Blown Mortgage

The Stock Market

chynes — Fri, 21 Nov 2008 15:59:46 +0000

When there is a stock market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them,” he elucidated. “Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this–just wait for the depression which will come sooner or later.” When this depression–or panic–becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you’ll have the pleasure of dying rich.

Default Risk: Not Just for Homeonwners Anymore

jhammond — Thu, 20 Nov 2008 16:50:43 +0000

Homeowners are not the only ones having difficulty paying their mortgages. Owners of commercial properties, from office buildings and industrial parks to malls and resorts to hospitals and medical buildings are all feeling the pressure. And as of Tuesday, the cracks are officially beginning to show.

Bloomberg reports that, according to RBS Greenwich data, delinquencies on debt backed by comercial real estate reached 0.78 in October. Further, payment on approximately 35 percent of all sub-prime mortgages backing bonds are 30 or more in arrears. Two large borrowers, Westin and Promenade, are about to default on $334 million in loans bundled into bonds. Both loans were made by J.P. Morgan Chase & Co.

These loans may be among the largest and first on the verge of default, but they are not the only one. Extrapolating on the level of enrivonmental site assesments (ESAs) which are the first step in most commerical real estate transactions, the commerical real estate market is slowing down. The number of ESAs conducted across the U.S. fell by 17 percent during the third quarter of 2008 compared to the same quarter in 2007, MarketWatch reports. The deepest decline occured in the West where ESA activity was off by 25 percent. The only region showing an increase in ESA activity was the Northeast with a gain of 11 percent. Unfortunately, the Northeast regional only accounts for about 4 percent of all ESA activity in the nation. Preliminary indications for October reveal a decline in ESA activity of 21 percent nationwide hinting that conditions will continue to worsen as the year ends.

At the local level, select metropolitan areas including Washington, DC, Boston, MA and California’s Inland Empire experienced increased ESA activity according to MarketWatch. Washington, DC also appears on Forbes‘ list of top five places to invest in commercial real estate in 2009. Seattle, WA leads the list, which is based on a survey of 700 real estate professionals conducted by the Urban Land Institute, followed by San Francisco, CA, Washington, DC, New York, NY and Los Angeles, CA. The $209 million Westin loan is backed by hotel properties in Tucson, AZ and Hilton Head, SC while the Promenade Shops at Dos Lagos in Cornona, CA back another $125 loan. If either do default it is likely to have a chilling effect on the commercial real estate markets in those cities and possibly beyond.

Some fear defaulting on these two large loans will user in the next phase of the financial crisis. Up to this point the commercial mortgage-backed securities (CMBS) market has survived the credit crunch sweeping the nation with minimal delinquency rates.

“It’s pretty unheard-of for tow large loans to go this bad early on,” Richard Parkus, head of CMBS research at Deutsche Bank told the Wall Street Journal. “This has shaken the market up.”

As it should.

“It blows my mind how fast this has happened. We had thought commercial real estate would be ok because it wasn’t overbuilt,” the Associated Press (AP) quotes Robert Bach, chief economist at Grubb and Ellis as telling the panel at the company’s 2009 Real Estate Forecast.

Falling consumer confidence, higher unemployment rates and fewer people traveling are all beginning to take their toll on commercial real estate. Loans, like the Westin and Promenade loans, made at the height of the commercial real estate market with the presumption that they would continue generating increasing amounts of cash are not just having trouble meeting payments when they come due. They are also finding it difficult to refinance the loans or sell the properties. And even if consumers started spending again immediately the commercial real estate market, which lags about a year behind the consumer economic cycle, will continue to decline.

“It’ll be awhile,” Bach told the AP. “Defaults on these loans could continue for several years.”

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What is the technical definition of “depression”?

constantine — Thu, 20 Nov 2008 15:01:56 +0000

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

“People have begun to feel like a Christian Scientist with appendicitis.” — Tom Lehrer

It is difficult to believe but earlier this year people were still debating whether or not we were in a recession. The debate broke down along the lines of, “We haven’t met the technical definition of a recession” vs. “If it smells, like a duck, quacks like a duck and looks like a duck then it’s a duck.”

One of the reasons for the debate was because there are so many different definitions of a recession.

The standard definition used by idiots and journalists (like me!) is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters.

Idiots and economists (like them!) don’t like this because it leaves out the unemployment rate and consumer confidence as indicators. “By using quarterly data this definition makes it difficult to pinpoint when a recession begins or ends. This means that a recession that lasts ten months or less may go undetected.” Sadly, that’s not going to be an issue this time around.

National Bureau of Economic Research (NBER) says a recession is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment (non-farm payrolls), industrial production, and wholesale-retail sales.” A recession runs from when business activity has reached its peak and starts to fall until business activity has bottomed out. When business activity picks up again is called an expansionary period. I like this definition because it would let us say that a depression is the period from the end of the recession until the start of the expansionary period. If there’s no gap between the two then there’s no depression.

Like so many other things that we take for granted today, the “recession” idea was invented as a response to the Great Depression. Before then any economic downturn was called a depression. Then the tsunami hit and economists realized they needed to differentiate between it and something that’s just a big wave.

So there really is no technical definition for a depression. One guide that’s been offered is that a depression is any economic downturn where real GDP declines by more than 10 percent. While useful this does create some difficulties for the academic types who mess with nomenclature. Consider the US GDP from 1930 to 1933:

So we were in a recession for all but one of those years? Personally, I would have called that duck as I saw it. Are we in a depression now? You can answer that for yourself by applying this complex economic formula I learned from a t-shirt: “Why am I in this handbasket and where is it going?”

PS: Now that the extension of unemployment benefits has passed the Senate expect to see a sharp increase in the unemployment rate — which only counts people who are collecting unemployment insurance. You are no longer officially counted as unemployed if you are not collecting insurance. A lot of people who used up their benefits but aren’t employed will now re-appear magically on the roles. They will just as magically disappear in seven weeks when their benefits are used up and the rate will go down again. However, those people won’t be any more employed.

PPS: The talking heads are now nattering about deflation. Allow me to say, you read it here first.

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Mortgage Aid: Who is Worthy of Help?

Morgan — Thu, 20 Nov 2008 05:05:02 +0000

A guest post from Frank Shump. Frank is a veteran from the financial services industry, and currently authors a blog called Thefinancecastle.com, which documents his thoughts on money matters and his adventures in self employment.

Even with bargain hunters starting to come out of the wood work and credit just barely starting to thaw out, things are still fairly bleak in the real estate market. Home prices saw a record decline in the third quarter, with foreclosures doing the most damage. Bailout money has been plentiful, from the $350 billion spent so far to help struggling financial institutions to Freddie Mac eating such huge losses that it had to tap taxpayer money already. What about struggling mortgage owners, though? The government has clearly stated that they aim to help out the homeowners too, but how will Uncle Sam decide who will get the helping hand? That answer may not come easy.

The Bush administration recently announced a new foreclosure prevention program that aims to help troubled borrowers and keep them in their homes. The plan, spearheaded by the Federal Housing Finance Agency, has worked with a coalition of lenders, servicers, investors and community groups called Hope Now to target the “most-at-risk” homeowners. Who does that mean specifically?

At present, Fannie and Freddie are looking to extend aid to homeowners that are more than three months past due on their loans so that the most troubled borrowers get the most immediate attention. You’ll have to jump through a few hoops, of course, including having to write a “hardship letter” to explain why you fell behind on your payments for a “good reason.” Good reasons could or could not include job loss, divorce, and medical bills. Borrowers will also have precious little equity in their homes, and if you exceed the mortgage balance by more than 10%, you’re too “well off” to get help. Other homeowners are so far deep underwater that there’s no way to pull them out. If you were already up to your eyeballs in debt and then lost your job for example, you’re out of luck there, too. Prepare for bankruptcy and giving up your home.

Lenders participating in the program will be sending out letters to those who qualify and requesting information like pay stubs and bills and the aforementioned hardship letters. If you’re busting your ass to keep your mortgage current, don’t expect anything but a hefty tax bill somewhere down the line.

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Fed Implode-o-Meter Update

Morgan — Wed, 19 Nov 2008 19:36:53 +0000

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

At the end of October (see Fed Implode-o-Meter October 31), it looked like the Fed had spent about $3.8 trillion in the year to date. Not even three weeks later, that figure is now up to $4.28 trillion. According to CNBC, “To put it in perspective that’s . . . more than what was spent on WW II.” Funny choice of comparison; the Iraq war, the longest-running conflict in the history of the US, has also cost more and the final tab won’t be in for years. Anyway . . .

So, where’s all the money going? Here’s a list (hat tip to CNBC) of what has been made public:

The Telegraph UK quotes Paul Volcker, former chairman of the US Federal Reserve and short-list candidate for Treasury Secretary, as saying, “. . . it is already too late to avoid a severe downturn even if the credit markets stabilize over coming months. I don’t think anybody thinks we’re going to get through this recession in a hurry. The economic slump has begun to metastasize after a shocking collapse in output over the past two months . . . normal monetary policy is not able to get money flowing. The trouble is that even with all this [government] protection, the market is not moving.” Further, he said “What this crisis reveals is a broken financial system like no other in my lifetime,” he told a conference at Lombard Street Research in London. Mr. Volker is 81 years old. Normal monetary policy can’t restart economic activity because credit is contracting at a faster pace than new money is coming into the system. Fractional reserve lending can’t work unless banks lend.

Through all of this, the Fed is still taking as collateral illiquid, mark-to-model assets, presumably at notional value, from the banks. In return, the banks receive brand-new treasuries that, in principle, could be lent out. At this point, most, or probably all, of the Fed’s general collateral is comprised of toxic waste. Currently, the Fed does not even have enough reserves to cover dollars in circulation.
Good thing we’re only talking about Monopoly money. If it were real money we’d be in big trouble.

There are a number of grass-roots efforts trying to put an end to the Fed’s out-of-control borrowing. One of them, End the Fed.us is having a meet-up on November 22 in 39 cities. Mish of Global Economic Trend Analysis is putting together another email, fax, and phone-call campaign to stop further auto company bailouts. Chances are slim that the brakes will be put on before the end of the year.

However, with a new administration coming in, 2009 could be another story.

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Federal Reserve Out of Firepower

Morgan — Wed, 19 Nov 2008 18:00:18 +0000

Thus far, all indications seem to lead us to believe that the Federal Reserve can solve economic problems by throwing massive amounts of money at it. From lowering interest rates from 1 percent from 4.25 percent this year, to putting billions of dollars into the commercial paper markets in order to stimulating lending, to the $700 billion financial bailout that’s constantly shifted from a package aimed squarely at aiding struggling financial institutions to helping out consumer debt firms as well. With all of this money being tossed around and historic, unprecedented actions taken place, is there anything at all left that the Federal Reserve can do to stop us from going into a recession? According to Kansas City Federal Reserve President Thomas Hoenig, no, no there is not.

“The Fed has done about as much as it can do, we might put it out there, but banks are not able to, given their own capital constraints, able to lend as aggressively.” If Hoenig is right on the mark with that statement, and the recession continues to worsen, then there isn’t much more that the Fed can do to help us out of it. If and when it comes to it, we’re just going to have to suck it up and continue to tighten the belt.

Unfortunately that certainly isn’t the answer that automakers in the U.S. want to hear. Talks between congressional Democrats and the Bush administration seemed to be bottoming out recently. Democrats in the Senate insisted that they’ll try and allocate a portion of the bailout to pay for loans to the industry, but talks have been ground out to a stalemate, and they don’t have the votes to do so without that support. Republicans, for their part, believe that the $25 billion loan should actually come from a loan program previously approved to help them develop more fuel-efficient vehicles.

That could change when Obama takes office, however. The Bush administration recently told top lawmakers that half of the $700 billion bailout fund will not go anywhere before Obama takes office. Treasury Secretary Henry Paulson will leave $350 billion left over for when Obama takes office and his administration will be able to decide how the rest of it should be spent. You can be sure that this could change the state of negotiations to have that portion of the bailout.

With the second largest economy in the world heading into an official recession as well, it’s probably best to start preparing yourself now. If things continue to get worse, there won’t be much that the Fed, or anyone, will be able to do to stop it from running it’s course.

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FDIC Unveils Homeowner Help

Morgan — Wed, 19 Nov 2008 17:24:24 +0000

I guess it’s not all that surprising given the increasing number of foreclosures across the nation over the past few months, but the FDIC officially came out with detailed plans as to how the government will come to the rescue of delinquent borrowers. The announcement was made earlier today by FDIC Chairwoman Shella Bair, and caught a number of experts off guard.

Apparently, the proposal is built upon 2 crucial points. The first is that housing payments on delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. How do they intend to do that? By setting mortgage rates lower for awhile…possibly as low as 3% for five years. Loan terms are also likely to be extended to as long as 40 years (so you’ll be dead before you actually own your home…?). In addition, the FDIC will “encourage” servicers to participate as well, as the government would share 50% of the losses if the borrower they help still doesn’t pay up and ends up defaulting anyhow.. is this really what it’s come to? The FDIC will also start paying servicers who process mortgages $1,000 for reworking loan terms to keep homeowners in their homes and to prevent additional foreclosures. The cost? An estimated $24.4 billion, which will come from the $700 billion bailout program that Congress approved in the previous month. The FDIC also released a statement Friday stressing the importance of reducing foreclosures: “It is imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.”

So..if delinquent homeowners are getting a piece of the bailout, what about everyone who happens to pay their mortgage on time and live within their means? Will they get a check in the mail to say hey thanks for doing a good job with your finances..sorry you have to eat trillions of dollars in debt over the coming years? The bailout’s focus has been constantly expanding, and there’s been no shortage of people and organizations lining up for their “share.” The mayors of Philadelphia, Phoenix, and San Jose among others have already requested that cities be added to the bailout list as well.

So that means for the bailout candidates list we have banks, delinquent home owners, credit car companies, failing U.S. Automakers, insurance companies, and cities (I’m sure I missed some).

Everyone except the average taxpayer.

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Nothing happens until the new prez takes over. Good or bad?

constantine — Tue, 18 Nov 2008 16:21:12 +0000

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

In a time of economic crisis, where every moment brings more bad/alarming news, what does it mean that the government is essentially in a holding pattern for the next two months?

Many people are concerned this will mean a continuation of the Paulson strategy of throwing good money after bad. (”Am I the only one worried that by the time Obama is sworn in on January 20th, the Paulson Treasury will have run through almost a trillion dollars to little or no effect?“) Currently there are attempts to qualify GM as a bank so it can get a cut of the bailout money (LOL!!!). A similar request by GE makes more sense to me because GE is a well-run company. Several large cities are also making requests for funds. Personally, I’d give funds to Wasilla before I’d hand a dime to GM.

Still others think that Paulson and the Congress will take this moment to do nothing — and that’s a good thing. Oklahoma Sen. Jim Inhofe thinks this is such a good thing that he wants to legislate a freeze on the remaining bailout cash. (Inhofe’s willingness to rip Paulson a new one is a great indicator of how the Bushies are closer to dead-duck instead of merely being lame: Senator Inhofe suggests Paulson “may have given the [bailout] money to his friends.”)

The last major outbreak of government stasis — when Gingrich et al. shut down the government and kept passing level-funding resolutions for all departments — certainly resulted in a lot of good things. It got us our long-departed budget surplus. It got us the truly amusing Monica-gate (remember when we thought that stuff was important? Ahh, the good old days.) And it showed us exactly what a wiener Gingrich was. A bipartisan win! Of course times were different then. We weren’t in two wars and a “recession”. Tax revenues were rolling in and not spending them meant putting money in the bank.

This time it is difficult to see maintaining the status quo as a good thing. Despite swearing that he wouldn’t reat this money as a blank check and just spend it on whatever he wanted to, Mr. Paulson has done just that. Even so, doing nothing is probably a bigger risk. Taking minimal action was how we wound up with the Great Depression, after all.

Fortunately, the Bushies and the GOP are against bailing out the auto industry. Also, I am not particularly worried about the proposed bailout of the auto industry in this rump session. If Congress even manages to pass the clearly needed extension on unemployment, it will be nothing short of a miracle. Sadly, my hopes diminish with the next congress.

What is clear is that it is time to shorten the time from the end of an election to when the new regime takes over. We’ve done it before. Originally inauguration day was March 4th. It clearly needs to be moved up to at least Jan. 1.

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G20 Meeting a Non-Event, Depression Full Speed Ahead

Morgan — Tue, 18 Nov 2008 15:21:45 +0000

Another guest post from MG Dungan who went from Wharton to Wall St. to real estate to Blown Mortgage.

I’m afraid many of the New World Order conspiracy theories will have to be laid to rest after this weekend’s G20 meeting. Worldwide coordination of anything other than a rate cut here and there will never fly. Not even the power of the dark side is sufficient to get substantive agreement among the G20. So, what came out of this weekend’s meeting? Pretty much nothing But, you ask, no new world currency, no new North American currency, no revaluation of the price of gold, no renegotiation of trade agreements, no dropping the US$ as the world’s reserve currency? Nope, nothing. However, based on their recent track record, this was probably the best outcome.

Telling It Like It Is

Last week I said the economy was going through deflation. That was just a trial balloon and an attempt at being PC. We’re entering into a depression. Things are a lot worse than underwater mortgages and SUVs losing trade-in value.

“The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself,” former Goldman Sachs chairman John Whitehead, 86, said at the Reuters Global Finance Summit on Wednesday. “I think it would be worse than the depression,” Whitehead said. “We’re talking about reducing the credit of the United States of America, which is the backbone of the economic system.” When you’re 86 years old and Social Security and Medicare’s got your back, why mince words.

Here’s what another senior citizen, George Soros, has to say, “Our greatest economic depression is ahead of us.”

One more retiree, Warren Buffet, in September said, “This is an economic Pearl Harbor. There’s no plan B for this . . . we were at the brink of something that would have made anything that happened in financial history pale.” (Pale by comparison . . . finish your sentences Warren).

Former Fed chairman Paul Volker, a downright New Age positive thinker by the standards of this group, says, “There’s a 75% chance of financial collapse within the next five years.”

From academia: “The United States is bankrupt. Our economic situation is worse than Brazil, worse than Argentina, worse than any nation in the world,” according to Professor Laurence Kotlikoff of Boston University. I never heard of this guy before, but he’s got a way with words. And from government service: “When we look back 10 years from now, we will see 2008 as a fundamental financial rupture,” says Peer Steinbruck, Financial Minister of Germany.

Associated Press on Friday reported that the mayors of Philadelphia, Atlanta, San Jose, and Phoenix are requesting bailouts. They’ll have to get in line behind the entire state of California, NYC, Chicago, Detroit, and LA.

There are a few bright spots, though; gun sales are one of them. The FBI reports that gun sales increased 13% in October and had a huge 49% spike in the first six days following the election. Hurry and get yours before supplies run out.

It’s time to prepare for hard times. There are a number of lists of “100 Things that Disappear First.” Google one that addresses your lifestyle and climate. Many of these items, like manual can openers, make good stocking stuffers. By the way, no Gift Cards this year. Gift cards are not yet guaranteed by the FDIC. If the store goes out of business, that’s the end of the gift card. Same thing with product maintenance contracts.

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The Housing Crisis: What is the Smart Money Doing?

chynes — Mon, 17 Nov 2008 22:26:30 +0000

One of the terms that veterans of the stock market often use to describe buying patterns is ‘smart money.’ Smart money refers to buyers who are informed, intuitive, and quick enough to anticipate market trends before they actually occur. Conversely, the term ‘dumb’ money is the money from buyers who rush in after the boom occurs, and get stuck holding assets that are worth less than they paid for them in the first place. The relationship between smart money and dumb money is a natural part of any speculative market, and is as old as time. Ironically, a smart investor can easily become dumb money when the market turns against him.

Nowhere was this more evident than in the housing market. The problem with the housing market is that while it was a speculative market for many, a large amount of buyers simply regarded it in the same way that they would regard a car. The mindset of these buyers was that housing, like food and clothing, was a fundamental need. As a result, many of these people assumed that whatever price they were able to negotiate and afford for their house must have been a reasonable one. They planned on living in their houses for an extended period of time, perhaps even the life of the loan. Sure, they might occasionally withdraw equity from the house, but only in cases of need and importance: things like college tuition, home improvement, or paying down other debt. All of these seemed reasonable, since home values would always go up in the long run, right?

But even though the paradigm of rising home values is still intact over the long-term, no one had considered the possibility of a severe short-term decline in home values. Unfortunately, that is precisely what has happened over the last year and a half. Suddenly, a huge swath of people suddenly seemed like dumb money. What separates dumb money from smart money, of course, is the ability to react constructively and profitably to a negative situation.

So I spoke with a veteran real estate agent (of 30 years, no less!) last week, to get her opinion on what be smart money might be doing in these market conditions. In no uncertain terms, she said both herself and her colleagues believe that the market is not anywhere near its trough. A true rebound, she said, would only occur when prices dropped far enough that credit-worthy first-time buyers would feel comfortable making purchases. These would be the buyers who fit into the profile I mentioned above, who regard housing first as a necessity, and second as a long-term investment.

These people weren’t quite the same as the smart money I had in mind, so I clarified my line of questioning.

“The people with money to spend, who know how to spend it…what are they doing right now? Are they just waiting on the sidelines, or have they started to brave the waters again?”

With that definition, she immediately knew who I was referring to. She pointed me to a few recent statistics, conveniently located on a website she frequents.

“You’ll see that it shows a [5.5%] rise in existing-home sales, but an 11.5% drop in new-home sales,” she commented. “Now think about it…does that seem rational?”

Of course, those numbers, indicating a huge spread, do not seem reasonable in the least. I told her so.

She explained the discrepancy by saying that “What it means is you have banks who are just beyond desperate to get rid of these, and are willing to do so in any way they can.”

As she said this, I realized that I had my answer. “So smart money could be hedging the values on their own properties by swooping in on foreclosures and short sales.” Yes, I said it more as a statement than as a question.

She responded with a characteristically Midwestern aphorism (she is originally from Nebraska, I discovered). “I can’t say for sure, but I’m pretty sure. So take that and two dollars, and buy yourself a cup of coffee.” I took her advice, and took a walk to my neighborhood Starbucks that evening.

The next day I discovered during a meeting at my office that my manager was considering making a hedge play on her own real estate property. She lives in a three-bedroom condo about twenty minutes from Los Angeles (by my estimation, probably worth around $600,000), but shared with us that she was strongly considering buying either a house or a condo in San Diego.

Sometimes the difference between smart money and dumb money can simply be the ability to sense opportunity. As I said above, the long-term paradigm for home-ownership has not changed. Unlike tulips and tech-stocks, people will always need homes, and it logically follows that home values will always appreciate over the life of a mortgage. So when banks start accepting short-sales (as in low-ball) offers on homes, smart money sees a potential profit at a very low risk. It’s worth noting that these are not the flippers, who so famously created artificial levels of demand in the housing market that contributed to the bust we are all suffering through. These are shrewd individuals with high credit scores, who see a significant opportunity to improve their net worth over a long period of time.

It doesn’t mean that we’re in for a quick recovery. But that is logic you can’t argue with.

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