Mark Bern

The FHA is Broke

The worst of the problem is that the trend on the cure rates doesn't seem to have leveled yet, last I looked. The latest rate was the historic low, unless I missed something more recent. That would mean the trend down is still in tact and could go further. The good news is: there isn't much further to get to zero (if you want to call that good news). I may be stretching in calling that good but I'm having a hard time finding anything better.

Unemployment and Three Bad Recessions

The comparison is very telling, especially the percent of the long term unemployed (more than 15 weeks), but neither that nor the total unemployment seem to have peaked yet according to the trend. There doesn't seem to be any similar formation or precursor that sticks out from the prior recessions that would give us a clue as to how close we are from the peak this time either.

It seems that the only thing we can conclude is that in prior recessions more jobs were still being creating because the majority of people were unemployed for less than 15 weeks. Not so this time. Job creation is happening, but at a slower rate than that of job destruction. I don't profess to be an economist (and many of those who do shouldn't either, IMHO) but this does not seem to portend well for a recovery in business activity, especially in the retail and recreational sectors.

QUICK CHAT #17- Start after Market closes 11/13/09

Maya - I just got new tires on both of my vehicles this year. I paid a lot less than I had the last time I replaced them. I also got tires with a longer warranty this time (for less money).

Thinking about all that money on pallets reminded me of a guy working at Treasury (no longer) who was on the team designing the new $100 bills back a few years. One day he and his team had just left the vault where they tested the new bills. They had a rule that never could just one member of the team enter the vault alone (to avoid the obvious temptation). He realized that he had left his briefcase in the vault, stopped suddenly and asked one of the other team members to re-enter the vault with him so he could retrieve the briefcase. The other members ignored the rule and let him enter alone. He quickly snatched a few bundles of $100 bills, stuffed them into his briefcase, and exited quickly so as to not arouse suspicion. He performed this maneuver several times throughout the testing period (over several months) and never raised any suspicion. But the idiot deposited the money into several bank accounts in order to earn the interest. He didn't realize it but the whole team was being watched by federal agents of the Treasury just in case. If hadn't been so greedy and just stuffed the bills in a box in the closet, he could have gotten away with his scheme. It wasn't premeditated. It was just a lax application of controls. It kinda reminds me of how the banks got away with killing our economy. They probably tested the procedure to see if they could. Then, since no one in the government seemed to care, they just kept doing it more and more until things got out of hand. The only difference is: my guy went to jail.

Blasphemy

And you can be the Executive Producer! We'll figure out the split on royalties, but they're bound to be huge.

More on Oil Manipulation

John - That is an interesting article by Mr. Cohen. I, too, expect to see the global economy in the doldrums (except China) for the next year or two (or three) so that I don't expect the oil supply issue to give rise to higher prices for a while yet. But I agree with the assessment that when GDP growth does get started, we could find ourselves pushing up against supply constraints fairly quickly. If we experience another leg down (double dip) in this recession, I'll be adding to my energy positions for the long term.

The FHA is Broke

John - Excellent article about a very important issue that needs to be dealt with soon.

There seems to me to be one piece of very valuable information missing here in order to calculate the full exposure of the FHA fund. One assumption has to deal with the net loss to the bank or FHA, whichever ends up stuck with the property after foreclosure, after they end up selling the property. This assumption is a HUGE part of the puzzle, unless I misunderstand the FHA exposure here. So, the FHA's maximum exposure would be $20,000 on a $96,500 mortgage (assuming a $100,000 sales price with 3.5% down; the minimum allow by standard FHA rules) For the $360 billion in FHA mortgages issued so far in 2009, their maximum exposure should be about $75 billion (don't forget to add back the down payment if you are checking my numbers).

I'm not sure if the "$685 billion portfolio" defines the total exposure (or the portion of outstanding mortgages that they insure) or if it means the total face value of mortgages insured by the FHA. So, I won't try to estimate the exposure here.

The point about the assumption regarding exposure is what I want to make. In reality, you are right, John, that probably more than half of the FHA-backed mortgages initiated in 2007-2009 could be under water. And the percentage of those issued from 2005-2006 is probably as high or higher due to the steep drop in value since that time. But what assumption do they use for the loss? To get to the expectations they reported, I would have to assume that they played very favorably with that assumption. What I mean is that they must be assuming that FHA will not have to take a maximum loss on all those under water mortgages. From what I'm seeing in the housing market today in the distressed or bank owned sales, there is probably little or no chance that such an assumption can hold water. But that wouldn't stop them from using a favorable assumption to calm public concern, would it?

There is one other assumption that could play a big role in coming up with favorable numbers. It's the cure rate. The cure rate is the rate at which mortgages that have late payments become "cured" or, in other words, the buyer brings their mortgage payments current. There are different cure rates for different types of mortgages, of course. The average cure rate, if memory serves me correctly was around 30%. But, the cure rate has recently dropped to around 6%. If FHA assumes that cure rates will recover to historical norms soon, that could make another huge difference in the results of their model. However, once again that would be overly optimistic, IMHO. But since none of their assumptions are available for public review, again why make the public worry? We already have enough to worry about without hearing the scary truth from our leaders. I'm sure they are just trying to save us from harming ourselves further by keeping us in the dark and feeding us like mushrooms.

As I understand it, FHA insures the top 20% of the mortgage.

Blasphemy

YH - Only one change I would suggest. I think BO should be standing on the steps of GS HQ with all the people bowing as if to him. BO would be smiling and accepting the praise when, all of a sudden the HQ doors open, everyone shudders (especially BO) and out walks Blanfein. Then everyone resumes bowing, including BO, toward Blankfein. I think maybe either Blankfein or BO should be wearing a cape flowing in the light breeze. And maybe one shot should accidentally show the fan creating the breeze (just to take the dramatic edge off of the scene).

The Lloyd's Prayer - Version 2 (From Mish)

Very cute! This rings very true. I have already forwarded to some of my friends! (attributed to Mish)

The Fed: Starting to Come to Its Senses

"But the group also said its members will be hard-pressed to find replacements for that revenue,"

I suppose we're all supposed to feel sorry for the big banks woes. But, somehow I am having a hard time urging even one tear forth.

"Conventional wisdom has it that the U.S. economy will not make a complete recovery until the U.S. banking system does."

This rings true with me. If lending does not become available to small businesses and consumers for legitimate purposes the economy will continue to contract, IMHO.

Right now it seems that banks only want to lend for mortgages, whether the buyer can afford it or not, so that they can securitize the loans and sell the responsibility to someone else. Hey, it made them money before, didn't it?

The only other activity the banks want to exercise is borrowing for nothing from the Fed and investing in T-bills to collect the spread.

These types of activities will not create the jobs or new businesses that our economy needs to pull itself out of the abyss.

Open Comment to Paul Krugman on the "Stupidity Economy"

Personally, I think even Keynes would be rolling over in his grave if he knew what economic policies were being attributed to him today. Keynes, in my understanding, never thought that continuous deficit spending at unsustainable levels compared to GDP and continuous high trade deficits were a good thing. He advocated that deficit spending, when necessary to pull an economy out of a recession, was an appropriate action. But if he were to see how the stimulus money is being spent on pork projects, even he would go ballistic. That's not what he intended. Keynes wasn't stupid!
Those who call themselves Keynesian today are making a mockery of the poor guy and destroying his legacy.

Having said that, I'm not a Keynesian supporter in the true sense. I lean more toward the Austrian side of the economics field. But, I do believe that, during a deep recession such as the one we are currently experiencing, deficit spending can be good. But not if it is done willy nilly as we are witnessing today. It must be strategic in nature. It must be done with long-term benefits to infrastructure so as to ensure that a nation will be stronger than before. It must create jobs with permanency of nature that will last at least four or five years instead of 90 days to one year. It should not be a stop gap just to get us through the worst. It should contain strategic (that means long-term and beneficial in nature to me) plans to support basic industries and needs of the country such as: an energy policy (not just words and mottos, but a real executable plan that will solve the problems), a national security plan to address our borders and immigration issues and to make our ports and air cargo terminals more secure, an infrastructure plan to modernize our aging (over one hundred years old and rotting badly) water and sewer systems in cities across the country and the bridges that have been declared unsafe or nearly so, an industrial plan to determine which industries will be the most important for future growth and prosperity and how to support growth of such industries and jobs within our own borders.

Have any of these important issues been properly addressed and funded? No. So, where are we headed? No one knows. Why? There is no plan. Our leaders are just throwing our hard-earned money out the windows and hoping for the best. I, for one, don't call that leadership. And it sure as heck would not be supported by Keynes if he were alive today.

Friday Roundup: Commodities, Emerging Markets

As usual, excellent charts and commentary as interesting as can be in this environment. Who knows where we go from here? It would appear, from a technical point of view, that we will find out soon. But, it we head higher, just how far can this market run without the support of fundamentals? I'm not saying that all fundamental data is negative. It's not. It's just that the majority of the good news can be explained by stimulus. Of course, that's what stimulus is supposed to do. But, IMO, the economy hasn't shown the ability to sustain growth without the stimulus money flow. When more of the growth results from non-stimulus sources that can sustain growth even after the stimulus money runs out. Right now, I'm kind of hovering between thinking that, with the majority of the stimulus funds about to hit the economy in 2010, we may pull out or that the economy may contract further from here if the holiday season is too weak. If the later happens, do we take the medicine and let the losers fail or will Congress and the Administration pass another stimulus? I'm in the crowd that believes that another stimulus, if needed, will only put off the inevitable and necessary pain. If $800 billion, plus $700 billion in bailouts, plus the first stimulus of (what was it?) about $350 billion (under Bush), and the deficit spending of $2 trillion in one year (2010) after about $1.7 trillion in the previous year(2009), plus all the loan guarantees by the Fed and Treasury, plus all the loss sharing deals being made by the FDIC, another projected $1 trillion for health care over the next decade (assuming the bill passes the Senate)...well, if all that isn't enough, along with zero percent loans from the Fed, I'm not sure a few hundred billion more down the toilet would be a good idea. Even if we can kick the can down the road a few more years, I have to suspect we'll end up paying the price eventually and I also expect that the price tag (in terms of economic pain) just keeps rising the longer we put it off. But, then again, it may prove to be enough and everything will be great! Right?

Best and Worst Performing S&P 500 Stocks This Earnings Season

I really don't care whether they beat or missed expected earnings. What I think wouldbe interesting is whether their earnings are up or down compared to last year. That's the first cut in assessing a companies earnings, in my way of thinking. Are earnings growing or declining? If earnings are declining, then perhaps the stock should be trading significantly below where it was a year ago. After all, we are paying for future earnings. That would imply that the price paid a year ago was too high and if results are worse now why would we expect the stock to go up? I like to pay for performance and I want a management team that can stay ahead of the crowd. Otherwise, I feel that I am paying a premium for a laggard.

Renegade Photo & Video Collection

Maya - I just posted this near the top of the insta. To include a link in a comment from here all you have to do is right click of the photo, then choose "copy image location." Then just right click again in the comment box and choose paste. And below is what you get.

static.seekingalpha.co...

Ten years ago today brought the repeal of Glass-Steagall, which had split commercial and investment banking since the Depression. DealBook looks back at how few opponents the repeal had - and then there's Sen. Byron Dorgan (in 1999): "I think we will look back in 10 years’ time and say we should not have done this, but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010."

"we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010"

Boy, did we ever forget. And even though the reminder has been sent, we are still in denial. Maybe a second round of pain will teach our leaders something.

QUICK CHAT # 16- 11/10/09 after Market Close/ Update of Insta

That didn't work. So hopefully here is the pic that should have gone with the last comment.

static.seekingalpha.co...