Federal Reserve cracks down on Goldman Sachs

Apparently a unit of Goldman Sachs engaged in robo-signing of foreclosure documents:

The Federal Reserve announced an enforcement action against Goldman Sachs Group Inc., saying the company's mortgage-servicing unit had engaged in "a pattern of misconduct and negligence" in its handling of home-mortgage loans.

The Fed's action on Thursday seeks changes in mortgage-servicing practices and unspecified monetary damages. ...

The Goldman Sachs order is modeled after a series of consent orders issued by federal banking regulators in April to 14 of the nation's largest mortgage servicers that require them to clean up their practices. Federal regulators began looking at other mortgage-servicing companies, including Goldman Sachs's Litton unit, after the initial reviews were completed.

In its order Thursday, the Fed said Litton employees engaged in robo-signing and took actions in foreclosure and bankruptcy cases "without always confirming that documentation of ownership was in order." The company also failed to staff up appropriately to handle a surge in delinquencies or to sufficiently oversee outside lawyers and establish "adequate internal controls," the order said.

The Fed action requires Goldman Sachs to retain an independent consultant to review foreclosures that were pending at any time in 2009 and 2010, and "to provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies" identified by the review, the Fed said in issuing the order.

Economic podcast

Friday's Wells Fargo weekly economic podcast has a discussion of last week's economic news, including a four-and-a-half minute discussion of construction and housing from 1:38 - 5:58.

America slowly digging out of economic hole

The Aggregate Weekly Hours Index—one of the best measures of employment—shows that the U.S. is very slowly digging its way out of the recession. In the graph below, the blue line shows an index of the total number of hours that Americans are working per week. The red line shows an index of the growth in the civilian non-institutional population (i.e. civilians not in prison). As long as the blue line rises faster than the red line, it means that America's employment situation is improving.

Government to sue banks for bad mortgage loans during bubble

The bad news for banks just keeps coming:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.

Speed up foreclosures; don't slow them down

CNN Money says the U.S. should speed up foreclosures, rather than the current approach of slowing them down:

If the Obama administration really wants to save the housing market, it should speed up the foreclosure process — not prolong the inevitable, experts say.

Four years into the housing crisis, the real estate market is still teetering on the edge. The Obama administration has tried one program after another to stem the tide of foreclosures with limited success. And it is continuing to look for ways "to ease the burden on struggling homeowners," though no new initiative is imminent, the White House said this week.

But some housing experts argue that the administration should go in a different direction than it has in the past. Instead, they say it's time to focus on pushing many of those delinquent borrowers through the foreclosure process and putting foreclosed properties back into use.

While some of the 2.2 million loans in foreclosure can still be saved, many are too far gone, they say. Some 37% have not made a payment in more than two years, while another 34% have not made a payment in 12 to 23 months, according to Lender Processing Services.

"Loans enter into foreclosure, but never come out," said Thomas Lawler, founder of Lawler Economic & Housing Consulting. "If this keeps going on, you have a continual overhang that never goes away."

I have long opposed the Obama administration's attempts to artificially keep delinquent borrowers in their homes (unless we are talking about currently unemployed borrowers, who may well have bought responsibly).

That said, I am also opposed to artificially increasing the speed of foreclosures if it weakens private property rights. Banks should still have the burden of proving their right to foreclose on a property.

Theoretically, however, if it could be done without weakening private property rights, I believe getting the pain over quickly is better than dragging it out as long as possible.

Updated housing chart

I have updated my national housing graph to reflect the new S&P/Case-Shiller numbers.

S&P/Case-Shiller national index down 5.9% YoY; up 3.6% QoQ

In the second quarter (Q2) of 2011, the S&P/Case-Shiller National Home Price Index was down 5.9% since Q2 2010, but up 3.6% since Q1 2011:

Data through June 2011, released today by S&P Indices for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index increased by 3.6% in the second quarter of 2011, after having fallen 4.1% in the first quarter of 2011. With the second quarter’s data, the National Index recovered from its first quarter low, but still posted an annual decline of 5.9% versus the second quarter of 2010. Nationally, home prices are back to their early 2003 levels.

As of June 2011, 19 of the 20 MSAs covered by S&P/Case-Shiller Home Price Indices and both monthly composites were up versus May – Portland was flat. However, they were all down compared to June 2010. Twelve of the 20 MSAs and both Composites have now increased for three consecutive months, a sign of the seasonal strength in the housing market. None of the markets posted new lows with June’s report. Minneapolis posted a double-digit 10.8% annual decline; Portland is not far behind at -9.6%. Thirteen of the cities and both composites saw improvements in their annual rates; however; they all are in negative territory and have been so for three consecutive months. ...

The chart [above] depicts the annual returns of the U.S. National, the 10-City Composite and the 20-City Composite Home Price Indices. ...

S&P Indices has introduced a new blog called HousingViews.com. This interactive blog delivers realtime commentary and analysis from across the Standard & Poor’s organization on a wide-range of topics impacting residential home prices, homebuilding and mortgage financing in the United States. Readers and viewers can visit the blog at www.housingviews.com, where feedback and commentary is certainly welcomed and encouraged.

Keep in mind that Q2 is the traditional spring buying season, when home prices typically rise. The seasonally adjusted numbers from Q1 to Q2 were basically flat (up 0.08%).

Pending home sales up 14.4% YoY

From the National Association of Realtors:

Pending home sales declined in July but remain well above year-ago levels, according to the National Association of Realtors®. All regions show monthly declines except for the West, which continues to show the highest level of sales contract activity.

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, slipped 1.3 percent to 89.7 in July from 90.9 in June but is 14.4 percent above the 78.4 index in July 2010. The data reflects contracts but not closings.

Lawrence Yun, NAR chief economist, said sales activity is underperforming.

Thank the government, in part, for the high unemployment rate

Sometimes when politicians try to help people, they hurt people:

The painfully slow rate of job growth can be blamed at least in part on home mortgage modifications that reduce house payments for struggling homeowners, because such policies incentivize people to stay where they are instead of moving to better job markets, according to a new paper by researchers Kyle F. Herkenhoff and Lee E. Ohanian, both at UCLA.

The paper is one among a growing number papers that explore why mobility has decreased so drastically through the recession, and what the effects have been. Most economists would agree that reduced mobility increases unemployment: When people don’t move, they deny themselves the chance to find work in a city or state where jobs are more plentiful.

This week's housing news in summary

On Monday, the Mortgage Bankers Association reported that mortgage delinquencies are rising again:

In another hit to the beleaguered housing market, a report out Monday found that the number of delinquent mortgage borrowers -- those who have missed at least one payment -- rose during the second quarter.

The delinquency rate grew only slightly, up 0.12 percentage points to 8.44%, but that reverses the steady improvement of the past two years.

The increase, as reported by the Mortgage Bankers Association (MBA), may not sound like much, but it could mean that the recovery in the housing market will take even longer than thought.

On Tuesday, the Commerce Department reported declining new home sales for the third month in a row:

U.S. sales of new homes declined in July for the third straight month, a sign of continued woes in the housing market.

Sales fell 0.7% in July to a seasonally adjusted annual rate of 298,000, the slowest pace since February, the Commerce Department reported Tuesday. Sales had reached 316,000 in April before slipping.

New home sales were still up 6.8% year-over-year.

On Wednesday, the FHFA reported that home prices fell 5.9% year-over-year:

Home prices in the U.S. fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009, as foreclosures added to the inventory of properties for sale.

Prices dropped 0.6 percent from the prior three months, the Federal Housing Finance Agency said today in a report from Washington.

Also on Wednesday came news that Australia's housing bubble may be popping:

One of the few bright spots in real estate amid a three-year global slump, Australia now faces falling home prices and fears of overbuilding.

A downturn in Australia's real estate market will add to concerns of a two-speed economy in the resource-rich nation. Mining profits are surging due to heavy demand from China and other fast-growing Asian countries, but consumer businesses and manufacturing have faltered under the weight of the swollen Australian dollar, which is trading near 30-year highs to the U.S. currency.

On Thursday, RealtyTrac reported that 31% of homes sold were in some stage of foreclosure:

Nearly one-third of all U.S. homes sold in the second quarter of 2011 were in some stage of the foreclosure process or had been repossessed by a lender, according to numbers released today by RealtyTrac, an Irvine, Calif.-based real estate data provider.

Also on Thursday, the National Association of Realtors says it's really a landlord's market:

NAR expects vacancy rates in multifamily housing will drop from 5.5% to 4.6% in the third quarter of 2012. Vacancies below 5% generally are considered a landlord’s market, the trade group noted.

On Friday, another reason not to be a homeowner: Hurricanes

As Hurricane Irene bears down on the East Coast, many Americans are preparing for the worst. But whether they are covered for the ensuing damage is another matter entirely.

Between Wilmington N.C. and Boston, there are nearly 1.9 million residences and businesses that are at risk of storm surge flooding, according to CoreLogic, the financial analytics company. And nearly half of those properties lie outside of a designated flood zone and are likely to lack flood insurance.

Mortgage lenders require homes that lie within designated flood zones to be covered by flood insurance. This low-cost coverage — which runs as low as $129 a year — is provided by the federal government and purchased through insurers like Allstate Insurance and Farmers Insurance Group.

But homes outside of flood zones often go uncovered, mainly because homeowners don't realize that their existing policies don't cover floods or because they don't feel their home are at risk.

If you rent and your place gets flooded, you may lose your belongings, but the landlord takes the expensive structural damage losses.