Hexan

Consumer Debt Sets New Records - Again

There is a growing trend among homeowners who are underwater to "strategically default" on their mortgage, without missing a single prior payment. Remarkably, these consumers do not default on other debts concurrently.

The proper term is a debtor's revolt, and it's already begun. They only thing many people have to lose at this point is their credit rating.

However, once free from the shackles, the consumer actually accumulates cash (if they are the 83% employed) to pay down other debts.

Of course, the defaulting homeowners' credit is destroyed, which prevents any further indebtedness. The bridge is burned.

I have a number of friends in the loss mitigation industry and the big secret is that they allow people who are in default to live in the home without starting foreclosure proceedings because the bank does not want the home back.

This situation is much worse than people realize.

The 'Paradox of Thrift' Is Sending the U.S. to the Poorhouse

So, let me get this straight. According to your dutiful reading of the Wall St. Pravda, "the paradox of thrift is destroying us".

The Chinese are fastidious savers and are not only financing our debt, but also expected to pull the world out of this malaise through spending. Economists have a scientific term to describe this event. They call it a "miracle".

This downturn was caused by the Fed's prior money printing. Now they want Americans to further leverage themselves into the future. Nice try.

S&P / Case-Shiller Home Price Numbers

One of the first things I learned in business school is that when you go down 50% and then go up 50%, you're not back to even.

1. Look at the absolute numbers, a 5% increase in prices still represents a lot of borrowers underwater.

2. Builders simply could not build less homes. Many of the current homes being built are either in areas with expansion (e.g. Texas), or very wealthy people (custom homes) who held off earlier in the year.

3. Foreclosures are still being mitigated by the H4H program(s), forbearance, or bank REO's unable to sell (due to solvency concerns).

4. Housing prices in Japan fell slowly for 17 years after the bubble burst there. Prices here could glide down or stay near their current price range for a long time.

5. Boomers transitioning to empty-nesters will continue to sell larger houses at an increasing pace as they approach retirement. Boomers vastly outnumber younger potential buyers. This is a long term trend and will depress any upward price movement.

What Housing Recovery?

The prices of homes will drop over an extended period, even without any forclosures.

It's simple demographics. Echo Boomers have kids going off to college (2nd spouses). During the next few years, the trend towards downsizing the home will only grow. Sellers will want to liquidate their primary asset (home ownership still represents on of the primary sources of American wealth) to purchase low risk, income producing assets to shift into retirement.

Buyers on the other hand, are few and far between. Outside of the growing group of illegal immigrants, there is a much smaller group of younger people in the housing market. Demographics also make this group less likely to purchase. Younger people are loaded with debt, both from college loans (at new higher non-government rates) and from consumer credit. In an environment of tightened underwriting, very few young people have the down payment banks require.

Second, and more important, this group of young people are getting married at much lower rates. Those that do marry are having fewer children at a later age, if they have children at all. The primary market for homes consists of 3-4 bedroom homes, designed for two parent/two child families. Higher divorce rates also have create more 1-3 person households.

This means an eager group of asset-rich, income-poor sellers trying to move larger houses to a much smaller group of buyers, who are indebted, single/divorced, childless or willing to wait to purchase.

Foreclosures: The Problem That Won't Go Away

It's also a relevant fact that many mortgages are not serviced by the investment trust that owns the servicing. The large investors use contract sub-servicing, like Dovenmuehle.

Sub-servicing firms are chosen by the investor and have a disincentive to please the borrower. They work for and at the will of the trust. If they hurt the investment (e.g. the mbs), they will lose the client's business.

The governments shame report may have the unintended consequence of driving sub-servicing work to the firms least effective at modifications.

This, of course, does not apply to banks like Citi and Wells, which service their own loans.

4 Drivers of the Exploding Federal Deficit

"For a brief period after World War II the income tax in this country was 82 percent on incomes over 200,000 and look at how the economy was able to grow in spite of it!"

Let's level all of Europe, Asia, and northern Africa. Our economy will skyrocket!

The Rating Agency Scapegoat Cycle

I agree with Jasper. Frank and Dodd blocked all attempts to rein in the GSE's portfolio.

Until the accounting issues, they had OFHEO on the ropes. Literally it was a three person operation oversight of a combined $~1.5 Trillion dollar portfolio.

Sucker's Rally Approaching an End

Here's my take, for what little that is worth:

1. The trend is your friend. This rally appears to be missing the big money and the smart money. It's a question of when, not if.

2. Being early is the same as being wrong. This rally appears to be driven by the news cycle, e.g. emotion. It just needs more straw.

3. Bank fundamentals are better in the short run, but much worse in the long run. Regional banks have much more exposure to commercial real estate. New regulation will hurt more than help.

4. The American consumer is done spending. Large purchases still have not found a bottom. Travel is down close to 40%y/y. Spending upticks in the last two months represented pent up demand from the fall.

5. Bankruptcies have not spiked up yet. They're up huge, but the rate of increase is still increasing.

6. Commercial real estate finance remains challenging.

7. Insurance companies will feel that pain very, very soon. They have not taken the kind of write-downs required. Significant "TARP"-like handouts may not be available due to political blow-back from AIG.

8. Forbearance and heavy loan modification efforts have simply kicked the can down the road with regard to write-downs from REO/Auction sales. Servicers I speak to indicate that foreclosures will go up in the coming months, not down.

9. TALF is useless. PPIP is not going to be nearly large enough to have a real impact. The stress test appears to be more placebo than medicine (at this point). Future bailouts will meet stiff resistance from the right and left.

10. The paradox of thrift has taken hold very strongly. When the savings rate peaks, that may be the new normal. Until then, hold on to your dog Dorthy, we're still in the tornado.

When Hedge Funds Embrace Regulation

Agreed.

However, many players will burrow underground and work behind the scenes over the coming years to create complex regulatory exclusions. In the 70's they were called tax shelters.

I talk to a lot of hedge fund guys that are taking a long holiday to see what the new normal is before making a move. Right now, it feels like wait and see.

Either way, I expect the wealthy to become very low key and more tightly knit.

Has the Monetization Really Started?

Is it possible that China is quietly selling of Treasuries while using the funds to purchase the IMF's gold?

If so, they could end up in a very strong position after this shakes out.

www.commodityonline.co...

Why It's Actually Different This Time

On Mar 13 01:14 PM ArtfulDodger wrote:

> Mr. Lee Eugene Munson:

> While we are whining our way through some rough times, to compare
> this time to the Great Depression is ludicrous.

Both eras do share some common elements worth studying in more detail.

> There is money everywhere today; people are out shopping and dining.

Retail sales are down more than 10% in the last three months. This month the number appears to have bottomed, but might be consumers spending on necessities they held off purchasing.

Durable goods orders are down 25% or so. There are very real declines in many sectors. Many retailers are having a hard time financing inventory purchases.

> To put the whole thing in perspective, in 1929, 659 banks went bust;
> in 1930, 1,352 shut their doors; and in 1931 2,294 closed down.<br/>

The concentration of portfolios and deposits are different. Today, something like 80% of all home loans are serviced by the top 6 banks. The top 25 banks have ~70% of all deposits.

A few firms, like Fannie Mae and Freddie Mac guarantee half of all US mortgages. They both failed.

Some experts believe most large banks are insolvent based on the TCE ratio.

A simple counting of bank failures is not a relevant measure due to the concentration of assets today.

> But I can tell you that things look much, much better today than
> they did in the 1970s; and if you can look through the eyes of those
> who lived from the late 1920s through the 1930s, you would have to

It's not there yet, but many of the solutions are simply wrongheaded. Nothing I hear from this administration makes me want to spend or invest. Nothing I hear makes me want to take on new debt.

Businesses are girding themselves against future losses, not preparing for future demand growth.

70% of GDP is based on US consumer consumption. It's not sane to be optimistic the consumer will spend with aplomb given the measures of consumer confidence, income growth, MEW, etc...

>Your generation is a very pessimistic one at this >point, and it's because you've never had the red torn >off your candy cane, as every generation before you >has—to one degree or the other.

Fix Social Security before you give me a finance lesson, Grandpa.

President Obama's Effect on the Market

The same thing was said about Hoover. Everytime he spoke the market dropped.

Is the Market Really Like a Political Tracking Poll?

Per Chief Investment Officer and President Barak Obama:

"What you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long term perspective on it,"

Actually, it's Price to Earnings ratio.

It's like when George Bush Sr. did not understand how much a gallon of milk cost.

Market Death Spiral Continues

"They won't move away from the greatest country on earth! Will they? No, because other countries tax at an even higher rate or can't offer them the things they think they can't live without. Mass migration? Hardly."

It does not take mass migration. In fact, quite the opposite.

According to Mayor Bloomberg, almost half the budget of NYC is paid by 44,000 people (of over 8 million).

If half those people left, the city would be bankrupt.

22,000 people could leave in an hour from JFK.

Was the Global Equities Crash Related to Obama's Election?

"The new economy that will emerge from all this will be more innovative, tighter, better educated and less likely to out-source than before"

Sunnsea;

If you believe that load, put all your money in CITI common.