I noticed Hugh has asked that we slow down on the Frank-Dodd housing bill. I got a press release from Rep. Michele Bachmann stating the bill is "deeply flawed".

"The bill even includes a $35 million dollar slush fund for trial lawyers. And according to the Congressional Budget Office, the bill would help refinance the loans of only 500,000 people – less than 1% of homeowners – at the expense of the 51 million homeowners who pay their loans on time, however much they may be hard-pressed to do so.

"The bill is so broad that homeowners covered could deliberately default on their loans to cash-in on the taxpayer bail-out. In others words, a taxpaying single mother working extra hours to pay her mortgage on time could be asked to help pay the loans of someone who intentionally defaulted.

"Lenders and servicers can game the system as well. The bill invites them to cherry-pick only their worst loans to dump onto American taxpayers – including loans people secured through outright fraud.

Hugh's request that we need more time to look at it would be met by the CBO report on the bill that Rep. Bachmann mentions. They estimate the subsidy at $1.7 billion, or $3400 per household refinanced. That on top of the Heritage report on the bill should be enough to convince most that it's a bad idea.

Unfortunately it passed, and thus gives the banks yet another fillip in return for bad decisionmaking. And, as Dean Baker points out, it is just delaying the needed price adjustment in housing.

For those Minnesota congresspeople who voted for the bill (read, all the Ds plus Rep. Ramstad), ask this: Do you think this money should be used to bail out the Parish Homes development? Are you sure it wouldn't be?

Labels: economics, housing

The Minneapolis Board of Realtors put out today a report on the number of sales they estimate have been either foreclosures or "short sales". It is partially an attempt to get people to understand that the market for traditional sales -- where the owner is selling the house and the bank is a passive party -- has not fallen in prices nearly as fast as suggested in the aggregated data.

Not surprisingly, lender-mediated homes have seen a substantial increase in total market share over the last 24 months. The percent of total new residential listings in the Twin Cities 13-county region that are flagged as foreclosures or short sales using our methodology has shown steady growth, rising from 2.9 percent in Q1 2006 to 7.1 percent in Q1 2007 and 21.7 percent in Q1 2008.

...The actual number of traditional seller new listings has fallen by 27.4 percent over the last two years, with only 19,675 in Q1 of this year compared to 27,116 in Q1 of 2006. So clearly, homeowners are holding steady in their current residences with greater frequency and home builders are producing far less new inventory.

The market share picture is similar for home sales, with foreclosures and short sales comprising a larger portion of overall sales than they have before. In Q1 2008, 27.6 percent of total residential closed sales were mediated by a financial institution, up substantially from the first quarter of the two years prior. And the number of traditional closed sales fell from 8,896 in Q1 2006 to 4,790 in Q1 2008, while the number of bank mediated sales increased from 324 to 1,828 for the same time period comparison.

So people putting homes on the market has fallen, but the number of homes put up by traditional sellers and which sold fell by much, much more. 1828 houses either through foreclosure or through short sales has a very depressing effect on homeowners "holding steady" in their homes. They may be holding, but they're not steady.

More of the short-sale and foreclosed homes are lower-price homes, so if the rate of those homes being put into the market accelerates, the report is right to point out, that makes the value of houses look like it's falling faster than it is. But there may be many more homes out there with people not able to sell, not able to make their payments, and not able to get out of the game. Even if traditional sale prices have only fallen 3.5% over the last two years, that still means a lot of homes with mortgages repricing this year are about to be in big trouble.

Labels: economics, housing, Minneapolis

From this morning's St. Cloud Times,

Local single family home sales were down 4 percent in first quarter 2008 compared with first quarter 2007, according to data released this week by the St. Cloud Area Association of Realtors.

That's a slightly larger drop from last year around this time, when first-quarter home sales decreased 1 percent from first quarter 2006.

Local home sale prices have dropped almost $20,000. The median price of a home was $143,000 in first quarter 2008 compared with $162,650 in first quarter of 2007. And the average number of days a home remains on the market is now 111, according to first quarter 2008 data. That's six days longer than first quarter 2007.

Here's the sales report. Homes were discounted more than $6000 from their listing prices, and 13% fewer homes were listed in the first quarter of 2008 vs first quarter of 2007. It appears the mix of homes sold had something to do with the downturn, as single-family home prices fell 10%, but more condo, townhouse and patio home sales occurred this year than last.

Meanwhile, local gas prices hit a high. It happens every spring, as we change blends for the Clean Air rules, but it's hard to argue with $115 oil.

Labels: economics, housing, St. Cloud

MN Chair in Real Estate Steve Mooney sent me a copy of his report along with the press release that surveys graduates of his program to determine conditions in the real estate industry as discussed earlier. The survey was of 141 graduates, with 42 of them having three or fewer years of experience. Here are a few interesting tables:

Table 1 – How Do You Rate the Market?

2005						2007
	Very Good	Good	Average	Poor			Very Good	Good	Average	Poor
Appraisal	14%	66%	21%	0		Appraisal	0	17%	57%	27%
Development	38%	38%	23%	0		Development	14%	57%	14%	14%
Property Management	29%	57%	10%	0		Property Management	0	38%	54%	8%
Mortgage Banker	3%	84%	13%	0		Mortgage Banker	0	12%	35%	53%
Broker	13%	80%	7%	0		Broker	0	26%	41%	33%
Assessor	7%	57%	36%	0		Assessor	0	0	73%	27%
Res-All	11%	63%	25%	0		Res-All	0	12%	37%	51%
Comm-All	19%	71%	10%	0		Comm-All	1%	23%	52%	21%

That is as telling about the movement in the market as anything we can publish. In particular for mortgage bankers, the market is grim. When asked whether the respondents see themselves in the same business five years from now, here are the percentages who said "yes".

Table 2

	2005	2007
Appraisal	93%	90%
Developer	100%	100%
Prop Mgt	76%	88%
Mortgage Banker	91%	59%
Broker	100%	92%
Assessor	100%	86%

29% of respondents see the market improving in the next 1-3 years and 13% think it will get worse. (The rest believed it would "stabilize" -- at what level? I don't know.)

Labels: economics, housing, SCSU

The housing issue is rearing its head in the presidential and other campaigns. MPR reports on the criticism of the Senate bill (supported by both Minnesota senators.)

The Senate bill is likely to include several provisions aimed at shoring up the weak housing market. Among them are tax credits for buyers of foreclosed homes, along with billions of dollars to refinance problem mortgages and for cities to buy foreclosed properties.

But the bill also provides billions of dollars in tax breaks for businesses. Critics, including Democratic House Speaker Nancy Pelosi, say those tax breaks come at the expense of directly helping homeowners who are in trouble.

Last night we had another blogger conference call with Senator Norm Coleman, and I asked about this criticism. His response was that the tax breaks do help homeowners and that this distinction between direct and indirect help is a false one.

He also points out the issue I raised about that criticism being in conflict with the criticism in the story of there not being enough money for mortgage counseling. As Michelle Malkin has described, the mortgage counselors are often affiliated with left-wing groups like ACORN and La Raza. Coleman defended the idea of counseling; I did not bring up these groups as part of my question, wondering if he was aware of the issue. He made no mention of them. His support of the housing bill pointed to the residential construction industry, which suffered a 14% decline in employment in 2007.

I find no discussion of the mortgage issue on Al Franken's website.

Meanwhile, the Bush administration appears ready to double-down on last summer's FHA insurance expansion.

Under the expanded program, lenders could get FHA insurance for problem loans in exchange for "voluntarily writing down the outstanding mortgage principal," according to the testimony. That would entail the government being responsible for an increasing number of risky loans.

Mr. Montgomery emphasizes in the testimony that "while considering any changes to FHA, we must ensure that the financial solvency of the [FHA] must not be compromised." FHA is a division of the U.S. Department of Housing and Urban Development, which didn't return calls seeking comment.

Under the original program created last year, known as FHASecure, homeowners with high-interest, adjustable-rate mortgages currently can refinance into an FHA-insured mortgage and lower their monthly payments. To date, the administration says it's served 145,000 homeowners in need, and projections show that it will likely reach more than 400,000 by year's end. A temporary expansion of the program would be expected to add significantly to that total.

The plan differs significantly from the Durbin plan, which Coleman criticized for its cram-down provisions in "turning mortgages into junk bonds." (Ed Glaeser writes about how to not use the bankruptcy courts to solve the mortgage crisis.) In the Bush proposal, the lenders are being told if you want the FHA insurance, you have to work out a haircut of the principal, reducing the debt of borrowers. Coleman had not seen the plan yet and had no comment.

States are not missing the opportunity to posture for the voters or the media. In Minnesota, SF 3396, the Subprime Foreclosure Deferment Act continues to work through both houses of the legislature.

"We have a crisis in mortgage foreclosures, and this seemed like the boldest way that we could respond to the problem," said state Sen. Ellen Anderson, a sponsor of a Minnesota bill that would let some borrowers with subprime loans or negative amortization mortgages defer paying a portion of the amount owed, without being considered delinquent. A negative amortization mortgage is one in which the loan balance can grow even if the borrower keeps up with the payments.

I'm troubled by the implication that boldness should be the criterion by which we choose how to resolve debt issues. Seems like boldness got us here.

The Minnesota legislation would require a mortgage lender attempting to foreclose on a home to honor a borrower's request for a 12-month deferment. During that time, the borrower would have to continue paying either the monthly payment due on the loan at the time it was made, or 65% of the monthly payment at the time of default, whichever was less, though the borrower would eventually have to make up the deferred payments. The bill has passed committees in the Minnesota House and Senate, but the governor has said he probably will veto it. [Last] Wednesday, the bill's sponsors sent to the governor a letter suggesting that lawmakers work with him to craft a compromise.

The legislation faces strong industry opposition. "It would significantly erode the confidence lenders and borrowers have about the stability of contracts in Minnesota," said Tom Deutsch, deputy executive director of the American Securitization Forum, an industry group.

Contrary to some opinions, the bill does impose some real costs. The terms of the loan are changed. Who would lend again in a place where bad times means the power of government is shifted onto the depositors of a bank, its employees, and the taxpayers?

One thing is for sure: Housing draws voters' attention, which leads it to draw politicians' attention. The latter should worry you.

Labels: Coleman, economics, housing

I haven't seen the survey yet, but a KNSI news report says it's getting harder for area real estate professionals:

When he asked where they see themselves in five years. 59 percent of mortgage bankers say they would stay in their field, compared to 91 percent in 2005. In 2005, 100 percent of assessors said they would keep the same career, compared to 86 percent last year.

Professor of finance, insurance and real estate Steven Mooney says professionals are not expecting an improvement in the next three years. Most are rating the market as “poor to average”. A big contrast to just two years ago; not a single respondent described the market as “poor”.

The only thing I find really striking about that is the degree to which opinion seems to move in a herd-like fashion.

I'll drop Steve a note and ask if I can see the survey.

Labels: economics, housing

Good news: $4.3 million coming to Minnesota to help with the mortgage crisis. As this cool dynamic map will show you, the problem in Minnesota is worse than almost any other state in the union. (Coolest of all, it will give you data by zip code!)

Bad news: The money goes for additional "mortgage counselors". Tell me who is in a bad mortgage right now that is just waiting to work out their problems but frustrated by a busy signal?

Instead, it will be Marquette Bank that gives out some bridge money for borrowers who need some cash to get through a work-out of their loans.

It would be interesting to watch political reaction to Holman Jenkins idea of supporting house prices by reducing supply. Would Marquette get praise for funding demolition teams?

Knocking down surplus homes would be the most efficient and equitable way to spend taxpayer dollars. It can proceed experimentally. It can be turned off quickly when the need evaporates. It would not be a lesson to Americans that housing debt is not real debt and need not be repaid. It wouldn't benefit the most irresponsible lenders and borrowers at the expense of responsible ones. The housing market would still have to hit bottom, but the bottom would be higher (and sooner).

I'm not advocating that as the best plan, but it's the most interesting paragraph I read today.

UPDATE: Captain Ed gets it. I'm reminded of all the criticism of US aid to developing economies being mostly about hiring U.S. consultants to offer advice rather than giving money to the poor in those countries. (And yes, I say that as having been one of those consultants.)

Labels: economics, housing

A bill sponsored in the Minnesota Senate by Ellen Anderson (companion in the House sponsored by Jim Davnie) would give an option out for owners of homes financed by subprime or negative amortization mortgages. They get to stay in their houses for a year. The bill appears to impose a moratorium on foreclosures for a year. Homeowners would have to make the monthly payment they were required to make when the mortgage was originated.

Seems everyone has an idea what to do about the mortgage crisis. Federal Reserve Bank of Boston president Eric Rosengren touted a shared appreciation model where banks take a haircut on the principal of the loan but in return get a stake in any price appreciation from that point forward. I'm not so sure that giving banks a piece of a declining asset is such a good deal when what banks need to do is deleverage, but it doesn't appear anyone in a policy position is prepared to say interfering in mortgage contracts is bad policy.

So leave it instead to Steve Landsburg, who points out that those homes in the hands of people who cannot afford them without a subsidy (and will it really be paid ONLY by the banks?) keeps these houses out of the hands of someone who might benefit from it:

I predict with great confidence that when I say that foreclosures create new homeowners, a sizable chunk of my readers will scoff that "the people who can afford them would have been able to afford nice homes anyway." I could use economics to explain why those readers are mistaken (a glut of homes on the market leads to falling prices, etc.), but that's unnecessarily complicated. All it takes is the simple observation that there cannot be more homeowners than there are homes, and if one home becomes vacant, then there can be one new homeowner. Call it the law of conservation of homes.

That's one reason to temper your distress over strangers suffering foreclosure. Here's another: If you get to live in a nice home for a few years and then lose it to foreclosure, you are not worse off than someone who never got to live in a nice home in the first place. If the Treasury Department is looking for ways to help people, it would be nice to focus on the people who are most in need of help.

Losing your house is painful. Never having anything to lose is even more painful. How do the feds justify spending money—and, rest assured, any program to stop foreclosures will cost money—to help struggling homeowners instead of, say, the struggling homeless? Or, for that matter, a child starving in Africa? There is room for a lot of legitimate debate about how much we should be taxed to help the less fortunate. But whatever level of assistance we agree on, I'd like to see it targeted to those who genuinely are less fortunate.

There's at least one more reason to regret Secretary Paulson's eagerness to forestall foreclosures: If banks can't enforce contracts (or even if they "voluntarily" forgo the enforcement of contracts under pressure from the Treasury Department), they will undoubtedly be more reluctant to make loans in the future. Rest assured that somewhere out there—invisible to you and me but nonetheless real—is a young couple who, thanks to this intervention, won't be able to get the mortgage they want next year.

I predict with equal confidence that a sizable chunk of readers will attribute my observations to a failure of compassion. But which is more compassionate: to care about the fortunes of the people who happen to be in your field of vision or also to include those whom you cannot see? The homeless are out there. The starving children in Africa are out there. The would-be new homeowners are out there. Each of them, in different ways, stands to gain or to lose from the policy choices we make.

Here's one example of a homeowner-to-be MOBster who is getting her family's house from a bank. The bank got the property via foreclosure.

We don’t want to take advantage of people and rip them off, but we also want the market to dictate our housing price. We’ve been watching prices… we had an area in mind, what people around here call “south of the river.” Our hope was in an area that is still developing, we would find some better prices. It seems to be the case...

They are a couple who will have their first baby in less than four months (she is a former student of mine.) The Anderson-Davnie bill chooses to help current homeowners at the expense of Liz and Josh. I'm not saying one is more valuable than the other, but the question is, who do you want to decide who gets the house? I'm certain they could have afforded a house at the higher prices of three years ago, but it would be a smaller house, in some other, less desirable area. This bill would influence the decision of where the Lizes and Joshes of the world live too.

Labels: economics, housing, Minnesota

The Joint Economic Committee's Democratic membership has released a report on the impact of the subprime mortgage crisis on property values and property tax revenues. This morning's press release includes this statement from our own Sen. Klobuchar.

“In the world of subprime lending, the chickens have come home to roost,” said Klobuchar. “If we are to contain the economic spillover effect of the subprime lending disaster, we must act now.”

They claim over $100 billion in lost home value and, not to be ignored, almost a billion dollars in property tax revenue.

Yet while claiming they are using conservative estimates, the report itself contains this paragraph on page 12:

The effects of larger price declines could considerably increase the magnitude of these damages. For example, Moody’s forecasts that, in the aggregate, housing prices will decline by about 6.9 percent between Q3 2007 and Q2 2009 and rise mildly thereafter. If we instead assume that the aggregate price decline is 20 percent over that period, the total number of foreclosures for the period 2007 to 2009 would be nearly 2 million and the loss of property values would total about $106 billion.

That is indeed what they go for, and as a result for Minnesota's estimated 121,000 subprime mortgages, 28,000 will end up in foreclosure, and the repricing of those homes and the homes near them will lead to a $14 million loss in local property tax revenue.

Of course federal government officials have been peddling solutions like it was soda pop. Klobuchar and other Democrats on the JEC have been pushing for increasing the repurchase of mortgages by Fannie Mae and Freddie Mac, changing bankruptcy laws and attacking "predatory lending practices". Norm Coleman has proposed allowing borrowers to tap tax-free accounts without penalty to refinance. But if you think prices are going to drop 20% as the JEC report projects -- and given the sales of existing homes, I wouldn't say that is an impossible outcome -- it's not clear any of these are good solutions -- the Democrat plan puts the taxpayers on the hook, while the Coleman plan has the borrower bear the cost and sacrifice some of his or her retirement funds to help let the banks off the hook.

So here's your quiz: How much in local (county, municipal, school) property tax is paid in Minnesota? I'll put the answer in comments after you put your guesses there. Or you can Google it if you like. Then ask yourself -- how horrible would a $14 million hit be? And how likely will it be that local officials will cry panic over the number at any rate and rail louder than ever for property tax relief from the state next spring?

Labels: economics, housing, taxes

Alex Pollock tries to do so in yesterday's Financial Times:

But the real confusion derives from the fact that "liquidity" is a misleading metaphor. This metaphor suggests that there is some "flowing" substance, which could be a "flood", could "slosh around", or could be "pumped" somewhere. But if liquidity were substantive, there could not have been plenty of it a few weeks ago and a shortage now.

...[L]iquidity is about group belief in the solvency of counterparties and the reliability of prices, reminding us that "credit" and "credo" have the same root. When no one is sure who is broke, and there is high uncertainty about prices, we will discover that liquidity has vanished, however plentiful it may recently have seemed.

I use a graph in my money and banking course in discussing the theory of asset demand, reproduced at left. I can sell my house right now ... for $1000. If I wait until tomorrow, a sign offering it for $5000 might find a buyer. If I want to find a buyer for what we might call "fair price", on the other hand, I have to wait a while for someone to find it, prove its value to someone else who will lend the money, and draw up contracts to complete the transaction. Liquidity, in short, is a function of time, and this is how I've drawn the graph.

The point here is that in the world Pollock describes, liquidity simply means it takes longer to find the buyers willing and able to purchase an asset, and this drives down the price of all assets, not just the ones that are more risky. My house isn't any less a good now than it was two months ago -- it still produces the same level of household services -- but if I wish to sell it within 90 days of listing it, I would have to offer it for less money than I would have then even if there are no more houses on the market now than two months ago.

This is why temporary injections of credit by a central bank can help; they may increase the number of buyers who can purchase assets in a normal amount of time by decreasing the number of lenders they would need to visit to obtain funds.

Labels: economics, housing

Yves Smith (filling in for Felix Salmon) has an excellent post on how sometimes sensible people are arriving at nonsensical solutions to the subprime/credit crunch. The takeaway:

[T]he prospect of a 10% to 15% fall in house prices is being treated as if it would constitute the end of the world. Yet as we pointed out, quite a few economies have endured 25% or more housing price falls. They did not go into an economic black hole. They had short bad recessions.

The fear of recession in this country has gotten so bad that the Economist ran a story this week arguing that America needs a recession. I have no doubt they did that mainly to be provocative, but the horrified reactions from some quarters proves the point. This fear of recessions, and tendency to paint a recession in the dark colors of a depression, is dangerous and distorts policy decisions.

Fear of a recession is leading some to argue that we need to throw money at this problem, in the many variety of ways Smith elucidates. Fortune itself has an article in which Jerry Useem is calling for Washington to take on "the scarier role of leader" to avoid a panic, predicting dire consequences if we do not do something about.

a nebulous concern about income disparities, assets obtained with easy credit, the use of novel financial instruments that seep into the mainstream, and above all, the lack of what Henry James called the "imagination of disaster."

Yet that has been just what has been done: The Fed has acted in as close to a Bagehot-ine fashion as possible without yet firing all the bullets in its holster. It has certainly given the impression that it will use those bullets if needed. It has gone so far as to let banks borrow against sound collateral to finance their brokerage affiliates; some see this as a bad sign for the commercial paper market, but it does demonstrate that there has already been a robust response from Washington.

Fiscal solutions do what John Palmer fears: When you shield losers from losses while letting winners keep their gains, you encourage a greater-than-optimal amount of risktaking. Be it own to rent (helping borrowers) or expanding Fannie and Freddie into jumbos to help lenders as Larry Summers supports, or some other bailout like that Bill Gross suggests. In each case you are encouraging people with little financial cushion to purchase highly-leveraged assets.

Mark Thoma argues that heads do not need to roll to prevent this from happening again because it will happen again, and it does without anyone necessarily committing fraud. (Those who do, we agree, should be punished according to law.) Yet it is in the interest of a well-functioning market that people understand we live in a profit-and-loss system, and that those who do not appropriately treat and take precaution for the risk of their investments will not use scarce resources that could have gone to other, potentially more valuable investments. That is, a way to view this crisis is as an overinvestment in housing. While we may not be able to prevent overinvestment, that's no reason to encourage it.

Labels: economics, housing

Let's start with better news. The discount window strategy of the Fed might be working.

U.S. banking giants Citigroup Inc., J.P. Morgan Chase, Bank of America and Wachovia Corp. said on Wednesday that they borrowed $2 billion from the Federal Reserve as part of a new program set up last week to pump cash into the creaking financial system.

Citibank, a unit of Citigroup, said it took out a $500 million, 30-day loan from the New York Fed's discount window program for its clients. The company didn't identify those clients.

"Citibank stands ready to continue to access the discount window as client needs and market conditions warrant," the bank said in a statement. "Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients.

Using the banks as go-betweens for paper that mortgage companies and hedge funds need to use is part of the strategy. The banks may be better judges of the paper's value than Fed officials. There's no doubt this jawboning, as Bill Polley calls it, is working with those banks. I'm reminded of the Knickerbocker crisis of 1907, when NYC banks did act as a lender of last resort before there was a Fed. (See Tallman and Moen for more.)

There are stories all over of mortgage bank units being closed.

• Lehman
• First Magnus
• Accredited Home Lending
• Greenpoint
  

I don't see any stories of people jumping from windows (though an abandoned Maserati of some hedge fund official is rather humorous.) I am not necessarily calling this bad news; it's part of what has to happen when some people take risks that go sour.

It may be that they took more risks than we realized, if this story from Barry Ritholz bears out.

What happens if a lender fails to comply with the TILA [Truth in Lending Act] rules? The borrowers are allowed to RESCIND THE LOANS AND VOID THE MORTGAGES ON THEIR HOMES. The mortgage lender is then just another unsecured creditor, who must get in line behind everyone else who may have filed a lien on the property. Who ever files first (Credit card, auto finance, doctors, etc.) has first priority.

It's not clear to me whether judges are going to allow borrowers to get out of the first liens on their homes by this, but it doesn't sound entirely implausible. This could be part of that information problem we've discussed -- the collateral the lenders think they have might not be good.

Here's the one that will have to go down as bad news:

The number of troubled assets among federally regulated thrifts rose rose 49% in the second quarter from 12 months before to the highest level since the savings and loan crisis, the Office of Thrift Supervision reported Tuesday.

The agency also reported that the number of "problem thrifts," or companies rated poorly by regulatory standards, had risen to 10, up from just 4 in the second quarter of 2006.

Thrifts are federally regulated banks that originate one out of every four mortgages. The companies largely originate prime or jumbo loans, so their stressed loan portfolios suggest that more loan types - not just subprime mortgages - are under pressure.

The thrift industry had $14.2 billion in troubled loans, which are either noncurrent loans or repossessed assets, the OTS said. That's up from $9.5 billion in the second quarter of 2006. This is the highest level of troubled assets since 1993, though as a percentage of total assets its only the highest level since 1997. Noncurrent loans include mortgage delinquencies, which have grown precipitously as the adjustable-rate mortgages that were very popular during the recent housing boom reset into much higher monthly commitments.

"This is what is keeping us as regulators up at night," James Caton, director of financial monitoring and analysis, said at a press briefing to discuss the data.

The OTS attributed the growth in noncurrent loans to two business lines - one-to-four family mortgages and construction and land loans. For one-to-four family mortgages, 1.26% were considered noncurrent as of June 30, up from 0.78% on June 30, 2006.

For construction and land loans, 1.61% were noncurrent at the end of June, compared with 0.47% on June 30, 2006. Troubled loan levels are expected to continue rising in the third quarter, OTS senior deputy director Scott Polakoff said.

I think this is as much a symptom of the bursting of the housing bubble as it is the fault of subprimes. (h/t: Calculated Risk.)

Of course the most worrying thing: Congress wants to get involved and do more for borrowers.

Sen. Charles Schumer (D., N.Y.) is pushing federal regulators to raise portfolio caps at Fannie Mae and Freddie Mac and ask banks to help with workouts for borrowers hit by the mortgage lending meltdown.

“The Federal Reserve Bank has taken good steps to restore liquidity to the financial system, but there is still much more that needs to be done to address the risks that we face to our broader economy caused by the ongoing turmoil in the mortgage market,” Schumer wrote in a letter to federal regulators.

Schumer, a member of the Senate Banking, Housing and Urban Affairs committee, asked Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and other federal regulators to get behind a plan to provide $100 million to not-for-profit housing groups to help borrowers refinance their subprime loans, spokesman Brian Fallon said. Fallon said that 20% to 40% of borrowers hit in the subprime lending crisis should have qualified for prime-rate loans.

To see why that probably won't help, read the post just below this.

Labels: economics, housing

Chad the Elder has posted an excerpt from Holman Jenkins' editorial in today's Wall Street Journal (link for subscribers only.) Go read Chad's excerpt first please, then return.

OK. Now recall a quote I posted here:

When you buy a house you are doing two things: 1) paying rent to yourself instead of someone else (and forgoing the opportunity for someone else to pay that rent to you), and 2) taking a long position in the asset class that is real estate in your local area. The type of mortgage you take out has no bearing on the rent you are "saving" (or forgoing) but it has everything to do with how levered your long position is in the asset class that is real estate. While the details of ARMs, neg-am mortgages, NINJA loans, no-money down deposits etc. are complex, essentially they all add leverage to that position. This is fine when prices are rising, but it also means you will lose all of your money (equity) when prices fall. Historically, home prices have never fallen, but they have never had such leveraged financing either.

Dean Baker (with an approving nod from Andrew Samwick, from whom I got the link) has been pushing the idea of a repurchase agreement between the holders of subprime mortgages, who are in their homes but can't afford the higher payments. In short, the lender gets back the house in a foreclosure but then rents the house to the former borrower at "fair market rent", to be determined by a government entity, perhaps a judge, and adjusted as market conditions change. The now-renter "could then remain in their home as a renter for as long as they liked," and the now-owner-former-lender "the mortgage holder would now own the house and be free to sell it to another person, but the former homeowner would still have the right to remain as a renter, regardless of who owned the house."

I think this is a bad proposal for two reasons. First, it assumes in some way that you can shift the risk of house prices from the borrower to the lender costlessly. But the process of giving the renter a usufructuary right to the home removes value from the house -- the collateral is damaged by not having the ability to sell to other potential buyers the right to use (or bulldoze) the house. Let me put it this way: If I'm auditing a bank who holds a house under this arrangement, can I use the price of houses in the area not under this arrangement as comparables for setting the value of the asset? I think not. And the bank itself has the same problem. The whole subprime problem in the market has been based on not knowing how to value assets -- this does nothing to solve the information problem. A house that had this put option on it, in short, is going to cost more because the bank knows it bears an extra risk. Hello red-lining.

Second, there appears a moral hazard problem in the housing market by these owners. If prices go up, I can keep the house and pocket gains. If prices go down, I lose the ownership claim on the house but continue to enjoy its services. Does this encourage or discourage risktaking by those least able to afford it? True, they are protected against loss, and they end up with a house they can continue to use. But they lose that extra incentive to maintain the house (not unlike affordable housing.) As the WSJ points out, these schemes have had a poor track record in helping upwardly mobile families get a leg up. Encouraging them to stay in homes they no longer own is hardly going to help.

Labels: economics, housing

I'm watching for any further evidence of Federal Reserve intervention in the markets. So far the only transaction was for $2 billion in overnight loans, a fairly normal event size for a Monday and some indication that calm has restored. The European Central Bank is in for another $65 billion, about half the intervention level last week. Markets appear to be normal as well.

That's for today. Longer term, there's still the real estate market and the consumer more generally to worry about. James Picerno looks at today's retail sales data, which may be sold in the press as more positive than it really is.

Judging by the [declining] trend in retail sales, one is tempted to extrapolate the past into the future. All the more so, given the fallout in the mortgage market of late. It's not yet clear if this fallout will spill over, if ever, into the general psyche of consumer spending, but at this point we'd be foolish to dismiss the notion entirely.

And this from today's New York Times doesn't help: The housing market decline is spreading to places you wouldn't think, like Stockton.

The deadening market for houses has only worsened problems for people like Alma Neri, a mother of three boys who bought a modest house in Stockton in 2002 for $223,000. Three years later, Ms. Neri and her husband, Juan, found an even better house — three bedrooms, two and a half bathrooms, a two-car garage — around the corner. The plan was to sell the old house to pay off its mortgage, and live out their days in their dream home.

But now, both of the Neris’ houses are languishing on the market, and the debt from two mortgages — and an equity loan they took to remodel the new house — is piling up.

“We made bad decisions,” said Ms. Neri, 30, who commutes to her job as a contractor in Pleasanton, about 50 miles to the west. “We’re worried if we don’t sell by the end of the year, we will lose one of them. We just didn’t see the downturn coming.”

It is tempting to call the Neris speculators and allow them to suffer the losses they risked when they bought the second house. Some people will make this into a political issue instead, using other people's money to make the Neris whole.

UPDATE: Two pieces of background:

• Subprime 'crisis' FAQ by Steven Ceccheti
• The WSJ primer on open market operations

Labels: economics, housing, Minnesota, politics