Borrowers Just Walking Away

Jingle Mail, a term used to describe when the home owner walk away from the home, is becoming more popular.  Looks like 60-Minute episode has made walking away from home socially acceptable.

 

Now more and more people are walking away from homes.  But these are not owners who can not afford to pay the loans.  They are choosing to do it because they owe more on their loans then their houses are worth.

A rise in the number of people choosing to default on their mortgages would represent a significant departure from past behavior of American homeowners, who during past housing downturns tended to walk away only as a last resort, often because they couldn't afford to pay because of unemployment, illness, divorce or other life-altering changes that reduce income. And even then, the number of people who walked away was relatively small. During the oil bust in the Houston area during the 1980s and in California during the early 1990s, for instance, there was a brief spate of people sending in their keys to their lenders.

What's different now, analysts and economists say, is that home prices have fallen so far so quickly that some homeowners in weak markets are concluding that house prices won't recover anytime soon and therefore they are throwing good money after bad. Also, many borrowers who bought in recent years have put down little if any equity. "If they haven't lived in [the home] very long and haven't put any cash in it, it's a lot easier to walk away," says Chris Mayer, director of the Milstein Center for Real Estate at Columbia Business School. He also notes that new homeowners may not have strong ties to the community.

Some in the industry want to toughen the consequences for borrowers who walk away. Executives at Fannie Mae say they are working to create harsher penalties for people who walk away from mortgages, and they plan to pursue some borrowers in court. They also want to extend the amount of time between when borrowers default and when they become eligible again for a Fannie Mae-backed loan.

I hope the banks learn their lesson.  You need to have home owners skin in the game.  Very few owners who put down 20% would be walking away.  It's a different story when you have 0 down interest only mortgage.

Goldman Sachs economists estimate that as much as $3 trillion in mortgages could be underwater by the end of the year, leaving 30% of the country's outstanding mortgages in negative equity. Since there is roughly $1 trillion in subprime mortgages outstanding, that means a large amount of better-quality mortgages, such as prime and alt-A -- a category between prime and subprime -- will be attached to negative equity.

"The focus has been on the [interest rate] resets," said Goldman Sachs economist Andrew Tilton. "But if you're in a deep enough negative-equity position, defaulting has its own kind of logic."

Let's hope the leaders in congress are reading this.  This is not just a issue of affordability!  It is a choice many people are making.

"Every single person we talk to either owes 100% [of their equity] or is upside down anywhere from $10,000 to $300,000," says John Maddux, co-founder of Youwalkaway.com, which charges borrowers about $1,000 for advice. Mr. Maddux says the site has received more than 190,000 visits and about 20% of their clients are investors.

Getting paid to advise people to walk away from their house.  What a great business idea!

http://online.wsj.com/article/SB120424677934501611.html?mod=hpp_us_whats_news

 

Rates Going Up!

After initially going lower with the fed funds rates, the mortgage rates are going up.  Freddie Mac reported 30-year mortage rates averaged 6.24% up from 6.04% last week.

 

In a seprate report Bankrate is reporting average 30-year rate 6.41%.  In five weeks, the 30-year mortgage rates have gone from 5.57% to 6.41%.  Investors are waking up to the inflation.

 

As the fed lowers the fed funds rate, inflation is zooming upward.  Now, the investors are asking for excess returns to compensate for the inflation.  So much for all those analysts who said lowering rates is going to help the home owners. 

 

Just remember those analysts who upgraded the homebuilders.  Few months down the line, if the builders are doing worse, they are going to say we could not see mortgage rates going up so fast or other bull.  So when listening to an anlyst, make sure you do your own research. 

 

 

Freddie Mac posts $2.5B loss in 4Q

Freddie Mac lost $2.5 billion in fourth quarter of 2007.  Of course, the reward for losing all that money?  Raise the caps on what it can borrow. 

If not for a change the company made in its accounting, Freddie Mac said its fourth-quarter loss would have been much bigger -- $3.7 billion.

When Oftheo lifted the caps, it said that both Freddie's and Fannie's accounting has improved.  Now we know what improvement meant!  Now they know how to turn a $3.7 billion loss into $2.5 billion.  Hey Tan-Man try beating that.

'Today's economy represents one of the most severe housing downturns in American history, and our results reflect that difficult environment,' Freddie Mac's chairman and CEO, Richard Syron, said in a statement. 'If the economy weakens substantially from here -- a possibility for which we need to be prepared as a company -- it will have a further negative effect on homeowners across the country and drive credit costs higher.'

Once again this is from an industry source.  We have been saying the rates might go higher.  And also expect economy and housing to worsen.

http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-23361807.htm

 

New Home Sales and other Good News (For Stocks)

New home sales had biggest fall in 13 years.  But that should be good news for Home Builders because Homebuilders ETF (XHB) is up 2%.  Beazer is up 7%.  And this is just today. 

 

I guess this means we have a new bottom in housing market. 

 

http://www.cnbc.com/id/23369328

 

In other good news for the builder stocks and stocks in general, mortgage application declined for third straight week.  Mortgage applications were down 20% from last week.  Since mid-january, the 30-year rate has risen .78 percentage point - while the feds were cutting the rate.

 

Toll Brothers Reported it's biggest loss ever. It posted a first quarter loss of $96 million, or 61 cents a share. 

Toll signed a total of 904 contracts for new homes in the quarter, down about 38 percent from a year earlier. The value of the contracts fell 46 percent to $573.1 million. The average price of a home under contract was $634,000 compared with $646,000 in the prior quarter.

 

In the first quarter, signed contracts after cancellations totaled 647 homes, or $375.1 million, a decline of 37 percent in units and 50 percent in dollars.

 

The dollar value of contract after cancellations was down 50%!

 

 Fannie, Freddie Regulator to Lift Investment Caps - Now let Fannie and Freddie overextend themselves like the homeowners!  What a solution!  I hope they don't have to declare foreclosure in future.  Just bankrupt the future for a small present gain!

 

"In recognition of the progress being made by both companies, as indicated by the timely release of their 2007 audited financial statements, and consistent with the terms of the relevant agreements, Ofheo will remove the portfolio growth caps for both companies on March 1, 2008," the regulator said in a statement.

 

For the quarter, Fannie swung to a loss of $3.80 a share from profit of 49 cents in the year-earlier period.

 

The loss was worse than expected: Analysts surveyed by FactSet were expecting Fannie Mae to report a loss of $1.21 a share.

 

 So they are losing money, but we are lifting caps because of the timely release of their 2007 financial statements.

 

http://www.marketwatch.com/news/story/fannie-mae-shares-zoom-higher/story.aspx?guid=%7B90452788%2D5151%2D4950%2D9F18%2D8297B442C324%7D

 

 

 

 

 

 

 

S&P/Case-Shiller Home Prices Fell 9.1% in December

Home prices fell 9.1% in December.  And with foreclosures adding to inventory glut, it is going to get even worse for housing.

This was the 12th monthly decline in a row for home prices.  Remember that the NAR thought housing was a good investment 12 months ago. 

PPI

The Producer Price Index increased 1%.  That's 12% YOY.  The fed is concerned with growth so let's raise the rates again.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ap5TcAZRl9kE&refer=home

FDIC Readies for a Rise in Bank Failures!

The FDIC is hiring emloyees for it's division of resolutions and recieverships.  It is expecting abou 100 bank failures in the next 12 to 24 months.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

The FDIC rated 65 banks and thrifts as "problem" institutions at the end of the third quarter of 2007, up from 47 institutions a year earlier. Both figures are low by historical standards. At the end of 1993, there were 572 "problem" banks and thrifts. The FDIC is expected to update its data on "problem" institutions today.

The FDIC was created by Congress in the 1930s after a series of bank runs during the Great Depression. At the end of 2007, it had $52.4 billion in its fund that backstops the nation's insured deposits.

It's probably going to cost alot more than $50 billion if 100 banks are going to fail. 

http://online.wsj.com/article/SB120398607404892133.html?mod=hpp_us_whats_news&apl=y&r=887335

 

 

S&P affirmed the "AAA" ratings for Subprime...er MBIA and Ambac

One of the agencies that bought you AAA ratings on Junk CDOs, now has reaffirmed ratings on MBIA and Ambac.  This is a rigged game to buy time for monoline insurers, goverment and other players ennough time to come up with alternative plan. 

 

On Friday, the markets went up because banks came up with a $3 billion rescue package to save Ambac ratings.  If $3 billion was all it needed, why was this not done earlier?

 

This looks like a band-aid solution if you can call it a solution.  But you have to love the markets this days.  The worse the news, the higher they go.

 

 

Home sales down 23.4% vs. last year

The home sales were down 23.4 % from last year. Seasonally un-adjusted, the sales were down 23.1% from last month. Of course, you will see the "Adjusted" -.4% number from MSM.
The median price declined 4.6% to $210,100 from January 2007.

"Subprime loan and other risky mortgage products have virtually disappeared from
the marketplace, and over the past five months, this has been reflected in soft
but fairly stable home sales," Mr. Yun said.

Here is a quote from last NAR press release:

Lawrence Yun, chief economist for the National Association of Realtors,
said the continued difficulty in getting so-called jumbo loans had reduced the
sale of higher-priced houses, bringing down median prices in many markets.

First he is blaming prices going down on the jumbo loans. Now he is saying the subprime loans have slowed down. If slowing of jumbo loans reduces the price, wouldn't reducing of subprime loans raise prices? But you wouldn't ask the MSM to ask those kinds of questions.

The inventories rose 5.5%. That represents a 10.3-month supply vs. 9.7-month supply at the end of December! But you won't here Yun or MSM talking about the supply increasing. It's a nice little footnote.

The downturn is the WORSE downturn since the great depression. Yet, the "economists" at NAR said the market is "scratching the bottom."
By the time this thing is over, NAR will be scratching it's bottom.
http://www.cnbc.com/id/23334948

Lowe's Signals a Long Housing Downturns

Lowe's fiscal fourth-quarter net income slumped 33%. Lowe's expects the weakness to persist for several more quarters.

Chairman and Chief Executive Robert A. Niblock
said sales were below expectations "as we faced an unprecedented decline in
housing turnover, falling home prices in many areas and turbulent mortgage
markets that impacted both sentiment related to home improvement purchases as
well as consumers' access to capital."

He might be overstating it inorder to provide a cover for the bad results. But it's worth reading the above statements.

He went on to say "the next several quarters will be challenging on many fronts as industry sales are likely to remain soft."

The housing downturn is going to get worse before it gets better. Unlike Daniel Oppenheim of Bank of America, we do not expect a quick turnaround to this housing market.

http://online.wsj.com/article/SB120394232907090351.html?mod=hps_us_whats_news

Bond Insurer Downgrade Coming Soon?

CNBC is reporting time is running out for the bond insurers.  At least one of the rates could make an announcement today.

 

Downgrades could cost banks to writedowns of another $75 billion.

 

The decision by the big ratings agencies, Moody's, Standard & Poor's and Fitch is imminent, and at least one of the raters could make an announcement sometime today.

 

As reported on CNBC, Dinallo is working on separate plans with consortiums of bank that may infuse capital and provide lines of credit to sure-up the bond rating businesses at FGIC and Ambac and prevent downgrades. MBIA recently raised several billion dollars in new capital from Warburg Pincus.

 

But analysts are increasingly skeptical that even with the infusion of cash downgrades can be avoided because of the massive losses the insurers might take on their coverage of CDOs and other bonds that are packed with depressed subprime loans. As evidence, they point to recent management changes at MBIA and other moves; just yesterday, MBIA announced that wants to split its municipal bond business to shield it from the losses on its business of insuring CDOs. The move is being seen as a way to placate regulators and bond raters as a decision nears.

More Bailouts for Homeowners and Banks

Prodded in part by some of the nation's biggest banks, the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses.

This is a bailout for the banks in disguise. 

Not since the Depression has a larger share of Americans owed more on their homes than they are worth.

 

This is indeed the worse housing downturn since the Depression.  So when someone compares to 1991 or 1980 downturns are misleading the public.

 

Many owners are only gradually becoming aware that their homes would sell for less than the debt against them — a phenomenon, said Richard T. Curtin, director of the Reuters/University of Michigan Surveys of Consumers, that is "beginning to weigh on people, making them uncertain and nervous about the future."

 

More and more owners are upside down.  And more incentive to just walk away.

 

Mr. Breakstone, a 42-year-old lawyer, and his wife, Lori, chief of customs agents at Memphis International Airport — who together earn more than $250,000 a year — managed to extricate themselves by paying off the mortgage. But millions of others are trapped in their homes. They have jobs, make their mortgage payments on time, but cannot raise enough cash to cover the shortfall.

 

Remember that this is not a subprime issue (it never was).  Subprime was just one symptom.  The problem was affordability.  Everyone - from Prime to Subprime borrowers - overextended themselves thinking prices will always go up.  The banks kept lending as the foreclosures were going down.  The reason they were going down was because of house prices kept going up.  Thus, if you could not afford the payments, you could always sell the house.

 

Bank of America, which is in the process of acquiring Countrywide Financial and has potentially huge exposure, has circulated a proposal to create a new federal agency that would buy vast quantities of delinquent mortgages at a deep discount and replace them with fixed-rate federally guaranteed loans.

 

We have said this before.  Banks are openly begging to take the loans away.  We make the loans.  We get the payments.  If we don't, let's just pass it to the Federal Government.  May be Bank of America acquired Countrywide because it was good at getting the Federal government to bail it out.  May be Ken Lewis can try to learn art from the Tan Man.

  

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

 

It would take the remainder of the mortgage as a "negative amortization certificate," a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.

 

Collie Tuttle, in her early 60s, is caught in this bind. Four years ago, she purchased a newly built four-bedroom three-bathroom house in the Memphis outer suburb of Olive Branch, Miss., for $270,000. She put nothing down, relying on her six-figure income from selling furniture to pay down the mortgage, reducing it to $248,000.

 

 But then she lost her job, and in her next one — also selling furniture, but at lower pay — she is being forced to choose between her home and the rest of her life.

 

"It was a big mistake on my part to buy this house," she said. Divorced, with two grown sons, she rattles around in it alone. She had thought the house would add to her wealth.

 

  In a way you feel sorry for her.  But this seemed to be the mentality.  It seemed everyone would calculate their salaries going up and no one cared to factor in losing a job or salary going down.

 

Now the Breakstones are saddled with $4,000 a month in house payments, and $14,000 more in fixed outlays, including child support, car leases, taxes, consumer debt and utilities, using up the bulk of their income.

 

"I used to think," Mr. Breakstone said, "that I would pay the piper later and enjoy life now. I've totally reversed that view."

 

 Let's hope people have learned their lessons with borrowing.  Remember Mr. Breakstone is a lawyer not just an average joe. 

 

http://www.nytimes.com/2008/02/22/business/22homes.html?pagewanted=1&_r=1&hp

 

 

 

 

 

Freddie Mac: Fixed-rate mortgages rise again

We have been warning about the mortgage rates going up.  Of course, it is only one week and it does not make a trend. But with inflation and risks (especially in mortgage markets) going up, investors have to get more for their investments.

 

Last week, the fixed-loan averaged 6.04%.  It went from 5.72% to 6.04% in a week.  That is about 25 basis points in a week. 

 

The rate is down from last year when the rate wa 6.22%. 

 

"After trending up in the past two weeks, long-term fixed mortgage rates are back up to nearly where they were at the beginning of the year. In contrast, average rates on adjustable-rate mortgages are about 0.5 percentage points below levels of the first week of this year," said Frank Nothaft, Freddie Mac vice president and chief economist. "As the spread between long-term fixed-rates and adjustable-rates widens, it's possible we could see a slight increase in the popularity of adjustable-rate mortgages."

 

Have we not learned anything?  While Nothaft is not recommending ARMS (the way Greenspan did), I hope people have learned their lesson with ARM mortgages.

 

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B90CBBDF7%2DB69C%2D4BFD%2D9B07%2D419A5903E818%7D&siteid=mktw

 

 

Factory Activity in Philadalphia Region Weakens to -24 in Feb

Factory Activity in Philadalphia Region Weakened to -24.  Expected activity was -10.  More reason for stock market to go up.

 

In other news, Jobless claims dropped for the week.  But the number of people collecting unemployment benefits rose by 48,000.

 

 

Market Maniupation?

I have wanted to write about this for a long time. The market seems to move in an illogical way.

There has been so many negative news, especially last two days. If someone told you the headlines, you would have guessed market would have tanked. But yesterday, in the morning, they were up. At the end of the day, they were down a little.

Here is an article on CNN Money http://money.cnn.com/2008/02/19/markets/morningbuzz/?postversion=2008021910. This articles was written yesterday - even before todays bad news.

I doubt, as Brian Stine says in the article, that the doom and gloom is baked into stocks.

Mr. Practicle on Minyanville seems to have a better explanation.

I don't know if it's the fed or the PPT, but there is definitely some manipulation going on. This is a topic we have discussed before. But it seems to be more and more blatant attempts to prop up the markets.

Here are just a few headlines from last two days.

• Consumer prices rise more than forecast
• Port Authority of New York Bond-Auction rate falls to 8% (From 20%)
• KKR Financial delays Repayments
• Credit Suisse writes off another $2.5 Billion
• New Single-family homes at 17-year low
• Corporate Bond Default Risk Soars to Record on Speculation Over CDO Losses
• Alliance & Leicester Plummets to Record Low After Abandoning Profit Target
• Standard Chartered Drops Plan to Refinance $7.15 Billion Whistlejacket SIV
• Not to mention all the mono insurer headlines

Your Tax dollar in action.

No sooner do I Post this, and wham! The Stock market takes off again. As in Minyanville article, it's easy to see that there are people out there willing to pay extra money.

CPI Rose .4% in January

US Consumer price index rose .4% in January (same as December).  The "core" CPI (excludes food and energy) advanced .3%.

 

That is almost 5% inflation per year.  Inflation is so bad that even the fed can not hide it.  Of course, in real life, it's worse than just 5%.

 

But this won't deter fed from lowering rates.  But it does remain a "concern" for the fed.

 

Dollar is dropping. Oil is up.  Gold is up.  But we need more rate cuts. 

 

Housing

 

In another report, home construction rose .8% in January.  But future groundbreakings fell to lowest in 16 years.

 

http://online.wsj.com/article/SB120350729106279823.html?mod=hps_us_whats_news

 

Home-Builder Index is still bad

The index for sales of new, single family homes rose to 20 from 19 in January. 

 

That index is down from 39 in Feb 2007.  So we still have a long way to go.  There is increased traffic, but it's mostly people looking.   Also the rise in mortgage rates last week will not help.  

 

"Some potential buyers who have been sitting on the sidelines are starting to at least research a new home purchase given improving affordability factors and the large selection of units on the market," said NAHB chief economist David Seiders. "That said, builders know there's a difference between people looking and people buying, and their current outlook remains quite subdued."

 

Most of them are just looking.  Many to gauge the housing market. 

 

Home builders seek government policy action to spur the moribund market. "Congress must follow up on its recently enacted economic stimulus program by passing legislation that will jump-start the housing market and keep the economy moving forward," said Sandy Dunn, the NAHB's president for 2008

 

If banks and Wall St. can beg, why not the NAHB and the NAR. 

 

"While builders remain very cautious about the outlook for new-home sales given today's economic environment, the fact that more consumers appear to be checking out their options is a good sign," said Ms. Dunn, a home builder from Point Pleasant, W.Va.

 

You know it's pretty bad when the best thing to look forward to is the traffic.

 

http://online.wsj.com/article/SB120344373861377251.html?mod=googlenews_wsj

 

 

Banks Getting Donations from Fed

We have told you about the Fed giving out loans to Countrywide for worthless collateral.  Now the situation is so bad that more banks are doing it.

 

US Banks have borrowed $50 billion from the Fed. 

 

The use of the Fed's Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February.

 

Using garbage collateral!

 

"The TAF ... allows the banks to borrow money against all sort of dodgy collateral," says Christopher Wood, analyst at CLSA. "The banks are increasingly giving the Fed the garbage collateral nobody else wants to take ... [this] suggests a perilous condition for America's banking system."

 

Once again, this is not a dooms day blog.  This is in Financial Times. 

 

When it comes to protecting the little guy, nobody seems to care.  But when it comes to saving the nations banks, the fed will do anything to help them.  These are the same banks that have raised interest rates to 30% if you miss one payment. 

 

"Some Fed officials have expressed an interest in keeping and possibly expanding the TAF," says Michael Feroli, economist at JPMorgan.

 

BTW, we have not donated ennough money.  How about a bigger tap to give money away.

 

Nevertheless, Mr Feroli said banks now appeared to be using the TAF instead of other funding routes, meaning that the overall level of reserves in the system was remaining constant. "The banking system certainly has its problems, however the notion that ... banks have trouble maintaining reserves stems from a superficial reading of the Fed's statistical reports," he said.

 

http://www.ft.com/cms/s/0/66db756a-de5d-11dc-9de3-0000779fd2ac.html?nclick_check=1

 

 

 

 

 

 

Countrywide delinquency rate rises again

The delinquency rate in Jan 2008 was 7.47% up from 7.2%.  It almost doubled from previous year when the rate was 4.32%. 

 

I think Bill Miller has lost his touch.  It's hard to believe he is asking for more money from Bank of America.  He should be thanking them for saving him bigger losses.

 

Remember that this is just the tip of iceberg.  More and more people are going to walk away from their houses. 

 

http://money.cnn.com/2008/02/15/news/companies/bc.countrywide.volume.ap/index.htm?postversion=2008021509

 

In another story, Sacramento region foreclosures nearly equals home sales.  I guess you can call people who bought houses during this period "Brave."

 

http://www.sacbee.com/749/story/713187.html

 

Inflation Is Here?

We have been hearing about China exporting inflation.  Could this be the beginning?  In January, import prices rose by 1.7%!  The year-to-year rise in inflation was 13.7%!

 

Imported food prices increased 3.1. 

 

Are you ready for another rate cut?

 

http://www.nytimes.com/reuters/business/politics-usa-economy-imports.html?_r=1&oref=slogin

Steepest Home Prices decline

According to the NAR, the median price dropped 5.8% in fourth quarter of 2007.  That is the steepest drop on record. 

You have to love how Mr. Yun tries to sugar coat all these bad news. 

``The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges,'' said Lawrence Yun, the association's chief economist. ``Higher ratios of sales for more moderately priced homes are naturally dampening the national median price as well as the data for some of the more expensive markets.''

Yeah, it was the jumbo loans that did it.  One month it's the jumbo loans - next month it's subprime - next month it's Alt-A - then it's prime.  But the problems are contained to those loans only.

By the way, after initial declines, the mortgage rates are going up.  It looks like they are not following the fed rate cut as some people were expecting.  I will detail the rates in another post.

Each of the four U.S. regions recorded losses compared with the fourth quarter of 2006. The West took the worst hit, at 8.7%. Prices dropped 4.8% in the Northeast, 5.4% in the South and 3.2% in the Midwest.

In Lansing, Mich., square in the Midwest Rust Belt, prices plunged 18.8% to $109,600. In Sacramento, Calif., prices fell 18.5% to $197,600, and in both Jackson, Miss and Riverside, Calif. prices dropped 16.8%.

 

So if it was Jumbo Loans problems, what about Midwest Rust Belt wher prices dropped 18.8% to $109K?  I guess jumbo loans are trickling down.

 

The least expensive single-family-home market in the nation got even cheaper, as prices in Youngstown, Ohio, dropped 9.3% to $72,600. .The most expensive market, San Jose, Calif., got dearer, with prices up 11.2% to $845,300.

 

Huh?  Prices went UP in a high price neighborhood?  And the problems were due to Jumbo Loans?  If MSM looks at these numbers, even they would be able to through the lies.

 

"The healthiest housing markets today generally are moderately priced and are experiencing job growth and often population growth, which in turn is supporting strong price growth," said NAR's Yun. "Most of the weakest markets have either experienced both job and population losses, or they are experiencing corrections following a prolonged period of rapid price growth."

 

So down markets are overpriced markets or job and population losses.  Stating the obvious.

 

"Higher limits for FHA loans, which go into effect March 14, will be a big help to first-time buyers in high-cost markets," said NAR President Richard Gaylord.

 

"Higher limits for conventional loans purchased by Freddie Mac and Fannie Mae will take a bit longer," he said. "When they become available, high-income, creditworthy borrowers in high-cost areas will have access to affordable and safer financing, and that will help unleash pent-up demand."

 

But other industry insiders are predicting harder times ahead. A Merrill Lynch report in January forecast peak-to-trough price declines of 15% in 2008 and another 10% in 2009 before markets begin to recover.

 

We've got a long way to go before we can call this a bottom.  Of course, you'll have NAR clowns revising their numbers every month.

 

http://money.cnn.com/2008/02/14/real_estate/home_prices_fall_for_year/index.htm?postversion=2008021410

 

 

Shifting Risk to Fed

We have been writing about FHA and Countrywide for a longtime. We have wrote about how FHA loans to Countrywide were dangerous and it was shifting risk from Countrywide to Tax Payers.

 

Now, they are trying to do it in the open.  Credit Suisse is floating a plan to shift bad loans from it's book to the federal government (and to you the tax payers). 

 

The risk: If delinquent borrowers default on their refinanced loans, the federal government would have to absorb the loss.

 

Nice deal.  We make the loan.  We make the money from the loan.  But when the loan is bad, pass it onto the tax payers. 

 

Another plan gathering support seeks to make it easier for banks to write off part of the unpaid balance on loans that exceed a property's value, people familiar with the matter said. If that happens, homeowners would owe less, and they might be able to refinance their loans and avoid foreclosure.

 

I don't care about this plan as long as TAX PAYERS are not the once left to foot the bill! 

 

The Credit Suisse plan would open the way for nearly 600,000 subprime borrowers, many of whom are delinquent on their mortgages, to refinance into loans backed by the FHA. Some 1.3 million borrowers were either seriously delinquent or in foreclosure at the end of the third quarter, the most recent numbers available from the Mortgage Bankers Association.

 

If things are so bad, why are they paying dividend on their stocks?  In a way, the federal government would be the one paying the dividend.  We need to stop this crap and hold people responsible.  Let the stock price and dividends of the banks go down to zero before we help them take their bad debt.

 

It's sad to see America become United Stated of Bailouts!

 

 

Repricing Risk

There is repricing of risk going on all over the place.  Repricing risk is going to lead to higer rates. 

 

The rate on $100 million of (weekly) bonds soared to 20%.  While some of it may be due to market overreaction, we are probably going to see an increase in interest rates despite what the fed does.

 

We have seen student loan auction fail.  It's going to be interesting to see if this is temporary or not.  If it's not temporary, it's going to have profound effect on local government projects to business spending. 

 

If we get the same issues with Home Mortgages, look out below!

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aju0C0WBT8GI&refer=home

 

Investor demand for the securities has declined on waning confidence in the credit strength of insurers backing the debt, and on reluctance by dealers to submit bids and risk ending up with too many of the bonds. The failures in a market where local borrowers have more than $300 billion of debt outstanding follow unsuccessful auctions of student loan-backed bonds last week.

``It's the beginning of the end for the auction-rate market,'' said Matt Fabian, a senior analyst with Concord, Massachusetts-based Municipal Market Advisors. ``Banks have stopped supporting the market.''

Local governments are obliged to pay the high rates until either the auctions start attracting more buyers or they arrange to convert the bonds to some other form of debt. Bankers and borrowers have been working on conversion plans for several weeks.

``We have seen widening spreads, reduced demand for certain auction-rate securities and failed auctions, including some auctions in which Citi acted as broker dealer,'' Danielle Romero-Apsilos, a spokeswoman at New York-based Citigroup, said in a statement.

 

Unsuccessful auctions have hurt companies that bought those variable-rate securities as short-term investments with excess cash, and are unable to sell their holdings. Bristol-Myers Squibb Co., the New York-based maker of the anti-clotting pill Plavix, announced on Jan. 31 a $275 million writedown of its auction-rate holdings related to subprime debt, which totaled $811 million at the end of 2007.

About a third of 449 companies polled in a survey last May for the Association for Finance Professionals said they had investments in auction-rate bonds.

Prime is the New Subprime

Many prime borrowers are falling behind in their mortgage payments now.  Just remember this is not a prime or subprime issue.  The main problem with housing is affordability.  The only reason house prices went up was because people bought houses they could not afford. 

 

When house prices are going up, delinquency issues do not come up as people who can not afford their house can sell them or refinance them. 

 

Now in this market, many can not resell or refinance as the borrowing standards are much more strict then before and with falling house prices many can not refinance because they are upside down in Home Equity. 

Another change is the change in psychology.  With the recent 60 minute report on people walking away from their houses, more and more people are walking away from their house rather than try to make the mortgage payments.  This was confirmed by Ken Lewis of Bank of America. 

 

An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter's college tuition.

 

"The whole plan was to get out" before his rate reset, he said. "Now I am caught. I can't sell my house. I'm having a hard time refinancing. I've avoided bankruptcy for months trying to pull this out of my savings.

 

 

Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

"Still, Mr. Doyle does not regret refinancing in 2004. "My goal was clear: I wanted to help my daughter go through college," he said. "It wasn't like it was for  

 

You feel sorry for Mr. Doyle because he was using it for daughters tuition.  But at the same time, you have to wonder whether you want a hanging sword of refinancing hanging on your head.  Did he not realize he was gambling on refinancing? 

 

I guess he did not want her to take out college loans because this would have been cheaper. 

 

About 7.1 percent of auto loans were in trouble, up from 6.1 percent. Personal bankruptcy filings, which fell significantly after a 2005 federal law made it harder to wipe out debts in bankruptcy, are starting to inch up.

 

On Monday, Fitch Ratings, the debt rating firm, reported that credit card companies wrote off 5.4 percent of their prime card balances in January, up from 4.3 percent a year ago. The so-called charge-off rate is still lower than before the 2005 law went into effect.

 

Remember that credit cards might be the next ticking time bomb.

 

"You don't mind making a $2,000 payment when the house is going up" in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn't refinance or sell. "When it's going down, it becomes a weight around your neck, it becomes an anchor."

 

 Walking away.

 

Thank you Alan Greenspan for creating the bubble and ruining many lives.

 

 

 http://www.nytimes.com/2008/02/12/business/12credit.html?pagewanted=1&hp

 

Buffet offers to help out monolines

Warren Buffet has offered to help out bond insurers by offering a second level of insurance on up to $800 billion in municipal bonds. 

The offer is only for the safer municipal bonds and not the riskier CDO bonds. 

http://online.wsj.com/article/SB120282254306762077.html?mod=hpp_us_whats_news

Red-Bull Economy?

Mark Gongloff talks about how the fed and the government have risked long term downturn to the economy by focusing on the short term.

We've got interest rate cuts and tax rebates which may help in short term but will hurt in the long term.  He compares it to Red Bull where you get a short term jolt then get even sleepier.

Remember that the consumers are becoming more cautious.  Most people - fearing a recession - are going to stash the check into savings.  So I am not sure how big of an effect it's going to have. 

Getting back to the article. 

Remember in 2001 it was not the tax rebates that helped so much.  It was the HEW and the housing bubble that played a much bigger role.  Now the HEW and housing going down, this rebate is not going to do much.

With the credit bubble and housing bubble blowing up,it is looking more and more like Japan.  That is one scary situation.

But this cycle looks different. Home prices haven't fallen this broadly or deeply before. And the banking system is sorting out an overhang of broken debt securities it has little experience fixing.

 

"In the rush to enact a timely package, politicians may have stopped a 2008 recession, but they have ignored a risky letdown -- after the election," Lehman Brothers economist Ethan Harris wrote Friday, warning the U.S. faces "another brush with recession in 2009" for this reason.

 

One scary example -- especially when you consider that the S&P 500 has been essentially flat in nine years -- is Japan's Nikkei, which closed Friday at 13017.24. It first crossed the 13000 mark in July 1985. What happened to Japan's economy in the two-decade interval? A stock-market bubble, a real-estate bubble, a credit crunch, a messy banking-sector cleanup, super-low interest rates and a series of short-term stimulus packages that solved nothing.

Credit-Card Pinch?

We wrote back in October 2007 that Credit Card may be the next ticking timebomb.  Credit-card delinquencies are rising.  And that has led banks to tighten credit. 

 

The december increase in seasonally adjusted revolving credit was only 2.7% compared to 13.7% in November and 11.1% in October.  The article in WSJ confirms a similar article in NYT that talked about "involuntary thrift."  Where the consumers are forced into "Pay as You Go" Strategies. 

 

It's not a bad thing to live with in your means.

 

In past economic downturns, Americans used credit cards mainly for discretionary purchases, such as furniture, appliances and jewelry. Now, however, many of them regularly whip out plastic to pay for groceries, gasoline and other everyday necessities. Credit-card issuers won't disclose exact figures, but they say it is evident that a growing percentage of card volume is for basic purchases. Many issuers even dole out extra rewards for such transactions.

Card delinquencies are ticking up from historically low levels, but the trend is sending shudders through lenders already reeling from the subprime-mortgage tumult. As a result, leery card issuers are bulking up their reserves against future card-related losses -- and getting so much tougher on borrowers that some consumer are reining in overall spending.

After J.P. Morgan doubled the interest rate on her credit card to around 30% and lowered her credit limit in December, Jennifer Campion, a 39-year-old computer-software instructor in Chandler, Ariz., decided to eat out less often and to forgo her daily coffee at Starbucks so she can pay off her outstanding card balances. "Our whole lifestyle has changed at this point because of this strict budget we're on," says Ms. Campion, who has a total of about $7,000 in credit-card debt.

Indeed, many Americans are so dependent on their credit cards for basic needs that about 25% of the clients walking into Margo Mitchell's credit-counseling office in Tulsa, Okla., have opted to pay their monthly credit-cards bills before their mortgages. "The credit card is a means for them to supplement their income and becomes a cushion to buy groceries," she says.

Home Sales

If you look at the seasonally unadjusted sales for December, the sales were down 24.5%!  That's right folks..a decline of 25%!  The november sales also were revised from 87.6 to 87.2

 

Of course you wont hear anyone on MSM talk about the declines of 25%. 

 

 

Pending Home sales fall 1.5% in December

More Details soon....

Retailers Report Slow Sales

Walmart reported only a .5% rise in sales in January.  It was interesting to see what the company said about the Gift Cards.  It seems consumers are using gift cards for food.

 

The firm said that despite continued grocery and health-and-wellness strength, sales were hurt by bad weather, especially in the Midwest, while gift-card redemptions were also below expectations. Wal-Mart noted customers seem to be holding on to them longer and using them more often for food and other consumables rather than discretionary items.

 

Target reported same-store sales are down 1.1%.  Macy's reported same-store sales down 7.1% in January.  Macy's is also cutting 2,550 jobs.

 

Looks like consumers are feeling the pinch. 

Inflation Remains a Big Worry?

Huh?  Did I miss something?  Fed's Plosser says inflation remains a big worry.  It is another example of talking hawkish and acting dovish.  They have talked hawkish too many times to have any credibility left.

If you want to raise the rates go ahead...But don't insult everyone's intelligence by suggesting inflation is a worry.  May be they are trying to protect themselves because they know inflation is coming but can't do anything about growth is also slowing down. 

"Unfortunately, I expect little progress to be made in reducing core inflation this year or next, and I am skeptical that slower economic growth will help,'' he said.

He did not forecast a recession but told reporters after his speech that ``if something can tip us into recession, the housing market is the biggest risk.''

Going forward, he said rising inflation remains an equally large risk for the U.S. economy and the central bank.

"In taking aggressive action in supporting the economy's eventual return to its trend growth rate, I continue to believe we must not lose sight of the other part of the Fed's dual mandate, which is price stability,'' he said. ``We cannot be confident that a slow-growing economy in 2008 will by itself reduce inflation.''

http://www.cnbc.com/id/23031557

In a related story, how far has the mighty dollar fallen?  Now they are starting to accept Euro in NYC!  Yes, folks.  They are starting to accept Euro.  It is still hard to belive this is possible, but this is a story on CNBC. 

http://www.cnbc.com/id/23031776

Moody's Expects to Downgrade Builders

Moody's expects to downgrade some major homebuilders in 2008.

The 2008 will be less severe than 2007 because "ratings already reflect the industry's challenging conditions."

For those who think we are at the bottom, we are only starting to dig.  It is going to be a long way before we bottom out.

Of course, you will have analysts like Daniel Oppenheim - an analyst at *Banc of America* upgrading the homebuilder stocks. 

Is it just a coincidence that it came a few days after BZH signed a deal to reffer mortgages to CFC?  If you want to buy the stocks then go ahead.  But please do not do it blindly because someone upgraded the stock!

http://biz.yahoo.com/ap/080205/homebuilders_ratings.html?.v=1

ISM Services Index Shrinks

ISM Services Index shrank at the fastest pace since 2001 (Yes, Recession).  The non-manufacturing index represents almost 90% of the economy.  It fell to 41.9.

The worst housing slump in a quarter-century is spreading throughout the economy, hurting businesses such as builders, retailers, wholesalers and mortgage lenders. The report adds to concern Americans are spending less as job losses mount, raising the risk the economy may tip into a recession, economists said.

An index of employment dropped to 43.9 from 51.8, and a gauge of supplier deliveries decreased to 49 from 52.5.

The housing recession is hurting other parts of the economy. Employers in January reduced payrolls for the first time in more than four years, the Labor Department reported last week. Service providers added 34,000 workers to payrolls after an increase of 143,000 in December. Builders trimmed staff by 27,000 workers.

http://www.bloomberg.com/apps/news?pid=20601087&sid=adAUwP4TZb_0&refer=home

Is DEFLATION Here?

The banks are raising credit standards for loans.  Banks are expecting more delinquencies and chrage offs this year. 

It seems like the fed lowered the rate more for the credit crunch than the recession.  Remember, nothing scares them more than deflation.  But if Japan is an indicator, even lowering the rates to zero wont avoid deflation. 

The fed can change the liquidity, but they can not change human psychology.  Are consumers and lenders psychology turning when it comes to lending and borrowing?

Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed's quarterly survey of senior bank loan officers, the Fed said.

The survey backs up the Federal Open Market Committee's comments last week that credit conditions had tightened considerably, a factor that led to the FOMC to slash interest rates by an unprecedented 125 basis points in two weeks.

The Fed remains worried that credit is getting too tight after years of loose standards.

Banks are requiring more disclosures, more collateral and a higher interest rate before approving loans, the survey said. Demand is plunging for many types of loans, especially for residential mortgages and commercial real estate loans.

 

http://www.marketwatch.com/news/story/banks-putting-squeeze-credit-fed/story.aspx?guid=%7B7BE04142%2D569B%2D4889%2DAC74%2D4F30FA124B59%7D&tool=1&dist=bigcharts&

Morning Update

Job cuts rise from year ago - According to a  report by a private placement firm, job cuts announcements increased to 74,986 from 62,975 in Jan 2007.  Remember, we have been telling you that the already ugly housing market will get uglier if there is any trouble in the labor markets.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a1LIIigl67xI&refer=home

It's interesting to see that other world markets are going down because of fears of a US recession.  Yet, while many world markets have dropped by about 10%, the down has only dropped by 4.6%! 

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0dnv70Bya7g&refer=home

 

U.S. Payrolls decline by 17,000

The US Payrolls declined by 17,000 for the first time in four years.  Economists had expected to gain 70,000 jobs. 

 

The housing market has been declining even before the job market.  So if the job market gets worse, that's going to make it worse for the housing.  So for those expecting a housing bottom, we have a long way to go.

 

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBZeZKCz1zcw&refer=home