Tuesday, June 12, 2012

Today's links

1--Family Net Worth Drops to Level of Early ’90s, Fed Says, NY Times

The recent economic crisis left the median American family in 2010 with no more wealth than in the early 1990s, erasing almost two decades of accumulated prosperity, the Federal Reserve said Monday.


A hypothetical family richer than half the nation’s families and poorer than the other half had a net worth of $77,300 in 2010, compared with $126,400 in 2007, the Fed said. The crash of housing prices directly accounted for three-quarters of the loss.


Families’ income also continued to decline, a trend that predated the crisis but accelerated over the same period. Median family income fell to $45,800 in 2010 from $49,600 in 2007. All figures were adjusted for inflation.

The new data comes from the Fed’s much-anticipated release on Monday of its Survey of Consumer Finances, a report issued every three years that is one of the broadest and deepest sources of information about the financial health of American families.

While the numbers are already 18 months old, the survey illuminates problems that continue to slow the pace of the economic recovery. The Fed found that middle-class families had sustained the largest percentage losses in both wealth and income during the crisis, limiting their ability and willingness to spend.


“It fills in details to a picture that we already knew was quite ugly, and these details very much underscore that,” said Jared Bernstein, an economist at the Center on Budget and Policy Priorities who served as an adviser to Vice President Joseph R. Biden Jr. “It makes clear how devastating this has been for the middle class.”

Given the scale of those losses, consumer spending has remained surprisingly resilient. The survey also illuminates where the money is coming from: American families saved less and only slowly repaid debts.

The share of families saving anything over the previous year fell to 52 percent in 2010 from 56.4 percent in 2007. Other government statistics show that total savings have increased since 2007, suggesting that a smaller group of families is saving more money, while a growing number manage to save nothing.

The survey also found a shift in the reasons that families set aside money, underscoring the lack of confidence that is weighing on the economy. More families said they were saving money as a precautionary measure, to make sure they had enough liquidity to meet short-term needs. Fewer said they were saving for retirement, or for education, or for a down payment on a home.

The report underscored the limited progress that households had made in reducing the amounts that they owed to lenders. The share of households reporting any debt declined by 2.1 percentage points over the last three years, but 74.9 percent of households still owed something, and the median amount did not change.

The decline in reported incomes could have increased the weight of those debts, tying up a larger share of families’ take-home pay. But one of the rare benefits of the crisis, historically lower interest rates, has helped to offset that effect. Families also have been able to reduce debt payments by refinancing into mortgages with longer terms and deferring repayment of student loans and other obligations.

The survey also confirmed that Americans are shifting the kinds of debts they carry. The share of families with credit card debt declined by 6.7 percentage points to 39.4 percent, and the median balance fell 16.1 percent to $2,600.

Families also reduced the number of credit cards that they carried, and 32 percent of families said they had no cards, up from 27 percent in 2007.


Conversely, the share of families with education-related debt rose to 19.2 percent in 2010 from 15.2 percent in 2007. The Fed noted that education loans made up a larger share of the average family’s obligations than loans to buy automobiles for the first time in the history of the survey.

The cumulative statistics concealed large disparities in the impact of the crisis.

Families with incomes in the middle 60 percent of the population lost a larger share of their wealth over the three-year period than the wealthiest and poorest families.

One basic reason for this disproportion is that the wealth of the middle class is mostly in housing, and the median amount of home equity dropped to $75,000 in 2010 from $110,000 in 2007. And while other forms of wealth have recovered much of the value lost in the crisis, housing prices have hardly budged.

Those middle-income families also lost a larger share of their income. The earnings of the median family in the bottom 20 percent of the income distribution actually increased from 2007 to 2010, in part because of the expansion of government aid programs during the recession. Wealthier families, which derive more income from investments, were also cushioned against the recession.

The data does provide the latest indication, however, that the recession reduced income inequality in the United States, at least temporarily. The average income of the wealthiest families fell much more sharply than the median, indicating that some of those at the very top of the ladder slipped down at least a few rungs.


Ranking American families by income, the top 10 percent of households still earned an average of $349,000 in 2010.

The average net worth of the same families was $2.9 million.

2--Spain has an overhang of between 800,000 and 1,000,000 completed but unoccupied residential properties, IFR

The total Spanish sovereign bills and bond market is worth, give or take, €600bn. That might put the mooted €100bn in context. The original sum which the IMF suggested would be required in order to shore up the Spanish banks was €40bn and the aim of the eurozone leaders by announcing a facility of up to €100bn was probably in order to scotch suggestions that they had once again not done enough.


However, as in all these cases, the proof of the pudding is in the eating – in this case the valuation of the property assets in question. I have heard estimates that Spain has an overhang of between 800,000 and 1,000,000 completed but unoccupied residential properties. Putting a value on these is like pinning the tail on the donkey.

One number quietly doing the rounds yesterday was that the worst case scenario was for a potential write down of a total of €249bn. Personally, I wouldn’t lend that figure too much credence for anyone who decides to report €249bn might just as well have reported €250bn - it’s all guesswork anyhow and I am naturally sceptical of people who put precise numbers on speculative guesses.

3--Obama "jobs failure" in one graph, washington post

4--Real Time Economics – Number of the Week: Corporations Not Hoarding Cash, The Big Picture


$496.5 Billion:How much less cash U.S. corporations had at year-end 2011 than previously believed. The Federal Reserve on Thursday came out with its quarterly “flow of funds” report, which for two years now has reflected the steady increase in the amount of cash on corporate balance sheets. Sure enough, the report showed that corporate cash ticked up yet again in the first quarter of the year by around $12.6 billion, to $1.74 trillion. … In other words, the big pile of cash sitting idly on the sidelines? “Boom, it’s all gone now,” says James Bianco of Bianco Research. Mr. Bianco has long been skeptical of the cash-hoard narrative. Even before the revision, he argued that the rise and fall of the real estate bubble distorted the corporate cash picture, making cash look artificially small as a share of assets when property values were rising, and then artificially large when prices collapsed. Better, Mr. Bianco argues, to strip out real estate and look at cash as a share of financial assets, which showed a much milder run-up in cash holdings using the old data, and now shows no run-up at all. “It was slightly above average and now it’s not even that anymore,” Mr. Bianco says.

5--Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Housing, Bloomberg

The financial crisis wiped out 18 years of gains for the median U.S. household net worth, with a 38.8 percent plunge from 2007 to 2010 that was led by the collapse in home prices, a Federal Reserve study showed.


Median net worth declined to $77,300 in 2010, the lowest since 1992, from $126,400 in 2007, the Fed said in its Survey of Consumer Finances. Mean net worth fell 14.7 percent to a nine- year low of $498,800 from $584,600, the central bank said yesterday in Washington. Almost every demographic group experienced losses, which may hurt retirement prospects for middle-income families, Fed economists said in the report.

“The impact has been a massive destruction of wealth all across the board,” said Lance Roberts, who oversees $500 million as chief executive officer of Streettalk Advisors LLC in Houston. “What you see is an economy that’s really very, very stressed for the bottom 60 to 70 percent of the population that’s struggling just to make ends meet.”


The declines in household wealth in the course of the longest and deepest recession since the Great Depression have held back the consumer spending that makes up about 70 percent of the economy. Fed policy makers led by Chairman Ben S. Bernanke meet next week to consider whether the central bank needs to add to its record stimulus after employment grew at the slowest pace in a year in May.

Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices,” the Fed economists wrote.


The S&P/Case-Shiller U.S. Home Price Index fell 23 percent in the three years through December 2010. The Standard & Poor’s 500 Index (SPX) lost 14 percent in the same period.

The proportion of families with retirement accounts decreased 2.6 points to 50.4 percent during the period, wiping out much of the 3.1 percentage-point increase over the prior three years, the report said.

6--FHA Turns to Investors as Losses Continue to Rise, CNBC

Faced with a rising number of severely delinquent loans, the Federal Housing Administration is taking a very small program to sell these loans to investors and ramping it way up.


The government's mortgage insurer came to the rescue of the mortgage market, when credit seized up at the start of the recent housing crash.

It's market share rose from barely 3 percent to upwards of 40 percent of new originations. Now it is saddled with over 700,000 bad loans, or 9 percent of the residential loans it insures.

"I'm not going to make any future predictions "bailouts", but we are working hard every day to ensure that we are protecting the taxpayers and the FHA," said FHA Acting Commissioner Carol Galante.

The initial pilot program was launched in 2010 and sold barely 3000 loans in all of last year. The newly renamed Distressed Asset Stabilization Program, will offer up to 5000 loans per quarter starting this fall. Borrowers must be at least six months behind on their payments for the loan to be eligible.


"If we can sell the mortgage sooner, we have the opportunity to do at least as good in terms of money back to FHA and potentially help the borrower, and the community," said Galante.

Since the FHA does not own, but insures mortgages, this would be a voluntary choice by the banks, but likely a popular one, as the FHA requires banks to go fully through the costly and time-consuming foreclosure process before handing off the properties to the FHA.

FHA also limits the types of modifications the banks can do. Big banks have already starting selling off some of their non-FHA other mortgages to private investors, like Connecticut-based Carrington Mortgage Holdings.

"If an investor has correctly analyzed and priced the NPL(non-performing loans) pools, and has the people, services and infrastructure in place to work with borrowers and manage the properties, these pools can be a very attractive investment," says Rick Sharga, a Carrington executive.

Investors in these pools, however, will face restrictions. They cannot foreclose on the property for six months after purchasing the loan, and they must guarantee that at least half the loans would be modified to a reperforming status and held for at least three years. That is designed to prevent immediate "flipping."

"We have a fairly straightforward approach to how we handle NPL (non-performing loan) pools. We attempt to keep the borrower in the home and keep the property cash flowing. In the long run, that should deliver the best results for our investors," says Sharga.
...
"We actually save money because we're not paying all the cost of holding that mortgage all the way through to foreclosure and managing and maintaining those properties over a long period of time," said Galante.

7--New FHA Foreclosures Spike, CNBC

FHA loans, those insured by the federal government, saw a huge spike in foreclosure starts, up 73 percent during the month, according to the LPS report. Loans originated in 2008 and 2009 are primarily to blame, although all FHA vintages did see some, albeit far smaller, increases.


“In 2008, when the loan origination market virtually dried up, the FHA stepped in to fill the void,” explained Herb Blecher, senior vice president for LPS Applied Analytics. “FHA originations tripled that year, and increased to five times historical averages in 2009. High volumes like that, even with low default rates, can produce larger numbers of foreclosure starts.”

Still the numbers mean a big hit to the FHA, which is already operating at well below its congressionally mandated two percent capital reserve ratio. “The 2008 vintage alone represents some $14 billion of unpaid balances in foreclosure, and the overall FHA foreclosure inventory continues to rise,” adds Blecher.


FHA took on a huge volume of loans in 2008 and 2009, “with relatively little oversight of underwriting and lending practices,” according to Guy Cecala of Inside Mortgage Finance. That has since changed of course, and FHA is aggressively going after lenders for certain claims and is pursuing large settlements. In the recent mortgage servicing settlement with the nation’s top five lenders, FHA got over $1 billion from the big banks.

8--Lack of Distressed Supply Continues to Hit Home Sales, CNBC

The unexpected drop in signed contracts to buy existing homes in April should have come as no surprise. It is all about price point, supply, and where the action is/has been.


Depending on which survey you follow, sales of distressed properties (foreclosures and short sales), make up anywhere from a quarter to 40 percent of all home sales nationwide.

The bulk of these sales are out west in cities like Phoenix, Las Vegas and much of Southern California. Real estate agents out west will tell you that supplies of these distressed properties are dropping fast, thanks to huge investor demand. That, in turn, led to a huge drop in sales of lower priced properties, as we reported last week, down 26% in the $0-100,000 price range, according to the National Association of Realtors.

Now we see contracts to buy existing homes in April dropping 12 percent out west, far lower than sales in the northeast and mid-west, which were essentially flat.


The south, which includes troubled foreclosure states like Florida and Georgia, also saw a sizeable drop in pending sales of nearly 7 percent. Florida has plenty of foreclosures in process, but few are making it to the market, as Florida requires a judge in the process, and judicial state timelines are still far longer than non-judicial states.

Aside from the inescapable month-to-month variability, the increasing problem is on the shortage of inventory,” admits Lawrence Yun, chief economist for the NAR. “Areas like Phoenix and Vegas, Orange Country, California are all reporting sharp reductions in inventory, and this is a problem because this is reducing the business transaction potential. So the demand is there, but if someone blinks they’re losing out on the contract signing.”


Why is inventory so low? Because banks are trying to modify more loans as part of the recent $25 billion mortgage servicing settlement. States that require a judge in the foreclosure process are also taking far longer to get the properties out to the market. Approximately 1.4 million homes are currently in the foreclosure process, according to a report today from CoreLogic, with far more loans in some stage of delinquency. Many of these properties will inevitably reach the sales market, probably in Q3 and Q4, and that will in turn boost low-end sales again, but that in turn could push slowly recovering home prices lower again.

9--(from the archive) Bussinessweek figured out FHA scam 4 years ago!---FHA-Backed Loans: The New Subprime, Bussinessweek


The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more...

As if they haven't done enough damage. Thousands of subprime mortgage lenders and brokers—many of them the very sorts of firms that helped create the current financial crisis—are going strong. Their new strategy: taking advantage of a long-standing federal program designed to encourage homeownership by insuring mortgages for buyers of modest means.


You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country's swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening—or incapable of stopping it. They're giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

More Bad Debt

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Tex., predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."

10--CDS signal trouble in Germany, credit writedowns

To an economist this raises all sorts of questions such as what is the "risk-free rate" for the euro. And how can German paper be viewed as risk-free when German sovereign CDS is wider than Verizon, IBM, Pfizer, Microsoft, etc. CDS? What this tells us is that investors are becoming concerned about Germany’s growing liabilities associated with the Eurozone. And this concern stems from the fact that the costs to Germany of a potential breakup of the EMU would dwarf the costs of German reunification, which took the country a generation to absorb.


11--The failed mission of the FHA, Dr Housing Bubble

The above chart still highlights a very uneven market. The total distressed pipeline is much bigger than the non-distressed MLS listed inventory. So what you are seeing isn’t really a true reflection of the market. Many have elected to ignore this and are simply buying because of low rates. I have to shake my head when some talk about buying a home and walking away if prices would fall further. So say you buy a place for $500,000 with a 10 percent down payment. Would you really walk that easily away from $50,000? That is why 9 out of 10 underwater buyers continue to pay their mortgage on time even though they are underwater. Just look at how many people try to unload expensive European cars on Craigslist. You make money on the price of the asset you purchase not on going with a 2.9% interest rate on a car selling for $80,000....

FHA subsidizing inflated housing markets


FHA insured loans are another disaster waiting to happen. A recent report from the George Washington School of Business found that FHA loans are far removed from their initial mission and have been subsidizing inflated markets...

How can anyone look at using a FHA insured loan above say $400,000 and say it is to encourage affordable housing?  The median US home price is roughly $170,000 so they should peg it to that.  Instead we have these products encouraging maximum leverage and default rates are soaring.
Those calling for a bottom fail to mention where the good jobs will be coming from to make the market rebound. They also fail to talk about how all the rampant state budget issues will be solved without taxes or cutting. What about the future prospects of younger adults? We are now living in an “I got mine so screw the future” system. As much as we chide Europe for their high youth unemployment rate, we need only look at ourselves here. Do artificially high home prices really help young families looking to start out? Ironically those that champion higher home prices thanks to the government basically owning the mortgage markets are at the same time looking to “cut” government spending even though there is no larger subsidy than what banks are receiving via the Fed and GSEs for housing. In other words, very little consistency is provided here but a big heap of justification. I will wait until we see solid employment growth before being some bobble head for higher home prices.









































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