Tag Archives: credit market

McCain’s Economic Plan: Blame Minorities

Fox News’ Neil Cavuto made news of his own this week by suggesting that the credit crisis was caused by loans made to minorities

On Fox’s “Your World” on September 18, Cavuto asked Rep. Xavier Becerra (D-CA), “[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership … Are you totally without culpability here? Are you totally blameless? Are you totally irresponsible of anything that happened?” Cavuto also said, “I’m just saying, I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’” 
 
This wasn’t the first time that Cavuto blamed loans to minorities for the credit crisis.  In an exchange with House Majority Leader Steny Hoyer (D-MD) on September 16, Cavuto said “[Y]ou wanted to encourage minority lending — obviously, a lot of Republicans did as well. There was a lot of — expand lending to those to get a home,” Cavuto then rhetorically asked, “Do you think, intrinsically, it was a mistake, on both parties’ part, to push — to push for homeownership for everybody?”  Unlike Becerra, Hoyer either didn’t understand what Cavuto was saying or simply rolled over. “I think clearly what happened,” Hoyer replied, “ is Fannie and Freddie got caught up in trying to do what the Congress wanted done.”

This is not just a generic attack on minorities.

What is going on here is an attempt by Republicans to deflect public outrage from the credit industry, the investment banks and their Republican deregulators and to place the blame for the crisis credit on the government and the Democrats. 

That’s why John McCain and his Republican apologists have focused their ire on the quasi-governmental institutions Fannie Mae and Freddie Mac rather than on the wholly private companies and individuals behind the credit meltdown.

Every time McCain or one of the Republican talking-pointers blasts Fannie Mae and Freddie Mac, the message is: “These are government institutions, run by Democrats. They caused the credit crisis by pushing the Democratic Party agenda, including homeownership for minorities who could not afford to buy homes and should have been content to be renters. Blame them, not us.”

But are they right?  How big a problem are loans to minorities?  And should any future regulation of the credit and mortgage industry eliminate the mortgages that allowed so many minorities to become homeowners?

The answer is No.

The facts show that there has been tremendous racial disparity in lending is growing, and that the subprime mortgage crisis has disproportionately affected minority borrowers. Banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites. During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites. Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites. A study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

So, yes, minorities were very much more likely to receive high-cost subprime loans than whites. Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they have cautioned against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor and Barack Obama economic advisor Austan D. Goolsbee in his essay in the New York Times entitled “‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.”

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, “Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market,” showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans.” “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

In the search for villains in the credit crisis, Congress should be careful not to  eliminate the mortgages that have opened doors for many who have historically been excluded from homeownership and the American Dream.

It is also important to recognize that it was the Bush adminstration that pushed for greater access to homeownership for minorities, and specifically tasked Freddie Mac and Fannie Mae with expanding home loans to minorities.

As CNN reported on June 17, 2002:

“President Bush touted his goal Monday of boosting minority home ownership by 5.5 million before the end of the decade through grants to low-income families and credits to developers. ‘Too many American families, too many minorities, do not own a home. There is a home ownership gap in America. The difference between African-American and Hispanic home ownership is too big,” Bush told a crowd at St. Paul AME Church in Atlanta. Citing data he used Saturday in his weekly radio address, Bush said that while nearly three-quarters of white Americans own their homes, less than half of African-Americans and Hispanic-Americans are homeowners. He urged Congress to expand the American Dream Down-Payment Fund, which would provide $200 million in grants over five years to low-income families who are first-time home buyers. The money would be used for down payments, one of the major obstacles to home ownership, Bush said. … Fannie Mae, Freddie Mac and the federal Home Loan Banks — the government-sponsored corporations that handle home mortgages — will increase their commitment to minority markets by more than $440 billion, Bush said. Under one of the initiatives launched by Freddie Mac, consumers with poor credit will be able to obtain mortgages with interest rates that automatically decline after a period of consistent payments, he added.”

In the political battle over blame for the credit crisis, Democrats need to be careful both to counter claims that the crisis was caused by loans to minorities and also not to allow conservatives and Republicans to use the crisis as a pretext to scuttle these programs.

Foreclosure Activity Up 53% Over June 2007

Default notices, auction sale notices and bank repossessions were reported on 252,363 U.S. properties during June 2008, a 3 percent decrease from the previous month but still a 53 percent increase from June 2007, according to the latest RealtyTrac Foreclosure Market Report.

The report also shows that one in every 501 U.S. households received a foreclosure filing during the month.

“June was the second straight month with more than a quarter million properties nationwide receiving foreclosure filings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Foreclosure activity slipped 3 percent lower from the previous month, but the year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle. Bank repossessions, or REOs, continue to increase at a much faster pace than default notices or auction notices. REOs in June were up 171 percent from a year ago, while default notices were up 38 percent and auction notices were up 22 percent over the same time period.”

Nevada, California and Arizona continued to document the three highest state foreclosure rates in June.  Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah were other states that made the top ten.

For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

RealtyTrac noted that “Foreclosure filings were reported on 8,713 Nevada properties during the month, up nearly 85 percent from June 2007, and one in every 122 Nevada households received a foreclosure filing — more than four times the national average.”

“One in every 192 California properties received a foreclosure filing in June, the nation’s second highest state foreclosure rate and 2.6 times the national average.”

“One in every 201 Arizona properties received a foreclosure filing during the month, the nation’s third highest state foreclosure rate and nearly 2.5 times the national average. Foreclosure filings were reported on 12,950 Arizona properties, down less than 1 percent from the previous month but still up nearly 127 percent from June 2007.”

“Foreclosure filings were reported on 68,666 California properties in June, down nearly 5 percent from the previous month but still up nearly 77 percent from June 2007. California’s total was highest among the states for the 18th consecutive month.”

“Florida continued to register the nation’s second highest foreclosure total, with foreclosure filings reported on 40,351 properties in June — an increase of nearly 8 percent from the previous month and an increase of nearly 92 percent from June 2007. One in every 211 Florida properties received a foreclosure filing during the month, the nation’s fourth highest state foreclosure rate and 2.4 times the national average.”

“Foreclosure filings were reported on 13,194 Ohio properties in June, the nation’s third highest state foreclosure total. Ohio’s foreclosure activity increased 7 percent from the previous month and 11 percent from June 2007. The state’s foreclosure rate ranked No. 6 among the 50 states. Other states in the top 10 for total properties with filings were Arizona, Michigan, Texas, Georgia, Nevada, Illinois and New York.”

“Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, withone in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.”

“The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9. LasVegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.”

“Metro areas with foreclosure rates among the top 20 included Phoenix at No. 12, Detroit at No. 13, Miami at No. 15 and San Diego at No. 17”

RealtyTrac does not expect foreclosure activity to ease up until 2009.

Real Estate Values Per Square Foot Down More than 20% in Six Major Markets

Real estate prices continue to fall in most markets, according to Radar Logic Incorporated, a real estate data and analytics company that calculates per-square-foot valuations.

Among the key findings of the latest report from Radar Logic:

  • The broad housing slump continued as consumers showed persistent lack of confidence and difficulty in financing home purchases.
  • April 2008 continued to exhibit price per square foot (PPSF) weakness compared to last year in almost all markets. One MSA showed net year-over-year PPSF appreciation, one was neutral, and 23 declined.
  • The Manhattan Condo market showed a 3.6% increase in PPSF year-over-year coupled with an increase in recent transactions despite a modest decline of 0.7% in month-over-month prices.
  • Charlotte’s increase of 1.5% in year-over-year PPSF moved its rank among the 25 MSAs to number 1. This represents an increase over the 0.1% year-over-year PPSF appreciation last month.
  • Columbus showed year-over-year PPSF appreciation of 0.2% for April 2008, which is an increase from last month’s year-over-year decline of 4.3%.
  • New York declined 3.0% year-over-year in April 2008, its second decline in Radar Logic’s published history (beginning in 2000).
  • Sacramento, the lowest-ranking MSA, showed a 31.7% decline from April 2007, which is consistent with last month’s decline of 30.6%.

 The ten biggest declines in per-square-foot values from last year were in these markets:

Sacramento (-31.7%)

Las Vegas (-29.9%),

San Diego (-28.1%)

Phoenix (-25.6%).

Los Angeles/Orange County (-23.4%).

Miami (-22.4%).

St. Louis (-19.8%).

San Francisco (-19.7%).

Tampa (-16.6%).

Detroit (-16.1%).

You can read the full Radar Logic report here.

Major Law Firm Creates “Distressed Real Estate” Section as Crisis Deepens

In what could be a new and significant trend in American legal practice — and a sign that the real estate crisis is expanding — the prestigious Philadelphia-based law firm Ballard Spahr Andrews & Ingersoll LLP has announced that it is establishing a “distressed real estate” section. 

The firm’s “Distressed Real Estate Initiative” will involve at least 16 core lawyers in ten offices throughout the country, including those in Mid-Atlantic and Western locations hardest hit by the housing bust and the mortgage crisis, including Los Angeles and Las Vegas.

The purpose of the section, according to the firm, will be “to provide representation in acquisition, restructuring and bankruptcy matters.”

 “In this period of turmoil in the financial markets and economic uncertainty, new real estate opportunities and challenges present themselves,” said Michael Sklaroff, chair of Ballard’s Real Estate Department. “We stand ready to serve clients with respect to existing positions and also in assisting them in acquisitions and debt and equity investments in troubled projects.”

Ballard Spahr Andrews & Ingersoll was founded in 1886 and now employs more than 550 lawyers in twelve offices located throughout the mid-Atlantic corridor and the western United States.

When there is blood in the water, the sharks will appear.

Proof We’re in a Recession

Here’s proof that we’re in a recession: Starbucks is closing 600 stores.

According to the New York Times, “Starbucks said Tuesday that it planned to close another 500 underperforming stores and eliminate as many as 12,000 full- and part-time positions. The company, which now plans to close a total of 600 underperforming stores, will take related charges totaling more than $325 million. Most of the stores, which are company owned, will be closed by the end of the first half of its fiscal year, which ends September 2009, the company said. Starbucks estimated that total pretax charges associated with the closures, including costs associated with severance, would be $328 million to $348 million. The nation’s largest coffee chain said 70 percent of the stores targeted for closure have been open since the beginning of fiscal 2006. The job losses would represent about 7 percent of the company’s global work force.”

These closings are clearly fallout from the housing bust.  As the Times noted, Starbucks had “aggressively opened stores in areas like California and Florida, which have been hardest hit by the housing downturn. ”

The next time economists get together to discuss whether we’re really in a recession, they may have to meet somewhere other than the local Starbucks. 

It might be closed.

 

Home Prices Slip Again in Biggest Fall on Record

Home prices in 20 U.S. metropolitan areas fell in April 2008 by the most on record.

The Case-Shiller Index of 20 large cities for April 2008 shows housing price declines are accelerating, and are now falling at a rate of 15.3% from last year’s levels.

The report also showed that home prices fell 1.4 percent in April from a month earlier after a 2.2 percent decline in March.

There’s one bit of “good” news in the report: home price declines were less than expected.  According to economists surveyed by Bloomberg News, the index was forecast to fall 16 percent from a year earlier.

Not surprisingly, the housing bust continues to be most severe in previous boom areas in the West and Florida. 

Here are the markets where prices are falling fastest:

Las Vegas: -26.8%
Miami: -26.7%
Phoenix: -25.0%
Los Angeles: -23.1%
San Diego: -22.4%
San Francisco: -22.1%

Average of 20 large cities: -15.3%

The decline in home prices appears to be spreading.  Chicago showed a 9.3 percent decline and prices in New York City declined by 8.4 percent.  Charlotte, North Carolina, showed a decline for the first time.

According to Bloomberg.com, “One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.”

 

Financial Sector Blamed by U.S. Report as Primary Cause of Nation’s Economic Decline

While there is still disagreement among economists over whether the U.S. is in a classically defined recession, there can’t be any doubt that the economy is in serious trouble and has been for quite some time, and that the primary culprit is the nation’s financial sector.

The dismal economic growth figures announced this week by the Commerce Department’s Bureau of Economic Analysis underscore just how bad our national economy is, and which regions of the country and sectors of the economy have been hit the hardest.

The new estimates released by the U.S. Bureau of Economic Analysis (BEA) show that economic growth slowed in most states and regions of the U.S. in 2007. Real GDP growth slowed in 36 states, with declines in construction and finance and insurance the leading factor in most state’s economic losses.

Nationally, real economic growth slowed from 3.1 percent in 2006 to 2.0 percent in 2007, one percentage point below the average growth of 3.0 percent for 2002–2006.

According to the BEA report, “The deceleration in growth in 2007 was most pronounced in Arizona, California, Florida, and Nevada. Each of these states had experienced faster real growth than the nation since 2003, but slowed dramatically between 2006 and 2007, to rates below the national average (chart 2). In 2006, Arizona and Nevada were in the highest growth quintile, and California and Florida were in the second–highest quintile. But in 2007, Arizona dropped to the third quintile; California dropped to the second–lowest quintile; and Florida and Nevada dropped to the lowest quintile. In Arizona, Florida, and Nevada, construction subtracted more than one percentage point from real GDP growth. In California, construction and finance and insurance combined subtracted one percentage point from real growth.”

Forty-nine states saw losses in the construction industry 2007.  The sole exception was Wyoming with a 6.0 percent increase in construction. Nationwide, the combined drop in construction was 11.0 percent.

The largest drop in construction in dollar terms was in California, down $10.8 billion, which accounted for 1-in-6 of the $67 billion lost in construction work nationwide between 2006 and 2007.

In terms of percentage of construction work losses, the hardest hit states were:

New Hampshire -18.70%
Michigan -16.74%
Delaware -16.34%
Florida -15.96%
Arizona -15.53%
Maine -13.82%
Iowa -13.77%
Virginia -13.55%
Vermont -13.47%
California -13.46%

The BEA clearly identifies the credit crisis, and its domino effect on related industries such as real estate and construction, as the primary cause of the nation’s economic woes. 

BEA noted that “A downturn in the finance and insurance industry group accounted for nearly half of the slowdown in economic growth in 2007.”

“Construction’s value added declined 12.1 percent in 2007 after falling 6.0 percent in 2006. Real estate and rental and leasing value added growth slowed to 2.1 percent in 2007 from 3.4 percent in 2006.”

Four industry groups — finance and insurance, construction, mining, and real estate — “accounted for about one quarter of GDP in 2007. However, they accounted for nearly 80 percent of the slowdown in economic growth.”

These figures support what we’ve been saying for a long time: the real estate market (and related industries like construction) will not recover until the financial markets are stablized.