Tags: feinberg | housing | bubble | aei

Robert Feinberg: Rumors of Housing-Bubble Demise Are Just Hot Air

Friday, 12 Oct 2012 04:06 PM

By Robert Feinberg

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The American Enterprise Institute (AEI) has been holding semi-annual conferences on the progress of the housing bubble since 2007 after this writer introduced the principals to each other.

They have found it is always a timely event, because the economic crisis has become a permanent part of the economic landscape.

Tom Zimmerman, a managing director of UBS Investment Bank, presented evidence that the housing market is bottoming, but this is happening at a low price level and is likely to be a prolonged process.

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Existing homes make up 90 percent of the market, partly because new home sales are down. Reports have been publicized of spot shortages of inventory.

Zimmerman gave several reasons why a shadow inventory persists, due to people with underwater mortgages holding their houses off the market, people who want to retire waiting for prices to improve, and banks keeping houses on their books while people live in them for as long as five years.

“A lot of ugly foreclosed loans are sitting on bank balance sheets” while people sit in the houses, he said. (This should raise questions as to the actual capital standing of the banks, whose trade associations and compliant regulators blare that the condition of the industry is much stronger than in 2008.)

Zimmerman predicted that this overhang will persist for years, based on data from Amherst Securities, and this will put a lid on future prices. Reports that housing prices are up 5 percent need to be considered in light of increased seasonality, which may mean they will decline during the winter, and prices are still 30 percent below their peak.

The biggest improvement has occurred in cities where the biggest declines took place. Down the road, the dramatic increase in the national debt, which is likely to lead to an increase in taxes, will also act as a long-term drag on the housing market.

Zimmerman lamented that the housing finance market is “still dysfunctional.”

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He then complained that an array of federal and state banks has been “beating up on the banks, and this is the worst thing you can do.”

He alleges that Attorney General Eric Schneiderman, of New York, is going after JPMorgan for alleged transgressions of Bear Stearns, which JPM was asked by the government to take over “to help save the country.”

He regretted that Wells Fargo is being sued despite being “the best originator in the country.”

(Another panelist, banking analyst Christopher Whalen of Tangent Capital Partners, argued that Schneiderman was only belatedly bringing a civil case where he should have brought a criminal case several years ago, in order to protect investors and the reputation of the New York securities market.)

This writer would suggest that the reason JPM acquired Bear was to continue to grow and leverage its standing as a de facto government-sponsored enterprise (GSE).

Zimmerman concluded that the other leading banks beside Wells are withdrawing from the market due to the risk of litigation under pending Dodd-Frank rules, as well as uncertainty over the future of Fannie Mae and Freddie Mac.

Mark Fogarty, of National Mortgage News, said that while the mortgage market is improving, it is still “a ward of the government.” Purchase-money mortgages are still languishing, according to Fogarty, and the only securitizer of jumbo mortgages is Redwood Securities. He proposed merging Fannie Mae and Freddie Mac, since both are under government control.

In a more detailed comment on the legal regime for mortgage finance, Whalen also updated remarks from the last conference that Attorney General Kamala Devi Harris of California has been determined to convert California into a judicial foreclosure state, so that foreclosures could only be done by judicial decree. And she has succeeded, at the behest of the trial lawyers and public employee unions who are leading policy in that state.

Whalen warned that the result will be “a booby trap for lenders and investors.” Therefore, “no private investor will want to write a mortgage there.”

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Moreover, if a foreclosed house subsequently rises in price, California law provides a cause of action for personal injury. According to Whalen, the market has not absorbed the import of these developments.

Robert Feinberg served on the staff of the House Banking Committee for 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms, and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog, and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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