Archive for the 'Housing' Category

Georgia Monthly Mortgage Licensing Statistics

Posted on September 2, 2009, 9:52 am. Closed

Last night I spent some time collecting data from the Georgia Department of Banking and Finance regarding the monthly licensing activity of the Non-Depository Financial Institutions Division, i.e., the licensing activity of the mortgage industry inside Georgia. Before I began, I hypothesized the data would show a decrease in approval of licenses and increase in revocation of licenses some time around early 2008, roughly the time when people were starting to realize there might be a housing bubble and that it might be bursting.

Here’s a graph of the data I collected (click for larger size):

ga-monthly-mortgage-report

First, I thought it was interesting that July seems to be the month where the majority of the license revocations, expirations, etc., occur for the year. This might be a result of the seasonality of the housing/mortgage market or might just be the month where the government decides to release a large backlog of processed licensing decisions. I’m not sure.

Secondly, it looks I was not too far off with my hypothesis. Up until about December 2007, the amount of mortgage licenses approved outnumbered the amount of licenses revoked. Since that point in time, more licenses have been withdrawn or revoked per month than approved. This will be the trend until the mortgage market finds equilibrium.

Update: As an aside, though the publication reported the quantity of licensing decisions, the publication did not provide any context for the data. Data without context is next to meaningless. A simple historical chart such as the one I created could have easily been provided by the government and would have added so much more meaning to the data already provided. Is this just an example of how government often lacks initiative and foresight?

Enron’s Flaws Mirrored in Home Loan and Financial Industry

Posted on January 4, 2009, 1:18 pm. Closed

A few weeks ago I purchased The Smartest Guys in the Room, a book about the rise and fall of Enron. I found the book in the bargain bin for $10, which was about roughly 65% off list price—a great example of what one should do as a value investor: look for great things selling at great bargains!

As I began to read, a lot of things stand out in just the first 80 pages, mostly the business practices that the home loan and financial industries mirrored in the past five years that eventually brought about this current crisis.

For example, the compensation structure of Enron’s international division and the home loan industry are quite similar in that both were fatally flawed and both structures eventually helped lead each to their downfall. Enron International made money by building power plants and energy-related infrastructure to developing nations. However, the fatal flaw was the compenstation structure:

Developers got bonuses on a project-by-project basis. The developers would calculate the present value of all the expected future cash flow from a project…. When the project reached finanancial close—that is, when the banks lent money but before a single pipe was laid or foundation poured—they were paid. No wonder the developers were so eager to move on to the next deal; they had no financial incentive to follow through on the one they’d just completed…. The more deals Enron International did, and the bigger they were, the richer the developers got. The system encouraged international executives to gamble without risk.

Just like the compensation structure of Enron’s international division encouraged volume regardless of quality, so did the compensation structure of the mortgage and home loan industry. This structure also helped bring about the downfall of many lenders, banks, and financial institutions. Whether you’re in the energy infrastructure business, insurance underwriting, or home loan business, a compensation structure that values volume over quality seems to eventually lead to financial hardship or ruin over the long term.

Spain’s Slumping Property Market

Posted on April 4, 2008, 8:51 am. Closed

Spanish Property Auction Flop Brings Down Gavel on Housing Boom:

Thanks to Spain’s slumping property market, house buyers are as popular as movie stars — and they can cause even more excitement.

Reporters outnumbered bidders as lot No. 1 hit the slate in Europe’s first “Dutch auction” for real estate last weekend in Madrid. Of 216 lots, 194 were withdrawn when they weren’t purchased at the reserve price. One man, investor Manuel Sainz, bought almost half of everything sold.

“Next stop Hollywood!” laughed Sainz, head of property company Las Terrazas de San Blas SA, as he fought off the press after buying 10 properties at discounts of as much as 30 percent.

The event shows the depth of Spain’s housing bust after prices tripled in the past decade. In January, the government’s housing policy director, Rafael Pacheco, called the slowdown “moderate and orderly” after January sales volume fell 27 percent from a year earlier as the global credit shortage forced banks to reduce lending.

Sounds as good as ever a reason to short the Spain ETF, EWP. Also consider the fact that the slumping U.S. economy will have an effect on many other countries around the world.

040308 chart of EWP, the ETF for Spain

It’s Hard to Foreclose When You Don’t Have the Paperwork

Posted on February 22, 2008, 8:34 pm. Closed

Bloomberg reports that some banks are having trouble foreclosing because they lack the necessary paperwork:

Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.

That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork….

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

“I think it’s going to become pretty hairy,” said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. “Regulators appear to have ignored this, given the size and scope of the problem.”

So why is there such a mess with banks not being able to foreclose? Well, apparently in the sprint to make money and commissions, “short cuts” were taken. Also add to that the fact that a lot of the original lenders aren’t around anymore. More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg.

Here’s yet another indicator that things are getting screwy/scary as a result of declining home values: grandmothers are stripping their properties before they hand them over to the bank!