Yesterday, with special thanks to Matt138, I introduced the writings of Frédéric Bastiat, a 19th century French economist. I always find it interesting when writings from many years ago resonate through the ages as if they were written yesterday. If you’ve never read Plato’s Republic, it has a similar resonance. Plato’s critique of the shortcomings of democracy are still just as valid today as they were 2,500 years ago when he wrote it. Usually, I feature recent news articles less than a few weeks old. Today, I am featuring an essay written more than 160 years ago. The fact that it resonates so well today shows just how farsighted his vision was.
Our obscure French economist understood the workings of credit and it’s impact on society in general. He would readily recognize the misallocations of credit caused by government loan guarantees in the housing market and distortions of reality used to justify it. He would probably be amused by the parallels between what’s happening in the United States today and what happened in France 160 years ago. Or perhaps not. He might be horrified that mankind has made such little progress in understanding the folly of government intervention in the credit markets.
Selected Essays on Political Economy
Bastiat, Frédéric — (1801-1850)
At all times, but especially in the last few years, people have dreamt of universalizing wealth by universalizing credit.
I am sure I do not exaggerate in saying that since the February Revolution the Paris presses have spewed forth more than ten thousand brochures extolling this solution of the social problem.
This solution, alas, has as its foundation merely an optical illusion, in so far as an illusion can serve as a foundation for anything.
These people begin by confusing hard money with products; then they confuse paper money with hard money; and it is from these two confusions that they profess to derive a fact.
In this question it is absolutely necessary to forget money, coins, bank notes, and the other media by which products pass from hand to hand, in order to see only the products themselves, which constitute the real substance of a loan.
For when a farmer borrows fifty francs to buy a plow, it is not actually the fifty francs that is lent to him; it is the plow.
And when a merchant borrows twenty thousand francs to buy a house, it is not the twenty thousand francs he owes; it is the house.
This is the essence of asset-backed debt. When lenders broke the connection between the amount of the loan and the cashflow value of the house, they inflated a massive housing bubble which caused an enormous misallocation of resources as money poured into housing that we didn’t need.
Money makes its appearance only to facilitate the arrangement among several parties.
Peter may not be disposed to lend his plow, but James may be willing to lend his money. What does William do then? He borrows the money from James, and with this money he buys the plow from Peter.
But actually nobody borrows money for the sake of the money itself. We borrow money to get products.
Now, in no country is it possible to transfer from one hand to another more products than there are.
Bankers believe they can. They also confuse money with produce. They believe that if they print more money or come up with some “innovative” new loan program, they can actually create value. They don’t. Paper is paper. It has no value other than what we confer on it, and despite any short-term obfuscations and distortions, the total amount of money must equal the total value of goods and services a society produces. The excess — and there is always excess with a printing press — merely dissipates as inflation.
The federal reserve can print money out of thin air, and they have been doing so to the tune of $85 million for month for the last several months. This creation of money doesn’t match up with anything tangible, merely the bad loans — the illusory assets — polluting banks balance sheets.
Whatever the sum of hard money and bills that circulates, the borrowers taken together cannot get more plows, houses, tools, provisions, or raw materials than the total number of lenders can furnish.
For let us keep well in mind that every borrower presupposes a lender, that every borrowing implies a loan.
This much being granted, what good can credit institutions do? They can make it easier for borrowers and lenders to find one another and reach an understanding. But what they cannot do is to increase instantaneously the total number of objects borrowed and lent.
However, the credit organizations would have to do just this in order for the end of the social reformers to be attained, since these gentlemen aspire to nothing less than to give plows, houses, tools, provisions, and raw materials to everyone who wants them.
And how do they imagine they will do this?
By giving to loans the guarantee of the state.
Does this sound familiar? Politicians have worked to expand home ownership by guaranteeing loans through the FHA and the GSEs. The FHA has been around since the 1930s, and despite their best efforts, home ownership rates are no better in the United States than in countries with no government subsidies at all. As it turns out, you can’t give homes to everyone who wants one.
Let us go more deeply into the matter, for there is something here that is seen and something that is not seen. Let us try to see both.
Suppose that there is only one plow in the world and that two farmers want it.
Peter is the owner of the only plow available in France. John and James wish to borrow it. John, with his honesty, his property, and his good name, offers guarantees. One believes in him; he has credit. James does not inspire confidence or at any rate seems less reliable. Naturally, Peter lends his plow to John.
That is how the private lending market would work. An dispassionate evaluation of creditworthiness would determine who got loans and who did not.
But now, under socialist inspiration, the state intervenes and says to Peter: “Lend your plow to James. We will guarantee you reimbursement, and this guarantee is worth more than John’s, for he is the only one responsible for himself, and we, though it is true we have nothing, dispose of the wealth of all the taxpayers; if necessary, we will pay back the principal and the interest with their money.”
The FHA and the GSEs facilitate loans by guaranteeing investors repayment of principal and interest on a loan regardless of whether or not the borrower repays it. The positive impact of what’s seen is the new loan given to a low-income borrower. The negative impact of what’s hidden is the crowding out of more creditworthy borrowers and the pernicious effect on borrower’s attitudes and burgeoning entitlements.
So Peter lends his plow to James; this is what is seen.
And the socialists congratulate themselves, saying, “See how our plan has succeeded. Thanks to the intervention of the state, poor James has a plow. He no longer has to spade by hand; he is on the way to making his fortune. It is a benefit for him and a profit for the nation as a whole.”
Just as supporters of the FHA and GSEs pat themselves on the back for providing home ownership to those who wouldn’t be extended loans by private lenders.
Oh no, gentlemen, it is not a profit for the nation, for here is what is not seen.
It is not seen that the plow goes to James because it did not go to John.
It is not seen that subprime borrowers and others of dubious credit quality bid up prices so prudent borrowers have to pay more, or worse yet, prudent borrowers end up getting priced out of properties commensurate with their incomes and are forced to substitute down to lower quality properties. The borrowers who should not have been given loans are provided with nicer properties while the prudent are forced to accept lesser accommodations.
It is not seen that if James pushes a plow instead of spading, John will be reduced to spading instead of plowing.
Consequently, what one would like to think of as an additional loan is only the reallocation of a loan.
Furthermore, it is not seen that this reallocation involves two profound injustices: injustice to John, who, after having merited and won credit by his honesty and his energy, sees himself deprived; injustice to the taxpayers, obligated to pay a debt that does not concern them.
This is the central injustice of the housing bubble. By 2004, prudent borrowers were forced to chose between accepting a much lower quality property or wait for years for the imbalance to correct itself. Then, when the housing bubble collapsed, rather than gaining advantage of their prudence, those that didn’t participate in the housing bubble were forced to pay for bailouts designed specifically to keep them priced out of nicer properties and benefit the Ponzis and the stupid lenders that enabled them.
Will it be said that the government offers to John the same opportunities it does to James? But since there is only one plow available, two cannot be lent. The argument always comes back to the statement that, thanks to the intervention of the state, more will be borrowed than can be lent, for the plow represents here the total of available capital.
This economic fallacy is the entire justification for loan programs specifically designed to help lower income borrowers “afford” homes. In reality, it merely inflates the prices of entry level homes and deprives a marginal buyer an opportunity to own in favor of a less qualified buyer who meets the criteria of the program.
True, I have reduced the operation to its simplest terms; but test by the same touchstone the most complicated governmental credit institutions, and you will be convinced that they can have but one result: to reallocate credit, not to increase it. In a given country and at a given time, there is only a certain sum of available capital, and it is all placed somewhere. By guaranteeing insolvent debtors, the state can certainly increase the number of borrowers, raise the rate of interest (all at the expense of the taxpayer), but it cannot increase the number of lenders and the total value of the loans.
Do not impute to me, however, a conclusion from which I beg Heaven to preserve me. I say that the law should not artificially encourage borrowing; but I do not say that it should hinder it artificially.
If in our hypothetical system or elsewhere there should be obstacles to the diffusion and application of credit, let the law remove them; nothing could be better or more just. But that, along with liberty, is all that social reformers worthy of the name should ask of the law.
Right now the law artificially encourages borrowing. We subsidize interest payments with the home mortgage interest deduction, and we guarantee the repayment of debt with FHA and GSE lending programs. In fact, when you consider the FHA and GSEs now insure more than 90% of the loans in the marketplace, we have completely nationalized home ownership. This will ensure the misallocation of resources and further injustices to borrowers through the capricious allocation of credit based on government policy rather than merit and character of the borrower. The negative impacts of these problems will reverberate for another generation. Perhaps our grandchildren will enjoy a free market, but I rather doubt it.
Better late than never
The former owner of today’s featured property was a reasonably responsible homeowner during the bubble. He dutifully paid down his mortgage right up until the peak when he extracted about $300,000 for personal consumption. His timing was great if his intent was to sell the property to the bank at peak prices.
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We're sorry, but we couldn't find MLS # S721450 in our database. This property may be a new listing or possibly taken off the market. Please check back again.
Proprietary OC Housing News home purchase analysis
27342 ALLARIZ Mission Viejo, CA 92691
$899,900 …….. Asking Price
$424,000 ………. Purchase Price
7/31/1998 ………. Purchase Date
$475,900 ………. Gross Gain (Loss)
($71,992) ………… Commissions and Costs at 8%
============================================
$403,908 ………. Net Gain (Loss)
============================================
112.2% ………. Gross Percent Change
95.3% ………. Net Percent Change
5.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
3.48% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$166,863 ………. Income Requirement
$3,225 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$225 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$81 ………… Homeowners Association Fees
============================================
$4,311 ………. Monthly Cash Outlays
($717) ………. Tax Savings
($1,137) ………. Equity Hidden in Payment
$198 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$2,787 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move In at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$42,700 ………. Emergency Cash Reserves
============================================
$250,877 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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Some early peeks at the QM rules.
QM rule released with two legal liability standards
By Kerri Ann Panchuk January 9, 2013 • 11:14pm
The Consumer Financial Protection Bureau revealed its much awaited ability-to-repay and qualified mortgage guidelines Wednesday, creating two types of qualified mortgages with different legal liability standards.
The first QM-loan classification includes a safe-harbor provision, which essentially eliminates ‘ability-to-repay’ litigation risk for qualified loans.
Essentially, the ‘safe harbor’ standard applies to lower-risk loans that meet all of the QM requirements.
The second-type of QM loan comes with a rebuttable presumption of safe lending and applies to higher-cost loans. This loan type is presumed safe for the most part, but can still be challenged on narrow grounds in court later on.
ABILITY-TO-REPAY STANDARDS
The overarching ability-to-repay rule also outlines the basic guidelines lenders issuing new loans will have to follow.
On the very basic level, the rule requires lenders to document and verify a borrowers employment status, income and assets, current debt obligations, credit history, monthly payments on the mortgage, and monthly pay-outs on other mortgages and debts. (Click here for a full fact sheet and underwriting criteria).The rule stipulates lenders can no longer offer no-doc, low-doc loans.
The final rule also forces lenders of qualified mortgages to determine if a borrower possesses sufficient assets or income to pay back the debt.
In addition, lenders are required to determine a borrower’s ability-to-repay upfront by evaluating the consumer’s debt-to-income ratio, earnings, expected earnings, current debt levels and the homeowner’s ability to take on more debt.
The rule also is a death-knell for loans with teaser rates that have the potential to mask the true cost of a mortgage, the agency said.
Under ability-to-repay, lenders cannot base the evaluation of a consumer’s ability to repay on teaser interest rates.
Instead, firms are required to determine a borrower’s ability to repay both the principal and the interest over the long-term. In other words, using an introductory loan period when rates are generally lower will not suffice as an appropriate verification of a borrower’s capacity to service the debt.
WHAT IS A QUALIFIED MORTGAGE?
The CFPB will presume lenders have complied with the ability-to-repay rule if lenders write a loan that fits within the agency’s final definition of a ‘qualified mortgage.’
The definition of a qualified mortgage is a loan that has no excess upfront points and fees. Qualified mortgages limit points and fees – including those used to compensate loan officers and brokers, the CFPB said.
A qualified mortgage cannot exceed 30 years, allow for interest-only payments, negative amortization payments or loans where the principal amount increases.
Qualified mortgages also have a cap on how much of a consumer’s income can go towards a mortgage debt. A loan in which the borrower’s debt-to-income ratio is less than or equal to 43% will generally be classified as a qualified mortgage.
Recognizing that transitioning to this standard will be somewhat burdensome, the CFPB created a temporary, transitional standard for loans that do not meet the ’43%-or-under’ DTI threshold. In the transition period, loans outside the DTI requirement will be ‘qualified mortgages’ as long as they meet other government affordability standards such as being eligible for acquisition by Fannie Mae and Freddie Mac.
The rule also prohibits loans with balloon payments from receiving QM status. There is an exeption for small creditors in rural or underserved areas as long as the lender originates balloon loans under specifically defined conditions.
QM’s LEGAL RISKS
Once it’s determined a borrower has received a qualified mortgage, lenders will need to know what legal risks apply to the mortgage.
The qualified mortgage rule with a safe-harbor provision protects lenders from ‘ability-to-repay’ legal liability for the life of the loan as long as the loan complies with the guidelines. Qualified mortgages with a safe harbor are those mortgages described as “lower-priced loans that are typically made to borrowers who pose fewer risks.”
The CFPB added, “If the loan goes south, the lender will be considered to have legally satisfied the ability-to-repay requirements. But consumers can still legally challenge their lender under this rule if they believe that the loan does not meet the definition of a Qualified Mortgage.”
The QM with a rebuttable presumption applies to “higher-priced loans typically for consumers with insufficient or weak credit history.”
“If the loan goes south, the consumer can rebut the presumption that the creditor properly took into account their ability to repay the loan,” the CFPB noted.
In that type of situation, the borrower would have to prove the creditor did not consider other factors like living expenses after calculating the mortgage and other debts.
Mortgage industry accepts QM while citing flaws
By Kerri Ann Panchuk January 10, 2013 • 9:14am
The Consumer Financial Protection Bureau launched its qualified mortgage and ability-to-repay provisions to mixed reviews Thursday.
The CFPB introduced the rule at midnight eastern standard time, drawing praise in some cases for including a safe-harbor provision for lower-risk loans and saving the rebuttable presumption standard for higher-risk mortgages. The rule (which is accessible here) would not take effect until Jan. 2014.
But credit unions and consumers groups, along with the Mortgage Bankers Association, still expressed some concern as they dug through the complex guidelines.
Fred Becker, CEO and president of the National Association of the Federal Credit Unions, said the association “appreciates the CFPB including the safe harbor provision.” The provision, as outlined here by HousingWire, only applies to certain low-risk mortgages.
Meanwhile, higher-risk loans come with a rebuttable presumption making ability-to-repay litigation still viable in specific, but narrow instances.
“Credit unions have been and continue to be responsible lenders who work to meet their members’ needs with safe and sound products,” Becker said.
“The safe harbor is preferable for all parties involved in a mortgage loan transaction as it provides clarity and certainty, and consequently discourages frivolous lawsuits, claims or defenses.”
But Becker said the credit unions still worry about a “rigid approach to regulation.”
“We are concerned that the rule could curtail lending by credit unions, and ultimately, negatively impact consumers by limiting the choices of prudent lenders in the mortgage market,” he said.
The MBA also praised the safe-harbor rule that was included, but expressed concerns about compensation rules that could impact members in the lending industry.
“This is a very complex rule. We remain concerned that certain aspects of it could curb competition, increase costs and tighten credit availability for borrowers,” said Debra Still, chairman of the MBA. “In particular, the 3% cap on points and fees appears to be overly inclusive as it relates to compensation and affiliates. Loans with the same interest rate, terms and out of pocket costs should be treated the same under the rule regardless of the organizational structure or business model of the lender.”
The MBA is looking into “whether the interest rate threshold for the safe harbor, which is set at 150 basis points above the benchmark rate, will adversely impact too many borrowers.”
The MBA’s concern is pricing restrictions could keep consumers out of qualified mortgages, specifically smaller balance loans and jumbos.
But the MBA lauded the rule for at least getting standards in place to try to get the origination side of the market moving forward.
“If it also provides lenders the certainty needed to originate qualified mortgages broadly across the market to creditworthy borrowers, it will have been a success,” Still wrote. “However, if the result is a tightening of credit as lenders pull back from offering loans that would create greater risk of litigation, the CFPB may need to quickly revisit the rule to avoid harming the housing recovery.”
John Taylor, president and CEO of the National Community Reinvestment Coalition, said he never believed it was necessary for the rule to carry a safe harbor provision for lenders or even a rebuttable presumption. Instead, he believes the CFPB should have left all potential legal channels for consumers open while simply stating what the guidelines are for a safe loan.
Even though Taylor has suggested consumers should never be barred from presenting legal challenges in court, he is curious to see if lenders will now move forward offering more refinancing and home purchase opportunities to Americans with the safe harbor standard included on lower-risk loans.
“My position is okay you got what you wanted. Now lets see all this lending that you said you were going to do if you got this. There is no excuse any longer,” Taylor added.
Since misallocation of capital/credit always ends in asset deflation, malinvestment continues to pile-up, especially in places like OC.
btw, speaking of malinvestment….
Government Mortgage Enterprises Averaged 30% Risky Loan Purchases from 2001-2008
Fannie Mae and Freddie Mac contributed to the housing bubble, collapse and mortgage meltdown by taking on excessive risk.
Government housing policy is the root cause of the crisis.
http://confoundedinterest.wordpress.com/2013/01/08/government-mortgage-enterprises-averaged-30-risky-loan-purchases-from-2001-2008/
As long as Fannie and Freddie are around they can be abused for political purposes again like in 1992. It’s only a matter of time.
It’s better to have regulations like min 10% or 20% down payment and 43% DTI, but then don’t have a federal guarantee on the loan if it goes into default. Right we have regulations AND a national system.
The GSEs purchased most of the crap near the peak as they lost market share to private investors. I wouldn’t go as far as to say they were the root cause of the crisis, but they did help keep it going with their bad asset purchases near the peak.
Our state government, as liberal and consumer protectionist as it claims to be, allowed the bubble to occur. The CA AG and depts failed to regulate the non-depository lenders in the state that were making the vast majority of NINJA option-ARMs and selling them to Wall Street. Instead of regulating this patently dangerous lending, CA did nothing.
Everyone was euphoric about their illusory wealth, so there was no impetus to stop the music. It was a complete and utter failure of regulation to prevent an obvious Ponzi scheme.
Fed bringing rates to 1% was the main culprit. From this, all else flows.
Sorry IR, the banking industry is overregulated. You are wrong. Government guarantee of bank accounts removes fear and due diligence from depositors. You can’t have it one way with fannie/freddie guarantees and another way with bank account guarantees. They are of the same moral hazard.
Abolish the FDIC and the market will self regulate toward a natural, sustainable level of growth and conservative fractional lending. It is no different than any other industry. Anyone disagree? Thank your counter-education, collectivist psychopath society, and historical revisionist teachers.
Oh, and bring back honest money you disgusting FED apologists. CAPITALISM CANNOT FUNCTION PROPERLY WITHOUT HONEST MONEY. From this, all else flows.
“In addition, lenders are required to determine a borrower’s ability-to-repay upfront by evaluating the consumer’s debt-to-income ratio, earnings, expected earnings, current debt levels and the homeowner’s ability to take on more debt.
The rule also is a death-knell for loans with teaser rates that have the potential to mask the true cost of a mortgage, the agency said.
Under ability-to-repay, lenders cannot base the evaluation of a consumer’s ability to repay on teaser interest rates.
Instead, firms are required to determine a borrower’s ability to repay both the principal and the interest over the long-term. In other words, using an introductory loan period when rates are generally lower will not suffice as an appropriate verification of a borrower’s capacity to service the debt.”
If this rule would have been in place during the housing bubble, the 2/28 loan program given to subprime borrowers would never have existed. That one loan program did much to inflate the price of entry level homes.
IR, I didn’t see any mention of down payments requirements. Did you?
No. And that was the biggest provision I was looking for. They may have dodged it for now.
The 20% downpayment proposal is party of QRM, yet to be released, not QM.
Perspective,
Thanks. I guess the QRM will have even more detailed information. Do you have release date on that proposal?
There’s no definitive date. The QRM proposed rule includes a 20% downpayment requirement. QRM is related to risk-retention requirements for creditors who make non-QRM mortgages.
Short sales in California surpass sales of foreclosed homes
When housing prices first went off the cliff, most mortgage lenders refused to cut deals with homeowners, choosing instead to repossess homes on a grand scale.
Five years and billions of dollars in losses later, many banks can’t cut those deals fast enough, writing off large chunks of mortgage debt and even paying homeowners to move out.
In recent months, short sales — in which banks allow homeowners to sell for less than they owe — have surpassed sales of foreclosed homes in California for the first time since the start of the housing crash in 2007, according to real estate research firm DataQuick. The transactions now represent about a quarter of the market, a surge driven by rising home prices, government crackdowns on foreclosures and banks’ increasing capacity to process the deals.
Lenders have revamped short sale departments, streamlining paperwork, creating new software systems and enlisting newly formed companies as liaisons with borrowers. Some institutions are even paying homeowners sizable sums to move, similar to “cash for keys” arrangements used as an alternative to eviction in foreclosures. Bank of America pays up to $30,000 in relocation assistance for certain successful short sales. JPMorgan Chase will pay up to $35,000. Wells Fargo offers similar aid, though it declined to specify an amount.
When William Morrison asked Bank of America to approve a short sale on his Seal Beach condo, the lender obliged in October — letting him sell for about $192,000 and forgiving an additional $98,000 he owed on his mortgage, according to public records. The bank threw in enough relocation assistance to cover one month’s rent and the deposit on a new place.
“They gave me $3,000,” Morrison said. “And that is exactly what it cost me to secure a little studio apartment in Seal Beach, pretty close to the old place.”
The surge in short sales stems in part from last year’s national mortgage settlement with the nation’s five largest banks. To avoid going to court over foreclosure improprieties, the banks agreed to certain levels of debt forgiveness for underwater homeowners. Short sales count toward those commitments.
Unbelievable. Wish I could get $3,000 for relocation when I’m tired of paying my rent and need a bigger place.
Great reference article today with the French economist. I’m not sure whether it’s reassuring that mankind makes the same mistakes, so we can adjust appropriately knowing what to expect… or if it’s depressing that mankind keeps making the same mistakes and we all suffer for it because the state just keeps recycling history.
I know some that received $30K for moving fees from his lender for the short sale.
It is both reassuring and depressing. The only thing you can do is educate yourself, and those close to you, and then protect yourself financially and physically. Hard assets are salvation.
Historical revisionists, such as ben bernanke, ensure that this bullshit will perpetuate. They spew counter-education and logical fallacies to their audience. the counter-educated masses are made into whimpering, pathetic, ignorant units. Repeat over several generations and here we are.
Let’s see, $3k relocation plus $98k principal forgiveness. I think I’d trade a couple years of a hit to my credit score in order to essentially receive $101,000 in free money. Lucky bastard. And he’ll have a new loan guaranteed by the FHA on a new property within 2-3 years for himself, you watch!
Yes, he will be rewarded in every way for his foolishness. Anyone who denies the impact of moral hazard need only watch what borrowers like this do in the future.
Housing affordability on track to set record: NAR
WASHINGTON (MarketWatch) — Housing affordability is expected to set a record in 2012 due to low prices and interest rates, according to data released Wednesday by the National Association of Realtors. The trade association is forecasting that its index of housing affordability will hit a record level of 194 in 2012, up from 186 in 2011, when the prior record was reached. Data go back to 1970. A reading of 100 means that a household with median income would have exactly enough income to qualify for buying a median-priced existing single-family home. A level of 194 for last year means that families had almost double the income needed for buying a median-priced existing single-family home. Still, economists have been concerned that despite affordability, overly tight credit standards prevented many buyers from participating in 2012′s housing market. For 2013, NAR projects its housing-affordability gauge will decline to 160, which would be the third highest annual level on record.
“Rising home prices and a gradual uptrend in mortgage interest rates will offset improvements in family income,” said Lawrence Yun, NAR’s chief economist.
BofA bought Countrywide because they wanted the long-term servicing rights of Countrywide’s loans. Now that they are selling off much of their servicing right portfolio, the Countrywide deal can be officially considered a complete and utter failure.
Report: BofA May Be Planning to Unload More MSRs
After announcing Monday the sale of nearly $306 billion in mortgage servicing rights (MSRs) on 2 million loans, Bank of America might be looking to unload a little more.
Reuters first reported Tuesday that the bank is planning to sell rights on at least another $100 billion of mortgages. BofA is likely to announce more MSR sales in the next several weeks, according to two unnamed sources who spoke to Reuters.
The bank announced Monday agreements to sell $215 billion in MSRs to Nationstar Mortgage Holdings (in a $1.3 billion deal) and $93 billion to Walter Investment Management (in a $519 million deal).
Sales of servicing rights have become more and more prevalent as associated costs rise and servicers fall to bankruptcy, leaving hungry institutions to purchase their MSRs. The most active buyers as of late have been Nationstar, Walter Investment, and Ocwen Financial Corp., which purchased the servicing rights of the bankrupt Residential Capital, LLC in a joint bid with Walter Investment.
Another factor leading the rapid transfer of MSRs is the impending implementation of Basel III capital rules, which will force banks to either hold more capital for mortgages serviced or to put less premium on the value of MSRs. As a result, more banks are trying to unload their servicing rights to cut costs.
Because servicing companies are exempt from the Basel III Accord, they can capitalize on the sales.
Sources also told Reuters that Ally Financial Inc.‘s banking subsidiary is looking to sell $122 billion of MSRs, and JPMorgan may try to do the same. According to Reuters, Ocwen, Nationstar, and Walter are among a handful of firms attracted to Ally’s MSRs.
A BofA spokesperson declined to comment to Reuters on specific transactions, but he did say the sale of MSRs is part of the bank’s strategy.
“By reducing the size of our portfolio, we improve customer service capacity and resolve legacy mortgage issues and reduce risk in our portfolio,” he said.
I am a bit confused what comprises a MSR.
Forgive my naivete in asking, but in this example, Nationstar Mortgage is paying only $1.3 billion for the ability to collect mortgage payments on $215 billion of outstanding combined mortgage principal? Seems like an appropriate risk amount if so, I guess.
This sale is just a sign of BofA’s desperate cash situation. There is very little risk in servicing. It’s a fee generating cash cow which is why BofA bought Countrywide in the first place. When an organization starts selling off its good assets, it’s usually in its death throes.
It’s great that you have discovered Bastiat! Here are a couple of websites you might be interested in exploring:
http://www.mises.org
http://www.lewrockwell.com
Thanks. I will check out those links.
Thanks tazman.
Less than 20% of the homeowners in CA are free and clear
Published: Thursday, 10 Jan 2013 | 11:12 AM ET
As federal regulators and banks argue over whether new lending standards will make mortgage credit too tight or too expensive, one important fact about the housing market goes largely overlooked: More than 20 million American homeowners own their homes outright. No mortgage.
This represents just about one third of all homeowners nationwide, according to a new report from Zillow, a real estate information, sales and mortgage website.
Demographics, home prices and geographical location all seem to play into “free-and-clear” home ownership, according to Zillow’s survey.
Out of the nation’s top 30 housing markets, Pittsburgh, Tampa, New York, Cleveland and Miami had the highest percentage of free-and-clear homeowners. A high number of all-cash, foreign buyers probably plays into New York and Miami. The other cities have relatively low home values, compared to the rest of the nation, making it easier for homeowners to either buy their homes outright or pay off their mortgages more quickly.
Washington, D.C., Atlanta, Las Vegas, Denver and Charlotte had the lowest percentage of homeowners with no mortgage. Las Vegas, hard hit by the housing crash, saw many of its homes go to foreclosure and those homes then go to all-cash investors.
Demographic factors, like age and credit rating, also influence who does and who does not have a mortgage. According to Zillow, 65- to 74-year-olds are most likely to be free-and-clear, followed by 74- to 84-year-olds.
Obviously the longer someone owns a home, the more likely they are to have paid off a mortgage. When looking at free-and-clear ownership rates as a percentage of homeowners in various age groups, however, Zillow found 34.5 percent of 20- to 24-year-old homeowners are free of mortgages. That may be a factor of the recent housing crash and tighter lending standards.
So what can these factors tell us about the current housing recovery?
One of the biggest drags on the housing market is that nearly one third of all borrowers owe more on their mortgages than their homes are currently worth. These so-called “underwater” borrowers are stuck in place, unless they want to pay in to their mortgages to get out of their homes.
Obviously if a homeowner does not have a mortgage, they are more able to list their home for sale and buy a new property.
“By determining where these homeowners are located, we can also gain insight into potential inventory and demand in those areas, as well,” notes Zillow’s chief economist Stan Humphries.
Looking at the national map, mortgage holders appear to be concentrated on the coasts, where home prices are higher. The center of the country and much of the south carries less mortgage debt.
The lack of equity is also why the move-up market will be moribund for another decade or more. People simply don’t have the cash from savings or a previous sale to complete a move-up purchase.
What Bastiat, and men of good will generally, overlook, is that the reallocation of the plow from the more responsible John to the less responsible James is a feature not a bug, for the socialist and/or big-government enthusiast.
Because the bottom line is that “more responsible” ipso facto means more independent. John is better able to take care of himself. He will always need government, and socialist intervention, less. He will always bring an independent judgment to whether he supports the regime or not, to whether taxes should be higher or lower, to whether his freedoms should be curtailed or not — because he is not driven by simple dire need.
Not so James. James is clearly dependent on government. Without them, he won’t get his plow. He is a guaranteed 100% supporter. He will always vote for higher taxes, more programs, more intervention, and he doesn’t mind his and anybody else’s liberty being constrained — because he is not voting his conscience, but his purse, his stomach, his livelihood. James is the kind of guy who lives in the Philadelphia wards where the vote was 8000 Obama 0 Romney. You can’t get that kind of lopsided Stalinesque results uniess there is no more freedom of thought.
And even John will be transformed by this action: he has now been deprived of a plow to which otherwise his good habits and reputation would have entitled him, privately. What has he learned? That thrift and good reputation mean nothing compared to access to government. He will, therefore, as an adaptable and competent person, drop his habits of thrift and private repuation, and focus his efforts on ensuring access to government. He’ll work the system, and he, too, will become a client of the socialist.
A socialist must, above all, convince men far and wide that a massive, intrusive, and expensive state apparatus is 100% necessary for their survival. The last thing he wants is for his audience to consist of independent-minded self-sufficient men who can and do manage their lives competently on their own.
So the socialist will deliberately re-allocate credit from the naturally credit-worthy to the naturally credit-unworthy, because that turns both of them into his dependents, and keeps him in power.
You think Barack Obama, Timothy Geithner, and Ben Bernanke are stupid? They don’t know what the long-term results of current policy are? Of course they know. They’re smart guys. They know exactly what they’re doing, and it will be enormously profitable for those who will be part of the new aristocracy.
Barack et. al., socialists? Really? The only socialist thing here for the last 30+ has been “socialize the losses, privatize the profits“! The improper loans were not made because the gummint wanted to ‘socialize’ the masses w/free houses, the improper loans were made because 1-the loan originators (many of them brokers w/no ‘skin in the game) made a butt-load of money making the loans, 2-the loan servicers made a butt-load of money on fees 3-the market had an insatiable desire for mortgage backed securities 4-the rating agencies only got paid if the bonds were rated AAA regardless of the crap that was in the bonds themselves 5-the bonds were sliced & diced six-ways to Sunday and then sold to each & every meaning no one would have money at risk as the gummint via the GSEs eventually ended up with all the risky bonds. If you want to call that ‘socialism’, fine, just admit it was socialism for the 0.1%. IR has profiled a number of people who have cheated the system but for every $1 taken by a ponzi some banker got $100K of ‘em.
Reread Bastiat.
Regarding your #3 insatiable desire for MBS:
Dig deeper. Find out where the insatiable desire came from. Understand that centrally planned interest rates, set too low, have profound effects on where institutional money parks its money. Those managing these funds (lemmings) compete with others (lemmings) for client funds based on short(ish) term returns. Other products (managed by other lemmings) with guaranteed returns are pushed out further on the risk curve seeking returns as well. And we wonder how it becomes one incestuous clusterfuck? Centrally planned interest rates, that’s how. Research ‘repurchase agreements and rehypothecation’. Von Mises warns repeatedly of these false signals misinterpreted by the majority of businessmen and the resulting bust.
And obama is a collectivist. This means he is some toxic combination of communist, marxist, socialist, statist, anti-capitalist, anti-individual, central-planning apologist. In this digital age, he can lazily (in true marxist fashion) make you pay for his agenda by way of the keyboard shortcut CTRL-P (money printing). Also in true marxist fashion, he does not need to pay to have his useful idiots (voters) shot; no, the useful idiots will be dealt with via financial bloodshed – increasing dollar debasement. Hyperbole you say? Watch it unfold. Watch your standard of living get kneecapped.
Yesterday’s Bastiat article was sensible (about free-spending vs. cautional-spending), today’s was BS. Debts in a sovereign currency that is the only currency payable for tax debts in that sovereign currency can/will always be repaid and we look to the gummint bond markets to see what sorts of bond rates are extant in order to understand what sorts of currency inflation we are experiencing. Personally I’m mostly cash these days & would love enough inflation to make CD rates worthwhile again, WGAS if my MM rates are 0.3% vs a CD rate of 1%, $0.30/ per $!00 is no greater than $1.00/$100 if you don’t have $10M…. The classical meaning of “Socialism” is “the workers owning the means of production” aka the state owning the factories. You bomb throwers, please tell me what factories Obama has decreed they own. You really need to examine MMT, gold-standard policies are really non-applicable to floating sovereign currencies.
1. You dont want inflation to increase your returns, you want positive real interest rates. We have negative real interest rates.
2. obama is a collectivist. you can nitpick over classical definitions, but his centrally planned ZIRP is not only anti-capitalist and anti-American, it is anti-human. Putting ZERO time value on a human’s past productivity (rich or poor matters not) means obama and bernanke place ZERO value on hours of the workers life.
3. we do not have floating currencies. we have central banks who peg currencies to each other, explicitly, or implicitly via concerted debasement. The gold standard absolutely applies as a disciplinary check. It always will too.
Fed’s Bullard Sees Difficulty Tying QE to Economic Levels
By Joshua Zumbrun – Jan 10, 2013 11:00 AM PT
Federal Reserve Bank of St. Louis President James Bullard said it may be difficult to tie the central bank’s $85 billion monthly bond purchases to numerical levels of unemployment and inflation.
After settling a debate over how long to hold interest rates near zero, Fed officials are debating when to halt their purchases of Treasuries and mortgage-backed securities. At its December meeting, the Federal Open Market Committee agreed to hold the target interest rate near zero so long as unemployment remains above 6.5 percent and inflation stays below 2.5 percent.
Attempts to also put thresholds on the timing of asset purchases may be a bridge too far,” Bullard said today to the Wisconsin Bankers Association in Madison, Wisconsin, according to prepared materials from the St. Louis Fed.
Bullard said last week that unemployment could drop to about 7 percent by the end of this year, which may be enough improvement for the FOMC to halt the purchases, known as QE3 for the third round of quantitative easing.
“With QE3, the Committee instead seeks ‘substantial improvement’ in labor markets before pausing purchases,” Bullard said. “The Committee may also taper the program as needed.”
Mortgage Debt
The central bank began purchasing $40 billion a month of mortgage debt in September and announced purchases of $45 billion a month of Treasuries at their December meeting. If the program continues until year-end, purchases would total around $1 trillion and the Fed’s balance sheet would approach $4 trillion.
Minutes of the Fed’s December meeting show a split among policy makers over how soon the program should end. “Several” members of the FOMC said it would “probably be appropriate to slow or stop purchases well before the end of 2013,” according to the minutes. A “few” were willing to let the program run to the end of the year while “a few others” didn’t give a time frame.
Bullard said the Fed will “have to make a judgment concerning the program as macroeconomic data arrive.”
The St. Louis Fed chief forecast the economy could grow 3.2 percent in 2013 and 2014 as inflation will remain near the Fed’s 2 percent goal. That’s more optimistic than the median estimate in a Bloomberg Survey of 96 analysts, showing growth of 2 percent in 2013 and 2.8 percent in 2014.
Fed presidents rotate voting on monetary policy, with Bullard scheduled to join the committee at the FOMC’s January 29-30 meeting. Also joining the committee are Chicago’s Charles Evans, who led the campaign to link interest rates to economic conditions, Boston’s Eric Rosengren and Kansas City’s Esther George.
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
IR, thanks for posting Bastiat. Excellent job tying it into our current socialized mortgage market.
Recommend everyone add these to their favorites bar:
http://www.mises.org
http://www.lewrockwell.com
Kyle Bass
Peter Schiff
Jim Rogers
Marc Faber
Doug Casey
Just as irvinehouseblog and ochousingnews allow for more intelligent real estate consumers, these sites/individuals help promote a more intelligent voter and citizen.
Truth cannot be found in our colleges, our media, or our politicians. Where else can it be found? Internet blogs – information and education in free market form.
Peter Schiff just increased his inflation forecast.
Mike, if they dont stop the QE, all the dollars around the world are going to be repatriated here. We have been exporting our inflation for decades and when those dollars come back, and they most definitely will, we are going to experience hyperinflation. Schiff will be vindicated. He can make these wild calls because he understands base level economics and his mind is clear of the BS people like Krugman spew.
A New Start –
Philip Pilkington: The Origins of Neoliberalism, Part II – The Americanisation of Hayek’s Delusion
check this & surrounding articles out. IR, I’m concerned you started w/Rand & are now moving to Hayek & Von Mises. These guys are neoliberal porn and have no relevance to reality…
How do you feel about Paul Krugman?
How do you feel about the New Deal?
How do you feel about current bank bailouts and homeowner stimulus?
The market is completely broken due to the purveyance of ideas you hold.
I am reminded of the painting of Aristotle and Plato I use as a graphic. Plato was concerned with the world of forms, a deeper truth, while Aristotle was concerned with practical realities of daily life. I see the same battle in economics. The Austrian School looks at a deeper reality of how the economy works and notes the distortions of the market caused by government policy and central banking. The more I understand about Austrian economics, the less flaw I find with it.
However, Monetarists and Keynesians rule the world. Their policies don’t work, and they end up creating economic problems which increase their power as they are looked to for solutions to the very problems they create. To ignore the monetarists is to ignore the realities of modern economic finance. We are probably too far down the road to ever get back to a free market of pure Austrian economics, so dealing with monetarist policies is just the reality of life. However, that doesn’t make them right, it just makes them powerful. And pointing out the errors of their ways and the results of the economic distortions their policies create is useful and enlightening, and it may even steer the ship away from the rocks every once in a while.