I have a couple of Email updates from Mike Morgan to share. Here is the first:

Decession or Depression?

For two years, I have been writing about what I call a Decession, which is far worse than a Recession, but not as bad as a Depression.

Today I am convinced we are headed towards a Depression, and I don’t see any means to avoid it. The reason for this statement is simple. Inventory of homes is now beyond a two year supply and growing, while prices are falling off the cliff. That does not even include multi-family housing, as this market was also overbuilt. But it gets worse.

Even if builders stopped building homes today, prices would not stabilize. And, unfortunately, builders are still building. They are trying to monetize land and they have non-recourse money that is basically use it or lose it. Moreover, if the builders don’t build, the executives can’t get paid multi-million dollar packages and obscene bonuses. So they build. And they lower prices and eat away at shareholder equity. Without a doubt, at least a third of today’s builders will be bankrupt within the next 18 months. Maybe more.

Back to why I believe the coming conflagration will top anything we have ever experienced. The largest source of inventory is the homes moving through the foreclosure process and deeds in lieu of foreclosure. I estimate this will extend the national inventory to at least a 36 month supply . . . and in some markets double that. If you think I’m nuts, I’m used to it. Most people have told me I am nuts for the past four years. But I’ve been right on the mark all the way.

Over the past few weeks we have seen lenders that are giving up, when it comes to the disposition of inventory. Instead of putting policies and procedures in place, these lenders are slashing staff and outsourcing property disposition. The failure of lenders to get this under control is forcing prices down on a national level. It is not just Florida or Arizona or California. And the reason for the failure is the same reason we are in this position to begin with. There is no accountability and no regulations regarding what the lenders are doing. The snakes have moved out of the mortgage business and into the REO disposition business. These guys are taking the lenders to the cleaners.

I’ve written about one example at Fannie Mae. This week we experienced a similar horror story with GMAC. We are seeing outright fraud, but no one wants to make any attempt to stop it. The result is horrifying. Homes that should sell at $300,000 are being sold at $225,000. This lowers the bar for the rest of the inventory, because the appraisals will tag the $225,000 sale. The banks are letting the slime control how their inventory is sold. We have yet to find a single person at any of the lenders that wants to hear about the fraud or the negligence that is common place. They simply don’t care. Their only goal is to unload inventory. But without accountability, process, procedures and regulations in place, all they are doing is destroying the market.

By the way, property preservation is also outsourced to the snakes . . . and they couldn’t care less. So as this inventory sits, it costs the lenders money, but it also means mold in homes where the electric is turned off, as well as rodent and bug infestations, vandals, etc. Once again . . . no one is at the helm of the ship. Strike that. There are fat cats with big paychecks at the helm of the ship, but they are in the galley gorging themselves on food and drink, living it up at the expense of the country.

The second part of this is also lender created. As they dump inventory and allow the crooks to take advantage of them, the lenders pull back in their lending arms. And this feeds the conflagration further. When buyers can’t get financing, prices drop lower until financing either is approved or a cash buyer shows up to steal a property . . . and flip it within days.

The cycle is set, and I don’t see any attempt to slow it down or regulate it. I personally don’t see any means to avoid a depression when you have millions of homeowners losing their homes. This spreads out further, because property taxes come down as values come down. Now you have communities that are cutting police, fire, education and the basic elements that make the United States of America GREAT. Look around. Look at what people are selling at garage sales. Read the papers beyond the first page, and you’ll see stories about regular guys robbing banks and gas stations . . . because they have no other way to put food on the table.

The banks will fail. They cannot possibly continue to absorb the losses they are taking at the hands of the crooks that now control the REO markets.

Maybe I’m not making as much sense today as I normally do, but I’m in a bit of a fog. If you heard the voices of the people I deal with every week, and you saw the tears in the eyes of the kids that are crying because their Dad is crying . . . then maybe you would understand just how bad it is. If you spoke to lenders that are absolutely clueless as to what is going on, and maybe you heard the total disregard the lenders’ executives have for the problem . . . then maybe you’d have some sense of just how bad it is now . . . and what you will be reading about in 3-4 months. The lenders have lost control of the fire. It is no longer a brush fire. It is a conflagration, and the lenders are using jet fuel to try to put it out.

Regards,
Mike

Addendum:

Several people asked about this statement “Homes that should sell at $300,000 are being sold at $225,000” . I asked Mike about it and meant to comment on it. The answer is that Morgan had clients willing to pay $300,000 for some of these homes so $300,000 is a legitimate offer. By the way, that bid of $300,000 might be a 30-50% reduction of what the house originally sold for.

What happened is these are bank owned properties and Morgan could not find anyone with any authority to take an offer. As screwy as things are there was no one with any authority to negotiate and some of these homes are just sitting until they rot with mold, and pest infestations.

That is one aspect of what is happening. The second aspect is that banks and Fannie Mae have hired what Morgan believes unscrupulous agents to represent selling their inventory of real estate owned homes. Those agents are not even bothering to list the homes. Or if they do list them, the representing agent is in a city hours away and homes do not get shown. So the homes just sit until they decay and the banks end up selling them for $225,000 instead of $300,000 they might have been able to get. Mike believes this is by design.

When air conditioning is shut off in Florida, mold will set in and homes that the bank could have sold for $300,000 end up going for way less. Morgan has stopped even attempting to make offers on properties because invariably no one is willing to make any decisions on these REOs.

Mike “Mish” Shedlock
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