What We Know (and Don’t Want to Know) About Housing Today, June 16, 2010, 34 minutes ago | (Charles Hugh Smith) The housing market is doomed in the U.S., and the causal factors are all well-known. But we don’t want to know, because that knowledge would re-order the American culture and economy.

Yesterday I suggested that what we don’t want to know is as important as what we know/don’t know. We know housing values are artificially and unsustainably high, but we don’t want to know this.

About two-thirds of U.S. households own a house (75 million); 51 million have a mortgage and 24 million own homes free and clear (no mortgage). Most of the other 36 million households are moderate/low income and have limited or no access to credit and limited or no assets.

Who benefits from a housing market propped up by massive government subsidies? The homebuilders, lenders and real estate industries, of course, but the 75 million “stakeholders” in the housing market also want to believe the market is “fairly priced” and bound to recover its bubble-era heights.

Why? As I reported in Housing and the Collapse of Upward Mobility (April 16, 2010), the stupendous equity extraction of the bubble years left U.S. homeowners with little equity in their homes. The bursting of the housing bubble thus effectively destroyed most of the middle-class wealth held in housing:

If we look up all the gory details in theFed Flow of Funds, we find that household real estate fell from $23 trillion in 2006 to $16.5 trillion at the end of 2009. That is a decline of $6.5 trillion, more than half the total $11 trillion lost in the credit/housing bust.

Home mortgages have fallen a negligible amount, from $10.48 trillion in 2007 to $10.26 trillion at the end of 2009. As of the end of 2009, total equity in household real estate was a paltry $6.24 trillion of which about $5.25 trillion was held in free-and-clear homes (32% of all household real estate, i.e. 32% of $16.5 trillion).

That leaves about $1 trillion–a mere 1.85% of the nation’s total net

worth– of equity in the 51 million homes with mortgages.

The orgy of speculation, leverage and debt incentivized by the credit/housing bubble of 2000-2006 has, in the aftermath of the bubble’s bursting, destroyed most of the nation’s middle-class wealth.

In effect, three generations of accumulated equity was blown off in “wannabe wealthy” consumption and speculation.

That $6 trillion in wealth is gone. For many households, that was the majority of their wealth. Naturally, all of us who saw the value of our property skyrocket in the bubble years want those valuations (and all that equity/wealth) back.

But it is not to be, for fundamental, undeniable reasons.

1. There is a gargantuan oversupply of homes. U.S. vacant housing hits record 19 million:

The number of vacant housing units in the United States increased to a record

19 million in the first quarter of the year, up from 18.9 million in the fourth quarter. In the past year, the housing inventory rose by

1.14 million to 130.9 million, while occupied homes increased by 1.07 million to 111.9 million.

According to Census data, perhaps 4-5 million of these are truly second/vacation homes. We can estimate that several million other houses might be located in places no one wants to live any more, or they are no longer habitable. Deduct as many millions as you plausibly can, and you still have 10+ million vacant dwellings.

In the best-case scenario, it will take nine years to unload current inventory:

104 months to clear housing inventory, shadow inventory.

Basic supply and demand suggests that prices must fall as supply far exceeds demand.

Since Baby Boomers will be downsizing and defaulting for years to come, the supply of homes for sale could easily expand beyond today’s inventory.

2. The generations following the Baby Boomers are not numerous enough to provide demand for more housing. I reported the unyielding facts of demographics in Housing Headwinds and Baby Boom Demographics (April 13, 2010). As the baby Boom downsizes and defaults en masse, there aren’t enough potential buyers to soak up all the suburban homes and second homes that the Boomers will be selling.

3. The entire mortgage market has been socialized by the Federal government, which is poised to lose hundreds of billions of dollars propping up the housing market.

Wake-Up Time for a Dream:

As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.

Literally 99% of the mortgages are government-backed: With a big boost from the Feds, investors again like securities backed by assets:

(In 2009), government-backed loans have accounted for 99%, or $1.5 trillion, of mortgage securities. Banks and other private firms have issued a mere $15 billion. In addition, the Federal Reserve and Treasury have spent nearly $1.25 trillion buying those bonds to support the housing and broader credit markets. “The government is literally plowing trillions of dollars into the U.S. mortgage market to keep it afloat,” says Guy D. Cecala, publisher of Inside Mortgage Finance.

Meanwhile, the costs of this unprecedented subsidy of housing may cost

$1 trillion in losses on Fannie and Freddie alone.

4. The Roots of the Housing Bubble Remain Unchanged: moral hazard, unregulated risk, extreme leverage, fraud, you name it–nothing’s changed.

5. Defaults and foreclosures will dump millions more homes on the market.

The default rate on low-down-payment FHA loans is a staggering 20% on loans written in 2008–after the housing bust had already unfolded and the risk was undeniable: F.H.A. Problems Raising Concern of Policy


F.H.A. commissioner, David H. Stevens, acknowledged that some 20 percent of F.H.A. loans insured last year — and as many as 24 percent of those from 2007 — faced serious problems including foreclosure.

The problem with that willingness to absorb risk for the sake of incentivizing borrowing for home ownership is that next year another 20% will default, and then the following year another 20% will default, and by year Five the vast majority of those loans backed by FHA will be in default.

FHA Facing “Cataclysmic” Default Rates:

The Federal Housing Administration (FHA) has guaranteed about 25% of all new U.S. mortgages written in 2009, up from just 2% in 2005.

6. Mortgage re-sets will trigger additional defaults. The chart says it all:

Not knowing and/or not believing will not change the negative dynamics of the housing market.

12 Responses

  1. Have to blame Obama – do not like do to this – wanted to give him a chance. But, he is a puppet – nothing more.

    Who is Mr. Obama listening to??? And, why??? Mr. Obama is going down the wrong path. Foreclosing America is not the answer.

  2. 2 Anonymous… here in NY, second after FL. the back log of foreclosures and REO property owned by banks and other entities is 103 months… roughly 8.5 years and that is this month’s statistics… wait a few more months when the “selling season” slow’s down and that number will go through the roof… so to speak.

  3. Yeah PJ – I hear you. Do not know where you live – but I will tell you this – the power is enormous – and in some states, it is far greater than you can ever imagine.

    There is chaos in the courts – they really do not know what they are doing. We need back-up – we need Congressional and government support. It is a circus – and judges rarely do not are about individual homeowners. They really believe that it is better for country to foreclose upon us. This is what the government and media is promoting. I repeat – they do not care – the judges and courts are following propaganda. THEY DO NOT CARE – they will use everything they have to get rid of you – even it is a minor technicality. They are being pressured to do this. States are becoming insolvent – they want us to go away.

    THEY DO NOT CARE. And, we are doing nothing, as a whole, to stop it.

    Time to rally.

  4. 2 Anonymous… If a “servicer’ was calling me daily after a default judgment was issued, would personally file for a restraining order and press charges for harassment.

    Again if even for an instant I knew a “servicer’ was data mining personal information with the compliance of an unrelated entity… like where a 401K was held and how much was in it , in a heart beat would demand that good old Eric Holder get on the phone at the DOJ and summon up the army at the so called “Financial Fraud Unit” set up by the POTUS to look into the situation….

    Start at the top….

  5. Got this off the “Mortgage Servicing News” newsletter:
    June 16, 2010
    Investigation Highlights Challenges to Foreclosure Docs

    By Kate Berry

    The backlash is intensifying against banks and mortgage servicers that try to foreclose on homes without all their ducks in a row.

    Because the notes were often sold and resold during the boom years, many financial companies lost track of the documents. Now, legal officials are accusing companies of forging the documents needed to reclaim the properties.

    Recently, the Florida Attorney General’s Office said it was investigating the use of “bogus assignment” documents by Lender Processing Services Inc. and its former parent, Fidelity National Financial Inc. And a state judge in Florida has ordered a hearing to determine whether M&T Bank Corp. should be charged with fraud after it changed the assignment of a mortgage note for one borrower three separate times.

    “Mortgage assignments are being created out of whole cloth just for the purposes of showing a transfer from one entity to another,” said James Kowalski Jr., an attorney in Jacksonville, Fla., who represents the borrower in the M&T case.

    “Banks got away from very basic banking rules because they securitized millions of loans and moved them so quickly,” Kowalski said.

    In many cases, Kowalski said, it has become impossible to establish when a mortgage was sold, and to whom, so the servicers are trying to recreate the paperwork, right down to the stamps that financial companies use to verify when a note has changed hands.

    Some mortgage processors are “simply ordering stamps from stamp makers,” he said, and are “using those as proof of mortgage assignments after the fact.”

    Such alleged practices are now generating ire from the bench.

    “The court has been misled by the plaintiff from the beginning,” Circuit Court Judge J. Michael Traynor said in a motion dismissing M&T’s foreclosure action with prejudice and ordering the hearing.

    The Marshall Watson law firm in Fort Lauderdale, Fla., which represents M&T in the case, declined to comment and the bank said it could not comment.

    In a notice on its website, the Florida attorney general said it is examining whether Docx, an Alpharetta, Ga., unit of Lender Processing Services, forged documents so foreclosures could be processed more quickly.

    “These documents are used in court cases as ‘real’ documents of assignment and presented to the court as so, when it actually appears that they are fabricated in order to meet the demands of the institution that does not, in fact, have the necessary documentation to foreclose according to law,” the notice said.

    Docx is the largest lien release processor in the United States working on behalf of banks and mortgage lenders.

    Peter Sadowski, an executive vice president and general counsel at Fidelity National in Fort Lauderdale, said that more than a year ago his company began requiring that its clients provide all paperwork before the company would process title claims.

    Lender Processing Services, which was spun off from Fidelity National two years ago, did not return calls seeking comment Tuesday. The company disclosed in its annual report in February that federal prosecutors were reviewing the business processes of Docx. The company said it was cooperating with the investigators.

    “This is systemic,” said April Charney, a senior staff attorney at Jacksonville Area Legal Aid and a member of the Florida Supreme Court’s foreclosure task force.

    “Banks can’t show ownership for many of these securitized loans,” Charney continued. “I call them empty-sack trusts, because in the rush to securitize, the originating lender failed to check the paper trail and now they can’t collect.”

    In Florida, Georgia, Maryland and other states where the foreclosure process must be handled through the courts, hundreds of borrowers have challenged lenders’ rights to take their homes. Some judges have invalidated mortgages, giving properties back to borrowers while lenders appeal.

    In February, the Florida state Supreme Court set a new standard stipulating that before foreclosing, a lender had to verify it had all the proper documents. Lenders that cannot produce such papers can be fined for perjury, the court said.

    Kowalski said the bigger problem is that mortgage servicers are working “in a vacuum,” handing out foreclosure assignments to third-party firms such as LPS and Fidelity.

    “There’s no meeting to get everybody together and make sure they have their ducks in a row to comply with these very basic rules that banks set up many years ago,” Kowalski said. “The disconnect occurs not just between units within the banks, but among the servicers, their bank clients and the lawyers.”

    He said the banking industry is “being misserved,” because mortgage servicers and the lawyers they hire to represent them in foreclosure proceedings are not prepared.

    “We’re tarring banks that might obviously do a decent job, and the banks are complicit because they hired the servicers,” Kowalski said.

  6. PJ

    Good for you – stand firm. And, ask them to identify the CREDITOR.

    Your question – maybe – but then your loan should show up as a Fannie/Freddie on website. Has the servicer identified Fannie/Freddie as the Creditor???

  7. 2 Kickboxer

    “My own servicer is calling almost daily to inform me that we are in “foreclosure status” and that we didn’t qualify for ANY mod program. I know they are just playing head games. They are also asking us to borrow against our 401k plan. Yeah, riiiiight! That will NEVER happen.”

    Two things seem odd here, calling you daily… hope you are recording each and every call… that seems a bit deperate for a “pretender lender”

    Asking you to borrow againist your 401K… how do they know you have one and how much is in it… where would they get that information…

    One question is your servicer one of the “under the radar” GSE servicers that are getting away with breaking the law while being protected by Fannie Mae?

  8. Then, of course, there are those, like me, with prime loans who are defaulting due to loss of income and other hardships. Of my neighbors that are in trouble, most have prime rate loans and have been struggling to stay afloat but default is imminent.

    The banks just don’t seem to be modifying prime rate 30 year fixed loans. I guess they want to modify those with predatory/ fraud loans so that those homeowners sign away their right to future lawsuits. There is just no incentive to modify prime loans which is pushing us towards foreclosure.

    My own servicer is calling almost daily to inform me that we are in “foreclosure status” and that we didn’t qualify for ANY mod program. I know they are just playing head games. They are also asking us to borrow against our 401k plan. Yeah, riiiiight! That will NEVER happen.

  9. The delisting of Fannie and Freddie, as I recall, lessens the reporting requirements which they are obligated to provide as listed cos. While they will still be GSEs, I believe that the reporting requirements have now been reduced. This is convenient for both, as the astronomical scale of their deceit, corruption, gross mismanagement, taxpayer fraud, foreclosure fraud, and financial treason against the US will not be believed when it., too, is revealed by the light of day. It will certainly be in the trillions, say 3-4 trillion or more.

  10. @PJ – I don’t think the delisting will have any effect whatsoever on folks with F&F loans.

  11. Fannie and Freedie ordered to delist off NYSE! What will this mean for people who have loans “owned” by these two monsters!

  12. Wow, that’s scary! Even worse…the Alt-A loans haven’t even kicked in yet…the next housing bubble. There’s a guy that’s got a blog or website (Dr. Housing Bubble) and he writes excellent articles about the next bubble burst of these Alt-A loans. Our mortgage, that was just modified by Wells Fargo and most likely now sold off to a government trust, is still interest only until 2017. There’s no way we’ll be able to afford it when P&I kicks in. I guess we’re just renting. The original loan was riddled with fraud, forgery and deception. Thanks a lot Wells Fargo…let’s see…how many times have you been paid on our mortgage?

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