Here's where the rubber meets the road. The rubber is business lending and the road translates to "toxic assets" sitting in large, medium and small financial institutions, otherwise known in the Japanese vernacular as "zombie banks."
In CNN.com's Small Business Loans: $10 Billion Evaporates, we see what happens when we follow a logical chain of common sense. If you have read my previous blogs, or just skimmed them, I have alluded to investment analysts, economists and a bunch of people smarter than myself who pay attention to the economic landscape and see through the BS being reported.
Here's the logic chain:
Link One: A bank with trillions of dollars in loans that will never be fully repaid;
Link Two: A federal government that would rather retain a philosophy of higher debt and more consumer spending (70 percent of economic growth) over more fiscal restraint by putting banks into a receivership, unloading the toxic assets, merging together some of these "too-big-to-fail" banks and putting the Glass-Steagal Act back into place;
Link Three: Banks saying thanks for the free money--we'll hold it in our capital risk-ratio reserves so we do not fail or go into receivership;
Link Four: Banks saying that since they have so many "toxic assets" they need to hoard this money and not lend it to businesses;
Link Five: Businesses laying off employees to the current 10.2 percent unemployment rate with Wells Fargo Securities now reforecasting to 10.8 percent unemployment into the first quarter of 2011--well above the most-adverse scenario in the Treasury's bank stress tests that took place before the summer.
Hence, my title, the "Rubber Meets the Road," because small business leaders will speak with Treasury Secretary Timothy Geithner as to where any money is for credit. And, here's the answer--the strong businesses that do not need credit will have it available to them once they start expansion and the businesses that are weak--well--bank do not want to take the credit risk. Thanks for playing "tainted capitalism."
Meanwhile, the weak business that will undergo further layoffs--that also includes state and local governments as well--will increase the unemployment rate.
If we follow that logic chain to its full conclusion, it means that unemployed persons will not spend nearly as much money as they have in the past, more businesses will slowdown or fail, more homebuyers will face foreclosure since unemployment is the primary reason for foreclosure under normal economic circumstances and more RESIDENTIAL MORTGAGE toxic assets will keep banks from lending.
"The very issues that brought us to the brink of disaster and caused us to pass TARP are still there," said Elizabeth Warren, chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout or the Troubled Assets Relief Program (TARP) last week.
And, on a side note, retail stores become more vacant, hotel loans deteriorate, office vacancies increase and all banks are now stuck with EVEN MORE TOXIC ASSETS in terms of COMMERCIAL REAL ESTATE. Not to mention CREDIT CARD CHARGE OFFS, STUDENT LOANS, BUSINESS LOANS and other consumer and corporate debt.
Does this make sense? Do you see why it is a mistake to not get rid of those crappy loans lying in these banks--all so the rich people who own our Congress...well...Federal Government in general...can remain rich. And our taxpayer money continues to capitalize banks that do not lend, our taxpayer money funds Fannie Mae, Freddie Mac and FHA-insured mortgages and our taxpayer money is going to dwindle down as more people lose their jobs and pay fewer taxes.
Meanwhile, the corporate leaders with overwhelming wealth use high-paid tax attorneys to find loopholes in tax laws so that they pay much less than necessary in taxes.
I'll tell you right now, I'm feeling a little frugal these days with the little amount of money I have left after the monthly mortgage payment, the monthly bills and the usual spending my wife and I do for food and any other necessities. There's really not alot left over for any discretionary spending unless I want to pay 30 percent interest rates on credit card debt for the next 10-20 years at least. And we don't even have kids! I don't really see how a family of four cannot go into serious debt--or at least go paycheck-to-paycheck in this society. To me, it's just common sense.
And, trust me, the people who can afford any and all luxuries in this society, can hire very smart accountants who will find every way to reduce any substantial tax burdens.
Now that I think about it, why did our founding fathers leave England for this new land? Oh...right...Taxation Without Representation...the wealthy, politically influential people owned everything and made all the rules...and the poor people had to go along with it. Now I get it.
There was once a man named George Washington, and his friend Thomas Jefferson who discussed finding a new country where with laws not manipulated by the wealthy for the wealthy. Where people had opportunities to start a business, a bank--perhaps, and succeed or fail based on their own merits.
The laws--the Declaration of Indepence and a Constitution--elected people to represent them in the government from local municipalities, districts and states, with their welfare in mind. Yes, they paid taxes so that everyone in the country took part in their pursuit of happiness.
I mean, sure, not everything was perfect--by far. But the men who founded this country philosophically believed in freedom from tyranny and equal treatment under the law--as much as they could back then. The Constitution provided a document for success and, rich or poor, America served as the land of opportunities.
It was all done because George and Tom felt a bunch of wealth aristocrats were ripping them off of their hard-earned money so they could go and get wealthier--taxation without representation.
Wait a minute, that was 18th century England...right? Not the 21st Century.
Nah...I was never that good with history.
Face it, George and Tom's role in history was to start a new government in a new land.
It's our role in history--as U.S. citizens--to start new home theater systems in new houses.
Tuesday, November 17, 2009
Friday, November 6, 2009
It's the Housing Market, Stupid
When this whole colossal credit crisis started and Congress tried to figure out what was going on--I still don't think many of them understand at this point--Fed Chair Ben Bernanke said the key is in the housing market. If the housing market returns, the economy returns. (I'm paraphrasing, of course).
Despite stupid subprime loans (i.e. interest only, no income, no asset, no job)--which are really not subprime but just stupid loans--the derivatives and structured investment vehicles tied to these loans turned a severe recession into a Great Depression--Part Deux.
However, don't think for a second the answer to this crisis is to revive a dormant housing market. The housing market will likely never be as heated as it was from 2002-2007, give or take a year, and consumers will never be spending like they did during that time for quite awhile. Yet, even though we know this, it seems the strategy is to keep mortgage rates low and incentivize potential homebuyers to do the same things that caused this mess in the first place.
Here's a few reasons it won't work:
1. Unemployment--most people can't keep houses without jobs or buy houses for that matter. The unemployment rate released today hit 10.2 percent.
2. Consumer deleveraging--The Federal Reserve reported today that outstanding consumer credit fell at a 7.2 percent annual rate in September, the eighth consecutive decline. Credit balances had never fallen eight months in a row before in the 66-year history of the data. Consumer credit fell by $14.8 billion to $2.46 trillion in September, down 4.7% compared with a year ago. Outstanding credit can fall if consumers pay off balances, or if lenders write off bad loans.
3. A Long Credit Time-Out--Yasmine Kamaruddin, economic analyst at Wells Fargo Securities, said consumer credit as a percent of disposable income was elevated during the previous business cycle, and "we may see a permanent downward shift as lenders continue to raise lending standards."
"Consumers remain reluctant to take on debt in the face of slow wage and salary growth and a weak labor market," Kamaruddin said.
But it's not just the consumer. Don't think for a second that banks want to lend to anybody remotely suspect of being a bad credit risk. They already need to hold capital reserves to the hilt for piles of valueless loans on their books.
No jobs, no consumer spending, no credit. It's a recipe for deflation even though no economist or expert with any political stature wants to admit it. Instead, the Fed/Treasury insists on going into its "toolbox" and using the "tools" it now has access to in order to fix this crisis.
Here are the "tools" in their arsenal:
1. Accounting manipulations--changing mark-to-market accounting to mark-to-model so banks do not need to write off all the bad assets on their books so their stock prices do not fall. Notice today how we discovered unemployment worse than expected and an historical drop in credit but the stock market ended in the positive range? Go figure.
2. Stimulus programs--Cash for Clunkers made it look like a resurgence in the auto industry when, in reality, it was "quick fix." Auto sales dropped immediately after the program dropped out of circulation. Also, the Homebuyer Tax Credit and its extension signed today. Again, another band-aid on a brain hemorrhage. With a supplemental 6,500 tax credit for current homeowners in their home five out of eight years, it should help incentivize some potential homebuyers out there.
The only problem with this "tool" is that it will add further debt onto the FHA, Fannie Mae and Freddie Mac balance sheets. For FHA, it is on its way to bankruptcy. There was supposed to be an announcement earlier this week showing why FHA is still solvent. They had to postpone that announcement to recalculate their numbers. No word on when they will have that press briefing.
Fannie Mae is now doing a "deed-for-lease" program meaning that borrowers facing foreclosure will be able to rent their house from a property manager hired by Fannie Mae. It also means Fannie Mae will not have to write down another bad loan.
However, as unemployment increases and consumers continue to not spend, it will cause a higher number of foreclosures. In normal circumstances, without stupid mortgages, the main reason for foreclosure is unemployment.
What is more dangerous, however, is that under normal circumstances, the housing market might slowly pick itself off the floor and start lending again through government programs. With Fannie and Freddie taking major writedowns--or renting out homes--more liquidity dries up and a bankrupt FHA dries up that government-based liquidity.
If you didn't hear, Fannie Mae said submitted a request to the Treasury Department for an additional $15 billion to eliminate its "net worth deficit." It is seeking to receive the funds on or by Dec. 31.
Therefore, the only money that banks can lend to homeowners will be from....from...hmmm....there is no money to lend to purchase a home.
Oh well, there goes the mortgage market.
Forget about a slowdown in homebuying...what about a shut down in homebuying???
So, if Ben Bernanke said that housing is the key, then this approach may just blow up in his face.
Without any mortgages--or a piddly amount--an economic revival appears highly unlikely for quite some time. Then, tack on commercial real estate's debacle of undervalued mortgages, and the community and regional banks become insolvent with those "toxic" loans.
Now, if you were a prudent bank or credit union that did not get into trouble prior to this economic crisis, with subprime mortgages and commercial real estate construction loans and private label securities, et. al. good for you. You're the winner.
Tell them what they've won! They've won the task of paying higher premiums to the FDIC because of all the other loser, irresponsible banks going under. Congratulations!!
And, for that consumer that purchases a home, takes out a prime loan, keeps up an impeccable credit history and goes to work each day trying to earn money to support his and/or her family to make their mortgage payments on time and not go hungry, what do they win??
Well, a free supply of food stamps and hopefully they can keep their job with potential salary cuts and furloughs, probably without a matching 401K and the fear of hyperinflation in the future!! They'll also know that the tax money they send to the federal government goes into all these programs that have been trying bail out the irresponsible, loser banks that destroyed the mortgage industry in the first place and the investment banks that melted down the entire global economy to go along with it.
A big thanks to Tim Geithner and Ben Bernanke for hosting this show, and thanks to the consumers for playing "The Rich Get Richer Everyone Else is Screwed." We'll see you next time on most of these politically correct stations!
Despite stupid subprime loans (i.e. interest only, no income, no asset, no job)--which are really not subprime but just stupid loans--the derivatives and structured investment vehicles tied to these loans turned a severe recession into a Great Depression--Part Deux.
However, don't think for a second the answer to this crisis is to revive a dormant housing market. The housing market will likely never be as heated as it was from 2002-2007, give or take a year, and consumers will never be spending like they did during that time for quite awhile. Yet, even though we know this, it seems the strategy is to keep mortgage rates low and incentivize potential homebuyers to do the same things that caused this mess in the first place.
Here's a few reasons it won't work:
1. Unemployment--most people can't keep houses without jobs or buy houses for that matter. The unemployment rate released today hit 10.2 percent.
2. Consumer deleveraging--The Federal Reserve reported today that outstanding consumer credit fell at a 7.2 percent annual rate in September, the eighth consecutive decline. Credit balances had never fallen eight months in a row before in the 66-year history of the data. Consumer credit fell by $14.8 billion to $2.46 trillion in September, down 4.7% compared with a year ago. Outstanding credit can fall if consumers pay off balances, or if lenders write off bad loans.
3. A Long Credit Time-Out--Yasmine Kamaruddin, economic analyst at Wells Fargo Securities, said consumer credit as a percent of disposable income was elevated during the previous business cycle, and "we may see a permanent downward shift as lenders continue to raise lending standards."
"Consumers remain reluctant to take on debt in the face of slow wage and salary growth and a weak labor market," Kamaruddin said.
But it's not just the consumer. Don't think for a second that banks want to lend to anybody remotely suspect of being a bad credit risk. They already need to hold capital reserves to the hilt for piles of valueless loans on their books.
No jobs, no consumer spending, no credit. It's a recipe for deflation even though no economist or expert with any political stature wants to admit it. Instead, the Fed/Treasury insists on going into its "toolbox" and using the "tools" it now has access to in order to fix this crisis.
Here are the "tools" in their arsenal:
1. Accounting manipulations--changing mark-to-market accounting to mark-to-model so banks do not need to write off all the bad assets on their books so their stock prices do not fall. Notice today how we discovered unemployment worse than expected and an historical drop in credit but the stock market ended in the positive range? Go figure.
2. Stimulus programs--Cash for Clunkers made it look like a resurgence in the auto industry when, in reality, it was "quick fix." Auto sales dropped immediately after the program dropped out of circulation. Also, the Homebuyer Tax Credit and its extension signed today. Again, another band-aid on a brain hemorrhage. With a supplemental 6,500 tax credit for current homeowners in their home five out of eight years, it should help incentivize some potential homebuyers out there.
The only problem with this "tool" is that it will add further debt onto the FHA, Fannie Mae and Freddie Mac balance sheets. For FHA, it is on its way to bankruptcy. There was supposed to be an announcement earlier this week showing why FHA is still solvent. They had to postpone that announcement to recalculate their numbers. No word on when they will have that press briefing.
Fannie Mae is now doing a "deed-for-lease" program meaning that borrowers facing foreclosure will be able to rent their house from a property manager hired by Fannie Mae. It also means Fannie Mae will not have to write down another bad loan.
However, as unemployment increases and consumers continue to not spend, it will cause a higher number of foreclosures. In normal circumstances, without stupid mortgages, the main reason for foreclosure is unemployment.
What is more dangerous, however, is that under normal circumstances, the housing market might slowly pick itself off the floor and start lending again through government programs. With Fannie and Freddie taking major writedowns--or renting out homes--more liquidity dries up and a bankrupt FHA dries up that government-based liquidity.
If you didn't hear, Fannie Mae said submitted a request to the Treasury Department for an additional $15 billion to eliminate its "net worth deficit." It is seeking to receive the funds on or by Dec. 31.
Therefore, the only money that banks can lend to homeowners will be from....from...hmmm....there is no money to lend to purchase a home.
Oh well, there goes the mortgage market.
Forget about a slowdown in homebuying...what about a shut down in homebuying???
So, if Ben Bernanke said that housing is the key, then this approach may just blow up in his face.
Without any mortgages--or a piddly amount--an economic revival appears highly unlikely for quite some time. Then, tack on commercial real estate's debacle of undervalued mortgages, and the community and regional banks become insolvent with those "toxic" loans.
Now, if you were a prudent bank or credit union that did not get into trouble prior to this economic crisis, with subprime mortgages and commercial real estate construction loans and private label securities, et. al. good for you. You're the winner.
Tell them what they've won! They've won the task of paying higher premiums to the FDIC because of all the other loser, irresponsible banks going under. Congratulations!!
And, for that consumer that purchases a home, takes out a prime loan, keeps up an impeccable credit history and goes to work each day trying to earn money to support his and/or her family to make their mortgage payments on time and not go hungry, what do they win??
Well, a free supply of food stamps and hopefully they can keep their job with potential salary cuts and furloughs, probably without a matching 401K and the fear of hyperinflation in the future!! They'll also know that the tax money they send to the federal government goes into all these programs that have been trying bail out the irresponsible, loser banks that destroyed the mortgage industry in the first place and the investment banks that melted down the entire global economy to go along with it.
A big thanks to Tim Geithner and Ben Bernanke for hosting this show, and thanks to the consumers for playing "The Rich Get Richer Everyone Else is Screwed." We'll see you next time on most of these politically correct stations!
Monday, October 19, 2009
Money Can't Buy Quality Resolutions
We are learning more and more--as a country and private citizens--that you can't throw money at a problem and expect to resolve it.
Washington Redskins owner Daniel Snyder behaves in the same manner that the U.S. Treasury acts toward banks. Snyder expects to throw money at staff and players and that will get the D.C. region a winning football team. Not so. It gets a bunch of greedy players who think they've won something before playing the game.
Earning--or not earning--millions of dollars means much more to many of these players than winning the Super Bowl. That's great for the players and staff, but what about the fans? They end up paying to watch a crappy product on the football field.
As for the Fed printing money and throwing it at banks, with the hope that they become magically solvent despite billions of dollars, maybe trillions, in toxic assets. That's led to executive compensation, bonuses and no lending to borrowers and businesses.
Without debt, all this country sees is a bunch of greedy investment bankers make more money while states and municipalities layoff police and teachers. Communities turn to crap and taxpayers watch neighborhoods in foreclosure and decline.
So, yes, we can throw money at a problem and hope it goes away--but it doesn't. It only helps the needs of the few outweigh the needs many.
Problem solving sometimes requires time, patience and hard work--three things nobody in power wants to deal with these days.
Washington Redskins owner Daniel Snyder behaves in the same manner that the U.S. Treasury acts toward banks. Snyder expects to throw money at staff and players and that will get the D.C. region a winning football team. Not so. It gets a bunch of greedy players who think they've won something before playing the game.
Earning--or not earning--millions of dollars means much more to many of these players than winning the Super Bowl. That's great for the players and staff, but what about the fans? They end up paying to watch a crappy product on the football field.
As for the Fed printing money and throwing it at banks, with the hope that they become magically solvent despite billions of dollars, maybe trillions, in toxic assets. That's led to executive compensation, bonuses and no lending to borrowers and businesses.
Without debt, all this country sees is a bunch of greedy investment bankers make more money while states and municipalities layoff police and teachers. Communities turn to crap and taxpayers watch neighborhoods in foreclosure and decline.
So, yes, we can throw money at a problem and hope it goes away--but it doesn't. It only helps the needs of the few outweigh the needs many.
Problem solving sometimes requires time, patience and hard work--three things nobody in power wants to deal with these days.
Friday, October 9, 2009
Mortgage Rates Likely to Rise
If the Federal Reserve stops purchasing debt from Fannie Mae and Freddie Mac--as they said they would do in the first quarter next year--mortgage rates will likely rise.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Why? Because the Council of Foreign Relations has a chart that shows only the Fed is purchasing GSE debt. With that being the case, and FHA delinquencies rising, mortgage rates will rise if foreign investors are not purchasing the debt.
Foreign investor had been purchasing agency debt during the good times, keeping mortgage rates low on Fannie and Freddie loans, but central banks are printing money to keep their own banks solvent.
Just a thought. With mortgage rates nearing all-time lows this week, it might be time to refinance if you can save $100 on your mortgage, if your home is not underwater and if you still have a job. Otherwise, unless the Fed decides to extend agency purchases (which is certainly possible) or it have Government Sachs purchases debt with its own money, the mortgage market will not be driving economic growth anytime soon.
Wednesday, October 7, 2009
The Other Mortgage Market
It's funny to just be hearing about how bad commercial real estate will get because I've been writing for the past year about how bad it's been getting--and it gets worse.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
California hotel foreclosures and delinquencies, for example, increased 220 percent and 389 percent, respectively, according to Atlas Hospitality Group, a consulting firm based in Irvine, Calif.
Alan Peay, the president of Atlas, said alot of those loans are 2005-2007 vintage CMBS loans--a vintage with rather lax underwriting.
Trepp LLC, a New York City research firm that monitors commercial mortgage-backed securities, said appraisal reductions increased 75 percent on $4.29 billion of CMBS loans. That means property values are falling like they've been doing in the residential market.
Many analysts I've spoken with say commercial real estate is a reflection of the residential market because capital chased product in both markets and inflated prices so that cap rates were driven to ridiculously low levels on commercial properties.
That said, Victor Calanog, director of research at Reis Inc., New York, does not expect property values to return to their peak levels for more than 10 years. That means banks are sitting with undervalued assets on their books that they are currently trying to extend--and CMBS special servicers also play the extension game for as long as they can.
Trepp said that in September, 1039 CMBS loans with a total balance of $11.81 billion had deteriorating delinquency status. Of the $11.81 billion, $739 million represented extended performing matured balloons. $3.19 billion of loans moved from current to 30 days delinquent; $3.80 billion went from 30 to 60 days delinquent; $1.87 billion went from 60 to 90 days delinquent; $892 billion were non-performing extended balloons.
$3.25 billion in loans improved their delinquency status but the net deterioration was $8.56 billion.
Retail loans had the highest balance of loans with deteriorating delinquency at $3.4 billion, followed by office loans at $2.2 billion and hotel loans at $2.3 billion.
I was just thinking, in fact, how Kevin Donhaue, a special servicer at Midland, spoke at a Mortgage Bankers Association conference nearly two years ago and said this danger awaited the CMBS industry.
I was at another conference where an investor said--off the record--that the CRE CDO market was going to implode.
Yes, there is a major spike in commercial defaults and more are coming. How bad do I think it will get? I think it's already bad. Bank CEOs are telling me that at least 500 banks are going to shut down and commercial real estate is a big reason for it (alot of construction loans out there).
In an article for tomorrow, I emailed Calanog and he replied that vacancies and effective rents for office properties will not return to their peak levels until 2017; for retail, 2015/2016; for industrial properties, 2013/2014.
Bad fundamentals, no CMBS market (although the Fed has the Troubled Asset Backed Securities Loan Facility to purchase AAA legacy securities and assist in new issuance), no banks lending on risky assets and alot of private equity waiting to scoop up assets at bargain-basement prices.
The Fed and Treasury are caught between a rock and a hard place. The accounting rules are more favorable for banks to make extensions because they do not have to declare "mark-to-market" values.
That said, if it takes 10 years or more for properties to return to 2007 values, I'm not sure how banks can keep these loans on their books without becoming "zombie" banks, a la Japan during its lost decade or two.
And, how do investors determine true value if the rules change in mid-stream? And, when will banks be able to lend again holding these risky assets?
Sticking with the Fed's present course, the only step is to create an GSE-type agency, like Fannie Mae or Freddie Mac, to refinance all these commercial properties with more printed money.
The U.S. is already ridiculously in debt. What's a couple more trillion going to hurt as long as banks don't have to admit that their loans are undervalue. That way, the Federal Deposit Insurance Corp. can save their money so that they don't have to borrow from Treasury.
Or, the Fed can print more money and give it to Treasury to loan to the FDIC to seize the banks.
There are probably only two people in the United States who have the answer to this commercial real estate dilemma we are in--rising defaults without liquidity to refinance maturities--and if Ben Bernanke and Timothy Geithner don't have it, then we are really in trouble.
Tuesday, October 6, 2009
Mortgage Time Warp
If you're in the camp that I'm in--that we're in a deflationary period as United States consumers deleverage off credit highs because there's nowhere else to go but down--then consider the current residential mortgage industry.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
First, a word from the Federal Reserve's Flow of Funds Accounts of the United States for the second quarter, released September 17.
"Household debt contracted at an annual rate of 1¾ percent in the second quarter, marking the fourth consecutive quarter of contraction. In the second quarter, home mortgage debt decreased at an annualrate of 1½ percent, while consumer credit decreased at an annual rate of 6½ percent."
I was just thinking today that we are more than two years from the securitization breakdown from August 2007. At that time, not only had the residential mortgage-backed securities market shut down but "innocent bystander" commercial mortgage-backed securities was caught in the negative turmoil that dried up liquidity from the capital markets.
The spigot was off even though some water was left running.
Those who don't know about securitization for residential mortgages, it's basically analogous to a mortgage pie. That mortgage for a house--that loan--is (or was) a pie that a bank/lender sold to an investment banker (in many cases, Fannie Mae and Freddie Mac--government-sponsored enterprises--or FHA, an agency under the Department of Housing and Urban Development that uses Ginnie Mae securities for a government-owned loan).
Investment banks pooled together loans, packaging them into securities and selling those securities to global investors. It's one reason that the subprime market (bad quality loans) caused the global economic meltdown--because some of those bad loans were pooled with the "prime" market (good loans). It was a "creative financial instrument" backed with the best ratings from rating agencies that were sold to investors who trusted those ratings and the investment bankers.
However, those bad loans were not just bad, they were horrible quality loans. Low-income people matched with interest-only loans that they could only sustain for a year or two. No-income, no-asset loans with rates low enough for someone with no money at all to get a home. These "horrible loans" were matched with good loans, good ratings and investors started losing alot of money. So, needless to say, investors could no longer trust the residential mortgage-backed securities market and it shut down.
Now, it seems many commercial mortgages fell into the same camp because underwriting an office, a hotel or a retail property "pro-forma"--meaning tenants would always be in place because the economy would always be strong and prices would never fall--was a hip thing to do from 2005 to 2007. Those loans, some also interest only, have five-year and 10-year maturities and the borrowers are not average Joe Six-Pack. Many are real estate investment trusts and some just real estate moguls.
But we can talk about commercial real estate another day. Let's stick with residential and get back to the present.
We sit in a residential mortgage market more than two years without securitization, which leads me to this article from HousingWire, "FHA is Replacing Securitization in Mortgage Financing."
No doubt, this is true. You see, normally, one might say the current mortgage market is not your grandfather's mortgage market. But, in this case, it is your grandfather's mortgage market.
With bank credit tight and no securitization market or warehouse lending, for that matter, the only place lenders can sell their loans are: Fannie Mae, Freddie Mac and FHA.
Now let me think...during the Great Depression, the mortgage market started picking up the economy because some housing programs helped make homeownership more affordable for everyone...what were those programs? Oh yeah...FHA, then Fannie Mae and then Freddie Mac.
You see, securitization was a product invented about 30 years ago and the commercial securitization market was not developed until the Savings and Loan Crisis in the early 1990s--less than 20 years ago.
The FHA, Fannie Mae and Freddie Mac is today's mortgage industry--same as in the 1940s and 1950s, which spawned suburban sprawl, more highways, higher employment and the "American Dream" of homeownership.
Today, the cloud of unemployment remains dark and ominous. Unless there is a job to go to, I don't think many people are going to be moving anytime soon. Today, interest rates remain low--just as they were back in the 1960s. However, housing prices remain high and for some who have weak credit, unattainable.
The U.S. federal government is trillions of dollars in debt, unlike the 1930s-1950s. We are in a different world of unchartered waters where history cannot be the guide to current solutions. It will take critical thinking applied to actions, consequences and geopolitical stability.
That said, I wonder how many people can afford homes with 10 percent down--which is the new Fannie Mae and Freddie Mac guidelines. There are no 0 percent down and 5 percent down with lender-funded mortgage insurance programs anymore--at least none that I know of or none without an extremely high interest rate (the definition of a real subprime loan). The are no first and second trusts.
There are alot of foreclosed properties and properties in default. There are alot of bad credit scores because of credit card defaults, foreclosures, judgements on liens, bankruptcies. In today's Fannie Mae and Freddie Mac, I can't imagine where people will go for loans???
Oh, right, one place. FHA. The place that middle-class people went following World War II to get a new home priced somewhat affordably for the time--before a massive credit bubble brought home prices to some exorbitant, completely unrealistic level.
Now, the Home Valuation Code of Conduct should keep appraisers from valuing homes too high. In fact, in reality, HVCC keeps deals from going through. Just ask a Realtor you know. I know some that said appraisers are tougher than they have ever been on home prices.
That said, people can still purchase foreclosed properties, there are short sales and...yes...some people are getting their loans modified (as long as these residential mortgage-backed securities investors don't sue lenders for contractually ripping them off).
But back to FHA--the government-run program backed by Ginnie Mae securities. As explained on the Ginnie Mae website, "Ginnie Mae MBS [mortgage-backed securities] are fully modified pass-through securities guaranteed by the full faith and credit of the United States government."
It also says: "At Ginnie Mae, we help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets."
So, FHA is backed by the Ginnie Mae, our U.S. Federal Government will insure that investors around the world will receive their money if these loans go bad. That's the good news.
Here's some bad news. FHA has nearly 23 percent of its loans in delinquency or foreclosure.
Ken Denninger, in his Market Ticker article, Corruption: Government Housing Programs, displays the statistics he likely received from FHA Neighborhood Watch. Looking at those statistics, major servicers show a number of loans in forbearance along with a lot of 90-day delinquencies. Investor’s Business Daily has delinquencies at 14.4 percent in 2Q, up from 12.6 percent two years earlier.
I'm not completely sure why anyone would really want to invest in mortgages with such high delinquency rates, particularly in today's market. The loans have good rates but low downpayments and questionable credit scores. In fact, subprime delinquencies were lower than FHA delinquencies at one point in the past decade. It's like investing in subprime loans with government backing but without the high interest rates to go along with them.
So, who would pay money for these loans? How about the same people who are investing in EVERYTHING these days? Looks like we need to rev up the printing machine again!
However, that said, Denninger also sends us today a disturbing article from a 21-year old Wall Street veteran who exposes ties from FHA to where else? Wall Street. Her name is Pam Martens and in her Counterpunch article, Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency, she said the Department of Housing and Urban Development has been "moving a chunk of that [FHA] role to Wall Street since 2002."
"Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars."
Well, there you go. We've come full circle.
Tuesday, September 22, 2009
'Because It's All Our Turf'
Remember the film The Warriors when Cyrus, a visionary gang leader, spoke in front of all the New York City gangs saying that they can rule the city "because it's all our turf."
That was then, this is now.
In today's financial climate, that may as well be Ben Bernanke standing in front of international banking CEOs, their companies and central banks saying that they can control the entire global economy "because it's all our turf."
That's true. The world does belong to the people who have money. But, don't expect investors to necessarily follow a rigged game. Ken Denninger's article, Find the Difference: Why Ponzi Finance Fails, in Market Ticker, paints a disturbing picture of today's economy and the future outcome unless the Fed and U.S., as a whole, reigns in decades of debt.
Denninger backs up his comments with charts, mostly Fed data from the FRB Z1 release. According to Denninger, the U.S. has pushed debt to the limits without the money available to pay for it. He also makes the assumption that the Fed and Goldman Sachs manipulates the stock and bond markets with Fed-printed money and asks the question: "How long will this last?"
I recently spoke with a Wall Street insider who said the true test of the market--whether it crashes or not--will be when the economy returns to full throttle and Bernanke needs to ween the U.S. off of this "printed-cash" to prevent inflation. However, doing it too soon will prevent the proper recovery.
For Denninger, it's not a matter of "if" but "when" the economy collapses. The insider I spoke with said that very few people are able to perform the balancing act Ben Bernanke and Timothy Geithner proposed--a very small percentage.
Again, the deflation-inflation debate comes to light. Some say the problem will never even get to inflation because the country has entered a long stretch of deflation. In either case, the prospects are not necessarily good in the near term.
For anyone with a 401k not ready to retire in the next 30 years, it might not be that bad. However, without a job, how long will money be going into that 401k?
When I asked my inside Wall Street source about when I might want to go conservative on investment and when might I be more aggressive, he told me not to worry about it because there is no way to predict when the market will fall and when it will rise. That's true.
Assuming Denninger is right, there is stll no way to predict a falling market from a rising one. The best guess would be if you start to see unemployment remaining at high levels--above 10 percent--into the second half of 2010 and into 2011, or if the 10-year Treasury bond begins to rise at an extraordinary pace. In any case, it will be on some kind of "shock" or "surprise," because only an unexpected event can truly trigger a market crash.
As in The Warriors, Cyrus' vision never did come to fruition, and most members of the gang called The Warriors returned home to their own turf--Coney Island.
After a night of running--because the gang was unfairly accused of assassinating Cyrus by a complete nut-job when that nut-job actually did it--they were tired and rundown.
The leader of The Warriors looks up at their home, a rundown boardwalk on an empty beach and a broken down amusement park. He says, "We fought all that way to get back to this?"
Will bankers say that when they find consumers want to deleverage rather than spend because they can't spend anymore? Will CEOs look at their own financial institutions still filled with toxic assets that don't add up in value and say that? Will we say that to ourselves in the future, looking at vacant homes, condos, industrial buildings and retail establishments? Or, will it be a little of both? Let's hope not.
That was then, this is now.
In today's financial climate, that may as well be Ben Bernanke standing in front of international banking CEOs, their companies and central banks saying that they can control the entire global economy "because it's all our turf."
That's true. The world does belong to the people who have money. But, don't expect investors to necessarily follow a rigged game. Ken Denninger's article, Find the Difference: Why Ponzi Finance Fails, in Market Ticker, paints a disturbing picture of today's economy and the future outcome unless the Fed and U.S., as a whole, reigns in decades of debt.
Denninger backs up his comments with charts, mostly Fed data from the FRB Z1 release. According to Denninger, the U.S. has pushed debt to the limits without the money available to pay for it. He also makes the assumption that the Fed and Goldman Sachs manipulates the stock and bond markets with Fed-printed money and asks the question: "How long will this last?"
I recently spoke with a Wall Street insider who said the true test of the market--whether it crashes or not--will be when the economy returns to full throttle and Bernanke needs to ween the U.S. off of this "printed-cash" to prevent inflation. However, doing it too soon will prevent the proper recovery.
For Denninger, it's not a matter of "if" but "when" the economy collapses. The insider I spoke with said that very few people are able to perform the balancing act Ben Bernanke and Timothy Geithner proposed--a very small percentage.
Again, the deflation-inflation debate comes to light. Some say the problem will never even get to inflation because the country has entered a long stretch of deflation. In either case, the prospects are not necessarily good in the near term.
For anyone with a 401k not ready to retire in the next 30 years, it might not be that bad. However, without a job, how long will money be going into that 401k?
When I asked my inside Wall Street source about when I might want to go conservative on investment and when might I be more aggressive, he told me not to worry about it because there is no way to predict when the market will fall and when it will rise. That's true.
Assuming Denninger is right, there is stll no way to predict a falling market from a rising one. The best guess would be if you start to see unemployment remaining at high levels--above 10 percent--into the second half of 2010 and into 2011, or if the 10-year Treasury bond begins to rise at an extraordinary pace. In any case, it will be on some kind of "shock" or "surprise," because only an unexpected event can truly trigger a market crash.
As in The Warriors, Cyrus' vision never did come to fruition, and most members of the gang called The Warriors returned home to their own turf--Coney Island.
After a night of running--because the gang was unfairly accused of assassinating Cyrus by a complete nut-job when that nut-job actually did it--they were tired and rundown.
The leader of The Warriors looks up at their home, a rundown boardwalk on an empty beach and a broken down amusement park. He says, "We fought all that way to get back to this?"
Will bankers say that when they find consumers want to deleverage rather than spend because they can't spend anymore? Will CEOs look at their own financial institutions still filled with toxic assets that don't add up in value and say that? Will we say that to ourselves in the future, looking at vacant homes, condos, industrial buildings and retail establishments? Or, will it be a little of both? Let's hope not.
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