Archive for January, 2013

A few years ago there were news reports that Fannie and Freddie would directly sell their inventory to large investors consisting of enormous blocks of single family residences in hundreds if not thousands per transaction.  In fact, there were a couple of pilot programs.  However, it seems like the hedge funds are purchasing REO's and short sales listed on the market.  This has driven out the small investor due to the deeper pockets of these hedge funds.  Small investors might have hundreds of thousands while hedge funds have billions, it's a David versus Goliath.  They will purchase homes at 5% to 7% over list if they really focused on deploying capital in a give a area. This drives up prices…[READ MORE]

One of the most ridiculous features of the housing bubble rally was when buyers would write emotional letters to sellers to try to make their offers stand out in the crowd. In 2004 in particular as the Option ARM permitted buyers to raise their bids to ridiculous levels, competing bids well over asking price prompted sappy letters to appeal to a seller's emotions to get the deal. Now, with the federal reserve lowering interest rates below 3.5%, we face a similar infusion of affordability allowing buyers to raise their bids. The tight supply engineered by the banking cartel is causing the buyers to bid over ask again as they compete for the few properties available. The return of the ass-kissing…[READ MORE]

Everyone active in the real estate market today laments the lack of available inventory. Orange County housing market prices are rising due to the restricted inventory. Banks go “all in” betting on success of loan modifications to resolve their prior bad loans. In the interim, delinquent mortgage squatters are enjoying their free ride. It's unlikely that conditions will change in 2013. Foreclosures are likely to be fewer in number, not because the banks lack delinquent borrowers, but with the disincentives to foreclose and the new constraints from the Homeowners Bill of Rights, lenders will opt to permit squatting and allow a few short sales for those delinquent borrowers willing to gracefully exit their properties. Despite the falling foreclosures, California recorded…[READ MORE]

As I review the housing numbers each month, I see local housing prices rising quickly and no return of inventory to blunt the increases. Given those conditions, it's likely that prices will continue to rise in 2013, perhaps significantly. What's somewhat surprising to me is that my purely mechanical rating system continues to show improvements in market timing. I thought that rising prices would reduce affordability and cause the ratings to drop. That isn't what's happening. The declining interest rates have more than offset the rise in prices. In fact, housing affordability as measured by the monthly cost of ownership was at the lows for the year in November and December of 2012. There is still plenty of room for…[READ MORE]

When Congress took on the task of regulating the excesses of the mortgage industry, it ostensibly wanted to prevent a recurrence of the housing bubble. To that end, they passed the Dodd-Frank finance reform. One of the provisions of Dodd-Frank was to establish a "qualified mortgage" that establishes the parameters of what constitutes a "safe" mortgage product unlikely to cause another housing bubble. To this end, they solicited advice from various sources to come up with an appropriate set of standards. In Preventing the Next Housing Bubble, the final chapter of the book, I addressed what it would take to prevent another catastrophe like we witnessed over the last decade. It has a series of parameters similar to the recently…[READ MORE]

Apportioning blame for the housing bubble has become a polarized political issue. The Left wants to portray the evil banks as taking advantage of hapless borrowers thus entitling these borrowers mortgage relief or absolution for strategic default. The Right points out the responsibility borrowers have for their own behavior and wants to bail out the banks for completely self-serving reasons. As with most political issues, the polarized and generally self-serving positions of each side fail to capture the truth of the matter. Nobody wants to admit or take responsibility. Politicians are masters of deflecting responsibility, and now borrowers are deflecting responsibility in unprecedented numbers. Behaving like children who get to play but refuse to do their homework, borrowers are throwing…[READ MORE]

Just like the expansion of the FHA program, now the US government wants to expand the role of Fannie Mae and Freddie Mac.  This would be the second major expansion of their influence in mortgage refinancing.  If you refinance your house there is an 75% chance that it is guaranteed by Fannie Mae or Freddie Mac. Freddie Mac and Fannie Mae so dominate the mortgage industry right now that it would barely exist without them; however, this comes at a great taxpayer expense because they had loses in the hundreds of billions. After the housing crash, many of these Fannie and Freddie loans had balances greater than homes were worth.  Many of these underwater loans were affordability products with some…[READ MORE]

The housing bubble was inflated by private lenders giving nearly unlimited money to eager borrowers to bid up real estate prices to levels not sustainable by the real incomes of the borrowers. I have pointed out that lenders are more culpable than borrowers, but it took two to tango. Under intense political pressure to make restitution to the sheeple and to limit future lawsuits on the matter, the major banks agreed to investigate themselves and determine by their own standards if borrowers were treated unfairly. Since the review process wasn't placating former loanowners, the politicians and the banks negotiated a settlement agreement that will provide loanowners a few pennies to offset their perceived losses and injustice. The guilt payments won't…[READ MORE]

Yesterday, with special thanks to Matt138, I introduced the writings of Frédéric Bastiat, a 19th century French economist. I always find it interesting when writings from many years ago resonate through the ages as if they were written yesterday. If you've never read Plato's Republic, it has a similar resonance. Plato's critique of the shortcomings of democracy are still just as valid today as they were 2,500 years ago when he wrote it. Usually, I feature recent news articles less than a few weeks old. Today, I am featuring an essay written more than 160 years ago. The fact that it resonates so well today shows just how farsighted his vision was. Our obscure French economist understood the workings of…[READ MORE]

Many times over the last six years, I made the argument that lower debt service burdens are the key to a sustained economic recovery. Bankers and the federal reserve want to see an expansion of credit for completely self-serving reasons. They point to times in the past when an expansion of credit fueled economic growth as evidence of its necessity for a vibrant economy. Perhaps it's partially true. An expansion of asset-backed debt is good for the economy, but most credit expansions involve the populace taking on huge amounts of signatory debt, and expansions of signatory debt invariably lead to personal Ponzi schemes, HELOC abuse, and a contraction of credit when debtors have to pay the bills. A sustained economic…[READ MORE]

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