Saturday, November 10, 2012

Today's links

1--The Dirt on Erskine Bowles: The Tame Half of Bowles-Simpson, CEPR

2--LPS: Delinquency Rate Suddenly Spikes in September , DS News

As of September, there are 5.64 million properties that are 30 days or more past due or in foreclosure.
Loans that were 30 days or past due but not in foreclosure totaled 3.7 million; in that group, 1.53 million were 90 days or more past due, or on the verge of going into foreclosure. Foreclosure inventory numbered 1.94 million.

3--CBO on “Ultimate Can Kicking”, Bruce Krasting

Maybe we should "do nothing" about the fiscal cliff?

4--The phony fiscal cliff: expect tax cuts extended and spending cuts postponed, Guardian

Given Washington stalemate, we might get automatic spending cuts. But politicians' survival instinct will see tax cuts extended

There is one possible compromise on the sequestration. Both parties would rather reduce entitlement spending than actually cut domestic discretionary spending. Most Democrats would rather push off the retirement age eligibility for Medicare than cut their social welfare funding. Some Republicans would also rather reduce entitlements than cut defense. The two parties might cobble together a majority in the House and Senate to postpone or reduce the sequester on both social and military spending, while agreeing to cut entitlement spending by the same amount or more.
But the most likely result for the lapsing tax cuts is a repeat of 2010: the Bush tax cuts will be extended through the 2014 elections

5--TrimTabs Says Obama White House and Bernanke Fed Putting U.S. on Road to Financial Ruin, Trimtabs

6-Banks Seek The Largest Land Grab The World Has Ever Seen, Reuters

Oliver Chang, the former head of U.S. housing strategy at Morgan Stanley, on Wednesday announced the opening of an investment firm that intends to spend up to $1 billion to acquire distressed, single-family homes over the next two years.

Sylvan Road Capital is launching with a $300 million investment from an undisclosed private equity firm, the new firm said.

The new asset management firm will seek to acquire foreclosed homes across the United States with an eye toward operating them as rental properties.

Chang’s move comes at a time when many hedge funds and private equity firms are raising money to acquire foreclosed homes with the intention of renting them out for several years before selling them as the housing recovery takes hold.

Hedge funds and other institutional investors have embraced the buy-to-rent model as an asset class for their solid income streams at a time when bond yields have plunged.

But some wonder whether institutional investors are overstating the potential for making money with foreclosed homes, given that historically it has been an industy populated by local entrepreneurs.

“America is moving toward a rentership society, and I believe the opportunity to purchase and professionally manage single-family, rental homes represents one of the most compelling investment opportunities across all asset classes,” Chang said.

In May, Reuters reported that Chang was leaving Morgan Stanley to launch a so-called buy-to-rent fund. And other Wall Street executives who had been involved with the housing market are doing something similar.

Former Goldman Sachs Group Inc. mortgage executive Donald Mullen is trying to raise $500 million for a foreclosed home fund. Goldman Sachs is helping its former executive market the fund to investors.

7--Great Recession wipes wipes out 20 years of net worth accumulation, economist's view "eyepopping" charts

8--The single best graph on what’s driving our deficits, WA Post

9--Options for the fiscal cliff by CBO, conversable economist

....repealing the expansion of health insurance coverage and the "individual mandate" to buy health insurance from the Affordable Care Act would reduce the 2020 deficit by about $190 billion, which is real money, but not nearly enough (and would leave tens of millions of Americans again without health insurance). Or letting the the tax cuts enacted in 2001, 2003, and 2009 expire only for couples filing joint tax returns with income over $250,000 per year and for single taxpayers with income over $200,000, along with indexing the alternative minimum tax (AMT) for inflation, reduced the 2020 deficit by $110 billion, which is real money, but not nearly enough to do what is needed. So even if Republicans and Democrats would compromise on eliminating Obama's health care plan in exchange for eliminating the Bush tax cuts for those above $200,000 or $250,000 per year, they would have less than half of the $750 billion deficit reduction. To put it another way, Americans and U.S. economy are more drunk on deficit spending, and withdrawal is going to be more painful than most people realize.

10-Is job creation on Obama’s second-term agenda?, EPI

The American public has repeatedly indicated that the health of the economy is their biggest concern. An Associated Press election-day exit poll found that 59 percent of voters considered the economy to be the most important issue facing the country while only 15 percent considered the deficit to be the number one issue. And when voters say “the economy” they mean jobs and the rising cost of living....

Americans of all races agree that restoring the American economy to a condition where it is strongly creating jobs and producing rising incomes is the most important issue facing the country. Surprisingly, President Obama seems to have left this out of his second term priorities. In his victory speech, Obama stated:
And in the coming weeks and months, I am looking forward to reaching out and working with leaders of both parties to meet the challenges we can only solve together: reducing our deficit; reforming our tax code; fixing our immigration system; freeing ourselves from foreign oil.
These are all important items, but this list does not explicitly include creating jobs and lifting incomes. We know that deficit reduction actually runs the risk of weakening a still weak economy further and costing jobs. Thus, aggressive deficit reduction is contrary to the wishes of the majority of voters.

There is, of course, good reason for the American public to consider jobs and incomes the number one priority. We still need 9 million jobs to return the unemployment rate to where it was at the start of the recession in 2007. At our current pace of job creation, we will have to wait another eight years before we again see an unemployment rate at pre-recession levels.

At least, the national unemployment rate has remained below 10 percent. Blacks, however, have endured unemployment rates of more than 10 percent for more than four years. At the current rate of job creation, it will take about three more years before the black unemployment rate drops below 10 percent. Without additional federal job-creation efforts, blacks face the prospect of nearly a decade of extremely high unemployment rates.

In addition to jobs, the public is concerned about declining incomes. From 2007 to 2010, median household income declined 5.4 percent for whites, 7.2 percent for Latinos, 10.1 percent for blacks and 7.5 percent for Asians. It is increasingly difficult to make ends meet when prices are rising at the same time that incomes are declining.

High unemployment and declining incomes means that a large share of the American public is facing significant economic hardship. President Obama can keep deficit reduction on his second-term agenda, but he needs to make certain that it does not interfere with the public’s number one priority: job creation.

11--Household formation picks up, NYT

12--Waiting for the bond vigilantes, worthwhile canadian initiative

Paul Krugman is right if he is talking about a small attack by the bond vigilantes. It's a good thing, because it increases Aggregate Demand, which is what the US economy needs.
But too much of a good thing will be a bad thing.
A large attack by the bond vigilantes would be a bad thing, because it would increase Aggregate Demand too much. That would force the Fed to increase interest rates a lot, and that would force the US government to raise taxes and/or cut spending to cover the increased costs of servicing the debt.
If the bond vigilantes suspected that the US government could not or would not raise taxes and/or cut spending to cover the increased cost of servicing the debt, the bond vigilantes would all attack en masse.

13--17% of FHA loans delinquent in September, bailout coming, OC Housing

Everyone knew this was coming. The FHA needs a bailout. When the final tally of losses at the FHA come in, everyone will act surprised. Nobody paying careful attention to what the FHA is doing will be shocked. They are absorbing the losses the banks could not by insuring loans with low down payments in a declining market. No private lender or mortgage insurer would do this because the losses would put them out of business. Instead these losses will be absorbed by the US taxpayer — by you....

FHA was loaning money when nobody else would, and it did serve as a lender of last resort. However, since housing prices were just beginning their decline, the FHA underwrote a large number of what are now underwater loans. Further, since FHA standards were quite low — it only takes a 620 FICO score to get an FHA loan — the FHA became the defacto replacement of subprime lending. Common sense said if the FHA made mortgage loans in a declining market with tiny down payments to people with spotty credit, they were going to lose a lot of money. That’s why private money wouldn’t make those loans. It’s also why the FHA needs a bailout.

It was obvious these loans were disasters waiting to happen. So why did we do it? To save the banks, of course. Bailouts were designed to benefit banks, not borrowers, and certainly not taxpayers. Government officials like Timothy Geithner bailed out his crony friends like Robert Rubin of CitiBank whose balance sheet was loaded with bad residential mortgage loans. Many of those bad loans were recycled through loan modifications that increased the taxpayer liability, and many properties were sold at inflated to FHA borrowers who fell deeply underwater and defaulted. Loan modification programs and low-down payment FHA loans shifted the losses from the major banks to the US taxpayer. Now it’s time to pay the bills...

“If FHA alone simply stopped doing business, we would have been propelled down into another double-dip recession,” said John Griffith, an analyst at the Center for American Progress, a research organization aligned with Democrats. …

The FHA’s troubles stem from rising defaults on mortgages it insured during the peak years of the housing bubble. The agency now insures about 7.6 million loans with total outstanding balances near $1.1 trillion, triple the amount it backed five years ago.
The agency could cover its costs in the past because revenue from its insurance premiums exceeded claims. This year, it avoided taking a taxpayer subsidy despite mounting claims because it received a one-time payment of almost $1 billion from a legal settlement over claims that mortgage servicers botched foreclosures.
In an effort to disguise the problems at the FHA and delay the request for a bailout until after the election, the government got a billion dollars back out of the banks. A small price to pay for the hundreds of billions of bad loans the FHA recycled for them.

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