hank Paulson is a genuinely disciplined and principled person, based on what I know of him and what I see of him in interviews.  I’m watching him on This Week right now, and there’s no question he’s freaked out, but he’s clearly trying his best to solve a problem for which there are no easy answers.  And of course, if it’s up to you to solve the problem, you’d want as few strings attached to the money you need just in case the first idea doesn’t work the way you’d hoped.

But it’s worth all of us taking a breather for a moment and considering how we got here and whether what we’re doing is going to improve the future.  In my estimation, without stipulating some sort of reforms in addition to the bailout, we are doing very little for our future much past the first ten years when such “superfunds” and mortgage-based investments will be highly unappetizing to “the market.”

McCain: Lobbyists are Bad

You’ve gotta love this McCain Op-Ed in the Wall Street Journal, excoriating Fannie and Freddie Mac for their supposedly endemic problems and the do-nothing Congress that let it get so out of control.  Best of all, McCain blames lobbyists, presumably meaning the 20 or so lobbyists that run his campaign and have advocated for Fannie or Freddie over the years.  I’ll bet he’s giving them hell over the crab dip at fundraisers.

But wait. . . .

Fannie and Freddie have lobbyists?  Does anyone see the logical fallacy in this?  Yes, of course.  Government agencies do not lobby each other.  Fannie Mae and Fredie Mac, while setup by the Congress, are autonomous agencies over which Congress has had very little control.  Until now, that is.

And so I’m confused: is John McCain advocating Congress and the government take more control of the national housing economy?  Because Fannie and Freddie are easily the largest institutions in that market.  That means that the mortgage industry is for all intents and purposes a national industry at this point.  Dig that?  You can’t have a national health care plan, but you can have a nationalized mortgage industry.

That doesn’t sound very Republican to me.

And I say it every time we get on the subject of the Fannie/Freddie near-collapse: the problem is not any internal structural problems at these two agencies, though I’m sure there’s probably plenty of those.  The problem is that the government is stepping in to save the country from the depression that could have happened because of reckless private banking.  Not that anyone’s going to bother reporting that, but I though you might be interested.

“Failing” Fannie to shake up management

MSNBC.com picks up the story this morning about Fannie Mae’s new management shakeup.  Straining under the pressure of the Subprime mess, Fannie has opted to shake up management in an effort to instill confidence of the private sector that they’re going to weather the storm.

Well, ain’t that rich?  Nowhere in the story is there any description of why Fannie and Freddie are so encumbered.  Rather, the discussion leaves the impression that yet another government-backed institution is crumbling in the midst of controversy and crisis.  Nowhere is there a discussion of the fact that a decade and a half of irresponsible lending and reckless profit motive in the private sector cause the Subprime/ARM Mortgage crisis.  Not a word about the fact that – at the behest of the anti-government government of George Bush – the partial public agencies of Fannie and Freddie took on the bad debts of the private sector in an effort to keep people in their homes and the market from crashing our entire economy.

There is, however, copious tsk-tsking and doom-saying on the part of private sector analysts, many of whom probably cheered on the reckless spending that got us into this mess.  How nice.  It’s like setting your house on fire while juggling torches. . . and then bitching about the fire department’s response time.

Are Ya Listening? M.C. Highest Subprime Foreclosures in Upstate

Local media, especially the Democrat and Chronicle and the Rochester Business Journal, have been bending over backwards to say that Rochester and Monroe County are immune to the subprime crisis.  Well, shit.  Turns out that’s not true:

Report: Monroe County has most foreclosures in upstate | Democrat and Chronicle

Monroe County has the worst home foreclosure problem of any upstate county, the state Commission of Investigation said Thursday in a report that called for tougher state laws regulating the mortgage business.