'Suicide-tight underwriting' pervades markets
Commentary: Restore prices, credit to halt foreclosure wave
By Lou Barnes, Friday, May 15, 2009.
Flickr image by royblumenthal.To "V" or not to "V" ... that is the question.
The optimists see the steep far side, the middle-roaders see bottom nearby, and the skeptics see the economy still declining, just slower, with possible multiple bottoms ahead.
A 0.4 percent drop in April retail sales was less than the 1.3 percent dive in March, but the weakness still surprised the optimists, who are happy today with an "only" 0.5 percent decline in April industrial production. That is the smallest decline since October, but "capacity in use" fell 0.3 percent to a new post-Depression low of 69.1 percent.
The high week for new unemployment claims was April 4, with 668,000 ex-workers filing, and the cycle claims-top often precedes the recession bottom by a couple of months. From a late-April low at 604,000, however, claims popped back to 637,000 last week.
The National Federation of Independent Business's small-business survey in April climbed a hair from all-time-low territory, but did so only on two "soft" sentiment indicators. The "hard" ones -- sales, compensation, capital spending, employment -- all headed lower.
Obama administration spinners point to improved credit markets with some truth. No large institution has collapsed this year. Survivors have been able to sell some new stock. Some spreads have narrowed. However, only the very best businesses can borrow at affordable rates; BBB-rated bonds are still 6 percent above Treasurys -- normal is 1 percent.
The all-important effort to extract toxic assets from banks, recapitalize them and get them back in the game has stalled. Treasury Secretary Tim Geithner is the new opening-skit star on "Saturday Night Live," energetic and vacant while announcing new and wacky plans.
The greatest gap between credit reality and the authorities' comprehension or effectiveness (not sure which is worse) is in housing.
This morning, Minneapolis Federal Reserve Bank President Gary Stern foolishly announced that "creditworthy mortgage borrowers" would be approved, "if not at the first bank, the second or third."
We are now almost two years without affordable jumbo loans, with fixed-rate spreads most places 1.5 percent above Fannie conforming. Jumbo down payments are 20 percent to 25 percent. From the 1970s on, these loans were available up to 95 percent -- capped amounts, hyperqualified, but available. ...CONTINUED
All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.
You must login or register to post a comment.
Submitted by Carol Best on May 15, 2009 - 1:54pm.
It seems clear to me that the news media: CNN, CNBC & the Financial Networks are living in a world of their own - still very out of touch with reality. How can they possibly call a bottom to the housing market? The tsunami has yet to hit - short sales are impossible, banks are in denial, Realtors are working 24/7 to no avail, even losing their own homes. The impact on our housing market is like turning around the Titanic! Check out my discussion with the Chair of the Chicago Federal Reserve Bank, back in October of 2006: http://www.carolbest.net/Blog/Archive/?c=CHICAGO FEDERAL RESERVE ...While these economists may have graduate degrees from very fine Ivy League universities, they are clueless when it comes to truly understanding the reality of the majority of the people in the United States. A bill should be passed to force the SEC to actually perform their oversight jobs and another bill should be passed that would force those in Congress and the Senate who are over age 62 to retire. They have milked the system long enough - all at our expense. Unless we start speaking up/out, nothing will change... How sad for so many hard-working Americans who have lost so much to the greed of Madoff & Enron, just to name a few.
www.CarolBest.net
Serving Chicago's Gold Coast & Lincoln Park neighborhoods & the North, NorthWest & Western Suburbs of Illinois
Submitted by Brad Yzermans on May 15, 2009 - 1:56pm.
That 674 fico buyer with 20% down who's rate goes from 4.5% to 5.5% due to Fannie LLP adjustment will not die if you put that rate into perspective. Show him the cost of waiting for his credit to improve and he will see that the best deal is now. In my market prices are going up and every home has multiple offers.
He should be thankful for 5.5%. Lets sayhe waits 1 year and fico gets back up after paying collections. Home prices or rates will likely be back up. Goo dchane he could wait and even with 720+ fico his rate could be 5.5% in the near future. All indicators show rates want to go up but govt. is artificially keepig them donw....and that can't last forever.
Submitted by Norm Wagner on May 15, 2009 - 1:58pm.
Finally a voice of realism! To your point this is the essense of why we won't see values skyrocket anytime soon, and the business news channels are truly in their own 'bubble'! Thanks Lou, maybe you should talk to Diana Ohlick!
Submitted by joe bingham on May 15, 2009 - 2:13pm.
well said....the saddest thing is we no longer have decision making underwriters but instead mindless clerks looking at silly rules that have no bearing on credit worthiness....
Submitted by Sean OToole on May 15, 2009 - 2:24pm.
We can't go back to 2005 prices without taking fixed 30 year interest rates to 1.5%. That kills everyone on a fixed income and will put a tremendous burden on this country as baby boomers retire.
It kills me Lou that you can't do the simple math to figure out that prices are a function of income and loan terms, and that without 1% teaser rates we aren't going back to 2005 prices. Get over it already.
You said "There is no way to stop the foreclosure wave without restoring price appreciation, the only means to give hope to underwater and breakeven households. And there is no way to get markets going without mortgage credit restored to the reasonable standards of the '70s, '80s and '90s."
But that won't work. Look at median incomes, or even the folks walking through your door. Take them, qualify them on 70's, 80's, 90's standards and they simply can't qualify for 2005 prices. Again - we aren't going back. And it will be ok as soon as everyone realizes that and starts to deal with the real problem. How to get rid of the $4 Trillion in negative equity left over from our little crazy credit experiment. Seems the [http://www.youtube.com/watch?v=PXlxBeAvsB8 Fed has already lost track of $9 Trillion] - I'm sure we can find a way.
Sean O'Toole
Founder / CEO
[http://ForeclosureRadar.com ForeclosureRadar.com]
[http://ForeclosureTruth.com ForeclosureTruth.com]
Submitted by Jon Astaris on May 15, 2009 - 4:08pm.
You dont need price appreciation to stop the foreclosure wave!
You need Cramdowns! That is the only thing that would have arrested the freefall.
The "leaders" know exactly what they're doing - cramdown - bad, foreclosure - good. The banks end up with millions of houses, the uvmint ends up with the banks and the houses. Want a house? You know what to do.
Submitted by John Rakoci on May 15, 2009 - 4:59pm.
Well Jon, obama and his minions have already shown they are not concerned about the law or signed contracts - so why not cramdowns? Does anyone value their word any more?
Submitted by chis eliopoulos on May 15, 2009 - 8:06pm.
There is a bigger problem than Fannie reforms, Fico scores,tight underwriting and all this old junk.There is the reality of unemployment that is increasing every month.The prospects of improving the employment situation right now are very blink.Every one is trying to predict if real estate have hit bottom yet. In my opinion has 30% more to go.Now you can dispute that all day long if you ignore the inventory increases and the loss of good paying jobs in the local markets.During the crises of the 80s and 90s the credit issue was the least of my concern.The banks will jump in the market again when they sense that can make money and all this "careful"lending practices that are applying now will go again out the window (and why not we are paying for their mistakes).There is a HUGE misconception among the public about "homeownership",with 5%,10%20% down you do not own anything, you just have a percentage of participation.When one owns a house FREE AND CLEAR the he/she can claim ownership,until then the lender will be calling the shots.Real estate is a commodity and it is false advertised that every one has to have a piece (one has to have food and water).
Like anything else only the ones can effort one should have it.The problem is that every one is making money from it (government,lenders,insurers,contractors,home improvement makers and sellers,brokers,lawyers,you name it) to tell people the truth about ownership.
Submitted by Bill Fooks on May 16, 2009 - 4:13am.
Bill Fooks
TFT realty Marketing Service
Warwick, RI http://www.fooksteam.com
Everyone of the comments are great. The problem is that in the next couple of years we will have sky-hi rates. Have seen it before. Nothing in the Real Estate world happens fast. Cram downs will only make lenders more skittish in the future. Common sense underwriting is a good first start.Common sense appraisels are the next step.Income compliance will dictate the bottom of the market.When average household income meets the payment of a medium price home you have the bottom. More will take action to buy then to rent.
As taxes go up the home ownership deduction also becomes more important. Think long term and you will have your clients become winners in the game instead of winers.
Submitted by Teresa Boardman on May 16, 2009 - 9:26am.
I see too many vacant store fronts around town and have too many friends who are losing jobs. I say we are going for multiple bottoms.