Monday, June 12, 2006
This PBS report accurately sums up the reality of many foreclosures - no one's buying because there's no equity left. Instead, the creditors take the loss:
TOM BEARDEN: But no one foresees any immediate end to the wave of foreclosures. Mary Wenke's auction drew only one set of bidders and that was for a rare commercial property. There were no outside bidders for the 86 residential properties.This was in Colorado, but it's typical in many places. If there were equity, most borrowers would have been out before. I cannot get confirmation of this, but the Washington Times reported that regulators are considering changing the actual rules governing mortgage disclosures on May 25th:
MARY WENKE: ... bids $116,000 even...
TOM BEARDEN: Wenke says that's typical because few houses are worth enough to fetch a profit once the new buyer pays off the loan. She says the average mortgage she sees goes into foreclosure only a year to a year and a quarter after it's signed.
May 25--The Federal Reserve, Federal Trade Commission and other regulators said yesterday that they will work to stamp out the fraudulent advertising and bad deals being offered by brokers marketing seemingly low-rate mortgages with backloaded payment schedules that put many consumers in debt over their heads.We had been expecting a guidance instead of regulation changes. Even if they do change the rules, it probably won't go into effect for more than a year. But to put it bluntly, this is like throwing gasoline on a fire.
By some estimates, one-third to one-half of all mortgages made in recent years are the kind the regulators are targeting.
In light of the high stakes for consumers and lenders alike, the Fed plans to revamp its Truth in Lending rules to ensure consumers get the facts they need about these risky loans when they are exposed to them instead of at the end of the loan process, as happens currently and when it is often too late for them to switch to safer alternatives, said Sandra Braunstein, director of the Fed's consumer affairs division.
The reality is that lack of affordability is what is driving the market, and that the markets in which most of these loans are being sold are the ones that are unaffordable. Any attempt to suddenly halt these loans will produce over a 50% drop in home values in places like San Diego in a year. Is that really the best way to handle this?
As it stands, the correction is already occurring. Any creditors who held these loans (and most of them do have some exposure), and any investors who bought them will be taking consistent losses, which will force them to revise their practices. There is such a thing as compounding errors. If the Fed had changed the Truth In Lending rules in 2003, it would have been wonderful. If it does it now, it will be a disaster. Furthermore, it will be punitive to the homeowners who have bought in the last few years in these areas. There's quite a difference between being upside down by 10 or 20 percent, and being upside down by 40 or 50 percent.
"Any attempt to suddenly halt these loans will produce over a 50% drop in home values in places like San Diego in a year. Is that really the best way to handle this?"
From where I'm sitting in metro DC...darn tootin'!
If they try to engineer a "soft-landing", wouldn't that open the door for the "Big Bailout" that we both dread?
"By some estimates, one-third to one-half of all mortgages made in recent years are the kind the regulators are targeting."
Look, this was a "pas de deux", not a solo act on the part of a mortgage lender.
I know that I had some clown from a realty company respond to my query about a house with the "fact" that home values in my area were "rising at 20-30% a YEAR!", as though he were selling me junk bonds, and not a house to live in.
My reply was "click! bzzzzzzz!".
In fact, I reckon that if suckers bought the real estate analogue of "junk bonds", then the quicker they find out that they're indeed "junk", the better for EVERYONE. Buyers, sellers and the industry.
When the "E-Z finance" hucksters sink and take their passengers with them, then the land and the sticks and stones and bricks and blocks will command a price that has SOME relation to an objective reality...and hopefully innoculate people against the scam-masters.
About two weeks ago, that site got hacked. The URL now gets hijacked to a spammer selling get-rich-quick Real Estate. According to other RE Bubble sites I've been able to get to, this was not an isolated hack.
Yesterday at the grocery store, I overheard Stranger A trying to convince Stranger B that RE looked bad, but "anything a million or less" (tarpaper shack/crack house in my part of SoCal, where all the new jobs are minimum wage or less) would hold its value. I half expected to hear Stranger A finish with "It has to. IT HAS TO!"
I heard similar advice in the early Nineties, just before the last big RE crash. 2/3 drop in two years, all properties.
The Headless Unicorn Guy
The obviously foolish are going to lose their shirts, and I don't agree with any attempt to prevent that. Look, we all know that some "million" dollar properties are going to turn out to be $300,000 properties before this is all over. But those are relatively few - there's no need to crash real estate deliberately.
You're going to get property at a decent price very soon. In many areas, people are getting those deals NOW. That is actually a thing that's positive for the economy. Do you really want the good qualified buyers this year to take a 30% loss next year? If that happens, the result will be closer to the Great Depression than a sharp recession.
I have no problem with mandating additional disclosures. I do have a problem with mandating some of the other things in that guidance, because they will effectively knock many good buyers out of the market. My feeling is, make sure you crack down on the liars, and then let the market work.
Free markets are incredibly efficient. The proper role of the government is not to micromanage, but to ensure that free markets are genuinely free, which involves stopping fraud and misrepresentation. What's happening right now is that many good, qualified buyers who were locked out of the market are coming back in now. These are the people who were rational enough not to take those "deals". When they see a good deal now, they go for it. This amounts to a widescale transfer of capital from idiots to the rational, and will bear fruits a decade and two decades into the future. You don't want to stop this process.
No act of the Fed can stop quite a few homes in SoCal from dropping 30-40% over the next few years. The employment base isn't there at current prices. But the Fed can stop the broader compensations that will tend to protect the real value out there if it tries to fix things retroactively.
"In many areas, people are getting those deals NOW. That is actually a thing that's positive for the economy. Do you really want the good qualified buyers this year to take a 30% loss next year?"
Not around this burg...not yet. I have a 3/2 townhome around the corner from me that Long and Harder is listing for 479k...and that's without a garage and a "yard" that a LADY could urinate across.
No, I'm not wishing bankruptcy on anyone, but my own desires don't amount to a hill o' beans. If the Greater Fool is heading for a Greater Foreclosure, then let's have it over and done with.
And I ken it quite likely that good and qualified buyers THIS year may very well be, in all likelihood, even BETTER and MORE qualified NEXT year.
Monthly take-home should be the same, while the pile-o'-stucco is 30-40% less...right?
"When they see a good deal now, they go for it. This amounts to a widescale transfer of capital from idiots to the rational, and will bear fruits a decade and two decades into the future. You don't want to stop this process."
Which is the ONLY viable and healthy "soft landing" that anyone can hope for.
Kinda like the racetrack, you pays yer ducats and you pick yer nag.
I don't even know what to say about the $479,000 condo, except may God have mercy on whoever is dumb enough to pay that price.
They've bulldozed a whole block of Katella west of the stadium -- both sides of the street, formerly industrial -- and every rubble pile and construction fence is going CONDOS! CONDOS! CONDOS! (I hope they are able to complete the buildings before the crash, because I'm not keen on driving by those same rubble piles for the next ten years.)
I mean, you can list any property at whatever price you want. It doesn't mean that it will sell for that.
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