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Reserve Judgement: The Econometric Disconnect And The Housing Market Reality

September 12, 2007 | 11:01 am | |

The release of the Beige Book (last week) is always a fun read (yes, I am admittedly, pretty boring) because it allows the Fed to present a regular anecdotal description of the current economy. I’ve provided feedback to the Fed for this publication for a number of years and enjoy the national perspective submitted by each of the member banks. However, one thing I worry about is their ability to forecast with the rapid changes of late in the economy. Bernanke seems to be resigned to relying on the numbers as they come in, which of course, is behind the curve. Its like relying on the upwardly revised 2Q GDP numbers made irrelevant with the credit meltdown under our belt in 3Q.

The financial markets are probably expecting a half point drop at the next FOMC meeting on September 18th, so the impact of a generic 25 basis point adjustment is probably already built in. The Fed seems to be saying they will take action but probably not as aggressive as 50 basis points (1/2 percent) A 25 basis point move probably means no real impact on investor confidence in mortgage paper quality, no impact on rising non-conforming mortgage rates, no change to the housing market. With the full force of the housing downturn not to impact the economy until 2008 when resets peak, anything short of 50 basis points will be invisible.

If we get what we (I) wish for, a 50 basis point drop might actually make everyone even more nervous. In other words, the markets may think the Fed must know something we don’t because thats a bigger drop than we have seen in a long time. Crazy, isn’t it?

Recent distress in financial markets has “deepened” the housing slump, but the overall economy has seen little impact so far, the Federal Reserve said Wednesday in its beige book report. That assessment suggests that while a rate cut in two weeks may still be likely, officials may not see the same need for aggressive easing that financial markets expect.

Whether its a 1/4 point or 1/2 point drop, its not going to make any immediate difference to the housing market. Its a baby step towards investors getting back in the game, even though it doesn’t resolve the main issue: mortgage portfolios are laced with crap (sub-prime tranches) that no one seems to have a handle on.

As far as the perception of a Fed rate cut being a Wall Street bailout, I disagree. Its a moot point. I am more worried about the overall economy. The impact of housing as a drag on the economy hasn’t hit full force yet. I suspect not until mid-2008 or 2009. Mortgage resets are reported to be peaking in 2008 and the impact of a significantly lower number of sales transactions is just now beginning to hammer markets that are already weak.

The housing market is anything but beige.


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Staking Revisionist Mortgage Market History Yields Different Tomatoes

August 21, 2007 | 7:49 am | |

My son planted about 30 tomato plants in our garden this year so needless to say, I am now full of tomatoes.

One of the things that have come out of all the upheaval in the mortgage markets has been the frequency and clarity of explanations as to what happened and how the markets got into this predicament. Hindsight is 20/20 so they say. It was not long ago that people were scratching their heads about how prices can rise at an expotentially higher rate than income for a seemingly indefinite period of time.

It was all about the Benjamins mortgages and how easily the payments could be managed. Downpayment became monthly payment in the dialog between buyers and lenders. Lenders reduced underwriting requirements to bare bones, appraisers were encouraged to become form fillers. The lending community came up with mortgage products to stimulate transactions and Wall Street responded, creating a labrynth of tranches designed to move risk around to the right places…except investors ulitmately figured out that few on Wall Street really understood the risk. And then the world changed.

As Jim Grant wrote in Time Magazine (special thanks to “the man who wears shirts that look like graph paper.”):

That is the way great ideas end, not with a bang, not with a whimper, but through reductio ad absurdum. You know investment bankers are not satisfied until every good idea is driven into the ground like a tomato stake.

Here’s a few recent summaries of what happened over this period of mortgage excess that I found particularly interesting.

How Missed Signs Contributed to a Mortgage Meltdown [New York Times] with a very cool chart. Things were moving so quickly but we should have seen it coming.

As far back as 2001, advocates for low-income homeowners had argued that mortgage providers were making loans to borrowers without regard to their ability to repay. Many could not even scrape together the money for a down payment and were being approved with little or no documentation of their income or assets.

In December, the first subprime lenders started failing as more borrowers began falling behind on payments, often shortly after they received the loans.

Reaping What You Sow: Hedge Fund and Housing Bubble Edition [Huffington Post]. This article suggests that a Fed rate cut represents help for the wealthy and not the masses.

Last week we got to watch as the markets went wild with the realization they were over leveraged on bad debt, until Bernanke rode in with a huge bailout, answering a question (and settling some bets) on whether he was an inflation fighter, or an inflationist (he’s an inflationist, and he has now proved it.)

Bloody and Bloodier – The subprime-lending crisis is worse than you think, and could crush financial and real-estate markets for years. [New York Magazine]. Besides sharing dentists, I can empathize with Jim Cramer’s pain as of late. Barron’s Magazine dedicated its cover story to analyzing how wrong his advice has been in his CNBC show Mad Money in the article: Shorting Cramer.

You’re losing money right now. This very minute. You’re losing money if you own an apartment. You’re losing money if you own a country home. You’re losing money if you own a stock or bond mutual fund. You’re losing money if you have a pension plan. You’re probably losing money here or there, you’re probably losing money everywhere (except maybe from your savings account and wallet). But this is no Dr. Seuss story. It’s more of a John Steinbeck tale, and we are the victims, a new generation of Tom Joads, and it’s the damn bankermen who broke us. No, there won’t be a police officer to investigate, and the government, at least this federal government, won’t save us.

Panic on Wall Street [Salon]. It starts with an obligatory blame Greenspan bent but goes deeper.

There is a standard explanation included as a paragraph in almost every story attempting to explain the current turmoil. It goes like this: Anxious to goose the U.S. economy out of its dot-com-bust doldrums, Alan Greenspan and the Federal Reserve Bank lowered interest rates to rock bottom in 2001. The resulting flood of cheap money encouraged an orgy of borrowing at every level of the U.S. and world economies. Whether you wanted to buy a house or a multibillion-dollar conglomerate, lenders were your best friends, falling over themselves to offer you whatever amount of capital you desired — and charging low, low rates of interest. Cheap money led to a growing complacency about risk. If you ran into trouble, you could just refinance your house, or borrow a few billion more dollars today to pay off the billions you might owe tomorrow.

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Booked: Diary of a Real Estate Rookie

June 9, 2007 | 10:18 pm | | Radio |

Alison Rogers, a talented writer and editor (who on occasion, points out my gramatical shortcomings with a distinct sense of glee, yet supports me when blog commenters stray from topic), launched the New York Post’s successful Real Estate Section on September 6, 2003.

Why she gave up the slow pace, low stress, high pay and luxurious office accommodations in 2005 that the New York Post is known for, only she will ever know (hint: sarcasm). But she did it and documented the drama of her new adventures along the way. You may have read her column on Inman over the past year.

Ali provided me with the announcement, which I’ll simply post here since I am not the talented writer that she is.

My new book launches today. It is the “Read” pick in Newsweek this week. Please buy it.

In order to explain to you why to buy it, I have compiled the following list of Frequently Asked Questions:

Q: What’s your book about?
A: It’s about my adventures in my first year of real estate, which was also my first year of marriage. It’s called “Diary of a Real Estate Rookie.” It’s also been called funny.

Q: Called “funny” — by you?
A: Actually, it got a starred review from Publishers’ Weekly, which is kind of a big deal. They called my dedication to Rupert Murdoch “cheeky.” Also, there’s a movie star, a heroin scene, and some condos.

Q: That sounds intriguing. What do you want me to do?
A: Go to here to buy the book. Also, please forward this e-mail to others. Finally, please use the following phrase as often as possible: “Hey, have you read ‘Diary of a Real Estate Rookie’ by Alison Rogers, available now at your finer local bookstores or on amazon.com? It’s fast-paced and funny and has lots of real estate tips!”

Q: Alrighty then. Where am I supposed to do that?
A: Great places to use this phrase are: in Graydon Carter’s office; while riding the Lexington Avenue Line; on urbanbaby.com; in Pop Culture Love Letters; within earshot of any Hollywood producer; on National Public Radio; near anyone who has ever met Oprah or Stephen Colbert . . .

Q: So this is the launch, did you forget to invite me to a party, you b*!ch?
A: No, in keeping with the speed of publication (Rookie was commissioned just last summer) there hasn’t been time to set up a launch party. Keep your eyes open for a “Thank You” event later in the summer . . .and thank you!

Q: I’d go to a party. What else can I do? A: Blog about the book (much gratitude to the editor of Fortune for kicking this off). Write about the book in a local or national publication (thank you to the editor of Money magazine for starting this one, please check out the August issue.) Leave the book on your desk or carry it on the subway (face out please). Come to the signing at McNally Robinson on July 23rd.

Q: Do I get a discount on a co-op if I do this?
A: We’ll talk.


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Two Hands In The Cookie Jar: Banks Are Getting Closer To Entry Into The Real Estate Business

February 28, 2006 | 10:45 am | |

I wonder if the NAR, in some respects is regretting the housing boom. With all the income the industry has generated, it has also generated attention that probably isn’t beneficial to the trade group in the long run. Commissions, multiple listing service data, statistical methodology, believability as a resource, etc.

In the article NAR: Pittsburgh Condo Deal Puts Banks into Residential Real Estate [RISMedia] the National Association of Realtors contends that banks are getting into real estate despite regulations that prohibit this activity.

In a letter delivered last week to the chief counsel of the Office of the Comptroller of the Currency, the president of the National Association of Realtors responded to the recent defense by the OCC of its approvals permitting national banks to engage in new real estate and commercial activities.

They are also fighting Wal-Mart Bank’s application Because It Mixes Banking and Commerce [NAR]. [They] will actively oppose the application for federal deposit insurance by Wal-Mart Bank, a proposed Industrial Loan Company (ILC) headquartered in Salt Lake City, and requested the opportunity to testify at upcoming hearings. The Federal Deposit Insurance Corp. has scheduled public hearings in April in the Washington, D.C., area, and the Kansas City, Mo., metro area on Wal-Mart Bank’s application.

Since 2000, Realtors have opposed a pending regulation by the Federal Reserve and Treasury that would allow national banks to broker real estate and perform property management. Since 2002, Congress has blocked the regulation. It seems to be a matter of time before banks will have this option since every year this debate comes before Congress.

The NAR contends that by banks entering the real estate business, the safety and soundness of the banking system is at risk since it is a speculative investment. The idea posed is the the concentration of assets would be higher making the failure of one bank more critical to the financial system. NAR contends that the top 5 banks hold 45% of industry assets [Mortgage News Daily] and has a series of arguements why banks are a higher risk.

_Number of firms:_
Real estate – 98,000 to over 200,000 (depending on who is counting)
Banks – 8,000 to 10,000.

_Barriers to Entry:_
Real estate – usually less than $1,000 and a few weeks of studying time to obtain a license and enter the field;
Banking – large capital requirement.

_Taxpayer Risk and Historic Experience of Government Bailout:_
Real estate – none;
Banking – yes (historic evidence, S&L failures and RTC bailout.)

_Influence of Foreign Governments:_
Real estate – no;
Banking – large multinational corporations are subject to foreign government regulation.

_Consumer Data on Buying Habits and Possibility of Price Discrimination:_
Real estate – none;
Banking, -vast, often based on data mining of credit card purchase information.

_Cooperation with Competitors in the Sale of Products:_
Real Estate – yes, through MLS;
Banking – no.

_Degree of Regulation:_
Real Estate – minimal;
Banking – heavy.

_Social Promotion of Entrepreneurship, Women and Minorities, and Small Business:_
Real Estate – yes in every category;
Banking – yes in every category bus assessment is limited to owners of community banks.

Here’s a blog post on this issue from a banking perspective: ALERT: NAR’s New Threat from Mega-Banks – There they go again? There who goes again? [Inman] All I read into this most recent industry warning by the NAR is the voice of a threatened professional association that insists upon denying the consumer the choice of any other ownership structure for real estate brokerage other than the status quo – Realtor-centric. Drill down and you will find a true fear that if banks were to be in the real estate brokerage business about the last professional association they would insist their operators belong to would be the NAR.

This is all very interesting and well-laid out on both sides except:

==> ==> ==> ==> ==> ==> ==> ==> ==> ==> ==> ==>
NAR says that banks are not a good idea because they place a higher risk on the banking system by being more speculative.

< == <== <== <== <== <== <== <== <== <== <== <==
Banks (more than just the included post on Inman) say that NAR has a monopoly on home sales and keeping banks out of the process only extends broker control further.

Confused? Be glad you are not a regulator. Its tough to see through the spin. At the end of all this, I think the banking lobby will win out over the broker lobby. They seem to have the OCC and momentum on their side.


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