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December 20, 2012

What the Housing Market Actually Looks Like

Posted in: Uncategorized

This week brought more good statistical news for the housing market. Existing home sales rose at a decent clip in November, nearing post-bubble highs not seen since the artificial spike from the homebuyer’s tax credit (I’ve noted that the end of the Mortgage Forgiveness Debt Relief Act could be giving the same spike). Inventory fell again, which presages higher prices. And while housing starts fell in November, the more stable indicator of homebuilding permits rose above expectations. There’s a huge hole to dig out from – even with its 25% rise, housing starts in 2012 would be the 4th-lowest in history – but the digging is occurring.

However, it might be worth looking at some other statistics, to understand not the housing market based on prices and starts and sales, but based on what it looks like for the average person. And that shows a very different picture.

First of all, here’s a fairly astonishing stat:

Bank of America Corp. has amassed $64 billion of mortgages that are at least six months delinquent and have yet to enter foreclosure, more than twice the amount held by its four largest competitors combined [...]

The data, published last month by the monitor of the settlement, highlight Bank of America’s vast backlog of delinquencies, and the years it will take to work through them as borrowers fall further behind and losses mount for investors in mortgage-backed securities. While the Charlotte, North Carolina-based bank has begun modifications for many of its 275,000 homeowners at least 180 days behind as of Sept. 30, some will join the already clogged U.S. foreclosure pipeline.

I would focus less on how routing these $64 billion in mortgages into the foreclosure pipeline will affect prices and sales (though that will happen) and more about how the people behind those $64 billion of mortgages will survive without their house. Your talking about several hundred thousand if not millions of people, and this is but one mortgage lender.

Meanwhile, the mortgage market is now entirely a government-sponsored enterprise:

…with little planning and paltry public discussion, the government has almost completely taken over the American home mortgage market. Banks and other for-profit financial services companies lend money to homeowners, but without the guarantees and other support the government provides, the housing market would barely be functioning now.

Fannie Mae and Freddie Mac, the taxpayer-controlled housing giants, guaranteed 69 percent of new mortgages in the first nine months of the year, up from about 27 percent share in 2006, according to Inside Mortgage Finance. Meanwhile, the Federal Housing Authority and the Department of Veteran’s Affairs currently back another 21 percent of mortgages, up from just 2.8 percent in 2006. Altogether, 9 of every 10 new mortgages are backed by the U.S. taxpayer, up from three in 10 in 2006, when the government share hit a decade-low, according to the publication.

Similar to this, one should also point out the extreme price sensitivity in the mortgage market, and how the slightest increase in mortgage rates cause applications to crash. This has been a consistent dynamic, especially as it relates to refinancing. This lets you understand how much the Federal Reserve is propping up the mortgage market by purchasing mortgage backed securities and keeping rates extremely low. There is massive financial support being thrown at lenders.

And who does that enable? Companies which, as shown by this incredible chart, have committed vast amounts of fraud over the past several years, which the regulatory apparatus is only beginning to capture, and even then in cost-of-doing-business settlement. The one guilty plea that UBS had to give in the Libor scandal was the first criminal fraud charge agreed to by a major bank since 1989. Regulators have basically granted forbearance for 20-plus years, and with the other hand they shovel money toward the same fraudulent banks.

When you have the government this involved in a market, it breeds a certain corruption, or at least enables it. That’s how you get a market where banks can leave houses off the market for years and artificially constrain supply. That’s how you get investors able to scoop up all sorts of housing in the creation of another bubble. And considering that the same elements of fraud and fabrication and abuse remain evident within the marketplace, you have to say that such an enabling is already well underway.

Photo by Images_of_Money, used under Creative Commons license.


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