Weak Housing Starts Point to Double-Dip

 |  Includes: FMCC, FNMA, IYR
by: Richard Suttmeier

Most textbook economists say that the US economy is in a broad based recovery. I still don’t understand how that can be with the euro contagion, volcanic ash clouds and oil in the Gulf of Mexico effecting Louisiana, Mississippi, Alabama and the Panhandle of Florida. My reasons to predict a double-dip is housing, job creation and continued stress among community banks.

Jobs related to the Gulf of Mexico – On Fox Business on Wednesday I saw a report explaining the job losses just resulting from the six month moratorium on the operation of the 42 deep water rigs. The report shows 240 workers per risk with three times that in supporting jobs on land along the Gulf Coast and another four times for related jobs around the country. That’s more than 80,000 jobs.

Housing Starts declined 10% in May to 593,000 well below the 648,000 expected. Permits fell 5.9% to 574,000 versus the consensus of 625,000. The important single-family starts fell 17.2% to 468,000 to the slowest pace since May 2009. This followed Tuesday’s reading of the NAHB HMI which fell to 17 from 22 in June when 50 is neutral.

The expiration of the home buyer tax credits on April 30th caused the drop in housing starts and building permits in May. Keep in mind that those who qualified for the tax credits had to close on the sale on or before June 30th which is just two days away. We know that the National Association of Realtors is concerned that 180,000 of sales will not close on time. We don’t know how many new homes will not be built on time? On Wednesday the Senate passed an amendment to extend the homebuyer tax credits closing date to September 30th, but this amendment must be attached to a bill that becomes law to take effect.

Default Rates will be high for HAMP Modified Mortgages - According to Fitch Ratings most borrowers who receive a permanent mortgage modification under the government’s HAMP program will default with twelve months. The reasons include: credit card debt, car loans and other debt obligations. These loans remain highly risky as the median ration of total debt payments to pretax income still averages 64% leaving little balance for the cost of living. HAMP is scheduled to remain in place through 2012.

Ninety-One Banks Missed May 17th TARP Dividend Payments - The number of community banks not paying TARP Dividend Payments to the US Treasury and hence tax payers rose to 91 in May, up from 74 in February and 55 last November. Twenty banks have missed four or more payments with another eight missing five. Saigon National Bank (SAGN.OB) has missed all six of its dividend payments.

According to SNL Financial

the 91 delinquent institutions have received approximately $3.5 billion for preferred shares issued under CPP, approximately 1.7% of the $204.9 billion issued to the more than 700 participants of the program. In some cases, state regulators can restrict banks from paying dividends if their accumulated earnings do not meet a certain threshold. Also, some banks need shareholder approval before they can pay capital distributions.

Can Lending by Community Banks be Jump Started?

On Wednesday the Senate rejected a $140 billion bill to renew pieces of last year’s economic stimulus measures. The bill included jobless aid for the long-term unemployed, aid to state governments that are trying to balance budgets, and the renewal of dozens of tax breaks for businesses and individuals.

States face thousands of layoffs of public employees and teachers yet even some Democrats voted against the measure. Now the Senate is back to work on a scaled-back version.

Meanwhile, House Democrats hope to pass legislation to increase bank lending to small businesses. This would involve a $30 billion fund for community banks, which is a ridiculous extension of the TARP to banks seeking aid via the CPP, which would have banks issue preferred stock to the US Treasury. This is a failed policy as I mentioned earlier, as an increasing number of banks are not making the dividend payments. Most small banks that received TARP used the money to increase capital, not lending. For this $30 billion the dividend payments would be based upon how much the bank increases lending to small business, which will be next to impossible to monitor, particularly if a community bank is double-dipping into TARP.

This type of giveaway is becoming increasingly unpopular as US national debt threatens to break above $13 trillion, not including the $5.5 trillion of Fannie Mae (FNM) and Freddie Mac (FRE), which de-listed their shares on Wednesday. Taxpayer costs covering the GSEs will steadily mount on a quarterly basis right though 2012. I hope that de-listing does not decrease transparency?

Remember that my opinion is that more than half of all community banks can’t increase lending as more than 80% of their real estate loan commitments have been loaned out, and noncurrent loans are on the rise. This has been the main cause of 82 bank failures so far in 2010 and the FDIC increase to the number of problem banks to 775.

Disclosure: No positions