Thursday, September 1, 2011

Today's links

1--White House could unveil mortgage plan next week, Reuters

Excerpt: The Obama administration is considering unveiling new plans next week to revive the ailing housing market and reduce foreclosures, including an effort to help troubled borrowers refinance their mortgages.

The administration has been working for weeks on how to implement a mortgage relief program. President Barack Obama could include a nod to the plan in a speech on job creation next week, sources familiar with the administration's plans said.

The refinancing initiative would allow certain borrowers to refinance loans that are backed by government-owned Fannie Mae and Freddie Mac or the Federal Housing Administration, the sources said.

A broad-based effort to automatically refinance millions of mortgages is not in the works, yet the administration is looking to take targeted changes to an existing program that would allow more borrowers to take advantage of low mortgage rates, including allowing borrowers to refinance even if they owe a significant amount above their property's current value.

2--Choice for EU: Bail Out Greece or Bail Your Banks, WSJ

Excerpt: The yield on Greek one-year government bills hit 60% Tuesday.
Not only does this suggest default is now all but certain and will come soon, it also implies that the terms of the default will be particularly brutal for investors, with recovery rates possibly even lower than the currently anticipated 50%.

European governments are being forced to face up to the significance of a Greek default. This is perhaps the underlying message from International Monetary Fund Managing Director Christine Lagarde's warning that Europe's banks "need urgent recapitalization." She may have been warning about the costly alternative to a solution to the Greek sovereign crisis. But it could well be too late....And default will damage Europe's already fragile banks.

Getting to the nub of their exposure to Greece is tricky. On the face of it, their direct holdings of Greek government debt as a fraction of existing capital is probably not too scary. UBS estimates the exposure of European banks, except Greek banks, to Greek sovereign debt at €46 billion (£66 billion), with French and German institutions holding €9.4 billion and €7.9 billion, respectively.

Although these exposures are fairly significant for some banks—for instance, Dexia's exposure to Greek government debt is estimated at 39% of its equity capital, and Commerzbank's at 27%—most outside of Greece have much more manageable positions.

But these crises are seldom neatly contained.

"The problem with situations like this is that it is hard to quantify what the second- and third-round effects will be," warns Stephen Lewis, economist at Monument Securities.

Any default would hit the Greek economy more generally and banks have considerably more exposure to Greece than simply to its sovereign debt. According to the Bank for International Settlements, European banks have a total exposure of €94 billion to the Greek economy, with French institutions on the hook for €40 billion and Germany's €24 billion.

Given that in mid-August, the 32 members of the Stoxx euro-zone banks index had a total market capitalization of some €240 billion, Greece has the potential to put a huge dent in their balance sheets. What's more, the International Accounting Standards Board is worried that European financial institutions have been fudging their exposure to Greece in their recent results by underproviding against potential losses on these assets. When the default finally hits and banks are forced to recognize their true positions, the results could look very ugly indeed.

But that's not where it ends. These estimates don't include the exposure to Greece by non-banking institutions such as insurers. As they're damaged by the Greek fallout, domestic banks will be affected further still.

Ms. Lagarde argued that the "most efficient solution would be mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary."

3--European Liquidity Conditions Continue To Deteriorate With An Emphasis On SocGen And Barclays, Zero Hedge

Excerpt: we warned back in March 2010, a far more tangible threat is not what is happening in the already largely contracting shadow banking realm, but in real, non-shadow markets. Because for shadow to be impaired, these traditional liquidity conduits would have to be shut down first. Alas, while stocks resolutely continue to ignore anything but both good and bad headlines, all of which justify either QE3 or a surging economy ...liquidity in non-shadow markets is the most impaired it has been in a long time... As the charts below show not only are European banks seeing their LIBOR rates increasing ...with SocGen and Barclays the two most troubled banks from a self-reported liquidity standpoint, but also that the spread between the lowest and highest reported LIBOR is now the widest it has been in all of 2011.

A few more days in which European funding markets completely ignore what is going on with US stocks...and the time to talk about shadow banking repo halts may indeed be nigh. (see Libor chart)

4--LPS: : Average Loan in Foreclosure Is Delinquent for Record 599 Days, Calculated Risk

Excerpt: From LPS: LPS' Mortgage Monitor Report Shows Average Loan in Foreclosure Is Delinquent for Record 599 Days; First-Time Foreclosure Starts Near Three-Year Lows

The July Mortgage Monitor report released by Lender Processing Services, Inc. shows that foreclosure timelines continue their steady upward trend, as a payment has not been made on the average loan in foreclosure in a record 599 days. Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record. At the same time, first-time foreclosure starts in June were near three-year lows, and first-time delinquencies accounted for only 25 percent of new delinquent inventory.

As of the end of June, 4.1 million loans were either 90 or more days delinquent or in foreclosure, as delinquencies remain two times and foreclosures eight times pre-crisis levels. Foreclosure sales remain constricted, with foreclosure starts outnumbering sales by a factor of almost three to one.

According to LPS, 8.34% of mortgages were delinquent in July, up from 8.15% in June, and down from 9.31% in July 2010.

LPS reports that 4.11% of mortgages were in the foreclosure process, down slightly from 4.12% in June, and up from 3.74% in July 2010. This gives a total of 12.45% delinquent or in foreclosure. It breaks down as:

• 2.48 million loans less than 90 days delinquent.
• 1.90 million loans 90+ days delinquent.
• 2.16 million loans in foreclosure process.

For a total of 6.54 million loans delinquent or in foreclosure in July....
the in-foreclosure rate at 4.11% is barely below the peak rate of 4.21% in March 2011. There are still a large number of loans in this category (about 2.16 million) - and the average loan in foreclosure has been delinquent for a record 599 days!...

Looking at this graph, one might expect the number of loans in the foreclosure process to be increasing sharply since there are so many more starts than sales.
And there are very few cures too - what is happening is a large number of loans each month have been moving from "in foreclosure" back to "90+ days delinquent" status - so the number of loans "in foreclosure" hasn't increased recently.

5--First Time Foreclosure Starts Near 3-Year Lows, However Bad News Overwhelms; Foreclosure Pipeline in NY is 693 months and 621 Months in NJ, Mish

Excerpt: The LPS Mortgage Monitor August 2011 Mortgage Performance Report Shows First-Time Foreclosure Starts Near Three-Year Lows. That's the good news.

The Bad News

•Average Loan in Foreclosure Is Delinquent for Record 599 Days
•Of the nearly 1.9 million loans that are 90 or more days delinquent but not yet in foreclosure, 42 percent have not made a payment in more than a year with an average delinquency of 397 days, also a new record.

•As of the end of June, 4.1 million loans were either 90 or more days delinquent or in foreclosure, as delinquencies remain two times and foreclosures eight times pre-crisis levels.

•On average, at the current rate of foreclosure sales, judicial foreclosure states would require 111 months to work through inventories of loans that are 90 or more days delinquent or in foreclosure as compared to non-judicial states, which would be able to clear the inventories in approximately 32 months.

•Most of the foreclosure “outflow” is back into delinquency
•Loans deteriorating over 90 days still outnumber foreclosure starts 2:1
•Foreclosure starts outnumber sales by a factor of almost 3:1

6--Is Another Bank Bailout Brewing?, Marketwatch

Excerpt: If you thought the $800 billion TARP program was the end of our government’s bailout bonanza for wayward banks, you’re wrong. If you thought the Fed’s secret $1.2 trillion loan program for foreign and domestic banks was the end, guess again. It’s like we are living in one of those late-night TV ads for Ginsu Knives, ‘But wait, there’s more!’

From Matt Taibbi’s blog, we read about another political deal and power play favoring bad banks. Fortunately, this deal has, so far, been thwarted by a lone holdout [emphasis added]:

…On the one side is Eric Schneiderman, the New York Attorney General, who is conducting his own investigation into the era of securitizations – the practice of chopping up assets like mortgages and converting them into saleable securities – that led up to the financial crisis of 2007-2008.

On the other side is the Obama administration, the banks, and all the other state attorneys general.

This second camp has cooked up a deal that would allow the banks to walk away with just a seriously discounted fine from a generation of fraud that led to millions of people losing their homes.

The idea behind this federally-guided “settlement” is to concentrate and centralize all the legal exposure accrued by this generation of grotesque banker corruption in one place, put one single price tag on it that everyone can live with, and then stuff the details into a titanium canister before shooting it into deep space.

This is all about protecting the banks from future enforcement actions on both the civil and criminal sides. The plan is to provide year-after-year, repeat-offending banks like Bank of America with cost certainty, so that they know exactly how much they’ll have to pay in fines (trust me, it will end up being a tiny fraction of what they made off the fraudulent practices) and will also get to know for sure that there are no more criminal investigations in the pipeline…

7--Wall Street's Hurricane Isn't Over, WSJ

Excerpt: The lashing administered by Hurricane Irene on the Wall Street area and beyond over the weekend was an apt metaphor for the current state of the financial sector.

The world's largest banking groups have struggled to rebuild after being nearly flattened by the catastrophe of 2008.

Following a false dawn in 2009, caused by pent-up demand for trading services, the industry's revenue foundations have been undermined by a trifecta of stricter regulation, jittery capital markets and slow economies.

Investors, fearful that the heady returns of the past will never be repeated, have shunned banks, sending share prices of many below liquidation value. "Markets think we are worth more dead than alive," is how a banking executive bitterly summarizes the situation....

Wall Street will never be the same. Some businesses, such as the lucrative "tailor-made" derivatives of old, will shrink, while others, like "proprietary trading" on a bank's own account, will disappear.

As sluggish economies keep profits subdued—CLSA analyst Mike Mayo predicts that 2011 revenue growth at U.S. banks will be the worst since 1938—global finance groups will have to rethink how they do business.

Cutting costs is just a start but a necessary one. "The dirty little secret in our industry," a senior banker told me last week, "is that everybody hired like crazy in 2009 and 2010 for fear of missing out on the post-crisis bump."

Now it is austerity time, with the ax swinging through the cruelly named "non-revenue functions".

8--Vital Signs: Home Prices Remain Low, WSJ

Excerpt: Home prices ticked up in the second quarter but remained low. The S&P/ Case-Shiller Home Price Index rose 3.6% from the first quarter as the Spring selling season got under way. But the index was 5.9% below its year-earlier level and 31.5% below its peak five years ago. With a large inventory of unsold homes on the market, sustained price increases may be years away. (see chart)

9--Stocks in U.S. Pare Gains After Roubini Says Another Recession Is Starting, Bloomberg

Excerpt: ‘Fizzle Out’

“We’re not going to have a fiscal stimulus,” Roubini told Bloomberg Television. “We’re going to have a fiscal drag and therefore the short-term effect of a rally in the market is going to fizzle out when the real economy is going to go and tank. We’re entering a recession based on my numbers.”

10-- The overnight Black Swan, FT.Alphaville

Excerpt: ...As Perry Mehrling, professor of Economics at Barnard College, Columbia noted earlier this month:

Basically, the ZIRP provides strong incentive for carry trades of all kinds. If you can borrow at zero, and can roll your borrowing for two years, then anything with a positive yield looks good. If a hedge fund borrows at zero and buys MBS, that is QE1 private-style. If a hedge fund borrows at zero and buys long-dated Treasuries, that is QE2 private-style.

The difference is that, since the Fed is not doing the trade on its own balance sheet, it has no control over which trades get made. Private speculators can also buy yen or Swiss francs, and central banks intent on preventing currency appreciation are forced to take the other side of the speculation, so doing their own QE. And speculators can also buy gold, or indeed any other asset, so long as expected capital gains exceed storage costs.

Another difference is that private-style QE gets financed with private money expansion (private debt secured by the asset purchased) rather than public money expansion (Fed debt which is bank reserves). From this perspective, private-style QE3 looks like a repurposed shadow banking system. As everyone now knows, the collateral that stood behind the original shadow banking system turned out not to be the AAA credit it was claimed to be. But, at the time, demand for private money backed by that dodgy collateral was sufficiently strong that there were strong incentives not to look too closely.

Though, as and when things get riskier, there’s also a critical downside to this development. Private money has no obligation to keep funding. It can pull its money sharply and quickly.

What’s more, if and when it’s tempted back into the lending market the duration of such long-term collateral swaps is likely to get shorter. You’re still happy to lend for yield, just for a shorter duration.

Professor Lew Spellman, for example, has noted that in many ways it’s the development of a shorter, even overnight, term collateral swap market (especially when conducted with the shadow banking community) that could create an entirely brand new black-swan risk.

An overnight funding squeeze which emerges almost from nowhere, or what you could call a totally unanticipated overnight black-swan event. Demand deposit risk, squared.

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