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Archive for December, 2008

[Potterville Rocks!] Lessons Learned From “It’s A Wonderful Life”

December 23, 2008 | 12:09 pm | |

It’s funny how the rapidly changing economic scene changes our view on even the most basic things. A few years ago, it would be hard to imagine anyone seeing Frank Capra’s It’s a Wonderful Life as anything more than a feelgood holiday classic movie. It’s always been a favorite of mine to watch this time of year.

Here’s a recessionary take on current lending as it relates to Potter v. Bailey.

New York Times: Wonderful? Sorry, George, It’s a Pitiful, Dreadful Life

Here’s the thing about Pottersville that struck me when I was 15: It looks like much more fun than stultifying Bedford Falls — the women are hot, the music swings, and the fun times go on all night. If anything, Pottersville captures just the type of excitement George had long been seeking.

And what about that banking issue? When he returns to the “real” Bedford Falls, George is saved by his friends, who open their wallets to cover an $8,000 shortfall at his savings and loan brought about when the evil Mr. Potter snatched a deposit mislaid by George’s idiot uncle, Billy (Thomas Mitchell).

But isn’t George still liable for the missing funds, even if he has made restitution? I mean, if someone robs a bank, and then gives the money back, that person still robbed the bank, right?

I checked my theory with Frank J. Clark, the district attorney for Erie County upstate, where, as far as I can tell, the fictional Bedford Falls is set. He thought it over, and then agreed: George would still face prosecution and possible prison time.

“In terms of the theft, sure, you take the money and put it back, you still committed the larceny,” he said. “By giving the money back, you have mitigated in large measure what the sentence might be, but you are still technically guilty of the offense.”

Conde Nast Portfolio: George Bailey, Subprime Lender

We’re not saying that Bailey versus Potter is a perfect allegory for today’s credit crunch; Angelo Mozilo and his predatory buddies are no latter-day George Baileys, “starry-eyed dreamers” giving up their own riches to give the Ernie Bishops of the world a chance at the American Dream.

And the majority of the bad loans that have crippled our credit markets were not made to folks like Ernie Bishop, working tirelessly to put a roof over their families’ heads. A fair few of those loans enabled bad real estate investments by people who had no business buying or building homes as big as they did.

But consider this: Perhaps Mr. Potter wasn’t just a heartless Scrooge. Perhaps Mr. Potter, in the absence of sufficient regulatory oversight, was the one voice of sanity keeping the good people of Bedford Falls from over-leveraging themselves.

Salon: All hail Pottersville! This article is from 2001, also written during a recession.

But even a master sometimes flubs a brushstroke, and there is a glaring flaw in Capra’s great canvas.

I refer, of course, to Pottersville.

In Capra’s Tale of Two Cities, Pottersville is the Bad Place. It’s the demonic foil to Bedford Falls, the sweet, Norman Rockwell-like town in which George grows up. Named after the evil Mr. Potter, Pottersville is the setting for George’s brief, nightmarish trip through a world in which he never existed. In that alternative universe, Potter has triumphed, and we are intended to shudder in horror at the sinful city he has spawned — a kind of combo pack of Sodom, Gomorrah, Times Square in 1972, Tokyo’s hostess district, San Francisco’s Barbary Coast ca. 1884 and one of those demon-infested burgs dimly visible in the background of a Hieronymus Bosch painting.

There’s just one problem: Pottersville rocks!

Clearly, we see things the way we want to see them and right now, it’s probably not helping too much. Conservative lending practices continue to damage the very collateral they are intended to protect. Consumers won’t buy because they are worried about their jobs, which in turn causes more businesses to fail.

The solution?

Just watch the movie as intended and have a wonderful life holiday.

I’ll be back next week.


[Winter Of Our Discontent] Mortgage Meltdown In 60 Minutes, Toxic Mortgages As Bonus, Wacked-out Compensation

December 23, 2008 | 12:10 am | |

Ok, so I procrastinated placing this post up…

Watch CBS Videos Online

The program 60 minutes is on a roll after lying dormant for several years. I always view it as the bookmark to my weekend after watching my dose of NFL on sunday afternoon. It began with the Obama interview and keeps on rolling.

I am very late to post this, but the clip on the “Mortgage Meltdown” from a week ago Sunday is more of the same but, but like cod liver oil, it’s probably good to take.

And Credit Suisse has initiated bonus compensation based on their toxic mortgage portfolio. Brilliant! Did someone say “skin in the game?”

And while we are talking about mortgages, there was a terrific article last week in the New York Times about mortgage-related compensation. That hits close to home in Manhattan and it’s impact on the real estate market. So much was paid out, based on essentially nothing.

Aside: What really is a buyer’s market?

Hi Amy the attorney! Nice to meet you last week.

[Contrarian Move] Staying Put

December 22, 2008 | 10:56 pm |

I am not one for mushy demographic survey stats, but this one intrigued me because it incorporates Census findings and overlaps with housing sales. “Who Moves? Who Stays Put? Where’s Home?”

As a nation, the United States is often portrayed as restless and rootless. Census data, though, indicate that Americans are settling down. Only 13% of Americans changed residences between 2006 and 2007, the smallest share since the government began tracking this trend in the late 1940s.

A new Pew Social & Demographic Trends survey finds that most Americans have moved to a new community at least once in their lives, although a notable number—nearly four-in-ten—have never left the place in which they were born.1 Asked why they live where they do, movers most often cite the pull of economic opportunity. Stayers most often cite the tug of family and connections.

On the surface, this seems to contradict the surge in sales activity in 2004, 2005 and 2006 during the housing boom. However, NAR indicated that roughly 36% of all sales in 2004 were investor or vacation home sales. I interpret this as a surge of secondary housing, not primary, which is one of the reasons the surplus housing stock is going to be difficult to absorb over the next several years. Although I can’t find an updated version of those numbers (likely because they would not be rosy enough), I suspect they are nearly a non-factor now.

Exercise: try counting the number of times you have moved in your entire life, including higher education if applicable. I moved roughly every 4 years before I left for college, then every year of college (2x) and every 2 years until I owned my first house. After that I averaged once every 6 years. 8 states. I am sick of moving.

The findings that interested me most:

  • Most adults (57%) have not lived outside their current home state in the U.S. At the opposite end of the spectrum, 15% have lived in four or more states.
  • More than one-in-five U.S.-born adults (23%) say the place they consider home in their heart isn’t where they’re living now. And among those who have lived in two or more communities, fully 38% say they aren’t living in their “heart home” now.
  • The Midwest is the most rooted region: 46% of adult residents there say they have spent their entire life in one community. The least rooted is the West, where only 30% of adult residents have stayed in their hometown. Residents of the South (36%) and East (38%) fall in between.
  • College education is a key marker of the likelihood to move: Three-quarters of college graduates (77%) have changed communities at least once, compared with just over half (56%) of those with a high school diploma or less. College graduates also are more likely to have lived in multiple states.
  • Movers are more likely than stayers to say there is a good chance that they will move in the next five years. Not surprisingly, only a third of those who rate their current communities highly predict they’ll move within five years, compared with half of those who give their current communities a poor rating.

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SEC Inaction Defined: [S]erious [E]conomic [C]onsequences

December 18, 2008 | 1:47 pm | |

Ok, it’s the SEC football conference logo, but a more effective regulator.

Regulatory authorities can’t catch everything, yet they can anticipate mamoth problems and sometimes adapt timely to changing complex financial instruments.

The SEC has become the poster child for all that is wrong with the federal regulatory oversight. The federal government needs to be re-build trust in a financial system.

The President-Elect has made his selection for SEC:

Mary Schapiro, a veteran and diligent regulator if ever there was one, is Barack Obama’s choice to head the Securities and Exchange Commission. It is a choice that should please those who hope the S.E.C. can recover from what must be the worst year in its history.

Should she shut it down and start over?

President Bush recently explained how it works:

“I’ve abandoned free-market principles
to save the free-market system”

and of course:

“I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we’re in a crisis now. I mean, this is — we’re in a huge recession, but I don’t want to make it even worse.”

It’s time for powerful executive action by the administration to solve the crisis.

But I digress

The SEC is an agency that missed the Madloff ponzi scheme involving fifty billion dollars or more by relying on data voluntarily provided by Madloff, who may have had some inside help. Who are we kidding?

Here’s betting the SEC’s Chris Cox can’t wait turn over the keys to his office once the new administration rides into town. The embattled regulator yesterday said he was “gravely concerned” after reports surfaced that an agency official that took part in auditing Bernard Madoff’s books in 1999 and 2004 later married his niece.

The nuances are way beyond my expertise, but the common sense, for the most part, isn’t. Expect a boatload of hedge funds to sink in 2009.

Real estate, already hammered by the economic downturn and credit crunch, needs the Madloff scandal like a shoe at the head. (sorry)

Hindsight tells us it’s a lot cheaper to have modest effective regulatory oversight than complex regulations that don’t separate church/cookie and state/cookie jar so to speak.

Aside: Geeks versus Nerds.

[Treasury-Paulson-American Dream-Working In The Taxpayer’s Behalf Update] Drive Home Prices Down

December 18, 2008 | 1:15 pm | |

I took a double take today after reading HousingWire’s article about Treasury Secretary Paulson’s rejection of the rumor that the US Treasury was interested creating a 4.5% interest rate for mortgages issued by Fannie Mae to stimulate the housing market.

Paulson said:

“We didn’t float any plan,” Paulson said. “I am always looking at new ideas and I have said from day one that the key thing to get us through this period is getting housing prices down.

Mission accomplished: – housing prices are down. Perhaps that is why he is leaving in January.

Warning – excessive rhetorical questions ahead

So the US Government is working hard to push housing prices down?
…go against the “American Dream” agenda of the current and prior administrations?
Isn’t it kind of late for that?
And that type of policy will solve the credit crunch?

Ok, I’m back

The financial system enabled now-obviously illogically cheap credit which pushed housing prices higher with little regulatory oversight. We experienced a mortgage bubble – a housing boom was merely the byproduct.

To follow his logic, by going backwards using the recent history timeline, Paulson seem to view falling housing prices as a way to stabilize the financial system – take the pressure off, so to speak.

What he probably meant by his quote: I think he is simply a poor communicator and probably meant that housing price declines have a way to go and he doesn’t want to do anything to artificially “prop” them up.

I agree.

All fixes need to take the long view into consideration.

However, the economy can’t function without credit – it is not the exclusive purview of mortgages.

His poor communication skills ended up stalling transactions as people were waiting for rates to drop further.

Apparently large numbers of consumers thought precisely that during the week after the disclosure that the Treasury Department was working on plans to slash loan rates for consumers who buy houses in the coming months.

But in the meantime, the news threw a wrench into the marketplace — making some shoppers reluctant to commit to purchase without guaranteed access to 4.5 percent mortgage money. In some cases, it stalled deals that were ready to go.

Good grief – January 20th can’t get here fast enough. I’ve had it.

Aside: Shoe-ing is the new form of protest (hat tip to Curbed).


[Almost Zero] It’s Now Or Never: Fed Needs To Use The Toolbox

December 17, 2008 | 1:26 pm | |

It’s nice to see the Fed deal with the recession aggressively in their rate cut. Here’s a good summary from Bloomberg:

The Federal Reserve cut the main U.S. interest rate to as low as zero and said it will buy debt as the next step in combating the longest recession in a quarter-century and reviving credit. The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Here’s a good summary of economist commentary from WSJ/Real Time Economics blog in their post: Economists React: ‘Who Could Ask for Anything More?’

I pondered this action last week…..

We are now 0 to .25, the lowest federal funds rate ever and hopefully the beginning of noticeable stimulus to the economy. Of course, this fact is still to be determined by whether banks opt to start lending full scale soon rather than simply recapitalizing.

I am thinking we will see some thawing (on a small scale) in the first half of 2009, because lenders have to actually lend at some point (I know they are currently lending, but not enough to sustain their existence). If they don’t move forward, many will need to reinvent themselves (that is what the investment banks already did) fairly soon.

Aside: speaking of gambling, here’s the worst last name ever.

[Housing Our Shoes] Guilt Is The Gift That Keeps On Giving

December 17, 2008 | 12:30 am |

Since this is Matrix…

The issue of buyer’s remorse isn’t something I can throw a shoe at, let alone be a heel, a loafer or strain my sole to AA…or…

A shoe in the hand, beats throwing two at Bush (Ok, ok, I will stop.)

Ok, so I am feeling guilty about enjoying a 50%-75% average discount (without even trying) during my holiday shopping expedition this past weekend. Clearly retail stores do not have an extra 50%-75% margin to play with and I am not even asking for a discount. Retailers are pleading for us (consumers) to make an appearance. The stores were not crowded – amazing at this time of the year. I may even visit (shhhhh) the local mall, which I swore off (and at) while ago because I don’t expect it to be packed.

I would think that a number of big retailers already know it is over and we will learn their identities in early 2009 when the holiday receipts are totaled. Some are already dead but don’t know it yet. Is the consumer going to benefit from slash and burn retail pricing? In the short run, yes, of course. In the mid to long run, it sure feels like “no”. Ruinous competition for survival may lead to less selection and higher prices.

It seems that no matter what the bar is set at, consumers aren’t shopping in large numbers. The “black friday” uptick was due to the huge discounts offered from the start. Prices have to drop further to get more people out.

We all are observing the lack of activity in the housing sector right now (California is a notable exception with higher sales, thanks to properly priced foreclosures off 50% to 75%.)

It’s all about pricing.

Many housing markets are simply going to have to correct sharply before activity returns in a meaningful way.

Ironically, many of the actions being taken to stimulate activity, are crushing demand in the short run. When the consumer got wind of lower mortgage rates, activity in some markets ceased as consumers wanted to time their purchaser to an historic rate low.

By all accounts, sellers are about 9-12 months behind the market. Lenders are twice as disconnected. National retail banks are distracted with all the buyout activity of the past year and are not focused on consumer lending yet. It’s a lot to swallow: BofA -> Countrywide, JPM Chase -> WaMu, PNC -> National City, Wells Fargo ->Wachovia

Why can’t I simply be happy with a discount?

[Don’t Look Back In Anger?] A Rating Agency Expands Housing Metrics

December 17, 2008 | 12:00 am |

The US consumer doesn’t seem to want to fight like Oasis, although Oasis ends up making better more informed music…

Here’s a strange press release by Fitch, one of the big three rating agencies along with Moody’s and S&P.

Fitch Ratings has formalized the expanded housing-related metrics used in its public sector rating process and will continue to refine these data as market conditions warrant.

It costs $275 to get to see it.

Ok, so we are getting insight from one of the big three , although Fitch is believed to be the most conservative of the three. The ratings agencies sharply downgraded billions of highly rated mortgage-backed bonds just after the credit crunch began in July 2007. I seem to recall that their models didn’t have the right data.

Fitch believes the housing downturn will be more prolonged and acute in regions that experienced the most dramatic home price appreciation and new residential development since 2000 and in regions with high exposure to sub-prime and option ARMs mortgages.

What about credibility?

The new rules by SEC to address conflict of interest could be a start.

The three firms that dominate the $5 billion-a-year industry — Standard & Poor’s, Moody’s Investors Service and Fitch Ratings — have been widely criticized for failing to identify risks in subprime mortgage investments, whose collapse helped set off the global financial crisis.

The rating agencies had to downgrade thousands of securities backed by mortgages as home-loan delinquencies have soared and the value of those investments plummeted. The downgrades have contributed to hundreds of billions in losses and writedowns at major banks and investment firms.

The agencies are crucial financial gatekeepers, issuing ratings on the creditworthiness of public companies and securities. Their grades can be key factors in determining a company’s ability to raise or borrow money, and at what cost which securities will be purchased by banks, mutual funds, state pension funds or local governments.

These agencies need to do a lot of credibility-building going forward. I can’t help but wonder why these agencies aren’t receiving more scrutiny. How will investor confidence be restored when the ratings they relied on were inadequate?

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[New Fannie Policy] Renters Rewarded For Meeting Obligations

December 15, 2008 | 1:02 am | |

Don’t fulfill your contractual obligations and you get bailed out.

Fulfill your contractual obligations and you get evicted.

That’s the way the process has played out.

Chauntay Barnes, 30, moved into a single-family home with her two kids in November 2007 on a quiet street in Hamden, Conn. She never missed a payment on her $800 rent — never had so much as a late fee — and yet in mid-September she opened her mail to find an eviction notice.

If you are going to solve the housing crisis, you can’t treat tenants who met the their obligations as a throwaway. Fannie Mae is going to work with some tenants to prevent eviction. Still, only a fraction of the evictions will be prevented.

In a move that provides relief to thousands of renters who face eviction but draws the federal government even deeper into the housing market, the loan giant Fannie Mae said Sunday that it would sign new leases with renters living in foreclosed properties owned by the company.

In recent months, skyrocketing foreclosure rates have exposed as many as 70,000 renters to evictions, even though many never missed rent payments, according to analysts who track housing data. In many cities and states, renters can be evicted after their home goes into foreclosure, regardless of how long their lease stretches into the future.

Yes, properties may be easier to market when vacant, but the reality is the property will likely see extended marketing times with the surplus inventory levels. Why not keep income coming in to the taxpayer while the market finds it groove?

“We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”

When will the renter stop being treated like a second class citizen? Is the American dream of homeownership myopic?

Aside: The National Community Reinvestment Coalition, a consumer advocacy group has an amazing public relations sensibility. I would guess that coverage of this issue in the NYT and WSJ was a perfectly placed pitch. Kudos to them on this important issue.

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Crains New York Business Economic Spotlight Chart – December 2008

December 15, 2008 | 12:01 am | | Charts |

I have had the pleasure of providing a monthly chart for the Economic Spotlight section of Crain’s New York Business magazine since September 2003. Here is the latest, which appears in the current issue of Crain’s New York Business.

Source: Crain’s New York Business

Go here for a complete archive of my Crains’s New York Economic Spotlight charts that have been published. They are organized by year.


[Community Reinvestment Act Reconsidered] Quantity Before Quality

December 12, 2008 | 2:16 am | |

There was an interesting Op-Ed piece in the New York Times this week written by Howard Husock of the Manhattan Institute called Housing Goals We Can’t Afford.

The article points out that with all the housing and mortgage woes across the country, it’s pretty easy to point fingers. However, it gets more difficult when you point them at groups that tried to do the right thing.

The Community Reinvestment Act was passed in 1977 when bank competition was sharply limited by law and lenders had little incentive to seek out business in lower-income neighborhoods. But in 1995 the Clinton administration added tough new regulations. The federal government required banks that wanted “outstanding” ratings under the act to demonstrate, numerically, that they were lending both in poor neighborhoods and to lower-income households.

Banks were now being judged not on how their loans performed but on how many such loans they made. This undermined the regulatory emphasis on safety and soundness. A compliance officer for a New Jersey bank wrote in a letter last month to American Banker that “loans were originated simply for the purpose of earning C.R.A. recognition and the supporting C.R.A. scoring credit.” The officer added, “In effect, a lender placed C.R.A. scoring credit, and irresponsible mortgage lending, ahead of safe and sound underwriting.”

I remember at one point, quite a while ago, before digitally delivered appraisals, lenders were calling us to get the census tract number the property was located in. We soon discovered that the standardized binder that held the appraisal and other mortgage documents, required two holes punched at the top of the form. One of the holes covered the census tract number. This number was used to credit the bank with originations in lower-income neighborhoods. It struck home (no pun intended) how important it was for them to cover all the markets.

CRA is a noble endeavor. The solution to uneven lending missed a basic economic fact: banks were pressed to lend in areas with lower home ownership and therefore had to lower their underwriting standards to get enough volume to make the regulators happy.

The result? Higher default rates are experienced in these markets. Mandating quantity creates an environment of weaker quality.

If the Community Reinvestment Act must stay in force, then regulators should take loan performance, not just the number of loans made, into account. We have seen the dangers of too much money chasing risky borrowers.

An argument can be made here for encouraging renting when ownership is not affordable or simply creates too high of an investment risk. You can look around and see what happened when lending practices were not reflective of market forces. Bedlam – good intentions or not.

UPDATE: I got an generic but informative email from the Center for Responsible Lending, likely as a result of this post that contained the header: “Bashing CRA Doesn’t Help.” It provides tangible talking points that are informative. The sensitivity is very elevated over this topic and I wasn’t bashing – I just have a concern over the transfer of risk to lenders – it’s a brave new world out there and interpretation of risk has changed overnight.

Here’s their email text:

According to John Dugan, Comptroller of the Currency, “It is not the culprit.”

Federal Reserve Governor Randall Kroszner says, “It’s hard to imagine.”

They are talking about the wrong but persistent rumors that the Community Reinvestment Act, a longstanding rule to encourage banks to lend to all parts of the communities they serve, is the reason behind for the surge in reckless subprime lending.

First, CRA was passed into law in 1977, well before the development of the subprime market. The majority of lenders who originated subprime loans were finance companies, not banks, and thus not even subject to CRA requirements.

A recent study by the Federal Reserve points out that 94% of high-cost loans made during the subprime frenzy had nothing to do with Community Reinvestment Act goals.

A lump of coal to the media who perpetuate this myth. The sooner we stop finger-pointing and focus on real solutions, the better.

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[RE-Cap] Government Sucks, Mortgage-Mod, Car Commissar, Stop Enabling, Conceptual Error

December 12, 2008 | 1:41 am | |

I’ve been recovering from a wicked cold, swamped at work, etc. and haven’t posted since the weekend, which simply isn’t right. Here’s a collection of links to blogs I follow. A large scale hat tip, so to speak. I also throw in news items and other tidbits that make me want to curl my cap.

This week’s theme: Getting Screwed

The Government Sucks; Or, Stimulus Is Just Another Word for Pork-Barrel Spending [The Cody Word]

Mortgage-Mod Conundrum [DataPoints]

An Etymological Suggestion [Greg Mankiw]

McMansion Watch: Near Me McMansion [Bubble Meter]

Report: GSEs May Waive Appraisals for Refis [Calculated Risk]

2008 Seven Deadly Sins awards [Charleston Real Estate]

Jamie Dimon: Banks Must Stop Enabling Junkie Whores, Prepare For Tough ’09 [Dealbreaker]

How Big Is Bailout? Peel This Onion to Find Out [The Numbers Guy – WSJ]

Rep. Barney Frank: Wall Street Journal Editorial Board Does It Again [Huffington Post]

More or less; simple conceptual error that contributed to the credit crunch [Freakonomics]