Underwater homes, underwater recovery

Until we get housing and mortgage debt issues addressed, places like Phoenix and Las Vegas, where home prices fell another 10 percent in just the second quarter of this year, are going to be a long-term drag on the economy.

Former Reaganite economics adviser Martin Feldstein has some reasonably sensible ideas, focused on wiping all debt above 110 percent of a home's current value off the books, with owners in turn signing a simple, hardcore statement that if they accept the cramdown, they could lose other assets in case of a default. 


As he puts it, large parts of the country are in a deflationary housing market.


That said, this isn't enough. We need to address the larger issues of:
1. Tax deductions for mortgage interest;
2. The myth of home as investment;
3. The quasi-myth, at least, of home as ATM.

And, that's just within the world of housing. We're not even talking about things like the widening income gap.


Until we look at the larger context, we will have some variant, if not as big, on this housing bubble in the future.

Subprime lending sharks now subprime loan fixers

And, with a lot of similar tactics.

“We just changed the script and changed the product we were selling,” said Jack Soussana, who ran the Los Angeles sales office of Federal Loan Modification Law Center.

Oh, and FLMLC hired Soussana precisely because he was such a “good” subprime shark before.

Wunderbar. How many of your new clients will be in a second default in a couple of years? How many will have a new balloon note to replace an old one?

Convert delinquent mortgages to rentals?

That’s the latest housing prop-up fix coming from the Obama Administration. Not totally bad; could be better if at least a partial rent-to-own conversion option were made part of it. Not to let delinquent buyers 100 percent off the hook, of course, but, a “carrot” of some sort, in part to keep them interested in not trashing out what could still become their house some day.

Homes, yes; cars and banks, no

In what might be called the “duh” poll of the day, Gallup finds that the public is OK with bailout help for homeowners, but not elsewhere.

Obama housing plan missing one big item

Nowhere in President Barack Obama’s three-pronged housing-homeowner bailout plan is there any indication his administration plans to even attempt a differentiation between people, especially first-time homeowners, who were buying an actual house for themselves, at the size they needed, versus second-time homeowners buying McMansions, speculative/investment buyers, etc.

Now, tis true, Obama made this claim:

“It will not help speculators who took risky bets on a rising market and bought homes not to live in but to sell,” he said, adding, “And it will not reward folks who bought homes they knew from the beginning they would never be able to afford.”

But, nowhere in the plan is there any indication that, when his administration presents a request to Congress to enact necessarily legislation, he actually wants the power to do that.

And, per Dave Leonhardt, it’s unclear just how much jump-start help this will offer. But, a bigger plan might cost more than it’s worth.

Is Obama in housing industry pocket?

I can't think of why else he would let homebuilders extend the period from which they can write off old losses for a retroactive tax break from two years to five years as part of his stimulus package, especially when some 1,800 union leaders, by petition, opposed a similar Congressional idea last April.
Daniel Gross has more on that at Slate.

If the U.S. Chamber of Commerce is so in favor, that's another reason to be skeptical.

And, in many parts of the country, the housing bubble has yet to be fully lanced, anyway.

Eat a blank check, America!

Treasury Secretary Henry Paulson still can’t tell us the final price tag on the Fannie Mae-Freddie Mac bailout.

Wunderbar.

“It’s the economy, stupid.”

Government takes over Fannie and Freddie

Fannie Mae and Freddie Mac are to go into receivership, it seems.

Per my post earlier today, “It’s the economy, stupid,” took on a whole new level of meaning. Also, in the face of history that Fannie and Freddie knew they were overextending themselves, yet continued to overextend more while paying top execs big money, combined with the Bear Stearns bailout this year, is also going to increase the “help the rich, ignore the poor” claims against the Bush Administration.

That said, Daniel H. Mudd, the chief executive of Fannie Mae, and Richard F. Syron, chief executive of Freddie Mac, reportedly will get the boot as part of the takeover. Of course, BushCo had no choice on that.

And that said, the “It’s the economy, stupid,” just had either an atomic bomb or a hot, steaming pile of crap dropped in the middle of it. Pick your metaphor.

The foreclosure ‘surge’ continues – is Jeff Sessions listening?

Getting less attention from BushCo than David Petraeus’ Iraq surge, the sharp rise in foreclosures indicates this will not be a short or mild recession, no matter how much one (per Kevin Phillips) plays with federal economic analysis numbers.

Year-over-year foreclosures were up 65 percent in April. Almost 1 in 500 homes in the country had a filing in April.

With a House plan to address the home-mortgage situation officially at a standstill in the Senate, this is about to become the proverbial election-year hot potato, courtesy in fair part of Sen. Jeff Sessions of Alabama. Given how poorly his party has just performed in two special elections in the South in the House, you have to wonder if somebody at the RNC isn’t going to get enough political brains to kick him in the pants.

Fannie Mae and Freddie Mac in trouble?

It’s possible. Quite possible.

Even the word “bailout” is on some insiders’ lips.

The two quasi-federal mortgage agencies lost more than $9 bil last year, and some analysts think things could get worse.

Some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

On Tuesday, Fannie Mae reported a loss of $2.2 billion or $2.57 a share in the first quarter compared with a profit of $961 million, or 85 cents a share, in period a year ago. Analyst surveyed by Thomson Financial exepected a loss of 81 cents a share in the latest period.

In other words, Fannie Mae could lose $9 billion by itself this year.

Meanwhile, both Fannie and Freddie are pushing back against any possible new regulation to require a higher reserve percentage backing their mortgages. And their regulator, the Office of Federal Housing Enterprise Oversight, has promised to reduce that reserve backing requirement to 15 percent from 20 percent.

Its director, James B. Lockhart, is bullish, but an anonymous staffer says, “It’s not irrational to be thinking about a bailout.”

Wundebar.

Frankly, I think we should abolish both agencies as a freebie subsidy to the home-building and mortgage-lending industries.

Bernanke – ‘Notable increases’ in unemploymentB

Federal Reserve Chairman Ben Bernanke probably didn’t mean for that cat to slip out of the bag while urging Congress to do more about the housing crunch.

But it did:

The reasons behind surging late payments and foreclosures can vary and that needs to be taken into account when developing solutions, Bernanke said. For instance, parts of New England, states in the Great Lakes, including Minnesota, Michigan and Wisconsin, show increased mortgage delinquencies and “notable increases” in unemployment rates, he said.

So much for Alan Greenspan’s “mild recession,” or whatever the hell he called it. So much for the Bushshit of the day about the economy.
Meanwhile, The Worst Fed Head Since Greenspan™ admitted, in essence, that even he is at a bit of a loss on how to proceed:

“A widespread decline in home prices, by contrast, is a relatively novel phenomenon, and lenders and servicers will have to develop new and flexible strategies to deal with this issue,” Bernanke said.

I wonder how much indigestion this Monday dinner speech at Columbia University is going to wind up giving Wall Street today?

Hold on to your housing reform wallets – and hopes

When people like Treasury Secretary Henry Paulson and former Congressman Rick Lazio are buttering up Barney Frank, the idea of REAL finance industry regulatory reform is starting to set below the horizon.
First, Frank isn’t THAT liberal on financial regulation issues. Go look at his voting record in the 1990s.

Second, Frank is going to miss the boat by not attaching more comprehensive financial services regulation legislation to the housing reform bill. That’s what concerns Paul Krugman, who says the time for real fiscal-system reform is slipping away.

Indeed, we will instead get more Band-Aids, many in the form of dribble-out payouts, and maybe a few stitch-up jobs, but none of the needed serious surgery.

States and communities try to tackle foreclosure fallout

For example Pennsylvania has two special funds to help with mortgage problems, both created last November.

One fund offers refinancing for troubled borrowers who have adjustable-rate loans if they meet certain criteria, including a cap on household income and limits on debt relative to income. These borrowers are offered cheaper, more predictable, 30-year fixed-rate mortgages.

The other fund is more aggressive, purchasing loans outright from lenders and then setting up affordable repayment plans with homeowners. In those cases, the agency works with lenders to reduce the mortgage’s principal, instead of just rescheduling payments or temporarily reducing the interest rate.

Pennsylvania has refinanced 40 loans and negotiated principal reductions for an additional 38 under the two programs since they were adopted in November, said Brian Hudson, executive director of the state's Housing Finance Agency. In most cases, lenders have agreed to cut the principal by 15 to 30 percent.

But, what if a state is already bleeding money? Take California, for example. Gov. Ahhnold got voters to agree to float a statewide bond issue two years ago, to push back dealing with debt the Leaden State was already accumulating at that time. I don’t see any way it could do something like the Pennsylvania model right now.

The story also notes that in a state like California or Florida, where many people under the foreclosure gun are hugely upside down on their mortgages, the Pennsylvania programs really aren’t applicable anyway.

I have another critique. Pennsylvania’s first fund sounds fine, and like it targets people who were the targets of predatory lending. BUT … the second fund sounds like it could also bail out people who bought houses as investments, or bought more house than they needed to keep up with the Joneses, etc. Sorry, but you shouldn’t be getting bailed out.

And, proposals for the federal government to back new state- and community-based bonding programs suffer from the same problem.

The biggest problem with the Senate housing bailout bill?

Besides all the ones mentioned in this and previous stories? There’s no linkage with regulatory reform. Ditto for a somewhat different bill working its way through the House.

Given that what Treasury Secretary Henry Paulson is pushing for is NOT reform of the financial sector, but yet more dereg of the type that got us to where we’re at now, Democrats will either:

A. Be taken for a walk down the primrose path;
B. Willingly be DLC Democrats one more time and avidly sign up for yet another financial deregulation package.

My vote is for a mix, weighted 75-25 to the “B” side.

Economics roundup – lies on unemployment, from Paulson and about housing relief

First, it’s clear the federal unemployment rate doesn’t really measure unemployment:

This month's jobs report is a great example of how misleading the unemployment rate can be. In February, the economy shed 63,000 jobs, which is a strong indication a recession may be at hand. But the unemployment rate actually fell, to 4.8 percent from 4.9 percent.

As most people know, it only counts people actually looking for work. But, that’s not the worst of its pitfalls.

Here, if you work for a temp agency, even if you want a “regular job” instead, you're considered “employed.” In Germany (or it used to be that way, at least), you’re considered “unemployed.” (I don’t know about other European Union members.)

The Nation had an in-depth article on this in the late 1990s. At that time, Manpower was the largest employer in both the U.S. and Germany.

Other “apples and oranges” comparisons problems on U.S. versus E.U. employment stats?

Most European countries have some sort of universal service; whether you’re in the military or in alternative service, you're not counted in employment stats. In America, with the all-volunteer armed forces, you are.

And, the U.S. “War on Drugs” incarcerates many people who likely would be unemployed, plus creates (often low-paying) jobs that don't exist to that degree in most E.U. countries.

Meanwhile, Treasury Secretary Henry Paulson just can’t stop lying. This time, it’s about the definition of “regulation”:

The SEC should also consider streamlining the approval for any securities products common to the marketplace as the agency did in a 1998 rulemaking vis-a-vis certain derivatives securities products. An updated, streamlined, and expedited approval process will allow U.S. securities firms to remain competitive with the over-the-counter markets and international institutions and increase product innovation and investor choice.

Last I checked, “streamlining” wasn’t listed under “tighter regulations” in a financial dictionary. (Except for one paid for by Wall Street.)

And, that’s the problem. Other “regulating” in Paulson’s playbook include loosening Securities and Exchange Commission regulations per the 2000 Commodity Futures Modernization Act.

But, you smarmy Democrats. This was a bill that passed the House under suspension of the rules, requiring a two-thirds vote in exchange for killing off debate. It only had four no votes. (And, don’t forget, this contained the infamous “Enron loophole.”)

And, although nobody wants to break ranks, it appears a fair amount of what Congress is pegging as “housing relief” is also a lie. Sen. Johnny Isakson’s plan to give people who buy foreclosed houses a temporary tax credit sounds like the biggest part of the lie so far:

“Basically, you're giving money to builders that overbuilt and banks that issued bad loans,” said Dean Baker, co-director of the Center for Economic and Policy Research. “It’s giving money to the villains in this story.”

That’s really not the only part of the lie, though:

Economists also questioned how effective it would be to have local governments buy and refurbish foreclosed homes. Advocates of the idea say it would stabilize neighborhoods and protect home values, but the White House said it would benefit lenders most.

“The funding to purchase homes does nothing to help homeowners struggling to make their mortgage payments,” White House spokesman Tony Fratto said.

Well, even a stopped calendar is right once a year.

Somebody in the BushCo financial team actually has a brain

I agree with Treasury Secretary Henry Paulson that a housing bailout would hurt more than help. Here’s why:

“I’m not interested in bailing out investors, lenders and speculators,” he said. “I’m focused on solutions targeted at struggling homeowners who want to keep their homes.”

And, any bailout plan now under discussion simply wouldn’t discriminate between the former and the latter.

Somebody in the BushCo financial team actually has a brain

I agree with Treasury Secretary Henry Paulson that a housing bailout would hurt more than help. Here’s why:

“I’m not interested in bailing out investors, lenders and speculators,” he said. “I’m focused on solutions targeted at struggling homeowners who want to keep their homes.”

And, any bailout plan now under discussion simply wouldn’t discriminate between the former and the latter.

Two more reasons to oppose a housing bailout

First, a lot of help is going to go to buyers of high-priced homes, not those who really need help after being led on by predatory lending practices. The increase in federal jumbo loan backing from $419,000 to $730,000 has two problems. First, it was done with little debate as to exact amount of increase, etc. Second, it, like some of Bush’s stupider tax cuts, is a temporary provision; eventually, without further legislation, the cap will fall back again.

Given the mortgage deduction allowance on taxes, this is a big change in policy.

Second, why should we reward banks and other lenders for their bad behavior? Aren’t we actually encouraging more of it in the future? And, how do you sort out good guys from bad, whether it’s predatory vs. nonpredatory banks, or struggling first-time homebuyers vs. “flippers”?