Well, I’ve been predicting for some time that the BoA Contrywide deal would go south, and now we have the analysts suggesting that BoA may cut the price, and suggestions that they should drop the deal entirely.
It appears that my predictive powers are getting less sucky.
In the home mortgage packages, one of the things that the lareg home builders have been lobbying for is a tax change to allow them to carry operating losses forward to profitable years, but it increasingly looks like this will not be a part of any mortgage bill.
There are a number of reasons, the first of which was that the Senate version of the bill has been lambasted by everyone as a bailout for builders and mortgage lenders, and the second is that the threat by homebuilders to cut off political donations overplayed their hand.
Basically, because of the level of pay for play in this action, it made standing up to the homebuilders a political win, because it shows “character”.
BoA has announced in a regulatory filing with the SEC that, “hasn’t decided whether to guarantee Countrywide debt after BofA’s $4 billion takeover of Countrywide, which is supposed to be completed in the 2nd half of the year.
Basically, once it’s bought, if the corporate structure is right, Countrywide could declare bankruptcy and leave the bond holders with nothing, which would mean that it would not BoA’s problem.
Alternatively, BoA could be attempting to spook the bond holders so that they sell to BoA at a discount.
This system of corporations and shell companies is completely out of control.
I’m just saying.
It’s better than the Senate version, but still favors the lenders and homebuilders too much.
Thankfully, they were able to prevent the Republicans from adding amendments to make it even worse.
Well, we just got a jobs report that shows just how screwed up our statistics have gotten, with non farm jobs falling by 20,000 but the unemployment rate went down, which just does not work.
Additionally, the so called birgh death corrections are completely bogus:
+45k construction jobs v 37k April 2007
+8k jobs were added in financial activities versus 1k last April.
+72k in professional/business services versus 48k last April.
+83k in leisure/hospitality (95k last April).
The idea that construction and financial added 53,000 jobs in April comes from somewhere west of the planet Skaro.
The financial press is uncritically applauding, of course.
In energy, oil is upto over $116 for the first time in a few days, but gasoline is down, not hitting a new record for the first time in 17 days.
Meanwhile, the Fed and other central banks are pouring yet more money into the frozen financial system. The Fed is allowing more types of bonds in its trash for cash auctions, but it does not appear to help. The LIBOR, from which much of the adjustable rate loan rates are derived has been largely unmoved.
It’s pushing on a string, as I’ve said before, because it’s a solvency crisis, not a liquidity crisis, as I’ve also said before.
The is still strengthening a bit, but I’m a bear long term, but I’m a bear on everything.
In more pushing on a string news, the US treasury is offering 0% on its inflation protected savings bonds.
A small distinction, mypost of 4 March had was about TIPS, not inflation protected savings bonds, just in case you are wondering if I’m repeating stuff.
Finally, in real estate, 63% of home sales in San Diego are short sales and REOs, which means that either the owner has sold for less than they owe, or it’s been foreclosed on.
It’s called the Home Ownership Preservation Loan program.
Looking at the program, I think that it is directed primarily at the people who should have known better, mortgage lenders and home builders, with benefits “trickling down” to ordinary programs.
So once again, we see socialism for the fat cats, and capitalism for the tax payers.
As Tanta of CR notes, this would be at little cost to the government, at least if the borrower does not walk away from the home, and there are incentives to prevent that, but the lender (more accurately the holder of the loan) may not be willing to make the concessions to qualify.
If the borrower is at low risk of default, why should the lender take a haircut, if it they are at high risk, do they want to be at the behind the US Treasury in line?
Tants’s take, and mine, is that it’s PR more than a serious program.
The FDIC proposal from their web page:
Home Ownership Preservation Loans
The FDIC is proposing that Congress authorize the Treasury Department to make loans to borrowers with unaffordable mortgages to pay down up to 20 percent of their principal. The repayment and financing costs for these Home Ownership Preservation (HOP) loans would be borne by mortgage investors and borrowers. This approach is scaleable, administratively simple, and will avoid unnecessary foreclosures to help stabilize mortgage and housing prices.
This proposal is designed to result in no cost to the government:
- Borrowers must repay their restructured mortgage and the HOP loan.
- To enter the program, mortgage investors pay Treasury’s financing costs and agree to concessions on the underlying mortgage to achieve an affordable payment.
- Treasury would have a super-priority interest — superior to mortgage investors’ interest — to guarantee repayment. If the borrower defaulted, refinanced or sold the property, Treasury would have a priority recovery for the amount of its loan from any proceeds.
- The government has no continued obligation and the loans are repaid in full.
Mortgage Restructuring:
- Eligible, unaffordable mortgages would be paid down by up to 20 percent and restructured into fully-amortized, fixed rate loans for the balance of the original loan term at the lower balance. New interest rate capped at Freddie Mac 30-year fixed rate.
- Restructured mortgages cannot exceed a debt-to-income ratio for all housing-related expenses greater than 35 percent of the borrower’s verified current gross income (‘front-end DTI’). Prepayment penalties, deferred interest, or negative amortization are barred.
- Mortgage investors would pay the first five years of interest due to Treasury on the HOP loans when they enter the program. After 5 years, borrowers would begin repaying the HOP loan at fixed Treasury rates.
- Servicers would agree to periodic special audits by a federal banking agency.
Process:
- Mortgage investors would apply to Treasury for funds and would be responsible for complying with the terms for the HOP loans, restructuring mortgages, and subordinating their interest to Treasury.
- Administratively simple. Eligibility is determined by origination documentation and restructuring is based on verified current income and restructured mortgage payments.
Funding:
- * A Treasury public debt offering of $50 billion would be sufficient to fund modifications of approximately 1 million loans that were “unsustainable at origination.” Principal and interest costs are fully repaid.
Eligible Mortgages:
Applies only to mortgages for owner-occupied residences that are:
- Unaffordable – defined by front-end DTIs exceeding 40 percent at origination.
- Below the FHA conforming loan limit.
- Originated between January 1, 2003 and June 30, 2007.
First, initial unemployment insurance claims increase, ba by 35K to 380K. Note that this is an inherently noisy figure, but it’s been bad for over a month, which indicates a trend.
Becasue of the Fed’s signals regarding future rate cuts, as na ga na do it, the dollar has strengthened, and oil has fallen a bit.
That being said, the Euro zone appears to be under increasing stress from the different economic trajectories of its members.
Citi appears to need more money, so it’s raising it through a $4½ billion stock offering, further diluting its stock holders equity.
Seriously, it’s like a dog chasing its own tail…down the drain.
We have a number out of San Diego, with house prices off dropping 19.2% since February 2007.
This means that if someone bought a 30 year fixed mortgage, with 20% down, that they would be under water on the loan if closing and broker costs are included.
The big news, as it is on any day when the fed meets, is the decision, which was to cut the federal funds rate by 25 basis points. Of note that that they are no signaling no more cuts.
Of course, with the rate at 2%, it’s not like they can really cut much further.
Then we got the GDP numbers for the first quarter of 2008. The number is that U.S.GDP increased at an 0.6% annual pace, though this will likely drop when a final reading is released.
I will provide more detail, but the spin that this is not a contraction is false” initial reading, will fall. Also, we’ve already had 0.6% so far this year, we will likely see 3-4% inflation even with the bogus government data, it would be closer to 10% with honest data, and 0.6%-3%=-2.4% that’s a recession.
I, with the aid of the good doctor Roubini, will provide more detail in a later post.
Oil prices have dropped, which should come as no surprise. The spikes of the past few days were as the result of short term news, though the trend still seems to be up.
In real estate, we have
ortgage application volume falling 11.25% last week, and we have an analysis from Barclays Capital that upwards of half of Alt-A and subprime mortgages will be under water by year’s end, and they are predicting a fair amount of “jingle mail” as a result.
Well, the consumer confidence index fell to its lowest level in 5 years, what’s more, the Frog consumers are bumming more than they have in 20 years.
Sarkosy is not going to find a lot of support for making the French economy more “Anglo-Saxon” right now.
In real estate, foreclosures jumped 23% in 1Q of 2007, which is on a pace for a 200% increase in foreclosures in 2008, while the Case-Shiller Home Price index fell 13% year over year in February.
This is not over. It’s not close to being over.
In the ever entertaining Countrywide sage, the mortgage lender posted a $893 million first-quarter loss.
I still wonder when some Bank of America investor finally starts screaming about a proxy fight over their purchase of Nationwide. Every day, the deal looks worse and worse.
As to energy, oil is down, but gasoline is up.
I think that the best indication that we are well into a recession is that unpaid utility bills, as well as service cutoffs, are going through the proverbial roof. People can’t afford the mortgages, or the utilities, or so it seems.
BTW this is a very good pictorial representation of the credit freeze:
Click pic for PDF. (H/t econobrowser)
Oil hit an all time high, less than a dime less than $120/bbl, which means that inflation is still a problem, but don’t tell helicopter Ben, because the markets have already priced in another rate cut from the Fed.
As I’ve said before, it won’t matter, the fed is pushing on a string, but the fact that the Euro zone looks to be in for a round of slow growth and inflation, aka stagflation, with inflation of over 3% (their goal is 2%), so they will likely raise rates, as the ECB does not have maintaining employment as a part of its charter, just controlling inflation.
Rates going up in Europe should push the dollar down, which is why I find it confusing that the done better against the Euro in the past three days than it has since 2005, but I’m not sure how long this will last, as Japanese investors are moving away from US treasuries, which is significant, as they are the largest holders of US treasuries.
In real estate we have a new record for vacant homes in the US, 2.9%, the highest level since record keeping began in 1959.
Note that this does not include rental properties, and it’s pretty grim.
For those of you who are considering picking up something cheap in foreclosure, be warned, trash outs are way up Trashouts, here are stories from Massachusetts and Nevada.
We are talking serious stuff, sinks and bathtubs ripped out, and in some cases, vandalism along the lines of cement down the pipes. Factor that into a sales price.
I would also argue that it’s likely that we may shortly start seeing violence against people who purchase at auction, so do not enter into this likely.
The dollar is doing better now, $1.5613:€1.0000, as I type this, which is about 3% stronger than when it was above $1.60.
I put down most of the movement over the past week to people betting on what the Fed will do in interest rates, and the consensus that it will not cut.
Oil, however, just went up again, as did gasoline, because of reports of a pipeline attack in Nigeria. The reality is that supplies are so tight that even a minor disruption causes a minor panic.
The New York Times has discovered that the housing crisis has moved to tony Greenwich, CT. And so they cover it with wringing hands, because it interests their readers.
For the rest of us, the fact that the mosts states are having financial meltdowns, and many are near broke, because of falling tax revenues, are a matter of greater concern.
Also, Consumer confidence is at a 26 year low. That’s as in 1982, when we were at 10% unemployment, and so consumers are scaling way back on spending.
In a sign of the apocalypse, Moody’s is downgrading some more of the Alt-A mortgage backed slop. Who knew that a ratings firm would actually do its job.
It’s been a busy day for AMBAC, the monoline insurer, with a report that it may need to seek more capital after posting a $1.66 billion dollar loss for the quarter. Further confirming this report is the fact that their interim CEO is saying that there are no liquidity issues and that its ratings are solid.
S&P is back stopping Ambac on this explicitly stating that the loss will not lead to a downgrade.
Of course if the ratings agencies, or for that matter the financial markets, were at all honest, most the monoliners would already be rated as junk.
Barney Frank’s bill is better than the Senate version, but I think that any bill that does not allow for restructuring of mortgages through bankruptcy is a lose.
Roger Lowenstein is a very concise analysis of just how what Atrios and I call the “Big Sh%$pile”* got the high ratings from Moodys necessary for the debt to be resold.
I think that it explains the process in a clear and concise way, though I think that he is far too easy on Moodys.
The process involved is inherently corrupt, since the issuers get to choose their ratings agency.
I would argue that much of this was covered in “Best PowerPoint Ever“, which makes it rather more clear just how corrupt this game was.
*Only the distinguished gentleman from Philadelphia does not mask out the last two letters of the word “Sh%$”
It appears that both the Treasury Department and Congress are bedcoming concerned about the increasing exposure of Fannie Mae and Freddie Mac to a potential meltdown, and are looking at increased regulations to prevent this.
Considering the fact that they are the 2nd and 3rd largest borrowers in the world, after the US government, the effects of their needing a bailout are enormous.
On the other side of this are people who want to bolster the housing market, and tighter GSE regulation goes in the other direction, and the fact that they have been aggressively lobbying Congress for years.
Hopefully, this time the bears win, or we may see a trillion+ dollar bailout.
Unemployment claims fell again, note my standard caveat about noisy measures though.
Note also that new-home sales are unbelievably grim. An 8.5% drop month to month is falling off a cliff, but this is following the numbers being revised downward for the month of February.
If that doesn’t scare you, there is a Credit Suisse research report that suggests that there will be 6.5 million foreclosures by 2012:
The foreclosures could put 12.7 percent of all residential borrowers out of their homes, Credit Suisse analysts, led by Rod Dubitsky, said in the report. That compares with a foreclosure rate of 2.04 percent in the last quarter of 2007, they said, citing Mortgage Bankers Association data.
That is one out of 8 residential borrowers.
That’s too bearish for even me, and I’m the biggest bear out there.
In terms of non-residential real estate measures, we have the Architecture Billings Index (ABI) dropping to its lowest level ever, suggesting that commercial real estate’s about to tank too, and orders for durable goods, items expected to last 3 or more years, fell 0.3% from February, worse than expected.
The drop in unemployment claims triggered a drop in treasuries and a strengthening of the dollar, because it makes it less likely that the Fed will cut rates at its next meeting.
Truth be told, the Fed cutting rates won’t do much anyway, as is shown by mortgage rates continued upward path.
The Fed has lowered rates below the effective inflation rate, and so their rates have decoupled from the commercial rates.
Today, since they’ve been off the update for a while, I’d like to welcome back a monoliner insurer, specifically AMBAC which lost even more money than forecast, $3.6 billion.
However, they are looking to turning things around. Specifically, they have their “lawyers and forensic experts”looking at 17 big money losing contracts, targeting (it appears) Bear Stearns and First Franklin. The max losses were originally seen at 10-12%, and now they are staring down the barrels of over 80%, so they may have a good case.
We’ll be seeing a lot more of this, and insurers won’t be paying out in the near term without this sort of teardown of the contract and investment looking for evidence of deception of some sort.
In related news, bondholders recovery on bankruptcy has plunged, with B+ bonds going from around 42¢ on the dollar to less than 10¢.
This is not a liquidity crisis. It is an insolvency crisis.
The Fed, however, is still treating this as a liquidity crisis, because there is no cure for an insolvency crisis but the dissolution of the entities involved, and it will auction another $75 billion in Treasuries in exchange for pieces of the big sh%$pile.
Speaking of the sh%$pile Moody’s just downgraded 1,923 residential mortgage backed securities in the past to days.
It’s likely to get worse. Robert Shiller, who is one of the creators of Case-Shiller housing index, believes that house prices will fall more than 30% from their high, and likens this to the slump associated with the Great Depression.
In terms of the more general economy, we have UPS saying that it’s seeing a dramatic slowing in the U.S. economy, and in its business, and Target’s write offs on its credit card sales are soaring. They are at an annualized rate of 8.1% for March (ouch) up from a rate of 6.8% in February (ouch x2).
In currency, we already know about the Dollar cracking the $1.60 barrier, but now we are seeing a price hike driven by this, with Airbus raising prices on its planes.
We’re going to see a lot more currency driven inflation.
The rebels in Nigeria’s delta region just bombed an oil pipeline, and in response, oil hit $117/bbl before settling at $116.69.
In addtion to lower levels of employment, hours worked by those still employed are also down, so there are fewer people doing less work to produce goods and services.
Both Citi and AT&T are announcing big layoffs because of losses (Citi), and “increased competitive pressure (AT&T).
It’s a recession already.
The Fed just auctioned off about $25 billion for non-magic beans, as a part of its ongoing Wall St. bailout.
Yesterdya, I talked about new home sales falling, today, it’s existing home sales falling 13%, but north of the Border in Canada, which has generally had a better regulated loan market.
Finally, a picture, courtesy of Paul Krugman showing the increase in the LIBOR-OIS spread since this all started:
The second image is actually a bit scarier, because it shows a longer time frame, and it shows that the spread is completely outside of historical norms.
In terms of economic indicators, we have 4 today, one up, and three down.
FWIW, the Jobless claims are noisy, but overall the numbers are trending up, and the LEI typically does not mean anything until you get three in a row.
The Dollar hit a new low vs. the Euro, $1.5982:€.
As an aside, I spend a fair amount of time on currency, because I believe that it will be the final nail in the proverbial coffin, much like it was in the Asian and Argentine financial crises.
In banking, investment and otherwise, we have
Merrilly Lynch announcing a $6.5 billion write down and massive layoffs.
Across the pond, we have the Bank of England announcing that it had three times as many bids for its cash auction as it was offering, implying that credit is still pretty frozen, and the prospect of massive bank failures in Germany as a result of the subprime crisis, which truth be told extends well into the prime mortgages too.
Finally, in another sign of the apocalypse, my predictions regarding the countrywide sale, that Bank of America was throwing good money after bad, appear to be coming true, as , “Continued credit deterioration at Countrywide Financial Corp. could raise concern among investors about the final sale price of the mortgage lender to Bank of America Corp., a Lehman Brothers analyst said Thursday.”
I think that it is a good thing that the Maryland leg, and Governor O’Malley has signed into law, substantial changes in the time lines for foreclosures.
Basic gist of the bill is that the ender cannot file for foreclosure until at least 90 days after default, and there must be 45 days notice of foreclosure, with personal service, meaning a guy handing you papers.
It used to be theoretically possible to foreclose in 15 days.
The dollar is tanking again, this time on inflation worries, and Oil is above $113/bbl driven by demand and by the falling dollar.
In real estate, foreclosures rise are up 57% over a year ago, 5% over February, and I don’t see that number leveling off any time soon.
Just in case you are wondering, the New York Times is looking at the Wave of Bankruptcies that are sweeping mid tier retailers.
