With apologies to Charles Dickens, which is this, the best or worst time to buy a house or refinance your mortgage? Those are two completely different questions, but the short answer is that it’s a lousy time to buy and not all that good a time to refi, either, despite record low mortgage rates.

Home prices are down nationally and you’d think that would make this a good time to buy but it isn’t. That’s because values are STILL DROPPING. The time to buy an asset is when it is just starting to appreciate. I’m not demanding here that every potential home buyer try to time the market but it is simple logic that it makes little sense to buy something today if you can buy it cheaper tomorrow. Home prices are dropping and it looks like they will continue to drop at least through 2010 and maybe even to 2012 according to the S&P/Case-Shiller Housing Futures Index traded on the Chicago Mercantile Exchange. The Case-Shiller is the best indication we have of where housing prices are headed. And though the index has shortened a bit in recent months from predicting a 2013 housing market bottom, renting still looks smarter than buying until at least 2011.

If you are selling, not buying, it doesn’t look all that good, either. Yes, sell now if you can’t wait for 2013 or later when some price recovery will have finally taken place, but there aren’t that many buyers out there specifically because the smart money is still waiting for the market to hit bottom. Houses will always sell at the right price but these days the right price sucks.

What about refinancing your mortgage, then, and hanging onto your house? The perception in the news is that rates are down and refinancing is hot, hot, hot, except not that many people are actually getting loans. Fannie Mae and Freddie Mac lending guidelines have just tightened-up. Banks are demanding bigger down payments, more reserves, and dramatically higher credit scores than in the past. Today the rate you could get a year ago with a 660 credit score requires a 740 number. Ouch!

And all those properties that are under water with their owners having no equity at all and owing more than the house is worth – those properties are IMPOSSIBLE to refinance under current circumstances.

What we’ll see then in the coming months is a small bump in refi business but not at all the resurgence one might expect. Defaults and foreclosures will continue to rise for at least another year or more no matter what the Obama Administration does.

So this would be a great time for someone to come up with a new approach to home finance, please, because things are going to get a lot worse before they’ll get better.

Sorry.

12 Comments » Posted by cringely / What Passes for Wisdom

It’s getting ugly out there. No matter where you live in the United States mortgage defaults are up, as are foreclosures. Though everyone looks to the incoming Obama Administration to do something miraculous for homeowners, the stats don’t look good. In many markets falling home valuations have erased owner equity completely. People owe more than their house is presently worth and are paying more to live in that depreciating hovel than it would cost to rent something perfectly comparable down the street.

No wonder foreclosures are up.

But the truth is that your bank or mortgage company would actually far rather NOT foreclose, because foreclosure is a losing game for the bank.

The entire point of down payments on mortgages is enabling foreclosures. It always has been. But that doesn’t mean foreclosures are in the general interest of the lender. The ideal for lenders, remember, is to keep us owing as much as possible on our homes for as long as possible, so down payments just cut into their action. In an ideal environment the lenders would rather lend 100 percent of the house value. And as long as home values were consistently rising faster than inflation the banks could get away with that, because they actually MADE MONEY on foreclosures.

Here’s how foreclosures used to work. It takes a year and several thousand dollars worth of legal work to actually foreclose on a home, during which time the bank or lender is also deprived of revenue from the mortgage because we aren’t making payments, remember. But as long as home values were going up AND THE BANK COULD ACTUALLY SELL FOR THAT HIGHER AMOUNT it didn’t really matter. That’s because the increase in home value during the foreclosure time frame usually more than made up for the legal costs and lost revenue, even for houses originally bought with no money down.

This is yet another reason why the housing bubble got so big, because the lenders saw themselves as having literally no risk. THEY WANTED US TO DEFAULT. That is until housing prices started going south.

The current situation is far worse, however. The point of having a traditional 20 percent down payment was that the difference between the principle on the loan and the actual home value (that difference being the down payment) was supposed to more than cover the expenses of any foreclosure, even in a non-boom market. So traditionally while the lender didn’t WANT to foreclose, they also weren’t afraid to do so, because the down payment covered their inherent risk.

But no more. We’re in a housing Depression. With our houses leveraged as much as possible and selling prices down by 30+ percent in many markets, there is no longer that equity cushion to protect the bank. Where banks used to easily get 80 cents on the dollar or more through foreclosures, their current yield is closer to 50 cents on the dollar. Banks have a lot less incentive to foreclose than they did a year or more ago. Foreclosures are a losing business for banks and banks HATE to lose money.

The preferred alternative to foreclosure these days is loan modification. Surprisingly, banks tend to LOVE loan modifications. This is for two reasons; 1) they aren’t losing money on a foreclosure, and; 2) loan modifications as they are presently being done are actually profit centers for most lenders. Though we homeowners appear to pay less for our homes under modification plans, the banks actually tend to make MORE profit on the revised deals.

The point of loan modifications is to get your monthly payment down to something you can actually pay. The point quite specifically ISN’T to help you actually own your home. So the typical loan restructuring spreads out repayment, converting your 30-year mortgage into a 40-year mortgage, making the next 10 years of that loan interest-only. Your payment drops by a few hundred dollars per month and you feel some relief. But if you calculate the extra interest you’ll be paying over the life of the loan that savings is very expensive, benefiting only the bank.

Still, we tend to accept the modified terms because the payments are lower and it is only until we can refinance, right? Wrong. Underwater loans CAN’T be refinanced unless we come up with a big down payment we don’t have. So instead of being stuck with this loan for 2-3 years, we could be stuck with it for 40, or more likely the average 10 years we’ll own the house.

Extending the shelf life of the average mortgage from the current three years to 10 is a huge boon to the banks because they don’t have to spend three times as much marketing money to support the same level of homeowner debt over that time frame. They don’t have to sell the loan three times over, instead simply allowing us to stay in the house we couldn’t afford in the first place and really still can’t afford.

Lucky us.

7 Comments » Posted by cringely / What Passes for Wisdom

I’ve been thinking a lot about the $700 billion that Congress has earmarked for bailing banks out of the mortgage crisis, or what we used to refer to as the mortgage crisis.  Remember the Treasury was going to buy-up bad mortgages for more than they were really worth then decided, instead, to inject capital directly into the banks.  This latter capability, which was literally forced on the Treasury by Congress, is not in itself a bad deal because as the banks recover so will the value of the bank shares now owned by you and me.  Or at least that’s what Paul Krugman tells us.

And maybe it’s true, but there sure doesn’t seem to be much lending going on, is there?  And wasn’t that the whole point of this bail-out?  So far the only upside I can see for you and me is that we ought to be able to go into any big bank in America and demand to use the bathroom as shareholders, but even that concept is as-yet untested.

So the first $350 billion of the total $700 billion has been used for something completely different from the original pitch and the result of this change of course is doubtful.  Things may be better for the banks but they aren’t better for any of the rest of us.  Bankers are magnanimously foregoing bonuses while regular folks are more and more foregoing salaries.

But enough of this pissing and moaning, what I wonder is whether we should have seen this coming?  And the answer – at least in my case – is “yes.”  Whether you or the guy down the street or Hank Paulson should have seen it coming or not, I should have, and I am sorry for not having brought it to your attention.

The reason I should have known this was going to happen is because of an experience I had about 30 years ago working on a research study for the U.S. Department of Agriculture.

We were looking at how information technology could help agriculture.  Farmers in Kentucky were given access to Department of Agriculture computers to look at all available data in near real time.  They could check weather forecasts, crop yields, prices, look at economic projections – whatever was available to the Secretary of Agriculture was available to those farmers, each equipped with a little Texas Instruments paper terminal connected to the government through a telephone and an acoustic coupler.

This was pre-Internet, remember.

We were able to look at how much each farmer used the system and what they looked for.  We could then relate that to their crop decisions, planting plans, and ultimately trace the flow of information right into their bank accounts at the end of the season.  Or that was the plan.

Here is what we learned.  Some farmers used the system a lot, some very little.  But no matter how much they used the system, none of the farmers seemed to make any farming decisions based on that data.  They just did what they had done the year before.  Yet at the end of the year nearly all the farmers made more money than they had the year before – more money than we expected them to given that they hadn’t seemed to make any operational changes based on the new information.

Was this a placebo effect?  Was just having the data enough to make the famers more successful? That was very unlikely.  So a team flew to Kentucky to do interviews and find out what was up.  Alas, I didn’t go on that trip, but I can share with you what they learned.

The farmers didn’t change their operations because they generally felt they were already optimized.  There wasn’t that much to change without making bold moves like, say, deciding to no longer be a farmer.  But the new information did give them insights in areas where most of them hadn’t been active before.  Most of the farmers were using the Department of Agriculture data to guide them in hedging their crops by trading futures.  They had data better than and earlier than the traders in the pits at the Chicago Merc and used that advantage to make more money for their farms and families.

Why didn’t we think of that?

Jump with me now back to the $700 billion bank bail-out.  The banks were given $350 billion as capital injections aimed at getting them to give more loans.  The money was exactly analogous to the information we gave to the farmers in Kentucky.  But just like those farmers, it was soon obvious to the bankers – some of whom had the money literally FORCED on them – that more lending wasn’t in the best short-term interest of the bank – short-term interest being these days the only kind of interest that apparently matters.

So the money flowed to where it would do the most good in the view of the bankers receiving it, which was generally for bolstering reserves against the Winter they all saw approaching or for financing acquisitions of weaker banks.

We shouldn’t have been surprised it worked out this way.  But had we thought this through for more than a minute, maybe we would have done something else with the money – something more in the interest of the people actually paying the bills.

What a novel idea!

3 Comments » Posted by cringely / What Passes for Wisdom