Housing Doom

Doom recycles

I’m blaming Crispy for this one.  Here’s an extract from his recent post "Stop paying your mortgage?" 

Why should [anybody] pay their mortgage now? Why not just ask your lender for a reduction in the balance due or threaten them to walk away? What if ten million home-debtors did it, then what are they going to do? Why should only the most reckless financially among us get a bailout? …

Leaving aside the possibility we’re all about to be sentenced to relearning "The Little Red Hen" and "The Ant and the Grasshopper," Here’s what one of Wall Street’s cool heads was saying about the issue 15 months ago.  Again a big thank-you to Admin for grabbing the videos before they were yanked from their original homes!

from twist’s "Cramer: Underwater on your house? Walk away … oh, and plow under the Inland Empire" (July 30, 2007) –

from twist’s "Cramer: That’s Right - If Your House Is Down, Dump It" (July 31, 2007) –

I still can’t believe he got away with saying that — it was just two weeks before the start of the credit crunch.

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"Our inaction did not hamper credit markets — it helped to destroy them."

- Former FASB Board Member

Last week the testimony by FHFA chief Jim Lockhart, and the immediate correction that went up on the regulator’s web site, did much to clarify the status of the government guarantee on Agency Debt (now officially "effective"). This week a Bloomberg story [1] gives us invaluable insight into how accounting rules contributed to the present disaster.

Accounting rule SFAS 140 and the QSPE off-balance-sheet deals they govern are supposed to constitute a risk management package. For years I had suspected that there were deep technical flaws in the rule, and that companies (especially Fannie Mae) had dug out these flaws and exploited them to increase profitablility. I imagined that they honestly deceived themselves into thinking that anything they did within the rules would be safe. So yesterday’s article came as a major shock. These bozos knew exactly what they were doing the whole time.

Obviously FASB bears heavy responsibility for tolerating off-balance-sheet deals they were clearly uncomfortable with, as do the parties who lobbied hard for that tolerance. This episode had real world consequences, and one of them is almost certainly the historic selloff by foreign central banks of Agency Debt we are following in this weekly series.

Reuters reported [2] a small increase in net central bank sales of Agency Debt over last week, but the offsetting buy of Treasury Debt was down considerably, so that the net result was a small $0.86 billion "dip" in their total holdings of US obligations.

The Reuters report comes from FRBNY’s weekly statistical release H.4.1 [3] and Doom has again added the last week’s data to our CSV file going back to early 2000.[4]

Reuters reports a net buy of $7.91 billion treasuries and a net selloff of $8.78 billion agencies. These don’t break either of our "Top 10 Lists" for biggest all-time moves. You can see these at last week’s post. Once again the yellow and red lines diverge in the raw numbers graph. Reuters notes that "[t]his brought the cumulative drop in agency holdings among overseas central banks to $60.1 billion since the beginning of October." Examining the data file we find the present level of Agency Debt holdings equal to what the cenbanks had more than six months ago.

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It’s Friday, and I’ve been impressed with the novel approach to home loans expressed by former Treasury secretary, Paul O’Neil:  [Thanks L!]

WASHINGTON, D.C – Former treasury secretary, Paul O’Neill said that congress should scrap plans for a new economic stimulus package and instead simply require mortgage lenders to only make loans for people with a 20% or higher down payment.

On Tuesday, O’Neill addressed reports and indicated that he was not surprised that neither presidential candidate supported his position.

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Herbie Goes Bananas indeed! Telegraph’s Gordon Rayner tells the sad story [1] of how the world’s hedge funds piled into a naked short play on VW stock and, starting last Sunday afternoon, got given given their heads in their hands to play with to the tune of almost $40 billion. Here are a few choice quotes from the article (well worth reading the whole thing!)

• "I liked the whole fear factor," [Cohen] said …
• The biters have been well and truly bitten, and in a week full of ironies it was Porsche, manufacturer of the hedge fund managers’ transport of choice, which was to blame.
• "I have had hedge fund managers literally in tears on the phone," said one London-based analyst …
• Many fund managers believe they are victims of a stitch-up orchestrated by the German government and Porsche.
• The root of the hedge funds’ demise lies, appropriately perhaps, in the murky practice of short selling …
• … this week’s losers include David Einhorn, the poker-playing president of the American fund Greenlight Capital, who helped drive down the value of Lehman … [no way I'm touching that straight-line]
  
• The German establishment has never tried to hide its contempt for them, with a leading politician referring to hedge fund managers as "locusts".
• Germany’s somewhat eclectic financial regulations did not require Porsche to disclose this, and so none of the hedge fund managers had a clue what Porsche was up to.

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"That should take about four phone calls and three email messages to get going! (Are you reading this Barney. Chris, and Chuck??)"

Doom friend Bill Maloni has recently posted an article on the upcoming election, but this hasn’t stopped him from dealing with a housing related issue in part of his piece. We’ve abstracted the relevant bits and present them here for your enjoyment.

It seems to me that Secretary Paulson is working to have his old peers from the investment banking world and enterprises like bond companies take the lead in the big bailout. Bill’s simple observation is that the Goverment’s takeover of Fannie Mae and Freddie Mac means that all of the GSEs’ professional staff now work directly for Uncle Sam, and are available to the Treasury Department for the asking. And isn’t it possible that the people who sold all that MBS know more about these assets than the folks who bought the stuff?

 (see below comment #9 for this source of this sadly appropriate cartoon)

Maloni to Treasury Dept: Use the GSE Pros

by Bill Maloni

How can all of those well-meaning folks on Capitol Hill not get pissed at reports like Tuesday’s Wall Street Journal story, “Rescue Plan Faces Delay in Hiring Asset Managers” (subscription) ?

The news article discusses the Treasury problems in finding outside talent to do the initial work to identify, acquire and sell the billions of failed mortgage assets necessary to unclog the nation’s credit markets. The WSJ writer records typical and very predictable government related bureaucratic problems.

The article says that once in place, “The managers will help determine which assets to buy, when to buy them, and whether to sell or hold them.”

Golly gee Batman, isn’t that what hundreds of Treasury-indentured officials at Fannie Mae and Freddie Mac do every day for real?

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Doom friend One Salient Oversight is a world away from MISH in all senses.  Just sit back with something hot and have a look at the view from tomorrow.

A Deflationless Depression?

by OSO

Logic can be a bad weapon when the equation isn’t finished.

Think back to the Great Depression. Long lines of unemployment, years of economic contraction, suffering, etc.

One big thing that happened during that period was deflation - a continual falling of prices. Goods and services dropped in value on a daily basis.

The problem was chronic, and policy makers at the time either didn’t know how to cure it, or didn’t really see it as an important issue. In hindsight it was. Keynes rightfully argued that a good response would’ve been for the government to expand its operations and run a deficit, thus increasing economic growth and reinflating. Monetarists rightfully argued that interest rates at the time were too high and that increasing the money supply by lowering rates would’ve been a good solution. Ben Bernanke, in his study of the Depression, declared that there was always the option of merely creating money ex nihilo and throwing it around until deflation disappeared (and thus was born his nickname "Helicopter Ben").

So… here we are on the cusp of yet another potential depression. Ben is doing his best to keep deflation at bay - interest rates have dropped again, a process which acts to stimulate money growth. If the problem gets any worse Ben may have to warm up his helicopter and begin money bombing.

But will this solve the problem? Will the simple process of creating more money - which is balanced out by the market’s deflationary money hoarding - do the trick? Is it simply a matter of monetary policy?

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"It should be obvious to anyone that we are approaching the apogee of the Treasury bubble, with the credit bubble having broken already."

The lead quote is taken from Jesse’s Café Américain and a recent post there that we are taking the liberty of reproducing below in its entirety. Doomers will appreciate Jesse’s further thoughts on the divergence of our chart’s yellow and red lines.

In 2009 the US Will Be Forced to Selectively Default and Devalue Its Debt

Jessie

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The tidal wave of foreclosures seems to be unstoppable.  According to CNBC this morning: [Thanks L!]

Foreclosures—a multi-stage process that begins with a homeowner falling behind in their mortgage payments and can end with them losing their home—soared 71 percent in the third quarter, to an average of more than 8,500 homes a day.

There’s been a lot of press about government programs to encourage workouts, but there’s a couple of problems.  One- it’s more difficult for the banks than many people think and two- workouts don’t seem to be working:

Why is this happening—especially when the last thing most lenders want to do is repossess a house?

For one thing, banks are overwhelmed with the sheer number of troubled mortgages. That’s made it more difficult for them to work out loan modifications—essentially reducing the interest rates and even the principal to help people keep their homes.

Many mortgages also have second liens attached to them, requiring negotiations with third parties.

But the main problem is that so many mortgages have been grouped together into securities and sold off to investors worldwide. These mortgage-backed securities typically carry terms that severely limit the homeowner’s ability to renegotiate a mortgage.

So the banks that typically service the mortgage—collecting payments from homeowners and passing them on to the investors—risk being sued if they deviate from these terms. And those servicing the loans often make more money in foreclosures than in renegotiating a loan, giving them even less incentive to help out homeowners.

 “It basically floods the market with distressed inventory which makes it that much more difficult for prices to hold, and sort of feeds into this cycle, and as prices fall, you put more people in danger of foreclosure,” explains Sharga.

For that reason, there is growing talk in Washington of having the government step in to help stem the rise in foreclosures.

But what has been the result so far?

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Foreclosure brings out different reactions from different people.  Some people walk before the "notice of foreclosure" ever shows up.  Others chain themselves to their house and refuse to go:

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L told me this morning that the rumor mill had it that Brown Family Communities, a Tempe-based homebuilder had closed their doors. I just found the story from the East Valley Tribune:  [Thanks L!]

Citing the toughest lending environment he has seen in his 33 years in the homebuilding business, Dave Brown said Monday he has closed his Tempe-based company, Brown Family Communities.

"The banks have called in all my loans," he said, adding that after paying off most of his bills, "I’ve been left with nothing."

Brown said he has laid off about 55 employees. He also said he has been able to pay refunds to buyers who made down payments on houses that can’t be completed because financing is no longer available.

Brown said there are 31 partially completed houses dotting his neighborhoods. He expects that they will be taken over by lenders and remain in an unfinished state until the value of the properties rises and lenders can sell them at a profit.

The situation shows that the massive bailout of the financial industry engineered by the Bush administration has not yet filtered down to borrowers, he said.

Federal officials "are giving $700 billion to the banks, but nothing is coming out," he said.

Brown expressed bitterness that his lenders will no longer support him, even though he has survived several market downturns in the past. The difference this time is "the lending environment," he said.

According to the Arizona Republic:

Company founder Dave Brown said he was forced to cease operation and lay off all 60 employees because the company’s construction lender, which he didn’t want to name, was unwilling to extend additional credit to build new homes or finish homes under construction.

Brown said that means customers currently in the process of buying a Brown Family home would not be allowed to close the deal.

Instead, the bank will keep those homes as collateral. Brown said that he would refund every customer’s deposit.

The builder’s problems escalated early this year when the bank reappraised Brown’s land assets at a lower value and ordered the company to pay back a portion of money it had loaned, he said.

Brown said he had been trying to negotiate a compromise for months, and in the meantime the bank began keeping all of the proceeds from every home sale, cutting off Brown’s ability to generate revenue.

"They sucked every nickel out of the company," he said. "I went through the company’s money and my own money."

 

If you think that the actions of the past few weeks have "unfrozen" the credit market, think again.