Archive for September, 2015

Interest-only mortgages rest on the border between Ponzi borrowing and safe borrowing, a purgatory on the edge of the abyss of insolvency. Debts are supposed to be paid off. People forget that simple fact and take on debt as if it is something to be endlessly serviced. Those that embrace the debt-service mentality dance on the edge of the abyss of insolvency. When the amount a borrower pays toward principal on debt is matched by taking on new debt, a borrower is merely treading water. When the amount of new debt exceeds the amount debt paid down, particularly if debt was used to pay debt, the borrower is Ponzi borrowing. There is a point beyond which a borrower cannot pay…[READ MORE]

Dodd-Frank accomplished much to reduce taxpayer risk, but more should be done to get taxpayers out of the mortgage insurance business. The US taxpayer insures over 70% of the mortgage market through the GSEs and FHA. This is an unacceptably high level of exposure, particularly given the multi-trillion dollar size of the US mortgage market. Reducing this exposure is difficult because removing the guarantees will increase mortgage costs, reduce loan balances, and make it much more difficult for buyers to finance today's near-bubble-peak prices, a major goal of lenders and loanowners alike. Any change to mortgage lending will disrupt the housing market, so any change must be phased in slowly. The overriding strategy should be to limit the growth of…[READ MORE]

In LA County, the rate of rental rate increase now exceeds the rate of home price appreciation. Both exceed the rate of wage growth. It costs too much to live in California because the chronic shortages of housing supply inflates California house prices and rents. Starting in the 1970s with regulations like CEQA, California began to restrict growth. This inhibited builders and developers from bringing new product to market to meet demand in many areas. Nimbyism became public policy, and as a result, we don't have enough homes, either rental or owner-occupied, to meet our needs. When any commodity is in short supply, prices tend to rise; rentals are no exception. There are not enough rentals to go around, so…[READ MORE]

How children react to foreclosure depends mostly on how their parents deal with the situation. Millions of families were displaced from their homes due to foreclosure, short sales, and strategic default. Since the foreclosures generally lead to an involuntary property eviction, many former loan owners are upset by the consequences for defaulting on their mortgage. Rather than accept the consequences for their mistakes, many who involuntarily vacated their houses portray themselves as victims deserving of special dispensation. Pandering politicians, mostly from the political left, have lobbied for increased loan modifications, foreclosure remediation, principal reduction, and other misguided policies to prevent those who defaulted on their mortgages from enduring the consequences for their actions. In 2012 in an attempt to generate…[READ MORE]

Fundamental value analysis predicts tepid home price appreciation as mortgage rates rise to historic norms. Will it prove a powerful tool, or a dismal failure? I began writing publicly about housing issues in February 2007 on the Irvine Housing Blog, but I was a frequent commenter on housing blogs prior to that. Since my education and work experience were in land development, I formulated detailed analytical tools to measure market value. Based on my own analysis, the housing bubble seemed obvious, and I set out to make the case to anyone who would read what I had to say. At the time, mainstream housing economists were busy denying the housing bubble. Most were collecting large fees to write reports in…[READ MORE]

Historically, properties in this market sell at a 9.5% discount. Today's discount is 12.3%. This market is 2.7% undervalued. Median home price is $507,000 with a rental parity value of $577,000. This market's discount is $70,000. Monthly payment affordability has been worsening over the last 4 month(s). Momentum suggests worsening affordability. Resale prices on a $/SF basis increased from $398/SF to $401/SF. Resale prices have been rising for 1 month(s). Over the last 12 months, resale prices rose 4.9% indicating a longer term upward price trend. Median rental rates increased $23 last month from $2,569 to $2,592. The current capitalization rate (rent/price) is 4.9%. Rents have been rising for 12 month(s). Price momentum signals rising rents over the next three…[READ MORE]

The 9/11 terrorists killed several thousand people, but banking terrorists destroyed the lives of millions, and they are still in power. Millions of families lost homes during the housing bust, and most of those families hate the bankers who threw them out of their family homes; however, that wasn't an act of terrorism as much as it was a mercy killing. Most of those borrowers were hopelessly indebted, and the foreclosure ended the pain. The real acts of terrorism perpetrated by bankers were not these mercy killings. Foreclosure roulette or terrorism? During the housing bust, well over 10 million borrowers quit paying their mortgages. Lenders foreclosed on millions of these borrowers, including more than a million in California alone, but…[READ MORE]

Securitizing liar loans will work out well for early adopters, but as these loans proliferate, they destabilize the market and lead to disaster. If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it. W. C. Fields Were liar loans an innovation we should revisit? Is there a good way to underwrite loans without verifying whether or not the borrower can repay it? Personally, I don't think so. When lenders underwrite new loans, one of the fundamental tasks they perform is determining whether or not the borrower can repay; therefore, allowing borrowers to simply state their income with no verification is an abdication of an underwriter’s responsibility. Stated-income loans (aka…[READ MORE]

The housing market can't absorb a sudden or large increase in mortgage rates without major declines in sales and perhaps even decreases in prices. In response to the housing bubble and bust, Congress passed the Dodd-Frank financial reform. These new mortgage regulations will prevent future housing bubbles by effectively banning destabilizing loan products with interest-only and negative amortization features because those loan programs enabled buyers to greatly inflate house prices from stable levels set by wages and mortgage rates. The toxic loan products banned by Dodd-Frank were invented to solve the problem of affordability. In a stable housing market, the equilibrium price is the highest price consumers can finance, so under pressure to complete more deals, lenders seek ways to…[READ MORE]

House prices in Irvine, California, reached the peak of the housing bubble, providing equity and relieving many underwater homeowners. The federal reserve in conjunction with government officials reflated the housing bubble to restore collateral backing to lender’s bad loans. Whether or not this is a good idea depends on your perspective. If you’re a renter whose tax dollars are being diverted toward this endeavor, these efforts are not particularly welcome. Renters receive no benefit from this intervention, and the resulting high home prices make it more costly for renters to become homeowners, so it’s a double whammy. If you’re a homeowner, it’s a very welcome government intervention. It costs homeowners nothing, and they get all the benefits. Whether or not…[READ MORE]

In Memoriam: Tony Bliss 1966-2012