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 . . . .
Part of the problem lies in changes in mortgage processing over the past few decades. Fannie and Freddie rolled out automated-underwriting systems in the mid-1990s that allowed lenders to punch borrower data into computer systems in order to receive faster approvals or denials.The mortgage bust highlighted weaknesses. Fannie and Freddie did few upfront reviews of loans that they purchased; instead, they screened some of those that went bad, forcing banks to buy back any with obvious signs of negligence or fraud.After the meltdown, the mortgage giants began hiring armies of auditors—called "bounty hunters" by bank executives—to conduct detailed reviews of loan files to spot errors that could justify a put-back.deja vu
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
Many politicians, some federal regulators, and many vocal media commentators claim that the Community Reinvestment Act (CRA) and its regulatory evolution had nothing to do with the creation of the U.S. housing and mortgage bubble. It seems that, at some point in the near future, an objective review of the facts may require a revision of the claim that the CRA was not a significant factor in the creation of the U.S. housing and mortgage bubble.1
The Community Reinvestment Act: Its Evolution and New Challenges*
A speech by Chairman of the U.S. Federal Reserve, Ben S. Bernanke
At the Community Affairs Research Conference, Washington, D.C.
March 30, 2007
From the third paragraph below the heading: The Evolution of The CRA
Even as these developments were occurring, extensive change was taking place in the financial services sector. During the 1980s and 1990s, technological progress significantly improved data collection and information processing, which led to the development and widespread use of credit-scoring models and the availability of generic credit history scores. Deregulation also contributed to the changes in the marketplace. Notably, the lifting of prohibitions against interstate banking was followed by an increased pace of industry consolidation. Also, the preemption of usury laws on home loans created more scope for risk-based pricing of mortgages. Securitization of affordable housing loans expanded, as did the secondary market for those loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a percentage of their activities to meeting affordable housing goals (HUD, 2006). A generally strong economy and lower interest rates also helped improved access to credit by lower-income households.
Comment:Many commenters here have used the term 'Shadow Foreclosures' the proper term is "Shadow Inventory'. Shadow inventory represents the excess supply of housing. Banks and other mortgage investors have been deferring foreclosures (for several reasons) but one primary reason is because they realize if all the inventory was to come to market in any short time period home prices in most markets would plummet (further). It's estimated, by S&P, that the current shadow inventory will take about 45 months 'to clear'.1 A subtlety, hedge funds invest other peoples' money (o.p.m.) and they collect an annual management fee while they wait for their strategy to pay-off. If the strategy pays-off they get a very large incentive bonus (portion of the profits). Hedge funds generally will not allow investors to 'cash-out' for a couple of years after the investor deposits his or her investment (the 'lock-up' period). So, the idea is to sell a very risky or a very volatile strategy, so you can get the management fee while you wait for - and hopefully eventually reap - the huge incentive fees.2What happens when a hedge fund strategy "blows-up"? The manager moves-on to a different strategy, and most likely, a different group of investors. Picking the bottom of any market is a timing issue, by the time these hedge fund "lock-ups" have expired most of the investors will probably start to see signs of life in the housing market and will decide that after a couple years of pain, during the "lock-up", it's probably a good idea to hang-in-there and perhaps enjoy some profit. In my opinion the hedge fund managers in this article are following a contrarian strategy and may be quite early . . . but, it takes time to convince those hedge fund investors to invest.Remember, home prices change at the margin, one-sale-at-a-time, the next sale is based upon comparable sales and an appraisal - and in most cases - the completion of the sale is dependent upon the availability of mortgage financing. Watch unemployment and don't just look at the published numbers for mortgage interest rates, look at the number of new mortgages actually issued. If what used to be a qualified buyer can't buy, the excess inventory will not be absorbed by anybody but investors who want to be landlords. I believe Mr. Mark Hanson (in the article) has the proper current view of the housing market.Footnotes:1. see article, S&P: 45 Months to Clear Shadow Inventory By Kerry Panchuk pub. Housing Wire November 23, 2011 - at: http://www.housingwire.com/2011/11/23/sp-45-months-to-clear-shadow-inventory2. see Introduction pages 1 and 2 to A Balancing Act: Privacy, Regulation, and Innovation in Hedge Funds By Thomas Van De Bogart and Justin Blincoehttp://www.ethicapublishing.com/inconvenientorinvasive/2CH17.pdf
A dubious prosecution but it helps set the record straight.
By Holman W. Jenkins, Jr.
As I read Mr. Jenkins’ article I was impressed by many of his points, but not his conclusion. Then, after some thought, I remembered the article is published in the OPINION section, not in the FACT section.Q. What does CMO stand for? A. Collateralized Mortgage Obligation. What caused the COLLATERAL in CMO to become price inflated?In my opinion, The Housing Bubble and the ensuing financial crisis were caused by several factors which played-out in concert. Political pressure for every person to receive a home loan was one principle cause. The Greenspan Federal Reserve's manipulation of interest rates, and the Fed’s long low interest rate policies, in order to avoid any-and-every anticipated economic slowdown was another. The irrational levels of leverage used by large financial institutions (including Fannie and Freddie) was another factor in the formation of the bubble. The unregulated and irrational use of mortgage derivatives was another contributor (adding another layer of leverage). Serial reductions in mortgage loan qualification standards, the move to low-down payment or no down payment mortgages, and exotic mortgages with deferred payment options, also contributed.1 These were just a few of the ‘moving parts’ which contributed to the home price bubble.Then, when a few people began to look at the home price inflation - late in the bubble - those few people began to analyze the economics of home prices - it became clear to them that the 'house-of-cards' was dependent on infinitely increasing home prices and infinitely available financing for those infinitely higher home prices. That's when the music began to slow-down, and all the dancers began to head for that small exit.2Watch this video-clip in which Warren Buffett tries to explain the dynamics of bubble formation and bubble bursting to the Financial Crisis Inquiry Committee (FCIC) at:Note: Late in the bubble the impending implementation-date for the requirement that banks and other investors use mark-to-market3accounting for valuing ‘infrequently traded assets’ (way back in history mortgage backed securities were infrequently traded) might have also created a more sober attitude toward the volatility and risks involved in holding, leveraging and trading CMO’s 4* On December 16, 2011 The SEC filed lawsuits - charging fraud- against former senior executives of Fannie Mae and Freddie Mac. The filings provide interesting information and evidence which might force retraction and republication of past financial disclosures made by Fannie and Freddie, and which might also force significant revisions to volumes of analysis and statements about the safety and soundness of the two Government Sponsored Enterprises. [See SEC Filings at: http://www.sec.gov/news/press/2011/2011-267.htm ]Footnotes:1. See, SEC filing against former executives of Fannie Mae: page 9 para. 32 “Desktop Underwriter” and page 10 para. 35 “Fast and Easy” and “Clues” at: http://www.sec.gov/litigation/complaints/2011/comp-pr2011-267-fanniemae.pdf2. From, Inside Trillionaires’ Club of BlackRock By Shawn Tulley - Fortune Magazine - pub. August 18, 2009: “In late 2006 the company developed a model that put a lower, more realistic number on the incomes subprime borrowers were claiming on their "no doc" loans. The projections were shocking: BlackRock figured that when the loans reset to their new, higher rates in a couple of years, most borrowers would be spending more than half their real incomes on mortgage payments. Foreseeing an avalanche of defaults, BlackRock dumped subprime bonds in early 2007 when the prices were still lofty.” see complete article at: http://money.cnn.com/2009/08/12/news/companies/blackrock_trillionaires_club.fortune/index.htmand see, Former Countrywide #2 Sees Opportunities in Troubled Mortgages By Matthew Padilla - Orange County Register pub. June 10, 2008 at: http://mortgage.ocregister.com/2008/06/10/former-countrywide-no-2-sees-opportunities-in-troubled-mortgages/ and see, Betting on The Blind Side By Michael Lewis - Vanity Fair – pub. April 10, 2011 at: http://www.vanityfair.com/business/features/2010/04/wall-street-excerpt-2010043. see, FAS #157 at: http://en.wikipedia.org/wiki/Mark-to-market_accounting4. see, Congress Helped Banks Defang Key Rule By Susan Pulliam and Tom McGinty – WSJ, June 3, 2009 at: http://online.wsj.com/article/SB124396078596677535.html ).
See an article announcing the Massachusetts Attorney General’s lawsuit against firms in the mortgage industry.
The Mortgage Electronic Registration System (MERS) which is mentioned in the lead article is based upon a concept and operating model which was proposed to The Mortgage Bankers Association by the GSE’s, Fannie Mae and Freddie Mac, at a Mortgage Bankers Association meeting in the mid-1990’s. The Mortgage Bankers seemed to like the concept, so Fannie and Freddie financed the creation of MERS with a contribution of 2 million dollars each (from Fannie and Freddie). After MERS was created, Fannie and Freddie invited other major mortgage banking entities to join the MERS via an annual subscription arrangement.
The structure and the processes in the MERS system seem to have had some “destined to fail” characteristics which would make an interesting case study of ‘management control and audit procedures’. And, the system also raises some questions about the legality of the system’s processes in the context of common law of land title conveyance. See, “Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory” by Professor Christopher L. Peterson at > http://search.earthlink.net/search?q=Two+Faces%3A+Demystifying+the+Mortgage&area=earthlink-ws&channel=sbt_sgin&abtcgid=219&abtli=1
In late 2010 in a hearing before a Congressional Banking Committee the acting U.S. Controller of The Currency, John Walsh, stated that results from a multi-agency investigation of MERS would be released in early January of 2011. (The investigation was led by The Office of the Controller of The Currency. I never could find the results of that investigation).
A bit off-point, but still interesting, current California Governor, Jerry Brown, was the Attorney General of the State of California from 2007-2011. For much of that same period Jerry Brown’s sister, Kathleen Brown, was a member of the Board-of-Directors of Countrywide Financial [Henry Cisneros former Director of the Department of Housing and Urban Development (HUD), during President Bill Clinton’s first term in office, was also on the board at Countrywide during that time]. Kathleen Brown resigned from that board of directors shortly after information about the depth of Countrywide’s financial problems became public and only weeks before Bank of America acquired Countrywide. A few months later, when Jerry Brown was elected governor of California, Kathleen Brown almost immediately moved her Goldman Sachs municipal finance consulting office from Los Angeles, CA to Chicago, IL ‘to avoid any appearance of conflicts of interest’ with her brother’s gubernatorial administration. (See, “The Tragedy of Countrywide and Angelo Mozilo” at > http://news.muckety.com/2008/06/26/the-tragedy-of-countrywide-financial-and-angelo-mozilo/3712 and see Kathleen Brown's Wikipedia at > http://en.wikipedia.org/wiki/Kathleen_Brown
The other day I was reading an article which mentioned an organization called FM Watch.1 Out of curiosity, I did a key-words-search on: FM Watch. I discovered FM Watch was founded by private mortgage industry interests in the late 1990’s. Apparently, FM Watch was created with defined purpose of focusing attention on anti-competitive and risky mortgage lending practices employed by the Government Sponsored Enterprises, Fannie Mae and Freddie Mac.2 And, it seems FM Watch even anticipated that, if unchecked, the behavior of these Government Sponsored Enterprises would evolve even further into more risky and stronger anti-competitive behavior.3
While I was reading about FM Watch I saw a reference and a hyperlink to a video presentation called “A Crisis of Credit Visualized” it was claimed to be a very good video presentation describing the circumstances involved in the real estate bubble and the mortgage crises. Out of curiosity I went to the link and watched the video presentation. I thought you might also find the presentation interesting.4
I thought “A Crisis of Credit Visualized” was a good presentation of the basic processes in mortgage lending, mortgage securitization and mortgage financing. However, with the exception of the comment about the role of Greenspan era U.S. Federal Reserve interest rate policy, it lacks any discussion about the role of federal housing policy and the Government Sponsored Enterprises (Fannie Mae and Freddie Mac) in the creation and the extension of the housing bubble.
Furthermore, the presentation fails to specifically explain how government subsidized cheap money financing and government subsidized mortgage insurance increased demand and pushed home prices to levels that exceeded borrowers’ ability to repay what they borrowed (to finance their home purchases).
And, the presentation fails to emphasize that, after the bubble peaked, as riskier borrowers defaulted on their mortgages and those homes went on the market, the excess supply of houses and downward cascading home prices caused home values to drop to the point that well qualified borrowers, who could afford their mortgages, began to question the economic wisdom of continuing to pay down their mortgage. These qualified buyers’ decisions not to continue to pay their mortgage contributed further to the excess supply of homes which contributed to the further deterioration of home prices.5
In the viewer comments on “A Crisis of Credit Visualized” I found a comment mentioning the lack of information about how federal housing policy and the behavior of the Government Sponsored Enterprises contributed to the crises of credit. The commenter provided a link to another video titled, Burning Down the House: What Caused Our Economic Crisis?6 I believe that, by watching both “A Crisis of Credit Visualized” and “Burning Down The House: What Caused Our Economic Crisis” one can gain a very clear understanding of the major forces which caused the U.S. economic crisis.
1. Freddie’s Friend Newt By Holman w. Jenkins Jr. Wall Street Journal Opinion/Editorial page November 19, 2011.
2. Is FM Watch a Crusader With an Agenda? By Louis Sichelman – RealtyTimes, pub. 7/5/1999
3. New Alliance Confronts FM Watch, Champions Existing Housing Finance System By Broderick Perkins RealtyTimes, pub.10/5/2000
4. The Crisis of Credit Visualized A video presentation by Jonathon Jarvis published on Vimeo - 3 years ago
5. Many mortgage borrowers think of the home as an investment they will use in later years to fund children’s education, or their own retirement. If these home borrowers begin to believe the investment will end-up being a loss, or can’t be refinanced, their attitude toward continuing to make their mortgage payment changes - significantly. See, Underwater Home: What You Should Do if You Owe More Than Your Home Is Worth? By Professor Brent T. White - pub. 10/15/2010 and/or key-words-search “Strategic Default”.
6. Burning Down The House: What Caused Our Economic Crisis YouTube by TheMouthPeace pub. Sept. 30, 2008