But the money party made sure cramdowns and other procedures to help stop this from happening died in the crib:
The nation’s biggest banks and mortgage lenders have steadily amassed real estate empires, acquiring a glut of foreclosed homes that threatens to deepen the housing slump and create a further drag on the economic recovery.
All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.
Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.
“It remains a heavy weight on the banking system,” said Mark Zandi, the chief economist of Moody’s Analytics. “Housing prices are falling, and they are going to fall some more.”
Over all, economists project that it would take about three years for lenders to sell their backlog of foreclosed homes. As a result, home values nationally could fall 5 percent by the end of 2011, according to Moody’s, and rise only modestly over the following year. Regions that were hardest hit by the housing collapse and recession could take even longer to recover — dealing yet another blow to a still-struggling economy.
The most shortsighted people in the world are the ones giving out 30 year loans. We’re screwed. And we can blame most of it on greed.
Tom Levenson
The rest of it on the stupidity that greed breeds: folks can not know lots of obvious crap when it is in their financial interest to remain ignorant.
Maude
This.
Thank you.
Villago Delenda Est
Until banksters start paying with their entire fortunes, and their liberty, for their crimes, this shit will continue.
alwhite
I know a guy that lost his house last year because he couldn’t make the new adjusted rate. The bank refused to discuss a deal with him. It ended up selling the house for almost half of what the old mortgage was. The home owner would have gladly agreed to a pay more than that. But now they are living in an apartment with their credit wrecked & the bank lost real money.
Short-sighted & stupid beyond belief.
Roger Moore
Sure, that’s because they only keep those 30 year loans on their books for long enough to securitize them. After that they’re sold to be turned into delicious shit sandwiches. Why would the people giving out the loans care about their quality if they can sell them no matter how bad they are?
Comrade Javamanphil
As a resident of one of those states burdened by excessive government regulation of development, I find I have been suffering under a stable real estate market and non-declining home values. If only I lived in a Galtian paradise.
WayneL
In 2005, 40% of all home sales were for SECOND homes. We’re still feeling the effects and will for another decade, which is how long it’s going to take to absorb all the excess inventory of unneeded housing.
Villago Delenda Est
@Roger Moore:
Mind you, they get paid for doing that, too.
There are no financial disincentives built in as a check or balance to stupidity. It’s actively encouraged.
PeakVT
economists project that it would take about three years for lenders to sell their backlog of foreclosed homes.
Which economists? The ones that are always “surprised?”
The bad (worse?) news is that new home construction will be depressed by the foreclosure backlog until 2016 or later. We could make up for that by spending more on infrastructure, but that would really be porkulous we don’t need so never mind.
Roger Moore
@alwhite:
I think there’s some method to the stupidity. In normal times, the banks generally refuse to modify loans because they don’t want to give people the idea that they can get a break on their payments by playing poor. They’d rather take an occasional hit in foreclosure than risk having their whole portfolio devalued when everyone came to them to demand modifications. They just can’t get past the idea that people are trying to cheat them rather then being in genuine trouble, even though the amount of genuine trouble out there should be obvious.
burnspbesq
It takes two to tango. Every subprime loan that went south had two parties, and one of them was a borrower who should have known better. That one party is more to blame than the other does not absolve the other party.
Villago Delenda Est
@Roger Moore:
Too many banksters project their own greed and dishonesty on others.
So naturally, they think that someone is trying to cheat them. That’s what THEY WOULD DO in the same situation…
Villago Delenda Est
@burnspbesq:
Yes. Perfect intelligence for all parties, again.
The assumption of the assclown.
currants
See Matt Taibbi…well, that one or any of a number of others. I hope he’s right.
Roger Moore
@burnspbesq:
The problem with this argument is that it’s ultimately the lender’s responsibility to ensure it’s not loaning money stupidly. Many home buyers genuinely didn’t know how much they could borrow safely but believed that no bank would be dumb enough to make them a loan they had no hope of repaying.
The Snarxist Formerly Known as Kryptik
Hey, why should they care about what their short sightedness is doing to the economy as a whole. It’s not like they’re at risk of losing their assets or anything.
alwhite
@burnspbesq:
Please see: @Villago Delenda Est:
& ask for remedial help if you do not understand what that means.
EconWatcher
I think we may see a segmented market, where foreclosed homes are in a separate market whose prices move somewhat independently from prices in the market for occupied, non-foreclosed homes. I say this partly from personal experience.
My wife and I bought a foreclosed home from the bank two year ago and got what we thought was an absolutely fabulous deal (with an acre of land for our kids to play in). But the home had sat unoccupied for about 18 months (including one northern virginia winter with no heat). Plus, the people who were foreclosed upon had trashed and looted the place on the way out. That’s why we could afford it; it took some imagination to picture the value that was there.
It’s been a money pit–not so bad yet that I would say we got a bad deal, but the jury is still out. A house that sits unoccupied develops strange and unpredictable problems that can be difficult to diagnose. The banks sell them completely “as is.” We had a very savvy and decent realtor who tried to talk us out of buying the place because of all the “unknown unknowns.” He could turn out to be right in the end.
This is a long way of saying that I think foreclosed and unforeclosed homes are very imperfect substitutes for each other, and many buyers are not going to be willing to take foreclosed homes even with very substantial price accomodations. Not really the same market, in other words.
And you gotta wonder how the banks are valuing those assets for their balance sheets….
geg6
@burnspbesq:
This may be to a certain extent, but you are a sophisticated guy. I know plenty of people who are easily persuaded to purchase things or to take out loans by sleazy marketers and business owners. They aren’t financially literate and they don’t understand the legal jargon in which loans, credit cards, and mortgages are set out on paper. Not to mention that said jargon is often deliberately crafted to be obtuse and misleading. In addition, there have been numerous cases of people being foreclosed on who should not have been, active duty military families being a huge number of them. You give too much aid and comfort to what was essentially a criminal conspiracy by laying equal blame on both parties here, especially when there are so many cases in which one party is totally blameless but has lost their home nonetheless.
prufrock
@burnspbesq:
Yes, and if I handed my toddler a party sized bag of M&Ms, she’d eat until she puked. Clearly she must assume some of the blame for her gluttony.
And before anyone slams me for comparing adults to toddlers, let me say that I’ve come to the conclusion that in matters as complex as buying a home, many people may as well be toddlers.
Tonybrown74
@burnspbesq:
I worked at a real estate attorney’s office as a temp back in 2004. I watched as Countrywide guaranteed a loan on a $250k condo to a retired man whose sole income was social security. I also saw the same mortgage company finagle a loan for someone who was $10k in debt.
I know that anecdata != data, but I think I could safely say that yes, one party was definitely more to blame than the other. And it wasn’t the borrower.
Lee
Here is one of the few times an HOA can actually help.
We have a couple of bank owned homes in our subdivision. When the homes start looking bad, the HOA sends a letter to the bank “Here are the items that have been in non-compliance for X days. If they persist for Y days we will fix the items and the cost will be added to the lean against the home”
So the house looks nice and does not bring down the value of other homes by its appearance.
Lee
I would concur with this analogy.
EconWatcher
@burnspbesq:
I’m with you. There were some people who were steered into bad loans, sometimes outright rip-offs, by unscrupulous mortgage brokers. I assume you don’t deny that. Those people have my sympathy.
But some buyers were playing a game, too, or acting very recklessly. How many people bought BMWs and flat-screen TVs by tapping out every last bit of alleged equity in their homes, or bought houses they knew they couldn’t afford in hopes of taking a later equity loan to make the payments, based on (assumed) continuing increases in home value?
Sorry, no sympathy from me for those people. You’re an adult. Act like one.
LGRooney
The circle we’re in:
30-year loans, low interest rates, gov’t. incentives to boost home ownership, and an increase in two-income families all drove up the prices of homes because there was simply more competition to buy and more liquidity available for purchase. If 30-year loans go away, prices fall because people can’t pony up the cash monthly to cover shorter-term mortgages – or, since there isn’t the level of job security previously enjoyed, they won’t pony up the cash. If low-interest rates go away, prices go down for the same reason. If gov’t incentives go away (low-int. loans, mortgage interest deductions, gov’t-backed lending, low-down payment loans, etc.), prices go down because there is less competition in the market place.
However, the banking industry and building industry will fight the end of 30-year loans. They’re addicted to the massive amounts of interest and the high-prices, respectively. Interest rates are a matter out of most people hands. No one is going to kill the gov’t incentives because being able to claim that we have high home ownership is a political winner. Being able to claim homeowner protection is a political winner. Being able to claim assistance to the disadvantaged is a political winner. And, of course, no side in the debates, unless they never have real hope of gaining political office, is going to commit political suicide and suggest women should be back in the kitchen.
So, we are stuck. People got addicted to easy credit in the real estate bubble, bought into the excessive prices, won’t sell at a loss, and will keep voting in soothsayers who will do next to nothing even in the limited capacity they have to be able to do something.
In short, prices won’t fall where they should fall because people won’t admit stupidity and refuse to pay a price for it.
burnspbesq
@geg6:
Not exactly. I said one party was more to blame than the other. And I would have thought that my willingness to see criminals go to jail would not be in question. But in order to send someone to jail you need to prove every element of a violation of an actual law beyond a reasonable doubt. A generalized sense of outrage doesn’t get it done.
Luthe
This is when I repeat my call for states and municipalities to use eminent domain on these fuckers. You foreclose on a house? Fine. But you better have a title to it. What’s that? You can’t find the title? Well, then, here’s the extremely reduced fair-market value for the place, now get off our lawn. Oh, and we’re renting back to the people you just foreclosed on.
Alternate strategies include large fines on banks for not maintaining properties and tax liens for non-payment.
Assholes.
arguingwithsignposts
@LGRooney:
This is a huge, and IMHO, ignored part of the equation. People locked into 30-year mortgages because they believed they’d retire from their job in that place. Without that sort of “back of mind” assurance, who’ll sign on to a 30-year commitment, with no guarantee they’ll get anything like what they’ve put in, no matter how many glossy brochures the RE brokers put out?
arguingwithsignposts
@EconWatcher:
I will repeat something I wrote on a previous post. How many are “some”? Is it less than “many”? or “most”? Useless words – some, many, most. Give me a number.
geg6
Oh, I think there is plenty of evidence of law breaking, especially if you look into the situation with military families.
http://www.nypost.com/p/news/business/biggest_mistake_ucemTZsER6r5Yk346w7G0N
http://www.npr.org/2011/01/19/133036957/bank-overcharged-military-families-on-mortgages
And that’s just the tip of what seems to be a very big iceberg.
Frankensteinbeck (The ex-Uloborus)
@geg6:
My only amendment to this would be that it wasn’t a criminal conspiracy. It was a conspiracy to do things that SHOULD be illegal.
The joys of deregulation!
@geg6:
That’s fine as far as it goes, but it’s after-the-fact jackassery. There are things that were done illegally, I’m sure. Actually, my biggest hope from this is that the original perpetrators will be prosecuted because they couldn’t resist adding some illegal money manipulation when things were going so well. But the bad loan and unethical loan manipulation cycle that got us into this mess – the conspiracy itself – was not illegal. As such, odds are there’s not much to prosecute.
Zifnab
@Lee:
I would love nothing more than to see corporate banks nipped apart by an angry horde of pushy, obnoxious HOA agents. But big banks have big lawyers. And the HOA bullshit you see that really offends people is usually targeted at single parents and frequent travelers and the like – namely, people who don’t have the time or the energy to engage in a constant battle with an annoying local bureaucracy.
I don’t know if your average HOA is going to try and tangle with a Fortune 500 Company.
geg6
@Frankensteinbeck (The ex-Uloborus):
It was both. What they have done and are doing to soldiers and their families is illegal. Period.
Scum of the earth, these people. A friend of mine’s son works for BoNY/Mellon here in Pittsburgh. A very good job. But he hates it so much, he’s interviewing like crazy and will take almost anything to get out of the field of finance. He hates his co-workers completely. Says they are immoral sociopaths. I believe him.
Zifnab
@arguingwithsignposts:
You don’t need to be in a house for the full 30-years to make a mortgage valuable. If you live in a location for over 10 years, the equity and (presumable) price increase to the property will carry with you to the next residence. So it’s not really a 30-year loan for the current house. It’s more like a 30-year loan over the life of the homeowner.
That said, even 10-year continuous employment feels sketchy these days.
arguingwithsignposts
@Frankensteinbeck (The ex-Uloborus):
But what about the signing agency and faked signatures on transfer of titles? That seems a huge problem.
Tim Connor
@Tom Levenson: “…folks can not know lots of obvious crap when it is in their financial interest to remain ignorant.”
Right. It is an application of Sinclair’s law:
Comrade Javamanphil
@LGRooney:
FTFY.
El Cid
It’s kind of surprising that banks which foreclosed and took possession of huge numbers of homes in a very short period of time would now find themselves with lots of homes that they possess.
inthewoods
Uh, why should we believe anything Moody’s (These junk CDO are absolutely Triple-A rated gold!) has to say?
Just saying…..
LGRooney
@Comrade Javamanphil: Thanks for the fix.
GVG
Last I heard, the 30 year conventional mortgages were not especially the cause of the financial mess. 30 year mortages have been around a long time here and are actually pretty well beta tested & bugs worked out. It was the creative “new” types of mortages that were over represented in the mess.
It was also the securitatation of packages of mortgages, whicc=h meant the seller of the mortgage didn’t have any incentive to be careful and also that no one person or corperation owned any significant share of the package. this means that its nearly impossible to renegotiate anything because no one actually has enough authority to say yes. that is the reason nobody seems to have any luck getting a new deal, or accepting a short sale price or anything nessesary. the bank you send the payment too, is not the owner, they are the managing agent. there are thousands of owners who can’t agree on things fast enough and many of them are “investors” like us, who didn’t understand what was in those funds they bought and who don’t have the knowledge to know when the need to eat some losses to prevent bigger losses. In fact I doubt most of them even get told about these issues.
I suspect the cram down proposal would have only helped a small percentage because the main problem is it appears we built a lot more houses than there were actually people to live in them. that means the resale prices have to come down and stay down for quite some time. That is not to say we shouldn’t prosecute for violations of the law where they occured, just that it would help more if we put some real effort into preventing the same stupidity from repeating again. We did not in fact have laws against some of this stuff, and we deffinately weren’t spending enough on people to monitor what went on. fix that please.
I think most public attention has wandered off this subject because it is so complex. There were multiple problems. I also think that the stuff that was well, fraudulent as opposed to stupid, was and still is hiding behind a screen of complex issues that is done on purpose. Its a kind of con.
Frankensteinbeck (The ex-Uloborus)
@arguingwithsignposts:
It is a problem. But it’s not a CRIME. It results in there being extreme legal doubt as to who owns the mortgage and the property and who has the right to foreclose. But you can’t be prosecuted for it.
I’m not in any way arguing that these bankers weren’t the kings of all jackasses, cruelly ripping people off, selfishly advantaging themselves over their companies, and behaving in immensely unethical and immoral ways. I’m saying the things they did weren’t crimes, partly because the laws to stop them were revoked and partly because this was the first time these intricately devious ripoffs were perpetrated. I want these people to be prosecuted, but I don’t see how it’s likely because the basic mess itself wasn’t criminal – only immoral.
arguingwithsignposts
@Frankensteinbeck (The ex-Uloborus):
Okay, I’m not quite understanding how signing for another person and pretending to be the legal representative is not a crime. Call me dense if you will.
El Cid
@Frankensteinbeck (The ex-Uloborus):
On that first part, people need to bear in mind that that’s what a phrase like “deregulation” means.
It means that there aren’t regulations to stop someone from doing something or force someone to do something else.
People don’t push and lobby to deregulate because they like the word. Well, that too, but it’s not the main reason.
El Cid
@arguingwithsignposts: The fake signing thing is its own huge matter, I’m assuming involving criminal implications, maybe. I figured people were talking about the more broad market with easy loans and all the other factors which didn’t need to involve things like forged signatures or notary endorsements. I assume that the forging type stuff are a smaller number of the whole. I dunno.
Lojasmo
@EconWatcher:
Dunno. You can either substantiate your own (non) claims, or peddle your bullshit elsewhere.
Villago Delenda Est
@El Cid:
Really, that is surprising.
Also, I was shocked to find the sun rising again in the east this morning.
Cat
Sort of. With billions and billions, maybe even trillions, of the mortgages packaged up into securities not all of them are owned by entities that have an active role in the mortgages.
So the homeowner is really negotiating with the “servicer” of their mortgage. The “servicer” forwards the principal and interest payments to the security, pays out of the escrow account, and forecloses on the homeowner.
If you have a healthy imagination or read a lot about this mess you can guess that the “servicer” and “investor” interests stop aligning when the payments from the homeowner stop coming in. Once that happens whats good/profitable for the “servicer” is usually what happens rather then what is good for the “investor”.
daveNYC
@Lojasmo: Calculated Risk had some good charts tracking both MEW and consumer spending. If you look at them, it’s pretty obvious that home equity loans did a lot to support consumer spending during the mid ’00s. Can’t say what exactly the money was spent on though. Flat panels, home renovations, kid’s college… who knows.
End result was that you started with people who had a good chunk of equity in their house, and ended up with people who had little to negative equity (on a recourse loan) just in time for a general economic downturn and housing crash.
Villago Delenda Est
When you are giving out the loans, and you can immediately pass the potato on to someone else, AND you’re getting fees for doing so, why should you even bother with due diligence on the loan? After all, it’s not your problem. The potato has moved on, and you’ve collected your nice fees for processing it.
No one is bothering to check on the issue of if the loan can ever be repaid because they’re all in the same game of reselling it to someone else and collecting a fee to do so.
The financial incentives are from the Spock-with-a-beard universe.
prankster
@daveNYC: I was just looking for historical assumption rates of HELOCs for this thread and couldn’t find a decent chart..can you link?
Just anecdotally, the foreclosures that you see through the irvine housing blog, a large number of the houses are deeply underwater at least in part through having 5-6 digit HELOCs. Like daveNYC says, I have no idea what that money was used for, but it was a gamble for people who didn’t have enough info to be gambling like that.*
*note: this is not to defend the scummy, scummy mortgage brokers who fleeced people mercilessly.
Comrade Javamanphil
@LGRooney: I’d say it was my pleasure but frankly this depresses me beyond words. Our economic system has failed the majority of us and yet individually, we either blame ourselves or taxes. It’s beyond stupid.
ChrisS
I grabbed a 30-year VA loan last year and I regret that decision today. The house isn’t underwater, unless you consider selling costs and having to repay the $8k tax rebate if I have to sell in the next two years. My SO and I both have decent jobs (more so me) and the homes are selling rather quickly in my neighborhood in the same general price range.
While my job is somewhat secure and our company is on a skeleton crew while forecasting significant upcoming work, I’m still nervous. I’ve spent the last two years paying down other debts (student loans and a credit card), I’m still fucking nervous. The economy gives me pause especially in light of oil prices/unknown future energy costs. I’ve got some savings built up and we’re in a decent position (vis-a-vis commuting … we’re somewhat car dependent, but live in a village 10 miles from my office with bus lines and we can car pool). My career, environmental remediation, is driven by state and federal funding and travel to job sites.
It can be nerve wracking. I’m concerned how I’m going to keep my house in two years, let alone 20 years. Peak oil combined with a government that caters to the super-wealthy scares the everliving shit out of me.
LGRooney
@Comrade Javamanphil: Yes, but the economic system is not some animated entity acting on our lives without our participation. We are culpable for having been passive, or actively ill informed, while all of this was happening around us. 20/20 in hindsight and all of that, obviously it was much harder to carry on our day-to-day lives while acting on what we may have seen as a piece-by-piece dismantling of the world we thought we lived in.
IOW, I think we do share some of the blame for not being as aware as we should have been.
Sinister eyebrow
That’s just great. I’ve got the money to buy a bigger home (with the new baby, I need the storage space for the avalanche of blinky toys, and assorted baby items) but can’t do it unless I sell the one I’m in. I won’t risk being stuck with 2 mortgages. But my neighborhood is now an orchard of FOR SALE signs and no one is buying. And I live in a a relatively stable area for real estate that wasn’t clobbered like Nevada or Florida.
Now I’ve got to stay in this place for another 3 or so years. Craptastic.
sneezy
@burnspbesq:
True enough, I suppose. However, each of those borrowers made one mistake, while mortgage lenders made the same mistake over and over again, many thousands of times.
Also, too, the lenders were not really making “mistakes,” in that they knew exactly what they were doing and how it worked to their benefit.
Further, it is hard to work up much sympathy for lenders who deliberately abandoned standard underwriting practices. If you loan money to a deadbeat, that’s your fault and I don’t want to hear any whining about it.
catclub
@Luthe: Before the robosigning scandal there were already reports of blighted houses where the banks were obscuring whether or not they owned the house in order to avoid paying taxes and maintaining the homes. They still want it both ways, and right after they foreclose, they will pretend someone else owns it when the taxes are due.
McJulie
@daveNYC: Exactly. And I will always believe that the Bush administration deliberately inflated what they knew was a real estate bubble in order to have an economy that looked good enough on paper to keep getting Republicans elected.
Nobody right-leaning would even admit there was a problem until after election day 2008. Then they instantly started blaming it on Obama and the Democrats.
Can’t lose if you’re a Republican.
Lojasmo
@daveNYC:
Well, since you refuse to substantiate your innuendo, kindly respect my request.
Anecdotes, and hints of them don’t foster honest debates.
Lojasmo
This forum software confuzzles me. Appologies to all who I misquoted. Fuck.
JAHILL10
Thanks for the shout out, Cole.
Neldob
It’s not greed that causes these problems. It’s the way the system is set up. The system is set up to reward this behavior. We don’t need to change human nature we need to change the system of incentives.
burnspbesq
@Lojasmo:
Hard to discern that you’re interested in one.
Jeany
Credit sellers have been acting like drug dealers for a couple of decades at least. If you haven’t seen Inside Job yet, you should. The financial industry has eaten the guts out of this country.
mclaren
As I’ve explained repeatedly, there’s a good solid reason why mortgage cramdowns haven’t been instituted.
America’s banking system is insolvent. At present, all our major banks are broke: their assets are not remotely sufficient to cover their liabilities. Many of these liabilities come in the form of bad mortgages. The banks have managed to avoid going bankrupt and filing chapter 7 dissolution by a system of ‘extend and pretend’ — the banks drag their feet on foreclosing, modify the terms of loan agreements with commercial lenders, or, if all else fails, simply allow a house or office building to remain vacant without declaring the loan in default.
The problem with setting up cramdowns is that the banks would have to declare those mortgages in default and write them off as bad loans. If banks did that, their balance sheets would drown in red ink overnight and they’d all go bankrupt and have to file for chapter 7 dissolution. Even though all major American banks are in fact insolvent today, they don’t look that way when you examine their balance sheets because until a loan gets foreclosed, it’s carried on the books as an asset. Thus (weirdly) all those trillions of dollars of bad mortgages are currently listed on banks’ balance sheets as performing assets (even though they aren’t). Cramdowns would end that creative accounting kabuki play. In effect, our entire banking system would suddenly have to admit in black & white on published balance sheets that it’s insolvent, and the result would be some kind of mass nationalization or some other kind of gigantic financial clusterfuck.
Right now, by extending & pretending, American banks are slowly but steadily paying down all their liabilities by raping consumers with 35% credit card fees and borrowing money from the Fed at essentially zero interest rate and then loaning it out at a couple of percent. Over time, this will add up to enough trillions of dollars that eventually all the banks’ bad loans will get paid off. At that point, the banks will be able to declare the loans bad and write them off.
The peculiar accounting fact remains, however, that until a loan gets declared in default, it gets carried on the balance sheets as an asset. This is why cramdowns aren’t going to work. Cramdowns would help consumers but destroy our banking system.
In effect, Obama and company have chosen to help the U.S. financial system over helping consumers.
liberal
@EconWatcher:
Ding ding ding! We have a winner!
liberal
@burnspbesq:
I guess I’m one of the few to agree with this, though I do think the blame falling on the banks is much bigger due to information asymmetries.
What I don’t understand is the sense in which some of these borrowers are victims, in the (many) cases in which they put little or nothing down.
liberal
@EconWatcher:
OK, though is it possible that some of the uncertainty could be amelioriated with a really really kick-ass home inspector?