Fighting Fire with Fire
Here’s an excerpt from Norman Maclean’s 1992 classic Young Men and Fire, the who’s-your-daddy? of Sebastian Junger’s The Perfect Storm.
On the open slope ahead of the timber Dodge was lighting a fire in the bunch grass with a “gofer” match. He was to say later at the Review that he did not think he or his crew could make the two hundred yards to the top of the ridge. He was also to estimate that the men had about thirty seconds before the fire would roar over them.
Dodge’s fire did not disturb Rumsey’s fixation. Speaking of Dodge lighting his own fire, Rumsey said, “I remember thinking that that was a very good idea, but I don’t remember what I thought it was good for. . . . I kept thinking the ridge—if I can make it. On the ridge I will be safe.”
If you’ve never read Maclean’s remarkable tale of 15 smokejumpers who fought the famous Man Gulch forest fire in Montana in 1949, do now. Among numerous virtues of reporting, research, and masterful prose, it’s a heart-stirring Baedeker on when–if ever–to fight fire with fire.
Speaking of which, let’s consider the mortgage cram-downs issue among other moral hazards that have and will gain currency as the vicious cycle of wealth destruction, foreclosures, unsold home inventory, credit paroxysm, and economic decline plays out in its sinister algorithmic loop.
The provenance of the latest discussion of mortgage cram-downs–which refer to regulation that would give bankruptcy judges new license to modify what borrowers owe their lenders for home loans–is word that members of Congress are pushing for cram-downs’ inclusion as legislation in forthcoming economic stimulus initiatives due practically the nano-second Barack Obama swears into Oval.
Paul Jackson’s Housing Wire as been all over the cram-down issue, with analysis and opinion about whys, wherefores, and why-nots. Philosophically, opponents to giving judges the power to reset loan terms say that messing with the free-market tool to deal with failure to meet debt obligations–foreclosure–is opening a Pandora’s Box. It not only rewards an undeserving population, they say; it will also trigger higher costs among lenders, which will then pass along to new borrowers, and wind up hindering what’s intended for help.
Nothing against the Puritan Ethic that says those who take crazy risks need to suffer their consequences if they don’t pan out. But there are times that fighting fire with fire is all that’s left.
- The Wall Street Journal follows Jackson’s story by two days, and brings a bit more to the report by citing the traction the cram-down initiative has gotten among players who ferociously oppose such measures were we not currently heading to hell-in-a-handbasket: namely, banks and home builders.
Jackson’s credible coverage of the topic has spawned less-than-credible “ideobloggery” that purports to cite facts to make cram-downs seem un-American, let alone ineffective. We find that to be the case in Mortgaged Future analyst Bill Zielinsky’s take, picked up yesterday by Seeking Alpha. The nine questions Bill raises are freighted with biases and interpretations stated as unvarnished facts, and, taken together, they add up to a circular logic rant whose sole real revelation is that Bill Zielinsky doesn’t like cram-downs one bit.
Fine. Say that. But don’t make it sound like you know what the outcome of every initiative is now, because you don’t. The data you link to doesn’t prove your point. Nobody could.
What’s bothersome is the way so much analysis plays havoc with facts, timelines, causes, and symptoms, and what any of that has to do with what we need to do today to 1) prevent second-derivative rates of change from worsening as fast or faster than they are, and 2) set up time-release measures from the next 10 minutes to the next 10 years to make improvements happen to credit, regulation, job formation, consumer spending, earnings, and ultimately home valuations.
Per the Fed, things will get worse before they’ll get better. Still. 2009 may be a new year, but it’s definitely not a second chance. Calculated Risk recaps FOMC minutes.
In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Home building was expected
to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions.
Against this backdrop of vanishing stability, greater peril, and mounting gravity, we need to look hard at the moral hazard issues, and then simply get real.
What Zielinsky and so many others forget as they map their way through a technical analysis of data points and trends with actuarial precision is that psychology is an X factor that presses against every other statistical variable you can name: home prices, foreclosures, household spending, earnings, job loss or growth, credit availability, etc., etc., etc.
Have an opinion about this. It won’t kill you. Tell us we’re wrong to say that moral hazard arguments are just going to slow down our doing what we need to do to get through the crisis. We need decisive action, sustained action, compelling action, and undaunted action. Yes, foreclosures are a symptom, which is proof that symptoms can be killers.
Two reference pieces for you to debrief on related issues.
- Big Builder charts a residential real estate’s Congress for Dummies graphic in its current issue, giving you a snapshot of who to go to with your convictions and opinions on cram-downs, stimuli, etc.
- Big Builder gets the inside skinny on the progress-to-date of FDIC chair Sheila Bair’s programs to keep people in their homes via loan modifications.
- We agree with Calculated Risk’s take on the question of whether investors’ purchase of foreclosed properties will positively or negatively impact recovery. Inventory glut is another symptom that asphyxiates.
It’s time to strike the “gofer match” in the bunch grass. It’s time to fight some fire with fire.
Four for Fighting
From CONSTRUCTION PULSE, by John McManus: A sobering quatrofecta on the data front this morning–consumer spending, durables orders, jobless claims, and new homes orders–has four leading economic indicators all leading backwards to months and years past for the date when each hit a similar low point.
- The Wall Street Journal reports “Data Indicate Faltering Demand,” mapping out how both households’ and businesses’ spending has fallen off a cliff.
- CNBC flashes: “New-home sales Tumble to 18-year Low in October,” with new-home median price now at $218,000, a 7% slip from year ago levels.
- Bloomberg reports “U.S. Durables Orders Fall Twice as Much as Forecast.”
- Weekly job-loss claims data are coming in consistently above the half-million mark.
The direction of these indicators would only be news to a proverbial Sherlock. They’ve been heading south for more than a year since many of their mid-2006 peaks, and will do so until well into the second half of next year, or later. The magnitude of the negative momentum, though, keeps exceeding The Street expectations. This is what astonishes us.
For a good preliminary look at the devil in the new-home sales details, best stop in with Calculated Risk, which pulls Census Bureau new-home sales data across several cycles for comparison, and charts out both months-supply and absolute inventory for analysis. The obligatory reminder–Census Bureau numbers don’t account for cancellations, for which there are reasons galore these days. The following is analysis from Calculated Risk.
The second graph shows New Home Sales vs. recessions for the last 45 years. New Home sales have fallen off a cliff.
Sales of new one-family houses in October 2008 were at a seasonally adjusted annual rate of 433,000, according to
estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development.This is 5.3 percent below the revised September of 457,000 and is 40.1 percent below the October 2007 estimate of 723,000.
Over the last year, we’ve cheered some dismal NHS statistics as the market booed. Today, while we are not booing the results, we are not particularly cheering like the market is. So why are we more subdued? Well, when we look at the revisions to last month’s data, it is all sharply higher on inventories, the mix of inventory has changed for the worse and total sales were revised down a bit. All of these revisions combined with the economic malaise makes for a continued struggle for builders (ignoring the long overdue government help yesterday). We believe next month will witness Sales revisions down, inventories up and the mix to be more unfavorable, skewed toward finished homes.
After all’s said and done, we’re preoccupied with where housing prices new and existing will correct to and when that will be.
- The WSJ posts S&P/Case-Shiller’s latest home price analysis by metro area on this link.
Many of us are trying to do the math on where the least-worst fix is, given the $8 trillion-and-counting in rescue spending already in play–consumer spending, corporate stimulus, home purchase inducement, etc. Imagining a scenario where 36% home-price drops necessarily mean that residential investment would erode by trillions, and where real estate owned vacancies proliferate like dandelions, leaving many communities with a scorched-earth future even more compromised than their present, the domino-effect consumer spending decline, earnings evaporation, and job loss stretching beyond 2009 should shape prioritization at the policy level.
Meanwhile, even as the Federal Reserve and other government finance agencies take action to grease the wheels of the consumer credit engine, it’s the other side of banks’ business–the commercial real estate side that does construction, acquisition, and development lending that has a death-squeeze on the jugulars of housing’s rapidly shrinking band of mostly regional and local free-market stalwarts, privately-run home builders.
The rock-and-the-hard-place for many of these private home building companies is that finishing out their projects is their last best hope at not slipping into a capital-deprived coma. Even to liquidate at a loss, they need to get done with what’s started and sold, The FDIC’s scorecard on the viability of a project unfortunately may not incorporate consideration of a grim prognosis for the project builder-developer if credit on the project freezes.
The whirlygig of de-risk can make an enemy of someone who seemed like a friend, and will likely work to make a good number of new fast-friends from among longtime rivals in the housing market.
Rounding the Hope of Good Cape
A cause celebre of the moment, now that a lame-duck Congress and the Administration have determined that the economic and housing crisis will respond to the “Pause” button until the presidential transition is complete? Loan modification. We’re seeing more and more signs of it on the home mortgage side, but what happens as commercial default proliferation adds even more strain to banks’ capital structure.
We’re seeing re-terming of mortgages, and the intended outcome of modifications–slowing and/or suspending foreclosures–in various and sundry iterations, among banks themselves, the GSEs, and government agencies like the Federal Deposit Insurance Corp.
FDIC chair Sheila Bair’s mortgage modification crusade, being piloted among IndyMac bank customers on the brink, is regarded as one of the least flawed models yet offered to stanch hemmorhaging foreclosures–whether they be among those who are incapable of meeting monthly payment obligations or those who are capable but unwilling, given the dis-incentive to keep paying for a house under water on its loan.
Her plan centers on getting the monthly payment to a manageable level so that a struggling homeowner can stay in the home–for a price to the government, the lender, and the buyer. Weighing in the balance is what is more expedient in the present [it's technically easier to foreclose] with what is less expensive in for the future [the cost of houses rotting unoccupied and dragging down the comps in the neighborhood].
At the same time Bair may be regarded as a hero for her efforts to stem the tide of REO home properties inundating the system and enlarging an already bloated inventory of for-sale residences, Bair’s getting blasted by home builders and their building materials suppliers as a goat when it comes to many of those same banks’ commercial real estate deals.
ProSales editor Craig Webb reports on National Association of Home Builders’ president and CEO Jerry Howard’s lament to Bair about how her regulatory heavy hand is snuffing out whatever feint access to capital builders had up to the last few weeks.
NAHB's Howard
“Builders with outstanding loans that are placed under FDIC control are frequently unable to contact a decision maker to deal with routine but time-sensitive matters related to loan draws or extensions,” NAHB president and CEO Jerry Howard wrote in his letter. ”Some builders have encountered what seem to be arbitrary criteria on whether or not loans receive continued funding. Again, these developments are unnecessarily turning good loans into problem assets that will significantly exacerbate the losses that must be absorbed by the FDIC and the building and banking industries.”
At Construction Pulse, we’ve been hearing from more and more home builders who corroborate that they’re unable to contact an actual decision-maker at their lending institution, but we chalk that up less as a result of FDIC take-overs and more to the Ice-nine credit funk that has paralyzed commercial real estate lending, period.
Still, if Bair’s logic as regards incentiving lenders to work out home loans, saving home buyers from losing their homes to foreclosure, could apply as well to home builders and developers, her status might again revert from Bair the goat to Bair the hero on both the mortgage and commercial real estate counts.
Higher up the policy food chain, policy makers and elected officials face having to try to quantitatively analyze the cost to taxpayers, private, and public organizations of resetting the principle owed on both home and commercial real estate loans to reflect real estate’s correction.
Galbraith on Housing
The massiveness of such an initiative is the subject of discussion on a segment of CNBC’s Squawk Box this morning, guest-hosted by former General Electric CEO Jack Welch. Texas economics professor James Galbraith believes a multi-dimensional economic program would address housing in such a way as to fully recognize the need to put a floor under residential investment as a foundation for all the other fiscal and monetary stabilization initiatives that might occur.
- See the WSJ coverage of Fannie and Freddie’s plans to cease foreclosures through the New Year.
- Via Seeking Alpha, commentator Anthony Freed provides analysis and opinion on the prudence and effectiveness (or lack thereof) of initiatives to forestall foreclosures.
Feeling More Confident?
The plan for the U.S. to buy stakes in banks is rolling out, with this morning’s announcement that the government’s FDIC will invest $250 billion directly into banks’ equity base. Strangely, we’re getting the “for idiots” version of the several-fold plan, in contrast with the opaque take that characterizes so much government speak about programs. It all sounds complex, as many agencies and facilities kick into action with the singular purpose of freeing up frozen credit. This business of catalyzing “commercial paper,” which allows companies to carry on daily operations with access to capital to keep things moving, is a step in a necessary direction, but just one of other steps that Washington will need to take as the beat goes on and the economy weakens. You can almost palpably feel banks’ “willingness to lend” growing stronger around the land. Normal lending is the goal.
Attention turns to the other side of the lending equation. Borrowers. Who is credit-worthy? Who will remain that way, even as the economy runs through its weakening course over the next several quarters? We should train our focus on companies’ earnings for insight into these questions. Third, fourth, and first quarter 2009 earnings will contain the code of what our economy, and what housing will look like in the back half of 2009 and beyond.
“The new scorecard” that home building executives were speaking about for their own performance 18 months or so ago now has a Main Street equivalent. “Flow of funds” is the new return on investment. Merely having access to and use of the same dollar denomination we put into banks and investments, it is expected, is the fix our government believes we’ve awaited during the weeks of financial crisis.
As the economy undergoes recapitalization, and banks’ liquidity and capital bases change overnight amid the plans the government is rolling out, the intersection of banking and housing becomes even more complicated. There many be an entirely new opportunity, perhaps even a lifeline for companies who’ve been forced by declining asset values into technical default on their loans.
Whatever may be the case, it’s more important than ever to carry on regular, disciplined and fully transparent communication with lenders. We keep hearing the words “unprecedented and aggressive” associated with the measures being taken to get the “flow of funds” flowing. Well, that means fundamental changes to many of the ratios that have been your enemy for this past 12 months. It may mean that relief on some of the pressure of covenants is at hand.
Timelines are the most important issue. Global central banks’ intervention in the credit markets is a tourniquet, not a solution. The injections and infusions treat symptoms, and few mistake them as cures for what ails the system. There are macro timelines and granular corporate ones that need careful and disciplined management. As a result of the recent actions, it may be that more companies will survive to see the other side of the abyss.
But it will be after earnings shrink, job losses balloon, and both business and public sector capital flows endure prolonged stress. Intervention or no, fixes or no, a correction to a base of reality is necessary. Housing business executives can take a proactive role and find opportunity in that correction, or they can get carried along in its magnetic force.
Why it ain’t over
From CONSTRUCTION PULSE, by John McManus: Here’s what to know about September 29, 2008, on Capitol Hill. “There is no extra courage to go around,” Rep. Jim Cooper (D., Tenn.) told the Wall Street Journal after Monday’s stunning 228-205 vote against the $700 billion plan to stabilize U.S. financial markets. A one-point-two-trillion-dollar one-day panic says there’s more work to be done on all fronts, and like as not, our elected representatives will neither further ennoble nor endear themselves to many of us as they try to get their minds around the task at hand.Lots of American people are angry, and they’re letting it be known. American homeowners are angry because deflation continues to rob many them of the un-hard-earned paper profits they’d used to live above their means for more than a decade, and the home price correction has made many of us who bought in the past few years “the greater fools” for thinking the music wouldn’t stop at least until we had a wad of cash in hand. Non-homeowners are angry because their households will suffer the burden of a society that mistakenly over-prioritized and over-priced homeownership to fund its agenda for the past decade or more.
Still, the rescue bill will come back up again because it must. 435 politicos, who never stop campaigning, must continue to wrangle and tweak, lead and concede, and ultimately they need to use whatever suasive powers they possess to talk clearly and candidly to the one-third of their constituencies who “don’t know” whether they’re for or against the Federal government’s massive plan to stabilize the financial system. “Don’t knows” may justifiably resent the folly of financial companies who never learn the lessons that borrowing short and lending long harshly teach.
But “don’t knows” may also be able to get their minds around the surreal-but-real potential of soup kitchens and bread lines. [In light of today's market bounce, remember that 1929 and 1930 saw several big market rallies even as things headed to decades-long lows].
Authors of the next go-round of language for the rescue package have to do three things by they time they bring language for the legislation back to the House of Representatives for consideration after the Rosh Hashana holiday.
One, the authors have to get up in the balcony for a better view of the drama that’s unfolding. U.S. Treasury Secretary Henry Paulson has been so frank and earnest about his concerns for “the financial system,” but evidently he hasn’t a clue about Retail Politics 101. Bank failures only tend to strengthen a lot of smart people’s convictions that dastardly deeds and toxicity confine themselves to the financial sector. But we rank-and-filers’ indignation about the thievery of bullet-proof billionaires must be set aside for a moment while this thought gets a chance to enter our minds: Layoffs.
Do we really need a Ford Motor Co. or a McDonald’s to file BK before we believe this matter is a buckling of the economic ground beneath Main Street as much as it is a toppling of the citadels of Wall Street? Do we need lines of shivering people wrapped around the block on the dole?
- The bill’s rejection was the product of a failure of political leadership in Washington, as the principal players appeared not to comprehend or address in a convincing way an intense strain of voter opposition, The New York Times wrote.
This notion of skyrocketing unemployment and mass distress remains in the black box of the unimaginable. But for how long if we don’t compell our leaders to crack the code of failing confidence and freezing credit?
When next the Treasury Secretary or the President or the leaders of the Senate or House majority or minority parties in Congress open their mouths about this plan, they’ll need to have reworked the measure and its ambitions enough to be able to assert honestly that they address American business’s woes only insofar as they plan to use Federal power to try to ward off a worsening crisis for all Americans.
Two, the authors of the plan–whether they like it or not–are married to the sliding scale of accountability on the part of our elected lawmakers. Crisis or no crisis, their foremost interest is re-election. Mounting urgency, strong medicine, fairly estimable economic strategists and tacticians, and a virtual declaration of war on the economic crisis by the nation’s chief executive proved only that electoral politics trump sanity, and we should not be surprised by that.
Being right won’t win the day. The dilemma now is whether to try to swing no-voting Republicans across the aisle via Democratic concessions, or the other way around. In case we need reminders, we’re a polarized bunch today, and it seems the only shared trait in the halls of Congress is a desire to grandstand ad nauseum. At any rate, our current President’s role as a domestic lame duck has been dramatically confirmed, and it’s going to take the emergence of true leadership, political fortitude, and courage to get backing for the next go-round here. Partisans take heed, being right for all the wrong reasons may be hazardous to one’s position in current polls, but it’s the way to put America first in this case.
Three, stop focusing only on assets, and restore people’s and businesses’ trust in getting access to their money. When people enjoy safety, they take it for granted. When they begin to sense danger, they covet safety. Suspend FDIC limits, or raise them to $1 million. Yes, there’s a price to pay, but it’s probably less than the $1.2 trillion in value that vanished from the stock market yesterday.
FDIC Backs Commercial Banking Industry
From MULTIFAMILY EXECUTIVE, by Les Shaver: Although investment banks continue to disappear from the landscape, Federal Deposit Insurance Corp. Chairman Sheila Bair insists that the commercial banking sector is doing just fine. Read the complete article.
- Read more on the FDIC role in easing credit crisis fears.
- Should FDIC limits be raised?
- FDIC bids to increase deposit insurance.