Housing Doom

A recent court ruling forcing Citibank to continue funding a New York development might be a case where developers win a battle, but loose the war:

A ruling that Citigroup Inc. must resume lending to a stalled Syracuse, N.Y., mall project could push banks to revisit how they draft construction-loan agreements.

The New York State Supreme Court Appellate Division, in a split decision, upheld an lower court’s injunction requiring Citigroup to continue funding a $155 million construction loan on the Destiny USA Holdings project, even though the bank believes the project is a failure. Citi says the ruling is unprecedented in the state’s history. Now, New York lawyers are pondering how to write construction loans that would allow banks to stop funding what they believe are failing projects.

The ruling isn’t a total victory for Robert Congel, the developer behind Destiny. The court required the company to post a $15 million bond before Citi has to fund the rest of the money, roughly $29 million.
 

Why is this so significant?

This ruling definitely puts further strain on the market for construction financing.  Lenders are willing to take a bit of risk if the yield is right and it is clear that they have the option to back out of their commitment if the developer does not live up to his end of the deal.  But I can’t think of a single lender who would walk into a risky financing—no matter how high the yield is—if they cannot be certain on whether or not they have the right to back out when the developer fails to perform.  NY State Supreme Court’s decision in this case does nothing to provide that certainty.  Until lenders and their counsel can figure out a way to build that certainty back into their lending agreements, we can say goodbye to ground-up construction financing.

Commercial real estate lending might not be the only casualty of court rulings:

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This had to be an easy call- no one suspected the Butler.  Toxic loans have been found to be the cause of death for many banks: [Hat tip Freedom's Phoenix!]

The coroner’s report left no doubt as to the cause of death: toxic loans.

That was the conclusion of a financial autopsy that federal officials performed on Haven Trust Bank, a small bank in Duluth, Ga., that collapsed last December.

In what sounds like an episode of “CSI: Wall Street,” dozens of government investigators — the coroners of the financial crisis — are conducting post-mortems on failed lenders across the nation. Their findings paint a striking portrait of management missteps and regulatory lapses.

At bank after bank, the examiners are discovering that state and federal regulators knew lenders were engaging in hazardous business practices but failed to act until it was too late. At Haven Trust, for instance, regulators raised alarms about lax lending standards, poor risk controls and a buildup of potentially dangerous loans to the boom-and-bust building industry. Despite the warnings — made as far back as 2002 — neither the bank’s management nor the regulators took action. Similar stories played out at small and midsize lenders from Maryland to California.

How’s this for understatement of the year?

“We all could have done a better job,” said Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corporation.

The New York Times indicated that one of the dangers now is that banks will be held to a too rigorous standard.  Not everyone agrees:

The Obama Administration is prepared to do anything, including dramatically lowering mortgage lending standards, to keep real estate prices inflated, as demonstrated by statements, reports and events in the month of October.

First came the Federal Housing Authority inspector general’s report on the FHA’s lender approval process, which found that FHA was missing or ignoring relevant information, failing to document loans, not preventing convicted financial criminals from participating in its lending program, and in most other ways failing to "ensure that lenders met all applicable requirements." The IG’s spot check revealed, for example, that just one out of 22 approved applications contained all the documentation needed to meet the FHA’s own standard for guaranteeing a loan.

So which way will the wind blow then?  Will banks be too strict, or too lenient?

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Unemployed people can’t pay their mortgages.  Unemployment is up, and so is mortgage delinquencies:

The pace at which people fell behind on their mortgages slowed during the summer for the third consecutive quarter, but the overall delinquency rate hit another record, a new report shows.

For the three months ended Sept. 30, 6.25 percent of U.S. mortgage loans were 60 or more days past due, according to credit reporting agency TransUnion.
That’s up 58 percent from 3.96 percent a year ago.

Being two months behind is considered a first step toward foreclosure, because it’s so hard to catch up with payments at that point.

CNBC quotes F.J. Guarrera, vice president of TransUnion’s financial services division who said:

Two things must get better before mortgage delinquency rates start reversing themselves, he said: home values and unemployment. "Until we see improvement in both of those areas, it’s possible that it will take longer for delinquency to improve," Guarrera said.

Guarrera said he doesn’t expect declines until the middle of 2010.

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1:36:34 … This crisis was caused by massive government subsidies to purchase homes by people who couldn’t really afford them. So what does Congress do? They pass an $8,000 tax credit for people who can’t really afford to buy a home to buy one. I mean, how stupid can you get? - John Makin

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹ The event site has a variety of resources including both an audio and a video of the proceedings. There is as yet no official transcript.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 - Alex Pollock intro (preview post)
2. 0:11:43 - Tom Zimmerman presentation (preview post)
3. 0:26:50 - Chris Whalen presentation (preview post)
4. 0:37:03 - Nouriel Roubini presentation (preview post)
5. 0:54:19 - John Makin presentation (preview post)
6. 1:08:20 - Desmond Lachman presentation (preview post)
7. 1:21:56 - Panel discussion (preview post)
   1. 1:22:08 - Roubini discussion
   2. 1:22:59 - Whalen discussion
   3. 1:23:57 - Lachman discussion
   4. 1:25:24 - Makin discussion
   5. 1:28:01 - Whalen question
      1. 1:28:18 - Makin response
      2. 1:29:19 - Pollock response
   6. 1:29:51 - Pollock (with Roubini) aside on Canada
8. 1:31:26 - Q&A (preview post)
   1. 1:32:00 - Bert Ely question
      1. 1:33:04 - Zimmerman (with Roubini) response
      2. 1:34:29 - Whalen response
   2. 1:34:58 - Brian Gardner question
      1. 1:35:43 - Makin response
      2. 1:36:59 - Whalen response
   3. 1:38:18 - Steve Votaw question
      1. 1:38:59 - Lachman response
      2. 1:40:38 - Roubini response
      3. 1:41:22 - Zimmerman response
      4. 1:41:49 - Pollock response
   4. 1:42:11 - Jack Phelps[ph] question
      1. 1:42:54 - Makin response
      2. 1:43:24 - Whalen response
   5. 1:44:40 - John Serrapere question
      1. 1:46:02 - Roubini response
   6. 1:46:27 - anonymous question
      1. 1:47:44 - Whalen (with Pollock) response
      2. 1:48:44 - Roubini response
      3. 1:49:52 - Makin response
   7. 1:50:42 - Barry Wood question
      1. 1:51:12 - Roubini response
      2. 1:54:36 - Whalen response
   8. 1:55:02 - Christine Eisner[ph] question
      1. 1:55:24 - Zimmerman response
   9. 1:57:22 - Dale Kinsella[ph] question
      1. 1:57:55 - Makin response
   10. 1:58:44 - Pollock brief wrap-up
9. 1:59:06 (end)
   • Notes and References

Alex Pollock: [0:00:00] Good afternoon ladies and gentlemen. [slide² 1]

When in the course of financial events we have a huge bubble and the inevitable succeeding huge bust, a decent respect for the the opinions of mankind requires that we try to learn something useful from the painful experience. That’s the point of these deflating bubble series of AEI conferences, which you all have so kindly supported with your participation. So welcome to Deflating Bubble Roman numeral VI, "The Lessons of the Bubble and Crisis."

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1:27:42 No, might go wrong. - Allan Meltzer

Doom Transcripts: Index & Guide

Almost 19 months later, Doomers may enjoy putting some of these opinions up against what actually took place.

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s April 28, 2008 event "What Lies Beyond the Credit Crunch? Part II".¹ The event site has a variety of resources including a summary and both an audio and a video of the proceedings. There is an official transcript, but the link to it does not seem to be currently working.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 - Peter Wallison Intro
2. 0:07:43 - Charles Calomiris presentation
3. 0:24:33 - Kevin Hassett presentation
4. 0:36:53 - (interruption for computer problems)
5. 0:39:20 - Desmond Lachman presentation
6. 0:55:22 - John Makin presentation
7. 1:15:02 - Allan Metzer presentation
8. 1:36:04 - Vincent Reinhart presentation
9. 1:55:20 - Panel discussion
   1. 1:55:36 - Calomiris discussion
   2. 2:00:18 - Hassett discussion
   3. 2:01:55 - Lachman discussion
   4. 2:03:41 - Makin discussion
   5. 2:06:49 - Meltzer discussion
   6. 2:10:30 - Reinhart discussion
10. 2:12:34 - Q&A
    1. 2:12:59 - Jeff Wrase question
       1. 2:13:28 - Makin response
       2. 2:13:39 - Wallison digression
          • 2:14:33 - Calomiris response
          • 2:15:47 - Lachman response
       3. 2:16:26 - Lachman response
       4. 2:17:06 - Makin (with Wallison) response
    2. 2:18:34 - Bert Ely question
       1. 2:19:21 - Calomiris response
    3. 2:20:38 - Pieter Bottelier question
       1. 2:21:11 - Meltzer response
       2. 2:23:52 - Makin response
    4. 2:25:00 - Steve Entin question
       1. 2:26:05 - Meltzer reply
       2. 2:27:39 - Lachman reply
    5. 2:28:18 Wallison brief wrap-up
11. 2:28:54 (end)
    • Notes and References

Peter Wallison: [0:00:00] OK, I think we’ll get started. Everyone take his or her seat. I want to welcome you all on a pretty raining and nasty day. I’m delighted that all of you came out. This should be one of the more interesting conferences of the year, and I can understand why you’re all here.

This is the 2nd conference on exactly the same subject. The last time these esteemed AEI economists got together to discuss the future of the credit crunch and the US economy was in December of 2007. At that conference there was sharp disagreement at to whether the US, as a result of that housing meltdown, the credit crunch and other factors was headed for a deep recession, a shallow recession, or merely a slowdown for a quarter or two.

The data presented at that conference showed a serious breakdown in trading in the credit markets, and major losses in housing values. These factors would suggest a serious recession. But at that point there was no clear evidence of a recession, during the 4th quarter of 2007, at least. The Dow, which opened at 13,339 that morning, was down from its high of 14,000, but certainly was not signaling a serious recession.

All the participants in the December conference thought that their predictions would be proved correct when several months of additional data was available, so we scheduled this conference to see [laughs] whether in fact their positions have changed, and whether things have become any clearer to our AEI economists.

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Oops.  It looks like one couple’s home loan was modified right out from under them:

PHOENIX — Despite being up-to-date on their modified mortgage payments, a Valley couple found Chase foreclosing on their home.

"You work so hard. Put a lot of money down on your house. You pay your taxes. You pay your mortgage, and it’s all stolen from you,” said Jeff Zerner, the homeowner.

He and his wife, Yanthy, found out about the foreclosure when the new owner posted a notice on their door Nov. 4.

“I get this notice that says you have five days to vacate the property,” he said. “So I called the number (on the notice) and I say, ‘Who are you?’ and they say, ‘We’re the legal owners of this house. It went up for foreclosure."

Just days before, the Zerners thought their home was safe. They had finished their trial modification with Chase and were led to believe they would qualify for a permanent modification.

“We paid Chase several hundred dollars, which they accepted in good faith,” said Zerner. "I feel extremely ripped off.”

Chase officials admit they made an error by selling the house.

How did this happen?

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Yesterday, the U.S. Treasury released it’s Making Home Affordable Program Servicer Performance Report.  Interestingly, the report didn’t actually say how well the loan mods were performing. [Thanks L!]

Good news that more than 650,000 borrowers have been put into trial mods, no news that we have no idea how successful those mods are now five months after the program really got cooking.

It’s coming, that’s what the folks at Treasury say. 

I have a strong suspicion that if the program were meeting with any success at all, the data would have been a lot more forthcoming.

That doesn’t seem to be the only omission either.  A class action lawsuit was dismissed in Minneapolis yesterday by a group of homeowners fighting foreclosure after their loan mods were rejected.  The homeowners claim that they weren’t given proper notice,  nor were they informed that they had the right to appeal.

The judge ruled that loan modifications were not an entitlement nor were there "due process" qualifications. The attorney for the homeowners said that the Treasury was making changes however:

Treasury now requires that loan servicing companies collect data on denials, provide written notices of denials within 10 days, halt foreclosures when homeowners challenge denials and provide homeowners with some of the data that went into servicer’s decisions.

So the Treasury not only doesn’t know [or isn't saying] the performance rate of loans in the trial period, it didn’t even bother to ask lenders how many borrowers were being rejected?  How could anyone adequately assess the value of the program without knowing the percentage of successful modifications or the percentage of applicants that were even allowed into the program? Additionally you would think that a breakdown as to WHY borrowers were being rejected would be useful- especially if this data could be compared between lending institutions.

There is a scene in movie The Sound of Music where the Nazis discover the Von Trapp family attempting to escape in the middle of the night.  The officer tells Captain Von Trapp, So Captain- we have not asked you where you are going, and you have not asked us why we are here.  Captain Von Trapp responds Apparently we are both suffering from an appalling lack of curiosity.

The Treasury seems to be suffering from the same thing– an appalling lack of curiosity. Either that, or an appalling unwillingness to share what they know.

Extreme Makeover has been a very popular show.  It’s enjoyable to see people who are down on their luck get a chance at a nice place.  For some of the recipients though, a better home has brought an unwelcome side effect– foreclosure:

I can’t help but wonder if Extreme Makeover isn’t a miniature example of subprime lending.  EM is helping people get into homes they couldn’t possibly afford.  These people either can’t handle the associated bills, or are allowed to borrow more than they can possibly repay against the home.

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The United States Constitution Article 1, Section 8 puts Congress in charge of the national checkbook.  Legislation enacted over the years however, has created loopholes big enough to drive a semi through.  This may end up being one of the biggest ones:

The credit crunch has displayed yawning democratic deficits, like the inability of Congress to get a proper handle on the Federal Reserve’s emergency lending programs. But with Fannie and Freddie, it is the Treasury that gets to freely commit massive amounts of money. Both companies have bought most of the mortgages written in America this year and are modifying large amounts of loans to keep people in their homes.

This matters to investors. From a macroeconomic perspective, it is unhealthy when the government faces few checks when pouring billions of dollars into one sector of the economy, in this case, the housing market. The Treasury has committed up to $400 billion to keep Fannie and Freddie solvent. The two have already received or requested over $110 billion of that total.

Legislation passed last year puts no dollar limit on how much the Treasury can plow into Fannie and Freddie. Granted, Congress signed off on that bill, and the Treasury does have to explain its injections to Congress. But legislators may look back at one of the biggest blank checks they have signed.

What’s more, a possible accounting-rule change could force Fannie and Freddie to consolidate trillions of dollars of assets and liabilities early next year. Since Uncle Sam controls the companies, that would effectively balloon the government’s balance sheet.

Accounting rule changes only seem to serve as rose colored glasses anymore.  It’s hard for me to believe that an accounting rule change that would make the government’s balance sheet look worse will ever happen. 

What is far more likely than the accounting rule change is that the Treasury will continue to pour money down the dark hole of the GSEs in the name of stabilizing housing.   Someone needs to point out to Congress that the Constitution is intended to promote the GENERAL welfare, not the CORPORATE.

Well I think at some point we’re going to have a government in power that’s going to make a choice between the American people and our creditors, who are predominantly foreign. And I think that choice will involve letting the dollar depreciate. I don’t think we’ll ever actually repudiate our debts, as long as we can print more dollars. But I think that’s the fundamental political issue that faces our entire society … - Chris Whalen

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a eighth and final selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

The lively Question and Answer session that closed the conference featured everything from Roubini’s lurid medium term scenarios to Zimmernan’s surprising advice that Re-remics, along with just about any other recent real estate securitizations, are perfectly safe to buy.

Alex Pollock: [1:31:26] Let me come to our questions. We’re going to, we have microphones, a microphone in the back. Please remember how this works. Wait for the microphone, please tell us your name and your affiliation, and then ask your question. For those of you who may feel the urge to make an assertion in addition to your question, may I ask you to keep your assertion short and to the point, otherwise I’ll feel compelled to ask you to come to your question. … I have a hand way in the back, here. … Oh, it’s Bert [laughs] …

Bert Ely: I was hiding on you, Alex. Bert Ely, banking consultant. A suggestion and a question. In terms of describing the kind of recovery you have, let me offer another suggestion to you that I’ve been using. I call it a washboard recovery. Slow and very bumpy over the next few years.

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