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U.S. Senator Mocks The System

I don’t know about you, but I’m starting to get this feeling that our Senate is evolving into that “legislative” body from the Roman Empire (not Republic, mind you) and from whom they derive their name. Well, at least they’re not assassinating each other in the hallways of the Dirksen Building (at least, not yet).

However, even those among its ranks are starting to mock the establishment and its growing reputation of being out of touch with mainstream America. The Wall Street Journal’s Damian Paletta wrote a great post for the Real Time Economics blog on Wednesday about Senator Jim Bunning (R- Kansas) and his assault on the system. Paletta said:

The Senate Banking Committee plans to vote on legislation Thursday that would create a new regulator for Fannie Mae and Freddie Mac and allow the Federal Housing Administration to insure up to $300 billion in refinanced mortgages. Lawmakers plan to file up to 70 amendments during the committee vote, with 31 of those coming from Sen. Jim Bunning (R., Ken.).

According to a summary of all the amendments, Sen. Bunning wants:
• “to stop the bailout of the rich”
• “to prevent the bailout of illegal aliens”
• “to prevent the bailout of homeowners who used their homes as a credit card”
• “to stop the bailout of sex offenders”
• “to stop the bailout of drug offenders”

Another of Sen. Bunning’s amendments would change the name of the bill from “The Federal Housing Finance Regulatory Reform Act of 2008” to the “Bailout of Irresponsible Lenders and Borrowers Act of 2008.”

A good example of how to fight fire with fire, considering all the humorous initiatives coming from Capitol Hill these days. But, what would you expect from a Congress with an 18% approval rating, according to the latest Gallup poll?

Sources:

“Bunning Campaigns Against ‘Bailouts’ in Housing Bill”
Damian Paletta
Wall Street Journal (Real Time Economics blog), May 14, 2008

“Congress’ Approval Rating Ties Lowest in Gallup Records”
Lydia Saad
Gallup, May 14, 2008

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Merrill Lynch, Morgan Stanley Issue Recession Warnings

At a conference yesterday in Singapore, New York City-based financial services giant Merrill Lynch warned the U.S. economy is in a recession that will become more apparent as the year drags on. According to Channel NewsAsia yesterday:

Merrill Lynch said the world’s largest economy is already in a recession, and it expects to see a prolonged L-shaped recovery. This means the US may take a longer time to emerge from the economic doldrums….

Merrill Lynch said a key indicator of a recession is a slump in the housing market. It added that it expects the housing market in the US will see another 15-20 percent downside.

Staff from the firm said that government efforts to provide stimulus to the economy will only temporarily stem a fall in consumer spending, according to Reuters’ Kevin Lim. Merrill Lynch’s North American economist David Rosenberg told conference attendees yesterday:

I still maintain the business cycle is bigger than the government.

Rosenberg also predicted inflation in the United States would slow as consumer spending weakens, and that the Federal Reserve would cut interest rates to fight the recession. The economist warned:

No asset class security is priced today for a recession scenario.

Adding their two cents, economists from Morgan Stanley are concerned that the recession in the United States could rival the “the big five,” according to David Gaffen from the Wall Street Journal’s Market Beat blog today. Gaffen explained the “big five” were large-scale financial crises that resulted in a long-term underperformance in the respective economies. He wrote:

The long-term declines the firm looks at includes Spain in 1977 and Norway in 1987, and most recently Japan in 1992 – which they define as the worst, resulting in Japan’s so-called lost decade. Whether the current U.S. economic decline matches one of these situations, or looks more like the recent U.S. recessions “holds the key for risky asset prices,” they write.

However, Morgan Stanley economists do not agree with their Merrill Lynch counterparts when it comes to the topic of inflation. From the Market Beat post:

Morgan Stanley economists say that in this instance, inflation may not automatically recede as U.S. growth recedes. They say as a result that bonds may sell off if growth recovers in the U.S. and monetary policy remains loose, fueling price gains… “We believe that the Fed’s focus on keeping the financial crisis from sending the economy down the path of the Big Five will succeed, but lower rates and surging money growth will spill over into inflation. Bond yields are likely to follow inflation higher,” they write.

Sources:

“Merill Lynch says US in recession, but Asia to remain strong on consumer spending”
Channel NewsAsia (Singapore), May 14, 2008

“Tax rebate won’t stem U.S. recession: Merrill”
Kevin Lim
Reuters, May 14, 2008

“Regular Recession, or a Larger Disaster?”
David Gaffen
Wall Street Journal (Market Beat blog), May 15, 2008

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FHA Chief Shoots Down Housing Bailout Bill

Here’s another great piece that was suggested to me. As you may have heard already, the U.S. House of Representatives passed a bill last week that would enable struggling mortgage holders to refinance into more affordable loans guaranteed by Uncle Sam. The legislation, spearheaded by House Financial Services Chairman Barney Frank, would require a significant expansion of the Federal Housing Administration (FHA). Well, according to Luke Mullins of U.S. News & World Report, FHA Commissioner Brian Montgomery is a bit leery of the proposal (understatement of the year). Mullins wrote yesterday in “FHA Chief Criticizes Rescue Plan”:

Montgomery expressed his opposition to the legislation recently passed by the House:

As one colleague described it, it is “on steroids” because it throws sound underwriting out the window. It moves us toward a federalization of the mortgage market, forces taxpayers to pay for bad loans, and doubles FHA’s portfolio, adding hundreds of thousands of risky loans in a Byzantine process that will take years to sort out and create a regulatory nightmare.

Besides risking the wrath of the powers-that-be in our nation’s capital, I must admit that I’m impressed that he said this within a room full of real estate agents at the National Association of Realtors Midyear Legislative Meetings and Trade Expo. I haven’t seen an obit for him, so besides a few claw marks, I’m assuming Montgomery survived the ordeal.

You can access Mullins’ piece here.

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Housing Bailout Latest

This morning I received an e-mail from the powers-that-be behind Stop The Housing Bailout! According to STHB:

• Readers against a housing bailout should contact U.S. Senator Richard C. Shelby. He can be reached by telephone at (202)224-5744, and by e-mail at Senator@shelby.senate.gov. STHB stated, “He is going to run the show from the Republican side of the aisle.”

• You may want to check out the Wall Street Journal article “Democrats Face Rescue Backlash.” According to STHB, “A nice little piece about the Bailout Backlash!”

President Bush is vowing to veto a bill the U.S. House of Representatives passed last week that would, among other things, allow certain homeowners to refinance loans through a government agency if lenders agree to take less than the full amount borrowed. The U.S. Senate is expected to take up the issue this week.

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Latest On Housing Bailout

Even though I am still on hiatus, I just wanted to pass this along to you from Stop The Housing Bailout!:

Bailout Alert! According to this article, Bush says he will veto the Frank-Dodd bailout bill.

Please call or email the White House to voice your support of a veto of the any housing bailout bill:

Ph: 202-456-1414 or 202-456-1111

Just say, “I am calling to ask you to veto any housing bailout that comes out of Congress.”

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Quote For The Week

Dumbfounded. That’s the best way to describe how I felt after my research Friday morning. A number of the financial news sites were running articles that proclaimed a bottom to stocks, the housing bust, the credit crunch, etcetera. Jeez, you’d think the United States was in a new “golden era” from what some of these guys were saying.

When I couldn’t take the propaganda any more, I adjourned for lunch and tuned into CNBC. And what did I see? A commercial with Larry Kudlow, CEO of Kudlow & Co., LLC, an economic and investment research firm, and host of CNBC’s “Kudlow & Company.” His message to CNBC viewers?:

America’s got to hold onto its goldilocks economy.

So “goldilocks” is back? Go on, America, keep on telling yourself the economy is doing just great…

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Signs Of The Time, Part 14

Baseball. Once America’s national pastime (before suing anything with a pulse became all the rage). Who would have ever thought that the sport, in any way, would be connected to the ongoing housing bust here in the United States? According to Reuters’ Jill Serjeant yesterday, former baseball star Jose Canseco said on Thursday he had lost his California mansion to foreclosure. Apparently, Canseco, now 43, told the celebrity television show “Inside Edition” that it did not make financial sense to keep his 7,300 square-foot home in Encino, a Los Angeles suburb. The show said it had foreclosure documents showing that the six-time all-star owed a bank more than $2.5 million on the house. Canseco said:

I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else.

Sound familiar?

The Reuters reporter wrote:

Canseco said the foreclosure was not a difficult issue emotionally. But he sympathized with the millions of other Americans who have already lost, or face losing their homes, because of soaring interest rates on sub-prime loans.

“I decided to just let it go, but in most cases and most families, they have nowhere else to go,” he said.

According to Serjeant, Canseco said a good portion of the money he earned during his time in the major leagues went to pay for his divorces. “I had a couple of divorces that cost me $7 or $8 million,” the two-time World Series champion said.

Source:

“Baseball star Canseco loses home to foreclosure”
Jill Serjeant
Reuters, May 1, 2008

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No Property Tax Relief In Sight

More bad news, American homeowners. Just when you thought there might be a silver lining to declining home prices in that property taxes would be lower, the Wall Street Journal is reporting that local governments throughout the United States are raising property tax rates to compensate for revenue shortfalls. These taxes serve as a major source of funding for municipal governments, accounting on average of about 40% of general revenue, according to the Census Bureau.

The Journal’s Conor Dougherty wrote on April 24:

…flat assessments and rising rates add up to higher bills for many. Arlington County, Va., recently raised its property-tax rate 4% in part to cover retiree health benefits. Portland, Maine, has a proposal to raise the property-tax rate 3.7%, and lay off city workers. Oak Ridge, Tenn., near Knoxville, is preparing to raise its rate 5%, in part to cover the rising cost of items, such as gasoline for police cars and asphalt to resurface streets…

Some cities and states are dropping plans to roll back or eliminate property taxes. Arizona Gov. Janet Napolitano, a Democrat, recently vetoed a bill that would have repealed the state property tax. The tax, which had been suspended for the past two years, will be back in effect next year.

Despite revenue shortfalls, a number of local governments continue to increase spending. Dennis Cauchon of USA Today wrote yesterday that state and local governments have run deficits for the last nine months, according to Commerce Department reports. While tax collections went flat in the middle of 2007, he noted that local government expenditures continue to grow. In fact, federal, state, and local governments are hiring new workers at the fastest pace in six years, Cauchon reported yesterday. Federal, state, and local governments added 76,800 jobs in the first quarter of this year, according to the Bureau of Labor Statistics. States added 16,000 jobs while municipalities hired 47,000 employees. The USA Today reporter wrote:

But the job expansion could later cause financial problems for governments that are spending too much.

“More hiring has nothing to do with good government or economic policy,” says economist Kenneth Brown, research director at the Rio Grande Foundation in Albuquerque. “It has everything to do with government being slow to react to economic change.”

Ain’t that the truth…

Sources:

“Rising Property Taxes Fill Gaps, Pinch Homeowners”
Conor Dougherty
Wall Street Journal, April 24, 2008

“Hiring leaps in public sector”
Dennis Cauchon
USA Today, April 29, 2008

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Despite Falling Prices, Homes Are Still Unaffordable

Yesterday, the newswires were reporting that the decline in U.S. home prices accelerated in February, falling a record 12.7% in the past year for 20 key cities, according to the Case-Shiller home price index released Tuesday by Standard & Poor’s. David M. Blitzer, chairman of the index committee at Standard & Poor’s, went so far as to say:

There is no sign of a bottom in the numbers.

Despite the recent drop in prices, homes are still unaffordable for the average American family. Craig Guillot for Bankrate.com wrote back on April 17 that:

…the median price in many markets is still out of reach for a median-income family, according to “Paycheck to Paycheck: Wages and the Cost of Housing in America,” a study by the Center for Housing Policy, or CHP, in Washington, D.C.

Comparing housing costs in 210 metropolitan areas with the wages earned by workers in 60 occupations, the study found that homeownership is often unaffordable for workers in each of the five-fastest growing occupations — registered nurses, retail salespeople, customer-service representatives, food-preparation workers and office clerks. Registered nurses, who typically have high salaries, were unable to purchase a median-priced home in 108 of the markets.

“Even with the housing downturn, the drop in prices still just isn’t enough for many workers in traditional backbone occupations to afford houses,” says Rebecca Cohen, a CHP research associate.

Guillot noted:

Between 2000 and mid-2007, the median home price soared 64.9% to $229,200. The median income, meantime, rose just 16.6%. For would-be buyers, the math doesn’t work.

Back on April 16, Peter Hong of the Los Angeles Times talked about a recent study conducted by Chapman University’s Anderson Center for Economic Research which forecast further double-digit declines for Southern California home prices. Hong wrote:

A typical Los Angeles County family would have to spend 48.6% of its annual income on mortgage payments and property taxes to afford a median-priced home, the Chapman study concluded. Historically, the mean expenditure for a home in L.A. County has been 35.7% of income.

For affordability to return to that historic mean, home prices in Los Angeles County would have to fall more than 20% further, said Anderson Center director Esmael Adibi…

Sources:

“Home prices fall record 12.7% in past year, Case-Shiller say”
Rex Nutting
MarketWatch, April 29, 2008

“Average Joe still can’t afford a home”
Craig Guillot
Bankrate.com, April 17, 2008

“Foreclosure glut further depresses housing prices”
Peter Y. Hong
Los Angeles Times, April 16, 2008

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FDIC Expects “Troubled Bank” List To Grow

FOX Business Network’s Ray Hennessey wrote today that Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said new data on the FDIC‘s so called “troubled bank” list will show an increase over the current 76 banks on the list. However, she added “that is not a big number” and the increase should not be construed as meaning a new wave of bank failures.

While speaking at the Society of American Business Editors and Writers annual meeting in Baltimore, the FDIC chairman said housing woes (in particular, local construction loans) have caused problems for a larger number of small banks. Yet, she noted that at the present time smaller institutions are in better shape than their larger colleagues.

The FDIC stands to benefit from new regulations proposed by the Treasury Department. Hennessey wrote:

“Free markets and some baseline level of regulation are compatible,” Bair said. But the key is fewer, not more, regulators, she said. One of the problems with the current system is “regulatory arbitrage,” where banks chose what regulators - often weaker ones - they fell under. Limiting the number of regulators these banks are accountable to is the key.

“Regulatory arbitrage is a problem in this country,” she said. “Some homogenization needs to take place.”

And a little less greed, it seems.

Source:

“Bank Troubles Expected to Grow at Manageable Pace”
Ray Hennessey
FOX Business Network, April 29, 2008

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