Goldman Sachs claims the Senate subcommittee's characterization of its subprime business was “sloppy and incomplete.” (Photo Credit: CC BY/Ludovic Bertron/Flickr)

Goldman Sachs Group Inc., the securities firm Sen. Carl Levin, D-Mich., once described as a “financial snake pit, rife with greed, conflicts of interest and wrongdoing,” is preparing to strike back. The Wall Street Journal reports that the firm plans to counter the Senate’s financial crisis subcommittee’s 639-page report, which alleges that Goldman Sachs sought to profit by betting against the housing market and betraying its clients. Reports indicate that Goldman’s defense will focus on what the company believes to be “sloppy math” on the part of federal regulators.

‘Sloppy math and incomplete analysis’

The Senate Permanent Subcommittee on Investigations went through tens of millions of documents disclosed by Goldman Sachs, yet the securities firm says in its defense that the Senate’s analysis was incomplete. Goldman Sachs has not denied that the firm profited from the subprime mortgage crisis as prices fell and borrowers defaulted, creating the big short. However, the firm believes data suggest the Senate’s numbers are inaccurate.

One document the Senate found particularly damning for Goldman Sachs was a chart that characterized the company’s net short positions against the housing market being as high as $13.9 billion on June 25, 2007. Goldman says that number appears artificially large when juxtaposed against the 2007 net revenue of $11.6 billion the Senate reported. Goldman claims its actual net revenue was $46 billion.

Insider trading, truthful and accurate

The WSJ reports that Goldman Sachs will use data on bullish mortgage trades to temper the opportunistic venom behind such numbers, data to which the Senate already had access but chose not to highlight in its report. Goldman argues that billions of dollars in bullish trades – as well as more than $5 billion invested in prime mortgage bonds – more than offset the subprime short bets.

Despite the fact that former Goldman Sachs corporate board member Rajat Gupta backed away from his position following allegations of insider trading, the firm maintains that its dealings with the U.S. government have been “truthful and accurate,” according to a company representative for CEO Lloyd Blankfein.

Goldman Sachs gambled more than $1 billion of Gaddafi’s money

Sources

The Atlantic Wire

Goldman Sachs

Wall Street Journal

Plummeting home values are attracting cash buyers who outcompete mortgages with lower offers. Image: Flickr/Show Appeal Realty CC-BY-SA

The depressed housing market is attracting more people who buy homes with cash. In turn, home buyers who need a mortgage are finding it tough to compete with cash buyers. Yet mortgage buyers can match up better against cash by being better prepared when they make an offer.

Cold, hard cash is king

Deals made for cash comprised more than a third of home sales in February, an all-time high according to the National Association of Realtors. Cash buyers have become formidable opponents for many home buyers financing their deal with a mortgage loan. More home buyers are paying with cash because plummeting home values have made real estate a more attractive investment than the volatile stock market. People are also pulling their money out of the market and investing in rentals that net a greater long-term return than stocks.

In 2010, 59 percent of home buyers purchasing as an investment paid cash. Cash has an advantage over a mortgage because the seller knows a closing is unlikely to be derailed by contingencies. That convenience is often enough for the seller to accept a lower offer than one a financing buyer would make. Cash usually wins when the bank is the seller. Eager to get foreclosures off the books, banks will go with the safest option.

How to compete with cash

Foreclosures accounted for 25 percent of all home sales in 2010. Fannie Mae saw a 128 percent increase in short sales last year as well. But financing buyers have a more even chance over cash with sellers who have equity. Equity holders aren’t under pressure to take whatever they can get and will wait for the best offer. Financing buyers can also compete with cash by getting pre-approved for a mortgage. Being prepared with a high down payment also evens the odds. Listen to what the seller wants and be willing to do whatever it takes. Treat them with respect and have a detailed contract ready that makes the deal clear. When the time comes, act quickly. If none of these strategies work, financing buyers need not give up hope. Sometimes cash deals fall apart, too.

Cash deals versus mortgage financing

In addition to getting a better deal, paying cash to buy a home has several advantages. When mortgage rates are higher than available returns on other investments, the money saved on interest puts a buyer ahead of the game. Plus, with no leverage, if the value of the house falls, the buyer only loses what they put in. For a mortgage with 20 percent down, if the value goes down 10 percent, the home buyer loses 50 percent of the down payment.

But mortgages also have advantages over cash. Buying a home with cash leaves less liquidity for other investments. And leverage works both ways. If the value of the home goes up, the mortgage holder gains a higher percentage than the cash buyer. Plus, mortgage interest is tax deductible, which lowers the cost of the loan.

Sources

MarektWatch

WiseBread

Short Sale Daily News

The Bush tax cuts were the last foray into supply side economics, which led to wage deflation, job stagnation and astronomical deficits. Image: CC fotopedia

Rep. Paul Ryan, R-Wis., submitted a budget proposal known as the “Path to Prosperity” this week. It relies heavily on supply side economics that insist lower corporate taxes translate to more jobs and higher government revenues. Supply side economics were the principle behind the Bush tax cuts of 2001, which gave record profits to corporations while producing the weakest job growth since the Great Depression.

Supply side economics versus reality

Paul Ryan says cutting spending and taxes will generate an extra $100 billion in tax revenues, spark a new housing boom and bring unemployment down to 2.8 percent by 2021. Ryan wrote “Path to Prosperity” with the help of the Heritage Foundation, a conservative Washington think tank formed to advance supply side economics. Heritage Foundation analysis in Ryan’s plan predicts that by reducing the corporate tax rate from 35 percent to 25 percent, unemployment will fall from the current 8.8 percent to 6.4 percent within a year, down to 4 percent in 2015 and 2.8 percent in 2021. However, reaching 4 percent unemployment in the next four years would require the economy to overheat and cause runaway inflation. The Federal Reserve would respond by raising interest rates to cool things down long before that magic number is reached.

The job-killing Path to Prosperity

The “Path to Prosperity” predicts that the tax cuts will create a huge influx of jobs and set off a new housing boom, which in turn will create even more jobs. Ryan’s plan says next year it will attract an additional $89 billion in housing market investment. However, falling home prices, a backlog of millions of foreclosures and a glut of unsold homes will drag on the housing market for years to come. When it comes to jobs and Republican policies in the the near-term, Fed chairman Ben Bernanke said the GOP goal of 61 billion in spending cuts would cause a net loss of 200,000 jobs by 2012. Goldman Sachs predicted such cuts in spending and revenue would reduce GDP up to 2 percent. The Ryan “Path to Prosperity” offers only tax and spending cuts that primarily effect the poor, elderly and disabled. It doesn’t say why U.S. corporations sitting on billions in cash that aren’t hiring need more money to do so.

Exhibit A: the Bush tax cuts

The best predictions for the future of the “Path to Prosperity” lie in the past. When George W. Bush signed the 2001 and 2003 tax cuts into law, he boasted that he had launched a new era of sustained economic growth and prosperity. In reality, from 2001 to 2007 U.S. millionaires and billionaires got richer while average household income fell for the first time in history, jobs grew at the weakest pace in more than 60 years, the federal deficit rose to record levels, and the financial industry careened to the brink of collapse. In the middle of that period of job and wage stagnation, a Republican jobs package included a one-year tax holiday for companies that added up to $362 billion. Instead of hiring more workers, most of the money went to pay shareholders.

Sources

Fortune

Huffington Post

National Journal

Political Correction

Statistics of the national vacancy rate may cause people to think that ghost towns are popping up, but that is not the case. Photo Credit: Vivaverdi/Wikimedia Commons/CC-BY

It has been reported that the national rate of vacancy, or the number of houses sitting empty, has reached a 13 percent, but don’t panic. That figure does not mean it is time to begin constructing a bomb shelter and making hats from tinfoil. The housing market is depressed, but signs of life are still there.

Wealthy buying fewer homes in vacation hot spots

The media report a number of economic indicators, and statistics regarding real estate can cause a sense of doom on the horizon regarding the housing market. For instance, CNN recently published an article that said up to 13 percent of homes sit empty in America. That is a misleading statistic; CNN points out that many of the vacancies are in areas like Maine, Arizona and Florida — popular places for vacation homes. Furthermore, vacancies have gone up less than 1 percent, from 12.1 percent to 13 percent, in four years.

Pending sales increasing

Pending sales, homes that are being officially in the process of being sold, increased by 2.1 percent over February, according to Bloomberg. The dip in home sales over the past few months was attributed partially to frigid winter conditions, as no one wants to go house hunting in the middle of a blizzard. However, pending sales for February 2011 were also 8.2 percent lower than for February 2010, as the housing market is still sputtering. Lawrence Yun, chief economist for the National Realtors’ Assocition, anticipates existing home sales will pick up over the rest of 2011, according to Reuters, as older homes are selling at a faster pace than newly built homes. Newly built homes are usually more expensive than older homes.

Reality of realty

Most news about the housing market makes it seem as though a second crash is imminent, and it may be. The reality is that sales are slow, houses are not worth as much as they used to be, and banks may be less willing to lend. Prices are likely to stay low as long as fewer people are willing or able to buy houses, and lenders are skittish about lending in the current economic climate surrounding real estate. The good news is that anyone with the means to buy right now will get a great deal, and people who already own are likely to see the value of their property rise in the next few years.

Sources

CNN

Bloomberg

Reuters

Put into perspective, consumer spending is being canceled out by inflation, and the housing market could be bottoming out. Image: CC Mr. T in DC/Flickr

An increase in pending home sales in February was not enough to offset the big slide in contract signings reported in January. A February gain in consumer spending was also neutralized after being adjusted for inflation driven by rising food and energy prices. But the minutely positive data on pending home sales and consumer spending boosted stocks Monday, and some real estate experts think the housing market may have bottomed out.

Inflation and consumer spending

Consumer spending in February increased 0.7 percent compared to the month before, according to the Commerce Department. Consumer spending has risen eight months in a row, but February’s increase, adjusted for inflation, is just 0.3 percent, matching the increase reported in January. Rising food and energy prices pushed up inflation in February. After rising 0.3 percent in January, the Commerce Department said the personal consumption expenditures price index rose 0.4 percent, the fastest rate recorded since June 2009. The increase in the consumption expenditures price index effectively canceled out February’s 0.3 percent increase in personal income. Households have also been dipping into savings to cover rising food and energy prices. Savings dropped from $710.5 billion in January to $676.7 billion in February.

Pending home sales as an economic indicator

Pending home resales increased 2.1 percent in February after dropping 2.8 percent in January, according to the National Association of Realtors. Compared with February 2010, pending home sales fell 9.3 percent. Because they represent signed contracts, pending home sales are considered a leading economic indicator. The number affects existing home sales data a month or two later, when the contracts close. As for February, existing home sales — 95 percent of today’s housing market — dropped 9.6 percent from the month before. The median price for existing homes dropped 5.2 percent from February 2010, erasing all increases in home values since February 2002. New home sales plunged 17 percent in February to the lowest rate ever recorded. The median price for new homes dropped 8.9 percent from February 2010.

Has the housing market bottomed out?

Because home prices continue to fall, the National Association of Realtors expects existing home sales to eventually rise 5 to 10 percent overall in 2011. Very few people are buying despite the fact that housing has become so affordable it should be one of the most attractive investments in the U.S. According to Deutche Bank, it’s now cheaper to pay a mortgage and other major homeownership costs than to rent the same house in 28 out of 54 major markets. Optimistic real estate analysts are betting that this affordability will eventually entice potential homeowners into pulling the trigger. The re-emergence of homebuyers could start raising housing prices in many markets, which could get even more homebuyers off the fence.

Sources

Bloomberg

New York Times

Fortune

The 30-year fixed-rate mortgage, which only exists because of Fannie and Freddie, is likely to disappear along with them. Image: CC Scurzuzu/Flickr

The 30-year fixed-rate mortgage could be history if Fannie Mae and Freddie Mac go away. Ridding taxpayers of the burden to prop up Fannie and Freddie is a goal supported by both Democrats and Republicans. But the demise of Fannie and Freddie will likely make getting a mortgage a luxury for a majority of Americans.

Goodbye 30-year fixed-rate mortgage

The 30-year fixed-rate mortgage is threatened with extinction because the only reason it exists is through government support. Fannie Mae and Freddie Mac offer borrowers low mortgage rates because of money from investors who get a guarantee from the government they will make money even if borrowers default. That government guarantee cost taxpayers billions when the housing market collapse and now the housing market is too weak to stand on its own. Fannie, Freddie and other federal programs back about 90 percent of new mortgage loans because lenders can’t find investors in mortgages without a government guarantee.

Hello 10-year floating rate mortgage

Whether Congress abruptly pulls the plug on Fannie and Freddie or tries to gradually wean the housing market from government support, the 30-year fixed-rate mortgage isn’t expected to survive. Without the Fannie or Freddie guarantee, mortgage lenders will have no incentive to offer 30-year fixed-rate loans because they must assume the risk of rising interest rates over a very long time. Lenders will likely switch to a 10-year floating-rate loan to attract investors. The 10-year floating-rate loan would shift risk away from lenders and their investors to the borrowers. Borrowers will face higher loan fees, higher interest rate risk and a more acute “equity gap” risk in the event of a shorter term loan and falling home prices.

Profound changes in U.S. homeownership

Both Republican and Democratic voices on the housing issue want the government to replace Fannie and Freddie with a system that somehow offers borrowers similar benefits without the government guarantee. Others argue that a private market without government support would inspire investor confidence and offer middle class homeowners better loan products — products that would not include the 30-year fixed-rate mortgage.  Without the 30-year fixed rate mortgage, a housing market staple since the 1950s, fewer Americans are likely to buy homes. The majority who will are likely to gravitate toward less expensive homes.

Sources

New York Times

Huffington Post

NPR

Wealthy Americans are taking advantage of depressed prices and low jumbo mortgage rates while the housing market continues to decline. Image CC kennarealestate/Flickr

Sales of homes that cost millions rose dramatically in major U.S. cities last year. Wealthy Americans prospering from a rebound on Wall Street are taking advantage of low interest rates on jumbo loans and falling home prices to land unprecedented bargains. Meanwhile, home sales overall are stalling, and analysts expect home prices to decline another 25 percent as a flood of foreclosures hits the housing market in the months ahead.

Stock market wealth fuels luxury real estate

Million-dollar home sales increased last year in all 20 major metropolitan areas monitored by DataQuick, a real estate analytics firm. After four straight years of decline, high-end home sales increased 18.6 percent. Wealthy people are feeling more financially secure as stock values have nearly doubled since March 2009. The luxury home market in San Jose, Calif., led the way in 2010 with a 27.4 percent increase in sales of homes priced more than $1 million. In New York, Wall Street bonuses drove a 25 percent increase in high-end home sales. In Washington, D.C., richly compensated government workers boosted luxury real estate sales 20 percent. In contrast, Phoenix, one of the most depressed real estate markets in the nation, saw just a 0.4 percent increase in luxury homes.

Jumbo mortgage rates plummet

The boost in luxury home sales is also being driven by a dramatic decrease in jumbo mortgage rates. Buying a $1 million home requires a jumbo loan. A jumbo loan has a higher interest rate than a regular mortgage because it’s considered too risky to be backed by Fannie Mae or Freddie Mac. In 2009 jumbo mortgages had interest rates 1.8 percent higher on average than regular mortgages. In 2010, the difference narrowed to 0.6 percent. However, even though that decrease translates to about $780 a month savings on a million dollar jumbo loan, many luxury home buyers pay cash. Last year 29.4 percent of buyers who bought homes that cost more than $1 million paid cash, according to DataQuick. For home sales valued at more than $5 million, 62.2 percent of buyers paid in cash. For million-dollar homebuyers who got jumbo loans, the median down payment was 40.1 percent.

Outlook remains grim for housing market

Growth in luxury real estate sales is doing little to revive a moribund housing market that is down 80 percent from its peak in 2005. New home sales fell 11.2 percent from December to January. Analysts also predict that home prices may fall another 25 percent. Foreclosures accounted for 26 percent of U.S. homes sales in 2010, and that number is expected to increase. A majority of potential homebuyers are being advised to wait another year to get an even bigger discount. But there is some good news. According to the National Association of Realtors, an annualized rate of 5.36 million for existing home sales in January was higher than forecast. If the trend continues, existing home sales could increase 8 percent in 2011.

Sources

CNNMoney.com

Total Mortgage Services

International Business Times

The Obama administration has released a long-awaited proposal for getting government out of the mortgage business. Image: TheTruthAbout/Flickr

The Obama administration submitted its plan for the future of Fannie Mae and Freddie Mac Friday. The report is a series of options to consider for getting the government out of the mortgage lending business. The Obama Fannie-Freddie plan proposes higher fees and down payments that could make it harder to get the 30-year fixed mortgage Americans have relied on for decades.

The Obama Fannie-Freddie plan

The Treasury Department offers three mortgage scenarios in which the government is involved on different levels. The Obama administration favors option number three — replacing Fannie and Freddie with private companies to offer mortgage insurance. The private companies would be required to buy reinsurance for the mortgages they guarantee. The government reinsurance would only pay out if the private company is in danger of going under, not if any particular mortgage goes bust. The administration said this option would preserve low-cost access to mortgage credit. However, the administration warned that lax oversight in this system would leave the housing market vulnerable to another crisis.

Fannie and Freddie, plans B and C

Other options in the Obama Fannie Freddie Plan include privatizing the system or replacing Fannie and Freddie with a system for low-income, rural and veteran homebuyers that could expand in the event of a crisis. Privatizing housing finance would get taxpayers off the hook, but would likely boost fees, down payments and interest rates to levels that would put a 30-year mortgage out of reach for many who can get one under the current system. The low-income-rural-veteran option would make private mortgage lenders accountable for risk but was described as problematic because it would have to be designed so that it could expand during a crisis and contract again afterward.

Fixing Fannie and Freddie without jeopardizing housing recovery

The administration has acknowledge that the government provided too much support for housing with too many incentives for investment in housing — primarily in the form of mortgage-backed securities. A huge part of the mortgage business had no regulation or oversight.The administration said that a strategy for the future can’t cut back on government support too much too fast, or the housing market will take even longer to recover. Treasury Secretary Tim Geithner said replacing Fannie and Freddie and fixing the mortgage lending system could take five to seven years.

Sources

Washington Post

Bloomberg

TIME

A grain of salt may be needed to swallow the latest news of a "surge" in December new home sales. Image: CC quinn.anya/Flickr

New home sales exceeded analysts’ record-low expectations in December. The rise in December new home sales followed an alarming drop in U.S. home prices in November. A temporary spike in mortgage rates is suspected of driving the numbers, as home prices are expected to continue sliding.

Take new home sales with a grain of salt

New home sales registered a 17.5 percent month-to-month gain in December, according to the Commerce Department. New homes sold at a seasonally adjusted 329,000-unit annual rate in December. But these days even the most minor item of good news in the housing market must be taken with a grain of salt. The number of actual homes in the U.S. that sold in December was just 22,000. The Commerce Department also revised new home sales in November down to 20,000, the worst month ever. December 2010 wins the honor of second-worst month ever. Plus, December new home sales in 2010 were down 7.6 percent from December 2009. Overall new home sales in 2010 fell 14.4 percent to a record low 321,000-unit rate.

Why new home sales ‘surged’

New home sales may have received a bump from rising mortgage rates. The rate on 30-year fixed mortgages moved up more than half a point from the last week of November and into December to reach 5 percent. Potential home buyers sitting on the fence until home prices bottomed out may have interpreted the mortgage rate blip as a signal that it was time to get a home loan before the market turns the corner. However, the rate on 30-year mortgages has since returned below 5 percent. According to Freddie Mac, 30-year fixed mortgage rates averaged 4.99 percent for the week ending Jan. 21, down from 5.06 the week before. Another reason for the surge in new home sales may have been foreclosure moratoriums.

New home sales in 2011

A positive trend in new home sales for 2011 may depend on the behavior of home prices. Choosy shoppers in a buyer’s market continue to drive down home prices with cheap counter offers. The Standard & Poor’s/Case-Shiller home price index released earlier this week reported new lows in home prices for nine major U.S. cities. A wave of foreclosed homes is expected to hit the housing market in 2011, which will further drive down home prices. If it becomes evident to potential home buyers that home prices have bottomed out, many more are expected to visit a mortgage lender.

Sources

Reuters

CNBC

Los Angeles Times

It's a buyer's market, but home sales continue to suffer as potential home buyers wait for prices to bottom out. Image: CC TheTruthAbout/Flickr

The housing market has been suffering as home sales and home values continue to slide. People aren’t buying houses, but perhaps they would if they could. A recent poll shows that most Americans believe now is a good time to buy a home.

Believing in a buyer’s market

A lagging housing market has been a drag on economic recovery, but a recent Gallup poll found that when it comes to home buying, 67 percent of Americans believe that now is a good time. Even though that is a majority of poll respondents, it isn’t exactly good news. The poll, taken earlier this month, involved a random sample of 1,018 adults. A Gallup poll a year ago found that 72 percent of respondents believed in a buyer’s market, up from 71 percent in 2009. The percentage of optimistic potential home buyers has dropped to 67 percent as home values keep declining. Potential home buyers are waiting for home prices to bottom out.

The great decline in home prices

The drop in U.S. home prices began in 2007, has persisted and will continue in 2011. RealtyTrac, a housing market research firm, reported a record number of foreclosures in 2010. Most of these homes haven’t yet been marketed. When they do, inventory of homes for sale will rise. A report from Standard & Poor’s said the average price of homes in the U.S. could fall by another 7 percent to 10 percent this year. Twenty-seven percent of respondents to the Gallup poll believe home prices in their neighborhoods will continue to plummet. Even more, 42 percent, are worried that their own homes will continue to lose value. Surprisingly, 21 percent expect home values to increase in their community.

Housing market outlook

To resuscitate the housing market, the government pulled out all the stops last year. The new home buyer tax credit gave $8,000 for each mortgage. The Federal Reserve bought more than $1 trillion in mortgage securities and has kept mortgage rates artificially low. But with unemployment still high, most American’s believe the recession hasn’t really ended. Fed chairman Ben Bernanke said last week that it could take at least three more years for employment to recover to pre-recession levels. But interest rates are so low, getting a loan to buy a house now is one of the best long-term investments available. Most American’s seem to believe that, but acting on it has yet to happen.

Sources

MarketWatch

24/7 Wall St.

Seeking Alpha

A double dip in the housing market is imminent, analysts say, as home prices dropped further than expected in October. Image: CC johpan/Flickr

Home prices dipped lower than expected from September to October according to an industry report. The Standard & Poor’s/Case-Shiller home price index released Tuesday also reported that October’s plunge in home prices was the greatest year-over-year drop since December 2009. Analysts blamed the end of the homebuyer tax credit and warned of a double-dip in the housing market.

The Case-Shiller home price index

In October month-to-month home prices fell in 18 of 20 markets surveyed by the Case-Shiller home price index. Housing industry experts had predicted a flat October following a weak September. The decline in value hit faster and harder than expected after the end of the homebuyer tax credit last summer. Home prices in the 20 markets fell 1.3 percent from September to October, an annualized decline of 15 percent. Atlanta was hit hardest with a 2.1 percent drop in home prices. Five other markets, including Charlotte, N.C.; Miami; Portland, Ore.; Seattle and Tampa, Fla., hit all-time lows since the housing market collapsed in 2007.

Housing market double-dip

The chairman of the S&P/Case-Shiller home price index committee said the housing market is poised on the edge of the double-dip analysts have been warning about. Home prices in October have dropped 30 percent since peaking in July 2006. A backlog of foreclosures waiting in the wings will continue downward pressure on home prices in 2011. Inventory of homes for sale is up 50 percent over December 2009. Millions of homeowners planning to sell are standing by for signs that the housing market will recover.

Housing market winners and losers in 2011

The sustained decline in home prices is bad news for Realtors. However, news about a housing market double-dip is good news for homebuyers. The Case Shiller home price index reported that sales volume was down 25 percent from December 2009 as potential homebuyers wait for the housing market to bottom out. But there’s a catch. The depressed housing market is a drag on economic recovery as it is inextricably connected to high unemployment and low consumer confidence. Even though economists are optimistic about 2011 economic growth, home prices are expected to decline as much as 3 percent further in 2011.

Sources

Bloomberg

CNN

Wall Street Journal

Underwater mortgages declined as foreclosures increased, while negative equity is expected to grow as home prices continue to slide. Image:; CC 666isMONEY/Flickr

Underwater mortgages in the U.S. declined for the third straight quarter for the period ending Sept. 30. The decline in negative equity is a result of increasing foreclosures. Negative equity is expected to increase in the near future as U.S. home values continue to decline.

Decline in negative equity deceiving

The number of homeowners with underwater mortgages fell from 23 percent in the second quarter to 22.5 percent in the third. According to CoreLogic, a housing market research firm, in a healthy housing market only 5 percent of homeowners owe more on their mortgages than the house is worth. The decline in negative equity was credited mainly to a surge in foreclosures taking people out of their mortgages. CoreLogic said homes for sale in foreclosure auctions averaged 110,000 a month from July to September, an increase from 98,000 in the same period last year. Banks foreclosed on a record 288,345 homes in the third quarter, a 7 percent increase from the second quarter and a 22 percent year-to-year increase.

Negative equity feeds on falling home prices

Total negative equity in the third quarter was $744 billion, declining from $800 billion a year ago. Negative equity is expected to rise because about 2.4 million homeowners hold equity of 5 percent or less. Any further decline in prices will pull their mortgages underwater. CoreLogic estimates that home values in the U.S. will have dropped by $1.7 trillion in 2010. The Federal Reserve said the value of residential real estate fell $649 billion in the third quarter to $16.6 trillion. Morgan Stanley issued a report last week stating that home prices could drop another 11 percent before finally hitting bottom in the first quarter of 2012.

A solution to negative equity

Underwater mortgages have a detrimental effect on residential real estate. Homeowners with negative equity quit maintaining their property and many are motivated to default on their mortgages. The Obama administration has been pressuring Fannie Mae and Freddie Mac to give underwater homeowners a few percentage points back on their mortgage. Real estate experts say such an equity handout is a temporary, hollow gesture. The only real solution to the negative equity problem, which is holding back the entire economy, is significant price appreciation in a competitive housing market.

Sources

Bloomberg

Associated Press

MSNBC

Americans may no longer be entitled to a mortgage tax deduction if the deficit commission gets its way on the tax break. Image: CC erion.shehaj/Flickr

The mortgage interest deduction is a tax break Americans hold sacred. But the mortgage interest deduction takes a big bite out of federal tax revenue. The Obama administration’s deficit reduction commission has put it on the table, causing an uproar from homeowners and Realtors.

Mortgage interest deduction a big target

The mortgage interest deduction is regarded as an inalienable right in the U.S. Until the deficit commission came along, the tax break was considered politically invulnerable. But for a presidential panel looking to cut $4 trillion in deficit spending over 10 years, the $100 billion cost of the mortgage interest deduction in terms of lost federal tax revenue is an obvious target. The National Association of Realtors, which has courted Congress with nearly $38 million in campaign donations over the last 20 years, wants the deficit commission to leave the mortgage interest deduction as is.

Moment of truth for tax break

The mortgage interest deduction may survive deficit reduction, but not unscathed. Under the current mortgage interest deduction, up to $1.1 million in debt for a primary and second home qualifies for the tax break. In the deficit commission report titled “Moment of Truth” submitted to lawmakers Dec. 1, only $500,000 of debt from a primary residence would qualify for the mortgage interest deduction. Plus, the tax break would be converted from a deduction to a 12 percent credit against interest, corresponding with the lowest of three proposed income tax rate reductions to 12 percent, 22 percent and 28 percent.

Economists say tax break is overrated

The National Association of Realtors has said tampering with the mortgage interest deduction will delay any recovery in the housing market and plunge the country into a double-dip recession. However, economists say the tax break ends up making lower-income households subsidize people with expensive homes. In fact, according to Congress’ Joint Committee on Taxation, of $104 billion the mortgage interest deduction is estimated to save taxpayers for 2010, about one-third of that tax break goes to 11 percent of taxpayers making at least $200,000 a year. Economists also say the mortgage interest deduction artificially inflates home prices — which is what Realtors like to see.

Sources

Dallas Morning News

Forbes

Las Vegas Review Journal

U.S. GDP, driven by consumer spending, was higher in the third quarter than first reported, but not high enough to lower the unemployment rate. Image: CC Charlie Brewer/Flickr

U.S. GDP growth in the third quarter has been revised to a higher rate than reported earlier. However, as the economy struggles to get in gear, that’s not saying much. U.S. gross domestic product expanded at a 2.5 percent annual rate from July through September, about half the rate needed to affect the unemployment rate.

Consumer spending drives U.S. GDP

Gross domestic product, the value of goods and services produced in the U.S., is used as a broad measure of economic growth. The 2.5 percent growth of U.S. GDP in the third quarter was driven by consumer spending and increased exports. According to a Commerce Department report, consumer spending was predicted to rise 2.6 percent but increased at a 2.8 percent annualized pace, the strongest result since 2006. Exports were revised upward to 6.3 percent from the 5 percent originally reported. The U.S.economy expanded 3.2 percent in the past four quarters, the strongest year-over-year growth since the first quarter of 2005.

Obstacles to economic growth

The Commerce Department report also revised wages and salaries in the second quarter upward from a $51.1 billion increase to a $97.4 billion increase from the first quarter. The new figures suggest that consumers could have the resources to continue supporting economic growth in the near future. But the increase in consumer spending isn’t expected to be enough to offset the drag of a moribund housing market. Prices remain depressed by anemic sales and a huge inventory of unsold homes and foreclosures. The National Association of Realtors said existing-home sales slipped 2.2 percent in October. The median price for a home sold in October dropped 0.9 percent from a year ago.

High unemployment will persist

Most economists agree that a U.S. GDP annualized growth rate of 2.5 percent does nothing to move the unemployment rate downward. The consensus is that until GDP hits at least 5 percent growth, unemployment will be stuck at 9.6 percent. Growth is forecast at about a 2.3 percent rate for the rest of the year.

Sources

Associated Press

Bloomberg

MarketWatch

U.S. home ownership rates have fallen to the lowest level in a decade, and millions of Americans are expected to lose their homes in 2011. Image: CC TheTruthAbout/Flickr

U.S. home ownership levels have declined to the lowest level in more than a decade. The trend has accelerated in recent years because of high unemployment, a foreclosure crisis and falling home values. Millions of Americans have lost their homes in the last five years and millions more are expected to in the near future.

Home ownership declining steadily

Home ownership in the U.S. has declined steadily over the last five years according to a report from the U.S. Census Bureau. U.S. home ownership has dropped by 3 million households since 2005. In the third quarter this year the rate of home ownership was 66.9 percent — the lowest rate since 1999. The home ownership rate peaked in the first quarter of 2005 at 69.1 percent. The economic uncertainty of the past several years hit younger homeowners the most. In the third quarter 39.2 percent of people younger than 35 owned homes, a decline of 9 percent since 2005.

Housing market repercussions

As homeownership falls, the housing market follows. U.S. existing home sales in September dropped 19 percent from the year before. The current annual rate of 307,000 existing home sales is a historic low. The lack of sales continues to drive down home prices. The Census Bureau reports that 18.8 million homes are vacant. Housing starts in 2010 are at about a 600,000 a year annual rate, far below what is considered normal. A real estate analyst told CNN that fewer people are forming new households or renting. Families are doubling up and younger people are living with more roommates.

Home ownership and the foreclosure crisis

Nearly a million homes are expected to be foreclosed on in 2010. If the unemployment rate doesn’t go down, analysts have said foreclosure numbers will be even higher in 2011. A Morgan Stanley report said that about 3.1 million mortgage holders are seriously delinquent, and many are expected to lose their homes. An additional 4 million homeowners are falling behind, and half of those are expected to go into foreclosure. The total number of homes in danger of foreclosure is about 11 million.

Sources

CNN

Daily Finance

Consumer Affairs

The foreclosure moratorium idea will amount to nothing but headlines. Image: CC hragv/Flickr

Calls for a nationwide foreclosure moratorium have been rising, but the White House and the housing industry are against it. A foreclosure moratorium has not been declared, but many mortgage lenders have imposed what amounts to a voluntary moratorium by suspending foreclosure proceedings on their own. Real estate experts and administration officials agree that a foreclosure moratorium would  damage a weak housing market that is trying to recover.

Foreclosure moratorium unlikely

A foreclosure moratorium is showing up in a lot of headlines, but chances of it happening are unlikely. The reaction by mortgage lenders and government officials to the shoddy, shady practices of the mortgage servicing industry has already stopped  foreclosure proceedings across the U.S. ABC News reports that major U.S. lenders have admitted court affidavits for an untold number of foreclosures are rife with errors and forged signatures. In many cases, mortgage servicing employees signed foreclosure documents without reading them. As a result, JPMorgan Chase, Ally Financial’s GMAC, Bank of America and Goldman Sachs have suspended tens of thousands of foreclosures. Bank of America, the largest U.S. lender, has suspended all U.S. foreclosures.

Negative impact of a foreclosure moratorium

Attorneys general in 40 states today announced they’re investigating the mortgage servicing industry. Meanwhile, housing industry experts and government officials are saying that a foreclosure moratorium would hurt, not help. Lawrence Yun, chief economist for the National Association of Realtors, told ABC News that delaying closure on 30 percent of the housing market would hold back economic recovery. He said getting foreclosures off the market is part of the natural healing process. Bloomberg reported that Treasury Secretary Timothy F. Geithner told Charlie Rose  a foreclosure moratorium would leave homes empty longer and further drive down real estate prices.

Foreclosure moratorium winners and losers

A foreclosure moratorium would help the homeowners being foreclosed upon. Kelly Campbell at U.S. News and World Report said that of most homes in foreclosure, the mortgage holders haven’t made payments in more than 18 months. A foreclosure moratorium would let them live longer for free. But buyers who have put money down and are waiting for the paperwork to go through are left high and dry. Plus, banks servicing the bad loans can’t get their collateral. Campbell writes that ultimately homeowners and taxpayers would pay the price with higher fees and taxes to support new regulations and more bailouts.

The illegal foreclosure scandal is spreading to more states across the U.S. and Congress is calling for a Justice Department probe. Image: CC/The-Lane-Team/Flickr

Evidence of illegal foreclosure practices have forced three major lenders to freeze evictions and foreclosure proceedings in 23 states. Wednesday the Justice Department announced it will investigate reports that some of the nation’s biggest mortgage lenders submitted illegal foreclosure documents to the courts. On Capitol Hill, House Democrats accused financial firms involved in the foreclosure scandal of violating the law. The prospect of a nationwide foreclosure moratorium is gaining momentum.

Banks back off as foreclosure investigations multiply

Illegal foreclosures became a nationwide issue when some major mortgage lenders admitted that employees signed off on tens of thousands of foreclosure documents without reading them. Bloomberg reports that J.P. Morgan, Bank of America and Ally Financial have backed off on foreclosures or evictions in the 23 states where courts have jurisdiction over home seizures. At least seven states are investigating lenders for using fraudulent documents and signatures to justify hundreds of thousands of foreclosures. State officials and legal experts have said the number of investigations is bound to increase.

Congress: Mortgage lenders violated the law

The foreclosure scandal is emerging as Congress tries to lean on banks and mortgage lenders to give a growing number of struggling homeowners a break. The Hill reports that House Speaker Nancy Pelosi and 30 California House Democrats submitted a letter to the Justice Department requesting an investigation of financial firms for “possible violations of the law.” The letter said banks had misled and obstructed homeowners from benefiting from a foreclosure prevention program funded by $50 billion set aside from the financial bailout to help the housing market.

Nationwide foreclosure moratorium

The letter to the Justice Department is expected to embolden support for a nationwide foreclosure moratorium, according to the Washington Post. Tuesday, the AFL-CIO joined other consumer groups calling for a foreclosure moratorium. But real estate analysts told the Post that the a moratorium could overwhelm the court system and further weaken the housing market by killing potential deals on foreclosed properties. Guy Cecala, publisher of Inside Mortgage Finance, said millions of homes in foreclosure remain “in limbo” until they are processed by the courts. A foreclosure moratorium would further delay a stabilization of home prices and a recovery for the housing market.

Buying a home isn't the iron-clad investment opportunity it used to be, and economists are saying it never will be again. dvs/Flickr photo.

A home mortgage was known as “the most important investment a person ever makes” for decades. Then the housing crisis arrived and long overstayed its welcome. Overinflated home values soon became artificially low home prices. Home sales are at their lowest level in 15 years. Falling home prices are raising concerns about deflation. A Federal Reserve official recently said it was a mistake to look at buying a house as an investment opportunity. One financial expert advises that when it comes to housing, people shouldn’t confuse an expense with an investment.

Why housing is no longer a good investment

Real estate experts believe home ownership will never again generate wealth like it did in the second half of the 20th century. The New York Times reports that the inventory of homes for sale may soon rise to a 12 month supply — twice the level of a healthy housing market. As all those sellers compete for buyers, home prices will continue to fall after already losing as much as 30 percent in value. Dean Baker, co-director of the Center for Economic and Policy Research, told the Times it will take 20 years to recoup $6 trillion in housing wealth lost since 2005. Adjusting for inflation, home values will never catch up.

Housing has become a living expense

Treating a house as an investment is the biggest personal finance mistake a person can make, according to Charlie Farrell at CBS Money Watch. Farrell said housing should be looked at as a lifestyle expense like buying a car. A house is a depreciating asset, just like a car. It falls apart unless money is constantly pumped into it. Economists say in the next 20 years home values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment in the mortgage. Even when the mortgage is paid off,  paying maintenance costs and taxes on a home means owners will have put more money into houses than they get out of them.

Getting a mortgage:  having something still better than nothing

In the aftermath of the housing bubble, the U.S. housing market is the last place people should put their hard-earned money, according to Thomas Hoenig, president of Federal Reserve Bank of Kansas City. During testimony at a hearing held by the House Financial Services Committee’s oversight and investigations subcommittee, he said “If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake.” Linda Stern, Farrell’s colleague at CBS Money Watch, said Hoenig is right, but it could still be a good idea to lock in the price of a depressed asset and pay for it with other people’s money at 4.5 percent. Paying rent for 30 years returns nothing. With a mortgage, there’s a house at the end of the tunnel. Regardless of what it’s worth, it’s something.

McMansions are out as homebuyers seek smaller, more practical homes in the aftermath of the housing crisis. lisachamberlain/flickr photo.

McMansions are out. Count this symbol of American excess, waste and poor taste as another casualty of the housing crisis. New research is showing that large, rambling, expensive homes packed close together in cul de sacs have fallen from grace. Some McMansions that were thrown up in haste by greedy builders in the past few years lie abandoned. Others looming large and out of place with the houses around them are considered a blight on neighborhoods. People building new homes are opting for much smaller floorplans. Realtors and architects believe the sentiment that McMansions are out  is more than just a passing real estate trend.

Housing bubble bursts the McMansions era

McMansions — also known as “starter castles,” garage mahals and faux chateaus — may have reached their peak during the housing bubble. Now that the housing bubble has burst, the decline of McMansions could be permanent. Time reports that Trulia has released a report on real estate trends that said the average square footage of an American home is decreasing for the first time in 60 years. The average size of a home in America was 983 square feet in 1950, according to Trulia’s American Dream Survey. By 2004 the average had swelled to 2,349 square feet. Another study, the Truila-Harris interactive survey, found that only 9 percent of people polled were looking for homes of at least 3,000 square feet that are considered McMansions. A majority of the housing market, 64 percent of buyers, sought homes from 800-2,000 square feet.

McMansions a symbol of ugly America

A McMansion, according to Wikepedia, is a large new house considered pretentious, tasteless or designed out of character with its neighborhood. The term compares these bland homes often built with substandard construction and lack of style to mass-produced meals. McMansions typically have a floor plan covering more than 3,000 square feet, ceilings 9-10 feet high, at least a three-car garage and numerous bedrooms and bathrooms. The house takes up most of the lot, leaving little room for a yard or garden.

Housing market comes to its senses

People in the housing industry think the downsizing trend in the housing market is here to stay. Pete Flint of Trulia told CNBC that smaller square footage is a long term effect. In a survey of builders last year, nine out of 10 said they planned to build smaller or lower-priced homes. Kermit Baker, the chief economist at the American Institute of Architects, told CNBC his profession is moving away from the McMansion era as homeowners demand more practical designs. Paul Bishop, vice president of research for the National Association of Realtors, told CNBC that McMansions look and feel out of place in the aftermath of the recession.

FHA mortgage insurance will get more expensive because rising delinquencies and foreclosures have depleted FHA reserves. The TruthAbout/Flickr photo.

Federal Housing Administration mortgages saved the housing market from total collapse when the housing crisis emerged in 2007. The FHA virtually eliminated barriers to entry into the housing market to keep mortgage lending from completely drying up. FHA mortgages became so popular that today they make up nearly a third of the mortgage market. But risks and delinquencies from those loans are rising. And The FHA’s reserve funds used to cover losses when borrowers default or go into foreclosure are shrinking. To protect those reserves, the easy terms of an FHA mortgage are about to change.

FHA mortgage insurance takes a big hit

FHA mortgages weren’t a factor in the housing crisis, but its lax standards for mortgage insurance are a problem now. The Real Estate Channel reports that the FHA said 6.2 percent (about 360,000 loans) of the entire insured FHA mortgage portfolio had been issued to homebuyers with FICO scores lower than 500. More than 37 percent of these loans are now at least 60 days delinquent, in foreclosure or in bankruptcy. During the housing crisis, the FHA helped 450,000 families keep their homes out of foreclosure in fiscal year 2009. In the first quarter of 2010, the FHA helped another 122,000 families. The Office of Comptroller of the Currency and the Office of Thrift Supervision said 67 percent of these modified FHA mortgages were in default again within 12 months. The number of FHA mortgages delinquent more than 90 days climbed to 555,000 in May 2010.

Depleted FHA reserves force tougher terms

Because of soaring loan delinquencies and defaults, the FHA is taking actions to protect its Capital Reserve Account, which had dwindled to $3.5 billion by 2009, compared to a $19.3 billion balance on Sept. 30, 2008. SmartMoney.com reports that last week the Senate passed a bill that allows the annual insurance premium to increase on FHA mortgages. The FHA is also considering a minimum credit score of 580 to qualify for the 3.5 percent down payment. Borrowers with a credit score between 500 and 580 will have to make a down payment of at least 10 percent.

New FHA mortgage loan requirements

New FHA mortgage loan requirements will go into effect in Sept. 2010. Chicago77 reports that they may place home ownership out of reach for buyers who just squeak by. Under the new structure, FHA requires a borrower to pay an upfront mortgage insurance premium calculated at 1 percent of the loan amount. The good news is that this is down from the 2.25 percent currently required. The bad news is that the monthly figure will increase from 0.55 percent annually to 0.90 percent annually. As an example, Chicago77 examines a $150,000 home purchase:

Before Sept. 7 2010

Upfront Premium (2.25 percent): $3,256.88
Monthly payment including mortgage insurance: $793.93

On or after Sept. 7 2010

Upfront Premium (1.00 percent): $1,447.50
Monthly payment including mortgage insurance: $826.93

Net changes

Upfront cost: Decreased by $1,809.38
Monthly cost: Increased by $33.00