The turn of the year is the time to make predictions and projections. I’m optimistic that the tide will finally turn for the American middle-class, suffering silently in a one-sided economic war. I don’t think this will be because of altruism, or even justice, but rather simple pragmatism. Specifically, I believe that parasitic financial institutions have pushed the boundaries so far that they’ve put their host, the middle-class itself, at risk. One new bit of information suggests the housing front is in more perilous shape than most pundits believe.
One challenge when performing any type of analysis is that information is scattered in many different places, and even when disseminated by the government its accuracy is oftentimes questionable. We’ve already seen existing home sales for recent years revised downward from their already dismal position, with barely a yawn from the public and no accountability whatsoever from government regulators who used that information when more reliable sources existed.
I don’t understand why accurate housing data, which is supposed to be open to the public, is so hard to come by. The housing crisis arguably rises to the level of a national emergency, one we can see and fee every day as it ripples through the economy. Despite that, government-owned Fannie Mae still keeps loan-level data away from the public, it’s extremely difficult to get data from Freddie Mac, and MERS’ database remains a black hole.
There is one piece of data only recently released — and, as far as I can tell, has gone unnoticed — that, if true, suggests the housing market is in such dire straits we’ve finally reached a critical mass where only radical out-of-the-box solutions will work. If this information, which comes of a highly suspect albeit well connected insider, is accurate, then extend and pretend has finally reached its natural end.
On April 15, 2011, Ft. Lauderdale, FL attorney Steve Jaffe took the deposition of former “Foreclosure King” David J. Stern. For whatever reason the transcript was not filed until Dec. 21, 2011, and with the holidays it’s taken even those of us who’ve been watching the Stern road-wreck — a group he actually hands a shout-out to towards the end – some time to plow through the 277 pages.
Forgive me for being self indulgent and giving you a sense of what Stern’s deposition is like.
Jaffe: What are your plans with the office?
Stern: I’m shutting it down.
Jaffe: How soon?
Stern: Not soon enough.
Jaffe: Why do you say it like that?
Stern: It’s done, it’s over. I have no desire to do this anymore. It’s a backstabbing business. A guy finds a way to make success and people get thrills of seeing them come crashing down, not the American dream, not the way I am.
Stern filed false court documents on such a scale that it engendered scrutiny and pushback, a rare development in our bank friendly economy. Cutting corners to fatten your wallet while throwing families out on the street doesn’t engender widespread admiration, yet Stern somehow sees himself as a victim.
Now to that revealing statistic.
For a quick bit of background, Stern took the “back-office” of his law firm public in early 2010, calling his new company DJSP. Right before his second quarter earnings release, he told investors in a meeting in New York that foreclosure filing volumes looked peachy. However, my own data showed didn’t things look great from Stern’s vantage point. Filing activity was markedly down, for him and everybody else.
During that conference Stern reassured investors. He even gave them t-shirts of himself as “Capitan DJSP,” holding back two busses with his bare hands. At the time I was relaying my data to some of Stern’s investors. It turned out my data was right; Stern’s wildly off base. What Stern knew and when he knew it was the reason he was sitting in a marathon deposition.
Here’s the excerpt that should send a chill down the spine of any housing analyst … and everybody else too.
Jaffe: .. you’re reading reports. You’re seeing volume. You’re seeing new file intakes. You’re seeing how fast they’re closing. And you’re seeing cash flow in and out of the company.
Jaffe: And so, you have — in 2010, you have a handle on what’s happening with the business?
Stern: As the numbers are reported in the quarterly earning calls and the investors or the world, whoever elects to participate in that call is made aware of the day-to-day happenings.
Jaffe: Right. But you have that information, that institutional knowledge of your own business far in advance of those calls and reports for that matter.
Stern: When Fannie Mae comes in and sits down and says, “David, we have 600,000 shadow inventory loans,” we say “You mean, 60,000”? And they go, “No. We mean, 600,000.” And I say, “Oh, that’s nationwide”? And they go, “No 600,000 shadow inventory in the State of Florida”. Sure, I know. Yeah, it’s exciting. [Note: transcribed verbatim from the transcript.]
Let’s repeat that. In the spring or summer of 2010, before the robosigning scandal caused a massive slowdown in the number of foreclosures filed, Fannie Mae apparently had 600,000 loans they expected to foreclose upon. Not Fannie Mae, Freddie Mac, FHA, VHA, and private label mortgages, Fannie Mae alone.
Granted, Stern has a credibility gap; he’s clearly one of the lawyers whom FHFA Director Edward DeMarco was clearly referring to when he expressed to Congress that he was “puzzled” why state Bar associations have taken no disciplinary action. The Federal Housing Finance Agency (FHFA) is the government agency which oversees the GSE’s.
FHFA reports that Fannie Mae’s share of total US mortgage debt, at the end of 2010, is 27.7%. If Fannie Mae really does have 600,000 homes they expect to foreclose upon we’d expect to see about 2,165,000 shadow inventory homes total .. in Florida.
It’s impossible to believe this figure is accurate. Let’s look at some data. First, the Census Bureau reports there are just under nine million housing units in the entire state at the end of 2010, 8,989,580, to be exact. According to court records between July, 2010 through December, 2011, inclusive, there were 1,044 foreclosure filings per month in Stern’s home county, Broward County, FL; 22,144 filings total. However, from January, 2009, through June, 2010, inclusive, there 2,544 monthly filings in the same county; 48,144 filings total.
If the number Stern relayed is accurate, that would put a theoretical backlog of filings, for that one county, at 26,000. If we extrapolate to the rest of this high foreclosure state it’s safe to say shadow inventory estimates for the US have been dramatically underestimated, in much the same way that existing home sales were overestimated, albeit to a much more severe degree.
One thing is certain. Either a) Stern lied during his deposition, or b) Fannie Mae lied to Stern, or c) government and non-government organizations that project shadow volume have massively blown it. On Wednesday, Dec. 21st, 2011, HousingWire reports that CoreLogic projected shadow inventory to be 1.6 million homes throughout the entire United States. If Stern relayed the information correctly, and Fannie relayed it to him correctly, that figure looks more like it could be the shadow inventory of South Florida alone. Except that would mean they expect to foreclose on about half the houses in this state, which seems … impossible.
All this calls for far more disclosure on the part of the GSE’s, regulators, and courthouses. There is no legitimate reason to keep these figures locked away behind password-protected websites. Everything from the MERS database, to the Fannie/Freddie loan-level information, to the pile of mortgages the Federal Reserve has purchased should be open. This issue rivals a pressing matter of national security: there is no reason to force investors, home buyers, and others to speculate; to search for information.
But if Stern’s figures are anywhere near accurate it makes me optimistic that 2012 will be a turning point. Why? Quoting John Maynard Keynes, the only economist who seems to know how to pull a country out of an economic depression, “If you owe your bank manager a thousand pounds, you are at his mercy,” Keynes said. “If you owe him a million pounds, he is at your mercy.”
If he’s even partially correct then congratulations, Wall Street; we’ve reached a place where the foreclosures would cause Housing Armageddon. Where the middle-class itself has become Too Big To Fail.