Standard and Poor's, Amherst Securities, The Royal Bank of Scotland, and First American CoreLogic all agree shadow inventory is a major problem for the US housing market.
Today, we also have a Grade D HELOC abuser hoping to sell while they still have equity.
This song resonates with the freedom HELOC abusers feel when the free money flows. Go anywhere. Do anything. Fly away. Enjoy life's bounty. It reflects an abundance in life built on illusion; a neverending story rudely interrupted by reality. We see broken dreams and The Unceremonious Fall from Entitlement.
I wrote Shadow Inventory Orange County and Shadow Inventory Revisited to help define the terms and bring greater awareness to this major obstacle to a market recovery. HousingWire.com brings us reports from Standard and Poor's, Amherst Securities, The Royal Bank of Scotland, and First American CoreLogic delivering the same message: Shadow inventory is coming, and it must work through the system.
The “shadow inventory” of bank-repossessed properties, as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate, according to a report from the credit rating agency Standard & Poor’s (S&P). The analysts add that during this period many servicers will likely shift their emphasis from mortgage modification to loan liquidation.
The “shadow inventory” of homes includes all delinquent loans and real-estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation. As for the total amount of homes in the shadow inventory, Amherst Securitiesplaces the total at 7m. The Royal Bank of Scotland found 2.7m, and First American CoreLogiccounted 1.7m.
S&P estimates the inventory to equal a 33-month supply of homes. Analysts added the estimate is actually conservative, as they did not assume homes not showing signs of distress would default and push the overhang of supply even further.
Furthermore, court delays, political pressure and servicing backlogs constricted the flow of foreclosures hitting the market to a trickle. These delinquent borrowers who have not received a foreclosure fuel the “rapidly” growing shadow inventory of properties, according to the report.
“Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market,” according to the report.
Our current pricing is only sustained by lack of inventory and very low sales volumes. Any increase in inventory and resulting sales volumes will force prices lower, so homeowners and lenders live in fear of what will happen next. I speculate the loose cartel arrangement will crumble, and prices will slowly grind lower until this debt overhang is cleared. I am not alone in that conviction.
According to the listing agent, this listing may be a pre-foreclosure or short sale.
GREAT LOCATION INSIDE YALE LOOP ON CUL-DE SAC! A Must See Home in Highly Desired Woodbridge! This Home Features:4 Bedrooms and 3 Bathrooms ~Spacious Living Room with Cozy Fireplace and Cathedral Ceilings ~Formal Dining Room Opens to Family Room ~Large Kitchen with Center Island, Garden Window, Tile Flooring, Breakfast Nook and Plenty of Cabinets for Extra Storage ~Luxurious Master Suite, Mirrored Closet Doors ~Neutral Carpet and Paint Throughout ~Lots of Windows, Skylights and French Doors Add Natural Sunlight ~Plenty of Closet Space and Storage ~2-Car Attached Garage ~Nicely Landscaped Backyard ~ Enjoy Woodbridge Amenities with Parks, Lakes/Lagoons, Parks, Pools, & Walking Trails ~Award Winning Schools and Conveniently Located Shopping, Entertainment and Freeways.
Is there a stylistic use of tildes in English? Could I use it ~ or misuse it ~ like a dash? Does it look better ~~ or need ~~ a double tilde? Or does it just lõõk stupid no matter how it's used?
"In MediaWiki, three consecutive tildes (~~~) create a "signature" (which can be customised by the user), five consecutive tildes (~~~~~) result in the time in UTC, and four consecutive tildes (~~~~) result in the signature followed by the time in UTC.
Another recent use of the tilde is to indicate either a "melodic" pronunciation, or a commonly recognized vocal inflection by enclosing a word or entire phrase between a pair of tilde (similar to the use of quotation marks) which indicates that such word or phrase is to be either sung as a tune, ~Happy birthday to you…~, pronounced as a jeer or taunt, ~Nyah, nyah!~, or with a common change in pitch, ~What-EVER!~.
In many online or internet communities, the tilde is used to show a sarcastic or sometimes playful connotation for the word or words to follow it."
It will be interesting to see if I can find an appropriate stylistic use of a tilde….
Relax ~~~
~Not!
What grade would you give?
Today's featured property was purchased on 3/24/1992 for $300,000. The owners original financing is unknown, but by 2/7/2000, the owner had a $286,000 first mortgage. Let's use that as a starting point even though it may be off.
On 12/20/2001 the owners opened a HELOC for $30,000.
On 4/10/2003 they refinanced the first mortgage for $322,700.
On 12/2/2003 they opened a HELOC for $100,000.
On 8/29/2005 they increased the HELOC to $200,000.
On 6/12/2008 they refinanced the first for $417,000, and they obtained a second for $180,000.
Total property debt is $597,000.
Total mortgage equity withdrawal is $311,000.
IMO, this earns a grade D because these people were periodically and systematically withdrawing the equity from their property at a rate much higher than overspending ordinary lifestyle would indicate; they more than doubled their mortgage. To me, this symbolizes an active anticipation of appreciation and the intent to use as spending money just like income. By my definition, that earns a D.
Foreclosure Record
Recording Date: 01/27/2010
Document Type: Notice of Default
It is also possible that this owner is unemployed, and that they really are willing to repay all the mortgage equity withdrawal, but they can't. Perhaps the lender will dance with them a while longer, or perhaps not.
I like the photo above. The undistorted panorama provides the "feeling" of this room. I would like to see more like these.
The following article by real estate reporter Mary Umberger in the Chicago Tribune aptly illustrates the issue:
"I'm a baby boomer who thinks it's probably time to sell the manse and move to someplace smaller. That's what I'm thinking, anyway. Barring some nationwide economic miracle, however, that's not going to happen. Until housing finds its footing again and home prices start to look up, I'm going nowhere, unless I'm keen to lose money.
I have plenty of company. My fellow boomers and I, it appears, are suffering from a serious case of real estate irony. Housing, the very thing that fueled our generation's legendary mobility and free spending, is keeping us right where we are….
The Urban Land Institute's study, called "Housing in America: The Next Decade," divides us into two groups: older and younger…. The older group, aged 55 to 64, will continue to work, either out of necessity or choice. The news here is that just a few years ago, boomer studies were predicting that we'd put off retirement for the latter reason, that we liked the busy-ness of work. Those studies, though, were before the stock market shredded a generation's 401(k) plans. Now, the money is doing the talking.
The real estate takeaway for this older group is, in the institute's verbiage, that many boomers will be "trapped" in their suburban homes until values recover. Not only are they waiting for their homes' values to emerge from underwater status, but their houses, the institute says, tend to be bigger and farther out in suburbia than the next generation wants.
The younger boomers (aged 46 to 54) also won't have an easy time selling their homes. These people are in their prime earning years, but they're facing flat incomes and the ugly truth that many of them have very little home equity. In the olden days (five years ago), they would have been prime candidates for purchasing vacation homes, a prospect that now, for the aforementioned reasons, is "greatly diminished," according to the institute.
I could go on, but I've typed myself into a deep funk, here in my too-big ol' house. So I figure I might as well take a glass-half-full view of things: The Urban Land Institute study didn't say I'd never manage to sell, only that it will take longer than my generation, famous for its I-want-what-I-want-right-now attitude, is used to."
The group most harmed by the real estate bubble is the baby boomers who were relying on their imaginary home equity as their primary retirement nest egg. Boomers fortunate (or unfortunate) enough to live in areas that avoided the housing bubble never believed they had hundreds of thousands of extra equity dollars to create false expectations. Prudent boomers in these areas maintained other savings vehicles, whereas in California even the prudent came to believe outside saving was less important when the appreciation God's endowed them with so much housing wealth.
Eventually, baby boomers are going to need to convert their housing asset into living cash. For their sake, I hope they don't use reverse mortgages — the terminal Option ARM for seniors — but more on that for another post. Baby boomers face either downsizing to sell and extract cash equity, or as the article points out, they must stay put. If they either chose to stay or if they are forced to stay, they will need to (1) earn more money through delaying retirement (2) live on less in retirement and-or (3) grow a cancerous reverse mortgage which will leave them homeless and penniless in their old age. The last option being more difficult when many HELOCed themselves out of equity during the good times.
Whatever solution baby boomers hatch, succeeding generations pay the bills either through government entitlements or overpriced homes. As the Keystone Kops in our government attempt to keep the Ponzi Scheme inflated, particularly here in California, generations following the baby boomers are asked to pay higher debt-to-income ratios and assume larger overall debt loads in order to benefit baby boomers. The generation that cashes-out the baby boomers will not receive a similar entitlement. The California Social Contract is dead.
Single story house with high ceiling. Newly installed/upgraded: Hardwood floor, Electric range, Dishwasher, recessed lights, garage door & opener, window blinds, paint. Granite countertop. Spacious attic above the kitchen. Walking distance to award-winning middle school, and shopping center. Low HOA fee. No mello-roos assessment.
The picture is missing the alter and incense….
The intersection of Irvine Boulevard and Culver Drive is just behind that wall.
Has anyone else noticed lenders seem to be foreclosing on the worst properties first?
From my first post at the Irvine Housing Blog I am IrvineRenter, I have provided housing market analyses to help people make sound financial decisions with regard to real estate. To date, most analyses have pointed to renting rather than owning, but as conditions change, I will point out the positives and pratfalls of owning today. To that end, today's posting is among the most important because this post contains specific advice that in the future will either help you sell your house faster and easier or for more money.
Utilize fixed-rate assumable financing: Government entities like FHA, VA, GNMA or some other official government program (not Freddie or Fannie) provide assumable, fixed-rate loans desired by your future buyer.
Maximize your down payment (within reason)
I am not advocating FHA loans because they allow you to put down as little as 3.5%. I believe you should minimize your time to payoff by optimizing (generally enlarging) your down payment and utilizing accelerated amortization. Nor am I advocating emptying savings accounts and failing to keep liquid reserves or other investments. The middle road I advocate leads to financial freedom, whereas the road of maximum debt leads to deflation through individual financial disaster. The debt road is well traveled, but like Robert Frost poetically noted,
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
Money-changers chastise me for advising borrowers to eliminate debt when cheap money abounds. They contend debt is great as long as the borrower's back can bear the payments; similarly, cancer is great as long as the medication can treat the patient. Compound interest grows like cancer, and both are best avoided or annihilated.
Debt is like fat; it is an excess carried around as reminder of glories and gluttonies past. Go lean, purge cancerous debt and grow your net worth; wealth isn't going to appear through home-price appreciation for the next decade, so paying down debt is the best opportunity available for consistently improving your financial life. It isn't a Ponzi Scheme. Take advantage of it.
Expect no home-price appreciation
No meaningful appreciation will occur in the decade of the twenty-teens. The majority of knife catchers and much of the market participation over the next two years will be those who cling to beliefs of past appreciation coupled with those who don't believe prices will remain flat. The activity of knife catchers will provide liquidity as prices continue their controlled decent.
Some will buy without expectation of appreciation — certainly those who follow my writing expect very little — and if prices do appreciate, those not motivated by appreciation will consider it a bonus.
Assumption of Mortgage
Despite the apparent lack of price appreciation, there is still a method for obtaining financing equity from property from a little-known and oft-forgotten loan term known as assumption.
Assumption of mortgage is the purchase of mortgaged property whereby the buyer accepts liability for the debt that continues to exist.
To be more precise, the borrower is assuming both the rights and obligations of the promissory note and the Deed of Trust. Assumable loans have been around as long as lending. Borrowers seeking release from their payment obligations usually sell for cash and terminate the loan; nonetheless, a qualified new buyer may assume the previous borrower's liability and simply take over making payments on the loan.
Lenders despise mortgage assumptions (and they should)
Both buyers and sellers benefit from assumption, but lenders suffer — which is why assumption is generally limited to government programs and adjustable-rate mortgages; lenders do not want their fixed-rate loans assumed.
Lenders borrow short to lend long; in other words, when they underwrite you a 30-year loan, they obtain the money they loan you with short-term borrowing, mostly from savings accounts, maybe even your own. In the industry this problem is known as an asset-liability mismatch. If lenders have a portfolio of low-interest loans outstanding in a high interest rate borrowing environment, they experience a negative spread, and eventually go bankrupt. In fact, much blame for the Savings and Loan fiasco traces back to a negative spread condition and asset-liability mismatch during the early 80s.
Rather than letting thrifts die, we deregulated and allowed them to build taxpayer insured Ponzi Schemes prompting a massive government bailout. The Savings and Loan industry collapse was the early warning of problems with banking deregulation — not all deregulation is good; for instance repeal of the Glass–Steagall Act was a disaster as it enabled the conditions that contributed to our global Ponzi Scheme that collapsed in late 2008.
In rising interest-rate environments lender spreads are squeezed but not eliminated as older, low-interest loans are replaced with newer, high-interest loans. If all loans were assumable, lenders would be handicapped in their ability to rematch their assets and liabilities. To avoid asset-liability mismatch, lenders put due-on-sale clauses in their promissory notes specifically to prevent low-interest loans from surviving to term with a series of debt-assuming owners.
Fortunately for buyers, the federal government cares not about making a profit or cost of financing, and they hold loans to term; as a result, assumable loans are underwritten to standards compliant with FHA or other government programs and insured by same.
Unfortunately for taxpayers, A rising FHA default rate foreshadows a crush of foreclosures and the US taxpayer will be called upon to pay billions in losses for a government policy to keep the house prices artificially high. The taxpayer losses represent the loss burden lenders shifted to us and the moral hazard we are enabling for the future. You should feel defrauded… again.
Understanding by example
A buyer looking at properties like today's will spend nearly $4,000 a month paying down a 30-year mortgage on a $900,000 house (current FHA loan cap is $729,750 in Irvine). Fast forward ten years, and the future buyer of this property will likely be able to afford a $6,000 monthly payment, but since interest rates will also be higher, the mortgage is not larger, and thereby, prices are not higher. As I mentioned in, A Theory of House Prices and Housing Markets, expanding mortgage balances are necessary for prices to appreciate, and rising interest rates cause mortgage balances to contract rather than expand. In fact, if interest rates move higher faster than wages, prices decline.
If a future buyer is spending $6,000 per month to borrow the same amount that $4,000 supports today, then the future buyer would be $2,000 a month better off by assuming the old loan at 5% rather than underwriting a new one at 9% or higher. It is the desirability of the low payment on the old loan that makes assumption work.
Any rational buyer would want to assume a loan with lower payments and fewer than 30 years remaining to pay. The only downside for a buyer is that they will never refinance into a lower interest loan simply because they already have one. I have written many times about the virtue of buying when interest rates are high and refinancing into a lower interest rate to accelerating amortization. Buyers obtain this same benefit through assumption, and sellers can extract value from the transaction.
Seeing this potential outcome in advance will help you position yourself to take full advantage. Most fixed-rate private loans — including those issued by GSEs — are not assumable, and borrowers who utilize financing today with due-on-sale clauses will have no opportunity to extract value from their financing.
Sell faster or sell for more
If interest rates rise, assumable fixed-rate financing has value even if the financing has not been in place long. For instance, if a buyer must become a seller two or three years into their mortgage — and if they have equity and can sell — they will have a significant advantage over sellers with similar properties who do not have assumable loans. A few years from now, the lower mortgage payment will be an attractive feature prompting buyers to select one property over a neighboring one. If you faced two competing properties but one offered an assumable loan that reduces your payments 5%-10%, all things being equal, wouldn't you chose the one with the lower payment? I would.
As interest rates go up and time passes (which reduces remaining amortization), an assuming owner enjoys monthly savings and a shorter amortization schedule. At first, this is merely a sales point, but at eventually, the benefits accruing an assuming owner morphs into a source of real monetary value a seller can obtain.
How to use owner financing to obtain equity from assumable loans
There are three primary ways owners obtain direct and measurable financial value from their assumable loan:
Buyer increases down payment and pays more total dollars
Seller offers and buyer accepts a seller-financed second mortgage and the seller either keeps the cashflow or discounts the loan in the secondary market and obtains a one-time cash infusion.
The first concept — buyers increasing their down payment and paying more total dollars — should be familiar to anyone who has prepaid interest points when originating a loan. People frequently pay interest up-front in order to lower their interest rate and monthly payments over the life of the loan. When a buyer assumes a seller's low interest-rate loan, they are doing the same thing, but instead of that money going to a lender (or mortgage broker) that money accrues to the seller. Do you see why lenders hate assumption?
The second and third concepts — issuing seller financing as either a second mortgage or wrap-around mortgage — are far less common and much more complicated, but the financial rewards are great, and any seller with an aging and assumable first mortgage should explore the options assumable financing creates.
Seller financed second mortgages
Let's go back to the opening example of a loan issued today with a $4,000 monthly payment. Fast-forward to 2020, and the same loan balance financed at 9% yields a $6,000 a month payment. Obviously, a buyer would prefer the $4,000 payment to a $6,000 one, and the seller would like to extract the equity accumulated through paying down the loan balance plus a premium for the value of their financing.
If the seller allowed themselves to be taken out by a buyer using a conventional loan, they would obtain the $138,619 in financing equity obtained by paying down their mortgage debt, and at the closing, the sales price would show no change, and the seller would obtain a check for their financing equity minus fees. However, If the seller offers and the buyer agrees to a second mortgage with a $2,000 payment for a 15-year term at 9%, the seller would obtained an annuity worth $197,186 when the loan balance has only been paid down $138,619 for a value-added of $58,567 or about 8%.
(The annuity value of a $2,000 monthly payment over 15 years discounted at 9% is $197,186)
Why would a buyer agree to this? Well, if you were buying this property in 2020, you are still paying $6,000 a month, so you are no worse off on a monthly payment basis, and your total debt is the same, so you are no worse off on a total debt basis; however, and this is a big however, you will have one loan on a 15-year amortization schedule and another with 20 years remaining out of 30 — you have just accelerated your amortization and reduced your Time to Payoff. I would take such a deal, wouldn't you?
Both buyer and seller benefit greatly from assumption; only lenders dislike it.
Wrap-around mortgages
Wikipedia's description is well written, so I relay it in full here:
A wrap-around mortgage, more-commonly known as a "wrap", is a form of secondary financing for the purchase of real property. The seller extends to the buyer a junior mortgage which wraps around and exists in addition to any superior mortgages already secured by the property. Under a wrap, a seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance.
The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee(s). Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property.
Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home. An example:
The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage plus a negotiated amount less than or up to the sales price, minus any down payment and closing costs. The monthly payments are made by the buyer to the seller, who then continues to pay the first mortgage with the proceeds. When the buyer either sells or refinances the property, all mortgages are paid off in full, with the seller entitled to the difference in the payoff of the wrap and any underlying loan payoffs.
Typically, the seller also charges a spread. For example, a seller may have a mortgage at 6% and sell the property at a rate of 8% on a wraparound mortgage. He then would be making a 2% spread on the payments each month (roughly, anyway. The difference in principal amounts and amortization schedules will affect the actual spread made).
As title is actually transferred from seller to buyer, wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.
Note that pesky due-on-sale clause is back. Lenders do not like wraps any more than they like assumption and they dislike it for the same reasons, asset-liability mismatch.
Facts about loan assumptions
I wrote to Soylent Green Is People with help in writing this post, and he provided me the following list of facts about assumption:
Assumptions do not require a down payment. If the seller has equity it's paid to the seller. If the loan is break even to value to upside down, it's simply taken over.
Assumptions do not (for the most part) require appraisals. It depends on the investor. An FHA insured loan would not require an appraisal, a private investor ARM loan would.
Credit qualifying is based on underwriting standards available at that time. Income, assets, credit, and debt to income ratios apply.
Condo project HOA's are not re-evaluated. If an FHA loan was made in an association that was acceptable at origination but has since deteriorated, it is of no issue to the assumption department. Since the borrower must credit qualify for the assumption, the current HOA dues might impact the buyers ability to qualify, but that's the absolute depth of scrutiny these loan applicants will get.
"All in" lender costs to assume is about $1,500 per transaction. It is not a scalable fee. There will be escrow, title, and other non lender costs, but minimal at best.
The loan must be originated and in place for 12 months before an assumption can be completed.
The seller or borrower must pay any escrow shortage/past due interest.
These are our current guidelines, subject to change of course, and not applicable to every lender, but likely similar to what everyone else has as policy.
We get "many" requests to assume, but are closing 1-2 per month. I'd say this is likely due to below market financing available today. Most vintage 2005- 2008 FHA loans were priced in the high 5's. 2009 FHA loans do not have 12 month seasoning yet. Project forward into 2011-2012 – if we aren't all wiped out from the planetary alignment/Mayan calendar event…. I'd guess there will be plenty of cheap rates available for buyers willing to purchase FHA financed homes through assumption of the original note.
The GSEs will underwrite ARMs with assumability, but since they are ARMs, the assuming buyer is not locked in to a low rate, so it becomes worthless and pointless. Assuming an ARM does not work like assuming a fixed loan. Don't mistake one for the other. You want to take out an assumable fixed-rate loan.
Make sure your financing is fixed and assumable
As I stated at the opening of this post, this may be among the most valuable pieces of advice I have offered at the IHB. Fixed-rate financing that allows assumption is the best — and absent appreciation, the only — method of extracting value from real estate going forward.
Beautiful house in Quail Hill. Upgrades starting from driveway, landscaping to Crown moldings at ceiling. Too many upgrades to list. Seeing is believing. View this gorgeous home before it's sold.
The Twenty-Teens
What is the name of the current decade and who decides? When I started writing this post, I found the world of opinions on the subject, but in the end, common usage will determine what we call it. I am casting my vote with Twenty-Teens because I like the way it sounds. Twenty-teen as the T-T sound sandwiched in the middle that is just fun to say. The nineteen-teens (1910s) sounds ridiculous, so we couldn't have used it over the last seven hundred years because each century name had a -teen ending.
In my opinion, T-T sounds cool, but Teen-Teen sounds, well… teenish. I found one forum where a poster liked the sound of Twenteens, but it is a bit too clever, and too easily misunderstood or confused with Twenteen, "the new age for a person who doesn't want to lose being a teenager once they hit the age of twenty!"
The default choice from the last seven centuries leaves us with the twenty-tens. Boring.
I like Twenty-teens. It is a clean moniker seven hundred years overdue.
Alan Greenspan refuses to go to pasture quietly; therefore, bloggers like me need to remind everyone that Alan Greenspan is a dangerous fool who plunged the world economy into a near catastrophic depression and caused properties like today's to become elevated in price far beyond any rational measure.
Alan Greenspan is an embarrassment–an embarrassment to himself and to everyone who believed in him and his policies. If there is any one individual that deserves the most blame for the Great Housing Bubble, it is Alan Greenspan.
When Alan Greenspan stepped down as Federal Reserve Chairman in 2006, he was highly regarded by most experts and the wider general public as the man responsible for over 20 years of economic prosperity. Guided by his core beliefs in limited regulation and the wisdom of market participants to limit their own risk, he pursued policies during his tenure that have since proven to be disastrous.
If Alan Greenspan had died shortly after leaving office, he would have perished in ignorance of the problems he created. He would never have known the beating his professional reputation would take when the economic system he helped promote came crashing down. Ken Lay died before he could face justice, and his wife got to keep all the money. If Ken Lay had lived on, he would have faced nothing but suffering in his later years. Like Richard Nixon before him, Alan Greenspan will live on to wrestle with his failures, and also like Nixon, Greenspan will likely spend the rest of his life trying to convince a dubious public that his actions were justified and what he did was not wrong.
Alan Greenspan has publicly admitted to making some mistakes. His feeble defense of his actions usually center on the idea that the problems that brought down our financial system were too big for the FED chairman or anyone else to prevent. This is bullshit, and he knows it. The root of the problem is in the deeply held philosophical beliefs that he acted upon his entire career.
Alan Greenspan strongly believes the participants in the economy are aware of the risks they are taking on, and they are carefully managing those risks. In his world, government regulation to curb the excesses is an unnecessary hindrance to economic growth. Like Ronald Regan and the entire Conservative movement that he inspired, Alan Greenspan believed that government is not the solution, it is the problem.
The failures of Alan Greenspan and those who failed to regulate our financial markets have lead to the economic catastrophe we are facing. Everything Alan Greenspan believed his entire career was wrong. He knows that now; although, he will likely spend the rest of his life trying to deny it. He will live out his life in disgrace partly responsible for the suffering of millions of people around the globe.
I don't feel sad for him. I chose the word "pity" carefully. To feel sadness for someone's actions, you must feel compassion for their plight. Pity masquerades as compassion, but there is a lack of empathy in the emotion of pity–A lack of empathy often caused by the fact that certain tragedies are self-inflicted. The attitudes, beliefs and actions of Alan Greenspan caused his own downfall. I do not feel sad for him; I pity him.
For more information, please read Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve
"A number of analysts have conjectured that the extended period of low interest rates is spawning a bubble in housing prices in the United States that will, at some point, implode," Greenspan said. "Their concern is that, if this were to occur, highly leveraged homeowners will be forced to sharply curtail their spending.
"To be sure, indexes of house prices based on repeat sales of existing homes have outstripped increases in rents, suggesting at least the possibility of price misalignment in some housing markets. A softening in housing markets would likely be one of many adjustments that would occur in the wake of an increase in interest rates.
"But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much," Greenspan said.
Often public officials have to make statements they don't really believe in order to prevent panic in financial markets, but the discourse above is outside what would be required as a vague Greenspan-speak; The comments display a deeply held and woefully wrong Weltanschauung; in short, he really believed it.
Well, this is awkward. Alan Greenspan, hailed for most of his nearly two-decade run as chairman of the Federal Reserve as a market savant of the first order, is now assailed from all sides for the Fed’s apparent role in overinflating the country’s garish housing bubble. The charge is a fraught one, reports Fortune magazine’s Geoff Colvin, since should it stick, it will fundamentally reshape perceptions of Greenspan’s legacy at the central bank. Already the sweep of the emerging indictment is such, Colvin writes, that “four years after leaving the Fed as the Greatest Central Banker Ever, the longest-serving chairman, the Maestro, Alan Greenspan is the designated goat."
But Greenspan is not a goat who will go quietly into the good night. He takes vigorous issue with the criticism of Fed policy that is now fueling all the anti-Greenspan rancor: that from the pivotal years of 2002 to 2005, when mortgages remained artificially low and housing prices continued to drift ever higher above the realm of consensual reality, the Fed failed to put the brakes on the downward drift of interest rates. This critical oversight, Greenspan’s critics charge, meant that the Fed kept pumping the derivatives-fed fiction that no serious risks were accruing in the market long past the point of any empirical support.
Greenspan’s rejoinder is that the true causes of the 2008 housing crash were global—that prices kept spiraling upward because of a global savings glut, which channeled capital’s insatiable quest for exotic new forms of market expression into the opaque wonderland of securitized debt. Emerging market economies such as China kept unleashing new investments that, Colvin writes, “naturally pushed interest rates down globally—thus the decoupling of mortgage rates from the Fed funds rate, and the global nature of the housing boom.”
To detractors who point out that this upsurge of global capital didn’t really so much, you know, exist, Greenspan has an elegant rejoinder. As Colvin summarizes, it goes as follows: “You have to look at intended saving and intended capital investment, not actual saving and investment. After all, saving and investment by definition will always balance.” The mere existence of an overabundance of capital was enough, in other words, to prompt markets across the globe to keep their mortgage rates artificially low—thereby permitting housing prices across the globe to ratchet up ever higher.
Do I need to point out that Greenspan's look-at-intent-rather-than-reality defense is bullshit–Embarrassing bullshit? The kind of bullshit that makes you cringe and feel so sorry for the man that you want to run away and hide for him. An embarrassing bullshit that doesn't even pass the giggle test. Perhaps there is a special island where we can put David Lereah and Alan Greenspan to save themselves from further embarrassment. They should get Lost.
If it were only embarrassing, it could be easily forgotten and dismissed, but this fool still has the ability to influence public policy, and if our legislature or bureaucrats believe him, we may repeat Greenspan's grievous gaffes. Hopefully, wiser men (like Paul Volcker) will prevail and Greenspan's debt disease will be cured. I have my doubts.
Who should lose?
Alan Greenspan believed in the ability of financial markets to properly disperse and discount risk. Who do you think he saw as absorbing $900,000 losses on units like today's featured property?
According to the listing agent, this listing may be a pre-foreclosure or short sale.
Penthouse Suite…2 bedroom plus den. Highly upgraded…ultra luxury with 24 hour concierge. HOA dues were just lowered below $1,000. Unit comes with 2 parking spots next to elevator…
ultra luxury? Where do we go from there? Mega luxury? Super-duper luxury?
For your ultra mega super-duper luxury home, you get two assigned parking stalls? For $1,000 a month HOA dues, I should be unconcerned where the staff parks my car… Oh, wait. You mean I have to park it? What are residents getting for $1,000 a month? Hosed.
The Mortgage Bankers Association — the experts on finance and borrowing — are losing their national headquarters due to a poor understanding of finance and imprudent borrowing.
Stupid is as stupid does, observed Forrest Gump; the Mortgage Bankers Association is undeniably stupid.
How does an industry group most attuned to the mortgage markets and the implications of debt on the economy put $90,000,000 into a headquarters building in 2008? Either the Mortgage Bonehead Association completely missed the housing and commercial bubbles, or they are reckless and unconscionably stupid; ignorance or stupidity are the only two options.
I imagine the people who made the decision believe they were victims of circumstance. As David Lereah noted while covering up his own incompetence, "the subprime [mortgage] market blew up, and that has substantially inhibited lending. It was a monkey wrench that was thrown in; no one would have predicted it two years ago, no one." Sure, no one….
Even the pros are taking a beating. The Mortgage Bankers Association, its membership expert in real estate, sold its $90 million headquarters in downtown Washington on Friday for $41 million.
The three-year-old, 10-story building at 1331 L St. NW — built just before the office market soured — was bought by the CoStar Group, a commercial real estate information firm that plans to move its headquarters from Bethesda to the District. The city, which has been negotiating with CoStar for several months, offered the company a $6 million break on its property taxes to lure it from Maryland.
A greater than 50% decline in price in a little over one year, and it required government assistance. Fail!
The sale comes as commercial real estate troubles are rapidly multiplying in the Washington area. At least 20 percent of commercial properties in the region are worth less than their mortgages, experts say, compared with less than 1 percent before the recession.
The Mortgage Bankers Association moved into the building in 2008 just as the real estate market was crashing, and ended up paying millions of dollars more when interest rates rose. Moreover, the leasing market slowed considerably and the association had trouble getting other tenants into the 168,000-square-foot building.
The industry lobbying group has struggled financially in recent years, as the market collapsed and lending dried up, with members dropping out as they lost their jobs. Its membership fell to 2,500 from 3,000, officials said in 2008.
Did their ARM blow up? There is a striking parallel between the behavior of the Mortgage Bonehead Association and the boneheaded borrowers who they served. Remember Dean Baker from No Housing Market Bottom?
"It's a little bit of irony that in the middle of the mortgage crisis brought on by the bad lending practices of many members of the Mortgage Bankers Association that they got caught up in the same problem," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal research group.
.. .. .. .. . Located at the end of a Cul De Sac with an Extra-large front yard and a pool size Backyard .. .. .. .. Formal Dining Room …. Separate Family Room with Hardwood floors and Fireplace .. .. .. Gourmet Kitchen with Center Island, Corian Countertop, Hardwood Floors and Upgraded stainless Steel Appliances . . . . . . Breakfast Nook . . . . . . 4the Bedroom is being as an office/Den . . . . . . Light and Bright .. . . . . .. Ready to Move in..
I enjoyed the unintentional art of this photograph. Notice how the books and file boxes in bookshelf behind the table incorporates the most striking colors in the van Gogh print on the wall.
.. .. .. .. . Located at the end of a Cul De Sac with an Extra-large front yard and a pool size Backyard .. .. .. .. Formal Dining Room …. Separate Family Room with Hardwood floors and Fireplace .. .. .. Gourmet Kitchen with Center Island, Corian Countertop, Hardwood Floors and Upgraded stainless Steel Appliances . . . . . . Breakfast Nook . . . . . . 4the Bedroom is being as an office/Den . . . . . . Light and Bright .. . . . . .. Ready to Move in..