Sunday, October 25, 2009

The dog ate it

For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests.
But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.
Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.
The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

The New York Times

Monday, October 19, 2009

House Trap 2

It’s a debilitating condition that will soon affect one in four Irish households. Thousands of people suffering from the disorder don’t even realise it yet. But by the end of next year, up to 350,000 families could be stricken by the disease if property prices continue to plummet, the Economic and Social Research Institute (ESRI) calculated last week.
It is negative equity, which arises when the mortgage on a property exceeds its value. And it’s contagious: once one house on your street contracts it, the spread is unavoidable. Symptoms include stress and a loss of mobility.But the situation is worse for a couple living in a one-bed apartment who want to start a family, says Derek Brawn, author of Ireland’s House Party. “The social consequences of negative equity will only become apparent over the next few years. There is a huge over-supply of one-bedroom apartments in Dublin and if you bought one to live in during the last four or five years, then get comfortable,” he advised.
Brawn should know. In September 1992, he bought a one-bedroom flat off Tower Bridge Road in London, thinking prices had bottomed out in the then stagnant UK property market. “Three months later, a neighbour in my block of 25 apartments panicked when interest rates started to rise and handed her keys back to the bank,” he said. “They sold the flat quickly, accepting a low bid, and overnight, prices in the development were effectively set at that price. Overnight my home was worth 35% less than I had paid for it three months earlier.”
Brawn estimates that one-in-four Irish households will experience this sinking feeling by the turn of 2011. The ESRI estimates that more than 150,000 households are already in negative equity, while Goodbody stockbrokers estimates that, given the range of property values, the average household owes €43,000 more than their homes are worth.

But as long as you’re happy where you are, so what? Right?

BRAWN finally sold his London flat six years after he bought it, securing the same price he had paid originally as he cashed in on an upswing in the property market. But he had grown to resent his home for “trapping him in limbo”.
“Negative equity has a pernicious psychological effect. At one point, the pump that controlled the water pressure in the shower in my flat broke, but for six months I refused to fix it. I couldn’t bring myself to pay €200 or €300 to a plumber,” he said. “I didn’t see the point of putting money into a property that had been devalued so much.”
This is a common response to the burden of owning a home that is worth less than their mortgage. David Duffy, a researcher with the ESRI, discovered a similar phenomenon in America, where research has shown that “owners with negative equity behave more like renters and re-invest less in their properties”.
The social consequences of negative equity are manifold, he points out. “It affects consumer spending as people feel less wealthy. Those in negative equity tend to increase precautionary saving, taking money out of the economy,” he said.
Negative equity can also adversely affect people’s ability to obtain credit. “In my experience, a lot of people only realise that negative equity is affecting them when they look for a loan to extend their house or for a car, and realise that their credit rating has been affected,” said Brawn.
Those in negative equity, typically first-time buyers in their 20s and 30s, are also unable to move location quickly to take advantage of job offers.
Leo Varadkar, 30, a TD, recently wrote to the National Asset Management Agency (Nama), a bank set up for bad loans, asking it to purchase his apartment. “I was only half-joking,” he said. “I bought it for €350,000 in 2004 and now I estimate that it’s not worth much more than €250,000. I had planned to move in four or five years but I’m going nowhere now.”
Varadkar said that his age group has been deeply affected by the slump because they took out 100% or interest-only mortgages, or stretched them over 35 years.
Brawn said: “On a standard 25-year mortgage, you don’t start paying off any capital until after about five years. On a 100% mortgage, or a 35-year one, it takes longer. If you have one of these, you’re likely to be in deep negative equity.”

The Sunday Times

Sunday, October 11, 2009

Life after the bubble

Debt: Life in Oregon after the bubble

The nation is now living through a vast deleveraging. A huge bubble of borrowing, enabled by the financial industry's "don't ask, don't tell" lending policies, is a thing of the past.
The end of the bubble has enormous ramifications for individuals and families struggling with job losses, salary cuts and restive creditors. But it may have even greater significance for the U.S. economy, which some economists argue had come to rely on an artificial and unsustainable surge in consumer debt for much of its growth.
A new era of forced austerity arrived almost overnight last year when lower consumer spending pushed dozens of retailers into crisis. That led to further problems for the commercial real estate sector and banking industry, which in turn led to greater job losses and more mortgage defaults.
So if much of the economic growth of the past 15 years was illusory, fueled by injections of high-octane debt, what happens now that the tank is empty? We could be entering a wrenching adjustment period of lower spending, slower growth, perhaps a lesser standard of living.
"We're not going back to those growth rates; that was a dream world," said Kevin Lansing, an economist with the Federal Reserve Bank of San Francisco who for years has tracked consumer debt. "There could be 10 years where you're going to have this drag on the economy. ... People's living standards are not going to be improving the way they were. It will place a new strain on government as their tax revenue falters."

Household debt doubles
The current economic wreckage has its roots in a sweeping change in American behavior dating to the late 1980s.
Between 1965 and 1985, household leverage -- measured by the ratio of debt to personal disposable income -- hovered between 55 to 65 percent. It more than doubled in the ensuing years, reaching a zenith of 133 percent in 2007, according to a paper issued in May by Lansing and Reuven Glick, economists at the Federal Reserve Bank in San Francisco.
For people who wondered how their friends and neighbors afforded their McMansions, BMWs and high-end club memberships, it may well have been courtesy of their always-obliging debt merchant.
Much of the debt was mortgage-related, the loans backed by escalating home prices. In 1995, Americans took out $3.3 trillion in mortgage and home equity loans. Ten years later, the total topped $10.4 trillion.
The surge in debt is attributable, in part, to what Lansing politely calls "credit industry innovation and product development."
Translated, that means that some lenders dropped any pretense of cautious loan underwriting. In an era when most lenders simply bundled their loans and peddled them to the secondary market, a buyer's ability to make mortgage payments seemed of minor importance. No one could lose, as long as home values were going up every year by double digits.
Many borrowers eagerly joined the free-ride parade, fabricating loan transactions and working with unscrupulous brokers to extract the easy money from lenders.
As Americans borrowed and spent more, they saved less, culminating in the infamous "negative" savings rates of 2005 and 2006.
Some went on buying binges, but millions needed the money just to get by. The huge increase in debt stemmed in part from years of flat incomes and the simple fact that life got more expensive. Even people who took the historically intelligent steps of buying a home or getting a college degree had little choice but to take on increasing debt.


Friday, October 9, 2009

Austria’s very own subprime invention

It all started innocuously enough in the late 1980s. Many of Vorarlberg’s residents worked in neighbouring Switzerland and earned Swiss francs. So it seemed sensible enough to borrow in the same currency; Swiss interest rates were, after all, lower than those in Austria. Once the idea took off it spread fast and far. By the end of 2007 almost one-third of Austrian household borrowing was denominated in foreign currencies with low rates.
This rapid take-up was repeated and exceeded as Austrian and other Western banks moved into central and eastern Europe. The IMF reckons that Polish households took on mortgages denominated in Swiss francs that were worth about 12% of GDP in 2008. In Estonia foreign-currency mortgages accounted for about 80% of household borrowing last year (see chart); in Hungary almost 85% of new mortgages were in Swiss francs in recent years.
This borrowing primed a bomb that still threatens some emerging-market economies and their bankers. The most exposed of all is Latvia, where more than 80% of all household borrowing is denominated in foreign currencies, mainly euros. That seemed to pose little danger as long as Latvia could credibly keep its currency pegged to the euro. But with its economy mired in a deep recession and the country dependent on outside lenders’ money, there are increasing doubts about Latvia’s ability to maintain the peg. Devaluation might help exports but would also make it harder for households to pay back their foreign loans. On October 6th the Latvian government said it was drafting a law limiting the liability of mortgage borrowers to the (reduced) value of their homes, not the value of the original loan, a move that would make devaluation less painful and that would saddle banks such as Swedbank and SEB of Sweden with big losses.

The Economist

Sunday, October 4, 2009

House proud

The global economic crisis was accompanied by a collapse in house prices in most rich (and some not-so-rich) countries around the world. The IMF has compared house prices in the first quarter of this year with their level a year ago in 52 rich and emerging housing markets. It found a median house-price decline of 7%. The figures drive home just how savage the falls in house prices have been in many countries.

America’s housing bust may be close to the global average but the declines in some countries are mind-boggling. Latvia, with a wrecked economy propped up by emergency IMF funding, saw an annual decline in house prices of nearly 60% to the end of the first quarter. During that period Estonia and the United Arab Emirates also saw collapses of nearly 40%. In Britain they fell around 20%.
All of this prompts the question of how much further prices have to fall. Are the slight rises of recent months a sign of broader recovery, or blips on the way to further pain. The IMF’s analysis of past housing cycles provides some clues. On average house prices in rich countries rise for around six years by around 50%, before falling for five years by 24%. But this time around, the boom was twice as long and prices rose by more than twice as much as during past upturns. The IMF argues that although house prices have already fallen by 20%-close to the historical average–“there could still be significant corrections to come”. This conclusion will not please those hoping for a sharp recovery.

Of course, there will be plenty of variation across countries. The IMF has tried to see how much of the increase in house prices in various countries over the past decade cannot be explained by increases in disposable incomes, the working-age population, credit, equity prices, interest rates and construction costs. The results suggest that house prices still have some way to fall before they hit bottom in Ireland, Italy, and Britain. But the bleeding may nearly over in America, Germany, and South Korea.

The Economist

Friday, October 2, 2009


There is one serious misstep, though. It has to do with the notorious paradox that Russell discovered in the spring of 1901: the paradox of the set of all sets that don’t contain themselves as members. (Think of the barber of Seville, who shaves all men, and only those men, who do not shave themselves. Does this barber shave himself or not? Either possibility yields a contradiction.) The authors have fun unpacking Russell’s paradox, but they exaggerate its fallout. The paradox did ultimately doom Russell’s (and Frege’s) project of reducing mathematics to pure logic. However — and this is something that Russell himself failed to realize, along with the authors — it left mathematics pretty much undisturbed. When Cantor heard of Russell’s paradox, he did not react like a madman, the way ­“Logicomix” caricatures him. He calmly observed that it did not apply to his own theory of sets, which evolved into the present-day foundation of mathematics.
It is true that Cantor did suffer fits of madness (the magus of infinity died in a mental asylum), as did many other figures in this story. Frege, the consummate logician, ended up a foaming anti-Semite. Kurt Gödel, who proved that no logical system could capture all of mathematics, starved himself to death out of a paranoid fear that people were poisoning his food. Russell maintained his own grip on sanity, but his fear of hereditary madness was borne out when his elder son became schizophrenic and his granddaughter, also schizophrenic, committed suicide by setting herself afire. Russell’s philosophical confidence, however, was shattered by his onetime pupil Ludwig Wittgenstein, who made him realize that he had never really understood what logic was.
Is it madness to be driven by a passion for something as inhuman as abstract certainty? This is a question the four creators of “Logicomix” ponder as, in a beguiling coda, they make their way through nighttime Athens to an open-air performance of the “Oresteia.” Oddly enough, Aeschylus’ trilogy furnishes the concluding wisdom, which, at the risk of triteness, I’ll condense into a mathematical inequality:

New York Times

Thursday, October 1, 2009

Ignorance and Arrogance

People are generally ignorant of their own country’s history of financial crises and debt default. In the course of their research, Professor Reinhart and Professor Rogoff found that even government officials were blissfully unaware of such basic information as their country’s domestic debt records or recent housing market prices. In many cases, the authors (two veterans of the International Monetary Fund) said, national records simply do not exist.
Despite (or perhaps because of?) these huge memory lapses, both private investors and public officials, again and again, insist that the fundamentals of whatever financial bubble they happen to riding at any given time are sound, even indestructible.
When such hubris is eventually proven wrong, and whole economies are brought to their knees, investors finally realize how big their blind spots really were. In response they demand all sorts of new transparency rules, official investigations and investor protections — responses that eventually coax investors into a renewed feeling of omnipotence over the market, which again leads to a new underestimation of risk and, eventually, a new crisis.
In fact, until the current crisis, economists for years had been bragging about “ The Great Moderation,” the idea that technocrats had finally tamed the business cycle. New ways of pooling risk in the form of snazzy financial products had virtually eliminated all risk — or so everyone thought before Lehman sought bankruptcy protection.
This pattern of events has a long history. Even back in 1929 there was a false sense of security over new-found mass financial “sophistication.”
In their book, Professors Reinhart and Rogoff reprinted a gem of an archived advertisement. It tells, condescendingly, of the irrational exuberance that had plagued an earlier, more benighted species of investor:

when all Europe guessed wrong

The date — Oct. 3, 1719. The scene — Hotel de Nevers, Paris. A wild mob — fighting to be heard.

“Fifty shares!” “I’ll take two hundred!” “Five hundred!” “A thousand here!” “Ten thousand!”

Shrill cries of women. Hoarse shoats of men. Speculators all — exchanging their gold and jewels or a lifetime’s meager savings for magic shares in John Law’s Mississippi Company. Shares that were to make them rich overnight.
Then the bubble burst. Down went the shares. Facing utter ruin, the frenzied populace tried to “sell”. Panic-stricken mobs stormed the Banque Royale. No use! The bank’s coffers were empty. John Law had fled. The great Mississippi Company and its promise of wealth had become but a wretched memory.

Then, the advertisement proudly promises:

Today, you need not guess.

History sometimes repeats itself — but not invariably. In 1719 there was practically no way of finding out the facts about the Mississippi venture. How different the position of the investor in 1929!

Today, it is inexcusable to buy a “bubble” — inexcusable because unnecessary. For now every investor — whether his capital consists of a few thousand or mounts into the millions — has at his disposal facilities for obtaining the facts. Facts which — as far as is humanly possible — eliminate the hazards of speculation and substitute in their place sound principles of investment.

The ad — for a company called Standard Statistics, whose address has since been turned into a Chipotle Mexican Grill — ran on Sept. 19, 1929, about a month before the market crashed.

Any of this sound familiar?

New York Times