Good riddance to 2011′s housing market in Nevada. “RealtyTrac of Irvine, Calif., which tracks foreclosures, reported Wednesday that during 2011, more than 6 percent — one in 16 — of Nevada housing units received at least one foreclosure filing. That amounted to 72,844 properties with filings last year.” [full story Las Vegas Sun ] Solutions anyone?
There’s Governor Romney’s Invisible Hand Solution: “The idea of the federal government running around and saying, `We’re going to give you some money for trading in your old car…or we’re going to keep banks from foreclosing if you can’t make your payments,” Romney said, “The right course is to let markets work.” [Boston.com]
“Let the markets work,” would be a lovely solution IF the markets were working. What’s preventing the smooth operation of our housing markets?
(1) Toxic Assets. Surprise! Surprise! There is still a truckload of toxic assets clogging up the books of major banking and financial institutions. As of last February U.S. banks had approximately $13.8 billion in what are politely known as “unrealized losses.” Financial Superfund Sludge might be another way to describe it. If it is acceptable to let homeowners “hit bottom,” then why isn’t it acceptable to make the banks “bite the bullet” and write down their losses?
“…losses are baked into banks’ book value, but don’t get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks’ pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.” [Wall Street Journal]
Investment in What? Are these investments in home mortgages going into default held on the banks’ books? Are these investments in derivatives based on securitized assets (in turn based on mortgages) on the banks’ books? Are these investments in over the counter derivatives based on Heaven Only Knows What on the banks’ books? Not only is the Great Invisible Hand not moving in this stagnant pool, it gives every appearance of trying to cover the mess up.
Not only can banks delay writing down the value of the Financial Superfund Sludge, but if they do take action there are some accounting gimmicks that allow the bankers to prevent the write-downs from impinging on the Exalted Bottom Line. Somewhere between “unrealized losses” and “accounting tricks” there’s a piece missing — the value of the assets.
Remember, in order for the Great Invisible Hand to function properly there must be a price (value) which can be agreed upon by the two parties in a market. Meanwhile back at the reporter’s desk at the Wall Street Journal:
“One problem centers largely on “Level 3″ securities, illiquid investments that can’t be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in “Level 3″ securities. That amounts to 42.6% of the banks’ shareholder equity, a pile of assets whose value is hard to verify.”
More recent figures will probably show that the weight of those Level 3 (Doesn’t that sound ever so much nicer than “Really Stinky Slimy Sludgie Stuff?”) has declined since the last calculations, but that doesn’t mean it’s gone missing. “Value hard to verify?” No one can verify the values because no one knows what the really stinky slimy sludgie stick’em is worth, and no one knows the worth because the only yardstick at hand is nothing more than what the bank that owns the gooey mess thinks it might be.
Someone might think to ask Governor Romney HOW a market is going to clean up the toxic assets if the situation could be stated as: “I have a pile of paper (aka financial products) on my desk and I would like for you to buy it. I think it’s worth $13.8 billion dollars, but you think it might be worth $49.85 (the going rate for a decade’s supply of single ply industrial toilet paper). ” How do we “make a market?”
But this is all Your Fault — because your government should have known that the bankers were going to get carried away in their enthusiasm for “creative financial products,” and should have stopped them! However, if the Mortgage Twins, the OCC, or the SEC had tried to stop them, then that would have been Onerous Government Interference in the Free Market!
(2) The problem of imMERSion. Once upon a time the Bank of the Invisible Hand decided that Fannie and Freddie, which securitized home mortgages, weren’t moving fast enough, and those stodgy county recorders insisted on taking TIME to record property transactions — “This will never do,” cried the Bankers of the Invisible Hand, “We must move into the secondary mortgage market ourselves, and we will create MERS — an electronic mortgage recording systems — to make the process move FASTER.” So they did.
And when they did, standards for securitization declined, and so did the accuracy of the records regarding the original transactions. In fact the Bankers of the Invisible Hand made such a dog’s breakfast of the process that a New York Appeals Court came to the following conclusion:
“This Court is mindful of the impact that this decision may have on the mortgage industry in New York, and perhaps the nation. Nonetheless, the law must not yield to expediency and the convenience of lending institutions. Proper procedures must be followed to ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.” [BankNY v. Silverberg]
By July 27, 2011 MERS bowed out of the foreclosure process, and sent a message to its members: “… stating that no foreclosure proceeding may be initiated in the name of MERS and no legal proceedings in a bankruptcy may be filed in the name of MERS. ” [DS news]
Now what? Those toxic “Level 3″ assets were often based on mortgages which were supposed to have been “electronically recorded,” except that the fancy new Super-Speedy electronic recording system didn’t work. Not only do the banks have toxic assets on their books, which they can’t value, and don’t know if they will ever get beyond “unrealized losses” status, but now we’re having trouble figuring out what should have been a relatively simple question: Who owns what?
But this situation is all Your Fault — Because if your county recorder’s office had been up to speed with the latest and greatest in electronic real estate transfer systems, then the Bankers of the Invisible Hand would not have found it necessary to devise their own Super-Duper-Speedy MERS. However, if you had promoted the idea of upgrading county IT systems, then that would have been “taxpayer dollars being spent on more government!” and after all, “we” want “smaller” government.
(3) Inventory and Housing Prices. There is still slack in the housing market. “Total existing-home inventory fell again in November, by 5.8 percent to 2.58 million homes for sale. At the current sales rate, that represents a 7.0-month supply, down from a 7.7-month supply in October.” [RealEstateABC] Good news/Bad news — yes, the inventory is down, but there are still are 2.58 million existing homes for sale. And then there’s this pesky chart from the National Association of Realtors:
We know we’re in trouble when the little chart columns head down from the top instead of up from the bottom. We might also read this as indicating which part of the country has the most homeowners “underwater.” That would be “W” as in West, as in Us.
Good old fashioned common wisdom says that homeowners with 30 year fixed rate mortgages are probably not in as much trouble as those who purchased Alt-A, no-doc, subprime, or other exotic mortgages. There’s a chart for that too:
Yes, indeed, that blue line (adjustable rate mortgage default) shot up in 2007. If home values held steady — or increased — then a homeowner could sell and be able to pay off a mortgage. However, when we combine declining home values with those adjustable rate mortgages then the blue line has nowhere to go but up.
It’s never a good time to get into a protracted discussion of Loan To Value Ratios (LTVs) but it might be instructive at this point. 75 is the magic number because that’s the ratio most mortgage bankers want to see at a minimum. The LTV equals the mortgage amount divided by the appraised value of the property. For the truly wonkish, or totally curious, Bankrate.com has a calculator for your enjoyment. If you need to borrow $150,000 to buy a home appraised at $180,000 then your LTV is 83 and the banker may not want your business.
This digression is appropriate because at least two things went wrong while the Bankers of the Invisible Hand were playing in the Housing Market during the Bubble. One of the problems came in the form of inflated appraisals, when CoreLogic studied 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007.
“By back-testing the loans using the CoreLogic model from the time the mortgage securities were originated, the analysis compared those values with the loans’ appraised values as stated in prospectuses. Then the analysts reassessed the weighted average loan-to-value ratios of the pools’ mortgages.
The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.
That means inflated appraisals were involved in six times as many loans as were understated appraisals.” [NYT]
Problem Number One with inflated appraisals was that the Bankers of the Invisible Hand palmed mortgages based on them to investors in the secondary housing market thus making the problem not only “Who Owns What? but Who Owes How Much?” Problem Number Two with inflated appraisals is that:
“Loan originators, many paid on commission, sometimes pressure appraisers to fudge their numbers to make mortgages work, experts say. That means people who don’t have a ballpark figure in mind before they borrow — or who don’t verify numbers that sound too good to be true — could be setting themselves up for financial ruin.” [Bankrate.com]
And, the blue line goes up.
But this situation is all Your Fault: Because you should have known that the sales pitch for the mortgage was based on a faulty, fudged, or “bending-lending” home appraisal! Even though the Banker of the Invisible Hand supplied the appraiser. And, you should have known that the Bankers of the Invisible Hand were going to pool all these mortgages into asset based securities and sell them to so-called sophisticated investors who didn’t have a clue about the underlying origination terms and values, thereby creating more Super Slimy Toxic Asset Sludge. It’s also Your Fault because if your government had been awake while the toxic mess was being created, then the Bankers of the Invisible Hand wouldn’t have been able to manufacture these fudgy mortgages. However, had the government agencies cracked down on questionable Invisible Hand Bank practices — that would have been onerous and burdensome regulation on the Free Market.
Governor Romney has apparently overlooked the little problems of (1) the creation and accumulation of toxic assets currently gumming up the plumbing of the financial sector, and when the Bankers of the Invisible Hand might bite the bullet and write down the costs of their enthusiasm, (2) the imMERSion issue creating questions about who exactly owns what exactly, and (3) the exacerbation of the housing bubble collapse because the machinations of the Bankers of the Invisible Hand made mince-meat of the numbers that usually underpin the housing market — like loan to value ratios — in their zeal to crank out more mortgages to satisfy their appetite for securitization.
In short, to lend credence to Governor Romney’s blesséd and blinkered vision of the Free Market Solution To Everything, one must also ignore everything the Bankers of the Invisible Hand did to create a colossal Free Market failure in the first place.