You read the title correctly, the USDA offers mortgages, not only that, but they offer zero down government guaranteed mortgages. Does this sound familiar at all? Is there any wonder how the housing market has not totally collapsed with the tax credit and this USDA program, which is heating up dramatically. Essentially, both of these programs are perpetuating the low end of the housing market and are more than likely putting people into homes that cannot afford them, but only time will tell.
Essentially, the USDA home loan plan has been around for a long time and was designed to boost housing in rural areas. However, after the explosion in housing over the last few years are there really any rural areas left any longer? The program was founded in 1949 and was used very sparingly until the last few years. In fact in 2005 only about 30,000 homes used these loans, but in 2008 this increased to about 65,000 and this year about 120,000 homes used the USDA home loan program. The amount of money allocated to the program has ballooned from about $3B a few years ago to $10B in 2009.
Clearly this program has attracted people to it because, well, you don’t need any money down. All of these federal programs, including the USDA program are buoying the lending and homebuilding industry. For example, last quarter 64% of sales at D.R. Horton were a result of these government programs, I guess this supports the theory of a housing recovery.
Even though these programs are no money down or they allow you to use the tax credit towards your down payment, meaning, essentially, no money down they claim that lending standards are tight, but who really believes them with the mandates we see coming from the Whitehouse. Not to mention that we see the trouble coming from the FHA and they require a whopping 3% down payment to qualify. We are doing everything within our power to re-inflate a bubble that proved devastating to our banking system and economy. The worst part about it is that if it implodes again, which it will at this rate, there will not be the political will or money to bail out the banks nor should the banks be bailed out again.
Diana Olick did another piece about foreclosures tonight and I find the data very interesting. I would like to reiterate my respect for Diana and her work Frankly, I believe she is one of the best CNBC has to offer and does not attempt to carry the water for anyone. The numbers just speak volumes to the problem at hand and the data is provided by Hope Now Alliance.
Apparently people were pretty tough on Diana claiming she was lying or shilling for the industry, which I find had to believe, but those were the claims being hurled at her. She was simply reporting on the information she had, just as most bloggers or people do when they repeat something, even though it was only from limited sources. I tend to think that she is probably getting only the best part of the data points from the banks, but no one really knows because there is no one source for data. Each state has different regulations and laws when it comes to foreclosures not to mention that the foreclosures are so high courts are simply backlogged and banks may not even know a home is foreclosed on.
Regardless, the new data she brought from the Hope Now Alliance will shed some pretty bright light on the subject, both good and bad. The good news is that there are more workouts, which means that the bank and homeowner are working out the problem, but workouts or modification plans rarely work in the long-term and people lose their homes anyhow. However, what really caught my eye was the prime and sub-prime foreclosure starts, this is a lot of data so bear with me.
From 3Q07 to July of 2009 there are a total of 5.03 million foreclosure starts, which means they bank begins proceedings, which is just astronomical for a 2 year period. Out of those 5 million starts the majority of them are prime loans, at 2.7 million, which are supposed to be the safe loans, and sub-prime came in at 2.2 million. Clearly this is not merely a sub-prime problem and goes into conforming 20% down conforming loans, which means banks have many more loans that they will have to take losses on in the future.
In July alone there were 283K foreclosure starts and when compared to a total of 744K for all of 2Q09 that is a significant number. Of those starts in July 211K were prime mortgages and only 71K were sub-prime. The problem is simply getting worse, not better.
Now, the foreclosure starts are the beginning of the proceedings which means nothing happens to the property until it is sorted out through the foreclosure process. The other side of that coin is foreclosure sales which means the property has been ‘sold’ back to the bank or the bank retook possession of the property. From 3Q07 to July of 2009 there were a total of 1.7 million foreclosure sales, bank repossessions, which has been widely reported, now are you seeing the difference between the 5 million foreclosure starts and 1.7 million repossessions? It’s pretty significant and shows that there will indeed be a massive second wave of foreclosures in the near future.
Not to mention that in 2Q09 there were a total of 235K repossessions and in July the total number was 89K of repossessions which is on track for a substantial increase in 3Q09 over 2Q09. Out of those repossessions we see that prime mortgages are still leading sub-prime in both 2Q09, with 153K prime repossessed and only 82K sub-prime repossessed, and in July we see 59K prime and 29 sub-prime repossessed. Clearly the supply of foreclosures is building and will hit the market in the future, whenever that might be, and sub-prime is not the problem.
One could argue that there were more prime loans made which would explain the discrepancy, but that is not correct. Simply put, there are just so few sub-prime properties to foreclose on now then 2 years ago which explains that problem. However, there were more problems with prime mortgages then sub-prime mortgages with the exception of a few quarters. At the end of the day it really doesn’t matter, but based on these numbers sub-prime was a smaller part of the problem than we may have thought previously. No matter how we cut the data the one thing we know for sure is that foreclosures are here to stay for the foreseeable future and that means no recovery in real estate for now.
Apparently I was wrong about the impact of foreclosures when I said that banks were holding onto the properties and not placing them on the market. It came to light via Diana Olick, who I respect at CNBC, in a report earlier today. It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough.
According to the report banks are waiting as long as possible to try keeping people in their homes by using the Obama Making Home Affordable plan. Unfortunately, people cannot simply refinance when you are unemployed or underemployed which is the primary problem now. Bank of America told Diana that since most of the properties are owned by third party investors the bank has an obligation to place properties on the market as soon as possible.
However, the sheer numbers of foreclosures are the problem and slowing the process down of getting the inventory on the market. What the report did not comment on are the homes that the banks still hold the mortgages on. For example my bank actually holds my mortgage, but if I was foreclosed on the bank might not place my home on the market and hold it until the market improved. Clearly, most banks do not hold these mortgages now as they were securitized, but it raises the question that if banks actually held the mortgages would we have these problems to begin with. Furthermore, if the banks held these mortgages would the loans have been made and if they were made would the bank work harder to keep people in their homes.
I think the answer is clear, if banks held these mortgages we would have less pain because foolish loans would not have been made. Its funny how banks become more conservative with their own money than they are when they package the mortgages up and sell them off to yield hungry investors. Unfortunately we will never have a true answer to that question as banks, mostly, sold these mortgages off and continue to do so.
Here is what LPS Applied Analytics had to say:
He says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.
Then he offered the following very detailed chart of what’s called “roll rates” or the rate at which troubled loans are moving through the system. Note the “average” is a four year average, and two of those years were the worst ever in the mortgage market, so as Jadlos notes: Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.
Regardless, the foreclosed homes on the market are approximately 1.5 million, which sounds like a lot, and it is. However, the numbers of problem homes that are ‘seriously delinquent’ total an astounding 3.5 million. Unfortunately unemployment is still on the rise and that number should easily increase in the near future which is a major problem. It also indicates that the real estate market is still not even remotely healthy and there will be more pain on the way. Once that tax credit is gone I think we will see just how weak the real estate market is.
Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market and there are lots of institutions that hold these bonds. It is said that the majority of CRE outstanding will not be able to refinance because values have dropped so badly, 36% or so year-over-year. Ordinarily the rollover of commercial property into new debt or loans was not a problem, but when the existing loan value is so much higher than the value of the property no one will refinance it. Actually, I am betting the Fed will figure some way out to refinance these properties, why not at this point it’s only our money they are playing with.
The bottom line is that there are still major problems and while some data looks positive the remaining data is negative. The negative data pretty much trumps the positive data and points to lower prices. I know we will get a much better view of this when the incentives go away in November. However, I am willing to bet there will be another program rolled out in either early winter or spring to boost sales again. I am wondering how many people are suffering from buyer’s remorse about their new home purchase especially when they get the property tax bill.
All of this information about a housing recovery is just plain false. The biggest perpetrator of the housing recovery myth is CNBC and they actually ran this story today showing it is the lower priced homes moving, all other homes are just not moving, period.
There is simply no recovery in housing at this time and if this chart tells us anything is that the market will, at best, be flat for some time to come. However, I am inclined, as indicated in numerous other pieces I have written, that we still have a long way to go on the downside before things begin to level out. This means that banks, 81 YTD, are going to continue closing because they are losing money on these mortgages as people just walk away from homes that they cannot sell and are underwater in.
A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices. Foreclosures are only increasing, as we saw from yesterday’s Mortgage Bankers Association report, and that will mean more inventory.
I think that is proof enough that things are just not that good. I may have missed out on a couple of percentage points over the past week, but the market is going to come crashing down in the near future. Why, because all of the data supporting a bull run is over hyped and inaccurate at best. Housing is one of the data points supporting the bull’s case, but look at the data point and tell me that there is a recovery taking place.
Take a look:
U.S. Existing Home Sales Yr/Yr
$0 – $100,000
Up 38.8%
100,000 – $250,000
Up 8.7%
$250,000 – $500,000
Down 6.2%
$500,000 – $750,000
Down 8.9%
$750,000 – $1,000,000
Down 10.6%
$1,000,000 – $2,000,000
Down 23.3%
$2,000,000 +
Down 32.4%
Source: National Association of Realtors
As I have said numerous times before, burying and hiding problems through bogus accounting will only make the problem worse long-term. Enron tried it, MCI tried it, now we have the banks trying it through lax mark-to-market regulations. The FASB enacted the mark-to-market because it made sense, if you had to sell a security today you cannot just wait for a nonexistent price to come along, which is what the new regulations let banks do for accounting purposes.
One last point about this, ever since mark-to-market went away bank earnings have all been good. Do you see the problem? Frankly, real estate is still their biggest problem and the above information supports that theory.
This has been our main concern for some time, in the residential market, as Prime and Jumbo loans are getting ready to reset in the coming years. This, of course, is if they have not reset already because once the LTV, loan-to-value, reaches a certain point the interest rate automatically can reset. I am going off of memory, but I believe the LTV is about 120% or so that causes these loans to reset. We are there and then some.
Here is a disturbing figure, 1 in 8 homeowners are either delinquent or entering the foreclosure process in America, according to the Mortgage Bankers Association, MBA for short. That is pretty scary to say the least and with unemployment initial claims increasing over the last few weeks this number may increase. The good news is that sub-prime loans are being foreclosed on at a lesser rate than before, eventually everyone will be out of their homes and this number will go to zero soon.
However, we are talking about prime loans, these are fixed rate conforming loans with 20% down and good credit. This, my friends, is a major problem and one that we knew was coming for some time now. What this means is much more bad news in the coming months as many of these loans are securitized. However, the intervention of the government will more than likely lessen the impact of the growing problem, but it will drive the deficit higher, so much for Obama cutting his $1.8 trillion dollar deficit last night.
Here is what Jay Brinkmann, MBA’s Chief Economist, has to say:
“The rise in prime fixed-rate foreclosures can largely be attributed to unemployment” he said.
The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from 9.12 percent the first quarter of 2009, and up 283 basis points from 6.41 percent one year ago, the MBA said in its National Delinquency Survey.
The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.
So, nothing to see here, just move along as I am sure the media will spin this, somehow. I suspect they will point out that the sub-prime loans are not defaulting as bad anymore, they can’t go beyond zero, and completely ignore the prime mortgage problem. However, add this to commercial real estate, which is down 36% year-over-year a much further decline than residential real estate collapse, then the problems just keeps growing. Again, unemployment is the problem and until that turns we will continue to see further deterioration of the credit markets.
To illustrate this point, corporate defaults are through the roof this year, which is why I sold my high yield funds last week. According to the Financial Times corporate bond defaults reached 201 this year with $453B of debt. Compare that to last year where we had 126 defaults with a total of $433B and I think you can see the problem. The current default rate on high yield bonds is 8.58% this year, so far, and is expected to climb to 14.53% in 2010 taking out the prior record of 12.54% defaults in 1991 when junk bonds blew up big time.
As you can see, everything is fine, no problems at all. The markets are sure to continue its steepest market rally ever rising 49% since march, outpacing the 1929-1933 44% rally. I guess the new normal of a high unemployment, revenue-less, earnings-less, and growth-less recovery means that the markets can have the greatest percentage gain ever, in only 5 months, and should continue forever. I am kidding of course, this thing looks ugly and makes me question what is really going on.
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