A new report from the Federal Reserve Bank of New York shows that house flipping played a larger role in the housing bubble than originally thought and is largely to blame for the recession. See this msnbc.com story: Flippers’ housing bust role larger than thought
The story goes on to mention how cash investors are now helping markets, such as Las Vegas, to recover by picking up the foreclosures, fixing them up and reselling them.
In an unrelated story, strategic defaults are on the rise. See this piece from the Sioux City Journal.com: More homeowners opt for ‘strategic default’. According to the article Lender Processing Services reports that as of October there were 6,298,000 unpaid mortgages nationwide.
Did house flippers cause the recession?
[…] A new report from the Federal Reserve Bank of New York shows that house flipping played a larger role in the housing bubble than originally thought and is largely to blame for the recession. See this msnbc.com story: Flippers’ housing … Continue reading → […]
GratefulD_420
Good thing we didn’t have bank giving unscrupulous loans to people in Reno. That could have led to a flipping problem and some horrible bubble bursting lasting a decade! Imagine if real estate agents themselves owned a huge % of the inventory and became flippers & cheerleaders of the bubble prices that would never end! I certainly am glad that none of them were in cahoots and would cause an unethical market situation.
Anyways…. talking about about ethical Real Estate Professionals …. there is nothing wrong with cooking the books from 2007 through 2011, is there? Thanks to one of our favorite and often quoted sources… CoreLogic.
http://www.reuters.com/article/2011/12/13/us-usa-housing-existing-revision-idUSTRE7BC26V20111213
Don’t worry, early estimates only show the Official MLS counts to be off by ~20%. Seems funny that all RE transactions are public county records but the inventory and sales process is controlled by “professionals.” Don’t worry it’s the RE market is just one of the top assets across all markets… nothing to fret there.
I do have to wonder if the MLS books were open if this charade would have made it past 1 month of scrutinizing eyes, much less 4 years?
They think “strategic default” is a problem now? Wait till Nevadan’s figure out that the new law stops the bank from filing an NOD and cannot even take back their rightfully owned and rightfully devalued asset.
Again, I don’t object to “strategic default.” It is a rightful option in the contract. Stop paying, take the credit hit and give up the devalued asset. It is the mortgage lender’s fault for being greedy, for not getting correct financial information from the buyer, for correct valuations (or hedging for the obvious! which is the banks job!) and the devalued asset is their short-end of the stick. But whoever thought it would be best to STOP foreclosures and the banks right to getting the 50% asset has lost their mind that this will fix the situation. The results of this “red-tape-game” will become painfully obvious in the next 6 to 12 months.
Transplant
Good post, Grateful. Is the property rightfully owned by the bank if it can’t produce the paperwork supporting that claim? In such a case, it’s no longer foreclosure, but theft. If a person purchases an REO, but later a judge examines the bank’s faulty/incomplete/missing/sliced and diced paperwork and as a result declares that the buyer does not in fact own the property, this doesn’t fix the situation. It makes the whole real estate-buying process even less reliable. That’s 100% the fault of the banks. Does the new law stop foreclosures in situations where the bank has documentation that complies with the law?
MikeZ
“Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession.”
Exactly, but how do you take that data and then blame the people who merely used the financing that was being offered: non-doc, stated income, option ARM, 125% LTV, etc., to buy property?
Seems to me that reckless lending is the root cause, without it, flippers had no fuel.
Matthew
This is clear spin directed to blame private enterprise and “speculation” for the bubble burst when “speculators” are in the same boat with devalued assets as everybody else. The reality, which we all like to conveniently ignore, is that neither the housing bubble nor the “evil speculators” would have been feasible without the DIRECT and DELIBERATE intervention in mortgage credit markets to lower lending standards and increase federal mortgage holdings by Uncle Sam.
Matthew
MikeZ, flippers still exist. Their increase was a clear and predictable consequence of the “easy money” in the form of a subsidized availability of credit. Banks are not in the business of losing money. They made more reckless loans because of the moral hazard presented by GSE blindly buying and guaranteeing mortgages. Remember that the size of the federal mortgage portfolio was absolutely massive, and the vast majority of lenders were simply repackaging for transfer or sale to the GSEs.
As a result, the mortgage issue was one big game of “hot potato” in which the originators just didn’t want to get stuck with the asset.
Both the banks and the borrowers made their bed here. “We the people” consented to an overarching government body which fundamentally fueled the cheap-credit fire.
Reno Ignoramus
Any fair and objective appraisal of whose “fault” it was has to conclude that it was everybody’s fault. It was the fault of the lenders who knew damn well that the loan docs were phony (the “liar loans”), it was the fault of the borrowers who knew damn well that they were lying on their loan application, it was the fault of the realtors who just looked the other way and didn’t bother to question how a bartender could qualify for a $500K loan, it was the fault of the appraisers who were willing to “hit the number” or never get any more business, it was the fault of the origniators whose only aim was to generate paper, no matter what the crap content was, to sell off to the mortgage bankers for securitization, it was the fault of the mortgage bankers who who knew damn well they were bundling trash loans and representing them as AAA quality to large investors, it was the fault of the purchasers of this trash who only looked to the AAA rating and “bought the rating”in the place of any due diligence, it was the fault of the ratings agencies who handed out AAA ratings because they didn’t want to lose the hundreds of millions of dollars in fees. It was a chain of greed up and down the ladder populated by people looking for easy commissions and fees and profits.
I find it comical that it has taken the feds 6 years to conclude that house flipping played a large role in the bubble in Nevada. With all due respect to the feds, all they had to do was come to this blog in 2006 and 2007 and they could have read countless hundreds of posts by myself and others citing specific houses ( complete with MLS numbers) that were obvious “flips gone bad” as we used to refer to them back then. But then, what the hell do a bunch of blog posters know?
dirtbagger
Like Reno Ignoramus states, there were many at fault, but this doesn’t mean you cannot create a heirarchy of who’s sins were greater than others. In my small circle of acquantances, I know far too many people who purchased 2nd and 3rd homes for a quick capital gain. To their credit, most so far have taken the hit to their personal net worth and have not passed their losses onto the general populace.
That being said, the Banks and Investment banks aided by the Real Estate Industry were by far the largest causation factor of the housing boom and subsequent bust. Without a source of funding, the number of spec homes built would have been greatly reduced and inventory would have more closely mirrored historical supply and demand.
The first tenet of lending is – will the loan be repaid? With the GSE’s (Fannie & Freddie) backstopping the loans, the first tenet of lending went out the window. The new mantra was to “do the deal” and collect the transaction fees.
Drive by Poster
I’m confused. How did the federal government fuel the multiple house speculators, as suggested by Matthew? I thought Fannie Mae only guaranteed owner occupant mortgages. Unless speculators were lying (inconceivable) about occupying 2 or 3 different homes, then their fuel wasn’t GSE backed mortgages.
Reno Ignoramus
Drive by,
You are joking when you say it is inconceivable that speculators were lying about occupying 2 or 3 houses, right?
Because that is exactly what happened. Hell, the same speculator would buy 2 or 3 houses in the exact same new development. 3 phony loan packages on 3 different houses, sometimes all on the same street. Everybody winked, because there was so much money to be made. It happened right here in Reno. Many imes. Go back and check out some of the excellent threads by MikeMc back in 2007-2008 about the frequency with which it happened here in Reno.
If you are being subtle and tonge in cheek, forgive me for being slow on the uptake.
Walter
I remember some of those great threads by Green/Mike. That was back when we were allowed to name names. That was when we knew the names of the realtors who bought 3 houses on the same day, all, of course, as “primary residences”. And then they went out and did it again two months later, and thus came to own SIX “primary residences”. That was when Mike could name the names of all the former presidents of the realtor association who ended up losing all their “residences” to foreclosure.
Ahh, the good ol’days of the RRB.
Drive by Poster
RI:
You are correct. I was being sarcastic. I just watched The Princess Bride with my kids (first time they had seen it) and Vizzini’s word of choice has been running through my head.
My point was that it if the GSEs were part of the cause of the bubble, the speculators abusing the GSE system were likely a much higher contributor to that cause than Ma and Pa Kettle buying their first stick built house. So, regardless of what Matthew has heard, it still comes back to the speculators.
Matthew
@Drive By Poster,
Of course the liars taking loans and the speculators taking excess risk were instrumental in the bubble. That’s how bubbles work: they require participants. But they also require the foolhardy. You’re missing the key element here that the very existence of the GSEs lends to inevitable abuse. What’s more, the system with F&F was doomed to fail from the start because is was intended to cause a bubble.
Please tolerate my illustrating the point with a personal anecdote.
I have family with significant farming operations in the American midwest. They, like the vast majority of farmers, grow corn and soya because those are subsidized crops and they guarantee profits in a somewhat artificially less competitive market.
While the marketability of American corn has faltered, We The People consent to guarantee them profits (do you think it’s a coincidence that the Caucus is in Iowa?). I digress…
My point is this: my kin are not stupid. They know very well that the long-term outlook for their subsidized growing is not sustainable. It artificially costs the consumer more, decreases competition and efficiency and costs the taxpayers tremendous sums of money we can scant afford.
HOWEVER, they will always take the “free” money because if they don’t, the next farm over benefits and drives them out of business.
So they are directly incentivized (and nearly required) to perpetuate and further entrench the unsustainable practice, while the reality of the situation is that We The People simply need to stop the practice.
As long as the money is there I won’t be surprised when opportunists and vultures swoop in.
The housing bubble can be pretty easily related to the “Greater Fool Theory” wherein each participant understands that they are foolish for making the investment but they are convinced that they will profit off of the even greater fool who buys it from them.
Each of us was myopic and did not see (or chose to ignore) the fact the WE THE PEOPLE were the greater fool because Uncle Sam backstopped the assets.
It should surprise no one that the participation of GSEs in the mortgage market would lead to excess securitization, laxed lending practices and increased unqualified speculation. There is simply no other possible outcome.
By blindly buying mortgage assets, promoting in the market that your bonds were backed by the Federal Government, accumulating a portfolio of TREMENDOUS size (which would certainly been opposed by any risk-conscious private entity) everybody who was paying attention knew a collapse was imminent.
But who bears the burden hardest? Certainly it was the most vulnerable Americans. The irony here is that the very premise of a GSE and backstopping mortgages was a con, a lie, a bamboozle of either selfish politicians seeking votes or economically-braindead loudmouths.
Here’s the thing that people still don’t seem to understand though: we were dead before the ship even sank.
There was no way for this intervention to end any other way.
I wonder what will happen when the same poor who were so hard hit from this discover they have a lifetime of debt serfdom due to their student loans, which were promoted, backstopped and encouraged by the Federal Government (you and me) “for their own good.”
GratefulD_420
Please Transplant, spare me the appeasement. I have thick skin, no need to be so civil.
“In such a case, it’s no longer foreclosure, but theft. ”
Your grandiose conclusion of it amounting to theft is all telling of your one-sided opinion.
Can you please tell me who they might be stealing it from? From the people who signed a mortgage contract but are not paying the mortgage? Basically, I believe in mutually agreed contracts. Again, I have absolutely no problem with someone executing their “out clause,” which is not to pay and give back the house. It’s clearly defined as a possible outcome in the contract. Whereas, I absolutely abhor folks who don’t follow the spirit of any agreed contract. Such an example would be to agree on a payment plan for a substantial asset such as a house, then to not pay and still keep the house because someone didn’t dot the “i” or cross the “t.” I understand my example of dotting the “i” is an oversimplification of what happened to the actual note/title on the house, but the moral is the same. The thief is the person who doesn’t pay and keeps the depreciated asset. The new law allows just that. The rest is just red-tape dotting “i’s” and crossing t’s.
Reno Ignoramus
In their fine book on the housing bubble and the subsequent near collapse of the world markets, “All the Devils are Here”, Beth McLean and Joe Nocera note that while the GSEs were a large part of the problem, they were not the entirety of the problem. In retrospect, we now know that AIG played a far greater role than either of the GSEs in bringing about the near collapse of the world’s markets. The worst of the subprime originators, such as Countrywide, Washington Mutual and Ameriquest, really operated without reliance on the GSEs. GSE guarantee of their worthless paper really didn’t matter to them because they were not selling that paper to the GSEs. They were originating that paper soley for one purpose…..to sell it to the Wall Street houses that would then securitize the garbage loans into byzantine derivative instruments that were then peddled to mostly institutional investors around the world. And then, as we all understand now but nobody knew then, these byzantine instruments were “backstopped”by even more byzantine instruments known as collateral default swaps which were, in esence, nothing more than bets that the debt instruments would not fail. (Or would fail, depending on which side of the bet one took). It was through the use of the CDS that $1.7 trillion in garbage securitized loan instruments turned into $50 trillion in potential losses, which brought down the mortgage banks and forced the goverment to keep the world monetary system from collapsing. AIG was almost single handedly responsible for that $50 trillion ponzi scheme.
Matthew, I used to often refer to the Greater Fool Theory in the early days of this blog on a regular basis. Back then, there were still a number of housing market cheerleaders who used to post assuring us that there was no bubble. That houses could easily appeciate in value 25% a year. Forever. I got called a “hostile pessimist” for suggesting that houses cannot appreciate 25% a year forever and that only in a classic bubble can that happen. All of those folks have been gone for quite a while now.
And Matthew, you are absolutely right about the student loans. There are now tens of thousands of young people with anywhere from $20K to $200K in non-dischargeable student loan debt. It is not only a ticking time bomb for these individual kids (most of them are kids) but also for our nation as the amount of defaulted student loan debt now hovers around $ 1 trillion. Of course, I suppose it’s all relative. That’s only 1/50th of the potential losses that WE THE PEOPLE, as you say, had to guarantee thanks to WaMu and CTC and AIG and Goldman and all the other “devils”.
Elizabeth
Re: the “strategic defaults”
I am first time poster on this blog. My co-worker and her husband decided to stop paying their mortgage about 8 months ago. These are people who can easily afford to make the payments, but their house is now worth about $200,000 less than they owe on it and they figure why pay on a house that will never again be worth what they owe. Their plan was to stay until they had to leave and then go buy another house for cash, which they can afford. They have no kids so that is not an issue for them. So far, the bank has done nothing to start foreclosure. Now, they are hearing that the bank may not be able to start foreclosure because of the new law. Their lawyer told them the bank may never be able to start foreclosure because the bank probably does not have the right documents. They are now actively talking about just staying put where they are and living mortgage free for what they think could be years.
My husband and I are still paying our mortgage, but I have to admit I am beginning to feel like maybe I am the one who is the Fool. They have gone on two great vacations with the money they are not paying the bank. There seem to be some smart people on this blog. Can somebody explain to me how it can be the law that people can stop paying their mortgage and the bank is unable to recover on the loan?? It does not seem right to me that people ought to be able to live for free and just blow off the bank. Am I missing something here??
Matthew
Elizabeth,
The new law makes it nearly impossible for banks to foreclose. Notably, the law mandates two specific things:
A) That the bank cannot use any subsidiaries as its trustee
B) That the bank provide documented proof of it’s ownership of the property
Item A is a problem because conglomeration of banks has merged so many small banks into the large banks. And large banks may be resistant to offering such services to other large banks.
Item B is where the real challenge comes from. In a significant number of cases the bank doesn’t “own” the property. In fact, no single entity “owns” the property. Most likely the mortgage was securitized, bundled in with other mortgages and sold in tranches. Most banks are simply custodians of mortgages nowadays… and because this is the MO of larger banks it is getting more prevalent (see part A).
So let’s oversimplify and presume that a mortgage was chopped up between ten different owners. Those owners are likely to be other banks or mutual funds (think ING Real Estate Fund or something). They have wrapped it up with millions of other funds and partitioned it yet again to their fund investors.
So now, in order to demonstrate ownership we’re asking the bank to locate all the independent owners of the tranches and aggregate the “piece of paper” validating their right to foreclose.
A bank *could probably do this* but imagine the time, effort and cost required…. and perhaps they might find one owner of a tranche unwilling or unprepared to proceed? (this is unlikely, but let’s speculate!) well now the foreclosure cannot continue.
This law is an absolute mess and it *makes things worse* for non-defaulting homeowners. Its requirements are not founded in reality and there will be serious problems when Nevadans begin to wake up to this reality….
geopower
Matthew and all,
I certainly can’t argue with the results of AB 284, as they seem to be clear in the last couple months. My question is who was asleep at the lobbying wheel that a law that hurts banks so much could be passed. Banks are, after all, pretty much by definition where the money is, and they have huge lobbying power. Otherwise wouldn’t Angelo Mozilo and Lloyd Blankfein be in jail? No one important in the banking industry has even been charged for the systematic fraud that caused the implosion of the market. If the banks are good enough at lobbying to protect themselves from the righteous wrath of a maimed global economy, who wasn’t paying enough attention that they got so worked over by legislature here?
Drive by Poster
My guess is that the new law will have a relatively short term effect. I couldn’t find anything specifically on point, but my guess is that the 6 year contract statute of limitations is going to apply to foreclosure/deed of trust actions. So, if the deed holder or whatnot hasn’t started foreclosure proceedings by then, the homeowner truly will be able to walk with a free house. Now, I see two possible outcomes – banks deciding it’s the cost of business and writing off the loans, because it is not worth the time and expense to foreclose under the current system. Not highly likely, but I think within the realm of possibilities. The second possible outcome is that the banks decide they can’t afford to write off that much debt and they move forward on foreclosure regardless of how much of a pain in the butt it is going to be. More likely than the first possibility, but probably not a guaranteed course of action for all the banks. Either way, within the next 4 or so years, banks are going to have to sh*t or get off the pot and life will move forward.
Now, for everyone who is going to say that banks will pull out of offering mortgages in Nevada, I just don’t see that happening. It may, and I emphasis may, make mortgages more expensive in Nevada than elsewhere. But, the market is too big and banks are still making money, so they won’t go away.
Matthew
@Geopower, I think Drive By is spot on here.
The banks probably will eventually get their act together on this and reclaim the properties or the law will be changed.
My perspective is that the banks don’t really want to take over more inventories right now. If they sell (short or REO) they are forced to write the asset down on their balance sheet (as opposed to now, where they are not required to fully mark-to-market their mortgage portfolio). They’re looking at significant loss anyhow and I don’t think they prefer the vacant house to the occupied house YET. After all, there is theoretically a full pipeline of REO inventory already? Does the bank *want* to take on more right now? I’m not sure…
But now the major impact is the expense and difficulty of that endeavor and its impact on the timelines here. It has suddenly become an even more tempting option for a low-money-down borrowers to stop paying.
Sully
geopower, you might be interested in this:
http://news.yahoo.com/regulators-sue-former-top-execs-fannie-freddie-153057632.html
geopower
Sully,
It’s a start. There’s so much more to be learned from the crash that hasn’t been acted on yet.
If congress were functional, maybe we could also ban opaque naked credit default swaps, as the EU managed to do, if only for sovereign debt, even as dysfunctional as they are right now.
Jethro
What do you mean that the US Gov’t does not go after the criminals?
The United States of America has spent about $75 million in getting a $4,000 fine, 250 hours of community service, 30 days of house arrest in his mansion, and 2 years of probation for Barry Bonds.
Lawrence
Yea, Barry is going to have to spend 30 days in his 15,000 sq. ft. humble abode in Beverly Hills. I hope he does not have to serve those 30 days consecutively. That would be almost unimaginable torture.
Actually, this points out why there have been no prosecutions of any of the main players in the financial meltdown. Think about this. One United States Attorney, three Assistant United States Attroneys, an army of paralegals and other investigative and litigation support personnel spend four years and multi millions of dollars bringing criminal charges and end up with a $4,000 fine and 30 days house arrest against a baseball player.
The Bonds case was a slam dunk compared to trying to prove criminal conduct against the CEO of Goldman Sachs. And the U.S. Gov’t comes away with squat.
Carlo
I understand that Barry’s mansion sits on several acres in Beverly Hills, complete with tennis courts, an enclosed basketball court, and an olympic size swimming pool. If I go out and get convicted of obstruction of justice, do you think I would be able to spend 30 days at Barry’s house?
geopower
don’t jump to conclusions yet, he could still get out of the house arrest, the judgement is awaiting appeal. Clearly worth the $500/hour lawyers fees to fight this.
Reno Ignoramus
Quite right geo, and I would point out that the action against the managers at Freddie is a civil action brought by the SEC. This is a civil action for fraud seeking money damages only. This is not a criminal prosecution brought by the Justice Dept. To date, there has been only one criminal prosecution brought against anybody in connection with the financial meltdown. That was a prosecution against the two hedge fund managers at Bear Stearns whose fund failed and which started in motion the chain of events that lead to the demise of Bear. The case ended in acquittals for both managers. The case showed the enormity of the difficulty in geting a conviction in a white collar financial crimes case. If prosecutors can’t even convict two fairly low rung hedge fund managers, they are never going to get a conviction against the occupants of the executive suites at AIG, Goldman, Fannie, and on and on.
Sully
RI, what’s wrong with civil action seeking money damages? Would you prefer criminal action with jail time? I would much rather see these guys lose what they gained than go through a long drawn out trial costing millions with no guarantee of conviction.
Since Congress repealed most of the laws, which ones do you think they can dig up to charge these people with?
Reno Ignoramus
Sully,
The individuals who have been sued by the SEC in this civil action have not been accused of any criminal activity. This means that their defense will be paid for by their professional errors and ommissions insurance carriers, and that any damages that may be paid in settlement will also be paid by the insurance carriers. In fact, Sully, there is a specialty within the bar of lawyers providing defense to people accused of civil wrongdoing by the regulatory agencies, and these lawyers are the ones retained by the insurance companies to defend their insured clients. This case may well take years to resolve, but the cost will not be borne by the individuals involved, except for the payment of the deductible on their policies. (Probably about $25K). So sorry Sully, but this case will end up costing the individuals involved essentially nothing of their own money. The end result will be the payment of a relatively small amount of money to the SEC, which will paid by the insurers, and a promise by the individuals to never do bad things again. Without, of course, any admission of liability. The final result in this case will change absolutely nothing. Except to make people like you think the bad guys are finally being called to justice. The bad guys, Sully, will contine to live in their toney mansions in Greenwich, CT., travel to and from work in chauffer driven vehicles, and the financial security of their grandchildren will be unaffected by this case.
Carlo
Kobe Bryant’s wife is going to walk away with more money than the SEC is going to get out of this case.
Walter
Kobe is going to make $83 million over the next three seasons. Add that to the more than $300 million he has already earned. Ain’t no question that the soon to be ex Mrs. Bryant is going to do better than the SEC. The SEC may get $80K-$100K from each of these Fannie guys (or their insurance companies). Literal peanuts. The soon to be ex Mrs Bryant is going to be worth at least $150 million, cause there ain’t no prenup.
Transplant
Boy, oh, boy. You give a thumbs up to someone’s comment and they jump down your throat. I guess that’s what happens with deadheads when their stash of 420 runs out.
Transplant
That reminds me of a joke…
What did the deadhead say when he ran out of weed? “Good God, what is this music?!”
Treading carefully
Vanessa Bryant could pay the fines for these Fannie guys and not even notice the money was gone from her checking account.
Sully
RI, you’re so busy throwing a hissy fit you didn’t catch the last sentence I posted. Which law do you think they broke in order to be charged under criminal law? Also, how do you know what I think?
MikeZ
If AB 284 truly makes it nearly impossible for the banks to foreclose, then it will be changed, very quickly. I’m having a hard time buying into this whole “nearly impossible to foreclose” argument, it requires one to suspend disbelief.
Matthew
@MikeZ, perhaps I was being melodramatic when I said it was “nearly impossible.” It’s certainly possible, but very difficult and banks now have a different consideration of the costs and viability of foreclosing.
We’ve made the expensive and cumbersome process of foreclosure even more expensive and cumbersome so that we can claim to have made some sort of progress at solving the housing bubble.
I predict that it will certainly be changed.
Stewart
AB 284 will be amended. But it won’t be “very quickly”. The problem is that it cannot be amended until the next session of the Legislature, and that does not occur until February, 2013. In the meantime, literally thousands of foreclosures will stack up and will not move forward until the amended law is effective, which will not be until mid-2013 at the earliest. Thus, the housing market’s cleansing through the foreclosure process has essentially been put into a two year freeze. Look for an explosion of NODs in mid 2013. Now how, exactly, can that be good for the market’s ultimate recovery?
This legislation will become a poster child for unintended consequences.
John Billings
Did house flippers cause the recession?
Y E S