June 23, 2024

Archives for January 2009

Newspapers Reveal Secrets To Wealth Accumulation

Today’s horrendous economic news on Singapore would seem to suggest that now is a poor time to be considering the purchase of foreign stocks.

Singapore GDP Posts Biggest Fall On Record

SINGAPORE — Singapore plunged deeper into recession in the fourth quarter as gross domestic product marked its biggest quarterly decline on record, said the government, which lowered its projection for 2009.

The darker outlook for the small, trade-dependent economy — considered to be a bellwether for the rest of the region — likely means the government will step up spending to offset a slowdown in manufacturing and a rapid cooling in the construction and services sectors.

Singapore’s economy contracted at a seasonally adjusted, annualized pace of 12.5% in the quarter, accelerating from a 5.4% decline in the third quarter, according to the Ministry of Trade and Industry’s estimate. It was the biggest contraction since the government began publishing seasonally adjusted data in 1976.

Citigroup economist Kit Wei Zheng is more pessimistic. He forecasts GDP will contract 2.8% this year.  “If we are correct, 2009 will mark the most severe recession in Singapore’s history,” he said.

Now let’s consider the advice of Warren Buffet  – “Be greedy when other are fearful and be fearful when others are greedy”.  The best advice is also the toughest to follow and none of us “feel good” buying on bad news.   For those who do invest based on the feel good factor, consider the following super bullish article from February 12, 2007.

Singapore: The Safest Route to Asia’s Riches

AS A RULE, SMALL TROPICAL ISLANDS HAVE AN OBLIGATION to the rest of the world to preserve themselves as sun-filled, rum-soaked, licentious getaways. But Singapore doesn’t do laid-back very well. Nearly 4,200 flights take off and land each week at its bustling airport, and its port is the world’s busiest. At 4.41 million, the number of mobile-phone users exceeds its adult population, and sometimes they all seem to be talking at once. Even Singapore’s national pastimes — eating and shopping — are pursued with a ferocity that might make a New Yorker blush.

When the purchase of stocks is the easy decision, the reason it’s easy is because bullish news is usually a phenomenon associated with tops, not bottoms.

Courtesy of Stockcharts.com

Emotions aside, where would you rather buy?

Debate On Loan Modification Continues: Free Enterprise Vs Free Government

The debate seems to intensify on a daily basis regarding the merits and legitimacy of for profit loan modification companies.  Officials of HUD, Hope and the banking industry continue their criticisms of the loan modification industry by noting that they offer for free the service that many borrowers are now paying for.

Consider some recent comments from both sides debating the merits of for profit loan modification.  Daily Herald

“You don’t need to go out and hire someone to help you,” said Michael Gross, managing director of mortgage servicing for Bank of America. “It is very, at times, frustrating to find a homeowner who has paid a for-profit company $3,000 to $5,000 in an upfront fee, when they could have gotten the same or better assistance free.”

“Nonprofits are not as efficient as the regular market,” said Moose Scheib, head of Michigan-based LoanMod.com, a loan modification firm that charges homeowners $1,500 to help renegotiate their mortgages. “I think the difference is probably more attention you get from us.”

“Once a borrower pays an unscrupulous loss-mitigation consultant and time is wasted, the damage has been done,” said Sarah Bloom Raskin, Maryland’s commissioner of financial regulation. “While we may be able to recover fees, we can never recover the lost time — time that the borrower could have used to work out a bona fide loan modification.”

“We are extremely concerned about the huge proliferation of for-profit companies making a buck on these people,” said Laurie Maggiano, senior policy adviser at HUD’s Office of Housing.

Clayton Sampson, founder of U.S. Housing Assist of Nevada, which launched in July, said nonprofits provide a great service, but added, “We have a lot of clients that need us.”

Sampson said he spent five years at a mortgage brokerage and his contacts have enabled him to customize workout plans for a homeowner’s lender. His firm charges a minimum of $2,500, but he said he would return the money if he was unable to help the homeowner.

Some developments that I foresee in 2009 include the following:

As the number of mortgage delinquencies and foreclosures increase, the loan modification business will receive more scrutiny from state and federal regulators.  I would expect that many more states will introduce tough licensing and bonding requirements for any firm engaging in the loan mod business.

Companies involved in the loan mod business may be required by regulatory decree to provide full disclosure to a potential customer that loan mod services are offered for free by various agencies.

If the number of complaints about loan mod companies grows dramatically, strict federal regulations may be passed.  For example, it is possible that HUD would  require that banks and loan service providers deal only with third parties approved by HUD on any loan modification.

The loan mod companies that remain in business will have to give potential customers a compelling reason to deal with them, especially as consumers become aware of the free loan mod services available.

GMAC Sets Example For TARP Borrowers

This past week the Treasury used $5 billion of funds from the Troubled Asset Relief Program (TARP) to purchase senior preferred equity in GMAC, the financing arm of General Motors.  GMAC reacted immediately to deploy the funds by lending to new car buyers with credit scores as low as 621.

According to GMAC President Bill Muir, “We got the TARP money yesterday and today we’re out in the marketplace offering it to consumers”.

AutoNation Chief Operating Officer Michael Maroone was equally elated noting that “We want to get out there and let people know that we can get them credit now.  There are plenty of people with credit scores in the 600’s who want to buy cars”.

GMAC was masterful in showing its appreciation for taxpayer dollars by its quick lending, thus avoiding the criticism the banks received for not lending out their TARP funds.  The Treasury will, no doubt, show its appreciation by supplying GMAC with billions more as soon as possible.

The Treasury should reflect on the following points before advancing GMAC additional funds.

  • A credit score in the low 600’s is sub prime.  You earn such a score by paying late and taking on obligations in excess of your ability to repay.  A low 600 credit score reflects a financially stressed consumer, typically with little in the way of savings and in need of constant new credit to pay off old credit.   Any consumer in this category should think twice about buying an expensive new car.  What they should really be doing is trying to save some money, pay down some debt and visit the used car lot.
  • The free market was not providing car loans to sub prime borrowers for the reasons listed above.  The TARP fund is essentially subsidizing car loans, at taxpayer expense, so that customers who couldn’t buy a new car based on their low income or credit score, can now do so.
  • AutoNation’s Mr Maroone is certainly correct when he states that there are plenty of sub prime borrowers eager for loans.  I doubt very much that Mr Maroone would personally lend money to a sub prime borrower because he knows better.  Lending taxpayer bailout money, on the other hand, is apparently a great idea.   Have we already forgotten the results of lending to sub prime mortgage borrowers?

If the government really wants to get the lending machines running again, they now know where to go especially since GMAC also makes mortgage loans through its ResCap subsidiary.  Here are the results of GMAC’s mortgage operation:

GMAC mortgage lender’s future in doubt

courtesy of Reuters

The Residential Capital LLC affiliate of automaker General Motors Corp (GM.N) may soon join the ranks of U.S. mortgage lenders that failed to navigate the deepening housing crisis.

The specter of a ResCap failure grew after parent GMAC LLC on Wednesday said “substantial doubt exists regarding ResCap’s ability to continue as a going concern” absent more support from GMAC, best known for lending to GM customers.

Christopher Wolfe, an analyst at Fitch Ratings, added: “If GMAC can’t provide support that ResCap needs, then bankruptcy is an option for ResCap.”

The lender has lost $9.1 billion in the last two years, and said that as of September 30 it wasn’t receiving interest payments on 21.8 percent of loans, up from 5 percent a year earlier.

“We can only describe credit quality trends as ugly,” CreditSights Inc analyst Richard Hofmann wrote.

“With equity down to $2.3 billion, clearly ResCap cannot survive much longer at its current quarterly loss rate,” he added. “Absent of any government support, we believe GMAC’s statement points toward the filing of ResCap for bankruptcy.”

Conclusion

Lending more money to those least able to repay guarantees financial losses on a colossal scale.   In the very short term, Government subsidized lending may give the economy a modest boost.  In the long term, such reckless lending will result in the insolvency of our nation.