Category: Housing Crash

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.

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.

Senate’s Reid Dares Bush to Veto Foreclosure Bill

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I believe that this may be the fruits of the house telling Bush to pound sand on Telco immunity.

They did this, and then they went home, and the feedback from constituents was overwhelmingly positive, so now Harry Reid has found some guts on the foreclosure bill.

I think that Reid may finally get opposing that a president with a 19% approval rating, which makes Bush as popular as a home root canal kit, is a winning strategy.

Besides, this is something that is easily understood: It prevents foreclosures from creating instant slums, and it puts some of the onus on the banks, who were more financially knowledgeable than their victims.

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 dollar has flirted with crossing the $1.50:€1.00 for months, and not that it has crossed the barrier, it’s continuing to weaken to new lows, with it currently around $1.51:€1.00.

Of course, it doesn’t help that Alan Greenspan is suggesting that the Gulf states drop their pegs to the dollar. I guess that he’s shorting the dollar or something now that he is “retired”.

On the bright side, the falling dollars is attracting overseas investors to US real estate, as it is now cheaper to buy.

In California, we have the California association of realtors reporting that new home sales are down 29.8%, and median price is down 21.9%.

Make no mistake this is a blood bath, and the numbers would be worse if they corrected for home size. The housing market is collapsing from the bottom up.

It will get worse, Fannie Mae has posted a $3.6 billion q4 loss, and I would expect something similar from Freddie, and we are still very early in the collapse of the housing bubble.

We may very see the collapse of Fannie and Freddie in the next 3 or so years.

This may explain why new home sales nation wide are at a 13 year low and why Mortgage application volume is falling off a cliff.

It doesn’t help that mortgage rates are no longer following the Fed rates because of inflation fears.

As the big sh^%pile continues to collapse, we are starting to see the inevitable lawsuits, with HSH Nordbank deciding to file suit against UBS, alleging that, “UBS’s management of the portfolio has been in breach of its contractual obligations and fiduciary duties and that substitutions were made solely for the benefit of UBS”.

We’ll be seeing a lot more of this.

Testifying before Congress, Ben Bernanke is expressing concern about both inflation and recession, aka “stagflation”, though the Fed is still shoveling money out the door, with another $30 billion auction of cash for garbage.

In the world of more real world finance, where people make money by making things, durable goods orders fall 5.3% last month, but oil is down a bit after getting above $102 a barrel.

It’s under $100, for now, on expectation of a recession.

Bush and His Evil Minions™ Choose Fat Cat Bankers Over Home Owners

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The ‘Phants in the Senate are threatening a filibuster, and the white house is threatening a veto over the Senate’s bill modifying bankruptcy laws to allow a judge to modify the terms of a loan on a primary residence.

Today, you can do this on your yacht, or your vacation home, or your rental property, but not on your loan.

Allowing so-called “cram downs” will not fix the problem, but it will make it better, and it will land squarely on the shoulders of the lenders who were the worst actors in this debacle.

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.

Economics Update

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Well, let’s start off with real estate:

First, we have an article asking whether the Federal reserve is refilling the housing bubble. Normally this would not merit comment, but look at the link. Look at the author. Look at the title. It’s Lawrence Yun, chief economist for the National Association of Realtors, and it has the word “bubble” in the title.

When the NAR is calling it a bubble, it’s a bubble.

We also have reports that people are defaulting on subprime loans before they reset, which implies that these people so overbought their houses, that they can’t even afford the “teaser” rates.

We also have single family home starts dropping to a 17 year low, though there has been a pickup in condo and apartment construction (not sure how much is the former, and how much is the latter).

We also have Mortgage applications plummeting 22%, as rates rise in the face of the fed cuts, because no one trust to lend anymore.

The fed is “pushing on a string”.

Finally, we are starting to see Foreclosure tourism, with bus tours of foreclosed homes becoming a regular event in Florida.

It’s an attempt by some realtors and speculators to get the market moving again. Isn’t gonna happen.

In terms of more personal finance, we have an explosion of people tapping their 401(k) accounts for living expenses.

Yep, those private accounts to replace social security sound like such a good idea. As I’ve said before, it’s like eating your seed corn, which is what these folks are doing.

On a more general macroeconomic note, inflation is up, with the CPI rising 4.3% in 2007, and prices rising at a 5% annual rate in January.

On top of all this, the Federal Reserve has cut its forecast for economic growth.

Considering the fact that the official CPI understates inflation, we are probably closer to an 8% inflation rate (prices doubling every 9 years), so I’m calling stagflation, which seems a no brainer, even without oil hitting another record, with it peaking at trading at $101.32/bbl and closing at $100.74/bbl….No…wait….that’s two records.

In terms of the financial establishment recognizing that the problems are far deeper and broader than previously understood, we have Martin Wolf of the financial times saying that, “America’s economy risks mother of all meltdowns“, and we have Portfolio.com wondering if the basic model used to evaluate the complex instruments in the big sh$#pile, or more generally, the prices of options, the Black Scholes Pricing Model, is simply inaccurate, which would render their prices unknown. It’s literally look at the chicken entrails to figure out the prices time.

Basically, the model falls apart, and has always fallen apart:

Good theory. The glitch was discovered only after the fact: When a market is crashing and no one is willing to buy, it’s impossible to sell short. If too many investors are trying to unload stocks as a market falls, they create the very disaster they are seeking to avoid. Their desire to sell drives the market lower, triggering an even greater desire to sell and, ultimately, sending the market into a bottomless free fall. That’s what happened on October 19, 1987, when the sweet logic of Black-Scholes was shown to be irrelevant in the real world of crashes and panics. Even the biggest portfolio insurance firm, Leland O’Brien Rubinstein Associates (co-founded and run by the same finance professors who invented portfolio insurance), tried to sell as the market crashed and couldn’t.

This is what has happened with investment banks and leveraged loans, where they have been left holding the bag on $197 billion in loans to people like private equity buyout specialists that they cannot resell.

In the ever popular world of the bond insurers collapsing, we have Moody’s predicting a $7-$10 billion hit for banks as a result, though I would add at least one zero to that total.

As a result, a unit of private equity firm KKR cannot refinance, and has delayed repaying loans as a result.

Compounding this is the fact that the proposals to split the insurance companies into separate Municipal bond insurance and sh&^pile insurance is making it much more difficult for them to raise the capital they need to stay afloat.

Economics Update

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It appears that US banks have borrowed massive amounts of money from the Federal Reserve, over $50 billion, using assets that have very little value in the market right now. They get money for shovels of the big sh&#pile

Credit Suisse will be writing down $2.8 billion because of “pricing errors” of assets (also here), and has suspended the traders involved.

Errors, my ass. If these were “errors” as opposed to fraud and/or bad systems, the net would be closer to $0.

The Forthcoming “Jingle Mail” Tsunami: 10 to 15 Million Households Likely to Walk Away from their Homes/Mortgages Leading to a Systemic Banking Crisis

It is now expected that the U.K. government will keep British home mortgage giant Northern Rock nationalized for years, in order to avoid a massive exposure to the taxpayer.

In the increasingly dire world of insurance, we have predictions that bond insurer splits may lead to an explosion of lawsuits, as the separation valuable (municipal) side and the insolvent (big sh$%pile) side involves a lot of loss for the holders of non-municipal paper. Additionally, MBIA’s CEO has stepped down, and has been replaced by his predecessor.


Deck chairs, Titanic.

In the lawsuit category, we have investor activists calling for more accountability in management, which is generally a prelude to shareholder suits and the like.

Finally, we have inflation in China hitting an 11-year high, 7.8%. It’s likely that this will drive interest rates up in China, placing downward pressure on the US dollar.

And if that doesn’t make you think that it will soon be raining brokers in Wall Street, Noriel Roubini is predicting between 10 and 15 million home owners simply walking away from their homes, because they will be underwater with their mortgages, and cannot afford their resetting mortgages.

O’Malley Issues Emergency Foreclosure Regulations – washingtonpost.com

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Maryland Governor Martin O’Malley (I still love saying that) is instituting emergency regulations for mortgages and mortgage loan companies, see here and here.

First, they are requiring loan servicers to give advance notice to the state, so that state agencies might be able to help.

Additionally, it looks like administrative action may be taken against what appears to be one of the bad actors in this, Ocwen Financial Corp., which appears to have no one answering the phones.

Economics Update

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After not receiving what they considered to be adequate bids, Britain is nationalizing Northern Rock Bank, which was one of the top home mortgage providers in the UK. The bids received, “failed to meet the government’s criteria for protecting taxpayers.”

I think that we will see more of this in the UK, which is suffering from the Anglo-Saxon contagion much as its American counterparts are. We won’t in the US, substituting instead ruinous (for the taxpayer at least) bailouts, because the American body politic will not accept this solution.

In a related note, it appears that there is a lucrative business developing aiding banks in finding people who have skipped out on mortgages. With the costs of foreclosures typically nearing $100K, it makes sense to find and cut a deal with these people, but they leave without providing a forwarding address.

From September 2005 to August 2007, 53 percent of the loans backed by Freddie Mac that went into foreclosure involved borrowers who could not be reached.

As an insight as to just how bad this has gotten, some lenders are allying with ACORN, an organization with a mission that is seriously at odds with those of banks, to find the mortgage holders.

In much higher finance, we have signs of trouble in credit default swaps, a complex derivative whose market is estimated to be twice that of the stock market.

These instruments are largely unregulated, to the degree that the exact size of the market is not known.

Basically, it’s an agreement between two parties. One pays the other a fee, and if something bad happens, such as a default, the second party pays off the default.

How flaky and unregulated is this market?

But during the credit market upheaval in August, 14 percent of trades in these contracts were unconfirmed, meaning one of the parties in the resale transaction was unidentified in trade documents and remained unknown 30 days later. In December, that number stood at 13 percent. Because these trades are unregulated, there is no requirement that all parties to a contract be told when it is sold.

One out of 7 people did not know who owed them money.