By Michael Olenick, creator of NASTIACO, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
As it turns out, information is not perfect, volatility does not define risk, markets are not efficient, the individual is adaptable.
– Dr. Michael Burry, UCLA Economics Commencement Speech, June 20, 2012
As markets seized in 2008 as counterparty risk became apparent and bankers stopped lending to one another Treasury knew that they had a problem, though when they tried to find the source of the problem – rather than the symptom – they found a black hole, a dearth of data. Former Assistant Secretary Treasury Phillip Swagel describes this unwelcome surprise in a 2009 paper, The Financial Crisis: An Inside View:
Two main policy proposals aimed at calming the financial markets emerged from the August episode: the so-called Master Liquidity Enhancement Conduit (MLEC), or “Super SIV,” a common vehicle in which banks would hold their illiquid assets, and a mortgage information database that would provide individual loan-level information on the quality of underwriting and subsequent performance of mortgages, and thereby facilitate analysis of complex MBSs and their derivatives. Neither of these efforts came to fruition, although the American Securitization Forum (ASF) independently began to work on a mortgage database under the rubric of their “Project Restart.”
Despite that components of the more expensive and higher risk Super SIV arguably manifested in the various TALF programs not widely known when the paper was published the much less risky and less expensive Project Restart never even got its first start; we continue to fly blind. Later, Swagel concludes about the idea “What was surprising was that this database did not exist already – that investors in MBSs had not demanded the information from the beginning.”
I’ll add that what’s even more surprising is that neither government nor investors are willing to enforce the basic laws that lead to a lack of transparency even now, years later, despite that these issues continue to decimate the underbelly of the economy.
Take data from the National Association of Realtors (OK, I can’t resist, quoting the old Borscht-belt shtick, take it please). This data, used regularly by government and pundits, consists of summary data – not primary data – retrieved by a lose collection of entirely independent real-estate listings scattered throughout the country. Using data from a conflicted group that is continually revised downward as dispositive is akin to scanning Craigslist hook-up ads to determine upcoming household formation and project the birth rate.
Nevertheless, website like Calculated Risk faithfully plot this it in simplistic red and blue lines, then “prove” it by showing a correlation to other real-estate data-sets, like those that scan online real estate want-ads. Since the latter is often electronically generated from the former it’s not surprising that they don’t closely correlate; rather it’s surprising they don’t match precisely. However, unless a person is trying to gauge the completeness of online real-estate ads to MLS data the correlation is entirely meaningless. As Einstein noted when revising Occam’s Razor, “Everything should be kept as simple as possible, but no simpler.”
I’ve been working on a database of loan-level information aggregated from investor reports for a long time now. It’s a massive, complicated, expensive, and tedious project. To put it into perspective so far I have 11.74 million mainly bubble-era loans covering 378.3 million payment records. It covers every state, everywhere, though focuses more on states that had heavier Alt-A and subprime exposure and is loaded onto what is essentially a supercomputer that would be unaffordable except Amazon rents it. When finished I’ll cross-reference it to property records information to see if information relayed to investors on delinquencies, losses, and the generalized state of the trusts matches what is being filed in courthouse records.
Substantive surprises pop out when one studies detailed primary data. For example, while trying to figure out how long until the banks started to pound people to the pavements again I found an interesting tidbit: JP Morgan and Bank of America have been writing off their subprime loans at a furious clip lately. In March and April, using ZIP codes that begin with 334 – my own beloved and severely impaired West Palm Beach, FL backyard – I found that the top MBS issuers writing off loans were, in this order, Bear Stearns, J.P. Morgan Mortgage Acceptance Corp., Merrill Lynch, First Franklin, and Lehman LXS. The former two are, of course, JP Morgan and the latter two are, of course, Bank of America. JPM hides their Washington Mutual loans or I’d expect that Lehman’s spot would be taken by WaMu.
Writing off bad-debt is usually caused by short sales, principal reductions, or finished foreclosures. Since the pace of the write-offs exceeds the number of REOs – which, as the want-ads show is relatively low – it’s clear that the banks have been dumping debt, which is a positive step towards reaching a housing floor. I was impressed – almost shocked at the prospect about writing something positive about either bank (something I’ll admit that’s never happened) – that I called JPM asking what they were doing. After being bounced around by a few people they failed to return my calls; maybe their own PR people have forgotten how to manage a positive inquiry after all these years.
I’ve been asked to publish my data, for free of course, but I have a family and employees to feed, plus a tech powerhouse to maintain, though if it was affordable I would if I could. At least I’ll continue writing about it, albeit with the caveat that deriving patterns from massive and complex data-sets can sometimes lead to substantive findings but at other times is no more useful for divining economic insights than a Rorschach test.
I was able to cull my data because of rules and practices promulgated during the Bush era. Few people thought that business and government could get much worse but – as we watch JPM openly flout requirements to open the WaMu data depository to the public, and leave the legacy Fannie Mae and Freddie Mac data private – this seems like the latest Obama letdown. We can argue until we’re red and blue in the face about the meaning of various so-called economic indicators, and we can transfer those tea leaves to digital paper in easy-to-read graphs and charts. But the fact is even my own enormous database is still missing an enormous number of loans, and companies who have access to the information are highly conflicted by industry capture.
Maybe we’ve reached a bottom, like the cheerleaders relentlessly proclaim, or maybe we’ll reach one in 2013, like the economists of Fannie Mae predict, or maybe we’ve reached a place where prices will remain stagnant – neither going up nor down much – as Prof. Robert Shiller predicts. Or maybe there are regional bubbles driven my microeconomic trends, like the rise in Miami condos driven by South American investors or the bump in Arizona real-estate driven by cash-rich cold Canadian
s.
I try to be modest but believe I’ve reached a place where I can call myself a leading expert in housing data, yet all I can say definitively is that if the banks go into a tailspin again the current people at Treasury won’t be substantively much better off than their predecessors, and something is profoundly wrong about that. It’s time to restart Project Restart, to standardize this information, and make it widely available. I’m unfortunately not worried about that putting me out of business because I know that it will never happen.
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When useful data is unavailable (nearly always), common sense can be useful. Housing hasn’t come close to any kind of bottom. Units aren’t moving. Foreclosures aren’t happening. All we have is cheerleading from inadequate data most of which is undoubtedly manipulated. For the 99%, the only relationship that matters is the one between house prices and family incomes. That remains completely out of whack. If we acknowledge that everything taking place after 2001 was a bubble, a return to 2000 prices ought to be necessary, except that family incomes have probably deteriorated since then, so maybe it’s back to 1997.
You’re kidding, right?
Just an FYI, my salary plunged to figures I made 20 years ago.
The 1994-1995 housing bottom didn’t have these title problems.
Good luck figuring out if you are paying the real owner,
or the real lender….
IMHO, 1994-1995 house prices will seem like the good ole days.
Jake,
Well said. The anecdotal evidence from Chicago and the surrounding suburban market is that neighborhoods that were above my price range continue to fall into and below it. Bloggers like Calculated Risk are incredible spin masters of small, self serving data sets. As before the 2008 crisis, there is no one in government or mainstream media that seems to have any interest in allowing access to information that may shed light on the fragility of the housing or financial markets as it gets in the way of their cheer leading.
Michael, thanks for going directly at the data. Will look forward (keenly) to your future posts.
Great piece Michael.
How are the limbo foreclsoures captured in Fla? The ones which were usually stern foreclosures which were dismissed presumably to be refiled if and when documents can be assembled? It appears in these cases that nobody really owns them. The residents live in them for years without paying anything, the servicer pays the property taxes. How are these (and they are many in FLA) counted?
They report delinquency information and loan status month-by-month. You can see the limbo loans — but especially in FL — by looking at loans with many months of delinquency and no foreclosure, or that went into then out of foreclosure but that remain delinquent, or that have been in foreclosure an abnormally long time.
That is interesting. Of course what an abnormally long time is for foreclosure will evolve to is anybody’s guess. Do you sense any resistance on the part of servicers to keep paying property taxes on limbo or long foreclsure properties? I would imagine if they stop paying or make such sounds the counties would start to freak out? Its hard to imagine they would keep on paying taxes and thus fleece investors for much longer? What is your sense of this? Thanks for reply!
Somebody’s willingness to buy these REOs still doesn’t say much about affordability (for the end buyer) at whatever price was paid. The home still has to be affordable in the long term, with somewhat stable income, for the end buyer. I somehow don’t see this happening with wages falling and unemployment still so high. Whoever is buying these bank properties has probably just got their hands sliced by a falling knife.
These bank paper losses were massive, and the point of hiding the data was to find suckers to share the losses.
“I’ll add that what’s even more surprising is that neither government nor investors are willing to enforce the basic laws that lead to a lack of transparency even now, years later, despite that these issues continue to decimate the underbelly of the economy.”
Surprising?
Again, for example, we illegally invaded the sovereign nation of Iraq over nothing more than lies, murdered hundreds of thousands of innocent people, displaced millions more, stole who knows how many dollars worth of their resources and not a single thing has been done to address these war crimes.
This is the world we all live in now.
What more does it take for people to understand the big picture, to really see that there are no longer any rules/laws for our leaders?
If the elite can murder, steal, assassinate, torture and imprison with impunity, why do people still cling to any notions of legality and law enforcement in regards to anything else the elite may be involved in?
If there exists a situation where the elite will lose money and/or go to jail, they will simply engage in a holding pattern until something changes and they can get back to looting again.
There are no mistakes to clean up or admit to, just “situations” that need to be ridden out by those who have the means to ride them out until the gravy train starts flowing again.
Sure, it’s important to document all of their crimes but don’t be surprised by them.
How does your data compare to the standard sources for this sort of thing, like Loan Performance, the Freddie (and now Fannie) loan-level databases, and McDash?
The CoreLogic/LoanPerformance data, in particular, is the standard data set used to do loan-level projections on nonagency MBS; it got pretty thin around 2007ish because of lack of issuance, but it’s all right.
Those who look tell me it’s about the same; mine is still being developed — we’re still pouring in data — but there’s lots of data and it’s shaping up to be the same. The primary benefit is probably the flexibility and enthusiasm one gets working w/ young, small company’s; it’s not just a job to us. There’s also no conflicts or capture — we’re not going to worry that something a new client is working on might hurt a different long-term client, and all-new state-of-the-art tech (the latter is a benefit of any young tech company; no legacy systems clogging things up). We’re probably also more competitive on pricing because we don’t have to worry that offering lower prices will force all existing customers to demand lower pricing, another benefit to being a new company.
Theoretically all data should be the same — it should be a commodity — but in reality some seem to be more careful than others. Somebody (LPS?) claims they have a brief edge on getting the monthly reports by working directly w/ the servicers but that seems iffy; even if were true it doesn’t seem like it’d be helpful, trusts don’t change that fast. Besides, if used for trading it’d arguable be insider info and the benefit (read: pretty much none) wouldn’t outweigh the hassle the risk would bring even if it were legal.
On the GSE’s I’ve imported the Freddie data, though haven’t merged it yet. The other data varies in scope by servicer/trustee but, minimally, it matches except for some of the more esoteric demographic info the GSE databases disclose (ex: race/sex/age of borrower…) that, while may be useful for marketing — at least some of it — isn’t really the type of thing investors worry much about. The Fannie LL data is young enough I haven’t bothered working w/ it, though wish they’d disclose the legacy loans (or at least amend the HUD disclosures w/ origination dates).
For decades, home value increased in tandem with looser debt/income and loan/value limits. Lenders found the ceiling of sensibility the 90s. Real estate will never again be a “sure thing.” The only things left to drive prices are good old fashioned demand, or increases in income. Real estate is no longer magic. That poorly made tract home in Arizona is going to depreciate.
You changed your company’s name and are still in “alpha.” Amusing, but depressing. Obviously your “predictions” over the last year have been way off, but your explanation of why is incomprehesible. But it is amusing to read, so don’t stop!
What hubris! Calling yourself the leading expert in housing data, though unwilling to release any data, and clearly not using the data well to forecast trends. One cannot call oneself the leading expert in housing data without facts. We know your analysis of Phoenix was just silly; But that is a side issue. Don’t ever call yourself a “leader” without empirical quantificationl It’s so embarrassing.
Tom – you’re back! Nice to see you again.
For those who don’t know Tom was the SVP of Financial Strategy at Fannie Mae when they came up with a brilliant financial strategy: commit an $8 billion accounting fraud. Wherein once upon a time this would have put those responsible on a government-owned farm breaking big rocks into small ones, Tom instead retired, worked for John Paulson for awhile while Paulson was shorting MBS, quit after Paulson made a few billion, and is now a retired “economist” (a job he never seems to have held at Fannie), living on his own farm. Lawler is well respected by CR, which is why CR isn’t well respected by anybody who knows Lawler’s history.
Findthefraud was an experiment — a document review system — it’s still there. Try it if you want to see what’s there; I can’t think of a better person to scour through fraudulent foreclosure documents than you, Tom. Nastiaco, on the other hand, is a company. We are still in alpha, like I mentioned in the post, but only because your cronies like to play hide the salami w/ housing data. Doesn’t matter, just like the Fannie fraud came to light so too will accurate housing data; houses are big, expensive (lots less now than during your time at Fannie, but still pricey thanks to the bubble you helped engineer), and it’s hard to hide worthless mortgages forever.
NC fans; Tom’s a legend: he doesn’t even write on CR directly — Bill summarizes his harangues — but he writes to me directly here in NC comments. Tom disappeared for awhile — perhaps Fannie’s lawyers (wisely) told him to quiet down given that his former bosses are still under investigation (their defense paid for by us, US taxpayers) — but now he’s returned. Anybody who wants to know why the US has been in economic dire straits for the past four years should ask Tom: I can’t vouch for him as an economist but he does know about that subject, because he helped engineer it.
That’s the – spirit – Michael…. BRAVO, BRAVO! ~~~
skippy… From my near ossified heart* (*humanity’s potential hammered by lies cheapness)… a genuine thank you.
I agree. CR is a shill, and I’m grateful that someone like Michael is trying to dig up real information.
So Tom – are Michael’s accusations correct? His account of the housing market rings true. However, if his description of your past is inaccurate, you should set the record straight. Here and now would be a good place.
Fannie’s regulators were the one’s the wrote about Tom’s past, and Tom himself filled in some gaps (well, kinda…). He usually doesn’t run away, but there’s not much to say, is there Tom? He’ll run back to CR and publish more “data” from the NAR, setting another few million backyard investors up for slaughter in the housing finance game, like he did while working for Fannie and Paulson. Hey, as long as it makes money it’s fine — it’s not like anybody in the federal government is going to do anything about it (just keep the campaign contributions flowing) — right?
I’m not happy to call someone a housing shill, but when I opened “Mish” today, the CR links that showed were the following (another has since been added):
# Foreclosure Report: California “Homebuyers should brace themselves for significantly less inventory next year”
# CoreLogic: Negative Equity Decreases in Q1 2012
# Redfin: House prices increased in June, Inventory declined
# Buffett: US Housing Picking Up, Rest of economy slowing down
This could cause people to make horrible decisions. In the areas that I’ve been following for about five years (the Santa Cruz mountains of CA, eastern CT, central NJ) the same inventory has been sitting there for years and years. Finally something appears at a price that makes me gasp because it’s so low (2.5 times local income in a nice town with acreage in most cases), and then it sells. However, even in my tiny home town there is foreclosed stuff that the banks are sitting on, not trying to sell yet.
So – if you count as comps the places that sell at 2.5 times median income, then maybe, just maybe you could argue things have bottomed. If you therefore are willing to admit that the tons of overpriced stuff on the market will ultimately also sell at 2.5 times the income of the relevant buyers. And that people should buy only if/when the house they want is sold for such a low price. If that is what CR means, well, okay. However if/when those places sell at these huge discounts, the towns concerned are going to be toast. Everyone is going to be growing and canning veggies again, and raising snails in the basement for food.
Given how broke young people are these days, I think that they’ll ultimately be able to buy the boomers’ places in many locales for the cost of the back taxes. However, that’s just my view.
Have you considered investors? If you need to fund the efforts, and perhaps get someone to push for openness of raw data why don’t you consider offering analysis of the dataset as a service to hard hit communities (to compute their real economic state) and to investment groups like BlackRock or Pimco? Both groups have a vested interest in having access to this and might be willing to pay for its use.
So embarrasing. But good luck, though your data suck.
at least a rhyme
It took you that long to come up with that turd?
skippy… see you after the wash.
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