Immoral Hazard

I don’t blame the students. Before you tell me about how financially-prudent you were at 18, consider this: College kids are still finding their way…which is a part of what they hope to find at school. Up to this point, the biggest influence on their lives and shaper of their world-view is from their parents.

In short, a kid who is brainwashed from birth that they need a college education – and told all through high school to study hard to get into a better university – will see college tuition as a necessary price to pay for future success.

And, they are right to think this way. It’s not the concept of student loans that is the problem…it’s the willingness of colleges to saddle kids with crushingly-high levels of debt.

That’s right…I blame the colleges and universities.

Today, The Wall Street Journal reported that student loan debt has surpassed credit card debt:

Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today — both federal and private — total some $829.785 billion, according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com.

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In terms of volume, a person is likely to borrow more money to go to school today than, say, spend on necessities using a credit card during a patch of unemployment. Tuition at public and private four-year universities last year went as high as $26,000, with additional fees for housing and books not showing any signs of letting up either. It’s no surprise that many parents, reeling from the downturn, would turn to borrowing to make up the difference. With the cost of education increasing rapidly and the duration of unemployment increasing, perhaps the surprise is that this turning point didn’t hit earlier.

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But student loan debt, in many ways, is different than credit-card debt. These loans typically can’t be discharged in bankruptcy. They have different repayment terms, some of which can catch some have heavy consequences for borrowers who miss payments and borrowers’ families.

Student loan debt is a more common cancer than credit card debt. It’s deadlier too…at least credit card debt can be erased in bankruptcy. No wonder banks are happy to lend to students!

With only 40% of student debt being actively paid back, this problem is growing worse quickly. Bankruptcy laws need to be changed immediately. Banks and colleges would drastically scale back lending, which is a good thing. College demand would drop, and colleges would be forced to live within realistic means again.

An article in the Wall Street Journal today discusses the changing social attitude towards renting.

Plus, now that the first-time home-buyer tax credit is history, fewer renters are exiting for homeownership, companies report. Some tenants are even sticking around by choice, aware they don’t have to worry about their home’s plunging value or fear owing more than their house is worth. They can “wait out the turbulence in the single-family market,” says Jeffrey Friedman, chief executive of Associated Estates Realty Corp., an Ohio-based apartment landlord.

David Neithercut, chief executive of Equity Residential, the nation’s largest landlord, has noticed this “psychology change” in consumers.

There is “a change in one’s thought process about the benefits or wisdom of owning a single-family home,” he said at a recent industry conference. “There is no one in this room who doesn’t know someone who is upside down in a house or whose parents can’t sell the home to move to Florida or … know someone who can’t sell their house and move to another community to take a new job opportunity.”

Starring Michael Imperioli no less.

Foreclosure is the story of a broken family striving to stay together while a curse and the ghosts of a haunted house try to tear them apart.

Here’s a snip from a letter from the director:

It’s clear that recent times have pushed people to their limits, financially and psycologically, but I hope from the bottom of my heart that we never get a true-life story submission anything close to the horror we’ve cooked up in FORECLOSURE.

We hope that by filling out the simple form below, you’ll join a growing community of fans of FORECLOSURE, and give us insight into the reality of your personal place in this harsh economic climate.

This story is somehow being spun as a positive in other places…that 59 percent of borrowers say they wouldn’t default…but the real story is that a huge number, 41 percent, would.

And I betcha quite a few of the 59 percent would reconsider if they were more upside-down, had already tried modifying, or were more honest with themselves.

DS News reports Survey: 59% of Borrowers Would Not Walk Away if Underwater

A survey released Thursday by Trulia.com and RealtyTrac shows that only 1 percent of homeowners with a mortgage say walking away would be their first choice if they were unable to make their payments.

If their mortgage were to go underwater – meaning the property value drops below the amount still owed on the loan – 41 percent would at least consider a strategic default, while 59 percent would not consider walking away no matter how much their mortgage was underwater.

The latest data from CoreLogic reveals that nearly one in every five borrowers with a mortgage owes more than their home is currently worth, and as Pete Flint, Trulia’s co-founder and CEO, stressed on a call with reporters, the greater the negative equity, the higher the chances of strategic default.

But Flint says the new survey results show that “While it may not make the most sense to keep paying for this undervalued asset, many homeowners, at least for now, are holding on.”

With walking away from their mortgage obligation off the table for most homeowners, Flint broke down for reporters the avenues borrowers are leaning toward to prevent a foreclosure should they find themselves in that situation. He says only 5 percent of those surveyed say they would opt for a short sale as their first choice, while 69 percent would pursue a loan modification to save their home.

Irish citizens are beginning to protest their fleecing (via bank bailouts) more aggressively.  At least they understand that they should be angry.  Americans still have their heads in the sand.

Imagine buying a housing in 2000 for $300,000.

Now imagine that, today, some sucker would buy that house for $2,400,000.  Today would be a great time to cash-out, wouldn’t it?

Especially when your housekeeper might buy it (after all, she owns 3-4 already!)

Andy Xie, former Asia Economists at Morgan Stanley suggests home prices are over-valued by 100%:

Andy Xie, formerly chief Asia economist at Morgan Stanley, said the Chinese real estate market is 100 percent overvalued and that the intrinsic value of the Shanghai Composite Index is 2,000 points, reports 163.com. Xie compared the current Chinese housing market to the Japanese housing market of the 1980s and 1990s and predicts China’s stock and real estate markets will decline slightly in the fourth quarter of this year, with a large decline coming in 2012. Xie said the asset bubble was triggered by long-term low interest rates and an over-supply of money.

In December, 1999, broad M2 money supply in China was 11.76 trillion yuan, rising to 60.62 trilion yuan in December 2009, said the report. The 415 percent rise in the money supply was matched by a 453 percent rise in Beijing real estate prices, said the report.

The average home prices in Shanghai in 2000 was 3,326 yuan per square meter, soaring to 26,000 yuan per square meter in Apirl 2010, said the report.

Shanghai could be a whole lot worse off than even her suggests. Even if values fell by 75%, they would still be double their 2000 value.

Mountain House never should have been created. There was no need for it, and now it’s the poster-child for housing-bubble construction gone wrong.

And, it’s a stupid name for a town in the Central Valley. (no mountains)

CalPERS was a big investor in Mountain House and has watched their investment drop more than 80% in the last few years. But rather than cash out and save what they still have left, CalPERS is going to hold on.

For several decades, at least, if they want much more money back.

The Sacramento Bee reports:

The pension fund’s $1.12 billion investment in Mountain House shrank to just under $200 million in five years, Cal-PERS records show. That’s a loss of more than $920 million, making it one of the biggest headaches in CalPERS’ troubled real estate portfolio.

For now the loss is just on paper, like a share of stock that has dropped, and CalPERS says it isn’t bailing out.

“We have made a decision to retain the asset in the long-term for the recovery of California’s housing market,” fund spokesman Brad Pacheco said in an e-mail.

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In the meantime, Mountain House and other depressed real estate developments remain a dead weight on CalPERS’ $209 billion portfolio, administered on behalf of California’s state and local employees. Although its stocks and other investments have partially recovered from the crash, its real estate holdings lost half their value, a drop of $13 billion, in the 12 months ending last Sept. 30.

With an estimated population of 10,000 and its very own ZIP code, Mountain House is the Central Valley housing phenomenon in miniature – a stylish new town near Tracy for Bay Area commuters, fueled in large part by subprime mortgages and other dubious lending instruments. Home prices topped $800,000 at the market peak.

In late 2008, researcher First American CoreLogic released data showing that nearly 89 percent of Mountain House’s home mortgages were underwater, a higher percentage than any other community in America. “Underwater” means homeowners owe more than their properties are worth.

In one of his newsletters, John Mauldin correctly pointed out that, if the IMF is bailing out these banks, then it’s really the U.S. leading the charge.

Let me start this week’s Outside the Box by venting a little anger. It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can’t tell you how outraged that makes me.

What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks  and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.

If you thought that the U.S. housing bubble was bad, check out some of these other countries!

The Economist has an interactive chart showing home price appreciation from different countries. This one shows the U.S. versus Britain, Spain, Australia, and New Zealand. (they are all much worse)  And, Spain is in enormous trouble.