Archive for November 28th, 2009
They Aren’t Really This Stupid, Are They?
November 28th, 2009 | 
Author: I’ve been slack-jawed a couple of times during this debacle of an economic mess, but this has to take the cake:
Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.
Did ‘ya read all those “ifs” in there? What if one of the “ifs” doesn’t?
It gets better:
Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can’t reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on.
The pros get it (as have I and a few others.) What’s more they communicated it.
When I pressed the issue of political interference she said – what do you want us to do, bankrupt all the banks.
That is the choice.
What does this tell you?
A. The problem is going to take much longer to solve than it should,
B. The banks are still very weak, so lending will not return anytime soon,
C. A massive refi problem is getting deferred to 2013-2015.
D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.
Actually, it tells me something else.
What are the odds that all those “ifs” pan out?
Statistically?
Uhhhhh.
What happens when they don’t?
The banks all go bankrupt anyway, and the economy has been further trashed by the destruction leveled on employment as a consequence of this policy.
What’s even worse is that this jackass Treasury Representative, assuming the conversation reported really happened, told a bunch of professionals that if all of those “ifs” don’t pan out the banks are all going to blow up.
What do you think those professionals will be doing when, not if, it becomes apparent that they’re right – that the economy is not recovering at a reasonable pace and that the “extend and pretend” game is not only not working but is inhibiting recovery?
And by the way, I’m curious how you all think this is going to work out, given this little ditty (find the source here)…..
These pros are going to short the ever-loving hell out of anything that has a ticker symbol as soon as the turn-down is evident!
There is only thing worse than being stupid – it is admitting that you’re stupid by putting a bankrupt and unworkable “policy” in front of a bunch of professionals who have the acumen to analyze what you’re up to, tell you that you’re nuts, and then act on it to profit while grinding the banks and indeed all of America into dust - but you stick to it as “policy”, even though those who are smarter than you are have told you point-blank that it won’t and in fact can’t work.
Thank you Barack and Turbo Timmy – you own it, this is your policy, this is your legacy…….
……and this will be your political obituary.
Dubai: Floating on an Island of Debt
By Economic Forecasts & Opinions
Stock markets around the world cracked on Friday with the Dow Jones industrial average down more than 150 points (Fig. 1), and commodities plunging as Dubai debt woes unnerved investors, and sent tremors of uncertainty throughout all markets.
Concerns that a government-backed investment company risked default ripped through world markets. Investors read it as a sign of yet another sovereign implosion after Iceland and Ireland, and recoiled from risk and piled into dollars.
Deutsche Bank estimates that Dubai’s property prices, both commercial and residential, have halved since August last year, and could fall a further 15-20% this year.
U.S. Banks Less Exposed
Most analysts believe U.S. banks are probably less exposed than European rivals to a potential debt default by Dubai World, but a lack of transparency and the interconnection of the modern financial system make it difficult to know which institutions are ultimately exposed.
Dubai World’s largest creditors are reportedly domestic banks in Dubai and Abu Dhabi. MarketWatch noted data from the Bank for International Settlements which put cross-border banking exposure for the UAE as a whole at $123 billion at the end of June. Of that total, European banks hold 72%, with the United States and Japan only holding 9% and 7% of the exposure, respectively. The United Kingdom is by far the biggest creditor with a share of 41%.
Reminder of Other Risks
As pointed out in my previous article that the commercial real estate sector posed a much greater threat than the over-hyped “mother of all carry trades.” The Dubai debt crisis further reinforces this viewpoint.
As commercial property values fall, debt defaults rise. The $3.4 trillion outstanding in debt backed by commercial real estate poses a real threat to the recovery. Trepp LLC reported that last month, delinquencies on U.S. commercial real estate loans that were packaged into commercial mortgage-backed securities reached 4.8%, more than six times the year earlier level. Hotel loans, at 8.7% distressed, have begun falling into delinquency faster than any other kind of commercial real estate debt.
Write-downs and losses at banks around the world have risen to more than $1.7 trillion since 2007 as the credit crisis undermined the value of assets owned by financial institutions, according to data compiled by Bloomberg. Any further deleveraging and the resulting credit tightening from commercial real estate would impede the financial sector and probably derail the U.S. economy sending it into another recession.
Housing Market Mortgage Crisis
Based on a study released by Zillow.com, the foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. (Fig. 3) While subprime borrowers are still a factor in the current foreclosure epidemic, it’s becoming increasingly apparent that the weak labor market is the driving force behind the mortgage crisis we face today.
According to the Mortgage Bankers Association, one in seven U.S. home loans was past due or in foreclosure as of Sept. 30, putting that quarterly delinquency measure at its highest level since the report’s inception, 1972, and up from one in ten at the beginning of the year.
The continued surge in delinquencies suggests that a recovery in the housing market could be hindered by the weak job market as well as by further fallout from the easy money and loose lending practices of the past. The foreclosures and delinquencies are expected to keep rising well into 2010, not leveling off until the unemployment rate starts to moderate.
In a study by First American CoreLogic found that one in four of all U.S. mortgage-borrowers owe more than the value of their properties in the 3rd quarter. And many experts didn’t expect U.S. home prices to hit bottom until early 2011, perhaps falling another 5-10%, as more foreclosures get pushed onto the market.
Negative equity is another outstanding risk hanging over the mortgage market.
Dubai Is No Lehman
The circumstances behind Dubai’s moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai’s own general creditworthiness. UBS cautioned that Dubai’s overall debt “might be higher than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.
The current expectation; however, is that there’s a good chance that Dubai’s problems will probably prove a local issue. Most likely, Dubai, or its neighboring emirate, Abu Dhabi, won’t risk tarnishing their images and reputation further, and will come up with a reasonable resolution.
Even if Dubai goes into sovereign default, the amount is probably not enough on its own to threaten the financial system since any actual losses would be a fraction of the total. So, the problems in Dubai are unlikely to be as serious as last year’s Lehman Brothers collapse, nor is it a reflection on the ability of emerging markets to lead a global economic recovery.
Rational Expectations?
But Dubai could well spur a broader crisis of investor confidence in overly leveraged economies as market confidence world-wide is still fragile from the severity of the financial crisis. The debts of many emerging markets have risen even further as the countries governments have fought the ravages of the global recession by issuing more stimulus debt to fill the gap voided by private investment.
The spread of credit-default swaps on developing-nation’s bonds jumped 14 basis points after the Dubai news broke, the most in a month, to 3.24 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index. There is also a clear sign of potential contagion effects of global risk aversion on basically all risky assets, with the dollar and yen being the prime beneficiaries.
Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.
Despite some seminal signs of green shoots in the news headlines during this 9 month liquidity driven rally in many asset classes around the globe, we should be reminded that all that glitters is not gold, and that the global economic recovery is still on shaky ground.
Posted in Banks, Bloomberg, CDS, Collapse, Commercial Mortgage-Backed Securities, Commercial Real Estate, Commodities, Corruption, Credit Crisis, Credit Default Swaps, Creditors, Debt, Defaults, Delinquencies, Derivatives, Dollar, Dow Jones, Dow Jones Industrial Average, Dubai World, Economic Recovery, Economy, Financial Crisis, Financial System, Foreclosures, GDP, Gold, Green Shoots, Gross Domestic Product, Iceland, Ireland, Japan, Las Vegas, Lehman, Lehman Brothers, Markets, Money, Moody's, Mortgage Bankers Association, Mortgage-Backed Securities, Mortgages, Nakheel, Oil, Recession, Sovereign Default, Stimulus, Subprime, Subprime Mortgages, Swaps, TREPP, Transparency, UAE, UBS, Unemployment, United Kingdom, United States, Yen, abu dhabi, bonds, chase, dubai, housing market, lending, loans, losses, mortgage, off-balance sheet, prices, recovery, risk, securities, war | 
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Wells Fargo Chief Economist: “There is no clear, easy way out for housing”
In light of a weakening Case Shiller housing index, fears rise that Home Prices May Be Nearing a New Dip.
Two price indexes released Tuesday indicated that the momentum the housing market showed over the late spring and summer is faltering, even as the government said the economy grew at a slower pace in the third quarter than previously reported.The Standard & Poor’s/Case-Shiller home price index, a closely watched measure of the housing markets in 20 metropolitan areas, barely rose in September, rising 0.3 percent from August on a seasonally adjusted basis. Prices fell for the month in nine cities in the index, including Boston, New York, Seattle and Charlotte, N.C.
A report from the Federal Housing Financing Agency showed that prices were flat in September from August.
The housing market is confronting an abundance of inventory, high unemployment, fearful consumers and devastated family balance sheets.
“There is no clear, easy way out for housing,” said John Silvia, chief economist at Wells Fargo. “Contrary to my hopes, housing prices and the housing market in general will weaken again.”
He forecast a new decline in prices of as much as 10 percent, which he expected to shave a half-point off the nation’s economic output just as it emerges from the recession.
The Case-Shiller index, which covers about 45 percent of the United States housing market, is a three-month moving average. Since July and August were relatively strong, the weak September report could indicate a plunge in prices.
The 20-city composite index is off nearly 10 percent in the last year and 29.1 percent since its 2006 peak.
Pay Option Arm Time Bomb
If there is no clear, easy way out for housing, then there is no clear, easy way out for Wells Fargo. Wells is sitting in a huge pile of Pay Option Arms in bubble states like California, where prices still have a long way to correct.
iStockAnalyst comes to a different conclusion and states Wells Fargo’s Option ARM Problem Is Not That Bad.
I’ve been trying to make the point for some time that the Wells’ Option ARMs that it inherited in the purchase of Wachovia (Wachovia came by them via its purchase of World Savings) are not an immediate threat to the bank. The terms of the mortgages were more lenient in the amount of negative equity that would cause an automatic recast of payments and the recast feature does not automatically trigger until the ten-year anniversary as opposed to the five-year featured in most other Option ARMs.Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:
Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012…
In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.
Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.
Both assumptions seemed suspect, yet, they are in fact true. Looking at page 55 of the Golden West 10-K from 2005 we read:
…most of our loans are scheduled to have a payment change without respect to any annual limit in order to reamortize the loan over its remaining life at the end of the tenth year or when the loan balance reaches 125% of the original amount. We term this reamortization a “recast.” Historically, most loans in our portfolio have paid off before the loan’s payment is recast.
11% Decrease Forecast For 2010
Inquiring minds might be interested in noting Fiserv Case-Shiller Home Price Insights: U.S. Housing Prices Forecast to Decrease 11 Percent over the Next Year.
The Fiserv Case-Shiller Home Price Index forecasts that average single-family home prices will fall another 11 percent over the next twelve months, with declines expected in about 90 percent of the more than 350 metro areas tracked by Fiserv. Steep home price declines are expected to continue in markets that have been hurt most by the housing crisis, including metro areas in California, Nevada, Arizona and Florida.“Large supplies of foreclosed properties and extremely weak job markets will continue to put downward pressure on home prices,” said David Stiff, chief economist, Fiserv. “Many temporary factors that were partly responsible for strong spring and summer real estate markets, including the first-time homebuyer tax credit and Federal Reserve actions to drive down mortgage interest rates, will no longer be bolstering demand. Consequently, home prices will resume falling again before they stabilize in 2010.”
One-time bubble markets in Florida, California and Arizona, which have already seen home values fall 40 percent to 60 percent since prices peaked in 2006, are showing no sign of moderation in declining prices.
Cumulative Declines
Calculated Risk has this chart that nicely shows cumulative declines.
click on chart for sharper image
Extend And Pretend
Los Angeles, San Francisco, and San Diego are all down over 38% from the peak. The Wells Fargo Chief Economist expects a further 10% decline in prices, essentially the same as Case-Shiller.
Yet out of a portfolio of $100 billion in Option ARMs, Wells Fargo assumes that virtually none of those will recast at 125% of the original mortgage balance. That is a preposterous amount of mark-to-fantasy pricing.
Wells Fargo is simply refusing to recast problem loans, putting off today’s problem hoping it will not be as big a problem later. I have news for Wells Fargo. This problem can only get worse with age. There is no good reason to assume home prices will rebound before 2012, and in fact prices might fall for much longer.
In the meantime, most Option-ARM holders are only making the minimum payment with negative amortization increasing monthly. When those loans do recast, anyone in their right mind will hand over the keys. Given that buyers of high-priced homes are more apt to be in a right mind than buyers of low-priced homes, expect to see Wells Fargo the proud owner of a huge number of homes when those loans do recast.
In the meantime, Wells Fargo is collecting insufficient rent on properties it will own in due time. How long the market let’s Wells get away with this extend and pretend fantasy remains to be seen, but eventually it is guaranteed to sink Wells in due time.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Drama Over The Latest Hackneyed Tax Proposal
By now, you’ve probably heard all about the “Let Wall Street Pay for the Restoration of Main Street Act of 2009,” a trading tax of 0.25% on all trades you make in a given year, with the first $100K exempt (and as most of us know, to hit that level, you don’t have to be a fatcat, just a middle class investor or day trader – e.g., you could buy/sell $10K worth of stock 10 times). It’s not likely to go anywhere, so we mostly just ignored it until Jim Cramer got some panties in bunches by coming out as, well, at least not vehemently against it:
“Look, I take an unpopular stance, but you know I think the deficit’s bad and someone has to do something,” the 54-year-old former hedge fund manager told CNBC host Erin Burnett on Tuesday. “If it comes down on us we probably. . . deserve it.”
This, of course, inspired a full round of “I didn’t do it” as individual traders threw fits at the idea of being lumped by Cramer into a ‘royal we’ of sorts:
The cable TV star’s support for the so-called “trader tax” outraged Wall Street and Cramer followers, who argued that they weren’t responsible for the financial meltdown.
“I don’t see why if banks made bad loans and created all these problems why I have to pay for this rescue,” one trader told The Post.
“I don’t know exactly who ‘we’ might be but individual traders who make a living in the market sure did nothing to deserve it,” wrote one Florida-based investment manager and contributor to Cramer’s Web site, The-Street.com.
Cramer did respond, pretty much saying he’d back any tax that would help create jobs, a nice idea in theory, but one that requires you to believe giving the government more money to spend is actually going to create jobs, and I think a lot of people are having problems with that piece of logic right now:
I repeat, I am not so stupid as to want taxes to cut into profits.
However, for those who are not willing to sacrifice in order to create employment in this country, I say to you that you do not recognize what goes wrong if we don’t get employment going in this country.
For those of you who say that I stabbed you in the back by saying that I could live with this tax, let me remind you of something: I can live with any tax IF it helps create jobs.
Traders are of course more likely to say it’s going to erode small profit margins than it is to generate any kind of real economic growth. And, as we said, the general wisdom is that it isn’t going to go anywhere in Congress. But it got some press because it fits into that “Hit Wall Street to help Main Street” paradigm, and then Cramer opened his mouth, so I figured might as well write about it.
And besides, it gives me an excuse to use this picture of a cute kid on the floor of the NYSE, yanked from today’s WSJ/photos of the week. She’s probably charting support/resistance levels for $XOM or something too, we just know it.
