Commentaries

from Rolfe Winkler:

2010: Walking away will gain cachet

Why bother? That’s the question more underwater Americans are asking themselves about their mortgage.

Trapped in the abyss of negative equity, more will decide to quit paying. As they should.

About a quarter of all mortgages in the United States are on houses that are worth less than the unpaid balance of the mortgage, according to real estate consultant First American CoreLogic. About half of that group, 5.3 million borrowers, are 20 percent or more underwater. For 2.2 million, the property is worth less than half the mortgage balance.

Those folks are called “homeowners,” but “homeborrowers” would be more accurate. All they own is an obligation to whatever entity services their mortgage. They’re essentially renters paying above-market prices.

But that “ownership” tag is often felt to be important. Americans who are trained to believe that a mortgage is a moral obligation fear punishment or a bad conscience if they walk away.

But foreclosure is hardly the mark of Cain, especially in states like California and Arizona, where lenders have no practical recourse to pursue a borrower’s other assets.

As more underwater homeowners realize there’s no hope to regain their equity, more will cut their losses. The reduction of liabilities brings immediate debt relief and often a lower cash outlay — on rent — for comparable housing. The financial shot in the arm should outweigh the stigma of foreclosure.

from Rolfe Winkler:

Lunchtime Links 12-29

Was the global financial crisis a mathematical error? (Steve Keen, Business Spectator) Keen's latest. Another great piece explaining the flaws of neoclassical economics. (ht Yves)

Not just Tiger's temptations (Glanville, NYT) Another great column from ex-Cub/Phillie Doug Glanville.

Housing crash leads to falling divorce rate (Waller, WSJ)

Fed proposes selling term deposits to absorb excess reserves (Torres, BusinessWeek) To prevent banks from lending too much of the free money it gave them, the Fed will sell them CDs.  Earning interest on free money is another reason why it's good to be a banker...

In new way to edit DNA, hope for treading disease (Wade, NYT) "Only one man seems to have ever been cured of AIDS, a patient who also had leukemia. To treat the leukemia, he received a bone marrow transplant in Berlin from a donor who, as luck would have it, was naturally immune to the AIDS virus."

Video tour of 96 sq ft house (Unclutterer)

Lots 'o lights (imgur) Impressive Xmas decorating.

from Rolfe Winkler:

Evening Links 12-23

(Reader note 1: posting will be light through the weekend....taking a few days off)

(Reader note 2: Just saw Avatar, the IMAX 3D version. I highly recommend it.)

Food stamps altering how retailers do business (Maestri/Baertlein, Reuters) "At 11 p.m. on the last day of the month, shoppers flock to the nearest Walmart. They load their carts with food and household items and wait for the midnight hour. That's when food stamp credits are loaded on their electronic benefits transfer cards."

The Protocol Society (Brooks, NYT) "When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology."

Treasury to seek easing of bailout fund rules (Somerville, Reuters)

One cheer for Barney Frank (WSJ editorial) WSJ editorials tend not to be very useful, but I thought the last line of this one was notable: "Perhaps the House and Senate should simply ... start over with a new mission for [financial] regulatory reform: break up the too big to fail racket." More evidence that all sides of the political spectrum agree on this. I wonder how they would propose we do it.

New home sales decrease sharply in November (Calculated Risk) Yesterday's existing home sales report had everyone exited, but new home sales are far more important for economic growth, and those are still terrible. Bill has dubbed this "the distressing gap."

Losing the 3 handle on GDP

The downwardly revised 3rd quarter GDP certainly didn’t shock economists who were expecting a softer reading than the initial 3.5 percent, but the 2.8 percent certainly isn’t pretty especially considering the psychological blow of losing of the 3 handle. (Speaking of symbolic numbers, the FDIC also reported that its reserve fund is now in the red.) There’s still one more revision ahead though, so maybe it will inch back to 3 percent.

Weaker consumer spending – up 2.9 percent versus the originally estimated 3.4 percent – isn’t exactly encouraging since the recovery needs the nation’s shoppers to quicken the pace a little if the economy has any hope of picking up steam. And remember, the “cash for clunkers” program was a big contributor to the gain. It’s also no surprise that government expenditures helped at least partially offset the decline. Such spending increased 3.1% from the original estimate of 2.3%.

Alan Ruskin at RBS notes that at least corporate profits are strong at +10.6 percent. But, increased productivity is the cost. Companies are doing more with less, a phrase that those still holding their jobs detest and those without jobs dread.

Consumer confidence, meanwhile, ticked up slightly but still reflects a sour mood on Main Street.

Lynn Franco at the Conference Board, the group that compiled the survey released Tuesday, says it all.

Consumer Confidence posted a slight gain in November. The Present Situation Index, however, was virtually unchanged and remains at levels not seen in 26 years (Index 17.5, Feb. 1983). The moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen, as opposed to an increase in the percent of consumers expecting conditions to improve. Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood.

The Wall Street Journal’s front page splash that 1 in 4 homeowners owe more than their homes are worth underscores the point that the U.S. households are still in bad shape and the rapid fire gains in the stock market aren’t likely to offset fear of losing your job and house.

Government weighed down by bad mortgages

The Federal Housing Administration – the U.S. agency that actually enjoys full faith and credit of the government – is in quite a pickle. Reuters reporting that its capital reserves stand at a scant 0.53 percent, below the 2 percent regulatory minimum and without spitting distance of the “help me” threshold.

The deterioration has been fast and furious. Last year the ratio stood at 3% and the year before than 6.4%, according to The Wall Street Journal.

New York Times also has a nice data point:

The F.H.A., which insures loans made by private lenders, guaranteed more than $360 billion in mortgages in the last year, four times the amount in 2007.

The FHA has largely stepped in to fill the vacuum left behind by the banks that had been lending to subprime borrowers. Together with Fannie and Freddie, these housing agencies have kept the housing market from completely seizing up, but there’s a big downside: taxpayers are likely to foot the bill.

The FHA is putting on a brave face, saying reserves should remain above zero, but the still sick state of housing and high unemployment makes such promises sound hollow.

Fannie and Freddie are also feeling the heat. The delinquency rate on Freddie’s single-family mortgages have climbed to 3.33 percent, up from 1.22 percent a year ago. Fannie’s latest tally stood at 4.45 percent, up from 1.57 percent. Though they don’t have the explicit backing of the government – unbelievable but true – they still have a good chunk of the $400 billion equity line they can turn to if the losses accelerate.

Nooooo…not Fannie and Freddie

I know that the government already leaked the plan, but seeing it actually launched I can’t help but feel a little despair that the Obama Administration continues to use Fannie and Freddie to implement new housing policy.  I wrote a column when the idea was first floated to help state and local housing agencies access financing.

Simply, all things Fannie and Freddie at this point – more than a year into the conservatorship – should be squarely focused on sorting out what exactly they’re suppose to be. It seems absurd that they continue to operate in limbo given their enormous role in the housing market and credit markets. Either nationalize them, privatize them or unwind them, but don’t give them new tasks to perform.

If housing agencies need financing, then give them a grant or backstop their municipal debt. It’s more honest and efficient than the mind bending program launched today.

From Reuters:

The Treasury said it will purchase securities issued by Fannie and Freddie that are backed by new mortgage revenue bonds from the housing state and local housing agencies (HFAs). Treasury said the bond program can support “several hundred thousand” new mortgages for first-time homebuyers in the coming year, as well as refinancing “at risk” borrowers into more affordable loans.

The plan also aims to help jumpstart the private lending market for the state and local agencies. Before using proceeds of new mortgage bonds under the program, the state and local housing agencies must sell debt to private investors equal to 40 percent of the total amount borrowed via Fannie, Freddie and the Treasury.

Kohn on V-shapes, housing, inflation and a whole lot more

Donald Kohn, the Fed’s number 2, has a lot to say about the economic outlook but not a whole lot new in terms of when the central bank will reverse course on its extraordinary easy monetary policy. Full speech at the National Association for Business Economics in St. Louis can be found here.

Some choice bits:

I don’t think a V-shaped recovery is the most likely outcome this time around.

I’m not sure the stock market and credit markets agree, but they might come around to his way of thinking eventually.

The demand for U.S. exports has been increasing lately after falling sharply in the first half of the year. However, with the firming of domestic demand, imports have also begun to increase, and, on net, the external sector appears to be a roughly neutral influence on overall economic activity at present.

There’s been lots of talk about a weak dollar feeding an export-led recovery, but it doesn’t look like it’s weak enough just yet.

And here’s my favorite on the recovery in the housing market. Emphasis mine.

Been down so long, it looks like up

The latest S&P Case-Shiller home price data is feeding into the feel-good vibe of the moment, of mergers the Dow approaching 10,000 and other green shoots. The composite index of home prices for 20 U.S. metropolitan regions rose 1.6 percent in July from June — a stronger gain than expected and the third consecutive monthly gain. As the release notes, there have now been “six months of improved readings,” and this is giving some early support to stocks and the dollar.

Yet the year-over-year rate remains well in negative territory: a 13.3 percent decline for the 20-city index and a 12.8 percent decline in the 10-city index. Yes, 17 of the 20 cities had monthly gains, but 14 are still showing annual declines in the double-digits.

David Blitzer of Standard & Poor’s says:

We do need to be cautious in coming months to assess whether the housing market will weather the expiration of the Federal First-Time Buyer’s Tax Credit in November, anticipated higher unemployment rates and a possible increase in foreclosures.

And Calculated Risk puts it in perspective:

The debate continues – is the price increase because of the seasonal mix (distressed sales vs. non-distressed sales), the impact of the first-time home buyer frenzy on prices, and the slowdown in the foreclosure process (with a huge shadow inventory), or have prices actually bottomed? I think we will see further house price declines in many areas.

Stabilizing housing should make toxic assets easier to sell

When the subprime lending market fell off a cliff and the housing market with it, trying to figure out what the mortgage loans and bonds were truly worth became a pointless exercise since no one could agree when home prices would stop falling. Banks didn’t want to sell the assets at a steep loss since they hoped (and prayed) in the long run many of these loans and bonds would continue to perform. Buyers, of course, wanted to be compensated handsomely for the risk of taking on these loans when prices continued to plummet and the ranks of jobless swelled.

That appears to be changing. Though the unemployment rate is expected to go higher still and will stay elevated for some time to come, the number of those getting pink slips has started to moderate and home prices appear to have stabilized. Check out the chart below of the S&P Case-Shiller index of home prices in 20 metropolitan areas.

Enter the PPIP program. The FDIC announced yesterday that Residential Credit Solutions beat out 11 other bidders in its pilot program to unload what are now called legacy loans and once called toxic assets. It’s not a bad deal considering RCS only had to plop down $64 million in cash for 50% stake in a portfolio of $1.3 billion of home loans, with leverage and a FDIC guaranteed loan taking care of the rest. And it’s far easier now to asses the risk in these assets than say a few months ago.

If this works out to the FDIC’s satisfaction, the agency will use it as a way for public/private funds under the PPIP program to buy loans off banks that are still up and running. There’s still the question about whether banks will want to sell, but it will be much harder for them to argue that a loan is worth say 80 cents on the dollar, when models based on more stable inputs suggest otherwise.

from Rolfe Winkler:

NYT: Fight to extend the house tax credit

It's perhaps no surprise that the National Association of Realtors is fighting to extend the tax credit for homebuyers. They also want the credit enlarged and they want it to apply to everyone. From NYT:

The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 [from $8,000] and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.

Deductibility of mortgage interest is already a huge tax subsidy for home buyers. And the $8,000 first time credit is expected to cost $15 billion this year while resulting in only 350,000 home sales that wouldn't have otherwise happened. That's $43k per. Give 'em an inch, they'll take a mile.

[Update: A readers asks how the math works in the paragraph above. The credit was used for up to 2 million sales. But of those, only 350k wouldn’t have otherwise happened. Since the goal of the program is to spur home sales that wouldn’t happen organically, then the cost of the program is best described in terms of incremental transactions. $15 billion spread over 350,000 extra home sales is $43k per.]