The Home Price Valuation Mess And The Dollar
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2008-03-06 17:00 by Karl Denninger , 13 references Ignore this thread
The Home Price Valuation Mess And The Dollar*
.... in one easy step.

I've mentioned it before in passing (and so have a couple of other people on the forum, Boz being one), but this deserves its own Ticker, along with the rest of the day's news.

Its really quite simple.

Mandate that property tax appraisals are a "PUT" option written by the taxing authority.

That is, you can "PUT" your house on the county for the amount of the assessed value, and they are obligated to buy it for same, at any given point in time.

This brings the two competing forces behind assessments into immediate balance and arrives instantaneously at true market value.

The County, of course, wants to generate tax revenue. They therefore want to assess your house for as much as they possibly can.

However, they also don't want to own your house, and they certainly don't want to sell it back off at a loss. Therefore, they will not assess the property for more than it is worth in the free market, and in fact will assess it for very slightly under true market value to avoid this potential.
Bingo - end of problem.

This value is then the "fair market value" for all transactions. If you wish to pay more as a buyer you are free to do so, of course, but that doesn't change the assessed value - unless the country agrees with you and comes back in to reassess - at which point they run the risk of you PUTting the house on them.

In addition we now have a centralized (by county) database of all the homes and their market prices. This means that banks who have REOs can no longer maintain a fictitious "mark to market", as they can PUT the home on the county for that price as well. Since there is now a market at all times for these properties, they cannot escape true valuation.

If this was to be done we would have instant clarity on true value in the housing market and that clarity would change with actual market conditions.

Simple, elegant, and further, we now have a guaranteed buyer (albeit at some haircut) for the property at any given point in time.

Locales would be free, of course, to underasses by enough to insure that they did not get stuck holding a bag in the event of a significant market decline before their "normal" assessment cycle came back around, as well as any deferred and thus unrecognized in the assessment maintenance issues.

In the News Carlyle appears to be in the process of blowing up after failing to meet a margin call. The rumors about huge liquidations of agencies appear to be true:

"The collapse of the subprime mortgage market has prompted investors to flee all but the safest forms of debt, leading to the failure of hedge funds including Peloton Partners LLP. The Carlyle fund raised $300 million in July and used loans to buy about $22 billion of AAA rated so-called agency mortgage securities issued by Fannie Mae and Freddie Mac."
Well, now we know where the supply that magically appeared came from....

Ambac gets the headline "sells half of company, plan may not work" from Bloomberg:

"March 6 (Bloomberg) -- Ambac Financial Group Inc., the bond insurer seeking capital to salvage its AAA credit rating, will sell half the company in a bet some investors say won't pay off.

Ambac said yesterday it plans to issue $1 billion of common stock, more than doubling the number of shares outstanding. The New York-based company will also offer $500 million of units that convert to shares in 2011."

No kidding? You've got a $10 billion+ problem according to Egan Jones and you think $1.5 billion will fix it eh? Uh huh. I believe in the Easter Bunny, but if I want to eat Wabbit I'm still going to have to walk out the door and shoot the little bugger.

Both the Brits and Eurofolks held rates steady in their regularly-scheduled rate meeting.

Bernanke's dilemma is starting to get some play in the mainstream press, with CNBC noting that while The Fed has been "slashing rates" and flooding the market with "liquidity" the market hasn't recovered (and in fact has cratered) and the credit markets are in worse shape than in August, with the malaise now spreading into virtually every corner including supposedly-"safe" instruments such as Auction Rate municipals. And Bloomberg said the following today:

"March 6 (Bloomberg) -- Credit trading models used by Wall Street have gone haywire, raising company borrowing costs even as Federal Reserve Chairman Ben S. Bernanke cuts interest rates."
Well duh. As I've said repeatedly you cannot fix a junkie's problem by offering him heroin! Bernanke needs to decide whether he is going to address the willful regulatory ignorance emanating from The Fed and other banking system regulators or whether he prefers to have the credit markets seize up piece by piece, margin call by margin call, until we finally force into the open the institutions that are insolvent - the hard way.

Down the latter road lies a rerun of the 1930s or a Japan-like situation, with both being brought about by precisely the same sort of regulatory refusal to force market participants to face reality.

The bad news is that I fear that Bernanke has very little time left to get off his kiester as the market is choosing for him. He's wasted the last six months running the old Greenspam playbook but unfortunately this is not LTCM where you literally have one institution that got in trouble - this is much more serious as the we quite literally have all areas of the credit markets seizing up because trust has been destroyed.

What's worse, Bernanke and his Fed have destroyed confidence in our currency by willfully refusing to address the root cause of the problem and that is being reflected in the DX.

The irony of this is that the longer Bernanke fiddles with his bullcrap "rate cut" nonsense trying to shove more heroin at the junkie, the worse the dollar craters and the more inflationary pressure this puts back into the economy through higher import costs, with the most important of those being the energy complex! The Dollar broke 73 today - south!

Bluntly: Bernanke cannot control this situation with more "liquidity" or "rate cuts", and the more he jawbones the more the dollar reacts by sinking further into the quicksand, taking back - with interest - what he is attempting to "give."

This morning the IRX is trading at 13.05, or 1.3%. With the FFT at 3% this is clearly in "emergency rate cut" territory but should Ben do this it will simply roach the dollar further, which will drive even more people into Treasuries and push the IRX down more, while ramping import costs even more quickly!

If you've been following the technicals you know that I've been calling for a "10" handle on the IRX for a while entirely on technicals, but the backstory on this is that as the IRX continues to fall it is an indication of lack of trust, not a need for more liquidity.

This problem cannot be solved with "rate cuts." In fact, what is required right now is a draining of systemic liquidity to force up market rates and thereby force market participants to stop hiding things, acclerating the margin call monster so that we can clear all this bad paper and find out who's broke and who's not!

Now consider this - the "short dollar" trade has become one of the new "hot money" trades out on the street. This is extremely dangerous to play here - its been tremendously profitable, but at some point someone is going to call Ben and tell him to cut that crap out.

Consider what happens to you if he does - if he were to drain liquidity and RAISE the target to compensate by 25 bips.

Just for a month, just for now, but with a statement that "we must be mindful of inflation risks."

Do you want to be short dollars if that happens?

By the way, I rate the odds of such a blatant manipulation in the currency markets as very low - perhaps 1 in 100.

But were I Chairman of The Fed, I'd do it, because (1) it would have almost no real effect on the economy as a whole, (2) it would force the deleveraging to accelerate and (3) it would instantaneously reverse the slide in the dollar.

Something to think about.....

Unemployment came in at 359k initial claims, but the continuing claims number is trouble, continuing to rise; a mixed picture.

Unfortunately delinquent mortgages are now at 5.82% of ALL mortgages outstanding and foreclosures now stand at more than 2% of all outstanding as of the 4th quarter of '07.

That is more than 1 in 20 of ALL mortgages delinquent; this is no longer a "subprime" problem, it has now infested THE ENTIRE HOUSING STOCK.

A rumor started flying around the pits this morning that Fannie and Freddie would receive a "formal" full-faith-and-credit guarantee from Treasury. In a first to stomp on these sorts of rumors, Treasury almost immediately piped up and said there was zero truth to it.

What they didn't say, but should have, is that they CAN'T step in and do this even if they wanted to - any attempt to do so would result in an instantaneous rocket shot in the Treasury Complex yields and seal the fate not only of Fannie and Freddie but of the government as well!

In addition we have two more pieces of data today; The Federal Reserve said today that for the first time on record going back to the 1940s, when they started tracking it, American's home equity fell below 50%. NOT GOOD.

Worse, American household net worth fell at a 3.6% annual rate in the 4th quarter, and remember that this was BEFORE the big market swoon in January! That number is much worse today.

Now add to this that the dislocation in the credit markets is causing a full on ramp in real mortgage rates for buyers even though The Fed has the FFT at 3%! Hedge funds are forcibly being deleveraged and having to sell into the market in tremendous volume, causing yields to shoot up and prices to fall.

There are many commentators who say that comparisons to the 1970s "stagflation" situation are invalid. They're right - this is much worse. The '70s were primarily a result of energy price shocks caused by external events. This situation has been brought about by our own malfeasance and the continuing willful blindness among regulators, including Bernanke and his Fed, the SEC, OTS, OCC, Hanky Paulson and Congress.

All have reasons to not want to put their jackboot on the neck of the bad actors, but all need to do it, right here and now, if we are to avoid an economic catastrophe.

You can't force people to lend and you can't create the ability to borrow when it doesn't exist, and without a functioning credit market the capacity for economic growth disappears.

And that, folks, is the bottom line.

We either restore trust right here and now or our capital markets - and our economy - are toast.

Today we broke critical support levels on all primary indices. The break is not yet "convincing", which means it may - and can - retrace. But any material sort of down day tomorrow puts us at severe risk a DOW in the nine thousand range, a SPX around 1000, a NDX around 1200 and a Russell in the 400s.

Time's up Ben and Hank - act now, and no, your famous "sticksave" games won't work. Further damage to the dollar is the last thing we can afford with our dependence on imports; we will see $150 oil if you don't cut that crap out!