Housing Doom

Nudge: Improving Decisions About Health, Wealth, and Happiness,
by Richard H Thaler and Cass R. Sunstein,
Yale University Press, 2008.

One of the themes of the novel Bend Sinister (1947) is the principle that Tyranny & Competence are mutually exclusive concepts.  That thought has given me a lot of comfort over the years.  For example, very little harm (and some harmless fun) has come out of America's efforts to run propaganda out of the State Department over the last few years.

Recently, however, with the advent of Professor Cass Sunstein as the Administrator of the White House Office of Information and Regulatory Affairs, things have started to look a bit grim.  Indeed the prospect of combining choice architecture with the quality control of government department statistical products is downright alarming.

Some time ago Sunstein's name started to come up in the blogosphere so I borrowed his book Infotopia (2006).  That text was only vaguely disturbing, but then I read the online 2008 academic paper he co-authored on fighting conspiracy theories, which was very disturbing.

So the other day my turn came up to borrow Nudge from the library, and I feel a lot better now

Things didn't start off too well.  Thaler and Sunstein get the ball rolling in the Introduction with "Carolyn, … the director of food services for a large city school system." (1) It's not until two pages later that they casually point out (if I'm paying attention) that Carolyn is in fact bogus.  This (along with a subtle clue they slide into the first sentence) is a level of deviousness that is not, IMHO, really fitting in non-fiction.  Bogus is OK.  I was always fairly comfortable with — Fred (not his real name) an architect (not his real job) … — from the Readers Digest in the '50s, but don't really like playing mind games with my authors when I just want information.

But their opening gambit in Chapter 1 is sheer joy.

Have a look, if you will, at these two tables: (17)

Suppose you are thinking about which one would work better as a coffee table in your living room.  What would you say are the dimensions of the two tables? Take a guess at the ratio of the length to the width of each.  Just eyeball it. (17)

Now as any child of a species that has been throwing rocks and hitting things for the last several hundred thousand years will immediately see, the one on the left has ratio about 3:1, the one on the right about 1.5:1, just like the "[t]ypical guesses" (17) cited in the text.

It's easy to see that the viewer of the above picture is located above the two tables and looking down at an angle.  As it happens, Doom North has a coffee table very similar to the left-hand one and after some careful inspection Friday night I determined that I was looking down 45 degrees from the horizontal to achieve that effect.  That means the vertical axis in the picture is foreshortened by about 29 percent.  Since the picture-ratio of both tabletops is 2:1, the tables as pictured then have ratios roughly 2.5:1 (left) and 1.6:1 (right),  not too far away from those typical guesses.

By the way, the foreshortening effect is simple to demonstrate.  Just get a piece of graph paper and look at it from an angle.

What's really delicious is the date on that picture.  It would seem that at least a smattering of cognitive scientists believe the two tables have identical shape and have been clinging to their error for up to a generation, in spite of a steady stream of subjects giving them correct responses.  And Thaler and Sunstein, with all their editorial help, fell for it too.  In spite of the fact that their entire Chapter 3 (53ff) is on peer pressure.

So I don't think we have to worry very much, at least until Cass gets the memo about the cosine of pi over four being 0.7071.  And I suspect it's going to be a good long time before anybody at OIRA gets up the courage to do that 

CitiMortgage has a new program to help avoid foreclosure: [No, you don't get to keep the house.]

 CitiMortgage, one of the nation’s biggest mortgage lenders, tests a new program in New Jersey, Texas, Florida, Illinois, Michigan and Ohio.

Citi recently agreed to give qualified borrowers six months in their homes before it takes them over. It will offer these homeowners $1,000 or more in relocation assistance, provided the property is in good condition. Previously, the bank had no formal process for serving borrowers who failed to qualify for Citi’s other foreclosure-avoidance programs like loan modification.

Citi’s new policy is similar to one announced last fall by Fannie Mae, the government-controlled mortgage company. Fannie is allowing homeowners to return the deed to their properties, then rent them back at market rates.

To qualify for the new program, Citi’s borrowers must be at least 90 days late on their mortgages and must not have a second lien on the home.

That policy may be a significant obstacle for borrowers, since many of the people facing foreclosure originally financed their homes with second mortgages — called “piggyback loans” — or borrowed against the homes’ equity after buying them.

Partly for that reason, Elizabeth Fogarty, a spokeswoman for Citi, said that the bank had only modest expectations for the test. Roughly 20,000 Citi mortgage customers in the pilot states will be eligible for a deed-in-lieu agreement, she said, and of those, about 1,000 will most likely complete the process.

So why does this beat foreclosure? Read the rest of this entry »

Once more those permanently surprised analysts were surprised again.  Home sales were slow:

Feb. 26 (Bloomberg) — Sales of previously owned U.S. homes unexpectedly declined in January for a second month, signaling the government’s extension of a tax credit is being limited by a lack of job growth.

Purchases fell 7.2 percent, the second-largest decline ever, to an annual pace of 5.05 million, the National Association of Realtors said today in Washington. In December, sales decreased a record 16.2 percent. The median sales price was unchanged from the same month last year, the group said.

The federal tax incentive helped drive purchases in the second half of 2009 and its extension in November may have trouble generating as much demand in coming months. Mounting distressed sales are making it harder to clear inventories, indicating job growth is required to sustain the recovery in the housing market.

“We were seeing payback for the first tax credit, and the second credit is not having any measurable impact on sales,” Patrick Newport, a housing economist at IHS Global Insight in Lexington, Massachusetts, said before the report. “Demand for housing is really weak. Improvement in the job market is really what has to happen for homes to start selling.”

Economists forecast existing home sales would rise to a 5.5 million rate in January, according to the median of 70 projections in a Bloomberg News survey. Estimates ranged from 5.04 million to 6 million. Read the rest of this entry »

No pressure

There's always a good reason¹ to put off for three more weeks considering what to do with the $5-odd trillion of dodgy paper the big GSEs have balanced on their little slivers of capital.

WASHINGTON, Feb 25 (Reuters) – U.S. Rep. Barney Frank said on Thursday he would postpone a hearing on the future structure of U.S. housing finance and mortgage funding giants Fannie Mae and Freddie Mac until March 23.

… he rescheduled the hearing from March 2 to allow for a field hearing on commercial fishing issues in Massachusetts, and …

Read the rest of this entry »

Remember David Lereah, former chief economist for the National Association of Realtors? He was the economist we loved to hate. Where is he now?

Palm Beach County residents struggling to survive the worst housing crash since the Great Depression might soon be able to blame him in person: Lereah has applied for the position of president of Florida Atlantic University of Boca Raton.

Lereah, now head of a consulting firm in Washington, joins more than 40 candidates vying for the top job at FAU. Finalists are expected to start meeting with university officials in March. Lereah didn't respond to requests for comment.

Until recently, Lereah was the nation's real estate Cheerleader in Chief, a figure known for such comments as: "We feel confident that housing is landing softly" (2005); and "Housing bubbles pop. There's no risk of that happening here" (2005).

Lereah was roundly scorned by the business world when the bubble did, indeed, pop, and he could no longer get away with this sort of comment: "We've moved beyond the low for the housing cycle last fall" (2007).

Lereah resigned from the NAR in 2007. That same year, perhaps in a bid to hedge his bets, he penned, All Real Estate is Local: What You Need to Know to Profit in Real Estate — In a Buyer's and a Seller's Market.

 

In an e-mail, Lereah said he applied for the FAU post because believes his relationships and experiences with local, state and federal government, large financial institutions, Wall Street and the media would enhance "the university's brand, attracting quality professors and improving course curriculum." He said his contacts would also help out with fund-raising.

 

But Lereah noted that the still has a child in high school and is starting to think a move could be disruptive, so he's having second thoughts about the FAU job.

If Lereah does move forward with his application, he can send students to the bookstore for his previous works. They include his 2005 book, Are You Missing the Real Estate Boom? Why Home Values and Other Real Estate Investments Will Climb Through The End of the Decade — And How To Profit From Them. (The book was re-released in February 2006, as the market showed signs of strain, under the title, Why The Real Estate Boom Will Not Bust — And How You Can Profit From It.)

And how's this for irony? Read the rest of this entry »

Is it a credible threat that China could dump a significant share of its holdings of U.S. Treasuries? Many analysts argue that any threat by China to shift a large portion of its reserves out of U.S. government paper is just bluster as such a move would impose huge costs on China itself. But these costs tend to get overstated in popular discussions of the matter. – Brookings⁴

Well that's an interesting thought, and these weekly updates might be providing some clue as to just how serious China is about heading for the exit. Less serious this last week perhaps.

UPDATE: Perhaps US Secretary of State Hillary Clinton⁵ will be following these numbers with special attention.

Though she did not mention it, China's portfolio of some $755 billion in U.S. Treasury bonds has become a concern for some U.S. policymakers. They worry that Beijing's creditor status could create leverage to influence U.S. policy.

LATER: Twist just passed me an important dig from Nasdaq, posted Wednesday, "Something Very Strange Is Happening With Treasuries." I've put that into context in the form of an update at our Tuesday post that covered ZeroHedge's first thoughts on the same event: "Durden & Indirect Hit Ratios — penny’s dropped, I think"

The Fed's own MBS holdings advanced a modest $7.019 billion and total holdings of US obligations by foreign central banks rose at just about the same $1 billion a day pace. That's not a breakout, but suggestive that a change may be in the air.

This week's relatively rosy Reuters report¹ was, as usual, based on the weekly update from the NY Fed's H.4.1 table site.² Here is Doom's updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

The flatlines are significantly less flat today. Treasury Debt lies $11.249 billion north of its Dec 16th value, which is a better than doubling from last week. When you include agencies, the total move since then, 10 weeks back, is at least positive now — up $5.068 billion.

Treasury Debt holdings are up for a forth straight week, once again touching an all-time record, with a pretty decent buy of $6.547 billion.  That's the biggest move since the week ending Dec 16th itself.

Agencies crawled up only $0.511 billion, but up is up.

*Agen-FM: continuing thanks go to Chris Puplava whose version of the Fed MBS holdings graph led me to conclude that those holdings may be masking a more marked drop in cenbank agencies holdings than the official dataset was admitting to.  Indeed, reducing the agencies number by the amount of the Fed's MBS holdings seems to give a more plausible narrative through the first part of '09 than the red line does.

This week the total US obligations number rose by $7.019 billion, for two pretty good results out of the last three weeks.

Read the rest of this entry »

The administration's Home Affordable Modification Program (HAMP) has been an unqualified failure. They are considering a new tact however- if at first you don't succeed, try and force the issue:

Feb. 25 (Bloomberg) — The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

“It is one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts,” Treasury spokeswoman Meg Reilly said in an e-mail. “This proposal has not been approved and there are no immediate planned announcements on the issue.” Read the rest of this entry »

Perhaps our best hope is to be found in the observation that most Americans still find something morally repugnant in strategic defaults, and in the evidence that our collective willingness to set aside our moral convictions may be held in check if enough people remember the Ten Commandments at the right moment and think: Thou shalt make thy mortgage payment. – Kevin Hassett¹

Click the pic to go to the Amazon & the following info (you can't make this stuff up):

3 new from $30.00 … 22 used from $0.95 … 1 collectible from $5.00
…

AEI Senior Fellow Kevin Hassett's article¹ and it's tortured logic is a must-read.  All I've got to say is that the academic research community has some pretty weird ideas about this issue.  Fortunately Igor's got a secret survey that suggests 71.07 percent of underwater subprime and Alt-A borrowers also own the above 1999 classic which Hassett co-authored with retired US propaganda chief James K. Glassman so it's pretty unlikely they,² at least, would ever be able to get their heads around anything as complicated as "strategic default" to begin with

But that being said we really don't have to worry that there will be massive amounts of unforced jingle mail from private persons.  The moment the authorities suspect that such a trend is in the offing every feuding party within America's establishment will come together and squelch it faster than you can say "Federal Recourse Standards Act of 2010."

UPDATE (2/26): And if you think I'm just whistling Dixie here, check out this article⁴ that comes out of the American Enterprise Institute (indeed the charts it uses come right out of Sub VI Hotel, so perhaps I should scurry off to the dungeon and continue working on the thing )

Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages. In the United States, we have a mix of recourse and non-recourse laws that vary by state, but even in recourse states, the use of deficiency judgments to attach assets and garnish wages is infrequent. The full recourse feature of Canadian mortgages results in more responsible borrowing, fewer delinquencies, and significantly fewer foreclosures than in the United States.

……………….

Wow, but it's getting tough out there. This⁵ just in from a MarketWatch RE agony column.

Q: … Where did I go wrong? I want to move on with my life but this property is not letting me to do so. [reader moved from MI to AR in '08, hasn't sold MI house] I have contacted a number of real estate professionals, attorneys and lenders for possible loss mitigation options. The options are uncharted waters for me and very scary with no clear definition of the consequences. I am in desperate need for your help and direction.
A:… As you suspect, though, the consequences are rather grave, whichever path you choose. Your credit record is going to take a severe hit, not to mention your psyche. So before you do anything, I suggest you speak with a certified housing counselor about your situation. …

… but on the other hand, Tyler noted⁶ today (hat tip twist) that the Administration is threatening to give the lenders no recourse whatsoever, not even allowing them to pull the plug.  Is there no middle ground?  John Ryskamp, I know you're out there somewhere.  Whatever you're doing, could you please just cut it out?

Yesterday it was announced that the government is taking the first step in a plan to virtually ban foreclosures – a step that can only be classified as capital markets suicide. …

The real problem comes when tens of millions of sheep wake up and realize that their moral convictions are being exploited by a financial elite that itself has none.³

Read the rest of this entry »

According to David Vladeck, the FTC's director of consumer protection, the same sleezy guys that peddled the subprime mortgages are now scamming people by offering the false hope of a foreclosure rescue: [Hat tip M.R.!]

According to the Huffington Post:

Logistical problems have plagued the administration's Home Affordable Modification Program, which has produced only 116,000 permanent mortgage modifications. In turn, many homeowners have turned to fly-by-night companies for help, analysts say.

"Fundamentally they're a product of a broken system," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "As long as people are desperate to save their homes, and don't have a good alternative, these guys are going to find a way to cheat them." Read the rest of this entry »

The commission also said it hopes to approve the switch of American companies to international accounting standards by the end of 2011, but it set a series of conditions that made eventual adoption of the standards appear less than certain. – NYT¹

There's definitely a whiff of marsh gas about the above.  Why would a story about the ambiguous outcome of the new up-tick rule spend over half its column inches discussing these cross-jurisdictional accounting issues without providing any details?

The inmates at Doom Castle are a pretty timid bunch, but just this once we decided we needed to penetrate into some of the scarier financial corners.  Luckily Igor was able to pick up a trace² of what Tyler was writing about late last fall:

As lobbying attempts to eliminate or at least delay the implementation of FAS 166 and FAS 167 (as a reminder, these are the accounting rules that will force banks to onboard a lot of off-balance sheet assets) seem to have stalled, the next question becomes what the cost to banks will be as a result of this new change starting January 1. …

In the three months since that was written I think we can guess the answer to that one: a lot.  Indeed I sense that these are the rules alluded to here,³ and never mentioned again.  166/167, the numbers that dare not speak their names.

Feb. 24 (Bloomberg) — Freddie Mac, the mortgage-finance company that tapped $50.7 billion in federal aid, said it may resume draws from a taxpayer-funded bailout package this quarter as new accounting rules reduce its net worth.

So let me propose a fevered scenario linking the two stories.  I think the SEC has concluded that the system just can't stand the shock of rules 166 and 167 this year.  So  they have determined to sacrifice their own child, FASB, on the alter of international co-operation, hoping that QSPE reform gets lost in the resulting bureaucratic chaos.

Alas, the balance sheet consolidation monster and its spawn still lurks in the night.  Perhaps Ms Shapiro will consider this humble training video as she prepares to prevent those rogue vehicles from swallowing the financial services industry.

Read the rest of this entry »