Condemned To Repetition

George Santayana famously observed:  “Those who cannot remember the past are condemned to repeat it.”

I thought of old George when I read this article reporting that some banks, amazingly, have decided to once again offer zero down payment subprime mortgages.  Apparently it’s only taken ten years for banks to forget the lessons they purportedly learned during the last subprime mortgage lending bubble, when the collapse of countless numbers of bad loans brought the economy to the brink of total disaster.

tips-for-buying-foreclosed-homes-mstAccording to the article quoted above; “Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent.”  In addition to the “education session” and documentation and counseling requirements, recipients of the loans have to live in the houses with the mortgages.

The lending agencies think that residency requirement will keep out the investors looking to flip houses, which is one of the conditions that contributed to the prior housing bubble and subprime mortgage debacle.  Another purported protection against disaster is that the housing market is strong, there’s a shortage of homes for sale at entry-level prices, and therefore homeowners who can’t make their payments supposedly will be able to sell their houses and repay their mortgage loans.  And proponents of the lending program say it helps poor people and working families to buy houses and build personal wealth.

I’m all for people becoming homeowners if that’s their dream, but if banks think that things like education sessions and counseling are going to allow them to avoid problems when the economy turns — as it inevitably will — they are dreaming.  It’s not hard to forecast that some aggressive loan officers will push the rules, some house-flippers will figure out a way to take advantage of the programs, some bad apples will take out the mortgages and then abandon the houses when times get tough, and then we may well be back in the same perilous situation that existed in 2007 and 2008.

I hope not everyone has forgotten what happened to bring on the Great Recession.  And I hope some political leader makes it clear that banks are welcome to follow whatever practices they think are appropriate for their businesses, but this time, if it all goes to hell, taxpayers won’t be bailing them out — again.

The Meaning Of “Fine”

President Obama stepped into a controversy yesterday, when at a morning press conference he said about the economy:  “The private sector’s doing fine.”

Mitt Romney and other Republicans, ecstatic to be handed such a plum, jumped all over the statement, citing statistics like the unemployment rate and the number of home foreclosures to demonstrate that the economy is not doing fine and to portray the President as out of touch.  By the end of the day, the President was in wholesale retreat, saying:  “it is absolutely clear that the economy is not doing fine.”  We’ll have to see whether this incident is just one of those silly Washington, D.C. tempests in a teapot, or whether the President’s remark strikes a deeper chord with the American people.  (In that regard, the President’s constant fund-raising activities with high-money donors and Hollywood stars probably isn’t helping him dodge the “out of touch” label.  But who’d have thought that Mitt Romney, of all people, would take a crack at depicting President Obama as “out of touch” with ordinary folks?)

For now, though, I’d like to just pause for a moment to think about word choice.  “Fine” is a pretty elastic word.  At our firm, some partners use it to describe associate performance that is minimally adequate — a kind of air quotes “fine” — whereas others use it as synonymous for “good.”  Coin collectors will tell you that “fine” is in the top half of the scale — better than poor, fair, good, and even very good, but not at the extremely fine or mint level.  What meaning did the President intend to convey?  “Fine” as in people are not walking around wearing barrels and selling apples on the streets, or something else?  Given his later retraction of sorts, we’ll probably never know.

I’ll give the President the benefit of the doubt that he was using “fine” in a way that is consistent with our current economic reality; I don’t think it’s fair to seize on one word out of the thousands he speaks every day.  I also think what he said immediately after saying that the private sector is doing “fine” is more significant, anyway.  He went on to add:  “Where we’re seeing weaknesses in our economy have to do with state and local government, oftentimes cuts initiated by, you know, governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don’t have the same flexibility as the federal government in dealing with fewer revenues coming in.”

There’s no mistaking the meaning of that statement; he thinks we need to spend more on public employee jobs in order to help our economy.  I could not disagree with him more on that point — and I think that, given recent election results in Wisconsin and California and elsewhere, that is where the President’s views might truly be “out of touch” with those of the majority of Americans.

Your Landlord, Uncle Sam

Here’s a discouraging follow-up to a post about Fannie Mae’s enormous roster of foreclosed homes that require millions of dollars in upkeep: our government now owns so many homes it is thinking of getting into the rental business.

According to AP, the government owns 248,000 homes, about 70,000 of which are for sale.  What’s more, officials are expecting even more homes to fall into that category as foreclosures pick up after a brief lull.  So, what to do with so many government-owned houses?  One option is to turn them into rental units.  The acting head of the agency that oversees Fannie Mae and Freddie Mac says changing the homes into rentals may reduce “credit losses and help stabilize neighborhoods and home values,”  because sales of foreclosed homes are, on average, at a 20 percent discount, thereby depressing the prices of surrounding homes.

I think turning foreclosed homes into rental properties would be a ludicrous mistake.  It’s bad enough that the federal government lost its shirt in the mortgage guarantee business and owns hundreds of thousands of unwanted properties — now we are going to hire countless people to try to rent and manage the properties and collect rent checks and security deposits?  And while the below-market sale of a foreclosed home isn’t great for a neighborhood, often living next to a rental home is worse because the renters could care less about upkeep on the property.  Speaking as someone who once lived next to a rental home, I think it is far better to sell the property to someone who will live there and take care of it, even if the sale is at a discount.

Renting just defers the problem.  I’d rather the federal government do whatever it takes to sell its inventory of homes, get out of the home ownership and upkeep business once and for all, and get back to focusing on doing what federal governments are supposed to do — like, say, providing for our national defense.

Explaining The Housing Market Doldrums

Yesterday I heard a segment of NPR’s Talk of the Nation that discussed the housing market in America.  The host and his guests discussed how housing prices may have bottomed out, how buying a home is cheaper than renting in some areas, how buying a home and making those monthly mortgage payments is a good step toward financial discipline and accumulation of personal wealth, and other factors that weigh in favor of buying a house.  They seemed mystified about why American consumers aren’t flooding into realtor offices to snap up homes at bargain basement prices.

I don’t think there should be much mystery about why the housing market is in the doldrums, however.  In my view, it is almost completely attributable to a lack of confidence and optimism about the future.  Many people in America have been deeply rattled by the economic turmoil of the past few years.  They’ve seen friends thrown out of work and bright young college graduates unable to find a job.  They’ve seen the value of their 401(k) portfolio on a roller-coaster ride and, if they are an existing homeowner, they’ve seen the value of their home fall with the bursting of the housing bubble.  What’s more, over the past few years they’ve heard assurances from economists and politicians about an economic recovery and confident predictions of dropping unemployment rates and robust economic growth, and those bullish assurances and predictions have consistently proven to be unfounded.

The old saying “once bitten, twice shy” applies here.  Americans don’t want to bet right now on economic growth; they understand that we teetering on the brink of dropping into another recessionary period.  They just want to hang on to their jobs, hunker down, and wait until things improve in the real world and not just in some academic’s econometric models.  Signing your name on a 30-year mortgage is a really big step.  Why would you want to do it if you don’t have any confidence that you will keep your job and that better economic days lie ahead?

A Grim Scenario

The news about Fannie Mae and Freddie Mac is not good.  The entities were poorly run, and as the glut of foreclosures caused the risk of default by Fannie Mae and Freddie Mac to rattle the markets, the government stepped in.  Now, as foreclosures have continued, the Congressional Budget Office estimates that the total cost to the taxpayers could reach $389 billion.

It is a staggering amount of money.  Where did it go, and what has been done to make sure that this disaster does not happen again?

Redefining “Improving” (Cont.)

Here’s more evidence of the disconnect between the “improving economy” smoke that it being blown up our collective keisters and the unfortunate economic reality — Ohio foreclosures hit another record in the first three months of 2010, up 9 percent from the number of foreclosures in the first quarter of 2009.

With our “improving economy,” the flood of “green jobs” created by the “stimulus bill,” etc., how could this be?

Forbidding Foreclosure Numbers

We are in a period where the economic news seems very confused and inconsistent.  The stock market has rebounded significantly from its low point earlier this year, but unemployment continues its inexorable climb.  Some investment banks have earned huge profits, but businesses are forecasting a grim, cautious holiday spending season.  And then today we get the latest news on foreclosures — and it is stunningly bad.  The third quarter of 2009 turns out to be the worst quarter for foreclosures of all time.  It is worse than the very bad second quarter of this year, and 23 percent worse than the third quarter of 2008.

937, 840 homes — almost 1 million homes — received a foreclosure notice during the quarter, which is about one out of every 136 homes nationwide.  Get this:  in Nevada, the state that was worst hit, one out of every 23 households received a foreclosure filing.  It is hard to imagine what the hardest-hit Nevada neighborhoods look like.  During the quarter more than 237,000 homes were repossessed.  We are all used to dealing in big numbers, but these numbers are truly staggering.  In just one three-month period of just one year, the owners of almost one million homes reached the point where their lenders gave up and resorted to the ultimate option of foreclosure.

Given these numbers, we shouldn’t be too thrilled by the glimmers of positive economic news.  Unfortunately, the net worth of many Americans is significantly tied up in their homes.  Even if those homes aren’t in foreclosure, the housing market will likely be depressed for a long time.  There are a lot of empty houses there to be purchased before prospective homebuyers start bidding up the current prices for existing homes.  We aren’t going to see a true recovery, and a significant increase in consumer confidence, until the housing market rebounds, and these latest figures indicate that that development may be far into the future.