Feb172012
Government intervention delays housing market recovery
I have repeatedly made the argument that government intervention is counterproductive. However, politicians and federal reserve policy makers either don’t accept this simple fact, or they don’t care. Politicians need to look like they are trying because doing nothing — which is the proper course of action — makes them look helpless and inept — which they are. The same is true for the federal reserve, but they also have a mandate to keep their member banks solvent. Most of the meddling in the markets has been done for that reason. Perhaps a few loan owners were saved along the way, but the real reason for most interventions is to keep the banks alive.
I am not the only one who noted the counterproductive efforts of policymakers. Today’s featured article is an interview with Sam Zell, billionaire investor.
Government Bailout Actually Hurt Housing Recovery: Zell
Published: Wednesday, 8 Feb 2012 | 8:56 AM ET
By: Jeff Cox — CNBC.com Senior Writer
Government intervention has prevented the real estate market from healing, with the commercial sector hit especially hard, investor Sam Zell said.
As sales languish and prices continue to fall, the head of Equity Group Investments and numerous other ventures pinned the blame on policies that refused to allow market forces to take hold.
“Rather than let the elements of the business world take care of the problems, we basically stopped the process of creating market clearing,” Zell said in a CNBC interview. “Had we allowed the market to clear without trying to stop reality…we would have a healthy housing market today.”
The delinquent mortgage squatters are dead weight. They pay neither rent nor a mortgage. Perhaps politicians find some economic benefit from the squatter stimulus, but with so many homes producing no viable income stream, the housing market is mired. We will not have a healthy housing market until the squatters are cleared out, lenders and investors recover their capital, and the house is put to productive use either by an investor receiving rent or an owner occupant making payments.
Since the financial crisis began in 2008, Washington lawmakers and President Barack Obama have launched a counterattack against the housing market’s collapse.
Most prominently, the administration implemented the Home Affordable Modification Program, aimed at helping as many as four million distressed homeowners refinance their mortgages at affordable terms. However, the program has reached only about one-fourth its original goal.
In his state of the union address, Obama pledged to expand the efforts to include even those buyers whose mortgages are not owned by government-sponsored enterprises Fannie Mae or Freddie Mac.
Policymakers are committed to failure. They will continue to attempt one foolish manipulation after another which will simply prolong the crisis. What’s worse, when its all over, they will point to their various manipulative policies as the cause of the improvement rather than the reason it took so long for the improvement to happen.
“It’s putting off facing up to reality,” Zell said in describing the efforts to halt foreclosures. “The longer we avoid clearing the longer we’re going to be living with this problem.”
Zell drew a distinction between the housing programs and the bailout efforts for big Wall Street financial institutions that he said were necessary to save the national economy.
“If our banking system didn’t work, the calamity is almost immeasurable,” he said. “So to try and equate coming in and in effect protecting the banking system with protecting the housing market is apples and oranges.”
The bailout he benefited from is okay, right?
While the foreclosure robo-signing scandal is played out in the courts and the housing market languishes, Zell said banks should take action.
“The first thing I would do is I would encourage lenders to move forward and exercise their legal rights, literally — not so much to hurt anybody but to resolve the issues,” he said. “Remember, we’re different from any other country in the world. We are the only country in the world where you can borrow money on a house and walk away from it.
Zell said he likely won’t be making any big investments in housing soon, as “execution” remains a problem when dealing with so many homes. Commercial real estate, meanwhile, remains problematic as well.
Don’t be surprised if he changes his mind when bulk portfolios become available. The main reason large private equity funds like his haven’t been buying up single-family homes in beaten down markets is because it is difficult to put large sums of money to work. Imagine trying to buy a billion dollars worth of $100,000 homes one at a time.
During the downturn in the early 1990s, Zell said he advised “stay alive until ’95.” Now, his mantra is “come clean by ’13.”
“Commercial real estate still has another couple years to get its act together,” he said. “That’s literally the point at which all of these extensions and other stuff get cleared out. Because otherwise you’re going to have a commercial real estate market that doesn’t work.”
Nowhere has the amend-extend-pretend dance been more ridiculous than with commercial real estate. Many private equity funds formed in 2008 and 2009 to be ready to clean up the debris from the collapsing credit bubble, and many of them had to shut down for lack of properties. Rather than clear out the market, banks launched amend-extend-pretend, and they are still dancing today. Nobody’s quite sure how this will work out in the end, but everyone knows the market is totally dysfunctional, and values on everyone’s books are a complete fantasy. Will they be able to maintain denial long enough for the market to come back? History is not on their side.
[…] -Government Intervention Delays Housing Recovery (OC Housing News) […]
Obama’s Budget Calls for $61B from Banks
President Obama’s budget proposal continues to receive a barrage of criticism, especially from Republican lawmakers.
Obama specifically targets banks through a Financial Crisis Responsibility Fee, through which he intends to raise $61 billion from the nation’s largest banks.
The money is intended to “compensate the American people for the extraordinary assistance they provided to Wall Street, as well as to discourage excessive risk-taking,” according to the budget proposal.
A portion of the fees collected from the big-bank tax would be used to fund the mass refinance program outlined in the president’s State of the Union address. The fee would be assessed against firms with assets of more than $50 billion and would be paid over a 10-year period, starting next year.
“The Administration continues to actively implement ongoing Troubled Asset Relief Program (TARP) activities targeted to assist homeowners threatened by foreclosure, including unemployed homeowners and those with negative home equity,” Obama goes on to declare in the budget proposal.
He specifically mentions the $10 billion in savings brought to American homeowners through HAMP, although after
three years this program still falls short of its original goal of reaching 3 million to 4 million homeowners in its first two years.
As of December, about 910,000 loans had been permanently modified through HAMP.
The Financial Executives International, an industry organization for senior-level financial executives, released a statement this week expressing concerns about the budget’s increased taxes on American businesses and “American job creators.”
“Unfortunately, aspects of the President’s proposals to increase revenue would harm American job creators as well,” states the group’s president and CEO, Marie Hollein.
“FEI observes with concern that the budget proposes roughly $450 billion in tax increases on American businesses over the next 10 years,” states a press release from Financial Executives International.
House Budget Committee Chairman Rep. Paul Ryan (R-Wisconsin) has also been outspoken about Obama’s tax increases and calls attention to the budget’s net increase in spending.
“So we’re going to tax our most successful job creators, where most – more than half our jobs come from in America – at about 45 percent next year?” he asked on CNBC’s Kudlow Report.
Ryan says that while the budget may call for deficit reduction in some areas, overall it requires a net increase in spending.
Furthermore, he says the budget’s $1.9 trillion tax increases “will make it harder for businesses to create jobs and for workers to spur economic growth.”
Like other Republican congressmen, Ryan commented on the show, “This is really more of a campaign document than a credible fiscal solution to our big budget problems.”
The best, and most productive way to deal with these TBTF banks is to break them up into regions and then reinstate Glass Steagall. But the idiots in charge of dictating policy say that would be too harmful to our markets, and send us back to the ice age. Is it smart for the economy to be addicted to high risk?
Once you understand that the political class serves the banking class, who serves the interests of their shareholders, it all makes perfect sense.
If the widget company screws up it usually just affects it industry and related suppliers and markets.
However, when the financial industry screws up, it threatens to shut the financial system any and all business that depends on to conduct Commerce. That is basically everyone!
In 1997 in grad school we discussed TBTF, and we talked about there isn’t enough money to cover BofA if it defaults. Fast forward 10 years Lehman, Bearsterns, AIG, Fannie, Freddie, etc.
The risk…to me…doesn’t outweigh the reward.
Just wait till the price control phase of the nationalization process kicks-in. The phrase bag holder will have a whole new meaning, especially amongst those ‘players’ who at one point, thought of themselves as… savvy.
What is a “healthy housing market”? Is it one in which the average buyer can finance a house with 20% down at a monthly cost less than equivalent rent? Then aren’t we there in 90% of cities? So isn’t housing healthy?
These rich talking heads are almost as annoying as politicians and political talking heads. They say whatever supports their team regardless of how stupid, ignorant or hypocritical it proves them to be.
He supported bailing-out the banks due to the consequences of not doing so. Yet somehow, with his crystal ball, he knows that the if we’d just allowed the entire housing/mortgage industry to collapse, the economy would have been just fine. Great. Thanks for the opinion. You’re full of s#$%, but thanks anyway…
“Is it one in which the average buyer can finance a house with 20% down at a monthly cost less than equivalent rent? Then aren’t we there in 90% of cities? So isn’t housing healthy?”
As far as that goes, yes. Once we work through the backlog of foreclosures on those not paying their mortgages and put those properties in the hands of people who are paying their mortgage with 20% equity and fixed rates, then the housing market will be healthy.
“As far as that goes, yes. Once we work through the backlog of foreclosures on those not paying their mortgages and put those properties in the hands of people who are paying their mortgage with 20% equity and fixed rates, then the housing market will be healthy.”
When was the last time the coastal OC market was healthy, by those standards? 1970?
Sometimes I wonder if we’re putting “normal” and “healthy” on a pedestal, when it hasn’t existed since Prop 13 shifted the dynamics of the market.
We had a healthy housing market from 1994-2001, then toxic financing began to take over, and prices became inflated. If ARMs and interest-only and negative amortization products don’t proliferate, the market will remain healthy.
Sorry, but it’s not possible to have a ”healthy market” as long the funding mechanism that supports housing remains in a state of collapse.
Please explain how the funding mechanism that supports housing is in a state of collapse? The GSEs have cost the federal balance sheet $100B+ to date and likely more to come. Are you suggesting our federal government is unable to withstand that minuscule hit (relatively speaking)?
Our housing finance system is 90% government planned and provided right now. If/when they slowly reduce their position, rates and terms will be more costly. But “collapse”?
you actually explained it quite well in the last paragraph of your post; ie.,
”Our housing finance system is 90% government planned and provided right now”.
Right, so if the housing finance system is in a state of collapse, then so is our retirement mechanism since 90% of retirees depend on SSI. Actually, you would have to find a much more dire term to define SSI since its liabilities are growing and HUGE relative to our GDP.
This is good news:
More Than 95 Percent of Refinancing Borrowers Choose Fixed-Rate Mortgages
Trend Toward Shorter Loan Terms At Highest Share Since 2003
MCLEAN, Va., Feb. 14, 2012 /PRNewswire/ — In the fourth quarter of 2011, fixed-rate loans accounted for more than 95 percent of refinance loans, based on the Freddie Mac (OTC: FMCC) Quarterly Product Transition Report released today. Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.
News Facts
An increasing share of refinancing borrowers chose to shorten their loan terms during the fourth quarter. Of borrowers who paid off a 30-year fixed-rate loan, 43 percent chose a 15- or 20-year loan, the highest such share since the first quarter of 2003.
Fifty-eight percent of borrowers who had a hybrid ARM transitioned to a fixed-rate loan during the fourth quarter, while the remaining 42 percent chose to refinance into the same type of product.
Quotes
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist
“Fixed mortgage rates averaged 4.00 percent for 30-year loans and 3.30 percent for 15-year product during the fourth quarter in Freddie Mac’s Primary Mortgage Market Survey®, well below long-term averages. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.2 percent during the fourth quarter of 2011. It’s no wonder we continue to see strong refinance activity into fixed-rate loans.
“For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.7 percentage points lower during the fourth quarter. And for borrowers who plan to remain in their current home for only a few years, the hybrid ARM allows for even a greater interest-rate savings. The initial interest rate on a 5/1 hybrid ARM was about 1.1 percentage points lower than on a 30-year fixed-rate loan.”
Quarterly Product Transition Information
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans and the latest loan is for refinance rather than for home purchase. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions. During the fourth quarter of 2011, the refinance share of applications averaged 81 percent in Freddie Mac’s monthly refi survey, and the ARM share of applications was 7 percent in Freddie Mac’s monthly ARM survey, which includes purchase-money as well as refinance applications.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.
It’s actually a misallocation of resources when you realize on average people move every 7 years. When I bought, we locked into a 30 yr fixed, but that’s because I plan to keep the property for 20+ years. Anybody planning to move in 14 years or less should really be looking at the appropriate adjustable rate product for their timeframe. They would get the dual benefit of less interest paid and higher principal amortization each month.
http://www.talkirvine.com/index.php?topic=1588.msg19115#msg19115
This is a good thread expaining how a 7 yr ARM has a break even point with a 30 yr fixed in year 11 of the mortgage.
“The same is true for the federal reserve, but they also have a mandate to keep their member banks solvent.”
Once the public understands what the mandate, they will understand who the policy is designed to help.
Rent might may continue to increase due to inflation of property upkeep.
Keeping squatter in their house helps the banks and squatter, but underminds the community and neighbors. Do you expect squatters to make improvement to the property or do upkeep?
“Do you expect squatters to make improvement to the property or do upkeep?”
Squatters and underwater homeowners rarely make improvements. Squatters don’t keep up on basic maintenance.
I don’t quite agree this is all about servicing the banks. In the first place, politicians benefit much more from industries that are very tightly regulated and whose bottom lines depend critically on political access (= donations to my re-election campaign). I think Team Obama, for one, is very interested in keeping banks on a lifeline — not sick enough to die and go out of business, of course, but also not healthy enough that they no longer need government help (or are no longer sensitive to government regulation).
Hence the give with one hand (mortgage forigveness) and take with the other (fees on big banks). Notice how Peter is robbed to pay Peter’s own customer Paul? Peter is now very highly depending on that throughput from his right pocket to his left — through the US Treasury that is — being kept open and clear of obstructions. He will be carefully donating to the re-election campaigns of those who will keep the flow unobstructed.
Second, consider the possibility that some of these assistance to housing programs are *designed* to fail. Why? To keep the *main* “assistance” program, which is ZIRP by the Fed, turned on. Keep in mind to do that they have to ignore the blowback from seniors, savers and other investors pissed that their “safe” bonds and CDs and whatnot are earning essentially negative interest right now, as well as the very real threat of inflation and the anger of our international partners who are seeing this as a currency game, driving the dollar down.
But as long as the housing sector is “in trouble” there will be broad-based popular support of low interest rates, more than enough in the middle class to allow Congress and the Administration to ignore the muttering among investors, savers, senior and our international trading partners, and the Fed policy can continue.
And WHY does government want so very badly for the Fed to be keeping interest rates low low low? Because it is ONLY that way that the borrowing the Federal government is doing is even the least bit sustainable. Let interest rates rise to 6 or 7 percent and the Federal deficit would absolutely explode, and you could extremely easily have a serious bond and/or currency crisis. There’s no way it can happen before November’s election, at the very least, because it would cost Obama his job.
All the homeowner assistance programs are just fluff, and it would be naive to believe policymakers don’t know that. The serious issue is interest rates.
I am also deeply skeptical that this supposed sale of large groups of distressed houses to investors is going to work out. To be a successful landlord, it strikes me that you need to know the rental market for your properties quite well. Otherwise you’re going to price stupidly and get screwed.
All successful landlords, in my experience, are either small operators — so by definition they know their few properties and markets well — or, like TIC, they run a compact mass of very similar properties in a geographically focussed market. I’ve never heard of a successful landlord operating a wide variety of properties thinly scattered over a broad geographical area.
And yet that’s the proposed idea here. Somebody’s going to buy 500 houses scattered all over Orange County — some big, some small, some in pristine shape, some beat to hell, some in good school districts, some in awful — and then successfully price *each and every one* at the right point for their individual markets? Sounds….iffy. I can very easily see them getting totally beat at the game by small local operators in each market.
If that happens, they’ll have little choice but to sell and get out of the game (or perhaps sell and buy to consolidate in one focussed area) and then kazam the properties are back on the market. (“Must hold” provisions aren’t going to work, I think, because any fool going into this game would naturally form a separate corporation for the purpose, and if necessary that separate corporation can simply go out of business and sell its assets off. There’s nothing the law can do about that because you can’t force a business to stay in business.)
I’m not saying it’s necessarily impossible. But if it were very plausible, I’d think we’d already have seen such operations. Investors aren’t stupid. If all that was stopping you from buying a sweet, sweet stream of steady rental income across 3 states was finding $1 billion in capital and hiring a bunch of out of work real estate agents to go snap up distressed properties in cash — I think it would’ve been done already.
The fact that it’s not been suggests to me that there’s a good reason why not, and the obvious reason why not is that it takes good local knowledge to prosper in the rental business, which suggests only small local operators will prosper.
Still, it may be preferable for policymakers for XYZ Rental Corporation to go out of business and dump a bunch of properties on the market in 5 years than for a bunch of single moms struggling to raise adopted Down’s babies (or whatever) to get foreclosed on this year.
Very good post.
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