Posts Tagged ‘double dip recession’
By Margo D. Beller
Special to CNBC.com
Wednesday, 1 Jun 2011 | 11:06 AM ET
Wall Street is having a hard time figuring out what to do now that the U.S. economy appears to be sputtering and yields are so low, Peter Yastrow, market strategist for Yastrow Origer, told CNBC.
“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.
“We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake.”
Stocks extended losses after the manufacturing fell below expectations in May and the private sector added only 38,000 jobs during the month.
“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.
“We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer.”
However, he said he wouldn’t sell stocks.
“Any bears out there better be careful because the dividend yields on these stocks look awesome relative to all the other investment vehicles out there,” Yastrow said. “So bears are going to have to find a new way to express their discontent with the U.S. economy.”
Read the entire article HERE.
By John Gittelsohn
May 8, 2011 9:01 PM PT
More than 28 percent of U.S. homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.
Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.
Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.
“We get tired of telling such a grim story, but unfortunately this is the story that needs to be told,” Humphries said in a telephone interview. “Demand is still quite anemic due to unemployment and the fact that home values are still falling. And that tends to make people more cautious about buying.”
The U.S. unemployment rate rose to 9 percent in April, up from 8.8 percent in March, the Department of Labor reported May 6. Home prices have fallen almost 30 percent from their June 2006 peak, wiping out more than $10 trillion in equity, including $667.5 billion in the first quarter, Humphries said.
Dropping Home Values
Other analysts also expect homes to continue losing value this year. Oliver Chang of Morgan Stanley expects prices to fall as much as 11 percent, according to an April 25 report. Prices may fall “another 5 or 10 percent,” Robert Shiller, an economics professor at Yale University, said April 26 on Fox Business News. Home prices were 33 percent below the July 2006 peak in February, according to the S&P/Case-Shiller Composite 20-City Home Price Index, co-created by Shiller.
Prices will continue falling as more houses are lost to foreclosure, flooding the market with distressed properties, Humphries said.
Foreclosures fell to the lowest level in three years in the first quarter as lenders worked through a backlog of flawed paperwork, according to RealtyTrac Inc., an Irvine, California- based real estate information service. Foreclosure filings are likely to jump 20 percent this year, reaching a peak for the housing crisis, RealtyTrac predicted in January.
Las Vegas Highest
In Las Vegas, 85 percent of homes with mortgages were underwater, the most of any city tracked by Zillow. Other metropolitan areas in the top five were Reno, Nevada, at 73 percent; Phoenix at 68 percent; and Modesto, California, and Tampa, Florida, both at 60 percent. Zillow has tracked negative equity since the first quarter of 2009, when more than 22 percent of homes were underwater.
Property values rose in only three of the 132 regions tracked by Zillow: Fort Myers, Florida, where they gained 2.4 percent; Champaign-Urbana, Illinois, up 0.8 percent; and Honolulu, up 0.3 percent. Fort Myers prices increased after falling more than 60 percent from their 2006 peak because they “over-corrected,” Humphries said.
The first quarter’s U.S. home price decline was the steepest since the fourth quarter of 2008, when prices fell 3.9 percent, according to Zillow data. Values dropped almost 13 percent over the course of that year.
“It’s not going to be as bad as 2008,” Humphries said. “But it’s going to be worse than we thought it was going to be.”
Prices were propped up in 2009 and early 2010 by federal stimulus programs, such as tax credits worth up to $8,000 for first-time homebuyers, Humphries said. That program “was stealing demand from the future,” weakening shoppers’ appetites now even as housing affordability is at its three-decade high, he said.
“In the past, people felt more bullish in a post-recession recovery,” he said. “They’d go out and spend more on homes and that would ignite hiring in construction and the mortgage industry. And they’d start to get the flywheel moving more quickly. Unfortunately, now, that flywheel is broken.”
Read the entire article HERE.
Source: Karen Roche
The Gold Report
May 2, 2011
Economic recovery? What economic recovery? Contrary to popular media reports, government economic reporting specialist and ShadowStats Editor John Williams reads between the government-economic-data lines. “The U.S. is really in the worst condition of any major economy or country in the world,” he says. In this exclusive interview with The Gold Report, John concludes the nation is in the midst of a multiple-dip recession and headed for hyperinflation.
The Gold Report: Standard & Poor’s (S&P) has given a warning to the U.S. government that it may downgrade its rating by 2013 if nothing is done to address the debt and deficit. What’s the real impact of this announcement?
John Williams: S&P is noting the U.S. government’s long-range fiscal problems. Generally, you’ll find that the accounting for unfunded liabilities for Social Security, Medicare and other programs on a net-present-value (NPV) basis indicates total federal debt and obligations of about $75 trillion. That’s 15 times the gross domestic product (GDP). The debt and obligations are increasing at a pace of about $5 trillion a year, which is neither sustainable nor containable. If the U.S. was a corporation on a parallel basis, it would be headed into bankruptcy rather quickly.
There’s good reason for fear about the debt, but it would be a tremendous shock if either S&P or Moody’s Investor Service actually downgraded the U.S. sovereign-debt rating. The AAA rating on U.S. Treasuries is the benchmark for AAA, the highest rating, meaning the lowest risk of default. With U.S. Treasuries denominated in U.S. dollars and the benchmark AAA security, how can you downgrade your benchmark security? That’s a very awkward situation for rating agencies. As long as the U.S. dollar retains its reserve currency status and is able to issue debt in U.S. dollars, you’ll continue to see a triple-A rating for U.S. Treasuries. Having the U.S. Treasuries denominated in U.S. dollars means the government always can print the money it needs to pay off the securities, which means no default.
TGR: With the U.S. Treasury rated AAA, everything else is rated against that. But what if another AAA-rated entity is about to default?
JW: That’s the problem that rating agencies will have if they start playing around with the U.S. rating. But there’s virtually no risk of the U.S. defaulting on its debt as long as the debt’s denominated in dollars. Let’s say the U.S. wants to sell debt to Japan, but Japan doesn’t like the way the U.S. is running fiscal operations. It can say, “We don’t trust the U.S. dollar. We’ll lend you money, but we’ll lend it in yen.” Then, the U.S. has a real problem because it no longer has the ability to print the currency needed to pay off the debt. And if you’re looking at U.S. debt denominated in yen, most likely you would have a very different and much lower rating.
TGR: Is there a possibility that people would not buy U.S. debt unless it’s in their currency?
JW: It is possible lenders would not buy the Treasuries unless denominated in a strong and stable currency. As the USD loses its value and becomes less attractive, people will increasingly dump dollar-denominated assets and move into currencies they consider safer. And you’ll see other things; OPEC might decide it no longer wants to have oil denominated in U.S. dollars. There’s been some talk about moving it to some kind of basket of currencies—something other than the U.S. dollar, possibly including gold. This would be devastating to the U.S. consumer. You’d get a double whammy from an inflation standpoint on oil prices in the U.S. because the dollar would be shrinking in value against that basket of currencies.
TGR: Different countries are starting to discuss the creation of an alternative to the USD as reserve currency. How rapidly could an alternative currency appear?
JW: That would involve a consensus of major global trading countries; but just how that would break remains to be seen. Let’s say OPEC decides it no longer wants to accept dollars for oil. Instead, it wants to be paid in yen. It’s done. It’s not a matter of creating a new currency—it’s a matter of how things get shifted around.
TGR: What other commodities or monetary issues would that create?
JW: Again, the dollar’s weakness is doubly inflationary. It is the biggest factor behind the ongoing rise in oil prices. Let’s say you’re a Japanese oil purchaser. Oil, effectively, is purchased at a discount in a yen-based environment due to the dollar’s weakness. Usually, the market doesn’t let such advantages last very long. As the dollar weakens, you see upside pressure on oil prices. If, hypothetically, you’re pricing oil in yen, there’s no reason for anybody to hold the USD. The dollar would sell off more rapidly against the yen and oil inflation would be even higher in a dollar-denominated environment.
TGR: You’ve mentioned that hyperinflation will happen as soon as 2014. If that is true, wouldn’t OPEC want to shift off dollar pricing as quickly as possible?
JW: From a purely financial standpoint, that would make sense. Other factors are at play, though, including political, military and unstable times in both North Africa and the Middle East. Those who are able to get out of dollars, I think, will do so rapidly and as smoothly as possible.
TGR: And how will they do that?
JW: They will sell their dollar-denominated assets. They will convert dollars to other currencies. They will buy gold. Generally, they will dump whatever they hold in dollars and sell the dollar-denominated assets they don’t want. There’s a market for them; it’s just a matter of pricing. As the pressure mounts to get out of the USD, the pricing of dollar-denominated assets will fall, which in turn would intensify that selling. The dollar selling will intensify domestic U.S. inflation, which is one factor that picks up and feeds off itself and will help to trigger the hyperinflation.
TGR: The U.S., even in recession, is still the largest consuming economy. If the U.S. continues in, or goes into a deeper, recession, doesn’t that impact the rest of the world?
JW: If the U.S. is in a severe recession, it will have a significant negative economic impact on the global economy. That doesn’t necessarily affect the relative values of other currencies to the USD. If you look at the dollar against the stronger currencies, a wide variety of factors are in effect—including relative economic strength. The U.S. is probably going to have an economy as bad as any major country will have, with higher relative inflation. The weaker the relative economy and the stronger the relative inflation, the weaker will be the dollar. Relative to fiscal stability, the worse the fiscal circumstance in the U.S., the weaker is the dollar. Relative to trade balance, the bigger the trade deficit is, the weaker the currency. As to interest rates, the lower the relative interest rates in the U.S., the weaker will be the dollar.
Part of the weakness in the dollar now is due to the way the world views what’s happening in Washington and the ability of the government to control itself. That’s a factor that may have forced S&P to make a comment. So, even having a weaker economy in Europe would not necessarily lead to relative dollar strength.
TGR: If the U.S. experiences a continued, or even greater, recession, doesn’t that impact spill over into Canada?
JW: The Canadian economy is closely tied to the U.S. economy, and bad times here will be reflected in bad times in Canada. However, I’m not looking for a hyperinflation in Canada. Its currency will tend to remain relatively stronger than the U.S. dollar. Canada is more fiscally sound; it generally has a better trade picture and has a lot of natural resources. Keep in mind that economic times tend to get addressed by private industry’s creativity and, thus, new markets can be developed. For instance, you’re already seeing significant shifts of lumber sales to China instead of to the U.S.
TGR: What about the effect on other countries?
JW: The world economy is going to have a difficult time. You do have ups and downs in the domestic, as well as the global, economy. People survive that. They find ways of getting around problems if a market is cut off or suffers. I view most of the factors in Canada, Australia and Switzerland as being much stronger than in the U.S. Even when you look at the euro and the pound, they’re generally stronger than in the U.S. Japan is dealing with the financial impacts of the earthquake. There’s going to be a lot of rebuilding there. But, generally, it’s a more stable economy with better fiscal and trade pictures. I would look for the yen to continue to be stronger. Shy of any short-term gyrations, the U.S. is really in the worst condition of any major economy and any major country in the world and, therefore, in a weaker currency circumstance.
TGR: Then why are media analysts talking about the U.S. being in a recovery?
JW: You’re not getting a fair analysis. There’s nothing new about that. No one in the popular media predicted the recession that was clearly coming upon us, and the downturn wasn’t even recognized until well after the average guy on Main Street knew things were getting bad. We have some particularly poor-quality economic reporting right now. The economy has not been as strong as it advertised. Yes, there has been some upside bouncing in certain areas, but it’s largely tied to short-lived stimulus factors.
Let’s look at payroll numbers and the way those are estimated. In normal economic times, seasonal factors and seasonal adjustments are stable and meaningful. What’s happened is that the downturn has been so severe and protracted it has completely skewed the seasonal-adjustment process. It’s no longer meaningful, nor are estimates of monthly changes in many series. The markets are flying blind—it’s unprecedented, in terms of modern reporting.
Are we really seeing a surge in retail sales? If so, you should be seeing growth in consumer income or consumer borrowing—but we’re not seeing that. The consumer is strapped. An average consumer’s income cannot keep up with inflation. The recent credit crisis also constrained consumer credit. Without significant growth in credit or a big pick-up in consumer income, there’s no way the consumer can sustain positive economic growth or personal consumption, which is more than 70% of the GDP. So, you haven’t started to see a shift in the underlying fundamentals that would support stronger economic activity. That’s why you’re not going to have a recovery; in fact, it’s beginning to turn down again as shown in the housing sales volume numbers, which are down 75% from where it was in normal times.
TGR: But we were in a housing boom. Doesn’t that make those numbers reasonable?
JW: Housing starts have never been this low. Right now, they are running around 500,000 a year. We’re at the lowest levels since World War II—down 75% from 2006—and it’s getting worse. I mean the bottom bouncing has turned down again. We’re already seeing a second dip in the housing industry. There’s been no recovery there.
In March, all the gain in retail sales was in inflation. Retail sales are turning down. You’re going to see a weaker GDP number for Q111. The GDP number is probably the most valueless of the major series put out; but, as the press will have to report, growth will drop from 3.1% in Q410 to something like 1.7% in Q111.
TGR: You’ve stated that the most significant factors driving the inflation rate are currency- and commodity-price distortions—not economic recovery. Why is that distinction important?
JW: The popular media have stated that the only time you have to worry about inflation is when you have a strong economy, and that a strong economy drives inflation. There’s such a thing as healthy inflation when it comes from a strong economy. I would much rather be in an economy that’s overheating with too much demand and prices that rise. That’s a relatively healthy inflation. Today, the weak dollar has spiked oil prices. Higher oil prices are driving gasoline prices higher—the average person is paying a lot more per gallon of gas. For those who can’t make ends meet, they cut back in other areas. The inflation of Q410, which is now running at an annualized pace of 6%, was mostly tied to the prices of gasoline and food.
You also have higher food prices. It’s not due to stronger food or gasoline demand—it’s due to monetary distortions. Unemployment is still high, even if you believe the numbers. I’ll contend the economy really isn’t recovering. At the same time, you’re seeing a big increase in inflation that’s killing the average guy.
TGR: Why isn’t there more pressure on the U.S. government to reduce the debt deficit?
JW: When you get into areas like debt and deficit, it’s a little difficult to understand. The average person, though, should be feeling enough financial pain that political pressure will tend to mount before the 2012 election; but whether or not the average person will take political action remains to be seen. I don’t think you have until 2012 before this gets out of control and there’s hyperinflation. It could go past that to 2014, but we’re seeing all sorts of things happening now that are accelerating the inflation process.
TGR: Like the dollar at an all-time low.
JW: If you compare the U.S. dollar against the stronger currencies, such as the Australian dollar, Canadian dollar and Swiss franc, you’re looking at historic lows. You’re not far from historic lows in the broader dollar measure.
TGR: In your April 19 newsletter, you stated, “Though not yet commonly recognized, there is both an intensifying double-dip recession and a rapidly escalating inflation problem. Until such time as financial market expectations catch up with the underlying reality, reporting generally will continue to show higher-than-expected inflation and weaker-than-expected economic results.” What do you mean by “until such time as financial market expectations catch up with the underlying reality?”
JW: A lot of people look closely at and follow the consensus of economists, which is looking at (or at least still touting) an economic recovery with contained inflation. I’m contending that the underlying reality is a weaker economy and rising inflation. I think the expectation of rising inflation is beginning to sink in. Given another month or two, I think you’ll find all of a sudden the economists making projections will start lowering their economic forecasts. Instead of looking at half-percent growth in industrial production, they’ll be expecting it to be flat; if it comes in flat, it will be a consensus—and the markets will be pleased it wasn’t worse in consensus. But the consensus outlook will have shifted toward a more negative economic outlook.
TGR: Do you think economists will shift their outlooks before we get into hyperinflation or a depression?
JW: In terms of economists who have to answer to Wall Street, work for the government or hold an office like the Federal chairman, by and large, they’ll err on the side of being overly optimistic. People prefer good news to bad news. If Fed Chairman Ben Bernanke said we were headed into a deeper recession, it would rattle the market. People on Wall Street want to have a happy sales pitch. What results may have little to do with underlying reality.
TGR: In your April 15 newsletter, you mentioned that a signal of an unfolding double-dip recession is based on the annual contraction of the M3, which was the Fed’s broadest measure of money supply until it ceased publishing it in 2006. Recent estimates show that the annual contraction of M3 went down from 4.3 in February to 3.6 in March. Is this good news?
JW: No. It doesn’t have any particular significance as a signal for the economy. You do have recessions that start without M3 going negative year over year. In the last several decades, every time the M3 went negative, there followed a recession—or an intensifying downturn—if a recession was already underway. If you tighten up liquidity, you tend to tighten up business conditions. Again, though, you’ve had recessions without those signals. When it goes positive, it does not signal an upturn in the economy. It doesn’t make any difference if it continues negative for a year or two, or if it’s negative for three months. The point is—when it turns negative, that’s the signal for the recession.
We had a signal back in December 2009, which would have indicated a downturn sometime in roughly Q310. We already were in a recession at that point. According to the National Bureau of Economic Research, the defining authority in timing of the U.S. business cycle, the last recession ended in June 2009. So, this current recession will be recognized as a double-dip recession. The Bureau doesn’t change its timing periods.
I’ll contend that we’re really seeing reintensification of the downturn that began in 2007. Although it’s not obvious in the headline numbers of the popular media, you’ll find that September/October 2010 is when the housing market started to turn down again. That is beginning to intensify. We’ll see how the retail sales look when they’re revised. When all the dust settles, I think you’ll see that the economy did start to turn down again in latter 2010. Somewhere in that timeframe, they’ll start counting the second or next leg of a multiple-dip recession.
TGR: Does M3 have anything to do with calculating potential inflation or hyperinflation?
JW: It does; but when you start looking at the inflation picture, you also have to consider that we are dealing with the world’s reserve currency and the volume of dollars both outside and inside the U.S. system. Right now, M3 is estimated at somewhat shy of $14 trillion. You have another $7 trillion outside the U.S., which is available for overnight liquidation and dumping into the U.S. markets. It’s not easy to measure how much is out there, but that has to be taken into account to assess the money supply related to inflation. Again, that’s where the Fed chairman’s policies come into play.
Efforts have been afoot to weaken the U.S. dollar. Usually with the weakening of the U.S. dollar, you see increased repatriation of dollars from outside the system. If everyone is happy holding the dollars, the flows can be static; but when they start shifting and the dollars are repatriated, you begin to have currency problems. That’s when you have the money supply and the inflation problems we’re beginning to see.
TGR: This has been very informative, John. Thank you for your time.
Read the entire article HERE.
A quick look at today’s just released total debt to the penny from the Treasury may crimp the artificial smile of even such die hard administration sycophants as Moodys. Why: because the total debt, as we predicted when we observed last week’s 30 Year auction, is now at $14,305,336,580,992.11. This is a problem because as anyone who rails against the broken US fiscal apparatus should be able to tell you, the debt ceiling is $14.294 trillion. In other words we have now officially breached the debt ceiling by $11 billion. So why has the US not filed a notice of default yet? Because the actual debt that matters for legal purposes is the debt “subject to the limit”, which is $52 billion less than the total debt primarily due to $10 billion held at the Federal Financing Bank, and $41 billion in unamortized discount: a number which fluctuates in time depending on how much over or under par bonds are issued, but which ultimately will be zero at maturity of all debt (haha). In other words, as of today, the US Treasury has dry powder for just another $41 billion in issuance, or just over your average 5 Year auction. This can be seen best on the following chart from the Treasury where the total debt line has just passed the limit.
So what does this mean for near term issuance? Also per the Treasury, there is a total of $55 billion in debt paydown in the next week primarily in bill redemptions, offset by $14 billion in issuance in the last week of April. The problem is that this week also happens to be a major tax refund week. We anticipate that tax refunds will likely total between $20 -25 billion net over tax revenues. Which means there will be a net cash need of about $75 billion. As we ended Thursday at about $30 billion, Friday’s cash balance (released at 4pm by the FMS) could be very critical to determine if the Treasury will be forced to come up with some emergency form of 11th hour cash raise. It also means that the debt ceiling clock is ticking ever louder. The Treasury will have capacity for one more full weekly auction, to be completed in the first week of May, and then it is game over.
Update: cash as of Friday was $58 billion. With $55 billion in cash out this week and who knows how much of refund funding, it could get mightly close…
Read the entire article HERE.
The Multi-Agency Mortgage Servicer Settlement, Principal Balance Reductions, Effective Negative Equity, Foreclosures
March, 8 2011
The Multi-Agency Mortgage Servicer Settlement, Principal Balance Reductions, Effective Negative Equity, Foreclosures
1) The $20 Billion Multi-Agency Mortgage Servicer Settlement – A Pee-Hole in a Snow Bank
The multi-agency mortgage servicing settlement draft, or term sheet, was leaked to the press this week. There was a lot of commotion over it — mostly that the banks are getting only a slap on the hand again – including the missing monetary penalties.
The monetary piece of the settlement has been rumored to be between $20 and $25 billion. Its primary use has been stated as being for counseling, legal-aid, hotlines, web portals, education, outreach, post-Foreclosure relo assistance etc. However, it is also stated that ‘a substantial amount’ of the monetary settlement was to be used to ‘support an enhanced program’ for loan modification including principal reductions.
For the purposes of this analysis let’s pretend the entire $20 billion goes to distressed borrowers for principal reductions.
The BAC/Countrywide $8.6 billion settlement of late 2008 — referred to many times during the current multi-agency mortgage servicing investigations — included ~400k borrowers, or $21,500 per loan. Therefore, the $20bb monetary fine being floated to potentially be used for principal reductions for four to seven million borrowers in the delinquency, default or Foreclosure process – $2.6k to $5k per borrower – is a proverbial ‘pee hole in a snow bank’. It’s only a few percent of what is really needed for an effective principal program, if there is such a thing. I would rather see the money used to buy and rehab condo complexes around the nation and give keys to condos, instead of general assistance checks, to the less fortunate to cover rent.
An apples-to-apples Robo-Settlement based on the BAC settlement would be $86 to $161 BILLION depending on how many were allowed to benefit. And still, reducing principal on every underwater borrower in the country by $21,500 would not do much. Add an Order of Magnitude to that and we are talking – but not even the Fed has a couple of trillion dollars lying around.
A $20bb settlement makes no difference to anything in mortgage and housing that is occurring, or set to occur. As an example of how small of a number $20bb is, new Notice-of-Defaults — the first stage of Foreclosure — in the state of CA totaled $9bb in January alone.
If this settlement draft – which not incidentally does include a laundry list of servicer guidelines, codes of conduct, and consumer protections (albeit much of it is ambiguous and should have already been in place based on existing law) – is accepted then I counter intuitively expect Foreclosure, short sale, and deed-in-lieu liquidations to increase substantially…far beyond what is considered ‘normalized’.
This is because as the uncertainty that has been hanging over the servicer’s heads since Robo first broke in September 2010, which has resulted in a decrease of total legal default filings and Foreclosure completions by over 40% as of the end of February, is removed and servicer’s check their ‘conduct boxes’ off on each loan unit, there will be no uncertainty over liquidating when the hand book says it’s okay to do so. Further, there are hard and fast rules on modification timelines within the term sheet. In short, quicker modification decisioning allows loans to proceed to either the permanent modification or liquidation stage much quicker than is happening at present when loan mod can be in process for months on end with no final resolution.
2) Principal Balance Reduction Benefits are Overstated
As a career mortgage banker until 2006 — when it became blatantly obvious mortgage and housing was going to fall off a proverbial cliff and I left the industry to pursue other ventures – I am confident that the primary default driver has more to do with the back-end (total) debt-to-income ratios on the average legacy loan and loan modification being in the stratosphere than negative equity. In fact, on the average HAMP loan modification the median back-end DTI is ~65% of gross income. A household paying 65% of their GROSS monthly income to debt service each month — that can’t save, spend or vacation — is a massive credit risk, plain and simple.
Obviously, if a borrower has 20% equity and 65% debt ratios they can always sell making them less of a risk. But when you combine a high DTI and low to no home equity, it’s toxic. Even legacy Subprime loans only had a maximum total Debt-to-Income ratio allowance of ~55% when they were originated during the bubble years. To that end, legacy Subprime loans had an average LTV of ~93% and credit score of ~600. To that end, loan mods — with a ~65 DTI, 150% LTV, and 550 score on average — are much worse in structure than Subprime loans ever were and should perform accordingly. Even if loan mods had an average LTV of 100% due to principal reductions they still would be worse in structure than legacy Subprime originations.
Loan mods, restructurings, workouts and payment plans are simply new-vintage, higher leverage, worse-than-Subprime loans. And by design millions were originated from Q209 through Q310, when the low hanging fruit had been plucked and new mod volume began to fall sharply. All of these new-vintage toxic loans — many now called something else by banks and servicers including ‘performing and re-performing’ — are a real risk to housing and finance that few consider as such.
Bottom line: A borrower at a 65% total debt-to-gross income ratio is a debt slave whether he is 50% underwater OR has 5% equity in the house. There is no difference between the two. Neither can sell their house — pay their mortgage, pay the Realtor 6%, and put a 10% to 20% down payment on a new house — and re-buy. Both are stuck.
Therefore, unless total debt-to-income ratios are taken considerably lower through long-term household de-leveraging – or complete household balance sheet modifications that target the back-end DTI (the only known way now is through Chapter-13) — no modifications will ever stick in mass.
3) What is to be gained through reducing principal balances on mortgages?
Nobody is asking the primary question in my mind with respect to principal reduction mortgage mods…What is to be gained?
The central planners making the rules will say ‘fewer people will default and go into Foreclosure’. We already discussed that negative equity alone is not a determining factor. Further, if a principal reduction plan was rolled out to the mainstream, then I suspect many would strategically default to take advantage of it. So, principal reduction mods to prevent loan defaults and Foreclosures are hogwash.
However, principal and ‘other debt’ forgiveness to ’unburden the organic homeowner allowing them to participate in the housing market again’ would be highly beneficial. But, of course, this isn’t a quick fix, as homeowners who received mortgage principal and other debt forgiveness could not turn right around and buy houses for various reasons. Further, there just isn’t enough capital at all of the top banks in the nation to bring balances down enough to make it effective. Lastly, demographics are not in the favor of the repeat buyer — especially at the mid-to-higher end of the market — as baby boomers that were such a vital part of the bubble from 2001 through 2007 are not moving up anytime soon. In fact, they are looking to downsize. I suspect that the next time repeat buyers have an outsized benefit on the housing market is when today’s first time buyers can move-up.
Remember, housing has a demand AND supply problem, which most don’t understand. In a normal housing market, the repeat buyer drives volume, followed far behind by first timers and then investors. In this market, the repeat buyer is by and large absent relative to historic averages leaving all the heavy lifting up to first timers and investors who want low priced properties, preferably Foreclosures, REO and short sales. Thus, anything that disrupts the flow of distressed real estate prevents a housing bottom and subsequent recovery.
There is just no way to easily or quickly unleash the organic repeat buyer or unburden them from their extraordinary leverage positions. Actually, the latter could be achieved by offering foreigners immediate US citizenship for the capital investment into residential real estate of at least $500k, but I suspect things would have to get really bad before an idea such as this was floated.
4) Real (Effective) Negative Equity is a much larger problem, as it pertains to housing, than mainstream reports suggest
CoreLogic came out today with their latest monthly negative equity figure of 11.1mm borrower’s with mortgages, or 23.1%. But this number doesn’t mean much to me.
What most don’t consider is real, or effective negative equity, as it pertains to repeat buying I touched upon in the item #2. They generally only focus on the default and Foreclosure probability with being ‘underwater’. Effective negative equity begins at the point at which the homeowner can’t sell the house and rebuy another, which requires paying a Realtor 6% on the sale and putting 10% to 20% down depending on the type of loan needed.
For example, on a Jumbo purchase in CA effective negative equity begins at 75% CLTV (6% Realtor fee and 20% down payment), which is the reason the Jumbo housing market continues to languish and will get worse. In fact, when you lower the CA Jumbo negative equity threshold to 75% CLTV, then 64% of all mortgaged homeowners are effectively underwater. This is also why I believe that Jumbo loans, a clear focus of banks and servicers with respect to modifications, payment plans and workouts for the past year and a half, have not even begun the pain stage that will ultimately come.
In lower house price states such as AZ and NV where it takes 6% to pay a Realtor and 10% down to move-up, down, or across, when you lower the negative equity threshold to 85%, even a greater percentage are effectively ’underwater’.
When national house prices fall another 10% to 20%, entire states will be consumed by effective negative equity putting even more pressure on real estate supply and demand fundamentals.
Bottom Line: Whether the borrower is at a 95% LTV or a 140% LTV, they are in an effective negative equity position. Then it all comes down to debt-to-income ratios. If I was a whole loan long-term investor, I would much rather own a 140% LTV loan on a borrower with a 40% DTI than a 95% LTV loan on a borrower with a 65% DTI. To the 40% DTI borrower, the LTV is an inconvenience. But, the 65% DTI legacy or modified borrower — even at 95% LTV – is trapped and not saving, shopping or vacationing, with few options available. After months or years of being in debtor’s prison, walking away and stripping down the house in order to sell the parts for security deposit and first months rent, moves way up the most likely list. Further, with respect to sales demand, the US real estate market has lost its most significant segment of buyers – repeat buyers — due to effective negative equity and tighter lending guidelines.
5) Where do we stand now?
In final, I am always asked about my predictions for total Foreclosures stemming from the bubble years. And I have said the same thing for years.
In short, there have been 3.5 million foreclosures and short sales to date stemming from legacy loans. There are presently ~7.5 million borrowers delinquent, defaulted, or in Foreclosure at present — grows by 100k to 125k per month — of which 75% to 80% will ultimately be liquidated. If another 7.5 million defaults — and modification redefaults — occur over the next three to five years then a total of 12 million to 15 million Foreclosure, short sale, and deed-in-lieu liquidations will occur, meaning we are now ~25% complete in cleansing the infamous 2003-2007 Bubble-Year’s toxic lending cesspool.
Read the entire post HERE.
Editor & Publisher
Tuesday, June 15, 2010
The Federal Reserve appears to have serious concerns that the economy is heading into a double dip recession. That’s the only way to read a report coming from WSJ reporter Jon Hilsenrath.
Couched in the conservative, hedging style of the Federal Reserve, Hilsenrath’s column is really a five alarm fire bell. Hilsenrath does not quote anyone by name and merely refers to “Fed officials”, but this type of story does not come out without a strong source.
Federal Reserve officials are beginning to debate quietly what steps they might take if the recovery surprisingly falters or if the inflation rate falls much more.
Fed officials, who meet next week to survey the state of the economy, believe a durable recovery is on track and their next move—though a ways off—will be to tighten credit, not ease it further. Fed Chairman Ben Bernanke has played down the risk of a double-dip recession and signaled guarded confidence in the recovery.
But fiscal woes in Europe, stock-market declines at home and stubbornly high U.S. unemployment have alerted some officials to risks that the economy could lose momentum and that inflation, already running below the Fed’s informal target of 1.5% to 2%, could fall further, raising a risk of price deflation.
The Fed’s official posture is unlikely to change when policymakers meet June 22 and 23: The U.S. central bank is expected to leave short-term interest rates near zero and signal no inclination to change that for a long time.
But behind-the-scenes discussions at the meeting could include precautionary talk about what happens if the economy doesn’t perform as well as expected.
What is the Fed considering doing if it is clear the economy is headed for a double dip recession? Why, print more money, of course.
…he recovery falters, or if inflation slows much further and a threat arises of deflation, a debilitating fall in prices across the economy. In such cases, there would be a few avenues the Fed could take.
One is asset purchases. During the financial crisis, the Fed purchased $1.25 trillion in mortgage-backed securities on top of buying debt issues by Fannie Mae, Freddie Mac and the U.S. Treasury. Mr. Bernanke has said the steps helped to lower long-term interest rates, including rates on mortgages.
The Fed could resume such purchases, although it isn’t clear that they would have as powerful an effect as they had in 2008 and 2009, because long-term rates are already low. Rates on 30-year fixed-rate mortgages are about 4.7%, down from 5.2% in early April.
The Fed could also take an intermediate step. Right now, it isn’t reinvesting cash it gets when mortgage-backed securities are paid off by borrowers. If the Fed reinvested that cash—projected to be about $200 billion through 2011—in mortgage bonds or Treasurys, it would help keep the financial system awash in money and could hold interest rates down.
These are all money printing means that will ultimately lead to inflation. It is, ultimately, the only tool the Fed has at its disposal and is a very good reason to own gold, even if there is the potential for a short-term dip in the price.
Read the original article HERE.
John Carney | Feb. 23, 2010, 12:48 PM
“Today’s bleak consumer confidence number is undoubtedly bad news for the economy. The bigger than expected drop suggests that consumers have lost confidence in the recovery, which will drive down home prices and consumer spending.
Consumer confidence is typically our “first look” at the state of the economy. While most government aggregated data come out with a two-month lag, or more, consumer confidence hits with just a one month lag. Studies have shown that consumer confidence is a good predictor of consumer spending numbers. Basically, people surveyed seem to be good at accurately reading their own economic situation, and those surveyed accurately reflect the broader economy. When consumer confidence drops to such deep unexpected levels–today’s were the worst in 27 years–then it is a flashing red-light about the economy.
There wasn’t anything good about today’s numbers. Every part of the survey was awful. On jobs, the optimistic folks who say jobs are plentiful fell to 3.6 percent from 4.4 percent. The pessimistic people who said jobs are hard to get increased to 47.7 percent from 46.5 percent. The gauge of expectations for the next six-months fell to 63.8, from 77.3 the prior month. The share of people who believe their incomes will increase over the next six months fell to 9.5 from 11 percent. The share of those expecting more jobs fell to 12.4 percent from 15.8 percent.
The message: the economy sucks”
Read the entire article HERE.
It’s either a double dip recession or hyperinflation, pick your poison.
Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.
By Ambrose Evans-Pritchard, International Business Editor
Published: 8:43PM GMT 17 Feb 2010
David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. “Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline,” he said.
Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. “The shrinking in banking sector balance sheets renders any talk of an exit strategy premature,” he said.
The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed’s “Monetary Multplier” has dropped to a record low of 0.81, evidence that the banking system is still broken.
Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.
Read the entire article HERE.