Thursday, November 22, 2012

Today's links

1---US Manufacturing stabilizing; margins may be at risk, sober look

2--Borrowers with modified mortgages re-default as homes re-enter shadow inventory, sober look
 
According to the Fed, banks had a visible increase in resi mortgage charge-offs in the third quarter.
This could be a cause for concern. However, banks have some leeway in when they actually take charge-offs during the year, so it is worth taking a look at a more up to date delinquency data. JPMorgan recently published the October delinquency results. Indeed there was an increase in delinquencies, mostly in October (there seems to be some delay in reporting delinquencies that the Fed picked up in Q3, particularly by Bank of America). But delinquencies seem to the heaviest in sub-prime mortgages. Is this another wave of subprime defaults?
 
We are therefore seeing a sharp rise in re-defaults from modified mortgages.
 
This is telling us that mortgage modification programs have not been very successful, as the probability of re-default rises. By modifying mortgages, banks in many cases are simply kicking the can down the road - and now some are writing down these mortgages (which may be what is driving the higher charge-off numbers). We are therefore seeing an increase in delinquencies, but mostly among modified mortgages and concentrated in sub-prime portfolios. This in turn is having an impact on another important housing metric.

Note that once a mortgage is modified, the house is no longer counted as part of the so-called "shadow inventory". Modifications certainly contributed to a significant recent reduction in shadow inventory (see discussion - "mods" in the pie-chart). And now some of these homes are moving into the "shadow" once again.
JPMorgan: - It appears that mod re-defaults drove the increase. The number of re-defaults jumped 24% from the previous month.... We have argued that the sharp decrease in shadow inventory over the past two years was to some extent the result of aggressive modification activity. We think we are now seeing a wave of re-defaults from the modifications over the last two years that failed. This wave should last through 2013, and a greater share of current-to-30 rolls will come from re-defaults going forward.
 
3---Interview with calculated risk, Bus Insider

4--Shadow Banking, andolphotto

5---Skidelsky on inequality, project syndicate

It is generally agreed that the crisis of 2008-2009 was caused by excessive bank lending, and that the failure to recover adequately from it stems from banks’ refusal to lend, owing to their “broken” balance sheets....

The problem now appears to be one of re-starting bank lending. Impaired banks that do not want to lend must somehow be “made whole.” This has been the purpose of the vast bank bailouts in the US and Europe, followed by several rounds of “quantitative easing,” by which central banks print money and pump it into the banking system through a variety of unorthodox channels. ...
 
But one can take another view, which is that demand for credit, rather than supply, is the crucial economic driver. After all, banks are bound to lend on adequate collateral; and, in the run-up to the crisis, rising house prices provided it. The supply of credit, in other words, resulted from the demand for credit...what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt
 
 
Seventy percent of counties with the fastest-growth in food-stamp aid during the last four years voted for the Republican presidential candidate in 2008, according to U.S. Department of Agriculture data compiled by Bloomberg. They include Republican strongholds like King County, Texas, which in 2008 backed Republican John McCain by 92.6 percent, his largest share in the nation; and fast-growing Douglas County, Colorado.
That means Romney is counting on votes from areas where lower-income people have become more reliant on the Supplemental Nutrition Assistance Program, known as food stamps. Mark Baisley, who heads Douglas County’s Republican Party, said many recipients will back Romney in hopes he’ll improve the economy.

8---Predatory Lending, Bloomberg

Lenders were 3½ times more likely to steer blacks to high- interest mortgages than whites with comparable credit scores, according to a Center for Responsible Lending study of 27 million loans originated from 2004 to 2008. In Memphis, where 63 percent of the 652,000 residents are black, officials say their city was targeted for such predatory lending -- a practice that Marano says his company didn’t engage in....

The earnings gap between the richest Americans and the rest of the country grew to its widest point in more than four decades last year, based on U.S. Census Bureau data. The 1.2 million households whose incomes ranked them in the top 1 percent saw their pay rise 5.5 percent last year, while incomes fell 1.7 percent for the 96 million households in the bottom 80 percent -- those that made less than about $100,000 a year.

9---The Making Of A Great Contraction With A Liquidity Trap and A Jobless Recovery, NBER

10--Mortgage rates fall to record lows, Housingwire

Mortgage rates fell to new record lows during the week ending Nov. 21, Freddie Mac said in its latest primary mortgage market survey.
Fixed rates remained well below 4% even as homebuilder confidence rose for the sixth consecutive month and existing home sales edged up 2.1% in October, the GSE report said.

The 30-year, fixed-rate mortgage averaged 3.31%, down from 3.34% a week earlier and a decline from 3.98% a year ago.
The 15-year, FRM averaged 2.63%, down from 2.65% a week earlier and 3.30% from last year.

11---Uneven housing forecast for next year, Housingwire

Shadow inventory — properties not visible such as real-estate owned properties not in the open market and homes entering foreclosure — is also a concern that could potentially affect the housing recovery process. The gap between judicial and non-judicial states continues to widen, which could lead to disruption in the market, according to DBRS.

While home prices reached bottom during the first quarter of the year, the prices have rose throughout the year and will continue to do so. Barclays predicts prices to by 5.5% for the year and 4% by 2013.
Money raised to invest in distressed and foreclosed properties, however helped the market and may continue

12--Hostess bankruptcy: The brutal face of American capitalism, WSWS

13---Jobless Benefits as an Antipoverty Program, NYT

14---BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned, Bloomberg

The Bank of England voted 8-1 to stop expanding its bond-purchase program this month as the majority said uncertainty among consumers and companies may be affecting the impact of quantitative easing on the economy. ...

There was a question over the magnitude of the impact of lower yields and higher asset prices on the broader economy at the current juncture,” the central bank said in the minutes of the MPC’s Nov. 7-8 meeting, published today in London. “It was possible that elevated uncertainty and a desire to reduce leverage meant that real activity was less responsive to lower borrowing costs than normal.”

15---Private-market mortgage delinquencies reverse course and increase, Housingwire

Most loan types increased in default rates during October, with a surge in first mortgage default rates, according to S&P Dow Jones/Experian Consumer Credit Default Indices.

16--News Corp exposed to growing legal threat following charges for tabloid duo, Guardian
Charges for Rebekah Brooks and Andy Coulson raise prospect that News Corp could be prosecuted under US anti-bribery laws
 
 
 
 
 
 
...more than any other writer of his century, Marx described how periodic financial crises were caused by the tendency of debts to grow exponentially, without regard for growth in productive powers. His notes provide a compendium of writers who explained how impossible it was in practice to realize the purely mathematical “magic of compound interest”– interest-bearing debts in the form of bonds, mortgages and commercial paper growing independently of the economy’s ability to pay. [9]

This self-expanding growth of financial claims, Marx wrote, consists of “imaginary” and “fictitious” capital inasmuch as it cannot be realized over time. When fictitious financial gains are obliged to confront the impossibility of paying off the exponential growth in debt claims – that is, when scheduled debt service exceeds the ability to pay – breaks in the chain of payments cause crises. “The greater portion of the banking capital is, therefore, purely fictitious and consists of certificates of indebtedness (bills of exchange), government securities (which represent spent capital), and stocks (claims on future yields of production).” [10]

A point arrives at which bankers and investors recognize that no society’s productive powers can long support the growth of interest-bearing debt at compound rates. Seeing that the pretense must end, they call in their loans and foreclose on the property of debtors, forcing the sale of property under crisis conditions as the financial system collapses in a convulsion of bankruptcy

Marx’s analysis did note the problem of labor’s inability to buy what it produces. “Contradiction in the capitalist mode of production,” he wrote: “the labourers as buyers of commodities are important for the market. But as sellers of their own commodity – labour-power – capitalist society tends to keep them down to the minimum price.” ...

To avoid a glut on the market, workers must buy what they produce (along with industrialists buying machinery and other inputs). Henry Ford quipped that he paid his workers the then-high wage of $5 per day so that they would have enough to buy the cars they produced. But most employers oppose higher wages, paying as little as possible and thus drying up the market for their products.

This was the major form of class warfare in Marx’s day, but it was not the cause of financial crises, which Marx saw as being caused by internal contradictions on the part of finance capital itself. Interest charges on rising debt levels absorb business and personal income, leaving less available to spend on goods and services. Economies shrink and profits fall, deterring new investment in plant and equipment. Financial “paper wealth” thus becomes increasingly antithetical to industrial capital, to the extent that it takes the predatory form of usury-capital – or its kindred outgrowth, financial speculation – rather than funding tangible capital formation.

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