Virtual Open Houses

I just read an analysis from bond rating agency Standard & Poor's about how Japan dealt with its banking crisis in the early 1990s. From 1994 to 2003, 180 Japanese banks failed. Total cost of the credit losses: $950 billion.

There the government took small incremental steps. There was strong opposition to bank bailouts and a series of administrations that failed to act.

The Japanese real estate bubble burst in 1992. It wasn't until 1998 that the government began investing in the banks through subordinated debt. The government kept weak banks alive longer than they should have through depostion protection. Eventually the government began purchasing non-perfomring loans. The shortages of capital lasted until the early 2000s though.

Japanese industrial companies also had problems with excess capacity and a shortage of funding. In 2003 the government established an Industrial Revitalizaiton Corp. of Japan to provide capital. One of the lessons learned from Japan, according to S&P, is that it's also vital for a country to protect big industrial corporations, such as the automakers.

Okay we fell for this. The real estate information site
Cyberhomes shot us a comparison of the two earliest U.S. settlements, Jamestown, Virginia and Plymouth, Mass. Cyberhomes looked at which place would make the best settlement in 2008. The Jamestown Settlement is in James City County and the Plymouth Colony is in Plymouth County.

James City County

Median Estimated Home value - $319,766, which is down -6.44 percent in the past 12 months.
Population - 62,649
Pop Change since 2000 - 3.71%
Median Household Income - $95,567
Unemployment Rate - 2.60%
Recent Job Growth - 2.31%

Plymouth County

Median Estimated Home value - $310,752, which is down -13.87 percent in the past 12 months.
Population - 505,547
Pop Change since 2000 - 0.93%
Median Household Income - $92,471
Unemployment Rate - 4.80%
Recent Job Growth - 0.27%

Based on the above, Cyberhomes concludes that settlers looking to drop anchor today would be best to settle in Jamestown. Compared to Plymouth, James City County boasts a higher median household income, a faster growing population, lower unemployment rate and higher recent job growth. In addition, the county’s home values have not taken nearly as big a hit as in Plymouth.

No comment on who's got friendlier Indians.

A new Gallup study suggests that cities with loyal, passionate citizens are more likely to be economically vibrant. The three-year study, funded by the John S. and James L. Knight Foundation, surveyed 26 communities and looked at how emotionally connected residents were to their city compared to the GDP growth during the past five years.

"The findings show a significant correlation," a press release for the study said. "Over three years, the researchers will analyze the trends to prove whether emotional connection drives economic growth, or the other way around."

Hovnanian, the big New Jersey-based homebuilder, got a big no thanks from its bond holders this week. The company had tried to reduce its massive $1.6 billion debt load by offering bondholders new securties paying 18% interest. The catch was they had to accept just 60 cents on the dollar for their outstanding notes. Just $71 million worth of bonds were tendered.

The move was an attempt to preserve some assets for stockholders, including the 18% of the shares owned by management and the Hovanian family, says the debt watchers at the research firm Gimmie Credit.

"It's going to be long and dangerous housing recession," Gimmie Credit concluded. "If Hovnanian fails, at least the normal pecking order of claims to its assets will remain in tact for now."

The City Council of Valencia, Calif., has approved the $300 million expansion plan for Henry Mayo Newhall Hospital, under which the facility will gain a new patient wing and three additional medical buildings, along with a helipad and new parking structures.

Matrix Development Group has acquired an 82-acre site in New Jersey that includes a total of some 342,000 square feet across 13 office and labratory buildings. The site has 2,000 feet of frontage on the New Jersey Turnpike near exit 8A.

Mack-Cali Realty Corp. said today that Thomson Inc. has extended the term of its existing 62,500-square-foot lease at 2 Independence Way at Princeton Corporate Center in Princeton, N. J.  In addition, the company has agreed to lease the building’s remaining 4,800 square feet.

Bailouts are in fashion. The financial industry got one. The automakers have their hands out. Now the National Association of Home Builders and the National Association of Realtors are pushing their own multi-billion-dollar stimulus proposals.

The proposals are designed to get buyers off the fence and rejuvenate the flagging home sale market. The more expensive proposal comes from the home builders who want a $250 billion Fix Housing First package, which calls for a home buyer tax credit of 10% of the purchase price (up to $22,000) and a heavy subsidy from the federal government that would bring 30-year mortgage rates down to 3% for homes bought in the first half of next year and 4% for purchases in the second half, according to The Wall Street Journal.

The Realtor plan sounds is somewhat modest by comparison. The group also wants taxpayers to subsidize mortgages to bring down rates by about 2% -- at a cost to taxpayers of about $100 billion. And it wants the homeowner tax credit approved by congress this year to be changed so that the $7,500 credit can be given to all buyers, not just first-time buyers and that it no longer would have to be paid back. That part of the plan would cost another $40 billion, the group's chief economist Lawrence Yun told me today, adding that he thought the builder plan was too expensive.

Finally, the Realtors want the higher limits for federally-backed jumbo loans of up to $729,000 to be permanently extended (They're set to expire next year).

The lower mortgage rates should last about one calendar year, he said. "There should be some type of window where it closes," Yun said. "The main purpose is to get fence sitters off and bring them into the marketplace."

The real estate industry, which had a spectacular run earlier this decade, has reason to worry, especially as problems in the real estate sector spread to the larger economy. Buyers are more reluctant than ever to get into a falling housing market.

The National Association of Realtors said Nov. 24 that the median home price dropped 11.3% from October 2007, the largest annual drop since the group started tracking prices in 1968. Builders say that new-home buyers are backing out of contracts at an alarming rate. In October, the ratio of cancellations to sales was 42.6%. It was up from 34.8% in September, the month that Lehman Brothers failed.

What would be your advice to Obama? Are these stimulus proposals worth it?

If you looking for a book to read this Thanksgiving weekend to help you make sense of this whole mess we are in, I recommend Chain of Blame by Paul Muollo and Matthew Padilla. Muollo, an editor at the trade publication National Mortgage News, and Padilla, a reporter for the Orange County Register, were in the thick of things during the housing bubble and subsequent mortgage meltdown. They do a very good job of sketching the history of the subprime market including its roots in lenders such as Beneficial and Household that actually held on to the loans they underwrote and had repo men knocking on doors to remind folks to pay.

Thanks to brokerage firms such as Friedman Billings Ramsey and later all the big Wall Street houses, the subprime business mushroomed into a multi-trillion dollar orgy of sketchy loans, securitizations and all manner of financial exotica that we now see collapsing all around us. At times the book gets a little scattered as the authors jump from one mortgage industry player to another. But there are some memorable vignettes, including New Century Financial co-founder Steven Holder hosting "signing parties" where he personally approved loans that the firm's own credit analysts thought were too dicey.

There's a lot of detail on the always colorful Countrywide co-founder Angelo Mozilo including the advice of his now-deceased co-founder, David Loeb, who said that independent mortgage brokers--who only cared about closing a deal and not the long term viability of the loan--were "crooks." As negative news about Countrywide started piling up, Mozilo blocked off employee access to a Web site called the Mortgage Lender Implode-O-Meter. He also considered firing Coutnrywide's entire public relations department. In Countrywide's final days Mozilo went off on a rant, saying the government was deliberately persecuting Italian-American businessmen, citing former New York Stock Exchange head Richard Grasso, Qwest's ex ceo Joe Nacchio, investment banker Frank Quattrone and Home Depot's ex chief Robert Nardelli as evidence.

Mozilo was short on blame for himself. Asked about all the independent mortgage firms that piled into the subprime business he told co-author Muollo: "I didn't realize that they didn't know what they were doing. It got out of control. They were like 'We need more. We need more subprime loans to buy.'"

This book doesn't tell us how to fix the crisis and it isn't a pretty picture. It does provide a colorful reminder of man's vanity, greed and capacity to pass the buck.

A debate has sprung up in the blogs about whether it’s right for homeowners to deliberately stop making payments in order to qualify for programs that reduce their mortgage payments. There’s discussion also about whether journalists should even report that as an option.

I called Evan Wagner, press spokesperson for IndyMac, the big California bank that was seized by the FDIC in July. FDIC chairman Shelia Bair has been using IndyMac as laboratory to test efforts to renegotiate loans en masse. Since she launched her program big banks such as Bark of America and quasi governmental mortgage players Fannie Mae and Freddie Mac have been introducing similar programs. But do you need to stop making payments to get attention?

No, says Wagner. It is true that companies that collect payments on mortgages that were sold on Wall Street are only allowed to modify loans that are in default or at serious risk of default. To qualify for the FDIC program you need to be at least 60 days past due. But Wagner says the bank is working out deals with other borrowers, so it makes much more sense to go that route first.

The simple fact is that to even begin to qualify your house payments have to be greater than 38% of your gross income. Not working a second job or overtime, as some people have suggested, would be crazy in this economy. And deliberately stopping payments could backfire if the FDIC loan officers say you don’t quality, you may actually end up losing your home.

FYI, IndyMac is having an open house at the Van Nuys, Calif. convention centers on Saturday Nov. 22. from 10 AM to 3 PM. They’ll have twenty loan officers out there considering homeowners' loan problems.

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