"You're not stabilizing the market. You're creating more chaos."

It's only taken six years to learn, but the lesson may finally be sinking in: Public policy designed to keep bad borrowers in homes they don't want to pay for has been a disaster. 

The newest mainstream media support for this heretical idea is Adam Geller's excellent AP article on the shadow inventory. In 3,400 words, the piece contains plenty of the unintentional comedy the great mortgage rescue has generated: a neighborhood full of abandoned homes without a single for-sale sign; a swanky Florida block of new two- and three-bedroom homes for which nobody's willing to pony up $100,000; a defaulted borrower who turned up his nose at a chance to sell his house for six times what he paid and now wants your sympathy because he hasn't made a mortgage payment in several years. 

But Geller admirably cuts through the baloney being put out by the FHA and the National Association of Realtors. That includes the biggest lie of all – that "we" can create an orderly housing recovery by concealing the depth of the problem: 

Each month, analysts issue reports detailing the number of homes nationwide in foreclosure or held by banks. The implication is that if we can just find a cure for these loans and homes -- either by matching buyers with houses or helping the borrowers stay put -- the economy will be able to heal at last.

At ground level, though, it's more complicated.

There are many different estimates of the size of the shadow inventory, most of them colored by the desires of the people making the estimates. Geller gets his highest estimate – 8.9 million to 10.4 million homes destined to go back on the market – from Amherst Securities analyst Laurie Goodman, a committed real estate interventionist who advocates trying "one modification plan after another until a plan is successful." (Weirdly, Goodman's own data argue against her modification ideas. She includes "homes with loans that are at least 60 days overdue, have been delinquent in the past and are likely to go into default again." Does she really think, after all those redefaults, there's some point at which loans like that will stop going bad?) At the lower end is CoreLogic, which puts the shadow inventory at 1.6 million homes. 

Geller's anecdotes certainly suggest the higher figure is closer to true. He takes readers on a Jim the Realtor-style tour of cruddy properties and comes up with pro-cyclical arguments from some surprising sources – including robo-signing whistleblower (and winner of a large cash settlement) Lynn Szymoniak, who notes that lenders are not putting their REO properties up for sale; and a former real estate agent turned abandoned-building babysitter who tells the reporter, "I go online and see what they're reporting and it's not the same…It's not going to be better for years…and the reason I say that is the truth is not out yet."

The takeaway here is something Reason readers have been aware of for years but that the establishment media have only recently begun to consider: The real scandal is that lenders are too slow to wrap up foreclosures. And by encouraging lenders to drag out the process, the Obama Administration has taken bad borrowers on a long and costly trip in a circle, instead of letting them go back into the rental market and get on with their lives. The bottom line comes from a West Palm Beach real estate agent named Frank Verna: 

"The truth of the matter is we would have already gotten over it if they just let the properties get out there and get sold," Verna says. "So what are you doing? You're not stabilizing the market. You're creating more chaos."

Comments

[Pip]

Fussed!

[West Texas]

That dude's about to lose his right to call himself a Realtor?.

[Sudden]

Testing my return from the server nightmare of having had my username held for me.

Full gambol lockdown has ensued.

[John]

She still here. But she seems rather impotent. All she can do is throw a little shit like a monkey in a cage. Thus far no gamboling or endless pasting of her five favorite gamboling quotes.

[NAR]

There's been a heck of a lot more policy geared towards making bad lenders whole than in helping bad borrowers continue borrowing.

[Tim Cavanaugh]

True, but at least everybody recognized that was a ripoff even before they passed the TARP. Stupid policies and the poor you have with you always, but massive popular delusions make us all stupider.

[TELLMOFF]

The people getting ripped off are the tax payers. The people who are making out like bandits are the banksters who finance elections.

[Kaptious Kristen]

Gotta love the "But X is worse!!" argument.

[Anonymous Bosch]

So when will the market bottom out? There's some tasty condos going on the market near the city where I work (NOLA) but I don't want to get in too early.

[R C Dean]

Real estate markets are local. You'd need to look at the NOLA (condo?) market to know if this is a good time, or whether you should wait.

Real estate is (very) long-term market, too. I wouldn't worry too much about missing the very last bottom bounce, or getting in a few months too early.

[Sudden]

Agreed with RC. You shouldn't concern yourself so much about if/where the bottom is. Although, if you must know, it probably won't be fully revealed for a couple of years when interest rates inevitably spike. But in the meantime, if you plan on living there for 5 years or more, than it shouldn't be much of a concern.

[West Texas]

Since most people are buying a payment and not a house, prices will go down further when rates go up.

If you can pay cash, wait.

If you are buying a payment yourself, I don't see how mortgage rates can get much lower given that short term rates are effectively at 0% now, and in theory, your payment should now be pretty close to consistent since rates and prices are inversely related.

It's like any asset price: picking the literal actual bottom is more a matter of luck than anything else. Just getting close to the bottom is about as good as you can reasonably hope for with diligence.

[TELLMOFF]

Buying a house has become an investment rather than providing a home to live in.

[Ice Nine]

Not for a long time. Seventy million Boomers heading for retirement and they'll be selling their too-big houses (and, yes, some will then be buying condos). Then they'll start dying off and more houses and condos will go on the market. The number of younger potential buyers coming along after them to soak up the huge inventory is woefully inadequate. In the meantime, interest rates have nowhere to go but up. All of which will continue to depress the housing market. Prices will therefore continue to go down until supply and demand reach parity. This is a 20-25 year process. If that's not enough, if deflation hits, Katie bar the door on prices. Condos, incidentally, always lose value first, go down the most and are the last to recover. Tread lightly.

[Sudden]

Makes you miss the old days when people considered that the only way they'd make equity gains in their homes was by, y'know, actually paying their fucking bill for a decade.

[Lord Humungus]

co-worker is $30k underwater on his mortgage on a condo. He can't find a buyer and would rather use his money on building his next house, so he's going to rent out his condo instead.

On a side note, four years ago I moved into my current neighborhood. At the time there were lots of old people there. They're pretty much all gone now - the worst part was when they went into retirement homes, they sold their houses for whatever $$$ they could get, without any regard to the rest of the neighborhood. Not that I could blame 'em. But that brought in 1 or 2 trashier neighbors, and lowered house values all down the street. Yay me. I'm only a few grand underwater, so it's no big deal to make up the difference - but I wonder how much longer that's going to last.

[R C Dean]

The number of younger potential buyers coming along after them to soak up the huge inventory is woefully inadequate.

Especially when you factor in the school loans they are carrying. For a lot of them, it will push back their first home purchase 10 years or more.

[Scruffy Nerfherder]

There's only one way to sop up the inventory:

WE NEED MORE MEXICANS (or Canadians, but only as a last resort)

[TELLMOFF]

How about burning down most homes and then creating jobs building new homes? We could call them Obama jobs.

[Fluffy]

I think many people are overestimating the potential negative effects of the boomer retirement wave.

Total aggregate housing demand is a function of the number of households nationwide.

As the boomers age into retirement, the number of households continues to increase. Those households have fewer and fewer members on average, due to several different demographic trends, but one household = one domicile, so increases in the number of households is good for real estate in the long run.

[Ice Nine]

The number of US deaths per year roughly equals the number of US births per year. And the birth rate here, though the envy of most of the industrialized world, is projected to decline over the next fifty years. So, I think the estimates of negative impact of Boomer retirement/death are valid.

[robc]

Despite that, US population is still increasing.

Immigration >>> Emmigration

[Invisible Finger]

assuming current trends continue. Obama's deporting more than anyone before him.

[Invisible Finger]

My rule of thumb is if you need a mortgage any longer than 15 years to buy it, it's too early.

[Pound. Head. On. Desk.]

The real scandal is that lenders are too slow to wrap up foreclosures.

A friend voluntarily turned his house back over to the mortgager, filed bankruptcy and divorced his wife (who was the repeat source of financial problems) all at essentially the same time. The divorce is complete, the bankruptcy is several years in the past and the home is still in his name.
The HOA still sends him complaints and the county tax office says he owe taxes. I keep telling him to tell them both "Fine with me. Take it. It's not mine. See? Here's the letter from when I gave it back to the bank." He won't do it. Yet.

[joshua corning]

Don't pay the taxes and let it go up for tax sale...then have your kid/sibling/parent buy it at tax auction for pennies on the dollar.

This clears the title and any money that does not go to paying the taxes is payed to the title holder...ie not the bank.

Banks are often stupid enough not to pay the taxes and let this happen.

Also this is what happens in my state anyway...other states may have different laws.

[shrike]

A great deal of the delay in the natural foreclosure process is self-inflicted.

The banks/servicers are screwing up the legal work with illegitimate robo-signings.

[Sudden]

That's actually not nearly as prevalent as most believe. The biggest factor as to why the banks have been slow in this process is because they don't want to list all these REOs all at once for fear of devaluing each underlying asset further. They're taking a slow and prolonged approach under the hopes that the assets will remain at a certain price level by not flooding the market with inventory.

[R C Dean]

Aside from robo-signing, there are states that require all transfers of mortgages to be documented with wet-ink signatures. There's a real question about whether any of the clearinghouse transfers that set up the MBS's meet those requirements. If not, then the status of the mortgage (and the title) in those states is one unholy mess.

[Brutus]

We need to elect some stupid people to office. All these people who think they're smarter than the markets keep fucking things up.

[Soc Indv Sparky]

Nice alt-text fail on the sinking house. Needs something about how the house is literally underwater.

[Fist of Etiquette]

Is that a Chris Hansen video included in this post?

"Why don't you take a seat over there."

[Todd]

Fair or not, I think the biggest problem with the housing market is psychology. No one wants to admit that they're screwed, and no amount of government policy, one way or another, is going to fix that. Granted the government isn't exactly helping, but a non-trivial amount of the madness will happen anyway. Until and unless we grieve the loss of money in the housing market, we're stuck.

Oh, and there's the whole issue of judicial foreclosures which isn't going to be fixed easily no matter what, but that's a state-specific issue.

[Invisible Finger]

Is that Fatty Arbuckle's house?

[joshua corning]

It should be noted that banks hold loans on lots of property that at least on paper is not underwater.

They unleash a bunch of foreclosures then hold a fire sale on them the value of the property of the good loans will drop.

I am not saying what the banks are doing is a good thing...only they are rationally forestalling lower property values which is in their own interests.

[han]

You didn't hate the state, per se, but believed a mostly free market provided the best chance

[han]

You didn't hate the state, per se, but believed a mostly free market provided the best chance

[Dr. Frankenstein]

You know if you say Mary Stack three times into an internet she comes back.

[John]

But you seem to be pretty impotent Mary. Why aren't you shitting on every thread and posting your stock nonsense? Come on I know you are just dying to post some more retarded Jason Godesky stuff.

And why won't you talk about your life? We are so curious to hear about it.

[Suthenboy]

I keep asking and get no answer. What is Mary's motive for such hatred? Is she some one's ex trying to get even? Why the hatred and obsession?

[Soc Indv Sparky]

I think it's this.