It was the most atrocious bubble in U.S. history, pushing tens of millions of Americans into financial misery.
Even today, the last of the lawsuits have yet to be filed.
But five years later it's finally coming back.
The housing market has bottomed and there's money to be made on its return.
housing market crash 2011
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U.S. Housing Market Forecast: How to Profit as Real Estate Rebounds
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New Wave of Foreclosures Will Sink the Housing Market Rebound
The long-anticipated housing market rebound will hit a speed bump this year as the number of foreclosures rises again.
With January's mammoth $26 billion settlement between five major banks and a group of state attorneys general, foreclosures that had been held up for a year or more are now moving forward.
The spike in foreclosures will arrive just as other data, such as the 5.1% increase in new construction permits reported on Tuesday, had begun to point to a housing market rebound.
"We expect to see foreclosure-related sales increase in 2012, particularly pre-foreclosure sales, as lenders start to more aggressively dispose of distressed assets held up by the mortgage servicing gridlock over the past 18 months," Brandon Moore, CEO of RealtyTrac, told CNN Money.
RealtyTrac's February report showed new default notices - the first step in the foreclosure process - were up 1% from January. Default notices increased dramatically in some states, such as Pennsylvania (35%), Florida (33%) and Indiana (37%).
"The pig is starting to move through the python," Daren Blomquist, director of marketing for RealtyTrac, told CNN Money.
Distressed sales already account for about one out of three U.S. home sales.
The National Association of Realtors (NAR) reported this week that 20% of home sales in February were foreclosures and 14% were short sales.
In a short sale, an owner who owes more on their home than it's worth agrees to sell for less, with the bank agreeing to accept the loss.
That's a far cry from a normal housing market, when distressed sales are less than 5%.
For 2012, RealtyTrac predicts a 25% increase in foreclosures, which will push the portion of distressed sales even higher.
And the picture doesn't figure to improve for quite some time. Paul Dales of Capital Economics estimates as many as an additional 3 million foreclosures over the next several years.
All of the states that saw increases in new default notices were those in which the courts play a role in foreclosures. The robo-signing issues addressed in the bank settlement occurred almost exclusively in such states.
States that don't use a judicial foreclosure process didn't accumulate a backlog. In fact, foreclosure activity in those states was down 5% in February from the previous month, and down 23% from the February 2011.
But among the 26 states that use a judicial foreclosure process, activity rose 2% in February from the month before. Foreclosure activity was up 24% from the previous year.
That leaves little room for optimism in hard-hit states such as Florida.
With January's mammoth $26 billion settlement between five major banks and a group of state attorneys general, foreclosures that had been held up for a year or more are now moving forward.
The spike in foreclosures will arrive just as other data, such as the 5.1% increase in new construction permits reported on Tuesday, had begun to point to a housing market rebound.
"We expect to see foreclosure-related sales increase in 2012, particularly pre-foreclosure sales, as lenders start to more aggressively dispose of distressed assets held up by the mortgage servicing gridlock over the past 18 months," Brandon Moore, CEO of RealtyTrac, told CNN Money.
RealtyTrac's February report showed new default notices - the first step in the foreclosure process - were up 1% from January. Default notices increased dramatically in some states, such as Pennsylvania (35%), Florida (33%) and Indiana (37%).
"The pig is starting to move through the python," Daren Blomquist, director of marketing for RealtyTrac, told CNN Money.
Distressed sales already account for about one out of three U.S. home sales.
The National Association of Realtors (NAR) reported this week that 20% of home sales in February were foreclosures and 14% were short sales.
In a short sale, an owner who owes more on their home than it's worth agrees to sell for less, with the bank agreeing to accept the loss.
That's a far cry from a normal housing market, when distressed sales are less than 5%.
For 2012, RealtyTrac predicts a 25% increase in foreclosures, which will push the portion of distressed sales even higher.
And the picture doesn't figure to improve for quite some time. Paul Dales of Capital Economics estimates as many as an additional 3 million foreclosures over the next several years.
The Uneven Impact on the Housing Market
However, the impact of this wave of foreclosures will be felt unevenly.All of the states that saw increases in new default notices were those in which the courts play a role in foreclosures. The robo-signing issues addressed in the bank settlement occurred almost exclusively in such states.
States that don't use a judicial foreclosure process didn't accumulate a backlog. In fact, foreclosure activity in those states was down 5% in February from the previous month, and down 23% from the February 2011.
But among the 26 states that use a judicial foreclosure process, activity rose 2% in February from the month before. Foreclosure activity was up 24% from the previous year.
That leaves little room for optimism in hard-hit states such as Florida.
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The Housing Market's Biggest Hurdle
Forget about optimistic headlines on the housing market.
Whether it's record low mortgage rates, improvement in the Case-Shiller Index, higher housing starts, or any other report, the headlines don't tell the whole story - and the story matters.
The real story is that the housing bubble was inflated by cheap and abundant mortgage financing and a sustainable recovery is only possible if that story has a second chapter.
But, that's not happening.
In fact, structural changes in the mortgage industry are about to make buying a home loan a lot tougher than it has been in the last quarter century.
Let's start with the premise that no matter how cheap a house is, and no matter how low interest rates go, nobody is buying anything if they can't qualify for a mortgage.
Or, if lenders decide to charge too high a rate because they're either not constrained by competition or they can't offload the mortgages they underwrite, how can there be a housing recovery?
Lenders have been consistently raising standards for borrowers. Long gone are the days of the famously named NINJA loans, as in: no-income, no-job, no-assets, no-problem.
The primary reason standards have risen is that buyers of securitized loans crammed with mortgages have "putback" rights that force mortgage lenders to buy them back.
Fannie Mae and Freddie Mac, who ultimately bought hundreds of billions of dollars of mortgage-backed securities, have been forcing lenders to buy-back billions of dollars of non-performing mortgages.
In 2011, Fannie and Freddie demanded $33 billion in mortgages be bought back. That was a 10% increase over what they putback to lenders in 2010.
Basically, the standards by which lenders were supposed to judge borrowers were overlooked or fraudulently misrepresented. Other factors, like faulty appraisals, are also a factor in accessing the covenants that lenders have to abide by when they sell mortgages.
I'll come back to higher borrower standards in a moment, but the standards issue flows immediately into what's happening on the competitive landscape today.
Big banks not only got heavily into the mortgage origination business during the boom, they also bought mortgages that were already underwritten from "correspondent" lenders.
Correspondent lenders have contractual relationships with bankers that allow them to sell the mortgages they make to the banks, thus freeing up correspondents' invested capital to underwrite more loans.
Correspondent lenders are not depository institutions.
They are usually private companies that have their own capital to make loans or borrow money through what's called a warehouse line of credit.
Here's how it works.
Whether it's record low mortgage rates, improvement in the Case-Shiller Index, higher housing starts, or any other report, the headlines don't tell the whole story - and the story matters.
The real story is that the housing bubble was inflated by cheap and abundant mortgage financing and a sustainable recovery is only possible if that story has a second chapter.
But, that's not happening.
In fact, structural changes in the mortgage industry are about to make buying a home loan a lot tougher than it has been in the last quarter century.
Let's start with the premise that no matter how cheap a house is, and no matter how low interest rates go, nobody is buying anything if they can't qualify for a mortgage.
Or, if lenders decide to charge too high a rate because they're either not constrained by competition or they can't offload the mortgages they underwrite, how can there be a housing recovery?
The Changing Landscape in Mortgage Finance
Let's look at what's happening in terms of buyer qualification standards, competition in the mortgage industry, and lenders' ability to package and offload mortgages.Lenders have been consistently raising standards for borrowers. Long gone are the days of the famously named NINJA loans, as in: no-income, no-job, no-assets, no-problem.
The primary reason standards have risen is that buyers of securitized loans crammed with mortgages have "putback" rights that force mortgage lenders to buy them back.
Fannie Mae and Freddie Mac, who ultimately bought hundreds of billions of dollars of mortgage-backed securities, have been forcing lenders to buy-back billions of dollars of non-performing mortgages.
In 2011, Fannie and Freddie demanded $33 billion in mortgages be bought back. That was a 10% increase over what they putback to lenders in 2010.
Basically, the standards by which lenders were supposed to judge borrowers were overlooked or fraudulently misrepresented. Other factors, like faulty appraisals, are also a factor in accessing the covenants that lenders have to abide by when they sell mortgages.
I'll come back to higher borrower standards in a moment, but the standards issue flows immediately into what's happening on the competitive landscape today.
Big banks not only got heavily into the mortgage origination business during the boom, they also bought mortgages that were already underwritten from "correspondent" lenders.
Correspondent lenders have contractual relationships with bankers that allow them to sell the mortgages they make to the banks, thus freeing up correspondents' invested capital to underwrite more loans.
Correspondent lenders are not depository institutions.
They are usually private companies that have their own capital to make loans or borrow money through what's called a warehouse line of credit.
Here's how it works.
To continue reading, please click here...
The Housing Market is Finally Bottoming - Here's How to Play It
The housing market remains a drag on the economy, but there are indications that it is finally starting to bottom.
Prices have stopped declining, and there is even some sign of life in sales.
Not all the news is good, of course. New home sales dropped still further in August from July, falling to a pathetic 295,000 annual rate compared to the 1 million-plus in the good years. And housing starts fell to an annual level of 571,000 from 601,000 in July - that's 12% below their August 2010 level.
Still, this is to be expected. The new home sector should be the last to turn up. There is a massive overhang of existing homes, both through foreclosures and through suppressed sales from homeowners that are "under water" on their mortgages and can't afford to sell.
With the exception of a very few markets - such as North Dakota (4% unemployment and new jobs appearing from the Bakken oil shale) and the overstuffed bureaucrat haven of Washington and its surrounding suburbs - there should be very few new homes built for the next several years.
Prices have stopped declining, and there is even some sign of life in sales.
Not all the news is good, of course. New home sales dropped still further in August from July, falling to a pathetic 295,000 annual rate compared to the 1 million-plus in the good years. And housing starts fell to an annual level of 571,000 from 601,000 in July - that's 12% below their August 2010 level.
Still, this is to be expected. The new home sector should be the last to turn up. There is a massive overhang of existing homes, both through foreclosures and through suppressed sales from homeowners that are "under water" on their mortgages and can't afford to sell.
With the exception of a very few markets - such as North Dakota (4% unemployment and new jobs appearing from the Bakken oil shale) and the overstuffed bureaucrat haven of Washington and its surrounding suburbs - there should be very few new homes built for the next several years.
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Housing Market has Changed - Risks are not Recognized
Global Economic Intersection Article of the Week Back in May, I posted an article on Minyanville asserting that all-cash buyers have kept several major housing markets from collapsing. (See All-Cash Buyers Preventing Collapse of Housing Markets.) With new evidence in to support this claim, now is a good time to revisit this important issue and […]