Mortgaged Future

Banks Loss Reserves Can’t Keep Pace With Troubled Loans

June 2, 2009 by admin Leave a Comment

The latest FDIC Quarterly Banking Profile reveals that banks increased loan loss reserves by 11.5% and the ratio of reserves to total loans increased to 2.5%, an all time high. Despite the large loan loss reserves, the ratio of reserves to noncurrent loans fell for the 12th consecutive quarter to 66.5%, the lowest level in 17 years. This low reserve ratio, despite large increases in loan loss provisions indicates that the banking industry’s estimates of future delinquencies has consistently been too low.

Reserve Coverage Ratio

Even if the amount of noncurrent loans level off, the implications for future banking profits is a dismal picture. In order to establish an adequate coverage ratio for noncurrent loans, loan loss provisions will have to rise dramatically.

Prime Mortgage Defaults – Another Black Swan

The banking industry’s low estimate for loan delinquencies may be due in large part to the unexpectedly large increase in default rates seen on prime mortgages. Prime mortgages were never expected to have a default rate above the historical ratio of around 1% since these were mortgage loans made to the best customers. In the past, the only defaults typically seen on prime mortgages were due to unexpected job loss, a divorce, illness or other factors beyond the control of the borrower.

The rapid increase of delinquencies on prime mortgages has caught the banks off guard. The default rates on prime mortgages is now almost 5% (5 times normal), a true Black Swan event for the banking industry. In addition, the default rate could rise even higher since 25% of prime mortgage holders now have negative equity, a situation which enhances the odds of delinquency and defaults.

Based on the rapidly deteriorating numbers for prime mortgages, loan loss reserves need to be increased significantly. The myth that most of the smaller community banks are not exposed to the risks that afflicted the bigger banks is only partially true. Banks of all sizes have significant exposure to the mortgage market and the growing number of defaults by prime mortgage borrowers will cause significantly higher than expected losses at all banks.

Prime Mortgage Delinquencies

Courtesy of: moremortgagemeltdown.com

Problem Banks, Failed Banks Increasing Rapidly

The 36 failed banks we have seen this year has expanded dramatically from 25 for all of 2008, but has remained very low considering the extent of the losses in the banking sector. Many very weak banks have apparently been allowed to stay open under the misguided hope that mortgage defaults would decrease as the economy improved. The number of banks classified by the FDIC as “Problem Banks” has risen to 305 from 90 last year. The latest surge in mortgage defaults due to job losses, declines in real estate prices and negative income trends will have a devastating effect on an already weakened banking industry.

The FDIC’s line of credit with the Treasury was recently increased to $100 billion from $30 billion. The FDIC can borrow up to $500 billion with Federal Reserve and Treasury Department approval. Expect to see the FDIC draw down significantly on their expanded line of credit with the Treasury as the FDIC is forced to close increasing numbers of insolvent banking institutions.

Filed Under: Bailout, Banking Industry, FDIC, Housing, Mortgages, Problem banks Tagged With: failed banks, FDIC expanded line of credit, prime mortgage defaults skyrocket

Hyperinflation Worries – The Next Black Swan Or A Contrary Indicator?

June 1, 2009 by admin 2 Comments

Inflation Concerns Increase

There has been much speculation lately about the end results of the US Government’s massive deficit spending. Many analysts are predicting that the end result will be hyperinflation as the Fed is forced to monetize debt that the US Government is unable to borrow in the credit markets. These concerns have already turned to reality as rates on the 10 year Government have increased sharply from approximately 2% to 3.5% since the start of the year

Always quick to response with a new product to meet investor demand, Wall Street has come up with a product to protect investors from the risk of hyperinflation.

Wall Street Journal – A hedge fund firm that reaped huge rewards betting against the market last year is about to open a fund premised on another wager: that the massive stimulus efforts of global governments will lead to hyperinflation.

The firm, Universa Investments L.P., is known for its ties to gloomy investor Nassim Nicholas Taleb, author of the 2007 bestseller “The Black Swan,” which describes the impact of extreme events on the world and financial markets.

Funds run by Universa, which is managed and owned by Mr. Taleb’s long-time collaborator Mark Spitznagel, last year gained more than 100% thanks to its bearish bets.

Unlike last year’s sudden market implosion, inflation isn’t an unimaginable event that few currently anticipate. In fact, many fear inflation right now amid government efforts to goose the economy. Universa’s bet, however, is that inflation will reach levels few expect.

The fund will also bet against Treasury bonds, which tend to weaken in inflationary environments. Last week, Treasury yields shot to their highest level since November as prices fell on inflation concerns. Oil topped $66 a barrel. Gold is creeping nearing $1,000 an ounce.

Also, some investors are worried not about inflation but about deflation and its pernicious effects were the economy to remain stalled.

David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm, believes inflation won’t take hold until consumer spending rebounds, which he thinks could take years.

Mr. Taleb said any deflation would be matched by an aggressive move by governments to stimulate their economies, leading inevitably to an uncontrollable surge in prices.

Deflation Vs. Inflation

The emergence of Wall Street products to protect against hyperinflation may, in fact, be a contrary indicator. Many times in the past, eager buyers have rushed into investments pushed by Wall Street as a trend was nearing its peak.

Washington’s massive deficit spending and the lack of fiscal discipline it represents will no doubt end badly. At this point, however, stimulus spending, bailouts, guarantees and deficits have done nothing to reverse the decline in real estate values, corporate profits, consumer spending and consumer incomes. Events of the recent past have shown how quickly the country’s finances can change, but deflation rather than inflation seems to be today’s enemy. The rampant price cutting and decreasing incomes that we observe today are not the classic ingredients of inflation.

The event that may mark the tipping point into hyperinflation is how the Federal Government responds to the deficit crisis facing virtually every State in the country. Discussing the perils of a federal bailout of California, Peter Schiff recently noted that :

However, if Obama comes to the rescue, none of the needed cuts will be made. Instead, California will continue to operate its bloated bureaucracy and will be in constant need of more bailouts. In other words, if Schwarzenegger gets his bailout, look for him to utter his famous line – “I’ll be back.”

But it’s not just Schwarzenegger who will be back, but governors from all the other states as well. After all, if the Federal government bails out California, by what right can they deny similar aid to other states? The bailout will send a clear message that states do not need to cut spending.

The need to make good on state and federal obligations will further depress the appeal of all U.S. dollar-denominated debt. As a result, as real buyers flee the market, the Fed will have to run its printing presses even faster to pick up the slack. This will set into motion a self-perpetuating spiral of money printing and Treasury sales with a predictable result: hyperinflation.

Should we reach the point where the Federal Government winds up bailing out virtually every State in the United States, we will have reached the point of total financial absurdity. As I have previously pointed out, “The United States is not an abstract construction with a separate economic destiny, immune to events in the rest of the nation. The United States are 50 States joined as one. If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam is obvious.”

If the Federal Government adds the States to the bailout list, Universa’s hyperinflation fund will have more customers than it can handle.

Filed Under: Economy, Government spending, Hyperinflation, printing money Tagged With: all 50 states bankrupt, hyperinflation's tipping point

Financial Sense Eludes Most Americans

May 29, 2009 by admin 2 Comments

Financial Quiz – Which Option Is Better?

Savings - A Lost American Virtue

1. Spend $2.50 today and receive $92 back over the next four years.

2. Spend 25 cents 10 times over the next four years plus spend $92, at easy payment terms of $1.91 over the next four years.

It seems that most Americans are making the idiotic choice of selecting option #2, according to the WSJ.

Consumers Spurn Fluorescent and LED Models That Can Save Money Over Time

WSJ- The spiral-shaped “compact fluorescent,” around for years, produces the same amount of light as its incandescent ancestor with one-quarter the energy. It lasts for years, provides light in an array of hues, and, by lowering electricity bills, pays for itself in about seven months.

Studies say improving the efficiency of the light bulb is among the easiest ways to start meaningfully curbing fossil-fuel consumption. Lighting accounts for some 20% of residential electricity use in the U.S. — a lot to fritter away as wasted heat. Yet about 80% of all bulbs sold to U.S. consumers are incandescents, which often cost less than 25 cents apiece, about one-tenth the price of a compact fluorescent.

“I buy the cheap ones,” Dallas resident Betty Ferrell said the other day as she reached for a pack of incandescents at a local Wal-Mart store. “They may not be cheap in the long run,” she said, “but they’re cheap for what I have in my purse now.”

In fact, Americans have been so reluctant to buy the new bulbs that the federal government is about to force their hand. A recent law will, in effect, ban incandescent bulbs for most uses by 2014.

But sales of compact fluorescents have dropped in the current recession, to 21% of total U.S. consumer light-bulb sales in 2008 from 23% in 2007, according to the DOE.

Compact Fluorescent Light Bulb (CFL) Math

Calculating energy cost savings
We need two things to calculate how much it costs to light a lightbulb over 10,000 hours: total kWh of electricity used and cost per kWh.

For this exercise, we’ll use $.12/kWh:

CFL: 230 x $.12 = $27.60
incandescent: 1,000 x $.12 = $120.00

Now that we have the cost to light both bulbs for 10,000 hours, subtracting the two gives us a cost savings of $92.40 by using a 23 watt CFL instead of a 100 watt incandescent bulb.

Please note: The purchase price of the bulb was not factored into energy cost savings. The typical 100 watt incandescent bulb will last 1,000 hours, therefore, 10 bulbs would have to be purchased to last as long as one 10,000 hour CFL. However, since a single CFL is about the same price as replacing 10 incandescent bulbs, we chose not to factor price into energy cost savings.

Lack of Financial Sense or Flat Broke?

So why would anyone chose option 2? The savings of $92 over four years was based on replacing only one light bulb. A $10 investment today for four light bulbs would effectively yield a return of $368 over the next four years. It’s hard to imagine any other investment producing this type of return.

If the average American can’t come up with $2.50, the economy is probably in worse shape than anyone imagines.

The US is spending billions of dollars each month on imported oil, yet the Government can’t come up with a plan to utilize existing technology that would massively reduce foreign oil imports? Here’s two easy options – a) impose a tax on incandescent light bulbs that would effectively raise the price above that of a fluorescent bulb, b) instead of sending out another round of “rebate” checks, mail each American 4 florescent bulbs.

On a positive note, the incandescent bulb will be gone in 2014.

Filed Under: Have Nots, Saving Money Tagged With: CFL vs incandescent bulbs

Mortgage Rates Skyrocket As Fed’s Rate Manipulation Fails

May 28, 2009 by admin Leave a Comment

Markets Will Ultimately Determine Long Term Interest Rates

Treasuries continued their sell off today as the yield on the 10 year benchmark bond climbed to 3.72%, a stunning increase from the recent lows just over 2% in late 2008. Investors have become concerned that record amount of debt sales and quantitative easing by the Treasury that may lead to inflation.

10 Year Treasury

Courtesy Yahoo Finance

Further contributing to the huge bond selloff today were comments by Marc Faber that the US might enter “hyperinflation” based on the Fed’s super low rate policy, huge increases in government debt and massive liquidity injections into the banking system.

Mortgage Rates Explode Upward

The yield on the 10 year bond has been climbing since early January, gradually putting pressure on mortgage rates. Until recently mortgage rates did not jump dramatically since the spread between the 30 year fixed rate mortgage and the 10 year treasury narrowed.

Some analysts have speculated that the Fed was able to manipulate mortgage rates lower over the short term through purchases of mortgage backed securities. Today, the Fed discovered the limits of establishing artificial price points. The Fed may be able to manipulate rates in the short term, but the markets will ultimately set the price of money based on the reality of US financial conditions.

Bloomberg – The difference between yields on Fannie Mae’s current- coupon 30-year fixed-rate mortgage bonds and 10-year Treasuries had been narrowing. It was at 0.92 percentage point today, down from as high as 2.38 percentage points in March 2008, according to Bloomberg data. The Fed’s purchases drove the spread to 0.70 percentage point, the lowest since 1992, on May 22. The yield gap jumped from 0.71 percentage point yesterday.

“Many investors who felt MBS spreads were too tight thought it might be time to take chips off the table,” Credit Suisse’s Swaminathan said. “This is something we anticipated would build up” as many mortgage-bond holders who were previously wary of lightening their positions on the view the Fed buying would continue to support the market finally decided to act.

“The last two months have been quite abnormal” as mortgage rates generally held in a range between 4.5 percent and 4.75 percent even while Treasury yields began climbing, he said.

Today, the “abnormal” pricing situation was shredded. Major banks sent out multiple mortgage rate increase notices as the day progressed. Here’s an example of how mortgage rates have increased with one large bank over the past couple of days.

Mortgage Rates In The 4% Range Disappear

On Thursday, May 21st, a prime mortgage borrower could have obtained a 30 year fixed rate of 4.75% with a half point fee. On May 27, the equivalent rate for a prime borrower is 5.375% with a half point fee.

To obtain the 4.75% rate today, a borrower would need to pay approximately $5,400 on a $250,000 loan to buy the 4.75% rate. The monthly payment difference on a $250,000 mortgage loan at 5.375% vs. 4.75% amounts to $96 or $1152 per year.

Are 6% 30 Year Fixed Rate Mortgages Coming Soon?

So much for Mr. Bernanke’s grand experiment of buying mortgage debt with printed money. If the spread between mortgage bonds and the 10 year treasury widen to the spread of 238 basis points seen in March 2008, the 30 year mortgage rate will be over 6%, even if the 10 year treasury remains at 3.72%.

Filed Under: 6% plus mortgages, Government spending, Interest Rates, Mortgages, printing money Tagged With: 30 year rate 5.375%, 6% 30 year mortgages?, mortgage rates explode upwards

Mortgage Mod And Foreclosure Scams: Saying Goodbye To The Mortgage May Be Better

May 28, 2009 by admin 3 Comments

Home Sweet Home?

FDIC Advice Good But Too Late

The FDIC Consumer News is warning homeowners to avoid falling prey to loan modification and foreclosure rescue scams. Many financially distressed homeowners are preyed upon by firms that “guarantee” financial salvation, take the homeowners last few dollars and deliver nothing in return.

Foreclosure Rescue and Loan Mod Scammers Prey on Stressed Homeowners

Many homeowners having difficulty making their monthly mortgage payments are being targeted by criminals who charge large upfront fees and falsely “guarantee” to rescue a home from foreclosure.

Try to deal only with lenders, businesses and other organizations you already know or that have been recommended.

You don’t need to pay a lot of money for help or information.

“But scam artists will demand a large upfront fee, often thousands of dollars, and they do very little to actually help the homeowner,” said Robert W. Mooney, FDIC Deputy Director for Consumer Protection and Community Affairs.

Be especially suspicious of unsolicited offers that arrive via phone, e-mail or a knock on your door.

“Some companies have falsely advertised or represented that they are part of a government-endorsed mortgage assistance network

Be particularly wary of any organization that says it guarantees foreclosure relief or that it has a near-perfect success rate.

“Also be wary of anyone who promises to pay off your mortgage or repair your credit if you ‘temporarily’ sign over to them the deed to your home, because you may be permanently losing your home to a thief.”

Ironically, the job of the con men engaged in loan mod and foreclosure rescue schemes is made easier due to widely advertised government mortgage relief programs. The lure of “something for nothing” from a government program that the con men claim to be affiliated with is one of their most successful sales tactics.

The FDIC advice comes very late for many people who would have been far better off financially had they never purchased a home beyond their means to begin with. None of the government mortgage agencies require a potential homeowner to evaluate the true financial obligations and risks of home ownership. Many homeowners currently obtaining government mortgages are being approved with debt ratios that almost guarantee a future default and are not in the home buyer’s best interest.

One Option For Distressed Homeowners The FDIC Does Not Mention

The FDIC offers those in financial difficulty some good advice in their newsletter but what is not mentioned is whether the homeowner should consider becoming a renter. In addition, many of the government loan mod and Hope programs, etc. have done little to put homeowners in a better financial position and many default soon after they were “helped”.

For a homeowner struggling with the mortgage, constantly spending in excess of income and living a financially depraved existence, why not look at the benefits of becoming a renter? In many locations, renting is cheaper than owning.

Although not mentioned by the FDIC, government makes walking away from the mortgage an easy option. A mere two years after a bankruptcy or three years after a foreclosure, current FHA guidelines allow a borrower to apply for mortgage financing.

Do The Math

Here are a couple of web sites that can tell you whether it makes sense to own or rent.

payorgo.com

youwalkaway.com

More On This Topic:

Loan Modification Scams and Fraud Widespread – Mortgage Servicing News

Filed Under: Deleveraging, FHA, loan modification, Mortgages Tagged With: foreclosure assistance scams, loan mod scams, When renting is better

US Treasury-Owned Gold – What Would It Buy?

May 26, 2009 by admin Leave a Comment

Some Thoughts On The Value Of US Owned Gold

The United States Treasury Department recently issued a report on the total amount of US Treasury-Owned Gold. As of April 30, 2009 the US Treasury held a total of 261.5 million fine troy ounces of gold. The Treasury report uses a book value of $42.22 per troy ounce to calculate the total value of gold held at approximately $11 billion. Based on the current market price, total gold holdings of the US Treasury amount to approximately $238.5 billion.

Department of the Treasury
Financial Management Service
STATUS REPORT OF U.S. TREASURY-OWNED GOLD
April 30, 2009
Summary Fine Troy Ounces Book Value

Summary	Fine Troy Ounces	Book Value

Gold Bullion	258,641,851.485	$10,920,427,976.14
Gold Coins, Blanks, Miscellaneous	2,857,047.831	120,630,844.95
Total – Treasury-Owned Gold	261,498,899.316	$11,041,058,821.09

It is interesting to note that although the US dollar used to be a gold-linked currency, the current market value of gold held by the US Treasury is now nothing more than pocket change on the Federal balance sheet. In today’s new financial world, here’s a short list of what the U.S. government could buy with the entire U.S. gold stockpile of $238 billion.

cover the interest due on $9 trillion of government debt for one year.
buy General Electric, American Express and McDonalds
cover 40% of the $599 billion in bank losses expected by the US Government over the next year
pay for 6.6% of next year’s $3.6 trillion dollar US spending budget
cover less than half the cost of the TARP program
pay for 35% of the 2010 U.S. defense budget
cover less than two years of war costs in Iraq and Afghanistan
cover the cost of a stimulus check of around $800 for each American

The value of the nation’s gold supply is a rounding error on the Federal balance sheet and irrelevant to overall governmental finances. Maintaining a stockpile of gold as a store of value to back a nation’s financial system seems little more than a relic of past history. Citi commodity analyst Alan Heap recently stated that gold is “a crowded trade and fundamentals are not supportive”.

All of the above factors would seem to represent a contrarian dream. As the economies of the world continue to create trillions of new paper money, gold appears to be on the cusp of a multi year price breakout above $1,000 and the K-Ratio is still screaming to buy the gold stocks. In addition, China is calling for the establishment of a new gold linked reserve currency and the approximate market value of the fifteen biggest gold producers is only $135 billion.

Adding to gold stocks at this point as part of a diversified investment portfolio would seem to carry a good risk/reward ratio. The time to sell gold will be when there is a “crowded trade” in analysts telling us to buy.

Although Kinross Gold (KGC), Goldcorp (GG) and Randgold (GOLD) have all appreciated since last discussed, these are my favorite long term gold stock positions and merit additional purchases on price pullbacks. Newmont Mining (NEM) and Yamana Gold (AUY) round out the gold stock portfolio and should also continue to perform well.

Gold Chart

Disclosures: Holding positions in KGC, GG, GOLD, AUY, NEM

Filed Under: Gold, printing money Tagged With: goldcorp, K-Ratio, kinross gold, newmont mining, randgold, US Treasury owned gold, yamana gold

California’s Crash Omen of Nation’s Future

May 22, 2009 by admin 2 Comments

Borrow and Spend = Crash and Burn

California has always been the trend setter for the nation but never more so than today as it totters on the edge of insolvency. The theory that States or Nations cannot go bankrupt due to their unlimited taxing powers has reached its limits as California voters have resoundingly rejected further tax increases. Without a Federal bailout, the State of California will be forced to make massive budget cuts. The illusion of a free lunch, paid for with borrowed money is now replaced by the harsh reality of a mortgaged future.

California may be in the spotlight today as the first major state to collapse financially, but most of the Nation’s other 49 states are not far behind. Tax revenues have declined in 45 other states by almost 13% in the first quarter and are likely to continue declining as both corporate and personal incomes decline. For the first time ever, the biggest source of revenue for the States is from the Federal Government. Almost all 50 States are at the precipice.

Given the absolute financial disaster occurring in almost every State, how long can it be before the ability of the US Government to pay its debts is called into question? The United States is not an abstract construction with a separate economic destiny, immune to events in the rest of the nation. The United States are 50 States joined as one. If nearly every one of the 50 states is an economic train wreck, the conclusion for Uncle Sam is obvious. Can the whole be greater than the sum of its parts?

Numerous doubts are being aired daily about the credit rating of the United States. Consider some comments from today:

Britain’s Debt Omen

For a warning about America’s fiscal future, consider yesterday’s news from Britain. United Kingdom stocks, bond futures and sterling all fell after Standard & Poor’s lowered the country’s credit outlook.

But in both the U.K. and U.S. today, the politicians in power equate government spending with growth. So on present course, Britain’s credit future could well be America’s in the coming years as U.S. spending soars.

Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

Several policy missteps suggest that investors should stop trusting — and lending to — the U.S. government.

“All currencies are being debased dramatically by their central banks at extraordinary speeds and so in relative terms it appears there is no currency problem,” In reality, however, paper money is highly vulnerable to a public catalyst that serves to acknowledge it is all merely vapor money.”

For the fiscal year ending Sept. 30, the Congressional Budget Office forecasts a record deficit of $1.75 trillion, almost four times the previous year’s $454.8 billion shortfall and about 13 percent of gross domestic product. Bear in mind that the target demanded of European nations wanting to join the euro was a deficit no greater than 3 percent of GDP.

David Walker, a former U.S. comptroller general, wrote in the Financial Times on May 12 that the U.S.’s top credit rating looks incompatible with “an accumulated negative net worth” of more than $11 trillion and “additional off-balance-sheet obligations” of $45 trillion. “One could even argue that our government does not deserve a triple A credit rating based on our current financial condition, structural fiscal imbalances and political stalemate,” he wrote.

Flip-Flops and Governance

Mr. Obama campaigned on “responsible fiscal policies,” arguing in a speech on the Senate floor in 2006 that the “rising debt is a hidden domestic enemy.”

However, Mr. Obama’s fiscally conservative words are betrayed by his liberal actions. He offers an orgy of spending and a bacchanal of debt. His budget plans a 25% increase in the federal government’s share of the GDP, a doubling of the national debt in five years, and a near tripling of it in 10 years.

US Officials Vow Fiscal Vigilance

Treasury Secretary Geithner and President Obama both acknowledge that out of control spending could eventually lead to default, credit market rejection and a lower standard of living as the cost of debt servicing destroys our standard of living.

Geithner Pledges To Cut Deficit

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

– the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Obama Says US Long-Term Debt Load “Unsustainable”

May 14 (Bloomberg) — President Barack Obama, calling current deficit spending “unsustainable,” warned of skyrocketing interest rates for consumers if the U.S. continues to finance government by borrowing from other countries.

“We can’t keep on just borrowing from China,” Obama said at a town-hall meeting in Rio Rancho, New Mexico, outside Albuquerque. “We have to pay interest on that debt, and that means we are mortgaging our children’s future with more and more debt.”

The Future Reality

The President and Treasury Secretary say what they have to say. The reality is that the present course of unlimited credit expansion, quantitative easing, bailouts and massive deficit spending will continue in an attempt to re-inflate asset values and stimulate spending. The Government will not accept alternatives that they view as being worse – deflation and a collapsing economy with civil unrest. California will be bailed out like everyone else.

The course of action for long term wealth accumulation under the present circumstances seems obvious. Avoid an over concentration in paper assets (debt) that can be produced by governments in infinite quantity at zero cost. Diversify into assets backed by 1) real services or goods that there will always be a demand for and 2) natural resources such as commodities, oil and gold.

Filed Under: Confidence, Economy, Government spending, printing money, Sovereign Default Tagged With: California crashes, Nation to follow CA

Economies Plummet – Markets Yawn

May 21, 2009 by admin Leave a Comment

What Are The Markets Telling Us?

The reality disconnect between the markets and the economic news has become extreme. Consider the following headline:

World Economies Plummet- WSJ

Steep declines in the economies of three of the U.S.’s biggest trading partners — Mexico, Japan and Germany — underscored the severity of the global recession

On Wednesday, Mexico became the latest country to report a plunge in output. The country’s gross domestic product fell at an annualized rate of 21.5% in the first quarter

Mexico’s decline followed by a day Japan’s report that its economy contracted in the first quarter at a 15.2% clip, its worst performance since 1955. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970.

Contrast the reported huge plunge in GDP for these three countries to price movements in their respective stock markets:

Germany DAX Index

Mexico Bolsa Index

Japan Nikkei

Each country reporting huge declines in GDP has seen a 25% or greater increases in stock prices since the markets bottomed in March 2009. Besides the reported large contractions in GDP, there is a plethora of other negative economic headlines that suggest markets should be plunging rather than rallying. Consider a small list of some of the well known and seemingly insurmountable problems that the US and other major world economies face.

massive unemployment
potential downgrade of US credit rating
declining asset values
California insolvency
plunging tax receipts
massive deficit spending
huge consumer and governmental debt obligations
potential insolvency of major European and Asian nations
declining incomes
collapsing commercial real estate
insolvent public and private pension plans

Judge a man by his questions, not his answers – Voltaire

Many of these problems seems beyond the point of solution yet the equity markets rally in the face of horrific news. Is this a classic bottom where all the bad news has been discounted? Have the markets correctly priced the fundamentals or is this just the mother of all bear market rallies born of false hopes and a deeply oversold condition? The only certainty is that no one has the answers.

My goal as an investor is to make profits and not argue with the markets. Governments seem determined to inflate equity and asset prices and money is being driven from the “safe” alternative of treasury bills yielding a fraction of a percent. Besides the standard long term allocation to gold and commodities, maintaining or increasing equity positions seems warranted. If major markets violate their March lows, the Armageddon scenario comes back in full force.

Filed Under: Economy Tagged With: Armageddon discounted, GDP collapses worldwide

FHA’s New Mortgage Program – Free Home Plus Trip To Vegas

May 20, 2009 by admin 2 Comments

100% Plus Financing Available

The American Recovery and Reinvestment Act of 2009, passed early this year, provides up to an $8,000 tax credit for first time home buyers. The tax credit refund would be given to the home buyer after filing the 2008 or 2009 tax return.

It was only a matter of time before someone would realize that this tax credit was not helping the prospective FHA home buyers who had difficulty raising the required down payment of 3.5% for an FHA purchase. The solution seemed obvious – let the home buyer receive the tax credit money upfront to be used for the down payment.

Last week, use of the tax credit for a down payment was officially endorsed by Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development (HUD). Mr. Donovan stated that “We all want to enable FHA consumers to access the home buyer tax credit funds when they close on their home loans so that the cash can be used as a down payment”. Mr. Donovan noted that this is one of the ways that the government is working to “stabilize” the housing market.

Mr. Donovan’s plan may actually do more than just stabilize housing – it may set off a buying stampede, multiple offers and bidding wars at the lower end of the housing market. Consider the following example of a home purchase using FHA guidelines and the $8,000 home buyer tax credit.

Loan Scenario

On the purchase of a home priced at $80,000 the buyer needs the FHA required down payment of 3.5% ($2,800). In addition to the down payment, the home buyer needs money for closing costs and prepaid items, which could easily amount to 6% of the property’s purchase price ($4,800). The FHA also charges an upfront mortgage insurance premium of 1.75% ($1,400). The total amount theoretically needed by the purchaser totals $9,000.

In the real world here’s how this deal will be structured:

Down payment of $2,800 covered by tax credit – cost to purchaser – ZERO
Closing costs and prepaid items of $4,800 can and usually are worked into the purchase price since the FHA allows up to a 6% seller concession – cost to purchaser – ZERO
Mortgage Insurance Premium of $1,400 is added to the purchaser’s loan amount and financed by the FHA – cost to purchaser – ZERO
Total cash out of pocket by purchaser – ZERO
Cash due to purchaser for unused portion of tax credit – $5,200 – enough to easily cover a couple of weeks vacation in Vegas.
Based on the FHA’s default rate, approximately 15% of the new home buyers will default shortly after closing. Considering foreclosure freezes and loan modification attempts, many purchasers can look forward to enjoying payment free housing for 2 to 3 years.

Program Benefits/Limitations

Benefits for FHA home purchaser: Zero cash outlay to own a home, FHA financing provided at an all time low interest rate, $5,200 cash bonus to purchaser, plus a free long term call on the price of housing. With these types of buyer incentives, expect to see an increase in home purchases by the first time home buyer.

Higher incomes groups excluded: For single taxpayers with an adjusted gross income over $75,000 and for married couples with income over $150,000, the tax credit is reduced or eliminated.

Filed Under: FHA, FHA Defaults, Housing, Mortgages, Too Good To Be True Tagged With: FHA 100% Plus Financing, FHA's Cash Back Financing