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Mortgage Crisis Descends into Blather Phase

By Rick Ackerman Posted on June 22, 2011, 12:01 am EDT Last Updated August 22, 2011, 1:54 pm EDT

An article entitled Government Stays Glued to Mortgage Market topped an inside page of the Wall Street Journal’s yesterday, offering a mostly trenchant assessment of the real estate crisis but no easy alternatives. The 1,200-word think-piece, written by one Nick Timaraos, ponders the chicken-or-egg question of how to lure private capital back into mortgage lending. Should The Guvvamint pull back on support and hope investors fill the void?  That’s the solution some policymakers are advocating, according to Timaraos, but we doubt they fully understand what it implies. They seem to think capital would return over time if Fannie and Freddie were made to compete for savings honestly with higher fees and no open-ended guarantees. And return investors would, although presumably not before housing prices collapsed a further 30%. Valuations would undoubtedly have stabilized by then, although we doubt that’s what policymakers have in mind when they talk about helping to promote price stability in the housing sector.

Wading into the fever swamps of the academy for answers, Timaraos quotes Berkeley professor Kenneth Rosen, although we’re not sure why. Rosen’s one idea goes down easy enough – it’s only when you think about what he’s said that you wonder how his name wound in a Journal reporter’s Rolodex.  “We’re not going to get a recovery in housing until the average borrower can get a mortgage,” avers Rosen. We’d like to think the good professor meant to imply that, if and when housing prices fall far enough, the “average borrower” will be able to afford a home.  And we mean “afford” in the old-fashioned sense of the word —  i.e., putting 20% down, and making monthly payments no greater than 25% of one’s gross income. Since real incomes have shown no growth in this country for nearly two generations, it seems obvious that affordability will depend on lower home prices rather than higher paychecks.  We don’t doubt that Rosen means well, but we’d be surprised if it is not still more government intervention, and even more-marginal borrowers, that he has in mind to “rescue” the housing market.

Father Flotsky’s Doppelganger

Our gut feeling is that Timaraos understands this, but he nevertheless concludes his piece with a summation so delicately couched as to cross the line into double-speak. We quote his final paragraph in full because we think it is exactly the kind of pointless nonsense we will be hearing from policymakers in the months ahead: “Policymakers are right to worry over indefinite government stewardship of the mortgage market, which makes laying the foundation for a functioning market all the more pressing. If it’s lacking, housing won’t exit a destructive cycle: one where prices fall because credit isn’t flowing, and where credit doesn’t flow because housing is weak.”

This reminds us of the bumbling, blathering Father Flotsky, a Lenny Bruce character who is brought in to quell a prison riot instigated by the notorious Dutch: “Once a boy goes the bad road,” he tells the inmate, “the good road is hard to follow. When the good road is hard to follow, the bad road opens and the good road closes.” Ultimately, the priest brings Dutch around by promising him the Avon franchise at the prison. (“Did you hear that, you bitches in cell block 11!!?”) We have grave fears that The Guvvamint’s solution for the still-ongoing, deflationary real estate collapse will be similarly inventive – and equally futile.

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  • Anthony F June 22, 2011, 10:36 pm

    A few days ago I suggested to look at the Euro/Dollar chart for guidance rather than the SP/Dow/NQ etc.

    I am making this last chart post to reiterate the point.

    While looking at the SP (irrational exuberance) you would have deducted that another leg up (after surpassing two prior highs) was in the cards, the Euro found instead heavy resistance at the 1.44 oo , it could not even reach the prior high of 1.4450 and the MCD lines started closing in.
    Helicopter BEN gave it the final blessing. Thank you !
    http://www.flickr.com/photos/9068283@N08/5860763053/in/set-72157626855277951

    http://www.flickr.com/photos/9068283@N08/sets/72157626855277951/

    Good By AF

  • Jill June 22, 2011, 7:14 am

    Interesting question about the counter-party risk, Maloney. I wonder if we will ever get the chance to find out the answer– given that both Dems and Repubs just love to bail folks out, as we can see by the current and previous presidents. Perhaps the real president is the chairman of the Fed, with the other one being just a puppet.

    • TM June 23, 2011, 11:42 pm

      Recall the last days of Lehman when lending froze up for even the small business owners? That is just a preview of what could happen if the TBTF do go down. Maybe hitting the reset button is what the worldwide economy needs but in the past, that was brought about by famine, pestilence or war.

  • Maloney June 22, 2011, 6:29 am

    I just want to know exactly who would be hurt from this counter-party risk. I have never been shown exactly why would it be a bad thing for economy if a week player (a bank that is too stupid to make a good loan, or too greedy to stay of excessive leverage) goes down.

    My suspicion is that it is all a big fat lie. It would be exclusively a good thing if a big bank fails. I can name few benefits right away:

    – no bailout
    – immediate consequences, faster recovery
    – obama can boast that he had fixed the economy, as it recovers by itself.
    – no stagnation period, so businesses can actually plan forward
    – bad and evil people get hurt, so that they have a chance to learn a lesson with whom to invest, how to read a contract, how to thing with their own head instead of listening to a dumber than dumb financial advisers (all of whom are government licensed, which is why they have to be advising bad things)
    – kids would see that taking school seriously does matter in the long run
    – good, smart people would be able to buy their competition penny on a dollar, through liquidation, as a well deserved consequence of prudent way of doing business.
    – more dumb people would be on the street where they belong, and not on the wall street.

  • Jill June 21, 2011, 10:50 pm

    Maloney

    We can’t have that because big banks own our government. Thus they use government as a tool to solve all of their (the banks’) problems. It’s weird that some people think of this as socialism. Socialism would be vice versa– if the government owned the banks, regulated their activities, and received their profits. What we have is the banks owning the government– resulting in a system in which profits are always privatized but losses are always socialized i.e. borne by the taxpayer.

    Another reason why we can’t have what you proposed, as things stand now, is because we have Too Big To Fail banks that are not regulated very much. As attractive as the “free market, no regulation” idea is in some arenas, in the area of TBTF banks it is a total disaster. Because banks have recently proven that they will not regulate themselves or control their own leverage or risks. And when they don’t control these, and they get close to blowing themselves up, the taxpayers end up bailing them out, so that they the huge banks will not end up blowing up the entire U.S. economy due to counter-party risk.

  • Maloney June 21, 2011, 9:08 pm

    Housing supposed to be:

    1) affordable to anyone, even a deserving bum.
    2) going up in price so much so that we can live off appreciation

    Is this possible? Really?

    Some people want that there are hard regulations on how much housing one can afford.

    Some people want no such regulations, but they want “disadvantaged” people to receive subsidized mortgages.

    Here again, can’t we just have no regulations and no subsidies, so that a bad loan remains a problem of a bank who issued it?

  • Rich June 21, 2011, 7:33 pm

    Government taking our hard-earned money and giving it away to other people and people and themselves in the name of beneficence.
    How much longer will we tolerate that?
    Meanwhile, PAL>90 cents until the Feds straighten up and fly right as our Constitutional Founders intended…
    Great essay Rick, one of your best, pithy and to the dagger point.
    Can’t help but think we may have one of the great years ahead before the election as people wise up and just enjoy life…

    • mario cavolo June 22, 2011, 3:10 am

      …how much longer?….Alot longer, the mainstream there have been sufficiently numbed and lobotomized. And if they do decide to “revolt”, when it hits a certain level, the military will come out and suppress it as needed, followed by some minor policy changes to calm the revolt and allow the leadership to continue on their merry greedy way. I mean geez guys, let’s abscond a couple trillion through the banking system and if the people get way too pissed off and hit the streets, a few billion will calm them down.

      People here in China don’t revolt much because they know its primarily a waste of time, now that’s the familiar tune back in the good ‘ol US of A in today’s world. The political system has marginalized them too. They have no way to do a damn thing about what’s going on and what has happened to the moral and ethical degradation of the system.

  • Robert June 21, 2011, 5:45 pm

    Our existing lender reached out to us just last week offering a refi of our existing underwater balance with a full 1.25% reduction to our APR for $1500 (which can be paid in cash or tacked onto the backend of the mortgage), on the condition that our house appraises at the original 2002 purchase price or better.

    I asked how this deal could possibly make them any money and they said (and I can’t make this stuff up):

    “Since your loan is guaranteed by Fannie Mae and your payments are current, the gov’t will agree to underwrite 100% of the servicer’s risk up to 150% of the house’s current appraised value”

    Since I pretty much treat my mortgage as a rent payment anyway, I’m also thinking about taking the term back to 30 years as well, which will drop my payment enough to recoupe the $1500 within 3 monthly payments.

    On the one-hand- hooray that the gov’t is finally sharing some of the love with those of us who stayed current instead of walking away…

    on the other hand- I just know that within the next year or so that $500 per month will probably be going toward more expensive food, gas and electricity anyway…

  • Bam_Man June 21, 2011, 5:28 pm

    There is a very good reason why private capital shuns the residential mortgage market.

    For (too) many borrowers, paying the mortgage has become “optional”. They continue to pay only as long as the value of the house increases. In the event that it doesn’t, they stop paying and become squatters.

    In a scenario such as this, private capital would have to charge interest rates akin to those on credit cards in order to have any chance of making a profit. Little wonder the Guvvamint remains the only source of mortgage finance.

    Ny the way, the Guvvamint just so happens to have the ability to MAKE people pay their mortgages. fail to pay your mortgage and the IRS will hound you for life and your Guvvamint benefits will be cut off.

    • John Jay June 22, 2011, 2:53 am

      Bam_Man
      The US housing market is a classic example of bad money chasing good (real) money out of the market.
      I am starting to see some decent prices here in Southern California for beach close condos.
      I am wondering about clouded titles, and further price drops. Bloomberg had an article today about wealthy people from Brazil buying primo ocean front condos in Miami two and three at a time. They say they are a bargain compared to Rio, and they can flaunt their wealth in Miami and not get kidnapped or murdered, the high end stores are cheaper in Miami too, so they say. Chinese in Vancouver, Brazilians in Miami. I also read that the Chinese government reported 123 billion has been stolen and offshored by fleeing Chinese nationals. They should have worked for GS/JPM/MS, they could steal way more than that and then get a job with the government.

    • Cam Fitzgerald June 22, 2011, 6:47 am

      Yes, I have been seeing a lot of ink written on the subject of Chinese capital flight lately too John. It seems to be working its way through the economy all across Canada now. A Realtor was just telling me yesterday that a few weeks back a Chinese buyer flew into Saskatoon, Canada (of all places) and snapped up a dozen homes in the best part of town. Absolutely astonishing really. Especially as he told me the buyer had never even been here before. What the hell is going on?!! This is no resort town. We can get near the coldest temperatures on the planet in the dead of winter. Maybe the Chinese have finally just gone crazy with money and run out of good ideas on how to spend it.

      At least it helps reduces the national balance of trade.

    • mario cavolo June 22, 2011, 12:11 pm

      Hi Guys,

      What has gone on is this – Here’s just one part:

      Mr. Liu and his family were my landlords in Shanghai back in 2001 for 3 years. His family owned a typical old Shanghai French Concession lane home on Nanjing Xi lu, 3 stories high, relatively narrow, deep old wood, brass and crystal glass French doors, broad deep dark wooden staircases… magnificent!..and old! I rented the 1st floor for $400 / month.

      Through the 80’s and 90’s and early 2000’s, the value of Mr. Liu property and millions of others just like it across China’s first tier cities ( Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Sanya and a few other spots ) was….???

      3500-5000rmb per square meter = USD $50 to $75 per square foot.

      They are now worth TEN times that and I seriously doubt the price will EVER go down below current levels.

      So Mr. Liu and his wife, who were on $250/month salaries and pensions, now own their 200 sqm home mortgage free worth TEN million rmb – USD $1.5 million. And yes, someone WOULD buy it the very moment it was put on the market – the apt garden complex is the old 1940’s Shanghai style lane apartments.

      Tens of MILLIONS of simple low-income working families across China have owned 2-3-4 apartments together now worth three to five times higher – around USD $150k to $300k. And again, there is very little one can say to convince me these prices will drop much and even if they do drop 20% it will be of far less consequence.

      Wash, rinse, repeat millions of times.

      They sell two of those apartments and show up in Saskatoon…with a million USD or so. That is where their future generations will emigrate to if and as they wish to live.

      None of the above has anything to do with income or business success.

      Simple, hard to swallow reality. Malcolm Gladwell was prescient in his book “Outliers” talking about the simple fact of being in the right place at the right time and nothing more, timing and circumstance contributing to the degree of your success or wealth.
      I bought a lovely new single family Scottsdale home in 1985 for $110,000 and sold it ten years later for the market price of $115,000. Phooey. Timing. Life.

      Cheers, Mario

  • nonplused June 21, 2011, 5:16 pm

    If the government in China can mandate a maximum price for houses, maybe the government here can mandate a minimum? Just take the highest appraisal the house ever had and make it illegal to sell it for less. Yes, it’s dumb and it won’t work. Thus, it is a perfect government program. Something like that will be proposed.

    The downside would be that the banks will end up owning tons of vacant houses they aren’t allowed to sell that they will be too imcompetent to rent out. But at least they won’t have to write them down. Hey, wait a minute! Maybe that’s in effect what they are already doing!!!!

    • Cam Fitzgerald June 21, 2011, 9:26 pm

      The downside is that eventually, once the biggest of the banks finally fail (as they surely will eventually) the government itself, which is backstopping the banks with guarantees, will become the final landlord for many millions of people who remain perpetually underwater, thus ensuring the socialization of housing in America. In the final analysis, the Government will be your landlord and you, the steward and custodian of the home you once owned through debts you were ultimately unable to service. This is an easy conclusion to come to when we consider the default of States and Municipalities that are on the horizon and the massive un-repayable debt of the nation itself. As central funding dries up on rising interest rates, social benefits are pared back and the debt avalanche becomes overwhelming, we will discover that the real price paid by many in this faltering economy will be the loss of land, title, property and prestige. You will probably still have a roof over your head but it will slowly fall into disrepair and neglect as the Bureaucracy substitutes for the banks and professional property managers. Does anyone else wonder how Socialism in the USSR functioned for so many decades? How that country housed it’s people after wealth evaporated? Well look no further because the past is the future and the solutions that worked then in a different part of the world will be recycled here as the debt bomb finally goes off.

    • Steve June 22, 2011, 1:31 am

      Cam, too late. In Oregon the Oregon Lands Division is the Lord of Lands. The Law of Escheats already establishes that the mortgage holder is only a debtor in possession, even upon payment of the mortgage, and is subject to the ‘fee’ or property taxes under a feudal scheme. Allodial Deed is a Free Hold (drag out our 1828 Websters). Fee Simple Absolute is an inheritable tenature in fee for the peon to be able to pass the peonage to the next generation. The Lands passed to a British Feudal scam when Allodial Deeds were replaced with Fee Simple Absolute – the highest inheritable feudal estate. The authentic reality is that the government already owns the person of the debtor, and the debtor is merely a serf in fee to the Lord of Lands of the federal district of (name your state) as a federal territorial district like WA.

    • mario cavolo June 22, 2011, 2:52 am

      Well said Cam…. here in China, many people live in apartment complexes which are quite older, 30 years for example. The ownership is individual now but originally the complexes were of course built back then by the govt. There are still “social” benefits, for example, govt funds have been used to renovate the public areas of these apt complexes, that is, the outside of the buildings and the inside hallway/stairway/window public spaces. Its a good thing!

      I conclude good government is good, and can be very good, that good governments can be a reasonable blend of “social” and “democratic”. Get the greedy involved, get the bankers involved, get the self-serving involved, and it all goes to hell as we’ve seen over and over again.

    • Cam Fitzgerald June 22, 2011, 6:37 am

      That is a topic that I have wanted to look at more closely for a long while now Mario. Never seem to find the extra time though. I am curious as to how the Chinese are managing the old style social housing programs with new individual property rights, especially in the poorer rural areas. We know there are millions upon millions of rural poor living on just a few dollars a day. They cannot possibly be in a position to adequately maintain the property they have acquired, nor keep it up to date. The issue is all the more acute when large multi-family building are involved. Is the government also stepping in to fix roofs, electrify homes rural homes, bring in sanitation systems etcetera. Are the homeowners burdened with debts they can ill afford to pay as a result? So many questions about how the old socialism blends with the new realities of a modern developing China.

      Hey, maybe this is where all the ghost cities come in.

    • mario cavolo June 22, 2011, 11:51 am

      Simple answer Cam, yes. The govt is doing the upgrading at no cost to the property owners. This has been going on for many years….the items you mentioned plus the road are being paved. My wife and I used to hop on my motorcycle down on Hainan Island and go touring along the dirt farm roads in the countryside rainforest…great fun. We watched as those roads were concrete paved and widened.

      Another point on the farmer life and its telling – we can talk about farmer’s living on a few dollars a day and yes that’s true for many, however there’s another side to that story. We here have watched the farmers all across China build themselves typical 1-3 story new block and tiled homes on their lots out in the country… the point being that there they are on their 70 year leased acreage, on which they manage to leisurely build themselves a new home which, by the way several families probably live in, for next to nothing; I’m talking $15 / sq ft! Again, they have quietly gotten much richer but no one is talking about this side of the story. So, tongue in cheek, who’s better off?… an Asia city dweller paying $100-$400 a square foot in the crowded landless city or a farmer with hundreds of acres who builds themselves a block home for next to nothing? This speaks to the point often mentioned here, particularly Marilyn’s article awhile back about going back to the land as the modern society self-destructs.

  • C.C. June 21, 2011, 4:42 pm

    It is amazing to read/watch the silly blather and focus on housing, when housing itself is meaningless if there is no employment to support the entire dynamic of home ownership in the first place. It is all predicated on employment – the steady and sure kind. The kind that no longer exists for many.

    Peeling the onion a bit further, if a solid manufacturing base is the cornerstone of a strong middle-class based economy, and our economy is balls-deep into the whore of ‘outsourcing’ nearly anything/everything that is manufactured, then what basis is there for the notion that by simply fiddidling the financial end of the home finance spectrum, that we can expect anything positive in the housing sector, save for regional growth in sub-economies where manufacturing is not an influential factor?

  • Jacques Redou June 21, 2011, 3:13 pm

    Gov’t got involved in housing in a Big Way.

    VA – Fannie – Freddie – Fractional Banking – Etc…

    Gov’t got involved in Health Care in a Big Way.

    Medicare – Medicaid – Prescriptions for Seniors – Etc…..

    Now the Debt Slaves can’t afford houses or health care.

    Just another day on the Federal Plantation.

  • John Jay June 21, 2011, 3:09 pm

    The Federal government knows they can’t cease back stopping the real estate market anymore than they can cease back stopping the college education market.
    If they do that, then the greatly reduced number of people who can afford either means a collapse in house prices and college tuition. That is not going to happen with the elections this close. I think they will extend and pretend on those two markets, and concentrate on the open ended wars we have going on in the Middle East/North Africa. Everyone is finally starting to grumble about the financial cost of those wars. As if the human cost on both sides was never reason enough to end them.

  • BDTR June 21, 2011, 2:44 pm

    Policy ‘solutions’ invariably entail treating the symptoms of an underlying systemic distortion because correcting its ingrained basis, the foundational financial and monetary regime, is politically unapproachable.

    The die is cast for the failure of BoA with its enormous exposure via the remnants of Countrywide’s excesses, and insures decades long workout of underwater real estate values in a best case scenario. But, we should understand that the court backlog of the millions of foreclosures lacking authentic documentation precludes any timely clearing of a putrified market.

    Rather than throwing hundreds of billions at the banks to cover losses of securitized mortgages, band-aid to the market or not, stabilising housing markets could possibly have been achieved by bailing the homeowners with no interest loans instead and letting the banks hold the paper that they created.

    Unfortunately, moral hazard is applicable only to the borrowers and not to those that cultivated a Fed enabled market extreme that exploded, exposed and fatally weakened a financial system riddled with black holes of leveraged derivative extremes waiting their turn at economic mayhem.

    Inventive? Only in the sense of the increasingly desperate rationalisations for the failure of policy too little, too late and too attached to a mindset of malfeasance.

    Futile? Only if the intent is preventing economic collapse.

  • Mark Anderberg June 21, 2011, 1:21 pm

    Rick,

    Obama hears you and is giving away another BILLION to help homeowners. Colorado is on the list buddy, maybe you could miss a few mortgage payments and get some of that money for yourself. LOL

    http://community.nasdaq.com/News/2011-06/1-billion-in-homeowner-aid-offered.aspx?storyid=81588

    • roger erickson June 21, 2011, 6:31 pm

      “pointless nonsense” indeed;

      yet our banking cartel will accede to any & all pointless nonsense, as long as they get, say, a 5% “servicing fee”

      When talking to an orthodox economist, or TBT-not-be-pointless banker, it’s like talking to any other parasite. You ultimately realize you’re not even sharing the same paradigm.

      That’s what happens when complacency produces “Accountants Gone Bad”.


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