The Housing Bubble

Another early Sunday morning…

Yeah……I’m trying to finish up paperwork before I drive to DFW tomorrow.
Start a two week school on Monday….guess that means that my contract will run for at least a year.

About 7-8 hour from here, (the way I drive). More like 10 for a normal person. Dropping my mom off at my sister’s place. Will get to spend 8 hours in the car, getting filled in on what’s happening on “Survivor”, “American Idol”, and “Dancing with the Stars”….

Man, where did I leave those icepicks?……….

Yuch. I’m going to get up and dressed early today to participate in the 11:00 AM EDT (9:00 AM MDT) “a moment in time” that the NY Times is putting together. The idea is that everyone takes a photo at the same moment in time for the Times to put up on a photo blog.

http://lens.blogs.nytimes.com/2010/04/30/readers-11/?ref=global-home

Like to start some feedback about my Mom’s situation with Wells Fargo and her mortgage. My Father recently passed away, leaving my Mom without his income to help pay the mortgage. Wells found out and offered a 3 month trial of lowered payments to see if they could put her in a program of loan modification. She agreed, made all agreed upon payments and after the trial period, her loan mod was rejected.
3 days later, a certified letter wass sent threatening the acceleration of the loan if X amount of money was not sent to bring the loan current. The loan was current when the program began. The program was not asked for but solicited by the bank. In effect they took a current loan, categorized it as in default and are close to foreclosing.
She is 76, legally blind and not a flipper. Is the bank becoming like Washington D.C., we’re here to help?

My DH and I watched Vince Vaughn’s “Couples Retreat” last night, and after the credits, there’s a short scene with the following dialogue:

{ROMANTIC SONG PLAYING}

Oh, that feels good.

http://www.script-o-rama.com/movie_scripts/c/couples-retreat-script-transcript.html

Just thought that was funny!

I guess Ron Paul attended the premiere.

http://www.ronpaul.com/2009-10-07/ron-paul-attends-premiere-of-vince-vaughns-new-movie-couples-retreat/

I was talking to a legal Mexican immigrant last week, among things we discussed was the housing bubble. He told me he knew about 40 illegal immigrants who had bought houses in Port Saint Lucie Fl. during the boom for 300-400k no money down and had not made payments in years. Some had walked and some still live there for free. So I thought I would do quick search. Well.

SAVE | EMAIL | PRINT |
Banking on illegal immigrants

Banks are seeing an untapped resource in providing home loans to undocumented U.S. residents
August 8, 2005: 3:39 PM EDT
By Shaheen Pasha, CNN/Money staff writer

NEW YORK (CNN/Money) - The banking industry is opening its doors to a controversial new market: illegal immigrants.

Despite heated political debate in Washington over illegal immigration in the United States, an increasing number of banks are seeing an untapped resource for growing their own revenue stream and contend that providing undocumented residents with mortgages will help revitalize local communities.

It’s a win-win situation, they say.

But skeptics worry about the message these home loans send to illegal immigrants: break our laws and we’ll reward you with a home.

“It’s institutionalizing illegality,” said Marti Dinerstein, president of Immigration Matters, a New York-based think tank. “Now there’s no distinction being made between the people that follow all the rules and those who break our laws by entering the country or overstaying their visas.”

Dinerstein also worried that lack of knowledge on the part of illegal immigrants could pave the way for abuse in the form of predatory lending.

But advocates of the practice say the benefits outweigh any potential downside.

According to the Center for Immigration Studies, one million illegal immigrants cross the U.S. borders every year. About 500,000 illegal immigrants lose that status every year either by getting legitimate green cards or returning to their native countries. That leaves a 500,000 annual net increase of illegal immigrants – a market that has unmet banking needs.

“This is a huge untapped market with people that live and work in this country and are capable of buying homes to realize the American dream,” said Chan Peterson, executive vice president and head of community banking at Banco Popular, one of the earliest banks to enter this field.

He added that there’s a common misperception that illegal immigrants will be more likely to default on their loans than a documented resident. But the company has found that there is no higher rate of default in this loan portfolio than any other market the company serves.

“There’s a pride that comes with people moving from renting to owning and we’ve found that these borrowers are driven to hang on to their homes,” Peterson said.

Australia proposes 40 percent tax on mining profits booming due to China, India demand ~ Sunday May 2, 2010, 7:18 am

CANBERRA, Australia (AP) — Australia would heavily tax the booming profits of its mining companies under a tax system overhaul proposed Sunday that also would invest in infrastructure to support mining operations and reduce corporate taxes.

The new 40 percent tax on resource profits targets industries that have grown rapidly as they’ve produced the raw materials that feed burgeoning Chinese and Indian manufacturing demand.

Mining royalties currently paid to Australian state governments do not reflect rising commodity prices. The government says mining profits rose by 80 billion Australian dollars ($74 billion) in the past decade, yet government revenues from resources increased by only AU$9 billion.

The government would introduce the so-called Resource Super Profits Tax in July 2012. The company tax rate would be cut from 30 percent to 29 percent in July 2013 and to 28 percent a year later.

Honolulu foreclosures soar 123% in Q1
Pacific Business News (Honolulu)

The number of Honolulu properties that received foreclosure notices soared 123.8 percent year over year in the first quarter of 2010.

There were foreclosure filings on 1,564 properties, or one in every 216 households, according to the latest survey by Irvine, Calif.-based RealtyTrac Inc. The number of foreclosures jumped 14.8 percent from the previous quarter.

Honolulu ranked No. 110 for its foreclosure rate in the survey of 206 metropolitan markets in the United States.

Nationally, foreclosure filings grew 16 percent year over year to 932,234, or one in every 138 households. Filings were up 7.2 percent from the fourth quarter of 2009.

“It looks like Honolulu is playing catch-up with some of the other mainland metro areas that already have been hit hard by foreclosure,” said Daren Blomquist, RealtyTrac spokesman. “While the increase is pretty extreme the rate in Honolulu is still much lower than the foreclosure rates in some of the top foreclosure hot spots in the nation.”

Las Vegas reported the highest foreclosure rate with 28,480 properties receiving foreclosure filings in the quarter, or one in every 28 households. Utica, N.Y., posted the lowest foreclosure rate with 11 properties receiving foreclosure notices, or one in every 12,369 households.

How much damage will this oil spill cost local residents? Everyday it gets worse……maybe its not such a bad idea to drill for oil on land

Thieves, crooks and low life’s are every where, here in S.C. we have our own special breed.

Housing deal under scrutiny of FBI

The FBI and federal housing authorities are looking into whether the Columbia Housing Authority bought a house from a high-ranking city of Columbia official at an inflated price.

The sale could be a conflict of interest because of who was involved. The city official, Tony Lawton, 38, is the $108,492-a-year director of Columbia’s community development office, which directs hundreds of thousands of federal dollars each year to the Housing Authority.

The sale also might have run afoul of the law, if Lawton or Housing Authority officials knew the purchase price was inflated, allowing Lawton to make more money on the sale.

The documents show that, in deciding to buy Lawton’s house for $65,000, Walker disregarded a plea by three of his agency’s top-ranking officials.

The three wrote Walker a memo after an appraiser had just valued the house at $42,000 and agency officials had decided the house - north of Interstate 20, not far from the intersection of Fairfield and Crane Church roads - needed extensive repairs, about $35,450 worth.

“This house does not conform to our agency standard,” Housing Authority staffers Howard Thomas, Jethro Currie Jr. and Bill Turner wrote to Walker in a Nov. 13, 2008, memo. Turner is the agency’s planning administrator; Thomas, deputy director for housing management; and Currie, the capital improvements director. They are among the authority’s highest-paid officials.

“There are numerous houses on the market in excellent condition compared to this house,” they wrote. “Our money would be better spent on one of them.” They added that the house had only one bathroom, while the agency was looking for two-bath homes.

Read more: http://www.thestate.com/2010/05/02/1268947/housing-deal-under-scrutiny-of.html#ixzz0mm91DwpA

The illegal alien mob in LA didn’t quite live up to the billing:

“Los Angeles Police Chief Charlie Beck estimated that about 50,000 immigration rights activists participated in Saturday’s May Day rally, about half of what police estimated earlier.

Police had anticipated a larger crowd because of the controversy surrounding the recent passage of a tough immigration law in Arizona that allows police to check the legal status of people they believe are in the state illegally.”

1980s pricing?

In the immediate wake of some significant sales at my building recently, another bombshell was dropped last week. A 1 bdrm unit was sold as part of an estate for $50,000. This level of pricing takes us back at least 20 years.

To provide context, just last week I posted that another 1 bdrm in the same tier just sold for ~$125,000 in a regular sale. That had already caused quite a stir. After all my neighbor is in that tier too, and she paid $215,000.

Observing this on the micro level so close to home is both fascinating and unsettling. I’m told that the mood of many of my neighbors has profoundly soured. Underwater doesn’t even begin to describe the situation.

Going forward it will be my priority to measure what level of impact these recent sales have on prices. While I have been trying to prepare for the worst, I am uncertain how the price action will play out. One would think that this will lead to a prolong stalemate at least - but maybe there are more weak hands out there than anyone realizes?

http://www.telegraph.co.uk/finance/economics/7663978/Radical-tax-on-debt-put-to-parties.html

A radical new plan for a tax on private debt has been submitted in the UK. Debts would be taxed at a rate of 1% which would discourage (in theory) households from accumulating excessive debt. Of course with the Bush-Obama War on Savers people are actively discouraged from saving money and cutting back on consumption - that’s un-American! Still, this is an interesting concept.

Walking back from the mailbox yesterday I read the “headline” on the latest AARP Bulletin- “New Health Care Law- What’s In It For You.”

In less than one lifetime we as a society have gone from, “Ask not what your country can do for you” to “What’s in it for you.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0uVT.A.qRA8&pos=5

Dubai markets tanking on weak real estate. I don’t understand. CNBC told us the Dubai World debt crisis was “contained.”

http://www.nypost.com/f/print/news/opinion/opedcolumnists/border_disorder_rfy8ccTuYvAzNeDzP7qmsM

By RALPH PETERS

South of the border, down Mexico way, a new and savage revolution rages just beyond our inspection lanes. After less than five years of fighting, estimates of the dead have reached 22,000.

The rate of killing accelerates each month. And Washington covers its eyes like a kid at a scary movie. Well, the Mexican narco-insurgency, in which well-armed guerrilla forces confront the authority and presence of the state, is our No. 1 security challenge.

The chaos in northern Mexico has far deeper implications for our country than Islamist terror or even an Iranian nuclear capability (as grim as those threats are).

The rule of law has collapsed from Tijuana on the Pacific’s edge to Matamoros and the Gulf of Mexico. Major cities are now “ungoverned spaces,” as our diplomats refer tidily to distant trouble spots.
More people now die violently on our southern border than in Somalia, Yemen or even Afghanistan. But Washington doesn’t know what to do about Mexico. So Washington does nothing much.

Our ruling class simply doesn’t feel the pain. So the DC elite demonizes Arizona’s desperate effort to shove the narco-revolution’s disorder back across the border. Murdered ranchers, overwhelmed emergency rooms and soaring crime rates in our border states mean less to the White House than a terrorist detainee’s claims of abuse. Our governing elite pretends that illegal immigration, torrential crime where illegals cluster, overcrowded prisons, Mexico’s narco-insurgency, legal cross-border commerce and the drug trade are separate issues, to be addressed discreetly.

But these issues are all interwoven with the Mexican government’s existential crisis. Drug wealth fuels criminal empires. Those narco-empires are now so powerful that they’ve risen against the state. Human trafficking is a useful sideline for drug lords. And illegal immigration drives crime rates in bankruptcy-threatened US cities and states.

(Link to rest of article)

Irrational NON-exuberance.

“…It was a night when people who once moved markets could be overlooked.”

“Look at Alan Greenspan,” said Oliver Stone, nodding toward the former Fed chairman. “No one is talking to him.”

nydailynews.com/news/politics/2010/05/02/

Paradigms sure are shifting any more these days: “Brother, could you paradigm? How about you, gramps?”

WHERE AMERICA LIVES
Happiness Is a Full House
by Lynn Schnurnberger
published: 05/02/2010
…
It Takes a Village

Multigenerational living is on the rise. A recent AARP study found that 6.6 million U.S. households had at least three generations of family members in 2009—a whopping 30% increase since the 2000 census. More than a third of Coldwell Banker real-estate agents recently reported an uptick in buyers looking for homes to accommodate multiple generations, and 70% expect to see even greater demand in the year ahead.

The trend is fueled in part by the economy, with “baby boomerang” kids returning to the nest after college, along with 30- and 40-somethings who have lost their jobs or homes or both. But Andrew Cherlin, a professor of sociology and public policy at Johns Hopkins University, sees an upside. “Parents and grandparents are like the National Guard—they’re called up to active duty when there’s a crisis,” he says. “But while families may be moving in together to save money, they’re discovering the advantages of shared child- and elder-care and an enriched family life.”

In fact, the idea of the nuclear family—mom, dad, and kids living together in isolation—is only about 50 years old. “In the coming decade, Americans will understand that our love of independence is kind of silly,” predicts John Graham, an international-business professor at the University of California, Irvine, and the co-author of Together Again. Of the 6.7 billion people on the planet, he notes, about 6 billion live in extended-family arrangements. “Talking to Grandma on the phone is one thing,” Graham says. “But to be with her smelling the cookies she’s baking is even better for everyone’s psyche.”
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http://www.independent.co.uk/news/world/europe/greece-a-new-age-of-austerity-and-anger-dawns-1960388.html

A few days ago, there seemed to be questions over Germany’s sizeable contribution to the bailout, but these have now been resolved. It emerged yesterday that Germany, which had shown great reluctance to help fund a Greek bailout in the face of public opposition, was put under massive pressure to change its mind at a G7 summit in Washington last weekend. Timothy Geithner, the US Treasury Secretary, was said to have told his German opposite number, Finance State Secretary Jörg Asmussen: “The Greek problem needs to be dealt with before the crisis spreads to other countries. As the leading economic power, this is Germany’s job.” The “problems” were resolved.

This clears up the question of who German officials answer to - and it isn’t their own taxpayers or voters.

http://www.groenewegenreport.com/?p=287

The economy is not recovering and will not recover.

In our point of view there are three factors why the US economy is not improving and will not improve:

1.) The U6, the broadest unemployment measurement, is 16-17% and the capacity utilization of the workforce is 70%; some 70% of US GDP stems from consumer spending though consumers without jobs don’t spend;

2.) House price declines are being temporarily stalled because of the $1.25trn mortgage buy-back program of the Government (although February existing and new home sales were about the worst ever) which will end in March 2010 and is keeping mortgage rates artificially low. Cost of building a house is higher than prices of repossessed houses. Banks are not cooperating in modificating mortgages (only 168,000 mortgages, out of 11.3m that have negative equity (in total there are 47m mortgages), have been modified of which 50% will default again) in other words the ripple effect of lower housing prices will continue. The banks are estimated to keep some 7m+ repossessed houses on their books in the hope that the market will recover. Lastly between 2010 and 2014 $1.4trn in commercial real estate has to be refinanced and with price declines of 40% since 2007, nearly 50% is showing negative equity which again the banks are not very willing to refinance;

3.) The enormous private and public debt levels which are increasing at stellar speed with budget deficits also increasing. Deficit/GDP ratios are increasing to new danger levels. According to a Barclay’s study studying 6 developed nations over the last 20-30 years, they found that a 1% change in deficit/GDP caused a 32 bps increase in 10 year rates. Based on this, we are due for a substantial rise in global rates.

Credit represents the use of future income to fund current expenditure. Going forward we will pay dearly for our irresponsible behavior. We believe that if investors really understood what is happening in the markets, long-term rates would be at 10-15%. Not because of inflation, there is no inflation in the West, contrary to China, but because of the crowding out with respect to loan demand.

Is anyone up for a game of Russian debt roulette?

Debt roulette: Is Portugal next?
By Dody Tsiantar, contributor
April 30, 2010: 1:36 PM ET

(Fortune) — As Greece barreled closer to the edge of a debt default this week, fears that the crisis would infect other countries rattled the world’s financial markets. “It’s not a question of the danger of contagion,” Angel Gurria, the head of the Organization for Economic Cooperation, said. “Contagion has already happened. This is like Ebola.”

If Gurria is right, who’s next? Many analysts and economists point to Portugal, the European Union’s poorest country, with Spain following close behind. “There is a very high likelihood that Portugal will be the next one to run into trouble,” says Nariman Behravesh, chief economist for IHS Global Insight.

That’s especially true if the 16 euro-zone countries get their act together and deliver a 45-billion euro bailout package to Greece as promised, a scenario similar to what happened to Bear Stearns in the banking crisis. Then Portugal may end up being the first to default. Jonathan Loynes, chief European economist of macroeconomic research firm Capital Economics, agrees with Behravesh: “Portugal is on the list, just behind Greece,” he says.

Indeed, Portugal got the financial equivalent of a negative diagnosis this week when Standard & Poor’s downgraded its debt on the same day the ratings agency slapped Greece’s government bonds with junk bond status. Spain’s warning came 24 hours later.

Markets responded by sending the yields on Portugal’s 2-year bonds to over 5%. The spread between German and Portuguese bonds also hit new highs, as did the price of its credit default swaps, a kind of insurance that investors take out to protect against default.

CMA DataVision, a London-based research firm that tracks the riskiness of sovereign debt, rated Portugal’s performance through the first quarter to be the worst in the developed world. The spread between the starting price of swaps in January and the end price in March widened to 52.3%, according to analyst Simon Mott. “That’s like what would happen if you’re a risky driver, you’d pay much more to insure your car than if you were a safe driver,” he says.

A familiar scenario

“The signals now being sent to Portugal are the same ones that were sent to Greece,” says economist Michael Arghyrou of the Cardill Business School.

Portugal, in many ways, mirrors Greece’s problems. Like its suffering Euro-partner, Portugal has weak public finances — its budget deficit rose to over 9% last year, six percentage points higher than the standards stipulated by the European Union. And its debt equals about 80%; Greece’s hovers around 115%.

But Portugal’s deeper problem is its slow growth rate over the last decade, according to Columbia University economics professor Ricardo Reis. Last year, Portugal’s gross domestic product was in the red, declining by 0.1%, this year it’s forecast to slow down even further, by 3.3%. To deal with slow growth, borrowing from foreign investors became Portugal’s lifeline — and that’s at the core of its trouble.
…

Does anyone have a handle on how many ‘low-to-moderate income’ Californians live in homes with $730,000 mortgages?

On the face of it, that number seems patently absurd.

WSJ Blogs
Developments
Real estate news and analysis from The Wall Street Journal

* April 29, 2010, 12:43 PM ET

California Proposes Principal Write-Downs for Homeowners

By Nick Timiraos

California housing officials would use $700 million in federal housing aid to match loan balance reductions offered by lenders and to subsidize mortgage payments for some delinquent and unemployed borrowers.

The proposal is part of the Obama administration’s effort to help the “hardest hit” states devise specific strategies to address the shortcomings of federal efforts to avoid foreclosures. California received the largest grant out of $2.1 billion that will be awarded to 10 states.

The first round of five states submitted their proposals two weeks ago to the Treasury Department, which is administering the funds under the Troubled Asset Relief Program, or TARP. The Treasury will approve or reject the proposals by the end of May.

California’s proposal would limit aid to low-to-moderate income borrowers and those with loans of less than $730,000. The initiative offers homeowners up to $50,000 in assistance through four different programs:

* Principal write-downs for underwater borrowers, or those that owe more than their properties are worth. Lenders would be required to match write-downs on a dollar-for-dollar basis and loan balances would be reduced over three years. Borrowers would have to prove that they faced hardship and that they could afford modified loan payments after a write-down. The California Housing Finance Agency estimates that around 5,500 households would be able to participate. (Around $427 million would be used for this program.)

* Up to $15,000 for borrowers who are able to make their mortgage payments but who had temporarily fallen behind on their payments and are facing foreclosure as a result of late payments. The state would spend around $130 million on that program, and officials estimate that it could reach 17,000 borrowers.

* Subsidize mortgage payments for borrowers who are temporarily unemployed and therefore unable to make their mortgage payments. Funds would be limited 50% of monthly mortgage payments up to $1,500 and would be provided for up to six months. The state estimates that around 9,000 borrowers would be eligible for that program. Some $65 million would fund this effort.

* Provide up to $5,000 in relocation assistance to homeowners who hand in their keys voluntarily under a “deed-in-lieu” of foreclosure or a short sale, where a home is sold for less than the amount due. Officials estimate that around 6,500 borrowers could participate at a cost of around $33 million.

The state has also proposed setting aside $20 million to create a “local innovation fund” that would allow local governments and housing counselors to develop additional programs to alleviate the housing bust. The state expects to spend around $23 million in start-up and administrative costs on the programs.

The housing aid proposal comes on the heels of California’s offer of a $10,000 state tax credit for buyers of new homes or for first-time home buyers for purchases that close on or after May 1.

Perhaps if the Fed worked a bit harder at its stated goal of increasing transparency in the banking system, we could finally settle this misnamed ‘debate’ on the number of foreclosure homes that are soon to hit the supply side of the U.S. residential real estate market.

The U.S. housing market would operate far more efficiently were it not for the ever present hobgoblin of foreclosure inventory uncertainty. Perhaps the GSE affordability mission could even be finally accomplished.

WSJ Blogs
Developments
Real estate news and analysis from The Wall Street Journal

* April 28, 2010, 5:31 PM ET

Debate Rages Over Supply of Foreclosed Homes
By James R. Hagerty

Why is there such a fierce debate about whether the housing market is slowly healing or heading for another free fall? Partly because no one can estimate with much confidence how many foreclosed homes banks need to sell or how fast they are getting rid of all that property.

A huge chunk of today’s housing supply comes from homes that have been acquired by banks or mortgage investors through foreclosure, plus those that are being offered by people who hope to avoid foreclosure by doing “short sales,” selling their homes for less than the mortgage balance due. The National Association of Realtors estimates that such “distressed” situations accounted for 35% of home sales in February and March. (See Foreclosure Estimate Falls.)

The latest heroic attempt to tally how many foreclosed homes are available for sale comes from analysts at Barclays Capital in New York. They estimate that banks and mortgage investors including Fannie Mae and Freddie Mac owned 480,000 homes at the end of February. That’s far lower than previous estimates. Barclays explains that it has acquired more data on mortgages and refined its methods for analyzing foreclosure trends. Under the bank’s previous methods, the estimate for February would have been more than 600,000.

Estimating the inventory of foreclosed homes is tricky because thousands of banks and others that own the properties disclose those holdings in varying ways, if at all. RealtyTrac Inc., another data provider and one of the few other firms that regularly makes such calculations, estimates that banks and mortgage investors own 758,000 foreclosed homes.

So we have a pretty big gap. Is it 480,000 as Barclays thinks, or 758,000, as per RealtyTrac? Tom Lawler, an independent housing economist who tracks reams of housing data when he isn’t tending the livestock on his farm near Leesburg, Va., figures the total is more than 550,000 but probably less than the RealtyTrac estimate.

“What is truly disturbing,” Mr. Lawler wrote in his daily housing-market commentary Wednesday, “is that given all of the economic data the government tracks, the sector it appears to track the worst is…the housing market! Why is it that the government has not deployed more resources to better track and report data on the housing inventory, households, home sales, home prices, and, of course, foreclosures and the number of homeowners who have lost their home to foreclosure?”
…

This article gets straight to the reason America needs a financial consumer protection agency. And I don’t mean a fox-in-the-chicken-coop consumer protection department buried inside the Fed’s wall of pro-banking-industry stealth, either.

WSJ Blogs
Developments
Real estate news and analysis from The Wall Street Journal

* April 29, 2010, 2:39 PM ET

Why Americans Get Ripped Off on Mortgage Loans

By James R. Hagerty

You might think that Americans would have learned over the past few years that home mortgages can be dangerous products, to be approached warily, only after careful study and consideration. You would be wrong.

Americans spend twice as much time shopping for cars than they do for home loans, Zillow.com reported Thursday. An online survey of 2,729 adults commissioned by Zillow found that on average they spent five hours choosing a mortgage, compared with 10 hours for a car and four hours for a computer. Nearly a third of the respondents devoted two hours or less to choosing a mortgage.

“Mortgages continue to be something that most people don’t want to spend time thinking about,” said Stan Humphries, chief economist for Zillow, a real estate information firm.

Of course, only an economist could find that even faintly surprising. Most people find it fun to look at shiny new cars and take them for test drives. Vroom, vroom! Reading through the fine print of loan contracts and trying to figure out what would be a fair price for title insurance and an appraisal–well, slightly less diverting.
…

WSJ Blogs
Developments
Real estate news and analysis from The Wall Street Journal

* April 30, 2010, 10:11 AM ET

More Homeowners Consider Strategic Defaults

From the Wall Street Journal’s Real Time Economics blog:

By Sudeep Reddy

More homeowners are willing to walk away from their homes voluntarily, according to new research released by the University of Chicago and Northwestern University. About 31% of foreclosures in March were considered “strategic defaults,” in which homeowners walk away when the value of a mortgage exceeds the house value — even if they can afford the mortgage. That’s up from 22% in March 2009.

One likely cause: About 56% of borrowers still believed lenders wouldn’t go after them for walking away from a home, up slightly from 54% a year earlier, according to the study that was based on surveys of more than 1,000 people in March. “With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments,” said Paola Sapienza, a finance professor at Northwestern’s Kellogg School of Management who conducted the study with Luigi Zingales, a professor at the University of Chicago’s Booth School of Business. The latest research was released late Thursday with the two universities’ Financial Trust Index, which tracks public trust in the financial system.

Old John Stossel on healthcare.

abcnews go com/video/playerIndex?id=8227482

Let’s not lose sight of Gollum’s role in planting the seeds for the Greek debt crisis.

Bloomberg
Greece’s Goldman Sachs Swaps Spawn EU Dispute on Disclosure
February 15, 2010, 11:47 PM EST
By Elisa Martinuzzi and Gavin Finch

Feb. 16 (Bloomberg) — A dispute is unfolding about how long European Union officials have known that Greece used derivatives to conceal its growing budget deficit.

Greece turned to Goldman Sachs Group Inc. in 2002, just after adopting the euro, to get $1 billion in funding through a swap on $10 billion of debt, Christoforos Sardelis, head of Greece’s Public Debt Management Agency at the time, said in an interview last week. Eurostat, the EU’s statistics office, was aware of the plan, he said. Risk Magazine also reported on the swap in July 2003.

“Eurostat was not until recently aware of this alleged currency swap transaction made by Greece,” spokesman Johan Wullt said by e-mail yesterday.

The disagreement about who knew what and when comes amid the worst crisis in the euro’s 11-year history. The existence of the swaps, which allowed Greece to delay payments and shrink its reported budget deficit, is fueling questions about whether Greece used the contracts to mask the fact it was struggling to comply with the currency’s membership criteria from the early days of its entry into the eurozone.

“Greece falsified deficit statistics, and that can’t be legal,” said Wolfgang Gerke, president of the Bavarian Center of Finance in Munich and honorary professor at the European School of Business. “Greece needs to be kicked out of the EU because otherwise there will be new copycats, and that could lead to the next catastrophe on financial markets.”

EU regulators pressed Greece yesterday to disclose details of currency swaps after an inquiry by the country’s finance ministry uncovered a series of agreements with banks that it may have used to conceal mounting debt.
…

Well off to Santa Cruz for a few hours. It is just beautiful here in San Mateo County.

Everyone take care and enjoy the rest of your day.

I’m missing the case for the stock market correction for three reasons:

3) The stock market always goes up, in the long run.

Nick Godt’s Market Medics
May 2, 2010, 12:01 a.m. EDT
Stock correction in bears’ crosshairs
Commentary: The case is getting stronger; guru Dorsey sees correction
By Nick Godt, MarketWatch

NEW YORK (MarketWatch) — Alain de Botton, a British philosopher and author of best-selling books such as the “Art of Travel” and the “Consolations of Philosophy,” has recently been asking this question: Is success always earned? Is failure?

Similar questions undoubtedly went through the minds of some investors over the past week as Greece edged closer still to default on its debt while Goldman Sachs Inc.’s (GS 145.20, -15.04, -9.39%) troubles with the law got worse.

But markets don’t stay philosophical for too long. On Friday, as Goldman shares plunged another 9%, the Dow Jones Industrial Average (INDU 11,009, -158.71, -1.42%) slumped 158 points to 11,008.

Both the Dow and the S&P 500 index (SPX 1,187, -20.10, -1.67%) saw to their worst weekly drop since late January, while the Nasdaq Composite (COMP 2,461, -50.73, -2.02%) fell the hardest, losing 2.7% for the week.

It was because of an unregulated and gigantic financial world that the financial crisis spread, and only through massive global government interventions that a recovery was engineered.

But notions of success and failure aren’t the same with unemployment at 10% in the U.S. and growth seriously threatened in Europe.

Paul Mendelsohn, chief investment strategist at Windham Financial Services, notes that both Greece and Goldman serve to reinforce a mistrust of governments and currencies.
…

Chuck Jaffe
May 2, 2010, 12:01 p.m. EDT

A death sentence for your retirement savings
Commentary: Paralysis is not a workable investment strategy

By Chuck Jaffe, MarketWatch

BOSTON (MarketWatch) — Jennifer W. is a single woman in her late 40s who is worried about her investment future and puzzled by her investment past.

Like many people her age, she has been encouraged to save as much as possible through individual retirement accounts and 401(k) plans in order to grow her retirement nest egg. She started doing that as early as she could, with as much money as she had.

Along the way, however, there were kids, a divorce, job loss and change. Couple some financial setbacks with 10 years of market volatility that has mostly resulted in flat-line long-term results, and Jennifer’s mutual fund accounts look better than when she started, but not great.

“I would have thought that by now I’d be a lot farther along toward retirement,” she wrote in an email. “I hate debt, so I try not to have any, and I don’t mind saving, but I do mind struggling and having accounts that don’t seem to be going anywhere.

“I’m not comfortable with mutual funds now,” she added, “but I know so little about stocks that I would probably do worse on my own.”

Her response to these problems? She’s not going to contribute to the company retirement plan this year — her employer does kick in a small amount on behalf of all employees — and she’s not funding an individual retirement account.

Indeed, many people like Jennifer have become completely frozen by disappointment and circumstance. They’re giving up the accumulation edge they get from the federal government when it comes to IRAs, 401(k)s and other tax-advantaged accounts. While statistics show that consumers have stepped up their debt reduction and savings, it’s still not the norm.

Doing nothing isn’t a solution, it’s a death sentence for your retirement savings.

Irrational exuberance is alive and well regarding the relative magnitudes of sovereign debt problems. But not to worry: Eat, drink and be merry, for tomorrow we die.

The Financial Times
Dangers loom beyond the eurozone
By Chris Giles in London
Published: April 28 2010 14:51 | Last updated: April 28 2010 20:09

The crisis in Greece serves as a warning to other countries not to lose control of their fiscal positions and the confidence of markets. But advanced countries have now stretched their public budgets so far that investors, economists and international organisations are getting worried.
…
So far, investors have concentrated their ire on peripheral eurozone economies because of the single currency area’s inability to resolve the Greek crisis cleanly. That is understandable, according to many economists, but they add that the single focus on continental Europe is unfair.

David Mackie of JPMorgan, for example, argues that the combined eurozone deficit and debt compared favourably with other countries. “In our view, the euro area has the fiscal capacity to backstop banks across the region and to support the sovereign states of Greece, Spain, Portugal and Ireland, along with some help from the IMF.”

This message has been picked up by eurozone policy makers. Jürgen Stark, executive board member of the European Central Bank, said on Wednesday that restoring sustainability to the public finances was “even harder for the UK, the US and Japan”.

“Given their high budget deficits and the high and rising debt levels, they must undertake very strong consolidation efforts to manage a reversal.”

Mr Stark’s analysis is not merely an attempt to divert attention from the eurozone. It is identical to that of the IMF.

The Fund has calculated that almost all advanced economies need to tighten fiscal policy significantly in the coming decade in order to stabilise debt at 60 per cent of national income by 2030 and the tightening needed in the US, Japan and the UK is just as bad as that required in Greece, Spain, Ireland and Portugal.

The US must tighten fiscal policy by 9 per cent of national income to achieve a stable position, the Fund estimates for example, something Mr Buiter believes its politics will make very difficult. “The way things are now, the Republicans will veto all tax increases and the Democrats all public spending cuts,” he says.

This week, a survey of former senior US economic officials, unanimously agreed the US was on an unsustainable path and warned that there would be another economic crisis in the US unless the deficit was addressed.
…

HBBers,
I have seen Sen. David Vitter on Fox bloviating about the oil spill.

Maybe he could donate his diaper to help clean it up.

Roidy
P.S. I was “invited” to another public meeting with the Right Honorable Senator Vitter. I couldn’t make that one. I’ll catch the next one and make a full report back to HBB.
P.S.S. To paraphrase the Church of Shatnerology: An HBBer in a room of normal people is akin to a Velociraptor in a room full of wiener dogs.

There seems to be a PR campaign that would like to make people think that with de-regulation all business law ,including good faith business practice ,
misrepresentation, product liability and fraud became void once de-regulation of Banks /’Insurance Companies/Investment houses came about . I would like to know when all that business law and commerce law was taken off the books . I think there are also laws against Ponzi-schemes
and attempts to misrepresent material facts with creditors . There are tons of laws on the books that I seriously doubt were dropped with de-regulation
of the culprits in the Real Estate lending Ponzi-scheme . I don’t think loan fraud all of sudden became legal for instance . “We didn’t see it coming “doesn’t seem to me to be a viable defense to me . When did the risk models change to real estate always goes up therefore you could abandon all lending standards and rate
junk loans as if they were AAA investment grade or bribe the Rating Companies to accept false models that no reasonable person would ever accept ? How liable are the market maker money changers for faulty business models for instance ? Not only were the risk models faulty but they were absurd .

Mark Hulbert
May 3, 2010, 12:01 a.m. EDT

Better than Goldman
Commentary: How to gain exposure to financials without a bet on Goldman

By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) — From good boy to bad boy.

After years of having the reputation as Wall Street’s most revered institution, Goldman Sachs Group Inc. stumbled badly in mid-April following news that the Securities and Exchange Commission was filing suit against the firm for defrauding investors with securities tied to subprime mortgages.

Shares of Goldman Sachs (GS 145.20, -15.04, -9.39%) plunged on the news, shedding some $30 in a single session–equivalent to a drop of nearly 17%.

Ouch. Incurring that much volatility is a high price to pay for exposure to the financial sector.

Is there a way to gain that exposure without investing in Goldman?

The answer, at least from the top performing investment advisers monitored by the Hulbert Financial Digest, is yes. Those that have beaten the market over the last five years have for several months maintained a healthy allocation in their portfolios to the financial sector. And yet hardly any of them were recommending Goldman Sachs before the SEC’s suit was filed in mid-April.

So their clients were not particularly harmed by Goldman’s April plunge.
…

Carmen Reinhart, co-author of This Time is Different, on the history of financial crises

I thunked Dudd’s Megabank, Inc masters wanted a ‘Bailout Bill’?

* OPINION
* MAY 3, 2010

How to Avoid a ‘Bailout Bill’
A new bankruptcy process is the right way to deal with failing financial institutions.

By JOHN B. TAYLOR

It’s good news there’s now bipartisan agreement that the financial reform bill should not be a “bailout bill,” and that amendments to Connecticut Sen. Chris Dodd’s draft legislation are being proposed and debated with this agreement in mind. The biggest challenge in this bailout reform debate is to avoid giving the federal government more discretionary power, whether by creating a special bailout fund or by providing more ways to bypass proven bankruptcy rules. Experience shows that such power would increase, not decrease, the likelihood of another crisis.

Some say that the government did not have enough power to intervene with certain firms during the financial crisis. But it had plenty of power and it used it, beginning with Bear Stearns. This highly discretionary power—to bail out some creditors and not others, to take over some businesses and not others, to let some firms go through bankruptcy and not others—was a major cause of the financial panic in the fall of 2008. The broad justification used for the bailout of Bear Stearns creditors led many to believe the government would again intervene if another similar institution, such as Lehman Brothers, failed.

But when the Federal Reserve and the Treasury Department could not persuade private firms to provide funds to Lehman to pay its creditors in September 2008, the Fed surprisingly cut off access to its funds. The examiner’s report on Lehman makes it very clear there was no preparation for bankruptcy proceedings before the day the government suddenly cut off the funds. No wonder there was a disruption.

Then, the next day, the Fed reopened its balance sheet to make loans to rescue the creditors of AIG, including billions for Goldman Sachs. The funding spigot was then turned off again, and a new program, the Troubled Asset Relief Program (TARP), was proposed. This on-again off-again policy was part of a series of unpredictable and confusing government interventions which led to panic.

This experience demonstrates why it is dangerous for the “orderly liquidation” section of the Dodd bill to institutionalize such a process by giving the government even more discretion and power to take over businesses; the interventions are likely again to cause more harm than good, even with the best of intentions. Many experts doubt the ability of the Federal Deposit Insurance Corp. (FDIC) to take over large, complex financial institutions, as the current bill calls for, without causing disruption.

The moral hazard associated with protecting creditors will continue even if the FDIC has the discretionary authority to claw back later some of the funds it provides in the bailout. The proposed liquidation process would have the unintended consequence of increasing the incentive for creditors and other counterparties to run whenever there is a rumor that a government official is thinking about intervening. Who is going to be helped? Who is going to be hurt? It is up to government officials to decide, not the rule of law.
…

Asia Markets

May 3, 2010, 12:38 a.m. EDT
Given that Asian savers were responsible for the U.S. housing bubble, due to sending our mortgage market excessive liquidity (at least according to Bernanke’s account), won’t a Chinese monetary tightening trigger a new leg down in the U.S. housing crash?

Chinese banks, property stocks slide on reserve rate hike

By V. Phani Kumar, MarketWatch

HONG KONG (MarketWatch) — The Chinese central bank’s move over the weekend to raise banks’ reserve requirements was designed to remove excess liquidity, as hot money pours into the country, due in part to hopes of the yuan’s appreciation.

But while Chinese banking and property shares declined Monday as the monetary-policy tightening weighed on investor sentiment, the increase may actually be mildly positive for Chinese banks, some analysts said.

The People’s Bank of China announced Sunday it was increasing commercial banks’ reserve requirement ratio by 0.5 percentage point, taking the RRR of large banks to 17% and that of small- and medium-sized banks to 15%.

The increase, which goes into effect May 10, is the PBOC’s third such hike this year and is estimated to drain out about 300 billion yuan ($43.9 billion) in liquidity from the Chinese banking system.
Asia’s Week Ahead: Focus on Australian rates

With U.S. and Japanese central banks keeping rates unchanged last week, how the Reserve Bank of Australia acts will be a focus in Asia. Results from Japanese electronics giant Panasonic are another highlight. MarketWatch’s Andria Cheng reports.

“We continue to view the RRR hike as a fundamentally positive tightening measure, as we believe it is still in the early part of the tightening cycle, which should help contain inflationary pressures, prolong the current economic expansion cycle and provide cushion for future policy flexibility,” Goldman Sachs analysts wrote in a report.
…

Subprime mortgage lending kingpins EXPOSED! But it all turned out great at the end of the day, as the Wall Street Megabanks got their bailouts.

* LAW
* MAY 2, 2010

Senate’s Goldman Probe Shows Toxic Magnification
Wall Street Banks Repackaged Same Risky Bonds into Numerous Securities, Spreading the Pain Across Multiple CDOs

By CARRICK MOLLENKAMP And SERENA NG

Even at its peak, subprime lending accounted for a relatively small portion of overall mortgage lending. Yet losses from these mortgages caused deep damage to the financial system.

Now, documents released by Senate investigators last week provide clues in understanding why the losses were so severe. The documents show how Wall Street banks packaged and repackaged the same risky bonds into securities that ultimately helped magnify the impact of defaulting subprime mortgages on the financial system.

In one case, a $38 million subprime-mortgage bond created in June 2006 ended up in more than 30 debt pools and ultimately caused roughly $280 million in losses to investors by the time the bond’s principal was wiped out in 2008, according to data reviewed by The Wall Street Journal.

This was a central finding of the Senate investigative panel probing Goldman Sachs Group Inc.’s actions in the mortgage market. In a memo last week, panel Chairman Sen. Carl Levin (D., Mich.) said Goldman’s work “magnified the impact of toxic mortgages” by replicating mortgage securities in debt pools known as collateralized debt obligations as well as CDO derivatives, and also in an index that tracks subprime bonds.

The subprime mortgages that caused big losses generally were packaged into CDOs, in which dozens of mortgage-backed bonds were pooled together and slices of the CDOs were sold to investors. Another version of these CDOs didn’t contain actual mortgage bonds but were linked to them via derivatives called credit-default swaps. Through the use of derivatives, banks created many of these synthetic CDOs using the same mortgage securities, all of which would rise or fall in value depending on how the mortgages were performing. With synthetic CDOs, those who had bet that the loans would perform well were on the hook if their performance deteriorated.

In effect, the documents said, Wall Street was “copying and pasting” what turned out to be the worst-performing securities of the mortgage boom. Such activity helped multiply opportunities for hedge funds and traders who wanted to short the housing market, but magnified the losses of those on the other side of the trades. To short a trade, in this instance, is to bet the housing market will turn down.

“There was a limited number of similar bonds,” said Darrell Duffie, a finance professor and derivatives authority at Stanford University. “So they are likely to show up in multiple deals.”

Goldman Sachs executive Fabrice Tourre, at last week’s Senate hearing

A Goldman spokesman declined to comment.

An important moment in the housing cycle came in January 2006, a year before the downturn of the housing market had crystallized. That month, a consortium of banks, including Goldman and Deutsche Bank AG, with the help of a London data firm, launched an index, known as the ABX, which served as a proxy for subprime loans.

For the first time, banks and hedge funds had an indicator of the prices of subprime-mortgage securities, and a somewhat active market to buy and sell credit protection against housing-market losses. There were four ABX indexes, each tied to 20 subprime bonds, some of which reappeared in numerous CDOs.
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