The Obama administration’s flagship effort to help people in danger of losing their homes is falling flat.
More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.
Last month alone,155,000 borrowers left the program — bringing the total to 436,000 who have dropped out since it began in March 2009.
Exhibit A: The deeply flawed mortgage giants Fannie Mae and Freddie Mac that have yet to be overhauled despite endless calls for an overhaul.
As Deal Journal pointed out post earlier today, Washington is seemingly paralyzed by a fear that ending the government guarantee of Fannie and Freddie would bring the housing recovery to a screeching halt.
Well, Exhibit B has to be an amendment to a bill winding its way through Congress. The bill is called the “Small Business Lending Fund Act of 2010,” and it would extend $30 billion to small banks to facilitate small-business lending. But the last minute amendment, which was sponsored by Democratic Reps. Brad Miller (N.C.), Joe Baca (Calif.) and Majority Leader Steny Hoyer (Md.), would allow builders to tap into the $30 billion to build more houses.
For more than two years, banks have practically shut off all financing to small and mid-size home builders as they pare back their exposure to construction and development loans. The National Association of Home Builders lobbied hard for the amendment to be included in the bill. “The Miller/Baca amendment will expand the flow of credit to residential builders and help promote the sustained growth and vitality of the nation,” the NAHB said in a letter sent to all House members.
The amendment passed 418 to 3.
The crumbling Episcopal church at Niagara and Vermont streets has been sold to a New York City business for $150,000 by the Bronx woman who acquired the property in a tax-foreclosure sale four years ago, according to Buffalo Housing Court Judge Henry J. Nowak.
The St. Mary’s on the Hill site was sold by Julia J. Myrie- Oyewo to Amansie Enterprises. As a result of the transaction, Nowak on Thursday placed the building code violation case on the court’s reserve calender, pending possible city action against the new owner.
Last Month, Nowak converted the unpaid $3,000 fine imposed on Myrie-Oyewo into a civil judgment. She had been sentenced in absentia to 30 days in jail April 27 and still faces that penalty. The new owners of the 117-year-old, three-building site, meanwhile, could face a fine.
St. Andrew’s Church, 300 Whedbee St., once served hundreds of parishioners. Now it might serve a much smaller congregation.
The city has scheduled a neighborhood meeting at 6 p.m. June 24 at the church on the corner of East Olive and Whedbee streets to discuss a proposal from Boulder developer Robert King to convert the church into four semi-high-end apartments.
St. Andrew’s disbanded in late 2008 when the congregation divided on theological differences, and a portion of the congregation left the church.
The Episcopal Diocese of Colorado decided to sell, putting the 7,434-square-foot property on the market about 18 months ago for $520,000.
The church is now listed on the Sperry VanNess website at $465,000, and Realtor Jared Goodman said it is under contract for about 7 percent less.
There are many adjectives one can use to describe legendary investor Robert Arnott, but “bullish” is not one of them. Arnott, who is chairman of Research Affiliates and manager of several successful Pimco portfolios, was a Cassandra of the subprime crisis. He correctly predicted in early 2008 that the housing market along with consumer spending would crumble.
Now Arnott, 55, is bearish once again. He said in a telephone interview with Reuters that the global markets are in “the very early stages” of a sovereign debt crisis which could lead to another recession in the fourth quarter of 2010. “People should not worry about is not the Greeces and Hungarys of the world, but contagion to the Italys and Spains and, heaven forefend us, the United States,” Arnott says.
Arnott isn’t sure how long the recession will last. “I would not expect it to be as deep,” he predicts. “But if it’s even a modest recession from this starting point, it will feel deeper.”
The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.
Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.
“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.
A typical house is tough enough to sell in a recession-hampered housing market. But when a house is a house of worship, the job often becomes one that smacks of the Biblical trials of Job. The challenges just seem to multiply.
Take the case of Trinity Episcopal Church, an imposing, steepled stone structure boasting elaborate stained glass windows that was a longtime center of worship in Bristol. It fell victim to the split in the church and was put up for sale for $850,000.
“It needs some work,” says Jack Spaeth, the canon for stewardship and administration for the Episcopal diocese of Connecticut. “But the right buyer is out there, whether that is a faith community or a transformed use.”
Spaeth knows of which he speaks; a former real estate agent who manages property and finances for the diocese, he has handled several church sales in the past few years. “Many of these are Gothic structures that are expensive to maintain,” he says. “It’s not just your standard cinderblock.”
The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.
Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget ”” saying it could save $208 billion over the next decade.
“My best guess is that we’ll have a continued recovery, but it won’t feel terrific,” Ben S. Bernanke, the Fed chairman, said at a dinner at the Woodrow Wilson International Center for Scholars on Monday night. “And the reason it won’t feel terrific is that it’s not going to be fast enough to put back eight million people who lost their jobs within a few years.”
One could almost envision the winces in the White House as Mr. Bernanke observed that the unemployment rate “will stay high for some time.” He went on to note that even if the economy grew at 3 percent, which would be considered a healthy pace, it would do little more than keep pace with the normal rate of growth of the work force.
Virtually every day of late, White House officials have struggled to explain how their strategies to provide economic stimulus to bring down the unemployment rate square with Mr. Obama’s oft-expressed commitment to tackle a record budget deficit. They talk about spending this year ”” in modest amounts ”” while waiting for the prescriptions of the president’s commission on debt reduction, which reports, conveniently, a few weeks after the midterm elections.
I’ll reiterate that from our perspective, the essential difficulty of the market here is not Greece, it is not the Euro, it is not Hungary, and it is really not even the slow pace of job growth in the latest report. The fundamental problem is that we have not, as a global economy, accepted the word “restructuring” into our dialogue. Instead, we have allowed our policy makers to borrow and print extraordinarily large band-aids to temporarily cover an open wound that will not heal until we close the gap. That gap is the difference between the face value of debt securities and the actual cash flows available to service them. The way to close the gap is to restructure the debt. This will require those who made the bad loans to accept the associated losses. By failing to do that, we have failed to address the essential problem faced by the world, which is that we have created more debt than we are able to service.
A few observations. First, I remain convinced that the other shoe to drop is not Greece or Spain or Hungary, but rather a second wave of major credit strains here in the U.S. related to fresh delinquencies from exotic adjustable rate mortgages.
Second, it is a delusion to interpret economic statistics suggesting an economic turnaround over the past year without factoring out the extent to which that has been driven by unsustainable levels of deficit spending.
In retrospect, the pattern seems clear. Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.”
Much of this indifference stemmed from an obsession with profits, come what may. But there also appears to have been another factor, one more universally human, at work. The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely ”” and may even have been unlikely ”” but that would bring enormous costs….
For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life ”” something they did not want but are in no hurry to get out of.
Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.
“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”
A growing number of the people whose homes are in foreclosure are refusing to slink away in shame. They are fashioning a sort of homemade mortgage modification, one that brings their payments all the way down to zero. They use the money they save to get back on their feet or just get by.
The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.
Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, said recent government measures to cool the property market needed to be part of a long-term push to bring high housing prices under control.
He added that there were still signs that the economy was overheating and recommended modest increases in interest rates and the level of the currency.
Not so long ago, Memphis, a city where a majority of the residents are black, was a symbol of a South where racial history no longer tightly constrained the choices of a rising black working and middle class. Now this city epitomizes something more grim: How rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress.
The median income of black homeowners in Memphis rose steadily until five or six years ago. Now it has receded to a level below that of 1990 ”” and roughly half that of white Memphis homeowners, according to an analysis conducted by Queens College Sociology Department for The New York Times.
Black middle-class neighborhoods are hollowed out, with prices plummeting and homes standing vacant in places like Orange Mound, White Haven and Cordova. As job losses mount ”” black unemployment here, mirroring national trends, has risen to 16.9 percent from 9 percent two years ago; it stands at 5.3 percent for whites ”” many blacks speak of draining savings and retirement accounts in an effort to hold onto their homes. The overall local foreclosure rate is roughly twice the national average.
The repercussions will be long-lasting, in Memphis and nationwide. The most acute economic divide in America remains the steadily widening gap between the wealth of black and white families, according to a recent study by the Institute on Assets and Social Policy at Brandeis University. For every dollar of wealth owned by a white family, a black or Latino family owns just 16 cents, according to a recent Federal Reserve study.
The economy trudges ahead yet debt dogs many Americans, stressing them out even as they firm up their own financial foundations.
There are new jobs produced but old worries persisting for people despite belt-tightening and boosted savings, according to an Associated Press-GfK poll.
About 46 percent of those surveyed say they’re suffering from debt-related stress, and half of that group described their stress as “great deal” or “quite a bit.” On the other hand, about 53 percent say they feel little or no stress at all.
That’s in line with findings from last year, even though times seem better today: The economy is growing and generating jobs, and households have made progress in repairing their financial footing, trimming debt, watching spending and saving more.
Like last week, with stocks lurching wildly with the headlines — up by triple digits one day, down the next. For the month, the Dow Jones Industrial Average dropped 7.9% and is negative for the year. The Nasdaq Composite and the Standard & Poor’s 500-stock index also are in the red for the year.
Some pretty smart people are cautious. Seth Klarman at Baupost Group is worried. John Hussman of the Hussman Funds says all sorts of warning lights have lit up across his screen. Even Ron Muhlenkamp of the Muhlenkamp Fund, who usually takes a sunnier view of things, says he has moved a big chunk of his mutual fund into cash in case there’s a plunge.
How far will it go? Mr. Hussman says the technical indicators have only been this bad 19 times before in the last half century — and on average the market plunged about 20% over the following 12 months. When markets were also high, like now, the picture’s even worse.
Ugh.
With the sudden drop in construction here, jobs disappeared. This shows another problem with a growth model built on construction: Employment swings up and down dramatically.
Professor JOAQUIN ARANGO (Director, Center for the Study of Migration and Citizenship, Ortega y Gasset Foundation): The Spanish economy is labor intensive.
GJELTEN: Joaquin Arango, of the Ortega y Gasset Foundation, points out that the economic boom in Spain brought more people into the workforce but mostly in low skill areas, like construction. A lot of the jobs could be filled by foreign-born workers. Arango, a sociologist, has documented the surge in the immigrant population that began with the economic boon in the last 1990s.
Prof. ARANGO: As a percentage of the population, at the beginning of that period, was two and a half percent or so. And now it is over 12 percent.
GJELTEN: Thats dramatic.
Prof. ARANGO: Yeah, spectacular.
5. Nobody really understands the world economy.
Sad, but true. For all the math and the theoretical models, economics remains an intellectual discipline rather than a predictive science. That is unlikely to change. Just as all the computer models in the world can’t tell you what the stock market will do tomorrow, all the world’s economists working together can’t tell you when the next crisis will come ”” or what you can do to avoid it. At any given point of time there will be economists predicting a crash and economists predicting good times along with every variant in between; some of them are bound to be right but so far this looks more like timing and luck than the repeatable and testable result of demonstrably better methods. The economics profession is full of dogmatic and pompous heretic hunters of all stripes, but as a group they are no better collectively at prediction than a similarly dogmatic and contentious group of medieval clerics. This doesn’t mean that economics is bunk (any more than theology is bunk); systematic and rigorous reflection on human economic activity yields many useful insights and an education in basic economic ideas remains an essential piece of intellectual equipment for any serious person.
Economic outcomes remain hard to predict not because economists are stupid (they aren’t, by and large) but because the world economy is continually in flux. Facts change; China rises, new industries emerge, under the influence of new economic ideas, central bankers and investors change the way they behave. Investors and entrepreneurs have mood swings: too optimistic in 2007, too pessimistic in 2008. All this change feeds back into the world system in unpredictable ways. Economics can help us understand what is happening and give us more sophisticated tools for investigating the unknown ”” but it cannot protect us from uncertainty and risk. The “unknown unknowns” will always be with us.
This means, among other things, that we are no closer to eliminating panics and crashes than the Dutch were in the wake of the Tulip Bubble.
It is past time to end the conspiracy of silence about Fannie Mae and Freddie Mac, government-sponsored companies that buy and sell mortgages and related securities. Both were taken over by the Treasury Department in 2008. So far Washington has shelled out $140 billion to keep them afloat. A Congressional Budget Office study says their losses could reach $400 billion. Other estimates put them at $500 billion.
In contrast, the net cost to date of TARP, after loan repayments and other government income, is $172.5 billion, nearly half of which is owed by the auto industry.
While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.
Unlike TARP funds, the subsidies to Fannie and Freddie do not show up in the government’s budget. If they did, it would be even further out of balance.
Far be it for me to make a dicey situation dicier but you can’t smell the sulphur in the air right now and not think we might be on the threshold of an age of rage….
Whether in 1789 or now, an incoming regime riding the storm gets a fleeting moment to try to contain calamity. If it is seen to be straining every muscle to put things right it can, for a while, generate provisional legitimacy.
Act two is trickier. Objectively, economic conditions might be improving, but perceptions are everything and a breathing space gives room for a dangerously alienated public to take stock of the brutal interruption of their rising expectations. What happened to the march of income, the acquisition of property, the truism that the next generation will live better than the last? The full impact of the overthrow of these assumptions sinks in and engenders a sense of grievance that “Someone Else” must have engineered the common misfortune. The stock epithet the French Revolution gave to the financiers who were blamed for disaster was “rich egoists”. Our own plutocrats may not be headed for the tumbrils but the fact that financial catastrophe, with its effect on the “real” economy, came about through obscure transactions designed to do nothing except produce short-term profit aggravates a sense of social betrayal. At this point, damage-control means pillorying the perpetrators: bringing them to book and extracting statements of contrition. This is why the psychological impact of financial regulation is almost as critical as its institutional prophylactics. Those who lobby against it risk jeopardising their own long-term interests. Should governments fail to reassert the integrity of public stewardship, suspicions will emerge that, for all the talk of new beginnings, the perps and new regime are cut from common cloth. Both risk being shredded by popular ire or outbid by more dangerous tribunes of indignation.
Senator Arlen Specter of Pennsylvania, who left the Republican Party a year ago in hopes of salvaging a 30-year career, was rejected on Tuesday by Democratic primary voters, with Representative Joe Sestak winning the party’s nomination on an anti-incumbent wave that is defining the midterm elections.
In Kentucky, Rand Paul, the most visible symbol of the Tea Party movement, easily won the Republican Senate primary and delivered a significant blow to the Republican establishment. His 24-point victory over Trey Grayson, who was supported by the most powerful Republican on Capitol Hill, Senator Mitch McConnell of Kentucky, underscored the anti-Washington sentiment echoing across the country.
The outcomes of both contests, along with a Democratic primary in Arkansas that pushed Senator Blanche Lincoln into a runoff election in June, illustrated anew the serious threats both parties face from candidates who are able to portray themselves as outsiders and eager to shake up the system.
In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.
The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”
Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.
Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.
Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.
Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.
Banks, with the help of the government, are offering some relief to homeowners who’ve lost jobs and just can’t meet their payments.
But there’s a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.
It’s called “strategic default.” People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – as zookeepers of an ever-growing parade of white elephants.
In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.
The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.
The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.
Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.
The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.
Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.
China’s inflation accelerated in April after house and food prices jumped and bank lending increased.
The news will fuel concerns that the world’s third-largest economy is overheating and that Beijing may need to raise interest rates.
April’s consumer prices were up 2.8% from a year ago, the highest rate in 18 months, and property inflation hit 12.8%, China’s statistics bureau said.
Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust.
Fannie’s losses reflected continuing weakness in the housing market and would have been worse without accounting changes that reduced its deficit. The quarterly loss was an improvement from the $23.5 billion loss for the year-ago quarter and marked the 11th consecutive quarterly loss for the Washington-based firm.
The company has now racked up losses of nearly $145 billion, or nearly double its profits for the previous 35 years. While many of the nation’s biggest banks have repaid their government loans and some are back to racking up big profits, Fannie and Freddie are still suffering from the housing-market crisis.
Update: FNM’s balance sheet could very well be hiding even more losses. Ugh–read it all also.
As they contemplate high unemployment, foreclosed homes, shrivelled house prices and the arrogant follies of their investment bankers, Americans may cast envious glances across their northern border. Despite its umbilical links with America, Canada’s economy suffered only a mild recession and is now well into a solid recovery. The Canadian dollar, having dipped sharply, is back up to rough parity with the greenback. The Bank of Canada has signalled that it may soon raise interest rates. When Stephen Harper, the prime minister, hosts the get-togethers of the G8 and G20 countries next month he will be able to boast to his visitors that his country’s economy is set to perform better than that of any other rich country this year.
How has Canada avoided the plagues that are afflicting everyone else? The short answer is a mixture of good policies and good luck …. The main reason for the country’s economic resilience is that neither its financial system nor its housing market magnified the recession. The banks remained in profit. House prices held up fairly well and are now rising. And for that regulators deserve a chunk of the credit.
Canada’s banks face high capital requirements and a cap on their leverage, such that their assets cannot exceed 20 times their capital (a lot less than the corresponding figure for many Wall Street firms and European banks). Canadians who take out mortgages worth more than 80% of the value of the property must also take out insurance against default from a federal agency, the Canada Mortgage and Housing Corporation.
If you see Joseph Laubinger on your doorstep, start packing. His courtly presence means you have exhausted all excuses, arguments and options for keeping your house.
“It’s like I’m a doctor,” said Mr. Laubinger, an agent here for big lenders. “People ask me how much time they have left.”
Hardly any. Legally, they have already lost ownership. If they do not respond to the carrot the lenders offer ”” as much as $5,000 in cash in exchange for leaving the house in good order ”” he employs the stick: the county sheriff, who evicts them.
Mr. Laubinger is having a busy spring.
US mortgage giant Freddie Mac saw a loss of $8bn (£5.3bn) in the first three months of 2010 and said it would ask for a further $10.6bn in state aid.
The firm has made a number of federal cash requests since it was taken over by regulators in September 2008.
And it said it would continue to need government funds with the US housing market not yet fully recovered.
The new request brings the total cost for rescuing Freddie Mac to $61.3bn.
Increased hotel bookings, spending by foreign tourists and business recruitment deals are three indicators that South Carolina is pulling out of the long economic slump.
Gov. Mark Sanford got the good economic news Tuesday during a Cabinet meeting in which his agency directors told him that South Carolina is doing better in business recruitment and travel and tourism than neighboring states.
Chad Prosser, director of the Department of Parks, Recreation and Tourism, said the state’s recovery is more pronounced than in Florida, Georgia and North Carolina, according to a benchmark that factors in hotel stays, available rooms and the price of the rooms.