From a site I never heard of before, called Reason.com:

“Something called the National Consumer Law Center criticizes state mortgage-mediation schemes as well as the Obama Administration’s Home Affordable Modification Program, which at last count had managed to prevent 235,247 homes from coming onto the market. However, data from the Federal Reserve and the Office of the Comptroller of the Currency indicate that even when these programs succeed, about half of all the renegotiated loans end up back in default soon afterward.

In those cases, the renegotiation has made things worse for everybody. The lender ends up with lower payments in the short term and then has to foreclose on a less-valuable property at some point in the future. The borrower gets no financial upside and (though he or she gets the use of a subsidized domicile for some period of time) is encouraged to stay in a losing situation when immediate foreclosure would have been a more merciful option. Prospective buyers get locked out as dumb lenders, deadbeat borrowers and the government all collude to keep the price of the house artificially inflated. And taxpayers have to spend $75 billion (the budget of HUD’s Making Home Affordable program) for the privilege of making it all happen. The best option for all concerned would be to get the deadbeat out of the house as quickly as possible, but nobody is doing that.

Put it all together, and throw in mainstream media outlets that as recently as June were calling for mortgage haircuts specifically to allow people to keep borrowing against their houses, and you’ve got the mother of all perfect storms mixed with the crack cocaine of third rails on steroids. The foreclosure wave may seem all tired and 2008, but it’s hotter than ever.”

#mce_temp_url#

Could this explain why banks aren’t looking to lend?

How do we square this with any kind of talk of recovery being underway?

Here’s a little message I sent off to a friend on April 22, 2009. I made a mental note to come back to it in the Summer. I now submit this as my application into the Junior Nostradamus Club of America:

“To me, it’s 100% about revenue streams off the MBS. As commercial RE prices deteriorate and loans mature and can’t be rolled or refinanced, delinquencies/defaults rise, and the underlying securities degrade. Classic deflationary debt destruction. Too bad that no other sector of the economy shows anything other than contraction; there are simply no new players or industries that can rush in to save the day. BTW…RE was the business that rushed in to save the day in 2001! Too bad that this time around, an actual industry that produces something other than paperwork will have to save the day.

So, banks are getting killed on residential RE, about to get killed on commercial RE, sunk in derivatives quicksand, and mired in credit card, auto and student loan defaults. How long can they trade their way to record quarters? How long can they lend free money at 5% and convince us they’re the masters of the universe again? How many times can they pull a “lost December” trick?

In residential RE, we know that the biggest indicator of imminent default is the crossover into negative equity. That trend is up, not down. As residential MBS continue to degrade, no amount of engineering can lipstick the pig. The MBS revenue streams simply track the decline in the real market. Why else would everyone in DC so desperately be trying to prop up housing prices? The insane theory is: stop the price declines, save the MBS. Of course, no one will even touch MBS unless the gubmint backstops them with 6-1 leverage and an underlying put.

We all know where this ends. Off a freaking cliff. The only thing I’m trying to game now is when it will happen. I get a queasy sense of the beginning of a rush to the exits, as my listing clients over the past few weeks have become eerily compliant. My listings are selling now in 3-5 weeks, and sellers I’m approaching with some really low offers are taking them. There is massive, rapid deterioration in the luxury market here since 1-1-09, with wholesale 5-10% price reductions coming within 30 days of listing in the 700K- 1mm segment (not surprisingly, the job loss among the owners in this segment is rampant). Anecdotally, this means nothing…but I think this time, my little world is a microcosm of the RE market writ large. We’ve also already seen this scenario play through in the sand states, so it’s not as if the local market is in uncharted waters.

BTW, don’t buy the line that rates are great and mtg money is plentiful. The refi boom is abating, and the various Oblamma refi/purchase money programs don’t work, period. Qualification standards are being ratcheted up almost daily, and standard underwriting periods now measure 18-24 days (it takes 40 minutes to actually run a basic underwriting process). That tells me that the pipeline of mtg money is running dry…which is consistent with the general seizure of credit extension. We now have correspondents telling us lies (i.e., cannot verify employment, existence of assets) about files in order to delay and/or stagger closings. The cash just ain’t there. It’s on a negative feedback circuit from gubmint-to-bank-to-gubmint…or, gubmint-to-bank-to-balance sheet.”

The Kool-Aid Brigade wants you to know that prices have stabilized. They may have…but not in this universe. Check out the handful of truly scary graphs (courtesy of James Bednar, at the excellent NJ Real Estate Report) at this permalink (you may need to copy & paste in your address bar):

http://njrereport.com/index.php/2008/02/06/north-jersey-january-residential-sales/

This is chilling stuff. We appear to be well on the way toward record-high inventories, married to a record-low sales pace. Is this an environment in which prices will stabilize?