The Market Ticker - Housing

The Debt Bingers Are Stuffed

nospam@example.com (Karl Denninger) — Wed, 17 Mar 2010 10:22:00 -0400

The Mortgage Bankers Association’s index decreased 1.9 percent in the week ended March 12. The Washington-based group’s purchase gauge fell 2.3 percent, while its refinancing measure declined 1.7 percent.

The lack of demand even as borrowing costs dropped signals a sustained housing recovery will be slow to develop this year. Federal Reserve policy makers yesterday cited stagnant home construction, declines in commercial real estate and a lack of jobs as risks that continue to face the world’s largest economy.

The problem is rather simple to understand - despite record incentives (such as the "homebuyer tax credit" and similar games) there are simply no more people who are willing and able to gorge themselves on more debt.

The cash-out refinance is dead, as there's no equity to extract. The use of the home as an ATM machine powered the last "expansion" in our economy, but that was a false expansion - it was not made up of production increases and general weal, but rather with debt.

There is no real demand for housing at today's price. At 1x or 2x incomes the housing stock would clear immediately. That's where the market "wants" to go. But doing so causes all the banks who made those imprudent loans at 5x or even 10x incomes to instantaneously detonate. Rather than make people eat their own bad decisions and thus learn from them (a great deterrent against sinning a second time!) The Government has instead chosen lies, obfuscation and intentional gimmicking of the accounting rules so that the consumer gets screwed but the institutions who made the imprudent loans are bailed out - in effect charging the consumer twice.

As an example of how badly screwed up our economy (still) is, I present an anecdote that is loosely changed from an actual person who presented themselves to a professional in the mortgage business not long ago.....

Mike, a driver of a piece of heavy construction equipment, became a first-time home buyer in 2004. His home cost $145,000 and his total mortgage payment was $1,046. He was making about $50,000 a year, so he had a nice safe, conservative "front end" ratio of about 25% - and with his only other debt being a car loan and a small credit card balance, his back end ratio was a reasonably-conservative 35%. He was easily able to afford his loan - and his life.

But now it's 2009. This client comes back to the original mortgage broker and calls in desperation. Work has evaporated and his income has roughly been cut in half.

He should have some equity in his home - after all, he bought before prices really took off. So we look at refinancing the debt - after all, rates have come down some, right?

What we find when credit is pulled is the ugly truth. Mike has done two cash-out refinances in the last five years, as well as taking out a HELOC. His total payment is now up to $1650 and the total indebtedness on the house is $216,000 - but the house is only worth $180,000.

When asked about the refinances Mike says that he was enticed by how easy it was to roll credit-card debt into the first refinance - he turned to this as a means to finance living somewhat-modestly beyond his income. He kept thinking - and was told repeatedly - that he'd be able to keep coming back to the same brokers for another refinance - after all, prices only go up on real estate.

After much consternation (after all, Mike can't really do much being this far underwater - other than try a modification or lose the house) Mike calls the lender and is "offered" a modification. His "trial" cuts the monthly payment to 31% of his (now reduced) income, but in doing so the term is extended to 40 years and the loan is essentially interest-only for the first several years. This "modification" means that Mike will never really own his house, as it will be a decade or more - assuming prices stabilize here - before he has any hope of reaching positive equity.

So Mike does this for a year - after all, he does like the house - and after a year the phone rings. The lender has denied his permanent modification. Who knows why - but what a pull of the credit report now shows is that the lender has been reporting the difference between the "trial" modification payments and the original as delinquent amounts to the credit bureaus! Mike's credit is now destroyed - he's $7,000 behind in mortgage payments, nearly $50,000 underwater, and has a credit score under 500.

Mike is screwed.

What could Mike have done differently?

Well, first, he could have not debt-binged. But that's water over the dam - he did debt-binge, and the debt is still there. Once the hangover hits it's too late to decide that the last bottle of Jack Daniels' was a bad idea.

Second, Mike could have done what I've advocated since this whole mess began. He could have not believed the snake-oil salesmen from the banks and finance companies and instead called up a good bankruptcy lawyer and enrolled agent (CPA authorized to practice before the IRS), got them both in a room, laid $250 or so on the table between the two of them for an hour of their time and figured out what his liability would be if he told the bank to stuff it.

He might have wound up in bankruptcy or foreclosure, but with proper guidance and a plan he would have almost certainly been in better shape than he is now. With the foreclosure or bankruptcy behind him, his credit would start to be rebuilt immediately. He would have contributed to the system clearing (even if he lost the house) rather than contributing to the balance sheet lies of the major financial institutions. While his credit would have been ruined, it's ruined anyway, he's still going to lose the house, and all he's managed to do is help the banks lie to the American people and perpetrate a scam upon everyone else.

And if, as I suspect, the housing market continues to tank for the next several years Mike would have been in a position to possibly buy a similar house - for cash - at some point in the next few years. Yes, this would require some pretty-severe austerity measures in Mike's household, but then again, the original goal was to own a house free and clear, right?

Mike listened to the crooners on CNBS and so-called "professionals" in the banks - people who's interest is not aligned with his - instead of hiring his own experts at his own expense to navigate a circumstance that, admittedly, was of his own doing - but from which he DID have choices.

There are millions of Mikes who have been seduced by the dark side of credit and then serially abused by the banksters and their minions. Until the market clears these moribund consumers' debt from the system, an act that can only occur two ways (through the passage of the aforementioned forty years - or bankruptcy of both borrower and lender) we cannot have sustainable economic recovery.

Our government has committed itself to the balance sheet lies and screwing Mike - as many times and as roughly as they can get away with. Sadly, so far, the American People are watching American Idol instead of recognizing that while they're culpable for listening to the siren song of "must have it nowitis", the banksters actions were anything but honorable - indeed, they both have been and remain outright predatory in nature.

If you want to know why Japan never got out of its slump more than two decades after their debt bubble burst, this is the reason. The debt was not forced through the system by defaults, with the government instead protecting imprudent lenders. They, like us, strung along borrowers for as long as possible, both deepening and prolonging the damage to their financial lives and futures. Instead of recovery these policies produced a nation of debt-zombies - a state of affairs that persists to this day.

We're stuck in the same trap, having learned exactly nothing from those who went before us as little as a decade ago.

HAMP: A Colossal Failure Of Leadership

nospam@example.com (Karl Denninger) — Tue, 16 Mar 2010 09:14:00 -0400

Mark Hanson (of Hanson Advisors) once again digs up a gem.

He's been on the HAMP/HAFA nonsense since it began, but today I would like to focus on one snippet out of his latest missive, to be found right here:

Uh, yeah.

Gross debt-to-income ratios of 59.8% after modification?

Folks, do you understand what this means? The average gross income of these folks is $2,702, or $32,433 annually. But their debt-service ratio, or amount of debt post-modification, is 59.8%.

That means they're spending almost as much on their other debts as they are on their house payment, even after modification.

Let's break this down.

The person with a $2,702 monthly income has the following "come out" of their check:

Their debt service of $1,616, of which half, roughly, is their (modified) house payment.
FICA and Medicare tax of 6.2 and 1.45% respectively, or $206.70.
Federal withholding of approximately 10% (slightly more, actually) assuming a married person, or approximately $300. (If single head-of-household it is somewhat higher, if married with dependents it is somewhat lower.)

This "average person" has $579.30 once their mandatory debt service and withheld taxes are deducted, and from this they must pay:

Electrical, water, sewer, and garbage disposal services.
Health costs, if any (including deductions from their paycheck, co-pays, etc)
Automobile insurance for their car, along with gasoline.
Food
Hazard insurance on the house (if not included in the back end ratio, and it frequently is not.)
Any other expenses (e.g. clothing, school supplies if there are kids in the home, any sort of recreational activities, etc.)

All on $600 a month for a family of four? You're joking, right?

Good luck just buying your food and paying the electric bill on what's left!

These people are economic zombies. HAMP has utterly failed to change the outcome for these individuals nor can it because their total debt load is impossibly high.

What these people need is an expedited bankruptcy procedure that clears their balance sheet - but our lawmakers refuse to do that because that would force the LENDERS to eat their irresponsible loans at the same time the consumer went through Chapter 7!

We cannot solve this problem until home prices are allowed to contract to the point that people can afford them - and the rest of their debts are similarly defaulted!

These statistics show that of those who are in the HAMP program most of them are over-levered all the way across the board. There is no "solution" for them - they were enticed by (and bit on) the bogus claim that they could "have it all" throughout their lives, and as such are deeply in debt.

Remember, these are averages. That means that a large percentage of the people coming out of "HAMP" are in worse shape!

A person with $30,000 a year in income that is carrying eight hundred dollars of non-housing related mandatory debt service has, typically, a moderately-priced "new car loan" and a couple hundred bucks of mandatory credit-card payments (totaling some $5,000 in debt.) They can't afford this - not with a house payment of some $800 on top of it.

Not a prayer in hell.

The issue isn't just excessive debt in their house - it is excessive debt everywhere. We keep hearing bleating about how "underserved" and "lower income" people need "more access" to credit.

This report proves that's utter and complete nonsense, and that the actions of our "financial institutions" have been outrageously predatory - acts that should be felonious.

What that "access" the banking industry demands has gotten them is a one-way ticket to a crushing debt load they simply cannot afford and will NEVER be able to pay.

This problem is not confined to the housing market, it is literally everywhere and allowing the financial institutions that have KNOWINGLY AND INTENTIONALLY marketed this credit to people THEY KNOW CANNOT PAY to receive "help" from the taxpayer to avoid THEIR OWN BANKRUPTCY FOR MAKING OUTRAGEOUSLY IRRESPONSIBLE LOANS MUST STOP NOW.

Assuming Barney Frank Is Not Lying....

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 12:44:00 -0500

... about fixing housing finance through a completely redesigned system instead of trying to "fix" Fannie and Freddie (I know, believing a politician is not lying is always dangerous) I offer up the following suggestions.

Put Fannie and Freddie into run-off via formal receivership. Leave them outside of the government and withdraw all support. Whatever the RMBS return, they do. Whatever the bondholders get back, they do. No support. The face of the prospectus was clear and everyone, including Bernanke, knew it. Honesty and fair dealing starts with telling the truth.
Leave the mortgage market alone for 90%+ of the transactions. That is, no government involvement whatsoever.
With that said, there are two places I recognize a reasonable place for the government to get involved. The one I cannot argue against is the VA mortgage program - I believe this is a perfectly-legitimate benefit of military service and should be maintained. The other is for very specific and targeted FHA loans for low-priced housing. Both should be limited to homes in the lowest quartile of price irrespective of location, that is, with no "escalator" for "high priced" areas. We live in a nation with freedom of movement and association - if you find the place you're living in to be too high cost, then move!

However, if we're going to leave FHA and VA loans in place (and we can do the issuance via Ginnie Mae, which already exists) we need to seriously restore underwriting standards. Specifically, the following are minimums I believe we must demand:

NO automated underwriting and no use of FICO scores at all. FICO is not useful for longer-term obligations, which a mortgage is. Instead, all files must be manually underwritten.
28% front-end ratio and 36% back end (DTI) ratios must be enforced. No exceptions, no ifs, ands, buts or maybes. High-ratio loans are still being made and they're the #1 reason why these loans default. This has to stop.
No VA or FHA refinances permitted for cash-out, without exception. If someone wants a cash-out loan they need to get it on the private market.
10% down payments in cash required, seasoned funds. No kickbacks, no funny games, no seller funding, no "loans from Dad." Cash means cash. If you can't come up with it you don't need to own a house. This isn't being cruel - it's being honest. Roofs needs repair (I'm putting one on my place this spring), water heaters leak and need to be replaced, things deteriorate over time or simply break. You have to be able to save up enough money so that you're not dependent on credit cards if and when something like this happens.

Task the DOJ with enforcement of all statements on mortgage loan applications and paperwork. You lie, you go to prison. Period. End of discussion. No more "fraud for housing" .vs. "fraud for profit" - fraud is fraud, you go meet Bubba and lose your house. Investors have to be able to fairly evaluate what they're buying and so does the government!

In the private market I would radically revamp the securitization system such that:

Any bank that securitizes debt cannot offload liability for breached reps and warranties. You issue it, what you represent and warrant is in the package is yours, without exception or disclaimer.
Credit derivatives on RMBS are absolutely banned (thereby preventing the formation of synthetic CDOs that are purposeful value destroyers by hedge funds and others.) Any true hedge + the underlying (if the hedge can perform) will return less than a Treasury of similar characteristics - as such it makes no sense at all to buy such a thing except to perform regulatory arbitrage, which must be prevented to stop future financial market disasters.
All off-balance sheet, "Level 3" or other-than-marked to the market "holding pens" for such vehicles are banned. If you want to hold these assets you have to do it where people can see them, without exception. That is, it's perfectly ok for investors to buy these for investment purposes but the practice of using them as speculative trading vehicles in hinky legal structures has to be stopped.

That would be a good start.

PS: As I write this the pumptastic CNBS crooners claim that Barney Frank has repudiated his statements. Even though he apparently made them originally in public.

Mr. Frank, did you truly wake up and decide to do the right thing or not? I think you owe everyone an answer.

Toxic Exploding Freddie Mortgage Factory To Close

nospam@example.com (Karl Denninger) — Fri, 26 Feb 2010 10:14:00 -0500

Gee, what took you so long?

McLean, VA – Freddie Mac (NYSE: FRE) announced today that on or about September 1, 2010, the company will cease purchasing and securitizing interest only mortgages, including Freddie Mac Initial Interest^SM fixed-rate and adjustable-rate mortgages. Additional information will be provided to Freddie Mac Seller/Servicers in an upcoming Single-Family Seller/Servicer Guide bulletin.

Interest only mortgages, including Freddie Mac Initial Interest mortgages, provide for interest-only payments for a specified period of time beginning with the first monthly payment after the note date, and principal and interest payments on a fully amortizing basis for the remainder of the mortgage term.

These "vehicles" are an outright scam for 99% of all borrowers. Their exclusive proper use is as a bridge loan.

Let me explain.

Let's say you have a $500,000 house you wish to buy. An I/O loan for the first two years (for example) at approximately 3.5% (currently) would have an interest-only payment of $1,458.

But when the two years is over assuming the interest rate does not change you now have a 28 year amortizing loan and the payment jumps to $2,329.70 - an increase of about 60%.

This is damn near what you have with an "Option ARM", which is similarly explosive when it has an initial "teaser rate." For example, the same loan with a 2% "initial teaser" interest-only has an initial payment of $833.33, but jumps to the same $2,329.70 if it resets to 3.5% once the "teaser" is over.

Note that these ARM rates are very cheap too - if rates go up it gets worse - much worse. Indeed if the rate resets to a fixed 5% then the amortizing P&I on the remaining 28 year term is $2,756.38.

Good luck making that payment if you qualified on the "interest-only" term's expense.

Freddie (and Fannie) had no business getting involved in these toxic self-immolation devices in the first place as they are intended to do exactly one thing - asset-strip the borrower by forcing him or her to come back after the interest-only period and refinancing.

In an environment where home prices are not advancing, however, such refinancing is of course impossible, which leads immediately to foreclosure.

The not-amusing part of this is that it was the market's collapse that forced government supported enterprises to stop looting the American citizen.

Say thanks to the government - both past and present administrations - for conspiring with our banks to literally flense the American Citizen for the benefit of Wall Street.

You Should Intentionally Default: President Obama

nospam@example.com (Karl Denninger) — Thu, 25 Feb 2010 16:05:00 -0500

Well, ok, maybe not quite that explicit, but....

Feb. 25 (Bloomberg) -- The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.

The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.

Contract rights don't matter, law doesn't matter, we'll just ignore all of that pesky stuff when we don't like it.

Should this come to pass the obvious thing for everyone in this country who is underwater to do is to default. On purpose. The resulting flood of defaults will bury the banks with the HAMP "review" requirement for literal years, allowing you to stay in a free house for that amount of time.

During that time you can save a lot of money (your entire mortgage payment) or live high on the hog on the money you would otherwise send to the bank.

Of course you should consult with counsel before doing this, but this sort of change, if Obama actually does it, should be expected to provoke exactly that response.

If I was underwater on my house and had a non-recourse loan, the day this went into effect I'd burn the payment book and send a picture of it on fire to the bank along with a photograph of my ass bearing a hand-scrawled "kiss it!"

Jingle Mail, Jingle Mail, Jingle All The Way!

nospam@example.com (Karl Denninger) — Thu, 25 Feb 2010 13:43:00 -0500

From the horse's ass, er, mouth!

"Why in the world should these homeowners pay that mortgage? After all, their debt was secured by the property, just like the commercial cases cited above. In most cases, they’d be fulfilling the terms of their contract by mailing in the keys and walking away from the house. In fact, by doing this, they’d save almost enough money to purchase the next house that sells in a foreclosure sale – perhaps even the one they’re in!

A word of caution: none of this is legal advice. Talk to a lawyer, accountant and financial advisor before considering this route. In some places (but not most), mortgage-holders are allowed to seize property above and beyond the real estate that secured the loan.

The point I’m making here is that we only hear about “moral obligations to pay debts” when it’s the consumer. Business walk away from bad deals all the time.

I asked Senator Chris Dodd about this earlier this evening (I mistook JP Morgan for Morgan Stanley, please forgive the error). As Chairman of the Banking Committee, he was careful about what he said, but what he said was sensible: talk to counsel and determine what is best for you."

Hosing, I Mean Housing...

nospam@example.com (Karl Denninger) — Fri, 19 Feb 2010 10:17:00 -0500

Well this isn't getting any better... from the wire:

*(US) Q4 MORTGAGE DELINQUENCIES: 9.47% V 9.64% PRIOR; first decline in 8 quarters

Yeah, but....

- Mortgages in foreclosure at 4.58% v 4.47% q/q

Oops. Wrong way there.

- percentage of loans on which foreclosure actions were started at 1.20% v 1.42% q/q

A loan on which the bank refuses to foreclose gathers no loss.

- Prime mortgage delinquency rate 7.01% v 6.26% q/q

But it's still delinquent, and getting more delinquent. This jump, by the way, now pegs the prime delinquency rate at some seven times normal.

Were those loans really prime? I think not.

- Mortgage Bankers Association: 15% of US mortgages were in foreclosure or delinquency (remains a record); with loans 90 days past due also a record

Oh that's nice.

70% of homes have a mortgage on them (the other 30% are "paid off.") This implies that approximately 10.5% of all all homes are delinquent or in foreclosure.

One in ten.

No, the housing mess is not over.

We keep hearing about how we need to practice "principal forbearance."

But that's what a short sale or deed-in-lieu (which then results in a sale to someone else) is - it is recognition of the loss, with the loss absorbed as it should be by both the lender (who loses money) and the borrower (who has his or her credit trashed.)

All the clamoring for "principal reduction" is an attempt to once again get someone off the hook - but nobody should get off the hook. What should happen is that the auditors, bank regulators and examiners should go into these institutions and demand that any loan 60+ be marked to the current appraised value of the property less 10% for rehabilitation and sales expense.

That would give the banks and MBS-holders a powerful incentive to negotiate immediate short sales or deed-in-lieus, as doing so would relieve them of the 10% additional penalty in rehab and sales expenses. That is, obstructionism of the market clearing mechanism of any sort would cost them money, instead of what happens now - they obstruct because it allows them to continue to lie about their balance sheets, asset quality and financial strength!

This is just another piece of "The Bezzle" in our financial markets and the financial side of our economy, and if we are to recover economically we must put a stop to it.

We've tried it the bank's way for three years. It has failed. It is time to tell the banks to cut the crap and either clear these homes or the examiners and regulators will simply mark the paper to the market less resale expenses and be done with it.

What Took You So Long? (Put-Backs and Blow-Ups)

nospam@example.com (Karl Denninger) — Tue, 02 Feb 2010 13:18:00 -0500

IRA put forward a nasty report on the "putback and blowup" risk issue related to the banks and fraudulent mortgages:

The wave of loan repurchase demands on securitization sponsors is the next area of fun in the zombie dance party, namely the part where different zombies start to eat one another. The GSE's are going to tear 50-100bp easy out of the flesh of the banking industry in the form of loan returns on trillions of dollars in exposure, this as charge-offs on the several trillion in residential exposure covered by the GSEs heads north of 5%. The damage here is in the hundreds of billions and lands in particular on the larger zombie banks, especially Bank of America (BAC) and Wells Fargo (WFC).

....

The action "arises out of the alleged fraudulent acts and breaches of contract of Countrywide in connection with fifteen securitizations of pools of residential second-lien mortgages" Take particular care to savor the fact that these are second lien pools and that, where defaults have occurred on the primary mortgage, loss severities on the seconds will tend to be 100%. Or the cost could be more than par if you count the cost of remediation and recovery efforts.

Sigh.... how long does it take folks?

On April 20th, 2007 I wrote the following:

Why? Because every last one of the stated income loans that has been made can be PUT BACK ON THE LENDERS IF IT DEFAULTS.

And by the way, this is not limited to Countrywide (CFC). It applies to IndyMac, Downey, AHM, Washington Mutual and every other lender in the ALT-A space.

Let me restate that again so that everyone gets it - every single ALT-A lender is at risk of having every defaulted loan - no matter how long it has been since it was securitized and sold off - PUT back on them if there is any material misstatement in the paperwork!

To those of you who are claiming that this is a "Subprime" problem, that it is "contained", that it is limited to "poor people who can't pay their bills" or anything like that, let me point out that you are one hundred percent full of crap.

Emphasis in the original.

And on April 17th:

So while mortgage companies may maintain that they have "little" exposure to defaults because they sold these loans off to the bond market without recourse, if in fact 60 percent of the ALT-A stated income products have incomes fraudulently inflated by 50% or more those mortgage companies can probably be forced to take back each and every one of those loans.

HALF of all stated-income loans?

This will BANKRUPT every single one of these companies if it happens.

Now go look at the big bank's balance sheets for second line (HELOC, silent seconds, etc) exposure. 70% of the outstanding dollar volume was written in California, Florida, Nevada and Arizona - on bubble houses. The clear majority of those have a first that is underwater and thus the recovery value on those HELOCs, if they default or are "put back" due to fraud, IS ZERO.

When you look at these large banks balance sheets and then take out of their capital the likely losses under this sort of analysis you find that every single one of them will be driven into regulatory capital trouble at best.

This is just one of the issues we have ducked instead of facing. The other big one is commercial real estate securitizations - S&P put out a report the other day in which it essentially said "if the banks have to eat the reduced value now they're all insolvent."

We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman. The only reason we have seen supposed "improvement" in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON.

But the underlying loss is still real, still present, and still out there. Refusing to recognize it doesn't make it go away. It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they're forced to recognize the already-occurred losses and thus declare bankruptcy.

If this was all "the government" that was stuck with these bad loans that were unmarketable (since they have a zero recovery value under legal collection methods they truly can't be sold for more than a few pennies to one of those "shark" companies that cheats on the law when it comes to those rules) we might have a situation where the government could try to shift it onto the taxpayer through opaque bailouts of Fannie, Freddie and The Fed.

But a good part of this debt was in fact securitized and distributed. Those holders, such as the FHLB that recently filed suit, aren't the government and have no reason to sit there and absorb a loss that occurred as a consequence of allegedly-fraudulent underwriting. For that matter neither does Fannie and Freddie, as despite their "conservatorship" they remain a publicly traded corporation and intentionally absorbing losses caused by other party's frauds could open their directors and officers up to a derivative action (read: lawsuits a-plenty.)

No folks, these losses won't be "buried and monetized." They will travel back up the chain to the last remaining standing organization that touched them, which just happens to be the zombie banks, since all the "independent brokers" that fed the bilge into these securitization factories are long gone, dead and buried. Thus the ticking bomb will wind up exploding on the balance sheets of those "too big to fix" institutions we refused to resolve last year because we lacked the political will to go in a close one or more of these banks, and when it happens..... it will rock our world.

You've had nearly three years warning Washington - and investors.

When - not if - this goes off I don't want to hear "nobody saw it coming" from The Halls of Congress and elsewhere in DC because I will be happy to run a campaign advertisement against anyone who so bleats with a copy of my TICKERS from 2007 documenting that in fact some people did see it coming - and were intentionally ignored.

(The Supreme Court recently made such speech legal.... and for that I must extend my heartfelt thanks!)

More Ponzi Failure: Stuyvesant

nospam@example.com (Karl Denninger) — Mon, 25 Jan 2010 10:44:00 -0500

The tone of articles like this never cease to amaze me....

The owners of Stuyvesant Town and Peter Cooper Village, the iconic middle-class housing complexes overlooking the East River in Manhattan, have decided to turn over the properties to creditors, officials said Monday morning.

Let's not forget what this place is. It was originally a rent-controlled apartment complex designed to provide a place for middle-income people to live in Manhatten - one of the most notoriously-expensive places to live in the world.

To be specific, this complex houses 11,227 apartments - a huge concentration of affordable housing kept affordable by New York City's rent control ordinances.

Met life built the complex in the 1940s after WWII and received a monstrous set of tax breaks and other incentives in return for submitting them to rent control - that is, a means to guarantee that middle income Americans could live there.

Tishman-Speyer, along with a number of other funds (including both Florida's state pension system and California's!) "invested" in an attempted sale that was designed to destroy the affordable nature of rent by releasing these apartments, as the current tenants moved to "market priced" rents (that is, dramatically higher rents.)

What caused the demise? This:

The rents collected did not cover the mortgage payments, as the new owners failed in their efforts to increase net income by steadily renovating and deregulating vacant apartments while raising rents substantially.

Let's not forget the underlying reality of a city like New York: Not everyone is an investment banker and makes $1 million or more a year. Those "pinstriped banksters" like to be able to step outside their gleaming towers and find a place where they can buy a deli sandwich, get some breakfast in the morning, or have a drink after work.

All of those places are staffed and operated by people who don't make $1 million a year and they need somewhere to live.

In our zeal to "welcome" Ponzi finance we seem to conveniently forget that for every bankster there are 1,000 policemen, firemen, teachers, hair stylists, deli operators, taxicab drivers, bank tellers and subway operators. All of these people have to be able to live in these cities too, lest the banksters find that they have a very nice tower on Broad Street but there are no taxis waiting outside, there is no deli at which to get a sandwich and when Joe Q. Mugger shows up there will be no cop on the beat either!

At its core this "project" was just another example of Ponzi finance. It was never economic at the current going rate in the complex for apartments that were under rent control, and could only succeed if the new owners could effectively throw out all the current tenants and replace them with the "upper crust" folks who had much more.

But by displacing those working-class folks the jobs that they represent would go away as well, and without those, well, who drives the Taxicab?

Nobody bothered thinking about that part of the equation before structuring the deal. To the banksters it simply wasn't important.

Frenzy overtook common sense, and it wasn't limited to New York. State pension funds "invested" in the Ponzi that was Stuyvesant and lost their shirts - Florida has written off in its entirety the coin they threw into this mess - a big chunk. In the days and weeks ahead I'm sure we'll hear that the loss to California was 100% as well.

It would be nice to see people wake up, but so far I see precious little evidence of it. Everyone wants to talk about "politicizing The Fed" and other BS, when the real issue is far simpler - we have built a Ponzi finance system that relies on ever-increasing levels of debt in the system, and we hit the wall in terms of being able to pay. Instead of doing the right thing we decided to paper it over because it was "easier", but all that has done is make the problem worse, and the "leakage" in areas such as this will continue to show up until finally, at long last, the bright light of recognition shines through.

When that day comes, and it eventually must, it will not be market friendly, but that day, irrespective of whether it comes with a market "correction" or a "crash", will mark the time when our economy will begin to move back toward balance and a sustainable road forward.

FHA: Nice Try, NO DONUT

nospam@example.com (Karl Denninger) — Wed, 20 Jan 2010 07:40:00 -0500

This is a move in the right direction:

The premiums FHA charges to insure mortgages will rise to 2.25 percent from 1.75 percent this year, the agency said in a statement yesterday. Borrowers who have credit scores below 580 will also have to make down payments of at least 10 percent, and allowable seller concessions will be cut by half.

NOT ENOUGH.

Look, how many times do I have to repeat it? It is called HISTORY and it demands the following standards for affordable, SUSTAINABLE mortgage lending:

28% maximum front-end ratio (PITI and other direct housing expenses)
36% maximum back-end (DTI) ratio
20% down payment, all in cash.

The issue is sustainable payments and limitation of leverage. The front and back end ratios provide for sustainable payments and the down payment limits leverage to no more than 5:1.

The down payment also proves that you can accumulate sufficient capital to cover the sort of "routine emergencies" that will happen when you own real estate. A new roof, a water heater, a washing machine, a broken window, a furnace or air conditioning unit. Things break over time and being absolutely reliant on continued access to cheap, easy credit or you freeze to death if your furnace fails in the winter is both unsustainable and unsafe.

The FHA REFUSES to address the front and back end ratio problem. Its "FHA TOTAL" scoring system will STILL approve loans with DTIs over 40% and, in many cases, with layered risks. THIS MUST STOP IF WE ARE TO SEE FHA DELINQUENCIES AND FORECLOSURES END!

Everyone is hell-bent and determined to keep house prices from contracting along with refusing to make home loans only to those responsible and financially stable enough to be able to actually own that house on an ongoing basis, and thus the government and industry refuses to embrace sustainable, affordable loans.

Yet that is exactly what has to happen if we are to heal the housing market and return it to health - NOT as a speculative financial vehicle but as a sustainable and responsible place to raise a family and live!

The FHA is cutting the amount of aid sellers can contribute to homebuyers’ closing cost to 3 percent from 6 percent of the purchase price. The FHA said the higher 6 percent concession led to inflated purchase prices.

That amount should be zero! Again, the issue is simple - if you can't afford the costs of acquisition of a house, and can't save enough money to close, what happens when, not if, you have to spend money on some piece of critical maintenance or repair?

We must stop making loans to people who can't afford to keep the house!

"HAFA" - Foreclosure Warning Dead Ahead!

nospam@example.com (Karl Denninger) — Mon, 04 Jan 2010 08:48:00 -0500

Under the Radar - a bit - came this ditty at the end of November. Coupled with the "unlimited" Fannie and Freddie "credit line", this may presage a veritable collapse in house prices this coming spring and summer - along with a massive "dump" of inventory.

"HAMP", the Treasury's program to "prevent" foreclosures, did not originally appear to have a "stick." Well, here's the stick folks - for those who cannot qualify for a modification, or who "blow it" while on a trial program and simply don't get a permanent change servicers are in fact required to offer short sale or "deed in lieu" alternatives when they make sense.

Got that? Servicers participating in HAMP must follow the guidelines set forth in this Supplemental Directive.

No choices here folks - if you're part of HAMP, you are required to offer expedited and unified procedures for short sales and, optionally, "deed in lieu" programs.

This goes into effect in April, although servicers can start offering these programs earlier.

Come the spring selling season you're going to see the inventory of homes that were "HAMPd" and failed for whatever reason hit the market.

This is not a trivial number of houses - there are close to 750,000 homes currently under trial modifications, and only a tiny number of them - something like 30,000 - have converted to permanent payment changes.

Thank Treasury for not telling you about this until the "selling season" had ended and we were in the middle of the winter months when sales are slow - and timing the "required start" date for April 1st, right into the maw of the spring selling season.

If you need to sell your house in the next year this is something you need to take into consideration. A flood of nearly 3/4 of a million houses appear poised to hit the market as short sales and "deed in lieu" sales beginning in April.

In short it appears that Treasury has figured out that all these "extend and pretend" games are not converting delinquent loans into sustainable payments and ownership opportunities. As such the stick has now made it's appearance. While this will promote the market clearing (a good thing) one wonders about:

The propriety of "deciding" to extend an unlimited line of credit to Fannie and Freddie on Christmas Eve in the hope that the market "wouldn't notice." Dennis Kucinich and a couple of other reps have made noise about Fannie and Freddie becoming the tools by which bad loans are dumped on the taxpayer in a back-door bailout of the banks. Before you applaud Dennis make sure you look at his voting record on the bills that enabled the bailout of Fannie and Freddie - and made Treasury's actions lawful - in the first place!
The be really really quiet fashion in which Treasury has tried to play this one. Remember that there are overlapping programs here, and the quiet nature of some, along with the trumpeting of others, appears to be designed to disadvantage consumers - that is, to SCREW YOU. Specifically, the "first time" home buyers tax credit (and repeat credit) both require contracts to be signed by April 30th, 2010. This program's mandatory effect begins on April 1st, which means that with the ordinary process of approval and evaluation (set forth in the document linked above) that inventory will hit the market right about May 1st. That $8,000 "credit" may be the most expensive $8,000 you have ever received compared to the deal you would obtain had you waited a couple of months and bought into the maw of the short sale and deed-in-lieu unload. Thank Tim Geithner and President Obama for hiding their intentions in this regard until tens of thousands of Americans bought (and are still considering buying) grossly-overpriced houses when they were fully aware of their intent to force an unload at an actual market price just a few months later!

The short form is that Treasury has suddenly pulled the stick out of its pocket with regard to the HAMP program and as a consequence those who believe that "housing has stabilized" are very likely to get a truly epic surprise later this spring and into the summer months.

In addition, those who bought during the time period of the "home buyer tax credit" almost certainly, to an individual transaction, have gotten and will continue to be screwed, with the essence of the rip-off being the lack of disclosure of Treasury's intent to force the market to clear. Indeed, Treasury has sent public signals for over two years that they have NO INTENTION of forcing market-clearing prices - EVER!

If "housing stability" is part of your investment thesis, whether it be in credit the equities, you need to check the premise upon which your thesis is based and adjust accordingly.

I applaud Treasury for what appears to be recognition of what I have advocated for more than two years: The housing market cannot be propped up at artificially-inflated prices and must be forced to clear by a return to fundamental values.

However, I must object to how Treasury has gone about this. Rather than being an advocate for the people of this nation Treasury has instead intentionally designed these programs and withheld critical information from the public with regard to their full intentions with the purpose and effect of inducing consumers to enter into transactions that are severely to their disadvantage - all to create yet another rip-off of the public for the benefit of the big banks.

The Mainstream Media Wakes Up? (HAMP)

nospam@example.com (Karl Denninger) — Sat, 02 Jan 2010 12:35:00 -0500

Gee, what have I been saying now since this crisis began?

Some of them, from the Mortgage Brokers (so they say; all anonymous) are particularly amusing, and demand a response.

Let's look at how we got here guys.

Home values have appreciated at rates that dramatically exceed individual's growth in salaries.

Of course home value expansion significantly beyond the rate of inflation must eventually cause people to be unable to afford houses. The "why" on this isn't particularly difficult to figure out, but for those who were educated in Government Schools, let me lay it out for you.

Dateline: April 1st, 2007.

Working on three years ago.

Indeed, if you want to look at every article I've written referencing "house", "prices" and "contract" (as in "house prices will and/or must contract") here's the link - have fun with all 185 entries.

When you bang the drum long enough someone eventually removes the cotton from their ears to try to figure out what in the Sam Hell all that noise is about. It appears the NY Times has finally done so.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Oh, it only took you damn near three years to print this in the paper, did it? How come?

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

EXACTLY.

Look folks, this isn't complicated. You can afford to spend roughly 30% of your pre-tax income on housing. A bit more, a bit less, but roughly that much.

So if you have a $50,000 income in your household you can afford to buy a $150,000 house.

But you can't afford to buy or remain in a $300,000 house no matter what you, the bank, President Obama or the tooth fairy wish to promise you.

The banks know this. They've known this since the bubble began, which is why they did their level best to package up all this crap paper and sell it to other people - so they would explode, not the bank.

But at some point they saw all the "moolah" these "investors" were making (for a while) and started to eat their own cooking. And boy, did they gorge on it in the most dangerous and outrageous fashion - they went hot and heavy into second lines (HELOCs and similar loans) which are the most dangerous of all, since they recover exactly NOTHING in a foreclosure until and unless the first mortgage is entirely satisfied.

HAMP and all the previous incantations are an outrageous and pernicious scam. They exist for one and only one reason - to permit the continuation of massive and pervasive accounting fictions by banks and other institutions that would otherwise be rendered instantaneously insolvent.

Let's just take a couple of examples - first, Citibank.

Their most-recent 10-Q shows a large concentration of HELOC and other Second-Lien mortgages in California. A very significant percentage of the homes in that state are worth less than the first mortgage balance. As such, should the people who own those homes stop paying, a huge percentage of the $14.6 billion that Citibank holds in second liens in California will be worth exactly nothing.

Now let's look at Wells Fargo (WFC):

Wells has nearly $35 billion outstanding in HELOCs in California and another $12 billion in Florida - both states where huge percentages of homes are "underwater" on their first mortgages. Again, the problem is the same - should the owners of those homes stop paying and the home be worth less at resale than the first mortgage balance the outstanding HELOC is worth a LITERAL ZERO.

Let's put this in perspective for Wells - in that same 10Q they claim $53 billion in "Tier 1 Common Equity", a 5.18% ratio. The outstanding balance on these HELOCs in bubble states is nearly enough to DESTROY the entirety of their Tier 1 Common Equity and should some fairly-conservative assumptions be applied - that is, that a quarter of these loans will ultimately default and be entirely unrecoverable due to the first lien being underwater this would be sufficient to impair their "well capitalized" currently-claimed position.

The other "major" banks such as Bank of America have a similar picture. Indeed, you can go over to http://edgar.sec.gov and check out any of the publicly-traded banks for their HELOC and similar second-lien exposure.

This is the reason for "HAMP" and all of the other silliness. It is not to "protect" homeowners, it is to prevent banks from having to recognize punishing losses that, in point of fact, they should have to recognize due to their own idiotic lending practices.

Treasury knows this - that their entire "TARP" recapitalization and "stress test" game was nothing other than a sham intended to pump confidence so that these institutions could issue stock into the market and try to "rebuild" their balance sheets.

If this didn't actually hurt the public I wouldn't care. But it does severely damage the public in multiple ways, specifically:

These "modification" programs in the general sense do not and cannot lead to sustainable mortgages for the vast majority of homes at risk. The reason for this is simply that the person who bought the house did so at a radical premium to what they could actually afford. That "premium" was there as a consequence of intentional speculative activity and outright fraud in underwriting that pumped "home values" - premium that has now disappeared and cannot come back by anything short of more fraud! Therefore these "homeowners" cannot be "saved" - any change that simply reduces payments but doesn't get rid of the negative equity problem only extends and increases the damage ultimately done.
A huge percentage of the people trapped in these loans are cajoled or outright threatened into doing things that are severely against their own interest. I hear daily of people who have raided 401ks and IRAs to try to remain in their homes and make these "trial payments" or participate in other similar schemes. Retirement accounts are privileged in a bankruptcy and cannot be taken; it is essentially NEVER the correct thing to do to raid such an account to try to prevent a foreclosure or bankruptcy filing! This sort of underhanded "suggestion" occurs all the time and in my opinion constitutes raw predatory conduct for which there should be felony legal sanction - but of course there isn't.
The artificial propping up of home prices severely damages those Americans who would like to buy a house but cannot afford one at the present price. If you do not own a car, you obviously want prices on cars to be low, not high. The same applies if you don't currently own a house - you want prices low, not high. The only people who benefit from prices that are pumped up out of whack with fundamental values are those who lent money at bubble prices and will lose that money if prices contract, along with those who build more houses at bubble prices and thus skim off unreasonably large "profits."

Let me be clear: I have no mortgage on my home at all and thus should the government do the right thing I would "lose" in that my home's value would contract further. That's perfectly ok - I bought this home as a place to hang my hat, not as a speculative financial instrument. I spent the money with the expectation that it would be a nice place to live, not as a means to play with leverage and try to make a fortune by finding a bigger sucker to offload my property to at a profit.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

There isn't any way to do that. Writing down loan balances on the back of the taxpayer would create a more than one trillion dollar liability on the taxpayer.

Mark Zandi goes on to prattle about how the taxpayer should eat the writedown of principal - and that we must not force the banks to eat their losses because it "could pull the economy back into recesssion."

So the solution is to make the taxpayer eat the loss? How will that not pull the economy back into recession?

Geither and Obama haven't done this and they damn well better not. Such a plan would not only likely cause foreigners to entirely give up on buying our government debt (thus precipitating an immediate government funding crisis) but in addition such a plan would be outrageously unfair to The American People. It would dwarf all of the bailouts thus far, transferring the cost of more than five years of reckless and even fraudulent lending from the banks and other institutions who engaged in it to the taxpayer.

Yes, I'm well-aware that the "unlimited" credit line for Fannie and Freddie that was passed in the dead of night on Christmas Eve could, indeed, be used to allow banks to dump all their principal forgiveness into the government AND FORCE YOU TO PAY FOR IT without an appropriation of Congress.

IF that happens the proper response is for the people of this nation to rise up and demand that Obama and Geithner be immediately IMPEACHED.

No, the correct solution to this mess is the same as it was in 2007, when I began writing on the topic. It is in fact to withdraw all of this support and allow housing prices to collapse back to reasonable and affordable levels.

If this bankrupts the "too big to fail" banks, so be it.

We need a banking system and we both have and will continue to have one. Community banks and credit unions are not materially exposed to this because they weren't dumb enough to get entangled in making loans they knew couldn't be repaid, and they will be the beneficiaries of the "too big to fails" being flushed down the sewer of bad ideas - where they belong.

We do not need specific, individual banks, no matter how big and politically powerful they might be.

HomeDebtor Fraud Intentionally Unpunished

nospam@example.com (Karl Denninger) — Tue, 29 Dec 2009 08:58:00 -0500

The scam during the housing bubble was to intentionally overstate income (and then take some sort of exotic loan) so as to hide the fact that you couldn't afford the house. Your "escape" was that when (remember, houses never go down in price) the loan's "teaser" expired you'd just go refinance. The banks loved it (they got to hit you for another round of fees and costs) and the liars loved it - they got to live in $500,000 houses on $50,000 of income - even if they'd never actually own the place.

This, by the way, is a federal offense (lying on a mortgage application) yet The FBI and other law enforcement officials were and are under explicit orders NOT to prosecute these crimes.

Now the scam is to understate your income so as to qualify for a "better" modification - and again, the government is refusing to enforce the law:

Until recently the rules were clear: if you grossly understated your income to qualify for the program, you had to restart the loan modification process. It made sense. After all, we got into this housing mess partly because too many people were dishonest about how much they made.

....

The government needs this program to work -- and fast. That's the only way to explain the Treasury Department's waiver of a requirement punishing borrowers who understate their income by 25 percent or more when trying to get a modification.

That means a borrower who had told a lender he made $75,000 but was found to make $100,000 doesn't have to restart the modification process. Under the waiver announced Dec. 16, that person now gets to continue the trial period instead of being rejected immediately.

Isn't that special?

Are you pissed yet? You should be. This sort of game means that the "waterfall" that I posted before goes further down than it should for a given borrower:

Yep.

This is the reality folks: Your neighbor lied about his income to get his house in the first place. He took out a loan he couldn't possibly repay on the original terms - an OptionARM or other "exotic" loan, and then (in many cases) HELOC'd out every penny possible and blew it on a Hummer, a Boat and a few exotic vacations.

This caused the "value" of your house to skyrocket. Cities and states of course got lots of tax revenue as a consequence of these higher "values."

But these "values" were not real. They were a fraud. Remember that a transaction requires a willing (and able) buyer and seller. Without a willing (and able) buyer, the price does not go up.

When the Ponzi ran out of suckers, people started to default en-masse. The government panicked - so-called "wealth" was disappearing, and in addition cities and states saw their "revenue" disappear as those who can't pay mortgages don't pay property taxes either.

So government rides to the rescue with an alleged plan to help those who are at risk of losing their house due to unemployment and other effects not of their own doing.

What happens? The very same people who played grift and scam on the way up do it again on the way down.

The felonies they commit are charged not to them, but to you - by government policy.

This is not a "lie" folks - it's a crime. A crime that our government is not only willfully ignoring but is and has been encouraging, and forcing you, the honest American, to pay for.

And let's be clear: while it is a "dirty secret" the US Attorney's Manual says:

Prosecutions of fraud ordinarily should not be undertaken if the scheme employed consists of some isolated transactions between individuals, involving minor loss to the victims, in which case the parties should be left to settle their differences by civil or criminal litigation in the state courts. Serious consideration, however, should be given to the prosecution of any scheme which in its nature is directed to defrauding a class of persons, or the general public, with a substantial pattern of conduct.

Got it?

If you lie on your mortgage, the government doesn't care - even though that was and remains one of the primary causes of both the housing bubble and now is preventing the market from being marked back down to actual fair value and clearing.

The government has in fact declared itself as an accessory to millions of felonies both before and after the fact.

Fraudie/Phoney - What Does Treasury Know?

nospam@example.com (Karl Denninger) — Thu, 24 Dec 2009 19:07:00 -0500

On Christmas Eve one would think you could have a nice evening with your family. Little did I know what Timmy Geithner had up his sleeve:

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

I see. But I thought housing was getting better? That's what I heard on CNBS Tuesday when existing home sales came in "above expectations."

But then Wednesday came around and, well, new homes? They're just not selling.

Purchases dropped 11 percent to an annual pace of 355,000, lower than the lowest estimate of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. The median sales price decreased 1.9 percent from November 2008.

Wait a second. How come the disparity?

Two reasons, really. The first, which the pumpers cite, is that "the tax credit was maybe going to expire." Uh huh.

No, folks, that's not the reason. The reason sales fell is that they're still falling everywhere. What's happening in the "existing home" sales numbers is that foreclosure sharks are taking a bite here and there, in many cases generating double counts in the "existing home sale" category, never mind the alleged data source in the first place. But even the NAR acknowledges that 33% of existing home sales were foreclosures, not actual organic "meeting of the minds" transactions! Take those out and existing home sales didn't rise 7.4%, they instead did their best imitation of a cliff-dive, with organic sales being a mere 4.38 million units (annualized), which is a mid-to-late 1990s print (and then again around the 1978 time frame!)

The Obama administration is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, said Julian Mann, who helps oversee $5.5 billion in bonds as a vice president at First Pacific Advisors LLC in Los Angeles. “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

No, really?

Mark Hanson has been on this since the beginning: if you haven't read his stuff, here's a nice treatise of why we are nowhere near recovery in the housing market. Read it and weep - Timmy has.

By the way, if you're wondering what sort of trash Fannie and Freddie are holding, here's what Mark says about their "underwriting quality" during the boom years:

Many lenders, especially the big banks, had in-house DU and LP underwriting ‘trainers’ that would go around to the various mortgage branches and teach underwriters how to ‘trip’ the systems in order to achieve automated loan approvals when a declination was certain, or simply get fewer approval conditions on a loan that was borderline. Getting a loan approval out of DU/LP on a borrower with a 100% DTI — with limited documentation required on the automated findings — was not uncommon.

Got that? A DTI - that is, debt-to-income - of one hundred percent - was quite possible, along with limited documentation as well!

Now let's remember that most people turn over their home about every seven years (that's the average "holding time"), so an awful lot of Fannie and Freddie's paper - quite possibly as much as half - is contaminated.

Still feeling good about a housing recovery?

If you're wondering how bad this is in the so-called "prime" loans the Mortgage Bankers Association lays it all out:

6.84% of prime loans are now delinquent (at least one payment behind but NOT in foreclosure) and 3.20% are in foreclosure. This means that almost 1 in 10 PRIME LOANS are either late or in foreclosure.

FHA loans are running close to 20% between delinquent and foreclosure-in-process. That's one in FIVE.

And of subprime loans, 41% are either delinquent or in foreclosure. Forty one percent!

A mortgage that is at least two payments late almost never "cures" - that is, once you miss a second payment you're virtually assured to eventually be foreclosed. (Some one-payment misses are legitimate errors or very temporary cash-flow disruptions.)

So let's ask a few questions here:

What's the bond market going to think about a literal $5 trillion guarantee (for three years anyway) on MBS? Might some people have known about this in advance, with that being the reason for the bleed in the long end of the bond curve this last week or so? One wonders - of course nobody would ever trade on inside information, right?
Why wait until the market closed on Christmas Eve for this? Oh, that's to stop a sell-off in bonds, right? Yeah, we're playing "American Idol is on, and you're too stupid to remember this for three days." Got it. We'll see how that works out.

Oh, and if that's not enough to make you vomit, get a load of this:

The government announced Thursday that it had approved Wall Street-style, multimillion-dollar compensation packages for top executives at Fannie Mae and Freddie Mac, the two mortgage companies that have become little more than arms of the federal government.

The two top executives at the companies, which have received $121 billion in federal aid since they were seized last year, could be paid up to $6 million each for their services this year. In total, the top 12 executives at the two firms are in line to receive up to $42 million in 2009 alone.

Cost the taxpayer an unlimited amount due to shoddy underwriting and lax (or absent) risk controls and not only do you get bailed out, you also get paid $6 million a year.

One final question: Does this force consolidation of Fannie and Freddie onto The Government's balance sheet? I'd think so - what say you CBO?

Where's my pitchfork?

Canada Real Estate And BNN Interview

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 08:51:00 -0500

First, here's the interview I gave yesterday on BNN - have a look-see..... (I don't believe this can be embedded)

http://watch.bnn.ca/#clip246874

I'd like everyone to note the difference between how BNN handles interviews like this - and guests - and how stations like CNBC do. There's a difference between an interview and an intentionally-slanted piece of hacksterism.

BNN does the first, CNBC the second. The difference is NOT subtle.

I want to talk about this, however, for one reason - the following chart they produced (which I couldn't see at the time due to the technical realities of being on a remote - and a Skype one at that, since the studio near me was booked and couldn't accomodate a "real" uplink):

The interviewer says "we're at about 2 times" but how can you have a chart of price .vs. income that has negative numbers on the chart?

Well that chart obviously doesn't say what people would like to think it says. That's off some normalized ratio - not actual income-to-price, as the latter could not be negative.

In point of fact doing a bit of research after the show I came up with the following....

Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.

That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)

It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.

Let me be clear, strictly on the numbers:

Canada is in for a housing bust WORSE THAN OURS.

Beware Canadians..... you can argue over the timing of the outcome here, but if you think the "bad event" won't happen and act on that belief, don't cry when a year or three down the road I start piping up with "I told you so!"

Loan Modifications: A JOKE

nospam@example.com (Karl Denninger) — Tue, 08 Dec 2009 13:35:00 -0500

I have often commented, going back the start of The Market Ticker, that the only solution to the housing mess is for house prices to contract to, on average, three times average incomes or less.

Every program from the government - literally every one - has been aimed at preventing this.

The reason is simple: Those who funded the bubble machine would be rendered insolvent - in some cases many times over - if the truth about home values was to be recognized.

Therefore, every program has been one sort of "extend, pretend and lie" or another. All of them.

Now we are finally getting people in the so-called "expert business" opining on what I have said since this crisis began: loan-to-value ratios are too high, and until they fall foreclosures will continue.

What regulators and lawmakers need to understand is this: Prices will fall - one way or the other. We are only able to determine who bears the loss of making these unsound loans, not whether the losses are ultimately recognized.

Specifically, Laurie Goodman said:

Got it?

Let me make a few things clear:

I fully understand that forcing recognition of true value in these homes - that is, principal reduction so that the outstanding amount on the loan(s) reflects market value, not the pumped bubble value, will result in huge losses and bankrupt many institutions, probably including so-called "Too Big To Fail" banks.
However, as Laurie has said, the choice is between forced cramdowns and workouts within the current loan structures or continued foreclosures. Both end in the same place for home values, but the latter results in larger losses, as a loss delayed is a loss that grows larger for multiple reasons. Some of those include "homeowners" who trash their foreclosures on the way out the door, vandalism and simple rehab-and-resale expenses.

More than two years into this mess it should now be clear that the approach taken by our government has been and is bankrupt - and will not work, no matter how many different ways it is repackaged and re-sold.

These losses must be recognized and the bad debt forced from the system. It is essential in order to return our economy to a sound and stable footing. Those who make these loans and bought these securities either through false representations or their own lack of diligence must suffer their losses even if it bankrupts them, and if they have a claim at law to bring for fraudulent marketing or misrepresentations then let them sort it out in court - where it belongs.

See, HAMP Really Was A Scam

nospam@example.com (Karl Denninger) — Sun, 29 Nov 2009 14:12:00 -0500

You have to give these banksters credit - they'll lie and lie and lie some more....

More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

None? Out of 651,000 "trial" modifications none have turned into a permanent repayment plan?

That's all the borrower's fault, right? There's no collusion here, yes? No intent to screw the taxpayer, having taken their money? Nothing wrong here at all... it just calls for the administration's "attention."

Yeah, right.

“We are taking additional steps to enhance servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications,” Treasury spokeswoman Meg Reilly said in an e-mail yesterday. The Obama administration plans to announce additional steps tomorrow, including new private-public partnerships and resources for borrowers.

Bull.

What's worse, Bank of America has only 14% of their "eligible" loans in a trial modification. Citibank has 40% under trial, and JP Morgan/Chase 32%.

All in all, only 20% of those "eligible" have been offered, accepted, and are in a trial but zero percent - zero - have actually turned into a permanent loan modification that the homeowner can count on.

The administration program requires banks that received federal aid from the Treasury’s Troubled Asset Relief Program, or TARP, as well as mortgage-finance companies Fannie Mae and Freddie Mac to lower monthly payments for borrowers at “imminent risk” of default.

That's some "requirement" eh? Zero percent completion from June to October? That's five months, and the "trial" period is supposedly 90 days, so this means that either (1) nobody did anything for the first two months, or (2) not one borrower successfully completed a trial between June and now.

If the Obama Administration and Treasury was serious about this "help" they would be seeking indictments.

Oh wait - they can't - there was no "or else" put into the law enabling HAMP, was there? Just looked again - nope - no criminal or civil sanction in there for banks who are allegedly "required" to do these things.

I repeat: A law without a punishment for failure to comply is no law at all - it is nothing other than a scam and a fraud perpetrated by the government to make you "feel good" while in fact doing exactly NOTHING.

Wake me up when our government stops allowing the banks and regulators to both write laws without punishment clauses in them and violate black-letter laws with wild abandon without one person or firm in the bankster community ever going to prison, having their bonus clawed back, or having their corporate charter revoked.

Our so-called "President For Change", President Obama, in fact has changed nothing, is permitting and encouraging the banksters to rob America blind, and forgot to tell you that the "change" you're going to get (or keep) is the couple of worn pennies wrapped up in lint at the bottom of your pocket.

Gee, Forced Put-Backs?

nospam@example.com (Karl Denninger) — Sun, 29 Nov 2009 13:56:44 -0500

Who was talking about this two years ago?

Banks had to buy back $7.1 billion in defaulted single-family loans in the third quarter to reimburse mortgage investors, up from $1.9 billion in the previous quarter. Federal Deposit Insurance Corp. Call Report information shows that most of the buyback demands fell on JPMorgan Chase and Bank of America. Chase repurchased $2.7 billion in defaulted loans and BoA repurchased $2.3 billion to satisfy investor demands.

Uh, let's see, that's a 270% increase in one quarter.

Oh, and this fun is just getting started.

Any loan falsely represented to have a certain level of underwriting that really didn't can be forced back on the originator. When the originator (such as some bucket shop with a warehouse line funded by someone like ex-Countrywide or similar) is gone, it travels up the line until the "last man still standing" winds up holding the hot potato, where it detonates.

The ugly here is that most of these are so far underwater that the ultimate loss will typically be 50% of face value and sometimes more.

No folks, this mess isn't over by any stretch of the imagination. Indeed, it is just getting started.

Housing: Yes, That Was (And Is) A Train Wreck

nospam@example.com (Karl Denninger) — Tue, 24 Nov 2009 09:17:00 -0500

The WSJ is starting to "get it" when it comes to housing:

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

....

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

....

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value.

This is the consequence of making loans that you have no reasonable expectation can and will be paid on the original terms.

Folks, this is really quite simple when you distill it all down. It comes down to the underlying free-market principle of sound lending:

The check and balance for both borrowers and lenders against making or taking out bad loans - that is, loans that you will not be able to pay as agreed - is that both lender AND borrower will go bankrupt.

The gross injustice in our nation today is that over the last twenty years we have increasingly forced borrowers who take out bad loans to not only go bankrupt but be unable to discharge their debt, so long as they are individuals. The corporate bankrupt, however, maintain their "corporate veil" and thus can file Chapter 11 - or 7 - with impunity.

This is the root of the problems in our economy. It is the root cause of the credit bubble. It is the root cause of the housing bubble and the ridiculously-pumped pulled-forward demand curve that is now inexorably collapsing, despite the protests of The Fed, Treasury and The Administration.

We will not return to a balanced economy capable of organic growth so long as this imbalance exists. We are precisely emulating the idiotic and in fact criminally-insane stupidity that was practiced in Japan when their property bubble imploded. Desperate to protect the politically-connected banking interests that had become entrenched as a result of structural decisions within the Japanese Central Banking system the Japanese government knelt before the banking interests and allowed them to sweep their bad debt under the carpet.

But that bad debt constrained lending and business activity, just as it has and is here. This in turn prevented real economic expansion, just as it is here. GDP growth was all government spending, but constrained in the ability to tax by weak consumption and pricing power, the government found itself on the business end of a debt ratio spiral - just as we are now here.

The root cause in both cases is the concept of "primary dealers" - favored banks that in our case are the "agents" of The Federal Reserve and who deal with The Fed and Treasury in the market for federal debt.

By creating these "Super Banks" the government and Fed have put the bank before the nation, and allowed themselves to be led around by the nose - literally.

What other explanation is there for UBS, for example, retaining its banking charter after admitting that it helped Americans intentionally evade taxes? For Goldman being able to securitize and sell debt - without civil or even criminal consequence as documented in my November 20th Ticker relating to certain "subprime" loans? For Citibank being bailed out from bankruptcy at least three times (and maybe four?) in the last 20 years?

Let's face reality folks - the "primary dealer" concept and implementation is nothing other than government capture. It is a scam. It is a device intended to profit a handful of ultra-large multinational firms at the direct expense of the American People - not just every day as they skim off their margin for "distributing" Treasury debt, but to an even larger degree whenever they decide to ignore the requirements of safe and sound lending and put the entire economy and indeed the government's viability in jeopardy.

This piece of embedded corruption provides cover for criminal conduct (felony tax evasion by American taxpayers) and knowingly unsound lending, with these firms confident that the US Taxpayer will be obligated to bail them out should there be trouble.

But in this case the bailout has embedded structural trouble into the system, just as it did in Japan. And let's not kid ourselves - all we've done when it comes to housing is shift where the risk is.

Recent analysis has shown that the FHA's "AUS TOTAL" decision-making program (computer-based underwriting) has been intentionally calibrated to produce unsustainable loans. Indeed, as I have documented FHA will provide an "approve" return on DTIs (when one includes the FHA "fudge factors") as high as 49% of gross income. This is clearly an unaffordable loan and is reflected in the current FHA delinquency and foreclosure rate which stands, at this point at more than one in five loans.

The true ugliness here is that these stats are far worse than they first appear. Why? Because more than half of the FHA total loan portfolio has been originated in the last two years.

Consider what this default ratio means given the portfolio composition, as there are only two possibilities - either the FHA is intentionally making loans that are defaulting quickly, within the first 24 months, or the older FHA loans are defaulting at an astronomical rate.

FHA is less-than-forthcoming when it comes to testimony before Congress on this point, and apparently, Congress has buried its head in the sand as well. Indeed, we have Congresspeople making statements that making dangerously-unsustainable loans is a "policy" intended to head off housing price declines.

But does and will it?

Does giving someone a loan that will foreclose in a year or two actually head off housing declines? Or does it simply bankrupt more Americans and defer the inevitable house price decline by a short period of time - a year or two at most, perhaps as little as a few months?

If the latter then this sort of institutionalized rape of our citizens, this time under explicit Congressional authorization as a matter of "policy", is in fact nothing more than yet another scam to allow those "primary dealers" (and others) to unload their deeply-underwater and compromised MBS into the government - where they will then detonate, forcing the taxpayer to bear a loss that should have been taken by those who lent money without a reasonable expectation of being paid back on the original terms.

The Warning Shot Fired Yesterday

nospam@example.com (Karl Denninger) — Thu, 05 Nov 2009 07:59:00 -0500

So few commentators have made this point..... indeed, I think I was the only one. Let's revisit the FOMC statement:

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

That's the key part of the statement: it is a warning to The Administration and Treasury.

What I said yesterday was:

We bought it all. We're no longer part of the market, we are the market! We have no freaking clue how to exit from this, and we know that when we do rates will spike higher. Unfortunately we also know that if Fannie and Freddie continue to bleed red ink we will blow up instead of them by doing this, so in March we pinky-promise to stop, even though that will destroy what's left of the housing market.

Read that again.

Now consider this:

The Federal Housing Administration abruptly delayed the release of a long-awaited independent audit of the financial soundness of the agency, citing potential problems with the accuracy of some of the study's economic models.

Economic models eh? You mean an institution that is levered 50:1 (which the FHA currently is, if I'm doing the math right) could have a wee problem should something go wrong? What could go wrong? Oh, maybe things like this:

Most banks rejected Ms. DeForte because her debt level was too high and her credit score too low. But Lend America put Ms. DeForte into a $402,000 loan backed by the Federal Housing Administration, a New Deal-era agency that Washington and Wall Street were relying upon to pick up the slack in the mortgage market as private lenders pulled back. Ms. DeForte fell behind on payments six months later and is seeking a loan modification. Taking the loan was "a stupid mistake," the 46-year-old office manager said.

It may have been a stupid mistake but the principle of asymmetric information meant that the FHA knew damn well what it was doing, and did it anyway. Ms. DeForte might not have understood it at the time (and now recognizes that it was a stupid mistake), but both Lend America and The FHA don't have that excuse.

Indeed, as I've documented, the FHA has been willing to write paper with their guarantee on loans with DTIs (debt-to-income) ratios exceeding 50%!

Congress is barking but has yet to bite:

"If not addressed promptly, problems at the FHA may result in yet another massive taxpayer-funded bailout that this country cannot afford and which the American people will not accept," wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, released Wednesday, to Housing and Urban Development Secretary Shaun Donovan.

Really?

I love 'ya Darrell, but neither you or anyone else on Capitol Hill have done a damn thing about Fraudie and Phoney! Indeed, close to $100 billion in taxpayer funds have been larded into those institutions to prevent their utter collapse but the bogus lending has simply shifted as a matter of formal policy over to the FHA, which is then selling the paper back into - you guessed it - Fannie and Freddie!

Fraudie and Phoney are not new to trouble. Documents from 2004 show that the "massage the earnings" game was well-embedded into these institutions as early as 2001, yet nothing was done.

Seven years later, the taxpayers are on the hook for $100 billion, the firm's capital continues to erode as their default rate skyrockets by the month and yet not one of the people responsible is sitting in the dock - or in a prison cell.

The Federal Reserve's statement is, I believe, a clear statement and warning to the Congress and Treasury: Figure out what to do with these two firms, and do it, prior to the end of the first quarter of 2010, or we will cut them off and stand back, as we're not going to be the one holding the grenade when it goes off.

The reason for the warning should be clear - FHA may be writing the insurance on these notes but most of them are being foisted off on Fannie and Freddie. Rather than solving the problem we have Barney Frank making public statements that intentionally making bad loans is a policy - when The Fed is the one buying the paper generated by those bad loans!

The proper Congressional role of regulation - that is, write laws which The President then signs - has been perverted by a Federal Reserve that has had two successive chairmen who have "knelt before Zod" and performed an obscene act - with Zod residing both in Congress and Wall Street. This was all in the name of "economic stability", but now it threatens The Fed itself.

Consider that The Fed will have over one trillion dollars of potential putrid trash on its balance sheet by next spring. MBS and Debt that have no formal guarantee from The Federal Government, contrary to the strictures on Fed ownership embodied in the black-letter law of Section 14 of The Federal Reserve Act.

The "detonation risk" on these securities is very real, and when one considers that said securities will back more than half of the reserves in the system under Fed control, this should be keeping Bernanke and company up at night.

The Fed has in fact been the handmaiden of both Congress and Treasury through this entire mess. Under the guise of "systemic risk" The Fed has monetized over a trillion dollars of debt for the explicit purpose of bailing out the outrageous actions of both Wall Street and Congress. But unlike the relatively small exposure of Maiden Lane I-III, totaling some $60 billion, the outrageously bogus lending practices ensconced in Fannie, Freddie and the FHA have exposed The Fed to well over $1 trillion of garbage paper.

Congressfolk must zip up and get to work, for The Fed has made a clear statement that it will not be coming back to kneel shortly.

Fannie and Freddie must be wound down. Whether Congress likes it or not, mortgage lending must return to sound principles - 20% down payments, 36% back end ratios - period. It must become reasonably safe and profitable to portfolio loans - not play "hot potato" with them so as to generate nothing other than fee income, relying on that for profit instead of making sound lending decisions.

Yes, this means interest rates will rise to a market rate.

We have spent more than two years trying to avoid recognition of fundamental mathematical facts - average home prices cannot exceed 3x average incomes, and on balance home prices cannot rise faster than income over long periods of time.

Mean-reversion isn't a suggestion, it is a mathematical reality. As a homeowner with a fully-paid-off house, bought with cash, I certainly would prefer my home to have a value closer to 2005's price than 1995's.

But what I prefer has nothing to do with what is mathematically sustainable or what can be supported by the broader economy, and my personal desire to be able to "flip" my house or use phantom "wealth" to extract a lifestyle I cannot afford does not and cannot change the reality of what stability in the economy, on balance, requires over the intermediate and longer term.

Property prices must contract to sustainable values. If this causes banks to fail, so be it. If this causes consumer bankruptcies for those who used their homes as ATM machines, so be it. If this causes me to lose half of the "value" in my home, so be it.

I believe The Fed sent a message to Congress yesterday in recognition that the wall is fast approaching at 120mph: do the right thing and do it now - or else.