1--Shadow inventory to push foreclosures to new heights, Housingwire
Excerpt: Two reports from separate credit rating agencies are drawing the same conclusion: Foreclosures will reach new heights this year, even after setting records in 2010.
It was hoped that mortgage delinquencies, and subsequent foreclosure filings, had peaked. Until that moment, the stockpile of properties facing imminent default, the "shadow inventory," will continue to threaten to further glut real estate market supply, with downside knock-on impact.
"DBRS expects foreclosure filings and completed foreclosures to reach record levels in 2011 as alternatives such as modifications for seriously delinquent borrowers are exhausted," said Kathleen Tillwitz, an operational risk strategist at the rating agency. "Consequently, losses to residential mortgage-backed securities will likely increase as REO inventories are sold at deep discounts causing writedowns in transactions — particularly the subordinate tranches."...
S&P expects that it will take 49 months to clear the supply of distressed homes on the market in the U.S. — an 11% increase over the previous quarter and a considerable 40% increase from 4Q 2009.
The delay in foreclosures is due primarily to improper documentation slowing down the liquidations of properties. Mortgage servicers will likely see regulation in 2011 on standardizing this process, but until then, everyone except the delinquent borrower will have to pay.
2--Car Sales are Up, Compared to What?, Dean Baker, CEPR
Excerpt: The media touted the 17 percent increase in January car sales compared to the level reported for January 2010. It is not clear that this implies a very good month, since sales were quite weak in January of last year. The 800,000 level of sales estimated for January is a decline of 17.5 percent from 970,000 average monthly sales for the fourth quarter of 2010. If this sales rate continues through February and March then car sales will be a major drag on GDP growth for the quarter.
3--The Dollar and Global Standing, David Leonhardt, New york Times
From Barry Eichengreen (via Matt Yglesias):
Sterling lost its position as an international currency because Britain lost its great-power status, not the other way around. And Britain lost its great-power status as a result of homegrown economic problems.
There isn’t much point in complaining about the devaluation of the dollar right now, given the trade deficit the United States is running. But there really isn’t much point in complaining about devaluation and not also complaining about our big long-term economic problems: slowing educational gains, the uniquely high cost of health care and the country’s inability to align taxes with government benefits. Those problems, not the dollar’s value, threaten the United States’ global standing.
4--‘Toxic’ Mortgages Rally as Resets Accelerate: Credit Markets, Businessweek
Excerpt: Home loans that inflated the U.S. housing bubble by giving borrowers the choice of cutting interest payments in exchange for higher balances are fueling the fastest gains in the mortgage-bond market.
Prices for senior bonds tied to option adjustable-rate mortgages, called “toxic” by a government commission, typically jumped 6 cents to 64 cents on the dollar in the past month, according to Barclays Capital. The next best-performing class of home-loan securities without government backing rose 4 cents. Option-ARM debt tumbled to as low as 33 cents in 2009.
Rising values show Federal Reserve efforts to stimulate the economy by purchasing an additional $600 billion of Treasuries and holding interest rates near zero percent are driving investors into ever-riskier securities. Bond buyers are overcoming a “mental hurdle” even as the debt is poised to lead a second wave of rising payments for homeowners, according to TCW Group Inc.
“As the rally matures, you’ve got to expect the more- banged-up, more-feared, less-participated-in parts of the market are going to eventually catch up,” said Bryan Whalen, co-head of mortgage bonds at TCW, which oversees $115 billion.
The market is pricing in defaults on option ARMs of about 75 percent, according to hedge fund Metacapital Management LP in New York. As the worst housing slump since the Great Depression deepened, assumptions reached as high as 90 percent, said Whalen, who’s based in Los Angeles.
Commercial Mortgage Bonds
Payment changes on option ARMs will lead adjustments on $246 billion of mortgages in the next three years, according to Barclays Capital. The amount, on loans among the $1.3 trillion packaged into so-called non-agency mortgage securities, may top out at $12 billion a month, rivaling the peak in payment resets led by subprime loans in 2007.
5--Group Accuses Government Investigators of 'Malpractice' In Undercover Report On For-Profit Colleges, Huffington Post
Excerpt: A lobbying group representing the for-profit college industry filed a lawsuit today accusing federal government investigators of "professional malpractice" after issuing a report last summer that documented aggressive and misleading recruitment at several for-profit institutions.
The undercover investigation by the Government Accountability Office, which involved four investigators posing as fictitious prospective students, found numerous examples of deceptive statements made by admissions officers and other employees at 15 for-profit colleges. The findings included overstated promises of potential salaries after graduation and high-pressure tactics that pressed applicants to enroll before receiving information about financial aid....
The report garnered great attention when it was released last August, causing stock prices to plunge at many of the publicly-traded corporations that own for-profit schools. The for-profit college sector includes a diverse array of schools, ranging from specialized institutions such as ITT Technical Institute to mostly-online colleges such as the University of Phoenix and Kaplan University....
The for-profit college industry faces increased scrutiny as evidence mounts of its students leaving with debts they cannot afford to pay, given the low-wage jobs they tend to attain after graduation. For-profit schools enroll about 12 percent of students nationwide, yet the sector takes in nearly 25 percent of all student aid dollars and is responsible for 43 percent of student loan defaults....
Another group representing the industry, the Association for Private Sector Colleges and Universities, filed a lawsuit last month against the Department of Education seeking to undo consumer protection regulations approved last fall. The disputed rules included guidelines meant to prevent misleading and deceptive pitches by recruiters and measures prohibiting bonuses awarded to recruiters based on the number of student enrollments they secure.
6--Radio Free Dylan with John Rosner and Yves Smith, dylanratigan.com
Excerpt: JOSH: Well we stand with the housing market that still has over 11 million homes that are going to ultimately have to be foreclosed, resold, modified worked out. We have a government that has spent the better part of three years not really addressing either a holistic approach to help keep borrowers in their homes or make sure that investors who owned mortgage backed securities backed by those were protected from harm by the banks who service those and may also own second leans that they’re carrying artificially high values. We’ve got a government that theoretically is investigating document fraud, robber signing fraud and origination issues and servicing fraud who to my understanding has really not done any granular investigation over mortgage loan files.
There has been very little discussion. We’ve got 50 state AGs who are in the process of doing an investigation and looking for a settlement even though again there have been very few subpoenas. And my understanding is there’s been very little actual granular investigation of behaviors of the parties involved. And that’s where we are which is a wonderful attempt to put lipstick on a pig as it’s said and not really addressing the underlying problems which keeps our economy in peril and the ultimate cost of finally coming to resolution rising....
YVES: So you almost have to go back 30 years to see the roots. We used to have an economic system in which the primary goal of policy was to make sure that we had rising average worker wages and things like growing trade deficits would have been seen as a course for alarm because that would basically mean that US demand was leaking to employment overseas and not supporting US workers. It sort of started in the Carter administration but it really came flow blow in the Reagan administration and has continued till today that we now have a philosophy that anything that happens is a result of market activity is good and will somehow be rationalized.
In fact Reagan ironically wasn’t always nearly true to his doctrine and some later president would have been. When unemployment went over 8%, he in fact became quite alarmed and engaged in radical market interventions among other things to drive the dollar which was very high at the time back down.
But what’s happened is we’ve had over the last 30 years what was first a gradual increase in consumer debt and then a much more rapid increase in consumer starting in 1999, the curve goes parabolic. And it was primarily housing debt and that was the solution for stagnant average worker wages that people were given more access to credit and therefore had improved lifestyles even though they actually weren’t in aggregate making more money. And the problem with consumer debt is that it’s unproductive debt. You get, X possibly investing in education. And effectively consumers hit the point where they could not, that it wouldn’t take much to put them into debts to solve these problems.
We had a time in the early; repeatedly we had times in the early 2000s where the savings rate household savings were zero to negative. That should have been an enormous red flag to policy makers and it was ignored. Instead you saw Greenspan and later Bernanke rationalizing this saying, oh its fine the consumer balance sheets look okay. That doesn’t solve the debt service problem, it doesn’t this so the people will have a way to pay and if anything goes wrong they’re going to be in trouble. (much more)
7---Credit Card Interest Rates Near 60% as Banks Return to Risky Borrowers, New deal 2.0
Excerpt: It’s no surprise that banks want back in the high-risk business. Despite the cushy goodies they give away to wealthy customers, the heart of their profits is made off of those who are drowning in debt and unable to pay it back. Consumer advocate Elizabeth Warren made this clear in an anecdote she recounted in the 2006 movie Maxed Out. She describes going into a room of banking executives with statistics that prove that if they screened out customers least likely to pay they could cut bankruptcy losses in half. “Then a fellow in the back said ‘Professor Warren,’ and everyone got quiet,” she says. “‘But it would cut those people off, and that’s where we make all of our profits.’” While they figured out this new source of revenue, financial wizardry kept pace to help put more and more people in this situation. In a presentation to the Make Markets be Markets conference in 2010, she wrote, “[T]he financial industry has perfected the art of offering mortgages, credit cards, and check-overdrafts laden with hidden terms that obscure price and risk…
Study after study shows that credit products are deliberately designed to obscure the real costs and to trick consumers.” While the CARD act and the new Consumer Financial Protection Bureau are working to undo that damage, it’s clear where the banks’ priorities lie: in finding ways to trap borrowers into debt they can’t get out of. And putting high rates in hard-to-understand signing contracts is one of their useful tools for doing it.
8--When will the balance sheet recession end?, Pragmatic Capitalism
Excerpt: Despite the seemingly strong activity in the economy in recent months there is trouble lurking beneath the surface. Don’t get me wrong – we have a real recovery on our hands (see here), however, it remains fragile and largely driven by government intervention. Beneath the surface the balance sheet recession lurks.
As the housing bubble grew the US economy experienced an unprecedented growth in debt. This generated an imbalance as debt levels far outstripped disposable income. This environment was sustainable as long as asset prices continued to climb, however, once prices deteriorated debtors were left with an imbalance. As a result, a balance sheet recession ensued as demand collapsed under the weight of households who preferred to pay down debts rather than spend. The impact is magnified by corporations that cut costs (read, fire workers) as demand collapses and they attempt to protect margins. Real sustainable recovery cannot ensue until the indebted sector of the economy returns their balance sheet to a state of normalcy.
The government’s response to the crisis was massive and far more effective than most presumed. But it was not a cure. It was merely a temporary fix. ...
The bright side is that things could have been much worse. Even better, we haven’t fallen for the fear mongering from the hyperinflation/USA is bankrupt crowd who are helping to cause so much destruction in the nations of Austeria. The problem is that this government intervention is not a cure. Aggregate household debt levels are still too high as evidenced by the debt:disposable income levels (see figure 2). This means we could still be several years from sustained private sector growth. As I like to say, the public sector is not yet ready to pass the baton to the private sector....
In sum, it’s clear that government intervention has been sufficient to defer the negative effects of the balance sheet recession. In the near-term, that is a net positive, however, the risks are substantial. If the balance sheet recession persists into 2013 or longer then the obvious risk is a substantial decline in the deficit. Austerity would almost certainly expose an overly indebted household sector and send the economy back into a tailspin. With the deficit projected to be $1.5T this year it’s comforting to know that we are not repeating the mistakes of Japan, however, it’s important that we not get too complacent as the balance sheet recession lurks underneath a seemingly rosy surface.
9---Housing Armageddon: 12 Facts Which Show That We Are In The Midst Of The Worst Housing Collapse In U.S. History, economic collapse blog
Excerpt: We are officially in the middle of the worst housing collapse in U.S. history - and unfortunately it is going to get even worse. Already, U.S. housing prices have fallen further during this economic downturn (26 percent), then they did during the Great Depression (25.9 percent). Approximately 11 percent of all homes in the United States are currently standing empty. In fact, there are many new housing developments across the U.S. that resemble little more than ghost towns because foreclosures have wiped them out. Mortgage delinquencies and foreclosures reached new highs in 2010, and it is being projected that banks and financial institutions will repossess at least a million more U.S. homes during 2011. Meanwhile, unemployment is absolutely rampant and wage levels are going down at a time when mortgage lending standards have been significantly tightened. That means that there are very few qualified buyers running around out there and that is going to continue to be the case for quite some time to come. When you add all of those factors up, it leads to one inescapable conclusion. The "housing Armageddon" that we have been experiencing since 2007 is going to get even worse in 2011.
Right now there is a gigantic mountain of unsold homes in the United States. It is estimated that banks and financial institutions will repossess at least a million more homes this year and this will make the supply of unsold properties even worse. At the same time, millions of American families have been scared out of the market by this recent crisis and millions of others cannot qualify for a home loan any longer. That means that the demand for unsold homes is at extremely low levels.
So what happens when supply is really high and demand is really low?
That's right - prices go down.
10--White House Allies Push Bank Lobby Line On Government Mortgage Reform, Zach Carter, Huffington Post
Excerpt: "This whole cooperative idea, handing the banks the keys to the kingdom to become the new GSEs, that's just a terrible plan," says Joshua Rosner, a former GSE analyst who now works as a managing director for Graham Fisher & Co. "Why create a new class of too-big-to-fail GSEs? The banks have wanted to be the GSEs forever, and now they think they've finally got their chance."
But even if financial firms were barred from owning the new Fannie-and-Freddie-like firms, the benefits from the government guarantee on mortgages will still flow directly to banks, and only indirectly to taxpayers. With the government standing behind any losses, banks that extend mortgages to borrowers would not have to worry about losing money if a borrower failed to repay the loan. That means plenty of risk-free fees for banks, as taxpayers explicitly assume risk.
The plan is not without benefits to consumers. Its proponents emphasize that the arrangement will keep mortgages cheap and readily available. If banks don't have to take on any risk, they don't have to charge much for loans, either. And some losses for taxpayers would be cushioned by an FDIC-like insurance fund, which the new mortgage giants would pay into.
Critics of the plan acknowledge that it would keep interest rates on mortgages lower than they would be absent a government guarantee. But they argue that subsidizing housing can be better achieved through the tax code, rather than a complex mortgage finance system that reinforces Too Big To Fail, by creating a new set of firms critical to the functioning of the U.S. housing market. And investors may not believe the government when it says it will not bail out the new firms -- that was the official government stance on Fannie and Freddie for years. If the market views the new firms as too big to fail, critics envision the entire GSE disaster repeating itself.
11--The Fed’s Secret Third Mandate Just Revealed!, moneyandmarkets.com
Excerpt: Fed Chairman Ben Bernanke made a rather pitiful impression during a recent CNBC interview....But he did ask how Bernanke could claim QE2 was a success since both interest rates and commodity prices have risen considerably since he first announced it.
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”
So finally it is official. The Fed has secretly adopted a third mandate by aiming directly at making stock prices rise via its quantitative easing policy. Obviously, Bernanke and his brethren haven’t learned a darn thing from two successive bubbles and their aftermaths. Now they’re actively going for the next one.
If the stakes weren’t so high, I could actually smile in the face of so much ignorance. But these wrong-headed policies are massively influencing the well-being of the whole country, your wealth and your financial future.
12--Fed passes China in Treasury holdings, Financial Times
Excerpt: The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures. Based on weekly data released on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips. According to the most recent US Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn....
"By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings," said Richard Gilhooly, a strategist at TD Securities....
"The end of QE2 will be a big test as rates are likely to rise once the Fed stops buying large amounts of Treasuries," said David Ader, a strategist at CRT Capital. "We don’t know if that means a rise of 20, 30 or even 50 basis points for key yields." In total, foreign central banks hold $2,604bn of Treasuries, according to the Fed. After rising from $2,250bn at the end of last June, foreign central banks have stayed at about $2,600bn since mid-November, when the Fed began QE2. This indicates the Fed has stepped up as other central banks have scaled back their Treasuries purchases.
Before the financial crisis, the Fed held $775bn of Treasuries in Soma. That was reduced by $300bn during the first half of 2008, when the Fed sold Treasuries and focused on supporting the financial system. The first QE program, which began in 2009, saw the Fed buy $300bn of Treasuries.
13--Happy Anniversary, Mr. Keynes, Victoria Chick and Ann Pettifor, Bloomberg
Excerpt: The global economy was finally ruined in 2007-09 as the financial system in the U.S. and Europe imploded under the weight of accumulated private debt. Subprime borrowers were the first to buckle under the weight of “dear money” -- costly, unpayable debts. The widespread belief that it was low interest rates that caused the credit crisis is indicative of how far economists have strayed from Keynes’s theory and analysis.
Equally, the idea that interest rates are now substantially lower, stems from a focus on policy rates while the high, real rates paid by consumers and businesses are ignored. To reduce real rates of interest for both industry and consumers requires the full embrace of Keynes’s approach to the global system: a coordinated effort to reverse financial liberalization.
Only with finance restrained can there be prospects for public and private-sector expansion. Keynes’s “General Theory” -- not the “Keynesian” theory of textbooks and conventional wisdom -- offers the same way out of today’s crisis as it did in the 1930s. But the economics profession must begin a reappraisal of his central contribution to monetary theory.
14--Is QEII Working?, Economist's View
It's great that QEII seems to be working, but let's not get overexcited here. According to this FRBSF Economic Letter, the effect on unemployment will be around 1.5% (and it won't happen overnight).
FRBSF: By 2012, the ... program's incremental contribution is ... 700,000 jobs generated ... by the most recent phase of the program. Increased hiring lowers the unemployment rate by 1½ percentage points compared with what it would have been absent the Fed's asset purchases... Based on other simulations, providing an equivalent amount of support to real economic activity through conventional monetary policy would have required cutting the federal funds rate approximately 3 percentage points relative to baseline from early 2009 through 2012, an obvious impossibility because of the zero lower bound.
That gets us down to 8% in 2012....There is also more evidence on QEII beyond the FRBSF research. This paper by Heike Schenkelberg and Sebastion Watzka of the University of Munich finds positive effects of QE for Japan. Here's there introduction:
1 Introduction We study the real effects of Quantitative Easing (QE) in a structural VAR (SVAR) when the short-term interest rate is constrained by the Zero-Lower-Bound (ZLB). Using monthly Japanese data since 1995 - a period during which the Bank of Japan's target rate, the overnight call rate, has been very close to zero - and sign restrictions based on liquidity trap theory, we find that an increase in reserves leads to a significant 0.7 percent rise in industrial production on impact.
This rise lasts for about two years. On the other hand, our results indicate that the same shock has no effect on inflation. Thus our results provide mixed evidence on the successfulness of QE in Japan. Whilst real economic activity does seem to pick up after a QE-shock, this does not seem to affect inflation in such a way that Japan could exit its deflationary period through such a policy shock....
15--Inequality, leverage and crises, Michael Kumhof and Romain Rancière, Vox EU via Economist's View
Excerpt: The US has experienced two major economic crises during the last century – 1929 and 2008. There is an ongoing debate as to whether both crises share similar origins and features...One issue that has not attracted much attention is the impact of the crises on inequality. In recent work (Kumhof and Ranciere 2010) we focus on two remarkable similarities between the two pre-crisis eras. Both were characterised by a sharp increase in income inequality, and by a similarly sharp increase in household debt leverage. We also propose a theoretical explanation for the linkage between income inequality, high and growing debt leverage, financial fragility, and ultimately financial crises....
In our closed economy set-up, the increase in leverage of the bottom 95% is made possible by the re-lending of the increased disposable incomes of the top 5% to the bottom 95%, resulting in consumption inequality increasing significantly less than income inequality. Saving and borrowing patterns of both groups create an increased need for financial services and intermediation. As a consequence the size of the financial sector increases. The rise of poor and middle income household debt leverage generates financial fragility and a higher probability of financial crises. With workers' bargaining power, and therefore their ability to service and repay loans, only recovering very gradually, the increase in loans and therefore in crisis risk is extremely persistent.
In our model, a crisis materialises in period 30. It is characterised by large-scale household debt defaults on 10% of the existing loan stock, accompanied by an abrupt output contraction as in the 2007-2008 US financial crisis, which is modelled as a destruction of physical capital.
The crisis barely improves workers' situation however. While their loans drop by 10% due to default, their wage also drops significantly due to the collapse of the real economy, and furthermore the real interest rate on the remaining debt shoots up to raise debt servicing costs. As a result their leverage ratio barely moves, and it in fact increases further later on so that by year 50 it is above its pre-crisis level, with a very slow reduction thereafter.
Update: Ryan Avent argues that a 1.5% change over such a long time period --around two years -- is, in fact, "working." Again, under my definition of what working means, this (less than 30,000 jobs per month) is far from fast enough and clearly indicates that the unemployment problem could use more help...
I am not saying that QEII did nothing, was worthless, anything like that. I'm just disappointed to see people patting the Fed on the back for a job well done when the Fed's actions were both far too late and far too small (why settle for 1.5% reduction in unemployment if inflation is not a worry? ...I am very pleased that 700,000 more people will have jobs as a result of the Fed's actions in QEII (and the total QE affects were even larger, the 700,000 is only for QEII). But with millions and millions out of work still, I am not going to settle for this, say great job, pat the Fed and Congress on the back, and move on to other things.
16-- Persistent racial inequalities in America, Understanding Society, Historian Thomas Sugrue, Economist's View
Excerpt: Here are a few factual findings from the book:
The most persistent manifestation of racial inequality in the modern United States has been racial segregation in housing and education. From 1920 through 1990, patterns of black white segregation hardened in most of the United States, despite shifts in white attitudes about black neighbors, and despite the passage of local and state antidiscrimination laws and the enactment of Title VIII of the Civil Rights Act (1968) which prohibited housing discrimination nationwide. (101)
Persistent residential segregation compounded educational disparities. Beginning in the late 1970s, when courts began a thirty-year process of abandoning the mandate of Brown v. Board of Education, school districts around the country resegregated by race, especially by black and white. (103)
African Americans are far more likely than whites to be economically insecure. The statistics are grim. In 2006, the median household income of blacks was only 62 percent of that of whites. Blacks were much more likely than whites to be unemployed (black unemployment rates have remained one and a half to two times those of whites since the 1950s). (104-5)
Social scientists have documented employers discriminating against job applicants with comparable credentials when one has a "black" name or has a place of residence in a known "black" neighborhood. (105)
The starkest racial disparities in the United States are in wealth (a category that includes such assets as savings accounts, stocks, bonds, and especially real estate). In 2003, the U.S. Census Bureau calculated that white households had a median net worth of $74,900, whereas black households had a median net worth of only $7,500. (105)
Another important indicator of quality of life is health. ... The racial and ethnic gaps in health and life expectancy are stark. The life expectancy of whites in 2004 was 78.3; for blacks, it was 73.1. ... In 2003, infant mortality rates were nearly 2.5 times as high for blacks as for whites.
17--The Financial Crisis: Foreseeable and Preventable, Econbrowser
Excerpt: What could the government have done? The Bush administration could have reduced the outsized fiscal deficits that spurred foreign borrowing, and more generally could have acted to slow an overheated economy. The Federal Reserve could have raised lending rates to decelerate the credit boom. Regulators could have been more stringent about applying prudential principles to all of the complex financial operations in which financial institutions were engaging. But instead, none of these government agencies did anything.
Why was nothing done to heed the warnings? Electoral considerations may have mattered: no incumbent government wants to put the brakes on the economy before an election. Special-interest pressures undoubtedly mattered: real estate salesmen, homebuilders, financial institutions, and many borrowers had come to rely on a continuation of the boom. David Lereah, chief economist of the National Association of Realtors, whose 2006 book was titled "Why the Real Estate Boom Will Not Bust," explained to Business Week several years later, "I worked for an association promoting housing, and it was my job to represent their interests."
Ideology probably mattered. Larry Kudlow, economics editor of the conservative National Review, in 2005 dismissed "all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market." Of course, the bubbleheads were exactly right, but the predictions did not accord with Kudlow’s partisan commitments or his ideology.
And so it is with the post-mortems. Politicians, special interests, and ideologues all have their reasons to insist on a particular interpretation of the crisis. And those connected to the Bush administration have strong incentives to deny that the administration could have done anything differently. But they are wrong.