by Calculated Risk on 12/22/2009 11:28:00 PM

Two modification-renter related quotes: the first on modifications essentially turning homeowners into renters, and the second, a proposal from Dean Baker on making the renter-landlord relationship more formal.

From an article by Carolyn Said in the San Francisco Chronicle: 2009's mortgage modifications pretty minor

"The problem with affordability-only modification is that it essentially makes homeowners renters for the foreseeable future and locks them into their homes so they can't move elsewhere for better jobs." [said] Paul Leonard, director of the California office at the Center for Responsible Lending in Oakland.

Exactly. Any modification that leaves a homeowner deep underwater is really converting the homeowner into a renter. And eventually most of those modifications will fail.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggest giving former homeowners the right to rent their home after foreclosure.
...
"If you give people the right to rent, it changes the logic from the lender's standpoint and makes foreclosure less attractive," he said. "Many lenders of their own volition will decide to work on loan modifications - otherwise they could be stuck with a renter for five to 10 years. It would shift the balance of power hugely in favor of the homeowner."

There is no good solution, but at least we are acknowledging that many "homeowners" are really renters.

by Calculated Risk on 12/22/2009 07:40:00 PM

From Tom Petruno: Financial-meltdown commission sets first hearings

The panel set up by Congress to tell us why the financial-system meltdown happened -- i.e., who and what to blame -- will hold its first hearings Jan. 13 and 14 in Washington.
...
Congress is expecting a final report from the 10-member, bipartisan commission by Dec. 15, 2010.

Maybe they will take suggestions and questions.

My first suggestion is they start by interviewing - in private - the field examiners at the Fed, FDIC, OCC and OTS. There is no need to publicly embarrass any examiner. The various Inspector General reports on bank failures would provide a starting point (see Eric Dash's article in the NY Times: Post-Mortems Reveal Obvious Risk at Banks).

Ask the examiners what they saw and when - according to the Inspector General's reports, the field examiners were warning about lending problems in 2002 and 2003.

Follow the trail. Did this information generate warnings inside the organizations? If so, why wasn't action taken? Was the action blocked by political appointees? And how would the proposed regulatory reform lead to a better outcome?

And a quote from Eric Dash's article:

“Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank examiner for the Office of the Comptroller of the Currency. “At the height of the economic boom, to take an aggressive supervisory approach and tell people to stop lending is hard to do.”

If the lending was risky, telling them to stop was the regulators job. How does reform fix this?

The good news is Brooksley Born is on the commission, and I think she will do an excellent job.

Here is their website (under construction):

by Calculated Risk on 12/22/2009 04:34:00 PM

From CNBC: After Record Lows, Mortgage Rates Headed Up in 2010

"If you told me by the end of 2010 a 30-year rate was at 6 percent, that sounds about right," says Mark Zandi, chief economist at Moody's. "I don't think there's any question rates are headed up."

Rates are definitely headed up right now, and with the Fed MBS purchase program scheduled to end in about three months, mortgage rates will probably increase some more. But I think the following estimate is way too high:

"The ending of the Fed program will definitely effect rates," says Mark Goldman, professor of real estate at San Diego State University. "So far, the Fed has not expressed interest in keeping the program going. That could raise rates by some 150-200 basis points."

As I've noted before, I think the increase in rates will be in the 35-50 bps range relative to the 10 year Treasury yield when the Fed MBS purchase program ends. But here is an estimate much higher than mine!

Zandi also suggests there might be some Fed tightening next year due to inflation concerns and that could push up mortgage rates (I think this is unlikely), and also that the bond vigilantes might return next year because of concerns about the U.S. fiscal deficit and push up long rates (also unlikely in my view). Although not impossible, I don't think mortgage rates will rise to 6% next year - mostly because I think the recovery will be sluggish and choppy in 2010, and inflation will be benign (too much slack).

But the fear of higher rates is probably another reason for the surge in existing home sales, although I think the primary driver was the expected expiration of the first time home buyer tax credit.

by Calculated Risk on 12/22/2009 02:16:00 PM

Yesterday I mentioned that the Fed's favorite house price index showed prices fell in October.

However most people follow the Case-Shiller index, and the October Case-Shiller house price index will not be released until next Tuesday. Although Case-Shiller is an average of three months, I think that index will probably show a price decline too.

The following graph shows the LoanPerformance index (with and without foreclosures) and the Case-Shiller Composite 20 index in real terms (all adjusted with CPI less Shelter).

Click on graph for larger image in new window.

It is interesting to look at the sharp decline in the index with foreclosures at the end of 2008 - this was what housing economist Tom Lawler described as "destickification" in the high foreclosure areas.

Notice the LoanPerformance price index without foreclosures (in red) is now at the lowest level since September 2002 in real terms (inflation adjusted).

This isn't like 2005 when prices were way out of the normal range by most measures - and it is possible that total prices have bottomed (although I think prices will fall further), but prices ex-foreclosures probably still have a ways to go - even with all the government programs aimed at supporting house prices.

by Calculated Risk on 12/22/2009 11:59:00 AM

Here is a little more positive data ...

Click on map for larger image.

Here is a map of the three month change in the Philly Fed state coincident indicators. Twenty five states are showing declining three month activity. The index increased in 20 states, and was unchanged in 5.

Here is the Philadelphia Fed state coincident index release for November.

In the past month, the indexes increased in 26 states, decreased in 16, and remained unchanged in eight (Colorado, Idaho, Indiana, Louisiana, New Jersey, Oklahoma, Oregon, and Utah) for a one-month diffusion index of 20. Over the past three months, the indexes increased in 20 states, decreased in 25, and remained unchanged in five (California, Iowa, New Mexico, Pennsylvania, and Rhode Island) for a three-month diffusion index of -10.

The second graph is of the monthly Philly Fed data of the number of states with one month increasing activity. Based on this indicator, most of the U.S. was in recession from about December 2007 through October 2009 - although the graph shows the recession ending in July 2009 (based on other data).

Note: this graph includes states with minor increases (the Philly Fed lists as unchanged).

A majority of states were showing increasing activity in November for the first time since the beginning of the recession.