Archive for January, 2013

Everyone wants to make money for doing nothing. Learning about investing takes time and effort, and the results are far too slow to satisfy most people. Plus, you have to sell the investment and pay taxes on the gains. It's too much hassle. Real estate is so much better. Everyone is already an expert on real estate (or so they think) because they live in a house or condo. No learning is required, and when people get lucky and catch a bubble, they get to pat themselves on the back for their great financial prowess. And best of all, they don't have to sell a house to get the cash. Banks will give them all the money they want with…[READ MORE]

Politicians and bureaucrats proposed many bailouts ostensibly to benefit homeowners that really benefit banks. Loan modifications are a classic example. Politicians crafted these programs to "keep people in their homes" when they merely transferred a few more payments to the banks before the borrower imploded. Each time they bring out a new program or proposal, it's always sold on the merits to "struggling homeowners." The best thing for most loanowners would be to put them out of their misery in a foreclosure, but that would cost the banks billions of dollars, and politicians would have to listen to the sob stories of millions of voters, so alternatives that transfer these losses to US taxpayers are frequently explored. Today we have…[READ MORE]

Everyone is cheering the bottom of the housing market, and the false assumption is that all properties will rise in price at a rapid rate as housing "recovers." Properties priced below the conforming limit will almost certainly continue to rise thanks to restricted inventory and record-low interest rates, but the move-up market is a different story entirely. As I pointed out last week, Delinquent jumbo loans in Coastal California pollute bank balance sheets. But it's not just Coastal California that will feel pain in the jumbo market. The jumbo market is not supported by government-backed loans, and as Mike pointed out over the weekend, these loans are subject to new more stringent regulations regarding amortization, appraisal, and debt-to-income requirements. But…[READ MORE]

Warning! Don't read today's post if you have a weak stomach or a strong affinity for consumer debt. This is your only warning. Hang on, Alice, as we bolt through the rabbit hole on an adventure to financial Wonderland. Come with me on a fantastic journey to the Great Lakes to save fish falling prey to evil bloodsuckers, and along the way we will save borrowers from the evil of debt peddler, Louie the Lender Lamprey. The Sea Lamprey and the Great Lakes Prior to canals of the nineteenth century, the Great Lakes were a thriving fishery. With over fishing and the introduction of the sea lamprey through the canals, the fisheries of the Great Lakes were devastated. According to Wikipedia: The Sea lamprey (Petromyzon…[READ MORE]

These new proposed rules are more than just guidelines, they have liability consequences for the lenders under the new Dodd-Frank.   Qualified Mortgages are much more than just redefined Fannie Mae and Freddie Mac loans. If fact, I thought Qualified Mortgages were only going pertain to GSE loans.  Qualified mortgages guidelines encompass loan products such as prime, sub-prime, government sponsored, private, jumbo and even seller financed second liens.  Appraisals have been targeted too with special conditions for flipping.  There have also been new rules defining compensation and fees, but these are not the confusing rules.  However, lenders are hiring compliance experts to help interpret and conform to these new Qualified Mortgage rules. What makes these rules so difficult to understand is…[READ MORE]

Economists look for correlations to infer causations for macro-economic events. Unfortunately, most macro economists fail to look at the individual incentives, the micro reasons, some events occur. What's even more amazing, or amusing, is how much effort and study they put in to trying to understand these correlations without having the foggiest notion what they're talking about. The biggest misunderstanding in macro economics today centers around the idea of a "wealth effect." Economists noted that people spend more money when asset values rise and less money when they don't. Of course, times of rising asset values also correspond to times of general prosperity, so it's difficult to identify what's really causing people to spend more, the fact that their assets…[READ MORE]

Banks are letting delinquent borrowers squat rather than foreclosing on them and booting them out. At first, it was a self-preservation measure by the banks taken out of desperation when the first wave of foreclosures caused prices to crash. However, now the banks are content to allow squatting, even for years, because squatters do not become MLS supply weighing down prices. The houses occupied by squatters are effectively removed from the market creating an artificial shortage. The lack of MLS homes for sale and high affordability is causing prices to rise, and as prices go up, banks have collateral backing on their bad loans. Rising prices due to rampant delinquent mortgage squatting creates an unusual set of circumstances for lenders.…[READ MORE]

Residential real estate is generally valued by comparable neighborhood sales. When a property sells for a new high price, it doesn't just affect the value of that property, it impacts the value on all similar properties within a mile of the new sale. During the housing bubble, neighbors cheered each new higher comp because it added to their (illusory) net worth. With unrestricted access to equity with no-doc loans and 100% LTV HELOCs, everyone near a new high comp was basically given free money. The late arrivals all eagerly waited a greater fool to come along and buy at an even higher price so they could get their share of the HELOC booty too. Obviously, under such circumstances, the desire…[READ MORE]

Last week I wrote about How the new mortgage rules will impact the housing market. Since then, even more regulations were announced. After thinking about the ramifications of these new regulations over the last week, I am surprisingly relieved by what I see. I think these new regulations really will prevent future housing bubbles. With any regulation, there is fear that it will either be changed or enforcement will be lax. While it's still possible future generations may forget the folly of the last decade, it's unlikely our generation will. These new regulations are here to stay. A far larger concern is the lack of enforcement and oversight. And if the issue were left up to the agencies or the federal…[READ MORE]

The good news in the mainstream media is that delinquency rates are down year-over-year. Of course, they ignore the fact that delinquencies have flatlined since the settlement agreement in February 2012 because that fact doesn't fit with their optimism bias. The delinquency rate is a national average, so it doesn't reflect where the delinquencies have declined and what segments of the loan market are recovering. The assumption most casual observers make is that delinquencies are concentrated in poorer subprime areas and the more affluent prime areas like Coastal California are relatively free from mortgage delinquency problems. Nothing could be further from the truth. Subprime loans became delinquent early in the housing crash because these borrowers were often given the extremely…[READ MORE]

In Memoriam: Tony Bliss 1966-2012