By Mike Whitney
“The national housing market took a hit in the latter half of 2011, falling to new lows not seen since the housing crisis began six years ago, according to data out Tuesday by S&P/Case-Shiller Home Price Indices……The index is down 33.6 percent from its peak in mid-2006.” – Washington Post
The reason that housing prices have dipped only 33.6 percent in the United States instead of 60 percent as they have in Ireland, is because the big banks have been keeping inventory off the market. If the millions of homes–that are presently headed for foreclosure–were suddenly dumped onto the market, prices would plunge and the biggest banks in the country would be declared insolvent. That’s why the banks have slowed the flow of foreclosures. According to Amherst Securities Group’s Laurie Goodman, “….2.8 million borrowers haven’t made a payment in over a year. Add that to the over 450,000 real estate owned (REO) units and you have approximately 3.2 million that are in the shadows. We are liquidating about 90,000 homes a month. That’s about 36 months of overhang; a really shocking number.” (See the whole interview here.)
Indeed, it is shocking, but what’s more shocking is that the banks are allowed to game the system this way and get away with it. New home buyers are paying hundreds of thousands of dollars more than they would be if the banks were not manipulating inventory, so there are real victims in this scam. . And is it really conceivable that Fed doesn’t know that nearly 3 million people are living in their homes for free? Of course, they know; they’re in on it too. The bankers even have a name for this arrangement; they call it “squatters rent” and they estimate it costs them an extra $60 billion per year. They would rather pay that hefty sum then foreclose quickly and have to write down the losses which would leave them broke.
Some readers will probably dispute the claim that housing prices could dip 60 percent in the US as they have in Ireland. These skeptics may want to read a new study titled “Housing, Monetary Policy, and the Recovery” released by the chief economists from the country’s two largest banks (Find it here.)
On page 29 of the report, the authors conclude that it would take “a 57% fall in housing prices would in our accounting sense eliminate housing overhang”. Their second projection estimates that it would take “a 68%” drop. So, if you bought a house in 2005
for $400,000. That house would currently be worth $128,000, a big enough loss to poke holes in anyone’s retirement plans.
So, what should the government do? Should they force the banks to release the backlog homes so prices can adjust quickly and new buyers won’t feel like they’re being gouged? But–if they do–what happens to all the people who bought homes in the last few years who suddenly discover they’re underwater? Won’t that create a whole new wave of foreclosures?
The best approach would be to reduce the principle on the mortgages of the people who are presently in some stage of foreclosure and make the banks pay for the losses. That would slow the stream of foreclosures to a trickle, stabilize the housing market, and force many of the banks into Chapter 11, which should be real goal of any mortgage modification program. The banks were the perpetrators of this gigantic mortgage laundering scam and continue to pose a threat to the financial security of every American. Dismatling the TBTF banks should be the nation’s highest priority.
The Obama administration has chosen an alternate course in its endless effort to appease the bank lobby. They’ve launched a Foreclosure-to-Rental program that’s aimed at severely reducing the backlog of unwanted homes on the banks books via bulk sales to private investors. The program–which is largely shrouded in secrecy– is being hyped as a common sense way to stabilize the housing market and to ‘lower monthly payments so responsible borrowers can stay in their homes.’ In truth, Obama is just helping the banks slash their mountainous inventory so they can avoid bankruptcy.
Here’s part of the announcement from the FHA:
“The Federal Housing Finance Agency (FHFA) today announced the first pilot transaction under the Real Estate-Owned (REO) Initiative, targeted to hardest-hit metropolitan areas — Atlanta, Chicago, Las Vegas, Los Angeles, Phoenix and parts of Florida.
With this next step, prequalified investors will be able to submit applications to demonstrate their financial capacity, experience and specific plans for purchasing pools of Fannie Mae foreclosed properties with the requirement to rent the purchased properties for a specified number of years.” (FHA)
So far, 2,500 Fannie Mae-owned properties have been sold to private investors. But–here’s the problem–”85% of the units are already being rented, and almost 60% of the units are on term leases.” (Calculated Risk) So, everything Obama said about the program was a lie. This isn’t a foreclosure-to-rental program; it’s a property-dump proffered to financial insiders who are getting cheap government financing to fatten the bottom line.
“The original idea behind the REO-to-rental program was to sell vacant REO to investors and only in certain areas. These investors would agree to rent the properties for a certain period, and that would reduce the number of vacant units on the market…. This offer doesn’t seem to match that goal,” says Calculated Risk.
Fancy that; another boondoggle-ripoff compliments of President Hopium. Who could have known?
Here’s a clip from the FHA’s Meg Burns:
“The pilot transaction very much gets at the issue at hand-helping to stabilize communities by keeping people in their homes where possible…This helps stabilize neighborhoods because many of the properties will continue as rentals instead of moving quickly to the for-sale market. In addition, it is easiest to price properties with renters already in place, which should help to attract investor interest. “ (Washington Post)
Sorry, Meg, don’t piss on my leg and tell me it’s raining. This is the old switcheroo pure and simple. The fact that the properties already have renters means that the investors will be raking in sizable returns from Day 1. That’s not the way the program was sold to the public. The American people have been hoodwinked again.
Here’s more from the FHA’s February 27 announcement:
“In order to ensure compliance with applicable securities laws and regulations, details of the sales announcement will be sent to prequalified investors per FHFA’s Feb. 1 announcement. Subsequently, investors who post a security deposit and sign a confidentiality agreement will gain access to detailed information about the properties. At that stage, interested investors must submit a comprehensive application, which will be reviewed by an outside firm. Only investors who are qualified through this rigorous process will be eligible to bid.”
Okay. So, John Q. Public–the little investor–is completely excluded from this massive transfer of real wealth to private equity, hedge funds and other deep-pocket Obama campaign contributors. That’s to be expected. But what’s the so called “confidentiality agreement” all about. Does Obama really think he can shower his dodgy friends with hundreds of billions of dollars in dirt-cheap property and keep the whole matter under wraps?
Dream on, Barry. And what about the financing? Are these cutthroat property scamsters digging into their own pile of cash to pay for these foreclosures or is Uncle Sugar providing 60, 70, 80, or 90 percent financing at rock-bottom rates of .01 percent? That’s what we want to know.
This is not how honest people deal with a crisis if they genuinely have the public’s interest at heart. This is just more-of-the-same fleece-job larceny that was perfected by the Bush claque. Wasn’t Obama going to change all that?
We are only half way through the foreclosure crisis. The experts predict there will be another 7 to 11 million mortgage defaults in the next few years. That means we need a game plan that will keep as many people in their homes as possible while reducing the vast overhang of supply that has left the market in a shambles. It’s a tough job, but it can be done provided the interests of the victims are placed above those of the banks. Fat chance of that, eh?