Too Late To Save The Housing Market
As I wrote in the last post, not much can be done for the housing market, short of a massive government bailout. The US Treasury Secretary is reported as announcing today that such a bailout would not be possible. Bloomberg writes:
U.S. Treasury Secretary Henry Paulson’s plan to prevent as many as 1.2 million people from losing their homes by freezing interest rates on subprime adjustable-rate mortgages will bring no benefit to the depreciating housing market.
“At best, it may stop some of the hemorrhaging of the housing market, but it doesn’t necessarily turn things around,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. “The fundamental problem with housing is oversupply.”
Those upside down in their homes should take note of this announcement. It’s hard enough to get out of debt in an upturning market, losing money on a house can be the last nail in a debtor’s coffin. Now might be the best time to sell, before things get any worse.
Housing Crisis To Continue For Years To Come
Things are looking bleak, and even Christmas time will do little to change the housing market. With ever increasing numbers of foreclosures, it appears unlikely that anything will be able to stimulate the market. The New York Post recently published an article that supports this:
A barrage of grim reports yesterday raised fears of an unprecedented wipeout of home prices over the next three years, erasing as much as 30 percent of a home’s value in many areas.
That bleak assessment from Morgan Stanley and Moody’s Investors Service hit just as another report warned that even good credit risks are suddenly turning delinquent on their payments, dragging down mortgage banking’s healthiest chunk of business.
The Mortgage Bankers Association says it’s alarmed by the surprising jump in third-quarter delinquencies on prime loans held by the most credit-worthy owners.
Morgan Stanley said the ongoing collapse of junk mortgage paper, combined with a decline in available credit, has plunged the US real-estate industry into “a very different environment on the heels of market events that could force a housing recession like none ever imagined or experienced.”
“History has never seen such extended periods of house-price declines,” it added.
With the market locked down, and lenders hesitant to issue loans or 2nd mortgage notes, there is little that can stimulate a recovery short of a massive government bailout.
President Bush’s Plan: The Real Consequences
The Blogosphere is identifying the flaws that some of the larger media seems to be skimming over regarding the government mortgage bailout plan. The OCRegister is blogging:
President Bush announced a plan today to help some subprime borrowers with adjustable-rate mortgages keep their homes. He said some loan servicers have agreed to freeze for five years the low introductory rate on subprime mortgages, if the borrowers demonstrate they can’t afford the loan when the teaser rate ends. (To read a Reuters story on it CLICK HERE.)
I interviewed three sources about the plan and got wide-ranging reactions.
Michael Pento, a senior market strategist with Delta Global Advisors, an investment advisory firm in Huntington Beach, lambasted the plan.
“I hate it. I think it’s disgusting,” Pento said.
Most economists agree with Michael Pento the plan, as much as it can be called one, only stands to benefit large lenders. Good borrowers still end up having to plan and take out products such as a Utah Heloc in order to paydown their mortgages.
Bond Market Takes Hit After Bush’s Announcement
It seems the vague announcement of government intervention is having an affect on the economy, unfortunately it’s a negative affect! Bloomberg has the latest:
President George W. Bush’s plan to freeze interest rates on some subprime mortgages may prove to be a cure that breeds another disease.
“If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,” said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. “When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.”
This is going to make interest rates rise across the board, even for those looking for loans as specialized as a Utah Home Equity Loan.
The Fallacy Within Housing
OptionArmageddon is seeking to open consumers eyes to lender’s questionable actions. They write:
Remember: negative amortization is the amount of interest due on a mortgage that the borrower defers to future periods. Accounting rules allow banks to count these “deferred payments” as current income. But if borrowers default on their loans, if they never make payments in cash, then “income” previously recognized has to be reversed.
Say I’m carrying a balance on my credit card; I owe interest on that balance. If I’m not paying my bill on time–if I’m making the minimum payment each month, for instance–then I’m “deferring” interest payments to the future. Wouldn’t it seem foolish for the credit card company to treat my “deferred” payments as income today? Banks that sold option ARMs are doing exactly this: watching the unpaid balance on their mortgage loans rise while counting nonpayments as income today.
If home values are increasing and borrowers can refinance, then there’s little risk to the bank that the loan amount won’t be paid back. But home prices are now falling across the nation. And defaults are rising…….
The concept behind reporting invisible (read:nonexistent) payments from homes about to be foreclosed as income seems idiotic. No wonder investors are shying away from large lenders. The borrowers will not payoff mortgage debts, and these companies are simply delaying the inevitable.
Toll Brothers Sees First Loss
Oh how the mighty have fallen…and keep falling. PhillyBurbs is reporting that Toll Brothers, the nation’s largest luxury home builder, has posted its first quarterly loss ever. Here’s the latest:
The $81.8 million loss was driven by $315 million in write-downs of property whose value had plummeted, the company said. A write-down is the downward adjustment in the accounting value of an asset.
“By many measures, fiscal 2007 was the most challenging of the 40 years that Toll Brothers has been in business,” said Robert Toll, CEO of the Horsham-based company. “1974 was perhaps rougher, but the difficult times only lasted one year.”
The loss translates to 52 cents a share. Without the write-downs, the company would have seen a profit of $118 million, or 72 cents a share. Still, the company beat analysts’ expectations of a 77-cent-per-share loss, and its shares rose 13 percent, or $2.70, to close at $23.42 on Thursday.
Yet another business taking huge writeoffs, it’s amazing just how fragile most real estate related companies are proving to be. Many home builders rely on profits to stay in business, and just one bad quarter can often mean bankruptcy.
Budgeting is important to avoid such a situation in one’s every day life. That’s why many use programs such as a mortgage payoff plan to budget their life’s finances, and ensure that even the bad quarters get weathered well.
Congress Does The Wrong Thing…Consistently
Many are starting to wonder just what Congress was elected to do…because so far they seem to be doing very little right. Here’s the latest from the Baltimore Sun:
Last night the Senate passed a bill to fix the Alternative Minimum Tax, which keeps vacuuming in non-rich households and hitting them with high taxes, an outcome Congress never intended. But it failed to replace the lost revenue and refused to tax venture-capital and hedge-fund partners at the rates everybody else pays. In other words, it made sure regular folks don’t have to pay fat-cat rates. But it refused to make sure fat cats pay regular-folks rates. Charles Rangel, chairman of the House Ways & Means Committee, reportedly said he won’t oppose removing a tax increase on venture- and hedge-fund managers in a bill that the House passed.
Essentially congress is ensuring that the wealthy continue to receive tax breaks while those that make far less pay more. Seems rather illogical given the current state of affairs for the US economy. Affording to live is becoming more expensive every day, and inflation is hurting many consumers (though making some loans like home equity line of credit loans more affordable).
Lennar Sees Downgrade
The AP has the latest on the mortgage crisis:
A Deutsche Bank Securities Inc. analyst cut his rating on Lennar Corp. Friday, saying joint-venture agreements with real estate and investment entities may come back to haunt the homebuilder as a housing crisis widens.
Homebuilders are facing high cancellations amid a glut of unsold homes on the market, as potential purchasers are skittish about the market as home prices fall. Some are finding it difficult to find mortgage financing because credit markets have tightened.
Nishu Sood, in a client note, cut his rating on the stock to “Hold” from “Buy” and cut his target price to $17 from $36. Lennar owns about $1.1 billion in equity in various joint ventures, he wrote.
Obviously, most good investors are shying away from anything having to do with the housing market. What’s surprising is that investors didn’t do so sooner. Obviously this house of cards had to fall sooner or later, the only real surprise being that no one saw it coming.
Smart consumers are now investing in their own homes using 2nd mortgage loans, rather than trying to play the market during a downturn.
Is Anyone In Favor Of A Government Bailout?
Just like the Airlines in early 2000, it seems that most big lenders are counting on a big government bailout to get out of debt. Unfortunately, it appears that the US government is quite eager to press forward with wasting tax dollars to help lenders that made bad loans.
Reggie Middleton blogs:
If the government really wishes to get involved, they should go after those who were victimized through being fraudulently induced into applying for mortgages and home sales that weren’t in their best interest. Make the perpetrators of that fraud make the victim whole, which takes no government funding (many of the perpetrators themselves may need funding, though). Fraud was prevalent in the boom, but unilateral fraud on the part of the vendor is where the government should focus its resources. The market should be allowed to sort out the rest.
For more on the ill thought out consequences of this plan: “I hate to say it, but this thing is going to be ugly, and we are a good 2-3 years from even thinking about the bottom. We finally started reaching critical mass with ’subprime’ foreclosures, but we haven’t even begun to hit the alt-a and a-paper sham loans. They are starting to pop up, but they will take longer. Most alt-a and a-paper borrowers were doing 5, 7, and even 10 year ARM loans.”
One of the keys to a working capitalist society is a laissez faire approach. Choosing to bail out lenders will not end well.
More Investor Claims Issued Agains Bear Stearns
Hedge funds are continuing to suffer at the hands of the declining real estate market, with Bear Stearns taking a beating this week. Reuters is reporting on the latest troubles:
The first of a new round of investor claims was filed against Bear Stearns Cos. on Wednesday for its role in managing two mortgage hedge funds that collapsed earlier this year, securities lawyers said.
The claims, which will be submitted to the Financial Industry Regulatory Authority (FINRA) for arbitration, represent more legal challenges for Bear Stearns, which recorded losses this summer.
The first of at least 11 new claims involves an unidentified Cayman Islands fund-of-hedge funds manager that lost $1 million in the Bear Stearns High Grade Structured Credit Strategies Enhanced Leverage (Overseas) Fund.
While such claims are kept somewhat anonymous, it’s a troubling sight to see Bear Stearns, long considered one of the savviest bond traders on Wall St., suffering so much from the housing decline. You’d thing someone in the firm would have done some basic calculations and realized that the likelihood of homeowners proceeding to payoff mortgage loans issued by subprime lenders was low at best.