Tuesday, February 7, 2012

Today's links

Today's quote: “The United States economy has been growing at its slowest rate since the Great Depression....The American economy’s reported 2.8 percent growth in the fourth quarter, at an annual rate, was seen as mildly encouraging. But it meant that over the previous 10 years, the economy had grown at a compound annual rate of just 1.7 percent. Until the current cycle, there had been no similar prolonged period of slow growth since the Depression.” Floyd Norris, New York Times

1--Banks Paying U.S. Homeowners to Avoid Foreclosures, Bloomberg

Excerpt: Banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

Losses for lenders are about 15 percent lower on the sales than on foreclosures, which can take years to complete while taxes and legal, maintenance and other costs accumulate, according to Moody’s. The deals accounted for 33 percent of financially distressed transactions in November, up from 24 percent a year earlier, said CoreLogic Inc., a Santa Ana, California-based real estate information company.

Karen Farley hadn’t made a mortgage payment in a year when she got what looked like a form letter from her lender.

“You could sell your home, owe nothing more on your mortgage and get $30,000,” JPMorgan Chase & Co. (JPM) said in the Aug. 17 letter obtained by Bloomberg News.

$200,000 Short
Farley, whose home construction lending business dried up after the housing crash, said the New York-based bank agreed to let her sell her San Marcos, California, home for $592,000 -- about $200,000 less than what she owes. The $30,000 will cover moving costs and the rental deposit for her next home. Farley, who is also approved for an additional $3,000 through a federal incentive program, is scheduled to close the deal Feb. 10....

A mountain of pending repossessions is holding back a recovery in the housing market, where prices have fallen for six straight years, and damping economic growth. Owners of more than 14 million homes are in foreclosure, behind on their mortgages or owe more than their properties are worth, said RealtyTrac Inc., a property-data company in Irvine, California.

JPMorgan, the biggest U.S. bank, approves about 5,000 short sales a month. It generally offers $10,000 to $35,000 in cash payments at settlement, real estate agents said. Not all of the sales include incentives.

2--Auto Loans in 30 Seconds Drive Accelerating Vehicle Sales, Bloomberg

Excerpt: Three years ago, credit was so tight that the owner of a legal firm with a $400,000 salary and a very good credit score of more than 700 couldn’t get financed to buy the car he wanted from Michael Mosser’s dealership.

“The world is upside-down compared to then,” said Mosser, general manager of Chevrolet and Cadillac stores in Ann Arbor, Michigan. “Today, somebody with a 500 credit score, I can get approved and in a Malibu,” which starts at $22,110.

Lenders resisted extending credit to car buyers when the mortgage market collapsed in 2008, helping push General Motors Corp. and Chrysler LLC into bankruptcy and sending U.S. sales to the lowest point in almost three decades. Amid a slow housing market, auto demand is rebounding, spurring lenders from Bank of America Corp. to Capital One Financial Corp. to approve buyers faster and at better rates to compete for a piece of an expanding market.

“Banks have had to look elsewhere for growth opportunities, and auto has been one of the nice spaces over the last couple years,” Curt Beaudouin, a bank analyst for Moody’s Investors Service in New York, said in a phone interview. “The credit experience in terms of losses has been very good in recent times. It’s never gotten out of hand. Right now, it’s basically good for everybody in the industry.”

U.S. light-vehicle sales rose 10 percent to 12.8 million last year. That momentum continued as automakers sold cars and trucks in January at the fastest pace since the U.S. government’s “cash for clunkers” program in August 2009, according to Autodata Corp....

GM Financial, formerly known as AmeriCredit Corp., the subprime lender that GM acquired in 2010, has provided competition for Ally Financial, GM’s former financial arm under the name GMAC Inc. Wells Fargo also is “aggressively going after our dealers’ business,” Johnson told analysts and reporters on a Feb. 1 conference call.

Subprime borrowers are considered to be a higher-than- normal credit risk...
Bond offerings linked to automobile loans and leases, such as GM Financial’s $1 billion sale announced on Jan. 31, are set to dominate the asset-backed debt market for the fourth straight year in 2012, according to Wells Fargo Securities LLC estimates.

Sales of the securities may jump 11 percent to $63 billion this year, accounting for about 55 percent of bonds tied to consumer borrowing, the bank said. About $57 billion of bonds tied to auto debt were sold in 2011, or 54 percent of new deals.

3--The Subprime Lure--Auto Lenders Might be More Lax With Loans, Credit Union Times

Excerpt: In another effort to drive in more business, some auto lenders, including credit unions, may be more willing to be flexible with credit-challenged consumers.

Experian Automotive recently said 21.87% of all new vehicle loans went to customers in the nonprime, subprime and deep subprime categories, according to its most recent quarterly data.

The largest percentage increases were in the two highest risk segments–deep subprime, which jumped 17.3%, and subprime, which jumped 17.8%. Nonprime loan shares also increased by 12.5%.

“With more loans being booked outside of prime, lenders are showing they are willing to be more flexible in their lending strategies,” said Scott Waldron, president of Experian Automotive. “However, consumers may still have the impression that lending is extremely tight, so it is important for lenders and retailers to educate car shoppers that there are financing options available to a wider group of consumers.”

Experian’s analysis also showed that the average consumer credit score for both new and used vehicle loans dropped in the third quarter of 2011. For new vehicle loans, the average credit score fell from 769 in third-quarter 2010 to 763 in third-quarter 2011. For used vehicle loans, the average fell from 683 in third-quarter 2010 to 676 in third-quarter 2011.

Despite the drop in credit scores and more courting of subprime borrowers, the automotive finance industry is continuing a steady climb to good solid footing, said Melinda Zabritski, director of automotive credit for Experian Automotive.

4--Experian Reports Fewer Late Payments, Credit Union Times

Excerpt: Within the auto lending sector, a mixed bag of strong and weak outcomes was seen in the first quarter.

Overall, open portfolios are still strong with a slight increase of $3 billion or 0.5% over last year, according to Experian’s State of the Automotive Finance Market for the first quarter.

The firm also noted improvement in both 30- and 60-day delinquencies as credit continues to loosen on originations. Meanwhile, all of subprime is up 11.1% on new auto loans and 3.6% on used. There has been a slight shift in used financing toward older model vehicles. For both new and used cars, Experian has seen a decrease in auto rates.

Still, average scores continue to decrease, Experian noted. Terms are increasing among the highest risk segments with financing and payments being relatively flat compared to the first quarter of 2010

5--Significant Percentage of Borrowers Still Choosing to Default, credit union times

Excerpt: A report jointly prepared by the Experian credit reporting bureau and the Oliver Wyman consulting firm revealed that a significant percentage of mortgage borrowers who default on their mortgage loans continue to choose to do so.

The phenomenon, called “strategic default”, has become one of the more lasting trademarks of the current mortgage crisis and appears poises to continue at least in the short to medium terms.

Borrowers who strategically default on their mortgage loans make the calculation that they would be better off financially if they stopped making mortgage payments on a home whose value has fallen to significantly less than the mortgage amount.

The firms reported that the trend hit a peak in the last quarter of 2008, when 20% of defaulting mortgage borrowers adopted a strategic default strategy. The tactic had fallen in popularity since, the firms said, but still remained high, coming in at 16% of all defaults in the last quarter of 2009 and 17% in the second quarter of 2010.

“It’s important for lenders to understand findings such as why about 90% of strategic defaulters are continuing to stay current on their other obligations — even a year after they’ve gone delinquent on their mortgage,” said Charles Chung, Experian’s president for decision analytics. “Knowing more about these behaviors helps lenders personalize strategies for consumers who have defaulted on their loans.”

The report also said that consumers with higher origination balances are more likely to strategically default. Of loan default customers with origination balances of less than $50,000, only 6% were strategic defaulters while 38% were distressed defaulters.

For those with loan origination balances of more than $1 million, one-third had strategically defaulted while only 20% had defaulted under distress, the firms said. (also see: http://www.autonews.com/article/20120118/FINANCE_AND_INSURANCE/120119832/1142

6--More on subprime auto loans, economic populist

Excerpt: The Market Watch news service reports that the banks are helping Detroit sell in excess of 11,000,000 cars this year by increasing their lending to sub-prime borrowers (those with low credit scores from 550-619). This segment of the population comprised 40% of all car loans last year. Even more interesting, loans to the segment known as “Deep Sub-Prime”, with scores less than 550 and a high risk of default, were up 17% last year.

How do the banks get around the fact that even these credit-challenged customers can’t afford the monthly payments on an average car loan? Easy. The banks are doubling the maturity on their car loans. Instead of granting four year loans, they are granting eight year loans to keep the monthly payment down. You don’t have to be an expert to know the rate of depreciation on a typical car is very quick, and by about two or three years the banks will be underwater on most of these loans.

But that is two or three years from now – an eternity in financial terms. Even if things really went bad for the banking industry with its car loans, all the evidence they have suggests that the federal government will be there to bail them out, no matter what President Obama says about “no more bank bailouts”. He was more than happy this morning to tout the 243,000 new jobs created and the economy that is on the mend. He certainly hasn’t complained about how Detroit and the bankers are up to their old tricks again. Ben Bernanke hasn’t said a word about deteriorating credit standards in the auto loan market; he’s too busy stripping wealth away from retired people and anyone else with savings. Here we are in 2012, and we have learned absolutely nothing from the debacles of the previous decade.

7--Subprime auto loans rose in 3rd quarter: Experian, Marketwatch

Excerpt: The portion of new-car loans made to consumers with less than stellar credit grew in the third quarter in a further sign that lenders are growing more flexible as credit quality continues to improve, according to the latest report from Experian PLC's (EXPGY, EXPN.LN) automotive unit.

Nearly 22% of new vehicle loans went to customers in the nonprime, subprime and deep subprime categories, with the biggest jumps in the two highest-risk segments.

"Consumers continue to do a better job of repaying loans, while at the same time, many of the most risky loans from 2007 and 2008 are now off the books," said Melinda Zabritski, director of automotive credit for Experian. "These factors combine to lower the total volume of dollars at risk and give lenders more confidence in loosening their overall lending standards."

Late payments declined in the period, with 30-day delinquencies dropping 7.1% and 60-day delinquencies off by 7.4%.

The average loan amount rose 2.4% to $25,873 for new cars and by 3.9% to $17,359 for used cars.

8--What does the economy need? Bigger deficits, Marketwatch

Excerpt: If Congress goes ahead with the deficit reduction plans already in motion, the CBO projects that economic growth would be mediocre at about 2.2% this year before braking to 1% next year. Growth is expected to be negative in the first quarter of 2013.

After rising by about 1.7 million in 2012, job growth would turn negative in the first half of 2013. About three-quarters of a million people would lose their jobs. The unemployment rate could rise to 9.2% by mid-2013.

Why would the economy suddenly slow next year, throwing hundreds of thousands out of work? Because of excessive deficit reduction that’s already been approved, including letting the Bush- and Obama-era tax cuts expire, allowing the alternative minimum tax to hit millions of middle-class taxpayers, and forcing spending cuts in the defense budget and in Medicare.

The austerity already in the pipeline could hit us pretty hard, especially with extended unemployment benefits about to expire and with state and local governments still cutting their spending and employment drastically.

If we really thought deficit reduction was our first and only priority, we’d let those tax hikes and spending cuts go ahead as now planned, and damn the consequences to the economy, jobs and incomes. That would be the European way.

Fortunately, Republicans and Democrats aren’t quite that foolish. It’s likely that the tax increases won’t take effect, and that most of the planned spending cuts will be overturned. Like it or not, the economy still needs deficit spending to keep the economy moving forward for the next few years, adding jobs and boosting incomes.

Four years after the beginning of the Great Recession, the “economy remains in a severe slump,” the CBO says. Everyone knows that.

But what people may not realize is that we’re only halfway through this slump. “A large portion of the economic and human costs of the recession and slow recovery remains ahead,” the CBO says. Gross domestic product and employment aren’t expected to get back to the economy’s long-run potential until early 2018.

That means five more years of economic suffering.

Much of the pain — in lost output, in unemployment, in foreclosures, and in budget deficits — is yet to come. Subjecting the economy to needless austerity now is only cruel.

9--LTRO Redux, prag capitalism

Excerpt: Since LTRO-II is expected to introduce incremental semi-permanent liquidity into the system, the amount of Surplus Liquidity will go up accordingly. As much as the ECB does not want this program to be viewed as a form of QE, it actually is. The difference between this process and the Fed’s program is that LTRO is locked up for three years (although banks can repay it after one year), while the Fed can start taking liquidity out at any time (the ECB can reduce balance sheet as well by selling other assets.) LTRO is also meant to support banks directly, while Fed’s QE is a general expansion of base money.

The new 3-year LTRO will be allocated on Feb 29th. Barclays expects the take-up to be €250bn-350bn (closer to the upper end of the range). The actual size may depend on the types of collateral that will be eligible. Some third of the LTRO-II will be used to refinance existing short-term ECB loans. Another third will be used to covermaturing bank bonds, particularly the unsecured paper that has no natural buyers.

There are several implications of this program for the Eurozone:

1. We should see a spike in the ECB Deposit Facility comparable to the increase in the Liquidity Surplus (chart above).

2. This will further reduce private repo financing in the banking system, driving down M3, the broad money stock indicator, particularly in the periphery countries.

3. LTRO-II will create additional encumbrance of bank assets pledged as collateral to the ECB, making any unsecured bank paper even less likely to recover anything in default.

4. The ECB will be less willing to lower rates further until it sees the full impact of this program. The central bank wants to leave some tools in its “monetary toolbox”, should the situation in the Eurozone suddenly take a turn for the worse.

10--Government Spending: An Economic Boost?, FRBSF

Excerpt: The severe global economic downturn and the large stimulus programs that governments in many countries adopted in response have generated a resurgence in research on the effects of fiscal policy. One key lesson emerging from this research is that there is no single fiscal multiplier that sums up the economic impact of fiscal policy. Rather, the impact varies widely depending on the specific fiscal policies put into effect and the overall economic environment....


What does this literature tell policymakers and others trying to assess the impact of fiscal policy changes? It is an inconvenient reality that this literature provides an enormous range of multiplier estimates, ranging from –1 to 3. However, this range is not so much a reflection of disagreement over an underlying parameter as it is a reflection of one of the key lessons of this research—that there is no single multiplier that can be applied mechanically to all situations. The impact depends on the type of fiscal policy changes in question and the environment in which they are implemented. The effects of government investment are potentially greater than those of other types of government spending. And the effects from transfers to people without much wealth or ability to borrow are probably higher than from transfers to others. The impact depends on how policy changes affect expectations of future government spending and taxes. It also depends on how quickly the changes are implemented and whether they were anticipated before they were authorized. Moreover, the impact varies depending on whether monetary policy counteracts or complements fiscal policy. Finally, it depends on the state of the business cycle. Effects are more positive during recessions. An important lesson from the research is that it’s essential to clearly understand the context in which fiscal policy is operating, that is, the factors that may cause economic effects and the size of the multiplier to vary.

11--Afghanistan--No light in the tunnel, Armed Forces Journal

Excerpt: How many more men must die in support of a mission that is not succeeding and behind an array of more than seven years of optimistic statements by U.S. senior leaders in Afghanistan? No one expects our leaders to always have a successful plan. But we do expect — and the men who do the living, fighting and dying deserve — to have our leaders tell us the truth about what’s going on....

Tell The Truth

When it comes to deciding what matters are worth plunging our nation into war and which are not, our senior leaders owe it to the nation and to the uniformed members to be candid — graphically, if necessary — in telling them what’s at stake and how expensive potential success is likely to be. U.S. citizens and their elected representatives can decide if the risk to blood and treasure is worth it.

Likewise when having to decide whether to continue a war, alter its aims or to close off a campaign that cannot be won at an acceptable price, our senior leaders have an obligation to tell Congress and American people the unvarnished truth and let the people decide what course of action to choose. That is the very essence of civilian control of the military. The American people deserve better than what they’ve gotten from their senior uniformed leaders over the last number of years. Simply telling the truth would be a good start. AFJ

Lastly---"A higher trade deficit reflects low demand for domestically produced goods and services, low profitability of same, and high cost of imported oil, all of which have a negative effect on U.S. employment." Economist James Hamilton (note: US Trade Deficit increased in November to $47.8 Billion)

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