mostly palaver

Mortgage Brokers

Read an interesting paper on the role of mortgage brokers in home lending.  It finds that mortgage brokers are actually worse for people with low credit than if those same people had gone directly to a bank for a loan.  It all comes down to (1) broker comp and (2) broker (non) fiduciary responsibility to the borrower.  It's worth a read, if for no other reason than to find out some of the crazy incentives for poor behavior in the market. That these brokers don't have a fiduciary responsibilty to the borrower is amazing. 

In between getting repeatedly outraged, this question popped into my head:

Are mortgage brokers the new travel agents?

Why does anyone need a broker when they can go online and get bank quotes directly?  Seems like a win-win for everyone if the banks just go direct and I can't see why brokers would continue to maintain a role in the purchase process.

Thoughts?

I don't get it

Markets soar based on the fact that home sales increased in February over January.  But they always do.  The bigger news (to me) is that they are down 23% YOY and the median price fell 8% or so YOY.  Could the rise be the beginning of a trend?  Sure, it could.  But nothing in the market has changed so I don't see how it is. 

More bad housing news

From Calculated Risk, my source for all things housing:

The Fed report shows that household real estate assets decreased from $20.325 Trillion in Q3 to $20.155 Trillion in Q4. That is a decline of $170.2 billion.

When we subtract out new single family structure investment and residential improvement, the value of existing household real estate assets declined by $282 Billion...

Household percent equity was at an all time low of 47.8%.

Two things about these numbers: (1) Real estate assets declined by $282 billion (so far).  Yet another data point showing why the stimulus package isn't going to do shit.  (2) Banks now, on average, now own more of the US housing supply than home"owners" do.  The last time that equity was below 50%?  1945. The level in 1986? 68.2%. 

Scary times.

Pushing on a string

A couple of articles in yesterday's WSJ together nicely illustrate my thinking.   First, this:

Nonetheless, [Bernanke] showed more concern that the economy will grow more slowly than the already-sluggish performance envisioned a month ago, due to the possibility that housing, the job market or credit conditions may deteriorate more than expected. The Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks," Mr. Bernanke said.

His comments cemented market expectations that the Fed will lower its short-term interest-rate target to 2.5% from the current 3% at its next meeting, March 18.

A particular risk Mr. Bernanke highlighted in response to questions from lawmakers was that the Fed's 2.25 percentage points of interest-rate cuts since September aren't being fully passed through to consumers and businesses because banks, other lenders and the capital markets have become more reluctant to lend.

A major reason for their reluctance is that losses related to subprime mortgages and other risky loans have depleted the capital of many banks and other major financial intermediaries, such as government-sponsored mortgage giants Fannie Mae and Freddie Mac. Mr. Bernanke called on such institutions to raise additional capital so that they could resume normal lending activity. [emp. added]

I've said this before, and I'll say it again, the Fed is pushing on a string right now, and all they are doing is priming the pump for some really nasty inflation later on.  And frankly, the more they push on the string, the more uncomfortable I get.  They are addressing the wrong problem with the wrong tool.    

The problem is not liquidity, it's solvency - the banks don't have the capital to lend out right now.  What we've seen in recent weeks are rising mortgage and credit card interest rates at a time when the Fed is cutting rates, increasing the interest spreads for the banks which mean that banks are (1) readying themselves for higher chargeoffs or (2) replacing lost income streams with interest income or (3) pricing the risk they are incurring more accurately due to the fact that they now have to hold many of these accounts on their own books or (4) a combination of all 3. 

The Fed cutting rates is taking some pressure off the bank margins (and may be killing them there too depending on what their deposit portfolios look like), but it is doing nothing for the ability of banks to lend or for borrowers to borrow.

Which brings us to the second article today:

A new round of higher debt costs confronts some states and cities as another usually humdrum part of the credit markets runs into trouble. This time, the culprits are variable-rate demand notes. And banks that guarantee they will act as buyers of last resort face something they never expected -- having to purchase many of them at once....

The largest participants in the backstop business include Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc. and State Street Corp. Also, Depfa Bank of Dublin and several other European banks have a sizable presence...

One banker at a large backstop provider said his bank has taken back about $500 million in variable-rate demand notes out of a total portfolio of more than $20 billion in backstops. That bank hadn't inherited any municipal bonds in 30 years, but more are likely this week and next, the banker said. Holding the bonds isn't necessarily financially bad for the banks, because the securities collect 6% on high-quality municipal debt But for some banks with balance-sheet pressures, taking back lots of bonds at once could be burdensome. [emp. added]

This is where all the capital is getting vacuumed up. When banks get these things crammed back down their throats, it eats up capital that they could be lending.  And it seems like the cramming is coming from all sides these days.  Variable-demand notes, auction-rate securities, mortgages, credit card receivables, these are all things that banks were able to get off their books not that long ago, but those days are over for now. 

Housing

Wow.  From today's WSJ:

The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight's index -- which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac -- was down 0.3%, the first year-to-year decline in the measure's 16 years.

More wow, from AP

The delinquency rate for a wide range of home loans that provide the payments for mortgage bonds has spiked in the past year, Standard & Poor's said Wednesday...S&P examined how dependably people are repaying their debt for five types of loans: home-equity lines of credit, subprime loans, Alt-A loans, closed-end second-lien loans and prime jumbo loans.

For nearly all these categories, delinquencies have accelerated in the past year.

The delinquency rate was the worst for pooled subprime loans, or loans to people with bad credit. For pooled subprime loans issued in 2005, the delinquency rate is 34.4 percent, S&P said. Delinquencies have soared as much as 15 percent for some subprime loan pools. Delinquencies on closed-end home-equity loans, which involve a fixed amount of cash lent as opposed to an open-ended line of credit, have jumped as much as 12 percent. In Alt-A, which are mortgage loans for which borrowers did not have to document their income, delinquencies have surged as much as 18.1 percent.

Delinquencies on prime jumbo loans are up as much as 18.2 percent. Jumbo refers to home loans with good credit quality but that are too big to be eligible for purchase by Fannie Mae and Freddie Mac. [emp. added]

And yet more wow from Calculated Risk.

Nothing really to add right now.

Do you believe in miracles?

MBIA and Ambac retained their AAA ratings. 

NEW YORK (Reuters) - Moody's Investors Service on Tuesday dropped its immediate threat to cut the top "Aaa" rating of MBIA Inc's insurance unit, staving off the prospect of more bank losses and market declines.

While downgrades are still possible, especially if MBIA, the world's biggest bond insurer, splits its business lines, the latest action eased market concerns over rating downgrades of bond insurers and the debt they guarantee.

I'm not going to even pretend that I understand it, but there it is. 

Willfully ignorant, or simply dishonest?

It's a question I frequently ask of the WSJ editorial page.  Take today's example:

The plan also borrows an idea from House Judiciary Chairman John Conyers to repeal a long-standing provision in bankruptcy law and allow judges to reduce the amount borrowers owe on their homes. Judges can do this now with credit-card debt -- a big reason rates on credit cards are so much higher than those for mortgages. [emphasis added]

"A big reason..."?  Really?  Funny, I had always believed that the reason credit card rates were higher than mortgage rates was because that mortgages were secured by a lien on the property, while credit card rates were unsecured loans.  I guess I was wrong. 

"A big reason" why the rates on mortgages is lower is because judges can reduce the amount of credit card debt outstanding when someone goes into bankruptcy?  That's the argument they are putting forth?  Sounds about as lame as the administration's FISA arguments. 

I'm going with dishonest on this one.

Calculated Risk is a great website for all things mortgage-related.  Tanta, one of the contributors, had an excellent post on this very idea a few days ago [note: having judges reset the mortgage is known as a "cram-down"]:

You are, of course, really and truly living in Wonderland if you think that larger down payments and higher credit-risk premiums aren't already starting to get here in part and will only get more "severe" until we return to something like normal lending practices... This is "serious" credit tightening only in the context of the egregiousness of the last few years, of course. But it's rather amusing that the MBA [Jim: mortgage bankers association] seems to think that we could avoid reversion to mean lending standards if only we didn't approve bankruptcy changes to allow cram-downs.

[...]

The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK [Jim: bankruptcy]. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending.

For the near future, banks will likely have a difficult time securitizing mortgage loans so I'd imagine that if they are going to keep rather than dump them, that underwriting is going to be more rigorous and they are actually going to insist that borrowers put some equity into the purchase (no more 100% LTV's).  They are also going to have to raise rates to cover losses for mortgages in their portfolios.  We're seeing it right now with credit cards - the fed keeps cutting but the banks, if anything, are raising credit card interest rates.  A similar thing will have to happen with mortgages, and it's got nothing to do with bankruptcy reform.

As for the nonsense in today's WSJ, if a borrower was actually going through the pain-in-the-ass that is Chapter 13, getting to the point where a judge actually crammed-down the mortgage, I'd have to be pretty happy if I were a bank.  The alternative is jingle mail (one of my favorite new expressions - means to drop your house keys into an envelope and mail them back to the bank - the bank gets "jingle mail") or foreclosure proceedings.  I'd be willing to bet that the banks will get far more from a person enduring Chapter 13, than from one willing to walk away and mail in the keys.

This legislation could be a good thing for both banks and borrowers, provided, of course, that banks are willing to return to lending standards that allow people to actually repay loans they take out.

People in genuine hardship

There are plenty of people across the nation in genuine hardship due to the housing implosion (self-imposed or not).  The two stories in today's NY Times are not among them:

Collie Tuttle, in her early 60s, is caught in this bind. Four years ago, she purchased a newly built four-bedroom three-bathroom house in the Memphis outer suburb of Olive Branch, Miss., for $270,000. She put nothing down, relying on her six-figure income from selling furniture to pay down the mortgage, reducing it to $248,000.

But then she lost her job, and in her next one — also selling furniture, but at lower pay — she is being forced to choose between her home and the rest of her life.

“It was a big mistake on my part to buy this house,” she said. Divorced, with two grown sons, she rattles around in it alone. She had thought the house would add to her wealth.

But now, to sell it for the $269,000 a potential buyer was recently willing to pay, “I would have to come up with $6,000 from my pocket,” Ms. Tuttle said, explaining that she cannot afford to invade her meager retirement account. “All I’m asking is for enough so that I come out even.”

...

“I’m stuck,” she said. “I’ve tried everything and I can’t get rid of this house.”

...

Jane and Kevin Naus, in their mid-40s, have had their home on the market since last May; their attempts to sell for a price that covers their debts are skewing their lives. Mr. Naus took a job in Greenville, N.C., last March, at a local bank. His wife stayed behind, putting their house up for sale, just a month before prices began to unravel.

But there were no offers at the $239,000 the couple asked for their four-bedroom brick house on a one-acre corner lot, so they gradually cut the price to $220,000, barely enough to cover the $192,000 in mortgage debt and an additional $22,000 in closing costs and broker’s fees. It still did not sell.

...

Mrs. Naus joined her husband in Greenville in December but he lost his job in January, when his division was shut down. The couple decided to stay in Greenville, to be near the family of Mrs. Naus, who has multiple sclerosis and no longer works.

Her $1,800-a-month in disability pay, however, falls short of the $1,400 in monthly payments on the Memphis house and the $700 in rent for an apartment in Greenville. The Nauses make up the difference with his severance pay, and occasional dips into their savings, which have fallen below $100,000.

“We don’t want to lose the house or cut the price,” Mrs. Naus said, “and end up owing money.” [emp. added]

What you have in both cases are people who believe that there is some guarantee that home prices would inevitably increase, that they'd never actually risk losing money.  Both of these stories illustrate people who made bad decisions and now have to pay for those decisions.  Both have the financial ability to do so.  Both would like not too.  Tough luck there.

But, and here's the crucial but, if they have to do it, THE BANKS SHOULD HAVE TO DO IT TOO.

As an aside, to bash the Times 2 days in a row (I must!), if they are trying to present sympathetic figures to present as the face of the current housing crisis, couldn't they come up with better stories than (1) a woman with a former "six-figure income" (in Memphis!) who is unwilling to part with $6k (2% of the mortgage) to rid herself of a house that is underwater and (2) a couple with $100k in savings?  These people are experiencing financial inconvenience, not financial ruin.

FWIW: I have no idea about the $248 figure in the story above, why she'd need to come up with the full $270, etc. makes no sense to me if she only owes the bank $248.  I'm assuming that she only owes $248, but wants the $270 so as to not "lose" any money on the house (that she had nothing invested in). Housing is a funny and irrational beast. 

“It isn’t a bailout, [i]t is a market-driven solution.”

I would expect you are going to hear this once, twice, a million times over the next few months.  Don't believe it when you hear it.  From today's NY Times:

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.

In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the F.H.A.

“It isn’t a bailout,” Mr. Reich said. “It is a market-driven solution.”

And when he says market-driven, he of course means that the market is driving all of these loans right onto the books of the FHA which will then use taxpayer money to cover defaulted mortgages.  See?  It's not a bailout because... because... well because we'd like it not to be. More nonsense from the same article:

The Federal Housing Administration, meanwhile, is examining ways to expand its new insurance program, known as FHA Secure, to help people replace their costly subprime mortgages with federally guaranteed fixed-rate mortgages.

Mortgage industry executives have complained that the F.H.A.’s eligibility requirements are so restrictive that the new program has helped only a trickle.

Credit Suisse executives said they have held lengthy meetings with F.H.A. officials and have urged the agency to relax rules that currently disqualify many borrowers.

One idea, company officials said, was to allow borrowers who had simply made six payments during the course of their mortgage to qualify.

SIX PAYMENTS?! Are you kidding me?  Remember back in the day, when industry hacks were bitching and complaining that FHA underwriting standards were too stiff because, you know, they demanded money from the borrower in the form of a down payment?  And they insisted that borrowers go through educational programs to address things like budgeting, etc.? Yes, Credit Suisse is STILL bitching and apparently believes that since its underwriting was for shit, everyone's underwriting should be for shit.  Especially if that underwriting it tied to a great big bag of public funds.  Jackasses.

I don't have a magic solution for this problem, but it would help if we started being honest about what happened - banks and buyers went through a period where they lost their minds.  Most of the time, that greed should be punished but this was so protracted, so large, and so tied to the core of our economy that it may not be possible to punish all who deserve it.  It may be that a public bailout may be the best of all the options available, the best of the worst, but let's at least admit to what we're trying to do here, OK?

Buyers are also acting unreasonably, but that's for another post.

Dangerous Times

Over a year ago, I said this:

People have been willing to buy because they feel that housing was as close to a sure bet as could be had. Sure they may extend themselves, but it would only be for a couple of years until the markets climbed and they could either refi or sell and move on. There's going to come a time when people, regardless of what they hear everyone telling them, are going to understand that the property they own is not worth what they paid for it. Or that the property they own is now unaffordable since they are now making principal and interest re-payments to their lenders. I think that time is now.

My timing was off a bit, it always seems to be, but it sure looks like this is coming to fruition right now.  My focus back then was that these homeowners would no longer be able to extract equity from their houses to fund lifestyles in the manner required to keep the economy humming along.  What I didn't ask then, or since, is what are these underwater people going to do?  I thought they'd simply hunker down and eat Ramen for a while.  There is another choice though:

"Another effect we are seeing has been a challenge with the media and consumer groups; and with consumers willingness just to walk away from homes. We haven't seen anything like this since Texas during the oil bust and people just willing to declare bankruptcy and walk away. We are seeing a lot of that similar type social phenomenon occurring, especially in California. And that is concerning to us."

Which, if it becomes more acceptable, could spell serious trouble for lenders.  And it looks like it just might:

If you are facing or considering foreclosure, you're not alone.

• Are you stressed out about your mortgage payments?
• Do you have little or no equity in your home?
• Have you had trouble trying to sell your house?
• Is your home sinking under the waves of the real estate crash?
• What if you could live payment free for up to 8 months or more and walk away without owing a penny?