Matrix Blog

Wall Street Journal

[REMICs] Rating Agencies Enable Bad Bonds To Be Made Good

October 1, 2009 | 12:28 am | |

The WSJ has an interesting article today on the new financial product designed to repackage a bad loan into (sounds like tranches) into good and bad loans so they can have more favored capitalization.

The popular deals are known as “re-remic,” which stands for resecuritization of real-estate mortgage investment conduits. The way it works is that insurers and banks that hold battered securities on their books have Wall Street firms separate the good from the bad. The good mortgages are bundled together and create a security designed to get a higher rating. The weaker securities get low ratings.

Ok – “Wall Street’s at it again” aside… on paper this sounds logical. But the regulators are resistant since it is predicated on ratings from the same agencies that gave AAA ratings to products that should have been rated CCC (junk) because they had used the wrong data (they didn’t have historical data on the new financial products).

These are the sorts of remedies that need to be put in place to restart the investor market to enable the mortgage market to work outside the government sector. But what has really changed since the meltdown? Not much.

James Surowiecki of the New Yorker, takes an exhaustive look at credit-rating agencies. Wall Street still loves them (probably because they can figure out ways to manipulate them like they did during the credit boom).

To date, rating agencies have been one of the least scrutinized participants in the systemic breakdown of the mortgage securitization process. Until everyone gets comfortable that the rating agencies grasp over these new products and use the right data this time, it seems like the regulators need to keep up the pressure. Its not the product that is the issue, it is the enabler of the product and the regulators are hopefully awake this time.

[Case Shiller 20 City Index] July 2009 Down 13.3% Y-O-Y, Up 1.2% M-O-M

September 29, 2009 | 12:03 pm | |

[click to expand]

Here’s the summary:

The S&P/Case-Shiller 20-city home-price index, a closely watched gauge of U.S. home prices, rose 1.6% in July from June in the third straight monthly increase, but prices remain below year-earlier levels.

For the sixteenth straight month, no area in the 20-city index posted a year-over-year price gain. That put nationwide prices at levels seen in 2003.

“These figures continue to support an indication of stabilization in national real estate values,” said David M. Blitzer, chairman of the index committee at Standard & Poor’s. “But we do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures.”

Whether or not we see a renewal in tax credits, its hard to imagine a housing market recovery with another year of increasing foreclosures. Perhaps the worst is over, but I would think the best we can hope for in the near term is stability.

Tags: , ,

[Existing Home Sales] Unexpectedly Drop 2.7%

September 24, 2009 | 1:59 pm | |

[click to expand]

After four consecutive months of seasonally adjusted gains, the

NAR existing home sales stats show a decline that was something unexpected happens.

The salient points:

  • July 09 to August 09 sales declined 2.7% (2nd highest total level in the last 23 months)
  • August 08 to August 09 sales up 3.4%
  • August 09 median sales price $177,700 down 2.1% from July 09 and down 12.5% from August 2008.
  • Inventory down 10.8% from July 09 to August 09 and down 16.4% from August 08
  • Months supply was 8.5 in August 09 from 10.6 in August 08

As Lawrence Yun, NAR Chief Economist, who is quite adept at cherry picking the data to show it in the best light (that’s his job).

Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process….

…actually says something the should resonate with most who follow this stuff:

…but the decline demonstrates we can’t take a housing rebound for granted.

UPDATE: Just a Blip? Why Housing Keeps Bouncing Around

Tags: , ,

Moody’s Overcorrects – 10 Years To Go Before Housing Recovery

September 21, 2009 | 1:11 am | |

I feel like Moody’s, in their report on the housing recovery, is overreaching.

They suggest that housing won’t recover for a decade.

Moody’s Investors Service threw cold water on optimistic projections of a V-shaped recovery in the battered U.S. housing market, predicting it could take more than 10 years to get back to boom-level prices.

They define “Recovery” as getting back the 40% peak to trough decline of the past several years.

MY KEY POINT – Their 10 year recovery benchmark is predicated on returning to credit-on-steroid-fueled-housing-levels which I believe most people now realize was not actually real. Therefore, the 10 year projection is based on a false premise and unfairly negative. For example, if housing prices remain flat for the next 5 years, don’t you think most will feel like housing has recovered (even if flat doesn’t = recovery by definition)?

It is strange to see Moody’s so ultra negative on a market aftermath that they help create since everything was AAA a few years ago. (Sorry, but I am annoyed).

Their key points:

  • It will take ten years to get back the 40% peak to trough that was lost
  • The downturn will over correct, meaning a longer time to get back.
  • Foreclosures and oversupply
  • Hard hit states will be the last to recover

While we are being dire – here’s a nice global recession map.

Click to expand

And map the US recovery – which states are recovering (after all, like real estate, all recessions are local).

The Housing Market Is Working…For The Government

September 17, 2009 | 1:39 pm | |

In a WSJ piece called No Easy Exit for Government as Housing Market’s Savior

…the article notes that

After a year of extraordinary interventions in the economy, the federal government is starting to pare its support for the private sector.

except for housing…

  • 80% of new mortgages benefit from government support
  • The $8,000 first time home buyers tax credit
  • The Federal Reserve has worked hard to keep interest rates at or near historic lows

“At least for the next two years, and possibly longer, it is not possible that the government would say: ‘The U.S. mortgage market no longer needs our support,'” says Dwight Jaffee, an economics professor at the University of California Berkeley’s Haas School of Business. “Were they to say that, the mortgage market and the housing market would almost surely crash.”

The article does seem to suggest that the government should rethink its stance on housing.

Promoting homeownership has been a stated goal of Republican and Democratic presidencies for decades. The Obama administration recognizes it will need — at some point — to rethink broadly the government’s role in housing and mortgages. Administration officials also acknowledge that moment won’t come soon.

Good grief – it’s not housing that is the problem – it’s credit. That’s where the focus should be. Both parties and government regulators help foster the environment the ultimately imploded. The housing boom was merely a byproduct.

It could have been gemstones or pet rocks. Let’s not confuse stupid credit policy with housing.

That’s why it is bitterly disappointing to see the momentum gone for real regulatory reform for financial services. The same regulators and executives remain at the helm.

It’s amazing how the passage of time makes the current credit environment somehow not seem broken. Not much has changed in the mortgage lending process to enhance the safety of the financial system.

Of course there are always gemstones.

[Sentiment versus Confidence] Dow Jones Sentiment Index Shows Improvement

August 31, 2009 | 11:20 pm | |

Confidence is more right here and now. Sentiment is more forward looking (it gives a snapshot of whether consumers feel like spending money.)

(a lame appraisal analogy would be estimated market value for a bank appraisal (today) versus anticipated sales price for a relocation appraisal (future))

but I digress…
I continue to be amazed with the types of analysis being done with the subjective nature of what is on the consumer’s mind – or in this case, what journalists are writing about:

The Dow Jones Economic Sentiment Indicator

The ESI, which was first published in April, aims to identify significant turning points in the U.S. economy by analyzing coverage of 15 major daily newspapers in the U.S.

The Dow Jones Economic Sentiment Indicator bottomed last November and has continued to edge higher. Newspaper coverage has become more upbeat about the economy (I assume they assume that consumers are sick of reading about bad news), the number of articles expressing either positive or negative sentiment about the economy has fallen now to approaching a third of the level of its peak in October 2008 following the collapse of Lehman Brothers.

A lot of people are drinking the Kool-aid right now.

I find this particularly ironic since the real estate industry has long blamed “the media” for the making real estate correction worse by “piling on.” However, I find the coverage today to be overly positive from sloppy interpretation of the 4 housing price indices: Case-Shiller Index, NAR Existing Home Sales, Commerce Dept’s New Home Sales and FHFA HPI, showed positive signs.

Actually all indices showed less negative results which were discussed excessively positive.

For example, The Conference Board’s recent Consumer Confidence Index was a little more positive:

Consumers’ assessment of current conditions improved slightly in August. Those claiming business conditions are “bad” decreased to 45.6 percent from 46.5 percent, however, those claiming conditions are “good” decreased to 8.6 percent from 8.9 percent. Consumers’ appraisal of the job market was more favorable this month. Those saying jobs are “hard to get” decreased to 45.1 percent from 48.5 percent, while those claiming jobs are “plentiful” increased to 4.2 percent from 3.7 percent.

While the recent Michigan Sentiment Index showed renewed weakness:

Confidence among U.S. consumers unexpectedly fell in August for a second consecutive month as concern over jobs and wages grew.

The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2, the lowest level since March, from 66 in July. The measure reached a three-decade low of 55.3 in November.

I find the whole thing a bit foggy especially using monthly figures for comparison.

Further reading on this.

Tags: , , , , , ,

[Over Coffee] Morning Quote: Too-Big-To-Feed

August 25, 2009 | 12:02 am | |

Many consumers seem to be feeling better about the economy (not good, just better than earlier this year). Well so do the central bankers – a la The Fed – at their annual Jackson Hole summer retreat.

Mr. Hoenig tried a few economist-jokes too. Playing off the phrase “too-big-to-fail” – a reference to banks that would topple the financial system if regulators let them collapse – he joked with the audience that he doesn’t want the Jackson Hole meetings to get too big. They could become “too big to feed.”

A number of ironies here but the overwhelming takeaway is that they are feeling better about the economy. While the economy “bites,” perhaps it’s now good enough to eat.

Slicing The Way We Thinking About Loan Modifications

August 5, 2009 | 1:18 pm | |

One of the most glaring housing issues that hasn’t been resolved is loan modifications. There are multiple owners of the mortgage, the servicers aren’t incentivized to move forward.

There was an interesting article in the New York Times which described how the lack of traction in loan modifications may not be simply the lack of infrastructure to handle the volume but rather the incentive to loan servicer, those who make more money in fees by taking longer to move forward than to resolve rather than move on to the next case.

Less than 10% of modified mortgages result in a forgiveness of debt. Late fees and other associated payments are tacked on to the end of the mortgage term, resulting on higher payments or a much larger mortgage balance. In many cases loan modifications can result in higher payments – no wonder the default rate is high. How about modifying some stupidity?

Holden Lewis of and I spoke about this yesterday in the podcast now available on The Housing Helix – he disagrees with the New York Times article premise that delay is profitable.

James Surowiecki’s “No Home Yet” article in The New Yorker lays out the modification landscape quite succinctly:

  • servicers can make more money on fees by “dragging their feet”
  • mortgagae delinquencies continue to rise
  • servicers can’t renegotiate in bulk
  • borrowers aren’t informed

But the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders. Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.

Speaking of scrambling.

Tags: ,

[In The Media] Fox Business: 7-30-09

July 31, 2009 | 8:36 am | | Public |

Had a nice conversation with Connell McShane and Jenna Lee about the false message being relayed through national housing reports and how this could actually damage housing further. On YouTube the clip is called “Housing Recovery is False.” 😉

I was given enough time to get my point across. Always fun.

“Rounding the corner” versus “finding a bottom”

Update: Similar message given in clip U.S. House Prices Haven’t Bottomed Yet [WSJ].


[Case-Shiller Index] 18.1% Becomes 17.1%, But M-O-M Is More Positive

July 28, 2009 | 1:35 pm | |

The May 2009 20-City Case-Shiller Composite Home Price Index fell 17.1% from May 2008, the fourth month in a row that the y-o-y rate of decline for the index gotten smaller. 17.1% is still a sharp decline.

We may be on the way to recovery,” said Maureen Maitland, vice president of S&P’s index services. “I say ‘may’ because it’s only been a couple months of data and home prices are seasonal … It will take a couple more months to see if we have turned around.”

This quote from S&P kind of confused me since, S&P/CSI has been seasonally adjusted since November 2008.

What’s got everyone so excited is m-o-m:

Looking at the monthly data, 13 of the 20 metro areas reported positive returns; and the 10-City and 20-City Composites reported positive returns for the first time since the summer of 2006. To put it in perspective, these are the first time we have seen broad increases in home prices in 34 months. This could be an indication that home price declines are finally stabilizing”.

WSJ/Real Time Economics has a nice summary of the release.

Remember, this index tracks prices only, not sales activity. Sales trends lead price trends.

I think the takeaway with the release is that the rate of decline is getting smaller which is a good thing and it does suggest the potential for improvement going forward. But this provides no support that the moment is at hand and its only up from here. Still, I’ll take what I can.

WET BLANKET UPDATE: Confidence among U.S. consumers fell more than forecast in July


[Existing Home Sales] 3 In A Row Is Not A Trend

July 27, 2009 | 11:12 am | |

Source: Tim Iacono-Seeking Alpha

After last week’s NAR June existing home sale release and the always interesting press release [sarcasm] that goes with it.

Resales of U.S. single-family homes and condos rose 3.6% in June to a seasonally adjusted annual rate of 4.89 million, the highest level since last October, the National Association of Realtors reported Thursday. Resales have risen for three straight months. The housing market appears to be healing, said Lawrence Yun, the NAR chief economist. The increase was higher than expected.

I started to write about the fact that we have seen this before. Before I finished writing about it, I came across Tim Iacono’s excellent chart(see above) in his Seeking Alpha post where he shows it much better than I could have. It is clear that the 3-peat pattern happened in late-2006 and early-2007.

I’m not trying to be a wet blanket here and I know these are seasonally adjusted but the inference is that we are close and things will improve shortly thereafter …but its still to make such a call. Housing is local (per NAR)… James Hagerty at WSJ drives home the point that housing is local in his “Home Sales, All over the map” piece.

And Andrew Leonard at Salon summarizes the economic reality we face quite succinctly.

Tags: , ,

[Confluence and Communion] From The Pope To Prudential, From Bill Gross To Bob Shiller

July 7, 2009 | 11:37 pm | |

Everyone is out there talking about where we are and where we seem to be going. One thing that is rather striking is the lack of spin relative to a few years ago – surprisingly refreshing.

Here’s a few notable individuals’ takes on the-state-of-where-the housingmarket-economy-is-at-right-now.

Pope Benedict XVI (Yes, the Pope): The “economy of communion.” ahem…amen.

The economy needs ethics in order to function correctly — not any ethics whatsoever, but an ethics which is people-centered. Today we hear much talk of ethics in the world of economy, finance and business.

Allen Smith, CEO Prudential Real Estate Investors: Confluence Of Indicators. Here’s the podcast.

Some have spoken about deleveraging. Some have told us about the shrinking of values. Others have said it’s a confidence game — as in, there isn’t any.

William H. Gross, Managing Director, PIMCO: “”Bon” or “Non” Appétit?” I always have to re-read his columns a few times to follow, because the nuances in his delivery are staggering.

Investors who stuffed themselves on a constant diet of asset appreciation for the past quarter-century will now be enclosed in a cage featuring government-mandated, consumer-oriented fasting. “Non Appétit,” not Bon Appétit, will become the apt description for the American consumer, and significant parts of the global economy, including the U.S.

Robert Shiller, Professor of Economics, Yale University:“Bob Shiller didn’t kill the housing market”

When the June Case-Shiller figures were released, he said they showed “striking improvement in the rate of decline.” Asked to look ahead, he says, “My guess is that prices will continue to fall for a while, but at a slower pace, and then stabilize. We’ve become very speculative in our attitude toward real estate, so there could be another boom. But if so, it likely won’t happen for another five to 10 years.”

Tags: ,

Get Weekly Insights and Research

Housing Notes by Jonathan Miller

Receive Jonathan Miller's 'Housing Notes' and get regular market insights, the market report series for Douglas Elliman Real Estate as well as interviews, columns, blog posts and other content.

Follow Jonathan on Twitter

#Housing analyst, #realestate, #appraiser, podcaster/blogger, non-economist, Miller Samuel CEO, family man, maker of snow and lobster fisherman (order varies)
NYC CT Hamptons DC Miami LA Aspen
Joined October 2007