Author Archive: Irvine Renter

The 9/11 terrorists killed several thousand people, but banking terrorists destroyed the lives of millions, and they are still in power.

Millions of families lost homes during the housing bust, and most of those families hate the bankers who threw them out of their family homes; however, that wasn't an act of terrorism as much as it was a mercy killing. Most of those borrowers were hopelessly indebted, and the foreclosure ended the pain. The real acts of terrorism perpetrated by bankers were not these mercy killings.

Foreclosure roulette or terrorism?

During the housing bust, well over 10 million borrowers quit paying their mortgages. Lenders foreclosed on millions of these borrowers, including more than a million in California alone, but with so many delinquent borrowers and so few creditworthy buyers, lenders couldn't foreclose on every bad loan and resell the[READ MORE]

Securitizing liar loans will work out well for early adopters, but as these loans proliferate, they destabilize the market and lead to disaster.

If at first you don't succeed, try, try again. Then quit. There's no point in being a damn fool about it. W. C. Fields
liar-loanWere liar loans an innovation we should revisit? Is there a good way to underwrite loans without verifying whether or not the borrower can repay it? Personally, I don't think so. When lenders underwrite new loans, one of the fundamental tasks they perform is determining whether or not the borrower can repay; therefore, allowing borrowers to simply state their income with no verification is an abdication of an underwriter’s responsibility. Stated-income loans (aka liar loans) were the worst financial innovation of the housing bubble because these loans undermined investors' faith in borrowers' capacity to repay, causing investors[READ MORE]

The housing market can't absorb a sudden or large increase in mortgage rates without major declines in sales and perhaps even decreases in prices.

In response to the housing bubble and bust, Congress passed the Dodd-Frank financial reform. These new mortgage regulations will prevent future housing bubbles by effectively banning destabilizing loan products with interest-only and negative amortization features because those loan programs enabled buyers to greatly inflate house prices from stable levels set by wages and mortgage rates.yellen_raise_rates The toxic loan products banned by Dodd-Frank were invented to solve the problem of affordability. In a stable housing market, the equilibrium price is the highest price consumers can finance, so under pressure to complete more deals, lenders seek ways to increase the size of the loans lenders provide borrowers. Unstable affordability products were born out of this constant market pressure. Since affordability[READ MORE]

House prices in Irvine, California, reached the peak of the housing bubble, providing equity and relieving many underwater homeowners.

boy_in_the_plastic_bubbleThe federal reserve in conjunction with government officials reflated the housing bubble to restore collateral backing to lender’s bad loans. Whether or not this is a good idea depends on your perspective. If you’re a renter whose tax dollars are being diverted toward this endeavor, these efforts are not particularly welcome. Renters receive no benefit from this intervention, and the resulting high home prices make it more costly for renters to become homeowners, so it’s a double whammy. If you’re a homeowner, it’s a very welcome government intervention. It costs homeowners nothing, and they get all the benefits. Whether or not we think its a good idea, policymakers do, and these efforts will continue until the bubble is fully reflated and the banks[READ MORE]

The real thieves of the housing bubble weren't the big players, the real thieves were the family next door.

People are basically honest and will do the right thing if given the chance. However, people are also opportunistic, and if encouraged and enabled to steal, many ordinarily good people will go down the wrong path. Lenders led many astray. During the housing bubble, lenders were desperate to loan money in what they thought were low-risk, high yielding investments. The advertising to entice homeowners to become loanowners was both effective and too-good-to-be-true. The housing bubble turned many good people into thieves. Most were petty thieves who merely gamed the system to get free money. This same group now feels completely justified asking for principal reduction as if that were an entitlement instead[READ MORE]

Quantitative easing boosted the economy to the degree liquidity was a limitation; however, with debt deflation the real problem, QE didn't accomplish much.

quantitative_easingThe federal reserve sets policy in meetings of the Federal Open Market Committee (FOMC), a group of bankers. The FOMC sets target interest rates and directs its traders to either buy or sell securities to meet interest rate targets. When the federal reserve buys Treasuries, the price goes up, and interest rates go down. When the federal reserve sells Treasuries, the price goes down, and interest rates go up. Prior to the financial meltdown in 2008, the federal reserve only bought short-term Treasuries, but in an effort to rescue housing, they began what's known as quantitative easing, an unprecedented campaign of buying 10-year Treasuries and mortgage-backed securities in order to drive down mortgage interest rates. It’s important to remember[READ MORE]

Is it wiser to view a depressed market that's improving as weak or recovering?

I_want_to_believeSince early 2012 when housing prices stopped going down, I characterized the price rally as a reflation of the old housing bubble rather than a price recovery. IMO, the crash was the price recovery because the prices that preceded it were a bubble with no tether to fundamental values. The price crash restored market prices to values supportable by income and rent. However, most people don't want to see this reality, particularly deeply underwater homeowners. Most want to believe peak housing bubble prices were fair value and the crash represented a deeply undervalued condition that needed to recover back to fair value prices. This viewpoint requires people to believe that record low interest rates and a bevy of market manipulations were needed to restore fair value rather than[READ MORE]

Qualified mortgage standards and the ability to repay rules provide a rigid framework designed to prevent lenders from irresponsibly inflating another painful housing bubble. The rules as drafted should achieve the desired effect.

honorable_borrowersThe housing bubble inflated because lenders underwrote huge loans to borrowers who didn’t have the capacity to repay unless the value of the underlying collateral kept rising to bail them out. It became a massive Ponzi scheme that imploded and wiped out the housing market, the economy, and nearly our entire financial system. Regulators were wise enough to understand that much, and they were brave enough to pass the Dodd-Frank law to attempt to rein in the worst offenses. Part of the implementation of Dodd-Frank is the establishment of rules regarding the ability to repay a loan. It’s shocking that bankers must be regulated in order to properly evaluate[READ MORE]

Those who buy when houses are undervalued come out far ahead of those who buy at the peak of the housing cycle.

California_real_estate_billionaireWhen I developed the OC Housing News Report, one of the biggest challenges was to develop a rating system that would time the housing market to maximum advantage. As we’ve all seen over the last several years of constant government manipulation, its very hard to pick the exact bottom. Despite these challenges, there are certain key indicators one can look for to evaluate market timing. I discuss these at length on the market report sign up page. In short, the best market conditions are when prices and rents are rising slowly and prices are undervalued by historic norms. These conditions usually occur only at the bottom of large market corrections like the one that ended in 2012. I first wrote[READ MORE]

Resting on a foundation of stable loan products and backed by can-kicking loss mitigation practices, the risk of future real estate declines is low.

real_estate_only_goes_upReal estate prices do not always go up. Prior to the housing bubble, and despite two previous bubbles in California where house prices went down, most buyers clung to the belief that real estate prices only go up. The housing bust ended this delusion forever, and in the process created a latent fear of future price declines. The fear of falling prices is rational. Without this fear, buyers become foolish and pay any price even when it's way, way too much. The lack of fear of falling prices contributed to the housing bubble. But is this fear rational today? For house prices to crash, two conditions must exist: first, aggregate loan balances must drop significantly, and second, large numbers[READ MORE]

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