Capital Economics claims that U.S. home values are 20 percent undervalued. Yields on Fannie Mae and Freddie Mac mortgage securities fell to record lows. Trulia reports that 19 percent of homes had a price reduction last month. Real estate appraisers claim that Obama’s new foreclosure program encourages fraud.

In The News:

ABC - “More Work Ahead on Housing Market: Treasury” (3-9-10)

“Michael Barr, the Treasury’s assistant secretary for financial institutions, said in prepared remarks to state housing agency officials that the Obama administration’s housing policies ‘are helping to stabilize housing markets’. He said mortgage rates remain near historic lows, unsold home inventories are falling and prices are declining less rapidly in most markets with some prices increasing.”

The Press Enterprise – “State law to save foreclosure victims from losing shirt on taxes” (3-9-10)

“Passing the Assembly by a 47-27 vote, the bill authored by Sen. Lois Wolk (D-Davis) would exempt people who did short sales or received loan modifications or lost their houses in foreclosure last year from having to pay state tax on any mortgage debt that was forgiven. Otherwise the forgiven debt would be considered income for the homeowners even though they received no money from the sale of their home.”

Housing Wire – “State Housing Finance Agencies Uneven in Plans to Use $1.5bn Federal Fund” (3-9-10)

“Last week, the US Treasury Department cleared select state HFAs to submit proposals for the fund. President Barack Obama announced the plan in February to use $1.5bn of the Troubled Asset Relief Program (TARP) to help homeowners in states where house prices have dropped 20% from peak. Nevada, California, Arizona, Florida and Michigan are making plans to target unemployed or underwater borrowers and provide second-lien relief.”

Housing Wire – “Economists Find US House Prices are Undervalued Globally” (3-9-10)

“House prices in the United States are nearly 20% undervalued, especially in the states of California, Nevada, Michigan and Ohio, when compared to global markets, according to a report from independent macroeconomic research consultancy firm Capital Economics.”

Bloomberg - “Fannie Mae Mortgage-Bond Spreads Fall to Record: Credit Markets” (3-9-10)

“Yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates fell to the lowest relative to Treasuries on record, even as the scheduled end of Federal Reserve purchases approaches. The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds and 10- year Treasuries narrowed about 0.01 percentage point to 0.61 percentage point as of 4:15 p.m. in New York, the smallest gap since at least 1984, according to data compiled by Bloomberg.”

Inman - “Trulia: Price reductions reach new low” (3-9-10)

“As of the first day of this month, sellers had reduced prices on less than 20 percent of listed homes for the first time since Trulia started tracking price reductions in April 2009, the property search site announced in a report Tuesday. The March report found that sellers had reduced prices at least once on 19 percent of the homes listed on the site, compared with 21 percent the month before. The report included about 3 million properties and excluded foreclosures and new homes from its calculations.”

Inman - “Beware listings scammers” (3-9-10)

“Real estate agents beware: Scammers can take the listings information from your real estate Web site and peddle them as rental properties to try to bleed unsuspecting prospective tenants of their money and personal information, according to a story by a news agency in Pittsburgh, Pa.”

Orange County Register - “Fed sees ‘little change’ in West’s housing” (3-9-10)

“Demand for housing appeared to be little changed on net, while demand for commercial real estate slid further. The pace of home sales was mixed across areas but appeared to be largely unchanged after adjusting for normal seasonal variation. Home prices reportedly rose a bit further in some areas of the District. However, the number of available homes for sale remained elevated, which substantially offset builders’ incentives to increase the pace of new home construction. Demand slid further for commercial real estate, and tenants continued to push for and often achieve rent concessions and other favorable terms through renegotiation of existing leases. However, one contact noted an increase in leasing activity in some segments of the major markets in the District, as well as slightly improved availability of financing for new commercial development and investment transactions.”

Orange County Register – “Appraisers: Obama plan encourages fraud” (3-9-10)

“Real estate appraisers today announced their opposition to part of an Obama administration plan to pay homeowners in trouble to move if they agree to a short sale, saying the program will lead to mortgage fraud. Under the plan, which takes effect April 5, delinquent borrowers who couldn’t get a loan modification can get $1,500 to move if they sell for less than the balance of the mortgage. Banks and second mortgage lenders would get $1,000 to process each of these short sales.”

Orange County Register – “Laguna Beach homes selling slower” (3-9-10)

“Homes are selling at a slower pace than two weeks ago, according to a biweekly report by Steven Thomas of Altera Real Estate. Laguna Beach’s market time, or home-selling pace, slowed from 9.14 months to 11.07 months. Countywide, the trend was the same. Two weeks ago, it would have taken an expected 2.51 months to sell Orange County’s home stock, which improved to 2.77 months.”

Looking Back:

One year ago, the San Francisco real estate market had the second largest year-to-year price decline in the United States. Economists claimed that the United States was in danger of deflation. Orange county had a 4 month supply of unsold home inventory. San Diego condo sales increased by 40 percent from 2008 to 2009.

Multifamily home building will likely become more expensive in San Diego, as a new water meter program gains popularity. According to RealtyTrac, one in every 25 Los Angeles homes received a notice of foreclosure in 2009. Silicon Valley Bank forecasts an increase in foreclosures in Napa Valley.

In The News:

MBA – “MBA and Others Express Grave Concerns About Regulations Proposed Under SAFE Act” (3-8-10)

“HUD is proposing to exceed its statutory authority under the SAFE Act establishing a backup system and determining whether state laws meet the SAFE Act’s minimum requirements.  In this regard, HUD indicates it may require states to treat servicer employees engaged in loan modifications as originators for the purposes of the Act.  If the regulation is finalized as proposed, HUD risks significantly curtailing the ability of servicers to complete loan modifications until their employees are registered or licensed.”

Sign On San Diego – “S.D. could require multifamily water meters” (4-8-10)

“The City Council takes up a proposed ordinance tomorrow after months of fine-tuning. The proposal is widely expected to pass, creating what several water experts said would be a first in the county. It would require submetering for new complexes with three or more units and in cases when an entire interior drinking water system is replaced for a complex with three or more homes. Some exemptions apply.”

Housing Wire - “Los Angeles to Pull Investments from Foreclosure-Heavy Financial Firms” (3-8-10)

“According to the real estate data provider, RealtyTrac, the Los Angeles metropolitan statistical area (MSA) had the 32nd highest foreclosure rate in the country in 2009 as foreclosures remained concentrated the sand states. There, one in every 25 homes received a foreclosure filing, a 37% increase from 2008. California leads all states with the most permanent modifications under the Home Affordable Modification Program (HAMP), according to the US Treasury Department.”

Housing Wire – “State Applications Open for Federal Underwater Borrower Aid” (3-8-10)

“Select state Housing Finance Agencies (HFAs) can submit proposals for using $1.5bn from the HFA Hardest-Hit Fund to prevent foreclosures and stabilize local housing markets, according to the US Treasury Department. Eligible HFAs can apply for clearance to fund principal-forgiveness, unemployment and second-lien reduction programs.”

Housing Wire – “Investors Shun Fund of Funds for Higher Hedge Gains: Barclays” (3-8-10)

“The migration of money away from fund of funds and directly into the hedge fund space indicates investors are being drawn by the recent successes in the industry, which look set to continue, according to market analysts. The business for hedge funds in the United States is growing posting an estimated inflow of $7.1bn — or 0.5% of assets — in January, according to TrimTabs Investment Research and hedge fund data vendor BarclayHedge.”

Housing Wire – “Failed Banks May Get Pension-Fund Backing as FDIC Seeks Cash” (3-8-10)

“The Federal Deposit Insurance Corp. is trying to encourage public retirement funds that control more than $2 trillion to buy all or part of failed lenders, taking a more direct role in propping up the banking system, said people briefed on the matter.”

Bloomberg – “Vineyard Defaults Surge as Bargain Wines Hurt Napa” (3-8-10)

“In California’s Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values and a consumer shift to cheaper brands. As many as 10 wineries and vineyards in Napa will change hands in distressed sales or foreclosures this year and next, up from none in 2008, according to Silicon Valley Bank.”

Looking Back:

One year ago, the number of borrowers who defaulted after the first payment tripled. The Government predicted a 10.3 percent unemployment rate. 650,000 jobs dissapeared in one month.

According to Callahan & Associates, the credit union industry originated $95bn from residential mortgages in 2009. The Labor Department reports that 36,000 jobs were lost in February. Chris Kotowski predicts that Fannie Mae and Freddie Mac may force other lenders to to buy back $21 billion of home loans this year. $4.1 billion in lending was sought from the Federal Reserve throughout the last six months.

In The News:

Business Journal – “Tiny supply builds hope for housing industry” (3-5-10)

“Existing homes listed for sale are in shorter supply here on a per-capita basis than in 18 major metro areas, including Chicago, Dallas and Atlanta. And unlike areas where condo towers proliferate, such as Las Vegas, the Southern California coast and south Florida markets, Sacramento has among the fewest finished-but-vacant new homes in the country.”

Wall Street Journal – “Study Sees FHA Taking More Risk” (3-5-10)

“economists warn that the Federal Housing Administration—which has jumped to fill the void left by the collapse of the private mortgage market—is overlooking factors that signal higher losses, according to a working paper released Thursday. The agency has traditionally turned a profit for the U.S. government. But the economists warn that by underestimating the risks it faces, the FHA has increased the likelihood that it will have to ask Congress for money for the first time in its 75-year history.”

Housing Wire – “Credit Unions Originate $95bn in Residential Mortgages in 2009″ (3-5-10)

“The credit union industry originated $95bn in residential mortgages in 2009, taking a 4.5% share of the nation’s total mortgage market. Including the mortgages written last year, the nation’s 7,710 credit unions originated more than $271.9bn in new loans, a 7.1% increase over 2008, according to data released by Callahan & Associates, a Washington, DC-based financial consulting firm that specializes in the credit union industry.”

Housing Wire – “Unemployment Holds at 9.7% in February” (3-5-10)

“The economy lost 36,000 jobs in February and the unemployment rate held at 9.7%, according to the Labor Department’s Bureau of Labor Statistics monthly report. The 9.7% unemployment rate is steady from January, but up from February 2009’s rate of 8.2%. The U-6 unemployment rate, which includes not only those without jobs, but also the underemployed, was 16.8% in February, up from 16.5% in January, but down from December’s 17.3%. A year ago, the U-6 unemployment rate was 15%.”

Housing Wire - “Bair: Too Soon to Know How Successful HAMP Will Be” (3-5-10)

“It is true that the numbers of trial and permanent modifications have lagged behind program projections. But at the same time, we saw a slowdown in the pace of new foreclosures in the second half of last year.”

Bloomberg - “Fannie, Freddie Ask Banks to Eat Soured Mortgages” (3-5-10)

“Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages. That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.”

Bloomberg - “Fed’s TALF Winds Down With Most Loan Requests in Six Months” (3-5-10)

“The Federal Reserve received the most loan requests in six months from investors for the final round of its program that unlocked the market for asset-backed securities. About $4.1 billion in lending was sought, including $1.8 billion for financing of student-loan securities, the New York Fed said yesterday on its Web site. In total, about $7.1 billion of sales this week were of securities that included eligible classes, according to data compiled by Bloomberg.”

Bloomberg - “Fed Presidents Say Rates Need to Be Low Early in U.S. Recovery” (3-5-10)

“Two regional Federal Reserve Bank presidents, speaking before today’s release of a February report on U.S. jobs, said they believe the central bank should keep rates low until the recovery picks up.”

Inman - “Hitwise: Zillow reclaims No. 2 spot” (3-5-10)

“Zillow eked out a tiny edge over Yahoo Real Estate in February to reclaim its title as the second-most visited real estate site on the Web, according to rankings compiled by Web metrics firm Hitwise. Zillow, which was bumped into third place by Yahoo Real Estate in December, captured 3.43 percent of traffic in the real estate category during February, Hitwise said, compared to 3.4 percent for Yahoo Real Estate. Realtor.com retained its top spot on the Hitwise top 10 list, with 6.67 percent of traffic in the category.”

Looking Back:

One year ago, the Mortgage Bankers Association asked to have the 105 percent LTV limit raised. The MBA observed an increase in delinquencies on mortgage loans. The NAA reported that gross receipts for real estate auctions grew about 1.1.

Robert J. Samuelson Author and Columnist (Full Bio)

This week Bruce is joined again this week by Robert J. Samuelson. Robert is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

One of the main claims in Samuelson’s recent book is that the rise and fall of inflation was the most significant event in the past 50 years. When most people think of the fall of inflation, they think of a very short time. One of Samuelson’s key points is that there was nothing usual about the last 25 years. Samuelson thinks the fall of inflation was even more important than the rise of inflation.

In the early 80s, inflation was reaching 15 percent, mortgage rates were around 15 percent, and the prime rate for good bank customers was over 20 percent. When inflation came down, interest rates came down slowly, because no one believed that inflation would come down. Asset prices, beginning with the stock market, began to increase during this time. The Dow Jones industrial average was between 800 and 900. There was an explosion in the stock market over the next 20 years. By 2000, the Dow was over 10,000. Stock market wealth within households went from about $1 trillion in the 80s to over $11 trillion at the end of the 90s.

Later, this increase in stock values lead to an increase in real estate values. For many years, consumers spent more of their income and borrowed more. There were only 2 modest recessions during this time in 1991 and 2001. This increase in wealth made people very careless. It conditioned them to take risks which they should not have taken, because they believed the economy had entered into a state of prolonged prosperity.

If you have a feeling of preordained success about an investment, you are probably ignoring a lot of the risk factors you would normally pay attention too. People thought that risk had gone down because of lower inflation. They also felt that they understood risk better. People then began to take more risks because of these two false assumptions. Lenders began to lend money to people with high levels of debt, and they did it with silly and destructive interest rates. People assumed that stock prices would increase forever. For many years, Samuelson warned people that things would not continue to increase forever. Some of those people looked at Samuelson with pity, because he wasn’t taking part in the stock market increase.

Great gains inspire perverse behavior. There were people who owned 50 and 60 homes, who did not have a normal job, with a $30,000 negative cash flow per month. They would show you their list of properties with pride, because they were worth $4 million. They assumed they would be able to sell all their properties to people who were even dumber than they were. These kinds of people were sure that their investments couldn’t go wrong.

Before the bubble burst, people had high expectations for success, which allowed them to grumble about things not being good enough. The paradox at that time was that they could only have grumbled if they expected themselves to be heading towards paradise. The fact that things had been so good for them allowed them to criticize the actual conditions. When historians look back at this time, they will likely conclude that the times were not that good, even thought they really were; the times just weren’t as good as people thought they should be.

Roughly 2/3 of today’s population are too young in 1980. They were either not alive, or they were in their pre-adult years. They were not aware of the 70s and the high inflation, but even the people who lived during that time forgot about it.

Samuelson knows a columnist who wrote about Reagan’s leadership qualities. Samuelson does think that Reagan was a good leader, but the columnist did not address inflation at all. This history is the lost history. Professional historians and economists have engaged in an act of amnesia. This is scary because people will be more likely to make the same mistakes in the future. Samuelson thinks it is good to have the truth for the sake of truth, but also because if we don’t know the truth we will likely repeat our mistakes. There are prominent economists who are claiming that a little more inflation would be okay. Samuelson believes that if we encourage a little inflation, we will end up with a lot of it.

When society is used to good times, it can be difficult to ask for sacrifices, depending on what sacrifice you are asking for and why. Today, we have made more promises to people than we can afford to keep. Most of these promises are to retirees through social security, Medicare, and Medicaid. The cost of paying for those programs, when the baby boomers retire, will be staggering. Our children will be saddled with very high taxes, high budget deficits, or great cuts in other services. If we explain this to people, perhaps they would be willing to make some sacrifices. They may have to cut back on benefits for retirees, and raise the eligibility age for those programs. There may also be some sort of tax increase. None of our political leaders have made the case for sacrificing for our own interest. They seem to be waiting for a crisis to happen, which will force them to do things they should have done on their own.

There seems to be a popular conception that hyperinflation will likely occur in the next 20 years. However, based on our current scenario, Bruce does not see this occurring any time soon. Bruce and Samuelson are more considered with short term deflation. Samuelson doesn’t understand how you get higher inflation when you have empty shopping malls, 10 percent unemployment, and surplus factory capacity. As long as the people running economic policy in this country don’t come to the conclusion that higher inflation is better, we shouldn’t have it in the near future. When Samuelson says near future, he means 3 to 5 years.

In the long term, some people say that we will have to inflate because we have so much debt. The problem is that it is not easy to inflate your way out of debt. Forty percent of inflation turns over in a year or two. If you raise the inflation rate, you don’t really erode the debt, because you just have to refinance it at higher interest rates. In theory it seems like a practical choice, but in reality, it is not realistic.

Economists make the mistake of assuming that the economy responds in a mechanical way to credit, interest rates, government spending, and taxes. These things are significant, but Samuelson doesn’t think they are everything.

What happened in Japan was that they had an economic model, from the 50s to the middle 80s, which worked well for them. They had an export led economy, and they had an undervalued exchange rate. Their domestic economy was not very dynamic, but their exports kept growth and investment high. That model didn’t work in 80s because the exchange rate appreciated dramatically, and their exports became less competitive. This caused the Japanese to settle into a low growth mode, and they haven’t found a different economic model that works better. Contrary to what people learn in college economics, monetary and fiscal policy cannot change that kind of problem. The Japanese efforts to expand their economy through large budget deficits and loose monetary policy didn’t work. Their policy was dynamic internationally, but not domestically, and Samuelson thinks that is the problem in Japan.

If deflation became anticipated, it would be very destructive. Samuelson doesn’t think that modest price decreases would be that bad for a little while. However, if people think that prices will decrease forever, then they won’t borrow money, because their debt burdens will rise. They will postpone buying because the car they could buy today will be expected to fall even more in the future. This mentality will reduce demand, and then unemployment will increase.

Bruce asks Samuelson about what has changed in the baby boom generation’s expectation for retirement. Samuelson claims that this question is a little above his competence, because he is at the very edge of the baby boom generation. Samuelson feels that his retirement has become much less certain. He has saved a fair amount of money, but one thing he has learned is that markets don’t always increase. For example, if you have $100,000 on Thursday, six months from Thursday you may only have $100,000 minus 30 percent of its value. If you thought that money amount would be adequate to supply you through retirement, you may discover later on that it isn’t. That whole generation is probably feeling that same way about their retirement savings. Bruce thinks this mentality will cause a scenario that will not be inflationary. The economists that Samuelson talks to claim that people have short memories, so if we get into a fast growing economy for a few years, then their mentality of fear will disappear. However, Samuelson tends to agree with Bruce in his belief that these setbacks will leave people with a scarred mentality.

Samuelson wrote that the baby boom generation was the benefactor of large chunks of profit. They had the stock market increase, and then they had the real estate increase. This caused the baby boom generation to accumulate a lot of equity. Most of the GDP growth after 2002 came from equity growth and the extraction of it. Bruce wonders what is going to fuel the GDP growth going forward. This makes Bruce think, “How will we get inflation if we will have difficulty obtaining a moderate GDP growth?” Samuelson says that in an ideal world, the source of growth for the next 10 years would come from higher exports, fewer imports, and investment related to those thins. Also, more investment into our energy infrastructure might help as well. Specifically, natural gas could help us a lot now that we know we have more than we previously thought. Also, oil production can make a big difference for our potential economic growth.

After the Great Depression, a pact was made between the government and big business. Bruce asks if Samuelson sees another pact being made today. Samuelson does not see another pact being made today. The pact that occurred in the past was informal and unstable. After World War II, businesses did not want to be reviled in the same way they had been during the Great Depression. Because of this, businesses submitted to social and economic regulation in return for continued market freedom. What we should have today is a generational pact in which the baby boomers agree to reduce their benefits, so that we can take those burdens off of the young. This will allow them to start businesses, have children, and live in such a way so that a significant chunk of their income isn’t being drained to support their grandparents. Bruce completely agrees with this. There are plenty of people who can afford to pay for their own retirement, instead of having their grandchildren be taxed for it.

Robert Samuelson has created one heck of a book: The Great Inflation and Its Aftermath: The Past and Future of American Influence.

Bruce Norris claims that the government’s aid will not be enough to prevent the U.S. economy from sliding back into recession. The NAR reports that national pending home sales decreased by 7.6 percent in January. According to Trepp, commercial real estate delinquencies decreased in February. The delinquency rate for Fannie Mae loans increased to 5.38% last month.

In The News:

Orange County Register – “Hear why housing will slump again” (3-4-10)

“Norris tells ocregister.com in a podcast interview that he believes that all the government aid that’s going to the housing market won’t be enough to keep real estate — and the entire economy — from sliding back into a second wave of recessionary conditions.”

NAR - “Pending Home Sales Down; Severe Weather Impacting Market” (3-4-10)

“The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in January, fell 7.6 percent to 90.4 from an upwardly revised 97.8 in December, but remains 12.3 percent higher than January 2009 when it was 80.5.”

CBIA - “Metro Regions” (3-4-10)

“Curious about housing numbers for a particular area of the state? This is the place to find all the numbers for an individual area.”

Recordnet.com – “Region’s future bright, experts say” (3-4-10)

“San Joaquin County, as well as the entire San Joaquin Valley, holds tremendous potential for growth even as it struggles to emerge from the recession, a panel of development experts, business and government leaders said Wednesday. The county could see gains of more than 30,000 new jobs in the next three years, paying wages and benefits of $1.5 billion.”

Housing Wire – “Valeo Fund Targets $1trn in Maturing Commercial Mortgages” (3-4-10)

“The private equity firm Valeo Fund is recruiting investors to go after $1trn of commercial mortgages set to mature between 2010 and 2013. The move comes as opportunities are begin to hit the entire commercial market, which has been bracing for struggles.”

Housing Wire – “Commercial Mortgages Showing Signs of a Brighter Road Ahead” (3-4-10)

“The blistering climb of commercial real estate delinquency rates, which crossed the 6% threshold in December, started to slow in February, according to the analytics firm Trepp, which monitors collateral performance on related commercial mortgage backed securities (CMBS). The amount of commercial loans at least 30-days delinquent grew 23 basis points (bps) to 6.72% in February, the smallest increase in six months.”

Housing Wire – “General Growth Gets Extension for Reorganization, Plans NYSE Re-listing” (3-4-10)

“A bankruptcy judge granted mall real estate investment trust (REIT) General Growth Properties (GGP: 1.05 0.00%) a nearly five-month extension period to file a plan of reorganization for the company to exit bankruptcy.”

Housing Wire – “Fannie Single-Family Mortgage Delinquencies Grow to 5.38%” (3-4-10)

“The serious delinquency rate at government-sponsored enterprise (GSE) Fannie Mae (FNM: 1.005 +2.11%) rose nine basis points (bps) to 5.38% in the single-family mortgage book. Its a slight increase from 5.29% last month.”

Housing Wire – “Freddie Says Mortgage Rates Dip Below 5%” (3-4-10)

“Freddie Mac said the average interest for a 30-year fixed-rate mortgage was 4.97% with a 0.7 origination point for the week ending March 4, down from 5.05% one week ago. Last year at this time, the 30-year FRM averaged 5.15%.”

Housing Wire – “Home Prices Continue Climb from 2009 Levels: Clear Capital” (3-4-10)

“US home prices climbed 5% in February from a year ago, despite an incoming wave of REOs that could saddle the market for another three years, according to the Clear Capital Home Data Index. Prices grew on a yearly basis for the first two months of 2010. The 5% uptick in February bested the 2.3% yearly increase in January. However, prices remained unchanged on a rolling quarterly basis.”

Looking Back:

One year ago, the MBA reported that mortgage applications decreased by 12.6 percent within one week. Statistics from First American CoreLogic showed that 20 percent of mortgages were underwater. Radar Logic claimed that foreclosures increased home sales by approximately 7 percent during 2008. Federally regulated banks filed 62,084 reports of suspected mortgage fraud during the mid-summer of 2008.

Bruce Norris estimated that lenders may lose up to $2.1 to 3.8 trillion before all the bad loans are taken off their books. According to the MBA, mortgage application volume increased from last week. The FHFA reports that Orange County home values increased by 6.38 percent in 2009. Last year, nearly 1,400 lawsuits were filed against lenders by homeowners in foreclosure.

In The News:

Press Enterprise – “Loan losses from home foreclosures could more than double” (3-3-10)

“Lenders who already have realized $1.5 trillion in losses due to home foreclosures could see their losses mount to an estimated $2.1 trillion to $3.8 trillion before all the bad loans are wiped off their books, a Riverside real estate expert told a gathering over the weekend. Bruce Norris, a real estate analyst, investor and principal of the Riverside-based Norris Group, told more than 400 real estate brokers and investors meeting in Costa Mesa Saturday that he had compiled these figures from data and estimates he obtained from ForeclosureRadar.com, Bloomberg Financial, Goldman Sachs, the International Monetary Fund, RGE Monitor and T2Partners.”

Mortgage Bankers Association – “Mortgage Refinance Applications Increase in Latest MBA Weekly Survey” (3-3-10)

“The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending February 26, 2010.  The Market Composite Index, a measure of mortgage loan application volume, increased 14.6 percent on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index increased 15.5 percent compared with the previous week.”

Orange County Register – “O.C.: Hottest U.S. housing market?” (3-3-10)

“Orange County home values — by one FHFA index that derives values from purchase records — rose 6.38% in 2009. That’s tops among the 25 major U.S. markets tracked by this methodology. Yes, O.C. is No. 1! We’re followed by Denver (+5.48%); Houston (+3.71%); and Pittsburgh (+3.26%).”

Sign On San Diego – “Hefty tax bill may hit those who lost home” (3-3-10)

“With less than six weeks before taxes are due, an estimated 16,000 former homeowners statewide will owe $15 million in extra income taxes this year and $29 million through 2012.”

Mercury News – “Increasing numbers of Californians are suing lenders to avoid foreclosures” (3-3-10)

“In the last five years, the number of foreclosure lawsuits filed in federal court in California has ballooned — like an exploding adjustable-rate mortgage — from only 29 statewide in 2005 to nearly 1,400 last year.”

Housing Wire – “Winter Weather Slows Residential Real Estate Growth: Beige Book” (3-3-10)

“In the January Beige Book, all but two Fed districts reported increased activity or improved conditions, with Philadelphia and Richmond seeing mixed results. Residential real estate markets remained weak or softened further in the New York, Atlanta, and Chicago districts and there was little change in the San Francisco district, the Federal Reserve Board said.”

Orange County Register – “Why loan mods & short sales take so long” (3-3-10)

“Hard to collect all necessary documents from borrower/owner. This may be because the banks never seem to receive the documents until they’ve been faxed in 5 or 6 times. It may be because it takes the borrower/owner or agent some time to respond to requests for documents.”

Inman - “90% of agents down on HAMP” (3-3-10)

“A mere 10 percent of real estate agents think the Obama administration’s Home Affordable Modification Program (HAMP) is reducing foreclosures in their market, according to a survey released Wednesday by real estate media and marketing provider Homes and Land. The company’s Market Pulse Survey Report asked more than 100,000 real estate agents nationwide to participate in a 10-question survey to gauge the state of housing in local markets. Nearly 5,800 agents responded; 51 percent had been a Realtor for more than 10 years. The company conducted the survey in February.”

Looking Back:

One year ago, Citigroup developed a plan which allowed unemployed homeowners to decrease their monthly payment to a minimum of $500. The NAR reported that home sales decreased by 7.7 percent within a month’s time. Bernanke claimed that the federal government needed to increase its fiscal involvement in the banking system. The government launched its $1 trillion TALF program.

Based on results from a recent poll, 68 percent of U.S. citizens support the government’s involvement in the housing market. Fannie Mae announced plans to buy 150,000 to 200,000 delinquent loans from MBS trusts this month. Economist Jan Hatzius believes that we will not see an interest rate increase any time in the near future. Realtors advise that staging is a critical component of selling a home.

In The News:

NAHB – “Poll Shows Strong Support for Government Housing Initiatives” (3-1-10)

“Americans remain strongly committed to federal support for home buyers, according to a recent survey of U.S. households. Roughly 68 percent of those polled said the government should continue to support housing, and 65 percent believe the government should be doing more to keep families from losing their homes to foreclosure.”

Press Enterprise – “New Homes sip, don’t gulp, water” (3-2-10)

“The study found that homes built in 2009 consume 20 percent less water than homes built in 1990, with each house saving on average over 15,000 gallons a year. Also homes built to 2011 standards will further lower indoor water use by 21 percent, saving another 12,000 gallons a year.”

Housing Wire - “Fannie to Buy up to 200,000 Delinquent Mortgages in March” (3-2-10)

“Government-sponsored enterprise (GSE) Fannie Mae (FNM: 1.00 +1.01%) said Monday it expects to purchase from 150,000 to 200,000 delinquent loans out of single-family mortgage-backed security (MBS) trusts during March.”

Bloomberg – “Home-Price Drop in U.S. Supports Low-Rate Outlook: Chart of Day” (3-2-10)

“A possible relapse in home prices that had Fed policy makers concerned late last year may now be coming to pass, underscoring forecasts by economists such as Jan Hatzius that an interest-rate increase is a long way off.”

Inman – “Real estate Darwinism” (3-2-10)

“Today’s brokers and agents who survive and lead us out of this current mess are going to be those most willing to change. They will share three key attributes: they will be the most competent in their craft, utilize all available technology, and be the most dedicated to customer service. Undoubtedly, these changes will be fundamental. Externally, technology will continue to drive our industry change, and internally, change will be in the form of technology and reduced commissions. Sounds simple, but the transformation to the brokerage of 2020 will be drastic.”

Realty Times – “Focusing on the Median Price Can Be Misleading” (3-2-10)

“Many observers have noted that the rise in the median does not necessarily indicate a rise in prices in general. Rather, it is reflective of more activity at higher price ranges than had been experienced in the recent past. In many market areas, for the past year to year and-a-half the greatest activity – practically frenzy in some areas – has been at the bottom of the price ranges. This is not a surprise. Smaller condominiums and starter homes were generally what constituted the first wave of foreclosures on loans that never should have happened. More recently, though, the number of sales has increased in higher price ranges. As the effects of high unemployment and a staggering economy spread throughout the land, there are more sales – many of them distressed sales – of larger homes, ones that people expected to live in a long time.”

Realty Times – “Sellers: Staging is a Must” (3-2-10)

“As a seller, you want your home to make a positive first impression. In order to do this, you repair, clean, and strategize marketing for your open houses, but home staging takes it one step further. It allows the buyer both the mental space to imagine their own belongings in the rooms and the ability to get excited about the life they could have in your home.”

California officials may be implementing new builder fees. Home sales generated $934 million from last year. Fannie mae lost 15.9 billion dollars during quarter 4 of 2009. Warren Buffet predicts the residential real estate market will begin to recover in 2011.

In The news:

Sacramento Bee – “Back-seat Driver: Sacramento proposes new-building fees for road projects” (3-1-10)

“Sacramento city officials today will propose a fee on new buildings – including up to $6,250 per single-family house – to help pay for $710 million in transportation projects over the next two decades.”

Orange County Register – “Best Jan. for real estate agents in 3 years” (3-1-10)

“Home sales generated $934 million, up 20.9% from January 2009, when sales generated $717 million. The lowest amount of revenue was generated in January 2008, when home sales totaled $670 million.”

Wall Street Journal – “Bid to Curb Mortgage Tax Break Falters” (3-1-10)

“President Barack Obama’s latest budget proposal, released in February, includes a provision that would shrink deductions for mortgage interest, real-estate taxes, charitable contributions and other items for married couples with annual incomes of more than $250,000, or individual filers earning more than $200,000. Under the proposal, such taxpayers would save 28 cents of tax liability for every $1 of mortgage interest or other eligible expenses, down from 35 cents now.”

Housing Wire – “A Dark Day for the Mortgage Industry” (3-1-10)

“the MBA, along with committee input from Fannie Mae, Freddie Mac (read: government) and others, are now pushing the U.S. Treasury to extend taxpayer-funded forbearances to unemployed owner-occupants. I say “taxpayer-funded” for a reason, as you’ll see. Under the MBA proposal, unemployed borrowers would be asked to make nominal payments equal to 31% of whatever their remaining income is – which for many millions of Americans without savings would be 31% of their unemployment benefits, not nearly enough to cover their usual mortgage. In exchange for whatever they can afford, borrowers would receive forbearances for up to 9 months – with the servicer continuing to advance full principal and interest to investors the entire time.”

Housing Wire – “Fannie Seeks $15bn of Aid After Quarterly Loss” (3-1-10)

“Government-sponsored entity (GSE) Fannie Mae (FNM: 0.99 0.00%) on Friday reported a $15.2bn net loss for Q409, narrowed slightly from a $18.9bn net loss in the previous quarter. The quarterly loss resulted in a net worth deficit of $15.3bn as of Dec. 31, 2009, according to the earnings statement”

Bloomberg - “Buffett Says U.S. Housing Will Recover by Next Year” (3-1-10)

“Billionaire Warren Buffett said the U.S. residential real estate slump will end by about 2011, predicting that’s how long it will take demand for homes to catch up with the supply. ”

Bloomberg - “General Growth Aims for Oct. 5 Exit Plan Confirmation” (3-1-10)

“General Growth Properties Inc., bankrupt owner of more than 200 U.S. malls from Boston to Los Angeles, aims to confirm a reorganization plan by Oct. 5, after taking 60 days to consider proposals that compete with one from Brookfield Asset Management Inc.”

According to the NAR, existing home sales decreased by 7.2 percent in January. The rise in GDP exceeded the median forecast of economists surveyed by Bloomberg. Freddie Mac reports the 30-year FRM increased to a rate of 5.05 percent. A recently proposed plan from the Obama administration would give homeowners an extra 30 days after receiving the HAMP non-approval notice before the foreclosure sale can proceed.

In The News:

NAR - “Existing-Home Sales Down in January but Higher than a Year Ago; Prices Steady” (2-26-10)

“Existing-home sales – including single-family, townhomes, condominiums and co-ops – dropped 7.2 percent to a seasonally adjusted annual rate1 of 5.05 million units in January from a revised 5.44 million in December, but remain 11.5 percent above the 4.53 million-unit level in January 2009.”

CNBC - “Housing Recovery Is Looking A Lot Shakier Than Expected” (2-26-10)

“Even the optimists never expected a traditional housing recovery with unemployment stubbornly high, the consumer balance sheet still in repair mode and credit conditions stingy, but right now there’s palpable worry about momentum—especially given a string of solid months in mid- to late-2009.”

Bloomberg - “U.S. Economy Grew at 5.9% Annual Pace Last Quarter” (2-26-10)

“The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, more than the government reported last month, reflecting stronger business investment and a greater contribution from inventories. The rise in gross domestic product, which exceeded the median forecast of economists surveyed by Bloomberg News, marked the best performance in more than six years, the Commerce Department said today in Washington. Inventories added 3.88 percentage points to GDP, more than previously reported, and investment in software and equipment grew at the fastest pace in almost a decade.”

Inman - “30-year fixed punches through 5 percent” (2-26-10)

“Rates on 30-year fixed-rate mortgages broke through the 5 percent mark this week for the first time in three weeks, Freddie Mac said in releasing the results of its weekly Primary Mortgage Market Survey. The 30-year fixed-rate mortgage averaged 5.05 percent with an average 0.7 point for the week ending Feb. 25, up from 4.93 percent last week but down from 5.07 percent a year ago.”

Housing Wire – “As Commercial Real Estate Weakens, Moody’s Considers Action on Related CDOs” (2-26-10)

“The credit rating agency Moody’s Investors Service put a total of $6.2bn of commercial real estate linked CDOs up for possible downgrade today, citing growing concerns over the ability of the underlying assets to continually perform.”

Housing Wire – “BB&T Originations Nearly Doubled in 2009″ (2-26-10)

“BB&T Corp. (BBT: 28.53 +1.06%) said it originated 72,500 mortgages through its retail operation, including 53,500 refinance loans and 19,000 purchase mortgages, a 97% increase from 2008’s origination level. In addition, BB&T said it closed 6,600 loans worth nearly $1.3bn Homeowners Affordability and Stability Plan, as known as the Making Home Affordable program, to help stave foreclosure for distressed borrowers.”

Housing Wire – “Homeowner Estimates as Good as Zillow? Appraisal Academics Think So” (2-26-10)

“When it comes to using the Zillow.com automated valuation model (AVM) to get a free listing price on a house, users may be getting what they paid for, according to a report published by the Appraisal Institute that finds the Web site overestimates the values on homes almost as often as the actual homeowners.”

Housing Wire – “Obama Aims to Prohibit Foreclosure to Give HAMP a Chance” (2-26-10)

“The Obama Administration is drafting a proposal that would prohibit foreclosure on delinquent mortgages until servicers get a chance to evaluate a borrower for the Home Affordable Modification Program (HAMP). According to the presentation to lenders obtained by HousingWire, the Administration would also give borrowers an extra 30 days after receiving the HAMP non-approval notice before the foreclosure sale can proceed.”

Housing Wire – “Republicans Say Government-Led Mortgage Modifications are a Failure” (2-26-10)

“The US Treasury Department launched HAMP in March 2009 to allocate capped incentives to servicers for the modification of loans on the verge of foreclosure. The $75bn program aims to modify 3-to-4m mortgages by the time it expires in 2012. Through January, participating servicers provided 116,000 permanent modifications, an increase from 66,000 in December. In November 2009, the Treasury initially estimated 375,000 permanent modifications by the end of the year.”

Realty Times – “Top Affordable U.S. Housing Markets” (2-26-10)

“The HOI [Housing Opportunity Index] showed that 70.8 percent of all new and existing homes sold in the final quarter of 2009 were affordable to families earning the national median income of $64,000, slightly higher than the previous quarter and near the record-high 72.5 percent set during the first quarter of 2009, according to a press statement from the National Association of Home Builders.”

Realty Times – “Commercial Real Estate Losses Could Reach $1 Trillion” (2-26-10)

“We estimate that between $800 billion and $1 trillion of losses to commercial real estate equity and debt will be realized over the next few years. The annual volume of commercial mortgage maturities is expected to increase each year through 2013, according to Ken Rosen, during the Commission’s first hearing on January 15, 2010.”

Robert J. Samuelson Author and Columnist (Full Bio)

This week Bruce is joined by Robert J. Samuelson. He is an award winning columnist and author. He has been writing a column for The Washington Post since 1977, and for Newsweek since 1984. He has recently published a book named The Great Inflation and Its Aftermath: The Past and Future of American Influence.

In discussing the similarities between the Great Depression and the great inflation, Samuelson wrote, “What ultimately governed their decisions was the conventional wisdom at the time. The policies had been set with egos at stake. They were presumed to be correct.”

Bruce asks what the conventional wisdom in the 1960s was in regards to creating a healthy economy. The conventional wisdom in the 60s was called Keynesianism. This term was coined from John Maynard Keynes; a British economist who died in 1946. Keynesianism lead people to believe that professional economists had concurred the business cycle. Economists had figured out how to forecast the economy, and they had the tools to counteract recessions. Economists believed they could maximize economic growth, and keep unemployment at very low levels. This mentality lead people to believe that they could bring about endless prosperity.

The Philips Curve was named after the Australian economist A.W. Philips. Philips postulated that there was a fixed trade off between higher inflation and lower employment. You could pick which poison/benefit you desired to receive by raising one and lowering the other.

Walter Heller was chairman of Kennedy’s council of economic advisors. Kennedy was a person who truly listed to his advisors. Bruce asks if the economic thought of the time was played out in Kennedy’s policy. Although Kennedy was a practical politician, he was open to new ideas. His advisors argued that the policies which Eisenhower followed in the 1950s were behind the times. Heller argued that economists could prevent recessions, keep unemployment lower, and maximize economic growth. Kennedy was a skeptic at first because he had been raised to believe that the government should balance its budget, and inflation was a bad thing. Heller argued that we could use federal budget deficits to manipulate the economy, and even if a little inflation resulted, it wasn’t a terrible thing because you would have lower unemployment and people would adjust to it. Since the economy of Kennedy’s first two years did not do incredibly well, and because he was genuinely curious, he was open to the idea of inflation. The ideas that Heller sold to Kennedy were embraced by most economists.

This theory of a stable trade off between inflation and unemployment was obviously wrong. Economists could not create a fixed rate of inflation. In fact, we got an ever-accelerating rate of inflation. When Kennedy first became president, the inflation rate was between 1 and 2 percent, but by the end of the 60s, it was 6 percent, and by the end of the 70s, it was 14 percent. Having this rising inflation made the economy less stable. Between the end of the 60s and the early 80s, we had 4 recessions of increasing severity. The recession of the early 80s had a peak unemployment rate of 10.8 percent. The net result of this economic experiment was that everything turned out to be completely the opposite of what the economists had promised. It promised stable inflation, but didn’t get stable inflation. It promised fewer business cycles and recessions, but we got more business cycles and recessions. It promised lower average unemployment, but we got higher unemployment.

The general idea of inflation is starting to become popular again. The chief economist of the International Monetary Fund recently put out a paper saying, “Maybe a little bit of higher inflation is okay.” Hearing this, Samuelson thought, “Haven’t they learned anything in the last 50 years?”

We were in a desperate position in 2008, and the idea of the economic stimulus program was desirable. However, Samuelson does not think that this program was executed well. The economy was in the process of falling off the edge. The idea of people being able to manipulate the business cycle seems ultimately self defeating. We have to intervene, but we have to be more restrained in our interventions. When interventions succeed, they create conditions that strike back at us.

If Robert wanted to make a formula for creating inflation, the most important ingredient would be to not care about inflation; to not care about keeping the money supply stable. This old fashioned idea that stable money is a responsibility of the government seems to be an ancient relic of the barbarian past. Robert thinks that responsibility is extremely important. The mindset of decision of makers, and the public, is the most important thing. Also, creating too much easy credit is a precondition for most sustained inflations. You can have easy credit, an easy monetary policy, and an expansive money supply, and not get inflation if there are other things off-setting the monetary stimuli. However, if you have people in charge who don’t care about inflation then you are preconditioned to have higher inflation.

Bruce will return to this topic in the next segment.

Samuelson remarked that the learning curve of successive presidents and their advisors is remarkably flat. It amazes Bruce that we have very intelligent people running our government, yet there has been no progressive learning curve. The same mistakes were made as new presidents came into power. Bruce wonders what role politics played in swaying the economic policy of the 70s. In the 60s, economists persuaded political leaders that it was possible to have sustained economic growth, with few recessions, and low unemployment. Once those ideas were accepted by political leaders, it became a part of the fabric of the public’s expectation. When these ideas did not accomplish their purpose, other people tried to achieve the same goal using different policies. Essentially, they continued to use bad policies to prop up a structure which was already collapsing. Unfortunately, our leaders were not able to admit and act as thought they were incapable of solving our financial problems. It fell to Ronal Reagan to deliver the news that their promises could not be fulfilled.

Arthur Burns was the Federal Reserve chairman from 1970 to 1979. He was an economist from Colombia University. He was also the head of the National Bureau of Economic Research. His major mistake was that he bought into Keynesianism. Once he bought into it, he did not take the actions he needed to prevent inflation. In Samuelson’s book, he stated, “What was politically convenient, was also rationalized intellectually.” He was pressured from Nixon, and he was politically expected to fulfill the goal of constant economic growth with no business cycles. At some point, the Federal Reserve would have to stop the rising inflation, so they would tighten credit and reduce the money supply. This would cause a recession, which made the people upset, and so they would start the inflation process again. The Federal Reserve couldn’t decide how to solve the financial problem, and they ended up choosing to do nothing constructively.

Samuelson believes that if you have expectations of higher inflation, then you will get higher inflation. This kind of thinking makes businesses and workers act in such a way as to produce it. Businesses start thinking that they can pass on any price increases, and workers assume that they can get increased wages to pay for their higher cost of living. This mentality causes a wage/price spiral. Unless the government steps in and stops this mentality, it will continue.

At the end of World War II, there was a huge burst of inflation, because during the war we had wage/price controls. As soon as the artificial suppression of the wages and prices was removed, there was a huge increase in inflation. However, we did not get double digit inflation in the late 40s or the 50s. This makes Samuelson ask the question, “Why didn’t that happen?” This wasn’t because policy became oppressive; it was because people didn’t expect the wages and prices to continue to increase. People at that point in time didn’t think that the U.S. was going to have inflation for forever, so they didn’t act that way.

At the end of the 70s, people were scared by inflation. They feared that the government could not control inflation, and they didn’t understand inflation. They didn’t know whether their wages would keep up with rising prices, they didn’t know if their savings would be eroded by rising prices, and they didn’t know how high interest rates were going to go. In the early 80s, mortgage rates got up to 15 percent.

Bruce Norris refinanced his house to become a real estate investor at age 17. People didn’t know if that kind of inflation would continue. Opinion polls showed that people did not think the future would be better than the past. The fears then, and the fears now, are not that much different from each other.

Samuelson believes that the fear, anxiety, and pessimism induced by inflation were the main reasons Ronal Reagan was voted as president in 1980. The vote wasn’t about conservative vs. liberal politics. They didn’t know if Reagan could fix the problem, but they certainly knew that Carter couldn’t. This change in public perspective gave Volcker and Reagan a chance to try something new. They were the right pair to make those changes. Volcker was chairman of the Federal Reserve board at the end of the 1970s. Volcker was chosen to be chairman of the Federal Reserve, because Carter had hired the previous chairman to take the position of Treasury Secretary.

Volcker and Reagan shared the belief that the country could not prosper with double digit inflation. Volcker decided that the government was not going to pump out money and credit. After that decision, interest rates increased, inflation slowed down, and the economy went into a horrific recession. Reagan did something that no politician would have done at the time; he supported Volcker’s decision. This caused Reagan’s popularity to plummet, but he continued to give Volcker his support, because he thought Volcker was making the right decision.

What was unique about Reagan and Volcker’s policy was that all of the adverse consequences were up front. No politician likes to have the news filled with negative information related to their presidency. From Samuelson’s perspective, any other politician who had been president would have told Volcker to stop. If Volcker did not stop, then they would have created legislation to change the nature of the Federal Reserve, so that it would be more accountable to its political masters.

Bruce encourages everyone to get “The Great Inflation and Its Aftermath: The Past and Future of American Influence”. Roger will be on The Norris Group’s Radio Show during the next segment.