Real Estate in the USA – from Darkness to the Abyss

Did you hear that B&G Mortgage (Bernanke and Geithner Mortgage) is offering a new option ARM loan program? The interest rate is zero and repayment is optional. Other terms will be decided later.

Government intervention has been off the charts since the bursting of the real estate bubble and they are still not done. This week, Obama is expected to announce his new and improved grand plans. Pertaining to real estate, the trial balloons of the past few weeks have been confirmed in detail in a speech by Federal Reserve governor Elizabeth Duke – Rebalancing the Housing Market.

If you are unfamiliar with these proposals, you may need to glance through the speech to know what I am talking about below.

This is the key sentence of her speech, in the second paragraph:

So, in crafting appropriate policy responses, an important starting point is to carefully analyze what we're solving for.

Policy makers should indeed give that problem some thought. What are they trying to accomplish? Each new round of policies has proven to be more destructive than the one before it,  and this upcoming round won't be an exception.

There are two parts to the new plan:

Refinancing of underwater mortgages at lower rates and converting REO's (1) into rentals. I can summarize the plan in one sentence: Let's throw money at it.

That is the plan.

The money is going to come from B&G Mortgage (see the previous post about Bernanke and Geithner Mortgage). Mr. G. is going to create all the junk mortgages, while Mr. B. will be buying them all up.

This will not work. I can explain in detail why it will not work. I can also propose ideas on what will work. In the end, it probably doesn't matter. I have no ability to alter or influence decisions that have already been made. So it is far more pragmatic to analyze the potential outcome of these policies.

The deterioration of a piece of property starts on the day when a borrower decides to stop making payments. At that moment, all incentive to improve and maintain the property is gone. This cycle ends when the property is sold and the delinquent borrower is removed.

REO's as such are not sold at distressed prices.  They are sold at prices that reflect the distressed conditions, which may be physical, legal, or reflect obsolescence.  It is unreasonable to expect a property in neglected condition to sell for the same price as one that shows pride of ownership.

The longer a piece of property stays in this cycle of deterioration, the more severe the damage it will inflict on the market. That is the primary mistake of all government interventions to date. The focus needs to be on how to shorten this deterioration period instead of prolonging it.

The new plan is going to do more prolonging. Just like with HAMP (2), there are going to be long delays just because of the logistics. Giveaway criteria have to be formulated, followed by months, maybe even years of screening for eligibility. There will be mass confusion and fraud.  Every borrower is going to want a lower mortgage rate, including me.  Every borrower who's under water is going to re-evaluate his position given the new choices. Would it be better to continue paying if mortgage rates are lowered? Maybe defaulting is the correct move, and then renting back the house at an even lower cost?

Servicers will once again have to process millions of applications with minimal financial incentives. They won't be told what is right,  but they will bear the blame for anything that goes wrong.

Lenders that were reluctant to lend before will be even more reluctant now. They will be originating agency (3) conforming loans with even more scrutiny, just to be certain that they cannot be put back to them due to some technicalities.

How is any of this good for the real estate market?  Properties that should be sold will remain in the possession of those who are already receiving, or are expecting to receive a government subsidy.

This is also the first time that government intervention is moving into the rental market.  Who is going to be buying the agency REO's and what conditions are going to be imposed on the buyers? I can easily see these properties being sold at unreasonably favorable terms to quasi non-profit entities, which will rent them out without any economic considerations. Could we see 'eviction intervention' similar to 'foreclosure intervention'? Why would borrowers that have not made a mortgage payment in years be interested in paying rent?  Isn't free housing a right?

The free market has offered the perfect solution.  There are plenty of buyers in every metro area to gobble up REO's, especially the type of properties the agencies have in their portfolios. There are owner-users, flippers and investors who will fix up the properties and put them on the rental market. These are the perfect buyers who will pay top retail price and return the properties to their highest valued and best use. But that would of course be too simple for the government.

I can also see a repeat of the RTC (4)  era,  when properties were pooled and sold in bulk to those with the best political connections and influence, at unbelievable bargain basement prices.

Unrelated to the upcoming grand plans of Obama, the agencies filed suit against 17 major banks over the losses incurred in the MBS (6) sold to them.  The timing is unfortunate,  but the statute of limitations is supposedly about to expire. These same banks are already facing civil suits from investors and possibly criminal charges by the Attorney Generals for their role in the robo-signing scandal. These are ironically the very same banks that the government is accusing of not making enough loans. These are also the same banks that the government forced free TARP (7) loans upon, because they were/are considered 'too big to fail'.

Policy makers are playing with fire. Yes, the banks deserve to be punished, and so do the rating agencies and above all, so does Alan Greenspan, for their respective roles in the fiasco.  However,  for the sake of the country, we need to stabilize the real estate market first and apportion blame later.

If there was ever a time for a uniform approach to mortgage lending, the secondary market and recourse, that time is now. The market needs clarity and stability. Lenders need some safe harbor guidelines. Investors need to know their rights. Buy/sell decisions need to be based on free market principles instead of anticipation of the next government intervention.

What lies ahead?  We know there can be no demand improvement without a rise in employment. At the moment, employment is heading down. Do not look to home construction to stimulate employment. There is vast excess supply.  Any stimulus in that arena would only serve to exacerbate the supply problem. There are nothing but dark clouds ahead. All my previous real estate opinions have in fact proven to be overly optimistic. Investing is a war between greed and fear. In the real estate market, from my personal viewpoint, fear is today winning the battle.

Footnotes, abbreviations:

(1) REO = real estate owned – involuntarily, by banks after foreclosure, ed.

(2)HAMP = 'Home Affordable Modification Program' [sic, ed.]

(3) agencies = the GSE's (government sponsored enterprises), Fannie Mae, Freddie Mac and Ginnie Mae

(4) RTC  =  Resolution Trust Corporation – the entity that administered properties after the savings and loans bust-up in the early 1990's, ed.

(5) FHFA = Federal Housing Finance Agency; Lockhart was appointed its director after the GSE's went into 'curatorship', ed.

(6) MBS = mortgage backed securities, ed.

(7) TARP = 'Troubled Asset Relief Program'




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


2 Responses to “Real Estate in the USA – from Darkness to the Abyss”

  • Floyd:

    Given record low morgage rates and RE prices, isn’t a good time to buy?
    Gov heavy handed intervenition is a concern, though. It sour a good investment.

  • amun1:

    The biggest problem with the real estate market now is interest rates, IMO. Who, other than the government, would lend money to a private citizen for 30 years at 4%? Even for a collateralized loan, in the current over-indebted climate with rampant currency debasement that is a fools trade and our bankers are not fools.

    Our housing market is effectively 100% nationalized, with all of the inefficiency and corruption that entails. It’s just another asset class with privatized profits and socialized losses, begging to be abused by shysters and con men. This is the tale of our entire economy in a nutshell.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...

Support Acting Man

Item Guides


The Review Insider

Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist