Second-Mortgage Standoffs Stand in Way of Short Sales – Over the past year, real-estate agents, lenders and federal policy makers have pointed to short sales as one way to revive moribund housing markets while helping troubled borrowers avoid foreclosure. But for homeowners that took out second mortgages during the boom, getting a short sale approved is proving to be a nightmare. Most first mortgages, like Mr. Trujillo’s, are guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac or held by other investors in mortgage securities. Second mortgages and other junior liens are typically owned by banks and credit unions. Banks are reluctant to write down second mortgages because many are still current, even if the borrowers owe more than the value of their homes. They may also be able to pursue borrowers’ assets after foreclosure.
Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers. In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started. As a result, banks are taking progressively longer to foreclose. The average borrower in the foreclosure process hadn’t made a payment in 492 days as of the end of October, according to LPS. That compares to 382 days a year ago and a low of 244 days in August 2007. In other words, people who default on their mortgages can reasonably expect, on average, to stay in their homes rent-free more than 16 months. In some states such as New York and Florida, the number is closer to 20 months.
Winning the Class War – The class war that no one wants to talk about continues unabated. Even as millions of out-of-work and otherwise struggling Americans are tightening their belts for the holidays, the nation’s elite are lacing up their dancing shoes and partying like royalty as the millions and billions keep rolling in. Recessions are for the little people, not for the corporate chiefs and the titans of Wall Street who are at the heart of the American aristocracy. They have waged economic warfare against everybody else and are winning big time. The corporate fat cats are becoming alarmingly rotund. Their profits have surged over the past seven quarters at a pace that is among the fastest ever seen, and they can barely contain their glee. On the same day that The Times ran its article about the third-quarter surge in profits, it ran a piece on the front page that carried the headline: “With a Swagger, Wallets Out, Wall Street Dares to Celebrate.”
The continuing fight against overdraft fees – Even before the Consumer Financial Protection Bureau gets up and running, other branches of the government are fighting the good fight against excessive overdraft fees. First came the Fed, of course, which forced banks to get their customers to opt in to the fees, at least when it comes to ATM and POS transactions: no longer can they charge them automatically. But then something very odd happened. Moebs had some data on the number of bank customers who had decided to opt in: About 90 percent of overdraft revenue comes from frequent users. The Moebs study noted frequent users, those with 10 or more overdrafts in a year, almost all opted in. For all consumers, consent varied between 60 percent and 80 percent with a median of about 75 percent. This astonishes and depresses me no end. Most banking customers are relatively unharmed by overdraft fees; by far the greatest damage to consumers, and the greatest profits for banks, came from the poorer customers who could least afford it. Essentially, overdraft fees were a way for the banks to monetize the naiveté and imprudence of their least-sophisticated customers, and the Fed rule was meant to put an end to such predatory price-gouging. Evidently, it failed: Moebs reckons that banks’ total overdraft revenue will hit $38 billion in 2011, a new record high.
More on the Damaging Implications of Corporate Cash-Hoarding – Yves Smith – John Authers of the Financial Times provides an update on corporate cash-hoarding. In brief, it’s getting worse due to probably-warranted executive nervousness about business prospects. As Authers puts it: Corporate chieftains the world over have lots of cash, and want to hold on to it. It is a critical symptom of a new Age of Anxiety, as the corporate world tries and fails to convince itself that the global financial crisis has blown itself out. As Richard Dobbs, head of the McKinsey Global Institute, puts it: “Companies are uncertain about where the world is going to go. Until they are sure, they don’t want to pay the money out.” In their drive for efficiency, companies have gone for operating too lean. There are two elements to this tale. One syndrome is well known, the now-infamous big company short-termism, which can easily come at the expense of longer-term results. But there is a second, related, but less well recognized aspect, that of operating with fewer buffers against risk. And as we wrote some months ago, we’ve hit the point where capitalists are no longer playing their proper role. The intuitive understanding most people have of how a proper economy works is that households save and businesses invest. But that is not how it has worked for quite some time.
The Give and Take of Liar Loans – Did you hear the one about Countrywide Financial demanding that mortgage originators buy back many of the so-called stated-income loans that it had purchased from them during the late great housing bubble? It boggles the mind. This, after all, is Countrywide we’re talking about: Countrywide, which came to represent, in the public mind, the dirtiest of all the subprime lenders. Countrywide, which handed out fraudulent stated-income loans — they were often called “liar loans” — like candy. Countrywide, whose former chief executive, the disgraced Angelo Mozilo, once actually admitted to analysts, “I believe there is a lot of fraud in stated-income loans.” This same company is now insisting that other lenders that made stated-income loans — loans that Countrywide eagerly bought to fatten its balance sheet — must repurchase them on the grounds that, golly, the loans turned out to be fraudulent. The hypocrisy is breathtaking.
Strongest argument against a State default has disappeared – MANY SERIOUS people, in Ireland and elsewhere, have reached the conclusion that the Irish State cannot support the debt burden it has taken on. Flowing from this conclusion comes the view that a portion of that debt must be defaulted on. The most obvious and frequently mentioned portion of that debt that advocates of default point to are monies lent to Irish banks, including senior bonds. There are very powerful arguments to support the default view, and the strongest argument against it, from Ireland’s perspective, evaporated last week – that argument was that any default on bank bonds would cause lenders to stop giving money to the Government to fund its deficit. That has now happened anyway. It is no longer in Ireland’s narrow national interest to prevent senior bondholders from suffering the consequences of their own bad judgement.
Irish protesters to march against cutbacks – Thousands of people are expected to take to the streets of Dublin for a protest against the Irish Republic’s four-year austerity plan. The Irish Congress of Trade Unions (ICTU) has promised a family-friendly march through the city centre. However, police have warned that some groups may be looking to "exploit" the event and could cause trouble. There was violence during a student protest against increased fees in Dublin earlier this month. Irish police commissioner Fachtna Murphy has said he hopes Saturday’s march will be dignified and peaceful. However, he said police are prepared for the possibility of trouble.
Portugal now getting pressure to walk the plank? – The FT Deutschland is reporting that the EU is pressuring Portugal to be the next to walk the plank and quickly accept a bailout package in order to head off the spreading of credit worries. This story however was denied by a German government spokesman and Portugal said they are not being asked. Either way, 5 yr CDS in Portugal, Ireland and Spain are rising to new record highs at 500, 600 and 320 bps respectively. To put these sovereign levels into perspective, California trades at 300, El Salvador at 310, Lebanon at 295, Hungary at 360, Coca Cola at 38, McDonalds at 39, Cablevision at 360 and the USA at 42. Following up Axel Weber’s comments on Wed that the EU/IMF could always expand the side of the EFSF, the German Govt immediately told him to shush up and Merkel said the existing facility is enough. While euro LIBOR has remained stable over the past few weeks, US$ LIBOR is at the highest since Sept 2nd.
Greece → Ireland → Portugal → Spain → Italy → UK → ? – It is now common knowledge that there is a potential domino effect of European sovereign debt contagion, While some people have been writing about this for well over a year, many others have joined the party late (there are now over 600,000 hits from a Google search discussing this topic.) It is also now common knowledge that while Greece and Ireland have relatively small economies, there will be real trouble if the Spanish domino falls. Iceland has the world’s 112th biggest economy, Ireland the 38th, and Portugal the 36th. In contrast, Spain has the world’s 9th biggest economy, Italy the 7th and the UK the 6th. A failure by one of the latter 3 would be devastating for the world economy. As Nouriel Roubini wrote in February: But the real nightmare domino is Spain; there is not enough official money in this envelope of European resources to bail out Spain. Spain is too big to fail on one side—and also too big to be bailed out.”And as I’ve previously pointed out, Germany and France – the world’s 4th and 5th largest economies – have the greatest exposure to Portuguese and Spanish debt. For more on the interconnections between Euro economies adding to the risk of contagion, see this.