Nov262013
Mel Watt soon to loot the GSEs for political gain
I recently asked What would Watt do as the new head of the GSEs? His public statements support the view he would institute a widespread principal reduction program to loot the GSEs for political gain. Such a policy would be a tremendous boon to loanowners and his colleagues on the political left. His predecessor, Edward DeMarco, fervently resisted such policies because he recognized the moral hazards, and he wasn’t motivated to help politicians buy votes. By contrast, Mel Watt is a political hack who would like to dole out taxpayer funds to buy more votes for his party.
Senate Rule Change Could Ease Housing Regulator’s Confirmation
By Nick Timiraos — November 21, 2013, 4:30 PM
Thursday’s Senate vote to eliminate the use of the filibuster to block certain presidential nominees paves the way for the Senate to confirm Rep. Mel Watt (D., N.C.) to head the agency that controls mortgage giants Fannie Mae and Freddie Mac.
The installation of Mr. Watt is part of a broader effort to redirect an impending overhaul of Fannie and Freddie, which have been in a government conservatorship since being rescued by taxpayers in 2008.
Last month, Senate Republicans took the rare step of blocking a sitting member of Congress to an executive post when they voted against bringing Mr. Watt’s nomination to head the Federal Housing Finance Agency up for a vote. Mr. Watt needed three more Republican votes to reach 60, the number needed to overcome a filibuster. Only two Republicans, Sens. Richard Burr of North Carolina and Rob Portman of Ohio, backed Mr. Watt.
With Thursday’s rule change, which was triggered by Senate Republican opposition to three key judicial nominees, that filibuster hurdle likely has been removed for Mr. Watt.
The end of the filibuster on judicial nominations frightens partisans of both parties. Some partisans celebrate its removal and want to see the filibuster eliminated entirely, but these desires to see their agenda enacted are short sighted. For all its flaws, the filibuster stabilized American politics for almost 200 years. The threat of filibuster prevents a tyranny of the majority by making laws difficult to enact or overturn. If the filibuster were entirely removed, the Congress that removed it would enact its entire legislative agenda, and partisans would rejoice. However, the moment control flipped back to the other party, the entire agenda of the previous Congress would be thrown out and a new agenda enacted. The turmoil would destabilize our entire political and legal system.
The above being true, it’s also true that application of the filibuster has been less restrained in recent years. Robert Bork’s Supreme Court nomination filibuster in the 1980s marks the first time a filibuster was used against a Presidential nomination. Only recently filibusters against political appointments became popular. The overreach by the minority party was destined to cause a backlash.
The move is a major adjustment to the Senate rules, however. One question that remains: does the filibuster-fix chill legislative work in the Senate, particularly the efforts between Republicans and Democrats to agree on a bipartisan overhaul of Fannie, Freddie, and the nation’s $10 trillion mortgage market? Those discussions have heated up in earnest after Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) introduced their own bipartisan bill this past summer. …
This appointment matters because whoever heads the FHFA over the next several years will play a large role in shaping and implementing whatever reform takes place. The last thing we need is a partisan hack who will plunder the pork barrel for political gain.
But some administration officials have raised concerns that in recent months, Mr. DeMarco has signaled a greater willingness to liquidate Fannie and Freddie without clear evidence that private capital is ready to pick up the slack. Mr. DeMarco, for example, has directed the companies to reduce their purchases of multifamily mortgages by 10%.
The tension underscores a fundamental challenge for the government as it tries to draw private investors back to the mortgage market five years after the financial crisis. One school of thought, seen in Mr. DeMarco’s approach, is that private capital will be unlikely to return so long as it has to compete with the government.
Private capital shies away from mortgage lending because it can’t compete with the government. The GSEs have the backing of the US government, so investors will purchase mortgage-backed securities from the GSEs at lower interest rates than they would from a private insurer. Further, investors will loan money to the GSEs directly in the form of bond purchases at lower rates as well also due to taxpayer backing. For private institutions to take over either of those functions of the GSEs, mortgage interest rates would have to rise.
The only method of bringing private capital back to the market while the GSEs exist is to increase the guarantee fees, which effectively raises interest rates, or tighten lending standards (See: Tightening government lending standards would bring back private lending). By making access to capital more expensive and more restrictive, private money can find opportunities on the margins. This is the current strategy Edward DeMarco is employing to slowly bring private capital back to the market. It’s also the most sensible approach to winding down the GSEs.
But some industry and administration officials have taken the view that other factors, including the low interest rate environment, may be keeping private capital on the sidelines, regardless of the government’s role. Raising the cost or limiting the reach of government-backed capital, they worry, might simply contract mortgage credit altogether. …
Mortgage credit will contract, at least temporarily, but contraction is a necessary precursor to private equity entering the market. Private lenders will only enter where a bona fide need exists, and they can make a profit.
“You can’t have a wind-down strategy … that doesn’t connect up to that long-term system that we have to build for the American people,” said Michael Stegman, a senior Treasury Department adviser, at an industry conference last month.
Gene Sperling, the director of the White House National Economic Council, said Wednesday that putting in place a confirmed director would provide greater certainty to markets over the future of housing policy and to the fledgling agency, which was created when two smaller regulatory agencies merged in 2008.
Putting Mel Watt in charge probably would provide greater certainty to the future of housing policy. It’s certain he will work to loot the GSEs for political gain at the expense of taxpayers. Beyond that, what he will do is a complete mystery. Perhaps he will surprise all of us and do the right thing like Edward DeMarco. I’m not holding my breath.
Last payment in 2008
Today’s featured property has been non-performing since late 2008. The last payment anyone made to live in this property was five years ago.
Despite this lack of income, the lender demonstrated no alacrity to process the foreclosure or sell the REO. The first NOD on the property was issued in April of 2009. The foreclosure occurred in October of 2012. One year later the lender finally lists this property. Why the delay? Perhaps the 22% increase in price gave them pause. The lender stands to profit from appreciation despite the years of non-performance on the loan.
Can-kicking works.
[idx-listing mlsnumber=”OC13232645″]
9 PETERSBURG Irvine, CA 92620
$749,900 …….. Asking Price
$600,000 ………. Purchase Price
3/29/2005 ………. Purchase Date
$149,900 ………. Gross Gain (Loss)
($59,992) ………… Commissions and Costs at 8%
============================================
$89,908 ………. Net Gain (Loss)
============================================
25.0% ………. Gross Percent Change
15.0% ………. Net Percent Change
2.6% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$749,900 …….. Asking Price
$149,980 ………… 20% Down Conventional
4.37% …………. Mortgage Interest Rate
30 ……………… Number of Years
$599,920 …….. Mortgage
$149,601 ………. Income Requirement
$2,994 ………… Monthly Mortgage Payment
$650 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$156 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$65 ………… Homeowners Association Fees
============================================
$3,865 ………. Monthly Cash Outlays
($713) ………. Tax Savings
($809) ………. Principal Amortization
$239 ………….. Opportunity Cost of Down Payment
$114 ………….. Maintenance and Replacement Reserves
============================================
$2,696 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$8,999 ………… Furnishing and Move-In Costs at 1% + $1,500
$8,999 ………… Closing Costs at 1% + $1,500
$5,999 ………… Interest Points at 1%
$149,980 ………… Down Payment
============================================
$173,977 ………. Total Cash Costs
$41,300 ………. Emergency Cash Reserves
============================================
$215,277 ………. Total Savings Needed
[raw_html_snippet id=”property”]
[raw_html_snippet id=”newsletter”]
S&P is already laying the groundwork for principal reductions
Principal Reductions Increase Loss Severities to RMBS Investors at Re-Default
Only 10% of loan modifications studied by CoreLogic (CLGX) in the past four years involved principal write-downs, while interest rate reductions remained the preferred tool for minimizing the risk of foreclosure across the United States.
But analysts with Standard & Poor’s Ratings Services claim in a new study that principal reductions overall perform much better than loans receiving a mere interest rate reduction.
In a report titled, “How Principal and Interest Rate Modifications Affect U.S. RMBS,” the ratings giant notes that the recidivism rate – or likelihood of a new default – hovers above 50% for rate reductions, while borrowers who obtain the benefit of a write-down and equity gains generally have a better chance of staying current on their mortgages afterward.
The only problem is what benefits the borrower is often a nuisance for investors in residential mortgage-backed securities.
If a borrower obtaining a write-down does fail to pay and re-defaults, S&P says the eventual liquidation of the home will lead to higher loss severity rates for RMBS investors.
In fact, the resulting losses will be worse than if the home had just been foreclosed on early on.
Yellen Acknowledges Federal Reserve Policies Inflate Asset Values
Last week, the nomination of Janet Yellen to head the Federal Reserve came one step closer to becoming a reality.
The Senate Banking Committee voted in favor of the nomination, a huge boost of confidence in the ability of Janet Yellen to talk through monetary policy. And during that nomination hearing, Yellen evoked the stock market when talking about quantitative easing. Here’s why that seemingly minor connection is actually pretty huge.
It’s an important distinction to note the there are some things Yellen will do more of than her predecessor. Yellen is seen as more-or-less a mirror version of the current Fed Chair Ben Bernanke. She will apply the same standards of relying on macroeconomic factors to drive the eventual decision to wind down the Fed policy of buying Treasurys and mortgage-backed securities.
While the taper is expected early next year, Yellen faced questions on the logic of this program in the hearing. As this article in the New Yorker points out, the senators implored Yellen on whether this monetary policy is driving the markets to bubble.
“The objective here is to assure a strong and robust recovery so that we get back to full employment,” Yellen said. “Stock prices have risen pretty robustly,” she added, pointing out that she didn’t “see stock prices in territory that suggests bubble-like conditions.”
Author Kirk Kardashian later opines: “Yellen would do well to acknowledge that the Fed’s current policies may not be working as well as they should.”
Government Prosecutes Small Fry, Leaves Too-Big-To-Jail to Loot Economy
Back in 2008, Congress created the Office of the Special Inspector General for the Troubled Asset Relief Program to oversee all waste related to the $700 billion TARP program.
TARP, of course, provided liquidity to U.S. banks in the form of asset and equity purchases after the financial crisis, serving as a make-shift liquidity program at a time when financial firms faced a cash crunch.
But looking at the inspector general reports coming out of SIGTARP today, it’s clear all banks that took funds — no matter how big or small — and their employees are unable to escape taxpayer scrutiny with SIGTARP Inspector General Christy Romero continuing to aggressively hunt for instances of abuse.
Her agency is dedicated to ensuring all TARP recipients — and employees receiving funds — are operating in an ethical fashion and not abusing funds that may tie back to the signature bailout program.
Looking at the latest case from SIGTARP, it’s clear the agency’s outreach and discovery efforts run deep, impacting banking professionals who seem small in the grand scheme of things.
The latest person to plead guilty for defrauding TARP banks is not even a major banker, but a bank employee who accepted bribes while working at a TARP-recipient bank.
SIGTARP announced that Wilbur Tate, III, 49, of Dacula, Ga., pleaded guilty to accepting bribes while working at U.S. Bank in Ohio.
The agency claims Tate accepted $24,000 in kickbacks from debt collection firm, Oxford Collection Agency, in exchange for U.S. Bank’s collection contracts.
“While the country struggled through the financial crisis, rather than collect the debts of TARP banks, executives at Oxford ripped-off TARP banks in a $12 million debt fraud scheme, and Tate shared in their spoils,” SIGTARP claims. “Tate took bribes which began with expensive cigars and escalated to cash payments of as much as $5,000 per month disguised in cigar boxes.”
Tate allegedly received some of the funds that Oxford employees collected on behalf of TARP banks, SIGTARP claims.
Tate, then an assistant vice president at U.S. Bank, ended up in SIGTARP’s crosshairs as they investigated the recipient bank. Tate was arrested earlier this year and officially pleaded guilty to one count of conspiracy to commit bank bribery.
The case shows how SIGTARP’s investigative reach runs deep, prodding into all banking affairs that link back to the TARP program in any shape or form.
Rally Dead: Pending Sales Collapse to Lowest Reading in Nearly a Year
Pending home sales slipped a bit further in October, reflecting an overall declining trend amid mixed regional numbers.
The National Association of Realtors’ (NAR) Pending Home Sales Index (PHSI), a forward-looking sales indicator based on contract signings, was 102.1 in October, a drop of 0.6 percent from September’s revised level of 102.7.
It was the fifth consecutive monthly decline. Compared to October 2012, the PHSI was down 1.6 percent, NAR reported.
“The government shutdown in the first half of last month sidelined some potential buyers,” said NAR chief economist Lawrence Yun. “In a survey, 17 percent of Realtors reported delays in October, mostly from waiting for IRS income verification for mortgage approval.”
While the market could still rebound from October’s level—the lowest since last December—limited inventory and deteriorating affordability stand in the way, Yun said. January’s new mortgage rules and the threat of another government shutdown present more cause for concern.
However, he noted “[j]ob creation and a slight dialing down from current stringent mortgage underwriting standards going into 2014 can help offset the headwind factors.”
Two regions reported modest increases in pending sales. The PHSI for the Northeast rose 2.8 percent from September to 85.8; in the Midwest, pending home sales were up 1.2 percent to 104.1.
The South and West both experienced declines as they continued to struggle with higher costs and lower inventory. The South’s PHSI fell 0.8 percent month-over-month to an index of 114.5, while the West’s index decreased 4.1 percent to 93.3.
Bubble Reflation Efforts Fall 14% Short of Goal
National home prices rose 0.2 percent over the month in September, reaching $232,000 for the month, according to Lender Processing Services’ Home Price Index, which was released Monday. Year-over-year prices rose 9 percent in September, according to LPS.
At their current level, prices are about 14 percent below their peak reached in June 2006.
Nevada and Connecticut posted the greatest price changes over the month—though in opposite directions.
Home prices in Nevada jumped 0.8 percent over the month, while prices in Connecticut fell 0.9 percent.
Two Southern states followed Nevada, tying for the second-greatest price increases over the month according to LPS—Georgia and South Carolina. Both states posted price gains of 0.7 percent in September.
[BTW, Keith Jurow was right. See below.]
Nine of the 10 metros with the greatest price declines are located in the Northeast with Kennewick, Washington, as the outlier.
The four metros with the greatest decreases were all in Connecticut. After Hartford and Torrington; Bridgeport and Norwich posted 0.9 percent declines.
Even despite 7 long years passing coupled with the largest housing welfare program in world history …. LA/OC still ~23% below peak.
C/S LA/OC
Sep2006: 273.94
Sep2013: 212.83
Too bad.
Mortgage credit will contract, at least temporarily, but contraction is a necessary precursor to private equity entering the market. Private lenders will only enter where a bona fide need exists, and they can make a profit.
If principal reductions happen, I just don’t see how private equity will return to the market.
[bracket] a href =”http://www.cnbc.com/id/101227513”> A New Wave of U.S. Mortgage Trouble Threatens [bracket]/a>
Hmm-m-m-m, and I can’t delete it either.
I laughed out loud at the price of the 9 Petersburg house. $3800 in outlays after 150k down. 🙂 I mean just wow! It’s a starter home for goodness sake. Right? I guess not, starter homes are 1br 700 sq ft condos in Irvine.
The wife was talking to some friends over the weekend, both have PhDs. They started looking for a home, and just gave up almost immediately when they saw the prices out there right now. I don’t blame them! The prices are probably just beyond the threshold of “stupid” right now. It feels like 2005 to me, but wait 9 Petersburg transacted in 2005, fire less than the current list price… a lot less. Crazy.
Even though lenders may be able to reflate the bubble with super low rates and restricted inventory, they can’t get people past their gut reactions to peak bubble prices. They were wrong then, and they are wrong now. People have some intuition of value. They may ignore this intuition if they are gripped by a financial mania, but I don’t believe we are back at mania psychology yet, so people are simply turned off — and they should be.
[ a href =”http://www.cnbc.com/id/101227513”> A New Wave of U.S. Mortgage Trouble Threatens ]/a>
A New Wave of U.S. Mortgage Trouble Threatens
You got it to work.
Thanks for the link.
“Institutional Investor Housing Purchases Plummet Nationwide”
Concluding the trifecta of today’s housing data, we present perhaps the most authoritative report on what is actually going on in the market, that by RealtyTrac. What RealtyTrac has to say is in direct contradiction with both the Permits and Case-Shiller data, both of which are now openly reliant on yield-starved institutional investors dumping cash into current or future rental properties.
In fact it’s worse, because if RealtyTrac is accurate, the great institutional scramble for any housing is now over – to wit: “Cash Sales Pull Back From Previous Month, Still Represent 44 Percent of Total Sales Institutional Investor Purchases Plummet Nationwide… Institutional investor purchases represented 6.8 percent of all sales in October, a sharp drop from a revised 12.1 percent in September and down from 9.7 percent a year ago. Markets with the highest percentage of institutional investor purchases included Memphis (25.4 percent), Atlanta (23.0 percent), Jacksonville, Fla., (22.2 percent), Charlotte (14.5 percent), and Milwaukee (12.0 percent).” And plunging.
home sales continued to decrease on an annual basis for the third consecutive month in three bellwether western states: California (down 15 from a year ago), Arizona (down 13 percent), and Nevada (down 5 percent).
http://www.zerohedge.com/news/2013-11-26/realtytrac-institutional-investor-housing-purchases-plummet-nationwide
Cash buyers are the last toothpick holding housing prices.
That really is big news. That’s a very sudden and dramatic pullback.
Is this a reaction to the Mel Watt future confirmation? I don’t see how the President Obama will sign this if it passes.
House Republicans propose closing down FHA
As Congress slowly debates the future of housing finance, a group of House Republicans led by Justin Amash (R-MI) has proposed taking the government out of lending altogether using a 5-year phased plan.
A one page document summarizing H.R. 3550, The New Fair Deal Banking and Housing Stability Act of 2013, has been making the rounds on the Hill and was recently highlighted on the Confounded Interest blog:
There are a plethora of housing finance bills being written or circulating. These include the deeply flawed Corker-Warner bill, the Crapo-Johnson bill (that I have not seen), the PATH Act from the House. Now we have another House GSE reform bill, The New Fair Deal Banking And Housing Stability Act of 2013, from Representatives Justin Amash (sponsor), Jeff Duncan, Jim Jordan, Doug Lamborn, Tom McClintock, Mark Meadows, Tom Price and Matt Salmon.
Most interesting about this bill: it eliminates not only Fannie Mae and Freddie Mac, but also the FHA. Talk about getting the government out of the lending business. This is pretty much the “all-in” version of that approach.
FHA mortgage loans no longer best option after rule change
The most popular type of mortgage for buyers with low down payments keeps getting pricier and less appealing as more buyers question whether it’s still worth getting an FHA loan.
The mortgage insurance premium on loans backed by the Federal Housing Administration has nearly tripled since 2008. A few months ago, the FHA changed its rules to require borrowers to pay for mortgage insurance for the life of the loan.
“FHA loans really used to be a first option for homebuyers with a low down payment,” says Scott Schang, a branch manager for Broadview Mortgage Katella in Orange, Calif. “Now, I see people doing them because they have to and not because it’s their first option.”
The FHA allows buyers to get a mortgage with a down payment as low as 3.5 percent. The underwriting requirements to qualify for an FHA loan generally are less stringent than for conventional loans. But after the recent change and the numerous fee increases, FHA loans are generally not a borrower’s best mortgage option, Schang says.
Historically, the purpose of FHA loans was to help low-income buyers afford homes. During the subprime boom from 2003 to 2007, less than 10 percent of the purchase loans being originated each year were backed by the FHA.
After the financial crisis of 2008, when mortgage standards tightened, more borrowers and lenders turned to these easier-to-get loans. About 40 percent of purchase loans being originated by the end of 2009 were backed by the FHA, according to the U.S. Department of Housing and Urban Development’s latest annual report to Congress. It dropped to about 26 percent at the end of last fiscal year.
As demand for FHA loans grew, HUD tried to shore up the FHA’s insurance fund through a series of hikes in mortgage insurance premiums. The latest increase was in April.
FHA borrowers are charged an annual mortgage insurance premium of up to 1.35 percent of the average outstanding balances of their loans. The fee is added to the borrower’s monthly mortgage payment. The FHA also charges a 1.75 percent upfront fee when the borrower gets the loan.
A borrower getting a $200,000 loan, after making a 3.5 percent down payment, pays $225 per month in FHA mortgage insurance, plus an upfront fee of $3,500. Say you keep that mortgage for 10 years before you sell or refinance — that adds up to about $30,000 in mortgage insurance fees.
Irvine Renter I thought you said we are still hovering around affordability in most of the OC. Why do I get the feeling another collapse is coming?
Buyers have been walking away in droves since rates went up. Once the frenzy was over, it was really over.
Two big differences between 2005 and now remain. First, in 2005, the financing was toxic and unsustainable. Today, the mortgages are 30-year fixed-rate mortgages, so a credit crunch is unlikely. Rates may drop which causes buyers to pull back further, but a sudden huge reduction in mortgage balances like we saw in 2007 isn’t forthcoming. Second, the frenzy didn’t rise to a level of mania. The frenzy was contained to a small number of buyers who were forced to compete for limited inventory. In 2005, everywhere you went, everyone was talking about the latest deal they were working on or how much their house was worth. I haven’t seen that to any major degree lately.
The future is largely going to depend on interest rates. If they remain low or go down further, the frenzy will return. If rates go up, what little buying interest that remains will evaporate.
As expected….
GSEs Announce Loan Limits to Remain the Same for 2014
The Federal Housing Finance Agency (FHFA) has announced that the 2014 maximum conforming loan limits for mortgages acquired by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, will remain at $417,000 for one-unit properties in most areas of the country.
The Housing and Economic Recovery Act of 2008 (HERA) establishes the maximum conforming loan limit that Fannie Mae and Freddie Mac are permitted to set for mortgage acquisitions. HERA also requires annual adjustments to these limits to reflect changes in the national average home price.
Further information on potential future changes in the maximum size of loans that Fannie Mae and Freddie Mac guarantee will be forthcoming.
Click here to view the maximum conforming loan limits for 2014.
“Realtors welcome today’s announcement from the Federal Housing Finance Agency that the current limits on conforming loans will remain in effect until further notice,” said National Association of Realtors (NAR) President Steve Brown. “As the leading voice for homeownership, NAR opposes lowering the ceiling on loans eligible for backing by the government-sponsored enterprises. Lower loan limits would increase costs for consumers and reduce their access to conventional mortgages.”
In determining 2014 loan limits under the terms of the Housing and Economic Recovery Act (HERA), FHFA did not change the baseline maximum conforming loan limit for the United States. The baseline limit, $417,000 for one-unit properties in the contiguous U.S., was left unchanged based on historical index values for FHFA’s monthly and quarterly House Price Index (HPI).
That is disappointing, but as you noted, quite expected.
Gold – Slam Dunk Sell
If ordinary people are buying gold as the next great investment opportunity, the end is near. I don’t think you meant this article as a contrarian indicator, but I’m taking it as such.
Honestly, I just meant it as intersting info and viewpoint.
BTW, the “aunties” and the ordinary people in China are not buying gold as the next great investment opportunity. They are buying it as savings; a store of wealth or value. The Chinese central bank is not buying gold as the next great investment opportunity. The Chinese central bank is buying gold as backing for their currency and economy. Both buy on the dips. The people who think that gold is or was in a bubble and proclaimed the evidence thereof had and have it completely backwards. The west is net sellers of it’s gold, and they sell every time it goes down in dollar terms. The east is buying it and does so every time it goes down in dollar terms. The west is selling paper gold, naked shorts. The east is buying physical. GLD has been drained of 37% of it’s physical gold in one year, and it has all gone to the India, China, and Russia. The COMEX has been drained of 35% of it’s physical gold in one year. The ratio of open interest to registered ounces at the COMEX is 69:1, a historical high.
Our generation and even the generation before us is so acclimated and spoiled with the USD holding it’s place as the world’s reserve currency that they have spent their economy into oblivion, without any concern until they can’t buy what they want at Wal-mart. The so-called experts or even contrarians watch only the price action of gold, especially the price action in USD, which is soley dependent on paper and digital entries. They are like someone who is valueing residential real estate in Orange County by watching the price of London mortgage backed CDSes, while ignoring the actual Orange County real estate market.
The aunties are saving for their future. The Joe 6-packs have sold theirs.