The Fed’s Expectation for Growth to Slow
An article published by the Wall Street Journal takes a look at the credit fears, rising oil prices, and declining dollar that may fuel inflation. According to the article:
Mr. Bernanke’s testimony to the Joint Economic Committee of Congress yesterday echoed the Fed’s statement last week that it saw the risks of economic weakness and higher inflation as roughly balanced, a signal it thought no more rate cuts would be needed.
He said the Fed’s policy committee sees growth slowing “noticeably” in the current quarter and remaining “sluggish during the first part of next year” but “then strengthening as the effects of tighter credit and the housing correction began to wane.
“Underscoring the delicacy of current circumstances, Mr. Bernanke acknowledged inflation risks from oil as well as the weaker dollar, saying the Fed is “very attentive” to the risk that the falling dollar has “the potential to raise import prices and contribute to inflation.”
The current circumstances have the Fed scared for the future of the financial system. So why are they trying to discourage the consumer from being scared? The biggest difference is that fear for the Fed will lead to reform that could lead to improvements, whereas fear for the consumer will only lead to less purchases and a decrease in the economy. Interestingly, it appears that the fed doesn’t want consumers to pay off mortgage debt.
Washington Mutual Hit by Suit
An article published by Bloomberg goes into the details of the suit against Washington Mutual and allegedly dishonest appraisals. An inflated appraisal can often make it impossible for a buyer to pay off mortgage loans, and is one of the reasons for the mass number of foreclosures plaguing our nation. According to the article:
Washington Mutual Inc., the largest U.S. savings and loan, fell the most in 20 years after New York Attorney General Andrew Cuomo said he found a “pattern of collusion” on mortgage appraisals linked to the company.
Appraisals that don’t accurately reflect a home’s price could allow unscrupulous loan officers or brokers to close a deal that would otherwise be scotched, said Terry Wakefield, a mortgage industry consultant.
Washington Mutual has lost more than $25 billion in market value this year, including about $3.7 billion today, as the stock plummeted 56 percent.Mortgage brokers are typically paid when they close a loan, and the “temptation to cheat is overwhelming” when home prices fall, Wakefield said.
“The fact that Washington Mutual and every other lender allow this conflict to take place within their organization is something they need to take responsibility for,” he said. “If this turns up an indication of rampant inflated valuations, it’s going to be a problem.”
The more we dig into the financial crisis, the more we find instances of corruption. It seems impossible to know who to trust these days. But let’s face it, there were always be corrupt officials trying to cheat everyone else of their money. The best that anyone can do is to get multiple appraisals and quotes to make sure that they are being dealt with fairly.
Las Vegas Housing Prices Suffer
An article posted on Housing Doom takes a look at the decline in housing prices in Las Vegas in comparison with prices in 2004. According to the article:
In Business Las Vegas said last week: it won’t be long before prices return to the levels of late 2004 when it comes to the existing home market.
The median price for a single-family home in October was $274,725. This is the lowest the median price has been since May 2004 when the median price was at $266,000. Appreciation is down 4% month-to-month and down 11% year-over-year- the largest year-over-year decline we’ve seen since the market started declining.
974 homes sold in Las Vegas in October, only a slight decrease from September’s 990. However, this is down 42.3% year-over-year from 1,689 in October 2006.
It’s getting tougher to borrow at the moment– the Wall Street Journal is reporting that even for prime loans, 40% of lenders are reporting tightening their standards in the past three months. Between tighter standards, falling prices and spooked buyers, the market is set to fall even further. Expect Las Vegas to make it’s way even further back in time.
Surely not all of the housing woes in Las Vegas can be extrapolated to the entire nation. But they may very well be an indicator of where the rest of the housing markets are heading. Las Vegas housing prices are back to where they were before the housing boom, and are not expected to jump back any time soon. The end of the housing crisis is a long way out of sight if similarly large housing markets follow in Las Vegas’s path.
It can be incredibly difficult for a home owner to remain inspired to pay off mortgage loans when they realize that their home is worth half what they paid for it
Subprime Loan Lenders Targeting Minorities
An article published by the Atlanta Journal-Constitution shows a disturbing trend that minorities are unfairly treated by mortgage lenders. According to the article
Nearly half of blacks who bought a house in 2005 or 2006 ended up with a high-interest mortgage, compared with 13 percent of white home buyers, according to an Atlanta Journal-Constitution analysis of federal mortgage data.The disparity was striking, even in a comparison of home buyers with similar incomes. Among black home buyers making more than $100,000 a year, 41 percent got a subprime mortgage, compared with 7 percent of whites in the same income category.
Hispanics, about a third of home buyers got a subprime loan in 2005 and 2006. Only 10 percent of Asians used a subprime loan to buy a house, the lowest of any group.The disparity is not unique to metro Atlanta. Federal mortgage lending statistics show that blacks and Hispanics across the country are much more likely than whites and Asians to end up with a subprime loan.
Dan Immergluck, a Georgia Tech professor who is an expert on mortgage lending, said lending studies show that subprime lenders tend to focus on minority communities.
It is sad to see that racism and generalizations are still so prevalent in our society today. The minority targeting in the loan market is especially disturbing because it can prove detrimental not only to their financial stability and credit standing, but their entire way of life.
The initiation of a loan based on the ethnicity of the borrower is predatory, particularly if it’s done with the intention of making it difficult to pay off mortgage debt. Hopefully such conduct will be curbed in the future.
Housing in America Getting Cheaper?
An Australian publication, the Daily Reckoning believes that falling prices in America has made it a more affordable place to live in. Unfortunately for Americans, the falling dollar limits their purchase power. Here’s an excerpt:
America is probably getting cheaper. And Americans are probably getting poorer. That’s how the global accounts get settled. Americans owe a fortune to foreigners. As their paper money is marked down so is the fortune they owe. They will owe less. But they will own less too – because the value of their own dollar holdings…and dollar incomes…will go down. Foreigners will take advantage of the situation in two ways. They will buy US assets at low prices. And they will take advantage of low US wages by outsourcing some of their low-wage business to America.
America is a cheap country already; our guess is that it will get cheaper.
Back in the beginning of September, Frederic Mishkin, a Fed governor, estimated that housing prices might fall 20% by the end of 2008, and that it would reduce GDP by as much as 1.5% within three years.
That didn’t seem like much to us…certainly not enough to worry about. But Mishkin felt like a passenger on the Titanic; he wanted to find the lifeboats.
It will be interesting to see how cheap housing affects America’s standing in international trade. Perhaps a second housing boom will be forthcoming. Cheap housing, but declining wages can also lead to a recession, something which would be very bad for the US economy. Recessions can make it particularly difficult for consumers to pay off mortgage debt.
Hyperinflation About to Hit England
Increasing concern is being expressed about the huge mortgage bailout which the Fed has proposed to pay off mortgage debt for British banks.
IntelDaily Speculates:
On Oct. 12, the U.S. Federal Reserve Board of Governors agreed to extend Federal Reserve contingency lines of credit to two {British} banks–$10 billion to the Royal Bank of Scotland (RBS), and $20 billion to Barclays, two of Britain’s Big 4 banks. The Federal Reserve would open these $30 billion facilities to the two banks, should the banks, in turn, need them to extend credit to their clients “in need of short-term liquidity to finance their holdings of securities and certain other assets,” the Federal Reserve said in a letter to the banks.
With respect to the Royal Bank of Scotland, the Fed said that the coverable assets could include “residential and commercial mortgage loans and mortgage-backed securities, asset-backed securities, commercial paper and structured products.” At the same time, the Fed lifted the limit on how much credit the RBS and Barclays could extend to their “affiliated broker-dealers,” to $10 billion for RBS, and $20 billion for Barclays, matching the size of the contingency lines of credit that the Fed would extend to them. RBS’ and Barclays’ affiliated broker-dealers would be the vehicles, which would then extend the funds to the two banks’ collapsing clients.
With such large amounts heading towards banks, it seems somewhat ironic that many of these banks will use these funds to issue more loans. A somewhat illogical solution to the problems caused by making too many bad loans.
Germany Accuses UK Economy of Being a ‘Sham’
The international blame game continues as two of Europe’s largest economies have begun to go for each other’s throats.
The Telegraph writes:
Britain’s economic resurgence over the last fifteen years has been driven by record levels of household debt and a public spending spree that cannot continue, according a German-led team of economists.
In a damning new report “More Mirage than Miracle” published by the free-market think tank Policy Exchange, the analysts said Britain was relapsing into high-tax and high-regulation sclerosis just as the rest of Europe begins to shake itself out of statist lethargy.
The country’s underlying slippage has been masked by a housing boom that creates a false sense of wealth and encourages people to over-spend by drawing cash from their homes.
With economies across the west struggling to pay off mortgage losses, it will be interesting to see just how heated the blame and accusations become. While certainly a far cry from last century’s World War, economic trouble may lead to heated conflict once again.
E*Trade Suffers Huge $58 Million Loss
The former lender E*Trade has been struggling to exit the lending business as a result of it’s inability to pay off mortgage debt incurred by increasingly large numbers of foreclosures. This is almost comical considering E*Trades record amounts of trading activity and asset growth. Writeoffs on bad mortgage debt have nonetheless led to a third quarter loss being reported of $58 million.
MarketWatch further illuminates us on the hilarity of the entire situation:
“People are probably surprised that a company like E-Trade is being snared in this mortgage crisis,” said Chip Hanlon, president at Delta Global Advisors Inc. in Huntington Beach, Calif. “This could fuel fear that the real estate mess isn’t close to being over.”
Shares of E-Trade finished down nearly 1.8% in Wednesday’s session. In after-hours trading about an hour after the market’s close, shares dropped 4%. E-Trade had warned last month that it was being heavily impacted in the quarter by adverse mortgage-related conditions. The company pointed at the time to a potentially large hit in earnings.
“This is very frustrating for us,” said Jarrett Lilien, E-Trade’s president. “We had the best quarter ever in our core business. But events in the credit markets overshadowed those gains.”
It is indeed surprising that such a large company, particularly one which markets itself as financially savvy enough to assist investors in investing, could have made so many bad real estate investments.
Foreclosures Remain Unsold
An increasingly high number of homes are being foreclosed upon by banks with few if any interested buyers. This is particularly noticeable in areas with high numbers of foreclosures such as California. Few buyers means that home prices have been heavily inflated, as homes are generally auctioned for the amount owed rather than market value. If a home is auctioned for $100,000, it could potentially be worth $400,000. Of course, if the buyer bought the home for a heavily inflated price, it’s quite possible to see a home valued at $400,000 auctioned for the $600,000 owed on it rather than the $400,000 it’s actually worth.
Generally the auction is run for the sole purpose of covering the expenses to payoff mortgage lien holders. One blogger wrote the following of the dire conditions in Orange County foreclosure auctions:
I visited a foreclosure auction at the Santa Ana courthouse steps on Oct. 3, as part of my ongoing effort to learn more about why foreclosures are rising and how they may impact local neighborhoods.
Out of 34 properties auctioned that day, all but one went back to the bank because no one bid. (Thanks to Graphrix of Irvine Housing Blog for going with me and sharing info on the auction process.) I don’t know why there was only one bidder that day. However, buying at an auction entails risks, including other claims on the property aside from the lender’s as well as potential property damage from an unhappy homeowner.
Occasionally a bank can be persuaded to sell a home for less than what is owed. This generally must be arranged prior to final foreclosure, and is called a short sale. Banks often realize that they lose heavy amounts when they foreclose on a home worth less than what is owed. As a result, they often are willing to consider a short sale to pay off mortgage liens as a partial payment in order to reduce their total losses.
Bernanke Struggles to Find an Easy Way Out of Housing Mess
Flip flopping between what is financially wise for the nation and what is popular seems to be Fed Chairman Bernanke’s strong point, and one which has displayed prominently during the past few weeks. Just take a look at this snippet from Bloomberg describing his plans:
Federal Reserve Chairman Ben S. Bernanke opposed a push to allow Fannie Mae and Freddie Mac to buy mortgages higher than $417,000, saying it may undermine efforts to strengthen regulation of the two largest U.S. mortgage finance companies.
A proposal in Congress to increase the limit “would be ill- advised if it has the practical effect of reducing the incentives to achieve meaningful” regulatory tightening over the companies, Bernanke said in a Sept. 17 letter to Representative Barney Frank of Massachusetts, Chairman of the House Financial Services Committee.
Frank and other Democrats, seeking to reverse the biggest housing market slump in 16 years, have called on the Bush administration to allow Fannie Mae and Freddie Mac to buy bigger mortgages and expand their $1.5 trillion investment portfolios. The companies’ regulator announced today it will allow the companies to annually increase their purchases of home loans and mortgage bonds by 2 percent.
Bernanke in the letter written two days ago said easing restrictions on the companies could prove to be “ill advised,”
While strongly opposing the us of Fannie Mae to bailout borrowers losing their homes, Bernanke fully supports bailouts for fellow bankers who issued illegal and corrupt loans. Politicians always look out for their own, but the national backlash this may produce could destroy Bernanke’s hope of holding power for much longer.
While the government certainly should not be expected to pay off mortgage loans for consumers, it certainly seems more logical for the government to help families who stand to lose their homes than to help bankers who’re trying to foreclose on such homes.