Gear Still Engaged: We Hope your Plan Works, But…
Here’s a post on the Fix Housing First Web site, worthy of discussion.
Dear Mr. President
I am writing on behalf of the Fix Housing First Coalition, a diverse group of employers, organizations and individuals with over 10,000 members from throughout the country, to express our strong support for the Homeowner Affordability and Stability Plan which you recently unveiled.
The Fix Housing First Coalition was formed only a few short months ago by businesses and individuals at the front lines of our nation’s economic crisis. Builders, real estate agents and brokers, building material suppliers, home inspectors, home owners associations and thousands of potential homebuyers came together to support efforts to stabilize the housing industry as a way to lead us out of the current economic recession. Your foreclosure prevention plan addresses head-on the first prong of our coalition’s goal – preventing foreclosures by keeping homeowners in their homes.
Your plan is comprehensive and aggressively addresses the foreclosure portion of the housing crisis in this country. We applaud you for focusing on making monthly mortgage payments affordable for borrowers. Creating a set of national uniform standards for mortgage modifications will provide consistent and fair treatment of all homeowners. Creating a partnership between lenders and the government to reduce interest rates and payments for at-risk borrowers will surely alleviate the severe financial pressures which many homeowners are experiencing. Significantly, your plan will cause fewer foreclosed homes to end up on the market at artificially reduced prices further depressing home values.
We look forward to working with your administration and Congress to implement these initiatives to help families across the nation.
Clearly, however more needs to be done to stabilize the housing market for home owners, buyers and sellers. Further housing demand stimulus measures are urgently needed. These include reduced mortgage rates for all buyers and broader tax credits than those included in the recent economic stimulus bill. Without these important incentives, housing demand could take years to rebound creating further downward pressure on bank assets, home values, and housing-related jobs in the manufacturing and retail industries.
Again, thank you for your leadership on the foreclosure portion of the crisis and we stand ready to work with you to address the remaining obstacles to fixing our nation’s housing crisis.
Sincerely,
Ken Gear
Executive DirectorWe know that as the stimulus bill came together, economics became politicized, and politics became politics as usual. Even as new residential construction leaders try to plot Act II in an attempt to elevate their policy agenda, it seems that hunkering down and working through inventory as prices find their norm is the mode to get used to.
Realism is Medicine
One way to characterize 2008′s sequence of economic and operational convulsions is shock.
Now, news can continue to be bad, and the series of negative headlines can continue, but, collectively, we’ve begun to shield ourselves from shock taking over.
Nobel Prize winning Princeton economist and New York Times business columnist Paul Krugman ties the dynamic disequilibrium of the moment to the econo-scape of our parents, grandparents, and great-grandparents to draw helpful analogy.
To be sure, the Obama administration is taking action to help the economy, but it’s trying to mitigate the slump, not end it. The stimulus bill, on the administration’s own estimates, will limit the rise in unemployment but fall far short of restoring full employment. The housing plan announced this week looks good in the sense that it will help many homeowners, but it won’t spur a new housing boom.
What, then, will actually end the slump?
Well, the Great Depression did eventually come to an end, but that was thanks to an enormous war, something we’d rather not emulate. The slump that followed Japan’s “bubble economy” also eventually ended, but only after a lost decade. And when Japan finally did start to experience some solid growth, it was thanks to an export boom, which was in turn made possible by vigorous growth in the rest of the world — not an experience anyone can repeat when the whole world is in a slump.
So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.
Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.
Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.
The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.
The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873. That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.
You can see, then, why some Fed officials are so pessimistic.
Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?
Krugman and the greatest economic minds of the present day are calling for nationalization of the banking system, at least for a brief, pre-privatizing moment. The Big Picture’s Barry Ritholtz observes yet another eloquent call for a bank take-over, despite banks themselves and the Obama Administration’s current insistance this is not the way to go.
The list of pros vs. cons on bank nationalization make the kicker refrain — you like it when your Nobel laureate economists can quote from Credence Clearwater Rivival — doubly poignant.
Here’s The Big Picture’s tally to date of those in favor, and those against.
Aside from myself [Barry Ritholtz], here are the folks who are in favor of temporarily Nationalizing the banks, and then spinning them back out:
Alan Greenspan
Gordon Brown, UK PM
Senate Banking Committee Chairman Christopher Dodd
Senator Chuck Schumer
Sen. Lindsey Graham
House Speaker Nancy Pelosi
Republicans (some)
Joseph Stiglitz
Paul Krugman
Alan S. Blinder, Princeton
Nassim Taleb
Nouriel Roubini
Greg Mankiw
J. Bradford DeLong
Elizabeth Warren, TARP Oversight Panel
Dennis Gartman
Chris Whalen
Josh Rosner
Jeff Matthews
John Mauldin
Jack McHugh
Bill King
Matthew Richardson
Dylan Ratigan (CNBC, Daily Beast)
Jesse Eisinger, Conde Nast Portfolio
Martin Wolf, FT
Aaron Task (Yahoo Tech Ticker)
Paul Kedrosky (Infectious Greed, CNBC)
Nicholas Kristof (New York Times)
Mark Gongloff (WSJ)
Richard Parker (Newsweek)
Michael Hirsh (Newsweek)
David Reilly (Bloomberg)
Paul Vigna (Dow Jones)
Henry Blodget (Silicon Alley)
Willem Buiter (FT)
Adam Posen (Peterson Institute for International Economics)
Jeff Macke
Todd Harrison
Calculated Risk (Preprivatize the Banks)Mark Thoma (Economistsview)
Karl Denninger
naked capitalism
Eddy Elfenbein (Crossing Wall Street)
Bronte Capital
Aaron Krowne Mortgage Lender Implode-O-Meter
Prieur du Plessis (investmentpostcards)
Roger Ehrenberg, Information Arbitrage
Felix Salmon
Interfluidity (Nationalize Like Real Capitalists)
Urban DigsAnd those opposed:
Ben Bernanke
President Obama
Tim Geithner
Lawrence H. Summers
Financial Services Committee Chairman Barney Frank
Republican Senator Jon Kyl
George Soros
Meredith Whitney, Oppenheimer
Deroy Murdock (NRO)
Larry Kudlow
James Cramer
Hale Stewart
Tyler CowenIf the administration ever gets to the point where its housing initiatives — i.e. foreclosure mitigation can actually target principal reduction, nationalization would be a way to go.
Second Day Leads: A Post-up on Obama’s Housing Plan
The equity analysts expected more. That may be the story of the first 30 days of the new administration. Validation of the strategies for fixing the financial system, for jumpstarting spending with a stimulus program, and halting the erosion of household wealth as a result of skyrocketing foreclosure trends will come or not come as the months grind along.
The story of the moment, however, seems to focus on expectations. Or rather management of expectations. Or rather mismanagement of expectations.
The incoming administration allowed expectations to soar. Stoked them, in fact. Set a bar unreasonably high for itself, and now is suffering the consequences of disappointing people who should know better that all of these programs, if they have any merit at all, will take more time to clarify, operationalize, and manage results from.
At face value, the belief system in the proposed Homeowner Affordability & Stability Plan is that a spigot-released $75 billion solution can offset a $300 billion problem.
Clearly, the devil in the details will come down to applying the rules of the program toward the selection of which mortgages to mitigate, the velocity of execution, the success-rate, the transparency, and the ability to stress-test the homeowners’ individual and collective scrupulousness and capacity to avail of the relief, thereby influencing a wider sphere people’s behavior and confidence level.
Just as clearly, the just-announced program falls short of delivering a shock-and-awe “fix” partly because of what it does, and partly because of what it doesn’t do.
Have a look at some top-line observations of a number of the home building equity analysts in their notes to their clients. One red-flag of concern regards the holes in the detail provided in the plan presented yesterday.
James McCanless, senior analyst at FTN Equity Capital Markets Group, believes the two-week lagtime between announcement of the program and rolling out specifics of how it’ll work can create an enormous negative drag right out of the gate.
We believe today’s tepid market reaction to the housing stimulus is due to a lack of detail in the White House and Treasury releases about who does and who does not qualify for the plan. Simple details such as an eligibility cutoff date or maximum household income for eligible participants would have provided some basis for analysis and discussion. Since those details are not scheduled for release until March 4, we think the near-term impact of the bill could be a general hesitation by lenders, buyers, and builders about any and all housing transactions. A similar effect was seen in December 2008 after Secretary Paulson made and retracted a 4.5% mortgage pledge during the month, and we believe the slowdown in December activity may be replicated over the next 2 to 3 weeks.
Further, McCanless seems to believe that a more rifle-shot program, vs. the blanket initiative proposed would have done a better job of nipping the problem in the bud, stemming foreclosures and breaking the free-fall in home prices. Here’s how FTN’s best-case scenario plan would have worked:
Our top 3 ideas/wishes for housing market revitalization are focused on stabilizing home prices through an isolation strategy for troubled mortgages. An isolation strategy would allow workouts and refinancings on a case by case basis and would not negatively affect the net present value of paying mortgages in the same geography. We believe this strategy would make banks more amenable to loan modifications and hasten the goal of home price stability through a faster clearing of problem borrowers and through a relaxed mortgage lending environment. Unlike the Treasury, we are not bold enough to assume our ideas would benefit the average homeowner by $6,000, but we do believe a resumption and restoration of functioning housing markets through proven strategies would have a generally positive effect on housing prices over the next 2 to 3 years.
So, from FTN’s standpoint, more clarity and more specificity as to the beneficiaries would have been the way to go. Josh Levin, home building analyst at Citigroup, is more generous with his assessment of the positives of the plan, with a caveat or two.
It is too soon to know how effective HASP will be at reducing future foreclosures. In the best case, we think HASP could mitigate some future home price declines. However, even in the absences of foreclosures we think home prices need to fall another 10%-15% based on the relationship between home prices and incomes and rents. Moreover, mitigating foreclosures does not change the fact that there are too many homes in the U.S. and it will take some time to absorb the excess inventory.
The team of David Goldberg and Eric Crawford home building analysts at UBS dismisses the ultimate impact of the plan in light of data that more than one out of two homeowners who’ve gotten new terms on their loans re-default within six months of the loan modification. Still, they’re not damning the initiative, only asserting that it will have limited impact in solving the urgent problems.
Although this plan will generate modest benefits, it is unlikely to curb foreclosures significantly, thereby minimizing its impact on home prices. Specifically, we expect “redefaults” among distressed borrowers who seek assistance to remain elevated. Further, although non distressed homeowners with LTVs in the specified range will benefit, we believe foreclosures among this group would have been minimal regardless. Finally, in our view, a trough in housing won’t occur until we see improvement in the broader economy, leading to greater demand.
Most skeptical of the plan’s design, scope, and likelihood of success or failure among the analysts we’ve heard from is Ivy Zelman, ceo of Zelman & Associates.
We are disappointed that the White House’s plan does not address the heart of the foreclosure problem, which is the negative equity position almost 30% of mortgage holders are currently facing. Absent principal reductions, our mortgage servicer contacts are concerned that re-default rates will remain above 50% as the problem is being delayed rather than solved.
More specifically, Zelman zeroes in on the plan’s failure to focus on geographies where its impact is most needed.
If the center of the economic problem is foreclosures, the epicenter is Arizona, California, Florida and Nevada as these states currently represent 45-50% of incremental foreclosures and underwater mortgage holders. We do not believe this plan will alter the mentality of the at-risk mortgage holder in the most troubled housing markets.
Calling for principal reductions is tantamount to letting the cat out of the bag on repricing assets up and down the financial system. Although the administration and its team seem bent on avoiding taking that course, more and more experts concur that it is inevitable.
Notably New York University economist and principal at RGE Monitor Nouriel Roubini.
Focus Shift: Measuring Stimulus
When it’s the stated mission of the $790 billion stimulus program to create or save jobs–2.5 million to 3.5 million if you’re the President, and fewer if you’re Economy.com economist Mark Zandi–it begs a question. How can you and will you measure whether you’re succeeding?
Who and what will determine whether a job has been created or saved as a consequence of the program? How much time past, say, the next six to 12 months, will a job have to have been created or save to qualify as counting toward the effectiveness of this program?
These will be some of the questions that challenge the Obama Administration during the next few weeks, months, and possibly, years.
Meanwhile, success for Treasury Secretary Tim Geithner will come if and when he can get the markets (i.e. investors, inwestors, however you say it) to believe they can venture back into the arena even as he gets Wall Street to take its medicine.
An increasing number of smart people suggest that nationalization — or the term Calculated Risk has coined to quell free-market-minded fears that we’re headed straight for Bolshevism: pre-privatization – of the banks may be the only way for U.S. society to get its arms around the problem. The problem being — like many homeowners under water on their mortgage — that banks owe more than they’re assets are worth thanks to the free-fall in assets.
Here’s a clip of Senator Lindsey Graham, R-S.C., speaking with George Stephanopoulos on ABC’s “This Week” yesterday.
And here’s a smart economist, Nobel Prize winner, Princeton professor and New York Times columnist Paul Krugman, on where nationalization or pre-privatization might fit into the context of ways society may have to meet its enormous challenge.
The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.
There’s hope that the bank rescue will eventually turn into something stronger. It has been interesting to watch the idea of temporary bank nationalization move from the fringe to mainstream acceptance, with even Republicans like Senator Lindsey Graham conceding that it may be necessary. But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.
If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.
Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely.
One way or another, part of the job for the fledgling Administration will be to offer ways to measure wins and losses so that people can get a sense of whether their sacrifice and contributions are paying off. You can only manage what you can measure.
U.S. Department of Vocabulary Minting
Seeking a new term–preferably confidence-inspiring–for ”bank failures.” Michael Shedlock, aka Mish, has an analysis of recent failures from the FDIC “Failed Bank List.”
Euphemists Anonymous, now’s the time to speak or forever hold your peace.
Calculated Risk highlights a New York Times article that sparks the need for this new terminology. In the article, Failed Banks Pose Test for Regulators, CR notes the F.D.I.C. is having trouble with the volume of troubled assets it must dispose of through auctions.
… The F.D.I.C. faces tough choices … every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.
The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.
Getting investors to move–like getting home buyers to move–in this environment where assets of all classes are in free-fall, doesn’t happen with a snap of the fingers.