Mr Mortgage: The Real Estate ‘Quickening’ is Upon Us

Posted on August 16th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Duck and cover.

They have been told to ‘de-lever and raise capital’ but it fell on deaf ears for over a year. Now, here come the ‘asset’ sales all at once. First, the FDIC said it will be liquidating IndyMac, then Merrill with $30 billion two weeks ago, this week Fannie says 54k homes may be bulked and now Lehman will likely sell $40 billion. To raise capital the banks burned through sovereign funds late last year, preferred buyers this year and now are selling common stock and/or ‘assets’.  It’s all they have left.  

In my opinion, banks stumbling all over themselves to get ahead of each other in the bulk real estate ‘asset’ unwind comimg right at the end of the Spring/Summer selling season is the wildcard that will deliver a cripling blow to the housing market for a long time to come. The last thing this market needs is more inventory.  

“Lehman Brothers is in talks for potential sale of its $40 billion portfolio of commercial real estate and securities The portfolio includes mortgages and mortgage-backed securities that were valued at $29.4 billion as of May 31, the article said. It also contains real estate assets worth $10.4 billion at the end of May, according to the report.” Source: Reuters

“To speed up the disposition of the 54,000 foreclosed properties it owns, Fannie Mae is opening offices in California and Florida and is considering selling those properties in bulk to investors. “I do not think this is a time to be holding onto (foreclosed properties) hoping for a better day,” CEO Daniel Mudd said last week.”

“On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008″

Note: Barry Ritholtz is under the impression Merrill actually sold at 5.47 cents on the dollar when you factor in the details of the transaction.

Foreclosures keep increasing each month. Defaults are at a temporarily plateau at all-time highs, 800% greater than 2 years ago. We are entering a phase in which the defaults are moving from Subprime to Alt-A and Prime led by the Pay Option ARM, which is a subset of Alt-A. The problem is the Alt-A and Prime universes dwarf the subprime universe individually. Together they are monstrous. Pay Option’s hard recast either at 5-years or when they hit their maximum allowable negative amortization (110% to 125%), which in most cases comes sooner. This is the primary reason for default and the recasts do not peak until Dec 2009. 

Below is the CA foreclosure market. The ‘Foreclosure Sales’ line shows that $12.5 Billion in loans or nearly 29k homes were sold at auction, a record high.  However, 97% of these went back to the bank in July due to the lack of 3rd party buyers, which is typical.  As you can see NOD’s have declined slightly but Notice of Trustee Sales and actual Foreclosures are surging…I cover the reasons why NOD’s may be declining slighly in my  July CA monthly Foreclosure Report. I maintain it is not a leading indicator.

While sales have ticked up slightly over the past few months, they should have. Never discount seasonality. However, foreclosure-related sales keep ticking up as well are now a third of all sales nationally and 42% in the state of CA last month. The leaves ‘organic’ (you and I) sales at multi-decade lows. In addition, prices keep falling month after month due to the massive percentage of foreclosure-related sales into the market. Total sales increasing with home prices falling and foreclosures increasing at a faster pace than total sales is not a positive and does not clear inventory.

The banks ‘shadow’ inventory represents an overhang very few consider, as the majority is not MLS listed. This represents the real threat to housing across the nation.  The foreclosure market is the real estate market and the banks are the market makers. Never before in history has one seller (banks) controlled so much of the available inventory or has been able to price to sell now. Across the nation, neighborhoods are being marked-to-market literally overnight, leaving many in the immediate area living in a ‘negative-equity’ nightmare. One from which they can’t escape other than with an aggressive loan modification or short sale.

The average home seller is getting squeezed out because they can’t compete with the banks.  Most either owe too much to discount the homes to the bank’s level or hold onto hope that their home is ‘better’ and refuse to accept reality. Short sales, while becoming much easier to do, can take months to get approved. Many who want, need or should be selling are sitting on the sidelines because they do not think they have options. Many don’t.

The end of the Spring/Summer selling ends this month and if last year was any gauge, prices will take a hit. As early as late July/early August, many with equity who had to move and who were able to accept any offer they wished, accepted the best offer on the table knowing when seasonality ended so did their chances of selling. The banks that have virtually no price floor did the same. These homes will be the lowest priced of the season and go on record in September. Last September home prices fell 7.6% in a single month in the state of CA. I expect something similar or worse this year. Since Sept 2007, price fell a subsequent 24% through June 2008.

Where do new buyers come from?  With so many in homes unsalable because the owners owe more than the property is worth or simply stuck because they can’t buy the same quality/size of home due to the highly leveraged and affordable loan programs being gone, where do the new buyers come from?

Remember, the majority buy homes when they relocate or move-up. Most can’t afford to re-buy in their own city again let alone move up. People are stuck and just waiting to default. If they are in exotic loan type or highly leveraged with a second mortgage in addition to an exotic first, when either one of those loans blows up, so will the borrower.

The move-up buyer was responsible for much of the housing boom we experienced in the last decade. There are very few move-up buyers left because neither median or per capita incomes can afford the median home prices in most cities in the nation using new vintage, 10-20% down, fully documented loan types. In the past an $85k per year income could buy a $800k home with little or no money down on a stated income Pay Option ARM. Now, the same borrower can afford a $300k mortgage. Affordability through financing has been removed from the market overnight. 

Below is a chart I put together a few months back when everyone thought we had bottomed. While prices have fallen since to $328k on the median from the $354k shown, it shows that housing prices primarily rose over the past many years due to even more exotic programs coming out designed to lower monthly payments. Now, all of those are gone and we are back to 1990’s and before lending standards overnight. For payments have to become affordable again prices have a long way down to go.


This leads me full circle to the beginning of this story. With IndyMac, Merrill, Fannie and now Lehman all in bulk ‘asset’ dump mode, other entities with less will want to get out ahead of them. Especially those banks holding vacant REO (real estate foreclosures) wanting to get ahead Fannie Mae’s 54k units. There is so much ‘shadow’ inventory on bank’s shelves, an asset dump across banks holding large amounts of property such as WaMu, Countrywide, GMAC, Chase and IndyMac could seriously depress prices for a long time. This is a variable nobody is considering.

Bulk ‘assets’ go for pennies on the dollar as you saw with Merrill’s CDO dump.  Therefore, the vacant REO and non-performing notes in these bulk asset sales will be sold so cheaply that vulture funds can swoop this up and get this product back into the market fast at deeply discounted prices. This brings values down immediately. The result is an immediate and swift mark-to-market in that neighborhood…as one family gets a ‘great deal’ 100 have more equity stripped away, 50 are thrown into an incurable negative-equity situation and 25 default as a result. This leads to even more inventory. It is a vicious cycle; a feedback loop from which there is no escape

I will post a follow-up to this story in October. -Best Mr Mortgage


84 Responses to “Mr Mortgage: The Real Estate ‘Quickening’ is Upon Us”

  1. I heard a great quote today from Liz Anne Sonders:
    Her take on the lifespan of a bear market: “They’re born on euphoria, grow on denial, mature on panic and die on despair.”

    I think we are still in the denial phase.

  2. Liz Anne addresses the shadow banking system! Pretty good analysis.
    Watch her comments here: You need flash btw.

  3. I just chose July 2010 because I am convinced by that time if you do not openly use the “D” word to describe the economic situation, you will be snickered at.

    Right now we are outliers in this opinion.

    The Federal Government DOES have a key role to play in public health. We don’t really need an uncoordinated 50-state response to a bird flu pandemic. That’s a federal issue.

    Additionally, I would NOT abolish the FDA. I’m convinced that if every state, facing huge cutbacks, had its own little food safety programs we would have a lot more food poisonings….

    So although most Americans are CONVINCED that the Federal Government is all BAD, thanks to relentless advertising from the transnationals who are plundering the planet, it does have a proper role in food safety, airline safety and public health.

    Or do we want to put the AIRLINES in charge of airline safety?

    Just my opinion. Nothing more nothing less.


  4. Any government is only as good as the people running it.

  5. Food safety? Give me a break. Have you noticed how FAT Americans are these days?? And how many new drugs are advertised to us every week?? The FDA is completely useless!

    The FDa doesn’t regulate anything. As long as it sells, they don’t care.

    I’m not even going to bother responding about the TSA.

  6. No EO, the whole point behind our country was to keep the gov’t in check. Right now it’s out of control.

  7. I guess I’m the only one who doesn’t support IMMEDIATE abolition of the Federal Aviation Administration? Let the “free market” be in charge of air traffic safety, starting at NOON tomorrow. WITHOUT DELAY!

    I remember conversing with Murray Rothbard, one of the GODFATHERS of the Libertarian Party, ADORED and REVERED by Ron Paul. Rothbard was on a book tour for his bestselling “Libertarian Manifesto”, back before being a libertarian was politically correct.

    Rothbard told me on the air that ALL streetlights should be abolished immediately, in all neighborhoods, as an unnecessary usurpation of the power of the people….

    Eliminate ALL traffic lights and signs immediately?

    That was HIS view….

    It’s on tape somewhere….

    Just my opinion. Nothing more, nothing less…..


  8. Tony, c’mon off course some things require regulation, but NOT “Bailing Out” PRIVATE ENTERPRISES with PUBLIC MONIES!!!! Give me a break… please.

    Rumor has it that Lehman will report write downs of $4 + Billion (double what was expected) but hey what do I know… and by the way that is not even 10% of their marked to mythical models of $60 + Billion. What a charade! I would expect a more realistic $10 + Billion write down which is still WAY TO SMALLL for what needs to go, but it would be an honest start. This amount is just saying FU to the public and the share holders that we know YOU KNOW we are broke and near bankrupt, but WE WILL FOOL YOU ALL into investing in us further so YOU WILL ALL LOSE MORE MONEY and we will lesson our losses… Oooopss… did I say that???

  9. Please stop the “free market” nonsense. It never has nor ever will exist.

    Elites control Wall St. & D.C. so they get what they want when they want it.

    “Free Markets” are for the Chumps that can pay to get it rigged.

  10. I agree.

    The GAINS are ALWAYS privatized and the LOSSES are ALWAYS socialized….


  11. Is deflation the winner?

    “US money supply has experienced the sharpest contraction in modern history, heightening the risk of a Wall Street crunch and a severe economic slowdown in coming months”

    “On a three-month basis, the M3 growth rate has fallen from almost 19pc earlier this year to just 2.1pc (annualised) for the period from May to July. This is below the rate of inflation, implying a shrinkage in real terms.”

  12. Viv, in my opinion we are on a crash course with severe deflation. By definition we are in a daflation tailspin right now with credit tightening and home prices entering into the free fall phase. Inflation is occuring as well with the printing of money by the Fed and in commodities, but the deflation effects are so much higher and widespread that they override any inflation worries. This is why I think the Fed has held steady on interest rates. They have very little fear of inflation hampering things. They are extremely worried about deflation however and its impact on the overall economy and its ability to pull out of the downturn we are in. Again in my opinion…

  13. stu, mr M and all, so do you reckon interest rates will head lower? what’s that going to do to the dollar and the price of oil and gold/silver. This crisis seems to get fuzzier by the day.

    The disconnect between physical demand for silver and gold and the market price is unbelievable, check this article

    “investors are simply not able to get any, without waiting for months. Investor oriented shops are bare, and the U.S. Mint has suspended coin production. All available supply seems to be reserved for industrial users.”

  14. In terms of deflation, the recent Fed survey of senior bank lenders shows a VERY strong trend in two respects, each of them accelerating:

    1. Banks are tightening standards, lending less in nominal terms AND
    2. They are increasing their markups dramatically over their costs of funds, i.e. interest rates are RISING.

    This is but one part of the bigger picture in which we are seeing a collapse in worldwide consumer demand.

    What is the best hedge against DEFLATION? It surely isn’t gold! Gold CANNOT be simultaneously a perfect hedge against BOTH inflation and deflation.

    Instead, the BEST hedge against DEFLATION is the VERY highest quality bonds you can find.

    This according to Henry Kaufman, former head of Salomon Brothers.

    And of course the massive rally in Treasuries continues. The next move by the FED will be to LOOSEN, but BONDS will STILL strengthen.

    It’s a flight to quality thing.

    Just my opinion. Nothing more, nothing less.


  15. LOL! Where do you find quality bonds these days?

  16. Viv, in my opinion interest rates will not head lower for us moving forward. They only have one way to go and that is up. They may head lower for the Aussies and Brits for example, but we are negative vs. inflation already and cannot go lower for many reasons and eroding the dollar further is one of the big ones. We will sit tight and start raising rates towards the end of the year as other currencies begin to drop their rates and as a result strengthen the dollar further. The current movement towards strengthening we do not want to jeopardize…

    As far as gold goes it is a commodity after all and not tied to the dollar like it used to be. In my opinion it will be volatile and there appears to be some manipulation by the Fed and other central bankers in collusion with the big financials to decrease their overall losses. There is a lot of money out there still that needs to get parked some place and gold was one of those places during the recent run up in inflation and people being overall just nervous about things. It didn’t work out so well and now has to be unwound in an orderly fashion…

    Tony, I totally agree with you and credit will get squeezed more and more until we are eventually back to the 80’s & 90’s lending standards which will cripple housing even further. Deflation is mostly a contraction of credit and we are about to see that take place like never before in our lifetimes in my opinion.

    Long term rates will rise due to the risk involved in lending and the increased need for revenue to show profits by the financials. They are simply getting clobbered in terms of profits and have given back so much over the last year in regards to profits made over the past 5 years. Also the increased cost of borrowing has to be paid for by the consumers who want these lenders to loan them money. It will be cost prohibitive to do so without raising long term rates. Lenders are getting to a point where as they charge higher rates to lend or simply don’t lend. Seeing as how that is what lenders do and how they make money I see rates rising and quickly over the coming months. I would not at all be surprised to see 8%-9% on jumbo loans & 7%-8% on confirming loans as a norm very shortly…

  17. With the price of oil this high (relative to last year), there is the beginning of the localization trend. With jobs moving back to america and less trade generally across the world as shipping goods from taiwan to china to japan and than to america becomes more and more expensive. There was a good article on this in the NY times recently and even Jim Paplava at reckons jobs are moving back to the rust belt. We’re certainly living in interesting times, there’s more going on in the financial markets and the geo-politics of oil than i can handle.

    On a lighter note, anyone else saw the superb world record run by usain bolt in the 200m? the events have really been magnificent and the brits are beating the ausis in the gold medal count for the first time in years.

  18. I’m a potential home buyer, but at this point, I’m in no hurry.

    A few times a week I’ll look through the multiple listings, but, for the most part, all I see is delusional pricing. Fine. My money stays in the bank and the deluded sellers can keep their overpriced properties. As for working with the banks? The seem to be disposing of their properties through heavily advertised “auctions,” but some of the auction companies have less than stellar reputations. And so once again, I’ll wait rather than deal with crooks.

    When will I buy? When I start to see properties advertised for sale at sensible prices. Until then, my rented condo in Scottsdale is just fine.

  19. Re: the original posting, it was a vicious cycle on the way up but nobody was complaining then. All pyramid schemes eventually crash. Suck it up. Looking forward to sanity resuming, foreclosures can’t happen fast enough. You’ll know we’ve hit bottom when HGTV is doing reality shows on how you can redecorate to fit 4 adults in a 1-bedroom apartment.

  20. OD, either you believe in the markets or you do not.

    You can’t have it both ways.

    The markets are saying US Treasuries are the ONLY place to be.

    That’s just what the markets are saying.

    The GREATER the risk of a DEFLATIONARY BURST, the safer your bonds need to be.

    Hence the FLOOD of money into Treasuries, as the historic bull market in them continues apace.

    Just my opinion. Nothing more nothing less.


  21. So T-bonds are the way to go? I don’t exactly understand how fixed bonds can ever keep up with the devaluing of the dollar?

    I don’t understand why you would “loan” money to a gov’t that will NEVER pay it’s debts?

    This is confusing.

  22. od-

    The markets don’t lie. There is no market more free, more transparent and with tighter bid/ask spreads than the Treasury market.

    We are talking 500 BILLION a DAY trading in Treasuries.

    In terms of this government “NEVER” paying its debts, that’s just not a serious comment.

    The US Government has issued TRILLIONS of dollars worth of 90-day T-Bills and one year Treasury notes in the last 50 years.

    You are somehow claiming that NONE of that was repaid.

    Get real.

    Either you believe in the markets or you don’t.

    They are saying right now (as they have said since July of 1982) that Treasuries are the best game going.

    Just my opinion. If you want to sink your money into gold or real estate, that’s up to you.

    But it puzzles me how people can claim that gold is a PERFECT HEDGE against BOTH inflation AND Deflation.

    That’s just not logical.


  23. “Under the current monetary system gold is not the official form of money and therefore does not represent liquidity. In particular, taxes cannot be paid with gold, debts cannot be repaid with gold unless a special agreement to do so is made between the borrower and the lender, and more than 99% of purchases cannot be made with gold. Therefore, in a situation where dollar-denominated obligations were huge and the supply of dollars was contracting many private investors would probably be forced to sell their gold in order to obtain the dollars needed to meet their financial obligations. Also, under such circumstances those who were sitting on a large amount of cash and were therefore under no pressure to sell anything would be far more likely to invest their cash in US Treasury bonds than invest it in gold. This is because T-Bonds would be one of the few places where a guaranteed income stream could be obtained. In fact, if we thought a deflationary outcome was likely over the coming few years we’d now be advocating the buying of T-Bonds during every significant dip in their price because the scene would be set for bonds to provide substantial real returns.”

    from An old article but agrees with what Tony says.

  24. Sure. In a HYPERDEFLATIONARY environment, the trick is finding ANY income stream that will hold up and not go bankrupt.

    This is the scenario for how to survive a complete and total liquidation of the entire financial system of the world.

    Because everyone is bankrupt in such a scenario, no one has any MONEY to buy gold. That’s why the price plummets and why it is crashing now, along with real estate, stocks, commodities and everything else except extremely high quality bonds.

    To value such a bond, remember, you are not just valuing the income stream, although that is PRECIOUS in a hyperdeflationary context.

    Remember, people are actually bidding up the value of the ACTUAL SECURITY. This is the same mechanism by which bonds “rise” and “fall” lowering and raising their yields, respectively.

    When you buy such bonds on margin, the CAPITAL GAINS are enormous. Plus you get the guaranteed income stream.

    This is how the Fed makes its money.

    The Fed is the best market maker in Treasuries. They have inside info in the form of advance economic data, before market release.

    And they won’t do anything to let that bull market in Treasuries die.

    Because it’s their 980 billion dollar portfolio (the size of their trading account at the Open Market desk in NYC) at stake.

    Just my opinion.


  25. Fortune have an excellent article on how “Our easy access to plastic is about to dry up – and with it our ability to fake living the good life.”

    This quote was quite compelling, “So now what? It’s hard to see where consumers can turn next. Home prices seem highly unlikely to start rising again soon. Stocks? You never know, but the Great Bull Market looks like a once-in-a-lifetime event. Homes and stocks are households’ biggest asset classes by far. There isn’t much else to borrow against.”

  26. Deflation in the short run but Inflation in the long run.

    All this talk about Debt misses the most important point:

    Debt is how Money is Created in this Fed / Bank System.

    No New Debt = No New Money.

    Deflation is happening now because Debt Money is being retired by folks walking away from their Mortgage Debt.

    Eventually, folks with a cleaner balance sheet will be loaned fresh new debt money.

    This is what the Fed wants. This is being engineered.

  27. “After I began researching HUD fraud in the late 1990s, I would be contacted by people with experience with HUD fraud. They insisted that the same home was being used to create ten or more mortgages that were placed into different pools. They alleged that Chase as the lead HUD servicer and the other big banks were implementing such systems. This was why we would see the same house default two, three, or four times in a year, they claimed. FHA mortgages had to be churned through multiple defaults to generate the cash to keep all these fraudulent pools afloat. This, they insisted, was all going to finance various secret government operations and private agendas. ”

    This is one of a series of articles that were written by Catherine Austin Fitts who served as Assistant Secretary of Housing and Federal Housing Commissioner in the first Bush Administration. Her company Hamilton Securities Group served as lead financial advisor to the Federal Housing Administration during the Clinton Administration.

    This is startling, the same home being put in many different asset securitization pools!!! what a scam, the full article/s can be found at

  28. Viv-

    Catherine was managing partner at Dillon Read, one of the world’s most prestigious firms that gave birth to all sorts of Washington and global insiders for decades. They were the chief investment banker for RJR Reynolds Tobacco, and made extraordinary sums investing all that tobacco money.

    As one of the chiefs at HUD in the 1980s, she was well positioned to grasp and predict the catastrophe to come.

    She was later offered a job as a Governor of the Fed, which she declined and shortly thereafter became very public in her speaking out against corruption at the highest levels of the GSEs and elsewhere.

    Her journey makes compelling reading. Her extensive story is at:


  29. Dear large banks-

    Your effort to hold large invetories of reo’s was mobile. But now with fannies announcement you have no choice but to let them go. Yes this cause property values to decline across America, thus causing an even more extreme negative equity effect, this causing more of your loans to default, this causing more of you to go under like indymac, cw, etc.
    What have we learned?
    If you give candy to a baby they will eat it.
    If you buy a bushel of hay on credit for 1000 bucks, and tomorrow it’s worth only 600 bucks, you might just let the seller take it back.
    Everyone might have a value decline threshold but at some point you would expect most to throw in the towel based on circumstances.
    Diffusion of knowledge and information will hurt this situation.

    Banks have been greedy and must repair the mistakes they have made. Banks, don’t wait for govt to step in, like in new York, pushing back foreclosure timelines. Be realistic, if someone owes you twice what something is worth, they won’t pay. Modify the mortgage to account for the decline in property value in that area. Give people time to recover from distressed situations. Forget about foreclosure timelines. These ate human beings and you got thin into this mess. You fed too much candy to the baby and now it is sick. Nurture it!!

  30. Why is Southern Maine Property still so expensive. I mean, Maine is a poor State and buying Housing in the soughern part of the state is like buying in Boston. When will home prices come down to a reasonable level in Southern Maine?

  31. Mike the Moose:

    Maine property will probably fall to reasonable levels the same time that we’ll see drops in Seattle, Portland, New York, Boston and other such “strong” markets. Their strength won’t save them, just belay the inevitable. When you see prices begin to drop, they’ll practically free fall.

    Or at least thus I hope. Lord knows I’m still waiting for the prices here in Seattle to drop. Granted $400K is better than $575-$600K on a year or two ago, but there is a LONG way to fall still…

  32. This is a good thing. I’m sure the banks originally thought they could slowly leak the inventory out and get the best prices, but now their hands are forced. I don’t care if people’s equity disappears. It’s all phony to begin with as the values were pushed up by untenable circumstances. I’m sure it sucks to have bought back in 06 and see your property worth less than half that, but a lot of people said this was going to happen, and willful ignorance out of greed is always returned at some point. I’m one of those that will get a “deal” when they unload, and even then I’ll be a bit nervous about the future of housing.

  33. […] version below. What she says fits in perfectly with a report I wrote mid last month called ‘The Real Estate Quickening is Upon Us’. If you have not read please do. -Best Mr […]

  34. […] I call it the ‘quickening’.  I talked about it a month ago in my post and video called ‘The Real Estate Quickening is Upon Us’.  This is a bi-product of the failing and/or deleveraging of all financial institutions. Some of […]

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