Are strategic defaults morally acceptable yet?
Sunday night, 60 Minutes featured an interesting piece featuring homeowners who were walking away from their mortgage obligations (who could otherwise pay) because they were underwater. Conventionally, these people would simply be considered to be “bums” and “deadbeats,” but at what point does a rational decision, based not on societal notions of responsibility, become acceptable? Well, it appears that now is the time.
We all have seen strategic defaulters and there are definitely some mixed feelings toward what they are doing. It should, however, be noted that it has been a standard practice in the business world for years. The most massive and eye-watering example was the recent decision by BlackRock to turn Stuyvesant Town and Peter Cooper Village over to creditors.
Roger Lowenstein wrote in January in the NYTimes Magazine that homeowners are supposed to be held to a higher moral standard:
… the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.”
The Case VS. Shiller Index
On Tuesday, Standard & Poor’s released the S&P/Case-Shiller Home Price Indices and they note an odd and uncomfortable mix, often quite varied by region:
…the annual rates of decline of the 10-City and 20-City Composites improved in February compared to January 2010. For the first time since December 2006, the annual rates of change for the two Composites are positive. The 10-City Composite is up 1.4% from where it was in February 2009, and the 20-City Composite is up 0.6% versus the same time last year. However, 11 of 20 cities saw year over-year declines.
Of course, there are parts for everybody to latch onto. Optimists love the part about relative gains being made against February 2009 numbers. A lot can be made of the numbers, depending on what you want to think. One person, who (for obvious reasons), should be listened to is Karl Case, who feels that:
We’ve turned a corner with housing. As long as mortgage rates don’t jump and employment continues to improve, we should see housing play a key role in preventing a double-dip recession.
Well, I tend to agree with him. As long as mortgage rates don’t jump and employment continues to improve.
The Feds
Interestingly, the other half of the index (Robert Shiller) specifically warned against hopes of avoiding a double-dip recession just a few weeks ago. His major worries were the ending lifelines offered by the federal government to the housing sector. The Federal Reserve ended MBS purchases and the expiration of the homebuyer’s tax credit.
First American CoreLogic wanted to see what impact an extension of the federal housing stimulus programs would have, so they conducted a simulation (full report here). The results yielded an underwhelming result:
Two simulations, one with the Federal Housing stimulus extended and one with the Federal Housing stimulus ending in April 2010, revealed that the forecasted year-over-year growth rates between the two scenarios ranged from a decline of 4.2 percent if the tax credits are removed to an increase of 4.1percent if the tax credits are extended.
Above are the results of the simulation (click for larger size). Like the real thing, this simulation shows lots of diversity, depending on the region.
So, what are we going to see going forward? Well, I tend to think we will probably go “sideways,” and hope to god we don’t go too much farther backwards.
Top Ten Mortgage Fraud States (Map)
CNNMoney.com reports that the Mortgage Asset Research Institute (MARI) has released a report which shows incidents of fraud comitted by mortgage industry professionals had increased by 7% in 2009.
The jump in mortgage fraud is a troubling trend, given that it played a big role in setting the housing crisis in motion, with mortgage professionals doing things like listing false income claims for borrowers, and overstating a home's appraised value.
And the statistics may not capture the entire picture, according to Jennifer Butts of LexisNexis Mortgage Asset Research, since fraud isn't usually detected until a loan goes bad.
10 Top scam states |
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10 Top Mortgage Fraud States [CNNMoney.com]
Fair Isaac Reveals How Mortgage Delinquencies Effect Your Credit Score
Somehow, Les Christie of CNNMoney.com got some specific data from Fair Isaac Corp. (the FICO people) detailing how mortgage delinquencies, foreclosure, short sale, deed-in-lieu, or bankruptcy would affect two hypothetical borrowers.
Here is what they released:
| Borrower #1 | Borrower #2 | |
| Initial Credit Score | 680 | 780 |
| After 30-day delinquency | 620-640 | 670-690 |
| After 90-day delinquency | 595-610 | 645-665 |
| Foreclosure, short sale or deed-in-lieu | 575-595 | 620-640 |
| Bankruptcy | 530-550 | 540-560 |
30-Year Fixed Rates Still Attractive?
The Federal Reserves decision to stop purchasing MBS last month seems to not have particularly affected the 30-year fixed rate, according to Scott Grannis:
Message to homebuyers: interest rates on 30-year fixed rate mortgages are extremely attractive from an historical perspective, since they are now about as low as they have ever been. Given the great uncertainty surrounding future monetary policy (i.e., how much will the Fed have to raise short-term rates to keep inflation at bay, given the Fed's massive $1 trillion injection of bank reserves), fixed rates also look very attractive relative to adjustable rate mortgages.
I don’t know if I particularly buy this. First, I see no reason to jump to the conclusion that the FEDs decision to stop MBS purchases had any impact whatsoever on the 30-year rate, at least not this fast.
But, I’m no economist, of course…
Fannie’s April Forecast: Tax Credit Fails, but Home Sales Should Increase (Soon)
Fannie Mae's Economics & Mortgage Market Analysis (EMMA) unit recently released its April forecast, [PDF] and it is a must read for macro-minded real estate pros. Basically, they note the up-trending number of purchase applications from late-February (+25%) and see a self-sustaining recovery in the housing market in the fourth quarter if the labor market improves.
Existing home sales posted their third consecutive drop in February. However, the near-term outlook is brightening, as augured by improving leading indicators of home sales. Pending home sales, which measure contract signings of existing homes, surged in February. Another leading indicator also suggests increasing sales in coming months: purchase applications have trended up beginning in late February and have risen nearly 25 percent in the last six weeks. Existing home sales should strengthen substantially in the second quarter, as more homebuyers rush to beat the expiring tax credit. With the tax credit pulling forward some sales into the first half of this year, we expect sales to pull back in the third quarter. If the labor market improves substantially as we anticipate in the fourth quarter, home sales should rebound and begin a self-sustaining recovery without the help of a tax subsidy.
Shiller on a Double-Dip, Housing Prices and more…
Robert Shiller, Professor of Economics at Yale, was recently interviewed on Consuelo Mack WealthTrack and addressed many of his (and most people’s) fears about the housing market. He, like many others, is particularly concerned about the growing possibility of a double dip in the housing market.
The federal government has supported over 80% of sales up until now. This will (mostly) be coming to an end because the Federal Reserve has ceased buying MBS and the Home Buyer Tax Credit will expire at the end of the month.
Shiller doesn’t think that homebuyers have the same “naive optimism” that they had just 5 years ago. He is worried that prices will actually fall again (but stressed that he was not “predicting” that). This is mostly because of the shadow inventory that is right around the corner.
Here is the complete interview:
Debbie Downer Strikes Again!
Meredith Whitney (previously covered here) is featured in an interview with Leigh Gallagher, an assistant managing editor of Fortune. She predicts a rocky recovery for the housing market and thinks that more foreclosures are on the horizon.
Why Is Texas Smiling?
Earlier this week I wrote about a study conducted by the Federal Reserve Bank of New York which examined why upstate New York seemingly escaped the housing bubble. They determined, based on their findings, that upper New York faired well in this last cycle because they have relatively few subprime mortgages and, of the subprime loans that were issued, they performed much better than other areas.
Similarly, ABC News has found that in Texas (of all places!), subprime loans performed much better than average. Their foreclosure rate (among subprime) is below 19% – among the lowest anywhere. Also, real estate prices were largely contained and grew only modestly, compared to the rest of the United States.
Lessons should be learned and policies adopted in Washington that reflect on Texas’ experience:
If there’s one single thing that Congress can do now to help protect borrowers from the worst lending excesses that fueled the mortgage and financial crises, it’s to follow the Lone Star State’s lead and put the brakes on “cash-out” refinancing and home-equity lending.
How Texas Escaped the Housing Crisis [ABC News]
Booms & Busts: Looking Back at the Dynamic U.S. Real Estate Market
In the newest issue of Current Issues In Economics And Finance, a journal maintained by the New York Federal Reserve Bank, Jaison R. Abel and Richard Deitz look into the real estate market in upstate New York and investigate why some areas are seemingly immune to booms and busts. They also depict a much more dynamic national real estate market. Here is their abstract:
Over the past decade, the United States has seen real estate
activity swing from boom to bust. But upstate New York has
been largely insulated from this volatility, with metropolitan
areas such as Buffalo, Rochester, and Syracuse even registering
home price increases during the recession. An analysis of upstate
housing markets over the most recent residential real estate cycle
indicates that the region’s relatively low incidence of nonprime
mortgages and the better-than-average performance of these
loans contributed to this stability.
Bypassing the Bust: The Stability of Upstate New York’s Housing Markets during the Recession [Federal Reserve Bank of NY]
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