Posts Tagged ‘Default’
Guest Post: What Is Normal?
Sunday, 19 May 2013 14:53
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Submitted by Ramsey Su via Acting-Man blog,

Is a $400,000 house with NINJA loan normal?

How about a $200,000 REO with missing appliances, a dead yard, a long list of maintenance and no financing?

(Read more…)

Maybe normal is a $300,000 flip after the flipper fixed everything and colored up the yard, and did some upgrades to the interior. 

Some may suggest that normal is more like a $300,000 sale with a 5.5% fixed rate and 20% down.

Then again, it may be more normal if this $300,000 sale is financed with a 3.5% down FHA loan at 4%.

Of course, all of the above is actually referring to the same house.

So what is normal? Analysts and economists have long accepted household formation, population and job creation as the basis for housing supply and demand. There was a study (I can't seem to locate) that showed that there is no correlation whatsoever. I am going to borrow a chart from my cyber friend Calculated Risk as an illustration:

 

 

housing starts

Housing starts, total and one unit structures – click to enlarge.

 

I think I am going to leave it to the Wharton grads to explain how population and employment fit into the above erratic housing starts chart. In fact, if you use employment as a factor, then we should be tearing down a few million houses since we have lost about 6-7 million jobs since the great recession. If population is a factor, then I suggest you invest in Cairo where the population is definitely growing much faster than that of Silicon Valley.

Is it normal that Wall Street is buying up all these houses? Wall Street OPM ('other people's money') is not only buying up all existing homes, now it is  squeezing out the buyers for new homes as well. The numbers work exactly the same way for new and existing homes. The builders would far prefer a no-contingency cash offer with no commissions, no lender fees and no marginal buyers that they have to coach into qualifying. In other words, builders can take a lower offer from Wall Street and still be as profitable as when they are selling to mom and pop.

Is this good housing policy? Of course not.  Where are the policy makers? Just like Greenspan during the sub-prime era, Bernanke is like a deer frozen in the headlights. He is busy with his QEs and claiming there is a housing recovery, while he should actually be busy writing his memoirs entitled: "I did not see it coming."

So what is normal? Logically, the past is only relevant if conditions in the future are expected to be similar. We know that with aging baby boomers, housing demand will be substantially different than when the same boomers were at the peak of their productive years. Should the demand rather be for duplex type constructions or grannie flats, as the boomers try to juggle taking care of elderly parents and boomerang kids?

Current economic conditions should also present a different outlook. For example, with youth unemployment so high, with student loans in the trillions, there is no reason why first time home purchases should not be delayed. It seems to me the worst thing policy makers can do is to give this group even more credit, especially long term credit like a 30 year mortgage that will entrap them forever.

However, I believe the new normal is going to be intervention. Here is a recent speech by Fed Governor Elizabeth Duke, entitled "A View from the Federal Reserve Board: The Mortgage Market and Housing Conditions"

This speech is significant because Duke usually labels herself as the Federal Reserve's main voice on housing.

Since joining the Board in 2008 amid a crisis centered on mortgage lending, I have focused much of my attention on housing and mortgage markets, issues surrounding foreclosures, and neighborhood stabilization.

For those who follow the housing market, I believe this speech is a must read. It provides insight into the data that the Fed is looking at and the Fed's understanding, or misunderstanding, of the real estate market. They seem to be overly concerned about lending to borrowers with low credit scores (emphasis mine):

“The drop in originations has been most pronounced among borrowers with lower credit scores. For example, between 2007 and 2012, originations of prime purchase mortgages fell about 30 percent for borrowers with credit scores greater than 780, compared with a drop of about 90 percent for borrowers with credit scores between 620 and 680 (figure 6).5 Originations are virtually nonexistent for borrowers with credit scores below 620…

 

[….]

 

At the Federal Reserve, we continue to foster more accommodative financial conditions and, in particular, lower mortgage rates through our monetary policy actions. We also continue to monitor mortgage credit conditions and consider the implications of our rule makings for credit availability. For your part, I urge you to continue to develop new and more sustainable business models for lending to lower-credit-score borrowers that lead to better outcomes for borrowers, communities, and the financial system than we have experienced over the past few years.”

Governor Duke has completely forgotten about the sub-prime disaster. A low credit score is not a given, it is earned. A borrower must carry some balance, miss a few payments or even default on a few loans before they can garner a 620 or lower credit score.  The last thing that sub-prime borrowers need is more debt,  something that they have proven they cannot manage.

At the moment, we know prices are going up in certain markets, and so are sales. Mortgage rates are higher now than when QE3 started in September 2012. Investors are gobbling up everything in sight in their favored target markets. As an example, they are buying 30% of the houses in Southern California, 38% in Phoenix and 53% in Vegas. First time buyers do not stand a chance, especially if their credit score is an iffy <620, making their contingency offer most unattractive to a seller. The percentage of home ownership is declining. Are policy makers happy with these results? Are these intended or unintended consequences of public policies? What are policy makers going to do – more QE, more HARP, principal reduction or something even more creative?

In my opinion, there will definitely be more intervention. Intervention is the new normal.

    



 
The Debt Ceiling Is Back
Friday, 17 May 2013 16:28
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While many may not recall that the US has been without an official debt ceiling for the past three months, or even that it has a debt target ceiling, the bonus period agreed upon in January to let the nation rake up some $400 billion in addition debt in the past few months, officially runs out tomorrow, May 19, when the debt limit will be restored to its previous level plus the debt that was incurred in the interim, which means around $16.735 trillion in total debt as of yesterday, plus the amount incurred today, excluding the debt not subject to the cap which is about $30 billion. And since no grand bargain is forthcoming in a world in which official governance is now almost universally in the hands of the world’s central bankers and out (Read more…) the hands of the theatrical career politicians, it means that the next deadline in the endless US debt ceiling saga will be the day when the extraordinary measures to extend the debt ceiling run out.

Such a deadline will likely be hit in just over three months. As the WSJ reports:

Mr. Lew said the Treasury would be able to use the same extraordinary measures that the department deployed during the last debt-ceiling standoff at the start of the year. Those include halting investments in government worker retiree funds and drawing down some accounts.

 

“Treasury is not able to provide a specific estimate of how long the extraordinary measures will last,” Mr. Lew said.

 

But because of strong tax receipts and billions of dollars in dividend payments from mortgage giants Fannie Mae and Freddie Mac the U.S. will be able to continue borrowing–and paying all of its bills–until after Labor Day, Mr. Lew said.

September 2 happens to be a rather interesting day: just after the August Jackson Hole symposium where Bernanke will be famously absent, and just before the September FOMC meeting at which the Fed may (or may not) announce it is tapering QE (and when according the current run rate, the S&P should be roughly in the 1800 ballpark).

The song and dance is well-known:

If the Treasury exhausts the extraordinary measures and Congress doesn’t raise the debt limit, the government would be forced to fund its operations with the cash it has on hand, potentially putting Social Security, Medicare, military salaries and other payments at risk.

 

“The global economic leadership position enjoyed by the United States rests on the confidence of Americans and people around the world that we are a nation that keeps its promises and pays all of its bills, in full and on time,” Mr. Lew said.

 

Republicans have argued that the Treasury could prioritize to ensure that the government doesn’t default on bond payments. Mr. Lew rejected such an option, saying it would be “unwise, unworkable, unacceptably risky.”

 

Mr. Lew said that the Obama administration would not negotiate with Congress over the debt ceiling.

The good news is that as a result of an acceleration in government receipts and modest slowdown in spending (however temporary), the immediate cash needs of the government are lower, even though they once again pick up in the last quarter of fiscal 2013 (July-Sept), when marketable borrowings are expected to increase by a fresh $223 billion. The other issue of course is that without the Treasury creating “collateral” (read government debt to fund a deficit) which the Fed can monetize and expand bank reserves in the primary market, the Fed risks to become far too dominant a holder of Treasurys which it would then have to buy from the secondary market, and in the process eliminate even more liquidity from the market. This means that implicitly, Congress will be given a green light to spend away at will, even as Bernanke rages, very theatrically, against the will to generate sound fiscal policy. Bernanke’s whole spiel is to create as many billions in excess reserves as he can thus pushing stocks, pardon the “wealth effect” as high as possible, for which he desperately needs a profligate Congress.

Which brings us to the bad news, namely that while many expected a bipartisan compromise on the debt ceiling to be quick and easy, especially in the aftermath of the GOP humiliation from the end of 2012 and early 2013, the events of the past week, which have seen scandal after scandal unfold in the Obama camp, have drastically changed the equation, and suddenly the resurgent GOP may once again play hardball with both the president and the democrats, at just the time when some are starting to throw around the “I” word. And if there is anything that the Obama camp would want to avoid, it is another debt ceiling fiasco at a time when all plates are full as is.

Does that mean a replay of August 2011 is in the cards? It would be oddly symmetric. And yet, that would presuppose that the GOP and the democrats truly have divergent agendas, when in reality both parties are eagerly willing to spend as much as possible in the name of “the people” and both are eager fans of a government that is as big as possible.

And finally, we now live in a day and age when the legislative and the executive are sorry shadows of their former selves, and the only true branch of government, is the monetary (in other words Wall Street). And Wall Street will only let the market drop when it is well and ready, and when it is confident it  has transferred enough paper wealth into hard assets, and not a moment sooner.

    



 
Santelli On The Reality Of The Rotten Heart Of Europe
Thursday, 16 May 2013 13:58
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This morning we were treated, once again, to confirmation that Europe is still in the middle of a deepening crisis. No, this was not a reflection of the terrible data, it was Mr. Hollande’s insistence that “the crisis is behind us.” Luckily we have a foil for this idiocy. Bernard Connolly, author of ‘The Rotten Heart of Europe’ explains to CNBC’s Rick Santelli, “the point is that the union has produced this disaster; and the people who put the disaster in place hail it as a success. (Read more…) are they crazy? If they are, that’s pretty disturbing! If they’re not crazy, then the question of why they have done it is more disturbing.” In a few brief minutes, uninterrupted by an anchor desperate for silver linings, Connolly explains to Santelli when asked of the future, that nothing will change in the short-term, “the potential ways of getting out of the mess are simply unthinkable,” to both beggar and chooser, adding that “you have a cycle of deflation, depression, default, more banking crisis, more sovereign debt crisis, and social and political crisis.” Simply put, Connolly concludes on social unrest, “I don’t see any way of avoiding it.”