Housing Doom

Japanese mortgages are recourse loans, meaning the borrower is still liable even after foreclosure. Depending on the state, most banks in America offer nonrecourse loans, which are secured by collateral, usually the property itself. Once they foreclose, the borrower’s debts are gone. If you default on a recourse loan, you’re messed up three times: you lose your home, you lose all the money you sunk into it, and you still have debt. Wait, make that four times — your credit rating is garbage.

Wow!  Sounds like Japan doesn’t have to worry about The Danish Model. Doom once again thanks the mysterious Jesse for allowing us humble mortals in the blogosphere to freely re-post their stuff under Creative Commons.

The Japanese Stagnation

by Jesse

This is interesting, and probably an eye-opener for most Western readers.

Most Japanese mortgages are ‘recourse’ loans meaning that the borrower still owes the full amount of the loan even in the event of foreclosure. One of the reasons for this is that so many Japanese residential buildings are not intended to outlast the 35 year mortgage and depreciate from the day they are bought.

The Japanese government promoted officially backed mortgage programs to keep the economy going, cutting down payments to zero from the traditional 20 percent. This lured in buyers who really could not afford the houses, and are often the first to have their pay cut in an economic downturn.

Japan uses a semi-annual bonus system as part of its pay structure for employees, the bonus portion of which is more readily sacrificed for the company good.

Please consider these things in the context of the governance of Japan which as we have said is semi-feudal, ruled by a few corporations and the wealthy elite in partnership with essentially a one party government.

This will go a long way in helping to understand the "Japanese disease" of economic stagnation. You start by crippling the middle class through debt indebtedness to a corporate elite. [what follows is a re-post of a Japan Times article supporting the above with Jesse's emphasis -- jm]

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NEW YORK, June 29 (Reuters) - The New York Federal Reserve said on Monday it will buy agency coupon securities maturing from Jan. 2016 to July 2032 in an open market operation on Tuesday. [1]

America’s a great country.  Unique too.  Part of that exceptionalism is that it’s the only decent sized country on the planet that doesn’t actually have a central bank.  If my garbled understanding of US history is any guide, they tried having one a couple of times, but public opinion, driven by Andrew Jackson era populism, made the project impossible.  Then 99 years ago a cabal of Georgia duck hunters, reacting to the near-death-experience of Ye Panicke of 1907, created the Fed as a sort of pretend replacement.  Congress, in obvious violation of key provisions of the Constitution (not to mention the annoyance of a century’s worth of conspiracy theorists) continues to give the thing sufficient privileges to maintain the joke.  It’s not obvious that America’s lawmakers have a choice.

But the Fed is, among other things, a chain of privately held banks.  The ownership isn’t exactly transparent, but seems to be based around a group of retired Ruritanian diplomats, stiffened with lashings of the sort of European aristocratic riffraff that’s in the habit of doing deals around the less brightly lit tables at the cushier sort of IOC banquet.

So that, stories like the above-quoted, and what seems to be an accelerating trend towards ever more opaque numbers coming out of official US financial sources is leading me to semi-seriously start considering the following question: Is it possible that bits of the Fed are now being labeled "foreign" for statistical purposes?

Yes I know it’s a ridiculous idea, but it’s the only means I can think of by which the wonky numbers we’ve been following here make any sense at all.  I’m guessing that one Brad Setser alternative explanation would be that foreign authorities have a heck of a lot more appetite for treasuries and agencies than they admit in public.  Do Doomers think that, or anything else, would fly?  Frankly, I’m at a loss.

Anyway, Twist is still on Jay Gatsby’s front lawn munching crab cakes (tough life) and waiting for Mr. Internet Guy.  Until connection is restored everyone’s going to have to imagine the charts.  Wait till you see the size of that yellow bar for last week’s t-bills!

Speaking of which, perhaps Chris Reese and the gang should wake up and smell the history. Their blandly worded weekly Reuters report,[2] didn’t so much as use a word like "surge," but it recorded the 3rd largest increase in Treasury Debt holdings by foreign central banks since they started splitting out the agencies number in February 2000. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[3] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[4]

Treasuries BAR GRAPH (it’s a doozy!)

Treasuries Top 10 List (new #3 this week)

In a startling turn-around, treasuries holdings increased by a massive $28.965 billion, now the new #3 result in our data set. Meanwhile agencies sagged an additional slight $1.061 billion.

Agencies BAR GRAPH

Agency Debt holdings have now been suspiciously flat for exactly half a year, with the total change in that time a measly $9.227 billion drop

Weekly Treasury Debt and Agency Debt chart here

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Politicians have been promising to save the housing market and reduce foreclosures.  A number of programs have been launched to great fanfare, but none have been a rousing success.  Is it possible that there are still folks out there who live under a rock and haven’t heard about these programs?  The Obama administration thinks so:  [Thanks M.R.!]

MIAMI – The Obama Administration today kicks off a nationwide campaign to promote the Making Home Affordable Program, a plan to stabilize our housing market and help millions of Americans reduce their monthly mortgage payments to more affordable levels. The campaign starts today in Miami and then travels to nine additional housing markets that have been hit hard by foreclosure, with the goal of empowering local partners to connect homeowners with much needed relief under the Administration’s housing program.  

The campaign will engage local housing counseling agencies, community organizations, elected officials and other trusted advisors in the target markets to build public awareness of Making Home Affordable, educate at-risk borrowers about options available, prepare borrowers to work more efficiently with their servicers and drive them to take action.

The Administration is ramping up on-the-ground outreach to homeowners to help ensure that eligible families that could benefit have the necessary information and resources to access the program. By organizing community events, the campaign maximizes behavioral research that suggests that more homeowners will feel comfortable asking for help if they are among peers who are doing the same.

“More than 50 percent of all foreclosures occur without servicers and borrowers ever connecting,” said Treasury Secretary Tim Geithner.  “With this targeted campaign, we can reach in to the communities most in need, bolster awareness of this program and help responsible homeowners take the first step toward getting relief – all steps that will in turn help to stabilize the housing market and get our economy on the path to recovery.”

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It’s Monday, and I’m on vacation- sort of.  I’m in New York helping some family move, and the new place is without internet until Friday.

If there’s anything that we should know, drop us a line or feel free to post a comment here.  This is an open thread. In the meantime, I’ve got to figure out where I left the packing tape- I’ve got a bunch of boxes to pack!

Here’s a story from Maricopa, AZ.  Maricopa is on the far fringes of the Phoenix metro area, and hard hit by the housing bust.  One thing that struck me about this story was one of the comments made afterwards.  This story is being told thousands of times across the nation- only the name and place changes:

A total of 325 homes in Maricopa were foreclosed during the first quarter of 2009. In 2008, there were 1,055.

There are five foreclosed properties alone in Christopher Fortin’s cul-de-sac on Windsor Drive.

And Fortin’s home may be next.

In August, the house he purchased in February 2006 is scheduled for auction on the steps of Pinal County Superior Court in Florence.

"I’m still working on it; I’ve been working on it since December," Fortin, 36, said of trying to renegotiate his loans. "It would almost be easier to let it go at this point."

Fortin, his wife and two children, ages 10 and 12, live in the Alterra subdivision of Maricopa. He bought a 1,300-square-foot home for $212,000 after friends encouraged him to check out the area.

Fortin said he probably made some poor financial decisions - a second adjustable-rate mortgage, heavy dependence on credit cards.

He’s currently working with his lender to stay in the home. It’s near his children’s school, and the family enjoys living in Maricopa.

Fortin has thought about moving back to Niagara Falls, N.Y., where they lived before a cross-country relocation in 2003, but "there’s nothing there but high taxes and cold weather."

"To be honest, I’m to the point where the house itself means nothing to me," he said. "To me it’s just a structure, right? My interest is to make sure my wife and kids have as little disruption as possible. If that means we rent a house, so be it."

Here’s the comment from "AZMaestro" that seems incongruous to me:

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Igor regrets to inform Doomers that the Versus Gang is Back

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The above homepage link will provide better quality than the following embed for many viewers.

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Predatory lending, in my mind, is when a lender encourages a buyer to purchase a loan that they know puts a buyer at risk for default, in order to enrich either the seller or the lender.  Representatives Barney Frank and Anthony Weiner would undoubtedly deny the charge, but they are promoting predatory lending in their support of relaxing borrowing standards for condominium developments:

(Reuters) - Two U.S. Democratic lawmakers want Fannie Mae and Freddie Mac to relax recently tightened standards for mortgages on new condominiums, saying they could threaten the viability of some developments and slow the housing-market recovery, the Wall Street Journal said.

In March, Fannie Mae said it would no longer guarantee mortgages on condos in buildings where fewer than 70 percent of the units have been sold, up from 51 percent, the paper said. Freddie Mac is due to implement similar policies next month, the paper said.

In a letter to the CEO’s of both companies, Representatives Barney Frank, the chairman of the House Financial Services Committee, and Anthony Weiner warned that a 70 percent sales threshold "may be too onerous" and could lead condo buyers to shun new developments, according to the paper.

The legislators asked the companies to "make appropriate adjustments" to their underwriting standards for condos, the paper added.

My friend and long time real estate agent L told me several years ago that he was discouraging buyers then from buying homes in developments that had no hope of selling out any time in the immediate future.  There are a couple of reasons for this.

First, properties are virtually guaranteed to decline in value as the developer will be forced to drop prices to sell out the development.

Additionally, developers arrange the financing on a development with an assumed date for buildout.  If the development does not reach buildout by that date, the developer may be forced into bankruptcy and be unable to maintain the development.

By tightening their standards from requiring 51% of units be sold in a condominium project to 70%, Fannie Mae and Freddie Mac are correctly indicating to potential buyers the risk involved. Barney Frank has indicated on several occasions that buyers should be protected from risky [predatory] loans.  You would think then that he would support the tighter standards.

In 2007, Barney Frank issued a letter stating his views of predatory lending.  He listed principles that he stated that the Financial Services Committee would keep in mind when drafting legislation, including the following:

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“The Fed is reminding the hyperventilating bond market that it needs to relax,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Inflation will be low for some time because the economic weakness will be with us for a time. They are not about to start to thinking about an exit strategy.” [1]

The above is an example of jawboning, the term a wonderful allusion to an Old Testament story. That, combined with an inability to actually do anything is what we at the Castle sometimes refer to as Ben’s state of Flexible Paralysis. Flexible, because when you’re immobilized you have the freedom to head-fake in any direction Notice, for example, that the Bloomberg story quoted above [1] features several obscure technical and mutually contradictory forecasts that serve different audiences. But doing that leads to the Two Constituencies Problem, and it’s why once a fiscal authority gets stuck on a number (like the present near-zero Fed target rate or the 6 month long maintenance of foreign central bank Agency Debt holdings within 1 percent of $810 billion) breaking either up or down from that number becomes a very serious business.

On the other hand, Brad sees cause for optimism [2] in the recent near-record growth in foreign central bank holdings of Treasury Debt, which is the climbing yellow line in the charts below. So it comes as a mild surprise that this week’s Reuters report [3] recorded very little net change in treasuries, along with almost none in agencies. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[4] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[5]

This week’s $1.890 billion net treasuries purchase is off more than 80 percent from last week’s figure, while agencies held their own with a sell-off of only $0.486 billion, cutting the size of last week’s modest dump by nearly 90 percent. The total increase of holdings was a mere $1.404 billion.

The agencies flatline continues to flirt with 6-month lows within the Tube of Bogosity.

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Tucson: Five of last year’s Parade of Homes properties have gone back to the bank- and there were only seven of them: [Hat tip M.R.!]

Five custom homes featured in last year’s Parade of Homes have now gone back to the Bank of Oklahoma after several months of negotiations.

Their failure to sell reflects the sharp decline in the high-end housing market where there are soft prices, a limited number of buyers and plenty of properties to choose from.

Of the seven featured properties in the Sonoran Preserve on the Bajada, near Dove Mountain in Marana, only one home ever sold in the traditional sense. Another one sold earlier in the year, but as part of a trade.

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According to Forbes magazine, Phoenix is the second best metro area in the United States to buy a home.  They used a formula based on sales activity to come to that conclusion.

One would think however, that a good housing market would be one with the least possible downside risk and the greatest upside potential.  While individual homes and areas may be holding their value better than others, the Phoenix area in general remains a risky place to purchase a home. Even former permabull Jay Butler, director of Realty Studies at ASU admits the risk:

There is increasing hope that the housing troubles are beginning to ebb, and the bottom, along with a potential recovery, are  in sight. However, many problems continue to exist that could hinder the timing of any recovery. The impact of foreclosures on the market has been the primary concern of the last year and will continue to be in the coming months, especially with the end of many hiatus programs and the weak job market.

It is fair to say that the huge number of foreclosures are the worst threat to the stability of the housing market in Phoenix, and the situation is deteriorating: [Hat tip Freedom's Phoenix!]

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