Thursday, November 29, 2012

Today's links

1--Another victory for Goldman, Bloomberg

Disclosure of those documents would have undermined the protection of the public interest so far as concerns the economic policy of the EU and Greece,” the European Union General Court in Luxembourg said today, rejecting a challenge by Bloomberg News. The news organization initially sought the documents in August 2010.

Today’s ruling by three judges denies European taxpayers, on the hook for the cost of Greece’s 240 billion-euro ($311.5 billion) bailout, the opportunity to see whether EU officials knew of irregularities in Greece’s public accounts before they became public in 2009.

The decision underscores the lack of accountability at the ECB as it expands its powers to become the region’s lender of last resort and chief banking regulator. The central bank, which puts greater limits on its disclosures about its decision making than its British and U.S. equivalents, is under pressure from policy makers including governing council member Erkki Liikanen to boost transparency. ECB President Mario Draghi last month defended the Frankfurt-based bank, telling reporters it was already a “very transparent” institution.
 
2--Subprime Students: How Wall Street Profits from the College Loan Mess , policy shop

Five years after Wall Street crashed the economy by irresponsibly securitizing and peddling mortgage debt, the financial industry is coming under growing scrutiny for its shady involvement in student loan debt.

For a host of reasons, including a major decline in public dollars for higher education, going to college today means borrowing—and all that borrowing has resulted in a growing and heavy hand for Wall Street in the lending, packaging, buying, servicing and collection of student loans. Now, with $1 trillion of student loans currently outstanding, it’s becoming increasingly clear that many of the same problems found in the subprime mortgage market—rapacious and predatory lending practices, sloppy and inefficient customer service and aggressive debt collection practices—are also cropping up in the student loan industrial complex.

This similarity is especially striking in the market for private student loans—which currently make up $150 billion of the $1 trillion of existing student loans.

As detailed in a July 2012 report by the Consumer Financial Protection Bureau and Department of Education, private student loans mushroomed over the last decade, fueled by the very same forces that drove subprime mortgages through the roof: Wall Street’s seemingly endless appetite for new ways to make profit. In this case, investor demand for student loan asset backed securities (SLABS) resulted in private student lenders—primarily Sallie Mae, Citi, Wells Fargo and the other big banks—to relax lending standards and aggressively begin marketing these loans directly to students.

Unlike federal student loans, private loans have higher and fluctuating interest rates and come without any flexibility for tailoring payments based on income. Before the SLABS binge, most private student loans were actually made in connection with the college financial aid office, which helped ensure students weren’t taken for a ride, or weren’t borrowing more than they needed to. Between 2005 and 2007, the percentage of loans to students made without any school involvement grew from 40 percent to over 70 percent. And the volume of private student loans mushroomed from less than $5 billion in 2001 to over $20 billion in 2008. The market shrunk back to $6 billion after the financial crisis as lenders tightened standards.

And just like the subprime mortgage market, not all students were aggressively targeted by these rapacious lenders. The largest percentage of private loans taken out in 2008 were by students at for-profit colleges. In 2008, just 14 percent of all undergrads took out a private loan while 42 percent of students at for-profit colleges took them out. And as we now know, these loans are sinking borrowers—with absolutely no ability to discharge these loans by filing bankruptcy.

The latest student loan default rates issued by the Department of Education show that the three-year default rates for those who started repayment between October 2008 and September 2009 was 13 percent nationally—an average masking sharp differences depending on the type of school the borrower attended. For-profit institutions had the highest average with nearly 1 out of 4 borrowers in default, compared with 11 percent from public institutions and 7.5 percent at private, non-profit institutions.
All these statistics mean that close to 6 million borrowers are in default (almost 1 in 6 borrowers) to the tune of a combined $76 billion, more than the combined annual tuition for all students attending public two- and four-year colleges.
And for the borrower who can’t make payments, the student loan industrial complex is not a good place to be. And it’s costly for taxpayers: the Department of Education paid $1.4 billion last year to debt collectors and guaranty agencies to chase down borrowers who weren’t paying their loans. And here’s where Wall Street grabs another slice of the debt-for-diploma system pie. As reported in the New York Times, of the $1.4 billion paid out last year, about $355 million went to 23 private debt collectors. The remaining $1.06 billion was paid to the guarantee agencies to collect on defaulted loans made under the old federal loan system, which they in turn often outsource to private collectors.
But wait, there's more: It turns out that two of the nation’s biggest banks own debt collection agencies that have contracts with the Department of Education to collect on federal student debt that’s gone bad: NCO Group, owned by One Equity Partners, the private equity arm of JP Morgan Chase and Allied Interstate, owned by Citi Venture Capital International, the private equity arm of Citigroup. Both of these debt collection agencies are distinctive in that according to a comprehensive report by the National Consumer Law Center, they have received the most complaints filed with the Better Business Bureau in a 3-year period. At the same time, NCOs performance in recovering past-due loans has made it one of the top performers for the DOE.

The new cop on the beat—the Consumer Financial Protection Bureau—is now going to be providing federal oversight of the nation’s largest debt collectors, which is welcome news. The Department of Education could also play an important role in rewarding good behavior by their debt collectors. As NCLC recommends in its report, they could incentivize humane treatment of debtors by penalizing agencies for large numbers of complaints filed against them and reward agencies with few complaints.

Over the last two decades, our nation—in a major shift from its historical roots—slowly privatized and financialized the responsibility of paying for college. The result is a system in which the entire pipeline of student loans—now the largest source of “aid” for most students—is fueled, serviced and collected by Wall Street.

The student loan industrial complex invites a more profound question: given the billions in profit generated by federal and private student loans, along with the billions in administrative costs absorbed by tax payers, is debt the most efficient and equitable way to provide access to higher education?

3---LDP leader Abe: BOJ must ease until inflation hits 3 percent, Reuters

The central bank has boosted its asset-buying programme four times this year and last week twinned the latest stimulus with an unprecedented joint statement with the government pledging continued efforts to end deflation.
Abe's comments raised the stakes in politicians' efforts to commit the central bank to even more aggressive steps.
He said that if his party returned to power he would consider revising a law guaranteeing the BOJ's independence to allow the government more say in shaping central bank policy....

Latest data showed Japan's core consumer prices fell for the fifth straight month in September, factory output suffered its biggest fall since last year's earthquake while the government's index of leading indicators fell to a level suggesting the start of a recession.
Some market players also speculate that the central bank will ease again this year, possibly in December, to help the struggling economy with a strong yen.

4---New home sales stagnant, cast shadow on housing, Reuters

New U.S. single-family home sales fell slightly in October and sales for the prior month were revised sharply lower, casting a faint shadow over one of the brighter spots in the U.S. economy.
The Commerce Department said on Wednesday sales dropped 0.3 percent last month to a 368,000-unit annual rate, while September's sales pace was revised to 369,000 from 389,000.
The housing sector has been a point of relative strength this year in an economy beset by flagging business confidence and cooling demand from abroad.
A report last week showed a surprisingly sharp gain in home resales in October, while data this week showed prices for single-family homes have risen continuously since February....

Weakness in business spending has been restraining growth, but housing has helped offset that. Consumer confidence has also been more bullish.
Wednesday's home sales report showed the median sales price for a new home in October was 5.7 percent higher than a year earlier, but the pace of year-over-year price gains slowed for a second straight month.

Some of this could potentially be Hurricane Sandy," said Megan McGrath, an analyst at MKM Partners in Stamford, Connecticut.
However, the Commerce Department said the storm did not affect data collection at all and its impact on sales was likely "minimal."

Economists polled by Reuters had forecast sales rising to a 390,000-unit rate last month from September's previously reported 389,000-unit rate.
To provide support for the housing market, the Fed has kept interest rates at rock-bottom levels since 2008. In September, it launched an open-ended program to buy mortgage-backed securities, driving mortgage rates to record lows.
In a third report, the Mortgage Bankers Association said applications for home purchase loans rose 2.6 percent last week to their highest level of the year.

5--How to game the system with FHA loans for maximum advantage, oc housing

And I can tell you from firsthand experience (I work in Loss Mitigation) that your assertions have been, and continue to be, dead on with regards to modifications and their abject failure. Banks never intended to help anyone, they are using loss mitigation as a way to restrain supply of foreclosed homes from the market, and squeeze blood from a stone. Anecdotally I can tell you (I do short sales myself) that 85% of the people who submit for a short sale, have been through MULTIPLE attempts at modifying their mortgage. They want to game the system, and the banks are happy to let them play their game, because being left to hold the bag is the greater of two evils. Were the banks in any position to liquidate the potential foreclosures without crashing the market, these people would have been out on their ass years ago....

FHA loans as a tool to maximize return on investment

There is a strong secondary incentive to put the minimum down when buying real estate. When you calculate return on investment, the denominator is your investment. The smaller this number is, the higher the return. A 3.5% down payment provides six times the return of a 20% down payment. It;s not the great deal zero-down speculators had going during the bubble, but it’s not bad...

Perspective says:
There are additional benefits to going with an FHA. There are many programs to help you if your income declines, including forbearance. There’s also a streamline refi that allows a quick refi with no appraisal or income checks. The MI is expensive on a 30-year loan (1.25% soon to be 1.35%), but worth the cost if you’re a marginal buyer maximizing your purchasing power and stretching your budget (and therefore can reasonably anticipate using many FHA homeowner aids).

6---New Financial Overseer Looks for Advice in All the Wrong Places, propublica

The Office of Financial Research is a great idea. And as I grasped it, I felt a minor sense of horror, as when you see a precious ring slip off a finger in slow motion and go down the drain while you are powerless to stop it.
The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried.
But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.
This month, it announced its advisory committee [1]. Thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it.
By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry

7--Armageddon 2.0, Bulletin of Atomic Scientists

8---Wells Fargo Peddling Down Payment Assistance Crack, Bay Area Real Estate Trends

9--Don't Believe the Near-Term Housing Data.....we've not reached a bottom of the market yet, Reason Foundation

For instance, the same Case-Shiller index saw increases from May 2009 to May 2010, only to resume its previous free fall with a vengeance. This period too was hailed as the bottoming out of the housing market. But the optimists failed to account for the effects of the First-Time Homebuyers Tax Credit that gave up to $8,000 to households as incentive to buy a home, pulling demand from the future into the present. Once that credit expired in mid-2010, prices began to fall again past the previous low.
This time around the cause of the uptick is that there were fewer foreclosures being processed over the past year which, thanks in part to the robo-signing scandal, has effectively taken existing housing supply off the market. But millions of these delinquent properties will be going through foreclosure and be coming on the market at some point, reversing the price trend currently enjoyed....

Eventually those foreclosures in the system will have to work their way through the pipeline adding to the supply of housing and putting downward pressure on prices.
The housing supply problem could get even worse if investors decide to dump the homes they've been buying up into this market of rising prices. In 2011, 27 percent of all home sales were to investors rather than families looking to live in the homes. These investors will be looking at the surge in housing prices and trying to time the best place to sell and turn a profit. If they decide to dump all these properties at once it could put serious downward pressure on prices in certain areas and add to that potential foreclosure hurricane. Alternatively, they could slowly sell these properties over time like foreclosures slowly dripping into the market, adding to that perpetual downward pressure on housing prices.

10--Austerity without end, WSWS  (Today's "must read")

The media has largely ignored the main message from Monday’s meeting of euro zone finance ministers: that the Greek people confront years, if not decades, of austerity.

In comparison, the issues headlined by the media—whether Greek debt falls below 120 percent of gross domestic product (GDP) in 2020 or in 2022; whether lending rates are lowered or a debt haircut is imposed—were of a marginal and largely hypothetical nature. They boiled down to the question of how many food scraps one allows the victim, in order to exploit him as long as possible, before he eventually dies.

Despite their differences on a number of issues, the assembled finance ministers, IMF head Christine Lagarde and European Central Bank President Mario Draghi all agreed that Greece should be bled to the bone. If everything goes according to their plans, Greece will begin to produce a large budget surplus, every cent of which will go directly into the vaults of the international banks. Given the social devastation already caused by three years of austerity, it takes little imagination to grasp that this means the complete ruination of the country.

Greece is being subjected to a social experiment unlike anything known in Western countries since the Second World War. Comparable devastation is associated only with bloody military dictators such as Chile’s Pinochet or what took place following the collapse of the Soviet Union, i.e., the looting and destruction of an entire economy at the hands of criminal oligarchs.

Greece serves as a model for all of Europe, and, indeed, for the whole world. Having been bailed out with trillions from the public purse after plunging the world into crisis in 2008, the banks are insisting that these funds be recouped through massive cuts in wages and social conditions.

“Financial discipline” has become a demi-god, worshiped by all the mainstream parties. They have created their own mechanisms—the debt brake in Europe, the fiscal cliff in the US—to wipe out all of the past social gains of the working class. The profits of the banks and the assets of the rich are sacrosanct, while the social rights of hundreds of millions are trodden underfoot.

Capitalism reappears as described by Karl Marx: a brutal class society based on the exploitation of workers by the owners of capital, resulting in the enrichment of a few and impoverishment of the vast majority...

the social gains and democratic rights of the working class in Greece and Europe can be defended only on the basis of a revolutionary perspective for the overthrow of the capitalist system and the reorganization of society on a socialist basis.

11---New Home Sales Disappoint - Could It Be 'Cliff Concerns?', CNBC

After a slew of positive readings on the nation’s housing recovery, sales of newly built homes in October were a big disappointment.

Despite the big public builders reporting big jumps in new orders and builder confidence positively leaping to the highest level since 2006, sales just didn’t compute, and even September’s numbers were revised down.

“The recovery in new home sales is looking a little weaker than we were previously led to believe,” writes Paul Diggle of Capital Economics....
 
All signs are pointing to big gains in the housing market for 2013. Those expectations, however, must be tempered with a dash of perspective yet again. Peter Boockvar of Miller Tabak maps it out well:
“While the housing industry is recovering, new home sales have trended between 360k and 370k for the last 6 months, still 73 percent below the bubblicious peak in July '05 and not too far above the trough seen in 1982 and still below the bottom seen in the 1991 recession. On one hand, there is plenty of room for continued improvement but on the other, the healing process will take a lot of time and will likely be in fits and starts as recoveries from the aftermath of bubbles typically are.”
 
12--International Capital Flows Slow Down, conversable economist
 
I'm not sure why it's happening or what it means, but some OECD reports are showing that international investment flows are slowing down in late 2012, whether one looks at international merger and acquisition activity or at flows of foreign direct investment.

For example, the OECD Investment News for September 2012, written by Michael Gestrin, is titled "Global investment dries up in 2012." The main focus of the report is on international merger and acquisition activity, and Gestrin writes:
 
After two years of steady gains, international investment is again falling sharply. After breaking $1 trillion in 2011, international mergers and acquisitions (IM&A) are projected to reach $675 billion in 2012, a 34% decline from 2011(figure 1) ... At the same time as IM&A has been declining, firms have also been increasingly divesting themselves of international assets. As a result, net IM&A (the difference between IM&A and international divestment) has dropped to $317 billion, its lowest level since 2004 ..."

"IM&A has declined more sharply than overall M&A activity. This is reflected in the projected drop in the share of IM&A in total M&A from 35% in 2011 to 29% in 2012 (figure 2). IM&A is declining three times faster than domestic M&A, suggesting that concerns and uncertainties specific to the international investment climate are behind the recent slide in IM&A,
 
 
With regard to the inflation safeguard, I have previously discussed how the 3 percent threshold is a symmetric and reasonable treatment of our 2 percent target. This is consistent with the usual fluctuations in inflation and the range of uncertainty over its forecasts. But I am aware that the 3 percent threshold makes many people anxious.

That's disappointing. If Mr Evans were failing to earn himself any hearing within the FOMC, I could understand a change in tack. But he seems to be winning the argument. Why compromise on principal while negotiations over appropriate thresholds are ongoing? I find this shift confusing and frustrating. Unemployment at 7.9% more than three years after the end of recession makes an awful lot of people anxious, as well. If a 3% threshold is, in Mr Evans' view, a reasonable and appropriate threshold, then stick to that.

14--The Growing Burden of Payroll Taxes, NYT

Payroll taxes and corporate income taxes accounted for an equal share of federal tax revenue in 1969. By 2009, payroll taxes generated more than six times as much revenue. We’ve become reliant on payroll taxes, and a goal of a tax overhaul should be to reform and reduce them, permanently.

First, some background. The share of federal tax revenues coming from payroll taxes has doubled since the 1970s, to about two-fifths of revenue. The payroll tax, underwriting social insurance programs, nearly surpassed the individual income tax as the single largest source of federal tax revenue in 2009.

15--The New Tyros of the Eurozone, Dean Baker, Counterpunch

The eurozone crisis countries still have not developed a workable strategy for countering the policies being imposed by the troika — the European Central Bank (ECB), the IMF and the European Union. Their main problem is not profligate government spending, as fans of data everywhere have long known; the problem is an imbalance in relative prices between the crisis countries and Germany and other northern countries.

This imbalance is causing the crisis countries to run chronic trade deficits. Prior to the collapse of housing bubbles in the peripheral countries, this deficit was financed primarily through massive lending to the private sector in the crisis countries by banks in the northern countries. Since the collapse, the trade deficit has been largely financed with official lending to peripheral country governments. However the core problem is the trade deficit, not government borrowing in the crisis countries.
Prior to the
creation of the euro, this problem of competitiveness would be easily addressed by a fall in the value of the currencies of the peripheral countries relative to the currencies of the core countries. However with the single currency, this is not an option.

16--G SAX global coup d'etat, smirking chimp

For years, tinfoil hat crazies who’ve bookmarked Glenn Beck's websites and often appear as “experts” on Fox so-called News have warned us about a one-world government (here, here, and here). The latest threat, according to them, is Agenda 21 and the creation of a Soviet-style world authority that will confiscate private party everywhere, redistribute wealth to developing nations, and force us all to live by new global laws that sacrifice our national sovereignty. It’s totalitarian governments and not transnational corporations that we should be afraid of, they warn.
But when the tinfoil hat is removed, you can see that a sort of one-world government has already been established in a far more subtle form, through the rise of Goldman Sachs and their colleagues in the Wall Street elite.
A million questions arise when looking at what’s happening around the world. But many of these questions can be answered, once it’s acknowledged that Goldman Sachs alumni have executed a global coup d’etat...

In this post-crash world, where agents of Goldman Sachs have infiltrated key positions of power all around the world, we must all fundamentally re-understand how we view the global economy and just how much effect our democratic institutions have on this economy.

We no longer have an economy geared to benefit working people around the world; we have an economy that’s geared to exploit working people for Goldman Sachs' profits. Trader Alessio Rastani told the BBC in September before Goldman’s Lucas Papademos was installed as Greece’s Prime Minister, “We don't really care about having a fixed economy, having a fixed situation, our job is to make money from it…Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession.” Rastani continued, “When the market crashes... if you know what to do, if you have the right plan set up, you can make a lot of money from this.”
And as we’ve seen over the last decade, Goldman Sachs knows exactly what to do. They’ve had the right plan set-up, and it's nothing short of a global coup d’etat.

As Rastani bluntly told the BBC, “This is not a time right now for wishful thinking that governments are going to sort things out. The governments don't rule the world, Goldman Sachs rules the world.”

17---Modified mortgages re-enter shadow inventory – By next month the housing crisis will have cost 5,000,000 Americans their homes via foreclosures. Distressed inventory still above 5,000,000., Dr Housing Bubble

 Since 2006 the housing crisis has cost nearly 5,000,000 Americans their homes while another 10,000,000 have faced the prospect of foreclosure. This is an incredibly high figure considering that nationwide, roughly 50 million households carry a mortgage on their property.....You still have over 5,300,000 mortgages in the foreclosure pipeline....

Rising home values make it easier for banks to unload these properties via short sales and other mechanisms. Given that the entire market was turned upside down because of 5 million completed foreclosure, the 5,300,000 homes in the foreclosure pipeline is still a big concern and the fact that nearly 100,000 are being put back into this bucket each month is concerning. The current momentum is clearing out properties but as we had mentioned, prices in areas like Arizona are actually turning investors away.

(From Sober Look)  “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?”...

A modified mortgage is yanked out of the shadow inventory pipeline. From data from the OCC and other figures from HAMP, re-defaults on modified loans are very high. It might take one or two years to re-default but the success rate is poor. In other words, was the shadow inventory figure temporarily depressed because of these weak modifications?..

Something is definitely going on recently because charge-off rates have spiked recently and the housing market is moving up:

So how many mortgages have been modified? Since 2008 it looks like over 2.5 million...
In other words, you have a solid number of modified homes re-entering the shadow inventory figures. With investor demand and short sales, the figure is moving lower.

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
http://economistsview.typepad.com/economistsview/2012/11/fed-watch-meanwhile-in-japan.html
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

 


 

Tuesday, November 27, 2012

Today's links

1--What Housing Recovery? Distressed Sales Still High, Shadow Inventory Massive, Forbes

There are several reasons to remain skeptical, though, that this recovery will both be swift and will fuel economic growth that will help pull the U.S. farther from the edge of a new recession. Goldman’s economics research team understands that much of the improvement in housing markets can be attributed to a fall in the percentage of distressed transactions, which accounted for 50% of sales in 2009 and has now fallen to 25%

2--Home Equity Loans Make Comeback Fueling U.S. Spending, Bloomberg

After six years of declines, lending for so-called Helocs will rise 30 percent to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31 percent to $104 billion, it projected....


The median U.S. home price will probably gain 8 percent this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. The amount of equity homeowners had in the second quarter rose by $406 billion to $7.3 trillion, the highest level since 2007.

3---Vital Signs Chart: Stalling U.S. Incomes, WSJ

U.S. incomes stalled this year after rising toward the end of 2011. Real median household income was up 1.2% on a seasonally adjusted basis in October from this year’s low of $50,757 in April. That’s according to a new study of Census data. At $51,378, median income is slightly above its year-ago level of $51,089, but well below the prerecession level of $54,761 in October 2007.

4---Mark Carney appointed next BoE Governor: what the papers say, Telegraph

Canada has lost a "rock star" banker who will face his first real test when he takes the top job at the Bank of England next year. Here's what the Canadian press have been saying about his appointment...

If one of the jobs of central bankers is to take away the punch bowl just as the party gets going, Mark Carney is shirking his responsibilities in Canada. The governor of the Bank of Canada has been summoned by Her Majesty the Queen to take over the Bank of England, to which he will depart in June, 2013, likely without having to face the challenge of raising Canadian interest rates from ground zero. Mr. Carney put them there some four years ago, and now he is leaving as a policy hero with the punch bowl still full and the party yet to get underway. We know not where Mr. Carney’s monetary policies will ultimately lead Canada.

Instead of seeing his policies through, Mr. Carney is departing for a bigger place where the uncertainties are even greater. A master of jargon, a highly skilled communicator and obviously bursting with ambition, Mr. Carney will face his first real test as a leader, policymaker and communicator. Canada is a country club by British banking standards, and Mr. Carney has already picked some enemies.

5---The “fiscal cliff” fraud, WSWS

There is bipartisan agreement between the two corporate-controlled parties to slash social programs upon which tens of millions of working people rely for health care and retirement income. The main issue under debate is how to package the cuts so as to best confuse public opinion and obscure what is really happening.

In this, President Obama is taking a leading role. His primary concern is to make the slashing of social programs that keep millions out of poverty seem necessary, while providing this reactionary attack with a fig leaf of “fairness.....

Obama’s call for a token increase in taxes on the highest earners, whether in the form of an increase in the top tax rate or some lowering of deductions, is nothing but a smokescreen. Any slight tax increase that might initially be imposed on the rich would be more than offset by the “comprehensive tax reform” supported by both parties

6---Housing Recovery Is Leaving Behind First-Time Buyers, CNBC

Current homeowners are finally moving up, and distressed sales are making up less of the overall market—all signs of much-needed improvement in housing.

Current homeowners accounted for 54 percent of October’s non-distressed market, up from 50 percent in June, according to a new survey by Campbell/Inside Mortgage Finance.

This as the share of non-distressed sales surged to 64.7 percent, up from 55.7 percent as recently as February.

Unfortunately, first-time home buyers are seeing just the opposite, largely left out of this surge in sales and prices. Their share of the market, usually up in the 40 percent range historically, fell to 34.7 percent in October, the lowest in the Campbell/IMF survey’s three-year history.

The National Association of Realtors put their share even lower, at 31 percent.

Either way, they are the only group of buyers that have not seen their share of non-distressed home purchases rise over the past five months. The mortgage of choice for these buyers, FHA-insured loans, are increasingly tough to obtain. (Read More: Yes, Housing Starts Surge, but Rentals Are the Drivers)

“Financing of first-time homebuyers with low down payments threatens to become a significant problem in the U.S. housing market,” wrote 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. Private mortgage insurance has started to fill the gap, but the long-term status of private mortgage insurance is in question pending the publication of the Qualified Residential Mortgage regulation resulting from Dodd-Frank.”
 
 
 U.S. home prices rose in September for the sixth month, signaling that the housing market is "in the midst of a recovery," according to the S&P/Case-Shiller home-price index released Tuesday. The S&P/Case-Shiller 20-city composite posted a 0.3% increase in September following a 0.8% gain in August. Home prices are up 3% from the prior year. "We are entering the seasonally weak part of the year. Despite the seasons, housing continues to improve," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices. Among the 20 cities tracked by the index, 13 posted monthly gains in September. Tuesday's report on home prices is the latest news on a strengthening housing market. There have also been recent gains in new construction, home-builder sentiment, and existing-home sales. However, while persistently low mortgage rates are attracting some buyers, consumers still face tight credit standards, and officials say factors such as tight lending terms will block a powerful housing recovery. Indeed, despite recent gains, prices are about 30% below peak levels in 2006, according to Case-Shiller data
.

Monday, November 26, 2012

Today's links

1--Household Income Stagnates, Again, NYT

2--Abe’s BOJ Marching Orders: A Step Too Far?, WSJ

First, market players moved. Then, they scratched their heads.
Opposition leader Shinzo Abe’s remarks favoring aggressive monetary easing drew a positive reaction last week from financial markets. The comments by the man tipped to become Japan’s next prime minister also attracted kudos from experts who welcomed them as outlining a much-needed remedy to get the economy out of its long slump.

But now, he may have gone too far.
In ratcheting up his rhetoric against the Bank of Japan 8301.JA -0.93% at the weekend, Mr. Abe seemed to cross the boundary between aggressive easing steps and irresponsible public financing, as he called on the central bank to purchase government bonds to finance public works spending.
Critics say such a step would set Japan on a slippery slope toward undisciplined increases in its public debt load — already the largest among developed nations — and a loss of trust in its ability to repay its debts.

3--Why Another Financial Crash is Certain, archive, inteltrends

Here’s an excerpt from a special report on shadow banking by the Federal Reserve Bank of New York:
At the eve of the financial crisis, the volume of credit intermediated by the shadow banking system was close to $20 trillion, or nearly twice as large as the volume of credit intermediated by the traditional banking system at roughly $11 trillion. Today, the comparable figures are $16 and $13 trillion, respectively… The weak-link nature of wholesale funding providers is not surprising when little capital is held against their asset portfolios and investors have zero tolerance for credit losses.” (“Shadow Banking”, Federal Reserve Bank of New York Staff Report)
So, between $4 to $7 trillion vanished in a flash after Lehman Brothers blew up. How many millions of jobs were lost because of inadequate regulation? How much was trimmed from output, productivity, and GDP? How many people are on now food stamps or living in homeless shelters or struggling through foreclosure because unregulated financial institutions were allowed to carry out credit intermediation without government supervision or oversight?
Ironically, the New York Fed doesn’t even try to deny the source of the problem; deregulation. Here’s what they say in the report: “Regulatory arbitrage was the root motivation for many shadow banks to exist.”
What does that mean? It means that Wall Street knows that it’s easier to make money by eliminating the rules… the very rules that protect the public from the predation of avaricious speculators.
The only way to fix the system is to regulate all financial institutions that act like banks. No exceptions

4--A Short History of Bubblenomics, counterpunch

Here’s how it all works according to Independent Strategy’s David Roche

"The reason for the exponential growth in credit, but not in broad money, was simply that banks didn’t keep their loans on their books any more ? and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.
There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."
 
So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks’ balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt." ("The Global Money Machine", David Roche, Wall Street Journal)
 
 
Mursi’s actions confirm the basic perspective of Trotsky’s Theory of Permanent Revolution: that the tasks of the democratic revolution, including independence from imperialism, cannot be resolved except through the independent mobilization of the working class in socialist revolution....
The role of the United States—Egypt’s main imperialist backer—has been central. The timing of Mursi’s decree is no accident. The declaration came the day after US Secretary of State Hillary Clinton thanked him for his role during the Israeli regime’s brutal assault on Gaza. While rockets rained down on civilians in Gaza, Mursi put himself forward as a reliable stooge for US imperialism. He vowed to tighten the blockade of Gaza and deepen his relations with Washington and Tel Aviv.
At least for the time being, the Obama administration sees the Muslim Brotherhood as a central ally in its overall strategy in the Middle East, including the imperialist-backed civil war in Syria against the regime of Bashar al-Assad, and plans for war against Iran.

6---Big investment firm buys hundreds of houses in Sacramento area, Sac Bee

7---Some securities purchases but no QE from the Fed yet, sober look
 
The Fed's latest securities purchases are still not having much of an impact on bank reserves (see discussion). The net effect of Fed's recent activities is equivalent to sterilization, although this is probably not what the central bank had intended. The result is similar to the ECB's SMP (Securities Markets Programme), which was (usually) sterilized by auctioning off term deposits (securities purchases increase reserves, while term deposits "drain" them).
 
8---Loan modification defaults soar 24%, can-kicking fails, oc housing
 
9---Many Executives Think Sales Growth Has Topped Out, WSJ

Saturday, November 24, 2012

Today's links

1---Economists, Obama administration at odds over role of mortgage debt in recovery, WA Post

The meeting highlighted what today is the biggest disagreement between some of the world’s top economists and the Obama administration. The economists say the president could have significantly accelerated the slow economic recovery if he had better addressed the overhang of mortgage debt left when housing prices collapsed. Obama’s advisers say that they did all they could on the housing front and that other factors better explain why the recovery has been sluggish.

The question is relevant because although Obama won reelection this month, the vast majority of voters still say the economy is weak and not getting better. Policymakers in Washington are now focused on another type of debt — the public debt all taxpayers owe — but the slow economic recovery, which depresses tax revenue, makes that problem harder to solve.
Nearly 11 million Americans, or more than a fifth of homeowners, are buried in debt, owing more than their properties are worth after piling their life savings into their properties — a persistent and largely unaddressed problem that represents the missing link in what many economists consider the administration’s overall strong response to the recession.

2--Bernanke Says Fed Will Do What It Can to Support Housing, Bloomberg

Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too- tight lending rules to racial discrimination.
“We will continue to use the policy tools that we have to help support economic recovery,” Bernanke said today in a speech in Atlanta, Georgia.
Bernanke is pressing on with record easing including a plan to buy $40 billion a month of mortgage-backed securities, aiming to spur growth and reduce a 7.9 percent unemployment rate. He has resorted to unorthodox policies six years after home prices started a plunge that knocked the economy into the longest recession since the Great Depression...

Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”

3---Marginal Rates and Economic Growth: They Go Up Together, angry bear

Higher taxes are good for the economy

4--Abe pledges to make BOJ buy bonds, Japan Times

Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December's Lower House election and he becomes prime minister.

Abe, who heads the largest opposition party, also said he would appoint as the central bank's next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa's term of office is set to expire next April.
 
"We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market," Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. "We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time
 
 
Government antipoverty programs keep nearly 50 million people out of poverty. Without them, the poverty rate would be twice as high, according to the Center on Budget and Policy Priorities. In 2011, unemployment insurance helped 26 million workers, points out the National Employment Law Project (NELP), and lifted 2.3 million people, including more than 600,000 children, above the poverty line.
In 2010, about two-thirds of people counted in the government’s unemployment figures received unemployment benefits. By 2011, however, that number had fallen to 54 percent. This year it fell to only 45 percent, according to George Wentworth, NELP Senior Staff Attorney.
Now, extended unemployment benefits, implemented because of the economic slump and the growth of long-term joblessness, are due to end by December 31. Unless the program is renewed, two million people will be cut off, and in no part of the country will the unemployed receive more than 26 weeks of jobless pay after being laid off.
If the program is allowed to lapse, according to Wentworth, it would mean that only a quarter of those who are officially unemployed would receive any form of benefits.

6--- China Shadow-Banking Risk, Bloomberg

Shadow banking worldwide is a $67 trillion industry whose size “can create systemic risks,” the Financial Stability Board said in a Nov. 18 report. The business in China, which includes banks’ off-balance-sheet vehicles such as commercial bills and entrusted loans, as well as underground lending by individuals, flourishes because more than 90 percent of the nation’s 42 million small companies can’t get bank loans.
China’s 64 trust firms, with sales offices in major cities, combine characteristics of commercial and investment banking, private equity and wealth management. They pool household savings to offer loans and invest in real estate, stocks, bonds, commodities, even bottles of sorghum liquor. No other financial firms operate across all these asset classes...
Trusts took off again in 2010 as they helped banks move loans off their balance sheets and circumvent lending quotas amid monetary tightening. Developers had to rely on trust loans for working capital even as borrowing costs including interest and fees amounted to about 15 percent this year and almost 20 percent last year, according to Benefit Wealth. That compared with the benchmark one-year lending rate of 6 percent

7---Modified-Mortgage Defaults Soar 24% in Looming Housing Challenge, Bloomberg

Subprime Loans
About 35 percent of outstanding securitized subprime loans have been modified and more than 25 percent of so-called option adjustable-rate mortgages, according to the report. About $216 billion of securitized non-agency mortgages are being paid on time after previous delinquencies, Amherst data show.
Recidivism rates after 12 months for modified subprime mortgages have declined to about 40 percent from almost 80 percent for loans reworked in the third quarter of 2008, reflecting loan servicers offering larger payment reductions and more cuts to balances, according to the Nomura analysts.
Fannie Mae and Freddie Mac’s burgeoning holdings of modified mortgages, which drove non-performing loans at the government-supported companies to a record last quarter, also cast “doubts on the true health of the housing recovery,” Jim Vogel, an FTN Financial analyst, wrote in a Nov. 16 report.

‘Thorny Issues’

The firms owned $195 billion of restructured loans on which they were accruing interest as of Sept. 30, according to the report. The debt is also on the “list of thorny issues” that must be addressed before the companies can be replaced, he said.
Values of securities in the almost $1 trillion non-agency market are little changed this month even after the release of the delinquency data and amid slumps in assets including stocksand high-yield company bonds.
Typical prices for the senior-most bonds backed by option ARMs were unchanged last week at 62.8 cents on the dollar, up from 51 cents at the start of 2012, Barclays Plc data show. Option ARMs can allow borrowers to pay less than the interest owed by increasing their balances

8---Task force says global shadow banking hits $67 trillion, Reuters

The system of so-called "shadow banking" blamed for aggravating the global financial crisis grew to $67 trillion globally last year, a new high, amid calls from the world's top policymakers for greater control of the sector.
A report by the Financial Stability Board (FSB) on Sunday appeared to confirm fears among policy makers that shadow banking is set to thrive, beyond the reach of a regulatory net tightening around traditional banks and their activities.
Officials at the European Commission in Brussels see closer control of the sector as important in preventing a repeat of the financial crisis that toppled banks over the past five years and rocked the euro zone.
The study by the FSB, set up by the world's top economies (G20) to police global finance, said shadow banking around the world more than doubled to £62 trillion in the five years to 2007 before the crisis struck.
But the size of the total system had risen to $67 trillion in 2011, more than the total economic output of all the countries in the study.
The multi-trillion dollar activities of hedge funds and private equity companies are often cited as examples of shadow banking.
But the term also covers investment funds, money-market funds and even cash-rich firms that lend government bonds to banks, and which in turn use them as security when taking credit from the European Central Bank
Even the man credited with coining the term, former investment executive Paul McCulley, gave a catch-all definition.
McCulley said he understood shadow banking to mean "the whole alphabet soup of levered up non-bank investment conduits, vehicles and structures", such as the special investment vehicles that many blamed for the financial crisis.

9---Shedding Light on Shadow Banking, Bloomberg

The last time people paid attention to shadow banking was when it was ripping the world apart. The 2008-09 global financial crisis, the worst since the Great Depression, was precipitated by a “bank run” that hit nonbank financial firms such as the Reserve Primary Fund money-market fund and American International Group (AIG), then the world’s largest insurer. Creditors accumulated chits that were unpayable by debtors, and the lack of government deposit insurance meant there was nothing to stop the creditors from panicking when the chits hit the fan....

Shadow banking covers any kind of lending that’s not done by banks that take insured deposits. Shadow banking, which remains lightly regulated, matches savers with borrowers in ways that conventional banks can’t. For example, money-market funds allow people and companies to stash excess cash that’s put to work financing auto loans, credit-card borrowings, and so on. Similarly, repurchase agreements (repos)—a form of secured lending—are a cheap way for pension funds and the like to raise money. “Where nonbank financial entities have specialized expertise in assessing risks, they may provide these functions in a cost-efficient manner and provide competition, innovation, and lower borrowing costs,” the Financial Stability Board wrote. Like banks, they fail when they can’t pay off their creditors in a crisis because their funds are tied up in long-term assets.

10---Greece in the grip of the EU, WSWS

Greece serves as a model for the whole continent. The redistribution of wealth from those at the bottom to those at the top cannot be reconciled with democratic rights or parliamentary forms of rule.


On Monday, a government spokesperson announced that Greece would deposit all the proceeds from the privatisation of profitable state enterprises into a special account that would be used exclusively for the repayment of debts and interest and is directly controlled by the troika. The German Finance Minister Wolfgang Schäuble has proposed that the financial aid could also be parked in such an account. In this way, the Greek state would lose the final remnants of its financial independence.

The dictatorship of the EU over all levels of the state administration is a direct reaction to the continuing mass protests, strikes and factory occupations with which the workers throughout Greece are resisting the brutal social attacks.

In order to impose new cuts and to further plunder Greek society, the financial elite is resorting to increasingly authoritarian means. While they subject the state administration to their diktats, the fascist gangs of Chrysi Avgi (Golden Dawn) are being mobilised and encouraged by the police to act against political opponents and workers.

The aim of these measures is not lowering the state debt, which continues to rise, but to lowing the living conditions of the working class to Third World levels. Social rights and the welfare system are being destroyed, wages cut and hundreds of thousands sacked. Many workers have already paid with their lives, being no longer able to pay for medical treatment or medicines in a health system ruined by the cuts.

The financial elite wants to impose this programme throughout Europe. Following Spain, Portugal and Italy, now France is in the firing line. On Monday, the rating agency Moody’s

11---A significant report on the global economy, WSWS

A report by a major US forecasting group has poured cold water on the idea that China, or any of the so-called emerging markets, can provide a new base of expansion for the global capitalist economy, either in the short- or long-term

The idea that China, India and other “emerging economies” could provide a new platform for global growth was always an illusion. It was based on the assumption that the rapid growth of the first decade of this century would continue indefinitely.

This scenario completely ignored the fact that, far from “decoupling” from the advanced capitalist economies, the new growth centres were dependent upon them. Chinese growth, for example, was the result of its development as the cheap labour platform for major transnational corporations, whose main markets were in Europe and the United States.

Those markets underwent a significant contraction with the eruption of the financial crisis, which continues today. In the face of the loss of 23 million jobs in 2008-2009, Chinese government and financial authorities responded with what is reputed to be the largest stimulus package in world economic history, based on increased government spending and the expansion of bank credit in order to try to prevent mass unemployment and social unrest.

However these measures were predicated on the assumption that pre-2008 conditions were going to return. That has not taken place as US and European markets continue to stagnate or contract

12---Workers Must Get a Bigger Slice of the Pie, NYT

ECONOMIC growth in Europe depends on a recovery in household consumption. And that, in turn, requires a rethinking of the balance between capital and labor.
Over the last 30 years, wage growth has lagged behind productivity across the industrialized world, leading to a steep fall in wages, salaries and other employee benefits as a proportion of G.D.P.
 
Simultaneously, there has been a big rise in inequality as the benefits of economic growth have accrued to those at the top of the income scale, as well as a steady increase in corporate income and profits. These trends have gone hand-in-hand with a steady decline in business investment.
Europe’s strategy for dealing with the euro zone crisis has exacerbated these trends and is therefore a further obstacle to economic recovery. European countries are relying on two things to boost investment and hence employment:
      
First, they are trying to lower labor costs, make their business environments more attractive by switching the burden of taxation from the corporate sector to the consumer, pushing through labor reforms aimed at reducing workers’ bargaining power and curtailing social rights and transfers. Second, they are attempting to boost business confidence by consolidating public finances.
Such a strategy might make sense for individual countries, so long as they can rely on exports, but not for the European economy as a whole. The strategy promises to further aggravate Europe’s core problem — a structural shortage of demand — by bringing about a further decline of labor income and a further rise in inequality.
 
There is no doubting the need for reforms aimed at increasing competition and opening the way for the adoption of new technologies. But governments need to combine market-led reforms with measures aimed at preventing a further decline in labor’s share of the pie.
With households now highly indebted across the industrialized world, a sustained recovery in private consumption will require a rise in the share of national incomes accounted for by wages and salaries.  
 
 
Interview Keith Jurow, video
 
 
 
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