The Housing Chronicles Blog: 12/1/08 - 1/1/09

Saturday, December 27, 2008

Retailers prepare for major change in 2009

Following a fairly abysmal second half of 2008 for the nation's retailers, many of which sought volume and multiple locations in order to grow sales and profits at the expense of basic metrics such as same-store sales and sales per square foot, 2009 will likely prove a watershed year for many famous retailing brands. Does this mean investors like Eddie Lampert (i.e., Sears) weren't the retailing geniuses once extolled by the business press? From a Wall Street Journal story (hat tip: Calculated Risk):

This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures...

...retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year. And luxury-goods makers already are working to cut the long lead times between orders and store delivery as a way to reduce risk.

"We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession."

More Bankruptcies: Corporate-turnaround experts and bankruptcy lawyers are predicting a wave of retailer bankruptcies early next year, after being contacted by big and small retailers either preparing to file for Chapter 11 bankruptcy protection or scrambling to avoid that fate.

Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11. AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 25.8% of 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years, the firm had estimated 4% to 7% of retailers then tracked were at a high risk for filing. Retailers are particularly vulnerable to a recession because of their high fixed costs...

Recent changes in the bankruptcy code make it more difficult for retailers to emerge from bankruptcy reorganization. The changes, passed in 2005, shortened to 210 days the time retailers have to determine whether or not to assume real-estate leases, limiting the amount of time they have to complete their restructuring. Lawrence Gottlieb, a New York bankruptcy attorney at Cooley Godward Kronish LLP says that only two retailers have successfully emerged from bankruptcy proceedings since the amendments to the code were passed.

In turn, because the debtor-in-possession market for financing bankrupt companies remains squeezed, many bankrupt retailers could quickly turn into liquidations -- as was the case earlier this year with chains Linens 'N Things, Mervyn's and Steve and Barry's...

Less Selection: Several department stores, including Saks Inc. and Neiman Marcus Group Inc., already have announced that they would narrow the range of merchandise they carry and drop vendors that don't perform. The cutbacks will ripple through the apparel industry, hurting the companies that are most exposed to the wholesale channel. Companies such as Jones Apparel Group Inc., for example, generate 50% of sales from department stores...

As a result of such cutbacks, a number of smaller fashion brands that have thrived over the past decade as luxury boomed, are expected to struggle or fail. "There's no question that you are going to see bankruptcies in the designer world," says Peter Boneparth, a Kohl's Corp. director and former chief executive of Jones Apparel...

Fewer Concept Stores: Many retailers invented new brands to spur rapid growth in recent years. But many such concepts already are being abandoned or cut back. Neiman Marcus said it would postpone plans to expand its Cusp store concept. Pacific Sunwear of California Inc. closed down its stores earlier this year, and AnnTaylor abandoned plans for a "modern" baby-boomer concept.

The best architecture in Southern California

Whether or not you agree with the findings of an architecture panel commissioned by the L.A. Times, the winners of the Top 10 'best homes' (i.e., architecturally significant) certainly provide an interesting glimpse of L.A.'s residential history over the last 100 or so years.

Click here for full story.

The demise of Washington Mutual

There's a detailed story in today's New York Times about just how Washington Mutual sowed the seeds of its own demise. As I read this story, I thought, "It's pretty clear to me that many criminals aren't in prison -- they're still working in mortgage banking." Apparently you have a much higher chance of being sent to prison for a drug-related offense in the U.S. than you do for ripping off people in various mortgage scams. Welcome to the 21st century! From the story:

At WaMu, getting the job done meant lending money to nearly anyone who asked for it — the force behind the bank’s meteoric rise and its precipitous collapse this year in the biggest bank failure in American history.

On a financial landscape littered with wreckage, WaMu, a Seattle-based bank that opened branches at a clip worthy of a fast-food chain, stands out as a singularly brazen case of lax lending. By the first half of this year, the value of its bad loans had reached $11.5 billion, nearly tripling from $4.2 billion a year earlier.

Interviews with two dozen former employees, mortgage brokers, real estate agents and appraisers reveal the relentless pressure to churn out loans that produced such results. While that sample may not fully represent a bank with tens of thousands of people, it does reflect the views of employees in WaMu mortgage operations in California, Florida, Illinois and Texas.

Their accounts are consistent with those of 89 other former employees who are confidential witnesses in a class action filed against WaMu in federal court in Seattle by former shareholders...

Some WaMu employees who worked for the bank during the boom now have regrets.

“It was a disgrace,” said Dana Zweibel, a former financial representative at a WaMu branch in Tampa, Fla. “We were giving loans to people that never should have had loans.”

If Ms. Zweibel doubted whether customers could pay, supervisors directed her to keep selling, she said.

“We were told from up above that that’s not our concern,” she said. “Our concern is just to write the loan.”...

WaMu’s boiler room culture flourished in Southern California, where housing prices rose so rapidly during the bubble that creative financing was needed to attract buyers.

To that end, WaMu embraced so-called option ARMs, adjustable rate mortgages that enticed borrowers with a selection of low initial rates and allowed them to decide how much to pay each month. But people who opted for minimum payments were underpaying the interest due and adding to their principal, eventually causing loan payments to balloon.

Customers were often left with the impression that low payments would continue long term, according to former WaMu sales agents.

For WaMu, variable-rate loans — option ARMs, in particular — were especially attractive because they carried higher fees than other loans, and allowed WaMu to book profits on interest payments that borrowers deferred. Because WaMu was selling many of its loans to investors, it did not worry about defaults: by the time loans went bad, they were often in other hands...

Click here for full story.

Finding the right solution to fix housing

Given the growing array of industries seeking bail-outs from Congress, the housing industry is ramping up efforts to ensure that its own Fix Housing First initiative remains at the top of the list.

From a story at

With an economic stimulus sequel on the fast track on Capitol Hill, special interest groups from sectors as diverse as aviation and banking are trying to elbow their way closer to the front of a long line of industries in need of some help from their lawmaker friends.

Faced with that kind of steep competition for a top slot on Congress's priority list, the Fix Housing First coalition, which has been pushing for another, more robust home buyer tax credit and an aggressive mortgage-rate buy down, has upped its lobbying efforts and launched a media campaign to generate grassroots support. The strategy aims to pressure key congressional leaders into securing its agenda a spot in the stimulus package expected to be passed in January when President-elect Barack Obama takes office...

So, to get a grasp of where much of the coalition's lobbying efforts have been concentrated to date--and where they're likely to remain in 2009--Big Builder put together a congressional cheat sheet that highlights the key lawmakers with a heavy hand in the fate of the coalition's proposals...

Click here for cheat sheet.

The World in 2009

Want to get a glimpse of what economic conditions await the world in 2009? Each year, The Economist publishes such a guide, which you can find here. Some of the stories included:

Click here for full report.

Wednesday, December 24, 2008

No job? No problem!

Since it's all too easy to get depressed about the ongoing situation in the housing sector (not to mention rising unemployment), for Christmas Eve I wanted to share an article I read in The Week magazine on how to take advantage of this newfound free time for other endeavors based on a book called "No Job? No Problem!" by Nicolas Nigro. From the article:

1. Start your day as early as possible. The human brain tends to be more focused and alert earlier in the day, and more tired and distracted later on. Simply put: Always take full advantage of the finite hours of daylight.

2. Keep your learning curve perpetually greased. Further your education any way you can. If there are courses or workshops available at nearby colleges, attend them when the subject matter interests you. Would an advanced degree in your field, or a degree in another discipline entirely, benefit your job search or, perhaps, inspire a future career? Look into the possibilities, including degree programs that can be completed entirely online.

3. Cavort with genuinely successful people. Not rich people, necessarily. People who neatly blend the best qualities of humanity, people who are good to the core. You can learn from them.

4. Learn to cook.

5. Practice yoga.

6. Nurture your family tree. While you’re job-hunting, you might want to allocate some time for genealogical research or piecing together your family history. Get in touch with relatives for missing pieces of the puzzle. (One of these people may even hold the key that unlocks the door to your next job or career.)

7. Paint your living quarters. Get in touch with your inner Bob Vila or Martha Stewart. There is no better time to tackle the challenge of getting your house in order—literally. Besides, physical order goes hand in hand with psychological and emotional order.

8. Balance your checkbook.

9. Play smart. There are all kinds of games you can play with your friends, and many more you can play when you are all alone. Why not opt for the ones that will make you smarter, or at least exercise your brain as much as possible? Play games like Scrabble and chess with others. When you’re all by your lonesome, pull out a Rubik’s Cube or do the daily crossword in your newspaper.

10. Sample bizarre foods. Take a prompt from chef Andrew Zimmern’s popular program on the Travel Channel, Bizarre Foods. Zimmern travels the planet to sample local foods that most of us might deem a wee bit strange, like barbecued cow scrotum and still-beating frog hearts. Since you have to eat lunch anyway, why not broaden your horizons by trying some foods that you never considered before? You don’t have to go to the fantastic lengths of Zimmern. Maybe ordering shish kebab from a street vendor is bizarre for you.

11. Witness a sunrise.

12. Go hiking. No matter where you call home—a thriving metropolis, a bedroom community in suburbia, or a sleepy small town—there are more than likely locations nearby with circuitous trails through woodlands or indig-enous shrubbery. Visit for ideas.

13. Go Dumpster diving. Okay, so maybe you shouldn’t physically climb into any garbage Dumpsters. (No. 1: It could be dangerous. No. 2: It’s actually against the law in many places to be crawling around in other people’s refuse.) Nevertheless, Dumpster diving—and just plain old garbage picking—has a long and vaunted tradition. The bottom line is that people toss out things of real value. Many garbage pickers find furniture that they refinish. Working lamps are regularly put out to the curb. Ditto perfectly good rugs. Traverse your neighborhood on garbage pickup dates and look for bits and pieces that you could take home and use, or, perhaps, sell on eBay or in a yard sale. Just be sure to wash your hands after any of your adventures.

14. Read a good book. This recommendation is an old favorite. Read a book in lieu of excessive television viewing and aimless surfing on the Internet. Your overall psyche will benefit tremendously.

15. Fast for a day.

16. Contact a long-lost friend.

17. Keep a journal. Spend some time each and every day documenting everything from the weather to your innermost feelings about all that’s transpiring during your unemployment odyssey. Journal writing serves as a psychological catharsis. It also improves your communication skills, which—by the way—are highly coveted in the workplace.

18. Become a shutterbug. If you’ve got a camera—preferably a digital one (no photo development costs)—take it with you on both your job safari and leisure activities. Get a shot of the sunset. Take shots of neighborhood hot spots. Snap photos of family and friends.

19. Volunteer your time. Volunteer at a local hospital, nursing home, school, or some other institution looking for help. Join a volunteer fire brigade. You can’t go wrong by giving something back to the community. In addition, volunteering your time while you are unemployed increases your visibility and your network. You now have more people invested in the ultimate success of your job search.

20. Make a video for YouTube.

21. Invent something

22. Go ‘green.’ Install low-flow showerheads. Attend to leaky faucets. Insulate your home.

23. Work at different jobs.
If you’re working part-time to plug the income gap until you find a permanent position, it certainly helps to experience new job challenges. Do things you’ve never done before. In the end, you’ll be smarter for it. For instance, working in a restaurant kitchen could teach you an awful lot, including some useful new skills. It may, in fact, teach you that you never want to go near one again. The larger point here is that working in different kinds of jobs with different kinds of people adds layers to your character and overall know-how.

24. Try new things all across the board. The same benefits of working different jobs arise with just about any other experience that’s new to you. So work at tasks at which you’re not especially proficient. Instead of hiring a house painter, paint a room for yourself. Instead of calling in a geeky neighbor to install a new computer system for you, try following the instructions without a helping hand. And this new stuff applies in all parts of your day. Sample new foods while cooking at home. Patronize unusual shops. Travel to places you’ve never before seen.

Commercial developers joining the bailout crowd

Due to an inability to refinance loans for commercial property developments (which generally run for well less than 10 years and must be rolled over) and reduced income from higher vacancy rates and lower retail sales, developers are asking to be included as part of a federal rescue plan. From a Wall Street Journal story:.

With a record amount of commercial real-estate debt coming due, some of the country's biggest property developers have become the latest to go hat-in-hand to the government for assistance.

They're warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years -- with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

Unlike home loans, which borrowers repay after a set period of time, commercial mortgages usually are underwritten for five, seven or 10 years with big payments due at the end. At that point, they typically need to be refinanced. A borrower's inability to refinance could force it to give up the property to the lender.

Click here for full story.

Not surprisingly, tight credit and recession worsening housing outlook

What's a builder to do? Even with housing starts to their lowest levels in decades and home builders mothballing communities, there's not much they can do to combat lenders who won't lend or a recession that steals, at least temporarily, their home buyers. From a Wall Street Journal article:

A deepening recession and tight credit conditions are compounding problems in the housing market, suggesting that declines in home prices may continue well into 2009.

Sales of existing homes tumbled 8.6% in November from the prior month to an annual pace of 4.49 million units, the National Association of Realtors said. The figure reflects contract closings, which lag behind sales activity, and as a result capture the credit-market turmoil that hit the economy starting in mid-September.

New-home sales declined 2.9% to an annual rate of 407,000 units, the Commerce Department said, continuing a nearly three-year decline.

The housing sector has been hit hard throughout the year by an oversupply of homes that gradually forced high prices to fall. Tumbling prices, in turn, hurt the overall economy by battering financial institutions, reducing the wealth of homeowners and prompting job cuts in the housing sector.

Now, the worsening recession is further damaging the housing market. Consumers who lose their jobs are adding to homeowner defaults, pushing forecasts for when the sector will hit bottom into the second half of 2009 or later. Until the housing market turns around, the overall economy is unlikely to grow much. Economists call this cycle an adverse feedback loop.

What this also means is that prices could fall below the historical ratios of income or rents until the economy rebounds.

There is one glimmer of good news not reflected in the latest figures: a sharp drop in mortgage rates in recent weeks tied to the federal government's efforts to support the housing market. Though tighter credit terms are restricting many potential borrowers, lower rates could pull some potential buyers off the sidelines and slow the price declines.

A broad measure of home values by the Federal Housing Finance Agency, released Tuesday, showed prices nationwide dropping 1.1% in October from the prior month and 7.5% from a year earlier. The agency's index, built on purchase prices of houses backing mortgages sold to or guaranteed by Fannie Mae and Freddie Mac, is down 8.8% from its April 2007 peak...

The Commerce Department's sales figures showed the median price of a new home at $220,400 in November, down 11.5% from a year earlier. The average price declined 9.2% to $287,500. The inventory of unsold new homes declined 7% to 374,000 at the end of November. That represents 11.5 months of supply at the current pace, down from 11.8 months in October.

"Home-building activity has declined so much that the backlog of unsold units is starting to be absorbed at a fairly rapid clip even in the face of such a slow sales environment," said Morgan Stanley economist David Greenlaw, who added that inventories won't drop to "manageable levels" for six to nine months.

Click here for full story.

Sunday, December 21, 2008

Did the Bush Administration stoke the housing bubble?

There's a detailed story in today's New York Times (hat tip: L.A. Land blog) detailing how policies of the Bush Administration and ignoring important warning signs (such as prices rising much faster than associated rents) served to stoke the housing bubble. From the story:

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.
Click here for full article.

Loan work-outs now available before missing mortgage payments

Up until this point in the mortgage crisis, borrowers had to be behind on their payments before lenders would even consider re-working a loan. Now, however, more lenders are allowing 'early workouts' when a wage earner loses a job, thus imperiling a mortgage soon down the road. From Kenneth Harney's column via the L.A. Times:

Here's some good news for homeowners facing tough financial times: You no longer have to miss two to three months of payments before your mortgage firm can modify your unaffordable loan terms.

Fannie Mae, the mortgage giant with an estimated 18 million home loans in its portfolio or in mortgage bond pools it guarantees, now will allow borrowers who face financial difficulties to request "early workout" loan alterations, even if they've never been late.

Fannie's policy change has the potential to help thousands of people who are losing jobs or facing layoffs as the recession crunches onward. Most lenders and loan servicers traditionally have declined to intervene in mortgage problems until borrowers are 60 to 90 days late. So-called loss mitigation staffs may then try to work out solutions through techniques such as rescheduling back payments or extending the loan term.

Under Fannie Mae's revised approach, servicers of the company's loans will be required to inform borrowers that if they are "reasonably" certain that changes in their income will cause them to miss mortgage payments, they might qualify for an advance loan modification -- before they fall behind.

Borrowers who qualify will enter into a trial period of reduced payments, usually for four months. If they make payments on time during the trial, the modified mortgage terms could be made permanent.

Click here for full story.

Friday, December 19, 2008

Did the 1997 change in the tax law for home sales launch the bubble?

Remember back in 1997 when the tax law was changed so people selling their principal residences would never have to pay capital gains taxes on certain amounts ($250,000 for singles, $500,000 for couples?). That was also about the same time that the housing bust here in Southern California of the early 1990s finally began to show some real bounce. A story in the New York Times investigates:

By itself, the change in the tax law did not cause the housing bubble, economists say. Several other factors — a relaxation of lending standards, a failure by regulators to intervene, a sharp decline in interest rates and a collective belief that house prices could never fall — probably played larger roles.

But many economists say that the law had a noticeable impact, allowing home sales to become tax-free windfalls. A recent study of the provision by an economist at the Federal Reserve suggests that the number of homes sold was almost 17 percent higher over the last decade than it would have been without the law.

Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for “fueling the mother of all housing bubbles.”

By favoring real estate, the tax code pushed many Americans to begin thinking of their houses more as an investment than as a place to live. It helped change the national conversation about housing. Not only did real estate look like a can’t-miss investment for much of the last decade, it was also a tax-free one.

Together with the other housing subsidies that had already been in the tax code — the mortgage-interest deduction chief among them — the law gave people a motive to buy more and more real estate. Lax lending standards and low interest rates then gave people the means to do so...

The provision — part of a sprawling bill called the Taxpayer Relief Act of 1997 — exempted most home sales from capital-gains taxes. The first $500,000 in gains from any home sale was exempt from taxes for a married couple, as long as they had lived in the home for at least two of the previous five years. (For singles, the first $250,000 was exempt.)...

The change in the tax law had its roots in a Chicago speech that Senator Bob Dole, Mr. Clinton’s Republican opponent in the 1996 presidential election, gave on Aug. 5 of that year. Trailing Mr. Clinton in the polls, Mr. Dole came out for an enormous tax cut, including an across-the-board reduction in the capital-gains tax...

The law’s defenders say that it also removed at least one tax incentive that had pushed homeowners to trade up. Before 1997, people had to buy a house that was at least as valuable as their previous one to avoid the tax, or else take the one-time exemption. Now they could buy a smaller property or move into a rental.

But many economists say the net effect of the law was clearly to inflate the real estate market. Dean Baker, co-director of the Center for Economic and Policy Research, a liberal policy group in Washington, criticized the exemption as “a backward policy” that “helped push more money into housing.”...

Perhaps the most detailed analysis of the provision has been the study by a Federal Reserve economist, Hui Shan, who did the analysis while at M.I.T. Ms. Shan looked at homeowners with significant equity gains, before and after 1997, and compared the likelihood of their selling their house. Her study covered 16 towns around Boston and took into account a host of other factors, like the general rise in home prices at the time.

Among homes that had appreciated less than $500,000, she concluded that the change caused a 17 percent increase in sales in the decade after 1997. Before the law changed, many people apparently avoided paying the tax by simply staying in their homes...

Click here for full story.

November home prices down 34.5% from a year earlier

The recent stats for Southern California from Dataquick are out, and home prices are down by 34.5% from a year ago, although not all counties performed the same. As we've seen in previous months, prices have fallen more steeply in inland counties such as San Bernardino (-44%) and Riverside (-38%) but less so along the coastal counties of L.A. (-32%), Orange (-31%) and San Diego (-31%).

So are we finally getting closer to a bottom for prices, and when will prices start to rise again? From an L.A. Times story:

Foreclosures continued to drag home prices to new lows in November, as the Southern California median sales price slid to $285,000, its first drop below $300,000 since 2003.

The November median price was down 34.5% from the same month last year, and 43.6% below the peak price of $505,000 recorded during several months in 2007, San Diego real estate information service MDA DataQuick reported Tuesday...

The flow of repossessed homes into the housing inventory persisted last month, undercutting all home prices and dominating sales. Foreclosed homes accounted for 54.6% of the properties sold in November, up from 18.8% in November 2007.

Foreclosed homes typically sell for far less than their previous sale amounts, driving down the median price in foreclosure-heavy regions such as the Inland Empire, where about 70% of November home sales were of foreclosed homes...

Low prices pushed the total number of Southern California homes sold in November up 27%. Economists say that the sales of foreclosed homes will help the market find its bottom but that a return to rising prices is a long way off.

That's because the sale of a foreclosed home doesn't provide the same boost to overall sales as a transaction that involves a homeowner who is selling willingly. An individual selling a house will typically soon purchase another home. That does not happen when a bank clears a foreclosed house from its inventory.

"Those transactions simply repay lenders," MDA DataQuick President John Walsh said. "They don't trigger a move-up purchase."...

By some measures, falling prices have made homes affordable to more Southern Californians. A National Assn. of Home Builders quarterly index showed that at the end of September, about one-fifth of Los Angeles-area residents brought in enough income to qualify for a loan on a median-priced home. During the height of the real estate boom in 2005 and 2006, only about 2% of Los Angeles-area residents could afford a median priced home, the index showed.

"In three to four months we should be back to historic norms" of home affordability, said Christopher Thornberg, principal of Beacon Economics, a Los Angeles consulting firm.

But that doesn't mean there will be a rush of home buying. Many people have lost their jobs, and some have lost savings they might have used for down payments. Others owe more on their mortgages than the value of their current homes and would not have the credit to qualify for a loan on a new home, even if their income would support it.

Thornberg predicted that based on the pace of current price declines, home prices in Southern California will settle at 55% below their peak in late 2009 and probably remain at that level for some time. If, however, unemployment continues to rise, "that may take the life out of the near-term bottom," Thornberg said.

Click here for full story.

Thursday, December 18, 2008

Bernard Madoff: Reason #1 golf courses not the best place to make deals

Ok, I'll admit it: I'm too impatient to learn golf. When I was in high school a friend -- and a very poor teacher -- so incompetently coached me on the game that as I got older it never revived any interest. Good wine and food? Now you're talking.

I only mention this because apparently many real estate developers and their projects are also imperiled with the demise of the Ponzi King Bernard Madoff (and what a great name for a financial villain: "Made Off," as in with $50 billion). Even Hollywood couldn't write this stuff because they probably figured -- incorrectly, it would seem -- that it was simply too far-fetched to be true.

And where did they make these deals which required few questions but great trust? Golf courses. Country clubs. And all sorts of other places where objective analysis and due diligence had no place at the table, because to ask questions was -- what? Rude. Discourteous. And, ultimately, honest. Why was that so scary?

There's a lesson here: DON'T MAKE FINAL DEALS ON A GOLF COURSE. Preliminary deals, sure. Expressing interest? Absolutely. But please do things like check references, ask for work samples and check out the competition. Because if you don't? Potential financial ruin.

From a New York Times story (hat tip:

Almost no segment of New York City’s real estate industry was spared in the Madoff scandal, which may be history’s largest Ponzi scheme: commercial brokers large and small, little-known developers and prominent families like the Wilpons and Rechlers all lost money to Bernard L. Madoff, industry executives say. The outsize impact on the industry may have resulted largely because Mr. Madoff (pronounced MAY-doff) managed his funds much the way that real estate leaders have operated successfully for decades: He provided little information and demanded a lot of trust... Across the city, industry executives said deals had been scuttled or jeopardized because of the scandal. Residential brokers are taking calls from Madoff investors who have had to put their apartments on the market. Many developers had pledged their investments with Mr. Madoff as collateral for projects, and are now worried that their banks will call in their loans... Jerry Reisman, a lawyer based in Garden City, N.Y., said he was representing six commercial real estate investors and developers in the area who lost a total of $150 million to Mr. Madoff. They met Mr. Madoff through contacts at country clubs in the tristate area, he said.

“They knew him from golfing in the Hamptons. They knew him from the locker rooms,” Mr. Reisman said. “He was considered a wizard.”

Mr. Reisman said his clients were especially concerned because they counted on Madoff investments to complete some of their real estate projects, pledging their investments as collateral for projects. Those developers fear that when their banks realize that their investments with Mr. Madoff have disappeared, they will demand new collateral from other sources, Mr. Reisman said.

Finding those alternative lenders will be difficult given the financial crisis — and given that many other real estate investors have been hurt by the Madoff case.

“Many of these developers, their resources are all with Madoff,” Mr. Reisman said.
However, there is a schadenfreude moment:

Some members of the real estate industry are receiving the news with a mix of schadenfreude and sadness for their peers. Jeffrey R. Gural, chairman of Newmark Knight Frank, the brokerage firm, said Mr. Madoff had turned his family down as investors about eight years ago because they would not invest at least $20 million. For years, he said, colleagues introduced to Mr. Madoff through relatives or country club friends had sung his praises.

“People used to brag how they were getting these great returns when everybody else was struggling,” he said. “They thought Bernie Madoff was a genius, and anybody who didn’t give them their money was a fool.”

The impact is already spreading to the residential real estate business. Brad Friedman, a lawyer representing about 100 investors primarily in New York and Florida, said several clients have already said they plan to put their apartments on the market. They depended on their Madoff investments to pay their mortgages and co-op fees.

“With that source of money frozen, they’ve got no cash,” Mr. Friedman said. “They can’t pay the electric bill. They can’t pay the mortgage.”

Click here for full story.

Next wave of defaults to take down small business owners?

I recently read a comment regarding my post on the IRS relaxing their rules on tax liens that was so compelling that I felt I should re-print it as a separate post. Submitted by Professor Samuel D. Bornstein, it warns of the potential fall-out from small business owners (and those they employ) who could often only obtain Alt-A or Option ARM loans because they didn't have the traditional W2 forms to submit:

I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now. On Sunday, 12/14/08, CBS 60 Minutes aired a segment "The Mortgage Meltdown". Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact.

The segment missed the fact that this next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were specifically marketed to the self-employed who fell prey to them. The upcoming defaults on these risky "Toxic Mortgages" will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed.

Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.
An NASE survey at , was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis.

The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.

According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.

The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners. I would be happy to discuss the implications of the NASE Survey, since I created it and NASE ran it to its national membership (250,000). See the NASE website under NASE NEWS for the Toxic Mortgage Survey.

Also from the survey:

Survey Highlights:

• 22.9 % (3,709,800* At-Risk) of all self-employed business owners used risky or "toxic" mortgages or refinancing that are scheduled to "Reset".

• 19.2 % (3,110,400* At-Risk) of all self-employed business owners are at-risk of "payment shock". They do not know the monthly mortgage payment that they will be required to pay at "Reset".

• 18.4 % (2,980,800* At-Risk) of all self-employed business owners are very worried about the monthly mortgage payment due at "Reset".

• 7.9 % (1,279,800* Immediate Risk of Default) of all self-employed business owners have already missed one to three or more monthly mortgage payments at this date before expected resets in 2009 to 2012.

Small Business Financing

Each type of financing has inherent risks for the small-business owner and their firm. In this financial meltdown, home equity financing and lines of credit have been frozen or withdrawn, while credit card debt has been subjected to extra fees and higher interest rates. These forms of financing may become unavailable or too expensive to maintain, leading to cash flow problems and business failure for small entrepreneurs.

• 33.9 % (5,491,800* At-Risk) of all self-employed business owners used their home for mortgage or refinancing to get cash for personal or business expenses.

• 49 % used various forms of debt (mortgage, home equity, credit card, etc) to start their businesses. Credit Card Debt was 28 percent of total debt.

• 66.9 % used various forms of debt (mortgage, home equity, credit card, etc) for additional cash for their business operations. Credit Card Debt was 39 percent of total debt.

Goodbye Century Plaza Hotel?

Developer Michael Rosenfeld, who bought the 1960s era Century Plaza Hotel earlier this year for $366.5 million in May, is now proposing to knock it down in order to replace it with a $2 billion, mixed-use project headlined by twin 50-story towers encompassing condos, offices, retail space and a smaller but high-end luxury hotel. So what do locals think, and what are his chances of getting this built? From an L.A. Times story:

The new owner of the Century Plaza hotel has revealed bold plans to demolish the renowned facility and replace it with two sleek skyscrapers containing condominiums, stores, offices and a smaller luxury hotel.

The Century City proposal comes during a crushing downturn in both the commercial and residential real estate markets. And the $2-billion plan, which has yet to make its way through the grueling city approval process, is sure to alarm many Westside residents, who say the area is already too crowded...

The proposal by Los Angeles developer Michael Rosenfeld, who bought the property for $366.5 million in May, calls for razing the 19-story arc-shaped hotel on Avenue of the Stars and erecting two 50-story towers in its place. At 600 feet, they would be the tallest buildings in Century City and among the tallest in the region, with 293 condominiums, 100,000 square feet of office space, 106,000 square feet of retail space and a 240-room luxury hotel...

The proposal won praise Wednesday from Los Angeles Mayor Antonio Villaraigosa, who through a spokesman said it could "transform an aging hotel into an iconic destination and a state-of-the-art, mixed-use development in the heart of our Westside."

But the development is certain to face scrutiny from neighbors worried that the Westside is becoming overbuilt. Traffic is already a nightmare much of the time, and city resources such as water and emergency services are stretched to their limits.

Some opponents signaled that they would fight to protect the existing hotel.

"We're seeing an assault on the '60s," said Linda Dishman, executive director of the Los Angeles Conservancy and one of several preservationists who increasingly are focusing their efforts on structures from the 1960s imperiled by new development. "If you look at Los Angeles in the '60s, the Century Plaza was one of the most significant projects," she said.

Rosenfeld faces the worst climate for real estate since the early 1990s.

The D.E. Shaw Group, Rosenfeld's financial partner in acquiring the hotel, will back the new development, said Francis Cappello, a senior vice president at D.E. Shaw, an international investment firm.

But the firm is among large Wall Street hedge funds caught up in the scandal around the $50-billion fraudulent investment scheme allegedly run by former Nasdaq chief Bernard Madoff, and has stopped redemptions of some of its funds. Cappello could not be reached for comment late Wednesday, but Rosenfeld said the firm's real estate fund was not one of the affected funds. "This is wholly unrelated," he said...

Rosenfeld has a strong track record in large-scale projects. His real estate investment company, Woodridge Capital Partners, has substantial hotel, residential and office assets in the U.S. and Canada, including a 3.5-million-square-foot, mixed-use project being developed in Calgary. Last year he sold the luxury Carlyle condominium tower under construction on Wilshire Boulevard near Westwood for almost $150 million.

By the time the new Century Plaza project is completed in 2015, Rosenfeld said, the economy is likely to have turned around. "This is a great opportunity to plan for the future," he said.

Click here for full story.

IRS to relax rules on tax liens to assist troubled homeowners

That most beloved of federal institutions, the IRS, has decided to temporarily alter their policies regarding unpaid taxes so homeowners wishing to refinance or sell a home can do so without a tax lien torpedoing the deal. From an L.A. Times story:

The plan announced by IRS Commissioner Doug Shulman would speed up a process in which financially distressed homeowners may request that a federal tax lien be made secondary to liens by the lending institution that is refinancing or restructuring a loan.

Taxpayers will also be able to ask the IRS to discharge, or remove, its claim to a property in certain circumstances when the property is being sold for less than the amount of the mortgage lien.

"We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today," Shulman said, stressing that "we don't want the IRS to be a barrier to people saving or selling their homes."

He said the program would focus on people who ordinarily pay their taxes in full but "because of these extraordinary times are getting behind in their tax payments."

Click here for full story.

FannieMae to allow renters to remain in foreclosed homes

In an attempt to prevent throwing out renters of foreclosed properties onto the street, FannieMae will act as an interim landlord for nearly 4,000 tenants. FreddieMac is expected to follow suit. From a story:

Fannie Mae, the battered mortgage giant, has agreed to act as an interim landlord for thousands of tenants living in foreclosed homes around the country.

Fannie (FNM, Fortune 500) will sign new leases for the approximately 4,000 renters in its foreclosed properties, said spokesman Brian Faith. These tenants would otherwise face eviction, even if they had been paying their rent on time, because of the owners' failure to pay the mortgage on the property.

The policy will go into effect on Jan. 9, Faith said. He said Fannie will observe an existing moratorium on new evictions. Both Fannie and Freddie Mac have agreed to temporarily hold off on evictions...

Freddie Mac (FRE, Fortune 500), the other government-backed mortgage giant, has not announced any changes, but a spokesman hinted that the company is developing a new policy.

"We are working through the operational details to provide something by January," said Freddie spokesman Brad German.

German said it was in his company's best interest not to evict responsible renters.

"If it's an investment property, with multiple units, we'll do our best to keep our tenants in the units, for all the obvious reasons, including that it's easier to sell the unit to another investor," said German...

So why wasn't this rather obvious and common-sense approach implemented months ago? Good question!

Sunday, December 14, 2008

60 Minutes covers upcoming Alt-A and Option ARM foreclosure wave

Tonight 60 Minutes covered the upcoming wave of potential foreclosures related to Option ARM and Alt-A loans, which are expected to start rising over the next three years, with as many as 8 million homeowners losing their homes. Already 10% of outstanding mortgages are in technical default:

Watch CBS Videos Online

Thursday, December 11, 2008

Amidst all the bad news, mortgage rates at lowest rates in 4 years!

Who knows how long they'll stay there, but due to reduced fears of future inflation and the federal government's intention to better firm up the mortgage market, national rates for 30-year fixed notes fell to under 5.50%. From an story:

Rates on 30-year-fixed mortgages dropped this week to their lowest levels in more than four years, effects of a startling November unemployment report and a government plan to buoy the housing market.

Freddie Mac reported Thursday that average rates on 30-year fixed-rate mortgages dropped to 5.47 percent, down from 5.53 last week. The rate is slightly below this year's previous low of 5.48 percent during the week of Jan. 24, and the lowest since March 25, 2004, when it averaged 5.40 percent.

Mortgage rates started falling after the Federal Reserve launched a sweeping new effort in late November to aid the U.S. housing market by purchasing up to $600 billion of mortgage-related securities and other debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Fannie and Freddie own or guarantee about half of the $11.5 trillion in U.S. outstanding home loan debt...

Click here for full story.

Good-bye sub-prime fiasco, hello Option ARM foreclosures

Every time I get some marketing piece from the loan broker who tried in vain to talk me into an Option ARM loan, I remember how hard she pushed for me to take it as opposed to the 30-year, fixed-rate loan at 5-5/8 that I ultimately chose.

At first glance, it was a tantalizing prospect -- only pay the minimal amount and still be current on the mortgage? It seemed too good to be true, so I started doing my research, and once I saw those forbidding words "negative amortization" coupled with an adjustable rate, I told her no way, no how, not ever. Plus with fixed rates so low, I was only paying a $50 monthly premium for knowing exactly what my payment would be.

Of course it also helped that right after college I worked for a mortgage company, helping to process and create loan documents and knew full well what negative amortization meant. So when my broker wouldn't let it drop, I told her if she mentioned it again I'd take my business somewhere else. Of course now I tell people with good credit and assets to simply go directly to a lender and save themselves some money.

But for those people who didn't understand the pitfalls of Option ARMs, the next wave of trouble will be focused in that arena. From an story: the housing recession deepens, a coming wave of payment shocks threatens to bring another surge in defaults and foreclosures as these mortgages “recast” to higher monthly payments over the next two years.

“The next wave (of foreclosures) is coming next year and in 2010, and that is primarily due to these pay-option ARMS and the five-year, adjustable-rate hybrid ARMS that are coming up for reset,” said William Longbrake, retired vice chairman of Washington Mutual...

The next wave may be even more difficult to handle than the last one.

“It’s going to get tougher to modify loans as these option ARMs come into their resets," Federal Deposit Insurance Corp. Chairwoman Sheila Bair told this week. "Those are more difficult than the subprime and traditional adjustable rates to modify because there is such a huge payment differential when they reset."

So why did banks promote these loans in the first place? As usual, they were promoting that national value which has eclipsed everything else: greed.

Some time after Sharren McGarry went to work as a mortgage consultant at Wachovia’s Stuart, Fla., branch in July 2007, she and her colleagues were directed to market a mortgage called the “Pick A Pay” loan. Sales commissions on the product were double the rates for conventional mortgages, and she was required to make sure nearly half the loans she sold were "Pick A Pay," she said.

These “pay option” adjustable-rate mortgages gave borrowers a choice of payments each month. They also carried a feature that came as a nasty surprise to some borrowers, called "negative amortization." If the homeowner opted to pay less than the full monthly amount, the difference was tacked onto the principal. When the loan automatically “recasted” in five or 10 years, the owner would be locked into a new, much higher, set monthly payment.

While McGarry balked at selling these pay-option ARMs, other lenders and mortgage brokers were happy to sell the loans and pocket the higher commissions.

Click here for full story.

Falling consumer confidence now having an impact on all real estate sectors

It looks like the retail and commercial office sectors of the real estate industry are about to join the funeral dirge that has been the housing market over the last 18 months. So when will each of these sectors revive? From a story:

Another cascade of business bankruptcies in the housing, retail and commercial real estate sectors could happen during the next six to 12 months if consumers' confidence doesn't improve soon, both in terms of the economy and their personal finances.

However, the likelihood of that happening appears slim, based on the dismal assessment of current and future market conditions by three real estate experts during an hour-long teleconference yesterday presented by the American Bankruptcy Institute.

“Asset and price recovery are several years away” for the housing industry, predicts Rebecca Roof, a managing director with the New York-based business advisory firm AlixPartners. During her comments, Roof dredged up the usual suspects behind housing’s deterioration (price appreciation, overbuilding, lax mortgage underwriting), and added another co-conspirator: consumer confidence, or lack thereof...

Consequently, she says, many builders “are just trying to find enough cash to make it” through the downturn, which is why when builders finally decide to file for creditor protection under Chapter 11, “they are really at the point of liquidation." And with so many banks having their own financial and corporate problems, she says “it’s hard to get their attention” to renegotiate debt or new financing...

All three panelists don’t see much immediate improvement for their respective spheres of influence. “Home building is going to be a very tough, wounded sector for many months to come,” says Roof. “We have not seen the bottom yet, and if consumer confidence continues to erode, home building will not enjoy its traditional spring rebound.”

While she doesn’t expect any sustainable recovery for the next 24 to 36 months, Roof says builders’ survival will be contingent on realistic sales projections and asset valuations. “They will need good, early communication with lenders before they trip a covenant, and they need to make sure that all available cost reductions are made in ways that protect banks’ value....

“Home builders will be able to wait out [the recession] if they can negotiate forbearance with lenders,” says Roof. However, she also thinks that “a lot” of small builders will eventually liquidate, which would open the doors for developers with cash to pick up land bargains.

Most recent column for Builder & Developer magazine now online

My most recent column for Builder & Developer magazine is a review of 2008 and a look ahead for 2009:

When 2008 began, the common wisdom of the day was that 2008 would prove to be a difficult year, and that builders should prepare for a market rebound sometime in 2009. However, with the world falling into recession and federal government bailouts becoming a staple of daily news, it now looks like any sustained market rebound could very well be postponed until 2010...

Consequently we’re in what the folks at Beacon Economics have dubbed ‘the mother of all hangovers,’ which in the short-run leads to something called the ‘paradox of thrift:’ as the savings rate goes up (which is good for household budgets) the overall economy shrinks due to less overall demand. Yet in the long run, these types of economic shifts are critical for an eventual recovery better able to leverage a productive workforce, great technology and solid investments in infrastructure...

Click here for full column.

Many Downtown L.A. condos becoming rentals

The L.A. Times is reporting on a shift in downtown housing that many local economists and consultants have been predicting for close to two years. Due to too many condos chasing buyers (and deeply flawed demand studies), many are converting to rentals, some until the market rebounds and others permanently. So is this necessarily a bad thing? It depends on who you ask. From the story:

In the midst of a downturn in the real estate market, some developers are finding that they no longer can sell condos in buildings that even a year ago would have been quickly snapped up. Flummoxed by a precipitous drop in qualified buyers, they are choosing to rent out their buildings instead.

It's happening in downtown Los Angeles, and to a lesser degree in Hollywood and the San Fernando Valley -- areas where high-density housing has sprung up in recent years.

And the shift raises questions about some of the fundamental assumptions surrounding urban development. Instead of buyers who can afford the hefty down payments and mortgages, some of these developments are now attracting renters who need only put down rents of $1,500 to $4,500 a month...

Jan Lin, a professor of sociology at Occidental College, said the change is "something that you should be a little cautious about if you are a planner or city official concerned about the social fabric."

Property owners are typically more invested in their neighborhoods and push for urban transformation that will better the neighborhood and increase their equity.

But the owners of rental buildings are usually absentee owners, not residents of the area in which they are invested, Lin said, and don't necessarily have the same dedication to bettering the neighborhood that condo owners often do...

But the revitalization of downtown was sparked much less by homeowners, said developer Tom Gilmore, whose conversion of old bank buildings along Main Street into rental lofts nearly a decade ago helped spark the revival.

It was renters -- a mix of artists, young couples looking for urban adventure and professionals who worked downtown -- who began to build the loft scene that eventually led to new restaurants, bars and galleries, as well as luxury condos.

Gilmore said downtown needs a mix of renters and owners.

Click here for full story.

Home builders reverse course on court-ordered loan modifications

Things are looking so bleak for the nation's home builders that they've recently changed course, and now support allowing bankruptcy judges to order mortgage holders to modify loan terms to avoid foreclosure. From an L.A. Times story:

Bankruptcy judges would be able to reduce payments and principal for homeowners with troubled mortgages under a proposal that appeared to be gaining momentum Wednesday...

Such reform is also supported by key advisors to president-elect Barack Obama, including former Treasury Secretary Lawrence H. Summers, who will be chairman of the National Economic Council in the new administration.

On Tuesday, Jerry M. Howard, chief executive of the National Assn. of Home Builders, said his group would no longer oppose the proposal. Continuing home foreclosures and the economic recession have opened the group to previously off-limits ideas, he said.

"The situation's deteriorated so much [that] every proposal needs to be considered," Howard said...

Howard said his group's newfound flexibility on the issue was "a huge acknowledgment by the home-building community that in this crisis, old doctrines don't necessarily fly." He said the builders would be most likely to agree to a temporary expansion of bankruptcy provisions, not a permanent one.

Builders will not oppose court-ordered mortgage modifications because they could keep more people in their homes, which in turn would mean fewer foreclosures flooding the market. Competition from cheap repossessed houses has made it difficult for builders to sell their vacant, surplus homes in many areas, Howard said.

Conyers' bill would empower bankruptcy judges to order reductions in mortgage principal, waive prepayment penalties and stop or modify interest rate changes on adjustable-rate mortgages. Judges could also extend the length of mortgages to 40 years. Such measures would apply to mortgages on primary residences...

Click here for full story.

UCLA expects a dismal 2009

After being somewhat late in calling the current recession, the UCLA Anderson Forecast is now predicting a dismal 2009 while dissing the private Chapman University's own forecasts. From an L.A. Times story:

Two million jobs could be lost nationwide next year under the weight of a severe global recession that shows no sign of relenting soon, UCLA forecasters say...

The nation's unemployment rate will rise to 8.5% by late 2009 or early 2010, according to the forecast -- further straining a job market that matched a 34-year high last month by shedding 533,000 positions.

Undergirding the joblessness will be a continued decline in real estate values, diminishing wealth as a result of the stock market crash and weaker consumer spending.

The negative forces are predicted to help change the trend in the nation's real gross domestic product from a growth of 1.3% this year to a 1.6% contraction next year. In 2010, the authors say, there might be a turnaround...

The forecast for California also appears grim. Manufacturing jobs are expected to disappear and tourism is likely to suffer from recessions overseas, the report said.

The state's unemployment rate, which is currently at 8.2%, could rise to 8.7% and remain there until 2010...

Retail, transportation, warehouse employment and temporary jobs are expected to suffer the most, while education and healthcare could hold steady...

The UCLA forecast comes two days after a similar report was released by Chapman University in Orange. A tongue-in-cheek rivalry has formed between the two schools.

James Doti, Chapman's president, chided UCLA for failing to call a recession during its forecast in June. He also trumpeted his economists for being among the first to deem the nation's economy in recession last year.

Leamer downplayed the issue in a phone interview Wednesday. "We don't particularly notice them," he said about Chapman.

Wednesday, December 10, 2008

Would the last honest person in the U.S. please turn out the lights?

I remember last week my reaction to a report that students who cheat still consider themselves "good people" -- a complete and total lack of surprise. I'm sure the heads of Fannie Mae and Freddie Mac also thought the same thing. At least drug dealers and armed robbers know what they're doing is illegal; in some twisted way, that actually makes them more honest than the so-called professionals who've been running the housing industry over the last decade. From an AP story via MSNBC:

Top executives at mortgage finance companies Fannie Mae and Freddie Mac ignored warnings that they were taking on too many risky loans years before the housing market plunged, according to documents released Tuesday by a House committee.

E-mails and other internal documents released by the House Oversight and Government Reform Committee show that former Fannie Mae CEO Daniel Mudd and former Freddie Mac CEO Richard Syron disregarded recommendations that they stay away from riskier types of loans.

Click here for full story.

Fortune magazine talks to 8 prognosicators

Dow 4000? Food shortages? A bubble in Treasury bills? Welcome to 2009, courtesy of 8 different visions of economists/analysts/businesspersons opining in Fortune magazine:

Nouriel Roubini

Known as Dr. Doom, the NYU economics professor saw the mortgage-related meltdown coming.

We are in the middle of a very severe recession that's going to continue through all of 2009 - the worst U.S. recession in the past 50 years. It's the bursting of a huge leveraged-up credit bubble. There's no going back, and there is no bottom to it. It was excessive in everything from subprime to prime, from credit cards to student loans, from corporate bonds to muni bonds. You name it. And it's all reversing right now in a very, very massive way. At this point it's not just a U.S. recession. All of the advanced economies are at the beginning of a hard landing. And emerging markets, beginning with China, are in a severe slowdown. So we're having a global recession and it's becoming worse...

Bill Gross

The founder of bond giant Pimco warned of a subprime contagion back in July 2007.

While 2008 will probably be best known as the year that global stock markets had their values cut in half, it was really much, much more. It was a year in which every major asset class - stocks, real estate, commodities, even high-yield bonds - suffered significant double-digit percentage losses, resulting in the destruction of over $30 trillion of paper wealth. To blame this on subprime mortgages alone would be to dismiss an era of leveraging that encompassed derivative structures of all types, embodying a belief that economic growth was always and everywhere a certainty and that asset prices never go down. As 2008 nears its conclusion, we as an investor nation have been forced to face a new reality. Wall Street and Main Street are fearful that a recession may be replaced by a near depression...

Robert Shiller

The Yale professor and co-founder of MacroMarkets called both the dot-com and housing bubbles.

We don't currently have anywhere near the level of unemployment that we had in the 1930s, but otherwise there are many similarities between today's environment and the Great Depression, with things happening today that we haven't seen since then. First of all, there's the magnitude of the stock market's move up and down. The real (inflation-corrected) value of the S&P 500 nearly tripled from 1995 to 2000, and by November 2008 was down nearly 60% from its 2000 peak. The only other comparable event was the one in the 1920s where real stock prices more than tripled from 1924 to 1929 and then fell 80% from 1929 to 1932. Second, we've had the biggest housing bust since the Depression. Third, we've seen 0% interest rates. We've actually seen briefly negative short-term interest rates. That hasn't happened since 1941. There was a period from 1938 to 1941 when we were bouncing around at zero and sometimes negative, but that hasn't happened since...

Sheila Bair

The FDIC chairman has been pushing to get mortgage relief for borrowers.

My 87-year-old mother is a native Kansan who grew up in the throes of the Great Depression and the Dust Bowl. She is a classic "buy and hold" investor who would make Warren Buffett proud. Her investment returns always exceeded those of my father, to his eternal consternation. He actively traded his stocks and produced decent returns, but nothing like those my mother achieved by simply buying stocks of companies she understood and liked, and then holding onto them...

Jim Rogers

The commodities guru predicted two years ago that the credit bubble would devastate Wall Street.

We are in a period of forced liquidation, which has happened only eight or nine times in the past 150 years. The fact that it's historic doesn't make it any more fun, of course. But it is a pretty interesting time when there is forced selling of everything with no regard for facts or fundamentals at all. Historically, the way you make money in times like these is that you find things where the fundamentals are unimpaired. The fundamentals of GM are impaired. The fundamentals of Citigroup are impaired...

John Train

The author and chairman of Montrose Advisors has 50 years of Wall Street experience.

I presume that although we are in a severe recession it will not decompose into a full-scale depression, because that is what everyone is afraid of and desperate to avoid. Wall Street likes to say that the market has anticipated five of the last three recessions - the point being that a market crash frightens the authorities into taking necessary action.

Keynes observed that pragmatic businessmen often could not imagine that they were the slaves of defunct economists, but ironically, never is this more true than today of Keynes himself. So we run a huge deficit to postpone the worst. That means inflation, so bonds are unsatisfactory...

Meredith Whitney

The Oppenheimer & Co. analyst was among the first to warn that the big banks had big problems.

What the federal government has done so far- with TARP, bailing out Citigroup, etc. - has stemmed the bleeding, but what it hasn't done is fundamentally alter the landscape. Yes, there's been a tremendous amount of capital thrown into the system, but my concern is that it's just going to plug the holes. It's not going to create new liquidity, which is what the system so desperately needs...

Wilbur Ross

The billionaire chairman of W.L. Ross & Co. specializes in turning around troubled companies.

We are clearly in a serious recession, and more aggressive action is needed to turn things around. The federal government initially underestimated the scale of the mortgage and housing crises and later panicked into an ever-changing series of ad hoc measures that at best dealt with some of the effects of the original crises. But homeowners have now lost $5 trillion, and 12 million families have mortgages in excess of the value of their homes. Therefore the economy will not stabilize until mortgages are adjusted down to the value of homes, with affordable payment schedules, and until new mortgages become available across the home-price spectrum. Till then, the poverty effect of falling house prices and unemployment moving up toward 7% will hold consumer spending back from its former 70% contribution to our economy.