Saturday, June 5, 2010

Will Home Prices Go Up Cause They Always Have

I hear the argument real estate will now rise because in the long term it has always risen. Now I know prices just don’t rise, just because, there are fundamental reason why that is the case.

During the US bubble it is easy to see one of the largest contributors to home price appreciation was loose lending standards. The loose lending standards meant more money chased a scarce good pushing up prices.

There were also additional fundamental reasons why home prices rose. The economic foundation of the country must be set up to support higher home prices. I think it is best to look at two time periods in the post war. The 1945 to 1981 and 1982 to 2006.

During the first time period the US was a net exporter of goods and services gaining wealth from the rest of the world. The population was young and received few government services. While there was a high marginal federal tax rate there were many deductions leaving the US with a fairly low tax burden. State tax rates were much lower and states like NJ and CT did not even have income taxes.

During the 1982 to 2006 the US became a net importer of goods. Factories across the Midwest closed down as the nation chose to import the goods. Where did the income come from to push up home prices? This is an easy question to answer: the US borrowed the money. Prior to 1982 most people in the country did not have credit card, car loans were not 72 months, and 20% down payments were needed to purchase a home. This all changed during this time period. In the finals stages as the country and individuals ran out of money the government guaranteed the loans as long as there was a home attached to it.

The states that benefitted the most from the change in the US economy were Cal, FL AZ, NV, NY, and NJ. In the NJ and NY region the financial services industry grew in order to help foreign creditors invest in the US. Paul Volker noted financial services contribution to GDP increased from 2% to 6%. The Sand States benefitted as former factory workers flooded to warm weather states and much of the borrowing from the rest of the world was transferred through NY and NJ then invested in homes and hotels in the Sand States.

How does the current state of the economy compare to the previous two periods that allowed for home price appreciation. It appears quite different:

· Consumer credit is declining

· Tax rates are rising

· The population is aging and the young are being asked to support their seniors

· Foreign creditors appear unwilling to lend unless there is a government guarantee

· Regulations being placed on the financial services industry may reduce employment opportunities in the NY and NJ region

The current foundation seems quite different than the economy of the previous 60 years. Prices could rise but it seems unlikely unless there are larger government subsidies or a hyperinflation. Sadly the hyperinflation does not seem out of the realm of possibilities when the policies of Obama, Geithner, and Bernanke are considered.

Monday, January 25, 2010

Mortgage executive = toilet cleaner

The same day, former Senderra executive Todd Knight scrambled to add more franchisees to his company that cleans retail stores and day-care centers. His new areas of expertise include stripping and waxing, restroom supplies and construction cleanup. Mr. Knight, 45, says he makes about $180,000 a year, half his peak earnings during a 15-year mortgage career.

"I drive a pickup truck that says 'cleaning' on the side," says Mr. Knight, who left Senderra as its subprime business was slowing. "There were several months where I said: 'I'm cleaning toilets. I used to run 120 people in sales. What have I done here?'


At long last we know the skills we know where the skills of subprime mortgage employees are valuable. I guess after making enough crap they now need to clean it up.

Monday, January 18, 2010

Judge Judy and the Credit Bubble

So I watched Judge Judy and the two cases she presided over were:

*One person suing cause they cosigned for a friend's breast enhancement
*One person suing cause their ex girlfriend did not pay back the $4,000 personal loan so she could qualify for a bigger loan on a Mercedes Benz

In case #1 the 20 something girl already had a daughter, was living at home, worked in a coffee shop, and did not have good enough credit to qualify for the plastic surgery loan. Amazingly she did not make one payment on the loan her former friend consigned upon.

In case #2 the boyfriend who makes $24K/year saved $4,000 while not paying his mortgage prior to foreclosure. He then lent it to his 22 year old waitress girlfriend the money so she could qualify for a larger loan on a Mercedes. Amazingly she did not pay him back.

So when you here all the stories about the banks not lending money. Both of these loans were made in 2009. Would you have lent these people money?

Whose getting foreclosed now

Glatt’s campaign manager said Wednesday that the house is not Glatt’s, but her mother’s. Campaign Manager Kathy Stack said, “She was helping her parents. This is a remodification of a loan with the bank. What happened is what has happened to 900,000 families across the country. She was helping her mother with a remodification of the loan.” – Hoboken Reporter

Actually Kathy, that’s not quite true. Her mother Elizabeth may live there, but she does not own the house and has not legally owned it for many years, if at all. Elizabeth Glatt’s name is not on the deed nor is it on the $999,900.00 cash mortgage taken out on the house. Elizabeth is a tenant, not an owner. At the time of the loan origination and the missed mortgage payment that triggered the foreclosure, public records show the home was owned by Kimberly Glatt, her husband Jay B. Yacker and sister Stephanie Glatt.

12/13/2005: Ownership of 910 CPT transfers from Stephanie Glatt alone to Stephanie and Kimberly Glatt, and Jay Yacker for $1

6/1/2006: Kimberly and Stephanie Glatt executed a note securing the sum of $999,900.00. To secure the payment of the note, the Glatt sisters and Yacker executed a mortgage they all signed to secure.

10/1/2008: HSBC says the Glatts and Yacker failed to make a payment due on this date and all payments due thereafter, making the loan in default since on or about 11/1/2008.

2/04/2009: a deed change is recorded by Hudson County removing Kimberly Glatt and Jay Yacker from the deed, and restoring Stephanie Glatt as sole owner for the sum of $1. Oddly, the deed is dated 1/03/08 but isn’t recorded legally for over a year. Regardless, Kim Glatt and Jay Yacker continue to be responsible for the $999,900.00 mortgage, which doesn’t change despite the $1 deed transaction.

Glatt’s husband, Jay Yacker, further explained that the house was sold over a year ago by Glatt’s parents to her sister Stephanie. The parents and Stephanie continued to live in the house. But after Hoboken’s large tax increase, they were unable to make the payments for a few months, and the bank automatically began foreclosure proceedings because they were behind. — HR

Anyone familiar with the Glatt family’s Hoboken assets and wealth would also find it laughable to hear someone claim that they could not possibly muster the cash to pay the tax increase on the family homestead. This is a group that includes a dentist of long standing in town and a Judge who just bought a $3 million 3-bedroom condo on the 21st floor of the W Hotel. They may also have a bridge to sell you. Yacker continues:

Kim Glatt had co-signed for the loan, Yacker said. So she and Stephanie are in court trying to work out how to make the payments back to the bank. Yacker said that once the bank starts foreclosure proceedings, they won’t accept retroactive payments until the situation is worked out legally. Yacker said that they are “a month or two away” from working the situation out, and that the house will be saved. — HR

“There are thousands of Hoboken residents who are working hard every day to make ends meet during these difficult times. They can know with absolute certainty that I can relate to their problems.”


Ms Glatt please let me remind you that in order to sell such a BS story you need to be in congress. Running for mayor of Hoboken does not excuse such behavior. My two favorite parts of the fable are:

*The multiple non arm length sales, clearly there was no goal of avoiding taxes or trying an end run around the bank.

*That the typical resident will understand the difficulties of owning multiple million dollar homes. I know it is tough for me. LOL

Mortgage Modifications for New Cars

Jason Axelrod learned that the hard way.

Axelrod, a municipal employee who lives outside Chicago, entered a trial mortgage modification program this spring.

He had not fallen behind in his mortgage, but he was finding it harder to make ends meet after his overtime was cut and his property taxesskyrocketed. Told it would not hurt his coveted 750 score, Axelrod secured a $565 reduction in his monthly payments.

And to his horror, his credit score has plummeted to 644.

"It's completely destroyed my credit," said Axelrod. "If I had known it would affect my score, I would have never entered the program."

Axelrod is already feeling the impact of his lower credit score. He ordered a new car this summer, believing it would come with a lower monthly payment.
It arrived in mid-December.

But because of his newly blemished credit background, his two credit unions turned him down for a car loan. His dealership told him the best he could get is a 12% rate, a hefty hike from the 4.7% he was paying before.

Lets review, based on a reduction in income Mr Axelrod needed to get a loan modification. Mr Axelrod noticed that after not meeting his originally contracted debt obligation his credit score fell. Why should that affect his score, clearly a new lender would not be interested in knowing Mr Axelrod could not meet his previous obligations, LOL.

Lastly Mr Axelrod is upset because it is hurting his ability to buy a new car. To be fair, he claims it is to reduce his monthly payment. Of course, this neglects the fact that what is lower than a new car payment is no car payment at all. Thats right if Mr Axelrod were to have paid all of his contractual obligations on time he would soon have no car payment and be better off.

This is also another case of why this blog is called Economic Stimulus? as the government pays lenders to give better terms to debtors like Mr Axelrod, savers are helping finance his new car purchase. Is that the America way?