December 22, 2024

Home Ownership Turns Into Nightmare For Many

January 5, 2009 by 1 Comment

The government’s obsession with making everyone a homeowner, regardless of qualification, has resulted in misery for millions and trillions in financial losses.  Here’s another example of our failed social experiment.

Housing Push For Hispanics Spawns Wave of Foreclosures-WSJ

California Rep. Joe Baca has long pushed legislation he said would “open the doors to the American Dream” for first-time home buyers in his largely Hispanic district. For many of them, those doors have slammed shut, quickly and painfully.

Mortgage lenders flooded Mr. Baca’s San Bernardino, Calif., district with loans that often didn’t require down payments, solid credit ratings or documentation of employment. Now, many of the Hispanics who became homeowners find themselves mired in the national housing mess. Nearly 9,200 families in his district have lost their homes to foreclosure.

For years, immigrants to the U.S. have viewed buying a home as the ultimate benchmark of success. Between 2000 and 2007, as the Hispanic population increased, Hispanic homeownership grew even faster, increasing by 47%, to 6.1 million from 4.1 million, according to the U.S. Census Bureau. Over that same period, homeownership nationally grew by 8%. In 2005 alone, mortgages to Hispanics jumped by 29%, with expensive nonprime mortgages soaring 169%, according to the Federal Financial Institutions Examination Council.

An examination of that borrowing spree by The Wall Street Journal reveals that it wasn’t simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos.

The full article is well worth reading as it details how reckless lending and borrowing by numerous players, some corrupt and others simply stupid, helped to cause the greatest housing crash in history.

The country has now learned the hard way that home ownership is not the best option for many people.   See Long Term Housing Stability Based On Strong Borrowers.

If sound underwriting guidelines had not been abandoned over the past 10 years, the rate of home ownership would have been marginally lower and we never would have had a housing boom or a housing bust.  We would have all been better off without either.

Filed Under: Housing, Mortgages Tagged With: , ,

Stay Long SSO & DIA

January 4, 2009 by Leave a Comment

My initial assessment on December 3rd that the world had run of sellers has been a win so far – see Breathless Hysteria Overdone?

I am maintaining my long positions in SSO and DIA.

Although not quite as bullish as I was a month ago, my thoughts remain the same:

Markets discount bad news and this market has discounted everything except the end of civilization.  The talking head predictions of doom dominate the headlines.   Today is probably psychologically equivalent  to when oil was peaking at $150 and predictions of $300 dominated the headlines.

Without bothering to consider what the future will bring, at this point there is money to be made on the long side.   The market is extremely oversold.  Nothing goes in a straight line.  High quality Dow stocks have 5-7% dividends.  The Fed’s zero interest rate policy will force money into higher risk investments.  There is optimism building about a new Administration.

Returns on SSO and DIA from December 3, 2008 closing to January 2, 2009 closing.

It is interesting to note that the DIA, an ETF structured to provide investment results that, before expenses, match the price and yield of the Dow Jones Industrial Average returned 4.8% vs 5.1% for the DJIA.

The SSO, an ETF designed to return twice the performance of the S&P 500, returned 12.3% vs a gain of 7.0% on the S&P500.

Generally speaking, the ETF’s worked as they were theoretically supposed to.

Under my theory of selective contrarian investing, which has served me well, this may be the time to start moving into selective issues in the oil and gas industries and to start selling positions in long treasuries.   Given the vast over performance of treasuries last year and the dismal results in oil and gas, the odds favor this investment reallocation on a long term basis.

I will be buying DIG this week and adding to positions on weakness.

Let’s all have a prosperous New Year!

Charts courtesy of Yahoo Finance

Filed Under: Confidence, Stocks Tagged With: , , ,

The Risk Of Higher Mortgage Rates

January 4, 2009 by 4 Comments

Mortgage rates again ticked higher Friday as the treasury market continued its sell off.  Most of the good news may already be priced into the treasury market that mortgage rates are based on.

Reasons why mortgage rates may increase:

1.  As the Fed’s efforts to stabilize the credit markets succeed, frightened money is moving out on the risk curve, selling treasuries and purchasing much higher yields on corporate debt, preferred and common stock and municipals.  To the extent that the Fed is calming the credit markets, their actions are  counterproductive to lower mortgage rates.

2.  The Fed’s announcement in late November of their intention to buy half a trillion dollars of mortgage backed securities is what kicked the mortgage rate decline into high gear.  Most of this may now be fully discounted.  The actual announcement of the purchase schedule of the MBS’s did nothing to lower rates.

3.  Without the backing of conventional mortgages by the government, mortgage rates would be much higher.   This can be seen from pricing in the jumbo fixed rate mortgage market where rates are as much as 2 to 3% higher since Fannie and Freddie do not purchase or guarantee these mortgages.  Many banks effectively do not offer jumbo mortgages since there is no secondary market for them.

4.  Continued massive government support of the mortgage market will be necessary since investor demand for mortgage securities is likely to remain low due to collapsing housing prices and the risk of mortgage debt being discharged by bankruptcy and loan modifications. How can an investor properly price a mortgage security where the asset value underlying the security is declining and also face the risk that the principal investment may be impaired by court decree?

5.  The question of how much financial support the government is able to continue to provide to subsidize mortgage rates becomes important, especially as bailout demands escalate.  There are reports today that the State governors are seeking $1 trillion in bailout support as their deficits grow.  Unless the funding ability of the US Treasury is infinite, price support for mortgages may be reduced.  The Fed is now expected to absorb virtually all of the new mortgage backed securities this year.  Meanwhile, the debt of the US Government continues to explode, possibly beyond the point where the debt can ever be repaid.  This scenario implies higher rates on all government backed debt.

Many investors expect the eventual outcome of the Fed’s quantitative easing campaign to result in much higher inflation.  Some very astute investment managers, who had correctly predicted the financial meltdown now view the treasury market as overpriced.

  • Jeremy Grantham of GMO describes the 30 year treasury bond as “ridiculously” overpriced and effectively forecasting only a 1% annual rate for the next three decades.  Mr Grantham sees the scenario where there could easily be a large surge in inflation.
  • Bob Rodriquez who runs the FPA New Income Fund and was up on the year in 2008 also sees a “massive bubble in treasurys”.  He is not buying treasurys since “We will not lend long term money to a borrower that capriciously erodes its balance sheet.”
  • Peter Schiff of EuroPacific Capital also sees a substantial risk of massive inflation and sharply higher interest rates at some point.   Eventually foreign investors will refuse to buy US Government debt based on concerns about the US ability to repay its debts.

The above scenarios may not be imminent but they do become more probable as the US Government depletes the Treasury with endless bailouts, guarantees and borrowing.

Filed Under: Bailout, Interest Rates, Mortgages Tagged With: , ,

The Good News About Retail Sales

January 4, 2009 by Leave a Comment

Business Week reports bad news that is actually good news.


The Economy That Stole Christmas

It was just as bad as experts had feared—and maybe even worse. Retail sales for the Nov. 1-Dec. 24 season sagged between 5.5% and 8% from 2007, according to MasterCard (MA) SpendingPulse, which tracks credit-card, cash, and check outlays. Wintry weather on the weekend before Christmas added insult to injury. E-commerce suffered least, down only 2.3%, boosted by healthy sales at Amazon’s (AMZN), Apple’s (AAPL), and Wal-Mart’s (WMT) sites. Now, get set for the fallout: The International Council of Shopping Centers projects 73,000 stores will shut their doors in the next six months. On Dec. 28th, Parent Co. (KIDS), a baby products company, filed for Chapter 11.

Reasons Why The Bad News Is Good News: Consumers Become Frugal

The American consumer may finally be starting to spend less than he earns.

The easy credit that made many of us big spenders and big debtors is over.

The savings rate is starting to increase as less is spent and more is saved.

The realization that our financial security will not rest on eternally appreciating stock and home values.

The downside of excessive leverage and debt can be devastating.

The ridiculous fact that many of our purchases wind up in our closets unused.

The American consumer is adjusting to reality by spending less, being frugal and saving more for an uncertain future.  Now if only our government would follow our example, everything would work out fine.

Filed Under: Retail Tagged With:

Promises That Cannot Be Kept

January 4, 2009 by Leave a Comment

Did Bernard Madoff run the biggest Ponzi scheme of all time, or does this honor actually belong to the US Government?

Is Social Security A Ponzi Scheme?

In the aftermath of the Madoff implosion, quite a few people have pointed out the parallels between a Ponzi scheme and Social Security. Arnold Kling, whom I respect, has written:

I’ve been thinking that Madoff is a perfect analogy for the public sector. The government gives people money, which it expects to obtain by taking the money from people in the future. Even the Center on Budget Policy and Priorities, not known as a right-wing organization, sees the U.S. fiscal stance as unsustainable (pointer from Ezra Klein via Tyler Cowen)—in other words, a Ponzi scheme.

Other people have gone farther. Paul Mulshine of the New Jersey Star Ledger wrote a column entitled “The Ponzi scheme that Baby Boomers are waiting to cash in on.” And Jim Cramer has called Social Security the biggest Ponzi scheme in history.

The article above discussed only social security and not the other two financial time bombs – medicare and medicaid.  The net present value future cost of these three programs is estimated at $52 trillion, a burden that we have thrown on future generations who may be unwilling or unable to pay.

Wages have been stagnant for a decade.  Politicians are afraid to raise taxes and voters don’t want to pay so the easy solution is to borrow the money and add more debt, a self defeating cycle.   Promises and free lunches are great ways to get elected but governments only redistribute wealth.   Without the ability to tax the productive capacity of its country’s labor force, a government would have no fiscal capacity.

Debts do matter, of course, it’s just common sense.  Merely because a governmental entity has taken on the debt in the name of the taxpayer does not mean we can get a free lunch.  Ultimately we fool ourselves to believe that debt obligations are not a problem –  the world learned this in 2008.   The government can promise all of us everything and we can keep electing the fools who say what we want to hear, but ultimately someone has to pay for the promises or they will not be kept.

Filed Under: Bailout Tagged With: , ,

The Terminal Debt Trap

January 4, 2009 by Leave a Comment

US Could Be Facing Debt “Time Bomb” This Year

WASHINGTON – With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world’s appetite for financing U.S. government spending.

Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression.

“When you accumulate this amount of debt that we’re moving into, it’s not a given that our foreign friends are going to continue on the path they’ve been on,” said G. William Hoagland, a longtime Republican budget analyst who now serves as vice president for public policy at the health insurer Cigna. “There’s going to come a time when we can’t even pay the interest on the money we’ve borrowed. That’s default.”

The unanimous conclusion of the politicians and economists seems to be that we can borrow our way to prosperity via fiscal stimulus conducted with borrowed funds or printed money.

It is, of course, delusional to think that we can spend and borrow our way out of a financial crisis caused by over spending and over borrowing.   The reason we are in a financial crisis is due to excess leverage and credit at every level of our economy.  The attempt to subvert free market solutions by socializing every loss will only expand and prolong our economic mess.

Foolish politicians promising easy and painless solutions are pandering at best.   Quantitative easing, fiscal stimulus, bailouts and guarantees are no solution.   We have a crisis because we spent our future.  The solution of hard work and a lower standard of living will eventually be forced upon us.   Massive new spending and borrowing at this point only brings us closer to a terminal debt trap where we have neither the capacity to repay nor the ability to borrow.

Filed Under: Bailout, Federal Reserve Tagged With: , ,

Newspapers Reveal Secrets To Wealth Accumulation

January 3, 2009 by Leave a Comment

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?

Filed Under: Confidence, Stocks Tagged With: , ,

Debate On Loan Modification Continues: Free Enterprise Vs Free Government

January 1, 2009 by 2 Comments

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.

Filed Under: loan modification, Mortgages Tagged With: ,

GMAC Sets Example For TARP Borrowers

January 1, 2009 by 3 Comments

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.

Filed Under: Bailout, GM Tagged With: , , ,