1--« No Alpha: Bain Capital’s Investment ResultsCapital flight from China rising »Housing bottoming? Then where are the buyers?, Big Picture
Whether it’s the data for existing homes, new homes, housing starts, or builder sentiment, all have pointed to signs of stabilization over the past few months and we hear stories of bidding wars again in some markets. One of the factors the NAR in particular is citing is the lack of inventory, whether because of the slowdown in foreclosure proceedings or sellers waiting for higher prices. Whether the case or not, one indicator is standing in contrast to the bottoming housing figures and that is weekly mortgage applications to buy a home. They fell for a 5th straight week and is at the lowest level since Feb. In analyzing existing home data in the next few months we should start focusing on how many are being bought for cash by investors who then plan to rent them out, a continuously growing trend.
2--The failure of supply-side tax cuts, Marketwatch
Commentary: We’re still waiting for the benefits to trickle down
Some 30 years after the Republican Party was smitten by supply-side economics, the Grand Old Party remains faithful to the creed, even if history hasn’t been kind to the idea that tax cuts and deregulation alone will lead to a wondrous new era of American prosperity.
Mitt Romney’s economic platform is little changed from George W. Bush’s or Ronald Reagan’s. It’s sparse on details, likely because it can be summed up in four powerful words: Government IS the problem. Like Reagan and Bush, Romney says he’s positive that the American economy would thrive if we’d only liberate businesses (that is, “job creators”) from pesky regulations and onerous taxes. ...
In the past 31 years, we’ve had three major supply-side tax cuts, which had the effect of reducing the top marginal rate from 70% to as low as 28%. The top rate is currently 35%, and it could go up to 40.9% if President Barack Obama gets his way.
If the supply-siders were right, then investment should have boomed when tax rates were low, and faltered when Presidents George H.W. Bush and Bill Clinton raised the top marginal rate in the early 1990s....
Anyone with a clear view of the economy can see that our immediate problems are rooted in lack of demand, not a lack of supply: The consumer sector took a huge hit to its wealth and income, and taking on debt no longer seems wise. It’s no surprise that consumption is weak.
The housing sector is depressed because of too much supply. Capital spending by businesses surged just after the recession ended, but has slowed recently because there’s little reason to expand a business if there are few new customers. Exporters are finding slower growth in global markets. Government spending has declined for eight quarters in a row.
In other words, demand is weak
3--48 Killed, 130 Wounded in Afghan Suicide , antiwar.com
4--Bill Black talks to Bethany McLean and Maria Bartiromo about Goldman Sachs, credit writedowns
Money quote: "It's the FBI that testified in 2004 that there was an epidemic of fraud...It's the MBA that said that 90% of liar's loans were fraudulent. It is overwhelmingly everyone who has been investigated who have said that it was the lenders who put the liar in the liar's loans. It's the FHFA showing people knew they were purchasing bad packages and not excluding them."
5--Who Is The Smallest Government Spender Since Eisenhower? Would You Believe It's Barack Obama?, Forbes
Courtesy of Marketwatch-•In fiscal 2010 (the first Obama budget) spending fell 1.8% to $3.46 trillion.
• In fiscal 2011, spending rose 4.3% to $3.60 trillion.
•In fiscal 2012, spending is set to rise 0.7% to $3.63 trillion, according to the Congressional Budget Office’s estimate of the budget that was agreed to last August.
•Finally in fiscal 2013 — the final budget of Obama’s term — spending is scheduled to fall 1.3% to $3.58 trillion. Read the CBO’s latest budget outlook.
No doubt, many will wish to give the credit to the efforts of the GOP controlled House of Representatives. That’s fine if that’s what works for you.
However, you don’t get to have it both ways. Credit whom you will, but if you are truly interested in a fair analysis of the Obama years to date—at least when it comes to spending—you’re going to have to acknowledge that under the Obama watch, even President Reagan would have to give our current president a thumbs up when it comes to his record for stretching a dollar
6--Japan's catch-22 , sober look
The Japanese government has made some progress in its efforts to generate additional tax revenue. The increase in the national consumption tax was finally passed. Japan urgently needs to begin addressing its runaway fiscal problem.
WSJ: - Japanese Prime Minister Yoshihiko Noda won a major victory in finally securing the passage of a hard-fought tax-increase package last week, but analysts argue that a provision in the law to consider economic conditions before implementation means the battle to achieve the tax increase isn't yet over.
The law to raise the national consumption tax to 10% from the current 5% in two stages by 2015 was passed Friday after a dramatic week of political brinkmanship that forced Mr. Noda to promise general elections "in the near term" in return for opposition support for the legislation.....
WSJ: - Critics have blamed the last tax increase in 1997 for wiping out the nation's fragile post-bubble economic recovery and triggering deflation, which continues to plague the economy 15 years later.
It truly is a case of "catch-22". Raising taxes now risks putting the nation into another recession and is not permissible unless the government believes they can improve growth. At the same time waiting for growth that may never come (per model above) will certainly accelerate the deterioration of Japan's fiscal conditions.
7--Home Improvement Shows Gains—But May Not Last, CNBC
The foreclosure slowdown to a five-year low, said California-based analyst Mark Hanson, could hurt the likes of Home Depot. He cites the 22 percent (month-over-month) July drop in home sales in Phoenix as an example.
“The Phoenix region is a leading indicator to other more ‘distressed’ regions that made up most of the dead-cat bounce in Q1 and Q2 housing. The foreclosure rehab trade is now a headwind to Home Depot,” Hanson said. (Related: Why Drop in Foreclosures Is Bad for Housing Market)
Hanson expects July existing home sales to come in at the lowest annualized rate of the year. While few others are predicting such a “triple-dip,” Hanson has been warning for months that a drop in distressed supplies would stem the rebound in home sales, and it did just that in May and June.
This is not to say that the foreclosure crisis is gone, just perhaps delayed for the next few quarters. There are still 5.7 million loans that are either delinquent or in the foreclosure process, according to the latest reading from Lender Processing Services. While not all of those loans will go to final foreclosure, many of them will, and there is a huge cadre of hungry investors waiting to buy them up and do quick rehabs in order to rent them out.
8--Why Drop in Foreclosures Is Bad for Housing Market, CNBC
More than 50 percent of all existing home sales have been to "investors" and "first timers" — thin and volatile cohorts relative to repeat buyers — looking for low-end properties to rehab and occupy or rehab and rent/flip respectively. These two cohorts have carried the market for three years,” California-based mortgage analyst Mark Hanson noted.
The distressed share of home sales fell to 25 percent, while it had been running at a third for much of the past year. The first-time home buyer share also fell to 32 percent, down from 34 percent the previous month and from a normal range of 40-45 percent. First-timers are having particular trouble obtaining home loans.
So why is the supply of foreclosures so low when there are so many hungry investors waiting to pounce? There should be plenty to go around, given that the total U.S. delinquency rate is at 7.2 percent, representing 5.57 million loans either delinquent or in the foreclosure process, according to Lender Processing Service’s June Mortgage Monitor.
The answer is the process....
lack of supply, even of distressed homes, should help settle this housing market, but the trouble is that regular buyers, move-up buyers, are, in large part, unable to participate in this recovery. Negative equity (including second liens) and near negative equity (less than 5 percent equity) is trapping an estimated 30 million potential repeat buyers in their homes, according to Hanson.
9--House Prices and a Foreclosure Supply Shock, calculated risk
This can lead to some pretty scary numbers being bandied about. As an example, CoreLogic recently reported that “11.4 million, or 23.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2012”. And LPS reported 1.6 million loans were 90+ days delinquent at the end of June, and another 2.1 million are in the foreclosure process.
These numbers suggest a coming “flood” of foreclosures to those arguing house prices will fall further. I think this is incorrect...
A more immediate concern is the 3.7 million homeowners currently 90+ days delinquent or in the foreclosure process. Many of these properties will eventually be a distressed sale, either a foreclosure or short sale, although some will receive loan modifications. It is important to remember that some of these homes are already listed for sale (so they are included in the “visible inventory”), and there has been a significant shift by lenders from foreclosures to short sales (short sales have less of an impact on prices than foreclosures).
10--Resale supply is coming, lenders increase foreclosures 10% in July in California, OC Housing news
The lack of supply on the MLS is becoming a serious problem. Buyers are getting burnt out and frustrated because they are unable to make a deal. Bidding is so aggressive — and so foolish — that 50% of deals fall out of escrow due to either a low appraisal or the borrower’s inability to obtain financing. The demand is still tepid by historical standards, but the supply is so constricted that lenders have considerable leeway to increase their foreclosure liquidations and still enjoy rising house prices. Perhaps as a response to current market conditions, lenders increased the number of properties they bought at auction and that they allowed to go to third parties by more than 10% over June’s numbers....
Lenders held steady to the rates at which they are filing notices. Perhaps they believe they have arrived at a new equilibruim that allows them to dispose of REO without crashing prices.....The consistent but slow liquidation of REO is ongoing.....Very soon lenders will reach a point where inventory is only what is held in their processing pipeline — a pipeline that continues to grow as they continue to increase the amount of time they hold their properties....
Lenders are the housing market. Through direct sale of foreclosures and indirect approval of short sales, they control most of the housing market. Perhaps as prices move higher more discretionary sellers will come to market as they emerge from the depths of their debts, but until then, lenders control the supply of housing available on the MLS. One thing that jumps out from these numbers is the dramatic decline in properties that are going back to the bank on a year-over-year basis. Each chart shows that lenders simply stopped foreclosing in February which makes for fewer REO. The removal of this REO is responsible for the lack of available housing now.
It’s also remarkable that a cartel of lenders has been so successful at limiting inventory.
11--Mortgage delinquencies rising as lenders slow foreclosure processing, OC Housing News
Foreclosure rates are declining across the Southwest. Lenders are slowing foreclosures because they want house prices to bottom and start going up due to a lack of distressed supply on the MLS. This would be a natural occurrence once shadow inventory is eliminated, but right now, this slowing of foreclosures is a contrived policy of a cartel desperately hoping they can force prices to move higher. If foreclosures were declining because lenders were out of delinquent mortgages to foreclose on, we would all be celebrating the housing market recovery. However, lenders are not out of delinquent mortgage squatters to boot out of the houses they are not paying for. In fact, lenders have slowed their foreclosure rates so much, they are no longer keeping up with current new delinquencies. As a result, shadow inventory is growing again.
It is difficult to imagine how house prices can put in a durable bottom with millions of delinquent mortgages yet to be processed. The federal reserve and government regulators have done everything possible to create conditions favorable to lenders. Zero percent interest rates lower the cost of capital to banks to near zero enabling them to sustain billions in non-performing loans on their books without bankruptcy. Suspension of mark-to-market accounting rules allows lenders to pretend their bad loans are still worth face value to give the appearance of solvency. Both of these measures have one thing in common; they buy time. Ultimately, neither measure will cause house prices to go up. Low interest rates make housing much more affordable which induces buying, but only improved credit conditions lower unemployment, and higher wages will make house prices go up.
The market-has-bottomed meme currently touted by every major media outlet is a concerted effort to improve buyer sentiment and induce people to enter into a transaction that may not be in their best interest. Affordability is currently quite good in nearly every housing market due to the low interest rates — and that is a good reason to buy — but sheeple are so accustomed to buying for appreciation that the market-has-bottomed meme must be pounded into the public’s heads to knock people off the fence. A secondary benefit of a widespread belief in future appreciation is a reduction in strategic default....
Mortgage Delinquencies Increase in Latest MBA Survey
MBA —WASHINGTON, D.C. (August 9, 2012) — The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 7.58 percent of all loans outstanding as of the end of the second quarter of 2012, an increase of 18 basis points from the first quarter, but a decrease of 86 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 41 basis points to 7.35 percent this quarter from 6.94 percent last quarter. Delinquency rates typically increase between the first and second quarters of the year....
Seriously delinquent loans don’t cure. Those are the committed squatters waiting until foreclosure.
The combined percentage of loans in foreclosure or at least one payment past due was 11.62 percent on a non-seasonally adjusted basis, a 29 basis point increase from last quarter, but a 92 basis points decrease from the same quarter one year ago.
That’s a big number! Nearly 12% of all outstanding mortgages are non-performing
12--Investors place big bets on Buy Here Pay Here used-car dealers, LA Times
Private equity firms are investing in chains of used-car lots, and auto loans are being packaged into securities much like subprime mortgages. They're attracted by the industry's average profit of 38% for each car sold...
On a recent morning, a dozen executives could be seen huddled in a glass-walled conference room, reviewing a slide presentation on plans to buy some franchised Byrider lots. It's part of a strategy to boost profit at the 135-lot chain, which had sales of $740 million last year.
Firms like Altamont pride themselves on being the smart money, identifying profitable opportunities ahead of the herd. Lately they and other investors are finding just such a windfall in a little-noticed niche of the used-car business known as Buy Here Pay Here.
These dealerships focus on people who need cars to get to work, but can't qualify for conventional loans. They sell aging, high-mileage vehicles at prices well above Kelley Blue Book value and provide their own financing. As lenders of last resort, they can charge interest at three times or more the going rate for regular used-car loans.
Many require customers to return to the lot to make their loan payments — that's why they're called Buy Here Pay Here dealerships.
If buyers default, as about 1 in 4 do, the dealer repossesses the cars and in many cases sells them again.
The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc.
"The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."
Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile.
In addition to private equity firms such as Altamont, several payday lending chains are moving into Buy Here Pay Here and have acquired dealerships....
Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.
Although they're backed mainly by installment contracts signed by people who can't even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.
That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.
Some analysts worry that the rush to securitization could lead to careless lending by dealers eager to sell more loans, as happened with many mortgage-backed bonds.
"We think that investing in such companies is a ticking time bomb," said Joe Keefe, chief executive of Pax World Management, which steers its investments into businesses it deems socially and environmentally responsible. "It has ethical as well as systemic risk implications