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HomeJoin Me Tonight at 8PM for NoQuarter Radio’s Sense on Cents with Larry Doyle
Posted by Larry Doyle on June 7th, 2009 7:32 AM |
UPDATE: The show has concluded, but you can listen to a recording in its entirety by clicking the Play button on the audio player below. Once the playback has started, you can fast forward or rewind to any portion of the show by clicking at any point along the play bar.
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Please join me Sunday evening from 8-9 p.m. ET for NoQuarter Radio’s Sense on Cents with Larry Doyle. I believe we are now entering the next stage of the Brave New World of the Uncle Sam Economy. As we navigate the trails in this leg of our journey, our primary focus will be on interest rates. We experienced a dramatic spike in global rates over the course of the last few weeks. What do these spikes mean? Will they persist? Do we need to “lighten the weight of our packs” to successfully traverse these hills and valleys? Do the moves in rates indicate that “inflation” is just around the bend?
Listen to NQR’s Sense on Cents with Larry Doyle tonight from 8-9PM as I address all of these angles. Additionally, I am thrilled to have Luke Fry of 12th Street Capital join me to address these topics and developments in and around the world of mortgage-backed securities. Luke is a senior salesman at 12th Street Capital, a leading broker-dealer with untold expertise in the mortgage business. Prior to 12th Street, Mr. Fry was a Managing Director at Knight Libertas, LLC where he was responsible for providing market insight and analysis in mortgage and asset-backed structured products to a wide range of clients that included hedge funds, money managers, insurance companies and banks. Mr. Fry was hired as the first salesperson on the ABS/MBS desk at Libertas Partners and helped expand the group to over 12 salespeople while seeing the company through a merger in July 2008 with Knight Capital Group, the largest U.S. equity market maker. (more…)
Freddie Mac, Fannie Mae Deja Vu?
Posted by Larry Doyle on May 28th, 2009 4:21 PM |
Can our economy absorb another financial hit of the magnitude of Freddie Mac and Fannie Mae?
In the process of digging for some data on Uncle Sam’s TARP commitments, I came across a compelling story at Subsidyscope, a Financial Primer (right sidebar) link here at Sense on Cents. The lead story at Subsidyscope, dated May 26, 2009: Concerns Grow Over Federal Home Loan Bank Investments. They write:
The Federal Home Loan Banks, or FHLBs, may be the biggest financial players you’ve never heard of. Collectively, they hold $1.3 trillion in assets and are the largest U.S. borrower after the federal government.
For readers here at Sense on Cents, I have raised warnings about the FHLB system both on April 3rd (Putting Perfume on a Pig!!) and just this past Monday, May 25th (FHLBs: Red Sea, Dead Sea, or Both?). In my opinion, there is little doubt that the FHLB system was the greatest beneficiary of the FASB’s relaxation of the mark-to-market. Subsidyscope says as much:
A Subsidyscope review of the FHLBs’ financial statements has found that several of the banks are carrying substantial “unrealized losses” on their investments in mortgage-backed securities. Because the banks believe these losses are temporary, they don’t have to be recognized on the banks’ accounting statements.
What’s potentially worrisome is the sheer size of the losses. For the Federal Home Loan Bank of Seattle, they are substantially larger than the capital the bank holds to protect itself against such declines. If its mortgage-backed securities don’t regain their value, the bank will have to write them down, which could wipe out its capital buffer and raise risks for taxpayers.
Remind you of Freddie Mac and Fannie Mae? I thought so. Let’s continue to dig even deeper. Subsidyscope asserts: (more…)
Housing: Cheap and Getting Cheaper
Posted by Larry Doyle on May 26th, 2009 10:59 AM |
The Case-Shiller Home Price Index was released this morning and disappointed with a worse than expected reading of -19% versus a year ago. Relative to the 4th quarter 2008, home prices nationwide are down 7.5%.
Are home prices continuing to decline despite the support of a variety of government programs or perhaps because of them? What do I mean? Any market – whether stocks, bonds, currencies, commodities, or housing – is constantly trying to assess both current and future demand and supply. Potential buyers or investors can most accurately assess the value of an asset when provided with full and accurate information.
In my opinion, our housing market is suffering from the unknown supply of homes – currently involved in a mortgage modification process – that will likely hit the market in the future due to foreclosure. The fact is that the ultimate default rate on many of the homes involved in a mortgage modification is extremely high. As the Wall Street Journal highlights this morning, Mortgage Modifying Fails to Halt Defaults:
A key finding from the Fitch report was that subprime, pooled loans that have been modified are souring at high rates despite a change in the loan terms. Fitch said a conservative projection was that between 65% and 75% of modified subprime loans will fall 60-days or more delinquent within 12 months of the loan change. That finding echoes prior U.S.-bank-regulatory agency reports of high redefault rates for modified loans.
The Fitch report said one reason for the high redefault rate was public pressure to modify loans even for borrowers who were likely to default whether the loan terms were changed or not. Fitch said another cause was falling home prices. Ultimately, these homeowners, deep underwater, walk away from the home, resulting in the redefault of a loan.
The simple fact is a significant percentage of the loans being modified NEVER should have been written in the first place. Modifying these loans merely forestalls the home from being foreclosed and sold. I do not believe government officials have real appreciation that this forestalled supply actually puts further pressure on housing overall. Why? The market is not being allowed to “clear,” a process in which an asset is moved from weaker hands to stronger hands. To wit, I believe we will continue to see ongoing declines in home values on a going forward basis.
A Look at Case-Shiller Numbers as provided by the WSJ:
“The tone of this report was clearly weak, and it comes at a time when markets were beginning to sense and price in (perhaps prematurely so) a stabilization in the U.S. housing market,” said Millan L. B. Mulraine of TD Securities. “Despite the encouraging signs that have been coming from the other housing market reports, we continue to highlight the risks that the correction in the U.S. housing market may continue for some time as the worsening labor market conditions and historically high inventory of unsold homes continue to off-set the favorable affordability conditions.”
That overhang of inventory will be perpetuated via the mortgage modification process. A full numerical chart highlighting the dynamics within respective metro regions is quite interesting. Not sure why Minneapolis is showing the greatest declines. Anybody who can provide color on the situation in MN, it would be deeply appreciated. Away from that, the other locales suffering the greatest declines continue to be in the obvious areas (Detroit, Las Vegas, Phoenix, Miami). Charlotte, Dallas, and Denver are displaying signs of stability.
Please share insights on housing in your region!!
LD
(About the numbers: The Case Shiller indices have a base value of 100 in January 2000. So a current index value of 150 translates to a 50% appreciation rate since January 2000 for a typical home located within the metro market.)
Home Prices, by Metro Area
Let’s Listen to Trust Company of the West’s Jeff Gundlach
Posted by Larry Doyle on May 22nd, 2009 5:06 PM |
Jeff Gundlach, Chief Investment Officer of TCW (Trust Company of the West) is widely considered to be one of the sharpest, if not THE sharpest, bond manager on Wall Street.
Let’s listen to him address the dynamics of the bond market, in general, and the mortgage market, specifically:
Let’s also listen to Mr. Gundlach address the dynamics within the housing market:
Glad to bring the best in the business to you here at Sense on Cents.
LD
Economic Update: Housing and Retail Sales
Posted by Larry Doyle on May 13th, 2009 8:39 AM |
Ultimately, all economic roads lead back to the housing market. The breakdown in the integrity of housing finance led us into this economic mess and any self-respecting economist (or financial commentator) will tell you that a healthy housing market will lead us out. Let’s check the patient.
The Fed has supported housing by effectively “overpaying” for refinancings. Mortgage rates relative to rates on U.S. government debt are at 17 year narrows. This development is great for homeowners who can and have refinanced. However, the pool of eligible homeowners is finite and seems to have run its course for now as recent data indicates that refinancing filings have declined while purchase activity has been unchanged. This data is reflected in the U.S. MBA Mortgage Applications Index Fell 8.6% Last Week, as reported by Bloomberg.
How about new supply of homes coming onto the market? Well, certainly home building has come to a virtual standstill with over a year’s worth of homes currently on the market. As new housing starts occur this supply can be gradually absorbed. Thus, we once again are back to the concept of needing time for the patient to heal. However, are we subject to another bout of housing sickness to hit our economy? I believe we are. Why? Two reasons:
1. government programs forestalled but did not eliminate a number of “sick” mortgages. These mortgages would likely have defaulted with banks forcing foreclosures a few months ago.
2. a large supply of adjustable rate mortgages will soon reset to a considerably higher rate leading to payment problems for homeowners and likely foreclsoures. Data indicating increased rates of delinquency (late payments) clearly points to increased foreclosures.
In fact, foreclosure filings just hit a record level of 342k as reported by RealtyTrac which monitors this data nationwide. Foreclosure activity also seems to be spreading from California, Florida, Nevada, and Arizona to other parts of the country. In fact, Idaho has recently had a surge in foreclosure activity as the unemployment rate in and around Boise has spiked.
What about home prices? The declines in home prices have certainly sparked renewed interest in prospective homebuyers. Will they enter the market at this stage? Data indicates prospective buyers continue to be patient as Bloomberg reports, Home Prices In U.S. Drop Most On Record In Quarter.
When may consumers feel confident enough to enter into the market and purchase a home? The largest factor in that decision is consumer’s confidence in their employment situation. In my opinion, with the rate of unemployment nationwide likely to hit double digits by year end, housing will remain under pressure.
On a separate economic note, the retail sales figures for April were just released and declined .4%, and excluding auto sales, declined by .5%. The market expected April retail sales to be unchanged. This report is a clear indication the economy remains on life support. Not surprising to me, March retail sales were revised even lower from a decline of 1.1% to a decline of 1.3%.
With all due respect to credible journalists, analysts, and financial commentators, I personally do not see enough green shoots in the midst of reviewing the entire economic landscape.
The equity markets are moving sharply lower on this news.
LD
P.S. Sense on Cents welcomes feedback. Let us know what you are seeing in your local economies.
Navigating the “Murky Waters” of Financial Services
Posted by Larry Doyle on May 7th, 2009 7:57 PM |
I am thrilled to have Rick Johnson as my guest on NoQuarter Radio’s Sense on Cents with Larry Doyle this Sunday evening May 10th. As Forbes recently reported:
JACKSONVILLE, Fla., May 1 /PRNewswire/ — Rick Johnson, author of the book Keep Your Assets. Take My Advice, applauds the Financial Planning Coalition’s effort to establish an oversight board to regulate financial advisers. The Financial Planning Coalition,
according to a recent update emailed to Certified Financial Planners, is proposing an oversight board with fiduciary standards, training and ethics requirements for financial planning advice that favors consumers. FINRA is trying to influence the Securities and Exchange Commission in order to regulate registered investment advisers, as stated in a recent speech by Richard G. Ketchum, Chairman and CEO of FINRA, before the Committee on Banking, Housing and Urban Affairs. The Financial Planning Coalition “wants to preclude FINRA from consideration as the oversight body … ” as stated in their April 27, 2009 email update. “This is a battle between lobbying groups with consumers caught in the crossfire,” according to Johnson.
In an April 27th FINRA News Release, FINRA has proposed closing a glaring gap in their Broker Check system that previously allowed advisers with revoked licenses to have their backgrounds dropped from the FINRA Broker Check system after two years. In his book, Keep Your Assets Take My Advice, Johnson pointed out this exact problem.
The suggestion from Johnson’s book is to close the background check loopholes. As quoted, “We need one disciplinary disclosure system for all insurance agents, FINRA-registered representatives and investment adviser representatives of registered investment advisers.”
In his book, Johnson breaks down why the fiduciary standard of care is what all consumers should demand. “You cannot do what is in the best interest of the consumer and have a sales quota. It is impossible. As long as these sales quotas remain, there is no chance at a fiduciary standard of care,” says Johnson.
Johnson educates his readers about the fiduciary standard of care, how to do annual background checks on financial advisers and he provides unique financial planning ideas typically not found in recently published financial advice books. Readers of his book will be “armed to the teeth,” according to Johnson, to navigate the “murky waters” of financial services.
Who is looking out for you? Sense on Cents and Rick Johnson this Sunday evening on NoQuarter Radio.
LD
Senate Approves Safe Harbor Mortgage Modification; Property Rights? What’s That?
Posted by Larry Doyle on May 6th, 2009 3:55 PM |
The assault on property rights continues as the Senate just passed the Safe Harbor Mortgage Modification legislation. Recall how I wrote the other day in Mortgage Magic or Mortgage Mayhem that this legislation would protect mortgage servicers from suit by mortgage investors.
Why would investors sue servicers? Servicers are charged with processing monthly principal and interest payments of mortgages and distributing the cash flow to investors. If they do not perform, then to this point they would and should be sued. Investors have the right to those payments for which they committed their funds.
The Safe Harbor Mortgage Modification legislation will protect servicers from lawsuits in the cases where mortgages have been modified and investors’ interests supposedly remain protected. One would think that covers all the bases. As I highlighted, however, the legislation may very well promote self-dealing amongst a number of the larger banks which both service mortgages and hold second mortgages.
From Bloomberg’s article, Senate Defeats TARP Measures To Move Safe-Harbor Bill:
The Mortgage Bankers Association and consumer advocates have endorsed the safe-harbor provision to protect mortgage servicing companies from being sued by mortgage-bond investors if they modify loans in accordance with President Barack Obama’s Making Home Affordable anti-foreclosure program.
“Safe harbor is something that you want as a servicer,” said Ajay Rajadhyaksha, the head of fixed-income strategy at Barclays Capital in New York. “Without the safe harbor, you’re far more skittish about doing anything.”
Corker said in a speech on the floor that the measure is a boon to larger servicers including JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Bank of America Corp. An amendment Corker sponsored that would have required borrowers to seek other forms of aid before their loans could be modified failed.
Mortgage bond buyers including Clayton DeGiacinto of Tower Research Capital in New York said allowing the safe harbor provisions removes any accountability servicers have to minimize investor losses and may make the process more susceptible to political pressure and more costly for borrowers.
“It ultimately makes bond investors skeptical and adds an additional layer of risk that will need to be priced into the securities,” said DeGiacinto, who manages a distressed mortgage fund.
I am all for credible and equitable legislation which promotes decreasing foreclosures. In the process, however, the legislation should be airtight in making sure there is no self-dealing and conflicts of interest. That question regarding this legislation remains outstanding.
While this legislation may help limit foreclosures in the near term, the real cost may be borne in the years ahead in the form of higher mortgage rates. Why might that happen? If banks which service mortgages are influenced and incentivized not to protect the investors’ property rights and thus don’t, the investors will sell their holdings, and take their bat and ball to another field.
LD
Water Finds Its Own Level
Posted by Larry Doyle on May 6th, 2009 5:15 AM |
If housing led us into this mess and is going to lead us out, then bring an extra pair of boots because we still have a long way to go.
Could the government intervention in the housing market promote short term support but also long term pressure? What do I mean? As I wrote yesterday in Mortgage Magic or Mortgage Mayhem, the government is providing real subsidies in terms of mortgage rates, guarantees, closing costs, and points. These subsidies are generating support to segments of the housing market. That said, housing in general remains under severe pressure in many regions. The higher priced markets with very limited government intervention are virtually stagnant.
Pressure from the higher end is actually prompting some banks to allow for short sales in which the bank absorbs the loss from a home sold below the outstanding mortgage balance. Why would a bank do that? Very simply because the bank believes a sale now, even at a loss, is better than a foreclosure later generating an even greater loss.
I think we will see further downward pressure on prices and a delay in real improvement in housing due to the fact that more homeowners are now under water on their mortgages. The WSJ reports, House Price Drops Leave More Underwater. How many are underwater? Almost a third of American homeowners!!
Government intervention is simply attempting to apply sandbags to this problem. While I fully empathize with the families impacted, these sandbags are no remedy or foundation for a long term fix. In fact, I think these sandbags are potentially causing pools of private capital to refrain from entering the market. Why is that? A market that is being artificially supported will always cause real money to wait in the wings.
As the water finds its own level, the private capital will definitely enter. In so doing, it is very likely the private capital will ultimately push the market to levels even higher than current.
Any market participant knows, though, that a market that is manipulated may stay elevated for a short stretch but will move lower, find its natural clearing level, and then move higher. Housing is no different.
LD
