Saturday, December 11, 2010

Weekend Links

1--Home Prices Falling Fast, Huffington Post

Excerpt: Plunging home prices hammered household finances in the third quarter, eroding homeowners' wealth and making them more vulnerable to foreclosure. As prices are expected to continue falling, the economic recovery could face a major stall.

Millions of homeowners saw their most valuable asset decay between July and September, according to recently released data from the Federal Reserve, as they lost a portion of the stake they can claim in their homes. A series of new reports reflects home prices are continuing to decline, increasing the pressure on America's tepid housing market...

By the end of this year home prices will have dropped $1.7 trillion, or about 7 percent, according to, a real estate data provider. This decline has accelerated: Since August, home prices have fallen 7.9 percent, data from Clear Capital, a Truckee, Calif.-based real estate research firm, show. It is the steepest decline in home values since the height of the financial crisis in 2008, said Clear Capital senior statistician Alex Villacorta.

Worse, home prices are forecast to drop an additional 10 percent next year, according to a recent report from Fitch Ratings, a major credit ratings agency.

2--Number of the Week: 1.6 Million Put Off Retirement, Wall Street Journal

Excerpt: 1.6 million: The number of older Americans in the labor force as a result of the financial crisis.

The financial crisis has been hard on just about everyone. But for older folks, the pain is proving particularly deep and lasting — a problem that could put a drag on the economy for many years to come.

People approaching retirement age are suffering on all fronts. Even with the Dow above 11,000, their stock holdings are worth less than they were back in 2006. Fixed-income investments hardly provide any income. Home prices remain depressed.

As a result, more older people are trying to make up lost ground by staying at work longer or rejoining the labor force – precisely at a time when finding a job is exceedingly difficult.

3--Get Ready for the Next Crash, Huffington Post

Excerpt: you would expect that the urgent priority of our governments after the bailout would be to put the banks back into a cage of sober regulation. But it hasn't happened. Two years on, the paltry new regulations have been the equivalent of a heart attack survivor deciding to cut back from smoking sixty cigarettes a day to fifty. They are gambling with derivatives again. They are gambling with our deposits again. They are using our money to pay themselves record bonuses for record failure. Most economists believe the banks need to hold capital reserves of 30 percent to protect against another crash. The new rules say they have to hold 3 percent, by 2019, if you wouldn't mind awfully.

For the bankers, it's a dream deal. When they make profits from gambling in the good times, they pocket them. When they make losses in the bad times, you and I pick up the tab. The people we have been told for decades to worship as "wealth creators" turned out to be the biggest wealth-sucking parasites in history. The only part of the banking sector that isn't partying like it's 1999 is the only one we actually need: lending to ordinary people for mortgages and small businesses. We bailed them out, but they are refusing to bail us out.

It's clear where this story will end. The US Treasury Department's Inspector General, Neil Barofsky, reported to the Senate in January this year: "If we do nothing to correct the fundamental problems in our financial system [we will] end up in a similar or greater crisis in two, or five, or ten years' time. It is hard to see how any of the fundamental problems in the system have been addressed to date. [The bailouts] saved our financial system from driving off a cliff in 2008, [but] we are still driving on the same winding mountain road, but this time in a faster car."

Why would our governments allow this? Why would they disregard our interests so blatantly? They have, in effect, been hijacked by a small elite bribing or threatening them.....It is all going to happen again, unless there is hefty public anger and pressure to bring back the banking regulations that worked so well between the 1930s and the 1990s.

4--Build America Bonds' End Poised to Batter Muni Market, Bloomberg

Excerpt: The looming end of the federally subsidized Build America Bonds program may push up yields in the $2.8 trillion municipal securities market and put more financial pressure on cash-strapped states and cities, investors said.

Senate Democrats backing the subsidy, which has helped finance bridges, roads and other public works, fell short in a bid to get the program added to a bill extending the 2001 and 2003 income-tax cuts. That failure was the latest in efforts to keep the Build America program alive beyond its scheduled end on Dec. 31.

The securities, which carry taxable interest rates similar to corporate debt, have allowed state and local governments to access investors abroad and others who don’t buy traditional tax-exempt bonds. That has eased the supply of tax-exempt bonds and buoyed prices, which move inversely to yields, a trend that may reverse next year if the program is killed....The failure by Congress to extend the Build America program may hurt taxpayers by pushing up the cost of financing local projects at a time when public officials are already wrestling with budget deficits, said Novembre.

5--Bond market freefall, Bloomberg

Excerpt: Benchmark 10-year Treasuries had their biggest two-day slump since September 2008 this week after tax cuts, signs of an economic recovery and asset purchases by the Federal Reserve fueled expectations inflation will accelerate. The losses may surprise investors who poured $267 billion into fixed income funds this year through October, ignoring warnings by Gross that the 30-year bond rally may have run its course.

“This is a very violent move we had this week,” said Richard Saperstein, managing director at Treasury Partners in New York, which oversees $10 billion in assets. “I think we’re going to have a very volatile bond cycle here over the next two years.” ...

Bonds have tumbled this week after President Barack Obama agreed on Dec. 6 to a two-year extension of Bush-era tax cuts in exchange for an additional 13 months of unemployment insurance and cutting the payroll tax by $120 billion for a year. The yield on the 10-year note was at 3.20 percent yesterday, after touching 3.33 percent on Dec. 8, the highest since June 4. Bond prices fall as interest rates rise....

The federal deficit totaled $1.3 trillion in the fiscal year that ended Sept. 30, according to the Congressional Budget Office. The White House budget office projected the federal deficit this year will exceed $1.5 trillion, or 10.6 percent of gross domestic product.

6--Obama boosts FHA bailout for banks sick mortgages, Wall Street Journal

Excerpt: Fannie Mae and Freddie Mac are in talks with Obama administration officials to join fledgling government programs aimed at reducing loan balances of mortgages where borrowers owe more than their homes are worth, according to people familiar with the situation.

An agreement with the two government-owned mortgage giants to write down so-called underwater loans .... would deepen losses at Fannie Mae and Freddie Mac, which already have cost taxpayers about $134 billion....

...Fannie Mae and Freddie Mac are reluctant to reduce principal because it limits their options to recoup losses. Typically, the companies collect claims from mortgage insurers or force banks to buy back certain loans when a loan defaults. Those options are relinquished when writing down loan balances.

In addition, Fannie Mae and Freddie Mac, along with other mortgage investors, are reluctant to approve principal reductions if banks that own second mortgages on the same properties also don't take losses....

The Obama administration is pressuring Fannie Mae and Freddie Mac, through their primary regulator, the Federal Housing Finance Agency. The administration wants the firms to join a program run by the Federal Housing Administration that allows banks and other creditors, which agree to write down mortgages, to essentially hand off the reduced loans to the FHA.

Federal officials estimate that 500,000 to 1.5 million homeowners could benefit from the program-a fraction of the estimated 11 million borrowers who were underwater as of June 30, according to CoreLogic Inc. That figure represents about 23% of all U.S. households with a mortgage.

7--"Make the rich pay", say Americans, Bloomberg

Excerpt: Americans want Congress to bring down a federal budget deficit that many believe is "dangerously out of control," only under two conditions: minimize the pain and make the rich pay.

The public wants Congress to keep its hands off entitlements such as Medicare, Medicaid and Social Security, a Bloomberg National Poll shows. They oppose cuts in most other major domestic programs and defense. They want to maintain subsidies for farmers and tax breaks like the mortgage-interest deduction. And they're against an increase in the gasoline tax.

That aversion to sacrifice is at odds with a spate of recent studies, including one by President Barack Obama's debt panel, that say reductions in Medicare, Social Security, military and other spending are necessary to curb a deficit that totaled $1.29 trillion in the fiscal year ended Sept. 30, or 9 percent of the gross domestic product.

8--Companies cling to cash, Wall Street Journal

Excerpt: Corporate America's cash pile has hit its highest level in half a century.

Rather than pouring their money into building plants or hiring workers, nonfinancial companies in the U.S. were sitting on $1.93 trillion in cash and other liquid assets at the end of September, up from $1.8 trillion at the end of June, the Federal Reserve said Thursday. Cash accounted for 7.4% of the companies' total assets-the largest share since 1959.

The cash buildup shows the deep caution many companies feel about investing in expansion while the economic recovery remains painfully slow and high unemployment and battered household finances continue to limit consumers' ability to spend.

The buildup has a big downside for companies, which get little return on their money because interest rates are low, but it reflects the relatively few opportunities they see to deploy their cash more creatively.

"The corporate sector is looking at the household sector and saying, this is not the environment where we should expand our business," said Deutsche Bank economist Torsten Slok.

9--Why Are U.S. Interest Rates Finally Going Up?, Grasping reality with both hands

Excerpt: Ryan Avent---"American deficits: The deal, and the yields", from The Economist: [Y]ields that rise because the government's solvency is in question are very different from yields that rise because the private sector is competing for the private savings government has lately gobbled up. Which kind of rise in yields are we seeing now?... Over the whole of the past week, yields have been generally flat, even as it became clear that a deal on the Bush tax cuts was likely. And most of the budget impact in the deal is attributable to the tax extensions that were expected to pass. But the "new stimulus" in the deal-the payroll tax cut and the accelerated depreciation for businesses-was close to a policy surprise. These measures were actually unanticipated by markets. And so it stands to reason that most of the jump in yields is likely due to their inclusion.

What's important to note is that these aspects account for basically all of the new stimulus... but... only add modestly to the budget impact... so it seems reasonable to conclude that most of the rise in Treasury yields is due to improved expectations for the American economy...

10--Mortgage Rates Hit Six Month High, Threatening Housing, CNBC

Excerpt: Rates on fixed mortgages rose for the fourth straight week this week, hitting 4.61 percent. The surge could slow refinancings and further hamper the housing market.

Freddie Mac said Thursday that the average rate on a 30-year fixed loan increased sharply from last week's rate. And it is well above the 4.17 percent rate hit a month ago- the lowest level on records dating back to 1971.

The average rate on a 15-year fixed loan rose to 3.96 percent. Rates hit 3.57 percent last month-the lowest level since 1991.

Rates are rising after plummeting for seven months. Investors are selling Treasury bonds in anticipation of an extension of tax cuts and unemployment benefits that could boost the economy. That is raising the yield on Treasury bonds. Mortgage rates tend to track those yields.

The increase in rates already is discouraging homeowners interested in refinancing their homes. Refinance activity fell for the fourth straight week last week, according to the Mortgage Bankers Association.

11--For-Profit Colleges Cashing In On Veterans, Huffington Post

Excerpt: - Veterans returning from the wars in Iraq and Afghanistan have been enrolling in for-profit colleges at substantially higher rates during the past two years, raising questions about the degree to which such institutions are seeking higher enrollment rates at the expense of true educational opportunities.

A report released today by the Senate's Health, Education, Labor and Pensions Committee, which has been examining aggressive recruitment practices and high student loan default rates in the burgeoning for-profit education industry over the past several months, shows the share of their revenue coming from veterans has increased fivefold from 2008 to 2010.

For-profit colleges have been one of the primary beneficiaries of the Great Recession, with many institutions capturing anywhere from 85 to 90 percent of their revenues from federal financial aid dollars. But veterans present a particularly attractive opportunity to boost enrollment, because their generous benefits through the GI bill and other programs are not counted as federal financial aid dollars -- a point singled out in the Senate report.

Under a rule in place since the early 1990s, for-profit institutions are required to have at least 10 percent of their revenues coming from sources other than federal financial aid -- a provision to prevent such colleges from relying solely on federal aid to make profits.

But the veterans' tuition benefits from the GI bill and the Department of Defense are not counted as federal financial aid dollars, because they are not technically student loans or Pell Grants governed by the Higher Education Act.

12-- Household Net Worth Jumps By $1.2 Trillion In Q3, All Due To Stock Market Gains As Deleveraging Continues For 10th Straight Quarter, zero hedge

Excerpt: With today's release of the Fed's Z1 statement, we once again see why Ben Bernanke's only "wealth effect" focus is on the stock market. In Q3 of 2010, household net worth jumped by $1.2 trillion from $53.7 to $54.9 trillion, the vast majority of which was due exclusively to a change in the value of "corporate equities" held by the public, which rose from $6.9 trillion to $7.8 trillion.

Still, this level is only back to the $7.7 trillion as of Q1 2010, and is roughly 30% off the all time high of $10.3 trillion seen in Q2 and Q3 of 2007, aka the peak of the bubble. What is also notable is that consumer deleveraging, as everyone knows, is continuing: total household debt declined for the tenth consecutive quarter, and was down by $58 billion to $13,429.4 billion. The peak was $13,923 billion in Q1 2008, so just about half a trillion higher.

Elsewhere, some may be surprised to learn that business debt increased to an all time record high of $7,351 billion, an $82 billion increase in the quarter. So even as all those continue to note the $1.2 trillion in non-financial cash built up by banks, of which at least half is offshore, at the very same time Corporations have grown their total debt by the same amount since Q1 2007. So net, it is not only a wash, but is domestically leveraging as companies don't have free access to the foreign cash even as all their debt is domestic. Hopefully that will finally end the "cash on the sidelines" farce. Yet the one chart which needs no introduction, or explanation is that of the Federal and State and Local Government debt. That grew by $350 billion in the last quarter as the government continues to attempt to offset the drop in household leverage.

13--On Christmas Shopping Lists, No Credit Slips, New York Times via Mish

The lowest percentage of shoppers in the 27-year-history of a national survey said they used credit cards over the Thanksgiving weekend, while the use of general credit cards like Visa and MasterCard fell 11 percent in the third quarter from a year earlier, according to the credit bureau TransUnion.

Britt Beemer, chief executive of America's Research Group, a survey firm, said "The consumer really feels a lot of pressure from previous debts, and they just aren't going to dig themselves into that kind of hole," he said.

After the Thanksgiving shopping weekend, the group found that just about 17 percent were paying with credit - just over half of last year's level and the lowest rate in the 27 years it has conducted a survey.

Some people are shunning credit cards for budgeting reasons, while others do not have a choice. More than 15 million Americans lost their cards because of strict credit-card regulations that were passed last year, or when issuers cut back on credit during the recession, said David Robertson, publisher of The Nilson Report, a credit card industry newsletter.

14--Household Real Estate assets declined $650 Billion in Q3 2010, Calculated Risk

Excerpt: The Federal Reserve released the Q3 2010 Flow of Funds report this morning: Flow of Funds.

According to the Fed, household net worth is now off $11 Trillion from the peak in 2007, but up $5.8 trillion from the trough in Q1 2009.

The Fed estimated that the value of household real estate fell $684 billion to $16.55 trillion in Q3 2010, from $17.2 trillion in Q2 2010.....This includes real estate and financial assets (stocks, bonds, pension reserves, deposits, etc) net of liabilities (mostly mortgages). Note that this does NOT include public debt obligations.

Note that this ratio was relatively stable for almost 50 years, and then we saw the stock market and housing bubbles....Mortgage debt declined by $65 billion in Q3. Mortgage debt has now declined by $488 billion from the peak. Studies suggest most of the decline in debt has been because of defaults.

Assets prices, as a percent of GDP, have fallen significantly and are not far above historical levels. However household mortgage debt, as a percent of GDP, is still historically very high, suggesting more deleveraging ahead for households.

15--The American student loan racket, Nancy Hanover, WSWS

Excerpt: Student loans have become the most lucrative form of debt in the finance industry, Collinge points out, because lenders have the most invasive collection rights and the federally mandated right to impose usurious fees and penalties. The industry is legally able to garnishee wages, tax returns and Social Security and disability payments without so much as a court order.

The other side of the ever-rising cost of college is explained in a recently released US government report, "The Rising Price of Inequality".[4] This comprehensive study documents the ways millions of qualified young people are being excluded or driven out of college because of its escalating price tag.

Using a statistically rigorous method, the study shows that among low- and moderate-income students, at least 3 million academically qualified young people have foregone their bachelor's degree due to finances. These figures are based on trends prior to the worst of the current crisis.....

Where then did the student loan industry come from? This can be answered simply. Since the 1970s, the burden of college costs has shifted dramatically from the government to the student.

Eric Dillon's Leading Lady: Sallie Mae and the Origin of Today's Student Loan Controversy states: "In 1977, it is estimated that students and their families borrowed about $1.8 billion .....Today, the cumulative principal and interest that is owed is calculated at $850 billion! (This figure includes the newer and more expensive private loan products, not yet invented in the earlier years)....

The Higher Education Act was amended six times, becoming progressively more lucrative for lenders and more onerous for students. The Student Loan Marketing Association (Sallie Mae), founded in 1972 as a GSE (government sponsored enterprise) and supervised by the US Treasury, was spun off in 1995 to transition to a for-profit operation.

Speculating on college loans-Sallie Mae goes public

In 1995, the Student Loan Marketing Association (Sallie Mae) began the transition to a profit-based operation. This process is documented by The Student Loan Scam. Between 1997 and 2006, Sallie Mae's holdings grew from $45 billion to $123 billion, as the cost of college skyrocketed. In a five-year period, its stock increased by nearly 1,700 percent. The company set aside, according to the Securities and Exchange Commission, $3.6 billion for stock bonuses in 2005....

Congress approved legislation that allowed for massive penalties and fees for delinquent student loans, legislation that actually made it more profitable for the lenders and guarantors when students defaulted than when they paid. The 1998 amendment to the Higher Education Act provided for collection rates of up to 25 percent to be applied to the debt.

"This meant," Collinge writes, "that when borrowers defaulted on their loans, guarantors could take a quarter of every dollar the borrowers eventually repaid, money that would not be applied to the principal and interest on the debts, which the borrowers had been unable to afford to repay in the first place. This massive, unearned revenue stream going to the guarantors and to the collection agencies they contract with (agencies that are often owned by the original lenders) has not surprisingly led to usurious situations."....

For example, you borrow what is in fact a modest $20,000 to attend a public university, say the University of Michigan for four years, and pay out of pocket an additional $80,000 minimum during that time for room and board. You elect a 12-year loan repayment plan. The federal government will guarantee this. If you pay this off at 8.8 percent interest over 12 years, you will pay $23,376 in finance charges.

If you cannot pay the $293 a month, after 270 days you will default. The federal government will pay Sallie Mae the balance of the loan, plus interest. It will then send the debt to a collections agency. The agency will add 25 percent to the loan as a collection fee. Additionally, it will receive a 28 percent commission on the loan (which you will pay). The largest collection agencies in the country are owned by Sallie Mae; therefore, they get the "second bite of the apple." The agency can garnish your wages, tax refunds, etc. There is no statute of limitations, meaning that even if it waits until you claim Social Security, you will pay. [5]

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (engineered by the credit card companies and banks) made all student loans, even those not guaranteed by the federal government, nondischargeable in bankruptcy. [6] Student loans were also specifically exempted from state usury laws and exempted from coverage under the Truth in Lending Act....(Must read)

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