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Washington’s Bear Hunt

From all the action coming out of the nation’s capital today, you’d almost think the various government entities in Washington coordinated efforts against the oil, dollar, and housing bears. Almost.

First, it was crude oil. Senate Democrats, led by Senators Byron Dorgan and Harry Reid, rolled out the “Stop Excessive Speculation Act” to scare off oil speculators, who they blame for high prices.

Crude for August delivery, scheduled to expire Tuesday, dropped $3.09, or 2.3%, to settle at $127.95 a barrel on the New York Mercantile Exchange, the lowest close since June 5.

Ironically, later in the day a task force chaired by the Commodities Futures Trading Commission (the agency assigned with investigating/punishing speculators in the bill) found that fundamental supply-and-demand factors, rather than speculators (as the politicians claimed), were most likely to blame for the high prices. Doh!

Next, dollar bears were targeted. Reuters reported:

The dollar rallied Tuesday, after a Federal Reserve official suggested that U.S. rates may have to rise to stem inflation and a top Treasury official repeated that a strong currency is in the interest of the country.

Treasury Secretary Henry Paulson reiterated on Tuesday that a strong dollar is important to U.S. interests and the underlying strength of the economy, as well as policies aimed at shoring up confidence, would be reflected in currency markets. At the same time, Philadelphia Fed President Charles Plosser said rising inflation could force the Fed to start raising interest rates even before labor and financial markets recover.

Gold for August delivery dropped $15.20 to end at $948.50 an ounce on the New York Mercantile Exchange.

Rising interest rates? Strong dollar policy? Looks a lot like jawboning to me. But don’t take my word for it. On July 15, Reuters ran a piece about legendary investor George Soros. From the interview:

All told, Soros said Ben Bernanke, chairman of the Federal Reserve, is in a bind.

“When he recognized the seriousness of the credit crisis, he acted very radically lowering interest rates and he used the tools that are at his disposal,” Soros said. However, now the “armory” is depleted, he said adding that Bernanke can’t lower interest rates because of the effect it would have on the dollar and he can’t raise interest rates because of the looming recession. Soros said.

“Therefore, his options are limited — he is boxed in.”

And how many times have we heard about this supposed “strong dollar policy” of ours? Actions speak louder than words, right? Back on March 17, Soros’ former partner, Jim Rogers, said during a Bloomberg Television interview:

Now, please, do we even bother reporting that anymore? Poor Hank Paulson, had a reasonable education, and a reasonably-good career, head of Goldman Sachs, now he goes around the world making a fool out of himself. Goes around saying we want a strong dollar, the next day he goes to China and says we want a weak dollar, and then he goes to Japan and says we want a weak dollar. I mean, you have to feel sorry for the guy. At least, I do.

Finally, it was housing naysayers who fell under the gun. From the CNBC website this afternoon:

Treasury Secretary Henry Paulson said America’s housing market could turn a corner and begin recovering within months, but it will take longer to resolve all housing-related problems.

“Obviously, it will go on beyond months with some of the issues in the housing market, but I believe we can get to the point within months where we turn the corner on housing,” Paulson said in a televised interview with Fox Business Network.

Sound familiar to anyone? From my post “Paulson Weighs In On Housing” from July 2, 2007:

Today, U.S. Treasury Secretary Henry Paulson spoke to Reuters about a number of economic issues, including housing. Paulson said the U.S. economy is healthy, despite problems with the subprime mortgage sector. The former chairman of Goldman Sachs stated that the downturn in the housing market is “at or near the bottom. It’s had a significant impact on the economy. No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it’s at or near the bottom.” Beyond subprime mortgage woes, Paulson declared that the financial markets looked sound. He said, “Markets are volatile. I haven’t seen a single thing that surprises me – it’s hard to surprise me.”

DJIA down 1,933 points since then, S&P 500 down 243 points, global credit crunch, $453 billion of write-downs, Bear Stearns, IndyMac, Fannie Mae, Freddie Mac… surprise!

Sources:

“Dollar Jumps on Paulson, Plosser Comments”
Reuters, July 22, 2008

“Soros says Fannie, Freddie crisis not the last”
Jennifer Ablan
Reuters, July 15, 2008

Jim Rogers Interview
Bloomberg News Video
Bloomberg, March 17, 2008

“Paulson: Housing Market Could Turn Corner Soon”
CNBC, July 22, 2008

Quote For The Week

The folks who sat on the sidelines, they should feel legitimately annoyed that the more speculative folks who bought homes they couldn’t afford are going to be bailed out or helped by the federal government… And these other folks [who] acted responsibly and didn’t get in over their heads and decided they didn’t want to buy
the home, they’re not getting any benefit.

-Edward Leamer, senior economist at the University of California and director of the prestigious UCLA Anderson Forecast, on government efforts to bail out homeowners struggling to avoid foreclosure.

Wall Street, Housing Woes Hit The Hamptons

There goes the neighborhood. I first talked about the Hamptons, the playground for America’s rich on the East Coast, back on June 5 due to a little foreclosure problem they were having. Now, I understand that the east end of Long Island, New York, is having a bigger problem related to home sales and prices. Bloomberg’s Sharon L. Lynch and Laura Marcinek wrote yesterday:

The Hamptons housing market is feeling the heat of Wall Street’s meltdown.

Second-quarter sales volume dropped 29 percent and the median price fell 11 percent to $735,000 from a year earlier in the resort communities on the East End of New York’s Long Island, Suffolk Research Service Inc. said in a report today…

Bloomberg attributes the decline in sales and prices to tough times on Wall Street. According to Wednesday’s piece:

Transactions are dropping as financial firms have cut more than 93,000 jobs and taken more than $416 billion in mortgage- related losses and writedowns. The retreat in global stock markets, waning consumer confidence and the deepening housing recession are also keeping prospective buyers at bay.

Source: L Nichols Woodcarving

Looking at the individual towns, Lynch and Marcinek noted:

In Southampton, the median price dropped 8.6 percent to $891,000. Sales volume fell 35 percent to 257 homes. In East Hampton, prices fell 11 percent to a median of $1,000,000, Suffolk Research said. Volume there fell 40 percent to 120 homes…

In Southold, prices fell 8 percent to $507,500 and sales dropped 19 percent. On Shelter Island, the median price rose 34 percent to $1.13 million, while sales fell 26 percent to 17. The cost to buy in Riverhead also rose, up 9.6 percent to a median of $411,100, while transactions gained 3 percent to 103 properties.

Source:

“Hamptons House Prices Fall Amid Wall Street’s Decline (Update4)”
Sharon L. Lynch, Laura Marcinek
Bloomberg, July 16, 2008

More Bank Failures Ahead?

According to the Paris-based publication International Herald Tribune, a number of analysts are predicting more U.S. bank failures in the aftermath of the IndyMac tragedy. IHT’s Louise Story wrote Monday:

As home prices continue to decline and loan defaults mount, U.S. regulators are bracing for dozens of American banks to fail over the next year…

The nation’s banks are in far less danger than they were in the late 1980s and early 1990s, when more than 1,000 federally insured institutions went under during the savings-and-loan crisis. The debacle, the greatest collapse of American financial institutions since the Depression, prompted a government bailout that cost taxpayers about $125 billion.

But the troubles are growing so rapidly at some small and midsize banks that as many as 150 out of the 7,500 banks nationwide could fail over the next 12 to 18 months, analysts say. Other lenders are likely to shut branches or seek mergers.

William Isaac, chairman of finance consulting firm Secura Group and a former chair of the FDIC in the early eighties, told the IHT:

Failed banks are a lagging indicator, not a leading indicator. So you will see more troubled, more failed banks this year.

Story noted that troubled small and midsize banks all share something in common:

They vary in size and location, but their common woe is the collapsed real estate market and souring mortgage loans.

According to the IHT piece, the Federal Deposit Insurance Corporation, or FDIC, has $53 billion set aside to reimburse consumers for deposits lost at failed banks. However, the IndyMac situation will subtract $4 to $8 billion from that fund, the agency estimates, “and that could force it to raise more money from the banks that it insures,” Story said.

Source:

“Analysts say more U.S. banks will fail”
Louise Story
International Herald Tribune (France), July 14, 2008

ARM Resets Hit Peak

Well, it seemed like a good idea at the time. During the summers of 2005 and 2006, wannabe homeowners opted for adjustable-rate mortgages with smaller initial payments scheduled to reset two to three years out. Now those ARMs are resetting, and many are watching to see if higher monthly payments will add more stress to an already troubled housing market in the United States. The Washington Post’s Renae Merle wrote in the Chicago Tribune yesterday:

The number of homeowners facing an increase in their subprime adjustable-rate mortgage payments will peak this summer, testing the efforts of lenders and others to keep those people out of foreclosure and stabilize the housing market.

The timing reflects the height of subprime lending in the summers of 2005 and 2006, when many borrowers secured loans scheduled to adjust in two or three years. For many, an adjustment means their interest rate will go up 2 to 3 percentage points.

Photo by svilen001, stock.xchng

Mark Fleming, chief economist for research firm First American CoreLogic told Merle:

The next six months, the industry, all of the folks that are out there trying to solve this problem, they are going to be very busy. There are a lot of people facing their resets right now. A good share of them don’t have the refinance option.

Merle noted that more than 300,000 such loans will adjust this summer. She wrote:

Lenders, federal officials and housing counselors have worried that borrowers will not be able to afford the higher payments after the reset and will quickly fall into foreclosure. Declining home prices have made it impossible for many of these homeowners to refinance.

It will not be clear for months how many will lose their homes, Fleming said. “A lot of those are resetting now,” he said. “We may not see the impact in foreclosures until the middle of 2009.”

RealtyTrac, an online marketer of foreclosed properties, told CNN Money last week that during the first six months of 2008, 343,159 Americans lost their homes, up 136% from 145,696 recorded during the same period in 2007.

Sources:

“ARM resets to hit peak this summer”
Renae Merle
Chicago Tribune/Washington Post, July 13, 2008

“Six months, 343,000 lost homes”
Les Christie
CNN Money, July 10, 2008

U.S. Senate Passes Housing Bailout Legislation

“Progress” continues to be made on the next major bailout. According to Bloomberg tonight:

The U.S. Senate passed a $300 billion plan to help thousands of Americans keep their homes and tighten regulation of Fannie Mae and Freddie Mac in an effort to ease the worst housing slump since the Great Depression.

The legislation, approved 63-5 today, would let an estimated 400,000 struggling homeowners avoid foreclosure by refinancing their subprime mortgages into fixed-rate loans backed by the government. The measure also offers tax incentives to potential homebuyers and sets aside $4 billion to help communities buy foreclosed properties.

Chicago’s Mayor Daley moonlighting as a real estate agent? Yeah, I guess I can see it…

“‘Got House?’ Oh, I’ll give you house!”

Source:

“Senate Approves $300 Billion Plan to Stem Housing Foreclosures”
Brian Faler
Bloomberg, July 11, 2008

IndyMac Collapse Second Largest Bank Failure In U.S. History

Well, it wasn’t long before all those recalled FDIC employees were put to good use. From MarketWatch tonight:

IndyMac Bancorp Inc. became the biggest casualty of the subprime mortgage crisis on Friday, as federal regulators shut down the troubled Pasadena, Calif.-based savings bank in one of the largest U.S. bank failures ever.

The Federal Deposit Insurance Corp. said in a statement it will take over operations of IndyMac, which will open for business on Monday as IndyMac Federal Bank. The thrift had total assets of $32.01 billion as of March 31.

IndyMac Bancorp Inc. now has the distinction of being the second-largest financial institution to fail in U.S. history, according to the Office of Thrift Supervision, which had regulated IndyMac.

MarketWatch reporters Jonathan Burton and John Letzing noted:

Regulators said the “immediate cause” of IndyMac’s failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac’s soundness.

By July 10, depositors had pulled more than $1.3 billion from their accounts, the OTS said in a statement.

“The institution failed today due to a liquidity crisis,” said OTS Director John Reich. “Although this institution was already in distress, I am troubled by any interference in the regulatory process.”

Schumer couldn’t immediately be reached for comment late Friday.

It must be pretty lonely up there on that pedestal right now…

Bank Slayer?

Source:

“Latest victim of mortgage crisis, IndyMac taken over”
Jonathan Burton, John Letzing
MarketWatch, July 11, 2008

Fannie Mae, Freddie Mac Bailout Coming?

When the competition for 2008 Word of the Year comes around, I have a feeling the word “bailout” will be in the mix. First, it was Bear Stearns. Next? Probably distressed homeowners. After that? According to former St. Louis Federal Reserve President William Poole, it will be mortgage lenders Fannie Mae and Freddie Mac. According to Reuters UK (did you ever notice how most of the unpleasant U.S. news comes from abroad these days?) reporter Ajay Kamalakaran earlier today:

Mortgage lenders Fannie Mae and Freddie Mac are “insolvent” and may need a U.S. government bailout, former St. Louis Federal Reserve President William Poole was quoted as saying in an interview with Bloomberg.

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer,” Poole was quoted as saying in an interview held on Wednesday.

Chances are increasing that the government may need to bail out the two mortgage companies, Poole was quoted as saying.

Kamalakaran observed that share prices for both companies have seen significant declines recently “on worries about whether they can withstand more losses and support housing as well as concerns that they may need to raise massive amounts of new capital.”

Source:

“Fannie, Freddie insolvent, Poole tells Bloomberg”
Ajay Kamalakaran
Reuters (UK), July 10, 2008

Housing Bailout Bill To Rescue Lenders?

I first heard of Dean Baker, co-director of the Center for Economic and Policy Research in Washington, DC, back in 2004. Believing that the housing boom was about to end, in May of that year Baker sold his two-bedroom condominium in the Adams-Morgan neighborhood for $445,000, clearing $270,000 after taxes and commissions. He then rented a two-bedroom condo just two blocks away. While his monthly outlay of $2,200 was about the same as what he was paying in mortgage, taxes, and maintenance at his former place, he invested the remainder of the money in corporate bonds paying about 7% annually in interest. He said at the time, “I’m just much better off renting.” And sure enough, the housing bust came…

I happened to come across a piece by Baker in TPMCafé from July 6 that pointed out some potential problems with the housing bailout bill making its way through Congress. The economist wrote:

The Congressional Budget Office (CBO) is not terribly optimistic about the success of the housing bailout bill going through Congress. They project that 35 percent of the homeowners “helped” under the plan, or 140,000 families, will find themselves again facing foreclosure. The reason for the pessimism is that the lenders get to decide which loans enter the program. Naturally, they will pick homeowners who they think will be the least likely to make it.

I wonder what the folks who support this bill will tell those 140,000 families? Many of these families will struggle to make their mortgage payments for 2 or 3 years, sacrificing health care, child care and other necessary expenses in a hopeless effort to hang onto their home. At their end of their struggling, they will end up out on the street, foreclosed a second time.

That is what Washington policy wonks call “asset building.”

That is what I would call “half-assed.”

While the CBO is pointing out the possibility of 140,000 second foreclosures, they also note that lenders may receive $680 million with the passage of this bill. Baker wrote:

As a result, we see Congress rushing to push through a bill that CBO projects will hand $680 million to lenders. Yes lenders — you know, the folks who issued predatory mortgages on an enormous scale to low and moderate income families in the last few years. Given the structure of the program (it does nothing to prevent loans from being issued at prices that are still inflated by the bubble), it is questionable how much any homeowners will actually be helped.

Sounds like it’s the lenders, not homeowners, who are being rescued by this bill.

Source:

“CBO Projects Housing Bailout Program Will Send 140,000 Families Into Second Foreclosure”
Dean Baker
Talking Points Memo Café, July 6, 2008

Housing Industry Buying A Bailout?

Let the people think they govern, and they will be governed.

-William Penn (English religious leader and colonist. 1644 - 1718)

This weekend I came across the following by Elizabeth Williamson of the Wall Street Journal:

The housing industry already has given more money in political contributions this election cycle than in the entire previous cycle, while winning favorable provisions in an emergency housing bill moving through the legislature.

Through May, mortgage bankers and brokers, real-estate companies and home builders had given more than $95 million to federal candidates and political parties so far this election cycle, according to the nonpartisan Center for Responsive Politics. That compares to about $57 million at this point in the 2006 cycle.

The recipients include people with key roles in the legislation. On the Senate Banking Committee, they include Chairman Christopher Dodd (D., Conn.), ranking Republican Richard Shelby of Alabama, and Sen. Elizabeth Dole (R., N.C.). On the House Financial Services Committee, recipients include Rep. Paul Kanjorski (D., Pa.), committee Chairman Barney Frank (D., Mass.) and Rep. Spencer Bachus (R., Ala.)

Lawmakers say the money is needed to pay rising campaign costs. The idea that it would influence their positions on legislation is “B.S.,” said Rep. Frank.

Ever heard of a “conflict of interest?”

“Keep it fair! Keep it fair!”“I can’t. I can’t.”
Scene From “Caddyshack” (1980)

Bloomberg’s Nicholas Johnston also wrote on July 5:

Contributions are given to lawmakers who support industry positions and withheld from those who don’t, the newspaper reported.

The contributions, which are allowed by law, are a means toward “relationship building,” Steve O’Connor, senior vice president for government affairs at the Mortgage Bankers Association, told the newspaper.

“Relationship building?” Come on, man. When Mark Twain said “we have the best government money can buy,” is this what he meant?

Sources:

“Housing Industry Ramps Up Political Donations”
Elizabeth Williamson
Wall Street Journal, July 5, 2008

“Housing Industry Political Donations Top $95 Million, WSJ Says”
Nicholas Johnston
Bloomberg, July 5, 2008

Weird Housing Tales, Part 8

From the Chicago Tribune this weekend:

A mortgage broker took a different road. The Sharpsville, Pa., man has been sentenced to three to 15 months in jail and must pay more than $174,000 to an insurance company because he gutted his $1.2 million home, which was in foreclosure and scheduled to be sold at a sheriff’s auction.

Authorities said he stripped cabinets, toilets, a whirlpool bath, locks, garage doors and other items, which led to his conviction on charges of defrauding his creditors.

The man argued in his own defense, stating that he didn’t know he couldn’t take the items with him. The judge said he didn’t buy that, noting that the man had been in the mortgage business.

“Who Knew?”

Source:

“Can’t take it with you”
Mary Umberger
Chicago Tribune, July 6, 2008

Half Of Wall Street Bank Profits Up In Smoke

What a difference a year makes. Louise Story of the New York Times wrote today:

Only a year ago, Wall Street reveled in an era of superlatives: record deals, record profit, record pay. But a mere 12 months later, nearly half of the profits that major banks reaped during that age of riches have vanished.

The numbers are staggering. Between early 2004 and mid-2007, a period of unprecedented wealth on Wall Street, seven of the nation’s largest financial companies earned a combined $254 billion in profits.

But since last July, those same banks — Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley — have written down the value of the assets they hold by $107.2 billion, gutting their earnings and share prices. Worldwide, the reckoning totals $380 billion, much of which reflects a plunge in the value of tricky mortgage investments.

Funny, but the word “tricky” doesn’t really come to mind when it come to describing those mortgage investments. Something with four letters beginning in “c” and ending in “p” seems to be a better fit.

Source:

“Nearly Half of Wall St. Bank Profits Are Gone”
Louise Story
New York Times, June 16, 2008

Mozilogate?

Leave it to Diana Olick, CNBC’s real estate reporter, to come up with another doozie. This time, she’s unearthed some skeletons that belong to a few U.S. Senators regarding their dealings with Countrywide Financial. Earlier today, Olick wrote:

Apparently, Countrywide has a VIP program, known as “Friends of Angelo,” where the lender gives certain people better deals, maybe shaves a point or something, simply due to who those certain people are, basically saving them all thousands of dollars.

Now how about Senator Chris Dodd, Chairman of the Senate Banking Committee, who has been spearheading the Senate’s housing rescue plan? Or Senator Kent Conrad, who is a member of the Senate Finance Committee? They got the deals. Conrad put out a statement saying, “Although I did not ask for or know that I was receiving a discount, and even though I was offered a competitive loan from another lender, I do not want to have received preferential treatment.” Conrad now says he’ll donate $10,500 to charity (Habitat for Humanity) and refi his loan (good luck with today’s mortgage market!).

I thought penance only worked for the Catholics. The CNBC reporter continued:

Senator Dodd’s statement reads: “As a United States Senator, I would never ask or expect to be treated differently than anyone else refinancing their home.”

I’m pretty sure there a number of Senators who would be upset if they weren’t treated differently. Their staff could vouch for that. Olick concluded:

So am I to believe that these high-ranking Senators, and a former Fannie CEO, didn’t read their loan documents to figure out that they were getting a special deal?? Did they not know enough about how mortgages work to figure it out? And why would Mozilo give these folks a special deal if he didn’t expect them to at least know about it??

The Senators are claiming they had no idea. Come on. I realize I’m supposed to accept that all those subprime borrowers didn’t understand their loans, but to accept that these well-educated leaders of our government didn’t–well that insults my intelligence, and every borrower’s out there.

I wonder if the next time we hear about Conrad, Dodd, and the Countrywide issue, they’ll be pleading the Fifth…

Source:

“Senators As Confused Borrowers? Don’t Insult Our Intelligence”
Diana Olick
CNBC, June 16, 2008

From Jingle Mail To Buy And Bail

First, there was “jingle mail.” Now, it’s “buy and bail.” Nick Timiraos of the Wall Street Journal wrote yesterday:

Next month, Michelle Augustine plans to walk away from her four-bedroom house in a Sacramento, Calif., subdivision and let the property fall into foreclosure. But before doing so, she hopes to lock in the purchase of another home nearby.

“I can find the same exact house as what I live in right now for half the price,” says Augustine, 44, who runs a child-care service out of her home. She says she soon will be unable to afford her monthly payments, which will jump to $4,000 from $3,300 in August, and she doesn’t want to continue to own a home that is now worth $200,000 less than what she paid for it two years ago.

In markets hit hardest by falling home prices and rising foreclosures, lenders and brokers are discovering a new phenomenon: the “buy and bail,” in which borrowers with good credit buy a new home—often at a much lower price—then bail out of the “upside-down” mortgage on their first home.

Homeowners are able to pull off this gambit—which some lenders and real-estate agents call mortgage fraud—by taking advantage of mortgage-lending practices that allow them to buy a new primary residence before their existing residence has been sold.

And with the lending industry in disarray as it tries to restructure millions of mortgages, some boast they are able to pull off the strategy with ease.

The best part of Timiraos’ piece?

In some cases, homeowners are coached through the buy-and-bail process by real-estate agents and brokers who see nothing wrong with it…

“It’s just a business decision,” says Linda Caoili, a Sacramento real-estate agent who is working with Augustine and others who are considering walking away from their mortgages. “If you’re upside-down $250,000, why would you keep it? It just doesn’t make sense.”

Readers- fraud or fair play?

Source:

“Some owners plot walking away from foreclosed home”
Nick Timiraos
Chicago Tribune, June 15, 2008