The President, Nancy Pelosi, Harry Reid and only God knows how many politicians have all said that the Fin Reg bill ends all taxpayer assisted bailouts for Wall Street. Well, the news lately will put that phrase to the test. To think that all of these foreclosures are not an issue was crazy to begin with, but throw in a little foreclosure fraud and overnight you get a $47B putback from BlackRock and the Fed… go figure.
I believe the putback situation we saw yesterday was merely the beginning and there are many more tens, if not hundreds, of billions of dollars to follow. The banking system cannot handle that type of volume, remember in 2008 it was MBS and derivatives of MBS securities that caused our little problem. There is no easy remedy for this problem, regardless of what JPM or BoA says, since we are talking basic contract law here. Now, Congress did try to sneak through a bill that would have solved the industries problem, H.R. 3808 which would make courts accept all sorts of junk affidavits, but Obama ‘pocket’ vetoed the bill. Do not think that bill went away because it can come back and probably will under a new name, but it will fail in the courts, in my opinion, remember Obama said Congress needed to fix some issues with the bill, a telling statement on his opinion.
Not only does he want Congress to merely make some cosmetic changes to it, but Obama also said that this is just a “minor paperwork snafu.” Oh, how I wish that were true, but it is not a minor snafu. I do not support homeowners who took on irresponsible loans, I have long said they should lose their homes, but I dislike actual fraud even more than irresponsible borrowers. Let’s also not forget that these same lenders often did not verify the borrower’s income either which makes this whole problem a bit ironic as lenders cut corners to give the loan and now they cut corners to foreclose on the collateral. There is a remedy to all of this, as written on Zero Hedge previously, which is a borrower accepts a loan modification which clears the title, guess how successful the HAMP will be now.
If Congress doesn’t create a fix, which they should not, banks will lose foreclosure proceedings to those defendants who decide to fight it. I do not believe anyone really knows how big this problem really is and, frankly, I would not trust anyone who attaches a number to it. After all, these will be the same people who said sub-prime loans were a nonissue a few years ago, the missed that one by a mile, obviously, so they will miss this one as well. Not to mention that this issue will once again be a global issue. Who knows how many of these bonds are sitting on the balance sheet of banks all around the world. Hell, we do not even know what outstanding derivatives are still in play with this paper.
To assume that this will pass with no real material issue to the banks is idiotic. The risk is real and the system is still very, very weak. Perhaps now we know why bank reserves are still so high, did they know this might be an issue? Probably as we know banks do not like to fess up to mistakes until, well, the global financial system is about to implode. The credibility of banks and government has probably never been so low in all of history and that is a problem especially if they need help again. I fully believe another bailout will be needed over this and that means the issues of 2008 will return in 2010 with a vengeance.
Remember, in 2008 it was really the CDO’s and CDS’s on tranches of MBS products that were the problem. We all remember senior and junior tranches that were in the headlines, but back then at least you could get the collateral back to try and sell, albeit at a much lower price. Today if these things are still blowing up and you cannot even get the collateral back that would be a total loss for the investor or bank if it got putback to them. See the problem now? It is just not the banks that have this problem, but the GSE’s as well who may be guaranteeing a lot of this junk now. The GSE’s have $5T in outstanding mortgage guarantees and some say that mortgages as far back as the late 1990’s might not have proper chain of title.
The math is enormous and this should scare people to death. Perhaps it will all go away. Perhaps judges will ignore the 200 year precedents of contract law, they did it with the auto makers, so why not now. However, if this doesn’t go away we are definitely in for a rerun of 2008 again on a much larger scale since even the government is reaching the end of their credit line. Maybe QE2 will buy these securities and that is how the problem will disappear, but if nothing is done the entire mortgage market and perhaps some well known banks are done… again, unless all our politicians lied to us.
It was funny to see many of the pundits spin bad data on the weather. This equates to my daughter saying the dog ate her homework. It is hard to believe the snow is to blame for higher initial jobless claims when we are in the middle of winter. However, I will concede that retail sales will be pretty horrible because of the weather, but other pieces of data, well, not so much of that weak data can be blamed on some snow.
Housing starts stink because the housing market is in trouble and even massive government stimulus is not helping. My guess is this data will probably improve in March to April because of the last minute rush to buy homes, but I would not count on that being much of a bump. What is worse is that the President wants a permanent moratorium on foreclosures which is doing no one any good and, in fact, will hurt banks that would not be able to collect or sell an asset that is earning them anything. I am referring to Obama’s demand that before a foreclosure can happen it has to pass through the re-modification process. Capitalism is officially being suspended until further notice.
As far as jobless claims are concerned, they are going to get worse as far as I can see. I am basing this on antidotal evidence of firms continuing to announce layoffs and a jump in the mass layoff indicator a few days ago. It is crazy to think employment will improve when you have blue chip companies announcing layoffs and claims are heading back above 500K a week. This is not because of the weather it is because the economy stinks. David Rosenberg calls this a Houdini recovery and he is correct. Besides a statistical recovery and a rally in equities, which is odd considering the dismal news over the past 2 weeks, the average person is worse off than they were last year. Again, unless it has been snowing for 8 months it cannot be blamed on the weather.
Perhaps it is snowing in Greece as well, that will explain their financial problems. It is true that the weather hurts certain things, but it has a rather limited impact on employment. After all, snow removal companies would probably be hiring. The weather might hurt retail sales, but with more people using the internet, me included, to shop I would not buy the soon to be claim that the weather killed retail sales. This is all about uncertainty in the world and to deny that there is uncertainty is simply crazy.
We have problems all over the place from domestic issues to possible sovereign defaults. Let us not forget we will witness municipal bankruptcies in the near future as well, chapter 9 is the more likely bankruptcy procedure. Health care reform is back and will be passed, whether you like it or not, and believe me you should be careful what you wish for because this means higher premiums for everyone. Do you really think Anthem raised prices 39% because they wanted to? Nope, it is because, I as speculated months ago, they know they are out of business in 4 years. All of these things mixed with tight credit conditions means tons of uncertainty.
Why the markets are not down 200 points, I do not know. However, it appears that Goldman Sachs was a huge buyer or S&P 500 futures yesterday, according to Zero Hedge reports, which made this a futures driven rally, check out the trading between 3 and 6AM for more weird futures action. I do not want to spread conspiracy theories, but all I am saying is the markets are trading very odd right now. I am still very bearish, how could anyone be bullish with the horrible data we have seen as of late? This is not 1 week of bad data, but 2 months worth of bad data and the market ignores it, weird.
Today was packed full of economic data that was less than impressive and in some cases downright scary. As you already know GDP, as predicted, was restated down to 2.8% and is likely going to be pushed further down again by the time we get the next report. Most say that the GDP revision is no big deal because it is looking in the rearview mirror, but I see it as a big problem as the market was pushed up dramatically based upon that report and many hailed the recession over based on that number.
The reality is that the revision down shows, with absolute clarity, that the economy is weak and without the governments support we would have pushed a negative number. I will say the number would have been relatively flat, somewhere in the -.5 to -.1%, but nevertheless very much anemic and not reflective of this so called V shaped recovery. The consumer is also in rough shape and the consumer confidence number was certainly nothing to write home about, but hey let’s not let the facts get in the way of a great recovery story.
The housing data was very interesting especially if you like month old stale data, but the widely watched Case-Shiller Index was up a whopping .3% which gave everyone a reason to cheer this morning. Of course it is widely known that the reason for the increase was because of distressed home sales and the tax credit. That housing data was on top of the huge, seasonally adjusted, data on Monday showing a 10% jump in sales, but again it was seasonally adjusted and the jump was because of, guess what, distressed sales and the first time tax credit. I know, the tax credit was renewed and expanded which I am sure will do wonders for the estimated 25-35% of existing home owners who are underwater in their existing mortgages and the 17.5%, U-6 report, unemployed or underemployed in America, not to mention the 50% of Americans worried about losing their jobs or having their taxes hiked to unspeakable levels. Again, let’s not let the facts get in the way of a great recovery story.
The Fed minutes were released today, nothing too shocking in them, but the mere fact that the Fed is not willing to remove its balance sheet largesse or raising interest rates should be a huge red flag for everyone, but apparently it is not. I happen to agree that there is no immediate inflationary threat, I say that with some apprehension as oil and other commodities do indicate some inflationary pressure, I would not expect any interest rate hike for some time into 2011 or ever. Given our countries debt load do you really think we could ever raise interest rates? I don’t think so. We have $12T in total US debt, treasurydirect.gov which is counting backwards now for some reason, and out of the $7T in treasuries some $2.8T comes due next year.
Add another $1.4-$2T in new deficit spending, plus the next new stimulus to be announced soon, and the US has to raise some $4.8-$5T in debt next year, not including refunding. Based on that number and the current interest rates at 2.4%, or so, we cannot afford to raise interest rates because the debt service costs would cripple us and we are having a hard time placing longer term treasuries, just watch the auctions for proof. That means we will constantly have to be issuing new deficit debt at shorter maturities and rolling our old debt into <10 year treasuries. Soon we will have to be rolling $8-9T a year in new and old debt every year and that means we will not want to be paying a lot of interest on it. Even though the Fed is “independent” from political influence, which it is not (see quantitative easing for proof), it is my contention that it has been told that it has to keep rates low forever. Well, maybe they weren’t told, Ben is no dummy after all, it is really just a math thing.
This leads me to believe that the dollar will probably stay weak for sometime into the future, like forever. I do think that we will see a spike in its value in the near future simply because it is oversold and the global economy is not that rosy, see China and the bubble talk from leading real estate moguls. If China does pop, which it probably will, then the dollar will see its day in the sun for sometime leading equities lower, commodities lower and treasuries higher. As I have said for some time now, stocks, bonds and commodities cannot all be right yet they are all going up at the same time, that is not a good sign, sorry.
Longer term the dollar will go much lower and here is the really scary thing, the Yen is outperforming the dollar. Japan has lower credit ratings than the US, they have an older population and higher debt to GDP ratios, but we are following right behind Japan fairly quickly in all categories. Based on that information how in the world can the Yen be doing so well, comparatively, to the USD? That should worry people, but it does not. Mish Shedlock actually foresees a crisis in the Yen before the USD, but if that is the case why is it doing better than the USD? Mish is no dummy and I hold him in high regards, but the signal I am getting is that we are in bigger trouble than Japan. I base that on a few facts, they save money, are net exporters and creditors, we do the exact opposite. Therefore, if the dollar strengthens and commodities get hit, buy gold heavily.
At the rate the US is going we are heading for fiscal disaster and we have an increasingly bolder President and Congress who seem to endorse the bankruptcy of the republic. The previous administration is equally as guilty as they did not see a spending bill that they did not like either, but the primary difference is we were promised changed, transparency and real change. We received none of what we were promised and from my vantage point the economy, which is what Americans are really looking at, is getting worse not better.
In my neck of the woods Penn Traffic just went into chapter 11 and will promptly be firing 5,000 people, they were a grocer so go figure that a grocer went out of business, and Adidas is moving 100 jobs out of this area for foreign shores, those are not green shoots. Only now does the government decide to make jobs a top priority, but I thought that is what the $797B stimulus bill was for? I guess I misunderstood what they were saying when they passed that bill at the dead of night on that Friday in February. Never fear though as the government is here to save the day with another estimated $500B jobs bill that will more than likely be passed in early January 2010, just in time for the BLS announcement of the overstatement of some 800,000 jobs between January and March of 2009.
My point is that is things were truly better than we would not even be having this discussion. Unemployment would not be climbing towards 11% and firms like Johnson and Johnson would not be trimming their work force by 6%. The Federal Reserve would not be keeping rates at 0% and continuing quantitative easing, which is monetizing the debt no matter how you cut it.
Foreclosures would not be increasing and the mortgage modification programs would not be failing, see CNBC Reality Check for the story how people still fall behind after they modify their mortgage, the FDIC would not be in the red by $8B, there would not be 550 banks on the FDIC troubled bank list (an increase of 140 banks since last quarter), banks would not be worrying about bringing on off balance sheet SIV’s into the light, and the Fed would not fear anyone looking at their books. If all were fine, none of those things would be open for discussion, but they are and we are talking about them. As I have also said many times before, it is a year later and what has really changed? Banks still hold the same bad debt on their books, but the accounting rules have changed, that’s it and everything else is the same which means we still got major problems.
Diana Olick did another piece about foreclosures tonight and I find the data very interesting. I would like to reiterate my respect for Diana and her work Frankly, I believe she is one of the best CNBC has to offer and does not attempt to carry the water for anyone. The numbers just speak volumes to the problem at hand and the data is provided by Hope Now Alliance.
Apparently people were pretty tough on Diana claiming she was lying or shilling for the industry, which I find had to believe, but those were the claims being hurled at her. She was simply reporting on the information she had, just as most bloggers or people do when they repeat something, even though it was only from limited sources. I tend to think that she is probably getting only the best part of the data points from the banks, but no one really knows because there is no one source for data. Each state has different regulations and laws when it comes to foreclosures not to mention that the foreclosures are so high courts are simply backlogged and banks may not even know a home is foreclosed on.
Regardless, the new data she brought from the Hope Now Alliance will shed some pretty bright light on the subject, both good and bad. The good news is that there are more workouts, which means that the bank and homeowner are working out the problem, but workouts or modification plans rarely work in the long-term and people lose their homes anyhow. However, what really caught my eye was the prime and sub-prime foreclosure starts, this is a lot of data so bear with me.
From 3Q07 to July of 2009 there are a total of 5.03 million foreclosure starts, which means they bank begins proceedings, which is just astronomical for a 2 year period. Out of those 5 million starts the majority of them are prime loans, at 2.7 million, which are supposed to be the safe loans, and sub-prime came in at 2.2 million. Clearly this is not merely a sub-prime problem and goes into conforming 20% down conforming loans, which means banks have many more loans that they will have to take losses on in the future.
In July alone there were 283K foreclosure starts and when compared to a total of 744K for all of 2Q09 that is a significant number. Of those starts in July 211K were prime mortgages and only 71K were sub-prime. The problem is simply getting worse, not better.
Now, the foreclosure starts are the beginning of the proceedings which means nothing happens to the property until it is sorted out through the foreclosure process. The other side of that coin is foreclosure sales which means the property has been ‘sold’ back to the bank or the bank retook possession of the property. From 3Q07 to July of 2009 there were a total of 1.7 million foreclosure sales, bank repossessions, which has been widely reported, now are you seeing the difference between the 5 million foreclosure starts and 1.7 million repossessions? It’s pretty significant and shows that there will indeed be a massive second wave of foreclosures in the near future.
Not to mention that in 2Q09 there were a total of 235K repossessions and in July the total number was 89K of repossessions which is on track for a substantial increase in 3Q09 over 2Q09. Out of those repossessions we see that prime mortgages are still leading sub-prime in both 2Q09, with 153K prime repossessed and only 82K sub-prime repossessed, and in July we see 59K prime and 29 sub-prime repossessed. Clearly the supply of foreclosures is building and will hit the market in the future, whenever that might be, and sub-prime is not the problem.
One could argue that there were more prime loans made which would explain the discrepancy, but that is not correct. Simply put, there are just so few sub-prime properties to foreclose on now then 2 years ago which explains that problem. However, there were more problems with prime mortgages then sub-prime mortgages with the exception of a few quarters. At the end of the day it really doesn’t matter, but based on these numbers sub-prime was a smaller part of the problem than we may have thought previously. No matter how we cut the data the one thing we know for sure is that foreclosures are here to stay for the foreseeable future and that means no recovery in real estate for now.
Apparently I was wrong about the impact of foreclosures when I said that banks were holding onto the properties and not placing them on the market. It came to light via Diana Olick, who I respect at CNBC, in a report earlier today. It is not that banks are simply holding onto the properties, they are just so backlogged that they cannot get them into the market fast enough.
According to the report banks are waiting as long as possible to try keeping people in their homes by using the Obama Making Home Affordable plan. Unfortunately, people cannot simply refinance when you are unemployed or underemployed which is the primary problem now. Bank of America told Diana that since most of the properties are owned by third party investors the bank has an obligation to place properties on the market as soon as possible.
However, the sheer numbers of foreclosures are the problem and slowing the process down of getting the inventory on the market. What the report did not comment on are the homes that the banks still hold the mortgages on. For example my bank actually holds my mortgage, but if I was foreclosed on the bank might not place my home on the market and hold it until the market improved. Clearly, most banks do not hold these mortgages now as they were securitized, but it raises the question that if banks actually held the mortgages would we have these problems to begin with. Furthermore, if the banks held these mortgages would the loans have been made and if they were made would the bank work harder to keep people in their homes.
I think the answer is clear, if banks held these mortgages we would have less pain because foolish loans would not have been made. Its funny how banks become more conservative with their own money than they are when they package the mortgages up and sell them off to yield hungry investors. Unfortunately we will never have a true answer to that question as banks, mostly, sold these mortgages off and continue to do so.
Here is what LPS Applied Analytics had to say:
He says there is no clear evidence of purposeful accumulation by the banks of these foreclosed properties. They are, he believes, working through the huge onslaught of new defaults as fast as possible, but it takes time. He says they are selling REOs at a fast clip as well, within about three months of taking them as REO.
Then he offered the following very detailed chart of what’s called “roll rates” or the rate at which troubled loans are moving through the system. Note the “average” is a four year average, and two of those years were the worst ever in the mortgage market, so as Jadlos notes: Just getting to the average isn’t saying all that much. We need to be close to the four year low to be fully entrenched in a meaningful recovery. Based upon foreclosure and REO timelines, it’s going to take at least 18 months to flush the system of our current problems. But to flush the problems in only 18 months, more problem loans need to leave the system relative to the new problem loans of today and tomorrow. That does not appear to be the case right now—we aren’t clearing faster than new problems are emerging.
Regardless, the foreclosed homes on the market are approximately 1.5 million, which sounds like a lot, and it is. However, the numbers of problem homes that are ‘seriously delinquent’ total an astounding 3.5 million. Unfortunately unemployment is still on the rise and that number should easily increase in the near future which is a major problem. It also indicates that the real estate market is still not even remotely healthy and there will be more pain on the way. Once that tax credit is gone I think we will see just how weak the real estate market is.
Let us not forget we still have commercial real estate to contend with which even the Fed is worried about. That market is much larger than the residential market and there are lots of institutions that hold these bonds. It is said that the majority of CRE outstanding will not be able to refinance because values have dropped so badly, 36% or so year-over-year. Ordinarily the rollover of commercial property into new debt or loans was not a problem, but when the existing loan value is so much higher than the value of the property no one will refinance it. Actually, I am betting the Fed will figure some way out to refinance these properties, why not at this point it’s only our money they are playing with.
The bottom line is that there are still major problems and while some data looks positive the remaining data is negative. The negative data pretty much trumps the positive data and points to lower prices. I know we will get a much better view of this when the incentives go away in November. However, I am willing to bet there will be another program rolled out in either early winter or spring to boost sales again. I am wondering how many people are suffering from buyer’s remorse about their new home purchase especially when they get the property tax bill.
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