Everyone who participated in the Great Housing Bubble wants to go back to the way things were before. That is the problem with Ponzi schemes; once they collapse, you can't rebuild them. Borrowers were only making their debt-service payments by borrowing more money. When faced with the prospect of paying their debts without continued borrowing, Ponzis can't do it. Loan modifications seem like a great idea: borrowers resume making payments and get to keep their houses, and lenders don't have to foreclose and recognize any losses. In other circumstances, this solution may have worked, but with recidivism rates exceeding 50%, these programs are largely a failure. Imagine a residential real estate market where all the owners borrowed using fixed-rate financing with at least 20% down and reasonable debt-to-income ratios and there was limited mortgage equity withdrawal (think Texas). A market like that would have significant equity and owners capable to withstanding some financial distress. An economic downturn would[READ MORE]
Archive for June, 2010
People form strong attachments to their homes. Walking away is never a decision they take lightly. We can discuss the pros and cons and come up with our own beliefs and attitudes about it, but the turnover of our housing stock caused by the housing crash will be very painful for those who go through it.
Ruthless default or accelerated default?I write often about hidden premises buried within the arguments writers make. These distinctions are important, and unless we uncover our fallacious beliefs, we make erroneous judgments and carry false beliefs. I have written many times about strategic default, and in my last post on the subject, I uncovered something new. There is no accepted definition of strategic default. Lenders have tried to define the issue as any borrower who is capable of making a payment and chooses not to. On the surface that[READ MORE]
I am shocked by the squatting. I really am. It never occurred to me that lenders would simply give away homes to people. Do lenders really believe they can do this without dramatic long-term consequences on borrower behavior? Back in 2004 to 2007 I was very confident the market would crash. The Option ARM was an obvious Ponzi loan, and it was only a matter of time before the market imploded. To me, it seemed like a really foolish time to buy because I knew the decline in value would put me underwater. If I had known that I could borrow 100% of the money, possibly get some HELOC booty, then squat indefinitely while the lenders denied there was a problem, I might have made different choices. The most foolish and imprudent borrowers are the ones getting most rewarded by the banks amend-extend-pretend policies, particularly those in the jumbo loan[READ MORE]
In the housing bubble debate, the bears clearly won the first round. People defaulted, banks foreclosed, and prices crashed just as predicted. However, round two has gone to the bulls. Banks stopped foreclosing, people squatted, interest rates went down, and the few buyers that remained pushed prices up slightly. Now we are on to round three: the Great Housing Liquidation.
Distressed sales equal lower pricesThe general concept is obvious to everyone including the lenders: distressed sales cause lower prices. Statistical experience over the last several years clearly demonstrates that markets can only absorb about 30% of its sales as distressed inventory. But what happens when more houses are in distress than can be absorbed by the market? Squatting. As we all know, loan owners have continued to go delinquent at a much faster rate than lenders have been processing their foreclosures. The resulting discrepancy is shadow inventory. The bulls[READ MORE]
As bailouts go, nothing quite matches the torrent of taxpayer money still pouring into Fannie Mae and Freddie Mac, the housing giants that now guarantee nearly half of the nation's $11.7 trillion in mortgages.To cover loans that go sour, the federal government has already doled out almost $145 billion, and the non-partisan Congressional Budget Office estimates the final tab will be about $381 billion. That's about half the size of the 2008 bank bailout but, unlike that bailout, most of[READ MORE]
You want to buy with your fancy friends? I'm tellin' you the rally's got to end. Don't bring them down. I'll tell you once more as prices bounce off the floor, they will go down. Prices have crashed nationwide because buying only made sense as long as prices were going up. Once the rally stopped, prices were doomed to crash because the only alternate reason to buy is to save money versus renting. In many areas of the country, prices are low enough that buying makes sense because it is cheaper to own than to rent. Locally, that is not the case. During the rally kool aid intoxication caused people to buy to capture appreciation, but this is not the only manifestation of kool aid intoxication. Now, some people are buying merely because prices have not gone down. This reason is just as crazy because it isn't grounded in[READ MORE]
The HELOC abusers stimulated the economy when they borrowed all that money and spent it. Now that these same people are walking away from their mortgages, they no longer have housing payments, and their spending amounts to about $10,000,000,000 each month. Perhaps we should thank them for all their spending? I think not. As long as lenders allow this to go on, and as long as the US taxpayer is paying the bills, these squatters are stealing from each of us. Lenders need to process their foreclosures, and borrowers need to experience the consequences of their actions.
ST. PETERSBURG, Fla. — For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to[READ MORE]