Tuesday, March 26, 2013

Today's links

1---We won’t [be] Germany’s slaves,”, RT

Capital controls are still in place in Cyprus, meaning that banks are able to impose restrictions on the amount of money citizens are able to take from the ATMs, or how much money they can move around.
“We have no cash. We are just… queueing behind the ATM machines, waiting to get some cash. For how long?” one resident said.
The restrictions are creating an intense atmosphere of uncertainty, and some mild hoarding of cash supplies.
“Everybody is trying to hold onto those 5 or 10 euros that they have just in case there’re even lower limits, because right now they can only take about 100 euros,” Arcilla reported.
Some are even feeling nostalgic for the old Cypriot pound.
“With the pounds – peace and quiet,” another resident said.
“It’s better to go back to the pound

2---New down payment requirements could crash housing again, oc housing

There are many more potential buyers with little or no savings than there are those with hundreds of thousands in cash in the bank. The size of the potential buyer pool rises or falls dramatically with changes in down payment requirements. A high down payment requirement greatly reduces the potential buyer pool whereas a low down payment requirement greatly increases it. This basic fact is why lenders and their lobbyists are working so hard to get down payment requirements lowered or eliminated. Any down payment requirement is an impediment to doing more business. In fact, if down payment requirements were reduced to zero, that barrier to home ownership would be effectively removed. Lenders tried that during the housing bubble, and it was a disaster. Lots of people who didn’t have any savings — or any sense of financial responsibility — took lenders up on their generous offers for free houses. This was a major contributor to the housing bubble and bust, and the resulting losses cost lenders — and taxpayers — billions.

Lending losses are the negative side effect of low down payment requirements. Lenders want to eliminate the down payment requirements to make more money on originations, but then they want to sell these loans off to investors, mostly with taxpayer backing, so they don’t have to absorb any losses when their loans go bad. The originate-to-sell business model is the best of both worlds...

So why has this subject been making headlines for well over a year? Here’s what started the debate:
“These underwriting standards include, among other things … a maximum loan-to-value (LTV) ratio of 80 percent in the case of a purchase transaction (with a lesser combined LTV permitted for refinance transactions); a 20 percent down payment requirement in the case of a purchase transaction…”
This quote comes from the Notice of Proposed Rulemaking published by federal banking regulators in March of 2011. This is the match that lit the fuse of controversy, complaint and lobbying. Though this was only a proposal (and there’s a wide chasm between proposal and passage, when it comes to federal laws), it did signal the desires of regulators to impose a 20% down-payment rule for purchase mortgages. It’s right there in black and white.
Let’s hope that requirement remains in black and white in the final draft of the rules. With all the lobbying for a zero requirement, I suspect a 5% or 10% requirement is more likely despite the obvious risks to taxpayers, homeowners, and communities when lenders inflate another housing bubble.

3---From S&P: Home Prices Accelerate in January 2013 According to the S&P/Case-Shiller Home Price Indices , calculated risk
Data through January 2013, released today by S&P Dow Jones Indices for its S&P/Case-Shiller Home Price Indices ... showed average home prices increased 7.3% for the 10-City Composite and 8.1% for the 20-City Composite in the 12 months ending in January 2013.

“The two headline composites posted their highest year-over-year increases since summer 2006,” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “This marks the highest increase since the housing bubble burst."
...
In January 2013, nine cities -- Atlanta, Charlotte, Las Vegas, Los Angeles, Miami, New York, Phoenix, San Francisco and Tampa -- and both Composites posted positive monthly returns. Dallas was the only MSAwhere the level remained flat.
Case-Shiller House Prices Indices Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 29.3% from the peak, and up 1.0% in January (SA). The Composite 10 is up 7.3% from the post bubble low set in Feb 2012 (SA).

The Composite 20 index is off 28.4% from the peak

4--The Big Picture

Source: Econbrowswer

5---The avoidable deposit insurance mistake, VOX

First, the plan disregarded the lessons of financial history about the high importance of deposit safety. This is particularly important for middle-class households (which is why there usually is an upper limit for explicit deposit insurance, harmonised at €100,000 in the EU since 2009).
  • Based on the experience of the early 1930s, it is virtually undisputed in the US that a breach of deposit insurance will primarily hurt the 'little guys'.
Sheila Bair, the respected former Chairman of the US Federal Deposit Insurance Corporation, has expressed this view with reference to Cyprus (Hobson, 2013). Similar lessons arise from the record of many recent emerging-market crises.
  • Even if, as alleged, it was Cyprus’s own president who recommended hurting small depositors, European negotiators were not justified in going along.
  • After all, in November 2010 the Troika did a similar thing with Ireland.
The EU, ECB and the IMF rebuffed Irish authorities’ proposal to 'burn' the holders of senior unsecured debt in failed banks. The refusal was aimed at preventing damaging contagion in the rest of Europe.
  • A similar argument was more straightforward and sensible for Cyprus than it had been for Ireland, and should have led them to oppose Mr Anastasiades’ proposal from the outset
6---Moral hazard in EZ, IFR, (shrinking the EU banking system)

Moral hazard may not be quite dead in Europe but it has a bad, hacking cough.
A new, tougher policy on banking bailouts, made flesh in Cyprus and enunciated by Dutch Finance Minister Jeroen Dijsselbloem, will shrink Europe’s arguably overly-large banking system and, ultimately, may put unbearable pressure on the currency union.

Actually the policy, allowing holders of bonds and uninsured depositors in insolvent banks to actually lose money, is not so much new as a return to following the rules of capital structure, with equities taking the first loss and uninsured deposits the last to suffer.

It does mark a huge change from how Europe, and the US, have handled bad banks since the crisis began, sheltering creditors and depositors from the consequences of their risk-taking in ways that make them likely to take on more and sillier risks, a syndrome called moral hazard.
“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?’,” Dijsselbloem, who also heads the Eurogroup of euro zone finance ministers, told Reuters and the Financial Times.

“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders, we’ll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders,” he said.
“It will force all financial institutions, as well as investors, to think about the risks they are taking on because they will now have to realize that it may also hurt them. The risks might come towards them.”

After a first, and disastrous, plan which would have violated the spirit of an EU policy of insuring accounts of less than €100,000, Cyprus, the EU and IMF eventually agreed a banking bailout which shielded small accounts and concentrated pain not only on those larger than the limit, but on depositors in the weakest banks.
Even more significant was the decision to force senior bondholders to accept losses. Both moves will give pause to investors who provide money to banks in Europe, who will likely now either decide this is not worth the risk, or who will demand better compensation for the hazards which now fall on them.....

This is also going to increase pressure for a controlled breakup of the euro, and may make it inevitable. Cyprus, like Greece, is going to suffer a massive implosion of its economy without being able to devalue its currency. That may well prove intolerable.
Those two realizations – that investors need to look out for themselves and that the euro’s center may not hold – are as big as they are scary.

This is an excellent policy but one which is going to hurt a great deal. It is not simply that this partly undoes the policy of public insurance against private risks which generate private gain. It also acknowledges, tacitly, that the debts within the euro zone may be too large, that losses must be suffered to allow restructuring to happen on better foundations.

7----Amanda Knox is ordered to stand trial for murder in Italy again, LA Times

Kercher, 21, was found with her throat slashed and more than 40 stab wounds. Authorities said there were signs of sexual assault.
Knox and Sollecito spent four years in prison before their acquittals. In a separate trial, Ivory Coast-born Rudy Guede was sentenced to 16 years in prison for his role in the slaying.

Knox's story about her whereabouts that night changed over the course of the case. After saying she had heard Kercher's screams, she denied it, saying brutal interrogations had forced her to make false statements.

Italian prosecutors said Knox's DNA had been found on the knife that killed Kercher, but that finding that was later undermined by an independent review that said the evidence had been severely compromised by sloppy police work.

8---Consumer confidence slumps in March, marketwatch

New York Fed President William Dudley said Tuesday that the combination of higher payroll tax rates, increased taxes on high-income earners, the new taxes from the Affordable Care Act, and the sequester will combine for a 1.75 percentage point drag on gross domestic product this year.

The index was the second large drop in three months. That said, retail sales growth has been solid the first two months of the year, posting monthly gains of 0.2% in January and 1.1% in February.

“The expectations number, if sustained, is consistent with zero growth in spending, but it is not always right. Thankfully,” said Ian Shepherdson of Pantheon Macroeconomic Advisors, in a note to clients.

One element of the consumer confidence report that economists focus on had a mixed result in March. Those who said jobs are “plentiful” fell to 9.4% from 10.1%, but those who said jobs are “hard to get” also fell, to 36.2% from 36.9%.

9---European Union imposes bank bailout on Cyprus, wsws

Ahead of the final round of discussions on Sunday, EU officials insisted on installing an economic dictatorship over the Cypriot economy. The measures included controls to prevent large-scale capital flight, restrictions on the use of bank accounts, and the imposition of limits on the amount of money withdrawn from ATM machines. Anti-democratic regulations passed by the parliament in a late-night sitting on Friday also included the provision for the Central Bank to adopt any steps “for reasons of public order or safety.”

10---Investors Pile Into Housing, This Time as Landlords, WSJ

Whether they knew it or not, investors helped set a floor. They warmed up the market, and it brought buyers back," said Lanny Baker, chief executive of real-estate brokerage ZipRealty.
[image]
Investors have always played a role in the housing market, but their presence was often small. Currently, cash buyers—largely investors—make up about 32% of sales nationally, according to the National Association of Realtors. In Southern California, a favorite target for investors, absentee buyers accounted for 31.4% of purchases last month, up from an average of less than 17% between 2000 and 2010, according to DataQuick MDA, a real-estate research firm.
While some firms have focused only on Sunbelt markets with newer housing stock, others are branching out. American Residential Properties Inc., which began amassing hundreds of homes in Phoenix four years ago, earlier this month bought 93 homes in Chicago's southern suburbs, bringing its total there to around 300. On Friday, the company said it planned to raise $300 million in an initial public offering,


The rush of investors into the housing market follows a long push by federal policy makers to foster the American dream of homeownership that unraveled for some people in the housing crash. The homeownership rate fell to around 65% last year from 69% in 2005. "We're clearly at the beginning of a rental boom," says Christopher Thornberg of Beacon Economics. "We all saw there had to be a shift towards renting single-family units that owners could no longer afford. Investors played a critical role in that transformation."
Their arrival will further transform some communities already hit hard by foreclosures and falling home prices. Renters have less of a stake than do homeowners. But deep-pocketed investors can still be good news for neighborhoods that otherwise would be at risk because so many homes had been neglected.

The house-rental market long has been dominated by mom-and-pop outfits, including retirees, real-estate brokers, doctors and other professionals, and they still account for most investor purchases. Over the past year, large private-equity firms such as Blackstone Group BX +1.35% and Colony Capital have spent billions of dollars buying up single-family homes. Blackstone says it has purchased 20,000 homes since early last year. It is buying more than $100 million worth of homes a week and has spent $3.5 billion so far....

Investors are concentrating on markets that have cheap housing and where job growth—and rental demand—is revving up. A year ago, Phoenix became the hottest target, and with prices there up by 20% since early last year, investors have raced to find similar discounts in other metro areas. Silver Bay Realty Trust Corp., SBY +2.89% which last year became the first publicly traded home rental firm, owned some 3,400 homes in 10 different markets from Phoenix to Atlanta to Tampa, Fla., at the end of 2012....

Not everyone believes that the current level of investor activity is healthy. Some worry that investors will eventually flee the housing market if values erode again or if the expense of maintaining a large number of homes becomes onerous. "Are they going to continue to maintain them? Or are they going to dump them into the single-family market?" said Mr. Thornberg of Beacon Economics.
Some investors have a notorious history in the housing market. During California's housing bust in the late 1980s and early 1990s, the federal government sold hundreds of homes in California's San Bernardino and Riverside counties, about an hour east of Los Angeles. Some homes weren't maintained, turning entire neighborhoods into shabby rental communities.

Colony's Mr. Chang said sophisticated real estate professionals are unlikely to repeat such practices. "If you're building the business for the long term, which we are, the incentive is to make sure the assets are looking good," he said. "If you let them go, tenants will leave." ...

Purchased homes get fresh paint, carpet, appliances, fixtures, and granite countertops. Skimping on repairs only leads to higher expenses later, said Mr. Pintar, who owns a separate property-management company.

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