Matrix Blog

Distressed Housing

[Unanticipated Consequences] The Joys Of Home Ownership

September 14, 2008 | 11:03 pm | |

If you are a renter and pay taxes, congratulations – you are now experiencing homeownership, and it’s not a pretty sight. In a great article by Gretchen Morgenstern of the New York Times called:
The Joys of Ownership

Make no mistake: we, the American taxpayers, are amassing quite a portfolio of flotsam and jetsam in the mortgage bust. It certainly brings new meaning to the notion of an ownership society, doesn’t it?

Here are the costs of the bailout of “Frannie”:

  • $24M parachutes for former CEO’s Mudd and Syron
  • Cost of lawsuits against Frannie
  • Cost of legal bills of former CEO Raines during the accounting scandal
  • Billions in potential losses $200B?
  • May not decide not to return fraudulent loans because lenders may collapse prompting a bigger bailout

[GSEs Get A Seizure] It’s About Time

September 8, 2008 | 12:01 am | |

It finally happened. The GSEs are no longer private corporations. The bailout is finally here.

I called this bailout on October 5, 2005 and was teased or ignored. History teaches us we forget history.

I have been lamenting (whining) for the past several months that nothing has really changed since last summer when the credit markets imploded. Sure, we had the stimulus plan and the housing bill became law, NY AG wrangles a deal with the GSEs to change the way with mortgage brokers and appraisal management companies were involved in the mortgage process. The housing bill created the FHFA which was a new and improved OFHEO, which had been in charge of GSE oversight before the seizure.

GSEs have been taken over and we are in bailout mode. Its fair to say this is the worst mortgage crisis in history.

Why the GSEs were doomed

They had an unfair advantage over competitors because they were protected by the federal government. Thats the very same government that was forced to bail them out. It makes a strong argument for promoting fair competition.

You can’t serve two masters:

the investors who put up capital and a government that wanted to help the housing industry and extend home ownership. In the end, they failed to serve either one very well.

The irony about the GSE set up is that was consistent with most members of the mortgage pipeline. Appraisers served the mortgage broker and the lender. Mortgage brokers served the borrower and the lender. Banks served the investors and their shareholders.

Fannie Mae continued to play with their spreadsheets even after the accounting scandal.

Fannie Mae did not have a grip on their accounting practices, OFHEO/FHFA was ill equipped to keep them in check, or they were simply incompetent. Remember FNMA kept revenue off the books in the original accounting scandal a few years back so they would not draw attention and be able to show better results the following year. Now they didn’t meet capital requirements to offset their mortgage market exposure.

The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid.

Despite all the confidence telegraphing by Lockhart (OFHEO), Mudd (FNMA) and Syron (FHLMC), few really believed the GSEs had a grip on the extent of the situation. After all they were part of the process.

They hold or back 5.3 trillion in US mortgages which is about 50% of the mortgages out there. The GSEs accounted for about 80% of new mortgages being issued since last summer’s credit crunch. With investor confidence fading fast, the Treaury department could not let the last pillar left in the mortgage market crumble and it appeared to be headed that way.

What does this mean to housing?

Its not clear until this all shakes out, but probably not much initially.

However, if the investors see the faith and credit of the US in action and this brings them to the table, it may eventually bring more liquidity to the credit markets and that may bring some of the risk down, lowering rates or tempering their rise. However, housing still has a lot of shakeout with foreclosures and inventory, but at least this is a step in the right direction.

It’s actually the first constructive step towards recovery. If we are going to pay through the nose, it might as well be towards something positive, as painful as that is. The stimulus plan and the housing bill are painful, but don’t do anything about solving the financial crisis.

“I would view it as the beginning of the markets recognizing and accepting the reality of our financial problems, which is the beginning of fixing them,” said Mr. Rosner, a managing director at Graham Fisher, a financial research firm.

In other words, perhaps there is hope credit markets will get a grip in the next couple of years.

An aside
It has always been my observation that Freddie Mac was the step child of Fannie Mae. It stemmed from my appraisal background. Freddie Mac let Fannie Mae design their forms. Freddie Mac was essentially created after Fannie Mae to provide competition for it yet it nearly always let Fannie Mae take the lead. Even its stock price seemed to mirror Fannie’s. But Freddie didn’t get into hot water in the accounting scandal and Freddie Mac was agreeable to the Treasury take over before Fannie Mae because they had more of a handle on how short their capital was. In fact one could suggest that when it counted, Freddie Mac was the leader all along. Of course, that doesn’t matter any more. CORRECTION: It was Freddie not Fannie…nevermind.

Inter-office announcement
Its a time for change: I win the office pool on the WAMU bet. Good grief, he should get an award for outstaying his welcome.

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[I.O.U.S.A.] Sooner Or Later It’s Real Money

August 21, 2008 | 10:41 pm |

A must see movie is coming out this weekend: I.O.U.S.A

To view more preview clips.

From the press release

Throughout history, the American government has found it nearly impossible to spend only what has been raised through taxes. Wielding candid interviews with both average American taxpayers and government officials, Sundance veteran Patrick Creadon (Wordplay) helps demystify the nation’s financial practices and policies. The film follows former U.S. Comptroller General David Walker as he crisscrosses the country explaining America’s unsustainable fiscal policies to its citizens.

As we slog through the current credit condition, its really an opportunity to reconsider the over reliance of debt as a way for government (and ourselves) to avoid making hard choices.

In fact, there is very little wiggle room with efforts for debt reduction on a federal level largely because of entitlements. Add to that a GSE bailout that may well exceed $100M and counting.

One for two

The Congressional Budget Office found that “typical estimates of the economic [deadweight] cost of a dollar of tax revenue range from 20 cents to 60 cents over and above the revenue raised.”3 Studies by Harvard’s Martin Feldstein have found that deadweight losses are even larger. He noted that “the deadweight burden caused by incremental taxation … may exceed one dollar per dollar of revenue raised, making the cost of incremental governmental spending more than two dollars for each dollar of government spending.”

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[Entitlement] The Mummy Returns (Proving A Lack Of Underwriting Quality)

August 19, 2008 | 12:51 am | |

I saw the 3rd installment of The Mummy with my son recently and he opined immediately after the movie ended that “it was just about the worst movie he had ever seen.”

When you look around at every institution involved in the mortgage process, after seeing this prolonged bad movie, it’s especially interesting that, other than enforcement authorities (Like FBI and attorney generals), no one is doing anything about reparations for the rampant fraud and sloppy underwriting that likely adds up to billions. I find this a continual source of amazement.

A legal precedent may be in the making within the title industry:

Ticor Title, one of the largest title insurance firms in the country, is suing Countrywide Home Loans, the nation’s largest home lender, saying it shouldn’t have to pay out on a title policy because of Countrywide’s gross negligence.

In other words, title insurance companies may begin to go after mortgage lenders who were negligent in their underwriting. In other words, it is simply the low hanging fruit to help offset significant losses.

Here is the case that was the last straw for Ticor.

The case that Ticor has drawn a line in the sand over concerns a $360,000 first mortgage on a graystone Victorian in the Kenwood neighborhood on the South Side. The story of that loan was told in a front-page Tribune story in February, several weeks after a clothed, mummified male corpse was discovered in the boarded-up house by a real estate speculator who had purchased the property from Countrywide in a foreclosure auction.

I wonder if an appraiser inspected the property at anytime? Good grief. (This AP appraisal article should have been written back in 2005 when the industry was screaming about appraisal pressure.)

[Drawing The Foreclosure Line] A Picture Tells A Story

August 6, 2008 | 12:25 pm |

Here’s an interesting chart given to me by someone (not a Realtor) who attended a presentation by the Leslie Appleton-Young, Chief Economist of the California Association of Realtors in July.

It is using data provided by, the firm featured in that CBS 60 Minutes piece a while back and shows broad disparity within Sacramento, California by area divided by a highway. On the left features new developments, peppered with the damage of speculators and subprime.

I have long said that there is “no national housing market” and that macro real estate data can be misused or misinterpreted.

Let’s take foreclosures.

Are they are growing problem? Yes.
Can they represent as much as half the sales in a market (ie Sacramento)? Yes.
Is it a serious issue that will get worse before it gets better? Yes.
Will millions of homes be foreclosed in the next few years? Probably.

Is every town (are most towns) in America experiencing massive foreclosure activity right now? No.

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[In The Media] Fox Business Network Money For Breakfast 7-25-08

July 28, 2008 | 2:00 pm | | TV, Videos |

Last week I was attending the Inman Real Estate Connect in San Francisco and was contacted by Fox to discuss the latest RealtyTrac foreclosure numbers just released that day and the conversation spilled over into other related topics such as the Housing bill.

The segment was to air live at 7am EST time, 4am in San Francisco, and I had to get there by 3:30am, meaning I got up at 2:45am. Well, sleep is overrated anyway.

Alexis Glick was the host – she’s sharp and thinks at 100mph. Always a pleasure. Here’s her blog post on the segment. She seemed pretty excited about the foreclosure features on

After the segment, I teased my colleague at RealtyTrac, thanking them for giving me content and for giving me a reason to wake up at 2:45am.

What’s particularly interesting about the foreclosure numbers is that 16 of the 20 major metro areas tracked were located in California and Florida. I think that the average consumer thinks half of all sales in their locale are foreclosures which is simply not true, however, it is a serious concern. I keep harping on the lack of activity in the MBS markets and lack of liquidity out there.

All else feels like “cart before the horse.” Until financing is more readily available I find it hard to see much of an end to this mess in the near future.

Here’s the clip

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[In The Media] Bloomberg TV – On The Economy Housing Starts And Fits

July 19, 2008 | 9:07 am | | Public |

Thursday I was on with Kathleen Hays at Bloomberg News, one of the best business anchors on television, to talk about housing starts. I was joined by Beth Pierce, of the California Association of Realtors (CAR) and owner of her own brokerage and mortgage companies. I thought she provided refreshing candor.

At one point I was asked a question about the change in NYC building codes and how it accounted for the surge in starts which helped skew the national numbers. I experienced a senior moment because my answer pertained to the recent expiration of a long time tax abatement program that had stimulated new development rather than talking about building codes. Sigh.

Here’s more info on the NYC building code change.

On the bright side, I got my first ever tv interview teaser earlier in the day. Gotta love Bloomberg News!

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[Smoking Gun Crack] Signs Of Housing Recovery

July 14, 2008 | 10:15 pm | |

In a lapse of judgement, poor writing or an irrational need to be contrarian, the normally solid publication Barrons (I subscribe) drops the ball on their cover story:

Bottom’s Up: This Real-Estate Rout May Be Short-Lived

If IndyMac, Fannie and Freddie didn’t steal the headlines over the weekend, I wonder if this article would ever made it to print.

The article suggests housing is moving toward recovery based on a review of recent data:

  1. NAR exisitng homes have a 10.8 month supply in May versus a 11.2 month supply in April (ahem: Seasonality occurs in rising and falling market. Home sales rise in the spring.)

  2. Case Shiller showed prices rose in 8 of 20 housing markets in April, and the pace of decline is slowing in many of the cities surveyed. (see no. 1)

  3. Treasury Secretary Paulson recently said: “”we are well into the adjustment process.” (This is a political move to allay investors – other than that, what does this statement actually mean?)

  4. David Blitzer, chairman of the S&P Index Committee indicated the media was only interested in the “…bad year-over-year number.” (blame the media observation – see no. 1.)

  5. Pending Congressional bailout. FHA will reposition $300M in subprime mortgages. (For perspective, Fannie and Freddie have 5 trillion in outstanding mortgages, how does this save the market? It’s a drop in the bucket).

  6. Fannie and Freddie may be taken over by the government is a good thing. (no it’s not)

  7. A million unit drop in housing starts has signified the end of the last 3 housing corrections. (none of those period saw anything close to the speculation and poor lending practices seen the recent boom – no lessons learned by history here).

  8. Affordability (via price/income) has improved with price declines. (The rationalization for increased affordability is pretty silly since underwriting standards are much tighter. In other words, if your credit score and salary didn’t change from last year, and your home dropped in value, your buying power is probably much lower. In other words, affordability did not increase despite the mechanical calculations to the contrary).

  9. NAR reports 2% increase in co-op. condo and townhouses from April to May. (See no. 1)

  10. NAR economist Lawrence Yun is actually relied on in this article. (He called the credit crunch temporary last August and the housing market would return to normal in the fall.)

  11. Mortgage market weakness is front end loaded with foreclosures and defaults. (In theory the bad is behind us – for the life of me, I can’t understand the rationale. How does this mean housing is poised for a turn if the scope of the credit crunch is unprecedented?)

Good grief.

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[Deflating Expectations] FOMC Shifts To Neutrally Unsure

June 29, 2008 | 10:46 pm | |

The Federal Open Market Committee was widely expected to raise rates a few weeks ago amid growing concerns over inflation. However, that concern eased in recent weeks as it became apparent that the overall economy was still weak and the rate was left unchanged.

Repeat of last month’s hint: Housing AND inflation

I would doubt there will be a change in the federal funds rate until after the election – a coincidence I am sure [wink].

Here’s a great discussion on Fedspeak and the Feds’s political connections by Holden Lewis over at Bankrate.

But assuming not much fixing happens until after the election, can the next President actually do anything about the state of the economy?

Here are the minutes from the last meeting:

Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

Of course, as Congress struggles to pass legislation to ease some of the homeowner pain (which, as a body of government, I feel the issue is far too complex for them to arrive at an effective solution because excessive compromise is the result), mortgage debt is snowballing.

Hurry up.

Although 71% of Americans describe the federal government’s economic policies as bad, a recent Harris Poll found that More Now Believe Their Household’s Financial Condition Will Improve in Next Six Months.


I think it’s not just the Fed that’s unsure about the economy at the moment.


[Foreclosure Bus Tours] Lost In Translation

June 23, 2008 | 4:29 pm | | Public |

A foreclosure storyline is probably better without a tie, no?

Click here to view.

CNBC interviewed me for a story covering the growing foreclosure situation on Long Island and how it is entering Manhattan. Natalie Erlich did a nice job with the piece. The foreclosure tour bus running on Long Island is now entering Manhattan.

Foreclosure bus tours are appearing in other parts of the country. Some with boxed lunches!

What I find fascinating, is that there were only 23 residential foreclosures in Manhattan in Q1 2008 down from 25 in 2007, according to

Hardly a significant trend or pattern…no? There must be another justification to run the tours to Manhattan with such a low foreclosure rate. I’m guessin’ it was a publicity play, to contrast the resiliency of the Manhattan market.

UPDATE: Click here to view the second video for the storyline. The disconnect between the number of foreclosures and the ability to run a bus seems to be because there are middlemen that buy blocks of distressed properties before they go into foreclosure and then re-sell for a profit. Sort of an inverse flip.


Florida, Florida, Florida

June 16, 2008 | 12:02 am | |

The passing of Tim Russert was very much a shock. It caused me to reflect on my own mortality for a good part of this Father’s Day. For years I watched Meet The Press and it’s one of my regular podcasts – loved it. I was drawn to Russert’s youthful enthusiasm, work ethic and ability to provide clarity to Byzantine world of politics. My father met him when we appraised his property a number of years ago and he was as genuine in person as he came across on television.

The use of a dry erase board in the 2000 presidential election was classic.

Amid the high-tech wizardry of television, it was Russert who picked up a white board and marker on Election Night 2000 and plotted the progress of the Bush/Gore all-nighter, scribbling “Florida, Florida, Florida” before anyone knew the race would not be settled there for 36 days.

And other moments.

Of course, Florida foreclosures aren’t going to settle down for quite a while because of the backlog in the foreclosure pipeline, unlike other markets.

Foreclosure Listings: Sad And Bloody

June 6, 2008 | 4:55 pm |

These photos say it all: captured on, a foreclosure listing somewhere in North Oakland, California. The listing doesn’t appear to be there now but the links to the photos are still here and here.

Sadness and…


What was the listing agent thinking?

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