Today's quote: “We had record profits this year, last year, and I’ll be damned if we don’t have record profits in the next year or two.” Jamie Dimon, JPMorgan Chase CEO
1--Huge Spike in Repeat Foreclosures, CNBC
Excerpt: Thousands of foreclosures that were stuck in process due to delays over the so-called "Robo-signing" paperwork scandal are working their way through a revamped banking system and heading toward final bank repossession.
Foreclosure starts surged 28 percent in January from December, according to a new report from Lender Processing Services. More than 230,000 loans began the foreclosure process in January.
Even more indicative of this new surge in processing is that repeat foreclosures hit an all-time high in January, representing 47 percent of all starts, according to LPS. Repeat foreclosures are either failed loan modifications, or loans that banks were attempting to modify but couldn't.
"This large amount of foreclosures that have been sitting out there, with borrowers not making payments for an extended period of time, this may be coming to an end," says LPS' Herb Blecher. "This is what the market is looking for."
That's because while painful to housing in the short term, moving the huge pipeline of delinquent loans to their inevitable end will help the overall market in the long term. There are nearly 4 million loans now in some stage of delinquency which have not even entered the foreclosure process. Banks are modifying loans more aggressively now, but many of these mortgages simply cannot be saved, and the sooner they are processed and new buyers are found for the properties, the sooner overall home prices can recover.
"It's the resolution of the crisis. It started with a flood of new troubled loans, bottlenecks presented themselves as delinquent loans piled up. "The necessary resolution before we can get back to a healthy market is that that inventory goes away," says Blecher.
The new surge in foreclosure starts consequently created an equal surge in foreclosure sales, that is bank repossessions or short sales (when the bank allows the property to be sold for less than the value of the mortgage. Foreclosure sales rose 29 percent month to month in January, indicating that there will be a new surge of distressed properties coming to the housing market in the next few months, as banks try to sell these homes.
While the pipeline is moving, there is still a stark contrast between states that require a judge in the foreclosure process and states that do not. Foreclosure sales in non-judicial states outnumbered those in judicial states by three to one, according to LPS. But signs are that even judicial states are ramping up, with foreclosure starts increasing twice as much as they did in non-judicial states in January.
While new mortgage delinquencies are falling, the backlog of distress is large. More than 40 percent of loans in foreclosure are more than two years past due, and judicial states have 63 months of foreclosure inventory to work through. Of course that's better than last February, when foreclosure inventories hit an all-time high of 147 months.
2--The Hundred-Billion-Euro Bomb--Euro-Zone Central Bank System Massively Imbalanced, Der Speigel
Excerpt: Even worse, the central banks also grew increasingly lax in the collateral they required for loans they made to banks in their country. Whereas in the past they accepted only government bonds with top-level credit ratings, now they began to accept second and third-tier securities. This can be seen clearly in the statistics: Just between 2005 and 2010, the volume of securities accepted by central banks rose from €8 billion to €14 billion -- and has likely increased even more since then.
Especially those banks in crisis countries, which are already reliant on their central banks, now submit even their worst securities. Greek banks, for example, have primarily their own country's sovereign bonds on their books. No one on the free market wants these securities, but the Greek central bank continues to accept them as collateral, issuing new money to the banks in exchange. "Private cash flow is replaced by public cash flow," Sinn explains.
This becomes dangerous if those securities ever need to be used, for example if Greece leaves the monetary union or declares bankruptcy. At that point, Greek bonds would be valueless, and the probability that Greece's central bank will be able to repay its debts to the euro system becomes miniscule.
3--Fed Study of Student Debt Outlines a Growing Burden, NY Times
Excerpt: A report released Monday by the Federal Reserve Bank of New York renews concerns about the growing debt load of college students and graduates.
The report suggests that as many as 27 percent of the 37 million borrowers have past-due balances of 30 days or more.
“In sum, student loan debt is not just a concern for the young,” the report said. “Parents and the federal government shoulder a substantial part of the postsecondary education bill.”
The report, which was created by an analysis of Equifax credit reports, said the total balance of student loans was $870 billion. Of the 241 million with Equifax credit reports (there are 311 million people in the United States), 15 percent had student debt.
Forty percent of the people under 30 had outstanding student loans, and the average outstanding debt is $23,300. About 10 percent of borrowers owe more than $54,000 and 3 percent owe more than $100,000.
4--Boom-Era Property Speculators to Get Foreclosure Aid: Mortgages, Bloomberg
Excerpt: The Obama administration will extend mortgage assistance for the first time to investors who bought multiple homes before the market imploded, helping some speculators who drove up prices and inflated the housing bubble.
Landlords can qualify for up to four federally-subsidized loan workouts starting around May, as long as they rent out each house or have plans to fill them, under the revamped Home Affordable Modification Program, also known as HAMP, according to Timothy Massad, the Treasury’s assistant secretary for financial stability. The program pays banks to reduce monthly payments by cutting interest rates, stretching terms, and forgiving principal.
The government’s need to protect neighborhoods from blight and renters from eviction by keeping the current owners in place is outweighing concern that taxpayers will end up bailing out real-estate investors. The program is being enlarged after less than 1 million borrowers modified loans through HAMP, compared with the administration’s stated goal in 2009 of helping 3 million to 4 million homeowners.
“When we started the program we focused on owner-occupied houses because the need was so great and we wanted to target the efforts to that group,” said Massad. “Given where we are today, more and more people recognize that vacant properties are a problem no matter how they became vacant.” ...
Almost one in four home purchases in January was made by an investor, according to the National Association of Realtors. And investment and vacation properties made up 21 percent of houses in the foreclosure process in January, according to Irvine, California-based RealtyTrac Inc....
The danger of blight to communities from foreclosed, vacant properties is still pervasive six years into the slump. Empty houses push down a neighborhood’s property values, according to a 2009 report by the Center for Responsible Lending, which said foreclosures will affect 91.5 million nearby homes through 2012. That will reduce property values by $20,300 for each household, according to the group, which seeks to protect homeownership and family wealth.
By widening the program, the plan will inevitably offer aid to buy-and-flip investors who pushed prices higher during the boom by taking out mortgages with little or no down payment. Speculators accelerated the crash because they were quick to default when prices fell, according to a September report from Andrew Haughwout, Donghoon Lee, Joseph Tracy, and Wilbert van der Klaauw of the Federal Reserve Bank of New York.
At the peak of the boom in 2006, more than a third of home purchase loans were made to borrowers who already owned at least one house, according to the study. In California, Florida, Nevada, and Arizona, which had the most pronounced bubbles, investors accounted for 45 percent of the mortgages.
While survivors of the property bust are now long-term investors, some of them may have started out as flippers, Haughwout said.
5--ECB Balance Sheet Jumps to a Record $3.96 Trillion Amid Lending to Banks, Bloomberg
Excerpt: The European Central Bank’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31 percent bigger than the German economy, after a second tranche of three-year loans.
Lending to euro-area banks jumped 310.7 billion euros to 1.13 trillion euros in the week ended March 2, the Frankfurt- based ECB said in a statement today. The balance sheet gained 330.6 billion euros in the week. It is now more than a third bigger than the U.S. Federal Reserve’s $2.9 trillion and eclipses the 2.3 trillion-euro gross domestic product of Germany (EUANDE), the world’s fourth largest economy.
The ECB last week awarded banks 529.5 billion euros for three years in the biggest single refinancing operation in its history, adding to the 489 billion euros it lent in December. The flood of money, which aims to combat Europe’s sovereign debt crisis by unlocking credit for companies and households, has increased the risk exposure of the 17 euro-area central banks that together with the ECB comprise the Eurosystem.
“With the dramatic expansion of its balance sheet since last summer, the ECB has become the most active central bank in the world,” said Klaus Baader, chief euro-area economist at Societe Generale in London. “The ECB’s measures are absolutely justified, but it has to be aware of the risks on its balance sheet and think of an exit strategy.”
The balance sheet has swelled by more than 1 trillion euros since mid July as the debt crisis made banks wary of lending to each other, forcing the ECB to provide additional liquidity and step into bond markets with its asset-purchase program.
The balance sheet records all the assets and liabilities on the books of the ECB and the central banks of the euro area, which conduct market operations on the ECB’s behalf. ...
The ECB has loosened rules on the collateral it accepts against loans, increasing the risk that taxpayers would have to foot the bill if a bank defaults. The lending could also discourage banks and governments from implementing reforms, or even fuel inflation.
Bond and equity markets have rallied since the ECB’s first three-year loan in December, suggesting banks are investing at least some of the money in higher yielding assets. That’s helped ease concern about a credit crunch and won governments time to agree on measures to contain the debt crisis.
6--Stress tests may shed light on Wall Street's 'mark-to-make-believe' accounting, CNN Money
Excerpt: Banks are still using the just trust us method to value hundreds of billions of dollars of assets left over from the financial crisis.
FORTUNE -- The stress tests, which are expected to be released by the Federal Reserve next week, will likely show that banks are better prepared for a financial crisis than they were three years ago. The tests are also likely to show the banks haven't abandoned the investments or practices that got them into trouble the last time around. Banks still have a stockpile of assets they say they have no way of valuing other than to make the numbers up.
Banks got into hot-water for putting their own price tags, rather than the market's, on their most complicated, and at the time troubled, investments during the credit crunch. Analysts questioned whether the banks were being straight with investors. It was one of the reasons banks stocks plunged in late 2008. Some called the practice "mark-to-make-believe" accounting.
These days bank stocks are soaring again. But that doesn't mean the banks have stopped playing make believe. As of the end of 2011, the nation's six largest banks label as much as $364 billion of their assets as hard-to-value. That means the banks are using their own models when determining the price they tell investors those assets are worth, not the market. That's down from the height of the financial crisis, but at some banks the level of assets they still say they can't readily value is raising eyebrows. In a recent report, bank analyst David Hendler for bond research firm CreditSights said the fact that Goldman Sachs (GS) holdings of hard-to-value assets have hovered around $50 billion for the last couple of years was a concern. The banks released new information about their assets in their annual reports last week.
At all the banks, the hard-to-value assets include auction rate securities, credit default swaps, collateralized debt obligations and other financial derivatives that created a headache for the banks during the credit crunch. But they also include some loans and more mundane assets such as mortgage servicing rights.
Banks in general are supposed to use market prices when they tell investors how much the vast majority of the bonds and stocks and other financial assets they own are worth. That's called mark-to-market accounting. But when market prices aren't available or reliable, banks are allowed to use internal models or their own judgment to determine how much a security is worth.
At height of the credit crunch, when prices of the banks' riskiest assets plunged in value, and had few buyers, the practice seemed somewhat defensible. Recently, though, the markets appear to have recovered. The Dow Jones industrial average crossed 13,000 for the first time since the financial crisis last week. Even subprime mortgage bonds appear to be gaining investors' interest again. Last week, the Federal Reserve unloaded the last of the mortgage bonds that it took off the hands of AIG during the financial crisis for a total profit of $2.8 billion.
As a result, it seems surprising that banks still have hundreds of billions of dollars of assets that they say they can't find prices for. All told, the hard-to-value assets represent an average of 4% of the assets a the nation's six largest banks. That's down from 7% at the height of the financial crisis, when those assets totaled nearly $600 billion. But the drop in hard-to-value assets has been bigger at some banks than at others.
For example, at Goldman, the value of assets that it owns and says it can't find prices in the market for rose by nearly $3 billion in 2011 to just under $48 billion. That represented 5% of the firm's overall assets. That was down slightly from nearly $55 billion in early 2009. Of its current hard-to-price holdings, about $3.3 billion were residential mortgage bonds, of which nearly $600 million were collateralized debt obligations. Just over $12 billion of Goldman's self-priced investments were in private equity funds.
JPMorgan Chase (JPM) says it can't find market prices for assets that it says are worth $118 billion, down 19% from early 2009. That represented just over 5% of the firm's overall assets, down from 7% in early 2009. Among JPMorgan's holdings are $7.7 billion in credit default swaps. Wells Fargo's (WFC) hard-to -value assets have fallen a modest 13% as well to a recent $53 billion. Among the big banks, Bank of America (BAC) has been the most aggressive in lowering its so-called Level 3 assets, which recently stood at $51.6 billion, or just 2.5% of its overall assets, down from nearly $127 billion in early 2009.
Nonetheless, analysts in general seem less worried about these assets than they used to. Dick Bove says he listens to the earnings conference calls of 25 banks and hasn't heard a question about Level 3 assets in at least six months. Following the financial crisis it was a regular topic. Bove says there is a silver lining to the fact that the firms haven't been able to unload the assets. He believes now that the market is coming back for subprime mortgages and other risky bonds, the banks hard-to-value assets, could end up being an asset. "All of a sudden what was once the Blackhole of Calcutta could really add to the earnings of the firm,' says Bove. And you can be sure that the banks' models won't miss the way up.
7--Don’t Fight the Tape – But Prepare for an Unhappy Ending, The Big Picture
Central banks are printing money all over the world. New names have been given to what is really an age old phenomenon. Desperate governments have traditionally debased their currencies when they have no other way of financing their deficits. Quantitative easing, LTRO, Fed/ECB swaps, whatever. A new technocratic lexicon has been invented to cover what is really a time honored expedient of debasement and paper money printing.
Investors for the moment almost have no choice. Get out the surfboard, hitch a ride on the global tsunami of freshly minted central bank money and get long equities. In 2012 equity markets have rallied everywhere, particularly emerging equity markets, and will probably keep doing so. Short term interest rates are near zero and likely to stay that way for the rest of this year. Investment managers are tired of telling their clients that they earned zero and had to pay a fee anyway. The European crisis has been overcome by massive LTRO money printing and a friendly “borrow all the dollars you want” swap agreement between the Fed and the ECB. And the US is in the midst of a tepid recovery (better than nothing!) Lastly, China seems to be slowing but not crashing.
Money must head for risk assets. Tough luck for defined benefit pension funds and retirees who until recently lived off of nice, safe bond income.
Bernanke’s little head fake of last week in not mentioning a QE3 can be taken with a grain of salt. The US has another $1.3 billion projected deficit to be financed and the fragile US recovery cannot stand a rise in short rates. A war with Iran would make the US deficit so much worse. The US unemployment picture is not as pretty as the recent decline in the official U3 rate to 8.3 percent would suggest. For one thing the Labor Force Participation rate continues to move downward. The broader and less quoted U6 rate which includes people who have given up looking for work for January is 15.1 percent. Bernanke knows the numbers. And recent Treasury data show some fall off in Chinese buying of US Treasury securities. US short rates will not rise and Treasury auctions will not fail. Not if the Fed can help it. The Fed will print.
Historically, countries faced with financing wars would print paper money and eliminate convertibility into a commodity such as gold, silver or copper. This happened over and over from Sung Dynasty China facing northern invaders, to the Napoleonic Wars, to the American Civil War and of course to World War I.
But this time it’s not wars but democracies’ underlying tendency to inexorably move to bankruptcy which is the culprit. Citizens vote to obtain through the political process what they cannot obtain in the market. Modern democratic governments are expected to socialize risk and redistribute income from the smarter (you would probably say luckier if you are on the left) affluent minority. The welfare state grows and grows, its costs disguised in the complexity of the budget process and ignored by the public anyway. Public sector unions, whose existence and freedom of actions politicians elected by universal suffrage found impossible to oppose even though they knew better, have accelerated the process. We vote for you, you reward us, is the working relationship most public sector unions in most democracies have with their politicians. No greater conflict of interest hath any country. The public sector debts have built up. And nobody has to bother lifting the fetters of a commodity money conversion requirement that was so important in the age of the classical gold standard before WWI. Richard Nixon cut the last of those golden fetters in 1971 when the US ceased to honor its commitment under the Bretton Woods Agreement to sell gold for dollars at a fixed rate to other central banks. Since the demise of Bretton Woods, every central bank in the world can be its own ATM machine. And indeed they have.
So far the world’s central banks have been “lucky”. Thanks to the prior global bubble ending in 2008 and the realization that the so-called advanced countries are reaching the end of their borrowing capacity, the world is in a massive deleveraging mode which tends to be deflationary. For the moment the central banks can get away with printing all the money they want without massive increases in consumer price indexes. The public doesn’t connect increases in prices of commodities like gold or oil with the current bout of money printing. But if history is any guide, this money printing will matter and the age of deflation and deleveraging will be followed by an age of inflation. Deleveraging or no, entitlements already promised will grow inexorably larger. Inflation of course is one way governments can effect major defaults on sovereign debt and unaffordable entitlements.
8--Obama Mortgage Plan: Bailout by Any Other Name, nlpc.org
Excerpt: All of this would come at a bad time for the Federal Housing Administration, created in 1934 and made part of the new U.S. Department of Housing and Urban Development (HUD) in the mid-Sixties. FHA may well require a bailout, the first in the history of its lender-paid single-family loan insurance program. Ed Pinto, a senior fellow at the American Enterprise Institute and former chief credit officer for Fannie Mae until the late Eighties, estimates that as of last October, about 17 percent of FHA-insured loans were in some stage of delinquency. About half of this portfolio - about $117 billion - was "seriously" delinquent; i.e., more than 60 days overdue. University of Pennsylvania-Wharton School Joseph Gyourko, author of the recent American Enterprise Institute paper, "Is FHA the Next Housing Bubble?," notes that the agency's exposure has grown from $305 billion in fiscal 2007 to more than $1 trillion today. Making this even more alarming, FHA capital reserves are a mere 0.24 percent, well below the statutory minimum of 2 percent, despite three premium hikes under President Obama. In lieu of a rapid recovery, Gyourko argues, FHA could need a bailout of anywhere from $50 billion to $100 billion.
9--EU Considers Tougher Collateral Rules on Repo Agreements to Rein In Risks, Bloomberg
Excerpt: Systemic Risk
Tougher rules on the collateral that investors must give to back repo transactions may be needed be prevent high debt levels that “can increase the fragility of the financial sector and be a source of systemic risk,” the EU document says.
The FSB has estimated that shadow banking activities were worth around $60 trillion in 2010. This figure would represent 25 to 30 percent of the total financial system, according to the EU document.
In addition to repurchase agreements, the document identifies exchange traded funds, special purpose vehicles, and money market funds as other possible “shadow-banking entities and activities” that may need tougher rules.
Barnier will publish the draft plans next week and may seek to have new rules in place by the start of 2013, according to an EU official who declined to be identified because the talks are private.
An “overly aggressive” approach to regulating shadow banking could worsen the supply of credit to companies, said Richard Reid, research director for the London-based International Centre for Financial Regulation.
A bankruptcy examiner’s report found that Lehman Brothers’ Holdings Inc., the lender whose collapse in 2008 sparked a financial crisis, used so-called Repo 105 transactions to move as much as $50 billion off its balance sheet temporarily to show investors it wasn’t carrying too much debt.
“Shadow banking entities present serious challenges for the competent authorities in the European Union and elsewhere,” according to the EU document. Other measures being weighed by the commission include adopting rules that would make it easier to wind up shadow banks that fail.