Friday May 22 Housing and Economic stories

KeNosHousingPortal.blogspot.com

TOP STORIES:

Banks Blocking Way Out Of Foreclosure Crisis - (www.huffingtonpost.com) Brett Ellis, a real estate agent in Fort Myers, Fla., was thrilled when he got an offer for a property in Bell Tower Park in May 2008. "It was a gorgeous property on the corner lot," Ellis told the Huffington Post. The owner, who had lost his job, wanted to sell the apartment for a loss rather than go into foreclosure, a strategy known as a short sale. The offer was for $350,000, and Ellis, who is a certified distressed property expert trained in executing such sales, knew it was as good an offer as he was going to get in this market. He immediately sent the paperwork into the bank. He waited for four months. The bank finally told him it wouldn't take anything less than $400,000 -- a price Ellis was sure he could never get. In September, the buyer's agent called to say, "You know what, we gotta move on, we gotta buy something else." Now the property is sitting vacant as it slides into foreclosure. Its former owner's credit is destroyed, and the house is losing value every day. "God knows what the condition is today," Ellis said, adding he'd be surprised if the property is worth more than $290,000 when it resurfaces on the market. Add in the legal expenses involved in a foreclosure, and the bank cost itself a hundred thousand dollars more that it otherwise would have. It's a scenario that plays out constantly, everywhere in the United States. In a time of collapsing real estate values, where one in five homes are now under water, a short sale is increasingly the only option before foreclosure. It is less damaging to credit scores and spares the homeowner the shame of foreclosure. It is also a better option for banks: According to one analysis, short sales resulted in loan losses of only 19 percent, compared with an average loss of 40 percent on homes sold after foreclosure. So why aren't these sales more widely used? The broad answer is that the American financial system simply can't handle a collapse of this magnitude. The fates of the banking and real estate industries are intertwined. But they don't work together -- and the result is that they end up working against each other.

The hookers no longer cost too much: geopolitics and the price of prostitutes in the Baltic States - (brontecapital.blogspot.com) At least partly for effect I noted that one of the most important (perhaps the most important) export industries in Latvia has been tourism. And it is not any type of tourism – it has traditionally been sex tourism. Latvians are beautiful Scandinavian people (if you like that Northern European look). They also have a more Scandinavian sexual morality and they were relatively poor. This meant that Ryanair put on discount flights and filled them with salivating Irish and English lads. Swill beer on the Friday flight over. Party all weekend, soil the plane on the way home. You could not walk around Riga as a single English guy and not be thought of as a Ryanair sex tourist. The only problem is that the ridiculous exchange rate made the hookers very expensive. Ryanair canceled the Shannon/Riga flight (and the Irish lads now go to Prague). The London Riga flights are less full. There are plenty of complaints on the web about over-priced bars and rip-offs in Riga. The oldest and one of the most dependable of professions was – due the ridiculous exchange rate situation – just priced out of existence. Still markets are correcting in the end. Now that there is a Great Depression in Latvia there is price deflation. Lots of it. The faster the deflation happens the faster Latvia will again become competitive. [Hint to the IMF – just float the currency and deal with the consequences of the new exchange rate rather than try to defend the old rate.] Anyway the problem is that most industries have contractual arrangements which fix prices. Wages are very hard to flex downwards. Rents are fixed over sustained periods and the like. All of this means that people go bust rather than reduce prices – simply because prices are sticky. Well – most prices. The contractual terms of prostitution are short (an hour, a night) and entry to the industry is unconstrained. That means that the prices are very flexible. Extraordinarily flexible. The price – looking at websites I will not link for decency's sake – has fallen by at least two thirds in the past year – and the advertised price (for a non-English speaking young woman) is LVL30 – or less than 60 US dollars. I am sure the rip-offs are still there – but anecdotal evidence suggests the hookers no longer cost too much.

No, the Free Market Did Not Cause the Financial Crisis - (www.lewrockwell.com) In March 2007 then-Treasury secretary Henry Paulson told Americans that the global economy was “as strong as I’ve seen it in my business career.” “Our financial institutions are strong,” he added in March 2008. “Our investment banks are strong. Our banks are strong. They’re going to be strong for many, many years.” Federal Reserve chairman Ben Bernanke said in May 2007, “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” In August 2008, Paulson and Bernanke assured the country that other than perhaps $25 billion in bailout money for Fannie and Freddie, the fundamentals of the economy were sound. Then, all of a sudden, things were so bad that without a $700 billion congressional appropriation, the whole thing would collapse. In the wake of this change of heart on the part of our leaders, Americans found themselves bombarded with a predictable and relentless refrain: the free market economy has failed. The alleged remedies were equally predictable: more regulation, more government intervention, more spending, more money creation, and more debt. To add insult to injury, the very people who had been responsible for the policies that created the mess were posing as the wise public servants who would show us the way out. And following a now-familiar pattern, government failure would not only be blamed on anyone and everyone but the government itself, but it would also be used to justify additional grants of government power. The truth of the matter is that intervention in the market, rather than the market economy itself, was the driving factor behind the bust. F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism.’ Although my recently released book, Meltdown explains the process in more detail, an abbreviated version of Austrian business cycle theory might run as follows: Government-established central banks can artificially lower interest rates by increasing the supply of money (and thus the funds banks have available to lend) through the banking system. This is supposed to stimulate the economy. What it actually does is mislead investors into embarking on an investment boom that the artificially low rates seem to validate but that in fact cannot be sustained under existing economic conditions. Investments that would have correctly been assessed as unprofitable are falsely appraised as profitable, and over time the result is the squandering of countless resources in lines of investment that should never have been begun. If lower interest rates are the result of increased saving by the public, this increase in saved resources provides the material wherewithal to see the additional investment through to completion. The situation is very different when the lower interest rates result from the Fed’s creation of new money out of thin air. In that case, the lower rates do not reflect an increase in the pool of savings from which investors can draw. Fed tinkering, in other words, does not increase the real stuff in the economy. The additional investment that the lower rates encourage therefore leads the economy down a path that is not sustainable in the long run. Investment decisions are made that quantitatively and qualitatively diverge from what the economy can support. The bust must come, no matter how much new money the central bank creates in a vain attempt to stave off the inevitable day of reckoning.

Scammy Mortgage Program Resurfaces in Congress - (www.washingtonindependent.com) Seller-Funded Downpayments Created High Foreclosure Rates, IRS Deemed Them 'Scams'. A housing program blamed in part for high default rates on government-backed loans, derided as a “scam” by the Internal Revenue Service and targeted for years for elimination by the agency that ran it looked like it finally had reached its end this fall, after Congress finally banned it. But now, in a sign that some lessons of the housing crisis have yet to be learned, a movement is afoot to bring it back. The program is called seller-funded down payment assistance. When U.S. Department of Housing and Urban Development Secretary Shaun Donovan told Congress last month that dramatic growth in seller-funded down payment assistance programs in recent years had added to high default rates on Federal Housing Administration-backed loans, it might have seemed like the final blow. The programs, initially intended to help low and moderate income people buy homes, had long been under fire, the subject of complaints from HUD, the General Accounting Office, and the IRS. And with FHA default rates threatening to trigger yet another taxpayer bailout, policymakers have plenty of motivation to steer clear of any lending approaches deemed risky or problematic. But supporters of seller-funded down payment assistance aren’t giving up. Despite Donovan’s stance, they’re still supporting a bill to revive the program - a measure now before the House Financial Services Committee. Sponsored by Rep. Al Green (D-Tex.), the bill has 17 co-sponsors, among them powerful lawmakers such as Rep. Maxine Waters (D-Calif.). Backers include builders and realtor groups, the National Association of Mortgage Bankers, and the Congressional Black Caucus. Committee Chairman Barney Frank, D-Mass., told the Wall Street Journal last year he wants to reform the program, not kill it. And supporters are continuing to pressure HUD to preserve it. “We do agree there were problems with the previous program,” said David Ledford, senior vice president for housing policy at the National Association of Home Builders. “But we still support the legislation. HUD was somewhat at fault for not properly monitoring it. It can be done more carefully, and with tighter controls. But HUD is just throwing up its hands and saying things turned out badly and we shouldn’t do it at all.” But Ledford’s views aren’t widely shared by many in the mortgage industry, and they simply don’t reflect reality, according to the program’s numerous critics. FHA’s seller-funded down payment assistance should have ended years ago, given ample evidence of its problems, said Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md. company that covers the lending industry. The GAO concluded that homes purchased using the programs were appraised at and sold for 2 to 3 percent more than comparable homes bought without the assistance. The IRS in 2006 revoked the tax-exempt charitable status of providers of seller-funded down payment assistance - and called the programs “scams.” HUD’s Inspector General and the FHA itself have complained the programs raise home ownership costs and lead to more foreclosures, saying homeowners using the assistance were two to three times more likely to default on payments than other borrowers.

Subprime Lending Is Back With a Vengeance - (www.minyanville.com) Just when you thought it was safe to go back in the water... Subprime lending has come roaring back. But this time, reckless financial innovation isn’t being hatched on Wall Street. Instead, state governments are angling to “monetize” first-time homebuyer tax credits so borrowers can purchase homes with little or no money down. If this sounds eerily similar to the type of lending practices that got us into this mess, well, it should. The federal government, as part of the recently passed economic stimulus package, will refund first-time homebuyers up to $8,000 if they meet certain eligibility requirements. The program is frequently cited as one of the myriad reasons a bottom in the housing market is imminent. Critics, however, argue that rebates don't end up in a buyer’s pockets until his or her 2009 tax returns are filed - even though rebates are credits, not just deductions. Homebuilders like Pulte Home (PHM), Lennar (LEN) and KB Home (KBH), along with their lobbying arm, the National Association of Homebuilders, have thrown their full weight behind the rebate program, but say it still doesn't go far enough. In an effort to boost home buying -- even for marginally qualified borrowers -- a number of states are finding creative ways to advance the tax credit to buyers on the day they get their new keys, rather than having to wait for next year's refund check. This allows buyers to pay for things like closing costs, mortgage points - or even the down payment. States are employing schemes whereby they offer prospective buyers low or no-interest loans for the amount of the tax credit, due upon of receipt of their money from Uncle Sam. If the borrower doesn’t make good, the loan becomes a junior lien on the property, with an interest rate that is far from usurious - usually just a bit over the prime lending rate.

New Hotels’ Big Expansion Plans Get Squeezed - (www.nytimes.com) When NYLO Hotels unveiled its loft-style hotel brand in 2005, the plan was to have more than 50 properties open by 2010. Ambitions were so high that the company announced another brand, XP by NYLO Hotels, in early 2008. But so far, just two NYLO hotels have opened their doors to guests — in Plano, Tex., and Warwick, R.I. — with a third scheduled to open in a community in Irving, Tex., in late June. NYLO is certainly not the only fledgling hotel brand struggling amidst the recession. Besides the decline in travel, the new brands have been particularly hit by the drying up of credit. NYLO’s troubles were compounded when its equity partner, Lehman Brothers, declared bankruptcy last September. According to Bjorn Hanson, who teaches hospitality at New York University, hotel companies introduced 42 new brands in the last four years, a big surge that has been drastically scaled back. “Whether they were announced or internal goals — like 500 hotels within five years — all of those targets have been ignored or so reduced,” Mr. Hanson said. “They’re just trying to get some properties up and running.” NYLO is a good example of that kind of stake-in-the-ground effort. “Our plan was always to grow by franchising,” said John Russell, NYLO’s chief executive. “We would do the first three to five hotels ourselves, then have a franchise platform to be able to grow aggressively.” Although Mr. Russell said NYLO had more than 40 franchises “in some form of development or negotiation,” he acknowledged that the company would be lucky to have 30 hotels open by the end of 2011. “It’s going to be slow because right now debt financing is almost nonexistent,” he said, though he was optimistic about the prospects for the XP brand, which is known as a select-service hotel, meaning it lacks some amenities, like a 24-hour restaurant. Mr. Russell estimated that an XP hotel would cost $12 million for a developer to build, versus $23 million for a full-service NYLO Hotel.

The Fed's GSE Tab: $248.3 Billion and Counting - (www.nationalmortgagenews.com) - The Federal Reserve Bank of New York has invested at least $248.3 billion in MBS and debt issued by Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System, according to a budget addendum released Monday by the White House. The figure represents asset and debt purchases as of March 31. A spokeswoman for the New York Fed was asked to provide an updated figure for the end of April but at press time had not gotten back to National Mortgage News. The MBS (Fannie/Freddie guaranteed) bought by the government total $201.5 billion, with the debt at $46.8 billion. The debt number includes $11.1 billion in bonds issued by various FHLBs. In the new "Analytical Perspectives, Budget of the U.S. Government" the White House also discusses the future of the GSEs, mentioning — as one option — their dissolution.

OTHER STORIES:

I Would Not Own Bank Stocks: Meredith Whitney - (www.cnbc.com)

Oil Prices Back at $100 a Barrel? Not Likely, Traders Say - (www.cnbc.com)

Oil Tomorrow: What Energy Traders Will Watch Tuesday - (www.cnbc.com)

Are Investors Too Optimistic About Overseas Growth? - (www.cnbc.com)

GM CEO: Bankruptcy Likely; Firm May Leave Detroit - (www.cnbc.com)

General Motors to Let Go of Thousands of Dealers - (www.cnbc.com)

Ford to Sell 300 Million Common Shares - (www.cnbc.com)

Bill Would Let Credit Card Holders Return to Lower Rates - (www.cnbc.com)

Obama Wants Fed as Finance Supercriminal, uh, Supercop - (www.money.aol.com)

Taxpayers paid IOU triggered by Deutsche Bank's gambling losses - (www.patrick.net)

Despite Signs to the Contrary, Real Estate Will Get Worse - (www.time.com)

Stressing The Positive, Ignoring The Rest - (www.nytimes.com)

Government's mortgage debt subsidies create disaster - (www.city-journal.org)

Countrywide, KB accused of inflating house prices - (www.lasvegassun.com)

Court decision targets mystery closing fees - (www.latimes.com)

Validity of Zillow values questioned - (www.redding.com)

20% Underwater In Silicon Valley - (www.viewfromsiliconvalley.com)

Mortgage defaults grow in Toronto - (www.yourhome.ca)

How France is surviving the economic crisis - (www.economist.com)

America's Medical System Makes Fainting a $10,000 Malady - (www.miller-mccune.com)

Indicted ex-official gets $500,000 annual pension - (www.latimes.com)

Congressional Bailout Commercial - (www.youtube.com)

And Thus Capitalism Ended - (www.dilbert.com)