Wednesday, July 11, 2012

Today's links

1--Michael Olenick: The Real Estate Market’s Continuing Data Vacuum, naked capitalism

...while trying to figure out how long until the banks started to pound people to the pavements again I found an interesting tidbit: JP Morgan and Bank of America have been writing off their subprime loans at a furious clip lately. In March and April, using ZIP codes that begin with 334 – my own beloved and severely impaired West Palm Beach, FL backyard – I found that the top MBS issuers writing off loans were, in this order, Bear Stearns, J.P. Morgan Mortgage Acceptance Corp., Merrill Lynch, First Franklin, and Lehman LXS. The former two are, of course, JP Morgan and the latter two are, of course, Bank of America. JPM hides their Washington Mutual loans or I’d expect that Lehman’s spot would be taken by WaMu.

Writing off bad-debt is usually caused by short sales, principal reductions, or finished foreclosures. Since the pace of the write-offs exceeds the number of REOs – which, as the want-ads show is relatively low – it’s clear that the banks have been dumping debt, which is a positive step towards reaching a housing floor. I was impressed – almost shocked at the prospect about writing something positive about either bank.

2--Operation Twist and QE (market impact), The Big Picture (chart)

3--Chart Of The Year: The Fed Has Doubled The S&P Admits... The Fed, zero hedge

We show that since 1994, more than 80 percent of the equity premium on U.S. stocks has been earned over the twenty-four hours preceding scheduled Federal Open Market Committee (FOMC) announcements (which occur only eight times a year)—a phenomenon we call the pre-FOMC announcement “drift.” 

4--Fed knew of Libor issue in 2007-08, proposed reforms, IFR

The Federal Reserve Bank of New York may have known as early as August 2007 that the setting of global benchmark interest rates was flawed. Following an inquiry with British banking group Barclays Plc in the spring of 2008, it shared proposals for reform of the system with British authorities.

The role of the Fed is likely to raise questions about whether it and other authorities took enough action to address concerns they had about the way Libor rates were set, or whether their struggle to keep the banking system afloat through the financial crisis meant the issue took a backseat.

A New York Fed spokesperson said in a statement that “in the context of our market monitoring following the onset of the financial crisis in late 2007, involving thousands of calls and emails with market participants over a period of many months, we received occasional anecdotal reports from Barclays of problems with Libor.

“In the Spring of 2008, following the failure of Bear Stearns and shortly before the first media report on the subject, we made further inquiry of Barclays as to how Libor submissions were being conducted. We subsequently shared our analysis and suggestions for reform of Libor with the relevant authorities in the UK.”

5--Banks are selectively leaking out inventory, Dr Housing Bubble

The decrease in nationwide inventory is an ongoing trend.  Keeping supply constricted has clearly helped with pushing prices higher as demand is now competing for a smaller number of homes.  A lower mortgage rate has also pushed the monthly payment amount lower thus allowing home buyers to purchase more home with stagnant income levels.  The recent employment report should come as no surprise.  The recent moves in the housing market are spurred on by record low interest rates and constrained inventory.  Yet this should not be mistaken with an improving economy that is pushing prices higher which would be healthier.  We have a limited horizon before the summer selling season comes to an end and the market is put to a bigger test in fall and winter.  Looking at market data from a variety of perspectives shows that the market is far from being normal.

Orange County is seeing a solid jump in sales this year.  We have seen a good amount of short sales hit the market recently.  If we look at MLS inventory and last month sales we have approximately two months of inventory!  This is back to the days of the mania.  Yet this is only part of the story.  Take a look at the total Orange County market: (chart)

Short sales are a big part of the visible MLS inventory making up roughly 30 percent of all inventory.  Look at how tiny the REO listings are.  But take a look at the yellow foreclosure pipeline.  These are homes in the foreclosure process.  This figure is nearly twice the size of the non-distressed visible inventory.  These are households unable (or unwilling) to pay their mortgages in an expensive county.  Does that seem healthy to you?  Just because banks are selectively leaking out inventory does not mean the market is healthy.

6--Consumer Confidence, Fiscal Cliffs, and Going Off the Deep End, CEPR

So if consumer spending didn't fall through the floor what explains the dropoff in job creation? Typically there is some lag between GDP growth and job creation. GDP grew 2.5 percent in the third quarter and 2.3 percent in the fourth quarter. That fell to 0.4 percent in the first quarter, followed by 1.3 percent growth in the second quarter.
And why did GDP growth slow? Try the end of the stimulus. Government spending shrank at an annual rate of 2.8 in the fourth quarter of 2010, followed by drops of 5.9 percent in the first quarter and 0.9 percent in the second quarter. After being a boost to growth in the second half of 2009 and the first half of 2010, the government sector became a major drag on growth in the first half of 2011.

7--Rich get richer, NY Times

8--The Spreading Scourge of Corporate Corruption, NY Times

9--There will be hell to pay for NATO's Holy War,  Pepe Escobar, Asia Times

10--Massive expansion of domestic spying under Obama, WSWS

11--Corporations find cheap labor haven in US, WSWS

12--Full-Employment and Political Will, Mark Weisbrot, counterpunch

Most economists are well aware what the problem really is, since it is so simple and basic.  The economy lost about $1.3 trillion in private annual spending when the real estate bubble burst in 2007, and much of that has not recovered. State and local governments continue to tighten their budgets and lay off workers.  If the federal government had simply funded these governments’ shortfalls, we would have another two million jobs today.

The right says we can’t borrow and spend our way to full employment, but there is no economic basis for their arguments.  In fact, the federal government can borrow at 1.6 percent interest today for 10 year bonds.  This is basically free money, and for those who want it to be absolutely free, the Federal Reserve has created $2.3 trillion since 2008 and can create more if the federal government is willing to spend it.  The inflation-paranoids haven’t noticed, but the Fed hasn’t created any inflation problem in the U.S.:  the Consumer Price Index is currently running at just 1.7 percent annually.

We won’t have a federal public debt problem either, at least not any time soon.  The easiest way to see this is to look at the net interest payments on our federal public debt:  these are less than 1.4 percent of GDP, which is as low as it has been in the post-World War II period.  This is the real burden of the debt; all those big numbers you hear about trillions of dollars are mainly thrown around to frighten people.

13--Small Business Confidence Plunges Most In 24 Months, zero hedge

14--Attack of the Central Banks Points to Impending Recession, economic populist

The Central Banks went on the move. Within 45 minutes of each other, the ECB lowered interest rates, the Chinese central bank did too and the U.K. just enacted more glorified quantitative easing. BoE increased their asset purchases by £50 billion to a grand total of £350 billion.

While it appears we have a global, coordinated plan of attack by Central banks, one might also notice we have a global coordinated plan to counter an economic slowdown. In other words, by all acting in concert, this gives more confirmation that we have a global economic mini-implosion going on.
We already know a U.S. recession is projected for 2013. The IMF not only scolded the United Statesbut also is warning on a global economic growth downgrade, coming to a press release near you on July 16th.

“The United States remains vulnerable to contagion from an intensification of the euro area debt crisis, which would be transmitted mainly via a generalized increase in risk aversion and lower asset prices, as well as from trade channels” said IMF Managing Director Christine Lagarde during a press conference in Washington, D.C.

On the domestic front, failure to reach an agreement on near-term tax and spending policies would trigger a severe “fiscal cliff” in 2013, threatening the recovery, she added. Lagarde made these remarks after joining the final policy discussions.

The IMF expects U.S. growth to remain modest during the next two years, constrained by housing difficulties, the expiration of fiscal stimulus measures, and continued low global demand, particularly in Europe. Growth is projected at 2 percent in 2012 and about 2¼ percent in 2013.

Seems generally the globe is preparing for yet another economic slowdown. In other words, things are not going to get better, things are going to get worse.

15--The last thing the world needs now is a deflationary shock from China, Telegraph

16--Jim Chanos on China, pragmatic capitalism

17--KEITH JUROW: Prepare For The Coming Housing Collapse, Business Insider

Serious Mortgage Delinquencies – The Real Story

We have been told that the rate of mortgage delinquencies has been declining over the last year. Let’s see.

In the NYC metro area, the banks drastically cut back foreclosing on properties in the spring of 2009 and have never changed their policy. This has nothing to do with the robo-signing scandal which occurred 18 months later.

Through sheer persistence, I obtained accurate statistics on serious delinquencies from the New York State Division of Banking. Let me explain.

In late 2009, the NYS legislature passed a law requiring all servicing banks in the state to send a “pre-foreclosure” notice to all delinquent owner occupants. It warned them of possible foreclosure and explained steps they could take to prevent this. These servicing banks were also required to report to the Banking Division all notices that were sent.

The Division published preliminary figures in October 2010 but has never updated these numbers. Here is what I learned.

Through the end of March 2012, a total of 192,000+ pre-foreclosure notices had been sent to delinquent owners in NYC. This does not include delinquent investor-owned properties because the law did not require servicers to send notices to them. There are lots of 2-3 family homes in the four outer boroughs of
NYC. I estimate that there are roughly 75,000+ delinquent investor-owners.

This means there are roughly 265,000 seriously delinquent homeowners in NYC who have not yet been foreclosed. Why so many? The banks do not foreclose in NYC. As of May 24, reported a total of 301 foreclosed properties on the active MLS and 103 in Brooklyn. Together, these two boroughs
have a total of 4.7 million residents. That is more people than live in Maricopa County where Phoenix is situated.

Hard as it may be to believe, the situation is even worse on Long Island. With fewer than 3 million occupants, Nassau and Suffolk Counties showed a total of 175,000 pre-foreclosure notices sent out as of the end of March.

If  you think the reduction in foreclosing is limited to the NYC metro markets, you’re mistaken. Take a good look at this revealing chart for Phoenix from

Bank repossessions in Maricopa County plunged from 3,159 in April 2011 to a mere 767 a year later. Clearly, the banks are gambling that this will help to stem the decline of home prices.

Or let’s take a look at Miami -- a market that suffered one of the largest price collapses since the bubble popped. In 2010, the banks repossessed 23,000 properties just in Miami-Dade County. They foreclosed on 54,000 properties in the 3 south Florida counties of Dade, Broward, and Palm Beach. Although they sharply curtailed repossessions in 2011, that number still totaled roughly 35,000.

I spoke with the head of data for the Miami Association of Realtors on May 18 and was amazed to learn that there were only 282 repossessed properties on the active MLS.

A similar tactic has been occurring in Phoenix. During the height of the credit crisis in early 2009, 2/3 of all homes sold in Maricopa County were repossessed properties. That percentage was down to 40 percent a year ago. Take a look at this chart from Phoenix broker Leif Swanson....

What About the Potential Sellers?
Over the past two years, I have written extensively about the so-called “shadow inventory.” It’s real, growing and very scary in what it says about where things are heading.

You need to keep in mind that the total number of underwater homeowners is far larger than just those who purchased during the bubble years 2004-2007. Millions of homeowners took out what became known as “cashout” refis. Banks were only too willing to shovel out cash to owners whose homes were rising at double-digit rates.

What has been almost completely overlooked by the media is the enormous number of properties with second liens. There are still nearly 12 million home equity lines of credit (HELOC) outstanding. It’s safe to say that 98 percent or more of these properties are underwater. Roughly 30 percent of all HELOCs were originated in
California. There are millions of owners there with HELOC balances in excess of $100,000.

The HELOC boom began in 2003. Most of these revolving lines of credit were interest-only loans for the first ten years. After that, they convert into 15-year fully amortizing loans. This means that beginning next year, these loans start to transform into a fully-amortizing loan. The number of HELOCs which do this increases in 2014 and even more in 2015 and 2016.

What will these homeowners do when their HELOC payment soars from a few hundred dollars per month to more than $1,000. The monthly payments that will go into effect in California are mind-boggling.

Finally, let’s not forget all those homeowners who have pulled their home off the market in the past year. A recent survey published by ProTeck Valuation Services showed that MLS listings had dropped more than 35 percent over the last year in metros such as Phoenix, Miami, Atlanta, Orlando, Tampa and Riverside,
CA. Dozens of others saw reductions of more than 15 percent.

Many are frustrated homeowners who were unwilling to take the hit and do a short sale. Nearly all are simply hoping that the pundits are right that housing markets are bottoming this year. Sooner or later, some of these homes will be put back on the market....


Let’s put this housing credit bubble and collapse in historical perspective. Prior to this disaster, the largest bubble and collapse in American history was the U.S. stock market from 1927 to 1932. Most of you probably don’t know that during that stock market boom, you could buy stocks with only 10 percent down. Brokers would lend you up to 90 percent of the price. Sounds like the housing bubble, doesn’t it?

The Dow Jones Industrials peaked at nearly 400 in October 1929. When it finally hit bottom, the DJI had collapsed to 34. Now that’s a true collapse. Every few months, pundits would claim that the worst was over. Sound familiar? Then the stock market would plunge lower.

Do I see anything on the horizon that could turn things around and correct the growing imbalance between potential homebuyers and sellers. No. Nothing whatsoever. Wishful thinking won’t do it.

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