Author Archive: Irvine Renter

What separates homeowners from people who don’t own homes? The answer is not as simple as you might think. If you go back to antiquity, the person who “owned” a house was generally the strongest warrior who was capable to taking it and holding it against all rivals. Over the last 500 years the development of government and stable laws of land ownership made it possible for ordinary people to have claims to real property stronger than the edge of a sword or the barrel of a gun. One of the first attempts to establish property title was the English Doomsday Book of the 11th century. The King set out to establish who owned what so he could better establish…[READ MORE]

The recent house price rally was financed with stable, fixed-rate mortgages. Stable mortgages make for a stable housing market. Pundits like to call asset bubbles; it attracts attention and helps make a name for the analyst. Most often they are wrong, but every once in a while, someone calls a bubble just before one pops, and they look like a prescient genius — and sometimes they are: Robert Shiller called both the Internet bubble and the housing bubble right at the peak of each, and he won the Nobel Prize for his efforts. The pundit sounding the alarm today is Charles Hugh Smith. I like his writing, and he generally displays a great understanding of financial history and the workings…[READ MORE]

If the FHA insurance fund falls short, the US taxpayer will pay the difference. With the FHA insuring subprime loans, as a taxpayer, your money is at risk. Many mortgage industry observers quipped that FHA is the reincarnation of subprime lending; the facts support this assertion. The FHA has very low standards for qualification (a 580 FICO score), a very low down payment requirement (currently 3.5%). Consequently, FHA insured loans became a necessity for anyone without the credit score or down payment to obtain other financing. Clearly, FHA filled the void created by the collapse of subprime lending. For the subprime business model to work, lenders much charge higher interest rates and fees to offset the losses on the numerous…[READ MORE]

Prime borrowers using negative amortization loans were largely responsible for inflating the housing bubble, and their defaults lead to the crash. Most people believe the housing bubble and bust was caused by subprime lending. It was not. The housing debacle was caused by a rapid expansion of credit to prime borrowers, particularly through the proliferation of negative amortizations loans. The housing bubble inflated because too much money was loan to everyone, not just subprime borrowers. Since bubble-era home prices depended on unstable loan products, the collapse was inevitable. Although the subprime borrowers defaulted first, all borrowers defaulted in large numbers because the loans there were given were toxic; in fact, delinquency rates were many times normal for prime borrowers as…[READ MORE]

September and October provides an abundance of motivated sellers and fewer competing buyers, making it the best time of year to shop for a home. "It's always a good time to buy or sell a house" anonymous realtor “They deem him their worst enemy who tells them the truth." Plato realtors proclaim that it's always a good time to buy or sell a house because it's always a good time for them to earn a commission. The reality is there are some times when markets favor sellers and some times when markets favor buyers. It can't simultaneously be a good time to buy and a good time to sell. During the housing bubble rally, the housing market strongly favored sellers.…[READ MORE]

When sleazy attorneys help deadbeat homeowners obtain free housing, everyone else pays a price through low housing inventory and higher home prices. Human interest stories need heroes. We are supposed to feel empathy for the aggrieved party that overcomes tough obstacles or intransigent people to achieve a victory for themselves and justice for us all. But have you noticed that the human interest stories from the housing bubble have no heroes? The housing bust brought out the worst in mankind. Everyone involved sought to avoid any financial responsibility and looked for ways to game the system to their advantage. Banks lobbied for (and obtained) massive bailouts. Homeowners begged for principal forgiveness and loan modifications, and when they didn't get what…[READ MORE]

In its simplest form, a personal Ponzi scheme is borrowing money to pay debt service: acquiring new debt to pay old debt. It’s a path to disaster. Carpe diem -- "Seize the Day" -- The first Ponzi Have you ever wondered why people make foolishly irresponsible financial decisions? Sometimes the mistakes are made in ignorance as people learn from their own mistakes, but sometimes this ignorance is willful and people don't want to learn a truth that might adversely impact their pursuit of short-term gratification. People make bad financial decisions because they want to pursue their short-term (and short lived) pleasures at the expense of long-term goals and wants. People want instant gratification, and lenders learned to use this instinct…[READ MORE]

Rising mortgage rates are a mechanical limitation that offers no respect to consumers' attitudes one way or the other. Buyer psychology matters, but not as much as the math of mortgage financing. Whatever happens to mortgage rates, people will still shop for homes, and they will still want to buy. Higher mortgage rates will force them to borrow less irrespective of the borrower's attitude. So while it may be interesting to note whether or not rising mortgage rates influence homebuyers' attitudes, it's completely irrelevant to how much they can borrow to buy a house. If mortgage rates go from today’s 4% to 5%, it will require a huge increase in aggregate wages to compensate. For example, each $100,000 of borrowing…[READ MORE]

Interest-only mortgages rest on the border between Ponzi borrowing and safe borrowing, a purgatory on the edge of the abyss of insolvency. Debts are supposed to be paid off. People forget that simple fact and take on debt as if it is something to be endlessly serviced. Those that embrace the debt-service mentality dance on the edge of the abyss of insolvency. When the amount a borrower pays toward principal on debt is matched by taking on new debt, a borrower is merely treading water. When the amount of new debt exceeds the amount debt paid down, particularly if debt was used to pay debt, the borrower is Ponzi borrowing. There is a point beyond which a borrower cannot pay…[READ MORE]

Dodd-Frank accomplished much to reduce taxpayer risk, but more should be done to get taxpayers out of the mortgage insurance business. The US taxpayer insures over 70% of the mortgage market through the GSEs and FHA. This is an unacceptably high level of exposure, particularly given the multi-trillion dollar size of the US mortgage market. Reducing this exposure is difficult because removing the guarantees will increase mortgage costs, reduce loan balances, and make it much more difficult for buyers to finance today's near-bubble-peak prices, a major goal of lenders and loanowners alike. Any change to mortgage lending will disrupt the housing market, so any change must be phased in slowly. The overriding strategy should be to limit the growth of…[READ MORE]

Monthly Housing Report

In Memoriam: Tony Bliss 1966-2012