I am a bear and that should not surprise anyone at this stage of the game, but I have long positions and individual holdings. Just because I think the market is going to tank that does not mean I am opposed to being long. However, I am long very specific items and not, generally, long U.S. stocks except for a few biotech’s, tobacco and some defensive names. I am long fixed income and have been for some time, high yield and emerging market debt has been very good so far with about a 5% blended return YTD, not bad for bonds, but my real winning positions are Russia, Africa-Middle East and Poland, up between 8 and 11% YTD.

I guess I am saying that even a bear can be long and in my case I had sought international, yield and strong dividends. One might say my positions are boring, but boring means consistent and low standard deviation. Investors should be embrace boring yet they are not as they pile into AIG (that was, evidently, a short squeeze today) and other very low quality stocks. Typically, when you see crap catching a strong bid that should signal a top to the market, but we are in a continued melt up still so I just take the dash for trash stocks as a warning sign that things are probably about to change. I think the change is not going to be triggered by the Fed either.

What is interesting, even though I think he is bluffing, is the Great Hoenig from the Fed has “put the market on notice” about excessive risk. What that means will be realized soon enough, but I am convinced that interest rates are not going to be raised anytime soon. What Fed Chairman would raise rates with prices falling and unemployment pushing 10%? It is not going to happen. There is zero money velocity, no wage inflation, no significant rise in the PPI or CPI, and deflation is written all over the place, credit contracted again(!), which is very deflationary. All of that means rates are staying right where they are. Although they may raise the discount rate again, big deal.

The risk is not from the Fed at all. A simply look at the front page of any newspaper in the finance world will tell you were the risk is coming from, Europe. Greece to be precise, but I see Greece as one simple cog in a very broken machine known as the EU. Greece may have significant funding issues starting right about know as Germany is giving them a cold shoulder and, supposedly, are cutting them off from easy liquidity, as they should. In response to this lack of liquidity Greece’s bond yields spiked above 7% which will guarantee a default if they cannot get cheap money to borrow. The other broken cogs in the wheel are Italy, Spain, Portugal and Ireland. If Greece falls so will the rest of the PIGS and that will bring the Euro down and could trigger a run on the currency, we saw this story before in 1997 in Asia I believe.

The very reason the Euro is selling off is why I own and have advocated owning gold, silver, palladium and platinum as currency uncertainty means the value of these commodities will rise. Look at today as the dollar gained value gold and silver continued to break higher, that is not supposed to happen. The reason for the rise in metal prices is because of Greece and that issue seems to have some people concerned enough to run to hard assets. Can a European default really be a problem for the U.S? You bet. Consider that French, German and every other European bank owns some form of PIGS debt and U.S. banks hold European bank debt as well. Just remember, sub-prime brought down the mortgage market and sub-prime was tiny in comparison to the overall mortgage market, the same lessons apply here.

On top of the new debt problems, foreign banks if the PIGS default, U.S. banks are still holding all the same toxic assets as before. Another shock from bad debt could be the straw that breaks the camel’s back and as I said yesterday the government and the Fed are out of ammo. On top of the European issues, California was downgraded and about $1T in more sub-prime debt was downgraded. As hard as I tried today I could not find any good news out there. You also have to remember that the credit (bond) market is where all the smart money is so when they see trouble that means bad news could be just around the corner for stocks.

The bottom line is that earnings might be good for 1Q10 although I think top line revenue will be weak, but that might be meaningless as sovereign debt is rearing its ugly head again. There is no harm in going long equities, but with such a huge rally and shaky fundamentals I do not think it is wise to marry this market or have zero shorts. This melt up could very well be coming to an end as stocks cannot go up forever and there are serious problems out there that are completely unresolved and are not priced into this market. If these problems get priced into the market I can assure you the Dow will not even be close to 11,000.

There is some hope that the next aftershock might be muted, a little bit at least. The President just launched his new initiative to save the housing market which involves principal write downs, but no one is asking the really big question, why? With an industry report due out shortly you will see why, according to Diana Olick of CNBC the foreclosure report coming will set a new record. Am I surprised? Nope and you should not be either.

The mortgage mania was an era that will probably never be repeated again by private lenders, it continues through the FHA though. Many believe or believed the worst was over for mortgages blowing up in 2009, but they clearly had not read any meaningful material on the subject. If one read any of the numerous books about the credit crisis, aka lend anyone with a heart beat some money to buy a house they could not afford, they would know that 2009-2010 (the beginning of 2010 at least) was the lull before the storm. Whitney Tilson has probably the best book about the subject with many interesting charts in it, but most telling is that the last 12 months was merely the eye of the storm.

What happens next is really anyone’s guess, but what we all know for sure is that the problems that existed in 2008 are still on the books right now and the problems were merely covered up with the FASB’s suspension of rule 157, mark-to-market accounting rules. As you know firms can now make-to-fantasyland what they feel all that worthless paper is worth, I wish we could run our books like that because I have a painting of some dogs playing poker that I know will be worth millions in a few hundred years. Regardless, the next wave of the crisis is starting to break now as we have resets on prime mortgages, Alt-A’s and even some sub-prime that will begin now.

Why do you think the major banks were so quick to agree with Obama and begin to really renegotiate those loans? It is because they know that the problem is still there and needs to be dealt with since mortgage modifications clearly have not worked, there-default rate is through the roof. Obama knows that the mortgage problem is still very real as well and if the FASB goes back to mark-to-market, well, we are right back to September of 2008 and now the Fed and the government have zero ammo left besides outright nationalization of the banking sector. This is why Obama has offered rich incentives to all parties to begin this program, to help avoid the next wave, but I have little faith that the program will work based on the modification failure. This has nothing to do with politics as I think this is the best plan to deal with the problem, but it is a huge problem and principal write down’s will mean losses for some banks.

The interest rate reset issue is also why you will not see the Fed raise interest rates soon either, along with that other little problem known as the national debt. All the talk about Hoenig getting rid of the “extended period” talk is just a side show. While he might have bubble concerns, rightfully so I might add, he merely wished to change the language, but it means, essentially, the same thing. According to the FMOC minutes here is what was said on the whole dissent issue:

“Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low “for some time,” according to the minutes, which did not elicit major market reaction.

Fed officials expressed concern about renewed weakness in housing and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.”

His dissent was for the markets, not because he really disagrees with the low interest rate policy. The Fed knows that the housing market is a mess, as they stated in their minutes, and they know that there are plenty of adjustable rate mortgages ready to reset, the terms stink I might add. Sub-prime resets are usually fixed to a maximum of, if memory serves me correctly, 15%, but the real issue is the deterioration of the prime mortgages which has yet to really get started. The prime mortgages, in my opinion, is just one of the reasons rates will not increase as the resets are prime plus (insert risk premium here). If these mortgages can be written down problem solved! Kind of.

Whether or not this new initiative will actually solve the problem remains to be seen, but as I said earlier it is just about all we got left without the government actually buying the houses and letting people pay rent to live in the house. Luckily we are not doing, oh, wait we are doing that to, never mind. Again, another shock to the system will be devastating and this is why the big banks are all over this new modification program, but it is unclear whether or not homeowners will go for the plan or not, see the latest GSE study on how Americans view homeownership. No matter what, unless there is another accounting gimmick, the banks will have to take some losses in the near future albeit smaller losses than a foreclosure.

Of course, the media is not looking at this data and merely parade people wearing rose colored glasses in for their interviews, but this problem is real and it is getting closer. I do not believe it will be as bad as 2008, but it certainly can turn as bad if the problem is not cut off over the next few months. If this new program fails or has a low participation rate that may be a problem. The other unreported issue is the SIV accounts that need to be brought on the banks balance sheets in the near future, those are the accounts that banks “sold” their CDO’s to in order to securitize them, but since 2008 that paper has not moved.

In short, the problems have not changed or gone away. All those who told you everything is fine are either lying or do not have a clue what was written. With 4 negative days in the past month and a rising tide still lifting all boats I think that alone should be a warning that we are still in very unusual times. Let’s face it, markets never go parabolic without having a not so bullish ending and with the banking system still impaired I believe there is a recipe for disaster in the not so distant future.

Everyone remembers the aftermath of 9/11/01 and how horrible those days were, but what sticks out in my mind, after the obvious, was what happened after words. The President said to get out and shop, and boy did we, but the thing most do not recall is what the auto industry did to boost sales, 0% financing. This was the beginning of the end for the auto industry simply because how can you ever raise financing costs after you go to 0%. The demand that 0% financing created meant that the automakers would have a heck of a time raising those rates and they needed the sales. It essentially created a major problem for the industry which help speed its way into bankruptcy.

We are seeing the same thing happen in housing with all the government help being injected into the market. We have tax credits to encourage buying, but we also see what the market looks like without those credits, see recent home sales data, and we have the Fed lowering mortgage rates like mad with QE. What happens when/if these programs stop? It will get ugly, just like when the automakers tried to stop 0% financing. If you do not let the markets work their magic, i.e. stop malinvestments, the pain is just prolonged. GM and Chrysler should have gone out of business a few years ago but that 0% financing helped keep them around, however it could not stop the inevitable.

The mistakes made by the automakers are being made by the government with the housing market. Homeowners already enjoy a ton of tax breaks, mortgage interest deductions, property tax deductions, etc. and the last thing they really needed was a tax credit to buy a home. It has helped, the data shows that, but the problem is these programs have to end and then what happens? As we have seen already, with limited data of course, is that housing does not move without that tax credit. Sure we can blame the weather or whatever external force we want, but that is ignoring the obvious, housing wants to go lower. That leads me to believe that more tax credits are on the way and QE is a permanent fixture at the Fed, see Japan.

When you incentivize buying to such a degree you create a major problem for yourself, or the country in this case, as you boost expectations on false hope. Once you remove those incentives and reality sets in you are stuck with doing nothing, clearly something government does not want to do now, or let the market sort things out, what should happen. Because the government has created false hope for a housing recovery they have created more problems than they solved. The sales we do see now are false demand, meaning it is only there because of the rich incentives, which means that many economists and market participants are creating strategies or projections around numbers that are not real. The fact is that without a natural housing recovery the economy cannot recover.

While the insane 0% financing hastened the decline of the automakers into bankruptcy, in my opinion, the government is simply slowing the fall of housing or kicking the can down the road a bit. The good news is that at least the incentives will not cause the government to go into bankruptcy, well on their own at least, but it is an enormous waste of money. The government should step back and stop what they are doing and the Fed needs to stop its QE program. If neither stop and they continue doing this the next leg down will be ugly and, the reality is, we do not need more incentives to buy houses, look at the tax breaks you get now. False demand creates false hope which lures investors into investments they ordinarily would not buy. When that false demand and hope disappear those investments decline in value, investors are being suckered.

Ben Bernanke may in fact seem like the unassuming soft spoken professor who is well spoken and polite, and he is, but at the same time he is perhaps suffering from the greatest of the deadliest of sins, pride. I am translating pride into arrogance with Ben because it is essentially the same thing and the sin is identical. There is also no question that Ben suffers from the delusion that he s right and everyone else is wrong, which is how we can tell that he suffers from this disease of arrogance wich will be his ultimate downfall.

I am referring to an article I read this weekend from Reuters, which was reprinted on Bloomberg and various other news sources, where Ben announced that it was not the Federal Reserve’s wall of liquidity during the early 2000’s that caused the housing boom, and subsequent bust, but rather lack of regulation. First of all, he is wrong, because without the liquidity easy credit or the showdown securitization mortgage market simply would not have existed, that is obvious. What is not so obvious is the fact that his regulation argument is also an attack on himself. While Congress did encourage the GSE’s and banks to loosen credit standards, so did the Federal Reserve Bank and the Fed had some significant regulatory authority over these mortgages.

Am I the only one that finds it ironic that Ben, Man of the Year, Savior of the Economy, or whatever else we are calling him now, is the same guy saying that his wall of liquidity is not to blame and more regulation’s was the answer, when part of his job was to regulate the banks? Granted, the Fed’s job in regulating the banks is somewhat small, but are we forgetting Greenspan’s famous speech were he encouraged banks to get more inventive when it came to mortgage origination? This does not sound like getting tough with banks, in fact it sounds like it was a green light to do whatever you want to get homeowners into a house.

Essentially, the Fed gave its blessing to do whatever it took to get people to sign the dotted line on the mortgage application. Not only that, the Fed also provided the liquidity to encourage the lax lending standards. Having just one of those two things is bad, but both combined is disastrous, which we found out. However, our Savior still does not realize that it was the Fed at fault for this mess and I think I know why he is saying this now. He simply wants to be left alone. He figures with his reappointment a done deal, his Man of the Year award, and the magical 25% S&P 500 returns in the market people will get off his back as he built up some credibility, especially the audit the Fed people.

I honestly believe he thinks that his sins of the past can be forgiven because of his recent ‘accomplishments’ which were not really accomplishments. If anything Ben was merely picking up after himself, but with our money. To put everything into perspective on how Ben feels here is how the article ended, and what he thinks caused, I guess, the credit crisis:

“Bernanke pointed to adjustable-rate mortgages and overconfidence that house prices would continue to rise as the main culprits behind the catastrophic housing bubble.”

That is that I guess. He was partially right, but it was not just ARM’s that were the problem, not at all, it was a whole slew of mortgages that were problems. There were jumbo’s that trigger higher rates if the LTV slides below a certain value, there were sub-prime, there was the fact that the asset bubble from the Fed was not just in housing, but in commercial real estate and, well, everywhere. The question is why were people betting so heavily on housing prices to rise? Perhaps because the liquidity spigot was going full force for way too long and then when you went to turn it off the effort was meager at best.  Regardless, the biggest problem now is with all types of mortgages, not just ARM’s and sub-prime.

The sheer arrogance of this man is just unbelievable though. The one thing about the deadly sins is that they are deadly and catch up to you, pride is always the one that kills the worst to. At first it was nice to see Ben apologize for the Fed’s role in the Great Depression, but how could we go from a guy who knows that his organization caused the Depression to him denying the Fed caused this problem. What happened over the last 4 years to Ben where he could state the obvious before only to deny it know? It makes no sense other than he suffers from the affliction of arrogance or pride. What I do know is what Ben is doing, long-term, will not work, because Ben has a terrible track record, and the Fed’s powers are on the verge of finally being reduced, which is a great thing as the system failed us greatly and it’s time for it to go.

No matter what Ben and Greenspan are to blame for a large portion of what happened. I am not saying that Congress is innocent, you know me better than that, and I am not saying that those who lied or bought houses they couldn’t afford are innocent either. However, legitimate fraud too place, even to reasonably intelligent people, the Fed let things happen that they should not have and Congress, well, Congress is just incompetent, what do you expect.

This has been speculated for some time now, but a WSJ article highlights a report showing that the FHA reserves has fallen below federally mandated levels. The reason for the levels falling below the minimums is because Congress made the agency fill in for private banks in 2007-2008 when banks began to pull out of the market. Of course there was a fair amount of fraud involved, because the government can never figure out how to rid itself of fraudulent behavior, but at the end of the day the firm took on risky borrowers.

Not to mention that Congress has literally no one to blame but themselves for this fiasco as they pressured the agency themselves. I am confident that they will find a scapegoat within the agency as Congress refuses to accept any responsibility for their own behavior. According to the WSJ the FHA will suffer some significant losses from loans written from 2007/08 because they had loosened their standards. The percentage of losses is pretty significant, from my perspective, but when you know there are 350M taxpayers behind you, well what is a little risk?

Here is what the WSJ said:

“Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008.”

The article went on to say:

“This month, the FHA is to release the findings of its annual audit, which will show that the projected value of the agency’s reserves has fallen below a federally mandated level, raising concerns that the FHA may need taxpayer money for the first time in its 75-year history. FHA officials say the agency has enough capital to withstand expected losses.”

The loans being hit the hardest are the refinancing loans, of course, which are a double whammy as the asset value is now worth much less than the loan value. The most shocking portion of the report, besides the fact that the FHA will more than likely need capital, is that loans written in 2007 for people with credit scores of less than 600 rose to 37% of the loans written. That is almost 4 out of every 10 borrowers had a credit score so low they probably could not get a secured credit card, but a mortgage, no problem. Of course the firm tightened standards after the collapse and now works with firms who implement their own minimum standards, but the damage is done.

What is not attached to the article is the exact dollar figure for these loans, but by the looks of the chart provided it is clearly substantial. It is becoming more apparent that the FHA is in or in the beginning stages of a major problem. Whether or not anyone cares about this problem is also another story, but this is a major deal as it puts the taxpayer on the hook again. Not only that, but it also proves that this mess is not over and the problems are still with us today, regardless of what we are being told by the Fed and other cheerleaders.

You read the title correctly, the USDA offers mortgages, not only that, but they offer zero down government guaranteed mortgages. Does this sound familiar at all? Is there any wonder how the housing market has not totally collapsed with the tax credit and this USDA program, which is heating up dramatically. Essentially, both of these programs are perpetuating the low end of the housing market and are more than likely putting people into homes that cannot afford them, but only time will tell.

Essentially, the USDA home loan plan has been around for a long time and was designed to boost housing in rural areas. However, after the explosion in housing over the last few years are there really any rural areas left any longer? The program was founded in 1949 and was used very sparingly until the last few years. In fact in 2005 only about 30,000 homes used these loans, but in 2008 this increased to about 65,000 and this year about 120,000 homes used the USDA home loan program. The amount of money allocated to the program has ballooned from about $3B a few years ago to $10B in 2009.

Clearly this program has attracted people to it because, well, you don’t need any money down. All of these federal programs, including the USDA program are buoying the lending and homebuilding industry. For example, last quarter 64% of sales at D.R. Horton were a result of these government programs, I guess this supports the theory of a housing recovery.

Even though these programs are no money down or they allow you to use the tax credit towards your down payment, meaning, essentially, no money down they claim that lending standards are tight, but who really believes them with the mandates we see coming from the Whitehouse. Not to mention that we see the trouble coming from the FHA and they require a whopping 3% down payment to qualify. We are doing everything within our power to re-inflate a bubble that proved devastating to our banking system and economy. The worst part about it is that if it implodes again, which it will at this rate, there will not be the political will or money to bail out the banks nor should the banks be bailed out again.

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.

RC Foreclosures

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.

All of this information about a housing recovery is just plain false. The biggest perpetrator of the housing recovery myth is CNBC and they actually ran this story today showing it is the lower priced homes moving, all other homes are just not moving, period.

There is simply no recovery in housing at this time and if this chart tells us anything is that the market will, at best, be flat for some time to come. However, I am inclined, as indicated in numerous other pieces I have written, that we still have a long way to go on the downside before things begin to level out. This means that banks, 81 YTD, are going to continue closing because they are losing money on these mortgages as people just walk away from homes that they cannot sell and are underwater in.

A full one third of all sales in July were of foreclosed properties, and as more foreclosures hit the market, you can only expect more downward pressure on prices. Foreclosures are only increasing, as we saw from yesterday’s Mortgage Bankers Association report, and that will mean more inventory.

I think that is proof enough that things are just not that good. I may have missed out on a couple of percentage points over the past week, but the market is going to come crashing down in the near future. Why, because all of the data supporting a bull run is over hyped and inaccurate at best. Housing is one of the data points supporting the bull’s case, but look at the data point and tell me that there is a recovery taking place.

Take a look:

As I have said numerous times before, burying and hiding problems through bogus accounting will only make the problem worse long-term. Enron tried it, MCI tried it, now we have the banks trying it through lax mark-to-market regulations. The FASB enacted the mark-to-market because it made sense, if you had to sell a security today you cannot just wait for a nonexistent price to come along, which is what the new regulations let banks do for accounting purposes.

One last point about this, ever since mark-to-market went away bank earnings have all been good. Do you see the problem? Frankly, real estate is still their biggest problem and the above information supports that theory.

This has been our main concern for some time, in the residential market, as Prime and Jumbo loans are getting ready to reset in the coming years. This, of course, is if they have not reset already because once the LTV, loan-to-value, reaches a certain point the interest rate automatically can reset. I am going off of memory, but I believe the LTV is about 120% or so that causes these loans to reset. We are there and then some.

Here is a disturbing figure, 1 in 8 homeowners are either delinquent or entering the foreclosure process in America, according to the Mortgage Bankers Association, MBA for short. That is pretty scary to say the least and with unemployment initial claims increasing over the last few weeks this number may increase. The good news is that sub-prime loans are being foreclosed on at a lesser rate than before, eventually everyone will be out of their homes and this number will go to zero soon.

However, we are talking about prime loans, these are fixed rate conforming loans with 20% down and good credit. This, my friends, is a major problem and one that we knew was coming for some time now. What this means is much more bad news in the coming months as many of these loans are securitized. However, the intervention of the government will more than likely lessen the impact of the growing problem, but it will drive the deficit higher, so much for Obama cutting his $1.8 trillion dollar deficit last night.

Here is what Jay Brinkmann, MBA’s Chief Economist, has to say:

“The rise in prime fixed-rate foreclosures can largely be attributed to unemployment” he said.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from 9.12 percent the first quarter of 2009, and up 283 basis points from 6.41 percent one year ago, the MBA said in its National Delinquency Survey.

The delinquency rate breaks the record set last quarter. The records are based on MBA data dating back to 1972.

So, nothing to see here, just move along as I am sure the media will spin this, somehow. I suspect they will point out that the sub-prime loans are not defaulting as bad anymore, they can’t go beyond zero, and completely ignore the prime mortgage problem. However, add this to commercial real estate, which is down 36% year-over-year a much further decline than residential real estate collapse, then the problems just keeps growing. Again, unemployment is the problem and until that turns we will continue to see further deterioration of the credit markets.

To illustrate this point, corporate defaults are through the roof this year, which is why I sold my high yield funds last week. According to the Financial Times corporate bond defaults reached 201 this year with $453B of debt. Compare that to last year where we had 126 defaults with a total of $433B and I think you can see the problem. The current default rate on high yield bonds is 8.58% this year, so far, and is expected to climb to 14.53% in 2010 taking out the prior record of 12.54% defaults in 1991 when junk bonds blew up big time.

As you can see, everything is fine, no problems at all. The markets are sure to continue its steepest market rally ever rising 49% since march, outpacing the 1929-1933 44% rally. I guess the new normal of a high unemployment, revenue-less, earnings-less, and growth-less recovery means that the markets can have the greatest percentage gain ever, in only 5 months, and should continue forever. I am kidding of course, this thing looks ugly and makes me question what is really going on.