Why Obama's Home Affordable Modification Program Failed (Spoiler Alert: Thank Bank Of America et al)Submitted by Tyler Durden on 12/16/2013 20:41 -0400
Back when the Executive and Congress at least pretended not to abdicate all power to the Fed, one of the centerpiece programs designed to boost the housing market for the benefit of the poor (as opposed to letting Ben Bernanke make marginal US housing a rental industry owned by a handful of private equity firms and hedge funds), was Barack Obama's Home Affordable Modification Program or HAMP, which attempted to prevent foreclosures by lowering distressed borrowers’ mortgage payments. Under the program, homeowners would be given trial modifications to prove they can make reduced payments before the changes become permanent. The program was a disaster as of the 3 million foreclosures that were targeted for modification in 2009, only 905,663 mods have been successful nearly five years later - a tiny 13% of the 6.9 million who applied (still, numbers which Obamacare would be delighted to achieve). Part of the reason: the program's reliance on the same industry that sold shoddy mortgages during the housing bubble and improperly sped foreclosures afterward. But there was much more. For the definitive explanation of everything else that went wrong, we go to Bloomberg's Hugh Son whose masterpiece released today explains how and why once again the banks - and especially one of them - won, and everyone else lost.
"If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications... Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important."
Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.
Chinese investment in London between 2010 and Q3 of this year has risen by a "ludicrous speed" comparable 1,500%, or from a frugal GBP54 million to over GBP 1 billion! And boy do the Chinese love London - according to the same report, over 50% of European property investment by Chinese buyers is now in London. As a result, China is now the third-largest overseas purchaser in U.K. behind Germany and U.S., which invested GBP 1.2 billion and GBP 1.1 billion respectively. "We expect the pool of investors from China targeting London to grow significantly in the coming years. They will consider everything from urban regeneration sites through to trophy assets." Which brings us to point number two: the latest target of the Chinese hot money colonization is none other than bankrupt Detroit.
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The last time the housing bubble popped, the "frontier" marginal market of Las Vegas was the first harbinger of what was about to come. It is that again, and as real estate expert Mark Hanson explains, "Las Vegas housing demand has crashed." This is hardly an auspicious sign for the rest of the epically reflated housing market which as we have been tirelelessly pointing out for the past two years, has not recovered, but has merely had its 4th dead cat bounce on the back of i) the implicit bank subsidy of foreclosure stuffing, ii) money laundering by "all cash" foreign buyers using the NAR's anti-money laundering exemption loophole, and iii) private equity zero cost of credit REO-to-Rent programs which are now in their last days.
Inflating serial asset bubbles is no substitute for rising real incomes. Why are we stuck with an economy that only generates serial credit/asset bubbles that crash with catastrophic consequences? The answer is actually fairly straightforward.
We had wondered what would happen once private equity players decided enough was enough and foreign oligarchs finished their real estate money laundering transactions. Well, we might be about to find out. According to RealtyTrac, foreclosures for homes worth $5 million or more are up 61% this year despite the fact that overall foreclosures are down 23%. The question is, does this merely represent holdouts from the prior housing bubble, or is it a sign of things to come? Only time will tell.
As a distant but interested observer of history and investment markets, Marc Faber is fascinated how major events that arose from longer-term trends are often explained by short-term causes.; and more often than not, bailouts (short-term fixes) create larger problems down the road, and that the authorities should use them only very rarely and with great caution. Faber sides with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”. Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis.
Back in September 2012 when we, correctly, suggested that one of the main drivers of demand (and increasingly becoming the only one) for US housing, especially in the mid and high-end, was foreigners - particularly of the oligarch persuasion - who come to the US to park their embezzled and otherwise ill-gotten funds, courtesy of the NAR's anti-money laundering exemptions, which means that they can buy any house, sight unseen, cash upfront (recall that a record 60% of all home purchases are all cash, which explains why mortgage bankers are being fired by the thousands left and right), no questions asked. One thing we made very clear, though, is that since one never actually buys the real estate, but merely rents it from Uncle Sam (or any other Development Market host nation), there is little preventing the host from cranking up the tax system, or outright changing it, when the need to raise funds strikes. After all what rights do criminal foreigners with multi-million homes in New York (or San Fran, or London, or any other major metropolis that is the target of offshore capital) actually have. Which is why, over a year after this prediction, we find that if not the US (yet) then certainly London, where the housing bubble is greater than anything seen in the US thanks to Russian and Asian hot money, is doing just this.
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Many believe that government and its partner the Federal Reserve are wise and strong enough to avoid this crash. If printing money and spending money were a solution, there would be no poverty anywhere in the world. Even the poorest country has a government and can afford a printing press. Thus far there has been no collapse. However, that is equivalent to the man who jumps off the Empire State building and is heard to say as he flashes by the fortieth floor: “So far, so good.” His fate was sealed when he jumped. Similarly, so is our economy’s. Economics has its own gravity. A complete cleansing of the mal-investments, distorted incentives and regulatory burdens must occur before a true recovery can take place.
There are a couple of disturbing points that came out of her take on bubbles and the rationale behind not tapering a mere 10 or 15 Billion dollars given the monthly commitment of 85 Billion in Fed Purchases every month.
You can’t overstate the baleful effects for Americans of living in the tortured landscapes and townscapes we created for ourselves in the past century. This fiasco of cartoon suburbia, overgrown metroplexes, trashed small cities and abandoned small towns, and the gruesome connective tissue of roadways, commercial smarm, and free parking is the toxic medium of everyday life in this country. Its corrosive omnipresence induces a general failure of conscious awareness that it works implacably at every moment to diminish our lives. It is both the expression of our collapsed values and a self-reinforcing malady collapsing our values further. The worse it gets, the worse we become. The citizens who do recognize their own discomfort in this geography of nowhere generally articulate it as a response to “ugliness.” This is only part of the story. The effects actually run much deeper.
A hungover America slowly wakes up from a day of society-mandated consumption and purchasing excess to engage in even more Fed-mandated excess in the equity markets. The only difference is that while the "90%" was engaged in the former and depleting their equity, and savings, accounts in the process, far less than 10% will be doing the latter. Overnight attention was drawn to the rapidly escalating territorial dispute between China and Japan, now in the air, Bitcoin's brief surge above the price of an ounce of gold, and the ejection of the Holland from the AAA Eurozone club (where only Germany and Finland remain), following an S&P downgrade of the Netherlands from AAA to AA+, which however had been largely priced in long ago (and was coupled with an upgrade of Spain from negative to stable outlook, as well as an upgrade of Spain from CCC+ to B-). Europe surprised pleasantly on both the inflation (better than expected) and unemployment rate (dropped from an all time high of 12.2% to 12.1%), even if youth unemployment rose to fresh record highs.