U.S. Housing – Measures to Prevent an Economic Cancer
Laurie Goodman is perhaps the best Real Estate / MBS analyst out there, with both buy-side and sell-side experience. Her recent testimony to Congress is worth reading and contains lots of good charts, sound reasoning, and a solid idea on what needs to be done – not to make housing what it was before the crisis (god forbid!) but to prevent it from becoming a malignant cancer on the economy. NB this was one of the references in “The Way Forward”, the white paper just co-written by Nouriel Roubini, Robert Hockett, and Daniel Alpert, released through the New America Foundation.
Here are some key points:
“10.4 million additional borrowers are likely to default (20% of total)”
“total shadow inventory to 3.2 million units” at 100,000 liquidations per month it will take 2.7 years just to liquidate serious delinquencies/NPLs
ballpark, 2mm annual supply, 1.2mm annual demand, ~800,000 excess supply per year
(cause is not overbuilding – that has self-corrected – but weak demand and income and household formation, i.e. willingness and ability to buy a home)
PROBLEM: how to generate 5-6mm units worth of demand over next 5-6 years???
“overhang means that home prices, despite being very affordable, are likely to decline further. This may recreate the housing death spiral… LTV is the single most important predictor of default. So more underwater borrowers means more defaults; more defaults means more inventory, more overhang, and even further declines in home prices. …, a 10% decline would certainly re-ignite the spiral”
“What is the best solution?”
“The situation requires both supply side and demand side measures. On the supply side, the modification success rate needs to rise in order to keep homes off the market. We actually know exactly what it takes to create a successful modification—reduce principal, give the borrower substantial payment relief, and modify the borrower in the early stages of delinquency. Since negative equity drives defaults, principal reduction is the key to a successful modification. On the demand side, we need to increase the level of investor participation, and a government program is the best way to start.”
2 Responses to “U.S. Housing – Measures to Prevent an Economic Cancer”
27% of US homeowner's have negative equity, thus, don't "qualify" to refi at 4%, instead of the 7+%, and they are paying their mortgages. These people are doing the right thing, and their reward? Being shut out of refi at a lower rate.
Solution: Anyone in good standing should be able to refi their loan, regardless of what the appraisal says. Negative equity? Let the Fed buy that extra paper and guarantee it. This is an incentive to keep paying on the note as your equity continues to go down. Otherwise, why not walk? Renting is cheaper. Who needs credit anyway when the Banks are not making loans?? HELLO?????
I can hear Jamie Dimon now: But what about all that interest income JPM will lose? Too bad Jamie. You were bailed out once. Figure out a REAL business banking model instead of gambling in derivatives and speculating around the world. Can't make it? Then go broke like you should have years ago.
Contracts are falling through because the appraisals are not high enough. Let the FED guarantee the difference, so the contract can close.
Foreclosures: Strategic defaulters should be offered a deal to make "rent" payments while they are being foreclosed in trade for a less hit on their credit report. After foreclosure, let them stay in the house and rent that damn thing. Why dislocate people? The little guy is tired of the double standard. The Banks gamble, lose and are bailed out. The little guy gets kicked out of his primary residence because he "failed to make payments". The Banks "failed", but they play by different rules. By renting it back, the property produces income while the work out happens. People are in their houses in Judicial states for YEARS waiting for the Robo Signing Banks to litigate their way to completing foreclosures.
The US real estate market will not recover for DECADES unless the debt is unwound at the Residential level. REO is a road to nowhere.
Beware: Hypocrisy Pretending to be Legitimate Authority (aka the FED, BoA, WF, Citi, etc)
Well, I took the time to read The Goodman testimony. She is obviously representing the 10% of people that control 70% of the wealth in the US. She would love to scoop up large numbers of foreclosures in blocks so "big money" can turn former homeowners into "renters", another term for indentured servants.
The middle class (aka wave slaves) are losing their final grip on any illusion of self-determination in the economic system known as capitalism.
The Bankers will own it all. President Andrew Jackson said there is no greater danger to a man's money and property than a fractional federal reserve bank. He then disbanded US Bank. It was true 100 years ago, and we see the ugly truth today in our lives.
Who will dismantle the FED today?