The housing disaster(s)

Considering the industry-wide scam perpetrated by borrowers, mortgage brokers, real estate agents, originators, GSEs, and private banking, no one should be surprised by the scale of the damage.

Amy Sancetta / AP / File
In this Sept. 22, 2010 photograph, a home has a foreclosure auction sign displayed in This Chagrin Falls, Ohio, home displayed a foreclosure auction sign on Sept. 22. New wrinkles keep appearing in the ongoing story of fraud, deceit, documentation falsification, and the housing market collapse. The latest is 'robo-signing,' but it probably won't be the last.

Robots (… actually in this case mind numbed employees) fraudulently forging signatures and notarizing documents… what will banking think of next!

Here is an excellent NPR “On Point” segment that aired yesterday concerning the recent “robo-signing” foreclosure scandal and housing in general with guests Diana Olick, Dr. Karl Case, the great analyst Ivy Zelman and economist Allen Sinai.

I must admit that this scandal has taken me by surprise but on further consideration what’s really surprising is how surprised everyone is.

Given the size of the colossal scam that was perpetrated by borrowers, mortgage brokers, real estate agents, originators (Countrywide Financial et al.), the GSEs (Fannie and Freddie and then FHA) and private banking no one should be surprised that the unwind should be a messy process… garbage in garbage out.

Should we be surprised that the same sham institutions that neglected to perform proper due diligence when underwriting millions of home loans on the origination side would now neglect due diligence on the cleanup end?

Should we really be shocked that a blunder on the part of merely processing foreclosure documents will be exploited by all the fraudster homebuyers who intended on exploiting the housing market in the first place?

We are now at a laughable situation whereby the worst, most greedy and ruthlessly fraudulent bankers and home-borrowers are mired down in an all out competition for which class will sink lower to abuse an asset market that has already suffered years of their punishment.

For home-borrowers, at least a quarter of which qualify as nothing more than vagrants squatting in properties they haven’t made a payment on in at least eighteen months, this scandal is essentially a windfall likely tying up their property in a mountain of red tape.

To the bankers, this scandal likely equates to a disaster that they sorely deserve.

That being said, let us not forget what happened the last time banks found themselves with mountains of “troubled assets”? .... The government gave them TARP and simultaneously the taxpayer got the shaft.

These are troubled times indeed!

So, enough ranting… let’s handicap the outcome for the housing markets given this “unexpected” turn of events.

As the NAR points out every month, at least a quarter of all existing home sales are foreclosures with the percentage reaching one third if you include short sales.

This should argue for there being a significant plunge in home sales over the coming months particularly in the areas hardest hit by foreclosure (California, Nevada, Arizona, Florida, etc.).

Although many have put forth the idea that without the foreclosure sales, there would be lower inventory and better price competition between “organic” sales (i.e. non-distressed typical sales), a more holistic macro view of the housing market would argue that lower transactions generally mean lower prices.

In any event, any price stability gained by the temporary removal of distressed properties from the market would likely inevitably erode when the distressed properties (likely even more distressed after the fact) are re-introduced.

As Dr. Case points out in the segment, foreclosures are not evenly distributed so for markets where there are few distressed properties, this halt in foreclosure processing could have little to no effect, while in other markets, literally all transactions will grind to a halt.

The housing industry will likely take a hit from this scandal as well with real estate agents and all the other middle-men servicers feeling the dramatic reduction in transactions while even homebuilders will likely feel more pain given all the uncertainty that will be created by this process.

The more uncertainly there is, the longer this clearing process will take and the worse it will be for housing in general.

This episode simply sheds more light on how bad an asset class housing has become through the abuse of homebuyers, speculators, bankers and the feds.

Some day this process will clear and housing will get back to its long established boring and lackluster appreciation due to inflation and incomes.... but not today.

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