Notorious R.O.B.

A couple of weeks ago, I wrote that if you have a REO or short sale practice, you want to pay attention to some legal cases going on around the country:

Trouble is, MERS might lack legal standing to bring a foreclosure action. At least, that’s what the attorneys for the homeowners who are getting foreclosed are claiming.

Given that so many mortgages were packaged into securitization pools (RMBS), sliced and diced, with different investors taking a different piece of a few hundred thousand pooled mortgages… it really isn’t clear who actually owns the mortgage, and has the right to enforce its terms by foreclosure (or have its duly authorized agent/servicer do it).

I noted then that this seemingly esoteric legal issue is a thermonuclear landmine for the entire foreclosure and short sale industry, including real estate agents who represent buyers and lenders.

Well, Congress has been holding hearings on problems in the foreclosure industry. I haven’t seen too many media coverage of the hearings. This blogpost on Washington Post is one of the few I could find. I just spent valuable two hours of my life watching CSPAN video of the hearing on December 15, 2010, which is embedded above.

This topic is just too big, even for my lengthy posts. But if you have anything to do with foreclosures, REO’s, and short sales… I would suggest you spend some time looking at this issue.

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Your future tax dollars at work?

In my earlier post on the New Normal in real estate, a commenter took issue with my predictions about the future of the 30-year fixed rate mortgage (among other claims).  I thought I would expand on that aspect a bit.

The specific mechanism that I think will be put in place is a change in the mission of Fannie Mae and Freddie Mac (possibly other housing-related agencies, such as FHA, VA, and the state/local housing authorities).  I expect that Fannie/Freddie will actually become fully government-chartered entities (as NAR suggests) rather than this weird government-sponsored private companies that provide private rewards at public risk.  As a GCE, rather than a GSE, F&F will no longer have profit as its raison d’etre, but the promotion of public policy.

In this case, that public policy is to encourage the development of affordable rental properties across the low and middle-income spectrum, thereby reserving homeownership for the (relatively) wealthy who pose far less credit risk to lenders.

That, to me, spells the end of the 30-year fixed rate mortgage.

Allow me to step you through the argument for why this is likely to happen.  (Which is not to say I want this to happen, of course.)

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James Pethokoukis writes on Reuters today (h/t: Instapundit) that the Obama Administration may be planning to eliminate many/most/all underwater mortgages in a single swoop:

Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. (Emphasis mine)

If this does come to pass, the mind simply boggles at the thought.

The underwater mortgages would become Federal government debt practically overnight.  It might be time to think about not paying your mortgage….

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Bringing you a giant cornucopia of helpful changes!

My friend Matthew Shadbolt alerted me to this editorial by Ken Harney, a columnist for the Washington Post, that was published on The Real Deal.  Harney believes that the not-yet-fully-formed Consumer Financial Protection Bureau can’t get here fast enough, and that the days of wine and roses will soon dawn upon us:

The financial reform bill signed into law by President Obama may look like a giant cornucopia of helpful changes for homebuyers and loan applicants — not the least of which will be the creation of a powerful Consumer Financial Protection Bureau to ride herd on the mortgage lending industry.

Well, forgive the snark, but… a giant cornucopia of helpful changes for homebuyers and loan applicants?Really?

Let’s see what the wondrous benefits of a $500m federal agency we’re about to receive are.

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In part 1, I laid out some hints of what the Obama Administration has in mind for a new federal housing policy that would “reset the rules of the market” and engage in a “fundamental rethink” not just of the mechanics of housing finance, but of the objectives of housing policy themselves.  The Treasury now has all of the comments that it requested from the public and we can expect to see a proposal from the Administration sometime this fall or early next year.

In this post, I’d like to engage in the purest conjectures about what such a policy might look like.  I know that assumptions are dangerous, and any conjecture at this early stage is more likely to be wrong than right, but… hey, this is fun.  (If you’re a real estate and politics geek like me anyhow.)  So here we go.

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1906 San Francisco earthquake

There was, apparently, an earthquake in Washington DC not too long ago.  Thankfully, no one was hurt, and no serious property damage occurred as the 3.6 magnitude tremor rolled through.  Mere days later, however, I learned that another tremor — this one not registered on any geological survey — centered around Washington DC occurred.  From the Washington Post:

Responding to the collapse in home prices and the huge number of foreclosures, the Obama administration is pursuing an overhaul of government policy that could diverge from the emphasis on homeownership embraced by former administrations.

“In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” said Raphael Bostic, a senior official in the Department of Housing and Urban Development. “You’re not going to hear us say that.”

While this particular tremor hasn’t developed yet into anything earth-shattering just yet, and there are absolutely no details available just yet, for anyone even remotely connected to the real estate industry, these statements amount to a tectonic shift of realignment.

What rough beast, its hour come around at last, slouches towards DC to be born?

Conjectures follow.

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Ah, Spring… a time when a young man’s fancy lightly turns to thoughts of love… and respected real estate market analysts voice cautious optimism…

For example, here’s Lawrence Yun of NAR voicing cautious optimism:

Yun expects a slightly stronger demand for housing and a fairly even level of foreclosures entering the inventory pipeline before easing in 2011. “We expect distressed home sales to account for 30 to 40 percent of transactions for the remainder of this year,” he said.

And here’s Mark Zandi, Chief Economist of Moody’s, doing the same:

Zandi also forecasts improving demand for housing, but with foreclosures rising later in 2010 before easing in 2011. He said home prices may weaken this year. “The housing crash is over—nearly. We are now near the bottom,” he said. “There will be no real price growth in 2010 or 2011. Whether home prices weaken is unclear, but it will take two more years to work off excess housing inventory at the current sales pace. Of course, if demand picks up, it would take less time for prices to rise,” he said.

Then there is David Crowe, Chief Economist for NAHB:

“Home buyer tax credits clearly did their job and got people back into the marketplace,” said NAHB Chief Economist David Crowe, who also served as moderator of the two-hour webinar.

With the expiration of the tax credits in April, Crowe said the housing momentum is being carried forward by low interest rates, pent up household formations, stabilizing prices and budding employment growth.

Freddie Mac is almost bubbly (PDF):

The reason to expect this relatively benign outcome is that, despite short-term swings in sales activity, the underlying fundamentals for housing markets are steadily improving. The job market report for April showed a rise in nonfarm payrolls of 290,000, the largest new hiring in four years. While temporary Census workers accounted for 66,000 jobs, private payrolls posted a respectable gain of 231,000. The other “headline” figure in the report—the unemployment rate—gave a head fake by rising two tenths, to 9.9 percent. Somewhat paradoxically, this was due to improved labor market conditions, which attracted over 800,000 job seekers back into the labor force. A broader measure of employment that is not affected by changes in labor force participation, the employment-to-population ratio, rose two tenths of a percent. Overall, labor market trends are looking much better than a few months ago. More robust job growth and the incomes this will bring should directly contribute to the housing market recovery, and will likely also have further indirect effects by boosting household confidence.

And we have very encouraging data from the Commerce Department, Fannie Mae, and others.

So why do I feel an unnamed dread going up my spine?  Is it just some sort of Eeyore-itis?  Perhaps, vampire-like, when the sun is shining and the birds are singing, I have to retreat to the chill of the grave.  Yeah, I probably need more Vitamin D….

Nonetheless, I have a bad feeling about the housing market, because of data that economists rarely look at.  That probably makes them right and me wrong (and boy, I’d love to be wrong on this), but hey, this is a blog, so… what the hell.

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Back in the day, I used to read the New York Times religiously.  I mean, I lived in New York City, was young, and was making a lot of money.  It’s what you do.  It’s kinda like going to church on Sunday if you were a Puritan in the Massachusetts Bay Colony, or doing the Starbucks run for an enormous segment of the urban yuppie population.

Then I realized that the editrix of the Old Gray Lady typically had no f’in clue about what they were writing about with such authoritative gravitas.  And nowhere is this more apparent than in the official Editorial section, the one written under the Times’ own byline.

We see this once again today in their editorial about Fannie Mae and Freddie Mac in which the Times Editors calls for a quick government rescue of  the two beleaguered  companies.  The editors write:

Unfortunately, support for swift passage is mixed from one important quarter: Mr. Paulson’s boss, President Bush.

On Monday, the White House renewed its threat to veto the foreclosure prevention bill if it contains a $4 billion block grant program for states to buy up foreclosed properties. The veto threat is misguided, first, on policy grounds. Mr. Bush wrongly portrays the grant as a handout to speculators when its main thrust actually is to protect communities from a destabilizing buildup of abandoned, unsold homes.

Ah, yes, well… so the Times hates Bush.  This is news?

What is news is the Times’ claim that the $4B block grant program will not be a handout to speculators.  Here is a situation where the Times confuses intent with impact.  The intent of the $4B handout may be to “protect communities” but the impact is to payoff speculators who took on financial burdens that they could not handle.

Where does the Times get the confidence to assert that the $4B will not end up in the hands of speculators?  What data or research can they point to to back up such a claim?  Oh that’s right — none.

Meanwhile, there are numerous other ways for communities to protect themselves from destabilizing buildup of abandoned homes.  Here’s just one suggestion.

Furthermore, there’s this laughable passage:

The veto threat also is a bad idea politically. Mr. Bush has not objected when the big firms and rich executives of Wall Street have been on the receiving end of federal assistance, but now he is threatening to block a measure to aid hard-hit neighborhoods filled with ordinary Americans.

Uh… dear Pinch & Gang… even with the bad financial news that probably means Fannie is bankrupt… it’s still a $15B company.  It’s hard to get any bigger, and it’s hard to be a richer executive than the boys and girls at Fannie and Freddie.  So.. WTF are you talking about?  A Fannie/Freddie rescue would absolutely be corporate welfare at its finest, justified by some mumbo-jumbo about stabilizing the market, or some such.  Those were the same arguments offered up when the government arranged for a bailout of Bear Stearns or Long Term Capital.  It’s the exact same thing.

Furthermore, the reporters of the New York Times itself are saying, “We have no idea what this bailout will cost us“:

The proposed government rescue of the nation’s two mortgage finance giants should appear on the federal budget as a $25 billion expense, the independent Congressional Budget Office said on Tuesday, but officials conceded that there was no way to really know what, if anything, a bailout might cost taxpayers.

Do the editors of the Times read their own damn paper?

Basically, the Times believes that we should write a blank check so the rich executives and investors in Fannie and Freddie can cash out.  Good idea, guys.  It sucks that the government is going along with it, but that doesn’t excuse the utter ignorance of the Times.

-rsh