Apr032014
Do lenders care about keeping delinquent borrowers in their homes?
Lenders only care about borrowers making payments, not borrowers continuing to live in houses purchased with the lender’s loan money.
Many borrowers and housing advocates suffer the delusion that lenders act out of compassion when borrowers become delinquent. Borrowers and activists believe lenders should concern themselves with the borrower’s unique life circumstances and allow delinquent borrowers to keep living in houses they aren’t paying for out of compassion. Undoubtedly, some bank employees feel compassion for delinquent mortgage squatters, but banks are running for-profit businesses, not non-profit charities; therefore, bank policy must be focused on maximizing revenue and profit rather than providing social services for needy borrowers.
I recently read Ayn Rand’s Atlas Shrugged, Ayn Rand’s manifesto on objectivism. The book relates the story of the court battle, Amalgamated Service Co. v. Mulligan, in which the banker Midas Mulligan was ordered to extend a loan to borrowers he believed would become delinquent because the judge felt extending them the loan was the compassionate thing to do. Rather than start making loans that would bankrupt the bank, Midas Mulligan shut it down. Lenders have a duty to their shareholders and depositors, and letting delinquent borrowers tie up bank capital without providing any return is antithetical to banking operations.
On the other extreme, It’s a Wonderful Life, portrays the actions of Banker George Bailey, who ran his bank as a communist collective where small depositors banded together to provide sufficient capital to make home loans for the betterment of the community. When depositors made a run on his bank, George Bailey made this famous speech:
Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.
It isn’t hard to guess what George Bailey would think of REO-to-rental businesses or too-big-too-fail banks, but I wonder how George would deal with a deadbeat. His collectivist idealism would be a magnet to freeloaders looking for a free ride based on their self-perceived need.
Both the examples above are idealistic extremes of banking. Atlas Shrugged is the conservative ideal of unrestricted free enterprise for personal benefit, and It’s a Wonderful Life is the progressive ideal of collectivist action for the greater good. Out of necessity for financial survival, modern banking functions far closer to the Atlas Shrugged extreme.
A Banker’s compassion must be bought
Borrowers and housing advocates want bankers to allow delinquent mortgage squatters to live in houses they aren’t paying for until the borrower gets on their feet financially, which really means indefinitely. Then, if the borrower is unable to make the contractual payment, these same borrowers and advocates expect bankers to unilaterally amend the terms of the promissory note in favor of the borrower at the expense of the banker and the bank’s investors and bondholders. The banker is supposed to happily absorb this blow out of compassion for borrowers who’ve fallen on hard times. Since so many borrowers were underwater, and since foreclosure would result in a huge loss, bankers played along by offering loan modifications.
Bankers don’t offer loan modifications out of compassion. They may pretend to for public relations benefit, but bankers offer loan modifications in order to get some cashflow out of non-performing loans they can’t foreclose on because the collateral is still worth less than the outstanding balance on the loan. The bank is between a rock and a hard place, and getting something is better than nothing. The obvious next step is for the bank to rescind the loan modification entitlement as prices near the peak. Realistically, the only reason they are modifying those loans now is because foreclosure is more costly.
Christopher Whalen: So what is today’s nonbank business model?
Regulatory pressures amount to legalized extortion
March 28, 2014
… “One of the factors causing the foreclosure crisis to sludge along and even to large degree run-in-place, is the amount of misinformation that has been allowed to proliferate throughout the country,” notes Martin Andelman, host of the “Mandelman Matters” program and a keen observer of the industry.
He continues:
“As time passed and the crisis worsened, absent any factual communications to the contrary, the problems of correlation and causation started to multiply. Georgetown Law professor Adam Levitin and Tara Twoomy, in an effort to explain what was happening to homeowners, published a paper in 2010 titled Mortgage Servicing, that became the gospel for consumer attorneys and then homeowners across the country… and it remains so today. The problem is the paper’s conclusions were wrong.”
The basic thrust of the Levitan Twoomy paper is that mortgage lenders and servicers want to push home owners into foreclosure, gain control over the homes and thereby profit. This fundamental error — that it is good business to push a homeowner into foreclosure – is repeated constantly in the Big Media …
Anybody with even the slightest idea about the world of distressed servicing knows that the law now requires that loan modification is the first order of business when a borrower gets into trouble….
If and only if the borrower is also underwater. Lenders may be legally obligated to consider a loan modification, but the answer will universally be “no” when there is equity and the bank can get it’s money back and loan it to a borrower who will pay in accordance with the promissory note.
If you actually know the world of distressed servicing, there are three golden rules when it comes to a non-performing loan.
First is keep the owner in the house.
Second is protect the asset and make sure that maintenance, taxes and insurance are current. And third is to preserve the cash flow of the loan via loan modification, if possible.
Keeping the family in the house and protecting the asset and cash flow, even with a substantial modification, is always better for the note holder, whether that is Uncle Sam or a private investor.
Notice the focus is on protecting cashflow. Compassion for the plight of borrowers is not on the agenda.
“Hero” foreclosure attorney slams Christopher Whalen, mortgage servicers
March 28, 2014, Thomas Cox
Mr. Whalen,
You and Martin Andelman simply haven’t a clue about what you are talking about.
I know that Martin does not go to court, and I doubt that you have any practical experience in the real world of foreclosures.
I train lawyers all over the country.
I speak to lawyers all over the country every day.
I go to foreclosure mediation often and I go to court often.
Your theories simply do not match reality.
There is daily and massive evidence in our dealings with the servicers outside of court, in our foreclosure mediation programs and in our court cases, that the servicers could care less about keeping homeowners in their homes. In fact, in a high percentage of cases where homeowners are demonstrably able to afford loan modifications that would benefit investors, the servicers work their hardest to deny those modifications.
The only thing shocking to me about the revelation that servicers could care less about keeping delinquent mortgage squatters in their homes is the idea that someone thought they would care — or even that they should care. Servicers should care about the interests of the investors in the loans they service.
Don’t go blaming the homeowners for this–I am referring to huge numbers of cases where they have either housing counselor assistance or legal assistance, where complete loan modification applications are submitted, and where the servicers, in defiance of the National Mortgage Settlement and now in daily defiance of the new CFPB regulations, fail to review the applications and wrongfully deny them.
Martin Andelman excuses the servicers, claiming that “it is hard” for them to do modifications. They have had more than five years now to do it right. The reality is that they are unwilling to invest in sufficient resources to do it right, because doing so will eat into their profits.
So who is right? Chris Whalen claims it’s in an investor’s best interest to modify the loan, and Thomas Cox says servicers are foreclosing because investors want them to. The real problem is that both of them can be right at the same time because we are very near the dangerous tipping point in favor of foreclosure.
Loan modifications carry a cost: Lenders could loan money to new borrowers at 4.5% in today’s lending environment, so each loan modification where they accept 2% creates an opportunity cost. … The only reason lenders allow borrowers to pay 2% when the going rate is 4.5% is because they would lose more money foreclosing than they would gain extending a new loan; however, once that calculation tips the other way, lenders will stop can kicking, and borrowers will either pay up or get out.
… as appreciation slows down, as lender’s costs go up, as lenders become strong enough to absorb losses, lenders will reach a tipping point where foreclosure makes more sense than can kicking or squatting.
Christopher Whalen: A rebuttal to consumer advocates generally
April 1, 2014, Christopher Whalen 
Consumer advocates conveniently forget that in the vast majority of cases, the “victims” of foreclosure abuses, real or imagine, have defaulted on their promise to repay the mortgage. They borrowed money to buy a home and now they are reneging on that solemn promise to repay the debt. Indeed, not content with their clients defaulting on the mortgage, consumer advocates want to further injure the note holder by allowing their clients to live in the house for free, sometimes for years. …
Obviously, reminding people that delinquent mortgage squatters are delinquent doesn’t serve the public relations interests of advocates, so this fact is always conveniently omitted.
The pre-2007 mortgage market was designed to move money around, not to care properly for consumers or service distressed mortgages. The big bank servicing operations were built on the assumption of zero defaults. As a result, the big banks are losing billions of dollars per year on mortgage servicing, one reason they are so desperate to sell these loans. …
Mortgage delinquencies much higher than reported because lenders are selling their non-performing loans. Also, the losses from all this servicing cost is pushing us toward the dangerous tipping point in favor of foreclosure.
Loan modification not only helps the borrower to repair their credit standing, but helps to preserve or restore the cash flow coming to the servicer and the note holder. When the borrower defaults, the servicer is required to pay the property taxes, insurance and in some cases the interest and principal due to the note holder. So a loan modification is always a superior choice vs. a foreclosure. …
Sadly, consumer advocates and many people in the regulatory community think that the many acts of stupidity committed by the TBTF banks are the rule for the entire mortgage industry. If people like Tom Cox and Adam Levitin actually took the time to understand how a compliant special servicer behaves in today’s mortgage market, they might change their tune – but I doubt it.
I doubt it too.
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This reveals much about a realtors mindset. In a realtor’s world, affordability has nothing to do with house prices; it’s all a matter of financing. Idiots.
Realtors to FHA: Your mortgage insurance rates drive buyers away
Citing a growing concern that homebuyers may be priced out of the market by the Federal Housing Administration’s mortgage insurance requirement, Steve Brown, president of the National Association of Realtors, sent a letter to FHA Commissioner Carol Galante asking the FHA to relax its mortgage insurance rules.
“I am writing on behalf of the one million members of the NAR with concerns about the FHA’s high annual mortgage insurance premiums and mortgage insurance that is required for the life of the loan,” Brown says in his letter. “Home purchases are becoming increasingly out of reach for many qualified borrowers who rely on FHA financing.”
Brown cites the losses suffered by the FHA’s Mutual Mortgage Insurance Fund during the housing crisis. “Now that the MMI Fund is on a path to recovery, NAR urges FHA to lower the annual mortgage insurance premiums and eliminate the requirement that mortgage insurance is held for the life of the loan,” Brown says. “This will slow the rate of prepayments that are having a negative effect on the fund.”
Brown’s letter says that in 2014, FHA fees make up nearly 25% of a monthly mortgage payment. On a $150,000 loan, at 4.5%, the mortgage payment is 13% higher today than it was in 2008.
Brown’s letter claims that as many as 125,000 to 375,000 prospective buyers were priced out of the market in 2013 by the FHA’s high insurance premiums and mortgage insurance requirement.
it’s all a matter of financing. Idiots.
The buyers or the agents? 🙂
Maybe I’m naive, but frankly, I’ve never understood PMI. This is a very costly and inefficient way to lay off default risk. I would understand if if I were able to borrow at the Fed funds rate + PMI.
The ridiculous cost of FHA financing is apparent in the daily featured property profiles. I calculate the cost of ownership with FHA and conventional financing, and the FHA insurance makes it a much more expensive alternative.
An interesting facet if the increased FHA costs which is special in CA is the lack of meaningful earthquake insurance.Bear with me.
Frankly, I find it amazing that lenders do not require meaningful EQ insurance in CA – a “big one” could result in thousands of “jingle mail” defaults, enough to bring down the global banking system all over again, but I digress.
Let’s not debate the ethics of it, but suffice it to say that for me personally, strategic default has zero moral component(full disclosure, I am a former commercial banker). Whether I would be willing to lose 200K just to protect my credit rating for a few years is not even a serious question.
Therefore, at the right price, 3.5 % FHA financing is theoretically attractive because in the absence of EQ insurance without huge deductibles, it represents a kind of “earthquake put”. I would even be tempted at the right price and interest rate to withdraw equity simply to maintain the put.
Of course, now that FHA is so expensive and opportunity cost is low, I doubt that this would pay out.
There’s nothing to debate. There’s nothing honorable about breaking your contractual promise, especially when you’re capable of fulfilling it.
If your house collapses in an earthquake, and it would cost $400,000 to replace it, and if insurance doesn’t cover it, most people don’t have the capability of replacing it. That’s exactly what would cause the rash of jingle mail.
Cute that you do as they say, but not as they do – or so you imply. The social contract is dead; only a fool would pretend otherwise.
What I love most about bankers and the idle wealthy is the belief that they should be paid simply for granting access to money. But this is not the case. The spread you are earning is for taking risk. Whether that risk stems from capacity, collateral, or character is no mind however you may wish to self-righteously characterize it.
So if the trite utterings of cricket morality have concluded, what is your take on the state of EQ insurance in CA?
You, sir, are what is wrong with society. Contracts are entered into with a certain amount of trust, otherwise the system would cease to function. It’s called a Promissary Note because the borrower is promising to repay the loan. Defaulting due to hardship is one thing, but what you are endorsing is theft. Just because you can get away with stealing from others, doesn’t make it moral.
It is called a promisory note also because if you do not pay the loan off the bank promises to take the collateral back.
Businesses default on their loans all the time, and not just because it is unaffordable, but because it is a losing $$ venture. The sooner you realize people are not any more morally obligated to a loan than a business trying to further it’s economic interests, the better off you will be.
Free market, do what is best for you, as a free agent in the free market!
Funny, my comment about the idle wealthy expecting to get paid for mere access to money must have really struck a nerve…
MR, with all the more troubling things to remedy in our society, that you think that stiffing a bank who should have understood the risk is among the most serious suggests that *you* are what is wrong with society. Nothing but money flowing through your veins.
Anyone who thinks that contracts are about trust is a fool. Ongoing business relationships are about trust, but purely transactional contracts are about the viability of legal recourse – end of story. The few contracts I have entered into in my early days based on trust – exclusively with “respectable” folk, BTW, because of their “respectability” – left me very sorry indeed.
Banks’ legal recourse is with the property. Failing to ensure the viability of their collateral by failing to curb lending when prices are becoming unsustainable, failing to insist on a reasonable amount of skin in the game, *and failing to ensure that the collateral is not lost in an earthquake* is the risk banks are taking, risk which is self-inflicted and entirely avoidable. I have zero enmity for people who walked away as a purely financial calculation. Had I been in their position, I would have done the same and happily admit it.
But let’s play your game for a minute. Morality emanates from the top, what other need is there for a “god” or for the moral imperative of the state? Sadly, our leaders have none, that’s clear. Businesses (who are people too) have none – do you really trust Bank of America based on its moral character? Ludicrous. Sadly, the “great and the good” have none either. Quick example: there was / is a major concern located near Lake Tahoe which had been jointly acquired by the founders of an apparel empire and several tech titans as their private plaything. This concern is ticking over, but a ton of money will be needed to refresh the infrastructure and equipment in the coming years. Billionaire club proceeds to bankrupt the joint – leaving many small / mid-sized contractors and suppliers twisting in the wind. Only then do they make the needed investments (no, I am not in anyway connected to this episode). This sort of thing happens at large and small scale all the time. Is it moral?
If you are looking for a cause of the breakdown of our society which you perceive, you might look in the mirror. Because the fact is that the wealthy and powerful have a unique ability to maintain, renew, or destroy the social contract. Behavior in our society is governed by the incentives implemented, and the illusion – at minimum – that there are things which are simply “not done”. But the wealthy and powerful in this country have lost sight of the necessity of maintaining this illusion, and now the horse is out of the barn. Most people can see that it’s one rule for some and one rule for the others, and rational people will not play ball. Now combine that with the high-stakes winner-take-all nature of American society. Americans don’t have the luxury of a meaningful safety net, and so cannot afford the luxury of believing that form is more important than success, because the consequences of failure are so grave.
if it is homo economicus you want, it is homo economicus you shall have. Welcome to the jungle of your own creation. Would you like a Pepsi with that? Enjoy, and have a nice day!
Theft is theft. It doesn’t matter if it’s a bank or a borrower that commits it. Morality isn’t determined by your position in society either. Your take is that because one group acts in an immoral fashion, it gives everybody carte blanche to act in the same way. Sorry I don’t agree. That type of thinking will destroy the fabric of society.
Then I would be a thief. But the reality is that its unlikely that either of us will ever be put in that position, so it is impossible to know whether our deeds will match our words.
What is sad is how easy it is to get some in this country to jump to utterly unactionable moral hysteria to the exclusion of a real actionable issue. Am I only imagining that there is a not completely insubstantial risk in some areas of getting your house knocked down by an earthquake without any adequate means of insuring against it, or are you in denial?
The potential cost of the inevitable will make hurricane Sandy look like a rounding error. If this should occur at a time when a large proportion of victims have little to no equity in their properties, this would surely bring down the entire banking system for reals this time (I know it’s unamerican to acknowledge anyone as a victim, but despite my best efforts I can’t think of what to call those who might be negatively impacted which would imply that the earthquake was their own personal responsibility).
A a nation we seem to be taking flood insurance somewhat seriously – forgetting about fatcat-owned projects using political favor to get their properties re-designated in order to lower their premiums at the expense of their less wealthy neighbors (a well documented occurrence).
I never assumed that the free market would magically solve the problem, but given that banks are exposed to so much collateral risk and that there is substantial demand for a meaningful level of coverage, is this really the best that the State of California can do???
This is a governance failure on the part of the state and a failure to address moral hazard and systemic risk on the part of banks which truly deserves your moral outrage. And guess what – unlike changing human nature, this is a problem which is solvable.
“Theft is theft. It doesn’t matter if it’s a bank or a borrower that commits it.” -MR
What exactly was stolen?
You are being hypocritical in your statement…
READ THE CONTRACT!
Last I checked the lender also signs the contract, they also make promises in the contract
pay x amount, and in 30 years you “own” the property…Fail to pay at any point in time, the bank repos the property!
Let me ask you this, then.
Say someone made all but the very last payment on their mortgage, 359 payments (they have 99% equity) cannot make the last payment, try to hold on, do not want to sell for whatever reason, the bank forecloses and seizes the property…
Did the bank just steal the property and/or the equity of the loanowner?
My answer: “No”
The bank followed through with the rules of the contract that both parties entered into
Mellow Ruse,
I wish you had been around for all the discussions on strategic default back when it was more common.
Like some others who commented, I completely disagree with your point of view, but since I know you work in banking, I can understand why you think that way.
I wasn’t aware the MR works in banking; I assume on the retail side of the fence?
On the commercial side, we always assumed that a borrower would attempt to loot the business and “strategically default” the moment it suited them. That is why all we really care about it is the viability of the collateral and the likelihood of having to pursue it which is based on our assumptions about the future cash flow of the business, furthered by the covenant package. There was never any “trust” involved. I’ve never understood why folks on the retail side do not make the same assumptions, because the excuses are virtually the same – “I have x employees and their families counting on me” / “I have x mouths to feed and put through college”. Maybe its simply more work than the retail side can bear to do the kind of due diligence and ongoing surveillance which is the norm in Commercial. If you can lean on “trust” and “morality” and “what if everybody did that”, etc and people are actually buying into it, well I guess it saves a lot of effort bothering with sound lending practices, the lazy buggers.
True story – keynote speech at the Risk Management Association’s 2009 +/- (think it was in Orlando) conference was about how back in the old days, loans were made on the basis of something called “the 3 C’s credit”. Hilarious. I nearly fell out of my chair.
Sympathy for these banks = 0, strategic defaulters did just what you should have expected. Do the job right, and you won’t have to concern yourself with society’s flagging sense of morality.
this is somewhat true, I had a foreclosure 3.5 years ago have since re-established and saved up a 20% down to hopefully buy again and not have to pay PMI, but FHA, the only loan I qualify for has mandatory PMI and MIP that totals $500 additional per month, making rental parity no where close and making the payment to the point where it no longer makes sense to pursue buying with prices are what they are now. W/O the PMI and MIP I would be much closer to parity and trying to buy
UCLA Anderson Forecast blames the weather for our economic woes. And as if to underscore that they really have no idea what they are talking about, they blame the drought in California for our problems. WTF?
Economic Outlook Positive for Spring Season
As it turns out, the entire U.S. economy has been suffering from seasonal affective disorder. According to the UCLA Anderson Forecast, the one-two punch of harsh winter weather in the East and a nagging drought in the West (namely California) stalled industries from real estate to factory production, putting a tight chokehold on the national economy.
However, according to its latest economic outlook report, released Wednesday, Anderson expects the national GDP to growth by roughly 3 percent now that warmer and wetter spring weather is on the way. Moreover, as the GDP rises, increased housing and business investments and consumer spending should keep that growth rate steady through 2016.
Accordingly, as the U.S. GDP grows, so should grow job opportunities and salaries. In March, Freddie Mac announced that it expects home sales to grow along with wages this year, despite a still-tough job market in most sectors. Mirroring UCLA’s GDP predictions, Freddie is projecting a 3 percent rise in home sales and a 20 percent rise in new home construction in 2014, which the agency expects to level out to a 5 percent overall growth.
In the Wednesday report, UCLA Anderson Forecast senior economist David Shulman stated: “We can visualize the economy creating between 200,000 and 250,000 jobs a month, with the unemployment rate dropping to 5.4 percent by late 2016. Total payroll employment will surpass the prior 2007 peak, but the economy will remain well below its pre-Great Recession growth path.”
Shulman’s words echo Freddie’s, which stated last moth that construction and manufacturing jobs, though still struggling, are on a steady rise. Construction is roughly 80 percent of its 2007 peak and manufacturing at about 90 percent, according to Freddie.
Shulman also expects the core consumer price index to increase from 1.8 percent (its 2013 low) to 2.5 percent by 2016. This uptick in inflation, he said, should bring a corresponding‒‒and much welcomed‒‒ rise in salaries nationally, as much as 4 percent this year. This, of course, bolsters a recovering housing market as more money and more stable jobs generate more interest in homebuying among U.S. workers.
Shulman also said that the Federal Reserve’s long experiments with zero-interest rates and quantitative easing are slowly waning. He expects that the monthly bond buying program, once at $85 billion and now at $55 billion, will essentially ground to a halt by September. “We forecast that the Federal Funds rate will rise, to use ‘Fedspeak,’ at a measured pace, reaching 3 percent by the end of 2016,” Shulman said.
Specific to California, UCLA Anderson Forecast senior economist Jerry Nickelsburg that the state’s lingering drought choked its four main economic engines‒‒agriculture, fisheries and the environment, households and industry‒‒but not beyond what Californians are long used to.
“Overall, the state is not likely to be greatly impacted,” Nickelsburg said. He expects the state’s total employment to grow by more than 2 percent for the next three years.
Does cold weather ever impact the economy or housing? Do retail sales fall at the mall if no one can get there?
Does lack of water drive up food prices? Does food price inflation affect discretionary income and thereby affect consumer spending?
All of the above questions can be answered: Aye. But it really is a matter of degree. Does weather affect the economy: a) not at all, b) somewhat, or c) significantly. Well, I think the degree of the effect is proportional to the degree of the cause. More severe weather will have a more severe effect. But even the worst weather may not significantly affect national GDP. There are always pockets of severe weather that might rise to national levels: Katrina, Superstorm Sandy, Northridge earthquake, or mid-west flooding.
Local storms like tornadoes can devastate local economies, but the national effect is limited. If commerce is affected in a significant way for a long time, then GDP will fall. As long as goods are flowing and consumers are buying then weather is not significant. If ports are impacted, then weather is a big issue. I don’t remember any ports being impacted this year, however.
My gut feeling is that the weather has affected consumer spending and consumer costs somewhat this winter. I think higher taxes and Obamacare have also affected consumer spending somewhat. Higher mortgage rates and housing prices have also affected consumer spending moderately. And reductions in federal spending have also had a chilling effect on business expansion.
Add them all together and I would expect a moderate drag on growth – which is what we have. If the weather improves, mortgage rates and housing prices stabilize, and federal spending stabilizes then the economy will respond positively.
The big question in my mind is what happens with taxes going forward? Obamacare is just now being implemented. We can expect the implementation to drag on for several years. We haven’t seen the effect of the employer mandate to provide insurance to employees. We haven’t seen taxes levied on employer health benefit plans, although we do see the amounts on our paychecks which means that the IRS could start taxing these next year to fund the shortfall in Obamacare.
Whenever a percentage of take-home pay is diverted via government edict to one area of the economy, it necessarily causes contraction in another. Spending will fall at restaurants and retail stores. Quarterly profits will miss estimates. Jobs will be cut in these sectors. On the other hand, health care companies will be hiring.
This healthcare growth trend will continue for a generation or two as the practice of medicine matures in the 21st century. This trend will eventually reverse itself as knowledge of the interplay between genetics and disease expands.
The current rate at which medical knowledge is growing, however, means that better treatments and, in some cases, cures are discovered daily. As basic science relieves us of our ignorance, less and less money will be invested in medical research. As general health improves, less and less health care will be required.
As lifespans increase, global population will rise placing even greater demand on natural resources. Healthcare insurance costs will decline, and money will shift out of this sector into some other unknown sector (asteroid mining)?
Everything is interrelated. It is just a matter of making reasonable deductions based on available data and trends.
As someone asked previously, why don’t we ever hear the economy was up strongly in the first quarter due to mild weather across the country?
Good news is always attributed to something constructive, and bad news is blamed on something outside our control whenever possible.
The Anderson School is not looking at the fundamentals. Why does the FED have rates at 0% with the markets at all time highs? Why is the FED still talking about deflation with rates at 0% for 5 years, and almost 4 trillion in QE?
The Fed is trapped, and the economic reset is coming:
http://www.fedprimerate.com/charts/federal-funds-target-rate_vs_prime-rate_vs_1-month-libor_vs_3-month-libor.gif
The Fed, the MSM, and even the UCLA Business School can jawbone all they want, but they can’t stop the approaching deflationary time-bomb from resetting the global economy.
The Fed is slowly halting QE, because they have to, not because they want to. Period! Game Over!
So you don’t think we have deflation already? The FED has spent $4T on QE and inflation is all but non-existent. Is that not evidence enough that an equal but opposite deflation exists?
Why does the FED have to stop QE, exactly, then? You say they have to. Why? If there is a deflationary time bomb rapidly approaching, why wouldn’t the FED be increasing QE? When the deflation starts to show in the fundamentals, why can’t FED just start QE all over again? Can you explain yourself?
>>>So you don’t think we have deflation already?
I think the real deflation begins when the debt crisis begins. We’re getting close.
>>>The FED has spent $4T on QE and inflation is all but non-existent. Is that not evidence enough that an equal but opposite deflation exists?
Exactly! There’s a forest of information and symptoms out there that are distracting most Economists from the BIG PICTURE. You just hit on that very point. We have no meaningful inflation while at the same time we have unprecedented stimulus. It’s obvious what’s happening, you just need to look beyond the chatter boxes.
>>>Why does the FED have to stop QE, exactly, then?
Before I answer that question, I want you to understand that QE is DEBT … QE = DEBT. It’s like a drug, in that more is required to have the same future impact.
At a certain point, QE simply doesn’t work to help fight deflation in a Capitalists mainstream economy. The more they do, the less impact it has. The Japanese are presently doing 3x’s per capita to the US in QE … they have ZERO inflation … literally NO inflation.
>>>Why? If there is a deflationary time bomb rapidly approaching, why wouldn’t the FED be increasing QE?
The credit crisis will be the switch that triggers the deflationary time-bomb. They may try more QE after the time-bomb goes off, but it’ll be too late. They will not be able to stop the deflationary cycle from happening. They’re presently at ZERO percent … they are toothless.
>>>Can you explain yourself?
I think the deflationary cycle is generational … it happens about once in a lifetime. It mainly has to do with the demographics and spending cycles associated with people aging. The Baby Boomers are getting old, and they’re spending less. This is the number one problem with Japan … it’s old, and getting older. China is facing the same problem.
As a generation gets older, they spend less. Therefore, governments and private debt try to compensate (fill the gap) with more credit/debt, only to spend beyond their means, forcing an economic debt crisis, thus destroying debt, and the assets that are supported by debt.
Lee, where does one park their money in this coming deflation? What/who is stopping the fed from upping QE to further combat deflation? Bond vigilantes? Voters?
During the last debacle all assets declined, including the metals. The only thing that increased in value was the US Dollar +28% index. There’s also variable indexed annuities that guarantee against loss, but then you have to worry about the insurance carrier remaining solvent in a deflationary environment. There’s also ETF’s that are designed to short the market, including shorting gold, oil, etc. Or there’s just cash … in a deflationary cycle, cash gains in value by waiting on the sidelines.
It’s too bad that you can’t just invest for the long-hall anymore. Our markets are full of ponzi finance that promote Boom-Bust cycles.
I’m not sure I follow the logic. First of all, you presume there is going to be a credit crisis. The last credit crisis we had was in 2008 when Lehman Brothers, Bear Sterns and others went belly up. Counter party risk wasn’t priced into credit default swaps because no one knew what leverage would be exposed when the tide went out. Interbank lending evaporated and the FED and UST had to step in to backstop the entire system. Surely you aren’t saying that we have greater risk today than we had then?
I assume you are talking public debt and not private debt right? Private debt is hardly increasing. Public debt is increasing because spending is more than revenue. But the difference has been shrinking the last few years. Since the FED holds the purse strings, there is nothing stopping 10x prior QE if required.
And the zero bound isn’t really the zero bound is it? If a deflationary crisis of the enormity you imply were really to occur, negative rates are possible. How much deflation would we have if people were paid to borrow money? Given the alternative of getting 90 cents on the dollar after a year, or getting 95 cents, which would you take?
The whole generational argument always mystified me. It’s not like we have three generations of 100 million people that were all born on the same day of the same year. Even the baby boom generation was born over a twenty year period. They will also retire over a twenty year or longer period depending on how their finances look. Any generational crisis would build slowly if at all. Given time, immigration policies could be altered, and technology could improve productivity so that fewer hours produce more goods and services.
Japan is a bit of a unique situation. The nation is on a series of islands that lack natural resources. They also don’t exactly allow immigration or citizenship freely. They don’t spend as freely there either as we do in America. I’m not sure Japan is the best example. Although, their latest QE effort is resulting in rising inflation.
http://www.bloomberg.com/news/2014-04-02/japanese-companies-forecast-1-5-inflation-over-next-12-months.html
And why is deflation bad again? With falling entry-level salaries and benefits and retirees living on fixed incomes isn’t it desirable for goods and services to cost less? As current workers retire and their salaries and benefits are phased out, and more goods are produced for the same or less labor, prices ought to fall; not catastrophically, but naturally in line with fundamentals. What we need is low inflation and a rising stock market to fund retiree pensions. Oh wait, we already have that!
I understand that your goal is to talk down the debt inflated assets, i.e. housing, so that prices will fall to the point where you can pay cash, gold or whatever. I’m sorry, my friend, but that isn’t going to happen by wishing for it. Cash-flow investors will jump in long before any ordinary people get the opportunity.
The big problem with deflation is that it has no natural constituency. People who hold currency do best, banks get back more valuable currency on loans, so they don’t mind, but governments can’t tax deflation, so they hate it. Governments can tax inflation through capital gains taxes and increased property taxes, so they love inflation.
GSEs seed cloud inventory with 1.6 million future foreclosures
In a press release issued Wednesday by the Federal Housing Finance Agency (FHFA), the FHFA reported that Fannie Mae and Freddie Mac have completed 3.1 million foreclosure prevention actions since the two companies came under the government’s conservatorship in 2008. Foreclosure prevention actions include actions like loan modifications, refinances, and principal reductions.
The actions by the two government-sponsored enterprises (GSEs) have helped more than 2.5 million borrowers stay in their homes, including nearly 1.6 million homeowners who have received permanent loan modifications.
During 2013, Fannie and Freddie completed nearly 448,000 foreclosure prevention actions, 99,700 in the fourth quarter alone. The agency noted, “The majority of these allowed troubled borrowers to save their homes.”
The FHFA report found that serious delinquencies dropped 7 percent during the fourth quarter of 2013 to the lowest level since the first quarter of 2009. The seriously delinquent rate fell to 2.4 percent.
The rate for loans 30-59 days delinquent was 1.7 percent, a slight increase from the previous quarter. Loans delinquent for 60-plus days dropped .1 percent to 2.9 percent from the previous quarter.
“Nearly half of all permanent loan modifications in the fourth quarter helped to reduce homeowners’ monthly payments by over 30 percent,” according to the FHFA.
In the fourth quarter, approximately 31 percent of homeowners who received permanent loan modifications had portions of their mortgage balance forgiven.
Since the beginning of the conservatorship, completed short sales and deeds-in-lieu totaled 552,000. The fourth quarter of 2013 saw more than 20,000 completed short sales and deeds-in-lieu.
Foreclosure sales continued a downward trend, posting a 15 percent reduction in the fourth quarter, with foreclosure starts receding 3 percent.
Apparently, consumers are only happy when house prices are going up. I don’t see how that impacts the mood of the half of the population that rents, but …
Home Value Slowdown Stalls Consumer Sentiment
Despite improvements in their own financial situations, consumers’ optimism for the economy fell back slightly in March, with trends suggesting subdued interest in major purchases such as homes.
According to a report released by Thomson Reuters and the University of Michigan’s Survey Research Center, consumer sentiment retreated last month to an index reading of 80.0, down 2 percent from February’s 81.6 but an improvement on last year’s 78.6.
The headline index was negatively impacted by 3.7 percent decline in the Index of Consumer Expectations to a value of 70.0. The decline more than offset a slight 0.3 percent nudge in the Current Conditions Index to a reading of 95.7.
“While consumers anticipate that the national economy will continue to grow during the year ahead, they have become increasingly concerned about the ability of the economy to avoid a downturn sometime in the next five years,” the joint report read.
The most immediate concern, according to the survey, is the ongoing slowdown in home value gains—one that is expected to continue in the year ahead. Given the stall in price improvements and the increase in interest rates over the last year, plans to purchase homes are reportedly on the decline.
“Since consumers have become accustomed to very low interest rates on loans, even small increases, which simply tempered demand in the past, could now have a much more pronounced impact on sales of homes and vehicles,” said Richard Curtin, chief economist for the survey.
Curtin added that with consumers now reacting to even small rate hikes, “[t]he Fed now has a more powerful policy tool as well as a less forgiving tool to a policy misstep.”
Purchase originations down 16.8% from last year
After months of weak growth to start the year, mortgage application volumes sank in March as purchase numbers continue to struggle to find footing.
Compiling weekly survey results from the Mortgage Bankers Association (MBA), macroeconomic research firm Capital Economics calculated a 2.9 percent drop in total application volume in March following a meek 0.1 percent increase in February.
For just the week ending March 28, MBA reported a 1.2 percent decline in applications.
All of that decrease can be pinned on a 6.2 percent drop in refinance applications. Over the year, Capital Economics calculates remortgaging applications are down by 65.7 percent.
“The earlier remortgaging boom is well-and-truly a thing of the past, and a further gradual rise in mortgage interest rates over the next few years will ensure that remortgaging volumes remain subdued,” said property economist Paul Diggle.
On the home purchase side, applications came up an estimated 2.7 percent over March (1 percent in the final week) but remained down 16.8 percent year-over-year.
While the slight increase “was a step in the direction,” it’s not nearly enough to support a housing market that’s receiving less and less support from non-mortgaged buyers, Capital Economics says.
“Investment and cash buying is likely to soften now that housing is approaching fair value, and it will fall to mortgage-dependent buyers to take up the slack,” Diggle noted. “[I]t’s clear that the longer mortgage lending flat lines, the more precarious the housing recovery will look.”
Since the underlying issue is insolvency (not liquidity) and the fact that a mod does not render a borrower solvent, the cost of the loan is NOT the problem, it’s the principle.
Expect deliquencies/foreclosures to rise substantially in the coming months/years.
Most people don’t believe we will see a second foreclosure crisis, but I do. We never completed all the foreclosures the first time around, and all these delayed foreclosures will happen some day.
“Most people don’t believe we will see a second foreclosure crisis, but I do”. Do you see a disparity of impact in different regions? I see the NY tri-state area as having a far greater proportion of zombie foreclosures and private loan mods than Socal (in fact, I am right now considering making an offer on a Westside property which was foreclosed on in 2010. As I think we’ve discussed before, there seems to be no way to know the % of zombie foreclosures / private mods by zip code without a pricey DataQuick subscription, but do we have a general sense of how the problem breaks? My intuition is that prime / near-prime Socal is comparatively zombie-free at this point, but this is only a hunch.
Actually, I think the prime areas probably have the most problem with hidden mortgage distress.
The subprime areas actually processed their bad loans, that’s why we had so many foreclosures and house prices got whacked. The prime areas had plenty of toxic financing, but by the time their loans started going bad, lenders figured out the can-kicking game, so most of the cloud inventory and overhang of distressed loans is still in better areas.
Here’s what Bill McBride says about the latest MPA news:
“The 4 week average of the mortgage purchase index is down 19% over last year”…and that is “probably understating” activity.”
Wow.
So, let’s assume that upcoming sales are off about 20% or more this spring.
Is that likely?
Would that be as bad as 2011?
How close would that be to Mark Hanson’s predictions?
Will the Fed ramp up MBS purchases?
How will that effect prices?
Will the banks scale back inventory to keep prices high?
Anybody???
http://www.calculatedriskblog.com/2014/04/mba-mortgage-purchase-applications.html
Unfortunately, the data being generated that McB continues to cite is a direct result of a massive bureaucracy (that thinks it knows how to manage an economy better than private citizens) intruding further into markets to alter worsening dynamics, which distorts the data. Heavily. Problem is, heavily distorted data only changes the perception of reality.
“So, let’s assume that upcoming sales are off about 20% or more this spring.
Is that likely?”
Depends on how you define the market. Nationally, regionally, or locally? I’m seeing pending sales 20% above where they were at this time last year. Asking and sales prices are way above. Listing volume is about the same as a year ago, and has been trending down all year. Pending applications may be down 20% from a year ago, but that also means that 4 out of 5 potential buyers are taking out applications. Are these the 4 that can’t afford houses at the current rates or the 4 that can?
“Would that be as bad as 2011?”
Prices or volumes? Prices can rise on low volumes. As the prime areas get priced out of reach, buyers look to adjacent near-prime areas. These areas then rise in price… and so on, and so on. This is more of a demand pull inflation than a cost-push inflation where prices are pushed up from the bottom.
“How close would that be to Mark Hanson’s predictions?”
I don’t agree with Mark’s prediction that we “might” be in a bubble right now. We haven’t seen near the level of participation seen in 2005-7. We haven’t seen the reckless speculation fueled by easy money. If you’ve applied for a loan during the last year, then you know what I mean. There is nothing easy about getting a loan these days. The fact that purchase applications have fallen as rates have risen is a sign of a healthy, not speculative, housing market. Unless must-sell inventory makes it to market in large quantities, prices won’t fall dramatically. If prices stabilize and rise slowly, is that still a bubble? If prices did pull back dramatically, then cash investors would be buying again with inflationary effects.
“Will the Fed ramp up MBS purchases?”
No. The law of diminishing returns dictates that the FED must pause in their acquisitions, even if this means tipping the scales towards recession. You can’t eat an elephant in one bite. Mmmmm… elephant. Is it lunch time already?
“How will that effect prices?”
Normally I would say that higher rates mean lower prices, but so much of the distressed inventory is now tied up in foreclosure prevention purgatory and there appears to be a leveling of supply and demand at current prices. Any change in prices won’t be abrupt but will probably revert to the long-term trend line.
“Will the banks scale back inventory to keep prices high?”
Where have you been? They already are scaling back inventory. The better question is will they take back more inventory in the face of declining demand? Probably not. But as rates rise, there is also an increasing incentive to foreclose as long as prices hold steady. If you are getting a 2% net on your investment through your mortgage mod and the market rate is 4.5% then the cost of foreclosure might not be justified by the 2.5% differential. But if you can get 6.5% then the 4.5% differential might make it worth it. Ideally, the banks want rates to rise and prices to rise while selectively foreclosing a small percentage each year. This will remove the backlog.
Good answer. Very complete.
“Are these the 4 that can’t afford houses at the current rates or the 4 that can?”
With prices 20% higher, the reason only 4 out of 5 bother to fill out applications is because 1 of the 5 was priced out.
““The 4 week average of the mortgage purchase index is down 19% over last year”…and that is “probably understating” activity.””
Frankly, I’m surprised he keeps clinging to this.
When did the understatement of activity start?
What changed to cause this understatement, and why haven’t the people who keep these statistics corrected the problem?
Is he stating he believes activity is increasing even though the data clearly shows its decreasing? If so, what data would he believe? Only data that matched the outcome he wants to see?
Is his confirmation bias so strong that he has to ignore contrary data or pretend it says something it doesn’t?
Purchase activity is up slightly month-over-month and down significantly year-over-year. Rates went up. What does he expect to see?
The problem I see is that he is arguing the wrong point. The facts are the facts, but what to infer from the facts is where to make the argument. Assuming that purchase activity fell off a cliff from a year ago, does that mean that prices will follow suit? This is the presumption, is it a valid one?
Do we have data that supports price correlation to purchase apps independent of available listings? If fewer desirable homes are listed at affordable prices then purchase apps will fall. But prices may rise since there is more competition for those fewer listings. I don’t know if this is true or not, but the analysis should be done before drawing conclusions.
Purchase apps is a red-herring, and serves to only distract from the meat of the issue. People are always looking for a leading indicator, and want to be first to know. But, as Thomas Jefferson said: delay is preferable to error. Time will tell.
Case shiller shows prices pretty much level from October through January. With seasonality and higher rates I would expect prices to be down, so level is actually surprising. This is starting to look like an inflection point. But the question is does this represent a near-term peak or a saddle as the market pauses before going higher? Listing activity is also trending down since last summer. If you look only at demand, you will miss half the equation and get the wrong answer.
I don’t think there will be a crash, but to see something resembling a durable recovery, we should see increasing prices on increasing volume. Decreasing volume, particularly during the ramp-up stage of the prime selling season underscores how weak this recovery is. Can the weakness be masked by a lack of inventory? Probably. Cloud inventory by its nature hovers in the clouds and waits for demand to catch up to it, even if that is many years from now. So unless lenders start foreclosing instead of can-kicking, we can probably sustain a reflation of the price bubble on extremely low volume, which is where we appear to be headed.
More FACTS for el O to ponder…
Home Sales in U.S. Poised to Surge With Spring: Mortgageshttp://www.bloomberg.com/news/2014-03-31/home-sales-in-u-s-poised-to-surge-with-spring-mortgages.html
Donna Cicerone and her husband Paul want to put their three-bedroom home in Milton, Massachusetts, on the market. First, they have to find a house to buy.
The Cicerones live in the Boston area, where all but three weekends this year have had snow, sleet or rain. Bad weather has forced them to cancel house-hunting plans half a dozen times, they said. When they have found a house they liked amid a limited supply of properties, they’ve been outbid.
“The moment we sign a contract to buy, we’re putting our house on the market,” said Donna Cicerone. “We feel like we’re missing an opportunity because everyone says there are lots of buyers, but there’s nothing we can do.”
Frustrated shoppers and would-be sellers like the Cicerones are setting the pace for the housing market’s spring selling season, the March through June period when more than half of U.S. home sales take place. The market’s getting a late start this year because so much of the country has been in the grips of bad weather, said Dean Maki, chief U.S. economist for Barclays PLC in New York.
“There aren’t many people who want to drive around looking for homes in a blizzard, and there aren’t many sellers who can put their homes on the market unless they have some place to move to,” Maki said. “We’ve seen sales take a hit so far, lagging where they usually are, but we think the next few months will make up for it.”
Silly MR…
Fact
1:something that actually exists; reality; truth.
Thus, something that hasn’t happened yet… ”Home sales are poised to surge with Spring mortgs” does NOT establish fact.
I’ve been thinking about using that article for a post, mostly because it doesn’t contain any facts. It is, however, loaded with wishful thinking.
Specifically, what in that article is factual? It appears to me to be a few anecdotes and a rosy opinion. In fact, I was going to profile that article as the biggest epic fail of 2014.
I agree that it’s an anecdotal article, but I was trying to emphasize the weather-related anecdotes as a follow-up to our discussion the other day. Having only 3 weekends with good weather out of 12 (a fact) indicates to me that weather has had an impact on the national stats. It was a record-breaking Winter and bears are writing it off as nothing. They are ignoring facts that don’t confirm what they want to believe. What do you call that again?