Rambling rants from the lunatic fringe
| The Current National Debt: |
Posts tagged ‘mortgage’
Many have been warning of this pending implosion for years, but evidently it’s just now hitting the major news organizations. How did anyone ever think that a mortgage that didn’t even cover the interest charges each month was a good idea?
From the numbers I’ve seen, 2010 and 2011 are the years when most of these Option ARM’s are due to reset to “real” interest rates. House prices aren’t done bottoming yet.
gk
Sphere: Related Content
From a story on Yahoo News.
A rising savings rate and an improved housing market, while not completely healed, point to brighter times ahead in the U.S. economy, O’Shaughnessy told Reuters in an interview.
“I do think that as all that coalesces, you see a good chance for the S&P 500 (at) 900 out of the year. What are we right now? 713? That could be a very nice rally,” he said, in reference to Wednesday’s closing level for the S&P 500.
Does he realize that we started this year at 931? And while I agree with him that we could have “a very nice rally” I don’t think this is the time to be buying. There’s too much downside risk that isn’t priced into the market.
For example as I detailed a few days ago, Standard and Poors is still estimating 2009 earnings for the S&P 500 to come in at $64.37 – a whopping 31% increase over the 2008 earnings of $49.04. I just don’t see that happening, so stock prices will adjust lower as the earnings estimates are eventually lowered.
I also disagree with his premise that we’re seeing “an improved housing market”. Foreclosures have been held down artificially for the past few months as Fannie and Freddie had a foreclosure moratorium in place, as did some states and banks. Those programs will be ending, and we’ll see the foreclosure rate skyrocket as Obama’s housing bill turns out to be ineffective.
I say it’ll be ineffective because the only thing that will heal the housing market is a bottom being established on prices. And that can not, and will not happen until foreclosures are allowed to go through to establish the true value of houses in each area. Any government program is bound to fail, because they’re seeking to establish another artificial boom. And that’s what caused this mess in the first place.
A rising savings rate IS a good thing, but that doesn’t “stimulate” the economy as fast as someone purchasing a new car or remodeling their home. Savings bear fruit in years, not months.
“The problem with today is everybody’s fighting the ‘Where’s the bottom?’ fight. If you try to keep a relatively longer-term perspective, which is three to five years, you get shouted out … From our point of view the market is even more compelling than it was when we spoke at the beginning of the year.
“Yeah, we could go down some more here in the short term, but it only makes the ultimate valuation more and more compelling.
No doubt about it, “you get shouted out” if you talk about a 3 to 5 year time frame – because it’s wrong. If you bought and held stocks anytime since 1997, you’ve lost money. In many cases, a lot of money. And that’s not an investment.
“The market is even more compelling than it was when we spoke at the beginning of the year.” He is 100% correct on this – but anyone who listened to his self serving BS at the beginning of the year has lost more than 25% of their money. Not a brilliant move, no matter how “compelling” the market appeared at the time.
As to making “the ultimate valuation more compelling” he’s correct – but that’s been the case forever. Look back at the beginning of this blog, where I said Doug Kass was wrong when he said “Buy the Financials. Yes Buy.” back in January of 2008. The S&P Financial index (XLF) was over $27 back then, and he said it was a good deal with good valuations. Today XLF closed at $6.24. That’s definitely a more compelling valuation, but you would’ve lost 77% of you money if you bought XLF because of it’s “compelling valuation” in January 2008.
Long term investors shouldn’t be trying to pick the bottom – leave that to day traders. Long term (I’ll use the same 3 to 5 year time frame as O’Shaughnessy) you simply buy when the 75 day EMA crosses over the 200 day EMA. And you sell when the 75 day crosses back below the 200 day. It’s easy. And virtually foolproof.
Check out a chart of the S&P 500 with these EMA’s here. When the red line (the 75 day EMA) is higher than the green line (the 200 day EMA) stocks are trending higher. You buy as soon as possible after that happens. The reverse is true in a down trend like we’re in today. And the distance between the 2 lines is not getting smaller yet, so long term investors shouldn’t be anywhere close to buying back in.
In short, if the earnings are down, the market will follow eventually. And when earnings rise, the stock market will also eventually rise. But that ain’t happening now, so stay on the sidelines.
gk
Sphere: Related ContentI’m not a Republican (or a Democrat), but I like this.
Honk if you're paying my mortgage
The only thing that might be better is if it said “Honk if I’m paying your mortgage”
Or maybe a few others:
Honk if you’re bailing out my bank.
Honk if I’m bailing out your bank.
Honk if you’re tired of bailouts.
Honk if bailouts suck.
Honk if you got stimulated.
Honk if I’m stimulating you.
Honk if you want to stimulate me.
Honk if you have a massive stimulus package.
Honk if you got off on Obama’s package.
Honk if you got stimulated by Obama.
Honk if you’re tired of stimulation.
And finally – Stimulate this!
gk
Sphere: Related Content
The NY Times has a good article today which examines why we’re stuck paying hundreds of billions in bailouts to AIG. The article is titled Propping Up a House of Cards.
It’s a good article, and it does a good job of explaining what happened, but I think it draws the wrong conclusion. The NY Times says we need to continue the bailout of AIG regardless of the cost. I say we should simply let them fail and let the house of cards collapse.
No, the result won’t be pretty, but it will be over. A lot of large banks will go under, both here and in Europe, but some will be left. And the trillions of dollars of losses will have been taken by the people who invested in AIG and the banks that relied on them – and that’s the way it should be.
gk
Sphere: Related ContentFortune has a good article today that talks about the causes and potential solutions of the banking crisis. I disagree with their conclusions, but the article does a good job of explaining the risks that the banks are facing – and getting ready to face.
How can it be that the banks are tottering after the government fortified them with hundreds of billions in bailout cash and guarantees on their troubled assets? For the past 18 months, the banks’ problems with toxic securities, especially collateralized debt obligations (CDOs) and other exotic products that packaged subprime mortgages, attracted most of the attention – and alarm. Now the storm is entering an entirely new phase that’s potentially even more dangerous: a historic meltdown in the bread-and-butter businesses of credit card, home-equity, and mortgage lending.
Unfortunately, at the very start of the article, Shawn Tully gives up. In the paragraph just before the one I quoted above, he says Fear is spreading that if all that rescue money can’t revive these stumbling giants, only one road remains. Everyone from former Fed chief Alan Greenspan to Senate Banking Committee chairman Chris Dodd is warning that the sole solution may be the once unthinkable one: nationalization.
Why does he so quickly get to nationalization as the “sole solution”? It’s not. There’s another solution to the problem. Let them go broke. It’s how stupid people are separated from their money.
In talking about the 19 largest banks (those with assets over $100 billion) the article says: Washington won’t let those big banks fail: It will boost their capital by purchasing preferred stock that will pay a 9% dividend. If a bank has trouble paying the hefty dividend, it can convert the preferred shares into common stock. Hence, the weakest big banks may well end up with the government as their largest shareholder.
How is that different from nationalization? They may still be private companies on paper, but if the government is the largest shareholder, the bank has been effectively nationalized. Government can now dictate policy to an even greater extent than they do now, sticking their noses into such things as bonuses, who gets a loan and who doesn’t, salaries, etc. There may be a technical difference, but the end result is identical. Bad.
FBR predicts the banks will eventually write off about 9% of their loan portfolios, with the vast bulk of losses coming in the next three years. That would hit the big four with around $300 billion – or $100 billion a year – in credit losses, more than three times the projected damage from their toxic securities.
And that’s at the four largest banks alone. That’s Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo. Between them, they hold almost half of all U.S. consumer and business loans. Double that number to $200 billion per year to get an idea of the losses still to come for the banks.
How the government proceeds from there will say a lot about the future of the banking sector. The fear is that Washington will continue to prop up Citi and other wounded banks in their current form. The best course would be to force battered banks to sell enough assets to restore their financial health – if that’s possible – or to dissolve.
I say dissolve them. Let them go broke and bankrupt and sell off whatever assets they have at fire sales to the highest bidder. That quickly establishes a market price for this crap, and it allows the good banks to stay in business. No government money is needed. And that’s the way it should be.
gk
Sphere: Related ContentJust another example of bailouts that don’t work.
MarketWatch says A study looking at loans that were modified in the first three months of 2008 showed that 37% of borrowers were more than 30 days behind on their payment within three months, and 55% had re-defaulted within six months¸ said Grovetta Gardineer, a managing director at the Office of Thrift Supervision, which conducted the study.
The statistics echoed the results of a similar report released last year by the Office of Comptroller of the Currency that also showed a similar high level of re-defaults on modified mortgages.
The testimony about the success rate for loan modifications comes a week after President Barack Obama announced a more ambitious plan costing some $75 billion to help homeowners refinance or modify their loans before they have technically defaulted.
So now we’ll also get to pay to help people before they default, and after they default the first time. How many chances are we going to give deadbeats and idiots who bought more house than they could afford?
They should default and go into foreclosure. The bank (or mortgage provider) should take possesion of the property and sell it. A true fair market price for the home is then established and the holder of the mortgage writes down the loss.
That’s the way to get through this mess. The constant renogotiating of terms simply delays the inevitable and is making this drag on and on. We’d be through it by now if the government would simply let the free market work.
gk
Sphere: Related ContentI was reading a story on CNN tonight. It was one of those stories that made me bang my head up against the wall because it feels so good when I stop.
I’m going to quote a bit of the story so you can see what pissed me off.
Take Joe Martinez of Bristow, Va., who fits the profile of the “responsible” homeowner Obama cited in the plan. The government contractor and his wife thought they did everything right when they bought their brand new $600,000 house two years ago. They put 5% down and got a 30-year fixed-rate mortgage they could afford.
So far, so good. But unless they bring home $200k per year, they bought more house than they should have. Their mortgage payment is about $4000 per month, and it shouldn’t be more than 25% of your take home pay. That means they need an after tax/take home income of about $200K. Having no information about their income in the story, I’ll assume they have adequate income.
Others in their neighborhood, however, couldn’t keep up with the payments. As foreclosure rose, the value of the couple’s home plummeted to $450,000, leaving them doubtful they’d ever recover their investment.
Martinez called their lender to try to get into the Hope for Homeowners program, which would reduce their loan balance to 90% of the home’s current value. But they were turned down because they weren’t in default.
So two months ago, the couple stopped paying their mortgage, hoping they could then qualify. But even if they don’t, they are willing to take the hit on their credit scores to stop throwing money down the drain.
“There’s just no point to stay here,” said Martinez, 29, adding he could rent the house across the street for half his monthly mortgage payment. “We don’t want to give up our home, but it’s never going to come back.”
Sounds to me like they just want out of the deal they agreed to. If “they could afford” the payments but “the couple stopped paying their mortgage” anyway, they are crooks. They are trying to scam the system. And they should go to jail.
What difference does it make if your home is worth less than you paid for it? This happens with cars all the time – is there some rule that says a home always has to go up in value? No? That’s what I thought.
You made a deal. You agreed to it without anyone holding a gun to your head. You signed dozens of documents at closing agreeing to do certain things. Now you want out. Tough shit.
Joe Martinez is a crook. He should be arrested and jailed for attempted fraud.
If you read through the CNN story, you eventually get to this part. Martinez isn’t interested in having his interest rate lowered. He would like to see some of his principal forgiven. “Why would it be such a big deal for them to modify my loan?” he said, noting that his tax dollars are being used to finance the program. “Wouldn’t that stabilize the economy?”
Hey, I’d like some of the principal on my home forgiven too! Those are my tax dollars going to pay off your mortgage too. That’s a great idea Joe! Let’s get the greedy bankers to simply “forgive” part of what we owe them – not because we can’t make the payments – but simply because we want them to. Damn – I wish I would’ve thought of that first!
All sarcasm aside, that’s the behavior you get when the government starts giving money away. Why is it so hard for the government to understand that people change their behaviors to take advantage of government policies? It’s happened for thousands of years, yet they always forget to take that into account.
When something is taxed, less people do it. Increase the tax on dividends and less companies will announce dividends. Increase the tax on cigarettes, and less people will smoke. Decrease the tax on income, and people produce more income. Pass a law that makes it easier for people to get out of contracts, and more people will try to get out of contracts. This ain’t rocket science – you can play along at home.
Here’s my simple, one step plan to solve the problem:
Problem solved.
gk
Sphere: Related ContentIt looks like the Senate is attempting to allow the banks to sweep their problems under a rug. A MarketWatch.com article this evening says “an accounting regulation that some bankers and lawmakers complain is a key contributor to the financial crisis might need to be temporarily changed or restricted. The rule, known as mark-to-market, requires corporations to adjust the value of their assets four times a year to reflect the fair market price.”
In other words, this accounting rule (known as FAS 157) requires banks to state the actual value of the assets they are claiming. Before this rule took effect, most banks used a “mark to model” method (many refer to this model as “Mark to Myth), which pretty much allowed them to make up a value and claim it as an asset. You can read about FAS 157 on the FASB site here.
Many are blaming the financial meltdown on FAS 157, because it became part of Generally Accepted Accounting Practices (GAAP) in November, 2007, which happened to be the same time we started seeing the huge write-downs. But FAS 157 isn’t the problem – the crappy mortgage derivatives the banks are claiming as assets are the problem.
Before FAS 157, the banks could pretty much claim any value they wanted for the mortgages and derivatives they owned. Investors didn’t have a clue regarding the real value. Mark to Market changed that. Now the banks had to own up to the shenanigans. No longer could they claim a $500,000 mortgage was worth $500,000 if the borrower was late or in default. They had to value that mortgage at what it was really worth on the open market.
The problem is that no one knows what anything is really worth until someone buys it and establishes a price. And there was (and still isn’t for the most part) anyone who wanted to buy a bad mortgage for anywhere near face value. So the banks didn’t like FAS 157, because they had to write down the value of their crappy assets to reflect the real world.
And when they wrote down these assets, it increased their leverage ratios. So when the government required them to have $1 in assets for every $12 they had loaned out (the standard until Bush changed it in 2004) suddenly they were under-capitalized.
They were caught between a rock and a hard place. They either needed to raise more capital, or call in their loans. They really had no choice – they couldn’t call in their loans because the loans were made to other banks (who counted them as assets and had borrowed against them) so most banks couldn’t maintain their required capital ratio of 33-1 (which is what the Bush administration changed it to – read about that part of this mess here.) so they had to raise capital.
That’s fine and dandy, but who would give an inadequately capitalized bank more money? Pretty much no one. Which is also as it should be.
So here’s what should have happened. The banks who made the crappy loans, the banks who bought those crappy loans from the original bank, the rating agencies who rated the crappy mortgages and derivatives as investment grade, the insurers (mainly MBIA and AMBAC) who insured the crappy mortgages and derivatives against default, and those who purchased stock or bonds from any of these companies should all lose money. Most would go broke and disappear. But someone would buy those crappy assets at the bankruptcy sale (thus establishing a true market value for them) and use that true market value as an asset.
And it would truly be an asset at that point, the write-down having taken place when the original company went bankrupt. But our idiot government could let that happen. So we starting re-capitalizing banks (and others like GMAC and GE) with tax dollars. Which obviously hasn’t worked very well because they still want more money.
These write-downs will happen someday – the crappy mortgages are still crappy and won’t be paid back – so all we’re doing with the trillions in bailouts is delaying the inevitable. And causing those who saved their money and didn’t over-leverage to go broke in the process.
Changing or eliminating the mark to market accounting requirement doesn’t actually change a damn thing – it simply allows the financial institutions to sweep their problems under a rug. The problems are still there, but everyone is allowed to pretend that they’ve gone away by claiming they’re still worth just as much as they were two years ago.
Idiots.
gk
Sphere: Related Content“Helicopter Ben” Benanke gave a speech yesterday (Jan 13th, 2009) at the London School of Economics. You can read the whole text of it here if you’d like.
I’d like to comment on part of the speech near the end, where Bernanke says this: Public purchases of troubled assets are one possibility. Another is to provide asset guarantees, under which the government would agree to absorb, presumably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks. Yet another approach would be to set up and capitalize so-called bad banks, which would purchase assets from financial institutions in exchange for cash and equity in the bad bank. These methods are similar from an economic perspective, though they would have somewhat different operational and accounting implications.
My main comment is in regards to his “so-called bad banks” statement. Let’s say we do that. The IMF (or UN or US Fed some other government organization) sets up a bank to purchase “assets” (pronounce “assets” as “toxic crap”) from banks in trouble. Some questions immediately come to mind:
I’m guessing that there are no answers for these questions – or at least Helicopter Ben would not truthfully answer this questions – which is the same thing.
Something else comes to mind. Maybe Ben is just trying to find a big rug. A big enough rug to sweep the whole mess under. A mess that he inherited and is making worse by his idiotic policies. Bush and Greenspan started the process, but Bernanke is considered to be a student of the Great Depression. And he’s dragging us closer and closer to a repeat performance – a so called “Greater Depression.”
How do people this ignorant get into positions of power? Oh yeah, we elected Bush. So as Buffett (Jimmy, not Warren) would say – “It’s our own damn fault!”
gk
Sphere: Related ContentThis needs to be read by more people, so more people can contact congress to let them know what they think of it. I’ll post the reasons for my own thoughts later (I think it sucks!) but for now, here’s the text of the proposed plan according to the NY TImes. Please read it and let congress know what you think!
gk
LEGISLATIVE PROPOSAL FOR TREASURY AUTHORITY
TO PURCHASE MORTGAGE-RELATED ASSETS
Section 1. Short Title.
This Act may be cited as ____________________.
Sec. 2. Purchases of Mortgage-Related Assets.
(a) Authority to Purchase.–The Secretary is authorized to purchase, and to make and fund commitments to purchase, on such terms and conditions as determined by the Secretary, mortgage-related assets from any financial institution having its headquarters in the United States.
(b) Necessary Actions.–The Secretary is authorized to take such actions as the Secretary deems necessary to carry out the authorities in this Act, including, without limitation:
(1) appointing such employees as may be required to carry out the authorities in this Act and defining their duties;
(2) entering into contracts, including contracts for services authorized by section 3109 of title 5, United States Code, without regard to any other provision of law regarding public contracts;
(3) designating financial institutions as financial agents of the Government, and they shall perform all such reasonable duties related to this Act as financial agents of the Government as may be required of them;
(4) establishing vehicles that are authorized, subject to supervision by the Secretary, to purchase mortgage-related assets and issue obligations; and
(5) issuing such regulations and other guidance as may be necessary or appropriate to define terms or carry out the authorities of this Act.
Sec. 3. Considerations.
In exercising the authorities granted in this Act, the Secretary shall take into consideration means for–
(1) providing stability or preventing disruption to the financial markets or banking system; and
(2) protecting the taxpayer.
Sec. 4. Reports to Congress.
Within three months of the first exercise of the authority granted in section 2(a), and semiannually thereafter, the Secretary shall report to the Committees on the Budget, Financial Services, and Ways and Means of the House of Representatives and the Committees on the Budget, Finance, and Banking, Housing, and Urban Affairs of the Senate with respect to the authorities exercised under this Act and the considerations required by section 3.
Sec. 5. Rights; Management; Sale of Mortgage-Related Assets.
(a) Exercise of Rights.–The Secretary may, at any time, exercise any rights received in connection with mortgage-related assets purchased under this Act.
(b) Management of Mortgage-Related Assets.–The Secretary shall have authority to manage mortgage-related assets purchased under this Act, including revenues and portfolio risks therefrom.
(c) Sale of Mortgage-Related Assets.–The Secretary may, at any time, upon terms and conditions and at prices determined by the Secretary, sell, or enter into securities loans, repurchase transactions or other financial transactions in regard to, any mortgage-related asset purchased under this Act.
(d) Application of Sunset to Mortgage-Related Assets.–The authority of the Secretary to hold any mortgage-related asset purchased under this Act before the termination date in section 9, or to purchase or fund the purchase of a mortgage-related asset under a commitment entered into before the termination date in section 9, is not subject to the provisions of section 9.
Sec. 6. Maximum Amount of Authorized Purchases.
The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time
Sec. 7. Funding.
For the purpose of the authorities granted in this Act, and for the costs of administering those authorities, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code, and the purposes for which securities may be issued under chapter 31 of title 31, United States Code, are extended to include actions authorized by this Act, including the payment of administrative expenses. Any funds expended for actions authorized by this Act, including the payment of administrative expenses, shall be deemed appropriated at the time of such expenditure.
Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.
Sec. 9. Termination of Authority.
The authorities under this Act, with the exception of authorities granted in sections 2(b)(5), 5 and 7, shall terminate two years from the date of enactment of this Act.
Sec. 10. Increase in Statutory Limit on the Public Debt.
Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.
Sec. 11. Credit Reform.
The costs of purchases of mortgage-related assets made under section 2(a) of this Act shall be determined as provided under the Federal Credit Reform Act of 1990, as applicable.
Sec. 12. Definitions.
For purposes of this section, the following definitions shall apply:
(1) Mortgage-Related Assets.–The term “mortgage-related assets” means residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before September 17, 2008.
(2) Secretary.–The term “Secretary” means the Secretary of the Treasury.
(3) United States.–The term “United States” means the States, territories, and possessions of the United States and the District of Columbia.
Sphere: Related Content
