Credit Card Brains

It is inevitable that we would join the mirth all over the rest of the toobz regarding The Tanned One’s unfortunate use of the “reply” rather than “forward” button in the process of registering his “disgust” with a borrower who emailed some 20 Countrywide executives (including the press office) with a request for a mortgage modification based on a form letter he found on the net. Moe Bedard, whose advice on approaching his servicer this borrower faithfully followed, wasted not a moment in “reaching out to the media” with this story, managing to land it in the LAT yesterday.

As a PR stunt, there’s not much you can criticize here about Mr. Bailey’s letter or Moe’s media-savvy frothing in response. Angelo just handed these folks a dose of self-righteousness that will keep them stoned for weeks. The problem here, of course, is that if you are a borrower in distress trying to work something out with your servicer–Countrywide or anyone else–your primary need is not sympathy from the senior execs or attention from the press office or a flap in the newspaper. Your primary need is to reach a person in default servicing who can do something about your problem. This person needs to understand very clearly what your problem is and what can, practically, be done about it. At the risk, therefore, of sounding like a shill for Countrywide (this is a blog in-joke; every time I write something insufficiently hostile to CFC I get accused of being an “industry shill”), I offer to use what insight I have into the minds of loss mitigation specialists who deal with these things to offer some advice on how to write a letter that runs much less of a risk of being dismissed as just another sympathy-seeking form-letter.

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First of all, your goal is not to convince the servicer that you deserve a loan modification. Some people can’t quite get a handle on this point, but you need to. Your goal is to convince the servicer that what you are asking for–in this case, a modification, although it could be a deed-in-lieu or a short sale or just a temporary repayment plan–is 1) necessary given your financial situation and 2) going to work. The biggest problem I have with Mr. Bailey’s letter is that it does not ask for anything specific and it does not help me see why a modification would actually work in his case. In fact, it makes the mistake of suggesting that a modification would only allow Mr. Bailey’s shaky income situation to continue or get worse. That being the case, it doesn’t really matter if the person reading your letter feels sympathy for you or believes that the situation was truly beyond your control.

Let’s start at the beginning:

To Whom It May Concern:

I am writing this letter to explain my unfortunate set of circumstances that have caused me to become delinquent on my mortgage. I have done everything in my power to make ends meet but unfortunately I have fallen short and would like you to consider working with me to modify my loan. My number one goal is to keep my home that I have lived in for sixteen years, remodeled with my own sweat equity and I would really appreciate the opportunity to do that. My home is not large or in an upscale neighborhood, it is a “shotgun” bungalow style of only 900 sq. ft. built in 1921. I moved into this home in May of 1992…this was the same year I got clean and sober from drugs and alcohol, and have been ever since, this home means the world to me.

The first sentence of this letter encapsulates what’s wrong with it: it is going to be about “explaining” “unfortunate circumstances.” The fact is that every letter every Loss Mit specialist in the universe gets from borrowers is about “unfortunate circumstances.” It is quite rare to get a letter from someone that says “Look, I’m a selfish irresponsible pig, but I want more from you than I already have.” Trust me on this. Everyone who talks to the Loss Mit department has “unfortunate circumstances.” That is what the Loss Mit department is designed to deal with.

It is very hard for people in financial distress not to focus on their own misery, or to imagine that the “uniqueness” of their misery is not really the point. You need to get beyond that. You may think it is “unfair” that your story sounds more or less like everyone else’s. Life is unfair. Servicers do not modify loans because they feel sorry for you. They modify loans because you have convinced them that you will be able to make payments that way.

A much better first paragraph would be: “I am writing to request that you consider a modification of my delinquent mortgage loan so that I can continue to make payments. I have tried to analyze my own situation objectively, and I believe that a monthly mortgage payment of no more than $xxx would allow to me to keep current on my mortgage and my other necessary obligations. I am a long-time homeowner and am committed to staying in my home if we can work out terms that are practical for both of us.”

Starting out by addressing head-on what payment you need in order for this to work accomplishes a couple of things: it shows that you are, indeed, thinking practically about your situation. It gives the Loss Mit people a clearer idea of what you want. And it (hopefully) sets a tone that keeps you from degenerating into irrelevancy or sympathy ploys. No one needs to know that you had a booze or drug problem prior to 1992. Certainly no one needs this hint that your property is old, obsolete, and probably filled with DIY “remodeling.” Not given what we see in the rest of the letter.

The main reason that caused me to have a hardship and to be late is my misunderstanding of the original loan. I was told that after the first year of payments, I would be able to refinance to a better fixed rate- then the bottom fell out of the industry. My payments for that first year were on time. I also lost my second income due to physical conditions in a very physically demanding industry.

Where to start with this? It simply sounds too vague to be believable, even if you think a Loss Mit specialist will be moved to modify your loan because you were told you could refinance. If you feel you need to include such information, I’d try this: “I refinanced my home in [month of year], and I made the mistake of relying on the broker’s oral assurance that I could refinance it in a year to lower the payments. After making the first year’s payments on time, I contacted my original broker again to apply for a refinance. I was told that I did not qualify because [specific reason given by broker]. I inquired about refinance opportunities with two other companies, both of whom told me [the truth goes here]. It appears that the only way I can lower my payments to a tolerable level is to request a modification.”

This would show that you did indeed attempt to refinance, that you paid attention to what you were told the second time, and that you have some understanding of what your options are. The original letter simply blames everything on the loan officer who wrote the original loan and sounds a little too pat–”the bottom fell out of the industry” does indeed sound like something you read on the Internet. Once again, this writer is asking for sympathy, not presenting himself as someone who has made a good-faith effort to rectify the problem himself.

As far as “I also lost my second income due to physical conditions in a very physically demanding industry,” you’re much better off being factual and specific there–especially since, if you do get a Loss Mit specialist assigned to your case, you might be asked for documentation of income in the last two years. A much better approach (assuming, of course, it’s true) would be: “I took a second job as a part-time bricklayer in [month and year] to help make ends meet, but I suffered a back injury in [month and year] that meant I could no longer do physically-demanding work. There are no second jobs available to me now that pay more than minimum wage, which is not enough for me to meet all my current obligations.” If you got fired, you should either admit it frankly or leave the whole detail out. If you were laid off, say so. “Lost my second income” quite honestly suggests the worst to those of us who read letters like this all the time.

As my ARM payments increased, I have had less money to put towards making my business (income) work. I had been unable to generate business because all of my funds were going towards attempting to make my loan payments. This, coupled with major repairs to my vehicle (93 jeep) and paying out of pocket for medical and dental issues (I have no ins.) caused me to fall further and further behind, destroying my credit rating.

Now, it’s to the point where I cannot afford to pay what is owed to Countrywide. It is my full intention to pay what I owe. But at this time I have exhausted all of my income and resources so I am turning to you for help.

I feel that a loan modification would benefit us both. With that, and knowing my home will not be foreclosed, I would be able to obtain a roommate in order to generate more income, have the funds to generate more business and have a good working relationship with Countrywide. I would appreciate if you can work with me to lower my delinquent amount owed and payment so I can keep my home and also afford to make amends with your firm.

Here’s where the wheels really fall off this letter. I need to know what kind of business you are in, and why it requires you to spend money on it, and what kind of money we’re talking about. As written, this letter suggests that you need your mortgage payment reduced so that the monthly cash-flow can be “invested” in a business that doesn’t seem very successful. Why does Mr. Bailey think that the lender would conclude, in this case, that a modification would work? And this is, actually, the point at which one wonders what happened to the proceeds of Mr. Bailey’s latest refinance. Apparently it didn’t go into home improvements; did it go into a failing business? That does happen a lot. Will it help to, in essence, do it again by means of a modification?

It is certainly OK to mention unexpected expenses that have arisen lately–like the car repair and the medical bills–but I would caution anyone about claiming that that “destroyed your credit rating.” The first thing a servicer is going to do is pull your credit report. If you can supply the car repair invoice and medical bills (or cancelled checks), showing that these expenses were incurred just before delinquencies began appearing on your credit report, you may indeed help the servicer see that the issue here is unforeseen expenses. But you need to be honest with yourself: if your credit history was a mess before those expenses popped up–which is likely the case for Mr. Bailey, I fear–then you don’t help your case by writing something like this. The person reading your letter can see your credit report.

Finally, suggesting that you would take in a boarder if you got the modification won’t help you much if you need boarder income to qualify for the modified payment. And how much would a boarder pay? How much of a difference would it make?

The big problem with this letter is that Mr. Bailey doesn’t simply present a budget and a proposal. The letter needs to say something like this: “My current income is $xxx per month. My monthly expenses [itemized] are $xxx per month. I believe I can add $xxx per month to income by taking in a boarder. That means that I can continue to pay my mortgage if we can reduce the monthly payment to $xxx.” The bottom line is, if you cannot write something like that because you cannot come up with a set of numbers that work (and can be verified), you really have no business asking for a modification. If you can come up with reasonable numbers that work, it only helps your case with the servicer to come across as someone who has taken a clear view of the monthly budget and can suggest a concrete plan.

Finally, if you are going to email or fax a letter like this, you need to offer to provide whatever documentation the servicer needs in a follow-up letter. A simple way to do this: “Please let me know what financial documents you will need from me, and where to address them so that they come to the attention of the right person.” Quite honestly, the offer to work cooperatively and promptly with the servicer in a specific way is worth any number of rhetorical flourishes borrowed from some Internet form letter.

There are some unfortunate comments over on Moe’s site about this letter, the burden of wisdom of which is “not everyone is a college grad or trained writer, you know, so people use form letters and shouldn’t be criticized for it.” Let me tell you that the biggest problem Loss Mit folks tend to have with borrower letters is not that they don’t have the old college polish. The biggest problem is that “explanations” for delinquencies are not actually the same thing as proposals for a successful workout. Nobody cares about rhetorical flourishes; Mr. Bailey’s modification will stand or fall on the question of whether it is likely to keep him out of foreclosure, and that stands or falls on whether he can afford the modified payments out of his current income.

To be just as honest as I can, I don’t think I would have used the term “disgusting” for Mr. Bailey’s letter, as Angelo did. However, the term “bullshit” did pop into my underwriter’s mind as I read it. That was in part because of the “form letter” quality of some of it; it was also because Mr. Bailey’s discussion of his income situation is so muddled. I write this to suggest to Mr. Bailey, and anyone else contemplating sending such a letter, that this is a likely response from servicing people. I am not particularly defending it, you know. I was in fact trained as an underwriter years ago and we were in fact trained to not leap to conclusions and use the term “bullshit” loosely. (And to “forward,” not “reply,” but that’s another matter.) So it’s possibly quite “unfair” that I think Mr. Bailey’s letter is unlikely to cut any mustard on its own (although now that it got Angelo in the papers again, he might get a more thorough hearing than his letter alone would have gotten).

But most people can’t count on the CEO screwing up and winning the battle in the pages of the LAT; most people really really need to get somewhere with the actual servicing employees we have, not the ideal ones who never react badly to borrower pleas for sympathy. We are what we are. I suggest writing in your own voice, about the details of your monthly budget, sticking to the relevant facts, and trying as hard as you can to stifle the impulse to blame your problems on everyone but yourself. That doesn’t mean you have to blame yourself; it means we’re past “blame” at this point. You’re in trouble; you need to work something out; you need to get on with a practical request. You are a flawed person writing to an undoubtedly flawed person. If you don’t want the Loss Mit specialist to “fill in the blanks” in your letter from his or her own possibly cynical experience with other letters of this type, don’t leave those blanks in it. That’s the best advice I can give you.

From OFHEO: Decline in House Prices Accelerates in First Quarter

U.S. home prices fell in the first quarter of 2008 according to OFHEO’s seasonally-adjusted purchase-only house price index. The index, which is based on data from home sales, was 1.7 percent lower on a seasonally-adjusted basis in the first quarter than in the fourth quarter of 2007. This decline exceeded the 1.4 percent price decline between the third and fourth quarters of 2007 and is the largest quarterly price decline on record. Over the past year, prices fell 3.1 percent between the first quarter of 2007 and the first quarter of 2008. This is the largest decline in the purchase only index’s 17-year history.

Click on graph for larger image.

This graph, from OFHEO, shows the four quarter and quarterly price changes for the Purchase Only Index.

There are significant differences between the OFHEO index and the Case-Shiller index (see House Prices: Comparing OFHEO vs. Case-Shiller), but it’s important to note that the Fed uses the OFHEO index to calculate changes in household assets - and this means the Flow of Funds report in Q1 will show a significant decline in the value of household real estate (no surprise, but the number will be large).

Last night I posted a video from Jim the Realtor showing an area of Oceanside, CA with numerous REOs. Jim has an REO listing in the area and he sent me the details.

260 Securidad, Oceanside, California
2 Bedroom 1 Bath, 820 sq ft
The house sold for $318,000 in July 2004, and the owner refinanced a year later for a total of $375,000 in loans.

The house is now listed (REO) at $127,900, and there are several bidders (investors and owner-occupant buyers) and Jim believes the property will sell for between $140,000 and $150,000. Note: the house is in good condition (for what it is) and appears to be move-in ready.

This is about 55% off the previous sales price and even more off the apparent appraised value when the homeowner refinanced.

This brings up a key point: house price changes vary widely by area, not just by state, but even within cities.

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Click on graph for larger image.

This graph shows the Case-Shiller Home Price Index for San Diego. Prices are off by about 24% from the peak in 2005 according to the Case-Shiller index, but the Oceanside REO is off by about 55%.

Obviously areas with numerous foreclosures have seen larger price declines than areas with fewer foreclosures.

The following map of Denver, from an article by Luke Mullins at U.S. News and World Report, illustrates this point. Some areas of Denver are being devastated by foreclosures, others are mostly untouched.

From the USA Today: Mortgage defaults force Denver exodus

Foreclosures are ripping through the rows of new homes in the flatlands where Denver turns to prairie. Every week, 10 more families here need to find someplace else to live.
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On some blocks, as many as one-third of the residents have lost their homes, making this one of the worst hotspots in a city that was among the first to feel the pinch of the foreclosure crisis. Many houses here remain empty, bank lockboxes on the front doors.

But prices in the areas untouched by foreclosures are actually flat, or in some cases have even increased slightly.

What does this mean for future prices? First, some areas are probably close to a price bottom. Looking back at the REO in Oceanside, we can see that this property is now attractive to investors. According to Jim, this property will rent for between $1000 to $1200 per month. Here is a simple cap rate calculation:

Cost: $140,000
Rent: $12,000 to $14,400 per year
Expenses:
Taxes (1% in California): $1,400 (note: no Mello Roos or HOA fees)
Vacancy: 5% or $600 to $720 depending on rent.
Maintenance and Insurance: $1,400 per year.

This yields a cap rate of between 6.1% and 7.8% depending on the rent. Investors provide a floor for house prices, and these are attractive cap rates for some small investors.

But what about prices for areas with fewer foreclosures? These prices are still sticky, but will continue to decline. From Peter Hong at the LA Times yesterday: At the luxury end, home prices are falling

“You can’t have one market hugely cheaper than another forever,” said UC Berkeley professor Thomas Davidoff, who specializes in real estate.

Davidoff and others say the time lag stems from the fact that affluent homeowners generally don’t have to sell under duress, unlike struggling borrowers facing escalating mortgage payments. But wealthy homeowners are increasingly finding out that if they want to sell their homes, they will need to discount the prices.

In the end, the housing market is linked as shown by this graphic.

Not all chain reactions start with a first time buyer using a subprime loan, but the loss of a large number of first time buyers will eventually impact the entire chain.

Over time the equilibrium between different price ranges will return, but the price dynamics will be different. Areas with a large number of REOs have seen much faster price declines - and are probably closer to the price bottom. Areas with fewer REOs will exhibit “sticky prices” and the prices will probably decline for some time.

From the WSJ: Fed Signals Rate Cuts Are Done, Lowers Growth Forecast for 2008

The Federal Reserve on Wednesday appeared to shut the door to the possibility of further interest rate cuts, saying in April meeting minutes that the last rate cut was a “close call,” and that many officials think future reductions are unlikely even if the economy contracts.
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The Fed also released updated quarterly economic forecasts with the April minutes. The central tendency of officials’ forecasts is for gross domestic product to rise between just 0.3% and 1.2% this year, down from the last forecast of growth between 1.3% to 2%. Officials also raised their forecasts for the unemployment rate and both headline and core inflation as measured by the price index for personal consumption expenditures.

Here are the minutes.

Slower growth, more inflation, no rate cuts …

From DataQuick: Bay Area home sales edge up in April

Bay Area home sales edged up from a seven-month run of record lows last month, indicating that mortgage availability is improving and that an increasing number of fence sitters have decided they like today’s lower prices, a real estate information service reported.

A total of 6,310 new and resale houses and condos sold in the nine- county Bay Area in April. That was up 28.8 percent from 4,898 in March, and down 15.3 percent from 7,447 for April 2007, DataQuick Information Systems reported.

The month-to-month jump was the strongest for any March/April in DataQuick’s statistics, which go back to 1988. Starting last September and through March, each calendar month was the slowest on record. Last month was the slowest April since 1995 when 5,636 homes were sold.

“The big issue here is that mortgages are becoming obtainable, which will reduce the pile of stacked up pending escrows. It’s unclear if the financing is because of policy changes or because mortgage investors are getting more interested in securities. Probably both,” said Marshall Prentice, DataQuick president.

The median price paid for a Bay Area home was $518,000 last month, down 3.4 percent from $536,000 in March, and down 21.4 percent from $659,000 in April last year. Last month’s median was 22.1 percent lower than the peak median of $665,000 reached in June and July last year.
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Foreclosure property resales accounted for 25.7 percent of last month’s Bay Area market. The percentage is higher in outlying areas that absorbed spillover activity during the frenzy. While foreclosure properties were 5.9 percent of San Francisco’s resale market and 8.9 percent of Marin’s resale market last month, they were 44.7 percent in Contra Costa and 54.2 percent in Solano.
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Foreclosure activity is at record levels …

I confess, I splurged. I bought a Dyson vacuum cleaner. I was totally reluctant at first; after all, at more than $400, it’s my most expensive purchase of the year. But after my first apartment sweep (and five canisters of horrifying gunk pulled off my floor), I absolutely love it. It’s worth every single penny. Vacuuming could very well be my new favorite sport. Which is weird for a girl who spends most of her time away from home…

The Cost (or, How I Paid for this Beast)
As you can probably guess, I didn’t pay the whole $439 by my lonesome. B and I agreed to split the purchase, which was nice since he could probably live with another $40 vacuum that doesn’t pick up anything (eh, guys). On top of his portion, I used a $50 gift card (cha-ching!). With that help, I was able to buy the Dyson outright (not on credit). PS. Love the feeling of ownership, rather than credit card debt!

At the Store
As for my purchase decision, I was between two vacuums - the Kenmore progressive, ranked #1 by Consumer Reports and priced at $375, and the Dyson Animal DC17, which received rave consumer reviews here (gracias), from my brother - an inventory manager at Best Buy - and on many Web sites, priced at $550.

I visited several retailers online, including Amazon, Best Buy and Sears to scope out pricing and reviews. I ended up at Sears, determined to buy the Kenmore model (though deep down I wanted the Dyson).

While browsing the aisle, B and I discovered the Kenmore needed new filters every ten months; we added up the cost of filters over five years and found they added an additional $210 to the price of the vacuum. That brought the total five-year cost of the Kenmore model to $585 (plus tax, of course). I was bummed, but at that point, the sales lady stepped in and told me she had a Dyson on close-out pricing… and so the magic began.

Sears had a Dyson model with attachments (the Sears-exclusive fully equipped DC-14) for $439 - it requires no additional filters or extra parts, and comes with a 5-year warranty. She demonstrated some nifty features, like the crazy long hose and ghost-busters extendo-arm, and then had me vacuum some dirt off the floor. I kid you not, at this point, I was in the center of my very own “as seen on TV” commercial. Sweet.

At that point I was sold, though still a little skeptical of how great a vacuum could really be. I mean, I already vacuum my floors every week. Would there really be that much of a difference? We packed up the cool-looking Dyson into the Eclipse and headed off into the sunset, with just a twinge of buyers’ remorse.

The Proof is in the Pudding (THIS THING ROCKS!!!!)
OK, you’re bored, I know. But I have to tell you, this vacuum is freakin’ amazing. I pulled what looked like an entire additional cat off the floor. It was like I never had vacuumed before; like there was a science project happening in my living room. Poor B was trying to study and I just kept shoving the full canister in his face shouting, “Look! Look at this gunk! Can you believe it? Can you believe we’re living in this???”

My carpets are clean, less smelly and less full of cat hair. If you are a pet owner, I would definitely recommend getting the Dyson, especially if you have frequent visitors with allergies (I do - my mom can’t visit for more than a half-hour at a time; though I’m hoping she can get in a full hour now). Sure, there are probably more pressing things to spend your money on, but if you’re living in an apartment, and your vacuum breaks and it’s the only appliance you are actually responsible for and you have the money set aside (wow, that’s a lot of “ifs”), then I would splurge.

I think it’s safe to say I’m obsessed. (You should have seen me cleaning the thing after I used it; it was like my dad cleaning, waxing and polishing a car.) If you ever want to come over and watch me vacuum, you totally can. Maybe the next time I sweep, I’ll take a picture of the full canister to share so you can share my obsession.

Until then, what new items are you randomly obsessed with? What’s the best big purchase you’ve ever made? Ever had a bad case of buyers’ remorse? Enlighten us!

Gather ’round, children, because Tanta is about to engage in a curiously hard-headed look at an editorial by a famous economist that demands, in every sincere and decent sentence, our kindness and compassion instead. This is blogging at its finest: nobody should get away un-pissed-off about something. And on a Sunday, too.

It’s also long blogging at its finest. You knew I’d have to try to figure out how to use the Read More thingy eventually . . .

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The editorial in question is by Robert J. Shiller, who is a professor of economics and finance and famous analyst of speculative bubbles. A specialist in behavioral economics, in the application of psychology to understanding financial markets. A co-founder of Case Shiller Weiss, that house price index we talk about a lot. His editorial, “The Scars of Losing a Home,” speaks not of lofty academic economic concepts but of human sympathy, of things that are “really important.” With references from famous academic psychologists. I haven’t taken this kind of a tiger by the tail since I went after Austan Goolsbee last year.

Yes, it was only a year ago that the distinguished Dr. Goolsbee wrote this on the same editorial page:

And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.

When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.

For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

I actually think Goolsbee’s piece was the high-water-mark of the “subprime helps the poor” talking point. You certainly don’t hear much about that these days. Less than two months after Dr. Goolsbee’s earnest op-ed, we got an interview in the very same NYT with one Bill Dallas, CEO of the famously defunct Ownit Mortgage, effusively testifying to his own burning desire to help out the unfortunate in a way that finally put paid to the respectability of that line (”‘I am passionate about the normal person owning a home,’ said Mr. Dallas, who is also chairman of the Fox Sports Grill restaurant chain and manages the business interests of the Olsen twins. ‘I think owning a home solves all their problems.’”) Plus by now we’ve got some numbers on the 2007 mortgage vintage, the one that Dr. Goolsbee was afraid wasn’t going to ever materialize if we tightened up lending standards too much. A year ago we were looking at a 13% subprime ARM delinquency rate. Per Moody’s (no link) the Q4 07 subprime ARM delinquencies were running 20.02%. And that is not, you know, “just” another 7%. By now, those delinquent borrowers in Goolsbee’s 13% have probably mostly been foreclosed upon and are off the books. The 20% or so who are now delinquent were either part of the 87% that Goolsbee thought were “successful homeowners” last year, or else they’re those lucky duckies who bought homes after the publication date of Goolsbee’s plea that we not tighten standards too much.

Of course Shiller wasn’t exactly spending his time a year ago defending the subprime mortgage industry on the grounds that it put poor and minority people into ever-so-humble homes with balloons attached. I seem to recall him mostly arguing that homebuyers were engaged in a speculative mania. In a June 2007 interview:

Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it’ll go up. It’s the easiest way to get rich.

At the time, that kind of statement struck some of us, at least, as not possibly the entire story either, but in any event a useful corrective to the saccharine silliness of the “Ownership Society” and Bill Dallas solving everyone’s problems by letting them put Roots in a Community (for only five points in YSP).

So I hope I can be just a tad startled by the New Shiller:

Homeownership is thus an extension of self; if one owns a part of a country, one tends to feel at one with that country. Policy makers around the world have long known that, and hence have supported the growth of homeownership.

MAYBE that’s why President Bush’s “Ownership Society” theme had such resonance in his 2004 re-election campaign. People instinctively understand that homeownership conveys good feelings about belonging in our society, and that such feelings matter enormously, not only to our economic success but also to the pleasure we can take in it.

So it’s no longer irrational exuberance or plain old speculating; it’s now an instinctive affirmation of some eternal verity of the human psyche? The ultimate patriotism: the definition of self so tied up in ownership of a slice of the motherland that to rent becomes not only psychologically dangerous–these people without selves can’t be up to anything good–but politically dangerous as well? Is it possible that Shiller can mean what he is writing here?

If you just scanned the first few paragraphs of Shiller’s op-ed you might come away with the impression of a sincere but somewhat hackneyed plea for us all to have a bit of sympathy for the foreclosed among us, foreclosure not in anyone’s experience being a walk in the park. Fair enough. It being Sunday in America, I suspect millions of us are being treated to exhortations to take a kinder view of the unfortunate than we often do; we need those exhortations; we are often lacking in sympathy. Hands up all who disagree.

But you keep reading and you find Shiller trying to explain the “trauma” of foreclosure. And that’s where this really gets weird:

Now, let’s take the other perspective — and examine some arguments against the stern view. They have to do with the psychological effects of strict enforcement of a mortgage contract, and economists and people in business may need to be reminded of them. After all, too much attention to abstract economic statistics just might make us overlook what is really important.

First, we have to consider that we cannot squarely place the blame for the current mortgage mess on the homeowner. It seems to be shared among mortgage brokers, mortgage originators, appraisers, regulatory agencies, securities ratings agencies, the chairman of the Federal Reserve and the president of the United States (who did not issue any warnings, but instead has consistently extolled the virtues of homeownership).

Because homeowners facing foreclosure must bear the brunt of the pain, they naturally feel indignation when all of these other parties continue to lead comfortable, even affluent lives. Trying to enforce mortgage contracts may thus have a perverse effect: instead of teaching homeowners that they should respect the contracts they sign, it may incline them to take a cynical view of the whole mess.

We need to modify mortgage contracts to keep homeowners from becoming cynical? That’s somehow more respectable an idea than the one saying we should throw them out on the street to “teach them a lesson”? If Shiller is serious that all those other parties are “to blame,” then why isn’t the obvious solution to throw them out on the street? There seems to be an assumption here that nothing can be done to punish those who are “really” to blame, so we’re left managing the psyches of those who can be punished. And that’s not cynical?

This the point at which Shiller dredges up the most stunningly unfortunate quote from William effing James (1890) to define the “fundamental” psychology of homeownership:

Homeownership is fundamental part of a sense of belonging to a country. The psychologist William James wrote in 1890 that “a man’s Self is the sum total of all that he CAN call his, not only his body and his psychic powers, but his clothes and his house, his wife and children, his ancestors and friends, his reputation and works, his lands and horses, and yacht and bank account.”

Now, that’s breath-taking. Horses. Yachts. His wife and his children. Ancestors. The whole late-Victorian wealthy male WASP defining the “Self” (with a capital!) as the wealthy male WASP surveying his extensive possessions, an oddly-assorted list that ranks the family and friends somewhere after the clothes and the house. (Yes, James did that on purpose.) The kind of sentiment that was a caricature of the late-Victorian male even in 1890. And Shiller drags this out in aid of generating sympathy for homeowners? Really? You couldn’t find some psychological insight about the emotional relationship of people to their homes that doesn’t speak the language of the male ego surveying his domain, sizing himself up against all the other males to see where he ranks?

(James on the psychological effect of losing one’s property: ” . . . although it is true that a part of our depression at the loss of possessions is due to our feeling that we must now go without certain goods that we expected the possessions to bring in their train, yet in every case there remains, over and above this, a sense of the shrinkage of our personality, a partial conversion of ourselves to nothingness, which is a psychological phenomenon by itself. We are all at once assimilated to the tramps and poor devils whom we so despise, and at the same time removed farther than ever away from the happy sons of earth who lord it over land and sea and men in the full-blown lustihood that wealth and power can give, and before whom, stiffen ourselves as we will by appealing to anti-snobbish first principles, we cannot escape an emotion, open or sneaking, of respect and dread.”)

I’m actually, you know, in favor of some sympathy for homeowners, but one thing that does get in the way of that for a lot of us is, well, the rather disgusting shallowness that a lot of them displayed on the way up. There is this whole part of our culture that has sprung into being since 1890 that takes a rather severe view of conspicuous consumption, unbridled materialism, and totally self-defeating use of debt to buy McMansions, if not yachts. We were treated to a fair amount of that kind of thing in the last few years. In fact, we had Dr. Shiller explaining to us last year that a lot of folks just wanted to get rich, quick, in real estate.

It is undeniably true, I assert, that not everyone was a speculatin’ spend-thrift maxing out the HELOCs to buy more toys, and that part of our problem today with public opinion is that we extend our (quite proper) disgust for these latter-day Yuppies to the entire class “homeowner.” But it is surely an odd way to engage our sympathies for the non-speculator class to speak of it in Jamesian terms as the man whose self is defined by his Stuff, and whose psychological pain is felt most acutely when he recognizes that he is now just like the riff-raff.

It’s worse than odd–it’s downright reactionary–to then go on to that evocation of homeownership as good citizenship and good citizenship as “feel[ing] at one with [the] country.” This puts a rather sinister light on Shiller’s earlier insistence that we need to make sure people don’t get too “cynical.”

I see that Yves at naked capitalism was just as disgusted by Shiller as I am:

Now admittedly, this is not a validated instrument, but a widely used stress scoring test puts loss of spouse as 100 and divorce at 73. Foreclosure is 30, below sex difficulties (39), pregnancy (40), or personal injury (53). Change in residence is 20.

Note that if we as a society were worried about psychological damage, being fired (47) is far worse than foreclosure (30), and if it leads to a change in financial status (38) and/or change to a different line of work (36) those are separate, additive stress factors. Yet policy-makers have no qualms about advocating more open trade even though it produces industry restructurings that produce unemployment that does more psychological damage than foreclosures. As a society, we’ll pursue efficiency that first cost blue collar jobs, and now that we’ve gotten inured to that, white collar ones as well (although Alan Blinder draws the line there).

But efficiency arguments don’t apply to housing since we are sentimental about it. And it’s that sentimentality that bears examination, since it engendered policies that helped produce this mess.

I would only add that we are about five years too far into a war that has not made a majority of us “feel at one with that country.” I think of another really important policy change we could be pursuing right now to shore up everyone’s psychological estrangement from their patriotic self-satisfaction. But “efficiency arguments” don’t apply to wars, either.

My fellow bleeding heart liberals like Goolsbee found themselves defending the subprime industry in the name of increasing minority homeownership. Now we’re treated to the spectacle of Shiller arguing for homeowner bailout legislation in the same terms that Bush used to defend the “Ownership Society.” Housing policy, I gather, makes strange bedfellows. It certainly makes strange editorials.

First a great quote via CNNMoney:

“On the commercial side, best I can tell the problems are in all of it - offices, retail, hotels. I think we will see a prolonged decline.”
Kermit Baker, chief economist for the American Institute of Architects, CNNMoney May 17, 2008

Wow. Clearly Kermit Baker is not a NAR economist! I think he is correct, and here is my analysis of three key categories of commercial: office buildings, multimerchandise shopping, and lodging with some estimated declines in investment.

And from a Reuters article: Retail properties dressed for distress

The retail sector is expected to soften through 2009, according to a report by real estate brokerage Marcus & Millichap. The report, obtained by Reuters, forecasts the overall retail real estate vacancy rate will rise 1.4 percentage points this year to 11.1 percent, after a 0.9 percentage-point increase last year.
…
While demand slows, the supply of new shopping centers is expected to continue to grow, albeit at a slower pace. Marcus & Millichap forecasts about 131 million square feet of new shopping centers should be completed this year, down from 145 million square feet in 2007.
…
Properties in once-hot residential markets of southwest Florida; the California’s Inland Empire areas, such as Riverside and San Bernardino; Phoenix; and Las Vegas are of particular concern.

“In some of those markets, what you saw were properties that were built to service a consumer base that never materialized,” [Spencer Haber, chief executive of H2 Capital Partners] said.

Another great quote: “a consumer base that never materialized”.

For more, here is my recent and somewhat lengthy overview on CRE.

“[T]he message is very clear: The single-family housing market is still deteriorating…”
NAHB President Sandy Dunn

“[T]he housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times…”
NAHB Chief Economist David Seiders

Click on graph for larger image. The NAHB reports that builder confidence was at 19 in May, from 20 in April. Usually housing bottoms look like a “V”; this one will probably look more like an “L”. (this refers to activity like starts and sales, but will probably also be apparent in the confidence survey).

Here are the individual components. Note that “present sales” is now at an all time low of 17.

From NAHB: Builder Confidence Edges Downward In May

Home builders remained considerably downbeat as market conditions continued to erode in May, according to the NAHB/Wells Fargo Housing Market Index (HMI), released today. The HMI fell a single point to 19, bringing it within one point of the record low 18 set in December 2007 (the series began in January of 1985).

“With the HMI hovering in the historically low two-point range that’s prevailed over the past nine months, the message is very clear: The single-family housing market is still deteriorating …” said NAHB President Sandy Dunn, a home builder from Point Pleasant, W.Va. …

“Despite the Federal Reserve’s concerted efforts to lower short-term interest rates, free up credit markets and shore up the national economy, the housing market has shown no evidence of improvement thus far. In fact, conditions have continued to deteriorate in recent times,” said NAHB Chief Economist David Seiders. “The latest HMI shows that even fewer builders now foresee market conditions improving over the next six months compared with our April survey, and builder ratings of buyer traffic through model homes also have dropped off over the past month on a seasonally adjusted basis. …”
…
The HMI’s component index gauging current sales conditions declined one point to 17 in May — its lowest level since the series began in January 1985. Meanwhile, the component gauging sales expectations for the next six months declined three points to 27, and the component gauging traffic of prospective buyers declined two points to 17.

The HMI fell in three out of four regions in May, with a four-point decline to 18 registered in the Northeast, a three-point decline to 12 registered in the Midwest (also an all-time low) and a two-point decline to 22 posted in the South. The West posted a three-point gain to 20 this month but remained well below the level of a year earlier.

From Fed Governor Frederic S. Mishkin: How Should We Respond to Asset Price Bubbles?

Rex Nutting at MarketWatch has the story: Fed should deflate some bubbles, Mishkin says

The Federal Reserve should try to aggressively deflate some types of asset bubbles before they can harm the economy, Fed Gov. Frederic Mishkin said Thursday.

But raising interest rates isn’t the way to prick a bubble, he said. And some types of bubbles, such as the dot-com bubble of the late 1990s, probably shouldn’t be pricked at all, he said.

On the other hand, the housing bubble of this decade was the type of bubble that should have been targeted with closer supervision and tighter regulation to prevent widespread economic damage, Mishkin said.

The Fed should watch for bubbles that are associated with a fast expansion of credit, he said, because these bubbles have the potential to inflate bank balance sheets on the way up and destroy them on the way down.

I’ll have more later …