Turn On The Lights, Watch The Roaches Scatter, Part 49

Things are getting disastrous for the housing market.  It's looking like another housing price drop cliff is ahead because of a combination of two factors.  First, Foreclosuregate has all but stalled out sales of both first-time homebuyers and especially "move-up" homebuyers.

Robo-signing exposed sloppy industry practices that critics charged violated state laws and regulations. Some lenders froze the foreclosure process for all their loans until they could check whether their procedures were flawed and make any needed corrections.

The robo-signing moratoriums were responsible for the lion's share of the decrease in November filings, said Rick Sharga, spokesman for RealtyTrac.

"I wish the report was actually good news," he said. "But it's just an artificial drop. For most borrowers in foreclosure, it will be a temporary reprieve."

As evidence, Sharga pointed out that in judicial foreclosure states, ones where courts are involved and where banks are most vulnerable to scrutiny over their foreclosure practices, filings dropped substantially more than in states where courts do not usually participate in foreclosure actions.

There were 34% fewer auctions scheduled in judicial states, month-over-month, compared with a 7% decline in non-judicial states. Even that small drop was probably driven by an excess of caution among the banks, Sharga said.

Banks are going to restart foreclosure proceedings next month, but the uncertainty of who owns the note means that those proceedings are going to be very slow, challenged in courts, and will be lowered by buyers scared off by the reports of fraud.  It's not helping that people who have the legal right to ask where their note is before buying or selling their home are being retaliated against by banks dinging people's credit scores arbitrarily.  This too will only drive prices down and sales dry up.

That's going to cause tremendous downward pressure on prices in 2011.  The other problem:  the tax cut deal has pissed off the bond guys, and treasury rates are going up, pushing up mortgage rates in turn.

The negative convexity loop in mortgages is starting to see casualties left and right. The most recent read on the 30 Year Cash Fannie Mortgage rose by 11 bps overnight, and by a stunning 1% in the last month. At 4.703% the prevailing wholesale mortgage rate is back to the highest it has been since May 2010. And while some have speculated that this inflection in rates would have been sufficient to get Americans to jump on refinancing their mortgages, attempting to catch low rates while they can, the jump has been so powerful that to many the now incremental 10% loss in purchasing power does not make a purchase equitable any more. As a result, ceteris paribus, home prices will have to decline by about 10% to compensate for the pick up in rates in just the last month. And since the jump in rates on a duration adjusted basis is even more painful, there will be increase selling of comparable securities as managers look to shed a sudden surge in duration, leading to a further spike in yields, and so forth.

And this just turns into a vicious cycle.  I'm seeing the potential for a nasty drop in home values again in 2011.  That of course will only continue to wreck the economy.

No end in sight to the Great Recession.