Housing Doom

In bubble markets like Phoenix and Las Vegas, we’ve heard the stories of massive mortgage fraud.  Rapidly rising appreciation made it easy to use phoney appraisals to artificially inflate home values- and enable mortgage fraud.  Once more the Austin market shows, "It doesn’t take a bubble":

The leader of a multimillion dollar mortgage fraud scheme who failed to show up for his sentencing hearing this month was sentenced to 27 years and three months in federal prison today.

U.S. District Judge Sam Sparks also ordered Corenelius Robinson, 48, to pay restitution in the case, said Assistant U.S. Attorney Mark Lane.

Sixteen people were indicted by a federal jury in Austin in January and charged with buying properties in the Austin area and then selling them to “straw buyers,” who were in on the scheme, at artificially inflated prices. The buyers defaulted on the loans and banks lost millions of dollars, most of which went to Robinson, according to court documents.

The defendants have now all been convicted and sentenced, several of them to prison terms.

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It’s Friday, and if the housing market isn’t that hot, we have the assurance of Realty Times that we can blame it on the negative press.

Realty Times asks, "Is all this negative press affecting your business?"  The big question this video raised in my mind though was, "Is that pig at 0:34 in fact Tanta’s [Calculated Risk] Mortgage Pig™?"[Try and ignore annoying background music.]

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Yesterday Reuters reported [1] that foreign central banks have been net sellers of agency debt, the senior debt of GSEs like Fannie Mae and Freddie Mac, for the sixth straight week. In order to get a better handle on the context for this story, Doom went to The NY Fed’s H.4.1 table [2] and extracted their weekly statistics on the holdings by foreign central banks of US treasuries and agencies. We collected [3] the data back to the start of the series on Wednesday Feb 9, 2000.

When Twist performed her chart magic on the data some interesting trends emerged. From the start of 2007 to the present, agencies as compared to treasuries held by cenbanks increased smoothly from 52 to 74 percent, then fell off noticeably over the last few weeks. It is possible that the present GSE crisis is affecting the appetite for agency debt among foreign central bankers.

If we stretch the timeline for this graph back to the beginning of the data in early 2000, we see that the upward trend commenced in late 2004.

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A new California bill has passed the assembly and is being considered in Senate. Assembly bill 2586  addresses the situation of renters facing foreclosure due to the financial problems of their landlords.  Bob Hunt in Realty Times cites a study that indicates 20%-25% of residential foreclosures involve rental properties.  Renters now frequently find themselves without their security deposits and scrambling to find another place to live.  Here’s some of the key points of AB 2586:

Under existing law a landlord may not attempt to terminate a tenancy by taking such actions as changing the locks or stopping utility services. By making it clear that a successor in interest who acquires a rental property through foreclosure is a landlord for purposes of the law, AB 2586 would provide a legal basis for preventing such harassment activities and/or for collecting damages should they occur.

If a landlord loses a rental property through foreclosure he is supposed to transfer security deposits either to the new owners or back to the tenants. In reality this is unlikely to happen. AB 2586 makes it clear that, should security deposits not be transferred or returned, the successor in interest (i.e. the new owner who has acquired the property through foreclosure) is jointly and severally liable for repayment of the security. The successor in interest may not require the tenant to post additional security to replace the amount that was not transferred by the former landlord/owner.

AB 2586 extensively addresses the matter of utilities. This is an issue in situations where the cost of one or more utilities has been included in the rent and payment of the utility bills has been the responsibility of the landlord. When a landlord loses a rental property in foreclosure he or she is likely to have let the utility bills go unpaid. Even if that is not the case, it is equally possible that the new owner won’t be paying them. The potential result is that the tenant will have the utility service discontinued, often without ever having received a notice.

AB 2586 requires that in such a situation the utility must provide at least 15 days notice to the resident(s) that the service is scheduled to be terminated. The notice must be posted as well as mailed to "Any Person Renting Property At ____". It must contain a statement on the outside of the envelope in large print saying, "Utility service to this address may be cut off soon." The notice shall then inform the residents that they have the right to have the service put in their names, without being required to pay any delinquent amount that is currently due. The notice and the statement on the envelope must be in English, Spanish, Chinese, Tagalog, Vietnamese, and Korean (California’s major spoken languages).

I agree with Hunt’s conclusion:

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From CNBC this morning:

Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

 

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.

The borrowed money would be repaid once the assets of that failed bank are sold.

"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses," Chairman Sheila Bair said in an interview with the paper.

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Yes banks have got trouble- big, big trouble: [Thanks L!]

WASHINGTON (AP) — U.S. banking industry profits plunged by 86 percent in the second quarter and the number of troubled banks jumped to the highest level in about five years, as slumps in the housing and credit markets continued.

 

Federal Deposit Insurance Corp. data released Tuesday show federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.

The FDIC said 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

And this won’t be the end.  According to Sheila Bair, FDIC Chairman:

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From Reuters this morning- more worthless economic "news":

WASHINGTON (Reuters) - Sales of newly constructed U.S. single-family homes in July were lower than economists expected but rose from a June pace that was the slowest in nearly 17 years, a government report showed on Tuesday.

Economists polled by Reuters were expecting to sales to remain unchanged at the 530,000 annual pace first reported for June. The actual sales pace in July of 515,000 climbed from the revised June level of 503,000, which was the lowest since a 487,000 pace in September 1991.

It’s hard to get real excited about that increase when you read the actual report from the Commerce Department:

Sales of new one-family houses in July 2008 were at a seasonally adjusted annual rate of 515,000, according to estimatesreleased jointly today by the U.S. Census Bureau and the Department of Housing and Urban  Development. This is 2.4 percent (±11.6%)* above the revised June rate of 503,000, but is 35.3 percent (±7.3%) below the July 2007 estimate of 796,000.

Note that this purported month to month "increase" is way less than the margin of error. The year-over-year 35.3% drop, however, is not.

Dollars to donuts this "rise" is revised downward next month anyway. 

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The widely watched Case-Shiller Home Price Index was released today.  Home price drops are either slowing or accelerating, depending on how you prefer your spin.  If you don’t want anything to cloud your morning, you might prefer Bloomberg’s version:

Home prices in the U.S. fell at a slower pace in the second quarter, signaling the worst housing slump in more than 25 years may be starting to stabilize, a private survey showed today.

Home values declined 0.5 percent in the three months through June from the previous three months, compared with a 0.9 percent drop in the first quarter. Compared with a year earlier, values dropped 15.4 percent, the most since record keeping started 20 years ago. [OK, so the last sentence wasn't so positive.  They needed a little "balance".]

The housing slump, currently in its third year, is declining at a slower pace as the drop in property values has made homes more affordable.
 

Prefer something a little more downbeat to start the day?  How about this from Yahoo Finance:

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Lenders, homeowners and even real estate agents are having a hard time selling properties.  Apparently a number of cities now think they can do it better:

As a wave of home foreclosures courses through the United States, some of the nation’s hardest hit cities think they have found a way to ease the blight left on their communities by the crisis.

Using taxpayer and private money, Boston, Minneapolis, San Diego and a handful of other places are buying foreclosed properties to refurbish and resell them to developers and homeowners in an effort to prevent troubled neighborhoods from sliding into urban decay.

The efforts so far have been taken on a small scale. But local officials say they can become an important pillar of any housing recovery with the help of $4 billion in federal grants that were part of a housing bill Congress approved in July.

The housing market has been hammered by an excess of properties for sale, not enough buyers, difficult financing, and pricing in many areas is still out of line with local incomes.  While cities might be able to subsidize sell homes for less than their purchase price, that will hardly serve to prop up local home prices or limit further foreclosures.

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Doom salutes Olympic Champion Hank Paulson, winner of the Gold Medal in the Press Dissemblathon at the Beijing Summer Games

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