AOL Real Estate - Blog http://realestate.aol.com/blog AOL Real Estate - Blog http://realestate.aol.com/blog/media/feedlogo.gif AOL Real Estate - Blog http://realestate.aol.com/blog en-us Copyright 2013 Weblogs, Inc. The contents of this feed are available for non-commercial use only. Blogsmith http://www.blogsmith.com/Housing Market 2011: As Rough As 2010http://realestate.aol.com/blog/2010/12/24/housing-market-forecast-the-pessimist/http://realestate.aol.com/blog/2010/12/24/housing-market-forecast-the-pessimist/http://realestate.aol.com/blog/2010/12/24/housing-market-forecast-the-pessimist/#commentsFiled under: ,

Looking back on 2010, the year in real estate was, in a word, terrible. Property values continued to fall, foreclosures rose, and even the lowest interest rates in 50 years seemed to have little positive effect on the property market.

For U. S. real estate, 2010 was the year of failed government intervention where nothing worked as intended. It was the year when bankers clearly threw their customers under the bus. And the only saving grace of this year from hell is that it might have been even worse.

So will 2011 finally be better for real estate? No. It will be 2012 before housing even remotely recovers.

Facing a mortgage crisis, governments this year did what governments do: They implemented new policies intended to help, then lied about those policies, saying they were really expected to work. Fat chance with $4 trillion in lost homeowner equity and a commercial lending system stunned into paralysis. While Treasury and the Fed had to respond somehow, the response they made was inadequate and possibly useless. It wasn't enough by a long shot, but then maybe no program could have been big enough to break this deleveraging fall.

The first-time homebuyer tax credit cost $16.2 billion for three months of slightly increased sales activity and a tiny (and temporary) slowing of price erosion. The Federal Reserve Bank spent more than $1 trillion buying mortgage-backed securities to keep mortgage rates artificially low, leading to some refinance activity but absolutely no impact on the purchase marketplace that was the Fed's target. The Fed spent more trillions buying government bonds to keep rates low across the board. This worked to some extent but did not fuel home purchase activity, which was, again, a major goal.

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Treasury's Making Home Affordable mortgage modification experiment, at a cost of $75 billion, was a proven failure, missing by 3.5 million its goal of 4 million modifications. The Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP) -- the two tools intended to repair millions of bad mortgages--failed completely in the face of a loan servicer paperwork blizzard in the tradition of "the dog ate my homework. " With loan servicers earning more from foreclosures than from mortgage modifications, mods didn't happen -- and won't.

One of the most damning aspects of the Making Home Affordable failure is that it is now touted as having helped the deficit by virtue of having been such a miserable failure. Yes, the program cost less than expected, because it was a dud. Ditto for Fannie Mae's DU Refi Plus program.

Don't even get me started on robo-signing. There are bankers who should clearly be in prison, yet I don't see that happening. Too big to fail, remember? And principal reduction is now just a good punch line for Conan.

Here's the bottom line for these many mortgage programs: If you can't fix a $4 trillion problem for $700 billion, you sure can't solve it for $75 billion. These loan programs were just camouflage allowing deleveraging to continue on its miserable course with the TV cameras pointed elsewhere. Had a miracle happened and job growth resumed, the Obama administration might have pulled it off, appearing to fix what they were never in a position to fix--what they still aren't in a position to fix.

Sadly, 2011 will just continue the deleveraging, and market conditions may well get worse before they get better. Interest rates are trending higher and are well off historic lows, which should bring refinance activity to a halt. Credit is still tight and there are warning signs of increased equity destruction. Foreclosure activity will increase dramatically. Unemployment, of course, is still a drag.

First-quarter purchase activity is expected to be at record lows. Seasonal effects, climbing interest rates, tight credit, unemployment still above 9 percent, and the foreclosure time bomb are going to hurt everyone. Foreclosure activity will reach record levels in the first quarter then fall somewhat through the rest of the year, not because the situation is getting significantly better but because banks will deliberately control the pace of foreclosure to avoid a legislative backlash (and jail).

Still, 2011 will show the highest foreclosure rates in history, weighing on the market well into 2012. If there is any good news for 2011, it is in a moderate increase in purchase activity expected in the second and third quarters. Higher rates, tight credit, oversupply of bank-owned properties and continued unemployment will temper this activity, though. The extension of the Bush tax cuts may help purchase activity, too, finally allowing for some "green shoots. " But the grass will not really grow until 2012.

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]]>Federal ReserveFederalReservefirst-time home buyer creditFirst-timeHomeBuyerCredithampharphousing marketHousingMarkettarpRobert X. Cringely2010-12-24T08:00:00 00:00Greenspan's 'No Housing Bubble' Prediction, 5 Years Laterhttp://realestate.aol.com/blog/2010/06/11/greenspans-no-housing-bubble-prediction-five-years-later/http://realestate.aol.com/blog/2010/06/11/greenspans-no-housing-bubble-prediction-five-years-later/http://realestate.aol.com/blog/2010/06/11/greenspans-no-housing-bubble-prediction-five-years-later/#commentsFiled under: ,

This week marks the fifth anniversary of then-Federal Reserve Chairman Alan Greenspan's observation that there was no housing bubble to worry about:

"Although a 'bubble' in home prices for the nation as a whole does not appear likely, there do appear to be, at a minimum, signs of froth in some local markets where home prices seem to have risen to unsustainable levels.... Although we certainly cannot rule out home price declines, especially in some local markets, these declines, were they to occur, likely would not have substantial macroeconomic implications."

Some froth, eh?

Home prices are nationally down 18 percent from that day in 2005 and 30 percent from their 2006 peak with total homeowner equity dropping by a stunning 50 percent. That's more than $2 trillion in homeowner equity down the toilet.

How could Greenspan have gotten it so wrong?
In recent testimony before Congress he explained it this way: "Regulators who are required to forecast have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be."

In short, he got it wrong because he -- and apparently everyone in his position -- isn't very good at seeing, timing or predicting economic bubbles.

This leads -- at least in my mind -- to the very logical questions:
  1. Why didn't he make that caveat in his original statement? ("Oh, by the way, keep in mind that I'm really not very good at this prediction thing.")
  2. Why did we even listen to him in the first place, if he was not good at prediction?
  3. What the hell is wrong with writing things clearly?
Greenspan testimony was alway ambiguous, with people like me trying to figure out the morning after just what they heck he meant and what did it mean for interest rates? This had to have been deliberate. Greenspan is married to Andrea Mitchell from NBC. She could have cleaned up his vague text.

At the time we all thought these obscure papal utterances were based on Greenspan having a bigger brain, but now it's clear that the guy was mainly winging it.

Bob Woodward wrote a book about Greenspan titled "Maestro." Not so ironically, it was Woodward's only non-bestseller.

We can spend all day beating up Greenspan for a huge mistake five years ago, but a more constructive approach would be for us to learn from this experience and apply those lessons to Greenspan's replacement, Ben Bernanke.

We should ask him regularly the question nobody every asked Maestro Greenspan: "Why should we believe you?"

 

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]]>alan greenspangreenspanhousing bubblerecessionRobert X. Cringely2010-06-11T14:00:00 00:00Greenspan, You're No Bill Gateshttp://realestate.aol.com/blog/2010/04/08/greenspan-youre-no-bill-gates/http://realestate.aol.com/blog/2010/04/08/greenspan-youre-no-bill-gates/http://realestate.aol.com/blog/2010/04/08/greenspan-youre-no-bill-gates/#commentsFiled under: ,

Testifying yesterday before the Financial Crisis Inquiry Commission, former U.S. Federal Reserve chairman Alan Greenspan defended his 21-year tenure at the Central Bank, saying it wasn't he who inflated the housing bubble that caused the Great Recession.

While mistakes were made, Greenspan admitted, he claimed to have been correct 70 percent of his time at the Fed, which sounds pretty good. The unanswered question in all this finger-pointing and next-day quarterbacking, though, is whether being right 70 percent of the time is good enough.

It isn't.

That's not just my opinion. It's a central conclusion of the 1977 Stanford University computer science dissertation of Charles Simonyi, longtime head of Microsoft's application group, the father of Microsoft Office, and now a celebrated space tourist.
Simonyi's paper on what he called "metaprogramming" -- technical process management by a strong central authority -- proved mathematically that a central manager of a complex technical process could be successful as the sole decision-maker only if the metaprogrammer was correct at least 85 percent of the time.

As a strong Fed chairman, Greenspan gleefully assumed the role of metaprogrammer for the U.S. economy.

But seventy percent correct, while it may sound good, actually isn't good at all, as Simonyi proved. Seventy percent is terrible. What's amazing is that Greenspan still doesn't understand this today.

This knowledge was available during the entire period of Greenspan's time at the Fed and many influential people read the paper.

After reading Simonyi's dissertation, for example, Microsoft founder Bill Gates hired the Hungarian to work at Microsoft where together they rigorously implemented the metaprogrammer system. Thus metaprogramming was proved not only mathematically, but also in practice, where it created thousands of Microsoft millionaires, made Gates the richest man in the world, and turned Simonyi into a billionaire with a $40 million one-bedroom house.

Any would-be metaprogrammer who couldn't make the right call at least 85 percent of the time, Simonyi calculated, would lead to an unstable system that would eventually -- and inevitably -- fail.

This doesn't prove, by the way, that the Fed chairman-as-metaprogrammer model (perpetuated today by current chairman Ben Bernanke) was bad. It just proves the Greenspan was the wrong man for the job.

Too bad Greenspan (and the various Presidents he served under) didn't know any of this.

If only they had called me.

 

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]]>Alan Greenspanbill gatesFederal Reservefinancial crisis inquiry commissionGreenspan testimonymetaprogrammingMicrosoftSimonyiRobert X. Cringely2010-04-08T08:30:00 00:00Best Protection Against Another Housing Bubble May be a Generation's Painful Lessonshttp://realestate.aol.com/blog/2010/03/29/best-protection-against-another-housing-bubble-a-generations-p/http://realestate.aol.com/blog/2010/03/29/best-protection-against-another-housing-bubble-a-generations-p/http://realestate.aol.com/blog/2010/03/29/best-protection-against-another-housing-bubble-a-generations-p/#commentsFiled under:

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why -- psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

I'm reminded of a story about Sid Richardson. Back in the 1950s, Richardson, a Texas oilman, was arguably the richest man in the world -- the bachelor uncle of today's ultra-rich Bass Brothers. (You though they made that money all by themselves?) Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we'd really worry about today. But this was back in the days when DDT was good and oil spills didn't matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson's pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

"You can't send him back to work on that crane!" the refinery manager shouted to Richardson. "The guy can't be trusted."

"Believe me," said Richardson, "he's not going to make that mistake again."

There is a lesson here for all of us, because -- just like that crane operator -- stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us three times to figure things out.

That's what Professor Vernon L. Smith (now of George Mason University) learned decades ago in economics experiments conducted at the University of Arizona -- experiments that earned him the 2006 Nobel Prize in Economics. Smith conducted real money experiments with groups of students. In their buying and selling of assets, the students inevitably created asset bubbles that eventually collapsed. Given another try, the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

Third time is the charm, as my Grandma Pearl liked to say.

And so this three-strikes-and-you're-out (of danger) apparently works in real life. That explains why American savers and investors suffered through the Florida Land Bubble collapse of 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933, before that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

In that 50 years, we had bubbles and recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. But what the Depression gave us, generational transitions and Reaganomics took away. Savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What does this means for today? Well, our generation has experienced the 1990s dot-com bubble and its pop, the 2000's housing bubble and its pop, and now the Great Recession. We're in our third time and likely due our own bit of subsequent wisdom as a result.

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up. Similarly, whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U.S. financial system may matter less to our future prosperity than the painful lessons we've been learning as a people.

It's us, not them.

We'll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson's crane operator, our generation -- and only our generation -- has probably learned our lesson: we aren't going to do that again.

 

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]]>BernankeDoddeconomic policyGeithnerGreat Depressiongreat recessionObamaSid RichardsonVernon SmithRobert X. Cringely2010-03-29T14:30:00 00:00How Bush's Secret Plan to Fool Saudis, Chinese With Loan Money Backfiredhttp://realestate.aol.com/blog/2010/03/26/supply-m3-died-to-fool-the-saudis-and-chinese-but-we-only-foole/http://realestate.aol.com/blog/2010/03/26/supply-m3-died-to-fool-the-saudis-and-chinese-but-we-only-foole/http://realestate.aol.com/blog/2010/03/26/supply-m3-died-to-fool-the-saudis-and-chinese-but-we-only-foole/#commentsFiled under: ,

Yesterday, I wrote a post titled "Who Killed M3?" that explored a Bush-era decision to stop tracking a key measure of money supply, and its link to the housing bubble. Today, I explore that further.

What did George W. Bush have against M3 that made it important enough to risk the world economy to get rid of? It was an inconvenient measure of inflation -- a kind of inflation that Bush really liked, being monetary inflation rather than price inflation. Monetary inflation tends to lower the long-term cost of deficits, because they are repaid with cheaper dollars. But it is inflation nonetheless, and a potential political embarrassment. Was that enough?

It could well have been. Think for a moment about W's character. If there was something potentially embarrassing he really liked, whether it was an arcane type of inflation or cocaine, what better way to deal with it than to pretend it didn't exist?

So M3 had to die.
M3, along with its sister numbers M1 and M2, was a measure of the money supply -- the amount of money available for use in the economy at a given moment. M1 is currency in circulation, commercial bank demand deposits, automatic transfers from savings accounts, savings-bank demand deposits and travelers checks -- money you could spend this afternoon. M2 is overnight repurchase agreements between banks, overnight eurodollars, savings accounts, CDs under $100,000 and money market shares -- money you could get to in a few days if you needed to, though possibly with an early withdrawal penalty. M3 was M1 plus M2 plus everything else, which came over the past decade to include exotic instruments that could add hundreds of billions to the money supply overnight.

You might think the amount of money is pretty constant and defined by printing presses down at the Mint, but that's not true. Banks make money all the time from nowhere and nothing simply by advancing credit to customers with that credit backed hardly at all by reserves or collateral. Banks -- not governments -- make money. And the more money the banks make to represent the same economy -- the same production of goods and services -- well THAT increase in money supply is inflation.

And inflation is bad, right? We hate inflation. Inflation is evil.

That's what Milton Friedman always thought.

Unless you are a strict monetarist, inflation has only two causes. First there is price inflation, which is based on the idea that prices go up with demand, so that piece of art suddenly represents more $100 bills than it used to even though the Mint hasn't printed any more bills. Nearly everyone hates price inflation and Fed chairmen always do what they can to contain it. The second cause of inflation is growth in the money supply, based typically on supply and demand fluctuations in the value of money, itself.

Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon." We saw this in action in the late 1970s when Fed chairman Paul Volcker starved inflation by tightening the money supply, driving interest rates through the roof.

But the Fed under Greenspan and Bernanke behaved as if money supply growth didn't matter and price inflation was all that mattered. Even if they raised interest rates, for example, in an effort to slow the economy and reduce demand, they let the money supply grow at double-digit rates.

The Fed could appear to be fighting inflation with interest rate policy while simultaneously allow the money supply to grow without restriction. They did this, we were told, because the Greenspan/Bernanke view was that money supply by itself was not a good indicator of future inflation.

This view is nonsense on many levels. It completely ignores, for example, the very conversion of the banking system from being backed by demand deposits (M1 and M2) to being almost entirely backed by collateralized REPO exchanges (M3 minus M2) built of money made from nothing. For another, it ignores the fact that money supply increases are inevitably connected to the growth of asset bubbles like the dot-com bubble of the late 1990s and the recently-popped U.S. housing bubble.

When asset prices increase beyond reason and that increase is accompanied (and fueled by) a comparable increase in the money supply, you know you have an asset bubble and sooner or later that bubble is going to pop.

Deciding to no longer even measure the total money supply makes it much easier to ignore bubble growth and to deny that a pop is coming, which is what happened to the U. S. in 2007 and beyond.

So, rather than killing-off M3 in 2006, you'd think the Federal Reserve would have spent money to develop and publish data for an M4 and maybe an M5 to track the ebbs and flows of an even-more-expansive definition of money that includes some of the new forms of money manufactured on Wall Street and in other global banking sectors.

Nope.

The Fed decided to kill M3 because it was the measure that showed the fastest growth in the money supply. M3 always grew faster than M2 and way faster than M1. M3 was embarrassing, then, for the supposed inflation fighters.

This was exactly the kind of monetary policy you'd expect from the world's greatest debtor nation. Use your credentials as a short-term inflation fighter to convince global savers it's safe to buy U. S. dollars and U. S. debt, while at the same time supporting the long-term inflation that would cut the future value of that debt and thus let the U. S. pay back its current debt in less-valuable future dollars.

It was all about fooling the Saudis and the Chinese, then, and the American people, too.

It is doubtful that M3 was killed to deliberately set the stage for the Great Recession. But that's what happened.

 

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]]>bush administrationeconomic policygreat recessioninflationm3money supplyRobert X. Cringely2010-03-26T12:15:00 00:00Who Killed M3?http://realestate.aol.com/blog/2010/03/25/who-killed-m3/http://realestate.aol.com/blog/2010/03/25/who-killed-m3/http://realestate.aol.com/blog/2010/03/25/who-killed-m3/#commentsFiled under: ,

Not long ago I wrote a post about a National Bureau of Economic Research study that blamed the Great Recession on a bank panic rather than that usual suspect, the sub-prime mortgage crisis. There was a sub-prime crisis, sure, but it was just the catalyst for the much more damaging bank panic that followed.

All this relates back to a little-noticed structural change in the U.S. banking system where Nixon-era deregulation led to the growth of money market funds that killed the savings deposits that had traditionally backed most bank lending. Rising to replace savings (and make a lot more profit) was loan securitization and REPO collateralized inter-bank lending enabled by Reagan-era deregulation. The Great Recession was caused by the banks all losing faith in each other, with commercial lending grinding to a halt as it continues to in many places even today.

Heck of a story, eh? Now that I had a better understanding of the actual crisis, I immediately began to wonder how we can avoid it happening again?

We can't.
Government doesn't have the tools to do so, which it hates to admit. At best, the efforts of Paulson, Bernanke, and Geithner reduced the severity of the crisis and helped the economy get back to something closer to equilibrium. In practice, not even the Fed has enough financial clout to fix a $20 trillion problem. They pretended they did, and continue to pretend so, but the truth is that all the balance sheet expansion and stimulus spending was a bandage just intended to reduce panic in the markets until they could regain natural equilibrium. And none of the reform proposals being floated in Congress do much to change this in the future. So if Geithner and Bernanke look like dopes because their efforts haven't handily solved the problem, returning us to positive economic growth, it isn't really their fault. Nobody else could do it, either, with the tools they have available. And that's the rub, because to admit so is to embrace anarchy, which is not part of the platform of either party.

I also wondered why we didn't we see this coming? As Michael Lewis explains in his new book, "The Big Short", plenty of people did see it coming and backed that vision with investments against the mortgage market that made them billions. But that was the mortgage market. Who saw the whole REPO problem emerging?

We all did, but then we deliberately shut our eyes.

The REPO, or repurchase, market had been growing strongly since 1990 -- growing at a rate high enough to cause concern for both markets and governments. We could see it growing in a number called M3, which was one of three measures of the total money supply, along with M1 and M2, which were released by the Fed in a report every quarter.

Notice I said were released -- past tense. M1 and M2 still are released every quarter, but M3 -- the only public measure of the REPO market available anywhere, stopped being published by the Fed on March 23, 2006, ostensibly to save money.

M3 was one of the oldest statistics released by the Federal Reserve, dating almost all the way back to the bank's founding. It was the only financial index ever retired by the Fed. Yet killing M3 seems to have been important to the George W. Bush Administration -- so important it was used as a loyalty test for Fed chairman nominee Ben Bernanke during his confirmation hearings in the Senate.

Bernanke supported the idea of dropping M3, saying it wasn't very useful and getting rid of the index would save $1.5 million per year.

Aren't we glad we saved all that money?

M3 would have shown us the asset bubble growth in 2007 and 2008 and taking the second derivative of that growth could have predicted approximately when that bubble would pop.

By dropping M3 the Bush Administration was deliberately blinding both itself and the markets -- poking out eyes apparently to keep the good times rolling for a few months longer. Only research will reveal the nuances of this decision, but it is research that should be done.

M3 offered an inconvenient truth about financial deregulation as it was done in the 1980s -- that it was leading us ultimately toward disaster -- but the Bush White House viewed that truth as inconsequential or they simply didn't care.

If there is a smoking gun here it is the end of M3. How did it happen? Why did it really happen? What would things have been like had M3 survived? And since the only part of M3 to actually die was its public report, how did the Fed of 2007-2009 feel about the data formerly known as M3, which it still holds closely to its vest?

Why didn't the Fed, itself, sound an alarm?

We had a dozen or more chances to avoid the Great Recession but we didn't. The lessons it has taught us include the fact as things stand now that we won't be any better prepared to deal with it the next time.

And as a long succession of bank panics have shown us, there will always be a next time.

 

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]]>bank deregulationbernankefederal reserveGeithnergeorge w. bushinflationM3money supplyNixonPaulsonReagansub-prime mortgageRobert X. Cringely2010-03-25T11:00:00 00:00It Wasn't a Mortgage Recession After All: So Why Don't We Feel Better?http://realestate.aol.com/blog/2010/02/26/it-wasnt-a-mortgage-recession-after-all-so-why-dont-we-feel-b/http://realestate.aol.com/blog/2010/02/26/it-wasnt-a-mortgage-recession-after-all-so-why-dont-we-feel-b/http://realestate.aol.com/blog/2010/02/26/it-wasnt-a-mortgage-recession-after-all-so-why-dont-we-feel-b/#commentsFiled under:

Panic ButtonThe Great Recession wasn't the result of subprime mortgage madness, according to a new report from the National Bureau of Economic Research. It was just a plain old bank panic. Yeah, but weren't bank panics supposed to be a thing of the past, thanks to the creation of the Federal Deposit Insurance Corporation in 1934?

That's the problem.

The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn't big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.

The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion -- not big enough by itself to wag this dog.
According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.

The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.

While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn't happen until August of that year when lenders began making collateral calls and demanding haircuts (collateral fire sales at discounted prices) from borrowers that led to all the big banks being seriously under-capitalized.

The government, while well prepared to respond to a demand deposit bank panic like those of 1907 and 1933, was not only unprepared for the 2007 panic, they didn't even know there was a panic until it was well underway.

The panic meant that the value of all types of bonds declined, trillions of bank capital evaporated and the REPO market, itself, collapsed as all counter-parties lost faith in each other and the basis of the entire banking system literally disappeared.

So what does this mean? Well it explains why the banks still aren't lending money, because they don't have the means to back the loans they'd like to make, absent government intervention. It means that until the REPO market regains some steam there isn't going to be much natural progress in getting the economy to start growing again (take out the government stimulus and we're screwed). And it shows that the Fed and Treasury in the United States were no better able to protect us than you could keep your dog from running into the road and being hit by a car.

But it wasn't strictly a subprime mortgage crisis.

Why is it I don't feel better?

 

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]]>bank panicfinancial crisisNational Bureau of Economic Researchsecuritizationsubprime lendingRobert X. Cringely2010-02-26T12:00:00 00:00Housing Starts Are Up, but That Means Nothinghttp://realestate.aol.com/blog/2010/02/19/housing-starts-are-up-but-that-means-nothing/http://realestate.aol.com/blog/2010/02/19/housing-starts-are-up-but-that-means-nothing/http://realestate.aol.com/blog/2010/02/19/housing-starts-are-up-but-that-means-nothing/#commentsFiled under:

Construction workerThe U. S. Department of Commerce reported earlier this week that housing starts for January hit a six-month high, growing 2.8 percent to an annual adjusted rate of 591,000 new units. Therefore the housing crisis is ending, we're told: end of story, if we build it they will come.

Not.

Housing starts refer primarily to building permits, which have to be in place generally before builders and developers can get construction financing -- financing that is very hard to come by in the current economic climate. So a start doesn't inevitably mean a finish nor even a true beginning of construction. There are other statistics for those -- statistics the Commerce Department in this case chose not to highlight.
"Forget housing starts, look at units under construction, " says blogger David Rosenberg of Gluskin Sheff, a Toronto-based money
manager. Rosenberg's excellent "Breakfast With Dave" blog is unfortunately for clients only.
"Yes, a 2.8 percent month-over-month rise was nice but the data is notoriously volatile and at a 591K unit annual rate they are actually lower now than they were last July when the tax credit to first-time homebuyers was in full swing. Single-family housing starts did edge up 1.5 percent but that fell well short of offsetting the 3.0 percent December decline and starts are 4.3 percent below the levels prevailing last summer... In January we saw both the number of units under construction and completions hit all-time lows! "

The housing crisis in America is far from over.

 

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]]>department ofspsnotreqdcommercehousing startsstatisticsRobert X. Cringely2010-02-19T13:30:00 00:00Housing Market Mess? Blame Mike Milkenhttp://realestate.aol.com/blog/2010/02/10/housing-market-mess-blame-mike-milken/http://realestate.aol.com/blog/2010/02/10/housing-market-mess-blame-mike-milken/http://realestate.aol.com/blog/2010/02/10/housing-market-mess-blame-mike-milken/#commentsFiled under:

Michael MilkenThe founder of every new business hopes that what he or she creates will eventually become not just a business, but an industry. They want their business to scale -- to get as big as possible as fast as possible. But sometimes businesses are forced to scale when they really shouldn't. That's what I have come to realize is at the heart of the current home ownership crisis. And I blame it all on legendary 1980s white-collar criminal Mike Milken.

Before Milken revolutionized the junk bond market at Drexel Burnham Lambert in the 1980s, banking was both more regulated and more sedate -- precisely the attributes being called for in bankers lately from both sides of the aisle in Washington. But with President Reagan working back then to reduce regulation and guys like Mike Milken pushing the envelope on what was possible (ethical, even legal -- remember Mike went to prison), the world of finance quickly changed. Milken was master of a killer new financial technology, the phone bank, and used it to sell enough junk paper in 1987 to score himself a salary and bonus of $550 million (more than $1 billion today), setting in every way the trend we see now.

That trend is using technology to force increases in both supply and demand -- increases that, absent the enabling technology, would have appeared absurd on their face.
But that didn't matter to Milken's telephone sales force. All they knew was that rich people who had never bought junk bonds before would do so if you called them at home after they'd had a couple of drinks and offered what appeared to be fabulous terms.

The terms were fabulous because the bonds were, well, junk. They didn't come up with that name as a joke.

The bond business under Milken and his ilk grew enormously, financing the profligate 80's and setting us up for the dot-com 90's. But that doesn't mean the business scaled well. In fact it scaled poorly. Scaling well would have produced big sales without having to compromise the quality of the bonds being offered. Applied to the housing market, scale would mean selling more mortgages, but only to people who could actually afford their new homes.

So here's the drill. A charismatic leader uses a new technology to dramatically expand a financial market to the benefit of his company and its people, but not necessarily to the benefit of people in general or the market overall. Milken blew out the bond market, ratcheting up demand and then supply until the market reached a state of equilibrium that was defined not so much by its success but by its EXcess. It was as big as the market could get without crashing -- an equilibrium of pain.

And thanks to the marvel of derivatives (and a little groundwork by Lewis Ranieri of Salomon Brothers), that's just what happened in the mortgage-backed securities and credit default swap businesses in the decade just passed. There is no real difference between junk bonds in the 1980s, day trading in the late 1990s or trading mortgage-backed securities two years ago. All three markets were artificially expanded beyond what they could reasonably sustain.

They didn't scale.

Greed is a great attractor. By scaling these businesses beyond what was even remotely sensible small organizations could make huge profits. The ultimate example of this was Bernie Madoff, who made a fortune doing nothing at all -- scaling to $60 billion a business that should have supported his family and a few employees and maybe that house out in Montauk.

Through the use of computers to create and trade synthetic securities, little companies could look big, posting big company profits and granting obscene bonuses because they cleverly avoided big company overhead. But of course it depended on creating more and more demand, which meant more and more home owners -- even owners who couldn't reasonably afford the homes they were buying. And that's how we got to where we are today.

Thanks for nothing, Mike.

 

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]]>housing crisismichael milkenRobert X. Cringely2010-02-10T12:00:00 00:00Fan/Fred: Don't Ask, Don't Tell?http://realestate.aol.com/blog/2010/02/01/fan-fred-dont-ask-dont-tell/http://realestate.aol.com/blog/2010/02/01/fan-fred-dont-ask-dont-tell/http://realestate.aol.com/blog/2010/02/01/fan-fred-dont-ask-dont-tell/#commentsFiled under:

A perfect storm is coming in the housing market. Millions of mortgages are in default or foreclosure, mortgage rates are firming and mortgage issuers are significantly raising both borrower requirements and fees. The Federal Reserve, which has been propping up the housing market by buying mortgage-backed securities, says it plans to stop buying at the end of March. The $8000 first-time and $6500 homebuyer tax credits are scheduled to end for mortgages that close after June. Meanwhile stocks are up and economists talk about the recession being technically over, which might be true, but for how long?

We're in big trouble and, so far at least, nobody seems to have a plan.

And then there's the mystery of Fannie Mae and Freddie Mac, those Government Sponsored Entities that House Finance Committee chairman Barney Frank says have effectively become policy tools of the federal government and ought to be reorganized to reflect that. Yet, in the Fiscal Year 2011 federal budget released this morning there is no sign of Fannie and Freddie's combined $7.2 trillion total corporate debt and mortgage obligations.

"What the Hell is going on? " I asked my friend Jack, the world's smartest mortgage banker.

"It doesn't look good, nor does it make any sense, " said Jack, who talks all day long to other mortgage professionals. "Nobody knows where this is going. "

Fannie and Freddie aren't going away soon, according to Treasury Secretary Timothy Geithner. They are still needed to back more than half of U.S. mortgages, and any replacement entity would probably take at least the three-year shelf life of an average mortgage to be implemented.

So we're stuck with Fannie and Freddie for now, essentially unchanged, the home market is likely to deteriorate as foreclosures accelerate this year... an election year. Absent a miracle, the housing market is going to get ugly, very, very ugly.

If all this seems crazy there is plenty of precedent. When the housing market was imploding in 2008, Fannie and Freddie responded by stiffening lender requirements and raising fees, which would seem to have been exactly the wrong thing to do. But that happened because those changes were already in the works, the decisions made months before the severity of the mortgage crisis became clear. Couldn't Fannie and Freddie have adjusted to the changing conditions?

No. These are bureaucracies. They don't adjust to anything fast.

And that probably gives us a clue to one possible way to soften the coming mess.

Jack, the world's smartest mortgage banker calls it, "Don't Ask -- Don't Tell. "

"Nothing in the short term is going to change the way Fannie or Freddie or FHA do business, " says Jack. "The best they can do is fudge the rules a little bit, which is what I think they will do in this election year. Fannie and Freddie, for example, aren't allowed to back refi mortgages that are for more than the property is presently worth. At the same time there is some precedent that allows them not to require an appraisal at all, and that is where I think things will head when the government begins to panic. "

'Don't Ask -- Don't Tell' would mean you could get out of that Option ARM and into a fixed-rate mortgage at today's rates by having everyone involved pretend that it isn't today's market.

"It's crazy, " says Jack, "but it is within the rules. They can stop asking for a credit score, too -- and will. The minimums won't change and they might even be tightened, but by not asking for an appraisal or a credit score the loans won't technically be out of compliance. "

Don't Ask -- Don't Tell.

 

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]]>barney frankfannie maefreddie macgeithnermortgage crisisobama administrationRobert X. Cringely2010-02-01T15:30:00 00:00Defaulting Our Way Back To Normalhttp://realestate.aol.com/blog/2010/01/26/defaulting-our-way-back-to-normal/http://realestate.aol.com/blog/2010/01/26/defaulting-our-way-back-to-normal/http://realestate.aol.com/blog/2010/01/26/defaulting-our-way-back-to-normal/#commentsFiled under:

Robert Shiller, he of the Case-Shiller Housing Index, wrote in the last Newsweek issue of 2009, "My data show that between 1890 and 1990 real home prices actually didn't increase. "

Say what?

It's true. If you look at U. S. home prices over an entire century, corrected for inflation, they don't change much, if any, until after 1990. This covers wars and depressions and -- most importantly -- conversion from an era of low home ownership and nonexistent mortgages (the average mortgage in 1890 -- if you could get one -- was a term of less than five years) to one of high home ownership and huge leverage. What came after 1990, then, can be viewed as a bubble that finally peaked in 2006, popped in 2008, and is still deflating.

Important word there, "deflating."

Home prices are down 34 percent nationally from 2006, though your city may vary. If prices are truly headed for that corrected 1890-1990 line, they have another 22 percent to go, which will take four more years and put tens of millions of homes effectively under water.
What's America to do?

Michael White, a blogger and mortgage banker from Illinois says it is the patriotic duty of those millions of underwater home owners to take one for the team and just walk away from their homes right now, giving them back to the banks, allowing prices to plummet and demand to be restored as quickly as possible at price levels that can be historically justified.



It's interesting to view as patriotic this behavior which banks and credit bureaus and our grandmothers view as bad and even unethical ("No more credit cards for you! "), but maybe White is correct. Maybe a swift correction is best.

But it won't happen that way, of course, because politicians want to be re-elected and because we don't want to give up our houses and become renters again, even if we really should.

There are only three ways to fix this problem, and we've just rejected the first, massive default. The second and third solutions are variations on the same technique, which is reducing mortgage debt to a traditional ratio of family income. Over that same 1890-1990 period American home-owners tended to have homes that were priced at about three times their annual income. Today the ratio is about 3.7. Note that to get back to a ratio of three will again require an effective price change of -22 percent.

If "affordability" is defined as having houses worth three times what we earn then we can either reduce what we owe through mortgage modifications or forgiveness, or we can increase what we earn, which simply isn't going to happen.

The ultimate solution will likely be a combination of one and two, then, with millions of defaults and foreclosures to drive prices down further, eventually followed by some heroic and economically unjustifiable federal program to reduce what the rest of us owe (we who still have our houses then) by beating up Fannie Mae and Freddie Mac, as we'll likely hear next month from President Obama.

This end game was probably inevitable and the fact that it has taken so long can be attributed to an unspoken desire on the part of government for as many foreclosures as possible, keeping to a minimum the ultimate cost of saving the day and the election.

 

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]]>Case Shillerfannie maehome affordabilityhome valuesHousing Bubblemassive defaultRobert X. Cringely2010-01-26T13:00:00 00:00A Mortgage Mod Happy Endinghttp://realestate.aol.com/blog/2010/01/18/a-mortgage-modification-happy-ending/http://realestate.aol.com/blog/2010/01/18/a-mortgage-modification-happy-ending/http://realestate.aol.com/blog/2010/01/18/a-mortgage-modification-happy-ending/#commentsFiled under:

Mortgage modifications were going to help up to four million Americans save their homes, remember? That was the claim of the Obama Administration when it announced its Making Home Affordable program in early 2009. Yet more than three million applications later, only about 100,000 mortgages have actually been modified under the widely-vilified program.

But what about those 100,000, the lucky folks who actually had their terms modified? For my friend Ralph, it is a story with a happy ending.
Ralph has been out of work since last spring, laid-off from his job in the financial services industry. With kids in college, no job, and both a first and second mortgage, Ralph needed a break. What worked for him was a good credit history, money in the bank, willingness to work with the system, and patience, lots of patience. Your mileage may vary.

It may have helped, too, that both of Ralph's mortgages through Countrywide Financial (now part of Bank of America) were actually owned by Fannie Mae and may well have been written-down by the now-nationalized mortgage securitizer.

"It was easy, " says Ralph, "though it took a lot of time. Bank of America services the loans but Fannie Mae owns them. It might have been harder if the bank owned the loan and saw it as their money. They asked me about my income, which came down to unemployment and my wife's business selling on eBay. They asked for a P&L statement for the eBay business, which was just a matter of printing-out a spreadsheet, then they adjusted our payment to 31 percent of my wife's net income, which came to an interest rate just slightly over two percent. Our payment was cut in half."

It helped that Ralph had the documentation requested by the bank, though he notes they did not require any verification -- no tax returns, just the P&L. Ralph also had to make it through the trial modification period, which just meant he had to make the new payment for three months before the rate became permanent.

So there are mortgage modification success stories, just not many of them. In Ralph's case his payment was cut in half for the next five years and that rate will stick even if he gets another high-paying job.

For now, Ralph is still looking.

 

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]]>bank ofspsnotreqdamericacountrywide financialfannie maemaking homespsnotreqdaffordablemortgage modificationobama administrationRobert X. Cringely2010-01-18T11:00:00 00:00For Bankers, Who's the Boss?http://realestate.aol.com/blog/2010/01/15/for-bankers-whos-the-boss/http://realestate.aol.com/blog/2010/01/15/for-bankers-whos-the-boss/http://realestate.aol.com/blog/2010/01/15/for-bankers-whos-the-boss/#commentsFiled under:

Watching the CEOs of America's largest banks testifying this week to Congress about their roles in starting The Great Recession with varying levels of contrition and defiance raises the question: exactly who are banks really accountable to in these post-TARP days?

Who's the boss? Shareholders? Taxpayers? Customers (whom they routinely bet against)? The government? Some banks have repaid their TARP money but still borrow nightly from the Fed for next to nothing. Where do their allegiances lie?

If you read the law, banks are supposed to serve a public purpose. That's why they are licensed and enjoy the benefits of limited entry, which theoretically keeps banks from being threatened by, say, Wal-Mart, which might like to take over the money business itself. Banks have their funding sources protected by the state: they can borrow from the Fed and we can't.

The trade-off to get these perks used to be that their risk-taking was limited and they were allowed to be reasonably, but not terribly, profitable. In theory, banks that did not serve a public purpose could be shut down. That all changed with deregulation in the 1980s and 1990s, and with it, apparently, that sense of public purpose.

An informal poll of top economic bloggers seems to indicate that these banking executives are accountable mainly to themselves.

"They are certainly not accountable to customers," says the aptly-named Adam Smith, dean of American financial writers, author of The Money Game and a blogger for Asset International. "Customers are complaining about teaser loans and service charges to their accounts, and it is shortsighted of the banks to keep twisting the corkscrew when there is this rumbling anger in America. Note the banks aren't out there lending the money, that anyone has noticed. You have a yield curve built for speculation -- borrow at zero percent, lend at nine -- and that's not just the banks."

If not their customers, maybe the banks are accountable then to their shareholders. Maximizing shareholder value has been a mantra on Wall Street for many years, justifying any number of bad corporate behaviors. But doesn't the government still own shares in some banks? CitiCorp and Wells haven't repaid their TARP funds, yet neither seems more accountable to the government as a result.

"I don't think the shareholders (even if they're in charge) will make any difference, " says Sramana Mitra, a serial entrepreneur and columnist for Forbes. "Team Obama can (make a difference), though, and so does the media."

"The real problem is that governments are now supporting capital markets firms with nothing even remotely resembling adequate oversight and control, " says Yves Smith, editor of the popular Naked Capitalism blog. "(Jamie) Dimon gets high and mighty at the hearing about how (JP Morgan Chase) didn't do the stupid stuff many of its peers did. Hello? It's a $1.3 trillion bank attached to a $76 trillion derivatives exchange. Tell me it's not exposed. Any serious bad stuff its peers does blow up on JPM too. The capital markets firms are in charge, running their enterprises for the sole benefit of their employees. "

So maybe huge bonuses ARE the issue after all.

 

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]]>accountabilitybanksBlankfeincitigroupeconomic bloggersGoldman Sachsjamie dimonjpmorgan chasepublic interesttarpwells fargoRobert X. Cringely2010-01-15T13:50:00 00:00Commercial Real Estate Still a Drag on Economyhttp://realestate.aol.com/blog/2010/01/13/commercial-real-estate-still-a-drag-on-economy/http://realestate.aol.com/blog/2010/01/13/commercial-real-estate-still-a-drag-on-economy/http://realestate.aol.com/blog/2010/01/13/commercial-real-estate-still-a-drag-on-economy/#commentsFiled under:


The second, third, or maybe Nth shoe to fall in the ongoing real estate crisis is commercial real estate -- offices, factories and to a certain extent rental apartments -- which tend to trail the owner-occupied housing market as leases end, jobs are lost, and businesses close (or recover). Alas, commercial real estate couldn't be much worse, according to a new report the commercial property research firm Trepp LLC.

Delinquencies on commercial-mortgage backed securities rose to 6.07 percent in December, from 5.65 percent in November and 1.21 percent one year ago. This is the highest delinquency rate ever recorded. The total value of the commercial mortgage-backed securities market was $724.5 billion in 2009. This is significantly smaller than the $5+ trillion market for securities backed by home mortgages, but $700+ billion is still a significant exposure for the U. S. economy and one that is going down, not up.
According to Trepp, there was a similarly high delinquency rate in the early 1990s because of overbuilding, but the current problems reflect large job losses since 2007 which have reduced the demand for office, retail, and residential space.

The U. S. apartment vacancy rate has increased to 8 percent -- the highest level in thirty years. As a result of this surplus, many landlords are also being forced to offer rent concessions. In 2009, apartment rents fell by an average of 2.3 percent.

So this is bad news for landlords and good news for renters.

That dynamic could shift as a surge of new renters flood the market from foreclosed properties. More than four million homes right now in default or foreclosure, and most of those families will become renters when they finally leave their homes.

Overall, these facts point to a very slow emergence from recession for the U. S. economy and housing markets. The recession may technically be over, but it sure doesn't feel that way, does it?

 

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]]>commercial realspsnotreqdestateeconomicspsnotreqdimpactrecessionTreppspsnotreqdLLCRobert X. Cringely2010-01-13T15:50:00 00:00Spring Break: How Fannie & Freddie Will Bail Us Outhttp://realestate.aol.com/blog/2010/01/06/spring-break-how-fannie-and-freddie-will-bail-us-out/http://realestate.aol.com/blog/2010/01/06/spring-break-how-fannie-and-freddie-will-bail-us-out/http://realestate.aol.com/blog/2010/01/06/spring-break-how-fannie-and-freddie-will-bail-us-out/#commentsFiled under:

I recently detailed the trouble that's coming for American home owners with the end of the recession (except not for us), the recovery of the big banks (but not commercial lending), the rise of the stock markets (but not jobs), and the likely further declines for housing as what little stimulus was being applied there (less than five percent of the total) finally expires. Now I'll turn to what can or will be done to fix this mess.

But first let me share what I was told recently by the managing partner of a New York hedge fund after reading my earlier post. "Unfortunately, I agree with you," he said. "However, in this Alice in Wonderland world, sometimes what is bad for Main Street is good for Wall Street."

There are three interested parties here -- big business and Wall Street, the federal government, and the American people. We got where we are because big business and Wall Street offered us cheap loans and we took them so we could buy that RV and put our kids through college. When the housing bubble burst, government protected big business and Wall Street, seeing them as essential to any eventual recovery. Government didn't do much to help the American people because Washington was too busy helping business and Wall Street, and we weren't going anywhere, were we?
But now it is 2010, an election year, and our chance as citizens to be heard at the polls. Over the coming months our political leaders will sound less and less like Wall Street and more and more like Main Street, which might be gratifying but doesn't mean anything will actually happen. It won't at first because of the current political deadlock between conservatives and liberals over how much pain we have to feel before this thing is over, de-leveraging is complete, and we can start buying and selling houses again. For the moment, then, we'll have a lot of shouting and finger-pointing and even more praying for that miracle which won't come.

Eventually, though, as primary elections loom and the Democrats start feeling a little shaky in their electoral boots, they'll have to do something to please the voters, or at least distract them. This will inevitably be some form of further economic stimulus. But the problem is that there is no political will for such stimulus: Congress may need it to stay in power but they won't vote for it because doing so might boot them out of power.

We have a dilemma.

Fortunately, the Obama Administration created last month a Get-Out-of-Jail-Free Card in the form of increased debt limits that it will cover at Fannie Mae and Freddie Mac, from $400 billion to infinity. And our economic salvation this Spring will come, as Buzz Lightyear says, by going to infinity and beyond!

Something has to happen to break open the housing market. There is no miracle recovery on the way, no chance for a formal stimulus and no will to increase the deficit even further. But Fannie and Freddie, which have been tightening their lending requirements for over a year (since BEFORE the housing crisis, in fact -- something they never even tried to mitigate as everything was going to Hell) can always go the other direction and loosen requirements, too.

Think about it. There is no loss limitation on Fannie or Freddie, which are effectively now tools of the U. S. Treasury, though cleverly maintained off the books and out of any Federal deficit numbers. The new, highly-paid CEOs of both organizations are getting none of their compensation in the form of stock, which presupposes that the stock will be going nowhere but down. These guys have nothing to lose.

Sometime this Spring, on a quiet word from the White House, Fannie and Freddie will drop their lending requirements back to where they once were or even lower. They'll start buying mortgages from anyone on any property even if doing so makes no economic sense. They'll throw $1 trillion or more of off-the-budget money at the problem, buying crazy mortgages. And the bankers, who haven't learned all that much from this experience but still love to make crazy deals if they are profitable for a moment and can be sold on to some sucker, will start lending in earnest. For a while.

It won't be a permanent solution of course. That would require an act of Congress. But the purpose of this temporary bubble reflation will be to get beyond the 2010 election with minimal Democratic carnage while saddling the Republican Party with responsibility for a continued crisis in jumbo mortgages (over $729,717) which are too big to be bought by even a temporarily insane Fannie or Freddie.

Sometimes what's good for Main Street is bad for Rodeo Drive.

 

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]]>bailoutfannie maefreddie macjumbo mortgagesObamaRobert X. Cringely2010-01-06T17:00:00 00:00Our Dystopian Future: The U.S. Economy Six Months from Nowhttp://realestate.aol.com/blog/2010/01/05/our-dystoian-future-the-u-s-economy-six-months-from-now/http://realestate.aol.com/blog/2010/01/05/our-dystoian-future-the-u-s-economy-six-months-from-now/http://realestate.aol.com/blog/2010/01/05/our-dystoian-future-the-u-s-economy-six-months-from-now/#commentsFiled under:

The recession is over, we're told by Bernanke, Geithner, and Summers, it's time for an exit strategy, to wind down the economic stimulus before it turns inflationary. Big banks are booming, TARP funds are coming home to roost, the market's up, the Fed has stopped buying mortgaged-backed securities, and the first-time home buyer tax credit will end in a few months.

Why, then, are we all still so nervous? Because the recession really isn't over, not for you and me. And, absent renewed stimulus -- for which there seems to be no political will -- we're screwed.

Here's a look six months in the future if the U.S. continues to follow its current economic course.
By the end of June, the home buyer tax credit will have ended and the Fed may well be inching up interest rates to keep a lid on inflation. What inflation? Housing prices will have peaked and dipped, dropping in every case by the value of that $6,500 or $8,000 tax credit. The unemployment rate will be, at best, stable between 9-10 percent because banks won't be lending yet to small businesses, sticking as long as they can to the Fed carry-trade of borrowing from Bernanke at a low rate then lending that money right back to Bernanke at a slightly higher rate. Sure beats investing in America, right?

The Treasury Department will still be looking in vain for the proper incentives to get banks doing the right thing, meanwhile another million homes or more will have gone into foreclosure with the failure of the Obama mortgage modification plan. Prices will stagnate, growth will falter, consumer confidence will dip again and Jim Cameron will still be 11 years away from releasing his next blockbuster.

It all comes down to political stalemate. You know that's true. We started talking about it here six months ago, now the New York Times has picked up the story, making it legit, and the general press is starting to emerge from its fog. This isn't anti-Obama or pro-Obama, it's just a mess we're finding ourselves in that's probably inevitable until our national ass is truly ablaze and we find the common will to do something about it.

But what's that? What do we do now to forestall such a lousy future? Or what do we do then if it's truly inevitable?

I'll cover that tomorrow.

 

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]]>Bernankeeconomic recoveryEconomicRecoveryeconomyJim CameronJimCameronstimulusTARPWhatRecoveryRobert X. Cringely2010-01-05T17:30:00 00:00Fannie-Freddie II: The Wrath of Obamahttp://realestate.aol.com/blog/2009/12/30/fannie-freddie-ii-the-wrath-of-obama/http://realestate.aol.com/blog/2009/12/30/fannie-freddie-ii-the-wrath-of-obama/http://realestate.aol.com/blog/2009/12/30/fannie-freddie-ii-the-wrath-of-obama/#commentsFiled under:

So why did the Obama Administration last week increase the amount of Fannie Mae and Freddie Mac losses it would cover from the previous limit of $400 billion to the new limit of infinity? In the simplest terms, it was to reassure investors like China or Saudi Arabia who have bought or might buy in the future the securities of Fannie or Freddie. But among mortgage professionals I have spoken with, there is a general feeling, too, that the extra funds will be needed.

"They've been hiding losses as long as they can and will soon have to start taking them, " said one friend who has been in the mortgage business much of his life.

Remember that the amount of room left under the previous cap for guaranteed losses at Fannie and Freddie was $289 billion ($400 billion minus $111 billion already spent). The amount of Fannie and Freddie securities in the market totals about $5.5 trillion. So, for another $289 billion in loans to go sour, you'd need only 5.2 per cent of existing mortgages to fail. Right now, 4.7 percent of U.S. mortgages are in default, under foreclosure, or bank-owned. Most of those homes will be lost in the next 12 months.

So, it's a no-brainer to see that the existing cap of $400 billion was unlikely to stand. Absent any heroic moves on the part of the Obama Administration then, Fannie and Freddie are still in trouble -- big trouble -- and increasing the guarantee limit, no matter how politically it was timed, was probably inevitable.

That's the No Heroic Action scenario -- Fannie and Freddie take a big hit and lots more houses are lost.

But what if we are due a bit of heroism, what happens then?

This recession and recovery has been grossly unfair to homeowners. Of the approximately $1 trillion spent to date to overcome the mortgage crisis, less than three percent has gone to people who actually have mortgages. The rest was used to shore up banks, brokerage firms, and insurance companies -- to secure the structure of our financial world, if not to help the people who actually live in it -- us.

And the homeowners or would-be homeowners who have been helped so far, who are they? They are first-time homebuyers -- people who weren't in financial trouble for the most part. They are people who weren't behind in their mortgages and probably didn't need to be saved. The millions of folks who were in trouble generally still are. These people were offered a Federal mortgage modification program that had no real teeth to motivate lenders and is unlikely to help more than half a million of the four million homeowners who were targeted.

A vital thing to keep in mind about the Obama Administration's mortgage modification program is that its goal of four million modified mortgages was over two years. How the heck does that help the 4.7 million homeowners who will be out on the street six months from now?

It doesn't.

But there is an election coming and a Democratic majority thinking about self-preservation, so I am guessing we'll shortly see Fannie and Freddie take it on the chin through a new Federal program that will have the agencies absorb those infinite losses that are now guaranteed, without requiring the mortgage holders to lose their homes. Yes, a real bail-out of real people. Remember you heard it here first.

But one part of the market will still likely be missing from this new Federal program -- jumbo mortgages. So far none of the programs being offered have ever mentioned jumbos, which are mortgages generally $729,751 and above. That's because Jumbos are viewed as rich people's mortgages, and rich people are supposed to have all the money, right? Yet Moody's this month warned that $143 billion in jumbo mortgages are right now in danger of going-under -- none of those backed by Fannie or Freddie.

I predict the Obama Administration will bail-out their base and leave Jumbo mortgage-holders spinning slowly in the wind. Democrats have figured out that more of those Jumbo mortgages in trouble are held by Republicans than Democrats. Eventually those distressed Republicans are going to cry for help and their representatives will be forced to ask for what will be perceived as a rich people's bail-out. Since they can hardly do that and claim Obama is wrong to have helped others, there is a good chance this move will defuse the whole mortgage crisis in political terms, at least for the 2010 election cycle.

Clever guy, that Obama.

 

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]]>bailoutdefaultfannie maeFannieMaeForeclosuresfreddie macFreddieMacjumbo mortgagesJumboMortgagesmortgagesobamaRobert X. Cringely2009-12-30T07:30:00 00:00Fannie & Freddie: More Than Politics As Usualhttp://realestate.aol.com/blog/2009/12/28/fannie-and-freddie-more-than-politics-as-usual/http://realestate.aol.com/blog/2009/12/28/fannie-and-freddie-more-than-politics-as-usual/http://realestate.aol.com/blog/2009/12/28/fannie-and-freddie-more-than-politics-as-usual/#commentsFiled under:

Last week, just before Christmas, the Obama Administration quietly increased the amount of losses it would cover at Fannie Mae and Freddie Mac -- the two Federally-chartered (and now controlled) securitizers of home mortgages -- from a combined $400 billion to infinity. I'm going to look at this move in two parts, first considering the political considerations then the economic ones.

"All politics is local, " said the late Tip O'Neill when he was Speaker of the House. If Tip was right, and it is easy to argue that he was, then there is a local political basis for this action by the Obama Administration. Political pundits (the worst kind) are tending to see it as a shifty move by the President against Congress, but I tend to see it as a shifty move by the President for Congress -- at least for Democrats in the House and Senate.

The original Bush-era deal to take Fannie and Freddie under conservatorship allowed the White House to modify the deal without further Congressional approval until the end of 2009. So this week, expanding the amount of losses covered by the Feds requires nothing but a signature. Next week, it would require literally an Act of Congress.

So did Obama sneak one past the Congress, thus avoiding a withering debate by the Republican minority? Not really. What Obama did was take one for the team by increasing the bad debt coverage without requiring his Democrats to vote for it or even speak up in defense of the action. In fact, we can probably look for at least some Democratic dissent in the aftermath of this action, which I'll chalk up to Congressional ass-covering.

If you are a moderate Democrat this might be a great time to criticize a necessary action that you can't really do anything about, all with the 2010 Congressional elections in mind.

The 2010 elections are at the heart of this. Putting the bad news as early as possible also puts it as far as possible from the election. Keeping it out of Congress and in the Executive Branch (which isn't up for re-election) might save a few seats.

But wait a minute! Did I write that this was a "necessary action?"

Yes.

As of a week ago, Fannie and Freddie had used only 26 percent of the funds allocated by Congress to cover such losses. With $289 billion still available and the economy improving, how could they possibly need more than that?

The spin we'll get on this, if the topic comes up at all, is that the increase is symbolic, that it effectively puts the "full faith and credit of the United States" behind these securities -- which is what the Chinese and the Saudis thought was the case all along but really wasn't. Now it is, end of discussion.

Except it won't be the end, because all Hell is about to break loose in the mortgage market during 2010. Details will follow in my next post.

 

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]]>2010 elections2010Electionsfannie maeFannieMaefreddie macFreddieMacmortgageobamaRobert X. Cringely2009-12-28T13:45:00 00:00So Is the Real Estate News Good or Bad?http://realestate.aol.com/blog/2009/12/23/so-is-the-real-estate-news-good-or-bad/http://realestate.aol.com/blog/2009/12/23/so-is-the-real-estate-news-good-or-bad/http://realestate.aol.com/blog/2009/12/23/so-is-the-real-estate-news-good-or-bad/#commentsFiled under:

Yesterday, trolling the web for real estate news, I had a hard time deciding whether the market was improving or deteriorating, whether the news was good or bad. It depended what I was reading and where it was published.

There were stories of home sales soaring in various parts of the country, including some of those hit worst by the recession. There were stories, too, about foreclosures going up and lending requirements tightening. For every 'up' story there was a 'down' one. How are readers supposed to understand what's really happening?

Leave that to me.

I've made my living from writing now for 42 years and taught journalism for six of those, so I have a pretty good understanding of how the press works. And it's the workings of the press we're concerned with here, much more than the real estate market, itself.

Sometimes you'll note, for example, that the body of the story doesn't accurately reflect the headline, which is all that many people ever read. That's because the headline is rarely written by the person who wrote the story. The headline writer -- usually an editor -- may have a little agenda of his or her own or maybe that of the publication, itself. Or maybe they didn't really read the story that carefully in the first place. (Ed note: Other times, it's simply a case of trying to write a hed for a tight space). So the very same story could easily have a headline that says "Home Sales Rise 30 Percent" or "Median Home Prices Drop Seven Percent."

Most stories don't have enough context. Explaining what the heck this really means isn't there either because it was cut from the bottom of the story where the writer would have stashed it, because the writer simply doesn't know the context and so can't write it, or because the publication doesn't care to provide the context.

I think understanding the context is vital.

So if, like me, you are wondering if the real estate news is good or bad, well it is bad. Home sales are up because of a Federal tax credit and nothing else. When that tax credit ends, home sales will come crashing down. Even if the tax credit doesn't end, home sales will eventually drop because we'll run out of well-qualified buyers, which are the group these tax credits are aimed at. Lenders are tightening, not loosening borrower requirements, the economy is still failing to add new jobs, and there's a huge glut of foreclosures two million homes deep that will hit in the first half of 2010.

Eventually (nobody really knows when) the market will truly turn and both prices and buying opportunities will improve, but a message like that doesn't sell newspapers or web sites.

 

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]]>economyjournalismmediapropertyreal estateRealEstateTax CreditTaxCreditRobert X. Cringely2009-12-23T15:00:00 00:00Person of the Year? Not Bernanke. Try Grandma.http://realestate.aol.com/blog/2009/12/16/man-of-the-year-not-bernanke-try-grandma/http://realestate.aol.com/blog/2009/12/16/man-of-the-year-not-bernanke-try-grandma/http://realestate.aol.com/blog/2009/12/16/man-of-the-year-not-bernanke-try-grandma/#commentsFiled under:

Since AOL is no longer of the Time-Warner body, it's easy to say Time made a mistake when it announced this week that Federal Reserve chairman Ben Bernanke should be its Person of the Year. But if Bernanke was a mistake, who should be Person of the Year? I nominate Grandma -- your Grandma, my Grandma, every Grandma -- because Grandmothers as a group are doing a better job than Ben is this year at propping-up the American way of life.

But wait, didn't Ben save us all from a Great Depression? Didn't his inspired and bold action opening taps and taking an axe to hogsheads of money down at the Fed preserve our very way of life? No. He preserved Wall Street's way of life. He saved the banks, not their depositors. In fact, he used the depositor's money (our money and that of our children and grandchildren) to not save the depositors, which I find particularly ironic.

We had a real estate crisis that precipitated a banking crisis, but Ben only fixed the banks, and not all that well, either.

And Grandma? She wrote a check, lots of checks, to her kids and grandkids helping them keep their homes. There is right now a charitable transfer of wealth happening from the oldest Americans to their middle-aged children that is, in many cases, the only thing keeping the latter in their homes.

Funny nobody talks about this.
Grandma is great, but Bernanke is just okay. He did a few things right but he didn't really fix the underlying problem with mortgages. He didn't do (and still hasn't done) simple things that could have had huge impact at relatively little cost.

Bankers aren't lending to small businesses, for example. President Obama had a photo opp this week to shame them into more lending. That won't work. Yes, BofA, for example, pledged another $5 billion, but is anyone going to remember? Is anyone going to measure compliance? If BofA doesn't actually come through with all $5 billion, will they be penalized? No, no, and no.

As the bank regulator, Bernanke could easily give banks a target or a quota for small business lending and tell them if they don't comply they'll be out of business.

For that matter, why didn't Obama order Bernanke to do that? Good question.

Why cajole when he could command? I can only guess that Ben Bernanke is too constrained by his academic understanding of what a Fed chairman is supposed to do. Or maybe he just has no balls.

Either way, Ben's no Man of the Year.

It's a good thing, then, that we have Grandma.

 

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]]>bailoutBernankegrandmaMan of the YearTimeRobert X. Cringely2009-12-16T16:40:00 00:00