1--Research: ‘Skin in the Game’ Is Good for Mortgage Market, Wall Street Journal
Excerpt: Requiring mortgage providers to retain a stake in what they have lent reduced the chance a borrower will run into trouble, a new paper from the Federal Reserve Bank of San Francisco argues.
The research, released Monday, was weighing the “skin in the game” idea, which holds that mortgage-lending quality is improved when those who offer the mortgage are prevented from unloading it completely onto other investors.
“Retention of even modest loss exposure by originators reduces moral hazard and is associated with significantly lower loss rates on these securities” resulting from the mortgage process, wrote bank economist Christopher James, as part of the regional Fed’s regular Economic Letter series.
The paper’s findings suggest that the recently passed financial-overhaul legislation will have a positive influence on the future of the housing market. Under the new law, those who securitize mortgages are required to hold a minimum of a 5% exposure to the credit risk. It is hoped the increased chance a loan originator will feel pain should the borrower run into trouble will make those lenders more careful when providing loans.
2--Economists: Europe Needs to Take Further Action, Wall Street Journal
Excerpt: Europe still needs to take further action to put its debt crisis behind it, according to most economists in the latest Wall Street Journal forecasting survey.
Of the 55 economists polled, most of whom are based in the U.S., just seven said the euro zone doesn’t need to take more steps to stem the debt crisis on its periphery. Twelve respondents said the bloc should boost its bailout funds, while eight suggested much higher bond purchases by the European Central Bank. Seven economists think the euro zone should issue collective bonds, while six want to see a debt restructuring of the most troubled nations.
“Any choice needs to be accompanied by difficult governance reforms,” said Lou Crandall of Wrightson ICAP.
Meanwhile, on average, the economists put about 30% odds of a country exiting the euro zone in the next three years.
3--The Illustrated History of the U.S. Credit Collapse, The big Picture
Excerpt: We constructed these charts with data from today’s release of the Federal Reserve’s Flow of Funds. They are both stunning and frightening as they illustrate the cardiac arrest that took place in the credit markets. The collapse in credit issuance/borrowing began in 2008 and would have been net negative without the Federal government. In 2009, for example, the Federal government was 141 percent of total net credit borrowings.
If, as the President says, ‘the flow of credit is the lifeblood of our economy”, the country would have died in 2009 had not the policymakers taken the extraordinary measures they did. These charts illustrate how close we were to the abyss and should give a clearer perspective on what Bernanke & Co. were/are up against. They are heroes, in our book, for stabilizing the situation and pulling us back from the abyss. The jury is still out, however, on long-term structural adjustment and preventing a global sovereign debt crisis. (These charts must be seen to be believed)
4--Dollar Poised To Sell Off If Fed Stays The Course Tuesday, Wall Street Journal
Excerpt: Traders are likely to sell the dollar in the wake of any statement from the U.S. Federal Reserve on Tuesday that supports existing stimulus measures, market participants expect.
For months, expectations that the Fed would embark on a new round of Treasury purchases to revive a stagnant U.S. economy have pushed down the value of the greenback on the basis these buys would be dollar dilutive.
Currently low inflation figures and a weak jobs picture support the Fed's argument for continuing with its existing $600 billon asset-purchase plan, known as "QE2," so a likely status quo statement expressing support for the plan seems likely, several analysts said.
"Quantitative easing is corrosive to the value of the dollar," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. Basically anything that indicates an extension or expansion of QE2 would hurt the dollar, he said.
Provided that the policy-setting Federal Open Market Committee makes few material changes to language about its bond buying program or the economic outlook in its final meeting of 2010, Treasury yields are likely to stay in a range, bond traders said. But risks are to the upside, with yields already near six-month highs on signs of a firmer economy and fiscal concerns.
5--The Mother of All Frauds, Randall Wray, Huffington Post
Excerpt: Here, in part two, I will discuss the implications for the securities that bundled the fraudulent mortgages registered at MERS. Not only did MERS defraud the counties out of their recording fees and the homeowners out of their homes, but it also helped to perpetrate securities fraud and federal tax fraud. Fortunately for the investors in these securities, the securitization process was fatally flawed, meaning that they can return to the issuing banks and demand their money back. But that implies, of course, that the banksters are hopelessly insolvent -- on the hook for hundreds of billions of dollars.
Inevitably, they will turn to Uncle Sam for more handouts. Get ready for more backroom deals made by the Fed and Treasury to rescue firms like Bank of America. If you loved the first three rounds of this financial crisis, you will love the next six rounds as markets pummel Wall Street banks, with Uncle Sam as referee applying the smelling salts to revive it for yet another round (whilst its CEOs skim more billions off the top in compensation). Ultimately, it will not work. Wall Street will go down for the count -- but probably not until it drags Main Street through a great depression that your great grandkids will study in the history books. And, by the way, they will laugh at the misguided efforts of the thoroughly compromised one-term Obama administration that focused its efforts at budget-balancing in the face of the worst headwinds America had ever seen....
The servicers are now "misplacing" all the documents, including the notes, associated with the mortgages on which they are foreclosing. The hope is that MERS and the mortgage servicing banks can get the properties, dispose of them in firesales, and pay pennies on the dollar to securities holders before they discover they've been scammed from here to Pluto. Hence it would seem the notes were not really lost, but rather are being destroyed to cover the fraud. And if this is true, MERS and the big banks are conspiring to commit foreclosure fraud as they destroy documents and create new counterfeit paper trails. The reader who pointed me to the MERS document put it this way:
When we get into the "work product" of the 'robo-signers' as seen in the sheer volume of Lost Note Affidavits, it is evident that these exist not simply because notes were "lost" but as a cover-up because the trustee and/or servicers realized early on that the notes were never properly endorsed and transferred or delivered to the trust so they "disappeared" the physical piece of paper and any allonges thereby eliminating any evidence contrary to the trust's ownership of the notes. As you wrote 'Those pesky little documents might come back to haunt them should someone later file a lawsuit.'
Yep, that is why they are shredding them and hiring Burger King kids to manufacture new ones. More fraud to cover previous fraud. Yes, this is go-to-jail fraud, but what the heck -- if you are already facing time behind bars you might as well go for broke.
6--Housing Shaky as Lenders Tighten, Wall Street Journal
Excerpt: Economists are worried that the housing sector may be heading into another downdraft as mortgage lenders continue to tighten already restrictive lending standards.
Such a scenario seemed less likely earlier this year, when home-buyer tax credits fueled a surge in sales. But sales have plunged in the second half of the year after those credits expired. New and existing home sales were down by more than 25% in October from a year ago.
Meanwhile, applications for mortgages have hovered near their lowest levels in more than a decade since May, even though mortgage rates have tumbled to their lowest levels in 60 years, with average 30-year, fixed-rate loans bottoming at 4.21% in October....
Banks have become more restrictive in part because Fannie and Freddie are stepping up demands for banks to buy back defaulted loans when they can prove that the mortgage didn't meet underwriting guidelines, an expensive proposition for banks.
"Originators are scared to death. We are being intensely cautious because we understand that the franchise could be on the line," says Mr. Walters. He says tightening could continue "for at least a year, maybe longer."
Loan officers say one of the biggest problems right now is a requirement that borrowers prove their incomes by relying on at least two years of tax returns. That often trips up self-employed workers and small-business owners who take deductions that shrink their taxable income. It could also sink borrowers who were unemployed for a short time or had a recent salary reduction.
7--Mortgage-Bond Slump No `Fun' for Housing as Rates Increase: Credit Markets, Bloomberg
Excerpt: A slump in government-backed mortgage bonds that’s sent yields to the highest level since May is threatening a recovery in the U.S. housing market, which had been bolstered by record-low borrowing costs.
Yields on Fannie Mae-guaranteed securities that most affect loan rates jumped to 4.22 percent as of 11:28 a.m. in New York, an increase of more than 1 percentage point from an all-time low in October, according to data compiled by Bloomberg....
The average rate on a typical 30-year fixed-rate mortgage has climbed for four weeks, to an average of 4.61 percent last week, according to Freddie Mac, pushing the monthly cost of a $300,000 loan to $1,540, from $1,462. The rate had dropped to a record low 4.17 percent in the week ended Nov. 11 amid speculation that a bond purchasing program by the Federal Reserve would restrain yields....
About 10.8 million homes, or 22.5 percent of those with mortgages, were worth less than the debt owed on them as of Sept. 30, according to CoreLogic Inc. An additional 2.4 million had less than 5 percent equity, the Santa Ana, California-based real-estate information company said Dec. 12.
As many as 8 million homes are in some stage of default or foreclosure, known as shadow inventory, and may be offered for sale over the next five years, according to Morgan Stanley.
8--FOMC Statement: No Change, Calculated Risk
Excerpt: (from FOMC statement) Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment. Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. The housing sector continues to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have continued to trend downward.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
9--Mark Thoma on why the stimulus was not big enough, Economist's View
Excerpt: Austerity is already here. In the US, as Larry Summers points out, the sum of total and private debt has been declining as a result of consumer deleveraging (increased saving and reduced consumption in order to pay debts and rebuild damaged balance sheets):
"Even with all the fiscal measures of the last several years, total borrowing in the American economy has failed to grow for the last 2 years. That is the first two year period since the Second World War when total borrowing in the U.S. economy has not increased.
Let me be clear: Even with our deficits, the amount of extra debt is less than the amount of reduced borrowing in the private sector. Increased federal borrowing has offset, but only partially, deleveraging in the private sector."
Or, to say it another way, the stimulus package was not large enough to fully offset the decline in aggregate demand brought about by deleveraging and other causes. Thus, we shouldn't be surprised that, instead of helping the economy bounce back toward full employment, the stimulus package merely slowed the fall.
There's something else we shouldn't be surprised about. Since more help is needed now than we'll get from the poorly targeted tax agreement, and since that help won't be forthcoming from Congress -- we'll be lucky to prevent deficit reduction over the next year -- the boost to employment from the tax agreement will be much, much smaller than needed to change the expectation of a very slow climb back to full employment.