Upon Further Review: a residential housing market with shadow market of foreclosures -or- a total eclipse of foreclosures?

John B. Taylor in his book Getting Off Track : How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis makes the grand observation that the financial crisis was a government lead failure. That government policy, or more succinctly politico policy, set the stage for shenanigans that occurred in the private sector leading to the financial crisis. (1)

Morgenson and Rosner in their book Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon write a detailed account, stretching back decades, and names-names regarding politico policy and the actors that set the stage for shenanigans. (2)

In an essay entitled Upside Down Economics Thomas Sowell writes a concise time line regarding politico policy setting the stage for shenanigans. (3)

M. Jay Wells essay Why the Mortgage Crisis Happened also provides a very good chronological history of politico policy from 1933 to 2008 which set the stage for shenanigans. (4)

Regardless of history and empirical study, certain individuals want to notionally blame the private sector or the market or banks for the financial melt down when in fact the case is politico failure of the first degree. The “market failure” mantra regarding the financial crisis is, of course, carried forward and lauded by politicos themselves to deflect the true case of politico failure.

One then arrives at today’s aftermath, a murky quagmire of residential home values falling and few new homes being built, a deflationary spiral of value if you will. The declining values fueled, in part, by abundant foreclosures with a pipeline full of foreclosures yet to come to market. One might find that the shadow inventory of foreclosures yet to come to market, depicted as a “pipeline”, may well be much bigger than advertised. How so?

Roger Arnold, chief economist for ALM Advisors, writes in an essay entitled U.S. Housing Market Cannot Recover:

“The most important issues to consider are:

　


How many foreclosures have there been?
How many more will there be?
What do the banks plan to do with them?
　
Properties received by banks through the process of foreclosure are carried and accounted for as Other Real Estate Owned (OREO). The three primary categories of OREO are 1-4 Unit Residential, Commercial, and Construction and Development.

In this column, I will only address 1-4 Unit Residential properties, which represent 25% of all OREO at U.S. banks. I will discuss the others in future column or in the comments section below if readers are interested.

There are about 7,000 banks in the U.S. and OREO affects all of them. The principal value of mortgages tied to the OREO at the four largest institutions, JPMorgan Chase(JPM_), Bank of America(BAC_), Citigroup(C_), and Wells Fargo(WFC_) is much lower as a percentage of outstanding loans than at the smaller institutions below them. This is because the smaller banks have foreclosed on non-performing mortgages while the larger institutions have not.

The result of this is that the outstanding value of non-performing mortgages held by the four largest money centers are much higher than at the smaller banks. The money centers have simply not been foreclosing.

The value of the loans attached to OREO, the properties already foreclosed on by the four largest money centers, is only 3% of the value of the non-performing loans they hold; the properties that have yet to be foreclosed on but most probably will be.

The 97% of mortgage loans that have not been foreclosed on but probably will be makes up the largest percentage of what is known as shadow inventory. This number is so horrifically high that even the pundits aware of the issue won't discuss it publicly -- probably because their own livelihoods could be at stake for doing so.” (5)

Arnold goes on to make this statement:

“Just think of the damage that has been done to the housing sector, as well as the national and global economies and financial markets, with only 3% of the probable foreclosures required as a result of the U.S. housing crash having been completed to date.” (6)

Hence the pipeline of foreclosures on their way to market is nothing in comparison to the reservoir of foreclosures feeding the pipeline. Hence it’s not so much a shadow inventory of foreclosures as it is a total eclipse of an inventory.

Notes:

(1) John B. Taylor, Getting Off Track : How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis.

http://www.hooverpress.org/productdetails.cfm?PC=1342

(2) Morgenson and Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.

http://www.amazon.com/Reckless-Endangerment-Outsized-Corruption-Armageddon/dp/0805091203

(3) Upside Down Economics, Thomas Sowell.

 http://townhall.com/columnists/thomassowell/2009/02/18/upside_down_economics/page/full/

(4) M. Jay Wells essay Why the Mortgage Crisis Happened.

http://www.americanthinker.com/2008/10/what_really_happened_in_the_mo.html

　
(5) U.S. Housing Market Cannot Recover, Roger Arnold


http://www.thestreet.com/story/11533664/2/us-housing-cannot-recover.html

　

　

No-Down-Payment Home Sales During the Housing Bubble Fueled by Non-Profits? No Way! Way!

“Before the housing boom got underway in the late 1990s, a California nonprofit group hatched an idea to help families who qualified for government-backed mortgages but still couldn't raise the down payment.

A home builder would agree to make a donation to the nonprofit in an amount equal to the down payment. The nonprofit would give the cash to the buyer, often earning a generous fee for its role as middleman. In less than a decade, nonprofits had arranged more than a million no-money-down house sales around the country. By 2008, they represented more than a third of all loans backed by the Federal Housing Administration.

Now many of those loans have gone bad. Defaulting at up to three times the rate of other FHA loans, they are one reason the housing agency's insurance fund is about to drop below its required capital level for the first time since it was created during the Great Depression.

Congress last year stopped the FHA from insuring any more of the loans, saying they were risky and carried the potential for fraud and abuse. One case in July confirmed those concerns: As part of a settlement of criminal charges in U.S. District Court in North Carolina in July, Beazer Homes USA Inc., acknowledged that its employees had defrauded buyers by simply rolling the extra cost of the down payment assistance into the house price.

Little attention has been paid to the role of the down payment programs in the origins of the financial crisis. Government and court records examined by the Huffington Post Investigative Fund illustrate how two large housing nonprofits - Nehemiah Corporation of America and AmeriDream Inc. -- worked closely with the mortgage divisions of the nation's biggest home builders, adding fuel to the housing bubble and in effect paving the way for even riskier subprime loans by private lenders.” - Home Loans Brokered By Nonprofits Helped Fuel The Housing Crisis, Huffington Post, 03/02/2012 [first posted 12/01/2009]

The link to the entire article appears below:

http://www.huffingtonpost.com/2009/10/01/home-loans-brokered-by-no_n_306520.html

Politicos Through the Mechanism of Government: Busting Bubbles and Benumbing Freezes

John B. Taylor in his book Getting Off Track makes the most excellent point that politicos through the mechanism of government created financial policy in regards to home ownership and the finance thereof [1978 - 2007] along with another branch of government [the Fed] creating a cheap money bubble [2002-2004] that set the table for the ensuing financial shenanigans. If one sets the table for shenanigans one should not be surprised that shenanigans actually do occur. -Or- if one sets the table for financial shenanigans then do not be surprised when financial shenanigans actually occur. (1)

Keeping the above observation in mind, what happens when politicos through the mechanism of government create a regulation machine that increases regulation at an increasing rate [1930 - present]. That the regulation increasing at an increasing rate, and in its regulatory summation, becomes a veritable mountain of regulation. That the mountain of regulation becomes a mountain chain of regulation [2008 - present]. Has another table been set for shenanigans?

If the financial crisis was a bubble created by politicos through the mechanism of government, which was merely a central planning scheme, then is regulation merely another central planning scheme, created by politicos through the mechanism of government, to create a “freeze”?

Moreover, if the fermentation of the effervescent bubble creating the financial crisis was approximately time period 1978 -2007, what about the benumb chill of the freeze of regulation with time period 1930 to present? If the financial crisis fermented for 30 years, does the benumbing effect of regulation over 80 years create a regulatory crisis of even greater magnitude than the financial crisis?

Finally, the 30 years of fermentation of the financial crisis was brought to the busting bubble stage by the cheap money effect of the Fed. Does the benumbing effect of mountains of regulation become a total freeze stage (the antithesis of the busting bubble) through a sudden and encompassing hyper-regulatory effect e.g. regulatory policies of 2008 to present embodied by Dodd-Frank, Consumer Protection Agency, EPA, Department of Energy, etc., etc..

In both instances, politicos through the mechanism of government have exercised central planning schemes known as financial policy and regulatory policy. One must consider such central planning schemes by politicos with the following insight:

This way lies charlatanism and worse. To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. - F.A. Hayek, from the essay The Knowledge of Pretense (2)


Notes:

(1) John B. Taylor, Getting Off Track, pages 3 and 4.

(2) F.A. Hayek, 12/11/1974, Nobel Prize Lecture, http://www.nobelprize.org/nobel_prizes/economics/laureates/1974/hayek-lecture.html