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FRED
08-09-06, 11:22 AM
IMF: House prices may crash in Ireland (http://www.imf.org/external/np/sec/pn/2006/pn0688.htm)
August 9, 2006 (IMF Report)

The International Monetary Fund (IMF) has warned that Ireland's personal debt levels and the spiralling cost of houses threaten to undermine future prosperity.

The IMF said the property market faces an "abrupt" downturn, and warned that the loss of competitiveness is undermining future trading prospects.

"Bank credit to property-related sectors has grown rapidly and now accounts for more than half of total bank lending. Household debt as a share of household disposable income rose to about 130% in 2005, among the highest in Europe," it said in a report.

"Growth has become increasingly unbalanced in recent years, with heavy reliance on building investment, sharp increases in house prices, and rapid credit growth, especially to property-related sectors."


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AntiSpin: Could the IMF warning on Ireland's housing bubble apply to the US? Here in the US, household debt as a share of household disposable income is also about 130%. But the IMF is measuring the wrong thing. The Frankenstein Economy (http://www.itulip.com/frankensteineconomy.htm) has, among other things, made the Monthly Payment Consumer* the dominant economic participant. That means the number to watch is the trend in the ratio of debt service to disposable income. What's the "right" ratio? No one knows, but we can see that it is at an all time high and has increased sharply in the past year, suggesting a possible peak for the cycle.



http://www.itulip.com/images/debtserviceratio.gif


US housing related loans also represent more than half of total bank lending as they do in Ireland. In 2005, home mortgage debt outstanding amounted to $9.1 trillion (http://www.financialservicesfacts.org/financial2/mortgage/mortgages/). While this represents a hefty 75% of the $11.7 trillion in total depository bank assets in the US, it represents less than 25% of the $40 trillion of total credit market asset holdings.


http://www.itulip.com/images/totalcreditvsmortgages.gif


The housing related credit risks in the US appear to be based on the kind of loans lenders have had to make and the way they've had to make them in order to stay competititive. A few excepts from Fed Governor Susan Schmidt Bies's remarks (http://www.federalreserve.gov/boardDocs/speeches/2006/20060614/default.htm) at the Mortgage Bankers Association Presidents Conference, Half Moon Bay, California, June 14, 2006:
"Supervisors have also observed that lenders are increasingly combining nontraditional mortgage loans with weaker mitigating controls on credit exposures--for example, by accepting less documentation in evaluating an applicant's creditworthiness and not evaluating the borrower's ability to meet increasing monthly payments when amortization begins or when interest rates rise. These "risk layering" practices have become more and more prevalent in mortgage originations. Thus, although some banks may have used some elements of nontraditional mortgage products successfully in the past, the recent easing of traditional underwriting controls and the sale of nontraditional products to subprime borrowers may contribute to losses on these products.

"Supervisors are concerned that banks may not be fully aware of the potential risks of using risk-layering practices with nontraditional mortgage products. These practices may have become more widespread over the past couple of years as competition for borrowers and declining profit margins may have forced lenders to loosen their credit standards to maintain their loan volume. In the Federal Reserve Board's most recent Senior Loan Officer Survey, conducted this past April, more than 10 percent of the surveyed institutions reported having eased their underwriting standards for residential mortgage loans. Only one of the surveyed lenders reported having tightened standards. Additionally, information from other sources seems to show continued growth in the number of borrowers purchasing real estate with no equity using simultaneous second liens."
and
"One final subject that is not addressed explicitly in our draft guidance, but that I believe is still important to supervisors and bankers, is mortgage fraud. There appears to have been a substantial upswing in suspected fraud related to residential mortgages in the past decade. Types of fraud include falsification of loan applications, identity theft, misuse of loan proceeds, and inflated appraisals. According to the Financial Crimes Enforcement Network, there were more than 18,000 reports of suspected mortgage fraud in 2004 (the latest year for which we have complete data), compared with fewer than 2,000 reports in 1997. And in the first six months of 2005 alone, there were more than 11,000 reports of suspected mortgage fraud. The increase may be attributable in part to an increase in the number of originators required to file Suspicious Activity Reports (SARs). Notably, the more widespread use of nontraditional loan products may present greater opportunity for fraud, as these products sometimes lack some of the quality checks typical of more-traditional mortgages. In general, we consider mortgage fraud to be a serious issue and one that bankers and supervisors must continue to confront. Of course, supervisors want to hear the industry's perspective on fraud in mortgage lending."
How much of the nine fold increase in reported mortgage fraud over the past nine years is realated to "an increase in the number of originators required to file Suspicious Activity Reports (SARs)" is unknowable because the report does not state the size of that increase, but we can safely guess that this cannot account for most or even much of this stunning increase in the number of suspected mortgage fraud reports. The 9143 signatures on this petition (http://www.appraiserspetition.com) by real estate appraisers represents 23% of the 40,400 real estate appraisers employed in the US as of June 2006 (http://www.economagic.com/em-cgi/data.exe/blsce/ceu5553132001). They have been petitioning state and federal agencies since 1999 to crack down on various violations of law by lenders.

That's the 23% of appraisers who are willing to put their livelihood on the line by posting their name and address on an Internet petition and, in the process, on the blacklist of bad guy lenders. Presumably, the other 77% are either lucky enough to work in an area where the law is enforced or the local lenders are scupulous, or they have have made the choice, as one petition signer put it in a note beside his signature, "to commit a felony versus find a new line of work." This, combined with the nine fold increase in complaints that Bies refers to, implies that mortgage fraud can be reasonably labelled prevalent if not endemic.

As in the case of the stock market bubble, the true extent of fraud related to the housing bubble will not be revealed until a few years after its over.

By the way, while the government has been busy not dealing with the abuses by lenders that the appraisers are complaining about (e.g., withholding of business if we refuse to inflate values, refuse to guarantee a predetermined value, or refuse to ignore deficiencies in the property; refusing to pay for an appraisal that does not give them what they want, and black listing honest appraisers in order to use "rubber stamp" appraisers), the banks have been busy enforcing laws that require them to report on you: (http://money.cnn.com/2006/08/09/news/economy/banks_secrecy/)

Since 1996, banks have been required to file a Suspicious Activity Report (SAR) whenever they detect a suspicious transaction of $5,000 or more that could involve potential money laundering or terrorist financing, said Candice Pratsch, a spokeswoman for the Financial Crimes Enforcement Network (FinCEN), the arm of the Treasury Department in charge of aggregating reports.

SARs provide the government with addresses, names, dates of birth, Social Security numbers or passport information, along with a brief description of the financial activities that raised red flags.

Between April 1996 and December 2005, 2.19 million SARs were filed by depository institutions, according to a recent report by FinCEN. The government touts the law as an effective tool in helping law enforcement track leads for new investigations and in identifying and linking intelligence for ongoing investigations by the FBI.
Sweet dreams.

You can place the blame on the banks for both problems, the mortgage fraud and the invasion of your privacy, but we all know the real culprit here: the government that runs this circus.

* The Monthly Payment Consumer: After several years of “No Money Down!” and “Zero Interest for Six Months!” financing, not to mention interest-only and negative amortization mortgages, consumers got used to the idea that credit is nearly free and in nearly infinite supply. Consumers no longer think of purchases in terms of total price of a product or service but as a monthly payment that is a portion of monthly income. The monthly cost of a home that went for $1 million in 2005 purchased with a $3.3% ARM carried the same monthly cost as a $500,000 home in 1995 purchased with a 6.6% fixed rate mortgage. The two homes are equally affordable. Problem is, the two prices often applied to the same house (http://www.cepr.net/columns/baker/2006_03_30.htm) but ten years apart. Even though the home did not increase in value (utility) over that time, the capital gains income earned by speculators and home owners from the price inflation when selling these properties (tax free up to $500,000 in Massachusetts) enabled by cheap financing was happily counted by the government as part of GDP growth.

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nikki
08-09-06, 12:07 PM
So when will we see a similiar statement about the US and the dangers of the potential crash of it's housing market? My guess is NEVER. Why is it so different here? We've got perma-bulls like Leareah and Stevens hawking their constantly revised predictions (http://www.realtor.org/PublicAffairsWeb.nsf/Pages/AugustForecast06?) that sales levels and prices will only stabilize (or rise, regarding prices) for the remainder of 2006, and that this new supply glut is great for buyers (lest we forget prices and mortgage debt are at all-time highs) even as we know all these ARMs are resetting and real people are hurting from it (http://www.msnbc.msn.com/id/14251743/). Yes, I know the NAR are salesmen, but they're like drug dealers, pushing their product at whatever cost and with whatever spin and fabrications they can muster, regardless of the adverse impact on customers. Comments like Yellen's are looked at and swept under the rug. The reintroduction of "normal" lending standards would pop this bubble all by itself, and everyone talks about the risks, but weren't we due for some new guidance on these mortgages in early June? Where are they?

bart
08-09-06, 01:28 PM
...
weren't we due for some new guidance on these mortgages in early June? Where are they?

The Fed, etc. have been jawboning about this since early 2005 and there was some minor tightening in May 2005 or so... and new home sales peaked in August. I'm in both not holding my breath mode and also in my usual curtain ( http://www.nowandfutures.com/grins/oz_curtain.wav ) mode. ;)


Here's Bull & Bears chart of the Fed's quarterly Loan Officer Survey data - not exactly what I'd call tight.
http://www.bullandbearwise.com/OfficerSurveyChart.asp

nikki
08-09-06, 05:29 PM
The Fed, etc. have been jawboning about this since early 2005 and there was some minor tightening in May 2005 or so... and new home sales peaked in August. I'm in both not holding my breath mode and also in my usual curtain ( http://www.nowandfutures.com/grins/oz_curtain.wav ) mode. ;)


Here's Bull & Bears chart of the Fed's quarterly Loan Officer Survey data - not exactly what I'd call tight.
http://www.bullandbearwise.com/OfficerSurveyChart.asp

Nice graph.

Calculated Risk had a blurb (http://calculatedrisk.blogspot.com/2006/08/pimco-housing-made-fed-pause.html) about this exact topic today.

"I'm still trying to find out the timing of the "Nontraditional Mortgage Guidance". I wrote to the FDIC last week, and this was their response:

"The agencies are currently reviewing the comments received and developing final guidance."

Not much help."

But I agree with PIMCO, that housing did indeed make the Fed pause, but it's not going to matter because they won't be able to pause for long. That's quite a statement for McCulley to say keep your ARM because rates will rise no more. Since PIMCO feels the next move will be a cut, is that supposed to rescue all those with ARMs? I don't think that will matter either, because even if they can make the payments, they're doing so (and likely stetching a bit because their start rate was probably like 2%) on a depreciating asset, so here comes more inventory as they all decide to sell at once. Nobody wants to owe more money than their house is worth, even for just a year or so.

Ann
08-09-06, 09:47 PM
Household debt service to income ratio... hey! There's that 1995 thing again. I vaguely recall that 1995 question coming up here at itulip.com a looooong time ago. Searching, searching...

metalman
08-09-06, 10:06 PM
Household debt service to income ratio... hey! There's that 1995 thing again. I vaguely recall that 1995 question coming up here at itulip.com a looooong time ago. Searching, searching...

from the old site, "The bubble began in 1996 where the bull market ended, following a policy change by the US Fed to permit the broad money supply M3 to increase at historically abnormal rates (M3 grew 4% from 1990 - 1995 and 32% from 1995 to 1999) and an influx of foreign investment that doubled foreign holdings of US debt between 1995 and 1999."

http://www.itulip.com/index_old.html

this is good, just ran across it....

http://www.itulip.com/greenspanthoughts.htm

geez. remind you of anything?

SeanO
08-10-06, 12:15 AM
[ "One final subject that is not addressed explicitly in our draft guidance, but that I believe is still important to supervisors and bankers, is mortgage fraud. There appears to have been a substantial upswing in suspected fraud related to residential mortgages in the past decade. Types of fraud include falsification of loan applications, identity theft, misuse of loan proceeds, and inflated appraisals.

The market drop itself has enabled a popular way to misuse loan proceeds. When a seller actually gets real and drops the price well below previous sales, they instantly get an offer for the original list price and asking for some type of credit that won't appear on buyers settlement statement (like commission bonus). Appraisal is a non-issue because the existing comps often don't yet reflect the market decline and thus support the original list price. These are always 100% financing offers.

Some of these offers come from mortgage brokers buying a home for them self (I suppose honest commissions no longer support their lifestyle).

For example:

Mortgage broker purchases $1M home, discounted to $900k. Offer $1M, 100% financing, minus $100k bonus commission, and usual 3% commission. Agent pockets $127k ($100k + 3% of $900k), and gets free use of house for 1 to 2 years (length of foreclosure if willing to abuse bankruptcy a little). If they're willing to make an occasional payment out of their $127k they can even stretch this out longer... especially since they are using a negative amortization pay-option ARM. Sometime they keep their existing home, which they claim will now be a rental, and never even move in. Risk seems minimal as California doesn't allow deficiency judgments on purchase money loans and bringing a case for fraud is time consuming and expensive. Only sacrifice is credit report. Plenty of people willing to do that for $10k, let alone $100k+.

Variations include lenders partnering with borrowers willing to lose their credit for a few bucks and a nice place to stay for a while.

I don't know of an agent that hasn't recently received one of these offers. The agents I know are experienced enough to not want any part of it. Too bad the State of California has such low licensing standards that many seller agents may not even realize they are enabling fraud.

It will be an interesting ride, and it's barely begun.

BK
08-10-06, 11:10 AM
Sure lots of government officials to blame - but, most people loved the increased in property values- especially older folks - they never consider the "unintended consequences" -
1. Higher and higher housing costs for young families and singles.
2. Increased speculation in Real Estate by average folks without the money to survive the down times- fuels the fire.
3. Banks increase their speculation and lower standards for lending (but, many have loved to see their Banking Stock go higher and higher).


Too often the Real Culprit is right there in the Mirror. But, there will be a long list of culprits for the Politicians to drag into hearings when the Air is finally out.