Archive for September, 2013

The success lenders enjoy in reflating the housing bubble is remarkable. Since they stopped foreclosing on delinquent mortgage squatters and focused their efforts on can-kicking, lenders managed to dry up the MLS inventory and force prices to rise 20% to 40% in a very short period of time. This will enable many previously underwater borrowers to sell without a short sale, which ultimately prevents another bank loss. Further, higher prices will increase the lender's recovery amount when they do foreclose on the most committed squatters. The success of lenders efforts is not without concerns. Back in May I discussed the 10 biggest obstacles to reflating the housing bubble. Today, we revisit that topic with an overview from the Wall Street…[READ MORE]

The headline of today's post is not news to anyone who reads this blog very often, but for many, including some academic economists, this basic understanding comes only after years of study of the aftermath. Perhaps I expect too much of academics. They are supposed to be very smart people, or we wouldn't entrust them with the education of future generations, but sometimes the lack of common sense is truly remarkable. Today's featured article appeared in the latest addition of Capital Ideas, a publication of the Booth School of Business at the University of Chicago. I will translate the lofty academic language of the author into common sense terms, not to assist you in understanding it, but to assist other…[READ MORE]

The Dodd-Frank financial reform law required bureaucrats to draft rules for qualified residential mortgages. Loans that conform to the standards defined can be sold into the secondary mortgage market without restriction. Loans that do not conform require the lender to retain 5% of the capital risk on their own balance sheet. Fortunately, this is not the only protection in the system preventing lenders from originating bad loans and passing the risk off to others. All securitized mortgages have put-back provisions that allow the servicers to force the originating lender to buy back the loan if the borrower defaults. However, for a loan to be put-back to the lender, there must be defects in underwriting, and if the underwriting standards are…[READ MORE]

It's not a secret that loanowners, especially if they have little or no equity, have been able to squat in their homes without paying their mortgages.  The FHFA through Fannie, Freddie, FHA has been encouraging the banks to refinance these loans through an alphabet soup of government sponsored programs.   In addition to these programs, Federal Reserve has pushed mortgage rates lower to encourage these defaulters to modified their loans instead of abandoning their homes in default.   The affect has been keeping these loanowners in their homes and thereby their homes off the market.  Without these efforts the banks have foreclosed on these defaulted mortgages and these homes would flood the market, pushing home prices lower.  The end result…[READ MORE]

During the 00's many countries inflated massive housing bubbles. The readers of this blog are well acquainted with the issues surrounding the US housing bubble, but Spain, Great Britain, and Ireland, among others also inflated painfully deflating housing bubbles. Norway inflated a housing bubble during this period, but after a brief pullback, they went on to inflate an even larger and more potentially damaging one. As strange as this may sound, I believe the root cause of this enormous problem is good governance and sound fiscal management. Unlike nearly every other government, Norway has managed its budget and resources well. Norway has massive oil reserves in the North Sea, and they have been carefully saving and investing the taxes they…[READ MORE]

The typical sources of housing demand are largely absent. In particular, first-time homebuyer participation is at near-record low levels. First-time bomebuyers only make up 29% of the market today, compared to 40% in normal times. Without first-time homebuyers, long-term homeowners are unable to execute move-up trades. This causes sales volumes to flag across all market segments. Some point to the lack of first-time homebuyers as a significant source of pent-up demand. For example, more Millennials are living at home than any generation in recent history. Perhaps that generation will step forward and begin buying houses, but they face some significant headwinds which may keep them out of the market for many years. Young homeowners sidelined by employment woes Unemployment up…[READ MORE]

The housing rally of 2013 is over. We are past the peak selling season, and although the year-over-year numbers will still show gains, we are entering the time of the year when seasonal factors drag prices and sales volumes down. If we were in a normal market, we would see price declines over the next 4 to 6 months. However, these are not ordinary times. The big question right now is whether or not the combination of higher interest rates and seasonal factors will cause a brief pullback in the housing rally, or if we just witnessed the peak of another housing bubble. Mark Hanson among others makes a strong case that we just witnessed the end of the rally…[READ MORE]

When policymakers are considering a change, they like to float trial balloons in the mainstream media to gauge the reaction. Recently, the FHFA proposed lowering the conforming limit on GSE loans. As you might expect, the industry insiders dependent upon real estate transactions are not excited by the idea. Today, I want to take an objective look at the impact of lowering the conforming limit nationally, and its specific impact on Coastal California real estate. The conforming loan limit is designed to provide government-subsidized loans only to lower and middle income Americans. Loans above the conforming limit are provided by private lenders in what's known as the jumbo market. During the housing bubble, the conforming limit rose as high as…[READ MORE]

In 2011 the market was extremely favorable to buyers. There was plenty of inventory, and the sellers were motivated to sell at whatever the market would bear. Banks were liquidating their own portfolios of REOs, and short sellers were allowed to complete their transactions without the banks asking for repayment of the shortfall. Plus, prices were falling and buyers were rare. As a buyer in those conditions, you could buy what you wanted without competition and get a good deal too. Then 2012 rolled around, and lenders made a number of policy changes which caused the market to abruptly shift from an extreme buyer's market to an extreme seller's market, almost overnight. Lenders stopped foreclosing on delinquent mortgage squatters, and…[READ MORE]

This a debate that is still being argued from the beginning of the bubble and I wanted to revisit on this blog.  I really wonder if this debate would be ever settled.  Other subjects such inflation or even the gold are continually debated between blog commentators.  Readers have strong opinion on these subjects, so I doubt the CRA debate, a similarly controversial subject will be settled any time soon.  Of course unless some sort of evidence the pops up and ends the debate. The theory is that Community Reinvestment Act that was passed in 1970's under Carter evolved over time into a  force that allowed mortgage standards to be relaxed to all segments of the mortgage market.  This one act…[READ MORE]

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