Bubble Meter told you so!

A warning from Bubble Meter in 2006:

The recession is coming soon. Be warned. :-(

In retrospect, David's warning was early, but right.

Those in government still don't get it!

Tim Duy writes:

From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach – if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.

Again, price and affordability are inversely related. Those who want to prop up home prices essentially want unaffordable housing.

The effect of falling prices on the conforming loan limit

From The Wall Street Journal:

At least one thing is holding steady for 2009: the conforming home loan limit, or the maximum size of loans that [Fannie Mae and Freddie Mac] can purchase. The current limit of $417,000 for single-unit homes will remain in place for most of the U.S., the Federal Housing Finance Agency, the regulator of the two mortgage buyers, said today.

The Housing and Economic Recovery Act of 2008, signed into law in July in response to the subprime mortgage crisis, established that changes in home prices in a given year would determine the loan limit for the following one. The limits could not decline, so falling home prices produce no change. ...

“For this year…all reliable metrics point to lower prices, and a price decline of any size is sufficient to determine that the national limit will not change,” the agency said in a statement. ...

Homes in “high-cost” areas are subject to different guidelines, as set by the Housing and Economic Recovery Act. The loan limits for those areas are equal to 115 percent of average local prices, but they cannot exceed the standard limit of $625,000 for one-unit homes.

Bits bucket for Friday, November 14

Please post your thoughts, links, and MLS/Craigslist finds here.

Barney Frank on foreclosure prevention programs

From CNN Money:

Rep. Barney Frank, chairman of the House Committee on Financial Services, highlighted the need for a bailout program for troubled homeowners on Wednesday. But he stressed that not all borrowers should necessarily be rescued.

"Diminishing foreclosures is an important part of getting out of this [financial crisis]," said Frank, D-Mass., in an opening statement at a Congressional hearing on bank rescue plans for homeowners facing foreclosure.

But Frank added that taxpayer money should not be used to give anyone a "free ride," and warned that aid should not go to homeowners who never could have afforded their mortgage to begin with.

"There is, in my judgment, zero likelihood that taxpayer dollars will go to those who should never have had loans in the first place," Frank said.

Mortgage Interest Rate Watch

Source: Bankrate.com

Almost 85,000 foreclosures in October

From CNN Money:

As government and industry scrambled to stem the housing crisis, another 84,868 homes were lost to foreclosure in October, according to a report released Thursday.

Last month 279,561 struggling borrowers received foreclosure filings, including default notices, notices of auction sales and bank repossessions, according to RealtyTrac, an online marketplace for foreclosures. That's a 5% increase from September, and up 25% from October 2007.

"October marks the 34th consecutive month where U.S. foreclosure activity has increased compared to the prior year," said James J. Saccacio, chief executive officer of RealtyTrac in a statement.

A total of 936,439 homes have been lost to foreclosure since the housing crisis hit in August, 2007.

Imagine what the numbers would be if we didn't have all these anti-foreclosure programs!

New York City joins housing slump

While the housing bubble decline has adversely affected much of the United States, some previous bubble markets like New York City, Boston, and Washington, DC proper, have been largely resistant. Well, according to Robert Toll, CEO of home builder Toll Brothers, New York City is now taking it on the chin.

According to the transcript of the company’s conference call, provided by Thomson Street Events, Mr. Toll is asked if there were there any areas that stood out as stronger than others. Mr. Toll responded: “I wouldn’t say so. … No, I reviewed that just this Monday night with all of the regionals, and unfortunately, I don’t see any areas of strength. We used to be able to claim New York City. We don’t claim that any more. We used to claim Connecticut, and that slowed down a little bit. I don’t see any standouts.

Later, he added: “Been a tremendous change in the last six weeks. Up to the financial debacle crisis that we’ve entered, New York City was a nice stand-alone, and a beacon, but it has now joined the ranks of the rest of the country. … I would expect the financial business in New York to probably lose 100,000 people. You don’t think it will be that high, guys? Well, I hope I’m wrong, but that’s got to have a serious impact on the price of real estate, and I would think that the foreign market, which supported in large measure the pricier condos in New York City, is not there in force as it was. What with the euro going down in comparison to the dollar lately, and with their own economic crisis. So I would think you are in for a more challenged time in New York.

Put a bunch of the city's highest paid employees on the unemployment line, and it will have an effect.

Toll Brothers is still seeing declining sales

Home builder Toll Brothers is continuing to see declining sales:

Troubles in the home-building industry keep getting worse. Toll Brothers Inc. said Tuesday that customer traffic and sales hit record lows last month, as the financial meltdown spooked an already weak market and triggered a wave of contract cancellations.

Chief Executive Robert Toll said signs of stabilizing conditions through the summer and into early September were "upended by the past month's financial crisis" and the fear of job and stock-market losses.

Don't worry, Messrs. Toll, the housing recovery is right around the corner. I know because people have been saying it's right around the corner for three years now.

Tomorrow, tomorrow, I love you, tomorrow! The recovery is always a day away!

Government announces "Streamlined Modification Program"

The U.S. government announced a new foreclosure prevention plan yesterday:

The plan centers on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages.

Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home's current value, live in the home on which the mortgage was taken and have not filed for bankruptcy.

Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

Officials said the standards for loan modifications should fast-track changes in payments. The standards will be applied to loans owned and guaranteed by Fannie and Freddie, but officials said they hope they will also be adopted industrywide.

"We expect that it could significantly increase the number of modifications completed," said James Lockhart, director of the Federal Housing Finance Agency, the regulator that oversees Fannie and Freddie. ...

Fannie reported this week that 1.7% of its mortgages by value are delinquent by 90 or more days. Fannie's filings suggest that it has about 18 million mortgages on its books, which would work out to about 300,000 mortgages that could potentially be eligible. ...

But even in cases where declining home prices have taken the value of a home to less than is owed on the mortgage, the balance of the loan will not be lowered under this program.

"This is not loan forgiveness; the loans will be paid but at terms affordable for borrowers," said Brian Montgomery, commissioner of the Federal Housing Administration.

The fact that mortgage balances will not be reduced for the so-called underwater mortgages — those in which a homeowner owes more than the home is worth — will limit the use and impact of the program, according to some experts.

The Washington Post has more details:

Instead of the standard cumbersome loan modification process, which can include reviewing a borrower's credit report and tax returns, the new plan focuses on the borrower's income and how much he or she can afford to pay. It also creates a formula for determining what a homeowner can afford, eliminating some guesswork.

Government officials said they expect the effort, dubbed the Streamlined Modification Program, to be able to help "hundreds of thousands" of homeowners. ...

The program, set to begin Dec. 15, applies only to mortgages owned or guaranteed by Fannie Mae and Freddie Mac, which are involved with more than 50 percent of residential loans. But major lenders, including Bank of America, Wells Fargo and Citigroup, have agreed to apply the formula to loans they administer for Fannie Mae and Freddie Mac and are expected to extend it to their own loans, industry officials said. ...

A borrower who is 90 days delinquent will be eligible for a new loan with a payment that does not exceed 38 percent of his gross monthly income.

To qualify, the homeowner must provide proof that he has suffered a hardship, such as losing a job, that made it impossible to keep up with payments. The terms of the borrower's loan then could be extended from 30 years to 40 years, and if that is not enough, the interest rate could be reduced to as low as 3 percent to make the payments more affordable. The homeowner could be subject to a interest rate increase after a set time, depending on how low their new interest rate is. If those options don't reduce payments enough, part of the principal owed on the loan could be deferred until the end of the loan term.

When I first read that this program is only available to people 90 days delinquent or more, I though it would reward irresponsible behavior. (If you pay your mortgage, you don't get help.) The criteria that the homeowner must "provide proof that he has suffered a hardship, such as losing a job" may prevent this plan from rewarding irresponsible homeowners. However, it may also dramatically reduce the number of financially-troubled people who can take advantage of the program.

Of the various loan modification options available, extending the mortgage to a 40-year mortgage is the least objectionable, because it doesn't give the homeowner free money. It just reduces their payments, while slowing the pace at which they will (eventually) acquire equity in their home. Reducing the interest rate or reducing the principal on a loan effectively gives free money to homeowners, so I generally oppose them.

CNN Money points out that this plan doesn't help most subprime homeowners, who are the people in the most financial trouble.