Investing Curiouscatblog

Category: Real Estate

  • Mortgage Rates Falling on Fed Housing Focus

    Mortgages Falling to 4% Become Bernanke Housing Focus by Brian Louis and Kathleen M. Howley

    Home loans may go as low as 4 percent if the economy worsens, said Robert Edelstein, a professor at the Haas School of Business at the University of California, Berkeley. Record foreclosures, falling home prices and an economy that has lost 5.1 million jobs since December 2007 will pressure Bernanke to further reduce borrowing costs. “The Fed will have to do whatever it takes,” Edelstein said. “People will buy cheaper houses at very low interest rates.”
    …
    Conventional mortgages averaged 4.61 percent in 1951, 4 percent when backed by the Veterans Administration, and 4.25 percent by the Federal Housing Administration, according to The Postwar Residential Mortgage Market, a 1961 book written by Saul Klaman and published by Princeton University Press. Rates during the 1930s were as high as 7 percent.
    …
    Mortgages were cheaper through most of the 1940s, ranging from about 4 percent to 5.7 percent, depending on whether the lender was a life insurer, a commercial bank or a savings and loan. In that era, most loans were for 14 years and less.
    …
    The central bank has purchased more than $300 billion of mortgage-backed securities in 2009 through the week ended April 8, helping to cut home-loan rates to 4.82 percent last week from 5.1 percent at the start of the year, according to Freddie Mac data.
    …
    The difference between 30-year mortgage rates and 10-year Treasury yields has narrowed to about 2.2 percent from 3.1 percent in December, which was the widest since 1986. The spread remains almost 0.7 percentage point above the average of the past decade, data compiled by Bloomberg show. Rates for 15-year mortgages are about 1.8 percent above 10-year Treasury yields, compared with an average 1.4 percent since 1999.

    Excellent article with interesting historical information. I don’t believe mortgage rates will fall to 4% but differences of opinion about the future is one function of markets. Those that predict correctly can make a profit. I am thinking of refinancing a mortgage and I think I am getting close to pulling the trigger. If I was confident they would keep falling I would wait. It just seems to me the huge increase in federal debt and huge outstanding consumer debt along with very low USA saving will not keep interest rates so low. However, as I have mentioned previously, it is interesting that the Fed is directly targeting mortgage rates and possible they can push them lower. The 10 year bond yield has been increasing lately so the slight fall in mortgage rates over the last month are due to the reduced spread (that I can see decreasing – the biggest question for me is how much that spread can decrease).

    Related: Fed to Start Buying Treasury Bonds Today – Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities – Low Mortgage Rates Not Available to Everyone – what do mortgage terms mean?

  • The Value of Home Ownership

    Home Ownership Shelter, or Burden?

    The collapse in house prices matters most directly to two overlapping groups: those who bought property at the peak of the market and now face “negative equity”; and those (in America) who took out subprime mortgages. Roughly 10m Americans are in negative equity—ie, the cost of their mortgage exceeds the value of their home. In Britain about 3% of households are in negative equity. For homeowners, negative equity makes houses more like a trap than a piggy bank. Those who cannot meet their payments lose their house, their savings and (in America, usually) their credit rating for seven years.

    The other area of concentrated distress is subprime mortgages, which increased their share of the American mortgage market from 7% in 2001 to over 20% in 2006. According to the Mortgage Bankers Association, the delinquency rate was 22% in the fourth quarter of 2008, compared with only 5% for prime loans.
    …
    “Perhaps the most compelling argument for housing as a means of wealth accumulation”, argues Richard Green of the University of Southern California, “is that it gives households a default mechanism for savings.” Because people have to pay off a mortgage, they increase their home equity and save more than they otherwise would. This is indeed a strong argument: social-science research finds that people save more if they do so automatically rather than having to choose to set something aside every month.

    Yet there are other ways to create “default savings”, such as companies offering automatic deductions to retirement plans. In any case, some of the financial snake oil peddled at the height of the housing bubble was bad for saving.

    The debate over whether home ownership is a wise investment or not, is contentious (more so in the last year than it was several years ago). I believe in most cases it probably is wise, but there are certainly cases where it is not. If you put yourself in too much debt that is often a big problem. I also think you should save a down payment first. If you are going to move (or have good odds you may want to) then renting is often the better option.

    The “default saving” feature is one of the large benefits of home ownership. That benefit is destroyed when you take out loans against the rising value of the house. And in fact this can not just remove the benefit but turn into a negative. If you spend money you should have (increasing your debt) that can not only remove you default saving benefit but actual make your debt situation worse than if you never bought.

    Related: Your Home as an Investment – Nearly 10% of Mortgages Delinquent or in Foreclosure – Housing Rents Falling in the USA – Ignorance of Many Mortgage Holders

  • It’s Now a Renter’s Market

    It’s Now a Renter’s Market by Prashant Gopal

    Effective rents fell in 64 of 79 markets that Reis tracks. Effective rents in San Francisco dropped 2.8% in the first quarter of this year, compared with the previous quarter—the nation’s largest quarterly decline. Rents fell 2.6% in New York City (all five boroughs), 1.3% in Charlotte, 2.5% in San Jose, 0.9% in San Antonio, 0.9% in Cleveland, 1.2% in Chicago, and 2.3% on Long Island.
    …
    Oklahoma City, where people spent just 12% of their income on rent, was the most affordable. Other cheap markets included Indianapolis, Denver, Fort Worth, and Cleveland. The least affordable market was New York, where people spent 57% of their income on rent.

    Rental markets are driven largely by 2 factors, vacancy rates and jobs. If jobs in a metropolitan area are increasing rents usually increase. If more new apartments are added to the market than jobs (which then increases vacancy rates) this will push down rates. Other factors influence vacancy rates (such as people moving back in with parent, people sharing apartments…). Those factors often are largely influenced by losing jobs in an area.

    D.C. apartment market remains strong

    The D.C. area continues to boast one of the best apartment markets in the U.S., with a vacancy rate well below the national number
    …
    Rent increases over the past 12 months for all investment grade apartments kept under the long-term average of 4.2 percent per annum, at 0.5 percent since March 2008.

    Related: Housing Rents Falling in the USA – Home Values and Rental Rates – Real estate investing articles – Urban Planning – Longer Commutes Translate to Larger Housing Price Declines
    (more…)

  • The Best Way to Rob a Bank is as An Executive at One

    William Black wrote The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L. I think he a bit off on the “owning one,” being the best way to loot. The looters are not owners, they are executives that loot from owners, taxpayers, customers… And those looters pay politicians a great deal of money to help them. He appeared on Bill Moneys Journal discussing the huge mess we know are in and how little is being done to hold those responsible for the enormous crisis created by them.

    Fraud is deceit. And the essence of fraud is, “I create trust in you, and then I betray that trust, and get you to give me something of value.” And as a result, there’s no more effective acid against trust than fraud, especially fraud by top elites, and that’s what we have.
    …
    The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn’t let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
    …
    Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law.
    …
    In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn’t matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you’re covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.”
    …
    And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don’t prosper. So, instead of being bad for capitalism, it’s what saves capitalism. “Honest purveyors prosper” is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn’t need to happen at all.

    Related: Fed Continues Wall Street Welfare – Credit Crisis the Result of Planned Looting of the World Economy – Lobbyists Keep Tax Off Billion Dollar Private Equities Deals – Poll: 60% say Depression Likely – Canadian Banks Avoid Failures Common Elsewhere – Too Big to Fail – Why Pay Taxes or be Honest

  • A Banker Who Avoided Toxic Debt Bubble

    The Banker Who Said No

    n late 2006 he sold $74 million of preferred stock although he had no immediate use for the proceeds. He says he couldn’t resist the “stupidly mispriced” terms–as low as Libor plus 1.7 percentage points for 30 years. He wanted as much money available when the boom turned to bust. With the extra money the bank could pay off nearly all its depositors with capital on hand–nearly unheard of in the history of banking.

    Then came a shocker: Amid one of the most reckless lending sprees in history, regulators focused on the one bank that refused to play along. Beal’s moves confused and worried them, and so they began to probe him with questions. “What are you doing?” he recalls them asking. “You’re shrinking yet you’re raising capital?”

    Says Beal about the scrutiny, “I just didn’t fit into any box.” One regulator, the former head of the Texas Savings & Loan Department, Charles Danny Payne, says, “I was skeptical at first, but I’ve gained a lot of confidence over the years,” adding that Beal has an “uncanny ability to sniff out deals.”

    Next, the credit rating agencies started pestering him about his dwindling loan portfolio. They never downgraded him but scolded him for seeming not to have a “sustainable” business model. This while their colleagues were signing off on $32 billion of bum collateralized debt obligations issued by Merrill Lynch.
    …
    He thinks the government is going to be “disappointed” by its various programs to revive lending. He says Treasury Secretary Timothy Geithner’s new plan to guarantee loans to buyers of toxic assets won’t lead to many sales because the problem isn’t liquidity but price. They are not low enough. Half the country’s banks–4,000 in all–would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

    “Banks are on a prayer mission that somehow prices will come back and they won’t have to face reality,” Beal says. And that reality, according to Beal, is going to get a lot worse. “Unemployment is going over 10%, commercial real estate hasn’t even begun collapsing and corporate credit defaults are just getting started,” he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

    There are some (very few) who succeeded in not acting like lemmings. I wish someone would explain to me why people are worthy of millions in bonuses when they just do what every single other person in their position did that was also getting millions in bonuses. Obviously they were just practicing bankruptcy for profit (which worked out incredibly well for them) and still we seem to think the only solution is to support these moral bankrupt (and now commercially bankrupt) organizations and individuals.

    Related: What the Bailout and Stimulus Are and Are Not – Sound Canadian Banking System – More on Failed Executives – Jim Rogers on the Financial Market Mess

  • Data Shows Subprime Mortgages Were Failing Years Before the Crisis Hit

    Here is a very interesting paper showing real analysis of the data to illustrate that the deteriorating condition of loans should have been caught by those financing such loans years before the mortgage crisis erupted. Understanding the Subprime Mortgage Crisis by Yuliya Demyanyk, Federal Reserve Bank of Cleveland and Otto Van Hemert, New York University.

    Using loan-level data, we analyze the quality of subprime mortgage loans by adjusting their performance for differences in borrower characteristics, loan characteristics, and macroeconomic conditions. We find that the quality of loans deteriorated for six consecutive years before the crisis and that securitizers were, to some extent, aware of it. We provide evidence that the rise and fall of the subprime mortgage market follows a classic lending boom-bust scenario, in which unsustainable growth leads to the collapse of the market. Problems could have been detected long before the crisis, but they were masked by high house price appreciation between 2003 and 2005.
    …
    In many respects, the subprime market experienced a classic lending boom-bust scenario with rapid market growth, loosening underwriting standards, deteriorating loan performance, and decreasing risk premiums.30 Argentina in 1980, Chile in 1982, Sweden, Norway, and Finland in 1992, Mexico in 1994, Thailand, Indonesia, and Korea in 1997 all experienced the culmination of a boom-bust scenario, albeit in different economic settings.
    Were problems in the subprime mortgage market apparent before the actual crisis erupted in 2007? Our answer is yes, at least by the end of 2005. Using the data available only at the end of 2005, we show that the monotonic degradation of the subprime market was already apparent. Loan quality had been worsening for five years in a row at that point. Rapid appreciation in housing prices masked the deterioration in the subprime mortgage market and thus the true riskiness of subprime mortgage loans. When housing prices stopped climbing, the risk in the market became apparent.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – How Much Worse Can the Mortgage Crisis Get? – Homes Entering Foreclosure at Record – Articles on Real Estate

  • Fed to Start Buying Treasury Bonds Today

    Fed to start buying T-bonds today, hoping to move rates

    The Federal Reserve will try to get long-term interest rates moving down again when the central bank today launches its first purchases of Treasury bonds. The Fed triggered a stunning drop in Treasury bond yields on March 18 when policymakers surprised Wall Street by announcing a plan to buy up to $300 billion of Treasuries over the next six months.

    The yield on the 10-year T-note plunged to 2.53% on March 18 from 3% the previous day, the biggest one-day drop in decades. But since then, Treasury bond yields have been creeping higher. The 10-year T-note ended Tuesday at 2.65%. Conventional mortgage rates have flattened or inched up, although they remain historically low, in the range of 4.75% to 5%.
    …
    On Tuesday the Treasury sold $40 billion of new two-year T-notes at a yield of 0.95%, which was lower than expected, indicating healthy investor demand. The government will auction $34 billion in five-year notes today and $24 billion in seven-year notes on Thursday. Against numbers like those in just one week, the Fed’s commitment to buy $300 billion of Treasuries over six months doesn’t look like much.
    …
    there’s nothing to stop the Fed from suddenly announcing that its $300-billion commitment will get substantially bigger: The central bank can, in effect, print as much money as it wants to buy bonds — at least, until the day that global investors stop wanting dollars.

    The original announcement caused a dramatic move but since then yields have been drifting up, every day, including today. Rates are already very low. And the huge amount of increased federal borrowing is a potential serious problem for lowering rates. And potentially an even more serious problem is foreign investors deciding the yield does not provide a good investment given the risks of inflation (I know that is how I feel). It will be interesting to see what happens with rates.

    Related: Who Will Buy All the USA’s Debt? – Lowest 30 Year Fixed Mortgage Rates in 37 Years – mortgage terms

  • Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    I make a point of showing the discount rate changes by the Fed don’t translate to mortgage rate changes. I do so because many people think the discount rate does directly effect mortgage rates. But the Fed announced today, actions that actually do impact mortgage rates.

    Federal Reserve to Buy $1.2T in Bonds, Mortgage-Backed Securities

    The central bank will increase its purchases of mortgage-backed securities by $750 billion, on top of a previously announced $500 billion. It also will double its purchases of debt in Fannie Mae and Freddie Mac to $200 billion. Those steps are intended to lower mortgage rates. The announcement of the previous purchases pushed mortgage rates down a full percentage point.

    If you are looking at refinancing your mortgage now (or soon) might be a good time, rates were already very low and will be declining. And if you own long term bonds you just got a nice increase in your value (bond prices move up when interest rates move down).

    Related: Lowest 30 Year Fixed Mortgage Rates in 37 Years – Low Mortgage Rates Not Available to Everyone – Why do we Have a Federal Reserve Board?

  • Over Half of 2008 Foreclosures From Just 35 Counties

    More than half of the nation’s foreclosures last year took place in 35 counties

    Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier.
    …
    A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble.
    …
    The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation’s foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation’s foreclosures last year.

    In more than 650 other counties – about a fifth of the nation – the number of foreclosure actions actually dropped since 2006.

    Related: Freezing Mortgage Rates – Nearly 10% of Mortgages Delinquent or in Foreclosure – Jumbo Loan Defaults Rise at Fast Pace – Ignorance of Many Mortgage Holders

  • Making Money Buying Distressed Mortgages

    Ex-Leaders at Countrywide Start Firm to Buy Bad Loans

    PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

    Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.

    Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
    …
    Phone operators for PennyMac — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if they do not respond to calls, are not willing to start paying or cannot afford the house. In many other cases, operators offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.
    …
    But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, cutting their monthly payments nearly in half, Ms. Laverde said.

    This is one way the economy cleans up messes. A foolish organization lends money (or buys mortgages, loans…) to lots of people that couldn’t pay back and they then sell those loans at a big discounts. The new owners of the loans now have this mortgage that the homeowner can’t afford. But the cost of the mortgage to them wasn’t anywhere near the amount the homeowner owes. So the new buyer can make a great deal of money just by getting the homeowner to start paying again (even if it is at a much lower rate). They can also make money by foreclosing and then selling the property but truthfully if they can get the homeowner to pay that is likely a much better quick profit for them (and they can then sell the performing loan to someone else – I would imagine). Who knows if PennyMac will make a ton of money this way, but I fully expect many organizations to do so.

    Related: Nearly 10% of Mortgages Delinquent or in Foreclosure – Learning About Mortgages – How Much Further Will Housing Prices Fall? – Jumbo v. Regular Fixed Mortgage Rates: by Credit Score