Everyone is focused on making house prices go up. Banks need higher house prices to recover the capital they put into trillions of dollars of toxic mortgages. Loan owners need house prices to go up to avoid damaged credit from a short sale or foreclosure. Home owners want to see house prices go up to feel rich. And politicians need to see rising house prices to keep everyone happy and get reelected.
Economists also play the game by promoting the “wealth effect” of housing. By cloaking what’s really going on with a comfortable euphemism, it becomes easy to ignore the fact we are really talking about Ponzi borrowing inevitably leading to bubbles and severe recessions when the Ponzi scheme unravels.
So what evidence do we have that housing was a giant Ponzi scheme? First, the daily posts I do have documented more than a thousand properties where Ponzi borrowing was the owners method of personal financial management. This was encouraged by lenders, and it went on so long that many borrowers think a personal Ponzi scheme is just how finances are managed. Credit is savings. Appreciation is income. Debt is wealth.
Another point of evidence of the grip of Ponzi finance comes from the high redefault rates on loan modifications. In theory, loan modifications are supposed to help a prudent borrower with temporarily diminished income due to the recession. A reduction in payments would help a prudent borrower survive until better days. Unfortunately, that isn’t reality. Most borrowers applying for loan modifications were Ponzi borrowers who need more debt to make the payments on the debt they have. Reducing their payments doesn’t help them because what they really need is access to more credit to perpetuate the Ponzi scheme. This is the only reasonable explanation for the extremely high recidivism rates on modified loans.
Six in 10 Homeowners with Loan Mods Default Within 18 Mos.
Six out of 10 homeowners who received a loan modification stopped paying their mortgage again after 18 months, but there may be a modest silver lining buried in the high recidivism rates.
A study by TransUnion has found that borrowers who received a mortgage modification performed materially better on new auto loans and credit cards than those who did not receive any help, an indication that some consumers who fall far behind on monthly bills are able to regain their financial footing.
“Once consumers have gone through a serious delinquency, there is still an opportunity to lend to them down the road,” says Charlie Wise, TransUnion’s director of research and consulting. “We’re going to see more and more consumers that had a loan modification and the mere presence of a modification, regardless of whether the borrower continues to pay, would indicate better performance” in paying other debts.
Researchers examined data on five million mortgages including 600,000 borrowers who received a modification between January 2008 and July 2011.
Out of 600,000 loan modifications, 360,000 redefaulted within 18 months. That is a dismal failure if the intent was to really help. In my opinion, banks will consider the program a success because it gave hopeless borrowers enough false hope to make a few more payments before they imploded.
The study found that borrowers who had previously gone delinquent only on their mortgages — but not other loans — were better credit risks than borrowers who went delinquent on other loans as well as their mortgages.
Still, high recidivism rate are a concern since most of the borrowers will redefault within 18 months and are likely to end up in foreclosure. The study also found that nearly 42% of borrowers who received a loan modification stopped making payments within a year.
Most of these borrowers will end up reappearing in shadow inventory, then finally making their way to foreclosure. Ponzi borrowers cannot be saved, and we shouldn’t try. It merely emboldens them to build an even larger Ponzi scheme and increase lender losses in the long run.
Hyman Minsky described the Ponzi problem this way:
“Ponzi’ finance units must increase its outstanding debt in order to meet its financial obligations. A transition occurs over the course of an expansion as increasingly risky positions are validated by the booming economy that renders the built in margins of error superfluous – encouraging adoption of riskier positions. Eventually, either financing costs rise or income comes in below expectations, leading to defaults on payment commitments.”
The defaults on all the Ponzi borrowing lead to the credit crunch in August of 2007 which began the unraveling of the entire Ponzi scheme the US economy was based on.
“… over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy with a sizable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.”
This is exactly what happened in the housing bubble. The only real question is, “What do we do about it?” The answer being given by everyone is to reflate the housing bubble to begin a larger, more massive, and ultimately more destructive Ponzi scheme. It that what we really want?
We cannot base a stable economy on Ponzi schemes. Low debt levels, particularly low signatory debt levels, are better for the economy because it frees up sustainable disposable income. We do not need rising house prices and rampant HELOC abuse to create an economic recovery. I would rather have a real recovery based on sustainable fundamentals rather than a fake recovery based on another mountain of Ponzi debt.
Should taxpayers and seniors fund HELOC abuse?
The way our system currently works, borrowers like the previous owner of today’s featured property take on enormous HELOC debts they never plan to repay, and when the Ponzi scheme unravels, the taxpayer is brought in to pay off the bad debts. Through the various bailout programs for banks and loan owners, they are gorging themselves on taxpayer funds and lost interest payments due to seniors.
- Today’s featured property was purchased for $340,000 on 6/5/2001. The owner used a $272,000 first mortgage, a $50,000 second mortgage, and an $18,000 down payment.
- On 6/20/2005 he went Ponzi with a $405,000 refinance of his first mortgage.
- On 6/16/2006 he refinanced again with a $481,000 first mortgage. Total mortgage equity withdrawal was $159,000.
- He defaulted in early 2009 and got to squat for nearly three years.
Is the benefit of economic expansion worth bailing out borrowers like this? I don’t think so. If it is, everyone will keep their HELOCs maxed out waiting for the crash next time around.
Fountain Valley Overview
Median home price is $509,000. Based on a rental parity value of $569,000, this market is fairly valued.
Monthly payment affordability has been improving over the last 11 month(s). Momentum suggests improving affordability.
Resale prices on a $/SF basis increased from $261/SF to $266/SF.
Resale prices have been falling for 12 month(s). Price momentum suggests falling prices over the next three months.
Median rental rates increased $182 last month from $2,180 to $2,362.
Rents have been rising for 12 month(s). Price momentum suggests rising rents over the next three months.
Market rating = 4
Proprietary OC Housing News home purchase analysis 
17385 SANTA LUCIA St Fountain Valley, CA 92708
$539,900 …….. Asking Price
$340,000 ………. Purchase Price
6/5/2001 ………. Purchase Date
$199,900 ………. Gross Gain (Loss)
($27,200) ………… Commissions and Costs at 8%
============================================
$172,700 ………. Net Gain (Loss)
============================================
58.8% ………. Gross Percent Change
50.8% ………. Net Percent Change
4.1% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$539,900 …….. Asking Price
$107,980 ………… 20% Down Conventional
3.67% …………. Mortgage Interest Rate
30 ……………… Number of Years
$431,920 …….. Mortgage
$100,011 ………. Income Requirement
$1,981 ………… Monthly Mortgage Payment
$468 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$135 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,584 ………. Monthly Cash Outlays
($313) ………. Tax Savings
($660) ………. Equity Hidden in Payment
$130 ………….. Lost Income to Down Payment
$155 ………….. Maintenance and Replacement Reserves
============================================
$1,896 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,899 ………… Furnishing and Move In at 1% + $1,500
$6,899 ………… Closing Costs at 1% + $1,500
$4,319 ………… Interest Points
$107,980 ………… Down Payment
============================================
$126,097 ………. Total Cash Costs
$29,000 ………. Emergency Cash Reserves
============================================
$155,097 ………. Total Savings Needed
——————————————————————————————————————————————-
We're sorry, but we couldn't find MLS # P826195 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
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$559,000 17395 SANTA MARIA St |
0.1 miles 4 bd / 2 ba 1,628 Sq. Ft. |
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$599,000 17655 SANTA TERESA Cir |
0.32 miles 4 bd / 2.25 ba 1,628 Sq. Ft. |
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$499,000 8980 LA DONA Ct |
0.33 miles 3 bd / 2 ba 1,534 Sq. Ft. |
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$550,000 17722 SANTA MARIA St |
0.35 miles 4 bd / 2 ba 1,606 Sq. Ft. |
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$539,900 17697 SANTA TERESA Cir |
0.36 miles 4 bd / 2 ba 1,606 Sq. Ft. |
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$435,000 16972 BRESSEL Ln |
0.41 miles 2 bd / 1.75 ba 1,627 Sq. Ft. |
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$519,900 8411 Amsterdam Dr |
0.43 miles 3 bd / 2 ba 1,684 Sq. Ft. |
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$499,000 17122 ROTTERDAM Ln |
0.46 miles 4 bd / 2 ba 1,812 Sq. Ft. |
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$599,000 17241 MARKEN Ln |
0.55 miles 4 bd / 1.75 ba 1,650 Sq. Ft. |
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$389,900 16682 LUCIA Ln |
0.69 miles 5 bd / 1.75 ba 1,741 Sq. Ft. |
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20 Responses to “Are rising house prices and low-cost Ponzi debt necessary for an economic recovery?”
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**The answer being given by everyone is to reflate the housing bubble to begin a larger, more massive, and ultimately more destructive Ponzi scheme.
——————————————————————
Not happening! The compounding equation has rolled over on itself; ie., fed must now create $2.5 of debt to generate $1 of growth.
Those who invest in reality will be far ahead of those who invest in illusion.
I hope you are right, but I have never before seen so much effort put into reflating a Ponzi scheme. We have created the ideal set of circumstances to do so.
$16+trillion printed since Q4 08 (fed audit) yet deflation remains the prevailing economic influence. Mind boggling. And, with current cost of debt-capital @ zero, the 2 main issues inflationistas have to reconcile (to validate their ‘pipe-dream’) are compounding interest expenditures + math.
That’s because should multiple reflation attempts ultimately prevail, the incremental cost of debt-capital will destroy hundreds of $billions in equity/asset values going forward.
And, they’re back to square-one.
What it all boils down to is the underlying assets are simply NOT worth their stated values.
‘fitting’ post just landed over at ZH from CHS…
”Debt can be expanded at a rate that exceeds the rise in real income in only one way: by lowering interest rates so the same income can support a larger debt.”
”How much debt growth do you think we’d need to get back to business as usual? 50s was 8%, 60s about 12%, 70s 15%, 80s maybe 20%, 90s back down to 15%, and 00s probably 25-30% per year. We’d probably need a surge of 35% or more, per year, to bring back those exciting bubble years. But who could possibly have the income to support that?”
http://www.zerohedge.com/news/charles-hugh-smith-why-debt-dependent-status-quo-doomed-one-chart
A little off topic here, but are the Europeans getting ready to do their own version of the 2008 bailout. I’m waiting for the QE Europe announcement.
Newly foreclosed former owners are being pushed into the rental market, and their activity is driving up rents everywhere.
Rental Market Attracting Residents Despite Price Increases: Survey
The rental market appears to be doing more than just sustaining its health. After surveying property managers, TransUnion found that increasing prices aren’t keeping tenants away.
Overall, managers reported they are doing better than the year before and are having an easier time attracting in residents despite the increase in prices.
The credit bureau’s June survey included 1,248 property managers across the U.S. who represented a range of property sizes.
Almost half (48 percent) of the managers surveyed reported rental price increases on the majority of their units since last year in June.
Approximately 44 percent said rental prices remained the same. In TransUnion’s 2011 rental survey, 39 percent of respondents stated that prices increased while 48 percent said prices were the unchanged.
For large properties (more than 200 units), 70 percent of managers reported price increases this year compared to 64 percent last year. Among small property (200 units or less) managers, 46 percent reported price increase from last year, an improvement from 36 percent last year.
“Data throughout the last year has pointed to a healthier rental market, and our survey helps validate the current strength of the rental industry,” said Steve Roe, VP of TransUnion Rental Screening Solutions. “The rise in rental prices, coupled with a decrease in vacancy rates and the ability to attract new residents with less effort are all positive signs for the market and rental property managers.”
Even with rental prices increasing, property managers are having an easier time with finding tenants. Nearly 73 percent of managers said finding residents is not difficult compared to 67 percent last year.
The percent of respondents stating vacancy rates for their properties are between 0 percent and 5 percent increased to 83 percent this year from 81 percent in 2011. When dividing up respondents based on property size, large property managers saw an increase to 64 percent his year compared to 60 percent last year.
In addition, 70 percent of small property managers said their vacancy rates are at 0 percent, which is an increased from 66 percent in 2011.
Even with a healthier rental market, property managers still face the issues with finding quality residents.
Nearly 60 percent of respondents said they are concerned or very concerned with finding reliable tenants.
“Though this number is down from 65% in last year’s survey, it does point to the continued unease about the economy and a lingering question about the ability of tenants to make timely rental payments,” said Roe.
More than half of the respondents (53 percent) said they have had a renter leave the unit with unpaid rent or damages, and about 18 percent said a tenant has done so in the last year.
“Finding reliable tenants is critical as property managers can lose thousands of dollars in rent if a tenant skips out of a rental unit, or if the property manager must take action to evict someone from a unit,” said Roe.
The survey included 1,107 small property managers and 141 large property managers.
TransUnion offers two rental screening services to screen residents: CreditRetriever, which is for large property management companies and SmartMove, which targets small and independent property managers.
Very interesting piece. I have a question and a couple of comments. First the question.
Do those “failed mods” include temporary hardship forbearances? Because if you suffer a setback (e.g. job loss) and need help paying your mortgage, most services will forbear some of the payments for at least 6 months. It all gets ballooned onto the balance, of course, but it allows breathing room. At the end of the 6 months the bell rings and you are supposed to be magically healed. If you aren’t, tough nuggies. Now, I would submit that this is quite different from a permanent mod, but technically this might not be true. So I’m asking if you know: does this figure include temporary mods or just permanent ones?
Second, a couple of comments. I’m not super worried about Grandma’s loss of interest as she has made out pretty well despite the depression: her house was bought decades ago (hopefully paid off), her SS benefits and perhaps pension are doing fine in our deflationary environment, and her meds are picked up by the taxpayer. In Illinois she even gets to ride public transportation for free (whee!).
Third, I am seeing the rental demand up close and personal here in Chicago and it is UGLY. Homes that are unfit for human habitation are fetching more than 3 grand a month in my burb (which is far from the most exclusive but does have excellent schools and low crime). To get a good rehabbed one is $4500-7000. Chicago has a lousy economy and high taxes. The weather sucks in all seasons (101 in June, really??!!). I am driven to contemplating renting a small dump in town to claim residency and another in a nearby town to actually live in. I can’t be the only one either as the school is checking documentation on all renters, whereas two years ago it was much more mellow. Yes, happy days are here again!
I don’t have the details on their methodology. They may also be counting the same borrower who fails multiple times which would also throw off the numbers.
Many seniors planned their retirements around getting interest payments on their savings. Perhaps they are comfortable with Social Security and other benefits, but it still is not right for them to forgo interest income for the benefit of banks.
Rents will continue to rise sharply until more REOs are converted to rentals to meet the demand. Some metros will see this happen faster than others. The total number of houses are there, but the way they are being used does not match the market demand.
Great video on the housing market in the Northeast:
http://www.youtube.com/watch?v=24ILTltr-WY
The talk starts 4 minutes in.
Did everyone catch the news story about Michael Marin, the Ivy League educated multi-millionaire convicted of arson? He couldn’t meet the mortgage so he set his estate ablaze. He apparently poisoned himself in court as the guilty verdict was read – it was caught on video, shown below. It’s a sad reminder that some people would rather take poison than let the home go into foreclosure and work their butt back up the ladder. Here are a couple links with different videos:
http://www.nydailynews.com/news/crime/michael-marin-ex-wall-street-banker-swallowed-poison-pill-courtroom-conviction-arson-article-1.1104528
http://www.dailymail.co.uk/news/article-2166303/Arsonist-Michael-Marin-53-collapses-dies-Phoenix-court-guilty.html
That’s just nuking futs. I don’t why he torched the house? First thought it was suicide attempt, but the then SCUBA gear. Did he really think he was getting away with the arson? They do have investigator.
Torched it to collect insurance dough. Didn’t work.
“He had fallen into serious debt and could no longer afford the $17,250 monthly mortgage payments. In addition, he stood to gain a $650,000 insurance claim, according to reports.”
He faced 16 years in prison for the conviction. It does seem a bit steep, given the crime, as child molesters receive lighter sentences.
The look of sheer defeat on his face is toe-curling.
Actually, 16 years for arson is pretty light. Arson is ranked as an “index” crime, along with murder, armed robbery, and child molestation.
Why? Because too many people can die. You know that when you start a fire that it can kill. It can easily get out of hand and spread to other structures. It can and does kill and badly injure many fire fighters, in addition to people the arsonist didn’t know but didn’t really care happened to be in the building.
While I agree that child molesters are treated far too lightly, arson deserves a very long stretch. Here in IL the sentence can be as long as 40 years, and if someone dies, life.
The strength of people’s attachments is remarkable. His unwillingness to live without his house or his wealth prompted him to burn his house down and kill himself rather than face the consequences.
Pretty obvious that for most a “loan modification” is a delaying tactic for those who have gotten addicted to no rent squatting.
The Insolvency Law Committee (“ILC”) has, for the past 7 years, sought to provide homeowners who have refinanced their mortgages the same protection against deficiency judgments following a judicial foreclosure that homeowners who have never refinanced enjoy under Code of Civil Procedure section 580b. With support from the California Banker’s Association, the California Association of Realtors, and input from the Center for Responsible Lending, the ILC produced a legislative proposal to amend section 580b that Senate Majority Leader Ellen M. Corbett introduced as SB 1069 on February 13, 2012 and amended to generate unanimous support. See the California Legislative Information site to read the amended bill. Senator Corbett and current ILC Co-Chair Robert G. Harris testified in favor of SB 1069 before the Senate Judiciary Committee on May 1, 2012. Video of the testimony is available online (the hearing on SB 1069 runs from 15:15 to 23:40). SB 1069 has now passed both the Assembly and the Senate and will go to Governor Brown for his signature.ntitled “Multiple Party Representation and Other Ethical Dilemmas.”
SB 1069, Corbett. Deficiency judgments.
Existing law provides that no deficiency judgment shall lie following a judicial foreclosure with respect to, among other things, a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of real property, or under a deed of trust or mortgage on a dwelling to secure repayment of a purchase money loan which was in fact used to pay all or part of the purchase price of that dwelling.
This bill would additionally provide that no deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction that is used to refinance a purchase money loan, as defined, or subsequent refinances of a purchase money loan, except to the extent that the lender or creditor advances new principal which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the refinance. The bill would provide, for purposes of these provisions, that any payment of principal for a refinanced purchase money loan would be deemed to be applied first to the principal balance of the purchase money loan, and then to the remaining principal balance, as specified. The bill’s provisions would apply to a loan, refinance, or other credit transaction used to refinance a purchase money loan which is executed on or after January 1, 2013.
http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201120120SB1069
So, if your loan is eligible under HARP 2.0, and your California home is severely underwater, it might make sense to wait six months and refinance in January.
e.g. You have a purchase mortgage at $400K on a home currently worth $300K. If you refinance today, that underwater portion becomes recourse debt and could grow over the next few years; but if you refinance in 2013 taking no cash out, then you could walk-away later with no recourse.
Ivy League educated? No surprises there LOL its the remark I am laughing at as there is no status to me to that remark “Ivy League” anymore, what do you think it is 1960? They will let anything and anyone into those schools. Have you seen some so-called Ivy League graduates today? It’s a joke. I know plenty of them who have the IQ of cinder blocks.
Spot-on post.
The most overrated education in the entire world. It’s all about the post grad network, nothing more.
For affirmation, just spend some time at a party in 3arch bay, CDM or inside Big Can. Believe me, they stand out. No offense intended, but I’ve always wondered where they cleverly hid the short-bus.
BTW, if you don’t have access to any those venues but would like to see for yourself, no problema, just head on over to Mastro’s.
Of course it will be reflated. But it won’t help. The reflation will occur at a rate less than rate of currency devaluation, specifically the reflation of residential re prices will occur at a rate less that the rate of currency devaluation divided by the average percentage of amounts financed.
There is no way out. There is only one cure for too much debt, … and it is not more debt. The status quo is to define all insolvency as liquidity problems and to solve by adding more debt. It has stopped working and will only make matters worse.
The inability to pay off debt will expose all the fraud and manipulation. It amazes me that six years later, so few can see.
It never was a real estate crisis. It is, was, and will always be a debt crisis.