– 01/04/2011

Amherst Securities: Investors Underestimating Severity of Housing Problem – Yves Smith – Amherst Securities, whose mortgage research is well respected, published a new article on Monday which gives a sobering reading of the prospects for the housing market. It gives a detailed analysis of default rates among performing and non-performing mortgages, and concludes that the outlook is far worse than most investors assume.  The big source of risk is what they call the “non-agency” market, which is often called the “private label” market. They’ve argued in the past that 11.5 million homeowners are at risk of losing their residences. They contend that where other analysts and investors are missing the boat is by focusing primarily on loans that are already in trouble. Loans that have always been current but where the borrower has significant negative equity also have a reasonable risk of default. Amherst Mortgage Insight January 3, 2011 One caveat about this report: it notes that once a borrower gets in arrears, the odds of the loan getting back on track, even with a mod, are low. Note that this is an indictment of the current way mods are done rather than mods in general. As Adam Levitin and Tara Twomey point out in a recent paper:

For B. of A., mortgage ‘put backs’ aren’t over — Bank of America Corp. unveiled a $2.8 billion deal with Freddie Mac and Fannie Mae on Monday that settles legal spats over losses on hundreds of billions of dollars in home loans that the lender sold to the government-owned mortgage giants.  However, the agreement only deals with part of Bank of America’s (NYSE:BAC)  exposure to mortgage repurchase, or “put back,” requests, according to analysts.  The put back problem stems from the housing boom, when lenders originated lots of home loans then sold them to Fannie and Freddie, or packaged them up into mortgage-backed securities that were sold to private investors and sometimes insured by private insurers.  When the housing bust and financial crisis hit, lots of these loans and securities turned toxic. Now Fannie, Freddie, mortgage investors and insurers are looking for errors in the underwriting of these loans and asking the banks to repurchase them at the original value. That’s left the banking industry facing billions of dollars in losses. Read about the issue here.

Dramatic spike in gas prices forecasted – Oil and gasoline prices have risen to their highest levels in two years, and analysts say prices could shoot up dramatically this year as the thirst for fuel grows in the U.S. and around the world.  The former head of Shell Oil has warned that gas prices could hit $5 a gallon by 2012 because of fast-growing demand in emerging countries such as China and India, where more and more people are buying cars, combined with restraints on drilling in the U.S. in the wake of last year’s disastrous Gulf oil spill.  Less-worrisome forecasts are calling for a rise in gas prices to $3.75 a gallon by spring from today’s $3.07 average level, with premium crude prices easily exceeding $100 a barrel this year as demand for oil around the world returns to pre-recession levels last seen in 2007.

Austerity may not be enough to save the EU’s weakest links…Analysts at the credit ratings agency Moody’s Analytics have issued a stark warning that even with budget deficit programmes and savage cuts in public spending across the eurozone some of the weaker peripheral nations will still default on their debts, requiring a "restructuring".  They say: "It is hard to escape the conclusion that austerity will not end the debt crisis, and that restructuring may be necessary, as Germany’s Chancellor Merkel has indicated."  Arguing that Europe is the "weakest link" in the global economy, they say that the fortunes of Asia and the West will diverge further next year, and that the United States’ prospects have "improved only somewhat" with the passage of the recent budget deal in Congress.  But China also represents a threat to growth around the world.  "Although China will continue rapid growth, it faces downside risks from inflation and a real-estate market correction. Despite these problems, our baseline outlook for recovery assumes Europe and China will go through orderly restructurings that will prevent further financial panic."

Overheating East to falter before the bankrupt West recovers – Policy levers in the US, Europe, and Japan remain set on uber-stimulus with the fiscal pedal pressed to the floor and rates near zero everywhere, yet OECD industrial output has not regained the peaks of 2007-2008 by a wide margin. Leading indicators are tipping over again. We are one shock away from a liquidity trap.  The East-West trade and capital imbalances that lay behind the Great Recession are as toxic as ever. Surplus states are still exporting excess capacity with rigged currencies — the yuan-dollar peg for China and, more subtly, the D-Mark-Latin peg within EMU for Germany.  Dangerously high budget deficits of 6pc, 8pc, or 10pc of GDP in countries with dangerously high public debts near 100pc may have prevented an acute depression, but they have not prevented the weakest rebound since World War Two, and they cannot continue, whatever the assurances of New Keynesians and pied pipers of debt.

Michael Hudson: Average Stock Held for 22 Seconds and Average Foreign Currency Position Held for 30 Seconds Michael Hudson is a highly-regarded economist. He is a Distinguished Research Professor at the University of Missouri, Kansas City, who has advised the U.S., Canadian, Mexican and Latvian governments as well as the United Nations Institute for Training and Research. He is a former Wall Street economist at Chase Manhattan Bank who also helped establish the world’s first sovereign debt fund. Yesterday, Hudson said: Take any stock in the United States. The average time in which you hold a stock is–it’s gone up from 20 seconds to 22 seconds in the last year. Most trades are computerized. Most trades are short-term. The average foreign currency investment lasts–it’s up now to 30 seconds, up from 28 seconds last month. See also this and this.

US house prices – Roll out the welcome mat for a double-dip – Let’s take a look at the situation after the October data from the Case-Shiller home price index has come in[1]: You see all major metropolitan areas peaking between March and May 2010 (the end of the first-time home-buyer tax credit). After only 8 months in positive territory, the overall index comprising 20 cities is back into the red (-1% in October). 14 out of 20 regions now show declining house prices. Prof. Robert Shiller (one of the creators of the index) pointed out that 6 out of 20 cities in the index have hit new lows (even lower than in early 2009). He said that the economy would face “serious worries” if house prices kept falling this fast.[2] Why did he say “this fast”? To understand, you have to look at the annualized rate of change of the last 3 months[3]. And it is not a pretty picture:

Holly Petraeus To Be Elizabeth Warren’s Pick For Top Post In New Consumer Protection Agency – Holly Petraeus, a longtime advocate for military families, is expected to be named to the senior post sometime later this week, according to the sources, who spoke on condition they not be named. They characterized her selection as part of the administration’s designs to crack down on unscrupulous lending operations that have thrived by focusing on vulnerable Americans–not least, military personnel and their families, who have been contending with a weak economy at home just as many breadwinners are serving overseas in the dangerous conflict zones of Iraq and Afghanistan.Petraeus’s appointment is aimed at empowering the agency to target abusive lenders without running afoul of Republicans in Congress, said the sources..  General Petraeus enjoys the favor of both Republican and Democratic lawmakers–boosting the administration’s hope that his wife and her initiative will be politically difficult to oppose, the sources said. Holly Petraeus has spoken passionately about the often-ruthless lending operations that have proliferated outside military bases.

ModernSurvivalBlog: Chesapeake Bay Is Freezing Over – Chesapeake Bay, more than 4,000 square miles of waterway in the United Sates, circled by Maryland and Virginia, has not frozen it’s surface to ice since 1976, an extremely rare occurrence. It may be ready to freeze once again. The latest satellite data reconnaissance from the U.S. Naval Oceanographic Office indicates that the surface temperature of much of Chesapeake Bay has reached 33 degrees, just one degree short of freezing over, turning to ice. Chesapeake Bay is the only inlet of waterway from the Atlantic, serving Baltimore, Washington DC, Alexandria, and countless other ports in the region. The winter of 2010 – 2011 is shaping up to be one of the coldest on record in many regions of the world. If it continues, many ports of entry could be impacted, which in turn could impact your life.

The Credit Card Regulation That Could Hurt Stay-at-Home Parents –  At issue is a proposal by the Federal Reserve that seeks to make sure that those receiving credit can actually afford to pay their bills. Currently, credit applicants are judged by their entire household income—in other words, the salaries earned by both partners. Under the proposed regulations, that would change. Instead, applicants would need, according to a report in The Wall Street Journal, to demonstrate “independent” income. If they can’t do that, they would likely be automatically denied unless they applied jointly with their income-earning husband or wife. The possible change is expected to have a particularly large impact on those non-working spouses—who are, of course, mostly female—seeking to increase existing credit lines or applying for instant credit from retailers.

“Citizens call for tough regulation of residential mortgage servicers” – Yves Smith – We just e-mailed the following message, along with a spreadsheet of signatures and messages, to Timothy Geithner, Ben Bernanke, Mary Shapiro, Sheila Bair, Ed DeMarco, and John Walsh. Thanks for your interest and involvement in curbing bad practices in the mortgage arena. My name is Yves Smith, and I run the economics-focused blog NakedCapitalism.com… I am writing to submit thousands of names of people asking you to impose regulations on mortgage servicers as part of the risk-retention piece of the Dodd-Frank regulatory reform act. We support the Rosner-Whalen letter on mortgage servicer regulation. Over 12,000 people have signed our petition, which you can see at StopServicerScams.com. It is quite obvious that the broken securitization market cannot be fixed without clear rules for mortgage servicing. Furthermore, regulatory failure to effectively police mortgage servicing is impairing the value of mortgage backed securities. You have the legal authority to write such rules as part of Dodd-Frank, and my readers and I encourage you to do so.

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