There has been a lot of press dedicated to the Chinese and Australian real estate markets. Are they overvalued or is demand greater than supply.  Here is an article arguing that Australia does not face a housing bubble or crash as demand greatly exceeds supply (h/t The Real Estate Bloggers).

The source of her frustration — a shortage of 200,000 dwellings — is helping fuel Australian home prices, which are 82 percent higher than in the U.S., and disproving investors such as Jeremy Grantham, who says they will fall 42 percent as interest rates rise in one of the world’s priciest home markets.
“It will take years to turn the shortage around,” said Matthew Bell, an economist at Australian Property Monitors, a researcher cited by the central bank. “When it comes down to it, that’s fundamentally what’s going to drive the market.”
Australia’s median home price was 6.8 times gross yearly income last year, compared with 5.1 times in the U.K. and 2.9 times in the U.S., according to the annual Demographia International Housing Affordability Survey. The nation of 22 million people has six of the 10 most unaffordable cities among the U.S., U.K., Canada, Ireland, New Zealand and Australia, the survey showed.
The median home in Australian cities cost A$468,000 ($395,000) in May, figures from real estate monitoring company RP Data show. The median price of a new home sold in the U.S. in 2009 was $216,700, according to government data.

The demand argument was used here in the States in 2005 and 2006 as demand did exceed supply. Eventually, people learn that housing is a manufactured good whose purpose is to provide shelter. As such, this manufactured good is tied to incomes. Everyone needs shelter, but their income limits the type of shelter they can afford. When the cost for the average home ends up exceeding the average income, a correction will take place. Once families start to realize they cannot afford homes and the demand/supply paradigm shifts, the correction begins. With an Australian home costing 6.8 times the average income, this market will correct. Then these people like Mr. Bell who are claiming the demand/supply dynamics justify current home prices will be amazed they didn’t see it coming.

The State of Maryland is offering mortgage incentives for folks whose jobs are relocating to Maryland due to the Base Realignment and Closures (BRAC). The theory is to get people who might rent or commute from Northern Virginia to buy in Maryland. Like most government programs, it sounds good in theory, but it makes no sense in reality.

Just like the $8,000 home tax credit offered by the federal government recently, there is no proof that this program isn’t a handout to folks who were going to buy anyway. The vast majority of the federal programs incentive went to people who were planning to buy anyway. The incentive may have pulled demand forward, but it did not create any demand.

The government has no means to determine if this is just an extra tax break for someone with a job. If they worked like a business, they might do some real data analysis. They could wait until the BRAC employee has either started renting or remained in an outside region to Maryland such as Delaware or Northern Virginia. Then they could target these folks with direct mail to entice a home purchase. This way the credit would be used as it is suppose to be, not as wasted money for someone who was planning to buy anyway.

Second, Maryland has a $10 Billion shortfall. Why would they give money away for a program that has no clear parameters if it is successful? Sure, they want the transfer taxes, which are hefty in the state, but the state needs to be cutting unnecessary expenses.

Third, the program hurts non-BRAC potential buyers. Lower rates may spur some demand, which could increase home prices (in theory). This hurts non-BRAC folks buying at higher mortgage rates, which could prevent them from buying. So for every BRAC purchase, a normal purchase could fall through.

It just amazes me how these idiots with no business experience come up with hairbrain ideas and then pat themselves on the back. In the business world, these jacknuts would get fired for wasting money.

I have stated several times here and elsewhere on the web that a homeowner should have no remorse from defaulting on a mortgage if it makes economic sense. The mortgage is a contract, not an oath or vow. Contracts cover all actions including non-payment. So, if you are way underwater on a house and renting an equivalent home is substantially below your mortgage, you might be wise to throw the keys in the mailbox and move forward.

However, I despise folks who are using default to live the high life. A New York Times article profiles some Florida residents doing exactly this. These people bought too much home and like to blame the bank for that. Now, they have stopped paying their mortgage and are spending freely.

For Alex Pemberton and Susan Reboyras, foreclosure is becoming a way of life — something they did not want but are in no hurry to get out of.Foreclosure has allowed them to stabilize the family business. Go to Outback occasionally for a steak. Take their gas-guzzling airboat out for the weekend. Visit the Hard Rock Casino.

“Instead of the house dragging us down, it’s become a life raft,” said Mr. Pemberton, who stopped paying the mortgage on their house here last summer. “It’s really been a blessing.”

If you can’t afford your mortgage and decide to move on, then move on. Don’t sit and milk the system so you can gamble and stuff your face with fat induced blooming onions after cruising on your boat. If these folks were unable to pay their mortgage, then they shouldn’t own a boat. It should have been sold to raise funds and save on docking fees.  The article goes on:

This type of modification does not beg for a lender’s permission but is delivered as an ultimatum: Force me out if you can. Any moral qualms are overshadowed by a conviction that the banks created the crisis by snookering homeowners with loans that got them in over their heads.

“I tried to explain my situation to the lender, but they wouldn’t help,” said Mr. Pemberton’s mother, Wendy Pemberton, herself in foreclosure on a small house a few blocks away from her son’s. She stopped paying her mortgage two years ago after a bout with lung cancer. “They’re all crooks.”

People like this are using a defense mechanism to justify their own bad behavior of buying too much house, not adjusting their lifestyle (like owning a boat), or refinancing too many times. The article profiles this older woman with lung cancer. Using a sick woman is an attempt to create empathy, but the reality is Wendy refinanced several times and took equity out of her house. She claims the only money she used for herself was for a new roof. Every other refi was strictly a mortgage broker scamming her into higher fees. Yeah, right. The mortgage brokers motivated homeowners to refinance after showing them how much moolah could be pulledl out of their home. I am betting she visited the Hard Rock Casino on a regular basis. But, this is just a cold-hearted statement on my part because she has lung cancer.

The story goes on to show how our defaulters have used the money to revitalize their business:

Mr. Pemberton and Ms. Reboyras decided to stop paying because their business, which restores attics that have been invaded by pests, was on the verge of failing. Scrambling to get by, their credit already shot, they had little to lose.

“We could pay the mortgage company way more than the house is worth and starve to death,” said Mr. Pemberton, 43. “Or we could pay ourselves so our business could sustain us and people who work for us over a long period of time. It may sound very horrible, but it comes down to a self-preservation thing.”

They used the $1,837 a month that they were not paying their lender to publicize A Plus Restorations, first with print ads, then local television. Word apparently got around, because the business is recovering.

My comment: your business should fail. You don’t know what you are doing. If you are starting a business, then you should not have bought so much house that it would affect your business’ cash flow. You should live in a van down by the river if need be until your business is cash flowing consistently. Apparently, Pemberton didn’t take the time before launching a business to buy a $6 calculator, a 30 cent pencil, and two pieces a paper to put a budget together. Business owners who put so little thought into their business should fail. Again, call me cold-hearted, but the world owes you nothing. If you don’t take the steps to achieve, then the achievement won’t come. Basic budgeting might have prevented this situation, but Pemberton would rather vilify the banks than look in the mirror and have a hard conversation with himself.

These people exemplify the “I’m entitled” mentality that has put us in this position as a nation. They believe they deserve a big house and should have a booming business despite any legitimate planning on their part. Eventually, the market gets what it wants. It wants for people to save, invest, and act responsibly with money. It will inflict pain until folks act this way. Cop out maneuvers like the Pembertons are taking work for the short term, but they don’t last too long. At some point, they will be forced from their homes and have to rent. Their access to debt will be diminished with a horrible credit score, which will affect their ability to pay for their boat and get credit for their business. Unless they shape up, they will end up in financial ruin. This just delays the inevitable and inflicts pain on the banks.

My hope is they read my blog post and get really pissed at me. It may just cause them a second to reflect to see if they should reform their financial actions. While they would still curse a cold-hearted SOB like me, they might get a wake up call before the market gives them one. My wake up will be much less painful.

Here is a video segment by Yahoo Tech Ticker featuring Barry Ritholtz, whom I am a big fan, where a theory is discussed about a backdoor bailout of the banks. It deals with Fannie Mae and Freddie Mac. Both of these organizations are losing billions every quarter, and we, the taxpayers, are acting as an unlimited ATM for those institutions.

You may wonder why this is a bailout for the big banks. Well, Fannie and Freddie are the largest buyers of mortgages in the U.S. In fact, 96.5% of all mortgages issued in the first quarter of 2010 are owned by the dynamic duo. This means only 3.5% are controlled by non-government entities for those like me who struggle with second grade math.

What has been happening is the banks have been able to offload their mortgages that smell like my high school football locker onto Freddie and Fannie’s balance sheet. As these mortgages implode, the taxpayer picks up the tab, rather than the banks. The banks make out like bandits. They sell the toxic mortgages for full price even though they wouldn’t fetch that price in the free market. Then they get to charge Fannie and Freddie a fee to collect the mortgage payment (or process the foreclosure as the case tends to be).  For new mortgages, they also get to charge a processing fee or loan origination fee. Mo’ money, mo’ money, mo’.

Anyway, it is nice to see some guys smarter than me say the same thing about the banks getting a backdoor bailout. We should be furious about this, but there is a special on TV about the divorce of Jon and Kate that I want to watch first.

I still believe the best way to hand the banks what they deserve is by moving your money to a local community bank. Please see my Move Your Money post.

Nice segment from PBS about strategic defaults on mortgages (tip of the hat to Barry Ritholtz).

If you have been reading my blog, you know that I am all for a strategic default when it makes sense. Too many Americans have this view that it is immoral to walk away from a mortgage. These folks gulped down the banks kool-aid – Oh Yeah! Let’s follow this logically from the bank’s viewpoint. Defaulting on a mortgage means you break your word. A man is his word. Ergo, a man is his mortgage. Sounds kinda silly doesn’t it.

The reality is it is a business decision. A mortgage is a contract between the bank and borrower. It lays out the contractual obligations of both parties. If the borrower pays all principal and interest over the required term, the borrower receives a free and clear title to the home. If the borrower fails to make timely payments, the bank reclaims the home. Pretty clear.

Many will say that letting your home go to a short sale or foreclosure hurts your neighbors by driving real estate prices down. This is total bunk. It actually helps the market. How can that be? Let’s suppose that homes are artificially inflated and that the only homes for sale are non-distressed sales. These homes will not attract buyers due to the inflated prices. Even in a normal sale, the price will have to drop. It may take longer as the homeowner is anchored to the peak price, but it will happen. Foreclosures merely help the market find the happy medium between buyers and sellers at a quicker pace. This process brings liquidity to the market. It creates a normal real estate market as realtors, home inspectors, mortgage brokers, and home improvement specialists are employed.

The end of this clip features a banker who gives the usual argument, “why would banks lend to people if they believe people will walk away.” To that, I say why didn’t you do your job properly. Had the banks required folks to go through a proper underwriting procedure, we wouldn’t be in this mess. Had the banks ensured the homeowner could afford the home, we wouldn’t be in this mess. Had the banks required a downpayment commensurate with the risk they were undertaking, we wouldn’t be in this mess.

Why should the bank come out of this mess unscathed with the homeowner paying every cent of interest and principal? After all, the bank hires the appraiser for the home sale, AND they make the borrower pay for the appraiser. If the bank’s hired hand properly performed his or her job, we wouldn’t be in this mess.

If you are a homeowner who could rent for substantially below your mortgage for a similar property, and you are severely underwater by 20% or more, then you are a fool if you stay in your mortgage…unless you really plan to stay in the home forever, need a strong credit report due to your job (security clearance), or you have a built in trampoline (who could leave that, after all).

Get ready for more strategic defaults as the shame fades. Now, what is your opinion.

Interesting article at Yahoo about folks behind on their mortgage getting their principal reduced. As I have written previously, this is a bad idea. It will motivate others to default to get their mortgage reduced. The Yahoo article profiles a couple folks probably hoping for sympathy, but when I read their tales, I couldn’t muster any bleeding heart feelings:

Joaquin Guzmann bought his Long Beach, Calif., house 23 years ago for $137,000 but has since struggled financially.

He moonlighted from his ground-servicing job with Continental Airlines and took out second mortgages and cash-out refinancings. By last year, his mortgage had ballooned to more than $518,000, counting late fees.

“I fell behind,” he said. “I tried to reduce my payments but nobody was listening to me.”

He got luck in the loan-servicing lottery when RoundPoint took over his account. The servicer combined his first mortgage with his home equity loan and lowered the total balance by 44% to $28,000. The servicer also lopped a point off his rate, lowering his monthly payment to $1,570.

So this guy pulls out over $350,000 in equity, and he should get a mortgage reduction? With an initial mortgage of $137,000, he should have zero problem making his mortgage. If he refinanced as rates dropped to 5%, his mortgage would only have been $723 per month. And, this is if he never paid down any principal over the 20 years. Considering he worked in position at Continental that is probably unionized, he should not be facing a huge financial issue. Maybe he had some serious problems like an uninsured health problem (probably not due to the fact that unions get nice medical benefits compared to everyday Americans) or a financial problem in his extended family, but the article doesn’t mention any extraneous circumstances. Certainly, if he had any tear jerking reasons to yank $350,000 out of his home, the writer would have mentioned it. My bet is this guy took some damn nice trips in a tripped out auto.

Larry Casanova, a New Jersey truck and snow-plow driver, bought a house in Cherry Hill in early 2008.

“I’ve been a carpenter most of my life and I bought the house to renovate and flip, but the market turned around,” he said. “I tried to sell but I wasn’t even getting nibbles.”

Here again, why should he get a break? If you bought a stock and it tanked, should you get part of that money back? Of course not. So why are we worried about helping a home investor out?

I am posting links to articles in the blogosphere about the recent bailout plan. Essentially, most agree this is a hidden plan to funnel money to the banks while making it look like a homeowner friendly plan. Also, I talk to a friend who is a banker. They are getting tons of calls asking what their options are – even from folks who are current on their mortgage. I expect this to sway homeowners who are underwater to stop making payments. Can you say moral hazard?

Good article (pre-HAMP II) about how the government plans are creating poor habits among owner occupied homes compared to investor owned

Barry tells it like it is.

Good article from Caroline Baum

Decent write up at the Atlantic

The mess that Greenspan created chimes in.

Don’t necessarily agree with this one but interesting reading.

Barring hyperinflation I don’t agree with the 3% appreciation rate found here. Based on historical inflation, homes are still overpriced nationally

Shows how people are changing their attitude towards paying their mortgage:

I guess that is enough for now. If you see any good articles, share in the comments, please.

Apparently, the government is at it again with housing. Considering the $75 Billion dollar HAMP plan that the government set up for housing has been an abysmal bust, the gubment now wants to forgive loan balances for underwater homeowners. They are going to use $14 Billion of the repaid TARP funds to pay for this.

The first key element is that the government will provide financial incentives to lenders that cut the balance of a borrower’s mortgage. Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.

Until recently, administration officials had been reluctant to encourage lenders to cut the principal balance, worrying that this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.

Twenty five percent of loans are underwater right now. If the government forgives a portion of this loan balance, do they honestly think that people won’t intentionally default in order to get the principal writedown. This is a total act of desperation. Now, they want the taxpayer to fund this silly program.

Even worse, the government is looking to the FHA to cover these programs. FHA is facing enormous financial constraints right now.

the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.For those borrowers who have more than one mortgage on their house, the FHA will allow refinancing of the first loan only. The new loan and any second mortgage could not exceed 15 percent of the home’s value. This approach is meant to benefit not only borrowers but also lenders by allowing them to offload mortgages that might otherwise fail.

Just let the markets work. I feel for people who bought too much house, but they simply cannot afford the home they own. This will just be another waste of taxpayer dollars and motivate others to become delinquent. When you let markets work, even if it is through foreclosures, everyone benefits. Realtors, home repair folks, mortgage bankers and others become gainfully employed, and the markets start to normalize.

Interesting article from the Wall Street Journal about the rise in foreclosures. The author claims the foreclosures will rise through April, but then they will start to decline. I believe the author is a bit optimistic. He is neglecting the upcoming Option ARM and Alt A ARM resets (recasts).

You can see we have between $500 billion and a Trillion of mortgages resetting or recasting in the next two years. Also, we have an enormous number of delinquencies, which are being messed up with the government’s modification program. The graph below isn’t pretty. The number of homeowners 90 days delinquent or already in foreclosure is higher than it was during all of 2008 and 2009.

I think reality checks are in order for housing bulls.

In yet another example that the government has gone mad, Sheila Bair, Chairwoman of the FDIC, is looking at a trial program to reduce the principal for homeowners who owe more than their home is worth.

Under the FDIC program, borrowers would be eligible for a reduction in their mortgage balances if they kept up their payments on the mortgage over a long period. … “We’re thinking about it in terms of earned principal forgiveness. If you stay current on your mortgage, you would earn a principal reduction. It would only be for loans significantly underwater,” said FDIC Chairman Sheila C. Bair.

The program would … apply only to loans acquired from a failed bank seized by the FDIC. That would be less than 1 percent of mortgages currently outstanding.

This is wrong on so many levels. One, homeowners will default in mass if they see the government lower their mortgage balance without any consequence. Second, this only drags out the correction. As hard as it is to hear, foreclosure and short sales are a good thing. California is a prime example. They actually have a real estate market with some life due to the price drops. The market is finding buyers; realtors and mortgage brokers have steady work; new homeowners are taking care of the property (rather than having homes disheveled due to neglect); the state is receiving property taxes on time; and the market is coming to life. Does this mean those who can’t afford their home are losing them…yes. These are the people that should experience the loss on the home, not the taxpayers. I feel for these people; I really do. They probably got pushed into a home by a realtor who told them they needed to buy before being priced out. Or, they probably had a mortgage broker sell them an exotic mortgage without really explaining what could go wrong. In the end, it is their responsibility to understand what they are doing. This is a $300,000 purchase, not a $358 laptop. Spend some time learning about buying a home. You can get a book at the library for free.

Ultimately, this will be a positive life lesson for these folks. They will become more financially literate. If we just forgive their principal, they will remain ignorant and expect the government to step in anytime they have a financial difficulty.