Category: bubble

Economics Update

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Well, we don’t need to feel so alone any more, U.K. house prices Fell 0.3% in February. What the French call “Anglo-Saxon” capitalism seems to be working wonderfully.

Back in the US, the housing market is not looking up, with Foreclosures hitting an all time high:

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report’s quarterly, 36-year history.

Even if you are paying your mortgage, you are probably still losing home equity. Total home equity is below 50% for the first time ever. It was 49.7% in Q2 2007, and 47.9% in Q3 2007, and the total equity dropped from $9.65 trillion from $9.93 trillion, or about $1000 for every man woman and child in the united states.

There is not a whole bunch of confidence in real estate now, so the spread on mortgage backed bonds is at its highest level in 22 years, and S&P has downgraded WaMu to BBB from BBB+.

We don’t have a stampede out of mortgages and real estate yet, but there are now rumors that UBS dumped $24 billion in Alt-A residential mortgage backed securities (RMBS). If this is reality, we could very see a stampede for the door, and Alt-A, which is for people with credit ratings above 700, will go the way of subprime.

So it’s no wonder that Fannie has dropped to a 12 year low.

It looks like the world is noticing this because the Dollar hit another record low, and oil hit another high.

This may have been driven by the European Central Bank and Bank of England not lowering rates, when it is expected that the Fed will.

We do have some mildly positive news retail sales were good in February, and new unemployment claims have fallen, though continuing claims are still going up.

It seems that Ambac is going to be a laugh a minute, see here, here,
and here. Basically, they have a plan to raise much needed capital, but no one thinks that it will work, and the markets halted trading at one point due to volatility over rumors.

Finally, in a case of the weak helping the even weaker, GM will provide $3 billion in loans to Delphi in an attempt to help them emerge from bankruptcy.

If that ain’t good money after bad, I don’t know what is.

Economics Update

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first, let’s start off by saying that Tom Toles is a bloody genius:

We have Citi on a path to cutting 30,000 jobs, and we have Dubai International Capital LLC, a sovereign wealth fund saying that losses will get worse, and they will need another infusion of capital.

FWIW, it was Abu Dhabi investors who just bailed them out a month or so ago, not Dubai.

In real estate, they’ve just discovered that
the real estate collapse is making first-time buyers less likely to buy.

In related news, water is wet, and the sky is blue.

In truth this is hardly surprising when even people like Ben Bernanke, who has done his best to avoid panicking the markets is saying that foreclosures will increase, and house prices will fall for a while yet.

Ratio of home ownership to rental costs are near a historic high, so why would someone want to buy into a depreciating asset?

Meanwhile, we are finding that the, “extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records”, recently, despite the fed rate cuts, leading a senior managing director at an investment firm to quip, “People are calling it financial Ebola“.

Translated into language for ordinary people, this means that people are requiring a much higher markup on either the prime rate, or the Fed funds rate, before they make loans.

Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31, according to Lehman Brothers Holdings Inc.

A basis point is 0.01 percentage point.

People are increasingly unwilling to lend money, and demanding higher returns, because they have no faith that it will be paid back.

Speaking of being paid back, Fremont General just defaulted on $3.15 billion in subprime mortgage loans that it sold a year ago.

The creditors are demanding immediate repayment, because Fremont’s “tangible net worth” (assets minus liabilities) have dropped below $250 million, meaning that they have violated the terms of the original sale.

Finally, we have Jon Moulton, the head of private equity firm Alchemy Partners, pretty much guaranteeing that, “There will be large private equity failures this year“. From the context he means both deals and firms.

With Friends Like These…..

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Specifically Penny Pritzker, Obama’s national campaign finance chair.

It turns out that she was chairman of the board, and from all accounts an engaged and active one at that, of the, “borderline shady and failed Superior Bank”, which collapsed in 2002.

It appears that these guys were the folks who created the so-called innovations that have led in large degree to the subprime mess, and it led to their downfall in the middle of the most bullish housing market in history.

See here, here, and here.

If there is one lesson to be had from the Bush administration, it is look at who the candidate keeps around him.

I agree with Earl Ofari Hutchinson’s assessment, “If Obama’s for real on the sub-prime crisis, he’ll dump his campaign finance chair“.

Economics Update

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Let’s lead off with the dollar on it’s way down, it’s at a 3-year low vs. the Yen, and a new record low vs. the Euro, which is one of the things that has oil breaking another all time record, $104/bbl.

The value of the dollar is dropping, so the price of oil, which is sold in dollars, is increasing. One wonders how many countries are considering a Euro oil bourse other than Iran.

In real estate, we have the largest drop in residential and commercial construction in 14 years.

So much for commercial real estate being “immune” from this contagion.

The poster child for the real estate meltdown, Countrywide, is still hemorrhaging on its mortgages, with 90 day delinquencies at 5.6% (up 900% from a year ago), and this is threatening to torpedo the deal with Bank of America to buy them out.

FWIW, there are more foreclosures than sales in a number of the states in the West, and Florida.

On the macro level, we have Warren Buffett saying that the recession is pretty much all ready here, and the president of the Philadelphia Federal Reserve saying that inflation is not important, and that the first priority is keeping the economy on track.

When a central banker says, “Inflation, no big deal”, you know that you are up a certain creek sans paddle.

Further evidence of a slowdown is the fact that Ford and Toyota sales declined in February. Ford having declines is not a shocker, but when Toyota is not selling cars, no one is selling cars.

The happy news is that the FDIC doesn’t see there being a surge in bank failures, though it does make one wonder why they are calling back retirees and generally staffing up.

They expect to be as busy as a one legged man in an ass-kicking contest.

In the world of municipal bonds, which should be safe-havens in a time like this, it appears that the costs are increasing, and the ratings falling, for municipal bonds, because of the collapse of the auction security markets.

In bond insurance, we have a new, or at least new to me, bond insurer bleeding, Security Capital’s to the tune of $1.5 billion on various complex investments.

It’s already been downgraded.

Finally, Buffet is now saying that his offer to buy the muni business of bond insurers is no longer operative.

Berkshire Hathaway is aggressively bidding on municipal bond portfolios, and as other insurers are downgraded, their position can only get stronger.

Economics Update: Housing Edition

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There is a lot of news, so this one is just housing.

Mortgage rates are climbing, despite the Fed rate cuts. As I’ve said before, with the expectation of inflation and greater risk of defaults, there is nothing that the Fed can do to keep the rates down.

It does not help that Standard & Poors is looking at cutting ratings on new tranches of mortgage backed securities, this time Alt-A, to the tune of 1,887 classes, which are supposed to be higher quality than subprime.

In the San Diego area home prices are in free fall, having fallen 3% last month, and 9.14% in the last three months.

Finally, we are beginning to see foreclosure self help websites. The link is “You Walk Away” dot com.

Economics Update

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We have bad news on income and spending. If you go to the link it says that they are both up slightly, 0.3% and 0.4% respectively, but this is less than inflation, which means that it is a real drop.

We also have oil at or near all time highs, and the dollar at or near all time lows.

We have a new estimate of total losses among financial firms from the meltdown, $600 billion. I think that they are off by at least one zero.

Insurance is continuing to unwind in a most unpleasant manner.

MBIA is not doing much in the way of business, because bond issuers don’t trust them to be solvent in the future.

Perhaps of more concern is that this is beginning to effect the reinsurance market, with Swiss Reinsurance Company posting an 87% drop in profits.

If this market goes south, it takes most of the insurance market with it.

Of course, we have the Fed shoveling out more money to the investors. It will auction off another $60 billion in March.

I don’t even want to think what the money supply is doing right now.

The credit crunch is also interfering with things like reorganizations, with Delphi unable to find the loans necessary for it to reorg under bankruptcy.

Finally, earnings fell across the market, with the S&P 500 companies’ earnings falling 4.2%, as opposed to the 10% increase forcast at the beginning of 2007.

Massachusetts Judges Rules Some Mortgages “Structurally Unfair” Under State Consumer Protection Law

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This is interesting. The judgehas basically ruled that this business model is fradulent and illegal:

A Suffolk Superior Court judge has issued a potential landmark order slowing down thousands of Massachusetts foreclosures and declaring whole classes of subprime mortgages “structurally unfair” under state law.

“It is both imprudent and unfair to approve mortgage loans that the borrowers cannot reasonably be expected to repay if housing prices were to fall,” Judge Ralph Gants wrote in a preliminary injunction against notorious subprime mortgage lender Fremont Investment and Loan. “Just because we as a society failed earlier to recognize that (many subprime loans) were generally unfair does not mean that we should ignore their tragic consequences and fail now to recognize that unfairness.”

My guess is that it will either be overturned on appeal, or the foreclosures will resume after 90 days, or both.

Economics Update

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First and most importantly, GDP increased at an annual rate of 0.6% in q4. Seeing as how prices are increasing at an annual rate of greater than 4%, I would call this a contraction in real dollar terms.

Also, Initial jobless claims rise 19,000 to 373,000.

Moody’s is looking at downgrading Fannie Mae. Right now, it’s B+, which may be fine for a grade, but not so good for a financial institution.

Moody’s is probably thinking that they at risk of having problems if there is something like a margin call, as Thornburg Mortgage Inc. currently is. It looks like they will take a $300 million hit.

We also have a q4 loss of $2.5 billionfor Freddie Mac This goes along with Fannie’s $3.6 billion loss that I reported a few days back.

And just to show you that it isn’t limited to real estate, the credit crunch is forcing the Pennsylvania student loan program will stop making loans, at least for now, because the credit crunch is making money too expensive.

Another Day, Another Alphabet Soup Collapse

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A few days ago, I was wondering what a VIE (variable interest entity) was, and why they were collapsing.

Well, the Wall Street Journal now has the answer. VIEs are basically bonds where the interest rate is periodically refigured at auction.

Municipalities like them, because the interest rates are lower, both because they are more liquid, and because if interest rates rise, then they will follow.

They are basically the same as adjustable rate mortgages, only for bonds.

The problem is that no one is buying at auctions, and the banks have to cover the unpurchased bonds.

The difference between these and auction rate securities is that the banks have to purchase these from whoever wants to sell.

The interest spike is not as bad, these typically go up to prime, so it’s a jump from around 2% to around 6%, but the maturity date gets kicked up too, with 30 year bonds becoming 5 year bonds.

Expect to see more municipal bankruptcies as a result.

Loan Portfolio Limits Eased on GSEs. Disaster to Follow

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As a result of their accounting scandals Fannie Mae and Freddy Mac had their portfolios capped about 725 billion dollars, but regulators have now removed the caps.

This is, to quote Nietzsche, “Like the bite of a dog into a stone, it is a stupidity”.

The head of OFHEO, James Lockhart, will be eliminating the caps this week, and it looks like he will be reducing their capital requirements below the current 30% too.

Mr. Lockhart is an ass. At a time when the 2nd and 3rd largest borrowers in the world, after the US government, are facing a collapsing market, allowing them to go further out on a limb that is being sawed through is insane.

Economics Update

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The Consumer confidence index has dropped to 75, the lowest number since 2003, the expectations Index, which is on hop people see the future declined to 57.9, the lowest number since 1991.

In real estate, January foreclosures are up 57% from one year ago, the fall in house prices is accelerating, with the Case-Shiller home price index falling 9.1% year over year.

It appears that home improvement is stalling, with Home Depot having its first drop in sales ever. People don’t want to improve a depreciating asset.

Inflation (stagflation) is rearing its ugly head too, with Wholesale prices rising 1% for the month of January, and 7.4% in 2007.

In insurance, MBIA will stop writing policies for asset based securities for at least the next 6 months. Additionally, it is looking at spinning off its municipal bond business, and announced that it had eliminate its quarterly dividend.

In general investment news it appears that yet another complex obscure financial instrument will give the world heartburn, something called a “variable interest entity” (VIE). It appears to be another asset structured to keep sh&^ty investments off the balance sheets.

Socialism for the Rich

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You know the old saying, “Capitalism for the Poor, Socialism for the Rick”, and in that vein we have the large multinational banks lobbying congress for a bailout.

Bank of America is circulating a legislative proposal to create “a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates”.

It’s a bailout for the banks more than anything else, and the author of the article, NY Times reporter Edmund Andrews, notes he irony when he says:

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

These folks made their bed, and they had the computers and models, let them lie in it. Any bailout should be to the people at the bottom of the pyramid, not the top.

Economics Update

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It looks like the US dollar is trending downward on the expectation of further weakness in the US economy.

And in the late to the game category, business economists are finally predicting a recession.

This is not surprising, as Fed rate cuts are no longer effecting longer term rates, because people are expecting inflation to pick up, and do not wish to be repaid in devalued dollars.

It won’t help that bond insurer Ambac may be downgraded even if it manages to raise $3 billion in new capital.

The problem is that people are increasingly unable to sell their homes, as shown by a 23.4% year-over-year drop in existing home sales. That’s a collapse in the market.

So now, investors are lawyering up to go after corporate boards, on the theory that the guys on the boards are supposed to be professionals and to show a modicum of competence.

Pass the popcorn on this last one.

Many People in US May Owe No Mortgage

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2½ months ago, I commented on a peculiar foreclosure case, where the judge had halted a foreclosure because the holder of the title could not be confirmed.

The title had not been properly processed as the mortgage was packaged and repackaged.

Well, it looks like this problem may be far more widespread than previously anticipated:

Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.

That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

“If you’re going to take my house away from me, you better own the note,” said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Seven years of no payments on a million dollar plus mortgage for two years, because the creditors cannot prove that they own the mortgage.

They simply cannot find out where the paper that says, “I own the mortgage”, is, and how to assign it to the proper entity.

This means that there may be trillions of dollars in which there is no note, and hence no way to enforce the mortgage.

Economics Update

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In local finance, we have King County, Washington potentially losing all of a $207 investment, the county claims that they will “only” lose 83 million, the state says all of it.

This will be repeated, and given that the auction rate bond market has collapsed, and localities are fleeing that instrument, their ability to issue bonds will be significantly diminished.

Don’t expect any new money to spent on roads, schools, water, sewer, fire, or police for the next 5-10 years.

In real estate we should note that 8.8 million homeowners, or 10.3% of all home owner are under water. They owe more than they can sell their houses for.

Gas prices hit are way up, which is an ill wind for consumer spending, which counts for 70% of the US economy.

Analysts are warning of risks to Fannie Mae and Freddie Mac, which makes the decision to allow them to finance even larger mortgages appear even stupider.

Fitch Ratings is saying that life insurance companies may take an $8 billion dollar hit on subprime and alt-A real estate investments.

It also looks like we will be seeing downgrades on the monoline insurers within a week or so.

And in hedge funds, we have D.B. Zwirn & Co. seemingly on the path to shutting down. It has shuttered its Special Opportunities Fund, a $4 billion hedge fund. Once it unwinds this, and it may take a while, they have less than $1 billion under management.

We also have Clifford Asness’ AQR Capital Management showing that mathematics based strategies are not working:

Asness’ AQR Capital Management has notified investors that its Absolute Return Fund, long one of Wall Street’s most stellar performing quantitative hedge funds, lost 15 percent of its value through mid-February. The slide follows an 11.9 percent drop through the end of November.

Bloomberg reported Friday that AQR flagship hedge fund now manages $2.9 billion, down from $4 billion.

I think that its clear, and should have been clear after LTCM went belly up nearly a decade ago, that these model based hedge funds don’t work.

The models break down when you get significant swings.

Economics Update

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The European Commission is predicting higher inflation and slower growth for this year.

Because the European Central Bank has controlling inflation as its sole mission, as opposed to the Fed, which also has an obligation to maximize employment, I think that we will see no rate cuts from the ECB, and perhaps a rate hike, which means that the current, and any future rate cuts by the fed will increase downward pressure on the dollar.

In terms of the US economy, we have the index of leading indicators index falling for the 4th straight month, the Philadelphia Federal Reserve’s report on manufacturing activity fell sharply, to the lowest point in 6 years, and Philly Fed’s future general activity index, which looks forward about 6 months, fell to the lowest number since 1990.

On the brighter side, this has driven oil prices down, because a recession implies reduced demand for energy, to $97.31/bbl.

In real estate, we have Mark Zandi, chief economist and co-founder of Moody’s Economy.com, predicting that home prices will fall 20% from their peaks.

He’s an optomist. First, interest rates are going up, and second, you always get overshoot in a correction like this. I expect a 40%+ drop in real terms, though inflation will mask some of that.

We also have the spread between adjustable-rate and fixed-rate mortgages growing. This is an indication that lenders are expecting rates to go up in the relatively near future, and they don’t want to be locked into low return loans.

We are also seeing localities recognize that they are going to get hosed on bond issues because of the bond insurance crisis, paying higher rates on lower rated bonds.