Professor Cole's Finance Blog

This past week, news on U.S. home sales was incredibly bleak. In July, existing home sales fell to an annual rate of only 3.83 million, a drop of 27% from June and the lowest since the the National Association of Realtors began collecting this information in 1999. New home sales also fell to a record low annual pace of 276,000 in July, down 12% from June, and the lowest on record since 1961. This is in spite of the fact that U.S. residential mortgage rates are at historic lows--just under 4.60% for 30-year fixed-rate conventional conforming mortgages--and, according to the Case-Shiller index, home prices  have fallen on average about 30% from their 2006 highs. How can this be?

High on the list of explanations is the expiration of the Obama administration's costly first-time home-buyer tax credit, which handed out lottery checks to those individuals lucky enough to be in the market for a new home and able to qualify for a mortgage at a time when loan underwriting standards have become incredibly stringent relative to those prior to onset of the financial crisis in September 2008, when Fannie and Freddie were placed into conservatorship. Everyone who was able to buy did so before July in order to qualify for the now-expired tax credit. In essence, the tax credit simply time-shifted home sales from July and later in 2010 to earlier months--a costly exercise in futility reminiscent of the Obama administration's equally ill-conceived "cash-for-clunkers" tax credit, which had approximately the same effect on auto sales.

But there is much more going on. Unemployment remains sky-high at an official rate of 9.5% for those looking for work during the past four weeks, but at 16.5% when discouraged workers and temp workers who would prefer to work full-time are included. If you don't have a job, you can't qualify for a mortgage to buy a house.

In addition, there are more than 7 million homeowners, according to Lender Processing Services, who are either delinquent on their mortgage or already in the process of foreclosure. The homes financed with these  mortgages will eventually end up on the market, further depressing home values, so rational buyers are staying on the sidelines. The only good news is that this is down from a high of 8.1 million in January 2010, so, at least, things are getting better. As of July, there were 2.0 million homes in the process of foreclosure and another 2.5 million past due 90 or more days. On average, the 2.0 million homes in foreclosure had been delinquent for an astonishing 469 days, while the 2.5 million past due 90 or more days had been delinquent for an average of 306 days. These figures underscore efforts by lenders to put off the day of reckoning when they will have to mark these mortgage loans to their true market values, but these efforts are dragging out the healing process of the housing market.

As for the Obama administration's foreclosure mitigation program--Home Affordable Modification Program or HAMP--it continued to flounder in July with only 37,000 new permanent modifications for a program total of 422,000 since May 2009. This is all we get from a program that was supposed to help 4 million homeowners stay in their homes.

If this is "change we can believe in," then we are all in desperate trouble. Come November, we all need to vote to "change" those in control of the Congress because the current crop of critters are doing nothing but "mortgage" our future in a sea of deficit red ink.

Posted by m1rac01 at 02:58 PM | Permalink

With the ink of President Obama’s signature on the Frank-Dodd Bill barely dry, the next bank bailout has already begun. How can that be, you might ask? Weren’t we promised that this “landmark” legislation would end bank bailouts? Weren’t we promised that this legislation ushered in a new era of transparency on Wall Street? Could it be that the politicians lied to us? Say it ain’t so—but it is.

How can I make such a preposterous claim, you might ask? What evidence do I have to support my assertion? Well, I reply, look no farther than the second-quarter earnings report of the Wall Street Titan J. P. Morgan Chase. (It is available online for all to peruse at http://investor.shareholder.com/jpmorganchase/presentations.cfm.) You will, however, have to dig deep into the report, into the financial supplement to page 32, where the company reports information on the credit quality of its loan portfolio. At the bottom of the page, in footnote (a), you will learn of more than $12 billion in nonaccrual loans (read: the borrower ain’t gonna pay) made by the bank, but which the bank does not consider to be “nonperforming.” Why not, you might ask? There in footnote (a) is your answer, and prima facie evidence of the next bank bailout. These bad loans are insured by U.S. government agencies. Which agencies, you might ask? So do I, because the bank doesn’t identify these agencies, but the most likely culprit is Federal Housing Administration, which insures residential mortgages.

Of course, it is unfair to single out J.P. Morgan Chase. Look no farther than the second quarter earnings report of Bank of America. There, on page 40 of its supplemental information, is a line item “Federal Housing Administration insured loans past due 90 days or more and still accruing,” showing a balance of more than $15 billion. Why are these loans not considered to be “nonperforming,” you might ask? The answer is simple: Bank of America plans to collect from the FHA.

Likewise for Wells Fargo. On page 33 of its supplemental information is a footnote that its “90+ days past due and still accruing” line item “excludes GNMA and similar loans whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs.” By comparing the reported amount with the amount from its Y9C regulatory filings, I estimate the exposure at more than $30 billion.

If this brings to mind the back-door bailout of Wall Street banks by AIG, it should. At just these three big banks, the taxpayers are on the hook for almost $60 billion in bailout money. This is yet another way to funnel our taxpayer dollars from Main Street into the banks on Wall Street. So the next time you hear President Obama, Sen. Dodd or Rep. Frank tell us how they have “ended bank bailouts,” remember that old comment from Yogi Berra, “This is like déjà vu all over again.” Only this time the conduit is not AIG, it’s the FHA.

Note: This blog appeared as an Op-Ed in the Washington Times on August 26, 2010

Posted by m1rac01 at 02:05 PM | Permalink

On August 3, the National Association of Realtors' reported that its index of pending home sales declined in June to 75.7 from 77.7 in May and 93.0 in June 2009. This is more evidence on the dismal state of the U.S residential housing market and the ineffectiveness of the home buyer tax credit, which served only to accelerate planned purchases rather than stimulate new purchases.

Also, Lender Processing Services has released its Mortgage Monitor for June 2010, which shows that the percentage of mortgage that are noncurrent (delinquent or in foreclosure) was 13.20%, with 9.55% delinquent and 3.65% in foreclosure. These percentages translate in 7.14 million noncurrent mortgages. At least this was a slight improvement from May, when 7.26 million mortgages were noncurrent and is a considerable improvement from the market bottom in January 2010, when 8.12 million mortgages were noncurrent. However, the average number of days delinquency continued to set new records: 300 days for 90+ day delinquencies and 461 for foreclosures. There are 2.59 million mortgages in the 90+ day bucket, and it seems likely that most of these will ultimately end up in foreclosure during coming years, so the end of this crisis is nowhere in sight.

This crisis continues to be about location, location, location: 23.8% of mortgages in FL were noncurrent, 22.0% in NV, and 18.5% in MS. Only 15 states exceeded the national average, and 15 states came in at under 10%, led by ND at 4.6% and SD at 5.4%. IL was sixth worst at 14.7%.

The most recent report on the Obama administration’s Making Home Affordable Program documents that program’s ineffectiveness at stanching the hemorrhaging in the housing market. While 1.53 million trial modifications have been extended, more than a third have been cancelled, 364 thousand remain active, and only 389 thousand permanent modifications remain active.

So much for the Obama Administration's pledge “to offer help to 3 to 4 million homeowners by 2012.” To paraphrase another recent president, I guess it depends upon what the meaning of the word “help” is. It’s looking more and more like “help” means “help become a renter.”

Posted by m1rac01 at 01:26 PM | Permalink