Mortgage applications fell last week:
The Mortgage Bankers Association’s index decreased 1.9 percent in the week ended March 12. The Washington-based group’s purchase gauge fell 2.3 percent, while its refinancing measure declined 1.7 percent.
The lack of demand even as borrowing costs dropped signals a sustained housing recovery will be slow to develop this year. Federal Reserve policy makers yesterday cited stagnant home construction, declines in commercial real estate and a lack of jobs as risks that continue to face the world’s largest economy.
The problem is rather simple to understand - despite record incentives (such as the "homebuyer tax credit" and similar games) there are simply no more people who are willing and able to gorge themselves on more debt.
The cash-out refinance is dead, as there's no equity to extract. The use of the home as an ATM machine powered the last "expansion" in our economy, but that was a false expansion - it was not made up of production increases and general weal, but rather with debt.
There is no real demand for housing at today's price. At 1x or 2x incomes the housing stock would clear immediately. That's where the market "wants" to go. But doing so causes all the banks who made those imprudent loans at 5x or even 10x incomes to instantaneously detonate. Rather than make people eat their own bad decisions and thus learn from them (a great deterrent against sinning a second time!) The Government has instead chosen lies, obfuscation and intentional gimmicking of the accounting rules so that the consumer gets screwed but the institutions who made the imprudent loans are bailed out - in effect charging the consumer twice.
As an example of how badly screwed up our economy (still) is, I present an anecdote that is loosely changed from an actual person who presented themselves to a professional in the mortgage business not long ago.....
Mike, a driver of a piece of heavy construction equipment, became a first-time home buyer in 2004. His home cost $145,000 and his total mortgage payment was $1,046. He was making about $50,000 a year, so he had a nice safe, conservative "front end" ratio of about 25% - and with his only other debt being a car loan and a small credit card balance, his back end ratio was a reasonably-conservative 35%. He was easily able to afford his loan - and his life.
But now it's 2009. This client comes back to the original mortgage broker and calls in desperation. Work has evaporated and his income has roughly been cut in half.
He should have some equity in his home - after all, he bought before prices really took off. So we look at refinancing the debt - after all, rates have come down some, right?
What we find when credit is pulled is the ugly truth. Mike has done two cash-out refinances in the last five years, as well as taking out a HELOC. His total payment is now up to $1650 and the total indebtedness on the house is $216,000 - but the house is only worth $180,000.
When asked about the refinances Mike says that he was enticed by how easy it was to roll credit-card debt into the first refinance - he turned to this as a means to finance living somewhat-modestly beyond his income. He kept thinking - and was told repeatedly - that he'd be able to keep coming back to the same brokers for another refinance - after all, prices only go up on real estate.
After much consternation (after all, Mike can't really do much being this far underwater - other than try a modification or lose the house) Mike calls the lender and is "offered" a modification. His "trial" cuts the monthly payment to 31% of his (now reduced) income, but in doing so the term is extended to 40 years and the loan is essentially interest-only for the first several years. This "modification" means that Mike will never really own his house, as it will be a decade or more - assuming prices stabilize here - before he has any hope of reaching positive equity.
So Mike does this for a year - after all, he does like the house - and after a year the phone rings. The lender has denied his permanent modification. Who knows why - but what a pull of the credit report now shows is that the lender has been reporting the difference between the "trial" modification payments and the original as delinquent amounts to the credit bureaus! Mike's credit is now destroyed - he's $7,000 behind in mortgage payments, nearly $50,000 underwater, and has a credit score under 500.
Mike is screwed.
What could Mike have done differently?
Well, first, he could have not debt-binged. But that's water over the dam - he did debt-binge, and the debt is still there. Once the hangover hits it's too late to decide that the last bottle of Jack Daniels' was a bad idea.
Second, Mike could have done what I've advocated since this whole mess began. He could have not believed the snake-oil salesmen from the banks and finance companies and instead called up a good bankruptcy lawyer and enrolled agent (CPA authorized to practice before the IRS), got them both in a room, laid $250 or so on the table between the two of them for an hour of their time and figured out what his liability would be if he told the bank to stuff it.
He might have wound up in bankruptcy or foreclosure, but with proper guidance and a plan he would have almost certainly been in better shape than he is now. With the foreclosure or bankruptcy behind him, his credit would start to be rebuilt immediately. He would have contributed to the system clearing (even if he lost the house) rather than contributing to the balance sheet lies of the major financial institutions. While his credit would have been ruined, it's ruined anyway, he's still going to lose the house, and all he's managed to do is help the banks lie to the American people and perpetrate a scam upon everyone else.
And if, as I suspect, the housing market continues to tank for the next several years Mike would have been in a position to possibly buy a similar house - for cash - at some point in the next few years. Yes, this would require some pretty-severe austerity measures in Mike's household, but then again, the original goal was to own a house free and clear, right?
Mike listened to the crooners on CNBS and so-called "professionals" in the banks - people who's interest is not aligned with his - instead of hiring his own experts at his own expense to navigate a circumstance that, admittedly, was of his own doing - but from which he DID have choices.
There are millions of Mikes who have been seduced by the dark side of credit and then serially abused by the banksters and their minions. Until the market clears these moribund consumers' debt from the system, an act that can only occur two ways (through the passage of the aforementioned forty years - or bankruptcy of both borrower and lender) we cannot have sustainable economic recovery.
Our government has committed itself to the balance sheet lies and screwing Mike - as many times and as roughly as they can get away with. Sadly, so far, the American People are watching American Idol instead of recognizing that while they're culpable for listening to the siren song of "must have it nowitis", the banksters actions were anything but honorable - indeed, they both have been and remain outright predatory in nature.
If you want to know why Japan never got out of its slump more than two decades after their debt bubble burst, this is the reason. The debt was not forced through the system by defaults, with the government instead protecting imprudent lenders. They, like us, strung along borrowers for as long as possible, both deepening and prolonging the damage to their financial lives and futures. Instead of recovery these policies produced a nation of debt-zombies - a state of affairs that persists to this day.
We're stuck in the same trap, having learned exactly nothing from those who went before us as little as a decade ago.
Mark Hanson (of Hanson Advisors) once again digs up a gem.
He's been on the HAMP/HAFA nonsense since it began, but today I would like to focus on one snippet out of his latest missive, to be found right here:
Uh, yeah.
Gross debt-to-income ratios of 59.8% after modification?
Folks, do you understand what this means? The average gross income of these folks is $2,702, or $32,433 annually. But their debt-service ratio, or amount of debt post-modification, is 59.8%.
That means they're spending almost as much on their other debts as they are on their house payment, even after modification.
Let's break this down.
The person with a $2,702 monthly income has the following "come out" of their check:
- Their debt service of $1,616, of which half, roughly, is their (modified) house payment.
- FICA and Medicare tax of 6.2 and 1.45% respectively, or $206.70.
- Federal withholding of approximately 10% (slightly more, actually) assuming a married person, or approximately $300. (If single head-of-household it is somewhat higher, if married with dependents it is somewhat lower.)
This "average person" has $579.30 once their mandatory debt service and withheld taxes are deducted, and from this they must pay:
- Electrical, water, sewer, and garbage disposal services.
- Health costs, if any (including deductions from their paycheck, co-pays, etc)
- Automobile insurance for their car, along with gasoline.
- Food
- Hazard insurance on the house (if not included in the back end ratio, and it frequently is not.)
- Any other expenses (e.g. clothing, school supplies if there are kids in the home, any sort of recreational activities, etc.)
All on $600 a month for a family of four? You're joking, right?
Good luck just buying your food and paying the electric bill on what's left!
These people are economic zombies. HAMP has utterly failed to change the outcome for these individuals nor can it because their total debt load is impossibly high.
What these people need is an expedited bankruptcy procedure that clears their balance sheet - but our lawmakers refuse to do that because that would force the LENDERS to eat their irresponsible loans at the same time the consumer went through Chapter 7!
We cannot solve this problem until home prices are allowed to contract to the point that people can afford them - and the rest of their debts are similarly defaulted!
These statistics show that of those who are in the HAMP program most of them are over-levered all the way across the board. There is no "solution" for them - they were enticed by (and bit on) the bogus claim that they could "have it all" throughout their lives, and as such are deeply in debt.
Remember, these are averages. That means that a large percentage of the people coming out of "HAMP" are in worse shape!
A person with $30,000 a year in income that is carrying eight hundred dollars of non-housing related mandatory debt service has, typically, a moderately-priced "new car loan" and a couple hundred bucks of mandatory credit-card payments (totaling some $5,000 in debt.) They can't afford this - not with a house payment of some $800 on top of it.
Not a prayer in hell.
The issue isn't just excessive debt in their house - it is excessive debt everywhere. We keep hearing bleating about how "underserved" and "lower income" people need "more access" to credit.
This report proves that's utter and complete nonsense, and that the actions of our "financial institutions" have been outrageously predatory - acts that should be felonious.
What that "access" the banking industry demands has gotten them is a one-way ticket to a crushing debt load they simply cannot afford and will NEVER be able to pay.
This problem is not confined to the housing market, it is literally everywhere and allowing the financial institutions that have KNOWINGLY AND INTENTIONALLY marketed this credit to people THEY KNOW CANNOT PAY to receive "help" from the taxpayer to avoid THEIR OWN BANKRUPTCY FOR MAKING OUTRAGEOUSLY IRRESPONSIBLE LOANS MUST STOP NOW.
... about fixing housing finance through a completely redesigned system instead of trying to "fix" Fannie and Freddie (I know, believing a politician is not lying is always dangerous) I offer up the following suggestions.
- Put Fannie and Freddie into run-off via formal receivership. Leave them outside of the government and withdraw all support. Whatever the RMBS return, they do. Whatever the bondholders get back, they do. No support. The face of the prospectus was clear and everyone, including Bernanke, knew it. Honesty and fair dealing starts with telling the truth.
- Leave the mortgage market alone for 90%+ of the transactions. That is, no government involvement whatsoever.
- With that said, there are two places I recognize a reasonable place for the government to get involved. The one I cannot argue against is the VA mortgage program - I believe this is a perfectly-legitimate benefit of military service and should be maintained. The other is for very specific and targeted FHA loans for low-priced housing. Both should be limited to homes in the lowest quartile of price irrespective of location, that is, with no "escalator" for "high priced" areas. We live in a nation with freedom of movement and association - if you find the place you're living in to be too high cost, then move!
However, if we're going to leave FHA and VA loans in place (and we can do the issuance via Ginnie Mae, which already exists) we need to seriously restore underwriting standards. Specifically, the following are minimums I believe we must demand:
- NO automated underwriting and no use of FICO scores at all. FICO is not useful for longer-term obligations, which a mortgage is. Instead, all files must be manually underwritten.
- 28% front-end ratio and 36% back end (DTI) ratios must be enforced. No exceptions, no ifs, ands, buts or maybes. High-ratio loans are still being made and they're the #1 reason why these loans default. This has to stop.
- No VA or FHA refinances permitted for cash-out, without exception. If someone wants a cash-out loan they need to get it on the private market.
- 10% down payments in cash required, seasoned funds. No kickbacks, no funny games, no seller funding, no "loans from Dad." Cash means cash. If you can't come up with it you don't need to own a house. This isn't being cruel - it's being honest. Roofs needs repair (I'm putting one on my place this spring), water heaters leak and need to be replaced, things deteriorate over time or simply break. You have to be able to save up enough money so that you're not dependent on credit cards if and when something like this happens.
Task the DOJ with enforcement of all statements on mortgage loan applications and paperwork. You lie, you go to prison. Period. End of discussion. No more "fraud for housing" .vs. "fraud for profit" - fraud is fraud, you go meet Bubba and lose your house. Investors have to be able to fairly evaluate what they're buying and so does the government!
In the private market I would radically revamp the securitization system such that:
- Any bank that securitizes debt cannot offload liability for breached reps and warranties. You issue it, what you represent and warrant is in the package is yours, without exception or disclaimer.
- Credit derivatives on RMBS are absolutely banned (thereby preventing the formation of synthetic CDOs that are purposeful value destroyers by hedge funds and others.) Any true hedge + the underlying (if the hedge can perform) will return less than a Treasury of similar characteristics - as such it makes no sense at all to buy such a thing except to perform regulatory arbitrage, which must be prevented to stop future financial market disasters.
- All off-balance sheet, "Level 3" or other-than-marked to the market "holding pens" for such vehicles are banned. If you want to hold these assets you have to do it where people can see them, without exception. That is, it's perfectly ok for investors to buy these for investment purposes but the practice of using them as speculative trading vehicles in hinky legal structures has to be stopped.
That would be a good start.
PS: As I write this the pumptastic CNBS crooners claim that Barney Frank has repudiated his statements. Even though he apparently made them originally in public.
Mr. Frank, did you truly wake up and decide to do the right thing or not? I think you owe everyone an answer.
Gee, what took you so long?
McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial InterestSM fixed-rate and adjustable-rate mortgages. Additional information will be provided to Freddie Mac Seller/Servicers in an upcoming Single-Family Seller/Servicer Guide bulletin.
Interest only mortgages, including Freddie Mac Initial Interest mortgages, provide for interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully amortizing basis for the remainder of the mortgage term.
These "vehicles" are an outright scam for 99% of all borrowers. Their exclusive proper use is as a bridge loan.
Let me explain.
Let's say you have a $500,000 house you wish to buy. An I/O loan for the first two years (for example) at approximately 3.5% (currently) would have an interest-only payment of $1,458.
But when the two years is over assuming the interest rate does not change you now have a 28 year amortizing loan and the payment jumps to $2,329.70 - an increase of about 60%.
This is damn near what you have with an "Option ARM", which is similarly explosive when it has an initial "teaser rate." For example, the same loan with a 2% "initial teaser" interest-only has an initial payment of $833.33, but jumps to the same $2,329.70 if it resets to 3.5% once the "teaser" is over.
Note that these ARM rates are very cheap too - if rates go up it gets worse - much worse. Indeed if the rate resets to a fixed 5% then the amortizing P&I on the remaining 28 year term is $2,756.38.
Good luck making that payment if you qualified on the "interest-only" term's expense.
Freddie (and Fannie) had no business getting involved in these toxic self-immolation devices in the first place as they are intended to do exactly one thing - asset-strip the borrower by forcing him or her to come back after the interest-only period and refinancing.
In an environment where home prices are not advancing, however, such refinancing is of course impossible, which leads immediately to foreclosure.
The not-amusing part of this is that it was the market's collapse that forced government supported enterprises to stop looting the American citizen.
Say thanks to the government - both past and present administrations - for conspiring with our banks to literally flense the American Citizen for the benefit of Wall Street.
Well, ok, maybe not quite that explicit, but....
Feb. 25 (Bloomberg) -- The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.
The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.
Contract rights don't matter, law doesn't matter, we'll just ignore all of that pesky stuff when we don't like it.
Should this come to pass the obvious thing for everyone in this country who is underwater to do is to default. On purpose. The resulting flood of defaults will bury the banks with the HAMP "review" requirement for literal years, allowing you to stay in a free house for that amount of time.
During that time you can save a lot of money (your entire mortgage payment) or live high on the hog on the money you would otherwise send to the bank.
Of course you should consult with counsel before doing this, but this sort of change, if Obama actually does it, should be expected to provoke exactly that response.
If I was underwater on my house and had a non-recourse loan, the day this went into effect I'd burn the payment book and send a picture of it on fire to the bank along with a photograph of my ass bearing a hand-scrawled "kiss it!"
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