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Subprime mortgage crisis

The headlines announcing that Bank of America has stopped processing foreclosures in order to assess their internal controls are difficult to process.  On one hand, this sound like a good thing, because if the pace of foreclosures slows it will diminish the number of families under stress and lighten the overhang of foreclosed properties on the housing market.  On the other hand, you don’t get foreclosed on until you’ve stopped paying your mortgage, right?  So what’s the big deal.

To sort it out, I recommend you follow the five-part series that kicked off today at Barry Ritholtz’ The Big Picture.  The post is authored by Mike Konczal, a fellow at The Roosevelt Institute.

The big question at play isn’t just whether the mortgage processors have been playing fair with homeowners.  It’s whether the financial institutions actually know where the original mortgage documentation is.   Can they produce the piece of paper they need to have to demonstrate the lien on the property?

The issue is captured neatly in a two-part graphic, reproduced below.

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As the post points out, the issue of whether or not the mortgages can be found has significant implications for the financial players.

So keep these frameworks in mind when you see the debate unfold in the next weeks. It is a problem of systemic risk, and it is a problem for the currently cratered securitization market. It will need to be addressed, the sooner the better.  But how?

What should we all make of this?  Consider it a last, bad joke on the part of the financial services industry.  This new “foreclosure crisis” has nothing to do with home values or the ability of home owners to make payments of mortgages.  But, it has a lot of potential to slow down the housing market, at a point that the market doesn’t need any more headwinds.

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The January home sales report from NAR felt to some people like a letdown — the annual rate of home sales dipped from 5.4 million in December to 5.04 million in January. Some pundits, citing the wildly wrong consensus projections from economists, characterized the results as a bad turn for the housing market.

Step back and you’ll see some encouraging signs of a normalization of the existing home market.

The chart below shows the percentage change in January home sales versus prior year for the last 10 years. (This figures are not seasonally adjusted, reflecting the actual number of transactions in each period.) Since 2006, January sales had been down from the year before. January 2008 was the deep point of the housing slump, with the market coming to a screeching halt that winter. Last January improved somewhat, but still declined from a much lower base. This January, home sales were up 7% over last year. That is forward momentum.

yoy sales jan.png

2009 was a year of two halfs: Home sales were down versus the prior year each of the first five months, and then posted increases in each of the following seven months.

The huge year-over-year increases of October and November were anomalies, driven by buyers hurrying to take advantage of a tax-credit that they believed was expiring.

yoy ch home sales.png

The composition of the housing market was highly unnatural in 2009. First-time home buyers made up close to 40% of the market; distressed sales made up close to 30% of the market. The jumbo mortgage market was essentially closed down for the year, putting intense pressure on the high-end.

And, many of the macro dynamics that contributed to the unnatural composition of the market continue to weight it down today. The job market is fragile and a high number of bank-controlled properties comprises a shadow inventory that puts pressure on home prices.

Despite those conditions, the market appears to be in the midst of a recovery.

The recovery is choppy, but it is being driven by a reasonable impetus. People are looking to buy homes, and sellers are reading the market more rationally, pricing homes in order to transact. The sheer human momentum of housing — families forming, expanding, contracting, moving — is creating the underlying energy for home sales. This activity is what has always been the foundation of a rational housing market.

This recovery in the home market isn’t going to lead the economy out of its slump, as in other recessions. To generate strong economic activity, we need an upswing in home building. For the foreseeable future, there is a surplus of existing housing stock — including bank-controlled properties that are held off market — and new construction isn’t needed to satisfy excess demand.

But a recovery in the existing home market is critical to helping to bolster the feeling of security, opportunity and flexibility among the American consumer. And that recovery is clearly underway.

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The short-term impact of negative equity homeownership on the housing market may not be as bad as people fear

February 24, 2010

This week’s report that more than 11.3 million homeowners owed more on their house than their house was worth has prompted a fair amount of discussion among the people I talk with.
The big question is what the data point means.
In practical terms, almost 1/3 of homeowners don’t have an ownership interest in their home.  They [...]

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October Home Sales Snapshot

November 25, 2009

It’s the time of month again to take a snapshot the housing market. We’ve got the new data on existing home sales, new home sales and price trends from all of the authorities, with accompanying commentaries.
The month showed strong performance in unit sales and a continued moderating of prices.
The seasonally-adjusted pace of existing home [...]

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A look at the leverage cycle

November 9, 2009

If you give people money to buy things, they’ll buy more than if they are using their own money. The less skin in the game, the more risk they will take. That’s the essence of what Yale economist John Geanakoplos calls “leverage cycle” theory. An article in the Wall Street Journal last [...]

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Home sales are within a normal band, but the market pressures are not

October 7, 2009

Earlier this year, I spent some time sifting through historical household and housing data to develop a perspective on what “normal” demand for homes was. One conclusion of that analysis, concluded in May, was there was roughly 18 months of excess housing inventory in the market, and as that inventory was worked through, home [...]

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