Category: Finance

Economics Update

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Just a few weeks ago, analysts were saying that the worst of the banking problems were over, but now they are saying oops! The banking downturn still has a way to go, so their “buy” message was premature.

This is not surprising, considering that analysts are low looking at something like $30 billion in additional losses just for WAMU for home mortgages, commerical loans, and credit cards.

I think that the only bank’s revenue remaining stream is check bounce fees, it appears.

Not surprising, considering that real estate is still crashing, with mortgage applications continuing to crater, and new home sales falling 40% from this time last year (and off 63% from the 2005 peak).

It’s no wonder that the changes in regulation allowing for Fannie Mae and Freddie Mac to repackage jumbo loans has had little effect, with the GSEs choosing instead to focus on repurchasing some of their own mortgage backed securities, which serves to minimize potential losses.

In terms of Jumbo loans, those over $417K, Fannie wrote $24 million and Freddie wrote $220 million since they could in March.

By comparison, in April alone, they spent $32.4 billion to buy back their old securities.

Nothing is moving until the players have a reasonable assurance that this is not all smoke and mirrors that they are dealing with.

Of course, the whole housing bubble breaking is not just academic. It now appears that a lot of the early babl boomers will have very little to live on retirement because of the housing crash.

In the wonderful world of energy prices, oil is down a bit on high inventory levels, and retail gas prices continue their downward path.

This lack of confidence, and lack of money, is probably why durable goods orders remain anemic.

Countrywide Shareholders Approve Takeover as the Police Close In

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OK, it may be a bit of an exaggeration. It’s true that Coutrywide’s shareholders approved the Bank of America takeover.

And as to the question as to whether BoA got a good deal, or whether they come to regret it, I would note that the state attorneys general of Illinois and California have both filed suit for what amounts to fraud and deceptive business practices against the mortgage lender.

Countrywide’s founder, Angelo Mozilo, aka “the Tanned One”, must be breathing a sigh of relief.

Fed Holds Rates Steady

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I think that I was right, no rate change, but the words accompanying the decision are a bit more hawkish on inflation.

FRB: Press Release–FOMC statement–June 25, 2008

Release Date: June 25, 2008
For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

My Prediction on Fed Rate Setting

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Even if inflation were not an issue, and it is, they would not cut rates, because they have already cut them so far that the market is no longer effected by this.

The economic news lately has been awful, so they won’t raise rates.

Thus, they will do nothing, though my guess is that their statement will be more hawkish on inflation.

We will know in about 14 hours.

FHA Still Backing Zero Money Down Home Loans

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It’s called the DAP, Down-payment Assistance Program, and it allows buyers to purchase a home with no down payment, even though FHA regulations require 3% down.

The offers — including “100% financing” — are made possible due to down-payment assistance programs run by nonprofit organizations. These programs are funded largely by home builders and also by private homeowners desperate to sell. The seller-funded groups provide enough down-payment money to buyers that they can qualify for a mortgage backed by the Federal Housing Administration, which requires at least a 3% down payment.

Basically, realtors and builders set up non-profits, and the home seller contributes to the non-profit to cover closing costs and down payments, which are made as grants to the buyers.

Of course, that money from the seller gets tacked onto the selling price. So if a condo were to sell for $100K, they would sell it for $110K, with 7K covering closing costs, and 3K covering the down payment required by the FHA.

Net effect: the buyer has no skin in the game.

They now account for 34% of downpayments on FHA loans.

Thankfully, the current FHA overhaul in Congress eliminates this…for a while, at least.

In any case, how about letting the pictures do the talking:


Economics Update

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I missed this when it was announced late Friday afternoon, but two moremonoliners hit junk status, FGIC and XL Capital and XL Financial.

I wonder when all of the monoliners will be junk rated, and I also wonder why this is not true now.

This means more than just that these insurers can no longer realistically write policies. These downgrades come with significant penalties, as MBIA’s statement that’s it downgrade will force it to make $4.7 billion in payments to creditors.

When they got downgraded, the terms of their loans changed.

In energy we have oil up despite the Saudi meeting, and retail gas prices falling. Hopefully this will bring a few months of stability at the pump.

The dollar strengthened, largely on crappy growth in the Euro zone, which would suggest that the ECB will hold off rate hikes for a while.

In real estate, we have Lehman predicting more losses for Fannie Mae and Freddie Mac, which should come as no surprise at all.

After when ¼ of Bay Area home sales in May had been in foreclosure, and statewide home sales hit a 13-year low, it’s not like there will be a whole bunch of players making money.

It’s why George W. Bush’s ownership is becoming a Pwnership society, with home ownership falling to below where it was when he announced the initiative to get people to buy houses.

BTW, if you think that this won’t effect you, you are wrong. We now have an estimate of properties falling by $1.46 Trillion, which, by my quick envelope calculation, means that state and local governments are looking at revenue shortfalls on property taxes on the order of $1.5 billion/month.

Economics Update

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I’m lazy, so let’s just say, Oil up, retail gasoline up, and dollar down.

I’m beginning if I should stop covering the above swings daily….day-to-day has too much noise to signal.

On the other hand, the rumors of massive writedowns at Citi over mortgages, LBO loans, CDOs, etc. is probably more significant, as is the fact that Moody’s finally cut MBIA’s credit rating.

Moody’s Investors Service on Thursday stripped the insurance arms of Ambac Financial Group and MBIA of their AAA ratings, citing their impaired ability to raise capital and write new business.

….

Moody’s cut Ambac Assurance three notches to “Aa3,” the fourth highest investment grade, and downgraded Ambac Financial three notches to “A3,” the seventh highest investment grade, from “Aa3.”

MBIA Insurance was cut five notches to “A2,” the sixth highest investment grade, and MBIA Inc was cut five notches to “Baa1,” three steps above junk, from “Aa2.”

This is actually more significant than just making their borrowing money more expensive, it means that some of the holders of insurance contracts the right to terminate or require the additional collateral from the company.

It’s what Atrios calls, “Another Jenga Piece” coming out.

This Much Schadenfreude Should Be Illegal

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Chuch Prince, former CEO of Citi who was fired for their losses that resulted from the collapse of the housing market, is now unable to find a buyer for his house .

Prince’s five-bedroom Tudor-style house in Greenwich, Connecticut, has been on the market for six months. He has cut the price by $300,000 to $5.85 million, according to the property listing.

It appears that he paid $4.48M for the house in 2003, so one wonders why he isn’t lowering the price more.

Maybe he has a 2nd mortgage on it…..heh.

Economics Update

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Well, I’d be worried if I had to job search, because about 1/3 of employers surveyed by the Business Roundtable expect layoffs in the next 6 months.

Needless to say oil heading back up, and the dollar heading down would indicate that those 1/3 of executives surveyed are being prudent, even if retail gasoline prices fell for the 2nd day in a row, which hasn’t happened in quite a long time.

Currency gets even more interesting when one realizes that the Chinese Yuan has gained 20% vs the dollar since it’s been allowed to “kind of sort of float” against the dollar by pegging to a basket of currency, it’s gone from 1 Yuan= $0.1208 to 1 Yuan=$0.1453.

What’s more, it looks like a strong Yuan may be the only way for the Chinese to keep their inflation down, by cooling off exports and lowering the cost of imports, particularly food and fuel, so they may continue to take actions to strengthen their currency, essentially exporting their inflation to us.

Real estate continues to suck too, with mortgage application volume falling last week and the Architecture Billings Index dropping two points.

Economics Update

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We now have the Fed’s report on national industrial activity, and the may disappoints, with activity falling 0.2% when an 0.1% increase had been predicted by economists.

I’m not sure if it factors in inflation, but if it does not, then those numbers are absolutely horrific, as the producer price index rose 1.4% in May, which is grim….Over the last year, the PPI has gone up 7.2%.

Note that this is going on while housing starts fell 3.3%, which is the lowest rate since March of 1991, 17 years.

No wonder that the builders’ confidence survey just hit a record low, matching the record established in December of last year.

Of course, that doesn’t take into account that the National Association of Realtors isn’t getting the numbers that they report right. They claimed that NJ home sales were up 4% in the Q1 when they were down 30%….that’s a hell of a “mistake”.

It’s no wonder that Goldman Sachs is suggesting that banks may need to raise another $65 billion to cover mortgage losses.

It’s even less of a wonder that investors are waiting for more dividend cuts from banks. No profit should mean no dividends.

Of course, the Fed is continuing to let banks get free money for sh%$ pile assets, this time to the tune of $75 billion.

There is good news in energy though, with both oil and retail gasoline coming down a bit today.

The standard wisdom would suggest that this was because of a strengthening dollar, but the greenback fell today.

Economics Update

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Well, we now know that in May, foreclosure was up 48% over a year ago, which is why we are seeing stories about places where foreclosures are a majority of sales, and banks are becoming more flexible on prices on the property that they have assumed.

Increasingly, it looks like the bump in house sales was just a bump in sales of lender own properties.

If interest rates go up, this will get worse, and May data points to increased inflation. It exceeded expectations again.

That’s why Fed Governor Plosser is calling for a quick rate hike. He is worried about the dreaded stagflation.