Lender's Checks For Taxes Bounce!
A: Crazy news and part of the insolvency concerns that I have been discussing lately. I read this from a commenter on one of Calculated Risk's posts today. Troubled lender American Home Mortgage apparently doesn't have enough funds to pay the real estate taxes for their mortgage clients! I seriously hope this is a trend that doesn't continue as it fits in nicely with the insolvency concerns Professor Nouriel Roubini has been discussing for some time and now has dragged me into his bandwagon.
The news story via Baltimore Sun's article "Ailing Lender's Checks Bounce":
Checks sent out by the troubled American Home Mortgage Investment Corp. to pay the property taxes of more than 70 homeowners in the Baltimore metropolitan area have bounced, local officials said yesterday.Just to re-iterate that last line, usually the mortgage lender collects the estimated monthly real estate taxes that are due from the homeowner with their mortgage payment. The estimated monthly real estate tax payments are then placed into escrow accounts and then paid by the lender when due; usually quarterly. So what happens when a troubled lender co-mingles these funds for other corporate finance responsibilities and then can no longer pay? Hmmmmm, I wonder quietly to myself."This is just another chapter in what is a very difficult time for the mortgage industry," said Donald I. Mohler III, a spokesman for Baltimore County, which no longer accepts checks from American Home Mortgage.
Homeowners often make monthly payments for property taxes, insurance and other fees to their mortgage companies to be set aside in escrow funds until the money is due.
Professor Nouriel Roubini, who is not the most optimistic voice on the US economy, states in his "The Coming of the US Hard Landing" article (a very interesting read to say the least):
Today, in addition to severe liquidity problems in the financial system (a near total freezing of the entire financial system liquidity plumbing), we have serious credit and insolvency problems too. The credit and solvency problems derive from a massive credit boom that lead to excessive borrowing that, in turn fed for a while rising asset prices that are now going bust, in a typical Minsky credit cycle. It is a insolvency problem as you have now millions of US households that are near insolvent and will default on their mortgages; dozens of sub-prime mortgage lenders who have already gone bankrupt; dozen of home building companies that are under distress; many financial institutions in the US and abroad - such as hedge funds and other highly leveraged institutions - that have already gone belly up; and the rise in credit spreads will also lead soon to a rise in corporate defaults that had been artificially low in the last few years given the excessively easy credit conditions.The Minskey Credit Cycle, as Professor Nouriel discusses often, is basically a model of asset bubbles that are driven by credit cycles; a cycle that obviously can be applied to our current environment after years of ultra cheap money and lax credit standards which led to a buyout and housing boom. My friend Jeff Bernstein also recently wrote about the psychology of asset cycles here on urbandigs (for all you that wonder why I discuss these macro economic topics and my thoughts, this news on American Home Mortgage and it hitting the consumers out there is the exact reason why)!
As I stated in my last macro update in the post "Jobs Weaken Big Time / Fed Likely To Cut" back on September 10th:
I have to adjust my biggest threats to housing once again as both my original predictions (tighter lending standards/credit crunch + jobs losses) have now come true. The two biggest threats to housing I now see are:Well the news out of American Home Mortgage on Friday could be signs of the beginning of that insolvency (assets no longer exceed liabilities; inability to pay debts) as a very real concern and that there are a number of classes that could be effected including the consumer, corporations, hedge funds, and any other highly leveraged entity.1. Global Growth Slowdown Amid Credit/Liquidity Crisis
2. Insolvency Crisis - Inability to pay back debts; assets no longer exceed liabilitiesI'll discuss #2 when I get back to NYC. My biggest fear now is that a slowdown is here in the US economy and even worse, it will SPREAD TO GLOBAL ECONOMIES! Globalization has been such a major factor in the growth of US corporate profits and ultimately stocks for the past few years. If we remove that equation, we will be entering a period of stock market corrections, more layoffs, negative wealth effect, change in consumer psychology, and big cutbacks in bonuses and salaries. This has NOT happened yet! I often say this when I make these predictions as I did with my past ones.
In today's NY Post I read a troubling article titled "Consuming Fire" that stated:
Consumer spending - the jet fuel that supplies 70 percent of the economic activity in this country - is in danger of being choked off, the result of mounting credit card debt and falling house prices. "The last life preserver of home equity loans has just been ripped away, so families are now alone in a sea of debt," says Harvard Law School's Elizabeth Warren, a law professor and expert on consumer debt. She's referring to the ability of families to turn the rising value of their homes into home equity loans to pay off their fat credit card bills.Along with this article came this graphic:The Federal Reserve said last week that the amount of revolving debt, mostly on credit cards, held by American families grew by 21 percent, to $907.4 billion, over the past five years.
This far outpaces wage growth and was fueled by the ability to refinance mortgages and to grab home equity loans to pay off the debt.
But now, with housing prices falling, one key tool used to pay off the debt is blocked.
Do the math: Rising Credit Card Debt + Falling Home Prices + Declining Payment Rates + Higher Refinancing Rates + Fewer Lenders / Refi Options + Tighter Standards + Slowing US Jobs Market + Possible US Recession = ??????????
Comments (2)
Great post, Noah... it is nice to see that the economic / real estate problems are being acknowledged by someone from within the real estate business. In the last paragraph, you ask us to do the math. It appears to be an easy calculation, and the result does not look good. But this being a New York City real estate blog, I wonder what you think will be the implications for Manhattan and the surrounding boroughs, including JC/Hoboken. How special are we really, and how much can foreign investment in our area help buffer a severe fall in real estate prices? Which areas will fare better, which fare worse? I wonder what you tell your clients.
Posted by ns | September 17, 2007 10:46 AM
NS - thanks, but tough to answer your question. Real estate is local and as many know, this market is one of the best places to invest long term. As long as inventory trends remain as tight as they are, you won't see a significant price correction other than those desperate sellers with a time pressure to move their property.
However, if economic weakness spills over to job losses and bonus cuts, that could cut out enough demand to reverse inventory trends and then you have a new ball game. Lets see how the macro fundamentals play out before discussing too much about this.
I tell my clients to make sure they can feasibly buy a home, have enough assets to do it, have a timeline to own over 4+ years, and understand every aspect of the transaction and their alternatives. When they agree to buy, I find them the best value at their price point and offer negotiating advice. More of a consultant.
Posted by Noah | September 17, 2007 1:10 PM