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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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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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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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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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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Here’s thoughts on Danish-style mortgages that expand on what I wrote in note [7] to Saturday’s AEI Subprime Danish: (nearly) Complete Annotated Transcript. I originally drafted a version of the following for some private correspondence, but on reflection thought I’d stretch a point on my "retirement" from active comment to share it with Doomers generally.

In the March 26th seminar, George Soros associate Alan Boyce described (from appoximately minute :06 to :36 in the transcript) his ongoing efforts to introduce Danish mortgage practice into Mexico, and outlined how it might be applied to the United States. Discussants describe with relish (e.g. around 1:36) how under the Danish system defaulting homeowners can have a deficiency judgment on their failed mortgage pursue them for the rest of their lives. One Danish bank president is described (around 1:31) as presently pursuing borrowers who defaulted in the Danish housing bust of 1991.

Strategies for implementing this in the US are also discussed (e.g. around :43, 1:36). The panelists think State level mortgage oversight would never allow for recourse mortgages, but that in the current crisis, federal standards could be forced through. Obviously a revolution in how the US Constitution works as profound as the currents that preceded the events of 1860-4.

The World Bank’s Olivier Hassler speaks (about 1:05 - 1:16) on his experience introducing Danish mortgage practice into Chile, and Boyce describes how his Danish / Soros joint venture is working to penetrate a variety of emerging-economy nations with the idea (around 1:49).

To sum up, it would seem that a lot of banks are looking at intensified control and exploitation of their middle-class customers in the US and beyond as a way to recover some of their recent losses. I find this very disturbing.

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President Obama’s got a new plan to fix the mortgage industry, and boy is this one hard hitting:

If the Obama plan for simplifying the mortgage process is approved, here’s how it might work:

The government would give its seal of approval to a handful of mortgage types — a standard 30-year fixed-rate mortgage and perhaps a few varieties of adjustable-rate loans. For a loan to get the "vanilla" label, the lender would have to verify borrowers’ income and have them set aside money for property tax and insurance.

Borrowers would still be able to get mortgages that don’t pass the government’s vanilla test. But they would be warned about the risks.

WARNED about risks.  That should put a stop to the insanity, shouldn’t it?  You could still throw caution to the winds and get a "risky" loan though:

[C]onsumers who take out mortgages would automatically get a "plain vanilla" loan — such as a traditional 30-year fixed-rate mortgage — unless they opted for a riskier variety.

I wonder why the vanilla loan is "automatic"?    Does the administration assume that the foolish or uneducated wouldn’t bother asking about other types if plain vanilla choices are "automatic"? 

I can almost see myself seated in front of an L.O. [Loan officer] now…

L.O.:  Good morning, Ms. Twist.  Have a seat.  What can I help you with today?

Twist:  I’d like to apply for a mortgage loan.

L.O.: [Stunned silence]

Twist:  Please pick your jaw up off of the desk- that expression doesn’t become you.  I always said I was going to get around to this eventually.

L.O.: Does this mean that hell has…?

Twist:  No, it doesn’t.  Come on, I’m trying to make a point here.

L.O.:  Right. [Reaching for a stack of forms.] Sorry.  Let’s just start filling out these forms.  Full name please?

Twist: Aren’t you going to discuss my mortgage options with me first?

L.O.:  Don’t be silly.  If I do that, the next thing you know, you’ll demand a zero down, neg am loan.  I’d probably give it to you, you’ll default within 12 months and insist that you were the victim of predatory lending.  When that happens, I lose this job and the next thing you know, I’m asking my customers if they want fries with their purchase.  No thank you.  We’ll just stick with the certified, grade A plain vanilla mortgage, shall we?  Like I said before, full name please?

Twist:  Could you define a plain vanilla mortgage for me?

L.O.:  A traditional 30-year fixed-rate mortgage.

Twist: Well what if I want….

L.O.:  I thought we just went over this!

Twist: A 15-year fixed-rate mortgage?

L.O.:  Oh, [Chuckles.] you were just messing with my head, weren’t you?  That’s plain vanilla enough.  You had me worried for a minute. Let’s get back to the form…

Twist: What if I want to put down 10%? 20%? Zero?

L.O.:  We can fill that in automatically.  It keeps you from making a poor decision.

Twist:  What if I WANT to make my own decisions?

L.O.:  Did I explain to you how much I really dislike fries?  I couldn’t handle the smell.  Please…

Twist: What if I want an adjustable rate loan?

L.O.:  What variety?

Twist: What do you mean, "What variety?"  Garden variety, I guess.

L.O.:  You had to go and do that, didn’t you?  Now before we proceed, you’re going to have to watch THE VIDEO.

Twist:  THE video?  What video? Why do I have to watch a video?

L.O.:  The law clearly mandates that anyone who wants a non-vanilla mortgage be shown Practicing Safe Mortgage Borrowing- Avoiding Risky Flavored Mortgages.  A garden variety adjustable rate mortgage is considered "risky".

Twist:  I didn’t say I wanted an A.R.M.  I just said, "What if?"

L.O.:  There’s no use you trying to impress me with the fact you know the acronym now.  You brought it up, so you need to watch the video.

Twist:  What if I refuse?

L.O.:  I’m sorry, but I’m afraid I’m going to have to insist.  It’s your own fault you know.  You could have just gone with the certified grade A plain vanilla mortgage, but no, you had to go and start asking questions.  You know, it was people like you back in 2006 who messed up the housing market for the rest of us in the first place!

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Thank heavens they’ve put a stop to those risky, "no-skin-in-the-game" loans, or have they? [Thanks L!]

Think we’re beyond the days of people putting little-to-nothing down for home purchases only to later walk away? Think again … and the government is sponsoring it.

For those not familiar with FHA loans, they are loans issued by major banks like Bank of America and Wells Fargo as well as smaller mortgage brokers and the origination arms of builders like Ryland and KB Home. Those loans are then insured against default by the Federal Housing Authority.

The rub is that FHA loans allow borrowers to buy a home with as little as 3.5% down. And with the ability in some cases to use the government’s $8,000 tax credit toward down payment, some folks can grab a house for 0% down. Isn’t it loans like that that got us into this mess in the first place?

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[43:00] … If we’re going to offer this new advantage to the homeowner, and allow him to borrow at today’s current market rates, but only because the government’s going to guarantee it, we should have full recourse to every borrower. [1]

Housing Doom is pleased to present an almost [12] complete unauthorized annotated transcript for the American Enterprise Institute’s disturbing [7] March 26, 2009 event "Can Elements of the Danish Mortgage System Fix Mortgage Securitization in the United States?" [1] The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is as yet no official transcript.

UPDATE 6/24: I’ve added a short summary and some comment here.

Peter Wallison [00:00]: We have a really interesting program today, and one [crosstalk] … That’s right. I’m sure you’re going to "tax" us up here.

We really have an interesting program today, and let me tell you how we’re going to work this. We’ll have a presentation by Alan Boyce about his plan, and then we’ll have each of the people on the panel here comment, and then some crosstalk in the panel, and then some questions from the audience.

So if things come up in the course of Alan’s presentation or elsewhere, please make a note so you’re able to ask some questions when the time comes.

I’ll start with a small introduction and then … I’ll introduce Alan, and then the members of the panel before they get started with their commentary.

Although members of Congress and the Obama Administration have sweeping ideas for how to regulate the US economy in the future, few of them, apparently have thought very deeply about how we finance mortgages. Yet at the root of the country’s current financial crisis is a dysfunctional mortgage system.

The central actors in that system are two bankrupt companies, Fannie and Freddie. And they are likely cost taxpayers $400 billion by the time all their losses are toted up, and their conservatorship brought to an end. Their lack of adequate regulation and their domination of housing finance were, more than any other factor, responsible for the financial crisis we now confront.

In light of this, one would think that, rather than planning to extend regulation to the farthest reaches of the financial system — regulation, incidentally, that has not worked, as we can see particularly well with the banking industry — policymakers would spend a little time thinking about how to reform a mortgage finance system that has obviously got major problems.

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It’s Friday, and it looks like mortgage defaults could go from bad to worse:  [Thanks L!]

WASHINGTON — Call it son of subprime. Experts warn that a new wave of mortgage foreclosures may be coming soon and could rival the default rates for subprime mortgages and slow efforts to find bottom in a prolonged national housing slump.

The mortgages in question are $230 billion of option adjustable-rate mortgages, creative lending products that flourished at the height of the housing boom. In an option ARM, a borrower can opt to pay less than his or her monthly balance due, and the difference is tacked onto the outstanding loan balance.

Many experts had expected an explosion of defaults in the springtime on these roughly 564,000 outstanding mortgages. However, interest rates dropped to historic lows, and that delayed the detonation of what many housing analysts still see as a ticking time bomb.

"They’re probably going to default at a rate that makes subprime look like a walk in the park," warned Rick Sharga , senior vice president for RealtyTrac, a foreclosure research firm in Irvine, Calif.

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