Wednesday, November 28, 2012

Today's links

1--Case-Shiller Home Price Rise for 6th Month, Big Picture

Home prices, according to the S&P/Case Shiller report, rose 0.4% sequentially (seasonally adjusted) in September and 3% year over year.
The index is now up for an 6th straight month, putting it at the highest level since Oct ’10 while still remaining 31% below its ’06 highs.
Jonathan Miller notes the declining momentum in Home sales: Falling mortgage rates are not creating housing sales. He blames credit remaining very tight. On a year over year basis, 18 of the 20 cities surveyed saw gains. Only Chicago and New York saw declines. Miller observes that year-over-year comparisons in various national reports are “skewed higher from an anemic 2011.Housing Pulse confirms this, observing further that 1st-time home buyers are not seeing any gains from the so-called recovery.
The bottom line is that housing has stabilized — but done so in a rate driven artificial manner — at least for now.

2--Reports of economy’s death premature, marketwatch

Commentary: Musings on ECRI’s famous 2011 recession call

But I am nevertheless reminded of the late great Harry Browne, the one-time investment-advisory-service editor who became the Libertarian Party’s candidate for president in the 1990s, and who pleaded with readers not to bet all or nothing on any one prediction or adviser — no matter how good his or her record.

In his classic book from the 1980s entitled “How The Best-Laid Investment Plans Usually Go Wrong,” Browne wrote: “Almost nothing turns out as expected. Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisers with records of phenomenal success fail to deliver when your money is on the line, the best investment analysis is contradicted by reality. In short, the best-laid investment plans usually go wrong. Not sometimes, not occasionally — but usually.”

3---Spain's rescued banks to shrink, slash jobs, Reuters

Spain's four nationalized banks will more than halve their balance sheets in five years, slash jobs and impose hefty losses on bondholders, under plans approved by the European Commission on Wednesday.
The measures open the door for nearly 40 billion euros ($52 billion)in euro zone bail-out funds for the state-rescued banks, offering hope for an end to Spain's banking crisis which has pushed the country to the brink of asking for sovereign aid...

The Commission said it would ensure the banks use no more taxpayers' money than necessary and that they do not go back to unsustainable business practices.
The Commissioner said he would decide on other Spanish banks with capital shortfalls on December 20.
The approval allows the euro zone to disburse the funds from its permanent ESM bailout fund. Spain was given approval to receive up to 100 billion euros from the ESM in the summer.

4---"The mother of all bond bubbles", Shelia Bair, Reuters video

"The mother of all bond bubbles...Fundamentals do not support current current Treasurys prices...this is what we saw in the houisng bubble, a massive underpricing of risk, and eventually it's going to correct, and it's going to create long-term problems for our kids and our country , ans short-term problems for the financial sector as well"..Sheila Bair
Zero rates and QE are the timebombs that are ticking"..Stephen Roach

5--First-Time Homebuyers Not Riding the Wave of Recovery, mortgage professional

Despite growing signs that the housing market is starting to recover from the depression-like conditions of the past few years, first-time homebuyers don’t seem to be benefiting from that recovery. According to the latest Campbell/Inside Mortgage Finance HousingPulseTracking Survey results, the first-time homebuyer share of home purchases fell to 34.7 percent in October. That was not only down from the 37.1 percent share seen as recently as June, but also the lowest first-time homebuyer share ever recorded in the HousingPulse survey.

The decline in first-time homebuyers participating in the housing market comes at the same time that purchases of non-distressed properties have risen significantly this year. In fact, HousingPulse data show that the non-distressed property share of home purchases climbed to 64.7 percent in October. That was up from only 55.7 percent back in February and the highest non-distressed property share recorded by HousingPulse in its three-year history.

First-time homebuyers are the only group of buyers tracked by HousingPulse that have not seen their share of non-distressed property home purchases rise over the past five months. Current homeowners have seen the biggest jump in purchases of non-distressed properties with their share rising from 50 percent in June to 54.2 percent in October. Even investors saw their share of non-distressed property purchases inch higher from 11.3 percent to 12.2 percent over the past five months.

But first-time homebuyers have seen their share of non-distressed property home purchases fall from 38.7 percent in June to 33.6 percent in October, the HousingPulse survey results show.

One factor depressing first-time purchases of non-distressed properties is the higher–and rising–prices associated with these homes. But another key factor is the availability of financing for first-time homebuyers. HousingPulse survey respondents identify FHA, with its low 3.5 percent minimum downpayment requirement and slightly looser underwriting requirements, as the primary financing vehicle for first-time homebuyers.

“Financing of first-time homebuyers with low downpayments threatens to become a significant problem in the U.S. housing market,” said Thomas Popik, research director for Campbell Surveys. “Fifty percent of first-time homebuyers use FHA financing, but FHA insurance premiums are increasing and underwriting is becoming more strict

6---Shiller: "Housing prices set to go up 3% per year for next 4 years". CNBC

7---Please don’t be fooled into thinking that the low inventory is a strong housing indicator. It is a by-product of a dysfunctional housing market, leading to multiple bids on a limited number of homes. Organic sellers have become ghosts, and there are yet long delays in getting distrssed homes into the market,   Logan Mohtashami

8---Get Down With It: Falling Mortgage Rates Are Not Creating Housing Sales, millersamuel

Inspired by my analysis of yesterday’s WSJ article, I thought I’d explore the effectiveness of low mortgage rates in getting the housing market going. I matched year-to-date sales volume where a mortgage was used and mortgage rates broken out by conforming and jumbo mortgage volume.
Mortgage volume has been falling (off an artificial high I might add) since 2005, while rates have continued to fall to new record lows, yet transaction volume has not recovered. I contend that low rates can now do no more to help housing than they already have.
Even the NAR has run out of reasons and is now focusing on bad appraisals as holding the market back (I agree appraisal quality post Dodd-Frank is terrible and is impacting the market to a limited extent – and I secretly wish appraiser held that much sway over the market).
I’m no bear, but the uptick Case Shiller’s report today (remembering that Case Shiller reflects the housing market 5-7 months ago) still shows slowing momentum and all 2012 year-over-year comparisons in the various national reports are skewed higher from an anemic 2011.
Five years of falling mortgage rates have only served to provide stability in volume. The monetary and fiscal conversation ought to be on ways to incentivize banks to ease credit – falling rates only makes them more risk averse.

9---Restricting loan types, DTIs and LTVs, oc housing news

In The Great Housing Bubble, I proposed a series of regulatory changes that really would have prevented the next housing bubble.

Loans for the purchase or refinance of residential real estate secured by a mortgage and recorded in the public record are limited by the following parameters based on the borrower’s documented income and general indebtedness and the appraised value of the property at the time of sale or refinance:

  1. 1. All payments must be calculated based on a 30-year fixed-rate conventionally-amortizing mortgage regardless of the loan program used. Negative amortization is not permitted.
  2. 2. The total debt-to-income ratio for the mortgage loan payment, taxes and insurance cannot exceed 28% of a borrower’s gross income.
  3. 3. The total debt-to-income of all debt obligations cannot exceed 36% of a borrower’s gross income.
  4. 4. The combined-loan-to-value of mortgage indebtedness cannot exceed 90% of the appraised value of the property or the purchase price, whichever value is smaller except in specially sanctioned government programs.
The only way to ensure lenders can’t provide the air to inflate another housing bubble is to restrict the types of loans offered to verify they amortize, and restrict loan-to-value ratios to ensure people can afford to repay the loans, and restrict the loan-to-value ratio to make certain borrowers have equity, and more importantly, confirm borrowers don’t have incentive to become Ponzis

The Texas example

Texas did not have a housing bubble. The reason was simple. In the Texas constitution, lenders are not allowed to loan beyond an 80% loan-to-value ratio. Without access to HELOC money, Texans
saw no purpose in running up house prices. Expensive homes did not provide them spending money, and in Texas, the higher home value also increases their property taxes, so higher home prices actually cost them more money. The incentives in Texas are the opposite of what they are here in California, so we endure bubble after bubble, while Texas enjoys stable home prices and relative affordability.

10--Mark Carney Stinks, naked capitalism

According to industry statistics, in 2006 sub-prime mortgages accounted for less than 5 percent of overall outstanding Canadian mortgages, while in the U.S. this figure was 22 percent. However, the oil and commodity price boom and the resulting strong real estate market generated growing demand for looser mortgage lending. Indeed, under pressures to deregulate further the financial markets (in the name of providing competitive financial services under NAFTA), the door was opened wide for the subprime market to move north in May 2006.
As Seccareccia notes:
This was so largely because of the lobbying effort of American International Group (AIG) that recruited the support of some former officials of the federally-owned Canada Mortgage and Housing Corporation (CMHC) who finally succeeded in persuading the federal cabinet to open Canada’s mortgage insurance sector to greater foreign competition. Hence, in 2007 and early 2008, subprime mortgages were rising precipitously in Canada, despite the growing problems south of the border and despite even the formal opposition of the Governor of the Bank of Canada at the time, who feared possible inflationary consequences of this type of credit expansion in the hot Canadian housing market that could then spread to the overall product market, thereby possibly frustrating the Bank of Canada’s own low inflation targeting policy. In a sense, it was the U.S. financial collapse itself in 2008 that actually aborted the process, thereby preventing a home grown subprime problem in Canada. The fact that the federal government offered $125 billion through CMHC to buy up mortgage assets would suggest that there was, indeed, a significant number of such high risk mortgages in the banking sector that have slowly been absorbed by CMHC, a public institution, in 2009, much as Fannie Mae and Freddie Mac in the U.S.
The upshot of all of this is that financial innovations, together with these economies of scale and unlimited securitization, was starting to transform the Canadian banking sector into what some have described as a giant “transaction generating machine” — a securitised model of credit that increases turnover of assets while increasing commissions, fees and bonuses via the trading of complex derivatives – much like its American counterparts. Indeed, facilitated by deregulation, computerization and globalization, this process of financialization has brought about a complete transformation in the source of revenues for the banking sector in Canada. As Seccareccia illustrates:
From as much as 90 percent of total revenues being derived in the early 1990s from the traditional interest rate spreads related to their activities in making loans to creditworthy borrowers, by the 2000s this had gone down to less than 50 percent, with more and more of these bank revenues earned from commissions, administrative and user fees, and other forms of compensation unrelated to their traditional role in providing loans to the public.
 11---Make Wall Street pay for the crisis, not retirees, Dean Baker, counterpunch

The reason that we suddenly got large deficits was the economic downturn, which caused tax revenue to plummet and increased spending on programs such as unemployment insurance. We also had temporary measures that included tax cuts such as the payroll tax holiday and various spending programs that further raised the deficit.

However these stimulus measures were temporary and were quite explicitly designed to boost the economy. Had it not been for the downturn, they would not have occurred. There is very little by way of permanent changes from the pre-recession tax and spending policy that would raise the budget deficits from the low levels that had been projected in 2008. This means that the story of current deficits is the story of the collapsed housing bubble.

In a sane world we might be looking to square the deck with the folks who brought us the bubble. One obvious way would be a modest financial speculation tax like the one that the UK has had in effect on stock transfers for centuries.

12--Escalating Delinquency Rates Make Student Loans Look Like the New Subprime, naked capitalism

Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter. Repeat: in the last quarter. Annualized, that’s a 19.7% rate of increase* during a period when other consumer borrowings were on the decline. And this growth is taking place while borrower distress is becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9% at the close of last quarter. The underlying credit picture is certain to be worse, since many borrowers aren’t even required to service loans (as in they are still in school or have gotten a postponement, which is available to the unemployed for a short period). And it was the only type of consumer debt to show rising delinquency rates.

This is the new subprime: escalating borrowing taking place as loan quality is lousy and getting worse. And in keeping with parallel to subprime, one of the big reasons is, to use a cliche from that product, anyone who can fog a mirror can get a loan.

The most popular type of loan, Stafford loans, allow undergraduates to borrow up to $57,500, no questions asked. Perversely, this practice, in isolation, looks rational. Look, if you could put borrowers in virtual debt slavery, would you care much about lending standards? All you need to worry about is death and those few cases where borrowers are so clearly unable to ever work for a decent amount of money that they can get their student debt that they can get their loans reduced or discharged.

Things are so bad that each media report seems able to present anecdotes more extreme than previous accounts. The WSJ found a recent graduate of Embry-Riddle Aeronautical University in Daytona Beach whose education loans total nearly $230,000 for a college education that has enabled him to get a job that pays $60,000. And $184,500 of that total was borrowed by his unemployed, disabled mother through a program called Parent Plus

13--9 Greedy CEOs Trying to Shred the Safety Net While Pigging Out on Corporate Welfare, naked capitalism

A gang of brazen CEOs has joined forces to promote economically disastrous and socially irresponsible austerity policies. Many of those same CEOs were bailed out by the American taxpayer after a Wall Street-driven financial crash. Instead of a thank-you, they are showing their appreciation in the form of a coordinated effort to rob Americans of hard-earned retirements, decent medical care and relief for the poorest

14---Embattled global banking cartel will play defense on cyberattacks, economists view

I'm drawing your attention to this area of risk... But I feel the need to be measured about the potential for severe financial instability from this source. In my judgment, cyberattacks on payments systems are not likely to have as deep or long lasting an impact on financial system stability as fiscal crises or bank runs, for example. Nonetheless, there is real justification for a call to action. ...
Even broad adoption of preventive measures may not thwart all attacks. Collaborative efforts should be oriented to building industry resilience. Resilience measures would be similar to those put in place in the banking industry to maintain operations in a natural disaster—multiple backup sites and redundant computer systems...
15---Geithner to lead the charge on fiscal cliff, economists view

During his tenure as Treasury Secretary, Geithner has followed in Rubin’s path — engineering a no-strings Wall Street bailout that didn’t require the Street to help stranded homeowners, didn’t demand the Street agree to a resurrection of the Glass-Steagall Act, and didn’t seek to cap the size of the biggest bank, which in the wake of the bailout have become much bigger. In aninterview with the Journal, Geithner repeats the President’s stated principle that tax rates must rise on the wealthy, but doesn’t rule out changes to Social Security or Medicare. And he notes that in the president’s budget (drawn up before the election), spending on non-defense discretionary items — mostly programs for the poor, and investments in education and infrastructure — are “very low as a share of the economy relative to Clinton.” If “pragmatic deal maker,” as the Journal describes Geithner, means someone who believes any deal with Republicans is better than no deal, and deficit reduction is more important than job creation, we could be in for a difficult December

16-Fed Watch: Meanwhile, in Japan...economists view
Meanwhile, in Japan..., by Tim Duy: Back in September, Iwrote:
What I expect to happen is this: The Bank of Japan will be forced into outright monetization at some point; a soft default in the form of higher inflation will occur. And dramatically higher inflation, I fear. Japan has not had inflation for two decades. I suspect they will experience all that pent-up inflation in the scope of a couple of years.
17--“The global economy is weakening again”, OECD

There’s brighter news in some of the emerging economies, where policy action such as investment in infrastructure and cuts in interest rates are helping to make up some of the slack caused by weakening global demand. After slowing to an estimated 7.5% this year – the lowest rate for a decade – China is forecast to see growth of 8.5% in 2013. India, which has been in an economic funk lately and saw growth slip to an estimated 4.4% in 2012, is tipped to rebound to 6.5% in 2013

18---Student Loan Debt Rising, and Often Not Being Paid Back, NYT

Americans have been getting better at paying off their debt in the last year, with a glaring exception: student loans.
Total consumer debt fell again in the third quarter, according to the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit. This figure has been falling for four years. As consumer debt has been falling, so have consumers’ delinquency rates. As of Sept. 30, 8.9 percent of outstanding household debt was in some stage of delinquency, with 6.6 percent at least 90 days late.
Bucking this trend is student loans. Student loan debt has been growing every quarter since at least 2003, the earliest data included in the report. And delinquency rates look worse than previously believed.

19--Proposed mortgage rules threaten private RMBS comeback, housingwire

It's likely the future mortgage market will feature a standardized, almost plain-vanilla mortgage product, some analysts suggest.
But on the other hand, analysts in the mortgage finance space believe the market will be perpetually lost without the return of private capital and a more robust system of lending.
Paul Miller with FBR Capital Markets suggests in a new report that the "ability to repay rule" and the qualified-mortgage rule are almost ensuring the long-term survival and "dominance" of the 30-year, fixed-rate mortgage and the end of products that surfaced during the housing bubble.
And with that being the case, private capital may likely find less room to flourish. Fewer mortgage products mean fewer mortgage players. Miller estimates the Dodd-Frank rules will, therefore, give preference to loans securitized by Fannie Mae and Freddie Mac.

"This preference, the guarantee on principal and interest on Fannie Mae and Freddie Mac securities, and the removal of subprime product features should make the return of meaningful private securitization extremely unlikely, in our opinion," he wrote. "These changes should also prevent new entrants from eroding underwriting standards in an attempt to increase market share."

We cannot see a recovery in housing without a private MBS market," noted Christopher Whalen, an investment banker with Tangent Capital Markets. "This market is already forming and the names will be more familiar in time."
Yet, the market also is saying it's too early to tell what the ultimate effect of the CFPB's final draft rules will be until they surface. Mortgage Bankers Association CEO David Stevens suggested in the past few months that the CFPB has been open to market concerns about the 20% downpayment requirement and other draft rules being too stringent. For segments of the market, this suggested the possibility of final rules that are more flexible in scope. Although, it's unknown at this point.

"Before anyone comments, it is important to see what the CFPB comes out with," said Suzanne Mistretta with Fitch Ratings. "How the QM comes out has huge reprecussions for securitizations and private-label RMBS."

20--Likely Next Japan PM's Policy Ideas May Fail Reality Test, CNBC

The former prime minister's prescriptions include "unlimited" easing until 2 or 3 percent inflation is achieved, pushing short-term interest rates below zero and having the BOJ buy bonds issued specifically to fund public works projects.
Zero Option
Abe's suggestion that the BOJ should set negative interest rates, in other words charging commercial banks for keeping excess reserves with the central bank, to encourage lending is regarded as a flawed strategy by many within the BOJ.

Shirakawa, who has held the deposit rate at 0.1 percent, has argued that a zero rate would discourage banks from lending to each other, making them too reliant on central bank for financing, and negative rates would exacerbate that reliance.

Unless demand for credit improves among businesses and consumers, negative rates could also undercut the BOJ's efforts to boost the economy by injecting cash through asset purchases.

Negative rates could make banks reluctant to sell bonds to the BOJ for fear of being left with cash they couldn't lend out, which would end up as an extra cost as they would then be charged interest on excess reserves deposited with the BOJ

21--Abe campaigning on direct monetary financing, forex

LDP leader Shinzo Abe, who is the favorite to win the Dec 16 election, is campaigning on a ¥200 trillion ($2.5 trillion) infrastructure plan.
How might a highly indebted country pay for such a lavish plan?
“If possible, I’d like to see the Bank of Japan purchase all of the construction bonds that we need to issue to cover the cost,” Abe said in a speech.
22--Bulk Investors And The Real-Estate 'Recovery', zero hedge

Of the aforementioned metro areas, Las Vegas is the most out of whack. There were 4,570 sales in October. 50.2% were sold to absentee owners, 52.5% in cash (43.2% were short sales, 16.7% were REOs) and 36.1% FHA financed. I have never seen a market where over half of the buyers paid cash and over 1/3 of the sales were financed via the FHA, leaving only 14% of sales in the "other" category.

In just the months of September and October, Las Vegas sold 4,278 single family units to absentee owners. Assuming a majority of them will show up as rentals soon, if they haven't already, how much more can the market absorb? If this trend continues, how many months will it take to swamp the desert with single family rentals?...

Phoenix was probably the first region to experience an investor driven rebound. The most recent data from DQNews for September are already showing a sequential as well as a year over year decline. I am eagerly waiting to see what the October statistics will look like. Is that recovery already running out of steam? The median price has been appreciating to $155,000 but it is still 41.3% below the all time peak of $264,100 in 2006. I am not suggesting that the subprime peak was reasonable, just that there is still a boatload of homeowners who have little or no equity in their homes.

23--The Scariest Chart Of The Quarter: Student Debt Bubble Officially Pops As 90+ Day Delinquency Rate Goes Parabolic, zero hedge



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