Monday, July 23, 2012

Today's links

1--Home Sales Held Hostage by Junior Lien Holders: Mortgages, Bloomberg

The average negative equity for homes with second liens was $82,000, compared with $47,000 for single-mortgage homes, Santa Ana, California-based CoreLogic said....

The four largest U.S. banks -- Bank of America Corp., Wells Fargo & Co. (WFC), JPMorgan and Citigroup Inc. (C) -- held 48 percent of the $849.5 billion in second liens as of March 31, according to the newsletter Inside Mortgage Finance. Home equity lines of credit accounted for $590 billion, or 69 percent of the value of second liens, as of that date, according to Amherst Securities Group LP.

Risks associated with home-equity loans “may escalate” as borrowers face rising obligations to pay down principal on lines of credit, according to a July 5 report by the Office of the Comptroller of the Currency. Borrowers, who were allowed to make nominal or interest-only payments on the credit lines for as long as 10 years, will be obligated to pay down $15 billion in principal in 2013, $29 billion in 2014 and $53 billion in 2015, according to the report. ...

Loan Writedowns ... The four largest banks reported $2.43 billion in writedowns on their second liens in the quarter ended June 30, down 13 percent from the previous three months. ...

While Axon of Franklin Credit Management declined to say how much his company collects on average, he said it’s higher than the industry standard of 6 percent of the unpaid balance...

Homeowners are “the ones being stubborn. They’re the ones who got their money and bought their boat, and now they want their boat for free. The fact is we’re willing to discount the obligation, get this behind them, and have them fulfill their obligations. If everybody gave everybody what they got for free, we wouldn’t have a banking system.”

2--Prosecutors, regulators close to making Libor arrests, IFR

U.S. prosecutors and European regulators are close to arresting individual traders and charging them with colluding to manipulate global benchmark interest rates, according to people familiar with a sweeping investigation into the rigging scandal.

Federal prosecutors in Washington, D.C., have recently contacted lawyers representing some of the suspects to notify them that criminal charges and arrests could be imminent, said two of those sources, who asked not to be identified because the investigation is ongoing.

Defence lawyers, some of whom represent suspects, said prosecutors have indicated they plan to begin making arrests and filing criminal charges in the next few weeks. In long-running financial investigations it is not uncommon for prosecutors to contact defence lawyers before filing charges to offer suspects a chance to cooperate or take a plea, these lawyers said.

3--Greece Back at Center of Euro Crisis as Spain Yields Soar, Bloomberg

Europe was plunged into fresh market turmoil as this week’s visit by Greece’s creditors rekindled concern the currency union will splinter and the first call for bailout aid by a Spanish region caused borrowing costs to surge.

4--U.S. poverty on track to rise to highest since 1960s, USA Today

The ranks of America's poor are on track to climb to levels unseen in nearly half a century, erasing gains from the war on poverty in the 1960s amid a weak economy and fraying government safety net...

The Associated Press surveyed more than a dozen economists, think tanks and academics, both nonpartisan and those with known liberal or conservative leanings, and found a broad consensus: The official poverty rate will rise from 15.1 percent in 2010, climbing as high as 15.7 percent. Several predicted a more modest gain, but even a 0.1 percentage point increase would put poverty at the highest level since 1965.

Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor. More discouraged workers are giving up on the job market, leaving them vulnerable as unemployment aid begins to run out. Suburbs are seeing increases in poverty, including in such political battlegrounds as Colorado, Florida and Nevada, where voters are coping with a new norm of living hand to mouth....

Poverty is closely tied to joblessness. While the unemployment rate improved from 9.6 percent in 2010 to 8.9 percent in 2011, the employment-population ratio remained largely unchanged, meaning many discouraged workers simply stopped looking for work. Food stamp rolls, another indicator of poverty, also grew.

Demographers also say:

—Poverty will remain above the pre-recession level of 12.5 percent for many more years. Several predicted that peak poverty levels — 15 percent to 16 percent — will last at least until 2014, due to expiring unemployment benefits, a jobless rate persistently above 6 percent and weak wage growth

5--“Thievery is what unregulated capitalism is all about.”, Robert Sherrill by Randall Wray, naked capitalism
After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.

Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets....

I see two scenarios playing out. In the first, we allow Wall Street to carry on its merry way, as the foreclosure crisis continues and Wall Street steals all homes, packaging them into bundles to be sold for pennies on the dollar to hedge funds. All wealth will be redistributed to the top 1% who will become modern day feudal lords with the other 99% living at their pleasure on huge feudal estates.

6--Here is Kalecki describing with preternatural precision the so-called “Great Moderation”,


The rate of interest or income tax [might be] reduced in a slump but not increased in the subsequent boom. In this case the boom will last longer, but it must end in a new slump: one reduction in the rate of interest or income tax does not, of course, eliminate the forces which cause cyclical fluctuations in a capitalist economy. In the new slump it will be necessary to reduce the rate of interest or income tax again and so on. Thus in the not too remote future, the rate of interest would have to be negative and income tax would have to be replaced by an income subsidy. The same would arise if it were attempted to maintain full employment by stimulating private investment: the rate of interest and income tax would have to be reduced continuously.

7--Plan to cut SS to follow elections, CEPR

While the rest of us are wasting our time worrying about whether Barack Obama or Mitt Romney are sitting in the White House the next four years, Pearlstein tells us (approvingly) that these honchos are scurrying through back rooms in Washington trying to carve out a deficit deal.

The plan is that we will get the rich folks' deal regardless of who wins the election. It is difficult to imagine a more contemptuous attitude toward democracy.

The deal that this gang (led by Morgan Stanley director Erskine Bowles) is hatching will inevitably include some amount of tax increases and also large budget cuts. At the top of the list, as Pearlstein proudly tells us, are cuts to Social Security and Medicare. At a time when we have seen an unprecedented transfer of income to the top one percent, these deficit warriors are placing a top priority on snatching away a portion of Social Security checks that average $1,200 a month. Yes, the country needs this....

Social Security amounts to 90 percent or more of the income for one-third of seniors. For this group, the proposed cut in benefits would be a considerably larger share of their income that the higher taxes faced by someone earning $300,000 a year as a result of the repeal of the Bush tax cuts on high income earners. The latter is supposed to be a big deal, therefore the proposed cuts to Social Security are also a big deal.

The most likely Medicare cut is an increase in the qualifying age from 65 to 67. Those who pay attention to policy issues know that the health insurance market for people in their sixties is a disaster. And, if they could be bothered to look at the Congressional Budget Office's analysis, they would know that this change would hugely increase the cost of care for the country as a whole, even if it saved the federal government money. In other words, it is exactly the sort of budget cut we would expect from a group of cynical rich people.

Just about everything in Pearlstein's piece is upside down. Of course the major problem facing the country at present is massive unemployment. If the economy was near full employment we wouldn't have a big deficit. The long-term story behind the deficit projections is of course projections of exploding private sector health care costs, as every budget analyst knows.That should lead to a discussion about fixing the health care system, not a discussion of the budget.

Pearlstein even bizarrely brags that his deficit fighting crew has been warning about the problem for the last decade. Well, we haven't had a deficit problem for the last decade. We had a housing bubble problem. And because the Washington Post and other elite media outlets obsessed in reporting about the deficit non-problem, the housing bubble continued to grow unchecked.

Eventually the housing bubble blew up and wrecked the economy and also gave us large deficits. So now who does the Post turn to as authorities on the economy, naturally the people who ignored the housing bubble. And they wonder why the country has contempt for the Washington elite.

8--'The Escape Artist': Christina Romer Advised Obama To Push $1.8 Trillion Stimulus, Huff Post (archive)
9--Euro exit and depreciation would bring economic gains, Telegraph

To return to prosperity, these countries clearly need a depreciation of what economists call the real exchange rate; that is, the level of their prices and costs compared to other countries’, as translated through the exchange rate ruling between their currencies. Clearly, the financial and economic aspects of the crisis are closely intertwined.

For countries afflicted by the twin problems of excessive debt and uncompetitiveness, leaving the euro and letting their new currency fall potentially offers not just a feasible but even an attractive way out. If successful, it would help support an economic recovery through increased net exports, while not increasing the burden of debt as a share of GDP through domestic deflation.

Indeed, the higher inflation unleashed by devaluation would reduce real interest rates and thereby tend to boost spending. Moreover, outside the euro there would be some scope to operate a policy of quantitative easing. This might also help to boost domestic demand. If the troubled peripheral eurozone economies were able successfully to deploy this adjustment mechanism, then they would not only improve their own GDP outlook, but also help to allay concerns about the long-term sustainability of their debt situation and, thus, bolster the long-term stability of the “core” countries, too.

10--State Data Highlight Limp Job Market, WSJ

The labor market continued to limp along across most of the country after a winter of solid growth, according state-by-state data on unemployment.

The national unemployment rate stood at 8.2% in June, the same as the prior month, the Labor Department said earlier this month. Friday, the agency released further details showing that the jobless rate rose in more than half the states, dropped in 11 states and Washington, D.C., and held steady in a dozen states.

11--Obama spending binge never happened, Commentary: Government outlays rising at slowest pace since 1950s, Marketwatch

Of all the falsehoods told about President Barack Obama, the biggest whopper is the one about his reckless spending spree.

As would-be president Mitt Romney tells it: “I will lead us out of this debt and spending inferno.”

Almost everyone believes that Obama has presided over a massive increase in federal spending, an “inferno” of spending that threatens our jobs, our businesses and our children’s future. Even Democrats seem to think it’s true.

But it didn’t happen. Although there was a big stimulus bill under Obama, federal spending is rising at the slowest pace since Dwight Eisenhower brought the Korean War to an end in the 1950s.

Even hapless Herbert Hoover managed to increase spending more than Obama has.
Here are the facts...

12--Two-thirds of Dodd-Frank still not in place, CNN Money

Two years after Congress enacted sweeping reforms intended to rein in risky practices on Wall Street, only a third of the new rules are actually in force.

The rest of the so-called Dodd-Frank rules are either stuck in a regulatory bog, ready-to-go but delayed, or substantially weaker than originally envisioned after pressure from financial industry lobbyists, according to data compiled by the law firm Davis Polk.

Former FDIC chief Sheila Bair said the reforms are "drowning in a sea of complexity." Regulators charged with carrying out the rules aren't doing their job in a "muscular enough" way, she added.

13--'Merkel Is Driving Europe into the Abyss', der speigel

Left-leaning daily Die Tageszeitung writes:

"The discontent (among politicians over the euro crisis) is more than justified. However, euro-zone leaders ought to take a hard look at themselves. They have only themselves to blame for the fact that -- after Greece, Ireland and Portugal -- now Spain is also on the brink. They recognized far too late that, in addition to a debt crisis, a banking crisis was swelling, too. And the strategy with which they are battling these crises is far too cowardly. Instead of seizing the problem at its roots and restructuring the financial sector (which would also mean bank failures), they are adding to the burdens of the states. This is only exacerbating the vicious circle of debt and banking crises."

"Chancellor Merkel is among the first to blame for this. She forced Spain under the bailout fund and is now trying to sell this as a success. But, in reality, Merkel is driving Europe into the abyss bit by bit."
14--Prime season existing-home sales plummet 6.9 percent in West, OC Housing News

The consensus among economists for June home sales was that sales volumes would continue to increase. Proving their fallibility, the consensus of economists was wrong — very wrong. June and July are typically the best months for sales volume in the prime selling season, and sales volumes dropped in every region in the US. A large decline in existing home sales is further evidence that the house price bottom the consensus of economists is also predicting is in jeopardy. Nominal prices are moving higher, but it isn’t based on the strength of demand, it is due to the restriction of supply. And with millions of homes in shadow inventory, weakening demand is not a good sign for the housing market. The consensus of economists may turn out to be right with their bottom call, but not for the right reasons. Further, there is a real chance, the consensus could be very wrong again....

5.4% decline in sales volumes in June is huge. I recently asked, Will dwindling housing supply cause resale prices to rise or sales volumes to fall? I think we have our answer.

Lawrence Yun, NAR chief economist, said the bigger story is lower inventory and the recovery in home prices. “Despite the frictions related to obtaining mortgages, buyer interest remains solid.”

Bullshit. All-cash investor interest for low-end properties remains strong, but demand among owner occupants using financing is dismal and showing no signs of improvement.
The lack of bank REO inventory being cleared out at reasonable prices is the main reason sales volumes have plummeted. When lenders were processing foreclosures at the maximum rate of market absorption, both first-time homebuyers and investors were eagerly buying up properties. Now that the inventory these two groups were buying is not being put on the market, sales volumes are plummeting. And sales volumes will continue to drop until this inventory returns. Cashflow investors will not raise their prices significantly because the rate of return doesn’t make sense at higher prices. First-time homebuyers won’t raise their bids because most of them can’t....

Foreclosures do not sell for below market value. Foreclosures establish market value. Whatever a property sells for is market value....

The worst part about Yun’s statement is that he likely knows better. He is purposefully misrepresenting the dangers current buyers face because he doesn’t care what happens to them. He just wants to convince them to buy homes to generate commissions....

the whole pent-up demand meme is nonsense realtors throw out whenever they have nothing else positive to say. To suggest that demand is what’s causing the tightening inventory is more bullshit. The demand is unchanged. It’s the supply of REO that has dropped off. He is right to point out that WTF asking prices from discretionary sellers do not attract buyers. Anyone who has looked at the MLS lately has been greeted with scores of ridiculous asking prices. Few of those are selling.

First-time buyers accounted for 32 percent of purchasers in June, compared with 34 percent in May and 31 percent in June 2011. “A healthy market share of first-time buyers would be about 40 percent, so these figures show that tight inventory in the lower price ranges, along with unnecessarily tight credit standards, are holding back entry level activity,” Yun said.....
Single-family home sales declined 5.1 percent to a seasonally adjusted annual rate of 3.90 million in June from 4.11 million in May, but are 4.8 percent above the 3.72 million-unit pace in June 2011. The median existing single-family home price was $190,100 in June, up 8.0 percent from a year ago...

Existing-home sales in the West fell 6.9 percent to an annual level of 1.08 million in June and are 3.6 percent below a year ago. The median price in the West was $233,300, up 13.3 percent from May 2011. Given tight supply in both the low and middle price ranges in this region, sales in the West are stronger in the higher price ranges.

Even the NAr acknowledges that the big jump in the median does not reflect the increase in values of individual properties. My $/SF data hasn’t turned positive over last year yet. We are up off the lows, but not by much...

The bottom line is that a significant decline in sales volume is because lenders have withdrawn the only affordable properties from the market. Potential homebuyers cannot simply raise their bids because the product gets scarce, so it isn’t a foregone conclusion that prices must go up. Most people stretch to get the most house they can for the money, and if prices go up, they must either substitute to a lesser quality home or chose not to buy. Right now, many are wisely choosing not to buy, so sales volumes are plummeting. Plus, I don’t see any end in sight. Nothing is changing that will bring more supply to the market. Little or no inventory and super low sales volume is the new normal

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