REO-to-rental hedge funds are latest bogeymen touted by the political left. The evil Wall Street money grubbers are profiting from the disaster created by the Banksters. It’s a narrative Matt Taibi popularized, and now others are jumping on the bandwagon. The latest diatribe from the left attempts to link their pet cause principal forgiveness to the activities of REO-to-rental hedge funds. As many political screeds are, this one is loaded with emotional pandering and is weak on good reasoning.
The housing “recovery” is a myth
Wall Street is running a new profit game by buying foreclosed homes and renting them back to their former owners
[and this is a bad thing?]
Thursday, Feb 7, 2013 08:40 AM PST — By Shabnam Bashiri
Every day, it seems a new report comes out praising the ongoing housing recovery. In Georgia, home prices are up 5 percent over last year, a year in which we also had one of the highest foreclosure rates in the country. Seems a little odd, doesn’t it? Don’t foreclosures usually drive down the market?
That’s because the housing “recovery,” as they’re calling it, is fueled almost entirely by Wall Street private equity firms, hedge funds and the Fed’s unwavering support.
This article started out very promising. The title catches your attention, and the first two sentences sum up the current situation accurately. Unfortunately, it’s downhill from here.
After creating a massive bubble in home prices that eventually burst and caused our economy to go into a tailspin, these guys have decided to come back for more, and figured out a way to profit off their destruction — by turning foreclosed homes into rentals and securitizing the rental income.
Wait a minute. “These guys” paints all Wall Street money with the same brush. The private equity funds buying up properties today were not the same guys that funded the housing bubble. Further, it took two parties to inflate the housing bubble, stupid lenders willing to fund stupid loans and borrowers willing to take the money. Today’s hedge funds are buying properties cash with no borrower to facilitate their deals.
Many are claiming this is the “private-sector solution” for the recovery we need to get the economy going again. The argument goes that investors snapping up these homes and fixing them up does more for the community than letting the houses just sit there, blighting the neighborhoods and lowering values.
Yes, that is the argument, and it’s a good one. Nothing that follows refutes that point.
That argument might have made sense for the pilot program Fannie Mae launched last year. In that bulk auction deal, investors had to agree not to sell properties facing foreclosure for a designated period of time. Many of the homes were occupied with tenants, and vacant homes had been on the market and not sold for at least six months. Of course, that deal proved too restrictive for most Wall Street types, leading the sale in Atlanta to eventually fall through.
So how exactly does that invalidate the argument that this is a good private sector solution. What it does point out is the Fannie Mae almost botched it by imposing too many restrictions. The free market is working whereas the government regulated one is not.
The Blackstone group, the biggest player in the new REO to rental market, has spent $2.5 billion in the last year purchasing 16,000 homes, a number that amounts to over $100 million per week. Property records show that many of the homes Blackstone has acquired in Fulton County over the last few months were purchased on the courthouse steps at the monthly foreclosure auction, or through short sales—when a lender agrees to accept less than the amount owed on a loan. The vast majority of these homes are not empty, but occupied by homeowners who fell behind during the great recession.
Is that a bad thing? Blackstone probably kept most of these people on as tenants so they wouldn’t have to move. What’s wrong with that?
The sale often represents the last nail in the coffin of foreclosure in Georgia, a non-judicial foreclosure state where there is very little opportunity or time to make good once a homeowner falls into default.
The implication here is that somehow a normally executed foreclosure process is too fast or unfair. That’s bullshit. Further, like everywhere else in the country, foreclosure processing has been slowed in Georgia to the point that borrowers are squatting for years.
Blackstone, operating under its subsidiary, THR Georgia, buys the homes for cash, usually at deep discounts from the principle balance owed on the mortgage. Take one of the homes it snapped up at the November auction as an example: THR purchased the Southeast Atlanta home at auction for $90,000. The principle due on the mortgage that was foreclosed upon was $219,300.
Again, what’s wrong with that. The false implication here is that Blackstone got some kind of a sweetheart deal buying a $219,300 house for $90,000. In fact, Blackstone was the highest bidder at a public auction for a house probably worth about $110,000 today. The fact that it had a $219,300 mortgage on it just underscores how far prices have fallen and how stupid lenders were during the bubble.
If banks were willing to offer principle reduction on these inflated mortgages down to the same price they are willing to sell at auction, many homeowners would likely be able to afford their payments, and stay in their homes for years to come, contributing to the stability of the neighborhood.
Whoa! Stop right there! First off, Principal reductions fail to reduce future default rates, so the contention that it has a stabilizing effect is not proven. Also, foreclosure Is a superior form of principal reduction. The last thing we want to do is start widespread principal forgiveness because it is the worst policy option. It inevitably leads to moral hazard, which is central issue in housing bust.
I want to cloak this in terms those on the political left will understand. Principal forgiveness is like prayer in public schools. It’s an issue that everyone on their side of the political spectrum can agree on, but if it were every instituted, it would quickly break down to chaos. In the terms of prayer in public schools, once it were implemented, the coalition that supported the idea would quickly break down in heated arguments over which prayer it should be. Similarly, every loanowner wants free money, but if principal forgiveness were every to be implemented, it would quickly break down into heated debate over who gets what.
If you forgive the full amount of underwater borrowing, besides being extremely expensive, it tends to reward the most reckless borrowers. Those who were prudent get very little while those who were very irresponsible get a huge payday. And what about the HELOC abusers. Does anyone, other than the HELOC abusers themselves, want to see them get free money? Won’t the forgiveness of this debt change future borrower behavior in a bad way? The reality is that any principal forgiveness program is loaded with moral hazard problems. The left would rather ignore this truth and pander to those looking for a government handout.
Instead, homeowners get a flier posted on their door the day after Blackstone purchases the home, offering them the opportunity to rent the home they once owned.
One of the properties I bought in Las Vegas still has the former owners living in it. Their current rent is $1,000 per month whereas their old mortgage payment was $2,200. When we bought the place, we put $5,000 into the property fixing it up. These people still get to live in their family home, pay less than half the monthly cost, and the home is in better condition now. I don’t feel as if these people are being ripped off. Do you?
Meanwhile, the deep pockets of firms like Blackstone allows them to outbid virtually everyone else in the market—eliminating any chance of owner occupants looking for a new home to get a good deal while prices and interest rates are low.
Eliminating any chance? Really? The hyperbole is getting silly. Hedge funds can easily be outbid by owner occupants for MLS properties. Hedge funds want to get a good price whereas owner-occupants are buying a home for their family. People buying houses for themselves will always bid more aggressively because they don’t need to make an immediate cash return on their investment.
Blackstone has partnered with Dallas-based Riverstone Residential, the nation’s largest third-party property management company, to form “Invitation Homes.” In a three-minute commercial for Invitation Homes posted on the company’s Web site, Jonathan Gray, head of global real estate at Blackstone, claims that “there are 12 million single family homes for rent in America, but it’s not done on an institutional basis.”
The rental market has traditionally been dominated by mom-and-pop investors, most with fewer than a couple dozen properties. Many landlords build relationships with their tenants, and the communities in which the homes are located. They hire local contractors to do maintenance work, and spend the income generated from rent back in the local economy.
For as much as I would like to embrace the romantic picture of mom and pop investors like myself, most of that characterization is bullshit. Landlords don’t build relationships with tenants. I’ve never met my current landlord, and I don’t care to. I’ve never met any of the tenants in the properties I own, and I don’t care to. It’s a business arrangement that doesn’t require personal interaction.
Tenants and landlords usually communicate through an property manager as an intermediary. Only in cases where landlords self manage do they meet their tenants.
As far as stimulating the local economy, both mom and pop landlords and huge equity funds hire local contractors, so that money continues to circulate. Most mom and pop landlords have loans on the property, so a significant amount goes out of the local economy, so they aren’t much different than hedge funds in that regard.
That’s not how Riverstone operates. Its Web site touts the array of services it offers in-house for property owners, from contracts with telecom and utility providers, and exclusive partnerships with suppliers, to in-house screening and debt collection. Riverstone is a one-stop shop for property management.
So Riverstone provides a superior level of service, and that’s a bad thing? Most of that money still circulates in the local economy. Property management is a local business. Riverstone will have employees and contractors anywhere they have properties, and those employees and contractors are spending in the local economy.
Probably the most disturbing of all is the partnership between Riverstone and credit reporting agency Experian. Riverstone entered into an agreement last year with Experian Rent, to turn over real-time payment history on all of its residents to be compiled into a national database.
A press release Experian put out when the deal was announced stated that, “by furnishing resident rental payment history data to Experian RentBureau, Riverstone will immediately enhance the effectiveness of its rental collections while decreasing bad debt levels and encouraging proactive rental payment practices among its residents, leading directly to increases in net operating income (NOI) and the bottom line.”
This kind of data will help Blackstone and other large firms to eliminate some of the doubt and uncertainty around renters and their stability to investors.
So what is so disturbing about that? It sounds efficient to me.
For the average renter, however, the consequences could be detrimental. Gone are the days of calling up your landlord to let them know rent will be there on the 7th instead of the 1st this month.
So being an irresponsible deadbeat is the right of every renter?
As more and more Americans live paycheck to paycheck, and wages continue to decline or remain stagnant, paying rent a few days late could lead to a negative credit score, impacting their ability to secure resources and move up the ladder of the middle class.
If the consequences are so dire, then perhaps they should be sure to pay their rent on time. This has to be one of the stupidest objections I have ever read.
Blackstone’s Jonathan Gray wouldn’t know much about that. He made $36.5 million in 2011. His boss, Blackstone CEO Stephen Schwarzman made $213.5 million.
Should they be penalized for their success?
This new plan further grows the disconnect between Wall Street and Main Street, and the difference between the 1 percent and the 99 percent.
Let’s stoke the class warfare meme whenever possible.
Interestingly enough, purchasing single-family homes isn’t Blackstone’s only recent foray into the housing market. In the lead-up to the crash, Blackstone’s hedge fund group, BAAM, chose to bet against the subprime market, purchasing credit default swaps and collecting billions in profits when the cards fell.
Sounds like Blackstone is run by some bright guys. How can I invest?
Blackstone’s hedge funds are now spending millions purchasing those very same subprime mortgage bonds for pennies on the dollar, betting on home prices going up, leading more homeowners to refinance and reinstating the value of these junk bonds. It’s a constant game of speculation for Wall Street, which culminates in bubbles being created, the rich getting richer, and communities losing control over the places they live.
In the wake of one of the greatest financial disasters in modern times, you’d think we’d have learned our lesson. Like they say, fool me once, shame on you. Fool me twice, shame on me. Maybe what we need this time around are solutions that help people find long-term housing stability, instead of chasing short-term fixes that will land us right back where we started.
Actually, we took a great first step toward avoiding another debacle. The new mortgage regulations will prevent future housing bubbles. What we don’t need is to embrace the stupid ideas about principal reduction expounded in this article.
REO-to-Rental is superior to principal forgiveness
Let’s say for a moment that proponents of principal reduction get their way and everyone gets free money and stays in their homes. Who does that hurt?
Everyone.
First, it obviously hurts the bankers and investors in bank stocks. That part I like, but then they will ask for another huge bailout, so in reality, it will be the US taxpayer picking up the tab.
Second, it hurts the owners. Yeah, I know it looks like they are getting a good deal, but this merely spares them the consequences of their poor decisions. Ultimately, it will lead to even bigger and most costly mistakes in the future. Plus, it will impact their attitudes and beliefs in ways that detracts from their character.
Third, principal forgiveness would screw prudent savers and first-time homebuyers. As I’ve pointed out before, the houses lost in foreclosures are found by another family. Nobody tells their story, but for each over-indebted loanowners put out of their misery, a nice family is waiting to move in.
That Option ARM was a bad idea
The Option ARM was the most toxic loan ever conceived. It was largely responsible for the housing bubble. Without the Option ARM, Wall Street wouldn’t have had a mechanism to dramatically increase loan balances on meager income and inflate house prices. Of course, borrowers had to play their part too, and those who didn’t inflate the bubble took advantage of it and withdrew their equity and blew it on trinkets and other useless crap.
The former owners of today’s featured property were no major HELOC abusers. They did increase their mortgage balance by about $100,000 during the runup, but by OC standards, they were prudent. Unfortunately, on 7/23/2007 they cashed out with a $516,000 Option ARM.
Although the notices of default and sale suggest the bank processed the foreclosure in a timely manner, the outstanding balance on the loan says otherwise. The unpaid balance increased by $75,000 since the loan was originated. The borrowers probably only made the teaser rate payment until the loan recast, then they simply quit paying. They hid in shadow inventory while the unpaid balance ballooned.
Wouldn't you be embarrassed to overpay by $100,000? Only fools buy houses without knowing neighborhood values. Don't be a fool. Don't suffer the pain of an underwater mortgage. The surest way to lose your house is to overpay for it. Our reports identify overvalued and undervalued neighborhoods. Use it to broaden or narrow your search area. Savvy buyers work with us to find bargains. We've saved thousands from financial ruin. Let us save you too. If you want peace of mind while shopping for your next home, sign up for our monthly market newsletter.
5711 Huntley Avenue, Garden Grove, CA 92845 (MLS # DW13013873)
(all data current as of 5/23/2013)
| Price | $479,900 |
|---|---|
| Beds | 4 |
| Baths | 2 full |
| Home size | 1,448 sq ft |
| Lot Size | 6,000 sq ft |
| Days on Market | 35; |
Move in ready, all new flooring, paint and updated kitchen. Pool and gas fire pit in backyard.
Property Type(s): Single Family, Residential
| Last Updated | 3/13/2013 | Tract | Unknown (Other (OTHR)) |
|---|---|---|---|
| Year Built | 1963 | Community | Garden Park |
| Garage Spaces | 2.0 | County | Orange |
| Total Parking | 4 |
Listing information deemed reliable but not guaranteed. Read full disclaimer.
(view all details for MLS #DW13013873)
Proprietary OC Housing News home purchase analysis
5711 HUNTLEY Ave Garden Grove, CA 92845
$479,900 …….. Asking Price
$267,500 ………. Purchase Price
4/3/2000 ………. Purchase Date
$212,400 ………. Gross Gain (Loss)
($38,392) ………… Commissions and Costs at 8%
============================================
$174,008 ………. Net Gain (Loss)
============================================
79.4% ………. Gross Percent Change
65.0% ………. Net Percent Change
4.5% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$479,900 …….. Asking Price
$16,797 ………… 3.5% Down FHA Financing
3.59% …………. Mortgage Interest Rate
30 ……………… Number of Years
$463,104 …….. Mortgage
$122,313 ………. Income Requirement
$2,103 ………… Monthly Mortgage Payment
$416 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$120 ………… Homeowners Insurance at 0.3%
$521 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$3,160 ………. Monthly Cash Outlays
($406) ………. Tax Savings
($717) ………. Equity Hidden in Payment
$20 ………….. Lost Income to Down Payment
$140 ………….. Maintenance and Replacement Reserves
============================================
$2,195 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$6,299 ………… Furnishing and Move In at 1% + $1,500
$6,299 ………… Closing Costs at 1% + $1,500
$4,631 ………… Interest Points
$16,797 ………… Down Payment
============================================
$34,026 ………. Total Cash Costs
$33,600 ………. Emergency Cash Reserves
============================================
$67,626 ………. 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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Nearby Foreclosures
Gain a competitive advantage over other buyers. By locating distressed properties -- before they hit the MLS -- you can discover where tomorrow's REOs and short sales will appear. Most of these properties are not listed on the MLS, but they will be soon. Research properties in advance and get a jump on your competition. Don't miss out on another deal because you couldn't act quickly. Use this tool to your advantage! The red properties are already bank owned. As soon as REO asset managers prepare them for sale, they will be on the MLS. Get ready! The green and blue properties have owners who are not paying their mortgages. They may be offered as short sales, or they may go through foreclosure and become REO. Either way, they will also likely be available on the MLS soon. Find your next home! Be prepared to offer on these properties by researching them in advance or risk losing out to buyers who are have done their homework. Start your research today! To find distressed properties, enter your desired location and press search. Scroll through list by pressing "next."
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UPDATE: “inflation looming”
Holdings from 12/31 – 1/31:
Treasury increased from 26% to 30
MBS decreased from 42% to 37
http://investments.pimco.com/Products/pages/346.aspx?selectedtab=3
Can Kicking: Foreclosures Delayed with 850K Mods, 422K Short Sales in 2012
For all of 2012, servicers completed more than 850,000 loan modifications, while the industry also continued to push for another foreclosure alternative—short sales, according to recent data from HOPE NOW, an alliance of mortgage servicers, investors, mortgage insurers, and nonprofit counselors.
Out of the 850,034 completed mods, 661,363 were proprietary modifications, and 188,671 were through the government’s Home Affordable Modification Program (HAMP), data from HOPE NOW revealed. For all of 2011, services completed 1.05 million mods. As of 2007, the number now stands at 6.06 million modifications, of which 1.1 million mods were through HAMP.
Since 2009, the industry has seen 1.15 million short sales, with 422,605 short sales occurring in 2012 alone. In 2011, completed short sales reached 372,168.
“In the past year, there has been unprecedented work from the industry with respect to short sales as a viable mortgage solution,” said Eric Selk, executive director of HOPE NOW. “For example, many mortgage servicers have staffed our borrower events with short sale specialists in order to help train real estate agents and created intake portals specifically for the short sale process.”
The group also reported foreclosure starts and completed foreclosure sales decreased in 2012 compared to 2011. For all of 2012, foreclosure starts numbered 1.92 million, down 14.8 percent from 2.25 million in 2011. Completed foreclosure sales fell 7.3 percent to 779,220 in 2012 from 840,186 in 2011.
Loans in danger of rolling into foreclosure status decreased as well as the inventory of 60-plus delinquencies shrunk in December 2012 from 2011. At the end of 2012, 2.52 million loans were past due 60 or more days, down 9.6 percent from 2.79 million during the same time in 2011. The findings are based on data from the Mortgage Bankers Association.
On a quarterly basis, completed loan modifications increased while foreclosure starts and sales were on the decline. From Q3 to Q4 in 2012, completed mods reached 185,608, representing an 8.3 percent quarterly increase.
Foreclosure starts plunged 27.2 percent in Q4 to 363,499, down from 499,362 in Q3, while foreclosure sales were fell 3.6 percent to 188,814 in Q4.
The recovery is investor driven
California Sees Record Number of Cash-Purchased Homes in 2012
The number of homes purchased with cash in California reached an all-time high in 2012 as the mortgage environment kept other interested buyers out, according to DataQuick, a real estate information service.
The company’s data shows a total of 145,797 condos and houses were bought without mortgage financing in 2012, up from 125,812 in 2011 (the previous high) and 39,731 in 2007, when the housing market started to deflate.
Percentage-wise, cash purchases accounted for a record 32.4 percent of California’s overall home sales last year, up from 30.4 percent in 2011 and more than double the annual average of 15.6 percent recorded since 1991.
“It’s clear that a lot of today’s housing market recovery is being fueled by people putting their own money into homes. Some cash buying is part of a normal housing market, but we’re at twice that normal rate,” said DataQuick president John Walsh. “There are always some rich people, also buyers from abroad, but in a normal market the biggest single category would be retirees and empty-nesters who are down-sizing. Today, a lot of buyers are chasing what they view as the deal of a lifetime.”
According to Walsh, the increase in cash buying comes from high investor interest, a higher perceived return on investment, and a currently difficult mortgage environment.
Boxer and Menendez Pander to Loanowners
Two U.S. senators reintroduced legislation designed to open up competition and limit barriers to refinance for qualified homeowners who are otherwise left without options.
Senators Robert Menendez (D-New Jersey) and Barbara Boxer (D-California) reintroduced The Responsible Homeowner Refinancing Act of 2013, a bill that would allow homeowners to take advantage of low interest rates by reducing or removing certain refinance requirements.
“We need to bring much-needed relief now to hard working, responsible homeowners who are struggling to keep up with their high interest rate loans — including thousands in New Jersey whom I have heard from,” Menendez said. “We need to do this before interest rates go up again. It’s time that Congress finally put families first and give homeowners who have played by the rules a fair chance to refinance at today’s low rates.”
Firstly, the bill would direct the GSEs to require the same streamlined underwriting and associated representations
and warranties for new servicers as they do for current servicers, leveling the playing field for lenders and servicers.
The bill would also expand access to low-cost refinances to borrowers with higher equity and would eliminate employment and income verification requirements for eligibility under the Home Affordable Refinance Program (HARP) based on the justification that HARP-eligible borrowers must already be current on their loans and must have demonstrated a commitment to paying on time.
In addition, the act would require the GSEs to develop additional streamlined alternatives to manual appraisals, reducing cost and time for borrowers and lenders alike.
Finally, S. 249 would also extend HARP by one year, pushing it through to the end of 2014.
What I worry is that as DeMarco moves on he will get replaced by someone that will open the principal reduction flood gate. Also if principal reduction, in theory, were to happen, mortgage rates would have to greatly increase. Because now mortgages would be closer to consumer debt, they wouldn’t be as secured. I doubt the fed would let that occur, but mortgage had low rates because they were secure and the borrower 20% down payment.
As long as the interest rates are determined by the federal reserve and all loans are backed by the US government, principal reduction wouldn’t impact rates or the ability to get financing. Private money won’t do these deals without the government backing, so it would certainly be contrary to the stated goals of reducing the government’s footprint in housing.
Wow….
Yellen: Fed To Keep Treasury and Mortgage Rates Low Even AFTER Inflation/Unemployment Targets Met
Posted by anthonybsanders
Bloomberg Briefs: Federal Reserve Vice Chairman Janet Yellen signaled stimulus may outlast the Fed’s bond purchases, saying the central bank has the option to hold interest rates near zero even after reaching near-term targets for inflation or unemployment. “When one of these thresholds is crossed, action is possible but not assured,” she said in a speech to the AFL-CIO in Washington.
In other words, The Fed may continue QE’ing even after the unemployment target is met and inflation exceeds the target rate.
That’s because the improvements are from manipulation. As soon as they take away the artificially low rates/QE things will get worse and they know it.
Eric in Vegas is correct. They know they will need to keep interest rates low even if they meet one of their thresholds because if they don’t, the economy will tip back into recession. This is exactly the dilemma the central bank faced during the 60s and 70s.
Obama Considers Shifting More Bank Losses to Taxpayers
One of the more significant moves under consideration is in housing. Obama is weighing whether to use his executive authority to give more of the country’s nearly 11 million struggling homeowners a chance to refinance at today’s ultra-low interest rates, according to the Treasury Department and others in talks with the administration on the issue.
Obama already has used his executive powers to make refinancing easier for people with loans backed by government-financed mortgage companies Fannie Mae and Freddie Mac. But the new plan could extend the opportunity to people who are underwater on their privately backed mortgages, which have not been eligible for the same relief.
The plan, if adopted, would likely be aimed at homeowners who have otherwise kept up with their mortgage payments but have been unable to refinance because the loan against their home exceeds its depressed value. Many Republicans in Congress have balked at the idea amid concerns over the cost to taxpayers.
I give up I’m becoming a Ponzi. There is no reward for paying your mortgage or your rent. I’m joking, of course, but it just seems the that way.
I’m going to guess, that even if HARP is extended to non-GSE mortgages, that having subordinate debt is still going to be a roadblock. Does HARP currently allow an underwater first to refi and simply re-subordinate a completely underwater second?
There are many holes in your argument today. I have come to think that the words “principal reduction” are a psychological tripwire for you, much like “let’s play some solitaire” were for Raymond in The Manchurian Candidate.
My first and most obvious objection is that PE in general and Blackstone in particular are not the free-market clean-up force you suggest here, but rather the demon spawn of our oligopolistic overlords in DC and on Wall Street. They do not collect money from investors to buy these cash houses. They sell debt, hewing profitably to tax laws they have created over decades via their creatures on Capitol Hill. They do not pay taxes on their profits for much the same reason. They are not like the rest of us. They are on a separate plane.
How are mere mortal homebuyers to compete against their like in the grubby local real estate market? Answer: they don’t. This is market distorting, plain and simple. What I saw up close while shopping for a house was that ordinary people could not get close to actual deals on distressed housing. If you put in an offer, suddenly a counter appears out of nowhere. Wait a few months for the deal to close, and come to find (I kid you not) that they buyer was the realtor’s wife. The door to this dice game is closed and you are not invited.
As for principal reductions, that is a completely separate question, one which I generally agree with you is not a path we want to go down, tho I suspect for different reasons. Principal reductions at the start of the meltdown would have been helpful, but now with years of squatting, courtroom shenanigans, and market manipulation clouding values on all sides (and yes, I mean values in every sense of the word) who could possibly determine how much to reduce? Do you reduce based on present value, money invested by homeowners, willingness of investors to take a hit, willingness of government to take the hit for them, or some arbitrary percentage of what the occupant/owners make now and how much they can afford to pay??? What a nightmare! Far too much room for fraud, manipulation, and outright theft.
So, I’m not saying that PE can’t be a part of the solution, but right now there contribution is murky at best. And I’m not saying principal reduction is always wrong (as I think you would argue) but I don’t see how it would work to anyone’s benefit right now. Better solution: let people out of their prison (or turn them out if they don’t want to go) and expedite their return as humbler, wiser owners in a year or two.
“Do you reduce based on present value, money invested by homeowners, willingness of investors to take a hit, willingness of government to take the hit for them, or some arbitrary percentage of what the occupant/owners make now and how much they can afford to pay??? What a nightmare! Far too much room for fraud, manipulation, and outright theft.”
It would be an open invitation to fraud and theft, and many people would do so.
With rising prices, the possibility of widespread principal reductions is greatly reduced. With prices going up, reducing principal is unnecessary because loanowners can just wait for the rising market to bail them out — at least that’s how legislators should probably see it. There is no need to spend a trillion tax dollars bailing people out when the market will do it for them.
Principal reduction is alive and well, and it’s a good option for some. Here’s how it works. You find yourself underwater in 2008, but rates are much lower than your mortgage’s(s’) rate. So you reduce your principal by paying extra – lump sums, a small amount every payday, borrowing on your cars or a 0% credit card offer, whatever. Eventually you’ll get to a point where you can refi or sell. Principal reduction is great!
If I ever find myself screwed by a shady realtor as you’re describing, I’m going to do my best to find that realtor’s aggrieved parties and inform them of the fraud.
There are so many agents doing so much worse stuff that any complaints would fall on deaf ears.
For example, I had a listing agent in Las Vegas use DocuSign to forge my name to listing contracts and change the terms to a full-rate commission when we negotiated something much less. When I took my complaint to the GLVAR, they found nothing wrong with what the crooked realtor had done. If theft through forgery doesn’t rise to the level of actionability, then what does it take?
??????? Sure sounds like someone is getting ‘principal forgiveness’ here, only it’s Blackstone & not the ‘loan-owners’. As a long-time reader I am well aware of and share some of your opinions wrt some of these deadbeats but this article IMHO not only doesn’t make your case, it’s an argument for ‘principal forgiveness’ for ‘we the people’ instead of billion-dollar hedge funds…
It’s going to be interesting to see what loan options are available in the $625k-$1m range in 2014, and to whom…
“…Since the jumbo market currently accounts for 10% of all mortgage finance transactions, while lacking exemptions available in the conforming market, the QM rule will start to shake up the jumbo space in early 2014, Khater asserts. But the impact will not be as extreme. Khater says more than 62% of total jumbo originations today would meet the eligibility requirements of the QM safe-harbor provision…
Jumbo loans will be moderately impacted in 2014. And in the long run, about half of all originations that pass easily pass through the system today will feel the effects of the rules, the report concluded.”
http://www.housingwire.com/news/2013/02/12/corelogic-only-half-todays-mortgage-originations-meet-qm-requirements
Implementing these requirements will impact jumbo market homes here in OC. Lenders are hoping they can kick the can long enough for the move-up market to come back, but I have detailed the many reasons this won’t happen.
You should be thrilled. This means you should be able to get the move-up home you want at a better price. Since previously you were competing with borrowers using insane leverage and unstable terms, leveling the playing field should help you tremendously.
I do like where this is trending. Couple conservative traditional lending standards in 2013 and beyond with stable or rising interest rates, and ~$1m Irvine area homes should experience downward pricing pressure.
Yes. In particularly the $900,000 to $1,200,000 should see the most pressure. There are far too many homes valued in these price ranges to be absorbed by the future buyer pool.
Wasn’t Blackstone partialllypurchased by Chinese investors years ago? Why is Blackstone the whipping dog on the public purchase of FC’s? Yellow peril campaign again?
In the past, many hedge funds were bailed out for their bad investment (Mexico Hedge funds in the early 90′s). If Blackstone’s investment goes south, I bet they won’t get bailed out by the US like the others did.
A $20,000 possible gross margin on a FC is still slim. There’s the cost of vacating the house and getting the house up for sale. Someone who been living in the house for a few free years is not likely to easily give up their free housing and would not have likely kept with the mantanance, taxes and possible last utilities bills. Plus the RE selling fees of 6% to 8% to get a produce a clean title. BTW are mechanics liens wiped out upon foreclouser or are they transferred to the new owners likely utility liens?
At this time, Govt backed loan programs are just another name for liablility transfers from the banks to the taxpayers, bankster bailout program.
Mechanics liens survive foreclosure. In fact, one of the biggest danger in foreclosure buying is a mechanic’s lien that hasn’t been filed yet. Those survive too.
IR,
Looks like the only way to make a profit on those FC is to rent them out and hope for a market recovery. How do you get someone who been living in the place with free rent to start paying money for rent?
When their options are getting evicted and paying rent on a new place or staying put, most will chose to stay put. Either way they have to start paying market rent, so most opt to stay in their homes.
I was thinking the idea of keys for cash and to get a couple more months of free rent might be too big of a temptation.
IR: ”Sounds like Blackstone is run by some bright guys” ??
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Really??
If the former Lehman/Solomon genius’s who run Blackstone are so ”bright”, why is their stock (BX) currently trading @ $18.37, vs its $31 launch back in mid-2007?
Also, their $21.7 billion V LP PEF3283 fund (from 2006–now inactive) only realized a 2 percent net annualized internal rate of return, as of Dec. 31.
Perhaps ‘cunning’ instead of ”bright” would be more apropos. just say’n
They are bright. They sold Blackstone to the Chinese near at the high and now collect the fees and bonus off the top. Best of both worlds for them.
I am no fan of the Right or the Left, but on the topic of principal forgiveness, I’ll attack the Left. I know why politicians pander, but I don’t know why our mainstream, and yes, “liberal” media pushes bad ideas. Is there ever any thorough thought process? Do they ever step back and look at the big picture. Sure, your simple idea might “help” quite a few families in bad positions today, but whom will it hurt? And not just the families that will be hurt today, but years into the future. If principal forgiveness goes mainstream on a wide scale over the next couple of years, are mortgage fees and rates going to reflect this increased cost for the next decade and beyond? Someone should try to quantify just how much it “costs” the public to provide $100k in principal forgiveness to one family.
Perspective,
The federal reserve owns $3 trillion worth of bonds and many are mortgage bonds. If principal reduction goes mainstream how many of these mortgages are owned by the federal reserve? I think they will just print more money to pay for these reductions. The “cost” will be increased inflation The current buyer of most new originated mortgages is the federal reserve, but I could be wrong.
I don’t know about the privately held mortgage bonds. That will probably a direct cost from Fannie or Freddie.
You need to get over the fantasy that they mean what they say. They’re lying. Once you understand that, their motives are clear as crystal. Why do government parasites and their media enablers prefer to keep people bewildered, in bad habits, unable to handle their own affairs? Why do they prefer to encourage such people, and discourage those who are thrifty, sensible, independent-minded, responsible?
The question answers itself. Who is a more reliable client of both sets of people? Who will more reliably send them money, vote for them, watch their babbling news anchors for instructions on what to think and say?
The first goal of power is to keep power. The first goal of those who work in government or the media is to keep the power they have — and that means more dependency, less self-sufficiency, and more irresponsibility — not the other way around.
As for why they frame it the way they do: what irresponsible and incompetent person does not love the message that he is, actually, a very responsible and competent person, and somebody else is to blame for his “bad luck?”
I hear you. The victim mentality/excuse is a strong draw, and you can apply it no matter the height of your success. e.g. If you just miss getting into UCLA and have to “settle” for another UC, you’ll find a narrative that blames others to help soften the pain.
what’s worse is that many of these politicians create the culture of dependency and don’t see it. Some of the wiser and more cynical ones know they’re screwing people, but the idealistic ones probably really believe they are doing something good for the people they dis-empower.
It reminds me of many examples, but one in particular – a story in the LA Times yesterday about the rebuilding of Jordan Downs (a public housing project in LA). The whole story focused on whether the public housing recipients are being treated fairly and whether the plans for mixed-use will work. The reporters interview families who are third-generation born-and-raised Jordan Downs residents. Not once, is there any consideration in the article about whether free housing creates dependency and actually entraps more people than it frees.
Of course they see it. There’s no insight into the culture of dependency that’s blindingly obviously to anyone here — to anyone with a three-digit IQ — that is completely missed by any halfway competent politician. They’re not stupid. You can’t be stupid about people and get elected to major national office time after time.
Instead of assuming they’re blinded by their incredible idealism, or just really dumb about people in certain ways that (strangely!) don’t prevent them from winning elections, why don’t we try the simpler explanation that they know exactly what they’re doing — but they’re not honest about it? They’re salesmen. They’re “selling” a product: Government Help. They get a fat “commission” (re-election, a good salary, access to all kinds of useful power) on any Government Help you happen to “buy” by electing them.
Now let’s just apply the same skeptical realism we apply to, say, real estate agents. In the case of RE agents during the bubble, do we believe they were largely motivated by blnding idealism? That they really believed all that “houses always go up!” stuff they used to
scam another suckerservice another client? Hmm.[...] the original here: REO-to-rental is superior to principal forgiveness » OC Housing News Filed Under 2012, CIA, disasters, foreclosure, hope now, ICE, investors, loan modification, loan [...]
Law of diminishing returns.
BANK OF AMERICA: ‘This Is Not A Fluke’ — The Fed May Have To Ramp Up QE Again
Matthew Boesler Feb. 12, 2013
“This is not a fluke: almost all of the underlying determinants of inflation point to weakness,” writes BofA Merrill Lynch economist Ethan Harris in a note to clients today.
For all of the talk of rising government bond yields and predictions for when the Federal Reserve will taper back its bond buying, Harris says, deflation is still a bigger risk than higher inflation – and disinflation could cause the Fed to actually ramp up QE if it continues.
Several key measures of inflation are actually headed lower, and have yet to bottom out, according to Harris.
“This, along with the fiscal shock, is a good reason to fade the bond market sell-off,” he writes.
The chart below shows Core CPI, Core PPI, Median CPI (calculated by the Cleveland Fed), Core PCE, and Trimmed PCE (calculated by the Dallas Fed).
Harris cites six forces weighing on inflation, summarized below:
* Spare capacity: Official estimates for the U.S. output gap, the difference between potential GDP and actual GDP, range from 3.6 to 5.6 percent – the widest since the 1982 recession. Moreover, the unemployment rate, at 7.9 percent, is still well above BofA’s estimate for the inflation-neutral rate (6.3 percent).
* Labor costs: High unemployment is keeping downward pressure on wages and salaries. Harris says that excepting for a distorted number in Q4, unit labor costs have been “essentially flat” over the past year.
* Imported inflation: The huge gains in commodities we’ve seen in recent years are tapering off, which means the food and energy components of inflation shouldn’t provide the same impetus for rising prices as they did in 2011, for example.
* Inflation expectations: Inflation breakevens are near 10-year averages, and an adjusted measure of inflation expectations using data from the interest rate swaps market shows an ongoing deceleration.
* Monetarist mechanism: Despite the massive increase in bank reserves by the Federal Reserve through its monetary stimulus programs, bank lending remains subdued, as does nominal GDP growth. In other words, those reserves haven’t made their way to the real economy.
* Rising rents: Harris calls this “the one major area of concern” when it comes to inflation. Over the past year and a half, these measures have stabilized following a sizable increase. “However,” Harris writes, “with vacancy rates still low, pressure may return.”
Harris says he expects that “inflation bounces around the Fed’s 2% target, with no clear trend over the next two years,” but warns:
However, if recent trends continue, we will have to revisit that forecast.
If this downdraft sticks, it has important implications for the long-awaited bond sell-off.
Lower inflation should not only put downward pressure on breakevens, it will encourage the Fed to stick to its QE program longer. If outright deflation threatens, the Fed could even ramp up its program.
More QE – imagine that.
Ooo, what a surprise. A finance guy thinks more money printing would be a nifty idea. Next up, Vegas con-men suggest laws against fraud are too strict, and lifting them would boost local economic activity.
I was looking at this article as indication that we headed more currency devaluation and at faster pace. Not good.
A guy at that level doesn’t waste his time talking in order to report on events. His goal is to influence events. His message is Yoo hoo Mr. Federal Reserve Chairman! We need much more happy talk about QE to keep our bottom line healthy and stock prices up. You wouldn’t want to be responsible for a bond crash in Q2 2013, when April 15-related 401(k) and IRA juice stops flowing into the market, would you? Thought not.
But what does he think in his secret heart of hearts? Does he own 200 ounces of gold in a Swiss non-banking facility? We’ll never know. You don’t get to that level without installing a hermetic seal between your private thoughts and your public utterances.
In any event, currency devaluation is in our future until (1) American voters in an unprecedented rage fire the entire leadership team, or (2) an economic miracle like none other occurs, and Keynesian stimulus actually works, for the first time in recorded history, and the economy starts going gangbusters, or (3) some horrible implosion, fast or slow, destroys American capital markets, and enraged citizens turn to (1).
Nothing else is possible, because without continuous currency devaluation a/k/a ZIRP the Federal budget would implode, the banking system would crumble, and many a state and muncipality with fantasy salary and pension promises would go instantly bankrupt.
Why Do People Leave California?
Jed Kolko, Chief Economist
A constant debate in California politics is whether jobs and people are leaving the state. This week, in fact, Texas Governor Rick Perry is in California, trying to lure businesses to his state. He won’t have much luck because jobs rarely move: in a typical year, just 25,000 jobs move out of California, and 16,000 jobs move in, out of an economy of 18 million jobs. In contrast, hundreds of thousands of people move in and out of California each year. Who are they, and why do they move?
Who Moves In and Out?
Here are the basic facts. In 2011, 562,000 people left California, and 468,000 came, according to the Census’s American Community Survey. That means 120 people moved out of California for every 100 people who moved in. Out-migration reached its peak in 2005, when 160 people moved out of California for every 100 people who moved in. The California exodus rose with the housing bubble and subsided in the recession. Lower home values in 2008-2011 made California more affordable, encouraging in-migration and discouraging out-migration, as well as pushing some California borrowers underwater, further discouraging out-migration.
Who leads the charge out of California? Even though California’s richer residents face high tax rates, lower-income households are more likely to leave. From 2005 to 2011, California lost 158 people with household incomes under $20,000 for every 100 who arrived, and 165 for every 100 people with household incomes between $20,000 and $40,000. In contrast, just slightly more people with household incomes in the $100,000-$200,000 range left than came to California (103 out per 100 in), and California actually gained a hair more people in the $200,000+ range than it lost (99 out per 100 in). The rich aren’t leaving California, but the poor and the middle class are.
Where Do Californians Go – and Why?
It’s no coincidence that the Texas governor is visiting California this week and not, say, the Massachusetts governor. Since 2005, far more Californians have turned Texan than the other way around: 183 Californians moved to Texas for every 100 Texans moving to California. (The average flow since 2005 between California and all other states – not just Texas – has been 133 out for each 100 in.) The only states where the flow from California is more lopsided are Oklahoma (212 out per 100 in), Oregon (198), Idaho (190), and Arizona (187). On the other hand, California gains more people from New York, Illinois, Massachusetts than it loses to those states.
Let’s take a closer look at California versus Texas. What does Texas have that Californians want? Cheaper housing, more jobs, and lower taxes.
To see which of these factors matter most in explaining why and where Californians move, we teased them apart statistically using regression analysis, looking at movements to and from California in each year since 2005 for each state. All three factors matter, but housing costs matter the most: the exodus from California was strongest when and where the gap in housing costs between California and other states was biggest. This detailed analysis confirms what the above chart showed: outmigration from California was most dramatic in 2004, 2005, and 2006, which were also the years when California home prices were most expensive relative the rest of the country.
Economic Recovery and California Migration
Will more Californians leave as the economy recovers? Probably, yes. The most important factor slowing the out-migration of Californians in 2008 to 2011 was that home prices fell more in California than in the U.S. overall, making California more affordable relative to the rest of the country than during the housing bubble. However, the housing recovery is now lifting home prices in California. According to the Trulia Price Monitor, which tracks asking home prices adjusted for the mix of listed homes, California home prices were up 10.4% year-over-year in January 2013, led by San Jose, Oakland, Riverside-San Bernardino, and Sacramento, well ahead of the national price increase of 5.9%. That means that the gap in home prices between California and the rest of the U.S. is widening once again.
The latest detailed migration data are from 2011, so it’s too soon to see any impact of rising California home prices on migration. But search traffic on Trulia suggests that migration out of California might be gearing up again. The ratio of outbound home searches (by people in California for properties in other states) to inbound searches (by people in other states for properties in California) went up between 2011 and 2012. In 2011, there were 94 outbound searches for every 100 inbound searches; in 2012, there were 99 outbound searches for every 100 inbound searches. Because California has more than its share of luxury and celebrity homes that attract attention, California typically gets more inbound than outbound searches despite having more outbound than inbound migration. But the key here is that the ratio of outbound to inbound searches went up from 2011 to 2012, which is an early leading indicator that outbound migration might be accelerating, too. In short: the home price rebound may be good for California’s homeowners, but it will make California too expensive for many people who would otherwise stay or move here.
Another fool who needs to have “correlation [between housing prices and out-migration] does not equal causation” branded on his forehead. And this guy calls himself an economist! Taleb was right. These people should wear bells and motley.
I think there probably is a causation effect between a lack of in-migration and house prices. Nobody moves out because their house just doubled in value. The out-migration is probably more likely caused by a lack of good jobs and high taxes.
Who knows? This is all speculation. But if I had to speculate: people move for three reasons: school, family, and jobs. That’s pretty much it. Very few people move — particularly across state lines — to secure a more advantageous cost of living, unless they’re retiring, and even then family probably plays a bigger role, else there’d be nobody over 65 left in Michigan.
So I’d suspect California housing prices and migration pattersn both reflect the change in employment prospects in California: the kinds of jobs that are available and the wages they pay. It’s not that migration causes prices or prices cause migration,but that both prices and migration are driven by the underlying reality of jobs and wages.
People say folks move to Texas because houses are cheap. But they’re cheap in Alabama or Detroit, too, and nobody’s going there. People go where there are good jobs, and good jobs arise where the state keeps the hell out of the way of decent business. That’s pretty much all there is to it, I think.
I’m friends w/a couple in their mid-fifties who left CA for San Antonio, TX because they realized they’d never be able to afford a house in LA. They have now bought a very nice house in San Antonio.
I think you’re overplaying the left-right angle on this one. (Especially when you invoke ‘prayer in public schools’. C’mon, that’s a favourite theme of RIGHT-wing populism.)
That aside, I fully agree with you that this is actually a reasonable solution AT THE MOMENT. My concern is what may happen a few years down the track. I and my immediate family moved to Australia in the 1960′s, from the UK, but go back a few generations and we can find plenty of evidence for the pernicious effects of having a large percentage of the population renting from a small number of powerful entities.
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