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Denniger On The Cost Of Housing

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Gee, what have I been saying now since this crisis began?

Some of them, from the Mortgage Brokers (so they say; all anonymous) are particularly amusing, and demand a response.

Let's look at how we got here guys.

Home values have appreciated at rates that dramatically exceed individual's growth in salaries.

Of course home value expansion significantly beyond the rate of inflation must eventually cause people to be unable to afford houses. The "why" on this isn't particularly difficult to figure out, but for those who were educated in Government Schools, let me lay it out for you.

Dateline: April 1st, 2007.

Working on three years ago.

Indeed, if you want to look at every article I've written referencing "house", "prices" and "contract" (as in "house prices will and/or must contract") here's the link - have fun with all 185 entries.

When you bang the drum long enough someone eventually removes the cotton from their ears to try to figure out what in the Sam Hell all that noise is about. It appears the NY Times has finally done so.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Oh, it only took you damn near three years to print this in the paper, did it? How come?

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.


Look folks, this isn't complicated. You can afford to spend roughly 30% of your pre-tax income on housing. A bit more, a bit less, but roughly that much.

So if you have a $50,000 income in your household you can afford to buy a $150,000 house.

But you can't afford to buy or remain in a $300,000 house no matter what you, the bank, President Obama or the tooth fairy wish to promise you.

The banks know this. They've known this since the bubble began, which is why they did their level best to package up all this crap paper and sell it to other people - so they would explode, not the bank.

But at some point they saw all the "moolah" these "investors" were making (for a while) and started to eat their own cooking. And boy, did they gorge on it in the most dangerous and outrageous fashion - they went hot and heavy into second lines (HELOCs and similar loans) which are the most dangerous of all, since they recover exactly NOTHING in a foreclosure until and unless the first mortgage is entirely satisfied.

HAMP and all the previous incantations are an outrageous and pernicious scam. They exist for one and only one reason - to permit the continuation of massive and pervasive accounting fictions by banks and other institutions that would otherwise be rendered instantaneously insolvent.

Let's just take a couple of examples - first, Citibank.

Their most-recent 10-Q shows a large concentration of HELOC and other Second-Lien mortgages in California. A very significant percentage of the homes in that state are worth less than the first mortgage balance. As such, should the people who own those homes stop paying, a huge percentage of the $14.6 billion that Citibank holds in second liens in California will be worth exactly nothing.

Now let's look at Wells Fargo (WFC):

Wells has nearly $35 billion outstanding in HELOCs in California and another $12 billion in Florida - both states where huge percentages of homes are "underwater" on their first mortgages. Again, the problem is the same - should the owners of those homes stop paying and the home be worth less at resale than the first mortgage balance the outstanding HELOC is worth a LITERAL ZERO.

Let's put this in perspective for Wells - in that same 10Q they claim $53 billion in "Tier 1 Common Equity", a 5.18% ratio. The outstanding balance on these HELOCs in bubble states is nearly enough to DESTROY the entirety of their Tier 1 Common Equity and should some fairly-conservative assumptions be applied - that is, that a quarter of these loans will ultimately default and be entirely unrecoverable due to the first lien being underwater this would be sufficient to impair their "well capitalized" currently-claimed position.

The other "major" banks such as Bank of America have a similar picture. Indeed, you can go over to http://edgar.sec.gov and check out any of the publicly-traded banks for their HELOC and similar second-lien exposure.

This is the reason for "HAMP" and all of the other silliness. It is not to "protect" homeowners, it is to prevent banks from having to recognize punishing losses that, in point of fact, they should have to recognize due to their own idiotic lending practices.

Treasury knows this - that their entire "TARP" recapitalization and "stress test" game was nothing other than a sham intended to pump confidence so that these institutions could issue stock into the market and try to "rebuild" their balance sheets.

His rant continues at the link.

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