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The S&P Case-Shiller index data for February, 2009 show home prices continue to decline (20
city composite index is down 18.6% year-over-year), but the rate of decline did slow in most regions during the month. Home prices seem likely to fall further (future prices suggest another 10 percent or so this year for the 20 city index), but lower mortgage rates and improving consumer sentiment could help limit the declines, providing some additional support to the economy.

So here’s the big question: if home prices have only another five percent or so to drop nationally, is it still worth waiting to buy?  Clearly not if you are also selling in the same or a similar market, but it may still be worth waiting if you are a new buyer or new to the market and there seem to be a lot of available properties that meet your needs.

Another five percent drop in prices could have significant impact on your down payment.  Instead of putting-down $7,500 (five percent on a $150,000 home for a $142,500 mortgage) you could put down that same $7,500 (5.45 percent on a $142,500 home for a $137,500 mortgage) and save thousands in interest over the life of the loan.  For some purchasers, then, it may still be worth waiting, especially in distressed markets like Las Vegas and Miami.

The 20-city composite index showed a 2.2 percent decline from January (compared to a 2.8 percent decline in January and 2.55 percent decline in December). This index is now 30.7 percent lower than its peak level (July, 2006) and has fallen back to August, 2003 levels. While the year over-year-decline in for the 20-city composite at 18.6 percent is slightly lower than the 19 percent yr/yr decline reported in January, it is equal to December’s, the second largest ever. Since 2000, the index has now increased at a compound annual rate of about 4.05 percent.

The 10-city composite index was 18.8 percent lower yr/yr and 2.1 percent lower sequentially. It is 31.6 percent below its peak levels reached in June 2006. Over the past 10 years, despite the recent decline, this index has still risen at a compound annual rate of about 6.2 percent.

All 20 metropolitan areas showed a sequential and year-over-year decline in February. But for 16 the January/February percent change was smaller than the December/January decline.

The worst year-over year decline in January was in Phoenix (-35.2 percent y/y, -50.8 percent from peak) followed by Las Vegas (-31.7 percent y/y, -48.4 percent from peak) and San Francisco (-31 percent y/y, -44.9 percent from peak).

Several markets showed modest year-over year declines, including Dallas (-4.5 percent y/y, -11.1 percent from peak), Denver (-5.7 percent y/y, -14.3 percent from peak) and Boston (-7.2 percent y/y, -18.5 percent from peak). Along with

the 10 and 20 city composite indices, only Charlotte, Washington DC, Cleveland, and New York
experienced greater declines from January to February than from December to January.

FHFA’s (formerly OFHEO’s) purchase-only house price index (non-seasonally adjusted) increased
1.13 percent in February, but declined 6.43 percent from a year ago. The year-over-year decline in February was lower than that in January and December.

Data from the National Association of Realtors on existing median home prices showed a 2.1 percent
increase in February and 4.2 percent increase in March. Year-over-year declines were 14.1 percent in February and 12.4 percent in March.

cringely Blog, News Case-Shiller, housing prices

Two months after Treasury Secretary Timothy Geithner began talking about new programs to help holders of federally insured mortgages who have lost all their equity in the housing bust and are now under water, rules for the new programs are finally starting to appear. But like most of the other federal homeowner initiatives described to date, early details suggest the Making Home Affordable Program will be of little practical help to those with low-to-negative equity and less-then-perfect credit scores.

The new programs for mortgage refinancing and modification sound ideal on paper, often requiring no mortgage insurance and allowing loan-to-value ratios as high as 105 percent and requiring no specific credit rating at all as long as homeowners have remained current to date on their mortgage payments. But the devil is in the details and looking into the conforming rate sheets just published by major lenders we see new risk-based pricing adjustments (generally called “loan level pricing adjustments” in the mortgage industry) that can add up to four basis points to the mortgage principal for homeowners with LTV’s above 95 percent and credit scores below 620 – the very heart of the homeowner group in the greatest trouble.

While the government claims the programs can help 7-9 million homeowners, that doesn’t seem likely under the current rules.

On top of other pricing adjustments for property type and loan amount these new programs can add thousands to the loan balances of homeowners with low equity and less-than-perfect credit, with the increased costs often enough to price many homeowners out of the programs entirely.

A homeowner trying to refinance a loan with a 100 percent LTV and poor credit, for example, might easily see the required risk-based points take that loan beyond the 105 percent LTV limit. While it is possible to take the points from savings or investments rather than roll them into the loan, most homeowners in this group don’t have such savings or investments available.

While the new programs are good for homeowners with credit ratings above 680 and LTVs in the 80s or lower, this does not describe most of today’s conforming mortgage holders who truly need a refi or modification.

cringely Blog fannie mae, freddie mac, Geithner, Making Home Affordable Program, mortgage crisis, mortgage modification, refinance

When Barack Obama was running for President one of his favorite sound bites was that any financial bailout should not just involve Wall Street, but Main Street, too – that the government’s responsibility was to help both bankers and homeowners. But now that the election is won and Obama is in office, the two streets are still being treated very differently, with Main Street getting a lot less help from Washington.

This is a HOUSING crisis, not a BANKING crisis, yet $700+ billion has gone to help bankers and only $75 billion to “help” homeowners. The banker’s money has mainly been spent and the homeowner money has hardly been touched. If this is a HOUSING crisis, why aren’t more resources being devoted to housing?

It comes down to an issue of morality, believe it or not, with homeowners expected to be moral and bankers not. Everybody blew it, but the homeowners are being disproportionately punished for their actions.

There is no morality issue in the bank bailout. Banks are having their capital boosted based not on whether they are well run or in some way “deserving,” but purely on the basis of whether they are viewed as being in three groups: 1) doomed; 2) capable of being saved through injecting government funds, or; 3) too big to be allowed to fail no matter how poorly run. This means the least-deserving banks tend to get the most help.

But the Obama Administration’s attempt to help mortgage holders is different. If you hope for government help in restructuring your mortgage you’d better not be behind in your payments. If you missed a mortgage payment months into this crisis, you are out of luck. If your mortgage isn’t guaranteed by Fannie Mae or Freddie Mac, you are out of luck. If your mortgage is jumbo you are out of luck. And if you owe more than 105 percent of the value of your home you are out of luck.

That’s a lot of homeowners out of luck. No wonder the Obama Administration thinks it needs only $75 billion to do the job, it is excluding so many people.

Let’s try applying the homeowner rules to the banks. If both played by the same rules, then banks with mortgage portfolios that have dropped by more than about 15 percent (are five percent or more underwater) would be ineligible for government assistance. Banks that MADE jumbo loans would be ineligible for assistance. Banks that made loans with private insurance or no insurance would be ineligible for assistance. Banks that had shown themselves unable to meet capital requirements (had effectively missed a payment) would be ineligible for assistance. In each case, these criteria define EVERY bank that has received assistance. They ALL have mortgage portfolios down in value by 15 percent or more, ALL made jumbo loans, ALL made uninsured loans, and ALL are under capitalized.

So if we apply to banks the same rules that are being applied to homeowners, then no banks deserve support and there should be no bank bailout. Well that can’t be, can it? So screw the rules, screw the idea of there being a moral issue with bankers, just start handing out cash without even requiring that they use any of it to make or restructure loans.

So that’s what the Treasury and the Fed have done – bailed out the bankers without regard to their past OR FUTURE behavior. And $700+ billion later do we really truly feel better as a result?

Hell no we don’t, because we still can’t pay our mortgages!

This bailout is broken, it is unfair, and it is incredibly inefficient as a result. The bank bailout is based entirely on providing INCENTIVES to the banks – bribing them to THINK ABOUT doing the right thing. The government won’t MAKE the banks do anything. They just ENCOURAGE the banks by giving money.

Where are the incentives in the much smaller housing bailout? There are incentives. THEY ARE ALL BEING GIVEN TO THE BANKS. It is very difficult to find in the new Federal mortgage modification rules much of anything that truly helps homeowners. Banks aren’t REQUIRED to do anything; they can reject any mortgage holder for any financial reason. The banks are PAID to restructure the mortgages and the way those mortgages are being restructured (primarily through increasing term and adding balloon payments) not only costs the banks nothing, it tends to make them MORE money over the life of the loan.

So that $75 billion allocated to modifying mortgages and keeping people in their homes, how much of that $75 billion will actually go to homeowners? About 25 percent, or $18 billion almost entirely in first-time buyer tax credits. This means the bank bailout isn’t $700+ billion, it is $758+ billion or FORTY-TWO TIMES the size of the housing bailout.

And why only first-time buyers? What makes them more deserving of help? The theory is that these are new homeowners so they’ll be buying-up excess inventory and helping to firm prices. They aren’t people selling one house to buy another. In another view they are virginal and uncorrupted by the housing bubble. It wasn’t their fault, so they are being rewarded. More morality, inequitably applied.

Main Street isn’t doing very well under this policy. Main Street is being cheated.

This is a bad plan, unfair and poorly executed. It places a moral burden on individuals and not on banks, yet there is no good explanation for why it has to be so.

What is it about banks that make them deserving of 42 times as much support as your Mom?

Nothing.

Like the Bush Administration before it, the Obama Administration has a bias for helping Wall Street. They couch this as a claimed inability to come up with any better ideas. Yet better ideas – ideas NOT couched in moral argument (or more appropriately couched in EQUAL moral justification) were presented right in this spot in the post titled The Not So Bad Bank. That’s a plan that helps banks and homeowners equally, doesn’t require incentives to work, acts faster, and costs a tenth as much.

What’s wrong with doing the job better, faster, and cheaper?

cringely Blog bank bail-out, banks, financial crisis, foreclosure, mortgage modification, mortgages, Obama Administration

The terrible California housing market suddenly isn’t so terrible after all, depending on how you look at it.  Home resales have soared, which is good.  Home prices have plunged – a natural result of foreclosures and short sales.  In other words, the nation’s largest housing market is deleveraging itself quite handily with little government help.  Not that the government isn’t involved, having already taken action to make FHA, Fannie Mae, and Freddie Mac loans readily available to buyers who qualify under new and more sustainable standards.

So what more should the government do?  U.S. Treasury Secretary Timothy Geithner’s plan to help homeowners is months from being useful.  Maybe he should just forget it.

The best thing Congress could do at this point for the housing market might be to help mortage modifications by giving some protection to loan servicers, which currently do not have a liability shield against investors.  Congress could pass a law protecting mortgage security servicers from lawsuits, giving them the freedom to negotiate new terms with borrowers, allowing more people to keep their homes

cringely Blog Blog, financial crisis, foreclosure, housing prices, mortgage crisis, mortgage modification

By Kristen Koh

It shocks me how little media pundits know about what is really going on when it comes to the mortgage crisis. The PPIP program (Private Public Investment Partnership–buying toxic assets) WILL loosen consumer lending and is NOT stupid.

The banks have TWICE the cash (capital) they had last year, even though they are accused of being insolvent today whereas they were flying high last year this time. The moolah is sitting in their accounts at the Fed earning 0.25 percent.  They are paying 5 percent on TARP money, and earning only 0.25 percent on it.  So are Jamie Dimon and Ken Lewis dumb?  NO.  They are TERRIFIED that bank regulators gone wild will seize their banks for not having enough collateral to back the declining value of their investment portfolios which include these toxic (or maybe not so toxic) assets.

Right now there is no market for these securities. They are absolutely frozen except for a few fire sales from liquidating funds and manipulation tactics from bad hedge funds. On top of this, onerous application of mark to market rules that came into effect in mid 2007 at the market peak are greatly exaggerating balance sheet crises for the banks.

What does this mean?  Let’s say that you bought an investment property for $1 million and it generates $50,000 in annual net rental income. You have a mortgage on the property for $700,000.  A comparable property sells under duress for $200,000 in an illiquid market and regulators tell you that your property is now worth $200,000 even though if you ran a Discounted Cash Flow analysis on the rental income stream, you’d get $1 million as an asset value.

You argue that even if rents fell 30 percent, which is a possibility under a Depression scenario, your property is worth at least $700,000.  But the regulator says, no, it’s worth $200,000 due to mark to market rules and you are now in violation of rules due to your mortgage ($700k) being higher than your asset value ($200k) so they seize your building since you are unable to come up with the $500,000 difference.

They sell your building for nothing and you are bankrupt.  Does this sound right?  Of course not!  This is why mark to market rules are stupid when the market is hyper-cyclical (artificially inflates values during bull markets and artificially deflates values during bear markets).

That is what is going on with the banks right now.  The market says their asset backed bond portfolios are worth 20 cents on the dollar and the banks are saying they are worth at least 70 cents (albeit on the books at probably 90+ cents), maybe more when held to maturity.  The 50 cent spread was the reason why then Treasury Secretary Hank Paulson (my former boss at Goldman) couldn’t make the first TARP effort work.  You can’t force the banks to dump their assets below what they are worth and investors are too scared to pay what they are worth.

That is until now since the PPIP program enables incredible leverage with Fed money so that it will be hard NOT to make money on these investments.  You put in $1, the government puts in $7 ($1 equity, $6 debt), and you are allowed to keep 50% of the profits.

So, you say, that the example above would never happen because the comparable building would never sell for $200,000.  Well that’s where hedge fund shenanigans come into play.

Let’s say I wanted to make some money manipulating the markets.  I would short shares in the big banks.  I would then find some illiquid asset-backed bonds that I know many of the banks owned.  I would find some desperate seller who just got a margin call and buy a tiny piece of his holding ($1000 worth) and print a price on the tape that showed that I bought the bond at 20 cents on the dollar.  Then I would tell everybody how the banks are holding their bond portfolios at 70 cents on the dollar (after 30 percent writedowns) and they are really just worth 20 cents.  I would point to the tape that showed my purchase (a price point I forced on very small volume).  I would go on CNBC and talk about how the banks have negative equity and will be seized by the regulators a la Lehman, Bear, Wachovia, Wamu, etc, and talk about how Ken Lewis is a liar just as was the case with Dick Fuld before Lehman went down in flames. Everyone will panic, and I’ll be able to cover my bank shorts 50 percent lower.  This is why Bank of America is trading at $7 instead of $15: hedge funds gone wild.

Regulations are WAY behind the many ways the market can be manipulated.  Don’t get me started about naked short selling, the elimination of the uptick rule, and the proliferation of the triple short bear ETFs that skirt existing margin rules.  The only people talking about how these confidence/market shattering conditions don’t matter are short sellers upset that they may have to stop taking candy from babies.

This is why it is important that the government is tweaking the application of mark to market rules. Congressman Paul Kanjorski (D-PA and chairman of the House Financial Service Committee) basically told Finanial Accounting Stadards Board (FASB) chairman Robert Herz that if the FASB doesn’t figure it out, Congress will legislate mark to market changes making the FASB irrelevant.

This is also why it is important to create incentives for vultures to buy the “toxic” bank assets (PPIP) at closer to 70 cents on the dollar so the banks will actually sell them.  Until those sales happen the banks will hoard capital to avoid what they fear – being seized by regulators.    Until then they will not lend in volume even though they have huge cash reserves being poorly deployed.

With the exception of Goldman Sachs and Morgan Stanley, the banks are holding their “toxic assets” at probably 90 cents on the dollar saying that they plan to hold these assets to maturity.  FASB rules allow assets in hold-to-maturity investment accounts to be valued differently than those in trading portfolios which have to be marked to market daily.   This makes sense,  yes, but banks have to mark down their portfolios at sale which is keeping them from selling at today’s irrationally depressed prices.  .

Now here is the important part.  The write-down from 90 cents to 70 cents can probably be absorbed by the operating profits of the banks given time.  It’s a good business to borrow at 0 percent and lend at 10 percent A write-down to 50 cents or less probably makes the banks truly insolvent which is keeping them from trying to sell these assets.  This uncertainty is what motivates banks to hoard cash.  There is $831 billion in cash on the balance sheets of these banks (held with the Fed earning 0.25 percent). So all the TARP money is right back where it came from, just under the ownership of the banks rather than the Fed.

That money is sitting there doing nothing while businesses are starving from the lack of credit.

Remember it’s not the quantity of money but the velocity of money that will get us going.

So what is the risk to the PPIP program?  The banks may refuse to dump assets at the prices these hedge funds are willing to pay.  This would give us a standoff where the velocity of money stays at very low levels.  That’s what happened in Japan where the market fell for ten years and real estate prices have been going down for 20.

We don’t want to be Japan.

Kristen Koh is chief financial officer of Home-Account. She personally owns bank ETFs and call options on those ETFs.

cringely Blog bank bail-out, Blog, financial crisis, Geithner, Kristen Koh, mortgage crisis