Either way, I don't really have a useful opinion on last weeks market activity or on the short-term outlook on the markets in general. Unlike the morons on CNBC that will tell you last week was a buying opportunity or that the market will be 10% higher by the summer, I admit that timing the markets in the short-run is next to impossible especially considering the fact that future movements are not set in stone.
There is a good chance that last week was a badly needed correction in global asset markets and that it truly is a good buying opportunity. Given that I am a bear in the medium-to-long term, I would say that there will be a day when the market will turn down for a long period of time - I just don't know if time is right now. Probably not.
However, there is a chance that my personal favorite theory of "punctuated equilibrium" took hold in the market last week and we are seeing the market meltdown that I didn't expect to happen for a few more years. Punctuated equilibrium, in lay terms, is the theory that things work until they don't. Basically, traders didn't feel that any of the bad news in the U.S. economy, global macro-imbalances or the world geo-political situation (mainly, but certainly not exclusively Iran) mattered anymore because nothing could stop the bull market of the past 4 years or so.
Well, things don't matter until they do, and then that is all that matters. Think about the meltdown of the sub-prime (borrowers with poor credit scores) mortgage industry - I have too much to say about this for the time that I have - but I do think that the we are about to see blood in the streets of many American housing markets. Markets rise and fall at the margins - you always have bulls and bears for every trade, but it is the "undecided" that determine whether a stock, index, commodity, etc. moves up or down.
At the margin, the U.S. housing boom started due to the Fed policy to lower rates to 1% (among other factors) which provided steroids to the market until about the middle of 2005 at which point the fraudsters and flippers (who make up most of the sub-prime industry) took over. Nobody cared about this until the gravy train finally ran out in recent months - now we are going to see pay-back for this.
Based on the fact that mortgage companies are imploding on a near-daily basis, the housing market could go bust very quickly. Or somehow, people (who are "people"? - The Real Estate Industrial Complex, the Fed,homedebtors, the U.S. Gov't, the Bank of Japan, the Bank of China, or maybe a combination of all) are going to fight this bust tooth and nail (Japan-style) and let this thing run its course over many years, maybe even a decade.
Hard to know, but it will be interesting to find out.
Anyway, if we are witnessing punctuated equilibrium, here are my guesses at what the headline stories of 2007 will be:
1) Subprime fraud and malfeasance comes to light (see story below - only a few of thousands out there). I have written several commentaries on mortgage fraud - this is going to be a big deal. I wish I had the time to go into this story in-depth.
2) Japanese Yen Carry Trade blows up (if you are not familiar, this is a long story - do some research if you are interested). Basically, Japanese interest rates have been around 0% for the last 10 years. Investors around the world have been borrowing Yen converting to other currencies and investing in various assets. It has been profitable so far due to the fact that Japan manipulated fx rates to keep the Yen weak.
An unwinding of this "trade" will cause weakness in asset prices around the globe.
3) China - the Chinese economy and financial markets are so heavily manipulated. You can't trust any information that comes from a communist gov't yet people are trading on their economic releases.
While I think China will be the story of the century as it becomes the biggest and most powerful economy in the world over the next 25 years, much like the U.S. 100 years ago - there will be periods of gut-wrenching turmoil. Perhaps not this week, but at some point. And now the global
economy and global financial markets will feel the pain.
SUBPRIME FRAUD
Valley fighting mortgage fraud wave - A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals.
Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona's real estate market.
The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated.
Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.
"Arizona was like a housing gold rush for speculators from California, Florida and Texas a few years ago," said Detroit real estate agent and fraud activist Ralph Roberts, author of the book Flipping Houses for Dummies. "But home prices stopped climbing, and speculators got greedy.
Now the cash-back scam is going to make the savings and loan crisis of the 1980s look like a soft landing"
Valley housing-market experts now believe home values are inflated anywhere from 10 to 40 percent.
State targets mortgage fraud
A wave of mortgage fraud in the Valley has prompted state legislation that would define it as a crime punishable by up to 10 years in prison.
A day after The Arizona Republic's special investigation into cash-back mortgage deals, Sen. Jay Tibshraeny of Chandler introduced a bill that would make mortgage fraud a felony.
"Mortgage fraud hurts everyone," said Tibshraeny, who has been working on the legislation for months. "Buyer, beware of a deal that seems too good. The strings your Realtor or mortgage broker pull may be illegal."
Only two states, Colorado and Georgia, have laws specifically regulating mortgage fraud. Most states, including Arizona, must try to prosecute the crime under general fraud laws, which make convictions difficult and less of a deterrent.
Cash-back deals are a newer form of mortgage fraud whose rapid spread in Arizona has alarmed regulators and real estate industry leaders.
The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. The deals inflate home values and can affect values across whole neighborhoods. Homeowners stuck with overpriced mortgages may never recover the difference. Ultimately, lenders end up with bad loans. All this can hurt the Arizona real estate market, the largest segment of the state economy.
Felecia Rotellini, superintendent of the Arizona Department of Financial Institutions, is leading a new mortgage fraud task force made up of state and federal agencies. She said the proposed legislation would help investigators crack down on mortgage fraud.
Rotellini said her agency was deluged with calls Monday from people reporting cash-back deals and other potential mortgage fraud.
Sunday's Republic story also struck a cord with people in the real estate industry and homeowners across the Valley as more than 350 people e-mailed or phoned with concerns or accounts of deals they thought were fishy.
From the real estate industry:
Valley appraiser Dennis McMillen said that mortgage fraud is an issue in the housing market but that it's not always due to inflated appraisals.
In some cases, he said, "real estate agents and mortgage brokers are withholding the cash-back agreements from the contract, thus the appraiser and title company does not know of these agreements."
Valley real estate investor and marketing executive Francine Hardaway said: "Thank God somebody finally blew the whistle on this. As an investor, I see it all over the place."
Valley attorney Michael Manning represents some groups that were sold "bad loans" as part of the cash-back scheme. "Public awareness coupled with a little proactiveness by local prosecutors will help stem the practice and help prevent a meltdown in the market," he said.
Don Matheson of Re/Max Excalibur Realty of Scottsdale said: "This is a very big problem and very damaging to our real estate market. We need to catch these people and put them in jail."
Many homeowners expressed concerns about fraud in their neighborhood. Dozens of people provided details on cash-back deals or sales that suggested cash-back pricing. Most asked to remain anonymous.
Several readers were alerted to the schemes when they saw homes sit unsold for months and their prices reduced. Then, as the housing market was slowing even more, those homes sold for tens of thousands of dollars more than the previous listed price.
That is the No. 1 warning sign for cash-back deals, regulators say.
<http://thehousingbubbleblog.com/?p=2436> "A Housing Shortage Has Become An Overabundance"
The Yuma Sun <http://www.yumasun.com/onset?id=32380&template=article.html> reports from Arizona. "Increasingly, people's dream homes of two or three years ago turn into nightmares because of mortgage payments they no longer can afford. 'We used to get one or two (foreclosures) every couple of months,' said Vicki Bardo, 2007 president of the Yuma Association of Realtors. 'For some years, we didn't have any at all.'"
"She noted that these days it's common to find several trustee sales listed in the public notices section of the newspaper on any given day. For example, on Friday, there were 20 listed. 'We're seeing a preponderance of them,' Bardo said. 'They're in every price range. They're new houses and old houses. They're all over the county from San Luis to Wellton and everywhere in between.'"
"For one thing, people may have used online lenders. Another factor was the number of investors in the market who sometimes bought four or five houses, Bardo said. That resulted in a run-up in prices and an artificial demand for houses. Some of them are now deciding to sell and move on because they can't rent their houses."
“And what had been a housing shortage for several years has now become an overabundance, she said. 'We couldn't keep a house on the market a couple of years ago. Now we can't get it off.'"
“This is all having an impact on new home construction as well, Bardo said. If people can't sell their current house, they can't pay for the new house they were having built. That trend is reflected in the number of housing permits issued by the city. In the first two months of this year, the city issued 38 new single-family housing permits, said Randy Crist, city building
official. During the same period in 2006, there were 187
permits."
"'It's not that money isn't there to buy a house and interest rates are still low. People are simply waiting for the best deal they can get,' Bardo said."
The Arizona Republic
"Dozens of civil lawsuits alleging the gamut of mortgage fraud, from cash-back deals to lying about income on loan documents, have been filed against Valley firms and individuals during the past few months. Fraud experts and regulators say the lawsuits are only the beginning as the fallout from mortgage fraud starts to hit the Valley."
"'Banks are going to force mortgage brokers to buy back bad loans, and mortgage brokers don't have the money so they are going to go under,' said Richard Hagar, a national mortgage and real estate fraud expert. 'This is the beginning of the wave of lawsuits, lost licenses and criminal indictments in Arizona.'"
"Phoenix-based Biltmore Bank is suing Security Title of Arizona and a group of others over a cash-back deal. The suit alleges the group worked together to get Biltmore to fund a $1.3 million loan for a home valued at $800,000 and then pocketed the extra cash. Also named in the suit are Valley
appraiser Kittelmann & Associates and Tucson resident Frank Padilla, who was indicted and pleaded guilty last year to fraud and money laundering as part of a $13 million property-flipping scheme."
"A Lehman Brothers investment trust in New York and Aurora Loan Services in Denver are suing the parent company of First National Bank of Arizona over 38 home loans. They say the bank has misrepresented the values of properties, and the income, debt and employment of some of the
borrowers."
"San Francisco-based Transnational Financial Network is suing Phoenix-based Lending House Financial and a Scottsdale investor who purchased 22 Valley homes within days of each other last spring. Transnational funded loans worth nearly $2 million on seven of the homes but says it wasn't notified the investor was buying multiple properties and his real debt level wasn't
disclosed on mortgage documents."
"The investor never made a payment on the houses, which were foreclosed on last year. Most of the homes sold at foreclosure auctions for tens of thousands of dollars less than the mortgages the
investor took out on them."
"This wave of mortgage fraud, bad loans and foreclosures is deja vu for Michael Manning. He was an Arizona attorney for the Federal Deposit Insurance Corp., which seized failed lenders due to bad
loans in the late 1980s. He was then the Phoenix attorney for the Resolution Trust Corp., which was formed to clean up the savings and loan debacle and dispose of the overvalued properties."
"'This is the tip of the iceberg, but I think regulators got on top of it faster than in the mid-1980s,' Manning said. 'And lenders are now really starting to crack down on their own underwriting.'"
The Greeley Tribune <http://www.greeleytrib.com/article/20070304/NEWS/103040134> from Colorado.
"A year and a half ago, Christina Vazquez and her family were happy when they qualified to own their first home in a new subdivision in southwest Greeley. Even though she only made $25,000 a year, a lender said her family could get her in a new home worth $225,000."
"'I don't know how they approved me, but they did,' Vazquez said. 'When I bought the home they said my payments would go down in a year.'"
"A year after owning the home, the payments never went down and Vazquez was left with no option but to foreclose. Vazquez is among close to 20 other families from the Gateway Lakes development who have either gone into foreclosure or may soon go into foreclosure. All of the families purchased their homes from the same man, Mark Strodtman of JS Real Estate, LLC."
"'I feel they took advantage of me,' Vazquez said. 'Even though I speak English, they still did not explain any of the paperwork to me and just told me where to sign.'"
"As the homeowners began investigating their home sale paperwork and talking with appraisers, the families discovered that many of their homes were sold to them several thousand dollars more than market value.
They claim that JS Real Estate bumped up the prices as much as $70,000 more than the market price in some cases."
"Vazquez purchased her home $55,000 more than what similar homes were selling for. 'What they did was wrong, and all I want is justice to be done,' said Guadalupe Moreno, who is struggling to make
the payments on her home. 'If I have to tell the whole world, I will.'"
"Librado Herrera works various jobs for about $12,000 a year and was approved for a $230,000 home. He said he was told by Strodtman to say he owned a catering company when the bank called to verify
the information on his loan application. Charles Brandt, president of JC Distinguished Finance
who worked with Strodtman in selling the homes, declined to comment."
"'I have never seen a Realtor selling a house $40,000 or $50,000 more than the market price,' said David Kiekhaefer, a Greeley broker and home builder who built five houses in the Gateway Lakes subdivision. 'Another scary thing is that many of them (the families) haven't seen their appraisals from when they purchased their homes.'"
"He said he was not able to sell the homes he built in the subdivision and ultimately turned them into rentals. He was always curious, however, how the other homes that were built were sold so quickly and at a higher cost."
"'There are homes on one side of the street selling at $70,000 more than the same house across the street,' Kiekhaefer said. 'There are a lot of freaky things going on, and it just brings up a lot of red flags.'"
