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Saturday, February 21, 2009
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36 comments:
Analysts predict more DC area mortgage meltdowns
http://www.dcexaminer.com/local/Mortgage-meltdown_02_19-39810687.html
This is a great graphic demonstrating the crosswords at which we stand today. Are we in a depression? or recession? Who knows.
http://dshort.com/charts/bears/four-bears-extended-large.gif
Someone asked me where I think housing will go and I told them I have no idea. The average home sold in Northern Virginia 2 years ago cost $520,000 dollars (source nvar.com). Today, it's $320,000.
Maybe it will go down to $250K, but maybe over a 5 year period it will eventually go to $400K. How can anyone know when there are so many uncertainties, such as: Will China stop buying our debt? How far will the government go in bailing out institutions?
I just read the previous post that linked to an article with these words, "The government contractor and his wife thought they did everything right when they bought their brand new $600,000 house two years ago."
Thankfully, many people today, in 2009, will agree that 'did everything right' and 'bought $600,000 dollar house' don't belong in the same sentence.
Yep, this could be a problem for the "ghetto suburbs" like Manassas Park.
I have no doubt the federal government will address the Alt-A situation with policies forced on the beholden banks including a moratorium on ARM adjustments or a limit on those adjustments. It doesn't seem Obama's housing plan currently deals with Alt-As much given that these type of loans are very prevalent in bubble areas - meaning most people underwater in those areas are too far gone to quality given the 105% provision of his plan. Many people in the bubble areas owe closer to 150% or more of what the property is currently worth. I used to wonder why the government didn't suspend or eliminate mark to market accounting which would greatly help the banks causing them to thrive. It hit me that the government would loose all leverage over the banks if they did this. The banks would be able to pay back TARP funds and the government would have no leverage over the banks to push down their "housing solutions" on them.
Eliminate mark-to-market and do what? Let the banks decide what the value of their loans are?
I really dislike the push on Wall Street to try and get rid of mark-to-market accounting. They love to espouse the wonders of a completely free market except when it's used to value their holdings. No way they should get off the hook this easy.
Steve Forbes explained it well last night on FNC. The problem with mark to market as it related to the banks (esp. in regards to the Mortgage backed securities owned) is that alot of these securities are fine - meaning they are backed up by loans that are still paying. The problem is given the current situation - there is no market for these securities at present. Banks are being forced to right these securities down to what they are worth (ie what someone is the market will currently pay for them - which isn't much) even though many of these securities are still healthy (ie the underlying loans are still healthy and being paid down). There are many areas in which mark to market works great - is easy to implement,etc. - but IMO there are other areas in which the accounting method itself does harm and has consequences beyond their intent. Why is it that almost 90% of all mortgages are currently "healthy", yet banks are being compelled to write down alot of these securities to 10 and 20 cents on the dollar - BTW, cash flow at banks is not the issue - it is capital requirements that are causing the meltdown - these capital level problems as directly related to these writedowns that some can reasonably argue should not be taken place to the level that they are.
Jeff B, I couldn't agree more.
Re: "doing everything right" I don't want to generalize too much, but it seems to me that it does NOT require 20-20 hindsight to say that if during ANY housing market, you have to gamble that you will be able to refinance at a lower interest rate in a few years, and/or that prices will go up, in order for you to afford the house over the course of your ownership, then it is clear BEFORE the purchase that you can't afford it.
dgg, thanks, I understand the Forbes point of view, but I think it's questionable. I'm not sure that the numbers are what he says (that banks are being forced to account for certain loans at 10-20% of face value because if sold that day that would be the market value) and would want evidence of that. But if they are, then it is only a matter of time before many of those homeowners walk away from their loans, since they are about as underwater as a person can get.
The analogy is that one's stock portfolio today is worth less today than a year ago whether one is planning to sell it or not. If others have to assess your worth (e.g., if you apply for a loan) (or to assess the viability of the banks in order to decide whether to invest in or loan to them) they don't care whether you plan to liquidate those stocks immediately; your stocks are worth what others would pay for them today.
ddg,
"Why is it that almost 90% of all mortgages are currently "healthy", yet banks are being compelled to write down alot of these securities to 10 and 20 cents on the dollar?"
Because they were bundled together with garbage into SIVs, foolishly rated AAA my agencies, sliced and diced into trances, and funnel the funds from the healthy mortgages to the senior trances. Gee, who wouldn't want a piece of that?
Sorry for the tone. I've listened to Forbes before and have reached the conclusion he's a partisan tool.
The banks should have cared about the quality of the underlying loans. Instead they ignored that point thinking they could pawn their garbage off onto others. I'm glad for their predicament--they've work very hard to get where they are today.
Ralph -
I agree with you regarding how these loans were bundled, sold, etc. This may not be realistic, but I think if banks were required to keep all the loans they originate, we'd have a much healthier system. The problem is the people/institutions that are going to come in to "fix" the banks need fixing even more - Congress. Watching some of the congressional hearings on all this is nauseating. Not only do half of them not know what in the world they are talkng about, but most of the ones grandstanding are as culpable as anyone for getting this country into the mess it is in.
There is no good answer when it comes to valuing these CDOs.
Some are perfectly fine and will pay out just as planned.
Others are going to prove to be totally worthless.
The problem is that it is extremely difficult to tell which is which. Even CDOs that have thus far performed well may stop performing well when the Alt-A loans reset.
That is why nobody will buy CDOs, they are more trouble and risk than they are worth.
So how do you value then? Trust the banks to tell the truth. (If indeed even they know...)
Or trust the market, which implies the whole bunch of them will prove almost completely worthless?
I think that's the key. The complexity of these derivatives is to blame for their assessed value, not the market that assigns those values. If it was simply a bundle of mortgages with a known default rate I can guarantee that someone would be more than happy to buy them at these prices.
Ultimately I think the problem is similar to the one that we witness on a regular basis in this area - people refusing to believe that what they own is worth as little as it is. The people that own these securities don't like mark-to-market because it doesn't jive with what they *think* their securities are worth.
Arlington County Manager Proposes Smaller Budget for FY 2010
$23.3 million in reductions proposed
ARLINGTON, Va. -- County Manager Ron Carlee proposed a $929.5 million fiscal year (FY) 2010 budget at the February 21, 2009 County Board meeting, a decrease of almost $12 million (1.3 percent) below the FY 2009 revised budget. Arlington’s real estate values bucked area and national trends by increasing 0.4% for calendar year 2009, but not enough to offset rising costs, the economic downturn, and unprecedented budget cuts from the Commonwealth of Virginia.
Total County spending is down 2.4%, excluding schools. The Schools transfer of $352.4 million is up $2.3 million, an increase of 0.65%.
DGG @ 11:02AM:
"Steve Forbes explained it well last night on FNC. The problem with mark to market as it related to the banks (esp. in regards to the Mortgage backed securities owned) is that alot of these securities are fine - meaning they are backed up by loans that are still paying. The problem is given the current situation - there is no market for these securities at present. Banks are being forced to right these securities down to what they are worth (ie what someone is the market will currently pay for them - which isn't much) even though many of these securities are still healthy (ie the underlying loans are still healthy and being paid down)."
I generally agree with mark to market accounting because it does what accounting is supposed to do: it portrays an accurate snapshot of a business. How else would you propose that the security be reported? If a security on a bank's books could fetch 20 cents on the dollar, it should be reported to the investing public as such.
What Forbes is really saying is that these securities are undervalued. He may be right, but the market disagrees. Let's see him use his billions to buy the securities; that will prop up the value of the securities such that mark to market accounting won't seem so troubling.
contrarian:
Not surprisingly, Harney missed the most interesting component of the $8,000 tax credit, i.e., buyers in 2009 can elect to have the purchase treated as though it occurred in 2008 solely for the purpose of claiming the credit on their 2008 return. This means that the buyer gets the big fat refund now rather than next spring or incrementally through reduced withholding.
Also odd is that a buyer who actually bought in 2008 is stuck with a $7,500 credit that the buyer must repay over 15 years, but a buyer who buys in 2009 gets an $8,000 credit that the buyer doesn't have to repay, while treating the sale as though it occurred in 2008. The two WaPo writers who host the RE blog on Fridays similarly failed to explain this properly. No surprise there as well; they've been consistently wrong, yet never in doubt.
zerodown @ 6:51AM,
Regarding the Examiner article, I think Prof. Morici raises the most important concern, i.e., the prime ARMs. The NY Fed published data regarding Alt-A and subprime, but not prime ARMs and prime I/O ARMs in particular. Once those began adjusting, we'll see surprising increases in inventory in affluent areas.
"Terminator X said...
Once those began adjusting, we'll see surprising increases in inventory in affluent areas."
Terminator -- do you (or does anyone) have any stats on how many of these we have here locally?
I hear these stories, people are refinancing out of ARMS and into fixed products in record amounts. I have no idea what "record amounts" means, but I look at stuff like this and it just looks like alot
http://3.bp.blogspot.com/_ym8Q9yxUg34/SZwr5qcyRMI/AAAAAAAAI8s/rB9J5ePywqQ/s1600-h/mbaa021809ri.jpg
I also think of all the ARM holders out there, the ones most likely/able to refinance (i.e. those least underwater) are the people in the immunozones.
I hope you are right, but ive gotten my hopes up too much to get to excited about this.
Terminator-X,
Once those began adjusting, we'll see surprising increases in inventory in affluent areas.
You mean formerly affluent areas?
High-end homes finally feeling the pinch in L.A.
LOS ANGELES — The Southern California real-estate crash has finally reached the high-end areas of Los Angeles' west side.
Home prices in Beverly Hills, Santa Monica and Malibu — which continued to soar well into 2008 — finally tanked at the end of the year, losing between 26 and 30 percent of their value in just a few months, the latest data show.
The sudden drop came as a surprise to Shelley Conn, who remained a believer in the myth that the wealthier parts of the area were immune until she put her Santa Monica house on the market last spring.
She and her husband, Bill, had been offered $2.4 million for the three-bedroom home just months before, so she listed the house for $2.3 million, figuring that would make up for the lousy real-estate climate. But it didn't sell until November, after the couple dropped the price to $1.9 million.
It's still plenty of money for a basic one-story house. But in Conn's wealthy neighborhood, few residents thought anything would drop below $2 million.
"I didn't believe it until the end," Conn said.
http://seattletimes.nwsource.com/html/realestate/
2008717250_rela08.html
And I thought the cave houses were a niche immunozone...now even those are starting to fall!
Missouri Cave House
Cave houses are the most immune of all!
The cave is the most interesting house built in the last 8 years. My compliments to the architect and owner, especially the owner for not getting a McMasion crap box for the same money.
Local-themed articles from the Post:
For PWC:
Housing Bust Spurs Rental Fears:
Inspections Proposed, and Groups Are Vetting Possible Tenants
http://tinyurl.com/afnl5z
Rather generic advice here:
Benefiting From the Bust
Wave of Foreclosures Can Be an Opportunity for First-Timers, Investors
http://tinyurl.com/bcx6vw
My personal favorite, a letter to the editor:
http://tinyurl.com/awhwcl
From the letter:
"I would like to know which political party is prepared to create an instant stimulus, to stop collapsing home values and to shore up many hurting banks by having the government pay down every existing home mortgage by 80 percent."
Let's stick it the renters one more time...
>Let's stick it the renters one more time...<
Stick it to the renters, please.
[Calm down.]
Inner voice: "You don't really mean 'stick it to renters'."
Outer voice: "Of course not, but there's always some 'renter' blaming someone. Renters are the new perpetual whinny class."
Inner voice: "That was cheap. At least the renters aren't looking for a get-out-of-mortgage-free card."
Outer voice: "The mortgage crisis has nothing to do with my feelings. What I'm sick of is renters using their status as renters to blame everyone for everything. Not too long ago renters were blaming everyone for pricing them out of Metro accessible housing forever!"
Inner voice: "Renters have a reasonable gripe about the mortgage bailout."
Outer voice: "Renters believe they have a reasonable gripe about everything. Before there was a housing crisis, they would whine about the mortgage interest deduction."
Inner voice: "Well, the mortgage interest deduction is unfair. Housing shouldn't be supported in anyway. Any government support distorts pricing."
Outer voice: "Look, academic/economic arguments aside, renters are now in the best possible market. Housing prices are crashing. There is an $8,000 housing tax, no strings attached, housing credit. And rental prices are falling in my DC neighborhood. Vacancies abound and there are 'first month free' deals -- offers I've never seen before. The market has clearly turned in favor of renters."
Tabitha,
To answer the question, "I would like to know which political party is prepared to create an instant stimulus, to stop collapsing home values and to shore up many hurting banks by having the government pay down every existing home mortgage by 80 percent."
That would be the Populist party. Where's William Jennings Bryan and his Cross of Gold when we -really- need him? <'/sarcasm>
kob,
The market is turning in the favor of renters. It's not entirely in our favor yet. So we'll continue to whine; but the 'owners' who are feeling the screws turn now are letting lose with a new bellow of rage we haven't heard in some time. They've fallen out of favor, and it is displeasing.
Jeff B, Ralph, that cave house is very creative, and I would imagine heating/cooling bills are low. You'd really have to trust the architect/geologist to buy it, though.
A huge advantage of living in the midwest vs. expensive coastal cities is that people there can afford to take more chances with interesting architecture.
I NEED SOME ADVICE ON LOUDOUN. The piece of land next to us is coming up 2 years of non-payment of property taxes. Does anyone have any idea it takes loudoun to sell land because of non payment? Also how much is land going per acre in western loudoun ag-1 these days?
FranklyMLS.com now has FSBO data
What do you think?
http://franklymls.blogspot.com/
"I would like to know which political party is prepared to create an instant stimulus, to stop collapsing home values and to shore up many hurting banks by having the government pay down every existing home mortgage by 80 percent."
Let me guess, the author of this letter has a huge mortgage. The self centered gimme gimme gimme attitude is truly unbelievable. I guess that's what happens when you start handing out money to some people and not others. I want mine, gimme gimme gimme.
"FranklyMLS.com now has FSBO data
What do you think?"
I think the NAR might put a hit out on you...
Awesome, thanks Frank.
Re: FSBO on frankly
Very nice Frank! i am now giving up ZipRealty. is there any way to import my homes from there to frankly?
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