Guest Commentary: A Festive Thanksgiving Message from Ramsey

The following is a typically cheery email sent by FOP (Friend Of Piggington), occasional guest poster, dim sum comrade at arms, and foreclosure guru Ramsey Su. Ramsey’s previous guest commentary can be found by poking around here.

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If you only have time to look at one set of data to figure out the status of the real estate market, there is no doubt that I would choose the monthly Hope Now reports.

Unfortunately, this is the official press release which grossly distorts the valuable data and timely data Hope Now collects: http://www.hopenow.com/upload/press_release/files/October%20Data%20Release%20.pdf

The meat is here: http://www.hopenow.com/upload/data/files/HOPE%20NOW%20Loss%20Mitigation%20National%20Data%20July07%20to%20October%202008.pdf

Here is an example of how valuable this data is. I call this the PUF indicator – PENT UP FORECLOSURES.

The data conclusively illustrates that borrowers are not paying and the default rate is increasing at a steady rate.  Foreclosures starts and completions are held flat, in spite of the massive foreclosure prevention programs in place. 

It is also clear foreclosure prevention is addressing the wrong problem.  Greenspan admitted that did not see the real estate bubble coming.  Bernanke said the subprime problem was contained.  Sheila Bair is promoting her FDIC/IndyMac mass workout plan.  Could it be any clearer that the real estate market needs a new engine and they are busy rotating the tires? 

How about "do no harm?"  If you don’t know how to help, at least try to do no harm.  Unfortunately, jillions of taxpayers’ dollars are thrown at the wrong problem.  If the foreclosures were allowed to happen, more properties would have gone from weak hands to strong hands by now.  Homes would have gone to deserving homeowners who had been saving for years to buy a home, instead of those who lied about their income and are now rewarded with living in a home they could never have been able to afford without government subsidy.  Properties would have gone to investors who are willing to purchase based on fundamentals rather than speculators who would pay anything hoping that they can sell to a greater fool. 

Yes, it would have been painful and property value would have declined, but probably no more than what it has declined anyway.  However, had foreclosures occurred under the free market system, the real estate market would have formed a base by now, supported by the new pool of owners and investors who are qualified and have skin in the game.  They are unlikely to default. 

Instead, we have a form of subsidized housing for the most undeserving.  This is how it works:

• Act irresponsibly and buy a house you can’t afford.
• The lender will reduce your payment, your loan amount or let you live free for a year or two before you have to move.
• The lenders lost a bunch of money but will be made whole by the government via TARP, Bernanke and Paulson.
• The government loads this burden on its responsible tax paying citizens who have no idea how much debt they have taken on. 
• This subsidy is a form of welfare that contributes little to the economy.  It does not create jobs nor does it stimulate anything. 

In summary, properties remain in weak hands.  Loans that had been modified are waiting to default again as soon as the subsidy is deemed insufficient.  We have this pent up volcano of foreclosures waiting to blow up. 

How big is this volcano?  You can see for yourself with this chart from Corelogic (available here: https://www.corelogic.com/documents/Core_Mortgage_Risk_Monitor_Q4_2008.pdf ).

Have a happy Thanksgiving, especially to those on the receiving end of TARP.