Archive for the ‘Housing Market’ Category

The Man Who Made His Accountant Cry

Saturday, March 29th, 2008

Larry Ellison Loves Himself

What has 23 acres, an 8000 sq. ft. house with two wings, a guest home, three cottages, a gym, a 5-acre lake, two waterfalls, two bridges, and hundreds of mature cherry and maple trees planted among 1000 redwoods pines and oaks?

The $200 million estate of Larry Ellison, the $25 billion, 12th-ranking member on the Fortune 500 list of world’s richest asswipes. The one that had his aptly-named Octopus Holding company buy it from him in 1995 for a deflated $12 million. The one that just “earned” him a $3 million property tax cut based on a professed 60% decline in the home’s value vs. the 6.3% for an average home. An average home - the ones not being foreclosed on anyway - that is being over-assessed because the neighbors can’t pay their mortgages down at Loan Shark Larry’s Savings and Loan.

And the rationale for the cut? It’s even richer than Larry (and apparently God) himself.

According to his tax appeal, the behemoth bungalow in his private redwood grove suffers from “significant functional obsolescence” because there apparently isn’t much of a market for $200 million pimp cribs. He also says the 16th century Japanese architecture, “over improvements”, and “excessive landscaping” are too costly for mere millionaire to maintains, so gee he’d appreciate it if just give him a break willya?

The Woodside White Elephant
In other words, Larry builds a Japanese-bred white elephant that no one can afford to buy, maintain, or want to live in so the taxpayers now owe him $3 million for his foresight in building such an opulent slum. Or as a consumer watchdog group puts into perspective, “Three million dollars to Larry Ellison is the equivalent of $300 to the average home owner.” Oh, and just so you know we aren’t picking on poor beleaguered Larry, Bill Gates did the same thing several years ago with his Redmond, WA-based monument to ostentation, avarice, and greed.

It makes you really admire modest billionaires like Warren Buffett, who actually pay taxes.

But Woodside, CA town manager Susan George says the deal is on the up and up. “It shouldn’t make any difference how much money he has if the process is fair. We’ll miss the money. We always have good things to do with it.”

True enough, but that’s relatively easy for George to say. Cash-flush Woodside is usually the top or near-top median income ZIP code in the country. The rest of relatively affluent - but still within human understandingly affluent - San Mateo County isn’t so lucky. They have people who can’t afford to claim their E. Palo Alto, cockroach-infested apartment is worthless because it’s “significantly functionally obsolete” with a leaking roof and broken plumbing. BTW, East Palo Alto is the other Palo Alto, the one that’s not home to multiple multi-millionaires and Stanford University. The folks in E. Palo Alto suffer from a crippling crime rate and crumbling housing over there on the wrong side of the freeway - the side that isn’t protected by sound fencing like the gracious folks across the road.

Rich Shouldn’t Matter
In principle I agree with the town manager. It shouldn’t matter how much money you have. So I suppose Larry wouldn’t mind if his revaluation was the going 6.3% - just to be fair and all. I’m sure he won’t mind, because he could just recoup the money by delaying the painting of his yacht, the world’s largest. Or perhaps he could stop routinely violating nighttime noise restrictions at San Jose International for landing after hours in his private Gulfstream jet. He was exempted from the noise restrictions too.

Larry is well-known as the infant-terrible of Silicon Valley. He runs his company Oracle based on the principles of Sun Tzu’s The Art of War.

He regularly buys out any competitors, frequently in hostile takeovers - and grinds their successful products under his heel in order to buy new sails for his America’s Cup yacht or gas for his aerobatic team. At each hostile takeover, employees lose jobs to feed Larry’s Giant Maw of GreedTM. And it’s a hungry maw indeed. So hungry, that Larry’s accountants warned him several years ago to cut his fantastic spending lest he bankrupt himself.

It’s Tough Out There for a Billionaire Pimp
I guess $12 billion doesn’t go as far as it used to.

I’m a firm believer in capitalism, although I recognize its limitations if left totally unrestricted. I have nothing against people earning money. In fact, I don’t care if a person makes billions - more power to them. But if you make billions you also inherit some responsibilities.

One of those responsibilities is paying your taxes like any other good citizen of modest means without a buttload of full-time shysters to find boondoggle tax breaks. It also comes with a moral responsibility to not deprive others to feed your own hubris and greed. Don’t take money away from schools and hospitals simply because you can. It’s not a frickin’ game to see who dies with the most toys. Don’t lay off employees to get that quarterly bonus that’s just about equal to the money you “saved” by laying them off. I don’t require you to find the light and abandon your Marley-like stinginess like Bill Gates turned away from his once well-known anti-philanthropic ways. Hell, you can even illegally fly your jet late at night provided you pay buy soundproofing for the more modest home owners who will go to work exhausted tomorrow from a lost night of sleep courtesy of your (literally) money-burning flying hard on. In short, all I ask you to do is act like a normal human being instead of a shit stain in the crotch of humanity’s Jockey shorts.

In short Larry, stop being such an asshole.

Cross posted at The Omnipotent Poobah Speaks!

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Why Spitzer Had to Go?

Sunday, March 23rd, 2008

Here’s another one sent to me by Chris – this time by my son Chris rather than my friend-since-ninth-grade Chris: http://www.brasschecktv.com/page/291.html As the link points out, the takedown of Elliott Spitzer for admittedly sleazy behavior, using what should have been confidential FBI information, took place shortly after he publicly pointed out the role of the Bush administration in creating the subprime mortgage mess by blocking the efforts of the state attorneys general to regulate lenders and investigate predatory lending. It sort of reminds me of the way Nixon used the IRS as his personal political hit team against people that made his enemies list.

Charlie Rose: Paul Volker On Bear Stearns Bailout

Wednesday, March 19th, 2008

Former Federal Reserve chairman Paul Volker appeared on the Charlie Rose show last evening to discuss the recent actions to bailout Bear Stearns. Volker points out that the actions were unprecedented and he cautions that doing so may be an argument for greater regulation of investment houses like Stearns.

Volker’s remarks were focused on his concern that we are witnessing a transformation in the financial market. As such, he argues that it is time to review the mechanisms we have in place to insure that the economy is being protected from the bad decisions of these newly emerging financial players.

Volker doesn’t believe that the Federal Reserve should play a larger part in the regulatory process; rather he contends that they were forced to step into the void with regards to Bear Stearns. Volker suggests that the regulatory process should originate with our elected representatives.

The problem with that equation (even though I agree with Volker) is that the influence of the players in the financial market is daunting…and nothing provides better evidence of this influence than the recent rewriting of bankruptcy laws making it far more difficult for individuals to walk away from debt. Unfortunately, it appears that our government is on the precipice of bailing out the same financial institutions that sought to limit the options for relief by financially strapped citizens.

Yes, the GOP likes to be seen as opposing handouts and welfare…except when it is directed to those corporations that ante up each election cycle. The welfare reform enacted under the Clinton administration was one of the first steps in this shift towards escalating corporate welfare. If this trend continues, be prepared for further financial calamities of greater proportion…with astronomically more acute consequences.

Cross-posted at Thought Theater

GWB: The Cash In The Cradle & The Silver Spoon - I’m Gonna Be Like Him

Friday, March 14th, 2008

I try to avoid making unequivocal assertions…but if my instincts are correct, I’m not taking much of a risk in predicting that the calamity that will define this Bush presidency will not be the Iraq war. As with his father’s presidency, it will be the economy. Yes, the Iraq war will be factored into the equation that facilitated one of the worst recessions in modern times, but numerous other missteps will receive far more attention.

With the Savings and Loan scandal of the late 80’s as my point of comparison, I expect the magnitude of this recession to be much deeper and far more complex. Frankly, the fact that we survived events like the S & L scandal and the tech bubble have only contributed to the lackadaisical policies that have fostered an air of invincibility. This false confidence has resulted in a deadly conflation of economic poisons that will place a strain on our financial fortitude that hasn’t been witnessed since the Great Depression.

For months, the Bush administration has sought to convince the American public that the economy is sound. Unfortunately, the hollowness of those assurances expands exponentially with each new report. Today’s news is awash with further warnings of economic uncertainty. The President’s remarks, in response to the growing storm clouds, simply highlight the mindset that has typified his inclination to ignore information that doesn’t comport with his rose colored rhetoric.

Unfortunately, I fear this president suffers the misconception that he can tackle this systemic economic malaise in the same manner he addressed the many miscalculations that have plagued the prosecution of the Iraq war. Sadly, brute force has little relevance when it comes to the economy. As with the troop surge, the attempts by the Federal Reserve to pump more money into the economy in order to prop up flailing financial institutions fails to address the dire dynamics that underly the debacle.

Let’s pause to review the observations of others.

From The Wall Street Journal:

It is a very logical progression. Peloton, Carlyle, Focus — hedge funds and other non-deposit-taking financial institutions (NDFIs) are now being hit by the credit crunch, which had so far been mainly confined to mortgage lenders and the banks.

The Federal Reserve has reacted. Its Term Securities Lending Facility aims to encourage investment banks and prime brokers to lend to NDFIs and so relieve those parts of the credit market it cannot reach with its rate cuts and loans to banks.

So far its liquidity injections have got no further than the banks. Now it hopes to reach higher. Unfortunately, it won’t work.

The Fed is like King Canute with a difference — it is trying to halt an ebbing tide rather than a rising one. Its liquidity injection seems huge at $200 billion (with perhaps more to follow), but it is still only equivalent to one-third of the expected losses in the NDFI sector.

Moreover, the Fed’s readiness to accept almost any asset at just below face value as collateral will prevent price discovery. That means the U.S. financial system will remain burdened with uncleansed balance sheets that penalize future lending and economic growth.

Creating a lot of liquidity does not resolve an issue of solvency, which is now the driver of credit contraction. All the Fed will achieve is a dollar that will be further debased and inflation that will be higher. It cannot stop the process of deleveraging and asset price decline.

The credit crisis is unfolding as we expected, but more slowly than anticipated, because of the actions taken by central banks (mainly the Fed) and the U.S. government to allay its effects. The wholesale socialization of credit has meant that government and central bank measures account for 70% of new credit since last summer.

But these policy measures will not prevent asset-price deflation or credit contraction, which are functions of risk appetite and general readiness to maintain current levels of gearing throughout the economy. The non-bank sector has the potential to inflict more damage on the system than banks, because it has a much smaller capital cushion for a much more volatile and risky balance sheet.

Credit contraction translates through the financial system into a reduction in available credit for the non-financial corporate sector, and thus into reduced investment and growth in the real economy. The size of that contraction can be estimated from the leverage ratios of the financial sector and their impact on real GDP growth.

We estimate that nonfinancial corporate debt ultimately will have to shrink by 11%-12%. This will generate a decline of five percentage points of real U.S. GDP growth and push the U.S. into recession. Europe’s real GDP growth will contract by two percentage points.

Essentially, the point being made by the author is that the Federal Reserve’s efforts to lower interest rates is inadequate to address the fundamental problem - the value of the assets that underly much of the existing debt is in a period of contraction…largely as a result of the collapsing housing industry.

As such, the ability of lenders to lend is limited. They lack the capital needed to make loans; let alone the capital required to support declining equity positions and the increasing default risks that are associated with these loans. Hence, the Fed’s efforts to infuse the economy with the capital needed to spur growth isn’t going to be sufficient. Even worse, should this contraction lead to lender insolvency, the likelihood of the need for a huge government bail out advances. If this happens, I believe it will be far larger than the one witnessed during the S & L scandal.

From The New York Times:

The Fed’s economic power rests on the fact that it’s the only institution with the right to add to the “monetary base”: pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.

When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands.

This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs.

But sometimes the magic doesn’t work. And this is one of those times.

Instead of following its usual practice of buying only safe U.S. government debt, the Fed announced this week that it would put $400 billion — almost half its available funds — into other stuff, including bonds backed by, yes, home mortgages. The hope is that this will stabilize markets and end the panic.

Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral in return for loans. But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.

Still, that’s not what has me worried. I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.

Krugman offers a look into the risks being taken by the Federal Reserve to avert the looming collapse of financial institutions. The fact that the government is taking unprecedented risk signals the seriousness of the situation. The fact that the government has committed half of its available funds to this risk intensive effort suggests that the ultimate solution will require the government to appropriate additional funds…hence the bailout begins. The price tag of the S & L scandal would likely pale in comparison.

The impact to the overall economy could be mind-boggling since it would be apt to affect consumer spending. Falling home values would strip millions of Americans of the bulk of their accumulated wealth which would no doubt restrict their ability and willingness to spend money. The direct correlation of this intertwined cause and effect spiral could have disastrous consequences.

We haven’t even factored in the disproportionate numbers of baby boomers moving towards retirement. A worst case scenario could place the financial stability of many of these individuals in jeopardy at a time when the safety net of Social Security is also approaching insolvency.

From CNBC:

The United States has entered a recession that could be “substantially more severe” than recent ones, former National Bureau of Economic Research President Martin Feldstein said Friday.

“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

“There isn’t much traction in monetary policy these days, I’m afraid, because of a lack of liquidity in the credit markets,” he said.

The Fed’s new credit facility, announced on Tuesday, “can help in a rather small way … but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital,” Feldstein noted.

I simply don’t see the mechanism by which this strained liquidity can be alleviated in the near term. Pumping more cash into the system could have short term benefits but the risk to the already tenuous value of the dollar would likely outweigh them. Relying upon the standard bearers…the consumer…to spend us out of this mess seems unlikely. Rarely have prior recessionary periods been accompanied by such significant declines in home values.

Were we to see the emergence of sustained inflation, the picture becomes even more disconcerting. Many of the measures designed to address the liquidity crunch have the potential to do just that. Toss in our trade imbalance, the amount of debt held by the Chinese, and an international shift away from the dollar as the preferred reserve currency and one begins to see the growing alignment of negatives.

The fact that the American image has been tarnished during the current administration makes it difficult to imagine the kind of international cooperation we might have otherwise received during such a slowdown. In fact, don’t be surprised if a number of nations stand idly by as the perceived bully endures its comeuppance.

Returning to the Bush legacy, I recall the deteriorating situation faced by his father prior to the 1992 election. When the senior Bush expressed his amazement with the scanning technology found in grocery stores, his appeal and his connection to the average American is thought to have suffered. When the Clinton campaign added, “It’s the economy, stupid”, the stain became permanent.

The fact that the current president expressed surprise when a member of the press mentioned the prospects of $4.00 per gallon gas seems eerily similar to the last days of his father’s presidency…and it may also assist in cementing the economy as his legacy’s leading albatross.

George W. Bush’s seeming shortage of empathy for the plight of the average American shone through in his mishandling of Katrina, his passage of tax cuts for the wealthiest, his inept energy policy, and his willingness to sink trillions of dollars into the execution of a virtual vendetta in Iraq. These events will forever be tethered to his tenure and his successors are apt to spend years trying to repair the damage done.

They say the writing of one’s legacy is rarely finished since the past undoubtedly shapes the future. In the case of George Bush, I suspect he’d be best to hope that his influence on the future be less indelible than his unabashed attempts to color the present.

Gertrude Stein stated that a “rose is a rose is a rose”. Ernest Hemmingway responded with “a rose is a rose is an onion”. In thinking of the Bush legacy, I’m inclined to argue that a silver spoon may beget rose colored rhetoric…but a silver spoon full of rose petals rarely helps us swallow the thorns. When the bow breaks, the Bush legacy will fall.

Cross-posted at Thought Theater

All About The Onion: 63,000 Jobs & An Economy Without A Core

Friday, March 7th, 2008

It’s difficult to find anything to smile about in the latest jobs report. Despite the assurances from the Bush administration that the economy remains strong, each new report brings evidence that we’re in a recession. It looks like the administration is either in denial or simply employing the same “head in the sand” mindset that spent the last five years telling Americans that the situation in Iraq is improving. Despite the president’s rosy rhetoric, I choose to believe that the data doesn’t lie.

The current economic uncertainty reminds me of a metaphor shared by a friend many years ago. While discussing borderline personality disorder, a psychological condition prone to sociopathic behaviors, she described it as being akin to comparing an apple to an onion. The normal personality is like an apple, in that it has a core; whereas with the onion, you peel away layer after layer to find that no core exists.

It’s not a perfect analogy, but it underscores my belief that this latest period of economic expansion has lacked the essential fundamentals to insure economic stability. When one strips away the facade of inflated home values…driven by artificially low interest rates…all that remains is a tenuous economy in the throes of adjusting to the instability and uncertainty of globalization.

The economy shed 63,000 jobs in February, the government said on Friday, the fastest falloff in five years and the strongest evidence yet that the nation is headed toward — or may already be in — a recession.

“I haven’t seen a job report this recessionary since the last recession,” said Jared Bernstein, an economist at the Economic Policy Institute in Washington. “This is a picture of a labor market becoming clearly infected by the contagion from the rest of the economy.”

The loss in February was the second consecutive monthly decline in the labor market; economists had predicted a slight increase. The government also revised down its estimate for January to a loss of 22,000 jobs — the first decline in four years — and cut in half its estimate for job growth in December.

Wages stayed stagnant in February, further depressing the outlook for consumer spending over the next few months. Among rank-and-file workers — more than 80 percent of the work force — average pay grew just 0.3 percent to $17.20 an hour. Wages are effectively running flat when adjusted for inflation.

These job losses are only one segment of the current economic downturn. Truth be told, the housing crisis and its impact on financial markets looks to be an unprecedented debacle that has yet to fully unfold. The efforts of the Federal Reserve to reduce interest rates and make huge amounts of capital available to struggling financial institutions is a testament to the severity and complexity of this crisis.

I suspect the powers that be are hesitant to offer a candid assessment for fear it will trigger even more caution on the part of consumers. To a degree, that is prudent. Unfortunately, this snowball is already rolling and I see little reason to offer false assurances that it won’t continue to expand. I look for the government to make added admissions in much the same manner found in a criminal investigation…as more evidence is unearthed, the administration will find itself unable to continue with the denials.

Look no further than a comparison to the Saving & Loan scandal of the late 80’s to understand how the government will attempt to downplay the gravity of the situation. Sadly, I’m concerned this fiasco may be far more pervasive. While the S&L scandal was primarily isolated to commercial real estate, the current crisis involves residential real estate and millions of homeowners. That alone suggests a greater magnitude; one that will strike a blow to a core source of economic growth…consumer confidence and spending.

I don’t want to be an alarmist, but I see a unique and troubling confluence of conditions that have the potential to challenge our existing economic constructs. The growth of multi-national corporations with GDP’s that rival those of many nations serves to undermine the assumption that all Americans share similar economic objectives with consistent measures of success. It simply isn’t true in this day and age of global investments and the outsourcing it facilitates in order to increase the bottom line. When the goals of a huge corporation no longer comport with the goals of their nation of origin, the established economic models have become outdated and virtually irrelevant.

I realize I’m painting a gloomy picture. At the same time, I’m convinced that the American public must demand an honest assessment and an open dialogue with regard to these dramatic developments. If we allow our politicians to plot the course…in conjunction with their corporate benefactors…we may find ourselves in a conflict with the United Empire of ExxonMobil…a conflict that we can neither overcome or endure.

On that dark note, I think the following video from The Onion captures much of the essence of this shifting economic construct. It made me laugh…but as with all comedy…it also underscores an undeniable truth that requires our consideration.

The Onion: Outsourcing Child Care Overseas

Cross-posted at Thought Theater

“Let the Buyer Beware”

Thursday, March 6th, 2008

Predatory lenders have caused a record number of home mortgage foreclosures. Credit card firms are extorting millions of dollars in “penalties” from customers who have never made a late payment or gone over their credit limit. Insurance companies are weaseling out of billions of dollars’ worth of claims, using the zaniest excuses imaginable. And you’re paying hidden fees and surcharges every time you rent a car, stay in a hotel, go to the bank, sign up for a new phone service (or cable TV or Internet service), deposit money in your retirement account…

And yet Libertarians and rightwing Republicans keep insisting that there’s no problem here. This is capitalism, Buddy; the free market. Caveat Emptor. That stupid mouthbreathing retard should’ve read the fine print.

Riiight.

What the fuck are we devolving into? A company can hide a booby trap on page 37 of a contract — written in legalese in a size .01 font — and it’s up to the customer to spend several hours poring over the contract with a magnifying glass.

How far does this “logic” go? Is it legal to sell fake Rolexes on the street for $200 apiece? After all, if some dumbfuck is gullible enough to buy one — cool!

Auto repair shops should be allowed to use the cheapest shoddiest parts they can find and then tell you they used the highest quality components money can buy (and charge you accordingly). Hell, why even make them work on your car at all? They can just tell you they did it and then charge you $1,200 for the work they didn’t do. Hey, if you’re suspicious, just look under the hood and check it out for yourself. What, you want some big fluffy drooling Nanny State hovering over you??

And why is it against the law to assault or mug someone? When you’re walking down the street, it’s up to you to be aware of your surroundings and be ready and able to fend off any would-be attacker. If a person is oblivious or preoccupied, and/or too feeble to defend him/herself — hey, easy pickings!

People get thrown in jail when they try anything mentioned in the previous three paragraphs. And when slippery businesspeople mug their customers with deceptive practices and fine print, they belong in jail too. And throw the key away.

Pearls Of Wisdom: The World Is No Longer Our Economic Oyster

Thursday, March 6th, 2008

Economists attempt to measure the health of the economy in a variety of ways. I’m of the opinion that two news reports (here and here) shed some ominous light on its status and may well signal the need to sound the alarm bells. For many years real estate, and in particular home ownership, has been the single greatest source of wealth accumulation for the average American. As such, it has served as the foundation for much of our confidence to spend money.

Having the safety and security of growing home equity has given consumers confidence to make purchases they might otherwise forego. It has also been the source of the capital needed to make large ticket purchases that wages may not always enable. The buying, selling, and refinancing of homes has pumped countless dollars into our economy and in recent years it has helped to offset the shifting dynamics of growth.

Following the recessionary period at the beginning of this decade, much of the growth we’ve experienced hasn’t translated to better jobs or higher wages. In fact, for a large majority of Americans, the latest period of economic growth has been accompanied by a decline in the standard of living…except for those in the top tier of incomes.

Here’s where the housing bubble comes into play. In this same period of time, we’ve seen an unprecedented increase in home values and therefore some means for consumers to offset the lack of measurable benefits from this latest period of economic expansion. Unfortunately, that offset appears headed towards a screeching stop…and likely a virtual reversal of fortune.

Let’s first look at the foreclosure picture since the bubble has already burst for these individuals.

WASHINGTON - Home foreclosures soared to an all-time high in the final quarter of last year and are likely to keep on rising, underscoring the suffering of distressed homeowners and the growing danger the housing meltdown poses for the economy.

The Mortgage Bankers Association, in a quarterly snapshot of the mortgage market released Thursday, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record high of 0.83 percent in the October-to-December quarter. That surpassed the previous high of 0.78 percent set in the prior quarter.

More homeowners — at the same time — fell behind on their monthly payments.

The delinquency rate for all mortgages climbed to 5.82 percent in the fourth quarter. That was up from the 5.59 percent in the third quarter and was the highest since 1985. Payments are considered delinquent if they are 30 or more days past due.

The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record of 5.29 percent in the fourth quarter. That was up from 4.72 percent in the prior quarter, which had marked the previous high. Late payments skyrocketed to a record high of 20.02 percent in the fourth quarter, up from 18.81 percent — the previous high — in the third quarter.

Take note of four key numbers. One, we’re approaching the point at which one percent of all mortgages are in foreclosure. Two, over five percent of ALL mortgages were considered delinquent. Three, over five percent of all subprime adjustable rate mortgages are in foreclosure. Four, over twenty percent of the remaining subprime loans are delinquent.

It doesn’t take a math wizard to realize that we’re on the front end of this crisis and it’s clearly going to get worse before it gets better. Why? Two reasons. First, the interest rates on more loans are going to adjust upward. Second, home values are going to continue to decline which will mean more borrowers will be unable to refinance. So what does this mean? It means there is currently nothing on the horizon that will blunt the increase in foreclosures…or the increase in borrowers who won’t be able to refinance out of unfavorable loans.

Now let’s look another key piece of the problem…the decline in homeowner equity.

NEW YORK - Americans’ percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.

Homeowners’ portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

Home equity, which is equal to the percentage of a home’s market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans’ single largest asset.

Moody’s Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be “upside down” if prices fall 20 percent from their peak.

The latest Standard & Poor’s/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year ago, the steepest decline in the 20-year history of the index.

I would argue that this data may be even more troubling than the rising foreclosure and delinquency rates because it undoubtedly predicts more declines in consumer confidence and spending and thus growing recessionary pressure.

Take particular note of the connection between the housing bubble and the latest economic expansion. When home values soared at the beginning of this decade, homeowners borrowed more money. They did so because the economic growth didn’t translate into better jobs and higher wages. Hence, more Americans dipped into rising home equity to keep apace with rising costs….and we haven’t even touched on rising credit card debt.

What this tells us is that the latest expansionary period was primarily manufactured through the implementation of artificially low interest rates which enabled homeowners to bolster spending through debt. Lower interest rates meant people could afford more expensive homes. Once this rollover process began, it set in motion rising home prices that were unsustainable. Even worse, it gave homeowners and borrowers a false sense of security. People began to believe their home values would continue to rise and they became less averse to pulling out and spending a higher percentage of their paper equity.

While one can fault these individuals for taking greater risk, one must also consider the incompetence of those who enabled this housing bubble…complete with shoddy monetary policy, suspect lending practices, and inadequate oversight. Not since the Savings & Loan scandal of the late 80’s have we seen such shortsighted and lax practices…complete with the now infamous non-qualifying assumption loans.

Well, just over twenty years later, we’ve done it again. I have two favorite examples of the current debacle. First, the 125% loan…a loan that simply allowed homeowners to borrow 25% more than a home was worth. Second, what the industry initially called “stated income” loans (NINA’s - no income, no asset verifications), which are now being called “liar loans”. Essentially, the borrower was allowed to state an annual income and place a value on assets held without the requirement of any substantiation.

What remains to be seen is how long it will take our government to fully embrace the magnitude of the current crisis. Sadly, the hope that reducing interest rates or rolling out programs like “Project Lifeline” will solve this problem is more of the same. A quick look at the value of the dollar informs us of the consequences that accompany these efforts to avoid the inevitable.

Harsh as this may sound, I find myself in general agreement with the following thoughts of Robert Samuelson from a recent Washington Post column.

Gloom. Doom. Calamity. Home prices are tumbling. We’re bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

Samuelson isn’t keen on aggressive measures to assist those who are in foreclosure or upside down; arguing that it only postpones the necessary adjustment. While this may sound heartless, the point he’s making is that we must cease our efforts to bolster a weakened and changing economic structure by creating artificial housing prices. The sooner we strip away this facade, the sooner we can begin to address the deficiencies of our underlying economy.

The longer we tinker with the primary means of accumulating wealth (homeownership), the more likely it won’t be available to more and more Americans. In this time of job loss to globalization, we can ill-afford to damage one of the last bastions of the American Dream…especially for an increasingly challenged middle class.

We must demand that our politicians implement the measures necessary to insure a sound and sustainable economy without resorting to politically expedient manipulations meant to mask the manifestations of a world economy. While the world used to be our oyster, I suspect our share of the pearls is destined to decline. Knowing this, I would suggest our leaders start by setting a better example with regards to fiscal responsibility. Lest we be buried by the shifting tides, it’s time for a sea-change.

Cross-posted at Thought Theater

How Many Revised Economic Forecasts Before The Fed Says The “R” Word?

Wednesday, February 20th, 2008

stimuluspackage.jpg

Just how many revised economic forecasts does it take to finally conclude that the U.S. is in a recession? Former Fed Chairman Alan Greenspan likes to up his odds we’re heading into a recession by approximately 20 percentage points every quarter. Current Fed Chairman Ben Bernanke seems to prefer a different approach. His modus operandi is to lower GDP a few tenths of a percent with each revised outlook.

As an outside observer, this measured slide towards using the “R” word feels like being in my car at a red stoplight with my favorite backseat driver seated beside me. As we wait for the lights to change (because we know they will), my trusted traffic manager sits there predicting the seconds until the opposing green light will turn yellow…never getting it quite right…but jubilant each time he announces…after the fact…that “The light just turned yellow”. This process continues until our red light turns green and we can proceed to the next intersection…to start all over again.

While I realize my analogy isn’t an actual equivalent, the frustrations are much the same. Yes, predicting the twists and turns of the economy isn’t an exact science…but I do find our willingness to grant these prognosticators a free pass each time they err to be a rather absurd practice. The fact that the nation holds its breath each time a new report is scheduled for release merely supports my contention.

WASHINGTON (AP) — The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That’s lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank’s old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That’s higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including “a further intensification of the housing market correction, tighter credit conditions …. ongoing turmoil in financial markets and higher oil prices.”

In truth, I suspect that the average American has just as good a sense of where the economy is headed as those who get paid to inform us. If the last number in our checkbook is negative, we conclude we have a problem. Why wouldn’t the same math hold true for our national economy?

No, we allow our political leaders to sell us on the notion that a tax rebate of $300.00 to $1,200.00 is all that matters and all that is needed to jump start the economy…even as they continue to predict further economic contraction. Excuse me, but isn’t that on par with each of us taking a cash advance on an already debt heavy credit card and thinking we’re suddenly in the black?

Look, I understand the notion of spending an economy out of a downturn. However, the rest of that equation posits that the increased spending will result in new jobs, greater investment and productivity, and increasing revenues for the individual, the corporation, and the government.

Unfortunately, this equation may no longer be valid…especially since the jobs are often created in other nations, the investments are frequently targeted for countries with cheap labor such that productivity is less relevant, and the only increased revenues find their way into the pockets of formerly impoverished third world individuals and the corporations and their CEO’s that benefit from the enhanced bottom line that ensues.

So what does the average American get? A stimulus package that provides a single check that won’t overcome the unfavorable wage-inflation ratios, the higher costs of fuel, the expanding credit card debt, the skyrocketing health care costs, and the ever shrinking job opportunities.

At the same time, some of our political leaders clamor for making the tax cuts for the wealthiest Americans permanent and lowering the corporate tax rate from 35 to 25 percent. I don’t know about anyone else, but these refund checks remind me of the dynamics underlying “the world’s oldest profession”…the one where one party gets poked for a few bucks by the fat cat who realizes that money can buy him anything he wants.

In the end, getting the powers that be to speak the “R” word is an exercise in relabeling. After all, once the deed has been done and the hush money has been paid, does it really matter what we call an old fashioned screwing? I think not.

Cross-posted at Thought Theater

Housing Crisis: “Project Lifeline” Dead On Arrival

Tuesday, February 12th, 2008

For homeowners facing rising interest rates, higher payments, and dwindling or nonexistent equity, the roll out of “Project Lifeline” seems little more than a “dying by inches” strategy. The plan’s 30-day freeze on foreclosures seems to be the equivalent of offering a band-aid to a patient in need of an organ transplant.

Project Lifeline is premised on the notion that granting homeowners a 30 day reprieve will lead them to contact their lender and provide some new financial information that will magically alter their grave situation such that the lender will forego the completion of foreclosure proceedings.

Feb. 12 (Bloomberg) — Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes.

Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that “Project Lifeline” would help stabilize communities disrupted by mortgage defaults.

“If someone is willing to make a call, to reach out, there’s a chance they can save their home,” Paulson said. “As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures.”

In a statement, the banks said the program would start with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to “pause” the foreclosure process. The homeowner has 10 days to respond to the notice and give additional financial information so the lender is able to weigh new payment options.

Having worked in commercial real estate through the Savings & Loan scandal of the late 80’s, my cynicism was piqued by the announcement of this plan. In truth, I suspect most delinquent homeowners with some mathematical potential to save their homes have already contacted their lender in the hopes of renegotiating. Those homeowners who haven’t spoken to their lender are apt to already know they lack the financial means to forestall foreclosure or to withstand the terms of a restructure that may provide some minimal relief. Further, most lenders already know what I’ve just stated.

So the unasked question remains, “What is this plan really intended to achieve?” I’ll posit two answers. First, the lenders participating in this plan are themselves in dire straits and the Bush administration, the Federal Reserve, the U.S. Treasury, and the Department of Housing and Urban Development know as much. Given the desire to avoid expanding recessionary pressures, it behooves the government and these lenders to slow the flow of home foreclosures. More bad news on the precipice of a recession simply accelerates the speed with which the economy falls further into recession. Thus, the plan hopes to blunt the bad news.

Secondarily, banking disclosure provisions require lenders to account for bad loans and to maintain acceptable loss ratios to remain viable. Should these huge institutions fall short on these formulas, an injection of additional capital is frequently required. Absent the ability to meet these capital calls, these lenders face insolvency and regulatory intervention…the very events that preceded the S&L fiasco and the subsequent creation of the Resolution Trust Corporation (RTC)…the entity charged with the management and administration of failed S&L’s, the bad loans they held, and the liquidation of the properties associated with those loans.

Given the huge amount of capital that has already been injected to stabilize the industry, I suspect the powers that be fear the impact of announcing even more stopgap capital infusions. If my hypothesis is correct, then my characterization of the situation as “death by inches” is certainly appropriate.

There’s no doubt the governments’ hands-off approach to regulatory oversight clearly enabled the industry’s careless and shortsighted practices. Truth be told, the government and the lending industry subsequently underestimated (or chose to bury their heads in the sand) the magnitude of the crisis. Too little has been done too late to solve the problems or to quell the growing consumer fears that hasten the trajectory of the recessionary spiral. Further half-measures to right the ship will only prolong the inevitable and heighten consumer mistrust.

A look into the pipeline simply indicates more bad news is on the way.

Federal Reserve officials project about 2 million homeowners face higher mortgage rates over the next two years as their loans reset higher. Economists at the Federal Deposit Insurance Corp. estimate foreclosures this year will be about 1 million more than average, a level that FDIC Chairman Sheila Bair has said “is just too high.” They average about 600,000 in a typical year.

“This [Project Lifeline] is good, but we’ve seen this over and over again,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington. “The fact that they keep having to roll out subsequent rescue plans every few weeks underscores that each plan is inadequate.”

I’ll close with an observation relative to the 2008 election. George Bush’s pattern of ignoring the economic warnings and the opinions of his underlings…coupled with his new focus upon bolstering his “fiscal conservative” legacy…may serve to enhance the Democrats’ argument that voters can ill-afford the continuance of a Republican in the White House.

Each time the President asserts that the economy is sound and will soon weather the storm…and then has to backpedal…he risks placing his fellow Republicans in the unenviable position of asking voters to send them back to Washington smack-dab in the middle of an economic shitstorm.

Not only is Project Lifeline apt to be dead on arrival, the intransigent leader of the GOP may be unknowingly orchestrating his party’s death march…one stubborn George W. Bush inch at a time.

Cross-posted at Thought Theater

F.B.I. Investigating Home Lending

Wednesday, January 30th, 2008

Don’t for a minute think that this post is about you the disenfranchised foreclosed on former first time home owner. Even though you were told by your lending professional, abandoned on the side of the road used car salesman, small appliance repair, and fortune teller that you could afford your recently foreclosed home, this story is not about you. Justice is never about you so this post is not about anyone at or below the middle class income level that lost their home to dubious lending practices.

One thing is a given in America, the only justice is for the millionaires that can afford to demand it. All of the bum loans that the mortgage lending and banking industry gave out like free cheese to the poor was not a big enough problem to look into. And yet when the millionaire investors start loosing their shirts it just might be a problem.

F.B.I. Opens Subprime InquiryBy REUTERS
Published: January 29, 2008

WASHINGTON, Jan. 29 (Reuters) — The F.B.I. has opened investigations into 14 corporations as part of a crackdown on improper subprime lending, agency officials said on Tuesday.F.B.I. officials told reporters that the inquiry involved potential violations including accounting fraud and insider trading.

Separately, Bear Stearns, Goldman Sachs and Morgan Stanley said government investigators were seeking information from them about their subprime mortgage activities. But it was not immediately clear if the disclosures by the three banks were linked to the F.B.I. probes.

F.B.I. officials did not identify the companies they were looking at, but said the investigation reached across the industry to include developers, subprime lenders, companies that securitized loans and investment banks that held them.

The cases could lead to potential civil or criminal charges, the officials said.
The F.B.I. said it was investigating the cases with the Securities and Exchange Commission, which has opened about three dozen investigations into the subprime market collapse.

Targets of the S.E.C. probe include the investment banks Bear Stearns, Morgan Stanley and Merrill Lynch, as well as the Swiss bank UBS and the bond insurer MBIA. It was not clear whether any of those companies were involved in the F.B.I. investigation.

The S.E.C., which has formed an internal subprime-mortgage task force, is looking at how financial firms priced mortgage-based securities and whether they should have told investors earlier about the declining value of those securities. - New York Times

All of the businesses that sold the loans to you the former homeowner hardly ever hold on to those loans. They sell them to bigger banks and bigger banks bundle them all together and sell them as investment vehicles for the mega rich. Now that the loans are being defaulted on in larger than life numbers those investment vehicles are up on cinder blocks with tickets on them from the board of health as a public nuisance. AKA losing money for the mega rich people and businesses that invest in them.

What the F.B.I. is investigating at the banks is the fact that the SEC has some serious rules about selling bovine by product as any kind of investment product. Especially, when those products are purchased by the mega dough bucks people at the top of the income earners heap.

Now it’s officially a Subprime Lending crisis! Now let’s see who goes to minimum security, weekends off for god behavior prison? Maybe when these guys have to loose their golf handicap they might see what justice is really all about.

One more note, Bear Stearns, Morgan Stanley and Goldman Sachs have all dropped in shareholder value between $15 and $20 in the last three months. Things that make you go hmmmm or screw them too?

Papamoka

Originally posted at Papamoka Straight Talk

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