Archive for the ‘mortgage crisis’ Category

Perverse foreclosure laws wreck Las Vegas housing market

July 10, 2013

It is a well-known historical fact that most governments – democratic or autocratic – introduce perverse laws. Ignoring the law of unintended consequences, thoughtless, ill-educated politicians produce laws that achieve the exact opposite of their explicit objective.

Few lawmakers, however, can bathe in the infamy of Nevada, a gamblers’ state whose residents gambled excessively on the housing market bubble that burst in 2007. Las Vegas confronted one of the most serious house foreclosure consequences of this gamble. Well, as a signature gambling state, the Nevada legislature gambled one again, recording another spectacular loss in the arena of the American housing dream.

Between 2002 and 2006, house prices doubled in Las Vegas with many buyers making zero or minimal deposits, and confronting the sketchiest of income and asset evaluations. From 2007 through 2012, average house prices collapsed 62 per cent, driving many households into foreclosure and short sale. What is required in such circumstances is a swift and efficient foreclosure system, removing those who cannot pay their mortgages out of home ownership and into the rental market, allowing house prices to fall quickly to their bottom, and thus encouraging a new inflow of more affluent home owners.

The State of Nevada rejected outright this solution. New legislation – in the form of A.B. 284 – threatens criminal penalties for bank officials who do not follow new rules to certify that foreclosures are processed properly. Further, it makes it a felony for any one who makes a false representation concerning real estate title. Worse still, the wording of the new law, rushed through the legislature, is highly ambiguous. Severe penalties apply to vaguely defined crimes.

The Nevada law simply stopped foreclosures cold. In October 2011, the first month after the law took effect, lenders filed just 600 notices of default, an 88 per cent drop from the previous month. By May 2013, foreclosed homes, which accounted for half of all homes sold in Las Vegas since 2007, accounted for only 11 per cent of home sales. Many mortgage holders have gone 60 or more months without making any mortgage payment and still remain in their homes, without any notification of foreclosure proceedings.

As a perverse consequence of the foreclosure seizure, Las Vegas now has only 4.300 previously owned homes listed for sale, down 70 per cent from two years ago. New home sales, in contrast, are up 87 per cent so far this year. The number of new building permits issued this year is up 52 per cent from last year.

Because mortgages for these new homes are extremely difficult to come by – the consequence of A.B. 284 – most of the new homes purchases are by cash buyers, many of whom are aiming to flip their purchases in order to re-sell at higher prices driven by the foreclosure seize-up of the existing housing stock.

So the New Nevada law has effectively destroyed the market in existing houses and driven a rising bubble in new house construction. When this second bubble bursts – as burst it surely will if ever the existing stock of houses comes onto the market – Las Vegas will be right back in 2007, with an even larger stock in houses that should, but will not be, foreclosed.

Well, it is the gamblers’ city. The game is in play and the tables load up until the dealer calls out : ‘Rien ne vas plus“!

Here they all go again: a new-house price bubble in the making

February 27, 2013

Politicians, builders, mortgage companies, realters, and impecunious would-be home-owners all love house price bubbles, at least until those bubbles burst. One would have thought that the post-2007 experience would have opened some eyes and closed some wallets. Apparently not, at least in the market for new houses.

:New home sales jumped 28.9% in January from a year earlier to the highest annual sales pace in four years, according to data released Tuesday by The Commerce Department. Sales of previously owned homes rose 9.1%. The disparate selling pace exists even though a typical new house cost 37% more than one already built, the widest price gap since the figures started being tracked in 1968, according to an analysis of home prices by Barclays Capital.” Robbie Whelan and Conor Dougherty, ‘Builders Fuel Home Sale Rise’, The Wall Street Journal, February 27, 2013

This disparity, both in price and in volume, is driven by all the actors in the U.S. housing market. Most especially, the nation’s home builders have re-mastered the art of selling that they deployed with disastrous consequences during the mid-2000’s. No cash? No problem! Bad credit? All the better! Under-water? Here’s a snorkel!

During the past two years, more home builders have offered to pay closing costs and to arrange home loans through in-house mortgage operations. They have drawn heavily on Obama-government-backed mortgage programs that enable buyers to purchase a home without any down-payment. In such circumstances, it has become much easier for a down-and-out would be home-owner to purchase a pricier new house than a less expensive existing house. Predictably, those buyers pour in, like moths to the flame, heedless of the tragedy of the late 2000’s and beyond.

“Two years ago, Lynda Riley and her husband started combing listings of existing homes in Stafford, Va. about forty miles from Washington. With past credit problems, including a 2008 bankruptcy filing, they figured they would spend $200,000 to $250,000 for a townhouse or a three bedroom. After seeing more than 10 pre-owned homes, Ms Riley and her husband spent far more than their budget, paying $426,000 for a new, four-bedroom house with a two-car garage and shiny kitchen appliances. Their builder, Drees Homes of Fort Mitchell, Ky., helped with $5,000 in closing-cost assistance, and they received a gift of $12,000 from a family member to help cover a down payment. ‘It’s much easier to buy a new home thsn an old one,’ said Ms Riley…’The builder’s whole attitude was, ‘No worries.’ They help you and they trust you. They really, really want you to get approved.'” ibid.

‘Do come in my parlor’, said the spider to the fly.

Larry Summers emits methane gas across Harvard Yard

February 11, 2013

In one matter we can be quite sure. Larry Summers is the most loyal Obama-sycophant of them all. He is, if you like, Heinrich Himmler to Adolf Hitler, loyal at least to the point in time when the Russian tanks were right outside the Berlin Reichstag.

Unsurprisingly, therefore, one day prior to his Master’s State of the Union Address, Loyal Larry’s syndicated column emits some vintage methane gas across Harvard Yard. There are only two ways to interpret Larry’s message: either the man is a seriously poorly-educated hydraulic Keynesian has-been, or he is a mendacious purveyor of White House snake oil.The two interpretations ultimately are entirely consistent. So I am not accusing Larry of outright hypocrisy.

Here in a nutshell is Larry’s message:

1. The U.S deficit is not a near-term priority. The debt problem should be kicked well down the road yet another time.

2. Budget-cuts implicit in the fiscal sequester due to take effect on March 1 should be thinned out over a much longer period of time. We simply cannot afford $85 billion in spending cuts when the 2013 budget deficit is running at a mere $1 trillion.

3. Fannie Mae and Freddie Mac should be right back in the mortgage market-place subsidizing lenders to support the housing market. House price bubble and junk mortgage bonds? The more the merrier. Government-agency bail-outs? Sure, since the government can always ensure that they are too big to fail.

4. The transformation of the North American energy sector must be accelerated.In particular,let us accelerate the obsolescence of all coal-fired sources of energy.

5. Unlike deficit reduction, where all the choices are painful, government measures to spur growth can benefit all Americans. There is such a thing as a free Keynesian lunch.

Readers may remember that Larry emitted an earlier vintage of methane gas in 2009. That vintage ended up as Stimulus I, quickly dissipating on the Massachusetts wind. Perhaps this time, Larry Summers, like Adolf Hitler, has gone vegetarian, in the hope that denser gas particulates find there way through the wind to a safe Keynesian harbor.

Hat Tip: Lawrence Summers, ‘There must be more to US policy than the deficit’, Financial Times, February 11, 2013

Regulations fail because political leaders want them to fail

January 9, 2013

The history of regulatory failures across time and across nations informs us that government regulations fail primarily because political leaders wish them to fail. For the most part, they do not fail because of inherent weaknesses in the rules or in the established mechanics for enforcing those rules:

From Fukushima or press scandals, from the Challenger space shuttle or the financial crisis, we tend to blame the machinery and the operatives for systems accidents. But the real responsibility generally lies higher.” John Kay, ‘Leveson should have learnt the lesson of the banking crisis’, Financial Times, January 9, 2013

Whether or not regulations are enforced effectively depends on the ruling climate in which political leaders scratch around for votes and campaign finances. Let me illustrate with respect to two examples of regulatory failure, namely the U.S. financial crisis of 2008, and the British press hacking crisis of 2011.

The U.S. financial crisis of 2008 manifested itself in the housing market which collapsed under the immense burden of junk mortgage bonds distributed by four corrupt federal government agencies, the Securities Exchange Commission, the Federal Housing Authority, Freddie Mac, and Fannie Mae.

Why were these agencies corrupt? Primarily, they were corrupted by several presidents, including Jimmy Carter, George H.W. Bush, Bill Clinton and George W Bush, and by ruling majorities, Democratic and Republican alike, in the House of Representatives and the Senate, all of whom pursued political objectives of pandering for votes to would-be home owners too impoverished and/or too prodigal ever to be entrusted with mortgage finance. Specifically, those political leaders were scratching for votes among minority populations, fully aware that financial institutions would be put at risk by their selfish, short-term vote-seeking ambitions.

Once the crisis occurred, and while the political climate seethed with anger and discontent, the same politicians retreated largely from housing market politics, allowing the private sector financial institutions to tighten their lending rules, while bailing out disgraced public agencies with taxpayer dollars to mitigate the political loss. New regulations drafted into law by Dodds and Frank – two especially corrupt politicians – had all the noise ‘of stable doors being firmly shut behind the horse.’ (John Kay, ibid) Already, as the political climate over housing eases, the political leaders of both parties, including President Obama, are retreading their routes into the mire of promoting house-ownership among the indigent and profligate, whose votes they still so desperately seek.

The 2011 British press crisis manifested itself in mounting evidence of phone hacking designed to publicize the private lives of people through the popular press, especially, though far from exclusively, under the control of magnate Rupert Murdoch. Once again, initial criticism focused on the failure of the self-regulatory Press complaints Commission, though later attention focused on high-level corruption within the Metropolitan Police, as evidence mounted that senior members of that establishment were selling private information to journalists. The Leveson inquiry has exposed a high level of corrupt dealings between the agencies of government and the media.

In fact, all the behavior chronicled by Lord Leveson was already illegal long before the onset of the scandal. The journalists simply felt that they could get away with such crimes, and for the most part, prior to 2011, they were entirely correct in this judgment. Most especially under the Labour governments led by Tony Blair and Gordon Brown, Rupert Murdoch effectively controlled the behavior of the political establishment through his assumed ability to mold electoral opinion through press manuipulation.

“Until July 2011. What changed was not law or regulation but the political climate. Before then, politicians regarded a close relationship with sections of the press – and in particular with those parts of it associated with Rupert Murdoch – as essential to gaining and retaining office. After that date, a close relationship with press barons became a liability. Wide-ranging investigation of journalistic wrongdoing and prosecutions followed.” John Kay, ibid.

The real problem, in both cases, is that political leaders do not relish living under the rule of law. As soon as they stretch their grimy fingers across that system of rules, imposing the rule of men over the rule of law, they attack the integrity of the market system in ultimately disgusting attempts to line their own deep-pockets without regard for the well-being of those whom they are elected to serve.

I’m from the government and I’m here to help you

December 30, 2012

Private charity, for the most part, is a good thing because the donors tend to be careful in deciding who is worthy of support. There is a big difference between the deserving and the undeserving poor, and private charities tend to be strict in directing aid only to the former

Government, in contrast, finds it difficult to make such important distinctions, especially when special interests fuel the campaign coffers of self-seeking politicians to put the money where they best can extract it for their own gain.

Let me illustrate the failure of the US government in this regard by reference to two examples.

First, is housing. For more than two decades, government policy attempted to make it easier for households with modest incomes to secure mortgages in order to purchase houses. Both the Clinton and the Bush administrations pushed hard on this button. The special interests in the realty market and in the construction industry just loved this charitable instinct, and supported it with campaign monies.

Unfortunately, those responsible for implementing the policy – FHA, Fannie Mae, Freddie Mac – forgot the distinction between deserving and undeserving applicants. Fueled by an indiscriminant love for minorities, mortgage monies were pumped into households that had no clue about how to control a budget. The collapse of the sub-prime market in 2007 brought about the worst recession in the United States since 1929.

Second is higher education. For more than three decades, government has subsidized college loans in a way that has pumped money into the nation’s colleges and universities. The justification was that higher education was the road to success for young people brought up in poverty. The special interests in the colleges and universities, together with all the contractor who fed off their expansion just loved this policy. It opened up a lucrative avenue to extract wealth from the nation’s taxpayers.

The result is little less than catastrophic. Lazy and incompetent students flood higher education, indulging themselves in degree courses devoid of market-value, partying off taxpayer dollars, loading themselves with debt, taking ever-longer to graduate, if indeed, they graduate at all. In the meantime, as I know from first- hand experience, university bureaucrats transfer the loan monies into their own fat pockets. Administrators now exceed faculty in numbers and administrative salaries are roughly double those of faculty at state universities across the country.

And guess what, folks, most administrators are failed academics, who cannot write publishable papers, and cannot teach effectively in the classroom. That is exactly how the worst tend to get on top.

The problem is not one that can be corrected by good governance. The problem is endemic in democratic politics. When government rushes to the aid of those in need, it surely does not do so through the impulse of Christian charity. It does so for the campaign funds, folks, and for the votes that surely follow.

And they come with very serious strings attached.

Hat Tip: Michael Barone, ‘When government offers help, it often makes a mess’, Sunday Examiner, December 30, 2012

Bill Clinton’s America was not all it appears to have been

September 7, 2012

Bill Clinton has become an icon for many Americans, especially those of liberal persuasion.  After all he presided over much of the 1990s, an age of supposed peace and prosperity.  That is the reason he was tapped to give the nomination speech for President Barack Obama at the Democratic National Convention.

The reality of the 1990s is more complex as is the role played by President Clinton.  The economy certainly picked up after 1994 and budget deficits certainly were transformed into budget surpluses.  However, all the initiatives behind this recovery – spending cuts, capital gains tax cuts, and welfare reform –  came from the GOP and essentially were forced onto a reluctant President, desperately triangulating in order to secure a second term in office.

President Clinton’s foreign policy was uneven to poor.  Under his watch the forces of radical Islam gathered steam, and went largely unopposed.  The Taliban tightened its grip over Afghanistan, Pakistan attained the Muslim world’s first nuclear bomb and Iran embarked on its nuclear program.  Somalia became a jihadist haven. Al Qaeda declared war on the United States, striking the World Trade Center,  bombing US embassies in East Africa, and leading a suicide assault on the USS Cole, all without any effective retaliation.

President Clinton’s trade policies for the most part were sound, embracing relatively free trade in  NAFTA, GATT, and the WTO.  But his social policies for the most part were poor, ignoring the rising debt burdens imposed by Social Security, Medicare and Medicaid, while pushing a home ownership program that would destroy the US economy in 2008.

So, as President Clinton campaigns for President Obama, Americans would be well-advised to remember the seeds of future chaos that were sown during those 1990s as well as the good things that also happened. And to remember the role played by the GOP in bringing good policies into play.

Hat Tip:  Jeffrey T. Kuhner, ‘Bubba’s America’, The Washington Times,  September 7, 2012

Moody’s bank downgrades exacerbate price tag on ‘too-big-to-fail’

June 22, 2012

On June 21, 2012, Moody’s Investors Service downgraded its ratings on five of the six largest U.S. banks, as measured by assets. The lower ratings will raise the companies’ borrowing costs, will affect how they raise new capital, and will deprive them of trading revenues. The banks involved are: Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan Chase.  The sixth bank, omitted from scrutiny because its investment trading section was smaller than the others, is Wells Fargo.

Five of these six large banks were essentially insolvent in September 2008, and should have been forced into liquidation. Only JP Morgan Chase was solvent and sufficiently liquid to ride out the storm.  The weak – if not politically corrupt –  administrations of George W. Bush and Barack Obama labeled the failed banks ‘too-big-to-fail’, subjected them to stress tests rigged by Treasury Secretary Geithner so that they would pass, and allowed them to continue as brain-dead dinosaurs that drag down the United States economy.

Moody’s, however, has brushed away expensive lobbying by the too-big-to-fail banks and has belatedly administered medicine that the U.S. government has corruptly evaded.  The downgrades administered tell us a lot about the fragile status of the banks involved. Let us review exactly what has been imposed, bearing in mind that Ba1 designates junk status and the line down to Ba1 from where the various downgrades commenced is as follows:-


JP Morgan Chase: downgrade two notches from Aa3 to A2

Goldman Sachs: downgrade two notches from A1 to A3

Morgan Stanley: downgrade two notches from A2 to Baa1

Citigroup: downgrade two notches from A3 to Baa2

Bank of America: downgrade one notch from Baa1 to Baa2.

Note that not one of these behemoths started off anywhere near a AAA rating. Two of the five banks, Citigroup and Bank of America, are now rated by Moody’s at only two notches above junk status.  Lest readers choose to believe that Moody’s has it in for these banks, I should mention that the regular markets downgraded each of these banks months ago.

Ratings derived from the banks’ credit default swap spreads – which serve as an indicator of their perceived riskiness – anticipated Moody’s downgrade by more than a full calendar year.  Morgan Stanley, for example,  was trading at Baa3 – below its new Moody’s rating – as early as May 2011.  As usual, the markets anticipate the rating agencies.

In tomorrow’s column, I shall indicate the consequences of the federal government bailing out these loser banks for economic performance economy-wide. The only good news that I can purvey is that actions hopefully do have consequences. Obama’s bank  bail-out philosophy predictably will confine him to a single term in the White House. And that will be a blessing indeed!

Obama at the bat

April 18, 2012

For those of you who have not yet viewed the four minute video referenced below I am sure that you will enjoy. It is satire at its best. It was created following the 2010 mid-term U.S. elections. It parodies a famous nineteenth century music hall  baseball poem: Casey at the Bat.  It captures the moment perfectly:

Beware the rationalizations of Benjamin Franklin

April 18, 2012

“Benjamin Franklin, a leading figure of the 18th-century enlightenment, advocated a rational approach to decision-making.  In a letter to the English chemist, Joseph Priestley, Franklin claimed to have found ‘great advantage’ in a process he described as moral or prudential algebra: set out pros and cons, attach weights to each consideration and arrive at a balanced judgment taking all relevant factors into account.  Yet Franklin knew very well that this was not how real people, including himself, behaved.  Franklin was an occasional vegetarian, having balanced the moral, nutritional and practical arguments.  But confronted with the delicious smell of freshly grilled fish, he observed that the fish themselves had disregarded his precepts by eating other fish and so deserved to be eaten.  ‘How convenient it is,’ he said, ‘to be a reasonable creature since it enables one to make or find a reason for whatever one has a mind to do.’  John Kay, ‘Beware Franklin’s Gambit in making big decisions'”, Financial Times, April 18, 2012

In recent years, Franklin’s Gambit has been utilized extensively,and with disastrous effect, by economists, statisticians, financial analysts and the like in developing business models.  John Kay played a role in such activity while engaged commercially in this field.  ‘Why,’ he asked himself continuously, ‘do we not use these models ourselves?’ The answer – the writing on the wall – was that such models were not useful in the running of any business. Their value lay in allowing managers to justify to boards, investors, and government bureaucrat, decisions that had already been made on entirely other grounds.

The financial crisis of September 2008 was a direct consequence of such misuse of financial models by Alan Greenspan, Ben Bernanke and Timothy Geithner, as well as such international agencies as DSK’s International Monetary Fund. Formal process was allowed to dominate common sense and historical perspective with disastrous consequences for ordinary people. Of course, the perpetrators of the error, with one exception,  walked out scot free from the shambles that they had created, delivering ludicrous sermons on economic policy to gullible audiences and stalking the international stage as policy heroes rather than as the low-lives that they really are.

The exception was Dominique Strauss-Kahn, who trapped himself in sexual honeypots that have exposed him for what he truly is as a human being. Even DSK will go down for sexual rather than for financial abuse. Such is the nature of the global market economy under state-run crony-capitalism.

The tax breaks that Paul Ryan will have to eliminate

March 24, 2012

Paul Ryan claims that he has proposed a neutral federal tax reform by replacing a system based on six tax rates by one based on only two: 10 percent and 25 percent.  Ryan claims that he can raise $1 trillion per annum to finance these tax cuts simply by eliminating ‘special interest’ credits and deductions.

Unwilling to face the political backlash, Congressman Ryan refuses to name the tax break credits and deductions that he must eliminate in order to achieve such revenue neutrality. So let me say what he will not. If he disagrees, he has plenty of opportunity to explain his alternative scenario. Alternatively, Paul Ryan may choose to follow the usual cowardly politician’s path and say nothing about the bad news for many voters implicit in his proposal.

The non partizan Congressional Research Service, this week, released a report which identifies 20 top tax breaks, each as a percentage of the total  loss to federal revenues projected for fiscal year 2014. This  is as good a basis as any to confront Congressman Ryan with the opportunity cost of his proposed tax reforms.

1.  Tax breaks that are technically difficult to remove

Some 40 per cent of the lost revenue would be difficult to capture under any circumstances because they take the form of  in-kind benefits that cannot easily be enumerated on individual tax forms. Prominent among these are employer-provided health insurance and employer pension benefits, jointly accounting for some 30 percent of the total. These are not tallied in employee paychecks and would be very difficult to enumerate for purposes of federal income taxes.

2. Tax breaks that would have to go

Paul Ryan would have to eliminate virtually all other tax breaks in order to achieve fiscal neutrality for his reform proposal. These include all mortgage interest deductions (8.4 percent of the total), medicare exclusions (6.4 percent), earned income credit (4.9 percent) , state and local income tax deductions (4.5 percent), charitable contributions deductions (4.3 percent), tax exempt/tax credit bonds (3.6 percent), social security benefit exclusions (3.6 percent), capital gains on housing exclusions (2.3 percent), property tax deductions (1.4 percent), medical expenditure deductions (1.4 percent), individual retirement accounts (1.3 percent), and child credit (1.3 percent).  In addition, personal allowances would have to be severely paired down in order to achieve full revenue neutrality against the 2012 expiration of the Bush tax cuts standard.

Now such a recommendation has a great deal going for it. It would eliminate a lot of tax distortions, especially those that exaggerate the demand for home ownership and stimulate healthcare cost bloating. It would restore incentives to create wealth and promote economic growth.

But the tax credits are highly specific and favored by large identifiable groups of voters. The tax rate deductions are dispersed across the population as a whole and, as such, are less salient in the political market-place.

As a vote-seeking politician, Paul Ryan seemingly favors the provision of concentrated over diverse benefits. If he can get away with both, then he is in the political paradise enjoyed by Republicans during the early noughties, a paradise that  turned into hell in 2008, when the electorate  finally caught on to the evil of  spend and borrow Republicanism.

So which way will you twist, Mr Ryan, in the 2012 poilitical winds? Will it be a return to the naughty noughties? Or will you show more political courage than you have so far been able to muster and become a statesman rather than a politician? Come on, Mr. Ryan, you can steel yourself to take the plunge. There are plenty of opportunities outside of politics for a young man like you, should you be voted out of the Congress in 2012.