United Liberty

John Stossel explains why that politicians may be too optimistic about the economy:

Obama advisor Larry Summers told my former ABC colleagues that “everyone agrees the recession is over.”

It’s possible. But I doubt it.

Sure, the vast Bush/Obama spending blew some air back into the housing bubble. But politicians’ delusion that they can control the economy does more harm than good. Home prices that by now might have found a sound floor — a foundation for growth — instead float on a sea of subsidies.

The March 15 issue of Forbes summarizes the Fed’s house of cards:

The FHA has a $45 billion cushion to cover $757 billion in home-loan guarantees. This is just one part of the federal government’s investment in housing. Another is the bailout of Fannie Mae and Freddie Mac… a third is the Federal Reserve’s purchase of mortgage securities ($1.25 trillion).

How much will the FHA cost taxpayers? Officially, nothing. FHA officers have told Congress they don’t believe they’ll need a bailout. (Fannie and Freddie said the same.)

CEO Franklin Raines promised, “it is private capital that is at risk, not the taxpayer’s…. We do not receive a nickel of federal money.”

Twin stories today in The Washington Post and The New York Times detail two different reasons that the foreclosure crisis, and most likely the economic troubles we’ve had for more than a year now, is far from over.

First, the Post reports on an expected coming wave coming wave of defaults by homeowners with so-called option adjustable rate mortgages:

The housing market faces the prospect of a new round of foreclosures as hundreds of thousands of risky home loans known as option adjustable-rate mortgages reset to significantly higher payments that could force borrowers to fall behind, according to a report released Tuesday by Fitch Ratings.

About 70 percent of the $189 billion in outstanding option ARMs will reset by 2011, the report said, which would be another setback to a teetering housing market still struggling to recover from the mortgage meltdown that precipitated the financial crisis.

Option ARMs make up only 1.3 percent of percent of outstanding mortgages and were used by a far smaller segment of the population than subprime mortgages, according to First American CoreLogic, so the fallout from the resets should not be as devastating. But the unraveling of the option ARMs could be felt for years.

“It does tell you there’s going to be continued front-page news about high levels of foreclosures as these loans continue to struggle,” said Paul Miller, an analyst at FBR Capital Markets.

Steven Pearlstein talks about the impending commercial real estate crisis:

Commercial property values have fallen an average of 35 percent, with further declines expected as the recession drives more tenants out of business or puts them behind in their rent payments. The process of securitizing new loans has ground to a complete halt, and the limited financing that’s available now comes from banks and insurance companies on much tougher terms. Loans now are typically for no more than 60 percent of a property’s current value, with an interest rate four percentage points above the Treasury rate. Borrowers must also repay principal, which is like adding another two percentage points to an interest-only loan.

You can see evidence of the impact of that all around, even here in Northern Virginia which has been shielded from some of the worst effects of the recession Multi-million dollar office buildings that were started while the market was still booming are completed and more than half empty. Strip malls have more empty spaces than they have in the past, and strip mall projects that were supposed to have been completed by Spring 2009 haven’t seen so much as a tree knocked down on the site they were to be built on.

But the impact of the commercial real estate crisis go far beyond a few empty office buildings or not enough Chinese restaurants:

[L]ocal and regional banks have so many souring commercial real estate loans that they have begun to fail at a rate not seen since … well, you know.

(…)

Then there’s the matter of half a trillion dollars in securitized loans that were made during the bubble and will be coming due over the next few years. These will need to be refinanced. Unless the securitization machine can be cranked up again, there’s simply not enough lending capacity at the banks and insurance companies to fill the gap. Moreover, there can be no refinancing until the current owners of the buildings come up with billions of dollars in fresh equity to make up for what has already been lost.

(…)

In the case of buildings that still generate rents sufficient to pay the monthly interest charges, the lenders — that is the holders of the mortgage-backed securities — will probably agree to extend the loan for a few years in the hope that property values quickly rebound and the market for securitized loans revives. “Amend, extend and pretend,” as my friend Arthur, the real estate maven, put it.

In the case of projects with rising vacancies and falling rents, however, the more likely scenario is that the lenders would foreclose on the property and sell it for whatever they can get. The problem is that if too many buildings are dumped on the market at the same time, it would trigger a self-reinforcing downward cycle that could depress property values even further, leading to more foreclosures and causing even more banks to fail. That’s what happened back in the savings and loan crisis.

Sound familiar ?

This ain’t over yet, by any means.

An article in the Sunday, March 15 edition of The Birmingham News, entitled “Lots crumble and mud flows”, discusses some of the complications resulting from the plethora of unfinished housing projects that have been put on hold in the current economic crisis. The problems include excessive runoff and mud flows, crumbling roads without a final seal coat, empty houses in various stages of construction, construction debris posing safety hazards, and other various forms of pollution. Curiously, nowhere in the article does its author acknowledge that most of these housing construction projects are the result of a housing bubble.

Barron’s has an article by Alan Abelson that expresses my sentiments better than I could today. Here’s the crux:

House prices, in our bloodshot view, have another 20% or so to fall before hitting bottom and, at the earliest, we’re talking sometime next year. And, possibly more important, a meaningful brightening of the current, profoundly bleak jobs picture, isn’t in the cards for certainly as long, if not longer.

A sad assessment of affairs, with which I agree.

I have had enough. Every story with even a hint of financial or economic news in the last six months has placed blame for the mortgage industry collapse on the propensity of mortgage companies to seek out “risky” borrowers to which they could loan money for a home. I must note here the reason for a business’s existence. Despite all of the “feel good” corporate speak espoused by the public relations department about the good, service, technology or information and how it benefits the world, their end goal is to return a positive gain for the owners. Without the profit motive, business would cease to exist.

So, in a free market, why would some of the biggest names in the mortgage industry, like Countrywide, Bank of America, and Wells Fargo, purposely seek out the highest risk borrowers to loan money to? Quite simply, they would not. Specialty finance companies with strong collection and repossession teams are better suited for these loans.