Apr022014
Was removing distressed house supply essential to the economic recovery?
Removing the supply of distressed homes created a supply shortage homebuilders responded to by providing more houses, hiring construction workers, and stimulating the economy.
If I understand Keynesian theory properly — which is important to understand federal reserve policy — inflating asset values through low interest rates is supposed to trigger businesses to expand because borrowing costs are so low, they can make marginal opportunities work. Business expansion puts people back to work, puts wage income back into the economy, and stimulates demand for more goods and services, which in turn creates more business demand, puts more people back to work, and so on — a virtuous circle.
But how is that supposed to work when we already have overcapacity? If we aren’t making use of the property, plant, and equipment we have now, why would business expand? If capacity utilization is only running at 75% to 90%, if businesses saw an opportunity, they would put existing capacity to work before expanding, but utilizing existing capacity does little to stimulate the economy.
So what’s the answer? Create an artificial shortage of capacity or supply and wait for businesses to respond to the false signal. In other words, distort the economy further.
Take homebuilding for example. Despite builder beliefs to the contrary, we don’t need any more homes. We had an entire industry come into existence (REO-to-rental) to mop up the oversupply. We have a huge inventory of distressed properties temporarily removed from the market with loan modifications and delinquent mortgage squatting. But rather than recycle this inventory, by removing it, we create an artificial shortage requiring builders to respond with new inventory. This is putting people back to work in homebuilding and beginning the virtuous circle the Keynesians dream about — and it’s actually working.
Of course, since the entire recovery in housing and homebuilding is built on a shaky foundation of artificial interest rate stimulus and artificial inventory restriction, housing and homebuilding are in for a rocky road as these manipulations are undone, but for now, house prices are up, and homebuilders are hiring again.
Is this what success of the Keynesian model looks like?
Spring Cleaning? Toss Homebuilders
Opinion: Investors aren’t buying the housing story
March 31, 2014, 12:01 a.m. EDT
New York (MarketWatch) — After a nice six-month run, the housing recovery story has soured, at least according to the stock market. Shares of homebuilding companies are in decline and look to have plenty more room to fall.
That deals a big blow to those looking for stronger housing propping up the fragile economic recovery. And even though there was good news on the earnings front from the likes of KB Home (NYSE:KBH) and Lennar (NYSE:LEN) in the middle of last month, the overall industry news is questionable. For example, existing-home sales in February were the slowest since July 2012. Builder confidence plunged that month, too. You can contact adtmoving to help you and your family move your things to the new house.
The charts tell the story. Last month, the iShares U.S. Home Construction ETF (NAR:ITB) rallied up to levels not seen since May 2013 and closed above that resistance level (see Chart 1). But within days, the sellers took over, prices fell and the technical breakout failed. Chart watchers will note that failed bullish signals often become bearish signals, and for homebuilders, it was certainly true. Prices have been in decline even since.
The breakdown of that upward trendline may cause some chartists to freak out, but stocks move up and down all the time. Based on the chart above, one could also argue that homebuilder stocks are consolidating briefly just below the recent one-year high, and it’s poised to break through on a new bull run.
Investors should be careful in the homebuilding sector. The charts paint a weak picture and smart money seems to be fleeing.
Housing in recovery, but not its stocks
Diana Olick | @diana_olick, Friday, 28 Mar 2014 | 11:59 AM ET
… “It seems like everything is set up very nicely for the housing market to have a solid year, not a boom that we can’t replicate, like we saw in the first half of 2013, but I think it’s just about right-sizing people’s expectations,” said analyst Ivy Zelman, CEO of Zelman Associates.
Last year, Zelman famously declared the market was in “housing nirvana.” Then last month, she admitted nirvana had taken a pause but was “around the corner” yet again. She said fundamentals are still good, and she is surprised at the bearishness among traders.
“We think housing starts will be definitely up at least double digits. We know the builders are bringing a significant amount of new product to market,” Zelman said. But, she added, “I guess the expectations have just gotten so negative, and I think that it’s piling on bearish sentiment with [Federal Reserve Chairman Janet] Yellen also indicating that the Fed could tighten sooner.” …
The bigger lesson here is that homebuilding stocks are going to be volatile over the next several years because homebuilders are responding to false market signals. In the mid 00s, during the housing bubble, homebuilders were responding to false market signals and built many homes we didn’t need. When the housing bubble burst, the industry paid for it with crashing stock prices, and construction workers paid for it by getting laid off for five years.
Is homebuilder hiring reluctance holding back the economy?
The homebuilders are hiring again, but after laying off 90% of their workforce in 2008, they are in no hurry to staff up. I recently spoke to a hiring manager from a major homebuilder, and he explained it just that way. He told me his company had 25 project managers working for them on sites across Southern California. In 2008, he fired all but two of them — two workers had to do the job of 25. It’s painful to fire so many good, experienced, and qualified people, many of whom were likely friends. Nobody wants to go through that again, so when homebuilding started to pick up, homebuilders didn’t hire, they just made existing staff work harder. The staff is so overworked that the builders must hire people now, but they are hiring as few as possible, and those that do get hired are expected to work 50-60 hours a week or more.
When the Keynesians construct their theoretical and mathematical models of the economy, they don’t anticipate and can’t model the emotional reactions of hiring managers like the one I talked to; however, these reactions are real and understandable. According to Keynsian thinking, homebuilders should have begun staffing up two or three years ago, which would have stimulated the economy. Instead, these hiring managers reacted fearfully and didn’t hire more people — they utilized their overcapacity; they got more productivity out of the staff they had.
Based on the macro picture for homebuilding, these hiring managers are right to be cautious. Although almost none of them know or care about the myriad of market manipulations creating demand for their product, they were once bitten, so they are shy about hiring today. Since the demand for their product is the result of artificial stimulus and supply manipulation, they may face future layoffs as these distortions come back to reality.
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Absolutely, removing distressed supply played an instrumental role in fomenting a mirage of economic recovery 😉
PS: Nice chart!
“But rather than recycle this inventory, by removing it, we create an artificial shortage requiring builders to respond with new inventory.” Not sure I could agree with that statement. The builders in OC who are building mostly had land they paid too much for and were sitting on it until it seemed there was an inkling of demand. That “demand” has turned out to be investors, who historically, jump out of the market if they don’t see prices rising every week. It’s been an “artificial market” since 2005.
Consumer Complaints to CFPB Nearly Double in 2013
Consumer complaints to the Consumer Financial Protection Bureau (CFPB) nearly doubled over the course of 2013, the agency revealed in an annual report.
According to CFPB’s figures, complaint volume last year totaled 163,700, an 80 percent increase from the 91,000 recorded complaints in 2012. Including this year, the bureau has received more than 310,000 complaints to date.
The leap in volume underscores the challenges that still remain despite the progress made by financial industries in the last few years.
“Consumer complaints have become central to the work of this agency. They enable us to listen to, and amplify, the concerns of any American who wants to be heard,” said CFPB Director Richard Cordray. “They are also our compass. They make a difference by informing our work and helping us identify and prioritize problems for potential action.”
Areas of dissatisfaction ranged from bank accounts to debt collection to all manner of loans—including mortgages, which represented the greatest share of complaint volume at 37 percent.
At 59 percent, the greatest share of mortgage-related issues came up when borrowers were unable to pay, “such as issues relating to loan modifications, collections, or foreclosures,” CFPB said in its report. At a distant second in volume was “making payments” (26 percent), followed by complaints about applying for a loan (8 percent).
“For consumers applying for a mortgage loan, consumers raise issues related to interest rate-lock agreements, such as lenders refusing to honor rate-locks, or assessing penalties when the loan does not close,” the agency explained.
Upon receiving a complaint, CFPB expects companies to respond within 15 days and to provide a description of the steps taken or planned. According to the bureau, companies have responded to more than 93 percent of complaints sent to them, and consumers have disputed 21 percent of those responses.
About 7 percent of complaints end up with some form of monetary relief, according to CFPB, with the median amount coming to $460 for mortgage-related complaints.
Is the CFPB really swamped with mortgage complaints?
Not every consumer is a victim, not every complaint is worthy
The problem is, anyone can make a complaint. As a HousingWire reader points out in a letter to the Editor:
Of all mortgage complaints, 77% are closed with a simple explanation or clarification to the consumer, without relief of any sort.
Another 3% are closed without relief or explanation. Right at 5% involved an administrative response. The company in question was reviewing the complaint in 6% of the cases, and in less than 1% of the cases, the company did not provide a timely response.
Just 2% involved the case being closed with monetary relief for the complainant, while 7% involved non-monetary relief for the consumer.
So in less than 2% of the cases, the company was demonstrably wrong and monetary relief was provided. In 7% of the cases, non-monetary relief was provided.
That means 4 out of every 5 complaints get closed with an explanation, or dismissed without even bothering with an explanation, much less relief to the consumer complainant.
That’s of the 0.119% of mortgage holders who filed a complaint at all.
This article hits the nail on the head. Most of the complaints are from borrowers unhappy about the customer service experience they received. They might be upset that their loan took too long to close, or that the loan officer didn’t return their calls, or that the appraisal came in too low, or whatever. Although it’s poor business practice, it’s not against the law to provide poor customer service. In reality, very few of the complaints are the result of actual wrong doing by the lender.
A lot of borrowers might ask for compensation for these types of grievances, but they usually won’t get it because they weren’t wronged in any tangible financial sense, and there’s no penalty to the lender for denying their request. The lenders are only required to respond to the complaint, but it’s at their discretion whether they actually pay anything to the borrower.
The CFPB trumps these statistics in the media to show they are fighting the good fight against the big, bad lending industry, but it’s all a show. There are no teeth to the complaint system.
When I saw that response to the headline on HousingWire, it made sense to me. These press releases are government propaganda, nothing more. The mortgage servicing industry, like any business, has good and bad operators, and I am glad the CFPB is watching over them, but this headline suggests mortgage servicing is bad and getting worse, and I don’t think that’s the case.
Mortgage apps decline for third week in a row
Mortgage applications fell 1.2% from last week, according to data from the Mortgage Bankers Association’s weekly survey of mortgage applications for the week ending March 28.
This is the third week in a row for declines after a spike of almost 10%.
MBA’s measure of mortgage loan application volume also fell 1.2% on a seasonally adjusted basis from one week earlier.
However, the purchase index increased 1% from one week earlier. The refinance index dropped 3% from the previous week.
The refinance share of mortgage activity decreased for the eighth straight week to 53% of total applications from 54% the previous week.
The adjustable-rate mortgage share of activity held steady at 8% of total applications.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) was unchanged at 4.56%, with points increasing to 0.31 from 0.29 (including the origination fee) for 80% loan-to-value ratio loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000) increased to 4.46% from 4.45%, with points remaining constant at 0.27 (including the origination fee) for 80% LTV loans. The effective rate increased from last week.
The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA increased to 4.21% from 4.16%, with points decreasing to 0.15 from 0.23 (including the origination fee) for 80% LTV loans. The effective rate increased from last week.
The average contract interest rate for 15-year fixed-rate mortgages was unchanged at 3.62%, with points decreasing to 0.23 from 0.24 (including the origination fee) for 80% LTV loans.
The Fed will try to figure out away to push mortgage rates down again. If they let mortgages get too high all the work of hiding distressed properties and FHA’ing loans will go down the drain.
I actually believe that the Fed is seeking a way to have less influence over the mortgage market. Even the most dovish of doves at the Fed are starting to realize that the more influence they have on/in the market, the less impact (and credibility) they’ll have for future accommodation. Without allowing mortgage rates to rise too quickly … the taper will continue.
Taper? QE? Ha! Chicken feed.
Behold… reverse repo ops
$242 Billion: That Is How Much Record “Window Dressing” Banks Got Today Thanks To The Fed.
Submitted 03/31/2014 14:57 -0400
The last time banks scrambled to pad their books into the quarter end, and come begging at the front door of the NY Fed’s Liberty 33 office, was on the last day of Q4 and 2013, when nearly $200 billion in Treasurys were handed out by the Fed to over 100 counterparties in what was the largest reverse repo operation conducted by Ben Bernanke, and his brand new Fixed-Rate Reverse Repo operation, in history.
That was the record until today, when just over an hour ago the Fed disclosed that as part of its most recent reverse repo operation, it had handed out to 93 dealer banks and other financial intermediaries, both foreign and domestic, some $242 billion in Treasurys in what is now the biggest reverse repo operation in history, a privilege for which the collateral-starved banks paid the Fed the king’s ransom of 0.05% in annual interest, i.e., nothing.
But what today’s off the charts reverse repo really shows us, aside from the fact that all the reverse repo operation really is, is a way for the Fed to make bank balance sheets appear far better than in reality (for all those still confused), is that the collateral shortage we have been warning about for the past several years, and which is getting only more acute the longer the Fed soaks up all 10 year equivalents from the Treasury market (of which it now holds 35% and rapidly rising), is getting worse for banks.
And in related news, one should consider that tomorrow – with their books well padded for the March 31 daily security “holdings” – the banks will almost certainly unwind over $100 billion if not more of today’s reverse repo, an amount that is now equal to nearly two full months of QE. Where that money will go, only the (NY) Fed and a few bank CEOs know.
Then again none of this should come as a surprise – we said precisely this during our last such window dressing observation, to wit:
In short: collateral window dressing on; collateral window dressing off, all with the blessing of the banks’ overarching regulator, the Federal Reserve. What is most disturbing is that both the world’s largest financial firms, and by implication the Fed, just admitted there is a massive collateral shortage currently if banks are forced to pad their books to the tune of nearly $200 billion in “high quality collateral” just to pass year-end auditor muster.
Today’s record quarterly window dressing merely confirmed precisely this.
So while the Fed can provide on both an orderly and on an emergency basis up to the total amount of Treasurys it holds on its entire balance sheet amounting to $2.3 trillion (as of today), what will happen if banks find themselves needing to urgently satisfy $2.4 trillion, or $2.5 trillion, or $5 trillion, or more in Treasury deliverable demands, as collateral chains suddenly collapse on themselves as they did the day after Lehman’s bankruptcy and rehypothecated Treasurys, not to mention re-re-re-rehypothecated Treasurys have to be delivered once those infamous “off the books” repo and reverse-repo operations suddenly find they aren’t quite netting each other off, as we have also been warning for years.
http://www.zerohedge.com/news/2014-03-31/242-billion-how-much-record-window-dressing-banks-got-today-thanks-fed
I don’t fully understand how the reverse repo works.
From what I understand, it gives banks a place to make riskless interest on their money in the overnight market. Supposedly, this was done to put a price floor beneath overnight rates so they never went negative.
It certainly looks like a bank bailout, but if the fed is setting the interest rate below the market rate, which they say they are, then the banks would be better off lending to each other overnight rather than put it on deposit at the federal reserve.
However, it also looks like banks use this to pad their balance sheets, although I don’t see how this works. Apparently it does because we see spikes every month, and big spikes every quarter.
This Is Where Today’s Buying Deluge Came From
I get the sense that the federal reserve wants to keep these activities opaque and complex so nobody can understand it and get upset about bailouts and bank plundering.
Remember, this is NAR, even the disinformation is based on disinformation.
Vacation Home Sales Surge in 2013, Investment Property Declines
Vacation home sales rose strongly in 2013, while investment purchases fell below the elevated levels seen in the previous two years, according to the National Association of Realtors®.
NAR’s 2014 Investment and Vacation Home Buyers Survey,* covering existing- and new-home transactions in 2013, shows vacation-home sales jumped 29.7 percent to an estimated 717,000 last year from 553,000 in 2012. Investment-home sales fell 8.5 percent to an estimated 1.10 million in 2013 from 1.21 million in 2012. Owner-occupied purchases rose 13.1 percent to 3.70 million last year from 3.27 million in 2012. The sales estimates are based on responses from households and exclude institutional investment activity.
NAR Chief Economist Lawrence Yun expected an improvement in the vacation home market. “Growth in the equity markets has greatly benefited high net-worth households, thereby providing the wherewithal and confidence to purchase recreational property,” he said. “However, vacation-home sales are still about one-third below the peak activity seen in 2006.”
Vacation-home sales accounted for 13 percent of all transactions last year, their highest market share since 2006, while the portion of investment sales fell to 20 percent in 2013 from 24 percent in 2012.
Yun said the pullback in investment activity is understandable. “Investment buyers slowed their purchasing in 2013 because prices were rising quickly along with a declining availability of discounted foreclosures over the course of the year,” he said.
“In 2011 and 2012, investment property was a no-brainer because home prices had sharply over corrected during the downturn in many areas, creating great bargains that could be quickly turned into profitable rentals. With a return to more normal market conditions, investors now have to evaluate their purchases more carefully and do their homework,” Yun added.
Controversial FHA payoff rule to end
WASHINGTON — Can you be charged interest on your mortgage even after you’ve fully paid it off? Can the meter keep running when you owe the bank nothing — your principal balance is zero?
Surprise! Much to the chagrin of large numbers of home sellers and refinancers, the answer for years has been yes. If your loan was insured by the Federal Housing Administration and you paid it off before maturity, at closing you’d be expected to cough up a full month’s interest, no matter what day of the month you actually settled.
Even if you closed on March 2, for instance, you’d be charged interest by your loan servicer through March 31, potentially adding hundreds of dollars to your costs in the transaction. The FHA’s practice has been unique among major players in the housing finance marketplace. Fannie Mae, Freddie Mac and the Department of Veterans Affairs all require interest to be collected only to the day of principal payoff. After that, the meter stops.
But change is on the horizon. Thanks to a regulatory mandate from the Consumer Financial Protection Bureau, the FHA has agreed to end its controversial full-month interest policy, but only for future borrowers. The FHA has until Jan. 21 to make the switch, so sellers and refinancers who currently have FHA-insured mortgages are cut out of the deal. Many will still get hit with extra interest charges.
Here’s a quick overview of what’s behind the agency’s belated retreat. For the last decade, homeowners and realty brokers have complained that the FHA’s interest payment policy amounts to gouging. Not only were many sellers unaware of the FHA’s odd requirement, but they didn’t factor the extra costs into their financial plans.
The National Assn. of Realtors, which began publicly criticizing the practice in 2004, said that by insisting on full months of interest payments, the FHA effectively has been squeezing tens of millions of dollars in unjustifiable extra charges out of sellers. In one year alone, 2003, according to the association, FHA borrowers paid an estimated $587.4 million in “excess interest fees.”
The FHA should be ashamed of this practice. It is a prepayment penalty, nothing less. The Bureau had to twist the FHA’s arm to get this change finally in the works.
I wasn’t aware they were doing this. It certainly is a prepayment penalty no matter how they justify it.
How Waters’ Bill Could Shift GSE Debate
Rep. Maxine Waters’ plan to let banks control a sole entity to issue government-backed mortgage securities is dead-on-arrival, but her proposal still significantly alters the housing reform debate.
A different housing finance bill in the Senate—which envisions private-market competition for securitizing loans—has greater bipartisan support and is scheduled for a Banking Committee vote next month. But Waters’ bill, which would create a single cooperative—in which banks have an equal vote, regardless of their size—to issue securities, may still influence liberal Democrats and other lawmakers skeptical of the Senate legislation but who are crucial to getting a final bill passed.
“She very much picks up the mantle of the anti-big-bank crowd with her one-entity, one-vote concept for the co-op,” said Brandon Barford, a partner at Beacon Policy Advisors. “The ideas she has in there are going to be appealing to certain segments of both Republicans and Democrats in Congress and could potentially show up as part of an amendment to the Senate bill at the markup on April 29.”
Waters, the ranking member on the House Financial Services Committee, has virtually no chance of getting her bill to reform the government-sponsored enterprises through the Republican-run House. Rep. Jeb Hensarling, R-Texas, chairman of the financial services, has been pushing his own conservative plan to all but remove government support for housing finance. He is extremely unlikely to consider the Waters’ proposal as he continues to push for his bill to be considered on the chamber floor.
But observers said her bill could play a significant role in the Senate debate over the leading GSE bill on Capitol Hill, authored by Banking Committee Chairman Tim Johnson, D-S.D., and Sen. Mike Crapo, R-Idaho, the ranking member.
Both the Waters and Johnson-Crapo plans would preserve government backing, each creating a federal insurance fund to mitigate losses suffered by the private mortgage market. But whereas Johnson and Crapo would establish a regulated securitization platform utilized by competing entities, and also create a mutual system to help smaller institutions aggregate loans, Waters’ proposed cooperative would be a more centralized structure to ensure that smaller banks can compete.
The Senate legislation, based on an earlier bill by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., has a bipartisan coalition of supporters. Yet it will still have to attract more votes, including from some of the Banking Committee’s more liberal members, to emerge from the April 29 markup with enough momentum needed to spur a full Senate vote this year. That will require quelling ongoing concerns about the Johnson-Crapo framework, including whether it would allow the largest financial institutions to dominate the new market.
The fate of the Senate legislation, to some degree, is in the hands of the uncommitted Democrats including Jack Reed of Rhode Island, Charles Schumer of New York, Robert Menendez of New Jersey, Sherrod Brown of Ohio, Jeff Merkley of Oregon and Elizabeth Warren of Massachusetts.
“They now have a month to go through the Waters bill and see how it’s done—and maybe lift some ideas to try and amend Johnson-Crapo,” said Brian Gardner, a policy analyst at Keefe, Bruyette and Woods. “It’s a tool that Senate Democrats can use, those who want to make changes to Johnson-Crapo. They clearly have a different approach here.”
Fannie and Freddie can’t get REO to market fast enough
The market is ravenous for more REO-to-rental properties, but the inventory is struggling to keep pace.
According to the latest report from the Federal Housing Finance Agency, REO inventory increased slightly in the fourth quarter as property acquisitions outpaced dispositions for the second consecutive quarter.
The total number of property acquisitions dropped 13% while dispositions decreased 7% during the quarter.
Along with that, completed third-party sales and foreclosure sales continued a downward trend with a 15% reduction in the fourth quarter and foreclosure starts down 3%.
But this comes with news of the market continuing to heal.
The FHFA also reported that Fannie Mae and Freddie Mac completed more than 3.1 million foreclosure prevention actions since the start of conservatorship in 2008, helping more than 2.5 million borrowers stay in their homes.
Meanwhile, the inventory of REO homes steadily declined year-over-year since 2010.
However, over the past three quarters, inventory started to push back up, especially in Florida, which jumped from 18,000 in the fourth quarter of 2012 to 28,000 in the fourth quarter 2013.
For two months straight, acquisitions outpaced dispositions, with 49,149 acquisitions and 46,673 dispositions in the fourth quarter of 2013 and 56,794 acquisitions and 50,277 dispositions in the third quarter of 2013.
The last time acquisitions were greater than dispositions was in 2010 when the numbers, granted, were much larger.
Lynn Effinger, noted in a HousingWire blog, “Many note that with so much government intervention over the past several years with programs such as foreclosure moratoria, HAMP, HAFA, and others purportedly created to help struggling homeowners avoid foreclosure, the for sale REO market began drying up in late 2009.”
But since homebuyers are getting squeezed out of the home-buying process and underwriting standards are tightening, the demand for rental properties increased as well.
“This, naturally, has attracted numerous investors to the REO-to-Rental space. It makes good sense and is a good use of investor dollars,” Effinger said.