Category: Real Estate

Bad Legislation

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Tanta has noted that, “some of the bigger economic illiterates in Congress,” have sponsored a bill to restore the Downpayment Assistance Program (DAP). (previous posts here)

Basically, it allows a seller to supply the down payment to the buyer in exchange for a higher sales price, allowing people who won’t make a down payment to get an FHA approved loan, which require a down payment.

They funnel the money through a DAP company, and all is forgiven.

The default rate on DAP loans is at least three times those with down payments.

This is something that, “builders, real estate lobbies, and DAP companies,” are lobbying for, big time.

The Congresscritters in question also do not understand insurance apparently, details at link.

OK, these Numbers are Grim

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This time, it’s commercial mortgage back securities, and the default rate is about 4%, but this number is expected to quadruple if the economy slows down significantly.

Let’s note that this is commercial property, the stuff that’s supposed to be largely recession proof that we are talking about here:

Such a scenario corresponds “to the negative predictions currently offered by commercial real estate experts”, analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.

The higher defaults under such a slowdown compares with a historical default rate of 7.9 per cent, and with the milder scenario that Fitch thinks is more possible of 0.8 per cent economic growth and a 13.7 per cent rate of default.

It would cause non-investment grade bonds – B and BB rated CMBS – to suffer loss rates of 100 per cent and 95.9 per cent, respectively. Meanwhile, 30.6 per cent of the lowest-rated investment grade bonds – BBB rated – would experience losses, while loss severities would rise to 37.9 per cent from an historical average of 33.5 per cent.

The data suggest that recently issued CMBS may fall victim to inflated property values and weaker underwriting standards experienced at the height of the US property boom in 2006 and 2007, as well as the weaker economy. Those bonds make up about 49 per cent of the outstanding CMBS market of more than $800bn. The survey covers all Fitch-rated bonds issued during those two years, making up 74 deals worth $217.3bn. That was about 60 per cent of all CMBS issued during the period.

These numbers are apocalyptic.

Freddie Mac Gets on the Clue Train

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This is why no one in their right mind is building anything. Construction spending is down for the 11th time in 13 months.

Freddie Mac seems to have realized the gravity of the situation though. Yesterday, I wrote about their doubling the payments to servicers for loan workouts, and today we discover that they are ending bonuses for servicers who foreclose quickly.

It makes sense. When times are good, you just want the stuff off your books and resold quickly, but when times are bad, you go broke doing that.

FDIC Puts Brakes on overed Bonds

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As I wrote earlier, Treasury Secretary Hank Paulson is pushing a new (for the US, at least) sort of bond, the covered bond, to unfreeze the mortgage credit markets.

Well, it looks like the FDIC just put up a road block, saying that it is considering limiting these new bonds to 4% of bank liabilities.

It has expressed concern about the instruments might place additional risk on them:

“The FDIC is concerned that unrestricted growth, while the FDIC is evaluating the potential benefits and risks of covered bonds, could excessively increase the proportion of secured liabilities to unsecured liabilities,” the agency said. In other words, Back off my insurance fund. The agency did say it would consider revising its guidance after it has a chance to evaluate the effect of covered bonds on banks.

The FDIC could refuse to cover these bonds in the event of a bank failure, and as such, if they institute this policy, it may very well put a stake through the proposal’s heart.

Of course, these days, all real estate loans are risky instruments.

Loan Servicers Under Stress

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One of the funny bits of the current mortgage market is that even when the banks hold the loans, they don’t generally handle the money.

They pass this off to loan servicing firms, who send out the bills, collect checks, handle escrow, etc.

Well, it appears that they have to make payments of interest and principal to the loan holders for accounts up to 90 days delinquent, in addition to handling property tax payments, and as a result, they are taking a beating from the skyrocketing rate of delinquencies.

H/t HousingWire

Another Day, Another Financial Term

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This time, it’s “Covered Bond”, and Sec Treasury Paulson is clarifying regulation to make them more attractive in the United States. (They are more common in Europe, particularly, according to the Wiki, Germany)

The difference between this and more common mortgage backed securities is that the banks have to keep the mortgages on their books, and the bonds are specifically secured with these bonds.

I don’t think that this will make much of a difference.

Until house prices bottom out in absolute dollar terms, which means that inflation might save us, the housing market will remain sluggish to frozen.

Cost of ‘Stealth’ Housing Bailout: $1.43 Trillion

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Steve Liesman at CNBC Runs the numbers on the housing bailout to this point:

Federal Reserve $446 B Term Auction Facilities, $150 B, Bear $29 B, $14 B Discount Window to Banks, Repurchase Agreements $88 B, Swap Lines to Euro banks $65B, Treasuries lent out for liquidity boost $100 B
Federal Home Loan Bank $274 B Advances to member banks
Fannie and Freddie $621 B
FHA $90 B Added since October
Total $1431 B

Ouch.

Senate Passes Housing Bill

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It already passed the house, so it will go to Bush, who says that he will sign it.

My guess on the total effect, very little, since there is no mechanism to encourage lenders to actually cut a deal.

The single thing that would help the most, and it would cost the government nothing would be to allow bankruptcy judges to modify mortgages for primary residences, as they can for investment and vacation property.

Maybe after January 21.

Fitch Now Predicting ANOTHER 25% Drop in House Prices

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This was a part of their updating their ResiLogic mortgage loss model, which is used to rate residential mortgage backed securities (RMBS), and they now believe that in constant dollar terms, residential real estate will fall 25% over the next 5 years.

Peak to trough, local housing bubbles bursting are typically 5 years, but this is far more widespread, and the bubble is far frothier.

I think that they are too optimistic. They ignore the size of the bubble, the national nature of the bubble, and the fact that unsustainably low interests created the bubble.

I agree with Rich Toscano’s assessment he did two years ago, which was far grimmer, (a 3-parter, see here, here, and here), though it should be noted that it’s primarily about San Diego, one of the frothier markets before the bubble burst.

Economics Update

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It sounds like good news, durable goods orders went higher in June, but it was almost entirely due to defense related purchases.

Real estate is pretty much bad news too, with 2nd quarter foreclosures up 120% year over year, and new home sales down, though not as crappy as expected.

Meanwhile, the National Australia Bank is writing down 90% of its mortgage backed securities, which is a realistic, if somewhat alarming valuation of these instruments.

In the world of retail, we have Rumors that Boscov’s is near collapse. They’re local, so maybe there will be some deals as a result.

More generally, oil and retail gasoline are down, and the dollar is mixed against world currencies.

The Next Thing to Kill You: Granite Countertops

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Well, it looks like someone has finally noticed that granite actually contains small quantities of Uranium which decay into Radon gas.

Ummm…I’ve know that for years, but I went to school in New England, where granite is a major source of Radon.

Had a discussion with Harry Stubbs, pen name Hal Clement, where he said that his being in a trench about a mile from a nuclear blast in the 1950s exposed him to less radiation than hanging in his basement..He ran the numbers for us, actually.

The amount of radiation is small, but it might effect resale value, so if you are getting the counters installed, you might want to have a technician measure the radiation level before installation.

DAP to be Eliminated in Housing Bill

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About f$@#ing Time

I’ve mentioned the Downpayment Assistance Program before, and it’s one of the worst scams in real estate, and the housing rescue bill shuts it down.

The FHA requires a down payment of 3%, and “non-profit” agencies will front the money to the buyer. That money, plus what is typically a $500 fee, comes from the seller, who raises the price of his house to cover it, effectively meaning that the buyer pays an additional $500 (plus taxes and commission) to create a phony downpayment.

Huzzah!

Why the Home Inventory Situation is Worse than You Think

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Care of Barry Ritholtz’s The Big Picture

Now for the really scary part: Shadow Inventory. The glut of homes for sale is likely much larger than reported. Inventory counted by the Realtors group only includes foreclosures that have been listed on the multiple listings service. The enormous number of REOs, auction properties, defaults and foreclosures not listed ARE NOT IN THIS DATA.

Ouch. Note that as foreclosures sore, this shadow inventory will become a larger part of the total inventory.

Economics Update

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Fairly slow news day: retail gasoline down, oil down, and dollar up.

In what has to be the most obvious bit of analysis this week, the Office of Federal Housing Enterprise Oversight (OFHE)) is saying that Fannie Mae and Freddie Mac may record more losses as a result of the moribund real estate market….Seriously, this could have come out of a fortune cookie, particularly since we are seeing more indicators that the housing market has not hit bottom:

Mortgage applications fell 6.2% last week, (again, note that this is a noisy number), and California foreclosures hit a 20 year high in the 2nd quarter….actually the most ever, since they didn’t start collecting the numbers until 1988.

Economics Update

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Charles Plosser, President of the Philadelphia Federal Reserve, called for rate hikes to forestall inflation. Not surprisingly, the US dollar has risen as a result.

Meanwhile, the banking meltdown continues aplace, with Wachovia losing $9.9 billion dollars and exiting the wholesale mortgage business, meaning that they will no longer offer mortgages through independent brokers, and WaMu Lost $3.3 billion too.

I would also note that federal examiners auditing the GSE’s books, though this is more a preparation for a US government bailout than it is any concern for wrongdoing.

Considering that U.S. home prices 4.8% from May 2007 to May 2008, I’d count a GSE bailout as likely.

Seeing as how tropical storm Dolly largely missed the offshore oil rigs, it’s not surprising that oil prices have fallen, and it appears that retail gasoline is doing the same.

Still, this is mostly a symptom of a slumping economy, where less oil is needed, much as UPS’s profit slump of 21% is clear evidence of a radically slowing economy.

It’s also old home week at 40 Years in the Desert, because we have some news about another monoliner insurer in trouble, this time, it’s Assured Guaranty, one of the two insurers left with AAA ratings from all three major agencies, that is taking a tumble, because Moody’s is making noises about a downgrade.

Economics Update

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Well, the Europeans, or at least the Germans promise to be in major freak out mode for a while, as producer prices are increasing at 6.7%, and this means that the Germans, the largest economy in Europe, will be screaming for rate hikes, because it was only 80 years ago that you needed a wheelbarrow or marks to buy a loaf of bread.

Unsurprisingly, this drove the dollar down too, though a contributing factor may be a report published in the financial times that sovereign wealth funds are looking to reduce exposure to the dollar.

There is no stampede, but people are tiptoeing toward the exits on the dollar.

I’m not sure how related it is, sovereign wealth funds hold a big chunk of GSE debt, but Freddie Mac has filed with the SEC to sell stock in order to raise new capital.

In energy, dribbled down a bit* to settle at $128.88/bbl, and retail gasoline fell about a penny.

In investment banking, Merrill Lynch lost $4.9 billion, and Citi lost $2.5 billion, though the latter was better than expected, and Citi will continue paying a dividend, which strikes me as foolish.

In real estate, evidence, in Orange County at least, that commercial real estate is comatose. A 91% drop in building, a 62% increase in vacancy, and a 2.5% decrease in rents.

It’s grim in the UK too, with mortgage lending falling 32% year over year, with near certainty of the central bank increasing rates.

The UK is beginning to look like the San Diego of Europe.

*No Apology for the pun.