Housing Issues

by

The $64 Question: Where is the bottom to the real estate market?

I am guessing that there are a lot of anxious people pondering that question. The optimists out there are hoping for a quick recovery. The pessimists cannot help but notice that the bad news keeps coming. Today Fannie Mae announced that it lost $2.3B in the quarter and has cut its dividend.  The really bad news is that the Yahoo article implied that the the market for Alt-A securities and all of its close cousins is probably defunct. This implies that the flexibility the mortgage brokers had with low documentation loans is gone, too.  This is not surprising but its impact could pull out the last support for real estate prices in the hardest hit markets. This is a “hassle” barrier for small business owners and commission based workers who might want to buy into this downturn. I think if a buyer has to put a considerably larger down payment  and a lot of more income verification to get their dream house, I think that they are going to demand some type of fundamental analysis that they are buying near the bottom.

My contribution in this area is the following graph comparing real estate prices to the Consumer Price Index(CPI) for several real estate markets. Comparing real estate prices to the CPI is a traditional way of evaluating financial performance and risk. For those readers that want to know I got the CPI data from the Bureau of Labor and the real estate indexes from the S&P/Case-Shiller® Home Price. I converted all of the indexes into percentages relative to their 2000 index values. The bottom line on the graph is the Consumer Price Index. It looks like the down turn in the real estate market has a ways to go in some local markets that benefited from the real estate bubble.

2000-08 Real Estate Appreciation versus the Consumer Price Index

by

Freddie Mac reports loss of $821 million (Reuters)

Reuters – Freddie Mac on Wednesday posted its fourth consecutive quarterly loss, set plans to slash its common stock dividend and warned of more difficulty ahead amid the steepest U.S. housing market slump since the Great Depression.

Although I recently expressed a  negative opinion of Fannie and Freddie Mac’s future, I was a little surprised with this announcement. I thought they would not even discuss cutting the dividend until after the elections.  Although I think it was a necessary decision for Freddie Mac, I thought there was an implied agreement to not cut the dividend until things settled down. Tonight I heard the CEO on NBR and I was not impressed with his efforts to finesse the hard questions about Freddie Mac’s financial plan. Things are not settling down. The big losers in this sad affair are the elected officials who went to bat for Fannie Mae and Freddie Mac. I think that the housing bill was a huge stretch for our elected officials so this announcement is a bitter pill to swallow.

Freddie Mac reports loss of $821 million (Reuters)
Wed, 06 Aug 2008 12:22:15 GMT

by

Fannie Mae & Freddie Mac Bailout: The most important mistake by Bush?

I am fascinated with the Fannie Mae & Freddie Mac bailout. As a Treasurer for a Habitat for Humanity affiliate I have an above average interest in the market for poor quality real estate loans. We were the original sub-prime lender. This bailout will allow Fannie Mae & Freddie Mac to corner the market at bad loans?! Is that the plan! Now imagine that you are in charge of investments for a retirement fund. Would you buy Fannie Mae or Freddie Mac securities?  How much of a risk premium would you require? Why would anyone over the age of sixty own any Fannie Mae or Freddie Mac securities? I think a lot of people are going to sit on the side lines for a couple of years.

It does not take a whole lot analysis on the subject before you come to the conclusion that passing this bill could ultimately determine Bush’s legacy for historians. It has the scandalous overtones of the oil for palaces scandal and the near sightedness of the Smoot-Hawley Tariff Act. The Wall Street Journal has been screaming to anyone who will listen that this bill is a really bad idea. Bush has the opportunity to be remembered like Hoover.

Over the next couple of days I hope to write about the difficulties of buying houses in poverty areas and what I see as strange dealings and complications of the bill. G’day mate! 😉

by

Of Markets and Mortgages/My recommendation

Lenders loaned too much money on too easy terms to borrowers who did not have the capacity to make their payments. No alchemy by even the brightest minds on Wall Street could turn bad loans into good assets.

I have to agree with what Ethan Penner says above in the Wall Street Journal opinion piece, Of Markets and Mortgages – WSJ.com. I disagree with him on several other points. The process of bundling mortgages into securities was way out of control and a major contributing factor to this debacle. As the treasurer for a local Habitat for Humanity affiliate I can say that I am familiar with subprime mortgages. All of our mortgages are subprime mortgages. That is just one of the tools we use to get low income families out of substandard housing. We are a charity and that is part of our mission. In a way similar to the commercial market Habitat for Humanity International offers its affiliates the opportunity to borrow money from HFHI based on a bundle of up to 25% of our mortgage portfolio. Despite the obvious differences between commercial lenders and Habitat, it is interesting to note that the foreclosure rate at Habitat affiliates is remarkably similar to those of commercial lenders until recently. Their foreclosure rates skyrocketed and ours stayed the same. If the commercial lenders were following HFHI’s standards they would hold about 75% of their mortgages. This would have allowed the lenders ample room to find good mortgages in their portfolio to replace the mortgages in default. This was the part of the process that failed. Commercial lenders looked at historical foreclosure rates and assumed they were safe.  By the time they realized the extend of their problem, they had already run out of good mortgages. They were experiencing another one of those difficult to predict Black Swan scenarios.

Ethan outlines several proposals for mitigating the credit crisis and reducing the backlog of foreclosed houses. The big question is how to avoid repeating this crisis. One idea that I did not see mentioned is a regulatory tool modeled after the margin call. I think we would have had a smaller problem if we let the Federal Reserve set the collateral limits for bundled mortgages.  The Federal Reserve could move the limits up and down based on the health of the mortgage market. This would have allowed the Federal Reserve to knock some of the irrational exuberance out of the housing market. Several analysts noticed that the housing market in California and Florida has been crazier than normal since 2000 and were openly wondering when the bubble was finally going to burst. We could have done better!

by

Bernanke’s ‘Principal’ – Time to Panic!

The Federal Reserve Chairman tells bankers to create more losses by writing down mortgage loans.

I just saw this story, Bernanke’s ‘Principal’, in which he recommends re-negotiating existing mortgages at a much lower amount and forgiving the debtor for the difference. This is an incredible request since all of the pain will be born by the banks, the bank’s good customers, and the share holders. As a Treasurer for a nonprofit that issues mortgages, I am pretty sensitive to questions concerning mortgages, foreclosures, and fiduciary responsibility. We believe we have a responsibility to the home owners who continue to make payments, the community, our donors, and the volunteers who helped build the house, too. Most of our foreclosure situations are solved by either temporary lowering the monthly payments or extending the mortgage terms. Occasionally we exhaust all of our options and we have to foreclose. Its painful! We follow the rules that have serviced us well for years and we move on. One family’s failure is another family’s opportunity. Bernake is asking the bankers to commit unusual and questionable transactions that are possibly unethical and may subject the bankers to additional lawsuits. I guess it is time to panic. His actions are lowering confidence in an already shaky banking system.

by

Trying to understand the foreclosure crisis in low income neighborhoods

Foreclosure map for Lincoln Heights, OHPreviously I had speculated in a post, Trying to get a grip on the impact of subprime mortgages on low income families, on what I thought was going to be the impact of subprime mortgage crisis. Yesterday I decided to see what the folks at RealtyTrac said for a low income area I am interested in. The numbers are not pretty. Lincoln Heights is the triangle in the middle of the map where most of the pushpins are located. There are around 1600 occupied houses in the Lincoln Heights community according to City-Data.com and something like 125 houses in foreclosure. This means that about 8% or 1 in every 12 houses in Lincoln Height are in foreclosure. The folks at foreclosurepulse say that it is likely to get worse. Read it and weep!