Housing Doom

This is one heck of a way to encourage flight-to-safety buys of Treasury Debt

From the first abuses of QSPEs to the latest headlines about 105 repo, the whole lesson of this financial crisis is that the economy is more fragile than we had previously thought and the system just can't stand any more adventures like this.

Doom is pleased to re-post this important article from the mysterious Jesse's café under his generous Creative Commons license.

"US Making Preparations for a Pre-Emptive Strike on Iran (or Some Other Eastern Destination)"

by Jesse

Key pieces of this puzzle are presently coming thick and fast from US government sources, the MSM and various parts of the blogosphere.  The fuzzy outlines of a picture are even beginning to emerge, but these appear at first glance to be much weirder than anything our conspiracy-soaked imaginations had previously envisioned, so it may take a while to get used to it.

Just in the last couple of days it's become possible to think about the Second District as a self-governing sovereign entity.  The approximate model would be a high Renaissance  Italian mercantile city state like Florence.  Indeed it's even possible that if, as Susan Bies proposed around 2005, the US Congress were to put the Fed Board in charge of the great Wall Street banks, it would profoundly alter the state of the financial (and real) world.

NY Fed Implicated in the Accounting Fraud at Lehman

by Jesse

Quite a bombshell from Yves Smith of Naked Capitalism tonight. [this was posted late Thursday evening - JM]

I wonder if the US mainstream media will ignore and dismiss it as they did the exclusion of the Wall Street banks from European debt sales in response to their fraudulent CDO sales. Is there a 'reverse gear' on the Voice of America?

In response, let's see if Chris Dodd puts the Consumer Protection section of the financial reform legislation under the control of a private organization,the Fed, which is owned by the institutions it is supposed to be regulating, and which is now implicated in the failure and fraud that helped to trigger the recent financial crisis.

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"… The Fed is scheduled to stop purchasing [GSE debt and MBS holdings] at the end of March. It will then have to start working off its $1.2 trillion in GSE securities. It faces an interesting conflict of interest since its major risk of losses is an increase in interest rates which would reduce the value of the securities …" – Maloni's informant

My bad for adding those extra letters to the regulator's acronym

Always a pleasure to welcome Doom friend and Fannie Mae loyalist Bill Maloni.  His political insights are always worth a look.

DeMarco?

by Bill Maloni

Why is Ed DeMarco still employed as the acting director of the Federal Housing Finance Agency, the ostensible federal regulator for Fannie Mae and Freddie Mac?

I note “ostensible,” because DeMarco, like his immediate predecessors, is taking his orders from the Administration in power, but DeMarco is and always has been a Republican. Clank!

He has been a Fannie and Freddie antagonist, from his time at the Bush Treasury. Clank!

Yet, he is opining regularly on GSE policy, allowing those uninformed to write about his pronouncements as if he really has some control and influence.

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Yesterday’s reflective post by twist brought out a number of thoughtful comments, including this one from long-time Doomer "Old Mike".  I’m taking the liberty of posting what’s really a fair sized essay as a Doom Guest Post.

US policymakers please note.  The strength of your economy is built to a large extent on tens of millions of stories like this.

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I Am Still ‘Net Positive’ Florida Real Estate

by Doomer ‘Old Mike’

As a Boomer closing in on Social Security, I am part of the generation that became serial homebuyers. And I am a homeowner again now.

Around 1950 my father bought his first home with a VA loan and help from family. His parents had once owned a farm, but The Depression took care of that. Neither his sisters, both of whom had good jobs, nor his parents ever did anything but rent the rest of their lives.

Our family’s tiny inner city home remained ours for 12 years (I was around for 10 of those years being the younger child), and then we joined the 1962 White Flight to the suburbs, which resulted in the purchase of a brand new 4 bedroom, 1 1/2 bath brick home near a great (then) school system for $21,000. The folks worked steadily at paying off the mortgage and in the 1980s, about the time Mom died, Dad had the deed, free and clear. In 2003, long after Mom passed away and when Dad needed assisted living we sold the house for almost 4 times, in nominal dollars, the 1962 purchase price. And that sounded good until you recognized that under the Rule of 72, $20k in 1962 would be $40k by 1980 at a mere 4% compound rate (ironically close to the mortgage rate as I recall), and turn into, at that same 4% by 1998, more than we sold the home for in 2003. Regardless, my Dad, a guy who worked his way up from the loading docks to being VP of a small manufacturing company, but who only had 2 “new” cars his entire life, also only purchased 2 (1 new) over a 80 plus year life. His “estate” in the end was meager, but he loved life, never failed to live up to an obligation and left life without owing anyone anything, even an apology.

Now his boomer son, did not “purchase” his first home until the late 1970s, paying an over 11% mortgage rate for a home in the same neighborhood, plus PMI, since I had only 10% down. After 6 years and a divorce, it was time for a new home, over twice the size, on a lake about 10 miles further out in the burbs. After a few years, it was time for the 6600 sq ft gated community home, next to the NBA player’s house, an absurd tribute to the irrationality of the male boomer ego, since there were only two of us for the three floors and four bathrooms in that monster. But heck, it had a boat dock. (Anti-spam word is, appropriately, ‘absurd’)

After a few years more, we decided to “downsize” to a new, very modern 4/3 on the golf course, and in the process were able to eliminate the need for a mortgage. We sold that home when I retired early and moved to Florida in 2002. Now bear in mind, we didn’t eliminate our mortgage by home appreciation or flipping, that happened with working 60 hour weeks, very conservative savings and income growth. Each of the 3 homes were sold for about what they cost to purchase, meaning we held them just long enough to cover the transaction costs. No profit was made even on a nominal basis. As long as I can remember, that was how real estate worked in the Midwest, you owned it for at least four years just to cover the commissions and other transaction costs. Until recently.

Like many boomers, however, I didn’t learn much. So we bought, for cash, a recently built 4/3 deep water canal home in South Florida, parked a stupidly large boat behind it, and began enjoying all that Florida had to offer. When I wrote the check for that house, it was nearly twice as much money as the most expensive property I had previously purchased (previously with a whopping mortgage) but that was Florida real estate in 2002. We enjoyed that home until March of 2006, when my wife’s work took her to Phoenix, …

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… uh, whoops

Your humble servant’s efforts to improve on the title of Bill’s last evidently showed that I’d missed the main point of the piece.

So here’s a clarification, and this time I’m not going to try to second-guess the author.

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“The Zimmer Plan” Redux
Not a Fannie/Freddie Bailout

by Bill Maloni

Last week I touted a proposal from Rob Zimmer, a DC-based financial services political consultant.

Zimmer would mandate the Obama Treasury, via regulation, or Congress through legislation (the former being far easier) that Fannie Mae and Freddie Mac reduce, to something lower than the current 10%, what they pay to the government for their TARP borrowings and direct the difference into dividends on previously issued preferred stock. That stock was gobbled up by many community banks, at the urging of then Treasury Secretary Hank Paulson.

But Paulson pulled the plug on the small banks (which he had cajoled into buying the capital qualify preferred stock) when he ended all dividends on GSE securities after putting both Fannie and Freddie into federal conservatorship late in 2008.

Zimmer’s idea has little to do with resurrecting Fannie and Freddie since the two companies would be paying out the same amount of money annually. He would share that $10 Billion between preferred stock owners and the US Treasury. It would be a huge capital benefit to the community banks which stand ready and willing to lend to small businesses and others.

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Longtime Doom friend, blogging colleague and former Fannie lobbyist Bill Maloni has been kind enough to drop by the Castle with another one of his intriguing works of political analysis.

I’m not quite sure what to say about this latest effort, except to note that it’s certainly a change of pace from what the guys are saying on the AEI seminar I’ve been transcribing recently

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The Zimmer Plan
A Smart Step for the White House and Congress

by Bill Maloni

A good friend of mine, Rob Zimmer, has come up with a capital idea—literally and figuratively—which I think needs the light of day or light of blog, depending on where you are sitting.

Simply stated, Zimmer would have Fannie and Freddie pay Treasury less than the 10% they now pay for their federal borrowings and channel some of the difference into dividend payments on their previously issued preferred stock.¹

The beauty of Zimmer’s idea is that it can be accomplished through a Treasury regulation. It corrects two historic wrongs committed against the country’s small community banks by the Bush / Paulson Treasury and would unleash powerful small-bank efforts to generate much needed jobs within the small business community and elsewhere.

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Longtime blogger and Doom reader "Chuck Ponzi" was kind enough to try straightening out my confusion yesterday on the difference between fiscal and monetary issues.  That was in response to my rather fuzzy commentary on the Ethan Ilzetzki presentation in under-construction Doom transcript VI.C.

His comment was sufficiently intriguing that I’d like to share it with a wider Doom audience "above the fold" (lightly edited) …

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Fiscal vs Monetary

by Chuck Ponzi

Well…

Fiscal policy in the US is controlled by the US Government. Revenues come from collection of taxes, and the expenditures come from various legislation. Basically, fiscal stimulus comes from Congress or the US Government.

In contrast, monetary policy in the US is controlled by the banking cartel known as the Federal Reserve system, aka the Fed. Monetary stimulus is a function of interest rates (overnight lending, interbank, etc). They can stimulate the economy by charging a lower percentage rate to their member banks and those banks should, in turn, lower the interest rates to their consumers (companies and people).

The term “Pushing on a String” describes what happens in monetary stimulus where the Fed lowers rates but that fails to ignite borrowing by consumers or companies. Indeed, the Fed is presently pushing money into the economy, but instead of it being taken up, the string remains slack, and banks are unable to lend.

This can have 2 possible causes:

1. either banks do not see sufficient lending opportunities because all risks are bad; or,
2. consumers do not see sufficient borrowing opportunities because all risks are bad.

In either case, what happened in Japan was pushing on a string because, although the rates were held low for an extended period of time, companies did not use this to invest in their own economies and therefore fuel demand which should have fueled some inflation. Instead, this created what was called the “carry-trade”, where basically people would borrow in Japan and export that borrowing elsewhere (invest somewhere else using Japan’s ultra-low rates). Some fear we are facing our own potential carry-trade here in the US. This would grow our monetary base without creating any inflation.

Chuck Ponzi

If a foreclosing lender shirks his new responsibilities to the community,[1] does a borrower who has been shouldering them until now have a right to carry on, even in default? Doomer greggparadiddle thinks so, and we’re happy to help him publicize his proposal for a new legal principle to make it so.  Originally a Doom comment, we’ve taken the liberty of editing the text for clarity.

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Constructive Foreclosure

by greggparadiddle

I would propose that people in the situation of "Op-Ed Friday: When even the bank doesn’t want the house" (August 14, 2009) could advance an as yet untried legal theory: Constructive Foreclosure. Essentially, if a lienholder has notified a borrower of a default and then does nothing about enforcing it there ought to be a point where law or equity will hold that the lienholder now has legal title and has started the "limitation period" clock ticking on adverse possession.

I would also suggest that States consider amending their laws on adverse possession to shorten the limitation period, and require that an adverse possessor pay the taxes for the limitation period (similar to what California does, but with an even shorter limitation period, say 3 years). A period of 20 years may have been fine for rural England, but modern cities cannot let properties sit for 20 years with a questionable title.

Say the homeowners in the video had been able to maintain a position of constructive foreclosure. Then after they lost title they might have been able to move back in and pay utilities and taxes. If the limitation period were changed to 3 years they might well have owned the house free and clear (adverse possession generally extinguishes all other claims except taxes). Even if the homeowners hadn’t gotten the property back, they would at least have been able to live in the home for the cost of utilities and taxes for the time they were there. And if these homeowners hadn’t moved back, perhaps someone else could have done the same thing and gotten a house for the same cost.

If the banks were faced with such a situation, I believe they might be a little more diligent in foreclosure situations. The cities would likely benefit too: either the bank forecloses and the house is sold or demolished, or at least the property might go to someone who would take care of it.

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Old Doom friend mtnmike was kind enough to send this link around.  He’d seen our recent post on statistical hanky panky, and was struck how his thoughts were moving in a similar direction from ours.

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Culinary Accounting, or Cookin’ the Books!

by Mike Folkerth

Greg Easterbrook said, “Torture numbers and they will confess to anything.” Barrack Obama said, “Americans don’t torture.” Either Barrack Obama doesn’t count number-torturing as a crime or his nose is growing.

Let’s talk about unemployment numbers. . . real unemployment numbers. The announcement that the unemployment rate declined slightly to 9.4 percent in July while only 247,000 additional jobs were lost has been greeted as good news. Really?

How is it possible for the unemployment rate to essentially remain unchanged when 247,000 jobs have been lost?  The reason is simple — the number of people who stopped looking for work rose dramatically.  Six hundred thirty-seven thousand additional people no longer consider themselves looking for work.

If we include the normally counted number of unemployed as well as those who have recently given up looking for work and those who have taken a part-time low paying job because they can’t find full-time work, the implication is that the unemployment rate for July would be at 16.3 percent! And our president stood in his cocky stern manner and announced that employment is getting better on his watch?

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Doomers please welcome Kat Sanders, who has been kind enough to submit the following general commentary on the Home Builders to Housing Doom.  Kat blogs at her Construction Management Degree blog and, within that site, at The Fixer-Upper Blog. She invites your comments and questions either below in the comments or at her email address katsanders25@gmail.com.

Problems in the Construction Industry

by Kat Sanders

It’s not a good time to be connected in any way to the real estate or construction industry. The recent subprime crisis and the disastrous consequences that followed have taken its toll on everyone connected in any way to the real estate and building industries, and as recent statistics portray, there is no sign of a let up any time soon. A look at the figures shows that:

• More than 60,000 workers in the construction industry have lost their jobs
• There is a significant slowdown in the real estate industry with property values falling sharply.
• The severe credit crunch and the sharp fall in the demand for and price of houses has pushed the construction industry to the back foot.
• Builders are being pushed to conform to green building standards and use sustainable material and environmentally friendly designs to construct new buildings
• There is an increasing shortage of skilled workmen and labor
• Contractors are being forced to declare bankruptcy or go out of business
• Construction spending has fallen by as much as 50 percent over the past year
• Contractors who are still in business are trying to hold their heads above water by cutting costs and selling all the assets that they don’t really need but which cost them money to maintain.
• Commercial property prices have plunged leading to reduced salaries and the forcible laying off of staff.

The solutions to these problems may not be easily visible now, especially with the economy still struggling to look up. The only way to tide over this crisis is to cut costs and hope to stay in business till things start to look better. There have been reports that prices in the housing sector have bottomed out and that there are signs of revival in the market. If that is true and if these early trends show promises of continuing, then the problems that the construction industry is facing will solve themselves.

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