The Bailout Is a Band-Aid: Housing Crisis Needs to Be Fixed
Thursday, September 25, 2008 4:18 PM
By: Christopher Ruddy
www.newsmax.com
Yesterday Sen. Orrin Hatch was hitting the airwaves.
The subprime crisis, he said, was the fault of the Clinton administration, who he said created the subprime mortgage crisis.
Other Republicans have been laying blame on the financial crisis on minorities and illegal immigrants who got mortgages they simply couldn’t pay. They offer no statistical proof on this point.
Nor does the usually sensible Senator Hatch offer evidence when it comes to pointing the finger at the Clinton administration.
The attempt to deflect blame for the crisis is not simply wrongheaded; I think it will compound Republican political woes and bring us disaster again in November.
Doesn’t Hatch and Co. know that Bill and Hillary Clinton voters in the swing states will decide who becomes the next president? They are wary of Obama, but love the Clintons and remember the good economic times of the’90s.
As a conservative Republican of the Reagan type, I find myself in this odd place cheering on some of the sensible things I hear from Democrats.
Barack Obama said any bailout to Wall Street must not be simply a cash payout or a loan, but be treated like an equity investment in these firms. We want our money back and then some. Yes to that, I say.
And demands by House Democrats that the secretary of the treasury alone not be given a blank check for more than a trillion dollars of our money, and that we have complete transparency in the transactions, I say yes to that, too.
Fiscal responsibility, transparency and accountability — aren’t these things Republicans believe in?
The Democratic complaints about the Bush plan shows that our government is working. The executive branch tried to put a gun to the head of Congress and told them, “Sign this check or the whole U.S. banking system will collapse.”
Congress didn’t blink.
Don’t get me wrong. I am for a bailout, but one that is sensible and is a win-win for Wall Street, Main Street investors and taxpayers like you and me.
But remember the government bailout plan proposed by the president and modifications supported by the Democrats won’t fix the underlying problem: the housing market collapse. Home prices are continuing to fall, and fewer people are buying homes than ever. Foreclosures will continue.
Unless this underlying problem is fixed, the economic symptoms will continue. There are some remedies. But before I get to them, let’s review what has happened.
The Federal Reserve under Alan Greenspan gave the U.S. economy shock treatment back in 2001 and 2002 when it lowered interest rates to 1 percent — the lowest Fed Funds rate in recent history.
By pushing the pedal to the metal and backed quietly by the White House, the Fed injected massive liquidity in the U.S. economy, creating the largest asset bubble in history, according to the Economist magazine.
Incredibly low rates by the Fed were accompanied by an acceptance of the central bank for all sorts of exotic mortgage loans. No down payments. Interest only. No job and income verification. Get the picture?
Compounding this irresponsibility was then the “greed factor” that kicked in at several levels.
First were the local banks and mortgage companies that pushed mortgages, notably adjustable rate ones that offered extremely low introductory rates, and gave them to buyers who would not be able to pay back once the rates adjusted up.
Well rates have adjusted up and the crisis hit.
Many mortgage providers also encouraged loan applicants to lie about incomes and qualifications to approve these mortgages.
Wall Street as a whole had little role at this stage. But later, Wall Street took these mortgages, which had been rolled up into collateralized debt instruments, better known as mortgage backed securities, and sold them off to investors globally.
Wall Street failed to compute the risks involved in these securities. It was a failure, not a crime.
But many Wall Street firms, hedge funds and other investments took incredible, unwarranted risks using these securities. These firms would borrow money at low rates — say 4 percent — and invest in CDOs paying 6 to 7 percent. This small difference in rates of 2 to 3 percent, the arbitrage, would throw off enormous returns, especially considering little or no money had been placed on the table to buy the securities.
I have been told that Lehman and AIG played this leveraging game, investing only $1 for every $30 they held in such toxic suggestions. Again, what they did was not a crime. They took enormous risk and reaped huge returns — for a while.
Now they want us to pay for the huge losses that ultimately fell upon them.
Washington played a role in the mess too. The White House pushed for easy money and easy lending practices, many weighted in favor of the banks and lenders and against the consumer.
Congress, dominated largely by Republicans from 1994 to 2006, did an awful job in oversight. This is especially true after President Bush took the oath of office.
When Bill Clinton was president, the Republicans acted beautifully, working diligently to keep President Clinton on a center-right economic course. The results were great.
This seems like ancient history, but it’s important to have a clear picture of how we got into this mess. It may help us get out of it.
First, we need to know the “crisis” the Bush administration presented to us just last week is not a crisis that just popped up. It was apparent to many two years ago the real estate market was in a bubble and would bust.
And when the Fed moved in 2004 and raised rates from 1 percent to 5.25 percent by 2006 — a more than 400 percent increase in two years, it also led directly to those adjustable mortgages re-adjusting at very high rates. Homeowners got struck hard — with monthly mortgage payments on medium size homes mushrooming literally overnight.
The Fed increase rates started the credit crisis. The first tremors were apparent over a year ago when the Fed took emergency steps to give banks liquidity.
It’s important to remember that most adjustable mortgages created in the boom years still have not reset – and will continue doing so through 2011.
This problem will worsen unless Washington tackled the underlying problems.
The first thing the Fed must do to reduce the continuance of the problem is drop rates. It doesn’t have much wiggle room, because the dollar needs to be protected, but a small decrease in rates could have an enormous impact on those readjusting mortgages.
The second-most-important thing to do is for Congress to give a significant tax credit for new home buyers. Congress just passed a $7500 tax credit for new home buyers, though it’s not actually a credit but a loan at no interest.
The famed economist Edward Leamer of UCLA’s Anderson School says a $25,000 tax credit to new home buyers would put an immediate end to the fall in home prices. He suggests it would spur economic activity and government tax revenues would grow, more than covering the cost of the program.
Already home prices have fallen to reasonable prices and it should be a buyer’s market. But government can spur home buyers who keep staying on the sidelines think prices will fall more.
If this is done, home prices will stabilize and likely begin rising. All of the sectors that relate to the housing market will find relief.
And, most important, the value of those mortgage backed securities will increase as the underlying mortgages become current. Foreclosures will also abate.
The key to solving the financial crisis is not to simply send a blank check to Wall Street, but to get consumers buying homes again.
Showing posts with label Housing. Show all posts
Showing posts with label Housing. Show all posts
Saturday, September 27, 2008
Thursday, June 5, 2008
AP: Foreclosures hit a record high - and more coming
Thursday June 5, 4:30 pm ET
By Jeannine Aversa, AP Economics Writer
Foreclosures surge to a record high -- late payments, too, signaling worse to come
WASHINGTON (AP) -- The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too -- an alarming sign that the housing crisis and its damage to the national economy may only get worse.
Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices -- extending a vicious cycle.
Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.
In fact, Americans' equity in their homes -- usually their single biggest asset -- now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.
Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers -- pounded by galloping gasoline prices -- will still be cautious.
"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent -- or 2.87 million loans -- compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association's survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.
The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
"The number one problem is the drop in home prices," Brinkmann said. Declining prices, especially in newer built areas, "are hurting people's ability to recover when they run into trouble -- a divorce or loss of job," he said. "In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure."
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
"These extra inventories from foreclosures complicate what is already a heavily built situation," said David Seiders, chief economist at the National Association of Home Builders.
After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.
Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.
As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.
The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.
Associated Press Business Writer J.W. Elphinstone contributed to this report.
Mortgage Bankers Association: http://www.mbaa.org/
By Jeannine Aversa, AP Economics Writer
Foreclosures surge to a record high -- late payments, too, signaling worse to come
WASHINGTON (AP) -- The foreclosure hammer is hitting ever harder. People lost their homes at the highest rate on record in the first three months of the year, and late payments soared to a new high, too -- an alarming sign that the housing crisis and its damage to the national economy may only get worse.
Dumping more empty homes on an already glutted market also is likely to put a further drag on home prices -- extending a vicious cycle.
Slumping home values are being blamed in large part for the rising tide of foreclosures. Troubled borrowers are left owing more to the bank than their homes are worth. They can't sell without taking a huge financial hit, so they just walk away.
In fact, Americans' equity in their homes -- usually their single biggest asset -- now has dropped to the lowest level on record in figures going back to the end of World War II. Homeowners' portion of equity fell to 46.2 percent, which means the amount of debt tied up in their homes exceeds the equity they have built up.
Watching their home values sink, consumers have pulled back on spending, a factor in the economy's slowdown. Buoyed by rebate checks, shoppers did get back in the buying groove in May, but analysts predict that consumers -- pounded by galloping gasoline prices -- will still be cautious.
"The economy is treading water, and the housing market is one of the undercurrents trying to pull it down," said Stuart Hoffman, chief economist at PNC Financial Services Group.
Nearly 1 percent, or roughly 447,723 loans, fell into foreclosure during the January-to-March period, the Mortgage Bankers Association said Thursday in its quarterly snapshot of the mortgage market. That surpassed the previous high of 0.83 percent over the last three months in 2007.
The report also found that more homeowners slipped behind on their monthly payments. The delinquency rate jumped to 6.35 percent -- or 2.87 million loans -- compared with 5.82 percent for the previous three months. Payments are considered delinquent if they are 30 or more days past due.
Both the rate of new foreclosures and late payments were the highest on record going back to 1979.
With prices expected to keep dropping, foreclosures and late payments "are going to continue to go up," Jay Brinkmann, the association's vice president of research and economics, told The Associated Press.
Homeowners with tarnished credit who have subprime adjustable-rate loans took the hardest hits. Foreclosures and late payments for these borrowers also swelled to all-time highs in the first quarter.
The percentage of subprime adjustable-rate mortgages that started the foreclosure process climbed to 6.35 percent. The rate was 5.29 percent in fourth quarter, the previous high. Late payments rose to 22.07 percent from 20.02 percent, the previous high.
The association's survey covers just over 45 million home loans.
More problems also cropped up with loans to more creditworthy borrowers.
The percentage of such loans falling into foreclosure was 0.54 percent, compared with 0.41 percent at the end of last year. Late payments rose to 3.71 percent from 3.24 percent.
The numbers were higher for those prime borrowers with adjustable rate mortgages. Initially low rates reset to much higher ones, making it difficult, if not impossible, for homeowners to keep up with monthly mortgage payments. The proportion of those loans falling into foreclosure jumped to 1.55 percent from 1.06 percent. The delinquency rate rose to 6.78 percent, compared with 5.51 percent.
"The number one problem is the drop in home prices," Brinkmann said. Declining prices, especially in newer built areas, "are hurting people's ability to recover when they run into trouble -- a divorce or loss of job," he said. "In other days, you could sell the home. But because home prices have fallen so much, in many of those cases, the homes are going into foreclosure."
California, Florida, Nevada and Arizona accounted for 89 percent of the total increase in new home foreclosures, he said. Those are places where prices have fallen sharply and there was a lot of home building, creating too much supply, Brinkmann said.
"These extra inventories from foreclosures complicate what is already a heavily built situation," said David Seiders, chief economist at the National Association of Home Builders.
After a five-year boom, the housing market fell into a deep slump two years ago. That dragged down sales, and prices with it. As the value of homes plummeted, many newer homeowners found themselves owing more on their mortgages than their homes were worth.
Nearly 8.5 million homeowners had negative or no equity in their homes at the end of March, representing more than 16 percent of all homeowners with mortgages, according to Mark Zandi, chief economist at Moody's Economy.com. He estimates that will increase to 12.2 million, or almost one out of every four homeowners, by the end of June.
Nearly three in 10 people say they are worried their home's value will decline over the next two years, according to a recent Associated Press-AOL Money & Finance Poll. Sixty percent said they definitely won't buy a home in the next two years. That's up from 53 percent two years ago.
As foreclosures and late payments climbed, financial companies took multibillion-dollar losses when their investments in mortgage-backed securities soured. A credit crisis spread, crimping other types of financing. The fallout plunged Wall Street in turmoil, disrupting the normal functioning of markets.
All those troubles have pushed the economy to the brink of a recession. Employers, cutting costs, have eliminated more than a quarter-million jobs in the first four months of this year.
To bolster the economy, the Federal Reserve made aggressive interest rate cuts. But with inflation on the rise, Fed Chairman Ben Bernanke this week sent his strongest signal yet that the central bank's rate-cutting campaign is coming to an end.
The Bush administration has urged lenders to freeze rates for some homeowners and encouraged lenders to rework mortgage terms so troubled borrowers can stay in their homes.
A congressional plan that includes a foreclosure prevention program has stalled as lawmakers figure out how to pay for it.
Associated Press Business Writer J.W. Elphinstone contributed to this report.
Mortgage Bankers Association: http://www.mbaa.org/
Sunday, May 25, 2008
AP: Existing home sales continue slide in April
The following appeared on page 2C of the Saturday May 24, 2008 issue of the St. Paul Pioneer Press.
Existing home sales fell for the eighth time in the past nine months, a string of weakness expected to continue as the housing industry, mired in its worst slump in decades, battles falling home prices, tight lending conditions and a weak economy.
The National Association of Realtors reported Friday that existing home sales dropped by 1 percent to a seasonally adjusted annual rate of 4.89 million units, matching the all time low set in January. These records, which cover single-family homes and condominiums, go back to 1999.
The median price for an existing home dropped 8 percent, compared with a year ago, to $202,300. It was the second largest price decline on record and analysts predicted prices would fall further in the months ahead given the huge backlog of unsold single-family homes.
The number of unsold single-family homes in April rose to a 10.7 months suply at the current sales pace, the highest level since June 1985.
As prices fall, it keeps more people sitting on the fence, analysts said, because prospective buyers don't want to purchase an asset that has the potential to fall further in price if they delay making the purchase.
Existing home sales fell for the eighth time in the past nine months, a string of weakness expected to continue as the housing industry, mired in its worst slump in decades, battles falling home prices, tight lending conditions and a weak economy.
The National Association of Realtors reported Friday that existing home sales dropped by 1 percent to a seasonally adjusted annual rate of 4.89 million units, matching the all time low set in January. These records, which cover single-family homes and condominiums, go back to 1999.
The median price for an existing home dropped 8 percent, compared with a year ago, to $202,300. It was the second largest price decline on record and analysts predicted prices would fall further in the months ahead given the huge backlog of unsold single-family homes.
The number of unsold single-family homes in April rose to a 10.7 months suply at the current sales pace, the highest level since June 1985.
As prices fall, it keeps more people sitting on the fence, analysts said, because prospective buyers don't want to purchase an asset that has the potential to fall further in price if they delay making the purchase.
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