Jan202017
Federal Reserve’s Dudley predicts return of HELOC abuse
The Federal Reserve’s Dudley believes people will forget the lessons of the housing mania and return to profligate home equity spending.
When people lose money (or foolishly waste it), they often behave differently after the incident. Wise people actually take action to prevent a recurrence of the tragedy. For example, if a thief breaks into someone’s house, the homeowner installs better locks or alarm systems to avoid a future loss of property or worse.
However, when the crime is more complex than breaking-and-entering, or when the government is the facilitator of the crime, it can be much more difficult for the victims to protect themselves, but it’s just as necessary.
Ben Bernanke reflated the housing bubble partly to expand consumer spending from what he called the “wealth effect.” In reality, the wealth effect is an illusion more aptly described as the “Ponzi effect.”
When house prices go up, people are not encouraged to spend their savings, they are encouraged to take on more debt. The increase in consumer spending is largely a result of increased borrowing, which is a benefit to the member banks of the federal reserve. Since our current system is set up to bail out the banks when they get in trouble, when Ponzis take this free money the federal reserve wants them to have, the US taxpayer will end up paying off the bills of these Ponzis when the Ponzi scheme collapses yet again.
How do you feel about having your tax dollars paying off the debts of Ponzis and paying the bonuses of the bankers who facilitated their theft? Personally, I don’t feel good about that, yet, that’s exactly what some governors of the federal reserve want to see happen.
Rising home values aren’t enough to shake consumers’ memories of the financial crisis
Krystina Gustafson, Tuesday, 17 Jan 2017
Consumers still see value in buying and owning homes. Yet with memories of the recession still fresh in their minds, the recent lift in real estate prices hasn’t been enough to persuade them to spend against that growing value. …
“People haven’t actually tapped that housing wealth,” Dudley said, noting that home values have increased 40 percent since 2012.
Perhaps it’s my own bias, but I would like to believe people learned from the housing bubble and bust. Perhaps people haven’t tapped their housing wealth because they realize mortgage equity withdrawal is a bad idea. Appreciation is not income. Credit is not savings. Debt is not wealth.
Looking forward, Dudley is unsure whether the recent gains in consumer confidence, which hit a 15-year high last month, will translate into elevated levels of spending. However, as the recession moves further into the rearview mirror, he predicts housing equity will once again become a source of consumer spending.
“As time passes, people will forget the financial crisis,” Dudley said.
Is this really something we want? Do we want people to return to their foolish ways?
Comments like that enrage me.
He added that it’s very unlikely there will be another financial crisis in the next five to 10 years, thanks to healthier balance sheets and a safer financial system.
While that may be true, if people followed his advice and began spending their home equity, we could probably destabilize the system much quicker. Idiot.
Mortgage equity withdrawal should be limited
In order to prevent foreclosures and theft of taxpayer money through bailouts, mortgage equity withdrawal should be limited and regulated.
I don’t like government paternalism. When Ronald Reagan came to power and began our 25-year experiment with government deregulation, I thought it was a good idea. It used to really annoy me when I would see paternalistic politicians who believed they knew what was good for me and for society, and that their ideas of right and wrong should be legislated. Government intrusions into the lives of citizens should be kept to a minimum, and citizens should have the right to make their own decisions and live with the consequences.
Well, maybe not.
I used to believe all of that, but based on what I witnessed during The Great Housing Bubble, I see good reasons to support government paternalism.
First, people refuse to accept the consequences of their actions. People want freedom of choice, and they expect the benefits of their decisions when things go well; however, the moment events don’t meet their expectations, they want the government to bail them out. Individuals, organizations, and entire industries share this trait.
Nobody ever steps forward and says, “I screwed up, and I don’t think the government should bail me out.” If gains are privatized and losses are collectivized, then for taxpayer protection, we need a paternalistic government regulator looking out for the collective interest — which entails unpopular regulations.
Second, even if people accepted the consequences of their actions (which they never do), sometimes these consequences impact others who had nothing to do with the original decision. If every insolvent homeowner accepted foreclosure, and if every lender accepted the losses without pleading for a government bailout, the economic consequences of their private foolishness would still have enormous impacts on the collective. Everyone suffers, including all of us who chose not to participate in the transaction.
When people accepting responsibility for their private actions still causes excessive collateral damage, then the activity should be regulated to save the rest of us.
I profiled over 1,000 properties where the borrowers spent themselves out of their homes. There is a fascinating, “train wreck” quality to these stories, with lessons to be learned about managing personal finances in general and mortgage debt in particular; however, most people will not learn these lessons. If given the chance, people will abuse their HELOCs, and lenders will extend the credit to people to allow them to do so. Without restrictions on mortgage equity withdrawal, people will spend their houses and lose their homes.
This conclusion is inescapable. The hundreds of properties I profiled clearly demonstrated this phenomenon is not isolated. The millions of foreclosures caused by refinancing and HELOC abuse are a testament to the depth and scope of the problem. If we do not change the system, we will see a repeat of this problem — and fools like Dudley are counting on it.
Some people are spenders, and some are savers. No amount of education is going to change that. Many of the outrageously pretentious spenders obsessed with conspicuous consumption are not going away. As I pointed out in Southern California’s Cultural Pathology, we have many spenders in our midst, people who will spend and spend until their creditors cut them off.
Many spenders deal with the painful reality of credit contraction, and if these people suffered in isolation and did not request government handouts, I would be inclined to leave the system alone; however, these people are not suffering alone; they beg for the government to give them some of my money to support their foolish ways. This is where I draw a line.
I would ban all forms of cash-out refinancing except for home improvement projects with certain restrictions or education spending.
There is no good reason for people to increase their mortgages to fuel consumer spending; anyone who makes this argument because of the economic benefit of mortgage equity withdrawal obviously has not been paying attention to the fallout of The Great Housing Bubble.
Rising Default Rates Not Indicative of Economy’s Health
Default rates are up for mortgage loans nationwide along with other types of consumer credit such as bank cards and auto loans, according to the most recent S&P Dow Jones Indices released by S&P Global and Experian. Despite the increases in default rates, their levels still point to an economy on the mend, according to one analyst.
According to the Indices, the country’s composite default rate went up two basis points in December 2016, while the mortgage defaults rose one basis point, bank card rate jumped 14 points, and auto loan defaults three points.
Four of the five major cities monitored by the Indices also saw default rates jump for the month. Miami default rates rose nine basis points, Chicago and Los Angeles rose two, and Dallas rose one. New York City was the only city to see a decrease, with the default rate dropping four basis points month over month.
Miami’s default rate, which is at a 30-month high of 1.53 percent, is likely due to the high number of first-time buyer mortgage defaults seen in the city.
“Among the five cities reported on each month, Miami has a larger and increasing first mortgage foreclosure rate,” said David M. Blitzer, Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices. “Home prices in Miami, as in most cities, have recovered from the financial crisis. However, Miami home prices, as measured by the S&P CoreLogic Case-Shiller Home Price Index, as of October 2016 were 22 percent below their December 2006 peak, while nationally, home prices have recently surpassed the pre-crisis peak set in July 2006. Florida also lags national trends in other measures—it is among the five states with the most foreclosures in 2016.”
“National average consumer credit default rates continue at low levels in an improving economy,” Blitzer continued. “Auto and light truck sales were up each month since August as automobile consumer credit defaults held steady. Bank card sector defaults ticked up slightly in the last two months, reversing five months of flat to down reports. This may reflect rising retail since the spring and larger consumer credit extensions in October and November.”
Mortgage default rates, though slightly up, “are also stable,” Blitzer said. However, that could change further into 2017.
“This favorable picture is likely to be tested by rising interest rates,” he said.
Minimum credit scores have been gradually dropping, so it’s not surprising to see an uptick in default rates.
I think the rising default rates are probably a sign that we finally reached peak tightening. I think rising mortgage rates will put further pressure on standards if lenders want to keep origination volume up.
I’m glad you absorbed that lesson from 2013. 😉
Yep. Your comments have opened my eyes on many occasions.
The wishful thinking in the mortgage industry is amusing. Dodd-Frank isn’t going anywhere.
Debating the Merits of GOP’s Dodd-Frank Alternative
With so much talk lately around the possibly of the soon-to-be-installed Trump Administration rolling back regulations for the financial industry, the House Financial Services Committee Chairman is making his case for the Republicans’ Dodd-Frank alternative while Democrats are vocalizing their strong opposition.
Rep. Jeb Hensarling (R-Texas), who was recently elected to a third term as Chairman of the House Financial Services Committee, recently appeared on two national radio talk shows to discuss H.R. 5983, a.k.a. the Financial CHOICE Act (Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs), which he introduced last June. In September, it passed through the Committee, largely along party lines.
“I know it is a priority of President-elect Trump,” Hensarling said on the Hugh Hewitt Show recently. “He has said he’s committed to dismantling Dodd-Frank, and in the House Financial Services Committee we have a bill to allow him to do that. I don’t think there’s another bill out there today that does do that. So it is a priority of the administration, and conversations I’ve had at high levels of the administration, I know they’re interested in using the reconciliation process.”
On Fox News Radio’s Kilmeade & Friends, Hensarling stated, “What’s interesting is even Barney Frank has indicated he would change about a half a dozen fairly significant provisions of his own namesake law but there are so many Democrats who view this as sacred text like it came down from the tablets on Mt. Sinai and it’s kind of an ideological commitment, a class warfare thing, but meanwhile the big banks are getting bigger, the small banks are getting fewer and the poor beleaguered middle income American is seeing his paycheck stagnant and his savings decimated, it has failed.”
You have it a bit wrong about the mortgage industry. The big players love Dodd-Frank because it stifles competition from their smaller competitors and makes it almost impossible to start a new company due to burdensome compliance costs. It’s only the small to medium sized lenders that hate it because they are the ones being stifled and they don’t have the scale to spread the massive cost of a compliance department around.
Whenever I read HousingWire or DS News, the articles and the comments are full of complaints about Dodd-Frank.
It’s not entirely true to portray Dodd-Frank as stifling small- and medium-sized lenders. The law merely ensures everyone complies with good lending practices, which creates compliance costs that larger lenders can more easily absorb. If compliance costs eliminates the bad actors, that’s a plus, not a minus.
In this business, there is a thing called the “cost per loan to originate”. It amortizes the overhead costs of every thing: salaries, benefits, buildings, office equipment, etc, and applies it on a per loan basis. If the cost to originate exceeds the revenue per loan for very many months, you will not be in business long. Spreading the costs of industry compliance software, internal audit staff, and legal & regulatory staff over too few loans originated means you won’t survive. It has nothing to do with being a bad actor.
I understand the problem. But without these compliance procedures, bad actors proliferate.
100%, Mellow.
DF compliance is especially scalable, bad actors or no, and hence an additional operational cost advantage to the largest players, in addition to the various funding advantages and capital markets-related profit center advantages they enjoy. Of note, I recently attended a conference in which a compelling argument that by 2030, 2/3rds of current US banks will be absorbed in M&A – DF is but one of the many reasons.
Changing gears, Trump has just raised FHA insurance rates – look out below?
My inner cynic is telling me that these rates will go back down again soon. Lowing rates now was the right move, but Trump doesn’t want Obama to get any credit for it. Raising rates will hurt first-time homebuyers and working-class families, so Trump doesn’t want to be responsible for that. If he waits a few months, he can make it look like his idea and claim credit for the move.
oops, so much for that prediction. the donald is reversing the decrease in the FHA MIP
Mortgage-Rate Rise Hits Coastal Property Markets Hardest
Pricey real-estate markets on the coasts are bearing the brunt of the recent rise in mortgage rates and are likely to feel more pain as rates climb, housing economists say.
The average rate for a 30-year mortgage has risen to 4.12% from 3.5% before the election in November.
An analysis by the National Association of Realtors found that home buyers in California’s San Francisco County have seen the biggest impact of the rate jump, with a nearly $375 increase in typical monthly mortgage payments for buyers over the last couple of months.
“It’s sort of a double whammy,” said Danielle Hale, NAR’s managing director of research. At a time when apartment rents are climbing quickly, home prices and mortgage rates also are going up, making it tougher to get into the housing market, she said.
https://si.wsj.net/public/resources/images/NA-CN302A_COAST_16U_20170118104805.jpg
The average rate for a 30 year mortgage was 3.5% in November? What was the lowest?
It hit about 3.35% back in 2012. We were approaching the record low just before the election.
MIT introduces breakthrough material 10 times stronger than steel
Engineers over at MIT have been hard at work creating one of the strongest and lightest materials in existence. When arranged in the proper molecular configuration, graphene becomes 10 times stronger than steel but only five percent as dense, presenting intriguing implications for building technology.
The breakthrough came when researchers at MIT’s Department of Civil and Environmental Engineering took a cue from the structures of minuscule coral creatures called diatoms. The organisms have a relatively enormous surface area but remain lightweight. Inspired by the porous configuration, the researchers tested whether arranging graphene in similarly would also make it strong and ultralight. It did.
https://www.youtube.com/watch?v=VIcZdc42F0g
CALIFORNIA HOME SALES DOWN 7% IN DECEMBER
Despite strong headwinds of tight housing supplies and an affordability squeeze throughout much of 2016, California’s housing market ended the year on a positive note, posting a moderate sales pace and home price increases in December, the California Association of Realtors ® (C.A.R.) said today.
Closed escrow sales of existing, single-family detached homes in California totaled a seasonally adjusted annualized rate of 411,230 units in December, according to information collected by C.A.R. from more than 90 local REALTOR® associations and MLSs statewide. The statewide sales figure represents what would be the total number of homes sold during 2016 if sales maintained the December pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.
The December figure was down 7% from the 442,320 level in November, and down 0.6% compared with home sales in December 2015 of a revised 413,700.
“While we had a decent fourth quarter performance, it by no means indicates that the market will be easy in the upcoming year,” said C.A.R. Senior Vice President and Chief Economist Leslie Appleton-Young. “Looking ahead, we expect plenty of headwinds in 2017, including rising interest rates, scarce housing inventory, and a persistent affordability crunch, along with many uncertainties in the policy arena to challenge the housing market.”
With the election in November and the holidays soon after, I would not trust this data to be indicative of much. The real test will be in the Spring whether sales can withstand pressure from higher interest rates.
Happy Inauguration Day!

Celebrations Begin for Donald Trump’s Inauguration
The political left will hate this day more than the Bush II inauguration.
Don’t forget that many on the establishment right also feel that way. Trump will work with them when he can, but he is not obligated to play by their rules. No lobbyist money was taken and no special favors were granted to help get Trump elected. The establishment has absolutely no leverage against him, and yet he can humiliate them at will using his Twitter account. It’s an amazing dynamic.
I hope he takes advantage of it. If you read anything written by the left, they are convinced Trump is an establishment meat puppet. I hope they are wrong.
Today is a good day for now. As an early Trump supporter I admit I wanted chaos within the elite class of politicians more than Trump himself. He offered the chaos part, now he has to deliver on some of his promises which I think he will probably succeed in a small number of them. I don’t know if he will make things better but I’m hoping so.
You were Donnie-conned. Those who voted for Trump are going to be the ones most hurt by him. But that is how a con works.
Trump’s got a new website:
https://www.whitehouse.gov/
Poor Perspective. He couldn’t hang with the relatively tame crew at TI and stopped commenting there right after the election. He must be apoplectic today.
I hope he comes back soon. I miss his insights.
That dude is intelligent but so are many others on this blog and others. To me he was just a typical left left wing liberal that can’t be open minded and doesn’t see what life is like outside of major liberal cities, which is why they can’t accept that the election was real. Can’t see that Obama also had major flaws/failures and handed so many victories to the GOP across the board, Trump was just the icing on the cake. I think he suffers from “white privilege” so has to be committed to the most liberal policies to compensate for that guilt.
I keep telling myself that I am glad everything is over so we can move on but liberals continue to bring this fight to the forefront on the daily basis, I still talk to some friends from liberal mecca Stanford though because at the end of the day we don’t have to agree on politics to respect each other but there are some that have stopped talking to me because I am a scumbag for voting for Trump… the tolerance is eye opening.
On the first day Trump rescinds a cut in the PMI rate, and now the White House official website is promoting Melania’s jewelry line? Interesting beginning. This is one of the greatest con-jobs in history. Most of the suckers just don’t see it yet.
Unfortunately the lesser of two evils….is still quite evil. Either way the country was in for a rough run.
If he does turn out to be a con man, the left will earn the biggest “I told you so” in human history.
These are nitpicks.
They are nit picks indeed. But insightful for Hour 1. There are much more serious concerns brought to light from the transition period.
It is clear what we are getting. A sociopath with no moral convictions whatsoever other than to maximize personal wealth and power. Not that the alternative seemed much different.
Some may be able to ride that wake, but most likely it ain’t the disenfranchised blocks that got him here.
Our global rivals have known for some time that the only way to defeat this superpower is to have it crumble from within. They have been working for decades to get us here, the rest is going to be up to us. It will be stress test of the century for the Republic.
Hell Yeah this is Tanking For sure now
https://www.yahoo.com/news/m/2ebe8a40-bcbd-3bc3-ab48-e7cb4f124bef/ss_hud-suspends-fha-mortage.html