Showing posts with label foreclosure. Show all posts
Showing posts with label foreclosure. Show all posts

Monday, July 13, 2009

Rex Murphy on Obama

I guess what I find most disturbing about the present administration, is that they are market rookies, as in fact most politicians are, and on their shoulders rests the responsibility to make decisions that will directly impact on our lives. Usually decisions here make minute impacts that work out over time. Today we have a Herbert Hoover moment unlike anything since. At least Herbert Hoover was no rookie, but he was worse, he was a successful market opportunist who then had to have deep insights in the middle of a market crisis. He failed. He got it totally backwards and accelerated and deepened the collapse.

Obama is surrounded by Wall Street opportunists who prospered because of the recent insane lending policies and simply cannot see what they did wrong. To start with, they do not understand that this is not all about them, it is about restoring the financial strength of the people from whom all the wealth originates.

Obama himself is a market rookie who has never given any evidence of even thinking about the issues besides repeating a little occasional socialist rubbish for the folks back home. This makes it impossible for him to be proactive as Reagan was.

In the end, he has to find someone that he can trust who can put it together for him and show him how to peddle it.

We are six months on and the only thing that has subsided is that abject fear of a few months past. In the meantime the bad news just keeps rolling in as unemployment and prime foreclosure inventory climbs.

In the meantime take a sober look at his agenda as seen through the eyes of Rex Murphy and understand that what is been shoveled into the system is decidedly odd and perhaps completely misses the point of the present economic catastrophe. In fact it has nothing to do with it.

Medical Insurance is a major problem and needs to be fixed, but is it a priority for the next six months?

Did we need a stake in GM in a form that effectively underwrites the union’s grab for control and does nothing to make the company competitive? I now expect GM to lose market share with a vengeance, but perhaps not until this has worked itself out. I think that it is great news for Ford.

And why this abrupt intervention in the economy? The problem is presently financial and we have a repeat of George Bush’s brain trust that ran amok when 9/11 gave them license.

And we are not hearing a peep about helping the millions who are sliding into foreclosure or actually using government guarantees to drive a massive capital investment in a new energy regime now when it is most beneficial for job creation.

Rex Murphy

Last updated on Saturday, Jul. 11, 2009 04:48AM EDT

He flies through the air with the greatest of ease,
the daring young man on the flying trapeze.

We've been watching over the past two weeks, willingly or not, the wrong icon. Michael Jackson's a distraction. Barack Obama is the superstar of the world, the real celebrity. And because he's President of the world's foremost power (for now), his actions have real, not just symbolic, meaning.

We've seen him in action for a bit more than six months. What we can say with confidence, now that we have the evidence of his actions, is that had he run on (a) transforming the U.S. economy by massive federal government intervention, (b) taking an owner's stake in the automobile industry, (c) transforming the rules of America's energy economy, (d) instituting a national health-care system - all of these simultaneously and in the centre of a financial meltdown - Barack Obama wouldn't merely have lost the election, he wouldn't have got as many votes as gnarly old Ross Perot did in an election long past. He wouldn't, in other words, have beaten a bad-tempered, egotistical spoiler.

We have also seen enough to make some observations on the observations of his once and now-no-more mentor, Rev. Jeremiah Wright. You will remember when the ravings of Mr. Wright finally got too much for the candidate, when the more pacific words of the “great speech” on race that he could “no more disown him than I can my white grandmother” were rendered inoperative by Mr. Wright's persistently obnoxious presence. Mr. Obama pushed him aside.

The pastor had one last shot of his own about his onetime “son.” That was the line, “He's a politician; I'm a pastor. He's got to do what politicians do.” We know what he meant by “politician”: one who is “forced” to say one thing to get elected, and do another; a person who conceals an agenda under cloudy rhetoric, a person whose calling – politics – is implicitly, essentially, deceptive.

The description is faithful to the commonplace understanding of “politician” today. It matches the stereotype, because the stereotype is a match for (most) of the reality. Mr. Wright may have been wrong in very much, but he knew his “son.” Mr. Obama is a politician, and very much a politician in that harsh, unflattering and somewhat cruel understanding Mr. Wright gave the term.

Mr. Obama has taken the real crisis of the U.S. (and world) economy and used it as the screen and lever for a massive agenda of transformation, a transformation that calls for expenditures on a scale never before seen in the history of government on this planet. The first expenditure, which began under George Bush's tenure, was large, but it was very specific. The financial “infrastructure” of America's economy was about to be exploded, and it was argued that government “had no choice” but to shore up the financial institutions without which there would be utter chaos in the overall economy. That was the genesis of the so-called bank bailout. After that came the stimulus package, the attempt to kick-start jobs, to get those “shovel ready” projects “out the door.” Both had to be done immediately. There was no time for review or oversight.

These initiatives, however, were almost instantly overlaid with the Obama agenda of massive government expansion, or attempted expansion, into everything from the auto industry to health care - all of them sold with cries of urgency and executed with reckless haste. Massive bills were passed before there were even copies of them to read. The U.S. government's debt is being swollen beyond all previous records.

It is inconceivable that these ideas occurred to Mr. Obama postelection. His agenda is of such scale and particularity that it is evidence of design and previous contemplation. He knew what he wished to do when he was campaigning, but he was not going to whisper the scale and range of his designs while the campaign was on. It would have scared off people.

But daring is Barack Obama's real middle name. When he borrowed the phrase “the audacity of hope” from his frightful mentor, most people fastened on the word “hope.” They should have highlighted “audacity.” With the smoothest and most finished ease of any candidate since John Kennedy, Mr. Obama glided through the primaries, and barely broke stride passing his hapless opponent, Senator John McCain, on the way to the White House.

He's flying high in dazzling hubris. The American economy is not yet fixed. It may get worse. And it is in this parlous and critical context that Mr. Obama has launched history-making expenditures and a reordering of American governance.

Daring? Daring - if you believe in it. Reckless – to the point of real danger if you do not.

This is the greatest trapeze act in the history of North American politics.

Rex Murphy is a commentator with The National and host of CBC Radio's Cross-Country Checkup .

Tuesday, June 30, 2009

Depression Looms

What is disheartening here is that this could be fixed, perhaps even today by the method I proposed back in September.

When a market that operates on margin which is certainly the housing market enters a collapse mode, the big and immediate losers are the borrowers. The problem is to avoid having those borrowers folding their positions and walking away because there is never a sufficient ready market available to absorb the inventory. After all, everyone who could be persuaded to buy got sold an over priced property already.

You must return to the borrowers and make it worthwhile for them to support the house. What is more, it must be done universally so all distressed inventory exits the market at roughly the same time. That results in a rapidly improving market that stimulates new building.

This way we will have lenders running around converting their problems into government bailouts while beggaring their neighbor through ongoing property sales even when the land value is driven to zero and the bid price is less than replacement. The inventory is so huge that it must drag on for years.

As a result it will be decades before housing is considered a store of wealth again and consumer liquidity will remain suppressed since they have no other easy mechanism to release capital.

Further on we face the additional reality that the job market has been hurt badly and no government program ever did much to turn that around. It takes growing companies to do that with ready access to fresh capital.

The most probable scenario, unless Obama surprises, is a continuing erosion of housing prices over several years as the inventory is slowly worked off. This also implies an ongoing diversion of consumer’s cash into that market in order to preserve capital. The impact of this is to make it difficult for the consumer to prosper at all. During this period, we can expect credit card debt to contract also. This hardly is a recipe for a buoyant economy.

While demand is been suppressed by financial failure, we will experience a grinding dragged out recession that will surpass previous records. It does not need to be this way, but I see little to cheer about.


June 26, 2009, 11:02 AM ET

When Is It Cheaper to Ditch a Home Than Pay?

Foreclosures aren’t only due to homeowners facing a cash crunch. One out of four defaults on mortgage loans is “strategic,” a new study says, due to a mortgage’s value exceeding the value of a house even if the homeowner can afford to pay.

Strategic default is most likely when home values have fallen by more than 15%, according to the study by authors of the
Financial Trust Index, a joint project of the University of Chicago’s Booth School of Business and Northwestern University’s Kellogg School of Management. (Read the paper here by authors Northwestern’s Paola Sapienza, Chicago’s Luigi Zingales and Luigi Guiso of the European University Institute.)

The researchers found that homeowners start to default once their negative equity passes 10% of the home’s value. After that, they “walk away massively” after decreases of 15%. About 17% of households would default — even if they could pay the mortgage — when the equity shortfall hits 50% of the house’s value, they found.

“Housing policy under the current administration has focused on reducing households’ cash flow problems in response to the housing crisis, but no one has addressed the negative equity issue as part of public policy regarding housing,” Sapienza said.

The research is based on homeowner surveys, which also considered moral and social factors involved. People who said it was immoral to default were 77% less likely to declare their intention to do so, the authors write, while those who know someone who defaulted were 82% more likely to say they would default themselves.

“Our research showed there is a multiplication effect, where the social pressure not to default is weakened when homeowners live in areas of high frequency of foreclosures or know others who defaulted strategically,” Zingales said. “The predisposition to default increases with the number of foreclosures in the same ZIP code.”

Among the other findings:

People under 35 years and over 65 said were less likely to say it was morally wrong to default, compared to middle-aged respondents.

People with a higher education and African-Americans are less likely to think it’s morally wrong to default, while respondents with higher incomes were more likely to think it’s morally wrong.

Republicans and Democrats showed little difference in moral views of strategic default, while independents were less likely to say defaulting is immoral.

People who supported government intervention to help homeowners were 12 percentage points less likely to say strategic default is immoral, the authors found.

Wage and salary income, which is key for consumer spending, fell… While lower taxes and one time checks from the government are obviously a net positive for the consumer, they tend to have a short-lived effect on spending growth as they only affect the rate of change in disposable income when they are implemented or shortly thereafter. Of more importance to ongoing spending growth is the rate of growth in wages and salaries and other continuing sources of income flow. –Joshua Shapiro, MFR Inc.

The lion’s share (94.3%) of the increase in income came from one-time increases of $250 per eligible recipient of social security, supplemental security, veterans benefits, and railroad retirement benefits. The $13.1 billion of these transfers boosted May income by about $158 billion (annualized). These transfers are not recurring so incomes will fall by a like amount in June. Spending from this actual $13.1 billion is likely to be spread out over several months or even years if recipients use the proceeds to increase saving or reduce debt. The key fundamental driver of spending — wage and salary income — fell 0.1% after a slightly smaller advance in April. –Nomura Global Economics

Today’s data does not particularly change the view in any way. We know that the consumer remains backed into a corner, and any ‘green shoots’ of improvement will be tempered by the fundamentals at play, including an increasing unemployment rate, and an overall negative wealth effect (primarily coming from loss in home values). As such, we don’t suspect future gains of this magnitude will be sustainable outside of the influence of government stimulus. However, at the end of the day this is a better than expected report regardless of the one-off factors that are giving the data a beauty makeover. –Ian Pollick, TD Securities

Almost all the jump in incomes reflects the impact of the stimulus package, which gave $250 one-time payments to people receiving a variety of social security benefits. By contrast, wage and salary income fell 0.1%. It will continue falling as wage gains slow and payrolls fall. Most of the stimulus money was not immediately spent, so the saving rate jumped to a 16-year high of 6.9%. It has further to go… Not a green shoot, in our book. –Ian Shepherdson, High Frequency Economics

Real consumption has struggled to increase so far despite a torrent of government income support: real PCE has fallen 0.4% annualized over the last three months despite a 11.9% annualized increase in real disposable income. It is important to keep this in mind as we go into the second half of the year, when income support will unwind some. With households smoothing their consumption, a drop in second half real disposable income need not necessarily lead to a drop in spending, though this is naturally something we will watch closely. –Abiel Reinhart, J.P. Morgan

I have argued for months that it would be the consumer who would lead the way out of this mess and that is starting to happen. Consumer spending rose at a moderate rate in May as people bought more durable goods and soft goods. Interestingly, demand for services, which had been holding in, was essentially flat. So far this quarter household spending has been essentially flat compare to the first quarter. That is not as strong as had been hoped given the stimulus bill. Indeed, it appears that so far the stimulus money has gone more to savings than spending. –Naroff Economic Advisors

Reduced wealth, high debt, tight credit, and a weakening labor market are all weighing on consumers. Wages and salaries were down in May, and have fallen in four out of five months this year. And higher gasoline prices are biting into spending power… Looking forward, we expect consumers to stay cautious. But we do expect spending to creep slowly higher in the second half of the year as the labor market deterioration becomes less severe. –Nigel Gault, IHS Global Insight

As an indication of how weak labor market conditions have become — recall it is not only significant job losses but also declining aggregate hours worked amongst those with jobs — yesterday’s revised GDP data show that during the first quarter, aggregate wage and salary disbursements fell on a year-over-year basis. While this may not seem much of a surprise, this is the first over-the-year decline in wage and salary disbursements since the second quarter of 1958. While the rate of job losses appears to have moderated, employment is nonetheless still declining, as are aggregate hours and aggregate labor earnings. Throw in the significant decline in household net worth over recent quarters and restricted access to credit, and it is no surprise that consumers remain cautious in their spending behavior and continue to add to household savings. –Richard F. Moody, Forward Capital

Friday, June 12, 2009

Obama's Good Ship America

Obama has been the captain of the good ship America for a good six months now. Most critically, he has done nothing to arrest the collapse in household worth and fair to say, he will do nothing to arrest the collapse in household worth. I could say that he is incompetent, but it is just as clear that all the others at the table share the same fault. Otherwise, they would resign in disgust.

The US consumer is losing a large portion of his net worth and creditworthiness through no fault of his own. And who do you think the average American housewife is going to be blaming for this attack on their home? They are already beginning to wonder who the hell they elected. And somehow, a paean to socialist policies rings pretty hollow when one checks the size of your monthly unemployment payout.

The democrats now face the reality that they elected this man by visibly cocooning the candidate and thoroughly gaming the electoral process in a way to avoid any hard questions ever been answered. If they fail to pull the economy together or infinitely worse, manage to stifle all signs of recovery by allowing the worst aspects of the present foreclosure system to run its course, then they will find themselves blamed for the results.

We have finally done something through the housing business that is able to bring on a real economic depression. To be sure that happens, we merely need only do nothing whatsoever. The housing market has a bottom, but is a bottom with the value of underlying land reduced to zero. There will be ample cash around to buy houses at a fair depreciated replacement cost anywhere.

My son has seen the wisdom of this and has discovered a market in which no appreciation has taken place whatsoever. He is able to purchase modest properties, extract his capital outlay immediately and have enough high quality rental income to pay all finance and carrying costs and leave a couple of hundred bucks in his jeans.

Look around your neighborhood and do the numbers. When that happens there, I assure you, that the housing market has found a bottom. Then ask yourself what will your net worth be? This party is so over.

The global economy is swiftly learning to work with the sharp reduction in US purchasing power and fair to say, they are not expecting or planning for a quick recovery. We can expect the global ecoomy to establish a renewed growth rate somewhat less than formerly but still positive.

There is one other deadly problem brewing up, because of our complete failure to turn around the housing market in its early stages as suggested in my earlier postings on the restructuring of the foreclosure laws. State and Municipal finance is in free fall and will recover at a much lower level of activity. California was hopelessly over exposed thanks to a history of financial imprudence that remained untamed and was likely untamable. At least that is what pundits are saying. This likely means one of the worst results coming over the next three years. Arnie will likely be free of all this just in time and it certainly was not his fault.

This means massive amounts of borrowing at locked in low rates by all government agencies over the next three years until government finance is stabilized and recovering.

The depression spawned incredibly low interest rates on government finance and we are on the way to doing it all over again. In Canada, we even had a 3% perpetual bond that most certainly was the highest rate at the time. I believe some of it is still extant although the only real buyer became the Bank of Canada.

Government finance cannot expand fast enough to make up for the catastrophic loss of household income and wealth. And that sort of finance only provides poverty anyway.

Tuesday, December 30, 2008

Second Mortgage Default Wave

60 minutes on Sunday a couple of weeks back shared with us the problem with the second wave of mortgage defaults been precipitated by mortgages with built in resets. It is ugly and the scale of the problem is easily as large as the subprime portfolio we have just digested. My own thoughts on this matter are that this portfolio will turn out to be a lot more financeable than anyone expects.

The reason for this is that the interest rates have sunk so low that the monthly payment should still be affordable to most borrowers. Of course, outright speculators who have no hope of a profit remaining and are certainly underwater will be walking. That is why some high rise condo buildings are empty.

The question now is how do we ensure that this possibility is fully exploited? A federal guarantee is one option for say ninety percent of the face of the mortgage. All this ensures that a large percentage of current homeowners remain homeowners and prevents this fresh inventory from entering the market.

That leaves the nasty problem of what to do with the inventory now underwater. We are still left with the option of going to a mark to market program that accepts a prices point anniversary date and refinances fifty percent of the property at going rates while exchanging the balance of the old mortgage for a fifty percent equity stake in the property.

This method still has the potential of resolving all the bad paper and can be also used as a tool to resell the entire property inventory that the banks are now stuck with. More critically it places a floor on the housing market and eliminates the entire overhang as quickly as possible. Otherwise this overhang will be squeezing the market for several years and I am been optimistic.

The necessary money is already largely in place and certainly more can be added. I would also expect that this drastic move would be swiftly rewarded by rising housing prices and a swift recovery of homeowner equity resulting in profitable buyouts of the remaining bank owned equity. In fact, I would expect that this procedure would become standard in the industry as a preferred alternative to foreclosure.

The problem with all this is that it needs to be mandated through legislation and carefully overseen. It cannot happen otherwise because of various conflicting rules.

The current scenario is unfolding in slow motion, one foreclosure at a time. This means that the end buyers are monitoring capital deterioration that they now expect to continue for at least two years. By going to a mark to market strategy, this is ended and the capital shortfall is recognized and made up. The institution is making money and rebuilding capital the next day. I think this is very doable once the complexities are fully understood and clarified.