Mar272012
Loan owners are $3.7 trillion underwater
The depth of American’s underwater mortgage debts is truly staggering.
$3,700,000,000,000
That’s not the amount of debt outstanding, that is the amount Americans are underwater. Principal reductions are not going to make America whole again. Nobody, not even the US government can afford to write down amounts that large. The biggest principal reduction programs proposed so far are less than $100 billion. That is less than 1/37th of the problem. In short, principal forgiveness is not going to solve the problem.
Lenders would like to see the problem remedied by having prices go back up. As someone accumulating properties in Las Vegas, that idea has a certain appeal, but the existence of the distressed debt is likely to prevent appreciation from happening because as each loan owner succumbs to the pressure, it adds to the distressed inventory already weighing on market prices.
If principal forgiveness won’t solve the problem, and if appreciation isn’t likely to do it, what other options do policymakers have? I see only two: (1) they can continue to meddle in the markets, delay the recovery, and eventually the problem will work itself out. This is what will probably happen. But there is also another alternative, (2) print money until wage inflation drives house prices up. Unfortunately, this has many downsides as well, not the least of which is rising interest rates which will counteract the increasing incomes and serve to lower loan balances. The solutions to our problems create more problems than doing nothing and taking our medicine.
Negative equity gap nears $4 trillion
The U.S. housing market contains a nearly $4 trillion-dollar negative equity hole, according to Williams Emmons, an economist with the Federal Reserve Bank of St. Louis.
Emmons made that statement while speaking at HousingWire’s 2012 REthink Symposium.
The Fed Bank economist said it would take $3.7 trillion, much more than the $25 billion mortgage servicing settlement and other federal housing initiatives, to get homeowners with mortgage debt back to preferred loan-to-value ratio levels.
The $25B mortgage settlement is 0.67% of the total value of underwater mortgage debt. And most of the settlement money will go toward writing off short-sale losses. The mortgage settlement was clearly a symbolic effort intended to make politicians look like they did something, give lenders protection from future lawsuits, and give loan owners false hope they will get principal reduction. There is no way lenders or the government could scratch the surface on the pool of underwater mortgage debt.
Emmons’ data estimates the average LTV for those with mortgage debt is currently 94.3%.
That compares to preferred LTV levels among mortgage debt holders of 58.4%, which was the average struck among mortgaged homeowners in the period stretching from 1970 to 2005. Emmons told the crowd there is no easy way to fill that gap, and the deep hole is hardly discussed among the media and policymakers.
“We are sort of stuck in this,” he told the crowd. “It’s a sweat box we’re in, and we can’t get out. We are not talking about this very much … it’s just too ugly.”
We are actually talking about this problem a great deal on the political left. The entire principal reduction movement emanates from this problem. What the principal reduction crowd conveniently ignores is the cost of their proposals and who is supposed to pay for it, but that has always been a weakness of the left.
He added, “It is like the debt that is outstanding is crushing the equity that is there.”
In effect he is right. Prices can’t go up as long as so much distressed debt is in the system. The distressed debt translates to distressed sales, and those distresssed sales keep prices down and prevent any meaningful appreciation which would translate to increased equity.
Emmons said the only viable option to narrow the gap is letting home prices fall until they eventually reach levels that entice buyers, bringing private capital back in.
From my earliest writings in 2007 I have made the same case. When prices get low enough that cashflow investors enter the market, they put in a bottom. Every market crash works that way because once prices start falling, appreciation buyers sit on the sidelines. It isn’t until value buyers enter the market that prices eventually bottom.
A home-price boom or a government bailout would help, of course, but both those scenarios are unlikely.
Thank goodness.
At this point, home price appreciation would need to rise 62% to narrow the gap to the ideal LTV level, Emmons said. Significant government intervention also is unlikely given the fact it would take a $3.7 trillion bailout, or 24% of GDP, to narrow the gap, according to Emmons’ data.
He says that amount makes other federal initiatives launched to band-aid the housing market so far look like “peanuts” in comparison.
It’s difficult to grasp the depth of this problem. For years, many of us writing about this issue have lamented the mark-to-fantasy accounting by lenders, but if they were to truly mark these loans to current market value of the homes, our entire banking system would be insolvent three-times over.
With that in mind, the only alternative is that we have “millions of weak homeowners exit, replaced by new private owners with equity to recapitalize the housing sector.”
And that will take time. There is no other viable solution.
Emmons said that option will still be painful since he believes another reduction in home prices is needed to attract new buyers.
“The asset class is not priced attractively yet,” Emmons said. “You need to get the value down to where it looks like a screaming buy.”
In some markets houses are a screaming buy, but not here locally. We are only now reaching a modest state of undervaluation, and above median properties are still not attractively priced (see far right column below).
Emmons in his report said with the assumption that another 20% decline in national home prices is required to bring in new buyers, the amount of mortgage debt that must be eliminated then is $4.97 trillion, or 50% of current face value.
What a mess.
Nearly a million dollars in HELOC abuse
The former owners of today’s featured property lived there for 24 years. They paid just over $200,000, so with such a small mortgage, it is reasonable to assume they paid the property off. However, these owners where HELOC abusers that managed to pile on over a million dollars in debt.
I have to admit, I’m a bit jealous about this one. These people lived in an ocean view property steps from the beach for 24 years. They got to spend over a million dollars in free money to help them enjoy their property. When times were good, it must have been really good.
Sometimes I wonder if it would have been worth it. Of course, these people now have an enormous sense of entitlement that likely will never be fulfilled again, and the suffering from their unceremonious fall from entitlement must be extreme; however, the years of living irresponsibly had to be fun. Carpe Diem?
- This property was purchased on 4/26/1988 for $220,000. I don’t have their original loan information, but they likely put 20% down and borrowed $176,000. It that number is correct, they they got over $1,000,000 in HELOC booty.
- My records go back to 1997. On 5/27/1997 they refinanced with a $242,640 first mortgage and a $30,330 second mortgage. They were already well on their way to being full-blown Ponzis.
- On 6/25/1998 they refinanced with a $255,000 first mortgage.
- On 8/2/2000 they refinanced with a $273,500 first mortgage.
- On 9/18/2001 they refinanced with a $295,000 first mortgage.
- On 11/27/2001 they refinanced with a $319,500 first mortgage.
- On 3/19/2002 they obtained a $230 second mortgage.
- On 6/30/2003 they got a $480,000 HELOC.
- On 9/7/2004 they refinanced with a $650,000 first mortgage.
- On 10/4/2005 they refinanced with a $840,000 first mortgage.
- On 5/24/2006 they refinanced with a $1,000,000 Option ARM with a 1% teaser rate.
- On 8/15/2007 they obtained a $183,138 HELOC.
- Total property debt was $1,183,138.
- Total mortgage equity withdrawal was around $1,000,000.
- And they got to squat for a year and a half.
It’s people like this that will cause the demise of the high end. The want of this HELOC money motivated many to grossly overpay for property in the beach towns. These markets have historically been supported by people bringing equity from a move-up sale, but that market is dead. Who will replace the HELOC abusers? Who has the cash or the borrowing power to buy these houses? Sure a few will sell, but there are far more houses at these price points than their are people capable of buying them. realtors lament the lack of financing, but financing will not support these markets. There simply aren’t enough borrowers with the income or the savings to absorb these properties. The high end is still going to come down.
Lawler on possible Fannie and Freddie Principal Reductions
From housing economist Tom Lawler:
Several media stories, including one from NPR/ProPublica, suggest that new analysis by folks at Fannie and Freddie indicate that engaging in some principal reduction modifications may be cost effective to the GSEs.
At least one of these stories, however, made what appears to be a “most erroneous” statement. E.g. a ProPublica reporter, in a follow-up article to the original NPR/ProPublica article on this issue, wrote that the GSE’s analysis suggested that “(s)uch loan forgiveness wouldn’t just help hundreds of thousands of families (stay) in their homes,” but “it would help save Freddie and Fannie money,” which “would help taxpayers…”
That latter statement, however, appears to be incorrect. Other reports, including an interview with Freddie’s CEO, indicate that the GSEs’ analysis finds that principal reductions would be “cost effective” for the GSEs ONLY after factoring in the new, turbo-charged incentives Treasury would pay to the GSEs (and other lenders/investors) for doing a principal reduction under HAMP. Such incentives — which were recently tripled, and which the administration recently agreed would be paid to the GSEs as well as other HAMP participants (the GSEs didn’t use to get any HAMP incentives) – are obviously paid for by the government/taxpayers.
HousingWire reported on Friday, e.g., that Freddie CEO “Ed” Haldeman said the following at a symposium:
“I have to say recently the Treasury sweetened the program and tremendously increased the incentive payments in their offer to us. We will reevaluate that to see what may be in our economic best interest. If there are very large incentive payments — which could be 50% of what you could write down — it may be in our economic self-interest to participate in that.”
So here’s the “taxpayer” scoop: as best as I can tell, the GSEs’ analysis (which, to be fair, some have questioned) suggests that principal reductions would NOT make sense for them (or, implicitly, for taxpayers) without any Treasury/taxpayer incentive payments. However, IF the GSEs receive hefty incentive payments from Treasury/taxpayers to engage in principal reductions, then in some cases doing so WOULD make sense to the GSEs – but NOT to taxpayers!
CR Note: Hopefully the analysis will be released!
Pending Home Sales Index Extremely Weak in February
The Pending Home Sales Index (PHSI) edged down February to 96.5 from January’s 97, which had been the highest level since April 2010, the National Association of Realtors reported Monday.
The index slipped for just the second time in the last five months, but was 9.2 percent ahead of the level in February 2011. It remains down 26 percent from the April 2005 level. The index began in March 2005.
Pending home sales are counted when sales contracts are signed, and are viewed as a leading indicator of existing home sales; recent reports suggest that home re-sales should be a bit stronger over the next couple of months but at a level that is still fairly subdued.
The PHSI has been drifting upward, albeit modestly for most of the past two years but remains lackluster. A substantial number of sales contracts are failing to meet underwriting standards and/or other loan criterion as sales contract cancellations remain elevated. Although a hopeful movement, home sales still appear to be searching for a sustainable level and continue to be subject to conflicting trends in labor markets, house,hold formation, mortgage interest rates and underwriting standards.
The PHSI in the Northeast slipped 0.6 percent to 77.7 in February but is 18.4 percent above a year ago. In the Midwest, the index jumped 6.5 percent to 93.8 and is 19 percent higher than February 2011. Pending home sales in the South fell 3 percent to an index of 105.8 in February but are 7.8 percent above a year ago. In the West, the index declined 2.6 percent in February to 99.3 and is 1.8 percent below February 2011.
The index is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.
The dip in the index was consistent with declines in mortgage purchase applications edged down in January and with the month-over-month drop in new home sales, which are also tracked by contract signings.
Shouldn’t a 9.2% increase justify a different headline?
And then there’s this…
http://www.housingwire.com/article/pending-home-sales-shoot-february-0
Pending home sales shot up in California during the month of February as more buyers signed contracts to acquire homes, the California Association of Realtors said Monday.
C.A.R.’s pending home sales index grew from 102.3 in January to 127.8 in February.
The index is based on the number of pending sales contracts signed each month. Contract activity is a sign of future home sales activity, and a sign of just how strong the home sales market is in certain areas.
In February, the share of distressed sales recorded in California fell due to a lack of inventory in the bank-owned segment and in the short-sale market, CAR said.
“In fact, REO inventory declined 24% in February from the previous year, while short sale inventory dropped 17% during the same period,” said C.A.R. President LeFrancis Arnold.
Equity sales in California made up 51.1% of home sales in February, compared to 49.9% and 44.8% of all sales in January 2012 and February 2011, respectively.
Of course CAr would have a rosier headline. Notice they use pending contracts to make the sales look better. Why not use closings, particularly now when so many fall out of contract? Could it be because they are not concerned with accuracy?
How is that different than NAR’s methodology in the article you cite? What am I missing here?
Even despite the fact that the C/S index does not capture investment properties, multi family, condo’s, or new construct sales data, (only captures single family detached, semi-detached housing) it’s considered the industry standard pertaining to price.
Let’s review the 5 worst performing metros of the composite 20-city for Jan ’12
Atlanta down -14.8% YoY
LasVegas – down -9% YoY
Chicago down -6.6% YoY
SanFran down -5.9% YoY
LA/OC down -5.4% YoY
Boy, I wonder what the total underwater equity will be when rates will start to increase.
“…The mortgage settlement was clearly a symbolic effort intended to … give loan owners false hope they will get principal reduction…”
You can add “intended to give loan owners false hope they will get principal reduction” to this list. The servicer of my first announced last week that they don’t intend to “modify” non-portfolio’d loans. These articles are never clear – either because the industry intends them to be confusing, or the media simply doesn’t understand what they’re writing about. Does “modify” mean any change, or just principal reduction? Does “modify” include rate reductions or refinances?
The Settlement targets first lien loans, but includes subordinate lien loans when the CLTV exceeds 80% LTV (and they’re owner-occupied). I don’t know what percentage of first lien loans the major banks service, are owned by the servicing bank. I’ve read that a large portion of subordinate lien loans serviced by the major banks are also owned by them. This is the case with my second lien purchase loan.
My first sentence should read:
You can add “intended to give loan owners false hope they will get rate reductions or refinances” to this list.
Are they refusing to give you relief of any kind on your loans?
Both servicers are saying they’re currently identifying applicable loans and will be notifying borrowers within 60-90 days of the settlement’s final approval date (should be any day now).
I hope they cut you a break, but I wouldn’t be surprised they wager you will continue to pay in full if they deny you any assistance.
I doubt their process is to identify the most deserving. They are likely trying to identify the ones most likely to strategically default. If you are fortunate, you fit their profile.
“…(2) print money until wage inflation drives house prices up…”
I don’t think this option is possible. Why? Global Wage Arbitrage.
We can’t artificially inflate wages in a competitive global marketplace.
50 or even 25 years ago such a scheme may have worked.
Today, as a side effect of incredible declines in the cost of computation and movement of data across high bandwidth networks, information is easily and cheaply transferred across any boundary, economic, political or geographic.
Evidence? Average U.S. wages in real terms have stagnated or in many cases declined over the last ten years.
See:
http://www.bls.gov/schedule/archives/realer_nr.htm#current
The plan is even better for the banksters and WS. There’s free money to borrow from the Fed to juice the stock market that 401k need to buy and WS needs to sell, inflation on good and services, and declines or stagnation on wages and bailout for the bad loans. Once enough liabilities are transferred to the taxpayers to “save the GSE money” the economy, employment will be allowed to recover. The rug will be pulled out from the retirement plans, by removing the juice from the stock market (Fed’s free money to WS to buy the stock). WS will have cashed out and let Joe blow holding another bag.
We truely have a socialist system, where the taxpayers cover the losses of WS and pick up some crumbs when WS wins.
Considering the most distictive element of the socialist agenda is to take away private property from individuals, it’s highly likely the current herd of market participants (who undoubtedly consider themselves ‘ingenious’ based on knowledge + history) are eventually going to be monkey-hammered.
That’s not socialism, that’s kleptocracy. Big difference.
In working socialism, there is an elite class that controls the means of production and own its profits. The workers are paid wages and govt require to cover the loss, while the elite and their family live in luxury. It’s also crony capitalism, when the elite have no loyalty to the country. I might have been describing EU socialism earier, while the US is more corny capitalism. No loyalty, just move overseas.
FHA Bailout Risk Looming Larger After Guarantee Binge: Mortgages
By Bob Ivry – Mar 27, 2012
The Federal Housing Administration won’t be able to earn its way to financial health this year, increasing the chance it will need a taxpayer bailout, based on an updated forecast from Moody’s Analytics, which provides the agency’s housing-market analysis.
The U.S. government mortgage-insurer, which guarantees $1.1 trillion in home loans, had been counting on “robust growth” in home prices to help rebuild its insurance fund after paying out $37 billion to cover defaults the past three years, according to its annual report to Congress, filed in November.
It won’t get that growth until 2014, according to the latest outlook from Moody’s Analytics. Prices will fall 3 percent in fiscal 2012 before growing 1.4 percent in 2013 and 6.5 percent in 2014, said Celia Chen, a Moody’s Analytics housing economist who updated her estimate after providing the housing-market forecast for the FHA’s annual actuarial report.
“The FHA’s economic projections are surreal,” said Andrew Caplin, a New York University economics professor who has testified to Congress on the agency’s finances. “They must believe there will be very few readers in Congress able to critically review such a complex report.”
In their annual review, the FHA’s actuaries — risk analysts who specialize in insurance — used earlier projections that called for increases of 1.2 percent in 2012 and 3.8 percent in 2013. The agency, which backs mortgages that cover as much as 96.5 percent of a home’s value, is sensitive to changes in home prices. While the insurance fund’s 2012 outlook called for net growth of about $9 billion, that will drop if home prices decline, according to the FHA’s November report.
By law, the fund is supposed to hold 2 percent of its portfolio in reserve; as of Sept. 30, it held only 0.24 percent, or $2.6 billion, according to the report.
‘Best Available Data’
While the FHA issues an annual report and hasn’t updated its outlook since the new Moody’s forecast, Carol J. Galante, the acting FHA commissioner, says there’s no indication that home prices will fall to a level where the agency would need help from the U.S. Treasury.
“The independent actuaries rely on the best available data that most closely reflects our portfolio to estimate how the market will behave in the future,” Galante said in a statement yesterday. “All things considered, we’re doing everything we can to remain in positive territory and to avoid needing additional support from the Treasury.”
Deeper Than Predicted
Losses will be deeper than the FHA predicts, in part because the agency uses a home-price index that excludes distressed sales, Caplin said. Distressed sales, which refer to sales at prices lower than what borrowers owe on their mortgages, will make up 40 percent of transactions this year, Chen said. Excluding them produces a rosier forecast on sale prices and may mean the agency is underestimating potential claims, Caplin said.
“They can’t even track their data correctly,” Caplin said in an interview. “Not knowing how to measure the performance of your borrowers is tragic and profoundly wrong.”
The White House submitted a budget plan to Congress this year that would have provided the FHA as much as $688 million from the U.S. Treasury, the first bailout in the agency’s 78- year history. The money wasn’t needed because the FHA will get almost $1 billion from the government’s $26 billion settlement with the five biggest U.S. mortgage servicers over alleged foreclosure abuses, according to Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, which oversees the FHA. Mortgage servicers collect monthly payments and manage the foreclosure process.
Business Tripled
As the FHA tripled its home-loan insurance to $1.1 trillion since 2007, defaults and expected defaults drained its cash reserve below the 2 percent legal threshold the last three years. The reserve is a cushion to offset possible future losses and is held in addition to $29 billion the agency has set aside to pay expected claims.
Caplin and others say the FHA’s plan to grow out of its cash squeeze amid rising property values won’t work. Taxpayers will be on the hook for between $50 billion and $100 billion “over many years,” says Joe Gyourko of the University of Pennsylvania’s Wharton School.
FHA officials dispute that conclusion, and note that they’ve taken steps to improve the credit quality of borrowers and to increase premiums and fees. The agency’s role in U.S. housing grew as private mortgage insurers retreated after the credit contraction of 2008. The FHA, created in 1934 to help low- and moderate-income people buy homes and to stabilize credit markets, insured 30 percent of U.S. house purchases last year, up from 4.5 percent in 2006. It charges lenders and borrowers a fee to guarantee that mortgages will be paid.
“To be clear, FHA is not broke,” Galante told a House Financial Services subcommittee hearing on Feb. 28.
Premium Increase
To help bring in more money, the FHA will increase the premiums it charges most borrowers by 0.10 percentage points, starting April 9. For borrowers with homes worth more than $625,500, the hike will be an additional 0.25 percentage points, as of June 11. Upfront fees will also rise, to 1.75 percent of the loan from 1 percent, effective April 9.
President Barack Obama said Feb. 1 he wants to reduce rates on FHA refinancings for about 3.4 million eligible FHA homeowners. Their upfront fee would drop to 0.01 percent from about 0.55 percent and their annual premiums would be cut to 0.55 percent from 1.2 percent.
Net Effect
The net effect of the hikes and proposed discounts would add a total of $1 billion to FHA receipts in fiscal years 2012 and 2013, Galante told a Senate subcommittee March 8.
The agency’s reserve fund — the amount held back after making provision for expected claims — declined from 0.53 percent of its total portfolio in 2009, to 0.5 percent in 2010 and 0.24 percent last year. For single-family mortgages, which make up 94 percent of the portfolio, the 2011 reserve was just 0.12 percent.
“The FHA clearly didn’t allocate enough capital to the loans it insured from 2007 to 2010,” said Morris A. Davis, a professor of real estate and urban land economics at the University of Wisconsin-Madison’s School of Business.
Apart from the reserve account, the FHA had budgeted $29 billion for expected claims at the end of fiscal 2011, about $900 million less than the agency will need, according to its actuary’s estimates. The FHA said in November it wouldn’t set aside the additional $900 million, an action that would have reduced its capital reserve further.
Over the last three years, the agency paid out $37 billion in claims — more than it expected and more than double the preceding three years — and “has not yet seen the peak of claim expenses,” which could come this year, according to the annual report.
Negative Equity
Property values are important to the FHA insurance fund. Negative equity — homeowners owing more on their mortgages than their houses are worth — is one of the most important triggers of defaults, Gyourko wrote in a November 2011 paper, “Is FHA the Next Housing Bailout?” published by the American Enterprise Institute, a Washington think tank that advocates for limited government.
The FHA will lose at least $10 billion more than it projects on 2009 and 2010 loans to first-time homebuyers who also took advantage of an $8,000 tax credit, Gyourko says. The credit was offered as part of Obama’s $787 billion economic stimulus package.
Gyourko called the credit a form of down-payment assistance, and noted that borrowers who receive such assistance are more likely to quit paying their mortgages.
‘False and Irresponsible’
Raphael Bostic, HUD’s assistant secretary for policy development and research, called Gyourko’s assessment “completely false and irresponsible” in the agency’s blog, The HUDdle. About 1 million first-time buyers used FHA insurance during the 13 months the tax credit was available, and their “failure rate” is less than 1 percent, he wrote.
The FHA was more accepting of arguments raised by Caplin and others, who say its actuary wasn’t correctly estimating risk for so-called streamline refinancing. The program moves borrowers from one FHA loan to another and doesn’t require updated property appraisals.
Caplin and six other researchers estimated that as many as 71 percent of FHA borrowers who streamline-refinanced in Los Angeles County, California, in 2009 owed more than their houses were worth, according to a February 2010 paper. Using the FHA actuary’s methodology, only 1.5 percent of the streamline refinanced borrowers would have had negative equity, Caplin said.
Capturing Values
For its 2011 estimates, the FHA’s actuary, Integrated Financial Engineering Inc. of Rockville, Maryland, changed its approach to try to capture home values after the refinancings, said Barry Dennis, the firm’s president. The change was one of several that increased the insurance fund’s potential payouts as of Sept. 30 by about $6 billion.
“Some borrowers have streamline-refinanced 10 times,” Dennis said.
Caplin said the change didn’t go far enough. The actuary counts each refinancing as a “successfully terminated mortgage,” he said. If a borrower refinances three times, the FHA counts that as three successful payoffs, Caplin said. That makes the agency’s performance look better — and that history helps shape estimates of future losses, he said.
“The refinance is just a rate reduction, it’s not a successfully terminated mortgage,” Caplin said. “Ask yourself if we’re creating sustainable homeownership. How many borrowers are ending their reliance on FHA?”
Handling Risk
Dennis said his firm’s approach uses FHA performance data to determine whether loans have had trouble in the past. While a refinancing removes risk from one year’s projections — the year in which the original loan was made — it adds risk in the year of the new loan, he said.
“It’s the same risk in the portfolio; it’s just in a different year,” Dennis said. “We’ve continued to improve our modeling.”
Caplin, Gyourko and others also question how the FHA gauges the condition of the housing market. The agency uses the Federal Housing Finance Agency index, which shows that home prices have declined 15 percent from a March 2007 peak. Another measure, the S&P Case-Shiller Home Price Index, shows that values have declined 34 percent since a July 2006 peak.
The FHFA index is more appropriate because the properties it tracks tend to be in the same geographic areas where the FHA insures mortgages, according to the agency’s annual report to Congress. Also, it said the Case-Shiller index “includes concentrations of properties subjected to subprime loans, and those sold in distress sales,” which aren’t in the FHFA index.
‘Appear Better’
Distressed sales tend to drive down home prices. Using the FHFA index “is just one of the many choices FHA makes that are completely unjustified and that coincidentally make the situation appear better than it is,” Caplin said in an interview.
Integrated Financial Engineering’s Dennis said he “wouldn’t argue that the FHFA index is perfect.”
“Some have suggested that the FHA use an FHA-specific home-price index,” he said.
One change in the FHA’s approach this year may help improve the quality of its mortgages. It will spend more time and money checking for potential wrongdoing by mortgage originators, said Helen R. Kanovsky, HUD’s general counsel.
‘Limited Resources’
Until recently, FHA officials chose to direct their “limited resources” to examining loan servicing rather than loan origination, Kanovsky said. In general, the agency trusts lenders to certify the quality of mortgages it guarantees and to report paperwork flaws or possible fraud.
On Feb. 9, Charlotte, North Carolina-based Bank of America Corp. agreed to pay $1 billion to settle claims it failed to do so, while on Feb. 15 Citigroup Inc. (C) admitted it certified loans for FHA insurance that didn’t qualify and will forfeit $158 million. Some of that money will compensate the FHA for claims it paid for defaulted home loans certified by Citigroup and Bank of America’s Countrywide mortgage unit.
The FHA can negotiate indemnification agreements in which the loan originator reimburses the agency for losses to its insurance fund. It typically requests indemnifications after a loan goes bad or when there are basic underwriting problems with the mortgage, such as missing paperwork or fraud.
Over the last seven years, the agency has averaged 1,282 indemnification agreements a year out of an annual average of 993,355 total loans guaranteed — a little more than 0.1 percent.
ROBERT SHILLER: ”Suburban Home Prices Will Not Rebound In Our Lifetime”
http://www.businessinsider.com/shiller-real-chance-of-japan-like-housing-slump-2012-3
Thanks. I am using that one as part of tomorrow’s post.
Scary stuff – despite the fact that Emmons is merely pointing out what everyone on blogs like this have been saying for a while. Maybe this is the beginning of true capitulation, when economists and consumers alike realize that the party is truly over, prices aren’t going to come back for decades, and that it’s time to plan for that reality. Once this mentality sets in, the market will fully tank as only a handful of people will be rich/ignorant enough to buy at current asking prices. Of course you never know what the gov will come up with next to draw this out, but there’s nothing they can do to solve this $4 trillion problem.
If people truly understood how markets worked and how the weight of this supply will hold down prices, it would cause a dramatic shift in market psychology. I think we are reaching a point where the decline has dragged on long enough that the mentality has begun to change. The failed bear rally helped. Even if prices bottom this spring, a few years of very weak appreciation will also make people realize no rocket rally is going to make buyers rich on appreciation.
[…] That’s wrong it’s $3.7 trillion. […]
[…] believes free money is on the way. That isn’t going to happen. The cost is simply too large. Loan owners as a group are $3.7 trillion underwater. There is no way the government can afford to make all of them whole, and I would be leading the […]