December 2, 2022

Archives for February 2009

Jumbo Mortgage Rates Reflect Default Risk

Economic Crisis Impacts All Borrowers

Jumbo mortgages, typically loan amounts above $417,000, are defaulting at a rapid pace as the economic crisis affects borrowers at all income levels.  Bloomberg is reporting that jumbo mortgages, typically associated with higher income home owners, are becoming the next black hole for the banking and housing industry.

(Bloomberg) — Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. They got to that level within 10 months, almost twice as quickly as 2007 borrowers and the fastest rate since at least 1992, when LPS Applied Analytics began tracking the market.

The jump in late payments on jumbo loans, while still lower than the 20 percent delinquencies in subprime mortgages, signals that the borrowers with the most money and the best credit are hurting as the U.S. recession deepens in its second year. It also means these loans will be even more difficult to obtain and more expensive to pay off.

Most of the mortgage defaults do not appear to be caused by poor loan underwriting but rather by growing job losses among high income earners.  Due to the higher level of defaults, banks are becoming very reluctant to make jumbo mortgages for either purchases or refinances.  Since Fannie Mae and Freddie Mac  will not buy or insure jumbo loans, the lending bank must assume all the risk, keep the loan on their books and set aside additional reserves for possible losses.  All of these additional risk factors are reflected in the higher jumbo rates and strict loan underwriting guidelines.

The difference in interest rates between jumbo loans and prime conforming mortgages, or mortgages eligible for sale to Fannie Mae and Freddie Mac and available to borrowers with top credit scores, had been about 20 basis points “for several decades,” according to BanxQuote CEO Norbert Mehl.

The difference between the jumbo interest rate and the prime conforming rate was 181 basis points on Feb. 18, according to Bloomberg data.

“The only jumbo mortgages being written right now have strict qualification criteria both in the credit rating of the borrower and the down payment requirements and they are nearly impossible to qualify for,” Mehl said. “Some lenders quote a jumbo rate but they don’t make the loans.”

Conforming Loans At 7%?

An interesting point to note is that the size of a mortgage loan is not the determining factor for the interest rate.  Mortgage rates are based on many factors but the primary reason for higher rates on jumbo mortgages is the lack of a government agency guarantee.  This implies that without price support from the government, conforming mortgages would also be in the 7% range to reflect the actual risk of mortgage lending in today’s environment.

No Relief In Sight For Jumbo Mortgage Homeowners

Given the higher risk on jumbo mortgages due to the factors cited above, homeowners who have high rate jumbo mortgages are unable to refinance to lower rates.  In addition, the proposed mortgage plans meant to help distressed homeowners provides no assistance for jumbo mortgage homeowners.

Jumbo Mortgage, Jumbo Headache – Wall Street Journal

Washington is trying to ease the mortgage crisis by helping people refinance into home loans with better terms. But one group is being left on the sidelines: borrowers with loans too big to qualify for government backing.

President Barack Obama’s housing stability plan, announced last week, excludes such borrowers from nearly all of its mortgage-bailout provisions. Instead, it focuses on middle-income consumers who have lower, so-called conforming loans. Such loans top out at $417,000 in most parts of the country

Anything bigger is called a “jumbo” loan — and not only is the government ignoring this segment of the market, so are lenders, few of whom are originating or refinancing jumbo mortgages. The reason: Jumbo loans are too large to be guaranteed by a government-backed mortgage agency, such as Fannie Mae or Freddie Mac, meaning banks assume the risk if the loan goes bad. In the current lending environment, few banks want to take on any risk.

“Every single day I’m talking to people who have a jumbo loan, and I can’t do anything for them,” says Jeff Lazerson, a mortgage broker in Laguna Nigel, Calif.

While total mortgage originations fell by 17% in the fourth quarter from the previous quarter, jumbo originations fell by 42% to $11 billion, according to Inside Mortgage Finance. That’s the lowest volume ever tracked by the trade publication, which has figures dating to 1990.

ING Direct, a unit of ING Groep NV, is one of the few lenders that is boosting jumbo originations, though it requires a minimum 30% down payment in the most expensive housing markets, up from 20% earlier last year. For condos, ING requires a minimum 45% down payment.

“If you have been able to … save for a down payment, that to us speaks volumes about your character,” says Bill Higgins, ING’s chief lending officer.

Some banks, though, are quoting much-higher jumbo rates. Mortgage brokers say that indicates that lenders are reluctant to make jumbo loans and are setting their prices high to deter new deals. For example, Taylor, Bean & Whitaker Mortgage Corp. in Ocala, Fla., recently listed a 7% rate on a 30-year fixed-rate jumbo loan, but charges up-front origination fees equal to 5% of the loan.

Real-estate professionals say that the lack of financing for high-income consumers is putting extra pressure on affluent communities and causing prices to fall even further. “The million-dollar-and-above market is sinking like a lead weight,” Mr. Lazerson says.

Jumbo Mortgage Rates Reflect Lending Risks

Jumbo borrowers are discovering the meaning of “pricing for risk”.  Mortgage lending has become a very high risk business due to the continuing decline of real estate values, the high risk of default due to economic conditions, principal impairment and/or rate reductions from loan modifications, the risk of bankruptcy court cram downs and government supported foreclosure moratoriums.   Some may incorrectly believe they are entitled to a low rate mortgage regardless of risk factors.  This peculiar belief by both banks and borrowers helped to create the destructive credit crisis we are now experiencing.  The banks are doing what they need to do with jumbo mortgages- setting rates to properly reflect risk.

Defaults Everywhere – More Lending Is Not The Solution

Mortgage Defaults Only Part Of The Problem

Mention loan defaults and most people probably think of mortgages.  Home foreclosures due to mortgage defaults are getting the bulk of press coverage and the most attention in Washington.  The credit crisis, however, is not confined to home mortgages.  Lack of consumer demand, reduced incomes, lack of credit and an economy that seems to be getting weaker by the hour, is causing growing defaults in almost every category of lending.  Commercial real estate, credit cards, car loans, student loans, second mortgage loans, business loans and personal loans are all defaulting at shockingly high rates that the banking industry never expected.  The losses from these loan defaults are depleting bank capital, making banks less eager to lend to anyone.

The Wall Street Journal reports today that loan Defaults by Franchisees Soar As The Recession Deepens.

From ice-cream parlors to tanning salons, franchisees’ defaults on loans guaranteed by the U.S. Small Business Administration are piling up in amounts unseen in years. A list of loans at 500 franchises shows the number of defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007. Loan losses totaled $93.3 million, a 167% jump from $35 million just 12 months earlier.

The figures, a stark barometer of the downturn’s severity and scope, could give pause to banks that have loan money about where to lend next. Banks that make SBA-guaranteed loans say they use the annual list as guidance in assessing future commitments.

SBA-guaranteed loans are aimed at providing capital to small businesses that often can’t qualify for conventional credit. Those loans, made through commercial banks and other lenders, can total as much as $2 million for as long as 10 years. The SBA essentially insures a significant portion of the loan to encourage lending and small-business entrepreneurship. The recently passed stimulus package raises that guarantee amount to 90% from 75%.

The franchise brands where at least 11 franchisees defaulted on loans during the 2008 fiscal year were: Aamco Transmissions, Carvel Ice Cream, CiCi’s Pizza, Cold Stone Creamery, Curves for Women, Domino’s Pizza, Dream Dinners, Planet Beach tanning salons, Quiznos, Subway and Taco Del Mar.

Over time, some businesses have significantly better loan-performance rates than others. Among the worst-performing franchise brands, as measured by the percentage of SBA-guaranteed loans issued to franchisees over the past eight fiscal years that defaulted: Mr. Goodcents Subs & Pastas, 55%; Philly Connection sandwiches, 51%; Cottman Transmission, 49%; All Tune & Lube auto centers, 47%; Cornwell Quality Tools, 42%; and Carvel and Blimpie, both with 41% failure rates. Each had obtained at least 50 SBA-guaranteed loans during that period.

An interesting aspect of the default ratio is that certain franchise operations have a huge number of defaults.  With more than enough bad debts on the banking industry’s books, one would hope that lending would be severely curtailed or eliminated to franchise operators that are showing over a 40% default rate.  A default ratio of almost half of all borrowers  would seem to indicate a basic flaw in the franchise system’s business model.

The bottom line for franchise operations and probably every other business right now is that more loans may keep the doors open, but at the cost of burying the business owners in debt and making future profitability all that much more difficult.   What businesses really needs right now to survive and prosper is increased sales, something that seems very difficult to achieve under current economic conditions.

Economic Reality Crushing The American Dream

Reality Becoming Impossible To Ignore

There still appears to be a serene sense of calm by the American public.  They hope that the government will be able to solve our economic crisis in short order and restore to us the American dream of nonstop prosperity.

For those who have lost their jobs, the American dream is over.   For those who have seen their equity and real estate wealth disappear, there is growing uncertainty that asset values will recover any time soon.  Those who have ignored or denied reality will lose the most since they are the least prepared to deal with the extended economic nightmare we are facing.

Can the world’s governments put Humpty Dumpty back together again?  For further consideration of where we are and where we might be headed, the following links are well worth the read.

False Hope To Reality

It appears as though we are on the cusp of the next (of several) phases in this global economic crisis. The phase we just went through lasted roughly from August of 2008 through the first of this month.  This phase included identifying our problems, getting through the smoke and mirrors, initial false promises of recovery, and the beginning of finger pointing among the nations. It was a phase where the crisis was centered on the banking system and the financial economy. It was a phase where the majority (but not all) of the problems that we are facing was revealed.

It is time now for the next phase. This is the phase where the people of this country and of the entire world begin to awaken to the reality of our present situation, and that reality begins to find its way into world markets. This is the phase where the depth and breadth of the problems we face will be revealed. With this revelation, any remaining hopes of a quick recovery will be dashed on the rocks of reality, and people will begin to actually deal with the crisis. It is a phase where the crisis deepens, not just in the financial economy and the banking system, but in the real economy and in the very life blood of all economic activity – the currency markets.

It is during this phase where the character of the nation will begin to be tested.

Increasingly I am becoming aware of a growing group of people who are ready and willing to stand for the principles given to us by our Founding Fathers. These include our national sovereignty, the rights of the states, limited federal government, sound money, the ability of people to express their faith openly, and the very idea of freedom and liberty for “we the people.”  We are entering a time period where the DNA will be set for how this battle will be fought as new leaders arise within this group.  And how it is fought will be the determining factor of whether or not it will be successful. This is the history we are poised to begin making in the months ahead.

Debt Addiction Depression Destruction

America is so hopelessly addicted to credit that unlike the family that understands its addiction to heroin has destroyed everything they once had, Americans don’t even yet understand they are addicted.

Americans today view the on-going credit contraction much as heroin addicts view the disappearance of heroin—with anxiety, dread and fear. Americans are so addicted to the flow of credit from the Federal Reserve that they no longer believe they can live without it.

The unnatural availability of credit causes an unnatural expansion of economic activity. This “economic expansion” is later followed by an “economic contraction” wherein the debts introduced by the unnatural availability of credit cannot be repaid. The business cycle is as unnatural as the monetary system upon which it is based.

While it is now too late to undo what has been done, it is not too late to prepare for what is about to happen, a financial collapse that will exceed even the suffering caused by the Great Depression. History is now moving quickly and the end of this epoch is near.

Although the economic collapse is now in motion, there is still time to preserve what savings you still have. This is the end of a three hundred year system of credit and debt based on the debasement of money, a system now in its final stages. As the crisis moves forward, the time left in which to act will disappear. Soon, it will be too late to do so.

Today, two years later, although the collapse has started it has only just begun and cannot be stopped until it has fully run its course; and when it has done so, the global economic, social and political landscape will be dramatically altered. Wall Street was first, Main Street is next and, soon, everyone’s street will be affected.

The Long and the Short Of It

Several years ago – I don’t remember the date – I read an interesting comment: “The great boom that the world is enjoying, is in effect an enormous shorting of cash and going long on debt. Eventually, there will be a short squeeze on cash which will have to be covered by going long on cash and shorting debt.”

Deflation and Depression are actually a manifestation of a massive short squeeze on cash in an attempt to reduce a gross and unsustainable long position on debt.

The Deflation and Depression will continue until the long position on debt is reduced. The long position on debt in the world is so massive, that it will only be reduced by equally massive defaults.

Delaying the inevitable will only drag out the agony of Deflation and Depression for many years. Bringing all the massive liabilities of the banking system onto the Treasury’s indebtedness – while the corresponding assets are worth far, far less than these liabilities – will solve nothing.

Debt must be reduced by defaults and bankruptcies. There is no other solution!

There’s Only One Cure For A Depression

In contrast with a depression, a recession is relatively easy to bring to an end. The genesis of a recession is caused by excessive credit creation on the part of banks and the Fed.

However, the only cure for a depression is time. Not the abrogation of the free market. The seeds of a depression are sown when an extreme over supply of money and credit is allowed to continue for a protracted period of time.  When this phenomenon occurs, it produces a pernicious level of debt to pervade throughout the economy. All sectors of the economy become overleveraged and the need to reduce debt becomes paramount. The economy then experiences a severe contraction in GDP. In a depression, the pull back in borrowing is not caused by interest rate increases from the Fed but an inability of the economy to take on further debt. A depression can last for many years as consumers, banks and the government goes through the painfully long and arduous process of deleveraging.

Unfortunately, the kneejerk response on the part of the government and central bank is to stimulate the economy by spending money and reducing interest rates. That is the very same strategy used to combat a recession. However, their response fails to produce the desired result because it ignores the root cause of the problem—debt levels that have become unsustainable. It is not lower interest rates on borrowed money that the consumer seeks, it is less debt. If fact, all attempts by the government to mollify the depression tend to exacerbate the situation by force feeding more debt when it is least capable of being serviced.

What does history say about the effectiveness of government intervention? In Japan, the Nikkei Dow hit a high of 39,957.44 on December 29th 1989. Then it’s epic real estate and equity bubble burst. The composite average is trading below 7,600 today. Even after two decades of trying to turn their market around, their government’s barrage of stimulus plans and a near zero percent interest rate policy has done little to ameliorate the malaise.

A similar result was experienced by both Herbert Hoover and Franklin Delano Roosevelt after they deployed a plethora of government interventions to combat the Great Depression. After four years of Hoover’s wealth distribution and trade wars, and five years into the New Deal, they both failed to bring the economy out of the depression. Unemployment reached 20% in the years 1937-1938 and the percent change in GDP dropped 18.2%. It wasn’t until we fought and won WWll that the economy began to enjoy a sustainable recover.

Unfortunately, we see the same playbook being deployed today as was used under the Hoover/Roosevelt regime. President Obama is following George W. Bush with the signing last week of his own stimulus plan that totals $787 billion. And of course, this is probably the first in a series of spending plans that are intended to help bring the economy back on track.

The reason all the government’s efforts fail to solve the problem is clear. Time is needed to allow asset values to retreat back to historically normal levels that can be supported by the free market. And time is necessary for debt levels to be attenuated to a level where the can be serviced without having the Fed artificially forcing interest rates down. Any and all attempts to prevent deleveraging and to prop up asset prices will cause years to be added to the healing process. Additionally, all government efforts to “help” end up becoming a huge misallocation of resources as they take capital from the private sector and redistribute it in the most inefficient manner. What’s worse is that the increased government spending adds yet more public sector debt to an economy already reeling from a mountain of liabilities.

This buildup in debt levels was unprecedented in history, thanks to a Real Estate bubble that was used to bail out an equity bubble. It would stand to reason that if the government continues to try to manufacture a recovery, it could take more than a decade to return to prosperity. The question is, do we have the patience to let the free market function and endure several years of hardship, but then emerge as a much stronger country. Or will the compulsion to intervene just propel us yet deeper into the abyss.

Diogenes Would Have No Luck In Washington

Mission Impossible

Somewhere around 300 BC,  the Greek philosopher Diogenes walked the streets of Greece carrying a lamp in the daylight looking for an honest man.  History does not tell us whether or not Diogenes ever found his honest man, but he would have little luck were he to conduct the same exercise today in Washington.

If there is an honest man in Washington, the Obama administration cannot seem to find him.  Many recent candidates for high level positions have not paid taxes or have enriched themselves representing special interest groups.  Now we are told that the administration’s Chief of Staff, who became very wealthy shortly after entering politics, was the recipient of large undisclosed gifts.  Can someone who has received large gifts be independent when the donor later asks for special favors?

Rahm’s Rent Is Just The Tip Of Ethics Iceberg – New York Post

NEWS broke last week that Rahm Emanuel, now White House chief of staff, lived rent- free for years in the home of Rep. Rosa De Lauro (D-Conn.) – and failed to disclose the gift, as congressional ethics rules mandate. But this is only the tip of Emanuel’s previously undislosed ethics problems.

One issue is the work Emanuel tossed the way of De Lauro’s husband. But the bigger one goes back to Emanuel’s days on the board of now-bankrupt mortgage giant Freddie Mac.

Emanuel is a multimillionaire, but lived for the last five years for free in the tony Capitol Hill townhouse owned by De Lauro and her husband, Democratic pollster Stan Greenberg.

During that time, he also served as chairman of the Democratic Congressional Campaign Committee – which gave Greenberg huge polling contracts. It paid Greenberg’s firm $239,996 in 2006 and $317,775 in 2008. (Emanuel’s own campaign committee has also paid Greenberg more than $50,000 since 2004.)

To be fair, Greenberg had polling contracts with the DCCC before – but each new election cycle brings its own set of consultants. And Emanuel was certainly generous with his roommate.

Emanuel never declared the substantial gift of free rent on any of his financial-disclosure forms. He and De Lauro claim that it was just allowable “hospitality” between colleagues. Hospitality – for five years?

Some experts suggest that it was also taxable income: Over five years, the free rent could easily add up to more than $100,000.

Nor is this all that seems to have been missed in the Obama team’s vetting process. Consider: Emanuel served on the Freddie Mac board of directors during the time that the government-backed lender lied about its earnings, a leading contributor to the current economic meltdown.

The Federal Housing Enterprise Oversight Agency later singled out the Freddie Mac board as contributing to the fraud in 2000 and 2001 for “failing in its duty to follow up on matters brought to its attention.” In other words, board members ignored the red flags waving in their faces.

The SEC later fined Freddie $50 million for its deliberate fraud in 2000, 2001 and 2002.

Meanwhile, Emanuel was paid more than $260,000 for his Freddie “service.” Plus, after he resigned from the board to run for Congress in 2002, the troubled agency’s PAC gave his campaign $25,000 – its largest single gift to a House candidate.

That’s what friends are for, isn’t it?

Now Rahm Emanuel is in the White House helping President Obama dig out of the mess that Freddie Mac helped start.

The president’s chief of staff isn’t subject to Senate confirmation, but his ethics still matter. Is this the change that we can depend on?

The Humpty Dumpty Economy

The Big Black Hole Expands As Asset Values Collapse

Not even a month in office, Mr Obama has spent trillions on bailouts, stimulus plans, bank recapitalization and loan guarantees.  The markets have spoken with a resounding lack of confidence.  The asset destruction caused by recent world wide drops in stock and bond markets exceed and effectively negate the government’s desperate spending and borrowing efforts to put Humpty Dumpty back together again.  The continued destruction of consumer confidence is being caused by the whacko “plan a day solutions” coming out of Washington.

The markets are bigger than any government’s ability to artificially prop up all asset values, as the example of Japan demonstrates. The destructive self reinforcing cycle of deleveraging will continue until debt levels decline to the point where debtors have the cash flow to service debt payments.   The process of achieving equilibrium between income and debts will be especially difficult as massive job layoffs, salary freezes and pay reductions make debt repayment more difficult.  Expect a long and painful deleveraging.  The debt bubble that has been building for decades will not be quickly reversed.

Source : Barrons

Some Further Insight From The Web Worth A Read

Gold Climbs As Economic Catastrophe

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government’s interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Despite massive Government spending on rescue and stimulus, the American consumer clearly is becoming increasingly nervous, and the credit markets show few signs of recovery.

Not only have gold spot prices risen in the face of such selling pressure, but the price of physical gold is now some $20 to $40 per ounce above spot. This would indicate that investors are now so nervous that they are insisting on taking physical delivery.

Make no mistake, the economy will not turn around soon. When the recovery fails to materialize, look for governments around the world, and especially in the U.S., to send another massive wave of liquidity downriver. When it does, the value of nearly everything, except for gold , will diminish. Don’t be intimidated by the recent spike in gold. Buy now while you still can.

Collapsing Dreams

It almost seems amusing that we are still discussing the “coming” depression because of the fact that it is already arrived and settling in.  Really, what this entire new “era” is all about is watching our dreams deteriorate right before our eyes.

It seems that the majority of us are just not destined to move forward.  How many thousands of thousands of heads of households are looking at the devastation of their 401K portfolio?  It’s not easy to forget the glory days of the past as they lose their home and lose their savings.  I see eventually Hooverville shacks lining vacant lots.  Made up of cardboard and bits of old trash taken from local garbage.  This is our future?

Fiat World Mathematical Model

Day of Reckoning

The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.

Why Obama’s Home Owner Rescue Is Bound To Fail

Is there anything more heartless than foreclosing on a home and throwing a family out on the street?

How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?


Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.

It is almost certainly bound to fail.

Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.

And the impulse of any caring President must be to do something, almost anything to keep the dream alive.

But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?

Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.

A Powder Keg – Debt and Unemployment

When times are good, some people still struggle to keep up with their credit and debt payments. In a downturn, bad gets worse because for some, there’s less money to devote to debt.

Some Americans, Underwater but Ineligible, Are Riled Up

President Barack Obama’s new foreclosure-prevention plan is already sparking outrage from some Americans who won’t qualify for federal aid — and from those who resent having to foot the bill for those who do.

“What do you expect from the government?” said David Newton, 46 years old, proprietor of DJN Management LLC, which owns 232 rental apartments in the Atlanta area. “The government isn’t out there to help people who obey the law and follow the rules.”

Mr. Obama “told everybody, ‘I’m going to spread wealth around,’ and that’s what he’s going to do,” Mr. Newton said.

The housing measures have also upset a range of homeowners who say they shouldn’t have to subsidize those who bought more than they could afford. “We’ve lived a conservative life,” said Tim O’Brien, 61, a retired CPA from Los Angeles. “We’ve paid our house off and saved our money, so you kind of find yourself on this issue not agreeing with everything.”

Brenda Gilchrist said she feels like she is being punished twice, first by watching foreclosures depress the value of her three-bedroom condominium in Santa Rosa, Calif., and now by subsidizing borrowers who bought more than they could afford.

Others are skeptical that the plan will work. “Twelve months down the road they’re going to say, ‘We’re going to need to throw another $50 billion at the problem,’ ” said Mr. Newton, the Atlanta property owner. “They should just foreclose on the properties, auction them off on the courthouse steps and see who buys them.”

Common Sense Eludes The Government

Financial Sense

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom.  What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Assessing the Mortgage Plan

The president’s new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.

In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.

Cash Starved Consumers Stop Betting

People are no longer willing to wager their last dollar on the hope of striking it rich.   The AP is reporting that Connecticut casinos reported almost a 10% decline in revenue for January 2009.

UNCASVILLE – Slot winnings at Connecticut’s two Indian casinos were down in January from a year ago, continuing to slide with the economy.

The winning at the Mohegan Sun declined 8.7 percent compared to January 2008, the casino’s poorest year-over-year performance since October.

The Mohegan Tribal Gaming Authority, which manages the casino, said slot revenues totaled $62.4 million. The tribe sent $15.6 million to the state under Connecticut’s gaming compact.

Foxwoods Resort Casino and MGM Grand at Foxwoods reported January slot winnings of $52.9 million, 7.3 percent less than Foxwoods reported the previous January. But the performance was better than in December 2008, when Foxwoods’ slots win was off 19.3 percent.

Some months ago Connecticut’s two major casinos also instituted job cuts and wage freezes.  You know things are bad when the casinos show huge drops in business.

The big question – are consumers suddenly very cash poor or are they being sensibly frugal?  Consumers know what they must do and are acting accordingly.  The State of Connecticut has yet to recognize reality and needs to take a lesson from its citizens.

You Cannot Multiple Wealth By Dividing It

Tax Foundation – Connecticut 3rd Highest Tax Burden in Nation

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2008, Connecticut taxpayers had to work until May 8 (the latest in the nation) to pay their total tax bill, 15 days later than the national Tax Freedom Day (April 23).

Connecticut’s State/Local Tax Burden Third-Highest in Nation
Connecticut, currently ranked 3rd highest, has risen 21 places over the last three decades and now holds a place among the nation’s highest-tax states.

Connecticut’s 2008 Business Tax Climate Ranks 38th
Connecticut ranks 38th in the Tax Foundation’s State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property.

Connecticut Levies Sales Tax above National Median; Gasoline and Cigarette Taxes among Nation’s Highest

Connecticut Residents Are Voting With Their Feet

The Connecticut State Data Center says figures from last year show the population growth in the state is very small.

The University of Connecticut-based center says Connecticut’s population grew by less than two-tenths of 1 percent last year.

There is a connection between high taxes, job losses and zero population growth.  Connecticut has become a very high cost state for both residents and employers.  If Connecticut really wants to increase jobs in the state,  attention should be focused on lowering taxes.

“A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned – this is the sum of good government.” Thomas Jefferson

Is There A Safe Place To Put Your Money?

Stanford Financial, with as much as $50 billion in customer assets,  was accused by the SEC of defrauding its investors.  Where does one put his money today, without worrying that it may not be there tomorrow?

Stanford Lured Clients With ‘No Worry’ Promise on Top of Rates

Feb. 19 (Bloomberg) — Stanford International Bank Ltd., accused by U.S. regulators of defrauding investors, relied on more than high interest payments to sell $8 billion of what it called certificates of deposit.

The Antigua bank, founded by Stanford Group Co. Chairman R. Allen Stanford, attracted clients with assurances that its CDs were as safe as U.S. government-insured accounts, if not safer, investors said.

“Security was the key aspect,” said Pedro, a 62-year-old software engineer in Mexico City who invested $150,000 in CDs issued by Stanford International.

“They told me that they had insurance. The broker told me not to worry and that the bank was safe,” said Pedro, who asked that his last name not be used because he didn’t want to anger bank officials.

Most U.S. certificates of deposit are insured for as much as $250,000 by the Federal Deposit Insurance Corp. CDs issued by Stanford International, a foreign company, aren’t FDIC-protected.

A Stanford International training manual obtained by Bloomberg instructed financial advisers to tell clients that “the FDIC provides relatively weak protection.”

The U.S. Securities and Exchange Commission on Feb. 17 said that Stanford, 58, ran a “massive, ongoing fraud” through his group of companies and lured investors with “improbable if not impossible” claims about investment returns. Stanford Group, Stanford International and Stanford Capital Management LLC were named in the SEC complaint.

Beware The Experts

By the time this financial crisis is resolved, the winners will be those who can keep what they have.   Any investor not doing his investment homework is severely at risk.   I have followed Ray Dalio, chief investment officer of Bridgewater Associates, for years.   Mr Dalio has been warning of an economic crisis due to excessive leverage since early 2007 and in 2008 produced returns of over 8% for his clients.  Definitely someone to pay attention to.  Mr. Dalio recently gave an interview to Barrons and it is well worth the read.

AN INTERVIEW WITH RAY DALIO: This pro sees a long and painful depression.

Dalio: Let’s call it a “D-process,” which is different than a recession, and the only reason that people really don’t understand this process is because it happens rarely. Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. Most people didn’t live through any of those experiences, and what they have gotten used to is the recession dynamic, and so they are quick to presume the recession dynamic. It is very clear to me that we are in a D-process.

Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

I can easily imagine at some point I’m going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won’t go down a whole lot, at first.

Definitely worth considering is that Mr. Dalio’s preferred choice of investments at this point are gold and treasury bonds.

Notable Links

Straight Talking Common Sense

Obama Must Destroy Detroit, So America Can Live – Evan Newmark

Dear President Obama,

Who said life was fair?

You’re in office less than a month and the markets already hate your presidency, your Treasury secretary and your economic stimulus plan.

It’s time for you to destroy Detroit, so that the rest of America can live.

Mr. President, it’s time for the bankruptcy of GM and Chrysler.

Now that may seem harsh. But you really have no choice. Look around you. Everybody in America has his hand out — California and the movie industry, New York and Wall Street, homebuilders and the millions of mortgage deadbeats.

You need to send a message to all America — and fast. No more Mr. Nice Guy and no more money. Reinventing America doesn’t mean bailing everyone out. It means stopping those things that just don’t work anymore.

But such a bold gamble could mark a turning point early in your term.

It would get Republicans behind you. It would get Wall Street and America’s trading partners behind you. And it would get even more Americans behind you. Americans know when something makes sense.

Remember Ronald Reagan and the air traffic controllers’ strike of 1981?

That’s how he reinvented America. Now, it’s your turn.

Some good thoughts – worth a full reading.  Only problem is it won’t happen because there is no common sense in Washington and Mr. Obama is not Ronald Reagan.

The Burning Platform

The $787 billion 1,074 page stimulus bill has been passed. President Obama has signed it. The market immediately dropped 500 points. It will have no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be demanded by the Democratic led Congress because speed and the appearance of action are how politicians get reelected. When I see Senator Charles Schumer of New York make a speech on the floor of the Senate saying, “And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don’t care”, I want to throttle him.Only a U.S. Senator would consider $100 billion a little tiny pork. His words prove that our leaders are so corrupted and disconnected from real Americans that they are running this country for their own self interest and the interests of their corporate money backers. Abraham Lincoln, an honest and wise man by most accounts, knew that calling pork spending stimulus doesn’t make it stimulus.

The definition of unsustainable is, not able to be maintained or supported in the future. To me, a picture is worth a thousand words.

Source: Robert Shiller

As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

Instead of allowing the housing market to correct to its fair value, President Obama and Barney Frank will attempt to “mitigate” foreclosures. Mr. Frank has big plans for your tax dollars, “We may need more than $50 billion for foreclosure [mitigation]”. What this means is that you will be making your monthly mortgage payment and in addition you will be making a $100 payment per month for a deadbeat who bought more house than they could afford, is still watching a 52 inch HDTV, still eating in their perfect kitchens with granite countertops and stainless steel appliances. Barney thinks he can reverse the law of supply and demand by throwing your money at the problem. He will succeed in wasting billions of tax dollars and home prices will still fall 20% to 30%. Unsustainably high home prices can not be sustained. I would normally say that even a 3rd grader could understand this concept. But, instead I’ll say that even a U.S. Congressman should understand this.

Another common sense analysis by James Quinn well worth the entire read.  Markets are larger than any government and ultimately cannot be manipulated by government over the long term.  The United States Congress will waste trillions trying to support a housing market that will ultimately stabilize based on free market factors – not government manipulation and price supports.  If the government had the power to control the housing market, they would not have let it crash in the first place.

Greenspan Backs Bank Nationalization

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

The one man who is probably the most responsible for creating the debt bomb explosion and global collapse has more advice for us.  Mr Greenspan, enjoy life with your $150,000 per speech fees along with your fine government pension.   But PLEASE stop giving us your damn advice.

The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy.

Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.

Before getting to those specifics, let’s revisit and recognize several truths:

• Home prices remain elevated;

• Artificially propping up prices is counter-productive;

• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;

Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;

• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.

What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;

More sound, common sense advice from Barry Ritholtz.  The government’s constant stream of ridiculous “new plans” for solving the housing crisis with their Rube Goldberg mechanisms is sure to postpone any recovery or bottom in housing for decades.

Sovereign Default –  Which Domino Falls First?

It’s no longer a question of if, but where.  Will the first sovereign default occur in Eastern Europe or Asia?  The debt levels of many countries are no longer sustainable due to collapsing economies, destruction of asset/collateral values and the inability to obtain more credit.  Of the $5 trillion in loans made to emerging market countries, almost 75% of the lending was done by Western European banks.

Many countries no longer have the economic ability to service their debts.  Debts that cannot be paid, by definition, will be defaulted on.  The larger question is will the first sovereign default trigger a domino of defaults, resulting in a catastrophic series of defaults worldwide?

Courtesy Wall Street Journal

Jet Age “Run On The Bank” In Antigua

Stanford Depositors Head To Antigua

Depositors from as far away as Colombia have begun arriving in the island nation of Antigua, seeking to withdraw their money from an offshore bank under investigation by U.S. state and federal authorities.

Reached by telephone on Monday afternoon, the chief financial officer at Stanford International Bank, James M. Davis, declined to comment when asked if investors are having difficulty obtaining redemptions. “I don’t have any comment, but I appreciate your call,” said Mr. Davis, the longtime top aide to Mr. Stanford.

A Stanford spokesman said because of the holiday he was unable to comment on the mutual-fund product.

Mr. Stanford said in a conference call to employees Tuesday there would be a temporary moratorium of two months on early redemptions for CDs, according to one Stanford financial adviser who has worked at the firm for about five years. Several depositors say they have been told the same thing.

In Antigua, anxious depositors have flown in from overseas to seek their money from Stanford International Bank, housed in an imposing neo-Georgian building beside Antigua’s international airport.

Just over three months ago, Mr. Stanford paid out $20 million in prize money to the winners of a single cricket match in Antigua. Mr. Stanford announced his inaugural tournament by descending on Lord’s Cricket Ground in London in what was described as a gold-plated helicopter. According to the Times of London, Mr. Stanford now plans to continue the tournament but in reduced form.

My take here is that many innocent people will sustain losses on their investments – See Stanford Financial Investigated. The SEC has been investigating Stanford since at least 2007.  After seeing the SEC in action with Bernard Madoff, investors should have zero confidence in the SEC’s ability to protect investors.