It appears the FHA changes that the government has been passing have been working, at least in terms of increasing the number of people getting FHA loans. These changes most notably include the sharp increase in the maximum loan limits, something that opened up the FHA program to a load of new markets. FHA loan applications were up 133.9 percent in July, compared to conventional loan applications, which fell 50.2 percent in July, according to a survey conducted by the Mortgage Bankers Association (MBA). While the new changes are certainly having an impact, the bigger question is whether or not this is actually a good thing.
Beyond the fact that the FHA program has been opened now to higher priced markets, one of the biggest selling features for the FHA program is the low down payment requirements. Typically, FHA loans only require buyers to put down 3 percent, which in today’s lending environment is about the lowest down payment a buyer can hope for. If buyers use one of the down payment assistance programs, though, they can actually get 100 percent financing. While the new housing bill includes a provision meant to shut down these programs October 1st, a separate bill is in the works to bring them back. How that shakes out remains to be seen, but with or without the down payment assistance programs, FHA loans still represent the highest LTV loans on the market right now.
With the housing bubble is still not deflated, and foreclosures still wreaking havoc across the country, it is concerning to me that the government is adding more and more to its housing portfolio. This is the same debt that is crippling financial companies, yet we are trading treasuries for mortgage securities and originating all kinds of new high LTV, high risk loans. With the debt load we already have, the last thing we need is for all of this housing stuff to go bad on us, too.
We can of course debate whether these additional risks are justified by the potential economic benefits that will be received by saving the housing market from collapsing. Assuming that the market can be saved, my question becomes: At what cost? Will we ultimately be better off, or will we just end up even worse than before? The story I wrote about yesterday certainly doesn’t help me feel better about this, either.
So exactly how bad have things gotten in places like Detroit? Banks are having a hard time giving homes away. The Detroit News published a story last week which highlighted a recent transaction where a bank which had foreclosed on a property basically paid a buyer to take the property off their hands. The property was listed on the MLS for $1, but really that was only because, in order to make the sale legal, there has to be some transfer of wealth. In actuality, once you take into the account that the bank paid $500 toward the buyer's closing costs, they actually paid the buyer to take over the property. When all was said and done it was estimated in the Detroit News article that the bank paid around $10,000 to sell the home. This figure included approximately $3,500 in real estate commissions plus back taxes and water bills. For those who might be thinking this buyer got an amazing deal, though, let’s take a look at how this home got to the point it is at now.
According to the article, the home sold back in November 2006 for $65,000. At that time it was one of the nicest homes on the block. Last summer the home was foreclosed on by the bank; vandals broke into the home and stole everything of value, including the doors, plumbing, wiring, even the siding--everything, including the kitchen sink. One day, the real estate agency boarded up the home only to find the boards stolen the next day, used to board up another nearby home. You probably get the idea by now that this is not exactly the best neighborhood around. In addition, there is also the fact that taxes on this property run $3,900 a year. This new owner better run, not walk, to the court house and put in a request to challenge the property assessment or else this home may soon start eating away at their savings. Hopefully, too, they have some sort of understanding with the locals so that as they fix up the property the improvements aren’t immediately stolen. There is definitely a reason why it took 19 days to find a buyer even willing to take the property.
While Detroit happens to be one glaring example of the economic problems faced by some in our country, they are not alone. These $1 sales are common in other cities as well, including Cleveland. "And in some cities like Cleveland, judges aren't letting them [lenders] sit on the properties -- they're ordering them to tear them down or sell them,” Anthony Viola of Realty Corp. of America in Cleveland was quoted as saying in the Detroit News article.
Since it only costs around $5,000 to demolish a property, and that it cost the bank--at least for this transaction--around $10,000 to sell the home, it might make more financial sense to just demolish the home and hold onto the lot as an asset, which will hopefully be worth more someday in the future. Obviously, for this strategy to work, they would need to challenge the property tax assessment and get it lowered closer to the real value, which would be nothing. Once they did that they could sit on the property forever if they wanted (considering that they will be able to generate more income on the $5,000 savings then any expenses the vacant property might require), or they could even donate the property to charity, if they could find one to take it. Ultimately I wonder how much longer banks are even going to be willing to lend in neighborhoods like these. Something tells me it won’t be for much longer. Oh, that is unless of course the government is willing to guarantee the loans, which will probably happen. So next time it will probably be taxpayers who have the privilege to foot the bill on this. I don’t know about you, but I’m not excited about that prospect.
*For more information on this particular $1 house in Detroit see Zillow's excellent write up. They have a bunch more pictures as well.
*Photo courtesy of Bearing Group (MLS photo for 8111 Traverse St, the property mentioned in the article)
In Q2 of this year, the Euro Zone saw its GDP shrink 0.2 percent and Japan’s GDP saw a decline of 0.6 percent, according to the New York Times. Since we have been focusing so much on the doom and gloom surrounding the U.S. economy, I thought it would only be fair to talk about the problems in the rest of the world, too.
This Euro Zone’s decline is the first quarterly decline that the group of nations has experienced since joining forces under the Euro in 1995, according to the New York Times. The Euro Zone’s two big economies, Germany and France, both contracted individually. Germany’s decline was more or less expected, and came in at 0.5 percent. On the other hand, France’s drop was a big surprise, according to the New York Times; it came in at 0.3 percent.
Japan, which represents another of the Group of 7 (G-7) economies, also has been hit hard. They reported a decline in their GDP of 0.6 percent. The G-7 consists of the U.S., Japan, U.K., Italy, France, Germany and Canada. When the group was formed, these seven countries represented the seven largest economies in the world. This make-up has changed thanks to China’s tremendous growth over the years, but these seven economies are still all toward the top of the list. Not one of these seven economies is doing well at this point, and it is possible that all of them could see economic contraction before the year is out. The U.S. has avoided one thus far, but let’s see how things look once the stimulus package impact wears out. The U.K. barely squeaked out gain in Q2 and many economists are predicting that their economy will contract in Q3. With the largest economies in the world all struggling, it seems we are set for a widespread global slowdown.
You can be assured that when all these countries slow down at the same time, the lesser economies of the world will suffer, too. No economy is completely shielded from all these economic powerhouses. Investors would do well to remember this, as well as that emerging economies, while offering diversification, are also much more volatile than developed economies. The biggest losses will likely be seen in the smaller countries. Don’t get me wrong--I’m a huge fan of emerging markets over the long term, but investors need to take proper precautions right now to protect themselves, because things are only going to get worse on the global scene.
By now I think most people are aware of the blank check the government gave to Freddie Mac and Fannie Mae as part of the recently passed housing bill, but was this truly the best way to fix the problems of these government-sponsored enterprises (GSEs)? According to Alan Greenspan in an interview with the Wall Street Journal, this solution was “bad.” Instead Greenspan thinks that we should have nationalized the GSEs, wiping out shareholders in the process, restructure them and then sell of the pieces in order to form five to 10 private companies. Greenspan has long warned that the current structure of these GSEs threatened the nation’s financial stability, according to the Wall Street Journal, and Greenspan saw present circumstances as the perfect time to make a much needed change. Greenspan isn’t the only one with this opinion either; former Nixon Treasury Secretary George Shultz had these words of wisdom, as quoted in the same Wall Street Journal article: “If they are too big to fail, make them smaller.”
How the markets would react to the nationalization of the GSEs is up for debate, but Greenspan seems assured that things would be just fine. Right now the companies enjoy the full backing of the U.S. government, only the shareholders get to keep all the upside. So no risk and lots of potential for reward? Sounds like a pretty sweet set-up they have over there.
Typically, I’m not a big fan of government getting involved in business. I’ve always been of the philosophy that the market will work things out. But this circumstance is very different. The government has already intervened by granting these companies an official unlimited line of credit. We can debate whether or not they had one before, but now it is official. At this point, taxpayers are potentially on the hook for trillions of dollars; we have essentially taken on all the risk without the possibility for reward. This is obviously a horrible arrangement for taxpayers. While I don’t like the idea of keeping the companies under government control, that is not what Greenspan is calling for. He is saying that the government should take control of the companies only long enough to sell them off to private investors, who will form five to 10 smaller companies in the process. To me this plan seems much better then what we have in place. This solution also would work out much better in the long term, since it would increase competition. In addition, since there would be a bunch of smaller companies, we wouldn’t necessarily have to worry about a collapse in the market if any one of them went under. That means we wouldn’t have to bail them out if they made stupid business decisions, which is a winner in my book.
I don’t normally agree with Greenspan, but in this case I think he is on to something. The government offering up taxpayer dollars to keep two flailing giants afloat is a horrible plan, and the time has come for a change. Present circumstances offer us the chance to make a change and if Bush isn’t up to the task, I hope that the next president is.
In what shouldn’t come as a shocker to legislators in New York state, but probably does, Freddie Mac has announced that they will no longer purchase subprime mortgages in New York state dated after September 1st, according to theWall Street Journal. New York passed a law that will go into effect on that date that is meant to curb abusive lending practices, but which could also increase risks for lenders. Freddie Mac saw enough problems with the law that they said enough is enough, and decided they aren’t going to bother with it.
I’ve been saying for some time that many of these laws being passed are ultimately going to hurt the consumer, and this is just the first step. Freddie Mac is the second largest mortgage buyer in the country, and without them in the equation, bottom line lending costs for consumers will go up. Now, we can debate all day whether or not people should even be buying homes if they have to use subprime loans, but that is not the point. If the goal was to eliminate subprime loans, then they just should have done that; by passing legislation such as this, though, they are just going to increase the cost of the loans for those borrowers who do use them.
We will have to wait and see how this ends up affecting the real estate market in New York, but it certainly isn’t going to help it. I don’t know how popular subprime loans are there in the first place, but it is likely that low income areas will be hurt the most. Typically that is where subprime loans are most widely used. Investors who are looking to buy property in these low income areas should look carefully at the borrowing possibilities for potential buyers. If subprimes are out of the question, then you had better make sure that people can get a FHA loan, or that you are offering some sort of owner financing. New York may also not be the last state to take such steps as these, and it is possible that Freddie and possibly even Fannie Mae could take a similar stance to the new rules in the other states.
The July 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices released by the Federal Reserve describes a lending environment that has gotten worse across the board. I won’t bore you with all the details; feel free to click on the above link if you want those (or you can read Mish’s blog post--he does a great job of summing up this report), but I do want to make the point that these numbers are not encouraging. Sure, residential lending standards have increased--I think most people understand that-- but we need to realize that this credit tightening is not confined to just residential real estate. Banks are hesitant to lend to pretty much everyone right now. That includes businesses loans, commercial real estate loans and consumer loans.
Our economy is driven by lending and borrowing--it has to be because we don’t have any savings. It is pretty safe to say that if Americans started buying only what they could afford our economy would collapse. In order to stay afloat, we have to keep borrowing; it is the only way to keep the train chugging in the short term (which is all the government cares about, but I’m not going to get into that). That being said, when lending becomes tighter, our economy pays the price. Borrowed money is our lifeblood, and right now the flow is being restricted. The Fed is trying to do their part by making the money cheaper and more abundant, but unless banks start actually lending out this money, it isn’t going to do them much good.
While lending is the lifeblood of our economy I should also add that it most definitely is toxic. We need to understand that we cannot go on borrowing more money forever. Right now the U.S. economy is acting more or less like a ponzi scheme. Basically that means that they are taking money from investors and the only way to pay these investors back is by bringing on more investors. As long as there is a steady stream of new investors coming in with their money then there are no problems. However, if anything happens to restrict the supply of new investors so that the money they bring in doesn’t cover the payments due to the old investors, then all hell breaks loose. The U.S. government obviously has the trump card in that they can print money at their whim, but we all know where that leads.
Those who want to know more about the U.S.’s addiction to borrowing should check out the new movie I.O.U.S.A. I don’t imagine that the Fed will take these tightening lending standards lying down, though; it will be interesting, to say the least, to see what they come up with to combat them next. They say that inflation is an overriding concern right now, but that shouldn’t keep them contained for too long. The thing investors need to remember is that this party can’t and won’t go on forever. They can drag it out, but at some point people will start heading for the doors.
Like millions of other people across the world, I watched the Olympics opening ceremony on Friday, and I can say that it was quite a spectacle. While it certainly was an amazing show, the likes of which I have never seen before from an opening ceremony, the price tag for this show made me choke. When the announcer said that China had spent $300 million on just this one show I was shocked. I knew they had spent $40 billion on the whole Olympics, but most of that went to infrastructure improvements and pollution cleanup. $300 million for a show just seems ridiculous.
To me, this just proves the point that China is trying to use these games to show the world that they are now a power to be reckoned with. What better way to do that than throw down $40 billion for the Olympics and $300 million for the opening show, both of which are unprecedented numbers.
The problem with this is that the world already knows China is now a powerhouse. We all know about the growth in their economy, and pretty much every country in the world wants a piece of China right now. They don’t need to prove a point that has already been made. While in one sense the employment created by all this spending is a good thing for China, one can’t help but feel the money could have been put to better use. China still has a lot of poverty in their country as well as many other areas of need, which could have greatly used some of these funds set aside for the Olympics. I don’t think there is any chance of China seeing a return on the money they have spent in the form of increased tourism (or anything else for that matter) after the Games, so really, most of this money will have been wasted on what the country considers a big party for themselves.
The Olympics is a great event with loads of history and tradition, but when countries start using it to make statements or impress the world (and to be fair, China is not the first, nor will they be the last to use the Olympics in this way) it is just a shame. Countries shouldn’t neglect the good of their people for the sake of a game. The Olympics bring in a large sum of money and countries should be smart and spend only on the Olympics what they can expect to see in return, anything beyond that is just a waste.
Seeing how the U.S. dollar, along with most other world currencies for that matter, has fallen against the Euro, one would think that the Euro Zone (countries of the European Union which use the Euro) was in great financial shape, but that isn’t necessarily the case. Spain and Ireland in particular are suffering mightily as they were unable to control the booms (see One Interest Rate, 13 Economies article), and now busts of their economies. The two stalwarts of the Euro Zone, France and Germany, have been holding the Euro up thus far, but now even their economies are starting to feel the heat. Oh, and don’t forget about the U.K.--even though they are not part of the Euro Zone, they are one of the largest economies in Europe and their outlook looks especially grim.
The German ZEW economic sentiment indicator has plunged to a record low, French business confidence has dropped, retail sales are down sharply and European companies are starting to default on their debt at alarming levels, according to Money Morning, an e-mail newsletter from MoneyWeek magazine. These are all obviously negative signs that point to the fact that the Euro Zone is heading in the wrong direction economically.
The U.K. isn’t doing all that great either. The U.K. had the same sort of run up in housing prices experienced in the U.S., only their down cycle is just beginning. Furthermore, their economy is driven by two key industries, construction and finance, both which are doing extremely poorly right now.
Even with the troubles being experienced in the U.S. the dollar could regain some ground against the Euro and British pound. While this might please travelers who are looking to visit Europe in the near future, there is a big concern to keep in mind with all this. When we talk about struggles in the U.S. and Europe, we are talking about the largest importing countries in the world. You can bet that if all these countries struggle at the same time, it will be felt across the world. We very well could be headed for a serious global recession of sorts, and investors certainly should be keeping that in mind.
I.O.U.S.A is being touted as “An Inconvenient Truth” for the U.S. economy. It is a new film that aims to shed light on the dire straits of the U.S. deficit economy. “An Inconvenient Truth” acted as a wake-up call for many about the problems we face with global warming, and film promoters are saying that this film will have the same effect about the U.S. economy. The film is debuting August 21st in 400 theaters across the country, followed by a live video town hall meeting with Warren Buffet, among others, and will open the following day in 10 cities, according to the Washington Post.
I’ve already got my tickets and am curious to see how the film turned out. I’ve heard really good reports about it so far. For those of you who aren’t already heading to the theater to watch it on the 21st, I will report back and let you know how it was.
If you’re curious about the movie and want to find out more about it, make sure to read the Washington Post article on it, which explains how the movie came to be and provides some background information on the production and financing of the movie, in case that stuff interests you. For more information on the movie itself, visit the movie’s website. The film was produced by Agora Entertainment, and their website also has some information about the movie. Last but not least, I’ve attached the movie trailer to this post so you can get a little sneak peek of the film. I think it is about time that the country wakes up to the potential problems our enormous deficit poses, and I applaud, if nothing else, the idea behind making I.O.U.S.A. Of course, I will have to withhold judgment on whether it is any good until the 21st.
Paris Hilton has recently released a video rebuttal to a rather ill-advised John McCain ad which compares Barack Obama with “celebrities” such as Hilton and Britney Spears, suggesting a lack of substance despite their charisma. The original ad seems desperate and is as insulting to the viewer as it is to those mentioned. Meanwhile, Paris’ ad is actually witty, albeit a touch misinformed about energy policy.
Who would have thought that perennial tabloid darling Paris Hilton could actually deliver a speech more effectively and with greater poise than our president of eight years? It seemed, in fact, that her relevance was beginning to fade until the McCain ad was released. While I doubt that Ms. Hilton will win a single state in November, this may have the unfortunate side-effect of reinvigorating the public’s fascination with her. Thanks, John; I guess we’ll always have Paris. Still, we could do worse than President Hilton: I dare say that she would have looked as convincing as Bush did arriving in a flight suit on the USS Lincoln to announce “Mission Totally Accomplished! Luvz it!” She might even be able to pronounce Sarkozy properly.
But my praise of Ms. Hilton stops there. In the video, she suggests combining the two energy policies of McCain and Obama to help solve the energy crisis. Her suggestion is to allow offshore drilling to tap those rich deposits for cheap, easy fuel as we work on alternatives. Appropriately enough, the last time I used the words “rich,” “cheap” and “easy” in the same sentence, it was to describe Paris Hilton, but unfortunately her plan is as superficial as her cult, and it is flawed for the same reason that McCain’s “solution” is flawed.
Offshore drilling would be a placebo for the problem at best, as the restricted areas would provide only a drop in the proverbial barrel of our oil consumption. Furthermore, it will take several years to construct derricks and refine the crude, providing no immediate relief and precious little when the wells truly begin to produce. All of this assumes that the oil would be sold exclusively to Americans, and we should know by now that this is not a given.
The Paris for President campaign is off to a rocky, though amusing start. I’m afraid she won’t have time to really establish a solid platform by November. That said, I think her decision to start this late in the campaign is a refreshing one. This overextended campaign season has been costly and grueling for everyone involved, and though I can’t get behind Hilton on her energy policy, her frank approach is a balm in this hostile election year. She even may have a running mate selected before the Republicans or the Democrats. She mentions Rihanna, but a ‘Hilton Clinton’ ticket has such assonant appeal, and it’s better to be called assonant than asinine, which is how I would describe the campaigns of other nominees at this point.
