1. Mortgage Bankers Association Weekly Applications
Every Wednesday, the MBA releases mortgage applications data for the previous week. Because it is weekly and limited in scope, this data point is typically a lot of noise and not very useful for quantitative analysis. That does not mean it is not informative in its own way.
Here are some of the key points:
Desperate Fed. Bernanke has thrown in everything and the kitchen sink, trying to keep long rates low. Yes, he has succeeded. The long rates are at historical lows but it is unclear what he has accomplished. He can argue that if not for his gallant effort, the real estate market might have tanked. Yes, that is probably also true but let us examine where he has taken the market.
"…. decreased 14.9%…" That, and a few other numbers, made up the headline news for last week's release. What changed from week to week to cause this drop? The 30 fixed rate went up 8 basis points to 4.33%. One has to wonder what happens if the mortgage rate increases by a quarter percent, or a shocking one percent, would all activities then come to a halt? The Bernank claims he still has a lot of tricks left. That I would like to see.
Refinance Share. The share of refinance dropped from 79.1% to 77.6%. Whether it is 79% or 77%, this is a huge number. There is little doubt that refinance activities would drop to zero immediately if rates increase drastically, say 50 basis points or more. Refinances would also drop to zero, gradually, if rates simply remain steady and every loan that can be refinanced has gone through the process. While refinances no longer contribute to consumption the way mortgage equity withdrawal (MEW) did during the bubble era, it still provides some relief to household expenses. A decrease may not be inconsequential to the economy.
Government Purchase. These are the FHAs and to a lesser extent, the VA loans. They are now 43.5% of the purchase applications. Who in their right mind will lend someone a 30 years fixed rate loan at 4.12%, collateralized by a property with less than 5% equity and make the loan assumable? [an assumable mortgage is one that can be taken over by another person, ed.] Answer: aside from B&G Mortgage (Bernanke/Geithner), no one.
This is sounding like a broken record. There is no real estate market. As a certain meaningless number of transactions continue to occur on the surface, the foundation has already been washed away. What is most troubling is the unawareness that the market is on a moving river, not a calm lake. It is struggling to stay in place with Bernanke on the starboard oar and Geithner on the port oar. From the Bernank, there may be QE3. From Geithner, it may be refinancing underwater mortgages with the taxpayers picking up the costs. Personally, I think it is best to put on a helmet and tighten the straps of the life jacket.
2. Massachusetts Supreme Judicial Court ruling – The Lawyers Are Ecstatic
Here are a couple of articles on the Massachussets SJC ruling, rendered last week.
This is my summary of the sequence of events:
Borrower borrowed mortgage from lender.
Lender sold or securitized the loan, transferring title to the electronic system.
Borrower defaulted, property was foreclosed by someone who thought they owned the loan.
Property then sold to a builder.
Builder tore down the house and built condos.
Builder sold condos to new owners.
Now, due to robo signing, Mass SJC decided the lender never owned the property, the foreclosure is invalid, the sale to the builder invalid, the builder never owned the property and has no recourse against the original borrower….
If your head is not spinning by now, let me help you. In reverse chronological order:
The buyers of the condos have no title, since the seller never had title. Sue?
There are probably loans on these condos, but now they have no collateral. Sue?
The builder has no title, so he has illegally torn down someone else's house. Sue?
The builder has no title, he sold something he did not own. Sue?
The lender who sold the property to the builder has no title, they sold something they did not own. Sue?
The borrower was kicked out of the house, then saw the house torn down. Sue?
Multiply above fiasco by an unknown number of properties in a similar situation in Massachussets.
Multiply above fiasco by unknown number of States that may follow the Mass SJC ruling.
Throughout the years, I have advocated some type of national standard for mortgages. Many have questioned why a free market believer like myself would promote more regulations. This type of ruling is exactly the reason why we need a standard for all States. Of all the evil deeds the banks are responsible for, foreclosure is not among them.
Think about how insanely chaotic the situation is. One side of the government via TARP, QEs and so forth is throwing money at the banks to bail them out. The State governments, courts, attorney generals and local municipalities, on the other side, are doing their utmost to punish the banks.
Aside from the lawyers, the big winners are those who had and will continue to have free housing. In fact, they may even end up getting paid. Take this case as an example. If the original borrower is willing sign a quit claim, then the chain of title would be cleared. How much is that signature worth?
Who are the losers? Look in the mirror.
3. What is B&G Mortgage up to now?
(for those not familiar with my articles, B&G Mortgage stands for Bernanke and Geithner Mortgage Company, USA)
Mr. B. has been claiming that the Fed is not out of ammo and he has a lot more tricks left, hinting at some form of QE3.
Last week, Fed Gov. Daniel Tarullo said large-scale purchases of mortgage securities could give a boost to home purchases and refinancing.
This week, Mr. G.'s boss announced some type of refinance plan for loans sold to the agencies. See:
You should also read other reports for a summary of this refinance plan. Nick Timiraos of the WSJ provided a good report here (12 Questions about Obama's Refi Plan).
I only have only one question: Why is this a refinance?
Given the criteria, the borrower has to have a FRE or FNM loan [Freddie Mac or Fannie Mae, ed.] originated before June 2009. They have to go back to the same servicer, be current for at least 6 months and be no more than one payment late during the last twelve months. Nothing else is needed from the borrower. No appraisals.
This is not a refinance, this is a simple loan modification. FHFA [Federal Housing Finance Agency, ed.] can instruct all the servicers to write down the interest rate and recalculate the payments on all loans based on the new criteria. In other words, this is as simple as doing a reset on a hybrid adjustable loan. This modification should not involve mortgage insurance, junior lien holders and anyone else in the title chain.
Once again, why is this a refinance?
Here is the way I see it:
Reason #1 – Bail Out the Banks.
The loans in question are basically uncollateralized losses, accidents just waiting to happen. When these loans default, the agencies have the responsibility to audit them and put back the bad loans to the originators. The banks therefore will absorb the losses instead of the taxpayers in such cases. The loss severity of these loans has to be 50% or higher. This is a risk that has been haunting the banks, especially for all the toxic loans originated before 2009 [in the meantime, refund demands for post 2009 loans are rising as well, ed.].
This FHFA program will provide a safe harbor for the banks to cut ties to their original evil deeds. That is why these loans need to be relabeled as a "HARP refinance".
Reason #2 – Operation Twist
(Note: I have not researched the following but I hope some of you bond guys, or investigative reporters might come up with some data)
The Bernank wants to drive down long rates. The pools of agency loans targeted in the FHFA scheme are probably the highest yielding loans available today that come with a US government guarantee. I speculate that they are largely in foreign hands, probably the Chinese own a good chunk. I do not know what right the agencies may have to unilaterally lower interest for borrowers without having to compensate the holder of these MBS. A refinance, on the other hand, is a prepayment. Holders of the original MBS are welcome to re-invest. Only now it will be at a much lower rate.
This is actually a rather brilliant move to screw the original MBS investors. Since Mr. G. is guaranteeing these loans anyway, why pay them a high yield?
As I stated above, Mr. B.'s Fed printing press is standing by to buy up all these new MBS in the event the old investors do not want to step up to the plate again.
In summary, I am neutral on this scheme. Even though I think it does very little to help the real estate market, I do not think it does much harm. However, holders of the old MBS are the ones who will end up paying for this scheme. If they are in the hands of foreigners, the idea is probably to simply screw them. If they are in the hands of domestic pension plans like CalPERS, or among those purchased by Bill Gross (PIMCO) recently, then there may be some issues that might not surface for quite a while [we would add to this that repeated screwing of MBS investors may have long term effects that worsen the situation beyond its current deplorable state, ed.]
The bankers are the clear winners here, but as we have learned, they always win, we just have to live with it.
Addendum , by Pater Tenebrarum
Alan Blinder is Back, Proposing More Housing Socialism
Former Fed governor, comrade Alan Blinder, who currently poisons innocent young minds at Princeton, America's stronghold of Keynesianism and interventionism, has once again graced , this time opining on how to 'solve the housing mess'.
Not surprisingly, Blinder wants to do whatever is necessary to put obstacles in the operation of the free market continuing the misguided attempt to 'fix' with government intervention what previous government interventions have caused. Our comments are interspersed in  brackets. He begins by saying:
“About four years ago, as the housing bust worsened, our country faced an entirely predictable problem: A huge wave of foreclosures was headed our way. The issue of the day was how to stop it before it engulfed the entire economy. My suggestion then was to revive the Depression-era Home Owners' Loan Corporation, which refinanced about a tenth of all the mortgages in America and closed its books with a small profit. Never mind the details; the suggestion was ignored. Maybe there were better ideas, anyway.
Sadly, however, we did almost nothing to stop the predicted foreclosure wave, which is now drowning us. The issue at this late date is how we can mitigate the damage.
One oft-repeated answer comes from the intellectual descendants of Andrew Mellon and Herbert Spencer: liquidate, liquidate, liquidate. Let the housing market find its natural bottom, and the chips fall where they may. [if this had indeed been done, the housing market would very likely have bottomed already and an upswing would be well underway by now. Sadly, policymakers did in fact listen to the interventionists of Blinder's ilk, even if they did not adopt his idea in detail, and have by now intervened the market to death]”
Blinder then attempts to take the wind out of the sails of critics by accusing them of being immoral and heartless, a leftist canard we have heard repeated many times over recent years.
“I beg to differ. Some of the reasons are humanitarian. Millions of foreclosures are ruining millions of lives and devastating many communities. We can do better than Social Darwinism.”
Keeping people in houses they could never afford in the first place 'for free' – which is what is actually happening in many cases – and artificially supporting inflated prices both undermines the functioning of the market and is unfair to all those who want to buy a home at its true market-determined price. Why are the deadbeats to be preferred over young couples seeking to buy their first home?
Blinder then begins to fantasize:
“But many of the reasons are strictly economic. The seemingly-endless housing slump is dragging down our economy. By now, massive underbuilding during the slump far exceeds the overbuilding during the boom. So, by rights, a shortage of houses should be pushing up house prices, incentivizing home builders, and boosting growth in gross domestic product. Instead, actual and prospective foreclosures hang over the housing market like a wet blanket.”
This nonsense almost leaves us speechless. Is Blinder aware that if we had actually allowed the market to operate freely, the 'overhang' would probably be gone by now? Moreover, the supply overhang from foreclosures proves ipso facto that there can be no 'shortage of houses'. What on earth is he talking about?
“That we let this happen is tragic. [true enough - the real estate bubble created by the Federal Reserve's accommodation of a massive credit boom was a mistake that cost the economy trillions in terms of capital decumulation. Tragic indeed]. It's not that policy makers did nothing. Starting half-heartedly in the Bush administration, and continuing (somewhat less half-heartedly) in the Obama administration, the government has tried any number of approaches to refinancing or modifying unaffordable mortgages. Let me count (some of) the ways: Hope Now, Hope for Homeowners, the Home Affordable Mortgage Program, the Home Affordable Refinancing Program, the Hardest Hit Funds . . . the list goes on. Some of these programs actually made a dent in the problem. But we needed a lot more than a dent.”
Ah, so we did intervene, with countless programs, but somehow they didn't work. Was it because the plans adopted were not following the Blinder proposals to perfection? You can already tell that he implies that we somehow 'didn't spend enough' on all of this. Several trillions in government spending and money supply inflation have been implemented since 2008 – but that was still not enough. So what went wrong? Blinder explains….
“Why the failure? Three formidable barriers have stood between us and success—and still do.
The first is money. Given the huge magnitude of the aggregate gap between house values and mortgage balances, a comprehensive anti-foreclosure solution requires hundreds of billions of dollars. (Note, however, that this money would be lent, not spent.) Compounding the tragedy, we now know that there was probably enough money in the Troubled Asset Relief Program (TARP) to do the job—but neither Treasury Secretary Hank Paulson nor Treasury Secretary Tim Geithner knew that at the time. [apparently not all central planners have the 'correct' epiphanies]. Now TARP is no longer available, and we are still trying to fix this massive problem on the cheap. [what about the huge monetization of mortgage backed and related toxic securities by the Fed? Did we only dream that?]
The second barrier is a host of legal complications—stemming from such things as securitizations, second mortgages, and the like—that make it difficult to design and execute a comprehensive plan. The details would put you to sleep. But the bottom line is that most serious solutions entail modifying somebody's property rights—which is something we don't do lightly in America, and for good reason. [this is of course preparing the ground for something comrade Blinder is not averse to at all – namely 'modifying someone's property rights', presumably just as long as they're not his own]
The third barrier may be the biggest: politics. Apparently, many Americans view it as unfair to bail people out of unaffordable mortgages. [it is not only 'unfair' – it is economic nonsense]. Do you remember the famous Rick Santelli rant on CNBC in February 2009—the one that gave the tea party movement its name? Mr. Santelli was griping about President Obama's new foreclosure mitigation programs—the ones I just characterized as half-hearted. It would have been a brave politician indeed who pushed to make those programs larger and more generous.”
The vast majority of mortgage holders have lived within their means and are paying their mortgages on time. If it is fine to 'bail out people from unaffordable mortgages', then why should these people continue to pay? It would be best for all of them to default and get bailed out instead. Santelli's rant struck a chord precisely because tax payers feel that they are being abused by government interventions intended to fix the mistakes of previous government interventions – things they never voluntarily signed up for. After all, someone is paying for all these interventions. In a free market system those who make the losses are usually expected to bear them. If you bail out every fool, your entire nation soon turns into a ship of fools.
Blinder then gets to his latest proposals:
“So what can be done now? There is no silver bullet; we need different remedies for different types of (actual or prospective) foreclosures. And to succeed, we must overcome the three barriers. Foreclosure mitigation is expensive. It will encounter political resistance. It probably requires bending some property rights. Not very appetizing. [but that won't keep comrade Alan from recommending it] But remember, the alternative may be continued stagnation, which is making everyone dyspeptic. [this is simply wrong – the sooner the market clears, the sooner the stagnation ends. It is precisely because of interventions that the bust keeps dragging on].
Here are some ideas.
• To get millions of refinancings done expeditiously, simplicity is essential. As nationalized companies that dominate the mortgage market, the government-sponsored enterprises, Fannie Mae and Freddie Mac, should be taking the lead, not watching their profits and mortgage-backed security (MBS) prices. If GSE managements won't move, their regulator, the Federal Housing Finance Agency, should push them. If the regulator won't push hard enough, the U.S. Treasury, their major shareholder, should. If Treasury officials won't, President Obama should order them to. If the whole administration is too timid, Congress should change the law. [in short: coerce people into making uneconomic decisions and then bill the tax payer for them]
Here's one concrete example of a legal barrier: When a mortgage owned by Fannie or Freddie is proposed for refinancing, it has the legal right to "put" the original mortgage back to the originating bank if there was even the slightest irregularity in the original documents. That right can make the originating bank afraid of refinancing, even if the homeowner is at risk of default. And if Fannie or Freddie does indeed block the refi, it will be left with the vast majority of the risk in the original mortgage, anyway. [as Ramsey notes above, the banks have already successfully dodged this bullet via the government's latest interventionist measures. In other words, creditors continue not to be held responsible for their foolish lending decisions – instead, the tax payer is once again picking up the tab]-
• Most economists see principal reductions as central to preventing foreclosures. That takes money, of course—plus ignoring the Rick Santelli rant. Perhaps the cost to taxpayers could be reduced by giving the government—or even private investors—some of the upside when house prices finally start climbing. One encouraging sign is that settlement talks between the government and the five biggest mortgage servicers (Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co.) are reportedly coming around, at last, to principal reductions. [such measures do not require government intercession. It is in the interest of lenders to get back as much as possible from property loans that are in danger of default. Government intercession means that compulsion and coercion will be employed to 'bend property rights']
• Many vacant houses could be converted into rental units by enterprising developers. [you mean 'enterprising developers' haven't noticed this yet? Where have you been?] The government could make such investments more attractive, e.g., by using mechanisms similar to what the Federal Reserve and the Treasury did during the worst of the financial crisis. Back then the government lent money to investors who were willing to buy mortgage-backed securities; this time it could lend money to investors who are willing to invest in certain rental properties.[again, if such projects are economic, they do not require government intercession at all. If they do, then they are obviously not economic and will waste more scarce resources]
An old adage says, "Where there's a will, there's a way." There is a way, or rather several ways, out of the mortgage mess. What we need now is the political will to take them.
To this last sentence we can only say: the only way that the mortgage mess can be solved as quickly as possible is to let the free market operate in unhampered fashion. The only 'political will' that is required is the courage to adopt a 'laissez faire' policy – something that was last seen in the recession of 1920/1921 under president Harding. That was a major recession, with deflation even more pronounced than during the Great Depression – and yet, no-one remembers it nowadays, because it was over so quickly. This is what happens when you allow the market to be free. If we did that, the bust might well be over before Alan Blinder gets to pen his next editorial.
Alan Blinder demands more intervention in the housing market – the very thing that got us into the mess is supposedly going to get us out of it. A certain bridge in Brooklyn springs to mind.
(Photo credit: charlierose.com)
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