The panel represents many perspectives on assessing collateral (translation: appraising!). It’s the first time that I am aware of where an event has been held to address the appraisal issue in a constructive way.
Prices there are down by more than 50% from peak but sales activity is rising.
Could this mean that the housing market is stabilizing?
The idea pushed in the story is FIFO (first in first out). Markets first to experience weakness may be the first to improve. I don’t see this is a viable explanation on what to anticipate in other markets. The reasons the south and west fell first is from rampant speculation, largely absent in the midwest and northeast.
Perhaps in that specific location. California has been experiencing heavy sales volume as prices come into alignment with the market.
So I wouldn’t hold your breath after the spring market ends. Seasonality means demand is higher now, buoyed by record low mortgage rates and a slew of foreclosures pressing prices to lower levels – making affordability within sight of many.
Posted by Jonathan J. Miller -Sunday, May 3, 2009, 10:16 PM Comments Off
Ok, so I’m not a Buffalo Bills fan (go Jets!) and I didn’t vote for Jack Kemp when he ran for president in ‘88, but I did admire him, especially his stint as Secretary of Housing and Urban Development under Bush I.
He was on the cutting edge on the topic of home-ownership and tenant-own thinking even though hisstint as HUD secretary didn’t accomplish what he set out to do:
As a bleeding-heart conservative, Kemp was a logical choice for Bush as the Secretary of Housing and Urban Development, whose job would be to foster public sector and private sector methods to meet the demands of public housing. However, the scandals of Reagan’s Secretary of Housing and Urban Development Samuel Pierce and the neglect of the president were obstacles from the start, and Kemp was unsuccessful at either of his major initiatives: enacting enterprise zones and promoting public housing tenant ownership. The goal of these two plans was to change public housing into tenant-owned residences and to lure industry and business into inner cities with federal incentives. Although Kemp did not affect much policy as HUD’s director, he cleaned up HUD’s reputation
In addition to opposition in Congress, Kemp fought White House Budget Director Richard Darman, who opposed Kemp’s pet project HOPE (Homeownership and Opportunity for People Everywhere). The project involved selling public housing to its tenants. Darman also opposed Kemp’s proposed welfare adjustment of government offsets. HOPE was first proposed to White House chief of staff John Sununu in June 1989 to create enterprise zones, increase subsidies for low-income renters, expand social services for the homeless and elderly, and enact tax changes to help first-time home buyers.
Kemp wrote a position piece on bankruptcy in early 2008 that covers the issue as it relates to home ownership and low and middle income families called Bringing bankruptcy home
Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property — all secured loans, that is, except those secured by the debtor’s home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets — their homes — and leaves untouched their largest liabilities — their mortgages.
Sometimes good ideas never see the light of day because of political disconnect.
a term used in bankruptcy law to refer to the Chapter 13 provision that allows debtors to retain collateral as long as they offer repayment of the â€œsecured portionâ€ or fair market value of the collateral in their repayment plan.
The Senate was likely afraid that the bill would give bankruptcy judges to much sway over modifying outstanding mortgages and would indemnify servicers. Here’s a summary of the version the House passed.
On a merely a practical level, I was never sure how the services would handle the cram-downs since the mortgages were sliced up into many tranches.
Without the incentives provided by the reform bill, we now estimate that 475,000 fewer voluntary modifications will occur, and with judicial modifications we project an additional 1.725 million foreclosures this year. This will significantly increase the inventory of unsold homes and place additional downward pressure on already-weak house prices. Equity values will erode further, leading to more defaults and placing greater pressure on prices, thereby prolonging both the depth and duration of the housing market correction.
In other words, when the commercial banks still hold sway over Washington, despite their financial condition and debt and the net result of this failed legislation may very well be worse.
In the grips of a bubble mentality, weâ€”as investors, consumers, and businessesâ€”blithely assumed risk and convinced ourÂselves it was perfectly safe to do so. We bought houses with no money down, took on huge amounts of debt, and let the booming stock and housing markets perform the heavy lifting of saving.
I remember the ridicule the former president took for his previous economic fix after 9/11 – “Shop!” else we enter the “paradox of thrift.“
If everyone saves during a slack period, economic activity will decrease, thus making everyone poorÂer.
We also need to start investing againâ€”not necessarily in the stocks of Citigroup or in condos in Miami. But rather to build skills, to create the new companies that are so vital to growth, and to fund the discovÂery and development of new technologies.
I am not suggesting that shopping is solution, but it is certainly part of the problem right now. When consumers and investors hunker down and do nothing, a failure spiral results.
Today Secretary Geitner announces the plan we have been waiting for, which is heavily reliant on the private sector. US Treasury secrectary Geitner unvailed his second attempt at getting the economy moving again and this time there is probably no room for a do-over. Did he really call it “My Plan”?
We cannot solve this crisis without making it possible for investors to take risks. While this crisis was caused by banks taking too much risk, the danger now is that they will take too little. In working with Congress to put in place strong conditions to prevent misuse of taxpayer assistance, we need to be very careful not to discourage those investments the economy needs to recover from recession. The rule of law gives responsible entrepreneurs and investors the confidence to invest and create jobs in our nation. Our nation’s commitment to pursue economic policies that promote confidence and stability dates back to the very first secretary of the Treasury, Alexander Hamilton, who first made it clear that when our government gives its word we mean it.
Here’s the problem with the AIG bonus outrage that fueled this modification of plans – it’s not about being scared of keeping AIG and other Wall Street firms afloat and it’s not about the obscene lack of morality – it’s about the danger of scaring off the private sector from participating in the solution. It’s called “Free Market.”
“We’ve got banks with a lot of toxic assets, what ‘toxic’ means is they are highly uncertain … so that is certainly the big picture, and that is going to be the main reason for doing this … We simply — we simply need them. We need them — you know, we’ve got a limited amount of money that the government has to go in here, so we need to partner, not just with private firms, but with the FDIC, with the Fed, to leverage the money that we have,”Â she said.
Congress underestimated consumer outrage and the House quickly passed retribution legislation to get even via a 90% tax. Because the political playing field is incentivized by one-upsmanship, Congress is much more comfortable with this sort of grandstanding/finger pointing and that’s what this debate has regressed to. Dodd is in hot water.
It began with the previous legislation of caps on Wall Street compensation (when Congress didn’t catch it), while a feel good measure, is also a short sighted position much more apparent now because there will always be work-arounds.
I love how many simply lump all Wall Streeters into one evil pile and feel it’s right to treat everyone the same. It’s professional prejudice on steroids. A market for the “toxic” assets needs to be fostered. Do we want to get out this mess or not? No room for populist shortsightedness.
More on the plan later. In the meantime I need to download that song from iTunes - it’s systemic so we might as well jump.
Regarding property appreciation over four decades:
Between 1974 and 1980, prices declined by 12.4% citywide.
Between 1980 and 1989, prices increased by 152%.
From 1989 to 1996, prices dropped by 29.3%.
From 1996 to 2006, the Cityâ€™s latest boom, housing prices increased by 124%.
A couple of interesting points made:
On average, despite very high price levels, hous-
ing prices in the City have not risen as much over the
past two decades as they have around the country: in
the most recent upturn, New Yorkâ€™s impressive growth
of 124% was dwarfed by growth of 189% nationwide.
the ten neighborhoods with the largest increases
in the 1980s boom were also among the neighbor-
hoods with the largest price increases in the most
Contrary to what one might expect,
higher-income neighborhoods are not insulated from
downturns, and investing in such a neighborhood does
not necessarily guarantee strong future gains. Rather,
prices in higher-income neighborhoods tended to
grow less than the City average in the 1980s upturn
and fall further in the 1990s downturn. In the most
recent upturn (1996â€“2006), there was virtually no
correlation between neighborhood income and sales
In Memoriam: New York just lost an essential New York media icon with the passing of Braden Keil of the New York Post to cancer. Combining celebrity and real estate, he always seemed to get the scoop. After starting off a bit shaky, I grew to appreciate my interaction with Braden and will miss him – he characterized his situation to me in early January: Life is indeed serving me up a lot of lemons.
I speak now from an especially close perspective to cancer but with a better outcome:
Cancer – for lack of a better word – sucks.
“We didn’t float any plan,” Paulson said. “I am always looking at new ideas and I have said from day one that the key thing to get us through this period is getting housing prices down.“
Mission accomplished: – housing prices are down. Perhaps that is why he is leaving in January.
Warning – excessive rhetorical questions ahead
So the US Government is working hard to push housing prices down?
…go against the “American Dream” agenda of the current and prior administrations?
Isn’t it kind of late for that?
And that type of policy will solve the credit crunch?
Ok, I’m back
The financial system enabled now-obviously illogically cheap credit which pushed housing prices higher with little regulatory oversight. We experienced a mortgage bubble – a housing boom was merely the byproduct.
To follow his logic, by going backwards using the recent history timeline, Paulson seem to view falling housing prices as a way to stabilize the financial system – take the pressure off, so to speak.
What he probably meant by his quote: I think he is simply a poor communicator and probably meant that housing price declines have a way to go and he doesn’t want to do anything to artificially “prop” them up.
All fixes need to take the long view into consideration.
However, the economy can’t function without credit – it is not the exclusive purview of mortgages.
Apparently large numbers of consumers thought precisely that during the week after the disclosure that the Treasury Department was working on plans to slash loan rates for consumers who buy houses in the coming months.
But in the meantime, the news threw a wrench into the marketplace — making some shoppers reluctant to commit to purchase without guaranteed access to 4.5 percent mortgage money. In some cases, it stalled deals that were ready to go.
Good grief – January 20th can’t get here fast enough. I’ve had it.
Chauntay Barnes, 30, moved into a single-family home with her two kids in November 2007 on a quiet street in Hamden, Conn. She never missed a payment on her $800 rent â€” never had so much as a late fee â€” and yet in mid-September she opened her mail to find an eviction notice.
If you are going to solve the housing crisis, you can’t treat tenants who met the their obligations as a throwaway. Fannie Mae is going to work with some tenants to prevent eviction. Still, only a fraction of the evictions will be prevented.
In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.
In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.
Yes, properties may be easier to market when vacant, but the reality is the property will likely see extended marketing times with the surplus inventory levels. Why not keep income coming in to the taxpayer while the market finds it groove?
â€œWeâ€™re not in the business of managing rental properties, and weâ€™re not in the business of being a landlord,â€ said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. â€œClearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.â€
When will the renter stop being treated like a second class citizen? Is the American dream of homeownership myopic?
Aside: The National Community Reinvestment Coalition, a consumer advocacy group has an amazing public relations sensibility. I would guess that coverage of this issue in the NYT and WSJ was a perfectly placed pitch. Kudos to them on this important issue.
Posted by Jonathan J. Miller -Friday, December 12, 2008, 2:16 AM 3 Comments
There was an interesting Op-Ed piece in the New York Times this week written by Howard Husock of the Manhattan Institute called Housing Goals We Canâ€™t Afford.
The article points out that with all the housing and mortgage woes across the country, it’s pretty easy to point fingers. However, it gets more difficult when you point them at groups that tried to do the right thing.
The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods. But in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted â€œoutstandingâ€ ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households.
Banks were now being judged not on how their loans performed but on how many such loans they made. This undermined the regulatory emphasis on safety and soundness. A compliance officer for a New Jersey bank wrote in a letter last month to American Banker that â€œloans were originated simply for the purpose of earning C.R.A. recognition and the supporting C.R.A. scoring credit.â€ The officer added, â€œIn effect, a lender placed C.R.A. scoring credit, and irresponsible mortgage lending, ahead of safe and sound underwriting.â€
I remember at one point, quite a while ago, before digitally delivered appraisals, lenders were calling us to get the census tract number the property was located in. We soon discovered that the standardized binder that held the appraisal and other mortgage documents, required two holes punched at the top of the form. One of the holes covered the census tract number. This number was used to credit the bank with originations in lower-income neighborhoods. It struck home (no pun intended) how important it was for them to cover all the markets.
CRA is a noble endeavor. The solution to uneven lending missed a basic economic fact: banks were pressed to lend in areas with lower home ownership and therefore had to lower their underwriting standards to get enough volume to make the regulators happy.
The result? Higher default rates are experienced in these markets. Mandating quantity creates an environment of weaker quality.
If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.
An argument can be made here for encouraging renting when ownership is not affordable or simply creates too high of an investment risk. You can look around and see what happened when lending practices were not reflective of market forces. Bedlam – good intentions or not.
UPDATE: I got an generic but informative email from the Center for Responsible Lending, likely as a result of this post that contained the header: “Bashing CRA Doesn’t Help.” It provides tangible talking points that are informative. The sensitivity is very elevated over this topic and I wasn’t bashing – I just have a concern over the transfer of risk to lenders – it’s a brave new world out there and interpretation of risk has changed overnight.
Here’s their email text:
According to John Dugan, Comptroller of the Currency, “It is not the culprit.”
Federal Reserve Governor Randall Kroszner says, “It’s hard to imagine.”
They are talking about the wrong but persistent rumors that the Community Reinvestment Act, a longstanding rule to encourage banks to lend to all parts of the communities they serve, is the reason behind for the surge in reckless subprime lending.
First, CRA was passed into law in 1977, well before the development of the subprime market. The majority of lenders who originated subprime loans were finance companies, not banks, and thus not even subject to CRA requirements.
A recent study by the Federal Reserve points out that 94% of high-cost loans made during the subprime frenzy had nothing to do with Community Reinvestment Act goals.
A lump of coal to the media who perpetuate this myth. The sooner we stop finger-pointing and focus on real solutions, the better.
Here’s a thought. Mortgages are more expensive and less accessible than two years ago. Until that changes, I wouldn’t expect real, measured improvement. Improvement will come eventually. Let’s deal with the situation at hand rather than all the focus of calling the turnaround correctly.
Had a fun interview with Tom and Sara this morning on the always MUST watch/listen Bloomberg Surveillance. We talked housing, rentals, vacancy and inventory. An added bonus was the addition of Adam Davidson – co-founder and co-host of Planet Money... Read More