Thursday, September 1, 2011

Cringely Finds the Housing Bubble Still Frothing

I find this amazing.

Robert X. Cringely has a post on his blog I, Cringely that knocks my socks off. The banking industry corruption hasn't died with the 2001-2007 bubble bursting. The sleazeballs in the financial industry have found another way to milk the system and get housing to pay and pay:
A year ago I wrote a sad little column about my friend Ralph and his difficulty getting his mortgage adjusted. Ralph had lost his tech job, there was this federal program to help people in his position lower their mortgage payments, but for some reason it just wasn’t working. His lender kept losing the paperwork, forcing Ralph to reapply three times. Twelve months later Ralph is now working hard at a tech startup that can’t yet afford to pay him, he’s thankful his wife has a good business reselling children’s clothes, but their mortgage still hasn’t been modified, though Ralph keeps trying.

Here are the numbers so far, according to Ralph:

He has dealt with 11 different bank negotiators
He has applied for either 8 or 10 modifications (depends who you ask)
He has made 50 phone calls
He has sent 35 FedEx shipments
He has faxed the bank 300 pages
He scanned 70 pages to PDF and sent by e-mail
He initiated one Congressional inquiry

Understand here that Ralph isn’t an outlier. He is not in foreclosure. He’s precisely in the intended sweet spot for this federal loan modification program — just the sort of customer who ought to easily qualify — and has qualified several times only to have the deal fall apart every time.


Instead of concentrating on who is being hurt by it, let’s look at who is profiting. And a lot of people are profiting. Financial bubbles eventually pop, that’s the rule. But this historic housing bubble from 2001-2007 we’re still recovering from hasn’t popped for everyone, at least not yet.

The first thing to notice is that most homeowners aren’t in Ralph’s position. For all the mortgage distress out there only about 14 percent of U.S. homeowners are behind in their payments or in foreclosure. While this is a huge number (something in the range of nine million mortgages) it still leaves 86 percent of U.S. mortgages intact and being repaid. With interest rates at historic lows you’d guess that most of that 86 percent have recently refinanced to take advantage of lower payments. No, they haven’t.

A quarter of those homeowners in good standing have no equity left in their homes at all and the rest have significantly less than they once did — often not enough to qualify for a new mortgage. So they just keep paying on the old one, which is at a significantly higher interest rate. That’s why we saw a refinance flurry in 2008 that has since, for the most part, vanished.

Rates are down, sure, but qualifying rules are stricter and there are at least 30 million U.S. homeowners who are literally trapped in their old mortgages. A few walk away, but most don’t because they worry about ruining their credit. And this means that while new 30 year mortgage rates are in the 3-4 percent range, the average rate paid by these trapped homeowners on their old mortgages is twice that. And since their loan initiation overhead was amortized years ago, their actual yield is even higher.

Are you making seven percent on your money?

What we have here is an astounding corruption of the mortgage market. This game is rigged, yet everyone in government from President Obama down pretends that it isn’t. And don’t blame just Obama: the Republicans might be even worse.

Over the last 30 years the average American home was refinanced every three to four years. That was the life expectancy of your 30-year loan in the mind of the guy at the bank who approved it, when, six years ago? But these underwater and zero-equity ghost mortgages have become essentially perpetual, since they can’t be refinanced and nobody will buy the houses.

This is all you need to know to understand the stalled U.S. housing market: it is stalled because a class of investors has found a way for their investments to not only live on after the housing bubble popped, they are actually making more — in some cases a lot more — than they were on that money when the loans were originated. They are doing so well, in fact, that they can’t imagine a circumstance under which they would ever allow the ghost mortgages to go away, no matter the cost to the economy or the nation.

So the ghost loans aren’t going away. And the longer this unnatural situation lasts the more all the rest of us are being hurt.

Understand that we are talking about at least $2 trillion in ghost loans that really ought to have been refinanced but weren’t because of these structural issues and because the banks — who clearly know what’s happening — don’t have the guts to stand against their investors. But that’s nothing new. And it’s not going to change until someone at the very top does something about it.
I've found it very odd that over the last couple of years that the HAMP program wasn't working. At first I thought it was just a teething problem with a new program, but it has been too long for that. With the above article by Cringely, I now understand why it hasn't worked and never will work. There is money to be made by keeping people in the never-ending torture of being in over their heads with a mortgage.

If Obama actually cared about the economy or cared about the people, he and his "team" would have noticed this by now. The fact that they haven't noticed says me me that the real "team" he is playing on is the banks and the financial industry. He is turning a blind eye so that his buddies on Wall Street and the banks can keep stuffing their pockets with money from people caught in a never-ending nightmare.

No comments: