Are you interested in the single family home market?
If so, you might want to watch this interesting February 7, 2013 CNBC “Closing Bell” video in which David Stockman and CNBC’s Diana Olick(1) discuss the factors they say are driving a new bubble in single family home demand and creating a new home pricing bubble.
They also discuss the factors that might cause that bubble to, in Stockman’s words, “splat” and deflate at some point in the near future (1 to 2 years).
Other Resources:
(1) See, “Housing Market Already Shows Signs of a New Bubble” By Diana Olick - CNBC Realty Check - Tuesday February 5, 2013, at:
(2) If the implications of an institutional home buying bubble interest you, you might also want to look at an article that was published on Posterous on September 4, 2012 titled, “The Institutional Home Buying Bubble” at: http://billsplace.posthaven.com/the-institutional-home-buying-bubble
[First draft, January 10, 2010] Recently I've been reading articles documenting the increasing size of "the shadow inventory" of housing. Many articles mention that in addition to foreclosed properties, and REO's, a rapidly growing portion of the shadow inventory is represented by homes for which the home loan is in default, but on which banks are not foreclosing. Many of the articles I've read explain some reasons why banks and other Collateralized Mortgage Obligation (CMO) investors would choose not to foreclose on borrowers-in-default, but none of the articles list all of the reasons I can think of for banks and investors not foreclosing.
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.
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:
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.
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’.
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
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
The shadow inventory and the large inventory of bank ‘Real Estate Owned’ (REO’s) is a phenomenon which I believe has been caused to a significant extent by the decision to delay the implementation of FAS #157 [commonly known as ‘fair value accounting’ or ‘mark-to-market accounting’].
The delay in the implementation of mark-to-market accounting allows mortgage investors to report (on books and records) the value of their mortgage investments at the investment’s origination value rather than requiring these assets be valued at an estimate of current market value. See article, Congress Helped Banks Defang Key Rule By Susan Pulliam & Tom McGinty - pub. Wall Street Journal June 3, 2009 | at:http://online.wsj.com/article_email/SB124396078596677535-lMyQjAxMTIyNDMzMTkzNjEwWj.html?mod=wsj_valettop_email
For further insight into the implications, and one of the likely consequences of the delay of mark-to-market accounting watch a brief video-clip of a portion of Georgetown University Law Professor, Adam Levitin's U.S. Congressional testimony titled, Federal Regulators Don't Want to Know at:
The shadow inventory and bank REO's (not under current listing contracts) represent an historically significant supply of housing which in many ways is not transparent or adequately disclosed, and therefore is not fully-factored into the ‘market's pricing” of homes (supply and demand).
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.
