A couple of years ago I was reading Treasury Secretary, Timothy Geithner’s Wikipedia Bio.(1) I was surprised to read that Mr. Geithner served as a Treasury Department Attaché in the U.S. Embassy in Tokyo, Japan during the early years of what has become known as “Japan’s Lost Decade” (A “Lost Decade” which is now approaching its second decade anniversary).(2)
It’s widely recognized that Japan’s “Lost Decade” was a consequence of the deflation of an asset bubble.* Since reading how Geithner was in a unique position to witness the formation and the consequences of a severe asset bubble, and because I believe he has no doubt followed the efforts of the Japanese Government to stimulate its way out of its economic doldrums, I’ve found Mr. Geithner’s policy positions a little strange.For me, the strangeness of Treasury Secretary Geithner’s policies took on an even more strange dimension this morning.This morning I was watching a video of a May 11, 2009 New Yorker Summit presentation of a conversation between Nassim Taleb, Robert Shiller(3) and Nick Paumgarten. At about 4.5 minutes into the video Robert Shiller describes how, after being on the New York Federal Reserve Bank’s “Academic Advisory Panel” for 14 years, Timothy Geithner ‘fired’ him (presumably for Shillers presentation to the panel on asset bubbles). Shiller’s ‘firing’ took place shortly after the first meeting of the "Academic Advisory Panel" after Geithner’s appointment as President of the New York Fed.* As much as most economists agree on anything, most economist’s attribute Japan’s “Lost Decade” to the [changed] wealth effect and loss of confidence which followed the late 80’s early ‘90’s bursting of the Japanese commercial real estate bubble, which had inflated excessively during the early-to-mid 1980’s.I copied the portion of the longer video in which Professor Shiller describes what he interpreted as being fired by Timothy Geithner. If you are interested, you can see the video clip here:The complete video of the May 11, 2009 New Yorker Summit discussion between Nassim Taleb, Robert Shiller and Nick Paumgarten can be found here:Footnotes:(1) Timothy Geithner - Wikipedia, the free encyclopedia, at: http://www.bing.com/search?setmkt=en-US&q=Timothy+Geithner+Wikipedia(2) Japan’s “Lost Decade” at: http://en.wikipedia.org/wiki/Lost_Decade_(Japan)and Japan announces “new dimension” in quantitative easing wsws.org Saturday 6th April, 2013, at:(3) Robert Shiller is an economics professor at Yale University. He is the author of a book Irrational Exuberance (published in 2000) which describes the role of excessive confidence in the development of economic bubbles. Professor Shiller expressed concern about the stock market bubble before that bubble burst bubble, and he was one of the earliest, if not the earliest, to warn us of the real estate bubble. He is co-developer of the S&P Case-Shiller Real Estate Price Indeces. [see, http://www.irrationalexuberance.com/definition.htm ]
On November 5th 2012 (the day before the election) President Obama spoke to a group in Columbus, Ohio.After hearing an excerpt from the speech I began to wonder if he actually believes what he said, or if he's just rearranging history to suit his goals. I hope you will watch the video at the following hyperlink to its end. I think I ask some relevant questions in the last minute, or so.Economics professors will tell you that one of the best ways to create jobs, and to stimulate an economy, is support home building. (Think of all the trades, products and services that are required to build and furnish a home.)But, I've never heard of any economics professor who advocated a long-term policy of providing loans to people who couldn't afford to repay the loans (However, I think some of what are called "Keynesian Economists" seem to favor such policies over as a short term prescription for economic stimulus.)I’ve come to believe that many of the policies embraced by President Bill Clinton produced great economic results during (and, for awhile after) his administration. But, as those policies and political pressures went to excess, they eventually led to the housing bubble and the financial crisis.It seems, the financial bubble that burst during the last year of George W. Bush's administration was a long time in the making.Just a thought . . . .
Does fewer foreclosure notices being filed mean that the foreclosure process is (temporarily) becoming even slower than it has been in the past? Does it mean that the homes of mortgage borrowers who are “underwater” and have decided to use the ‘strategic default’ strategy are not becoming part of the shadow inventory?(2) Does it mean that borrowers who have fallen on hard economic circumstances are not continuing to squat in the homes they financed with the easy mortgages they were able to get when economic conditions seemed better? Are such borrowers still squatting, biding their time and saving money, until the foreclosure notice comes and the marshal forces them out of the home? Does fewer foreclosures notices being filed mean that defaulted squatters will have even longer to save money (by not paying their mortgages) before the foreclosure notice is filed and marshal forces them to leave the home in which they are squatting?
Is it possible that filing foreclosure notices has slowed because of seasonal factors? Home purchases normally decline significantly over the holidays (during the Thanksgiving and Christmas Holidays and past the New Years Holiday). If you held the mortgage on a defaulted residence would you want that residence vacant for three or four months until the Spring home buying season begins. Is it possible that the large mortgage servicers and investors [like the Government’s GSA’s, large banks and public and private pension plans] are concerned about the public relations ‘fallout’ from continuing foreclosures, at a high rate, during the holiday season? Is it possible that mortgage lenders are delaying foreclosures so they can digest their past losses on foreclosures, and hopefully offset future losses on foreclosures against future investment revenue from other asset classes and from fee income? [Are defaulted, but not yet foreclosed homes, still “the pig in python”? (see note below)]
It seems that filing foreclosure notices is an activity which the holders of the mortgage investment can control, or ‘time’ - depending on a number of factors some of which can benefit them. As, the number and the speed of foreclosure filings varies, watch very closely for changes in the shadow inventory.
1. Foreclosure Filings Fall – But Not in All States By Teresa (Real Estate) at MSN - Pub. October 11, 2012, at: http://realestate.msn.com/blogs/listedblogpost.aspx?post=89cc9dfd-19e4-48c2-b...
2. For a definition of the shadow inventory see the third paragraph of the October 9, 2012 article, CoreLogic Reports Shadow Inventory Continues to Decline in July at: http://www.corelogic.com/about-us/news/corelogic-reports-shadow-inventory-continues-to-decline-in-july-2012.aspx
CoreLogic estimates the current stock of properties in the shadow inventory, also known as pending supply, by calculating the number of properties that are seriously delinquent, in foreclosure and held as real estate owned (REO) by mortgage servicers but not currently listed on multiple listing services (MLSs). Roll rates are the transition rates of loans from one state of performance to the next. Beginning with this report, cure rates are factored in as well to capture the rise in foreclosure timelines and further enhance the accuracy of the shadow inventory analysis. Transition rates of “delinquency to foreclosure” and “foreclosure to REO” are used to identify the currently distressed non-listed properties most likely to become REO properties. Properties that are not yet delinquent but may become delinquent in the future are not included in the estimate of the current shadow inventory. Shadow inventory is typically not included in the official metrics of unsold inventory.
NOTE: The pig in the python, see:
The change to mark-to-market accounting for certain classes of financial assets (GAAP) has been delayed by Financial Accounting Standards Board (FASB) - with pressure from the U.S. Congress and bank lobbyists (see: http://online.wsj.com/article/SB124396078596677535.html). So, the necessity to actually account for these bank assets' true market value is currently suspended.
If a mortgage owner is a bank and the bank forecloses, the process for re-pricing the asset begins. And, the amount of the loss on the asset would then reduce the calculated bank reserves and force the regulators to require the bank to add more reserves. Under present market conditions this would not be a good thing for the bank, or for the U.S. Government. (Under present conditions banks which could not raise more reserve assets would be forced into FDIC receivership). And, if banks actually began to foreclose rapidly on all borrowers-in-default the calls for Government Sponsored Agency (GSA) loan insurance payoffs would further complicate the bail-out of the GSA's. Also, the demand for private mortgage insurance payoffs would put further stress on private mortgage insurers and impose additional stress on the financial system in general (and probably require private insurers to increase their required reserves).
Another reason banks might avoid foreclosing on a borrower-in-default is that judges are becoming a bit cantankerous. Judges have begun to force loan modifications, mandate cram-downs, and in the absence of good physical documentation proving a bank or investor actually owns the loan, some judges have even awarded property to the (supposed) borrower when the loan documentation is missing, flawed or incomplete.
It seems that the rush to originate loans, slice-and-dice loan tranches, construct CMO derivatives, track ownership, and re-register frequently traded CMO's (in the electronic registration system) led some necessary loan details, and even some complete documentation, to "go missing". So banks and investors are beginning to see foreclosure as a risky and potentially expensive option. (see: 10/24/09 NYT article by Gretchen Morgensen titled, "If Lenders Say 'The Dog Ate Your Mortgage' " at> http://www.nytimes.com/2009/10/25/business/economy/25gret.html )
Another subtlety, as long as the bank allows the borrower-in-default to stay in the home the mortgage investor (bank or CMO investor) is not as greatly exposed to losses from theft, vandalism and gross depreciation of real estate value due to non-maintenance of the property.
Also, by not foreclosing on borrowers-in-default the lender avoids becoming the owner of the property and thus avoids direct liability for property taxes, HOA Fees, and some of the more recently imposed municipality assessments levied against investors who now own foreclosed property (see: http://www.dlapiper.com/miami-dade_foreclosure_ordinances/ for another example see mosquito abatement fees in some areas of California - Indio, Palm Springs, Stockton, Mountain House, etc.)
If the "shadow inventory" came to the market all at once demand would be even further overwhelmed by supply causing even more significant price erosion.
It’s logical . . . perhaps corrupt, but logical.
1. See CoreLogic.com at: http://www.corelogic.com/search.aspx?q=shadow+inventory
2. The Case-Shiller S&P Home Price Index is published on the last Tuesday of the month with a two month time lag in reporting for data gathering and data analysis, at: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en...
3. Also see, YouTube video The Impact of The Delay in Implementing FAS#157 at:
4. And, watch the YouTube video The Short Sale Conundrum - Mortgage Servicers’ Misaligned Incentives at:
5. Re: Was the strategy for delaying the pain learned during Japan's 'Lost Decade'? “Geithner worked for Kissinger Associates in Washington for three years and then joined the International Affairs division of the U.S. Treasury Department in 1988. He went on to serve as an attaché at the Embassy of the United States in Tokyo.” From Wikipedia, Timothy Geithner at: http://en.wikipedia.org/wiki/Timothy_Geithner
6. Watch a brief segment of Georgetown Law Professor Adam Levitin's Congressional testimony titled, "Regulators Don't Want to Know" at:
Many people and much of the media are pointing to recent improvements in home prices as a sign that the single family home market is bottoming and starting to recover. It seems to me that an alternative way to look at recent changes in the housing market might be to look at things a bit differently.
How about reading the tea leaves this way:
Several institutional asset managers have convinced investors that buying single family homes ‘in-bulk’ and then renting the houses or flipping them is a good business that will provide better yields than most other investments currently available (in The Bernanke Economy). However, it seems the institutional asset managers that are doing this have ignored that single family home property management and single family home ‘flipping’ are generally not ‘scaleable’ activities. That is, the operational costs of single family property management and single family home 'flipping' are very high, and the activities involved usually cannot reach economies of scale.
Meanwhile, the media is reporting a recovering market in housing. And, some homeowners who have discretion about the timing of selling their homes make a discretionary decision not to list their home and to wait for a better price – because all indications and the media say home prices are rising. This reluctance to list reduces the LISTED inventory, which further creates the appearance of a recovering housing market.
Then, in a few months, the investors in the institutional funds that have purchased homes 'in-bulk' begin to realize the institutional managers are not reaping the expected returns and they begin to cash-out of the institutional home buying funds. This cashing-out forces the institutional funds to sell the homes they bought ‘in bulk’ at the best price they can get.
Many very smart institutional investors have mentioned the operational difficulty and lack of ‘scaleability’ as reasons bulk home buyers may not succeed at single family home property management and / or single family home ‘flipping’.
Private Equity Has Too Much Money to Spend on Homes By John Gittelsohn | pub. Bloomberg News - Jun 12, 2012: http://www.bloomberg.com/news/2012-06-13/private-equity-has-too-much-money-to-spend-on-homes-mortgages.html
Institutional Investors Are Turning to Residential Foreclosures Investing in single-family rental market in its infancy By Arleen Jacobius | Pensions & Investments April 2, 2012: http://www.pionline.com/article/20120402/PRINTSUB/304029978
Insight: The Wall Street Gold Rush in Foreclosed Homes By Matthew Goldstein & Jenneifer Ablan - Forbes Magazine 3/20/2012, at: http://www.reuters.com/article/2012/03/20/us-usa-foreclosures-investors-idUSB...
Investors Flock to Housing Looking to Buy Thousands of Homes in Bulk By Morgan Brennan - Forbes Magazine 4/3/2012, at: http://www.forbes.com/sites/morganbrennan/2012/04/03/investors-flock-to-housing-aspiring-to-own-thousands-of-homes/
Och-Ziff Calls Top Of "REO-To-Rental", And Distressed Housing Demand, With Exit Of Landlord Business Submitted by Tyler Durden on 10/17/2012 http://www.zerohedge.com/news/2012-10-17/och-ziff-calls-top-reo-rental-exit-landlord-business
The Housing Bet Warren Buffett Wishes He Could Make By Steve Shaefer pub. Forbes Markets 3/29/2012: http://www.forbes.com/sites/steveschaefer/2012/03/29/the-housing-bet-warren-buffett-wishes-he-could-make/#
Critics Question Investment Fund’s Sacramento Rental Venture By Hudson Sangree and Philip Reese Sacramento Bee – Monday April 8, 2013 http://www.sacbee.com/2013/04/08/5323832/critics-question-investment-funds.htm
Lower Rates Push Yield Seekers to Higher Risk By A. Gary Shilling – Bloomberg News - Jan 29, 2013, at: http://www.bloomberg.com/news/2013-01-29/lower-rates-push-yield-seekers-to-higher-risk.html
Warren Buffett Says, “Buy Real Estate Now!” at the same time he mentions the problem of “scaleability” see video from CNBC Squawk Box pub. February 27, 2012: https://youtu.be/XOGP6hd0B24
When home prices begin to fall, a natural level of weak support may develop around a loan-to-value ratio of one. That is, when equity in a home approaches zero, the homeowner ought to become reluctant to sell. History suggests any such strategy should prove foolhardy. Trends in housing tend to be long and headstrong, and hence not easily resisted…The development of significantly negative home equity among the same homeowners that also comprise the world’s most voracious consumers would likely trigger several economic problems…banks would become reluctant to lend to home buyers. The effect would be to contract the credit available to would-be homeowners and therefore severely undercut the main late-cycle driver of demand…These problems would compound the worsening domestic employment situation, further reducing demand for residential housing and thereby producing the requisite positive feedback loop that historically has allowed burgeoning asset deflation to accelerate. As the real estate deflation wears on, it would not be unreasonable to expect that unemployment-induced income shocks mix in toxic fashion with the comparatively high mobility tolerance of the United States citizenry, motivating homeowners to start sending their keys to the bank in ever-increasing numbers. Many banks taking possession of increasing amounts of real estate will ultimately fail themselves. A catharsis could then take shape, and home prices would leg down yet again. After much pain both despair and disgust will settle in, and a bottom would begin to form.-Scion 2Q 2003 Letter to Investors
During a December 15, 2010 U.S. House of Representatives Judiciary Committee hearing witnesses gave testimony on issues relating to "Mortgage Servicing and Foreclosure Practices".1
A critical focus of the testimony and discussion was apparent problems with the recordation of land title and note ownership. Witnesses claimed that the Mortgage Electronic Registration System (MERS)2 has failed to reliably record changes in title and note ownership (chain-of-title). The accompanying video-clip is a segment from the C-SPAN video of the hearing:
If you are not familiar with MERS do a key-word-search for more information.
1. see, C-SPAN Video Library, Mortgage Servicing and Foreclosure Practices House of Representatives Judiciary Committee December 15, 2010 at: http://www.c-spanvideo.org/program/297095-1
2. see, Washington Post - October 8, 2010 article titled, Reston Based Company MERS in Middle of Foreclosure Chaos By Brady Dennis and Ariana Eunjun Cha at: http://www.washingtonpost.com/wp-dyn/content/article/2010/10/07/AR2010100702742.html