Catastrophe Worsens for Housing Market — Home Prices and Home Sales Fall Again

As Congress meets to bailout the financial industry and George Bush vies with Freddie Krueger for the nation’s archetypal face of visceral terror, the latest report from the Census Bureau shows that the housing catastrophe continues to get worse. 

Here’s the summary of the bad news:

• New homes sales in August dropped to the lowest level since January 1991.
• Home prices hit a four-year low. 
• Inventory continues to rise, creating more downward pressure for home prices.

And here are some of the ugly new numbers:

• New home sales had a seasonally adjusted annual rate of 460,000, down 11.5 percent from a revised 520,000 in July and down 24.5 percent from a year ago.
• Only 39,000 new homes were sold in July, the lowest level since December 1991.
• Prices for new homes were at their lowest level since September 2004.
• The median price of a new home sold in August was $221,900, down 5.5 percent from $234,900 in July and down 6.2 percent from $236,500 a year ago.
• 166,000 new homes came on the market in August, bringing total inventory to a seasonally adjusted 408,000, equal to 10.9-month supply, up from a 10.3 month supply in July.
• New home sales fell 31.9 percent in the Northeast, 2.1 percent in the South and 36.1 percent in the West. Only the Midwest showed an increase in new home sales, up 7.2 percent.
• Three out of four builders reported having to pay buyers’ closing costs or offer other incentives such as expensive features for free in order to maintain sales.

The housing market is so bad that the main cheerleader for an I-can-see-the-light-at-the-end-of-the-tunnel approach to the real estate crisis – the National Association of Realtors (NAR) – has finally admitted, albeit with NAR’s typical understatement of the obvious, that “the pendulum in the mortgage market has swung too far.”

But if you’re looking for a bright side to the nation’s residential real estate fire sale, NAR’s number one Pollyanna-in-Chief, economist Lawrence Yun, still has a bromide to offer.

“August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” Yun said. “With higher loan limits and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability.”

Yeah.  Right.

President Bush Signs Housing Bill in Near Secret Without Ceremony or Photo Ops

We don’t understand why President Bush took such an under-the-radar approach to his eventual support for the new housing bill that he signed into law on Wednesday.

For months, Bush said that he opposed the bill and would veto it if it passed Congress.

Then he changed his mind.

We suspect that political polls trumped Bush’s conservative principles and that he was convinced by senior members of his party that if he followed through with his veto threat, Republicans would face an even bleaker November.

But why, then, did he appear to want to sign the bill in secret?

Instead of orchestrating a high-visibility signing ceremony, in which he could assert Republican Party leadership in dealing with the three-headed monster of the housing-mortgage-and-credit crisis, Bush opted for a muted 7 a.m. affair with only his Treasury Secretary and a few aides present. 

No members of Congress — either Republican or Democrat — were there to get a pen and a photo opportunity.

If he could, before the signing he probably would have borrowed an invisibility cloak from Harry Potter.

This seems to us to have been the worst possible outcome for Republicans and John McCain. 

First, President Bush signed a bill that he had repeatedly insisted he would veto — appearing to capitulate to political pressure and to be following the Democrats rather than leading the country on the central issues in the economy. 

Then, by signing the bill in near secret, he deprived Senator McCain and the Republican Party of an opportunity to stage their concern for beleaguered homeowners and their command of the country’s economic problems, complete with photo ops of presidential handshakes and congratulations to the Republican leadership, taking credit (however undeserved) for the government’s response to the housing crisis.

Whether the housing bill will actually help homeowners remains to be seen.

But it is clear that President Bush seems intent on it not helping Senator McCain or his struggling Republican Party.

Florida Joins States Suing Countrywide

Florida has joined Illinois and California as states suing subprime lender Countrywide Financial for deceptive and unfair trade practices.

The Florida lawsuit claims that Countrywide put borrowers into mortgages they couldn’t afford or loans with rates and penalties that were misleading.

As in the Illinois and California actions, Countrywide CEO Executive Angelo Mozilo was also named as a defendant.

Here you can read the complaint filed Broward County Circuit Court in Attorney General, Department of Legal Affairs, State of Florida v. Countywide Financial Corp., Countrywide Home Loans Inc., and Angelo Mozilo.

Here you can read our earlier reports on the Illinois and California lawsuits against Countrywide.

In filing the lawsuit, Florida Attorney General William “Bill” McCollum said that “It is unthinkable that a company would try to take advantage of someone’s dream of homeownership. Florida homeowners who are trying to protect their homes from foreclosures shouldn’t have to worry about their mortgage brokers or lenders unfairly profiting at their expense.”

“Similar to other mortgage lenders, Countrywide attempted to generate large numbers of mortgage loans for resale on the secondary mortgage market. In doing so, the company purportedly originated loans with little concern about whether the borrower could afford and maintain payments on these loans. In the process, the company allegedly eased or ignored its own underwriting standards and encouraged borrowers to enter into “teaser” rates while concealing or misrepresenting that much larger payments would become due.”

According to Marc Taps of Legal Services of North Florida, “Our legal services programs throughout the state have seen a large number of clients who are now in default on mortgages written by Countrywide. It appears to us Countrywide did no due diligence and accepted applications which were patently fraudulent and reflected no ability on the part of the borrowers to make the required payments. We cannot help but conclude that the most financially unsophisticated segment of the population was targeted by the brokers who knew Countrywide would write these mortgages.”

The lawsuit also claims that Countrywide hid any potentially negative effects of “teaser” loans, including rising rates, prepayment penalties and negative amortization, which borrowers would inevitably face if they were making minimum payments or trying to refinance.

Traditionally, lenders require borrowers to document income and assets, but investigators with the Attorney General’s Office believe Countrywide offered reduced or no documentation loan programs to increase its loan sales. Countrywide also allegedly paid greater compensation to brokers for loans with higher interest rates and prepayment penalties because it could sell those loans for higher prices on the secondary market.

The Florida Attorney General’s Office also asserts that “[Countrywide’s] deceptive marketing practices were supposedly designed to sell costly loans while hiding or misrepresenting the terms and dangers. Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure, with the company reporting earlier this year that more than 25 percent of its subprime loans were delinquent. The Attorney General’s Office received more than 150 complaints about Countrywide, prompting a subpoena in February and ultimately leading to today’s lawsuit.”

In a sign that the growing state legal assault on Countrywide is a bipartisan project, McCollum is the first Republican state attorney general to sue Countrywide.

As we’ve observed before, Countrywide’s expanding legal troubles do not bode well for Bank of America, which plans to acquire Countrywide.

Adding to the pressure on Bank of America to abandon the Countrywide deal, McCollum vowed that he would go after Bank of America’s assets to pay for the damages owed by Countrwide if the sale goes through.

Florida asks consumers who believe they have been victimized by Countrywide to call the Attorney General’s fraud hotline at 1-866-966-7226 or  file a complaint online at: http://myfloridalegal.com.

 UPDATE:

The state of Washington is expected to file a lawsuit against Countrywide soon, accusing Countrywide of discriminating against minority borrowers. The state wants to fine the mortgage lender and revoke its license to conduct business in the state.

California Sues Countrywide for Mortgage Deception

California has joined Illinois today as states suing beleaguered subprime mortgage giant Countrywide Financial Corp. for deceptive loan practices.

In a lawsuit filed this morning in Los Angeles Superior Court, California Attorney General Jerry Brown sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

The lawsuit alleges that Countrywide Financial used deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors. 

The complaint also alleges that the company marketed complex and difficult to understand loans with very low initial or “teaser” interest rates or payments. Countrywide employees, including loan officers, underwriters, and branch managers–who were under intense pressure to process a constantly increasing number of loans–misrepresented or obfuscated the fact that borrowers who obtained certain types of loans would experience dramatic increases in monthly payments.

Here you can read the complaint filed in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

According to the Calfornia Attorney General’s Office, “In the past, lenders like Countrywide sold home loans to customers and held the loans in their own portfolio, an incentive to maintain strong underwriting standards. Countrywide, however, sold its loans to third-parties in the form of securities or whole loans, often earning more profit for riskier loans. The business model generated windfall profits for Countrywide.”

“The company pushed these loans by emphasizing a low “teaser” or initial rate, often as low as 1 percent for pay option ARMs. Countrywide obscured the negative effects–including rising rates, prepayment penalties and negative amortization–which would inevitably result from making minimum payments or trying to refinance. The company misrepresented or hid the fact that borrowers who obtained its home loans–including exploding adjustable rates and negatively amortizing loans–would experience dramatic increases in monthly payments.”

“In an effort to rope in as many customers as possible, Countrywide greatly relaxed and liberally granted exceptions to its mortgage lending standards. Traditionally, lenders required borrowers to document income and assets but Countrywide offered reduced or no documentation loan programs to increase its loan sales. Angelo Mozilo and David Sambol actively pushed for easing underwriting standards and granting exceptions to documentation requirements.”

“In Countrywide’s 2006 annual report, the company touted the massive growth of its loan production from $62 billion in 2000 to $463 billion in 2006–three times the increase of the U.S. residential loan production market, which tripled from $1.0 trillion in 2000 to $2.9 trillion in 2006. 26 percent of Countywide loans were for California properties. The company sold an ever-increasing number of loans in an effort to gain a 30 percent market share of loan originations and then sell its loans on the secondary market, as mortgage-backed securities or pools of whole loans. Countrywide’s securities trading volume increased from $647 billion in 2000 to $3.8 trillion in 2006.”

“Countrywide routinely sold loans based upon a borrower’s stated income and without verifying the information. Loan officers memorized scripts that marketed low payments by focusing on the potential customer’s dissatisfaction, saying, for example, ‘Which would you rather have, a long-term fixed payment, or a short-term one that may allow you to realize several hundred dollars a month in savings?’ The loan officer did not state that the payment on this new loan would exceed the payment on the current loan.

“Countrywide paid greater compensation to brokers for loans with a higher interest rates, as well as prepayment penalties, because it could sell those loans for higher prices on the secondary market. Countrywide also paid rebates to brokers who originated loans with prepayment penalties, adjustable rates and high margins.”

“Countrywide operated an extensive telemarketing operation in which it touted its expertise and claimed to find the best financial options for customers. Customer Service representatives at Countrywide call centers were required to complete calls within three minutes, often processing sixty-five to eight-five calls per day. Employees who did not meet quotas were terminated. The company’s deceptive marketing practices, designed to sell costly loans while hiding or misrepresenting the terms and dangers, included:

• Encouraging borrowers to refinance or obtain financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable mortgages;
• Marketing complex loan products by emphasizing a very low “teaser” rate while misrepresenting the steep monthly payments, increased interest rates and risk of negative amortization;
• Dramatically easing underwriting standards to qualify more people for loans;
• Using low or no-documentation loans which allowed no verification of stated income;
• Hiding total monthly payment obligations by selling homeowners a second mortgage in the form of a home equity line of credit;
• Making borrowers sign a large stack of documents without provider time to read the paperwork; and
• Misrepresenting or hiding the fact that loans had prepayment penalties.”

“As the secondary market’s appetite for loans increased, Countrywide further relaxed its standards to finance borrowers with ever-decreasing credit scores. Countrywide employees routinely overrode the company’s computerized underwriting system, known as CLUES, which issued loan analysis reports recommending or discouraging loans based on factors such as a consumer’s credit rating. As the pressure to produce loans increased, Countrywide set up an entire department in Plano, Texas, at the direction of Mozilo and Sambol, where employees could submit requests for underwriting exceptions. In 2006, 15,000 to 20,000 loans a month were processed through this exception process.>

“Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure. According to Countrywide’s February 2008 records, a staggering 27 percent of its subprime mortgages were delinquent. Overall, approximately 20,000 Californians lost their homes to foreclosure in May 2008 and 72,000 California homes were in default, roughly 1 out of 183 homes.”

“Despite receiving numerous complaints from borrowers claiming that they did not understand their loan terms, Countrywide ignored loan officer’s deceptive practices and loose underwriting standards. Countrywide also pushed its borrowers to serially refinance, repeatedly urging borrowers to obtain home loans to pay off their current debt.”

The California Attorney General’s Office asks that consumers who believe they have been victimized by Countrywide Consumers should file a complaint by contact the Attorney General’s Public Inquiry Unit in writing at Attorney General’s Office California Department of Justice Attn: Public Inquiry Unit P.O. Box 944255, Sacramento, California or through an online complaint form available at http://ag.ca.gov/contact/complaint_form.php?cmplt=CL

 

Illinois Sues Countrywide and Mozilo For Fraud and Deception

In the first state action against Countrywide Financial, the Attorney General of Illinois is suing Countrywide and its chief executive, Angelo Mozilo, claiming that the company and its executives engaged in unfair and deceptive practices that defrauded borrowers by selling them costly and defective loans that quickly went into foreclosure.

Here you can read the complaint in Illinois v. Countrywide Financial Corp., Countywide Home Loans Inc., Full Spectrum Lending, Countrywide Home Loans Servicing LP, and Angelo R. Mozilo. 

The lawsuit, which will be filed on Wednesday in Cook County, accuses Countrywide and Mozilo of improper underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, including its still heavily advertised “no closing costs loan.” 

The complaint also alleges that Countrywide created incentives for its employees and brokers to sell questionable loans by paying them more on such sales.

The lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present. 

In addition, the lawsuit asks the Court to require that Mozilo personally contribute to paying the damages.

Illinois Attorney General Lisa Madigan also asks the court for 90 days to review any loans currently in foreclosure or moving toward foreclosure.

The complaint states that Countrywide was the largest lender in Illionis from 2004 through 2006, selling about 94,000 loans to consumers in the state. The company operated about 100 retail branch offices in Illinois and its loans were also offered by Illinois mortgage brokers. Countrywide also purchased loans through a network of 2,100 correspondent lenders in the state.

The complaint also describes dubious practices in Countrywide’s huge servicing arm, which oversees $1.5 trillion in loans. 

For example, the complaint alleges that an Illinois consumer whose Countrywide mortgage was in foreclosure came home to find that the company had changed her locks and boarded up her home, although no judgment had been entered and no foreclosure sale conducted, and that It took a week for the homeowner to regain access to her home.

Attorney General Madigan claims that “People were put into loans they did not understand, could not afford and could not get out of. This mounting disaster has had an impact on individual homeowners statewide and is having an impact on the global economy. It is all from the greed of people like Angelo Mozilo.”

The lawsuit is being filed on the same day that Countrywide’s shareholders will meet to decide whether to agree to a sale of the company to Bank of America.

We’ve written before about why we think that Bank of America will ultimately pull out of the deal. 

Adding to the arguments that we earlier made against Bank of America’s purchase of Countrywide, the New York Times notes that “The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January. Countrywide and its executives have been named as defendants in shareholder lawsuits, and the company’s practices are the subject of investigations by the Securities and Exchange Commission, the F.B.I. and the Federal Trade Commission, which oversees loan servicing companies.”

In addition to the Illinois lawsuit, at least three lawsuits against Countrywide have been filed by offices of the U. S. Trustee, part of the Department of Justice that monitors the bankruptcy system,  contending that Countrywide’s loan servicing practices were an abuse of the bankruptcy system.

Countrywide CEO Angelo Mozilo also has troubles of his own. 

Mozilo is the subject of a Securities and Exchanges Commission investigation into his sales of Countrywide stock before the price imploded; from 2005 to 2007 Angelo R. Mozilo sold much of his Countrywide stock realizing $291.5 million in profits.

And, as we’ve reported, Mozilo is at the center of the new controversy regarding recent revelations that politically connected “Friends of Angelo,” including  U.S. Senators Christopher Dodd (D- Conn.) and Kent Conrad (D-N. Dak.), as well as members of both the current Bush and previous Clinton administrations, got special “V.I.P.” loans with extremely favorable terms from Countrywide.

In the last three quarters, Countrywide reported $2.5 billion in losses, and in the first quarter of 2008, total nonperforming assets reached $6 billion, almost five times that of the same period last year.

UPDATE:

California has also sued Countrywide for deceptive practices. 

You can read the story here.

You can also read the complaint in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

 

The “Friends of Angelo” — Countrywide’s Sweetheart Loans to Washington Big-Shots

The scandal involving special “sweetheart” loans to politicians and Washington insiders by Countrywide Financial is both heating up and widening.

Earlier this week, James A. Johnson was forced to step down as head of Barack Obama’s vice president selection team when it was revealed that he had profited from special deals on three home loans with Countrywide that were approved by Countrywide founder Angelo Mozilo only for his “close friends.”

At that time, we wrote that “Given its central role in the subprime mortgage debacle, it is no surprise that Countrywide Financial has become politically radioactive. The most recent evidence for the politically deadly consequences of an association with Countrywide or its corporate officers is the sudden and ungraceful exit of businessman James A. Johnson, a long time Washington insider and lobbyist, from Barack Obama’s vice-presidential selection team.”

Now it appears that Mozilo had a much larger circle of “close friends” in Congress and in recent Democrat and Republican administrations than was originally supposed, and that sweatheart loan deals were given by Countrywide to a wide array of Washington politicians and big-shots.

The “Friends of Angelo” list is now known to include Senator Christopher Dodd (D-Conn.), Senator Kent Conrad (D-N. Dak.), Bush’s Secretary of Housing and Urban Development Alphonso Jackson, former Clinton Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and Clinton Assistant Secretary of State Richard C. Holbrooke.

According to Portfolio.com, which broke the story:

“Most of the officials belonged to a group of V.I.P. loan recipients known in company documents and emails as “F.O.A.’s”—Friends of Angelo, a reference to Countrywide chief executive Angelo Mozilo. While the V.I.P. program also serviced friends and contacts of other Countrywide executives, the F.O.A.’s made up the biggest subset. According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value.”

“For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free ‘float-down’ to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.”

“Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the ‘Friends of Angelo’ discount, and that Mozilo had personally priced their loans.

“The V.I.P. loans to public officials in a position to advance Countrywide’s interests raise legal and ethical questions. Countrywide’s ethics code bars directors, officers and employees from ‘improperly influencing the decisions of government employees or contractors by offering or promising to give money, gifts, loans, rewards, favors, or anything else of value.’ Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.”

So far, neither Senator Dodd nor Senator Conrad have admitted any wrongdoing, and both claim that they did nothing for Mozilo or Countrywide in return for their sweetheart deals.

Dodd, who is chairman of the Senate Banking Committee, claims that he never inquired or even wondered whether his special status with Countrywide might be related to his position as a senator or as Banking Committee chairman.

“Well, I don’t know we did anything wrong here,” Dodd said at a press conference. “I negotiated a mortgage at a prevailing rate, a competitive rate. If anyone had said to me, ‘We’re giving you some special treatment here,’ I would have rejected it. So no, I don’t feel at this point that I have any obligation. I did what I was supposed to do. I did what millions of other people did.”

Conrad, who is chairman of the Senate Budget Committee and a member of the Senate Finance Committee, has said that he gave the money he saved on his special deal with Countrywide to charity.

We hope that Congress vigorously investigates this scandal, and that it fully exposes those who benefited from special deals with Countrywide while they were on the public payroll.

 

Top 10 Steps for State Governments to Tackle the Mortgage Crisis

The Brookings Institution, one of the nation’s most prestigious think tanks, has issued a new report on the mortgage crisis focusing on the role of state governments. 

The report, entitled “Tackling the Mortgage Crisis: 10 Action Steps for State Government,” was written by Alan Mallach, a Senior Fellow at the National Housing Institute and a Visiting Scholar at the Federal Reserve Bank of Philadelphia, and suggests “10 Action Steps” that can be taken by state governments to “tackle both the immediate problems caused by the wave of mortgage foreclosures and prevent the same thing from happening again.”

The 10 steps are:

• Help borrowers gain greater access to counseling and short-term financial resources.
• Ensure a fair foreclosure process.
• Encourage creditors to pursue alternatives to foreclosure.
• Prevent predatory and fraudulent foreclosure “rescue” practices.
• Establish creditor responsibility to maintain vacant properties.
• Make the process as expeditious as possible.
• Ensure that the property is ultimately conveyed to a responsible owner.
• Better regulate the mortgage brokerage industry.
• Ban inappropriate and abusive lending practices.
• Establish sound long-term policies to create and preserve affordable
  housing, for both owners and renters.

These seem like common sense steps to us — although the debate over what in fact are “inappropriate and abusive lending practices” and “sound long-term policies to create and preserve affordable housing” — will be where the reform process is likely to break down.

We’ve noted before that “while the federal government’s response to the mortgage and real estate crisis appears to be paralyzed by partisan politics, the States are taking the initiative in trying to protect homeowners facing foreclosure.”

The Brookings Institution agrees:

“Although most media attention has focused on the role of the federal government in stemming this crisis, states have the legal powers, financial resources, and political will to mitigate its impact. Some state governments have taken action, negotiating compacts with mortgage lenders, enacting state laws regulating mortgage lending, and creating so-called ‘rescue funds.’ Governors such as Schwarzenegger in California, Strickland in Ohio, and Patrick in Massachusetts have taken the lead on this issue. State action so far, however, has just begun to address a still unfolding, multidimensional crisis. If the issue is to be addressed successfully and at least some of its damage mitigated, better designed, comprehensive strategies are needed.”

As we’ve pointed out, “Unless a national consensus is quickly reached on dealing with the rising tide of foreclosures — and we believe this is unlikely to happen when presidential candidates are competing for votes based on whose plan is best for dealing with the mortgage and real estate crisis – we think lenders can expect to fight individual battles over foreclosure in all 50 States. Given the negative publicity that lenders have had in the media, and with a bitterly fought presidential election on the horizon, these are not battles that the lenders are likely to win.”

Since delinquent and at-risk borrowers have far more political leverage in many state capitols than they have in Washington, the Brookings Institution report not only provides a road map for individual state action, but also further increases the pressure on the mortgage industry and their supporters in the federal government to come up quickly with an effective national plan for dealing with the foreclosure crisis.

 

N.Y. Times Editorial Calls for Foreclosure Prevention Legislation Before the Next Mortgage Meltdown

The New York Times entered into the politics of the foreclosure crisis with an explosive editorial today accusing the Bush administration of failing to protect the economy and instead “sowing confusion and delay” in the face of the mortgage meltdown.

Here’s what the Times said:

“The housing bust is feeding on itself: price declines provoke foreclosures, which provoke more price declines. And the problem is not limited to subprime mortgages. There is an entirely different category of risky loans whose impact has yet to be felt — loans made to creditworthy borrowers but with tricky terms and interest rates that will start climbing next year.”

“Yet the Senate Banking Committee goes on talking. It has failed as yet to produce a bill to aid borrowers at risk of foreclosure, with the panel’s ranking Republican, Richard Shelby of Alabama, raising objections. In the House, a foreclosure aid measure passed recently, but with the support of only 39 Republicans. The White House has yet to articulate a coherent way forward, sowing confusion and delay.”

“[I]f house prices fall more than expected — a peak-to-trough decline of 20 percent to 25 percent is the rough consensus, with the low point in mid-2009 — financial losses and economic pain could extend well into 2011.”

“That is because a category of risky adjustable-rate loans — dubbed Alt-A, for alternative to grade-A prime loans — is scheduled to reset to higher payments starting in 2009, with losses mounting into 2010 and 2011. Distinct from subprime loans, Alt-A loans were made to generally creditworthy borrowers, but often without verification of income or assets and on tricky terms, including the option to pay only the interest due each month. Some loans allow borrowers to pay even less than the interest due monthly, and add the unpaid portion to the loan balance. Every payment increases the amount owed.”

“In coming years, if price declines are in line with expectations, Alt-A losses are projected to total about $150 billion, an amount the financial system could probably absorb. But until investors are sure that price declines will hew to the consensus, the financial system will not regain a sure footing. And if declines are worse than expected, losses will also be worse and the turmoil in the financial system will resume.”

“There’s a way to avert that calamity. It’s called foreclosure prevention. There is no excuse for delay.”

We agree with the Times that effective foreclosure prevention legislation is long overdue.  As the Times pointed out, unless Congress acts fast, it is likely that the economic consequences of the bursting of the housing bubble will be even more serious and widespread.

Even Fed Chair Ben Bernanke — who could not be called an advocate of government intervention in the markets — has stated that “High rates of delinquency and foreclosure can have substantial spillover effects on the housing market, the financial markets, and the broader economy” and that what is at stake is not merely the homes of borrowers, but “the stability of the financial system.” 

We also can not imagine a more self-defeating political strategy than that of the Republicans who have opposed foreclosure prevention legislation. 

We’ve already written about Senator Richard Shelby’s close ties to the apartment owners industry, which has aggressively opposed federal aid to homeowners in, or near, default.

Surely, with the presidential election only months away and their party in trouble, more Republicans — including Senator McCain — should see the need for coming to terms with the economic, and political, realities of the foreclosure crisis, even if it requires ideological compromise.

 

Disgraced Congressman Vito Fossella Comes Out of Hiding to Meet with Realtors

Realtors in Staten Island, New York, must have a lot of political clout — enough political clout to get disgraced Congressman Vito J. Fossella (R-Staten Island/Brooklyn) to come out of hiding.

As the Staten Island Advance explained: “The married congressman has been in a virtual media lockdown since his arrest May 1 for drunken driving in Alexandria, Va., and his subsequent revelation that he fathered a child with the woman who fetched him from jail.”

Fossella was a no-show Wednesday at a scheduled meeting with the Staten Island Chamber of Commerce.

Yet Fossella met on Thursday with several representatives of the Staten Island Board of Realtors in what was apparently his first official face-to-face meeting with Staten Island constituents since his DUI arrest and subsequent infidelity scandal.

Staten Island Board of Realtors’ president Dawn Carpenter reported that Fossella “appeared to be in good spirits and we had some community laughs with him.”

We’re not sure what either Fossella or the realtors had to laugh about. 

Staten Island has been severely hit by the housing meltdown and foreclosure crisis.  Single family home sales in Staten Island fell by 36 percent, and prices fell 6 percent from February 2007 to February 2008.  In the past seven months, home sales in Staten Island have dropped 40 percent.

Foreclosures in Staten Island continue to rise.  There has been a 400 percent spike in Staten Island foreclosures in the first quarter of this year.  Houses are also taking longer to sell, and much of this growing inventory is coming from owners selling before they have to face foreclosure or a short sale.

We’re also not sure why realtors, who have their own extreme PR problems — realtors and agents have come in dead last in the Harris Poll survey of the prestige of various occupations every year since they were first included in 2003 — would want to be the first to publicly embrace the hypocritical Congressman.

Perhaps it’s because Fossella pushed for a $10,000 tax break for home buyers.

Or perhaps the realtors believe that Vito Fossella is a positive role model for the homeowner of the future.

If everyone did what Fossella has done — have two separate families at the same time — it would double the demand for housing.  

That may be bad for wives and children, but it would certainly be good for realtors.

UPDATE:

Fossella announced on May 19 that he would not be running for reelection. 

Staten Island Republicans then selected retired Wall Street investment executive Francis H. Powers to run for Fossella’s seat in New York City’s only Republican Congessional district. 

Powers, 67, died on June 23.

Republicans may not be able to field another candidate, since the process of collecting the signatures required to allow candidates to qualify for a place on the ballot ends in roughly two weeks.

Democrats Michael E. McMahon and Stephen A. Harrison have already announced their intention to run for the seat.

Don’t be surprised when Fossella puts his hat back in the ring.

Here is the New York Times report on the story.

 

Who is Still Against Federal Foreclosure Legislation?

As the Congress comes closer to passing legislation to help homeowners facing foreclosure, it is worth taking a look at the opposition to federal foreclosure aid.

Of course, there are those who strictly oppose nearly all forms of government intervention in the economy.  Congressman and presidential candidate Ron Paul and his free market libertarian supporters would be among this group.

Then are those who are opposed to market interventions in general, but will support some government interventions when the stability of the market is at stake.  Most Republicans fit into this group — including Federal Reserve Chairman Ben S. Bernanke.

That’s why it was significant that it was Bernanke who last week made the most convincing argument from a free market perspective for federal aid to homeowners facing foreclosure.

As we noted in an earlier post, Bernanke told an audience at the Columbia Business School that the foreclosure crisis posed the clear and present danger of wreaking economic havoc far beyond the housing market. “High rates of delinquency and foreclosure,” Bernanke said, “can have substantial spillover effects on the housing market, the financial markets, and the broader economy.”

What is at stake, according to Bernanke, is not merely the homes and financial well-being of hundreds of thousands of borrowers, but “the stability of the financial system.”  In this extreme circumstance, even staunch free market advocates, such as Bernanke himself, recognize the need for the government to intervene in the market.

We think, then, that the overwhelming vote in the House of Representives in favor of government intervention to stop the rising tide of foreclosures — legislation that now has the support of many free market Republicans — was rooted at least as much in the economic reality of averting catastrophe as the political expediency of government largess in an election year.

Who then is still opposed to foreclosure aid?

The answer is the apartment owners.

Behind any legislative process is a power struggle of conflicting interests, and very often these interests are economic.  In the case of foreclosure aid, there this now a growing consensus that the foreclosure crisis threatens not merely the borrowers and the lenders, but the economy as a whole and hence the economic interests of almost every sector of the economy.

Except apartment owners.

The National Multi-Housing Council (NMHC) and the National Apartment Association (NAA) have consistently argued that the blame for the foreclosure crisis is what they have called the “misguided” national policy of “home ownership at any cost” and that “People were enticed into houses they could not afford and the rarely spoken truth that there is such a thing as too much homeownership was forgotten.”

The fact is that in sharp contrast to other sectors of the real estate market, the apartment industry has not suffered as a result of the current housing crisis.  Rather, as we’ve noted before, the real estate crisis is forcing the lower end of the single-family housing market back into multi-family rental apartments.  People have to live somewhere — if they can’t afford to live in a house that they own, they will be forced to live in a house that someone else owns, such as multi-family apartment units. As homeowners suffer, apartment owners benefit.

The apartment industry has some very powerful supporters in Congress, including Senator Richard C. Shelby of Alabama, the ranking Republican on the Senate Banking Committee.   Senator Shelby,  who has opposed federal intervention to stop foreclosures, has made millions as a landlord and is the owner of a 124-unit apartment complex in Tuscaloosa called the Yorktown Commons. 

“I want the market to work if it can, and most of the time it will, but not without some pain,”  Senator Shelby has said.

This time, the pain appears to be too great, too wide-spread, and too dangerous, for most other members of Congress, as well as most important players in the economy, to allow it to continue unabated.

Indeed, Shelby has already signaled that he would support a version of the legislation — and that the White House would sign the bill into law.

“I think if we reach a compromise,” Shelby said, “it would be acceptable to the White House because, as a Republican and former chairman of the committee, I’m going to do everything I can, work with the administration, to make sure that the program works for those it’s intended to do and make sure we can afford it as a nation.”

In this crisis, even Senator Shelby has other, larger, and more important economic interests at stake than helping the apartment industry.