Category: Real Estate

Vulture Mortgage Investing

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This is a rather interesting read on a guy who is buying mortgages at about 20¢ on the dollar and using the difference to make a profit:

The homeowner was $365,000 under water after buying the house with no money down in June 2005, according to a spreadsheet listing about 30 loans for sale by a national mortgage servicer that Gutierrez referred to in his truck. If Gutierrez bought the note for 20 cents on the dollar, or $73,000, he could probably get the owner to leave by giving her $5,000 for moving expenses, then sell the home for about $150,000, well below even the neighborhood’s declining market value, he said. That would leave him a profit of about $70,000.

I’m not sure how I feel about the ethics of all this.

It seems that lenders, who should have known better, are the ones who are getting the worst haircut.

Why Mortgage Lenders Don’t Negotiate With Distessed Home Owners

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The answer is because they actually have no contact with those homeowners.

Most interaction on the loan is being done by servicers who were hired to process payments, not the holder of the loan. It’s a fairly low margin business, 0.25% of the principal, and a lot of the profit is in things like late fees, etc.

They don’t negotiate because their skin is not in the game, and because it is more profitable for them not to negotiate.

Capitalism 101.

Countrywide Shareholder Lawsuit May Proceed

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Gee, what makes you think that the people running the lender were more interested in lining their own pockets than running a business competently?*

Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.

Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

Plaintiffs also identified “numerous red flags” that would have warned directors of increasingly risky loans made by Countrywide, according to the judge, who rejected a motion to dismiss the suit. “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

Hope that these folks are left completely destitute. They should spend the rest of their lives in homeless shelters and gutters.

*The interesting thing about this is how many people are shocked by this. Capitalism 101 is that people act for their own benefit, but somehow the senior executives are exempt from all this?

Economics Update

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I guess for those of us in the US, the big 3 are employment, energy prices, and real estate. So, going in that order, we have:
nitial jobless claims rising to 371,000 last week, though as I always state, this is a noisy number, and you need a few weeks, or better yet months to extract real meaning, but, quoting the article, “The trend in claims is still upwards and we expect new highs over the next few months.”

Matt Trivisonno has the withholding tax numbers, you know the social security taxes that employers take out of wages below about $104K, and they are way down too.

Here are the pretty pictures:


Trending Down on a daily basis


And on a quarterly basis


And on a yearly basis.

As to why these numbers fell? Because no one is making anything in the US in April. Industrial production fell -0.7% in the US. The consensus estimate was -0.3% down, and March output was ajusted to +0.2%, down from +0.3%. Not good.

In energy, Crude fell below $122/bbl, which is good, but Gas hit a new record, $3.776 a gallon, the 8th record in 8 days.

In real estate, we have the inevitable article calling the light at the end of the tunnel, when it is more likely an oncoming train, in Orlando, Florids, one of the worst hit areas. Inventory fell slightly, and sales are up a bit (0.2%), and the rate of decline of existing home sales is a bit better.

Me, I’ll go with National Association of Home Builders/Wells Fargo monthly index, which fell again. The home builders are in the business.

I would also note that even with the Fed rate cuts, mortgage rates fall seem to be pretty stubborn about staying above the 6.0% line, so there won’t be any help for the market there.

Europe, on the other hand, appears to be doing fairly well, with GDP increasing 0.7% across the Euro Zone in the first quarter, led by a sizzling, for the developed world anyway, 1.5% increase for Germany.

This makes it far less likely that the ECB will cut rates. Actually it makes it more likely that the ECB will raise rates, and as a result, the US dollar is down today.

Economics Update

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The CPI rose less than expected 0.2%, though there was a huge delta in food, about 0.9%, 2.5% and 11% annually rates.

Look at my earlier posts on this issue, and you’ll see that the real inflation is far closer to 11% than it is 2.5%.

This has, for reasons unclear to me, led to the UD dollar strengthening in overseas markets.

Year over year foreclosures in the US are up 65%, and between the banks discounting these properties, and the builders discounting new homes, we have a way to go to bottom.

In investing, the dispute between Clear Channel, which had a deal to sell itself to a private equity firm, and the banks, who were trying to get out because they had no expectation of being able to resell the debt, has been settled. The buyout is now at 36$/share, as opposed to the earlier $39.20/share, so both sides took a haircut to get the deal done.

Still this indicates that the credit markets are still frozen.

Finally, we are back to the monoliner insurers. with MBIA and Ambac’s losses making the ratings agencies nevous.

If the ratings process was an honest one, they would have lost their AAA status over 6 months ago.

Economics Update

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Well, the financial news is reporting that consumer spending are up, but as Barry Ritholtz notes, “Retail Sales were rather unimpressive: Gasoline, Groceries, Food & Beverage were up, while pretty much everything else was flat to down. (see picture)

Also note that the real numbers are actually a reduction when adjusted for inflation.

In the “same as it ever was” department, we have crude oil and gasoline hitting a new record again, $126.98/bbl.

In real estate, The median single-family home price dropped 7.7% Q1, annualized, that is around a 30% drop, but you will see articles calling a bottom soon.

In banking, we have Bank of America saying that credit costs are up.

Translated from bank-speak, it means that they are having more late payments, defaults, and foreclosures.

On the good news side, Ben Bernanke is promising more free money through the Federal Reserve’s “sh%$pile for dollars” auctions.

Roubini Likes the Mortgage Proposal

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If you’ve been following my posts on the various bits of legislation to help homeowners, you know that I’m in general agreement with Dean Baker, an economist I highly respect*, that most of the proposals are more about bailing out banks than homeowners, and that attempts to prop up home prices do little more than make housing less affordable.

However, I also highly respect Nouriel Roubini†, and he likes the Frank-Dodd Proposal mortgage relief.

Seeing as how I’m not an economist, banker, or realtor, I thought that my readers (both of them) should see his take.

First, he admits that this would be nationalization of bad mortgages to a large degree, but he sees the lenders benefiting, after a 15+% haircut, because they get a guarantee, homeowners get to stay in their house, their neighbors don’t deal with the effects of vacant lender owned housing, and it is far less expensive to the taxpayer than a full bailout.

I still think that real estate needs bankruptcy reform, and allowing mortgages on a primary residence to be adjusted by bankruptcy judges would be the best reform both in the long and the short term.

*Not only did he call the housing bubble, he actually sold his home on that expectation in 2004, and he’s now renting.
†Perhaps the strident of the bear economists. The frightening thing is that to the degree he has erred, it has been because he has been too optimistic.

American housing | Map of misery | Economist.com

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The Economist is suggesting that, “America may well be only halfway through the house-price bust“.

They lead off with the scary picture:

Though I would note that this is now almost 6 month old data, so there would be a lot more red now.

They make the obvious point, that the delta in house prices is still not clear, with a number of different ways of measuring, with OFHEO covering sales financed by the GSEs, and the two different Schiller numbers.


Note that the gray area is projected, and I think that they ignore the possibility of overshoot in the buy/rent ratio.

They note the fact that banks are still tightening standards at an unprecedented rate, which will push house prices down, but they neglect to mention that the 5-6% fixed rate mortgage is historically low, and that if there is a return to the 9% rate, we would see even further downward pressure.

We’re Now Getting the Calls for a Housing Bottom

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This is the next stage of an asset collapse, the declaration that a bottom has been found, and it has no where to go but up now.

First, we have an OP/ED in the Wall Street Journal declaring the housing crisis to be over. This is suspect for two reasons:

  1. It’s made by Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York, and he has a financial interest in all this fixing itself.
  2. It’s a Wall Street Journal OP/ED

Additionally, the logic is just plain silly. He claims, among other things, that low interest rates will have housing bottom out, even while there are increasing inflationary and interest rates pressure.

He also believes that since the inventory is not at 11 months, near historic highs, it will turn around.

He could be dishonest, or he could be an idiot, but my money is on both.

I also think that he does not understand how much Alan “Bubbles” Greenspan distorted the market during his tenure as Fed Chair.

We are also seeing some bargain hunting in the financial markets, but again, we saw that, and the declaration of a number of times during the dotcom crash.

To put it bluntly the market is a fool some times.

Of more significance are reports like this, where we see those neighborhoods hit earliest hardest are seeing an up tick. Is this because they are cannibalizing from other neighborhoods that people perceive as still being on the way down?

I agree with the Rich Toscano, when he suggests:

So what does it all mean? One really helpful puzzle piece was supplied by SD Realtor a couple weeks back. He posted some data showing that while volume has declined in many higher end areas, it is actually up quite substantially in some of the areas that have really been crushed (e.g. Eastlake).

His conclusion was that the price declines have gotten so bad in some areas that buyers are starting to creep back in. But where the prices have been stickier, demand remains quite weak. This is a sensible analysis and I tend to agree. If this is what’s going on, and volume is still the good leading indicator it once was, those hard-hit areas are likely closer to the bottom than the rest of San Diego.

There’s one other twist to the question. The months of inventory figure has declined, but that measures sales against “want to sell” inventory. What’s arguably more important is the number of sales vs. “must sell” inventory. It could well be that even as the total amount of inventory declines, must-sell inventory is steady or even rising. I attempt to proxy this relationship with my sales-per-notice-of-default charts. Perhaps the next update of that chart will fill in some blanks, but given that we’ve just been at or near all time high default levels and that defaults generally represent future must-sell inventory, it doesn’t seem like there is a real danger that must-sell inventory will decline much any time soon.

Banks are still foreclosing, and the numbers are continuing to increase, and that is the data which we should consider.

Why House Prices Still Have a Long Way to Fall

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Rolfe Winkler of Option ARMageddon makes a very simple point, that housing affordability is based on monthly payments, not on house price, and since house prices are falling with historically low mortgage rates, we can reasonably expect further price drops as mortgage rates return to their historical numbers.

With real inflation nearing double digits, and there being an eventual limit to just how long foreigners are willing to supply us cheap money, mortgages have to return to something nearer to their historic rates of around 9%, possibly with some overshoot.

BTW, here is how interest at a given rate influences house price:

By my maths, it looks like we might see an inflation adjusted drop of around 50% from peak, which means that people who bought a house at peak might be under water for more than 10 years barring significant inflation.

Economics Update

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We have another sign of recession, imports falling sharply in March, which indicates a decrease in consumer demand.

It also appears that the decisions by the Bank of England and ECB to target inflation may be putting an end to the brief dollar rally.

In energy, we have Oil settings new record, $126.20/bbl, and gas hitting a new record, $3.671/gal.

It should be noted that much of our trade deficit is oil, but the number dropped even with increasing oil prices. Things are slowing down a lot.

I would note that there are signs that the credit crunch is no spreading to insurance, with AIG posting a 1st quarter loss of $7.8 billion, and making plans to issue more stock to raise needed capital.

If the insurance industry goes balls up in any significant way, it’s going to be effecting a lot more people.

Finally, we have housing inventories continuing to rise, 3.5% in April, and 6% year over year.

Economics Update

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The numbers are out for March pending home sales, and they are very grim, with the pending home sales index falling to it’s lowest level since its founding in 2001, a 1% one month and 20% year over year drop. Of course the NAR is seeing a turnaround in the next few months, like they always do.

We are also seeing increasing signs of inflation, with Federal Reserve Bank of Kansas City President Thomas Hoenig suggesting that inflation pressures may lead to rate hikes soon, and Toyota to raising prices on their cars, largely as a result of the falling dollar.

On the plus side, however, productivity increased by 2.2% in the first quarter, more than the 1.5% predicted, which should moderate inflation some.

On a more general, “we in a recession” note, retail imports fell 4.8% in March, yet another indicator of a slowdown, that the retailers are cutting back.

Oil hit another record today too.

Schadenfreude, National Association of Home Builders Edition

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About 3 months ago, I noted that the NAHB was putting a moratorium on political donations to punish Congress for inaction.

Well, it looks like they are back in the bribe campaign donation business again.

They are claiming that it is because they have a tax credit to lobby on, but in reality I think that it’s because no one in Congress really cared that much.

The lesson to be learned is that members of Congress are less concerned about your donations to them than they about the potential of you donating to their opponent.

Barny Frank is Angry

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After raising the limits for loans that purchased by Fannie and Freddie, which carry a lower interest rate, in February, Barney Frank is now looking into why so few of the new “non-jumbo jumbo” loans have been made.

The raising of the cap from $417,000 to $729,750 was intended to help property move in high cost markets, like Frank’s district.

The simple reason that he is not seeing much in the way of these loans is because banks are not lending to anyone.

We are seeing an unprecedented tightening in mortgage lending standards, and so very few loans are being made.

Fannie and Freddie at Risk

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With all the hooplah over Congressional action to allow Fannie Mae and Freddie Mac to make more and larger loans, the financial press is just starting to notice that maybe it will mean larger, and perhaps a quicker problems for the GSEs.

I said this when they originally expanded their services to some “Jumbo” mortgages that this was ill advised, and with them controlling about 80% of the mortgage loans bought by investors, this is going to get ugly.