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Commentary on the Housing Market – May 2009
by Peter L. Zachary, MAI, MRICS

Here are some headlines in the New York papers:

April 5, 2009: New York Times– Page 24: "This Time Slump Hits Well Educated 700"
April 5, 2009: New York Post – Page 7: "Ready Blame Fire (The CEO's of Banks)"
April 7, 2009: New York Times – Front Page: "Finds Brightening Outlook in US Economy"
April 9, 2009: New York Times – Front Page: "Recession Anxiety Seeps into Everyday Lives"
April 11, 2009: New York Times – Front Page: "As Some US Markets Level off, Housing Slump Hits Manhattan"
April 11, 2009: New York Times – Page B3: "Trade Is Falling Fast Across the Globe"
April 11, 2009: New York Times – Page B5: "China Outlines Plans for Making Electric Cars"
April 12, 2009: New York Times – Front Page: "Crisis Reshaping Wall Street As Stars Begin To Scatter"
April 13, 2009: New York Times – Page B1: "Treasury Is Said to Tell GM to Prepare for Possible Bankruptcy"
April 16, 2009: New York Times – Page B3: "In Some Parts of US, Pace of Decline May Be Easing"
April 17, 2009: New York Times – Front Page: "Bank Industry Shows Signs of a Recovery"
April 22, 2009: New York Times – Page B1: "In China, GM Stands as a Powerful Player"
April 23, 2009: New York Times – Page B2: "Global Economy Called Worst Since 1945"
April 24, 2009: New York Times – Front Page: "U.S. Said to Seek a Chrysler Plan for Bankruptcy"

On April 15, the New York Post reported that "The chief watch dog of the government's $700 billion bank–bailout plans says top executives of struggling financial institutions must be fired if the economy is to have any chance of recovery". The article continues: "Elizabeth Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Trouble Asset Relief Program, told the Post that letting banking leaders off the hook for the mess their companies are in will plunge the country into a deeper hole. "Warren picked out the head of Citigroup for special mention, but will recommend all bailout recipients – which include Goldman Sacks and Bank of America – get the same cleanout at the top". She cites the failure of economies to do this, most notably Japan in the 1990's when the Japanese government handed banks cash but left their leadership in their jobs. She said that this slowed recovery drastically. The article continues: "It is crucial for these things to happen. Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade. "Together with the firings, Warren said other essentials needed to ensure the banks' survival include accurate valuations of the troubles assets currently being held, and wiping out current shareholders – a move that would create a turmoil in stock markets around the world. Her conclusions – expected to be published in a report due out this week – were drawn from a detailed study of historic banking crises in Sweden and Japan, the US savings – and –loan crisis of the 1980, and the Great Depression". As an aside, I agree with her. No one wants to keep a loser in a leadership position.

On April 18, 2009, the front page of the Times had an article "Poll Finds Brightening Outlook in US Economy". The article states: "American have grown more optimistic about the economy and the direction of the country in the 11 weeks since President Obama was inaugurated, suggesting that he is enjoying some success in his critical task of re–building the nation's confidence, according to the latest new York Times/CBS News poll. These sometimes turbulent weeks – marked by new initiatives by Mr. Obama, attacks by Republicans and more than a few missteps by the White House – do not appear to have hurt the president. Americans said they approved of Mr. Obama's handling of the economy, foreign policy, Iraq and Afghanistan; fully two–thirds said they approved of his overall job performance. By contrast, just 31percent of respondents said they had a favorable view of the Republican Party, the lowest in the 25 years the question has been asked in New York Times/CBS News polls.

While the New York Times/CBS Poll is just a poll, it does reflect people's confidences in our economic system. Indeed it was the lack on confidence, a reaction to the bankruptcy of Lehman Brothers and the $700 billion bank bailout that plunged the country into a recession.

On April 16, 2009, the New York Times had an article, "In Some Parts of the U.S., Pace of Decline May Be Easing". The articles states: "Though the American economy is in a rut, some areas of the country from San Francisco to Kansas City to New York, are seeing hints that the pace of economic declines is leveling off. That was one conclusion of a region–by–region economic snapshot released Wednesday by the Federal Reserve. The survey of a dozen Federal Reserve districts, known as the beige book, again described a landscape of continuing economic woe, one marked by rising job losses, declines in manufacturing and lower prices. But the assessment this time was a shade less dreary. Five of the Fed's 12 districts said the downward slide was slowing, and others glimpsed signs that different sectors of the economy were coming to rest at lower levels. Home sales and retail spending edged up in some areas. Manufacturing in Chicago and Kansas City was falling at a slower clip, and orders for high–technology equipment 'firmed somewhat' in Dallas and San Francisco, although at very weak levels, the Fed said. The grace notes in the report added one more glint to the 'glimmers of hope' in the economy that President Obama and other policy makers have cited as they try to build confidence in the government's economic agenda and rescue measures."

On April 17, 2009, the New York Times had an article, "Bank Industry Shows signs of Recovery". The article states: "Just three short months ago, many of the nation's biggest banks were on life support. Now, a number are showing glimpses of a recovery, aided by a tentative improvement in some corners of the economy and new business picked up from rivals that stumbled in the wake of the financial crisis. On Thursday, JPMorgan Chase became the latest bank, after Goldman Sachs and Wells Fargo, to announce blockbuster profits for the first quarter. The reports fed a rally in financial stocks that began more than five weeks ago, when Citigroup and Bank of America, two of the banks hit hardest by the crisis, suggested the worst might already be over. Banks are enjoying a fresh wave of profits from the government's efforts to nurse the industry back to life. Ultralow interest rates have led flocks of consumers to seek deals on mortgage loans. Investment banking and trading activities are enjoying a bounce from the billions of dollars spent to thaw frozen credit markets. And even before the results of a new health test for the nation's 19 largest banks are unveiled, those who can flaunt an improvement from their dismal recent performance are quickly trying to free themselves from government money."

But this silver cloud has a dark lining: millions of consumers continue to default on their mortgages, home equity and credit card loans. Corporate loan losses are just starting to pile up. And the residential housing crisis is seeping into commercial real estate with a vengeance: on Thursday, General Growth Properties, one of the nation's largest mall operators, filed for bankruptcy in one of the biggest such collapses in United States history. "We are in the eye of the storm,' Gerard Cassidy, a banking analyst at RBC Capital Markets. 'The worst is behind us for housing. For commercial real estate and corporate lending, there is still a big dark cloud".

Many banks are preparing for the next rainy stretch, setting aside more money now to cover future loan losses. Regional and community lenders, which are particularly exposed to corporate and real estate loan defaults, are socking away tens of millions of dollars to add to their reserves; big banks like JPMorgan are adding billions. "Times aren't exactly great as we speak," Michael J. Cavanagh, the bank's finance chief, said in a brief interview. "Until home prices stabilize and unemployment peaks, we will continue to be under pressure for losses on our balance sheet. As long as interest rates remain low, and the government continues to offer financial support; banks hope to earn enough profit to cushion the blow of some of these looming losses."

In my opinion, the government gave the banks more money than they needed while scaring the bejesus out of every American.

If you ever saw the word MERS on your mortgage document, it stands for Mortgage Electronic Registration System. It holds 60 million mortgages on American homes, according to an article in the Business Day section of the New York Times on April 24, 2009. It is effectively the bank that holds your mortgage. It is owned by two dozen of the nation's largest lenders, including Citigroup, JPMorgan Chase and Wells Fargo. It was the brainchild of the Mortgage Bankers Association, along with Fannie Mae, Freddie Mac and Ginnie Mae, who produced a white paper in 1993 on the need to modernize the trading of mortgages. The article states that MERS saved the financial industry $164 million a year.

Created by lenders seeking to save millions of dollars of paperwork and public recording fees every time a loan changes hands, MERS is a confidential computer registry for trading mortgage loans. "Before MERS", said John A. Courson, President of the Mortgage Bankers Association, "the problem was that every time those documents or a file changed hands, you had to file a paper assignment, and that became terribly debilitating." The article continues, "If MERS began as a convenience, it has, in effect, become a corporate cloak: no matter how many times the mortgage is bundled, sliced up or resold, the public record often begins and ends with MERS.

In the last few years, banks have initiated tens of thousands of foreclosures in the name of MERS – about 13,000 in the New York region alone since 2005 – confounding homeowners seeking relief directly from lenders and judges trying to help borrowers untangle loan ownership. "What is more, MERS obscures loan ownership and makes it difficult for communities to identify predatory lenders whose practices led to high foreclosure rates that have blighted some neighborhoods."

The court system has refused in many cases to allow a foreclosure to proceed because there is no paper trail showing who owns the mortgage. Judge Logan in Florida, among the first to raise questions about the role of how MERS came to possess the mortgage notes originally issued by banks, stopped accepting MERS foreclosures in 2005. MERS appealed and won two years later although it has asked banks to not use its name because of lingering concerns. Last February, a State Supreme Court Justice in Brooklyn, Arthur M. Schach, rejected a foreclosure based on a document in which of Bank of New York executive identified herself as a Vice President of MERS. Judge Schach wondered if the banker was "engaged in a subterfuge".

In Seattle, Ms. McDonnell has raised similar questions about bankers with dual identities and sloppily prepared documents helping to delay foreclosure on the home of Darlene and Robert Blendheim, who sub–prime lender went out of business and left a confusing paper trail. "I had never heard of MERS until this happened", Mrs, Blendheim said. "It became an issue with us, because the bank didn't owned the paper work to prove they owned the mortgage and basically recreated whatever they needed.

The article concludes that "the avalanche of foreclosures – three million last year, up 81% from 2007 – has also caused unforeseen problems for the people who run MERS. In Delaware, MERS is facing a class action lawsuit by homeowners who contend it should be held accountable for fraudulent fees charges by banks that foreclosed in MERS's name. Sometimes banks have held files to foreclosed homes in the name of MERS, rather than their own. When local officials call and complain about vacant properties falling into disrepair, MERS tries to track down the lender for them and has also created a registry to locate property manager responsible for foreclosed homes."

Big Brother, I mean MERS, is going to foreclose on everyone. Happy Mother's Day!

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