Already large unions in the U.S are encouraging borrowers to challenge banks to prove they won your mortgage. They’ve set up a website asking the question, “Where’s your note?”

You can see where this is headed. No one in America wants to own a failure. The banks want to foreclose on homes and sell them and avoid taking losses. Borrowers (some of them, and some of them rightly) want to avoid paying a debt for an asset that’s worth less. No one wants to be responsible anymore because the most lucrative and least painful route is to abandon responsibility and your word.

This is a serious breakdown in one of the most basic elements of a functioning market: contract (doing what you said you’d do). People at every level appear to have cheated and lied during the housing boom. The borrowers who lied on their loan applications…the mortgage originators who made the loan without any documentation of work or income…the securitiser who packaged it up and sold it to investors…the ratings agency that rated the debt investment-grade…the insurance companies who sold default insurance against the bonds multiple times…and the government that encouraged home-ownership and subsidised the fraud with an implied guarantee on the bonds of Fannie Mae and Freddie Mac, the government-sponsored enterprises that bought a lot of the garbage bonds.

What is really at stake though?

Well, if borrowers challenge foreclosure proceedings, and if banks (as they have already begun to do) halt foreclosure proceedings nationwide, the process of establishing a market-clearing price in the U.S. house market is frozen. Buyers can’t buy and sellers can’t sell if the ownership of the underlying collateral — the house itself — is in doubt. What sane person would enter a market like this with prices effectively having completely broken down?

As if that’s not bad enough — and it’s nearly as bad as it gets — don’t forget that that there is a whole universe of financial instruments whose value derives from the underlying collateral. Mortgage backed securities…collateralised debt obligations…the value of any instrument whose value is derived from the underlying asset is now suddenly in doubt.

It’s hard to understate what this could mean for financial markets. It could mean another capital crisis in the financial world. It would make 2008 look quaint.

This is why this problem is rapidly escalating into another contest between the banks and the borrowers. The U.S. Congress chose to side with the banks by passing a law (H.R. 3808) which would have made it easier for the banks to foreclose on properties without having to go through the usual process of documentation. But U.S. President Obama — less than a month away from an election that’s become a referendum on his policies — simply ignored the resolution (a pocket veto). Who wants to be seen siding with bankers right now?

Now you have a situation where U.S. banks again face massive losses on their exposure to residential real estate. You have a growing popular movement to challenge the banks through the legal system — raising bank costs and eating into bank earnings (which are already pretty flimsy when you take away the boost to the net interest margin from low short-term rates).

But the biggest problem by far is that you have a growing ethos in the American mortgage market that everything is so upside down and backwards that the best thing to do is just stop playing by the rules and stop paying your mortgage. The whole market is on the verge of breaking down. Trust has evaporated. The rule of law itself now seems irrelevant.

Who is the government going to side with in this dispute? The banks, who will claim (perhaps correctly) that the crisis threatens their ability to loan, and perhaps their very existence? Or will it choose an increasingly angry populace who doesn’t want to again get sacrificed on the altar of saving the financial system?

Our guess is the government won’t choose either. It will choose both!

The easiest way to deal with debt — if you have no intention of paying and don’t want to inflate it away right away — is to simply repudiate it. A great debt amnesty is required!

Bankers must be allowed to sell everything they don’t want to the government, and probably at a price that suits the bank, even if it wouldn’t be borne by the market. And distressed homeowners must be allowed to refinance at a fixed-rate for 50 years through a government lender that will never foreclose on them, and is probably statutorily prohibited from doing so. No one takes a loss. No one loses a house. Voila!

Of course it can’t work that way. Huge amounts of capital have been misallocated in a credit boom. The recovery begins when the losses are taken and household and corporate balance sheets are returned to sanity. But no one wants to deal with that pain. So insanity ensues and a completely zombified mortgage market looms.

Regards,
Dan Denning
The Daily Reckoning Australia
Whiskey & Gunpowder

October 13, 2010

The American Housing Market Is Headed for Total Destruction was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Insurance is taking hits from all over the landscape, from the probable inevitability of Hillary Care Plus, bidding fair to destroy health care insurance, foreclosures which have lead to loss of private customers (do any of us suppose that banks pay the same rate for home insurance that we do?), business failures, and the effects of Ike, Katrina, and Rita, with at least two storms probable to wreak havoc this season.  One wonders how many are on the hook for the recent earthquake in Belize.

A decade ago the rare foreclosure on a house really wasn’t that important other than to the individual who couldn’t meet his mortgage payments; the bank repossessed, the house was sold again within a relatively short period, and life went on as usual.  2009 is an entirely different proposition, with hundreds of thousands of homes that have been foreclosed on, lending tight (at least according to official sources; see my interview with an investment/mortgage banker in tomorrow’s Morning Whiskey!), job losses averaging over 625,000/month, a jobless rate that is officially eight and a half per cent. but probably twice that by former ways of tallying unemployment, and the whole socio-economic-political situation.

One factor which is new to this hurricane season is that never before has there been large numbers of what amount to abandoned houses.  Those which have not had storm shutters put up, or plywood, or at least a bunch of tape put up in big X configurations, and the usual sort of battening down homeowners normally do, are going to be a serious menace to other buildings in the vicinity.

How will damage caused by unoccupied domiciles be charged, and to whom?  It can scarcely be called “an act of God,” since the loss will be due to loss of preparation at least as much to the storms, themselves.  Who is responsible, the bank or the insurance company of the homeowner whose house has been clobbered, or the homeowner himself?  Someone is going to have to pay for the damage, and someone is going to have to clean up the messes or the entire neighborhood will diminish in value.

Banks are already troubled with malicious damage from the erstwhile owners who trash their former houses deliberately when forced to move out.  There are truly disgusting tales of those angry enough to defecate on the carpeting, break windows, sabotage appliances, sling bleach around, and generally act like thugs who never had any business getting a mortgage in the first place.  In at least one instance a major bank razed a selection of MacMansions, complete with all the extras such as eighty dollar a square foot (uninstalled) granite countertops, rather than try to protect or sell them.  Thieves are raiding the houses for copper and other valuables.  There are squatters.

In Galveston there are still 17,000 houses that were destroyed or have unrepaired damage from Ike during the last season.

Again, who is to bear the losses?  Who is responsible for protecting the properties?  No matter what the answer, it does not bode well for the economy.

Wells, as it is known in the trade, is hiring underutilized realtors to secure houses before storms and to take care of insulating outdoor faucets before freezes.

J P Morgan Chase is requiring bank employees to do the maintenance!  That must be wildly popular with tellers and lower managers who have their own belongings to protect.  One of the things I learned and have not written on yet is that a major problem in the banking houses is how little is done to foster employee loyalty and esprit de corps.  One can imagine the reaction of professionals being turned into maintenance men, and somehow I doubt that those who earn their salaries with their minds will be recompensed for the tasks they will be assigned to fix up, clean up, and protect houses they have no personal stake in.

To add to the excitement/frustration, government (of course) is getting into the act.  Palm Beach, Florida, County Commissioner Burt Aaronson has threatened banks with action if they do not see to this maintenance before storms hit.

Randall Webster, Director of the Emergency Management Department for Horry County, in South Carolina (Myrtle Beach, if that helps), is reported to have done approximately the same, and doubtless New Orleans, Houston, and other areas susceptible to severe storm damage will follow suit if they have not done so already.  I have sources at Citibank and BOA and will see if I can discover what their “emergency” prevention plans are.  If any of you have “insider” information, please respond below.

Back in the good old days, say, a hundred and thirty-five years and more ago, Americans felt responsible for “killing their own snakes” and also expected others to be responsible for any damage they had caused.  In this era of the Nanny State and Obamanomics, the almost certain outcome is the declaration of a “disaster area” by Mr. Obama.  More billions will be created to dispense from the Treasury, with more employees to oversee the new program…without anyone asking the residents of Houston or New Orleans precisely what they think of the efforts of FEMA, et al., after Ike and Katrina.  I have reports that singe my monitor with their vitriolic resentment over FEMA just walking off and leaving the mess.  I will remind you again that large grocery chains in Houston had five-item restrictions on purchases following Ike, and that vast amounts of damage have yet to be repaired.

FEMA caused far more problems than it solved during Ike, Katrina, and Rita, and very little has been done to clean up the destruction from those storms–unless one wishes to count the widely-publicized gratitude of a professional welfare recipient in New Orleans complaining that she “only” got a 60″ flat-screen TV for her subsidized housing and that she wasn’t “fooled” by the wood floors that were installed.  She doesn’t like the modern craze for distressed wood, any more than she liked having a job, which she tried for six months out of the sixty-plus years she has been on welfare.

Some may say, “Oh, well, FEMA tried, and we can’t get rid of the Nanny State, which is growing by ever-faster leaps to gargantuan proportions.”  If not us, who?  Still, it is not a major portion of our task to point out that hundreds died in the Super Dome because FEMA would not allow relief trucks to enter the city until the Governor geeked and gave FEMA control over the Louisiana Guard, although that is precisely the sort of governmental abuse some of us expect to see in increasing amounts.

Our sole question at this moment is whether the insurance field is a good candidate for our investment dollars, and I am going to “make a sign with my thumb,” in the negative.   Even with the clout insurance companies have had in the past, I have an itch that says that no matter how many millions of Bernankes are thrown at them, they could come out behind, as will all of the banks and homeowners.  Money tends to stick to the fingers of those who handle it first, in decreasing proportion to the distance between the source and those benefiting.

My suggestion is that if you have any insurance stocks it would be a good time to swap them for positions in small, well-capitalized gold or silver mines.

From our experiences with Ike insurance is going to be little consolation to those who want to go about their lives after suffering heavy hits, although those who have nothing better to do than wait for adjusters and fill out claims will benefit.  Our choice was to repair the electrical damage and roofs Ike blew off to protect other valuable property and to take care of our livestock, or to wait around for adjusters, estimates, reimbursement, and repair men while undergoing a great deal of inconvenience and possible danger to the stock in the hope of getting more than we spent.  Such matters are a personal choice dependant upon individual risk assessment.  I trust those of you who live in the path of tropical storms have plywood cut to cover your windows and have laid in ample supplies.

Regards,
Linda Brady Traynham

June 1, 2009

P.S.: Your lesson for today from my vast store of historical trivia:  Hollywood is responsible for the “thumbs down” and “thumbs up” signs.  What I quoted above is what ancient sources say, and Cecil B. DeMille decided that thumbs down was a sensible interpretation.

Adding Hurricanes to Foreclosure was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Remember the great hope for Hope Now…?

“Let’s not harp on about the costs, absurdities or risks of governments meddling in real-estate bubbles when they burst,” wrote BullionVault as the Bush administration pushed the initiative front-and-center in Dec. 2007.

“This is about hope. Hope now. Let’s worry about tomorrow some other time.”

Too bad tomorrow’s turned up, but with 917,000 homes foreclosed since then regardless. A further 1.3 million foreclosures are now in progress according to Hope Now’s own data, with nearly one-in-twenty of all US mortgages standing 60 days late or more on debt service.

Some 8.3 million mortgages risk being drowned by negative equity, too. So even if the lender moves to foreclose, the asset won’t cover the debt – if they can find a buyer at all – making the net loss of wealth truly systemic for America’s banks.

Which is kinda where all this began, only the other way round.

“Mortgage performance steadily declined each month in 2008,” says Hope Now in its full-year data. “One in 10 loans was delinquent in some way by December,” despite Hope Now itself helping modify and refinance almost a quarter-million loans that month. It helped modify and refinance a quarter-million loans yet again in January. By then, however, US real estate had lost $2.4 trillion of its value year-on-year, reckons First American CoreLogic.

Puff! It was gone, just like that. Which kinda makes you wonder where it all came from in the first place.

“There is broad agreement that until we begin to stem the tide of foreclosures, you will not get an end to the current crisis,” says Barney Frank, Democrat chair of the House Financial Services Committee, pointing to the, ummm, foreclosure crisis.

Put another way, “The remedy for [today's] deflationary delevering and mini-depression is simple and almost axiomatic,” as Bill Gross, head of the Californian bond giant, wrote last month:

“Stop the decline in asset prices.”

Such a happy truism; stop prices falling, and you’ll stop pricing falling. But how to achieve it? Maybe Gross doesn’t quite mean what he says. Not as simply as he says it, at least. Not without trimming his (occasional) moustache into a neat little paintbrush. You know, more like that highly-strung German chap who stole Charlie Chaplin’s look (minus the hat and cane) in the 1930s.

But that word “delevering” – it throws up the real problem sparked by declining asset prices: the gap between what they’re now worth, and how much money was borrowed to buy them.

“One in five US homeowners with mortgages owe more to their lenders than their properties are worth,” First American CoreLogic goes on, as quoted by Reuters, “and the rate will increase as housing values drop in states that have so far avoided the worst of the crisis.” That army of drowning, not waving debtors now threatens to swell by one-quarter if home prices slip only 5% further from here, as well.

Negative equity, of course, doesn’t in itself force default. It’s inability to pay, most often sparked by loss of income, which forces late payments. But negative equity makes the problem systemic. Because it gears up the net loss and spreads it from debtor to lender, levering the pain of foreclosure from the hurt of the home-loser to the net lending loss suffered by banks.

Lenders end up out of pocket – and so too might their lenders in turn – even if they can sell the house reclaimed to settle the mortgage. All of which, as we say, just replays the merry-go-round spiral of soaring house values and E-Z credit in reverse.

“Making Home Affordable will offer assistance to as many as 7 to 9 million homeowners,” said the Treasury on Wednesday. (Note the friendly, if all-too pessimistic, use of the singular “home”). Yes, the new commander-in-chief is leading a fresh charge against house-price deflation and the still-surging surge in foreclosures.

Once more, with feeling!

“The Home Affordable Refinance program will be available to 4 to 5 million homeowners [who] would be unable to refinance because their homes have lost value,” the Treasury went on, “pushing their current loan-to-value ratios above 80%…

“The Home Affordable Modification program will help up to 3 to 4 million at-risk homeowners avoid foreclosure by reducing monthly mortgage payments.”

Now throw on top the one million mortgagees expected to declare themselves bankrupt when Obama’s “cram down” bill wins the day in Senate (which it will), and up to 10 million American home-buyers look set to refinance or re-modify their loans, just 15 months after Dubya Bush and Hank Paulson swore blind that refinancing and re-modifying would stem the depression in housing.

Might it work this time round instead? Given that the cram-down act will enable federal judges to extend mortgage terms, slash the interest rates agreed with lenders, and cut the outstanding debt owed by insolvent homeowners, and you might expect the flood of foreclosures to slow. Destroying 1,000 years of contract law should achieve nothing less, you might hope. And that might stop home-prices tumbling. Right?

“Throughout 2008, the re-default rate ranged between 30% and 40%,” explains Hope Now, defining such recidivist shame as “any mortgage that is 90 or more days delinquent or in foreclosure 6 months after the date it was first modified.”

One-third of bad loans turned bad once again, in other words, even after the lender cut the debtor some slack. So perhaps the new hope for housing should just cut straight past the chase and go to the credits. Y’know, the bit where the state seizes outstanding home-loans entirely, and re-modifies their terms to give houses away free to what once were called “the buyers”.

Any house first bought for “no money down” should become a no money home, a free gift to the debtor. How’s that for putting a floor under prices!

“More householders than ever own their homes,” said the Census Bureau in 2001. Way up at 66.2%, however, that record ratio wasn’t high enough either for government or the finance industry. Hence the non-stop shilling by President Bush of home-ownership as a way to defeat racism, poverty, Bin Laden, you name it.

The number of owner-occupied homes had in fact swelled by nearly one-fifth in the previous 10 years. And since the 1990s marked prosperity (and even a shrinking fiscal deficit!) as interest rates ticked lower, runaway growth in home ownership was surely been an unalloyed good. Only an anti-American fanatic would think otherwise, you’ll agree.

But smothering fresh chunks of California, Nevada and Florida in hard-top failed to concrete over the basic facts of economics, however. Because where demand finds itself sated, but supply continues to build, over-capacity follows and prices start to fall back. And even before the housing recession became a depression, excess capacity was building fast in the US housing supply. The rate of occupation slipped from 87.5% to 86.4% between 2005 and 2007, while the total number of units crept higher to 128.2 million on the Census Bureau’s latest data.

Trying to stall or reverse this cold fact will clearly take more money – and more stupidity – than even the Bush administration could throw at the task. Such as, say, via fascism or hyper-inflation. Put a floor below prices, beneath which it’s illegal to sell; or allow house prices (if not the S&P too) to slide only in real inflation-adjusted terms, printing money to inflate the cost of living while nominal realty prices hold steady.

That would allow the slide in real asset values to continue, even as nominal prices stay flat or fall. Because short of socializing all houses and so taking their value to zero – a trick tried to sad effect across Eastern Europe c.1917 to 1991 – this tinkering and tweaking is just fighting a trend that cannot be stopped.

In this credit deflation, where the nominal price of all things is shrinking, that which inflated the most should now shrink the fastest. Both its share of total economic value and its absolute pricing are working to reverse their misallocation over the last decade and more.

And double the inflationary trouble means double deflation once the bubble has burst – as the financial services industry is only just finding out as well.

Regards,
Adrian Ash
BullionVault

March 9, 2009

Hope Now: Pretending People Can Keep Their Homes was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.