|Posted 04/24/2013 By Matt Stichnoth|
|CALIF. BORROWER ANGLES FOR FORECLOSURE HAT TRICK|
It seems like old times ($):
“I think now is the perfect time to actually buy a home,” said Donald Crabb, a 50-year-old longshoreman from Fontana who lost two homes to foreclosure when home prices tanked. “The economy, it is turning around.”
Crabb said he was nearly set to be pre-approved for a new home loan. He was hoping to find a five-bedroom property in Fontana, where he is now renting. [Emph. added]
To borrow from Oscar Wilde for a moment: losing one home counts as misfortune; losing two is downright careless. Or worse. The reporter must have mangled some facts here right? Right? . . . If not, heaven help us all. . . .
| 11:15 AM |
Posted 04/09/2013 By Matt Stichnoth
|QUOTE OF THE DAY|
“The bill is so anti-American as to have one think it was being written by the Chinese rather than any American legislator.”
--Dick Bove, on the Brown-Vitter banking bill that would require, by Bove’s estimate, big banks to raise an additional $500 billion in capital. It’s as if some people in Washington prefer that big banks simply get out of the lending business entirely. . .
| 3:10 PM |
Posted 03/19/2013 By Matt Stichnoth
|LIZ WARREN'S $22 MINIMUM WAGE ISN'T JUST A BAD IDEA, IT'S A TERRIBLE IDEA|
I see that Elizabeth Warren seems to think the minimum wage should be tied to productivity growth and that, if it had been back in 1960 or so, the rate would be a much more live-on-able $22 per hour rather than the current $7.25. That’s of course a bad, job-killing idea on its face, but an even worse one when you think about it. My recollection from Econ 101 many moons ago is that increases in the minimum wage drive increases in hourly wage rates generally, since the market will maintain a gap between what high-skill workers such as plumbers and electricians receive and the statutory minimum paid to the non-skilled workers at the bottom. Ergo, tying the minimum wage to productivity gains would tie all wage rates to productivity gains. But if 100% of the benefit of productivity improvement goes to workers (all workers, remember), which seems to be what Sen. Warren has in mind, there’d be nothing left over to provide a return on the investment that generated the productivity improvement in the first place, and such investments would basically stop. That would not be a good thing. I’m remembering all this from my college days, which were awhile ago and not always dry if you catch my drift, so I may have mangled some details, but I doubt it. Input welcome. . . . |
| 11:56 AM |
Posted 03/18/2013 By Matt Stichnoth
|NYT: JPM BOARD NOT HAPPY WITH HOW JAMIE HANDLED LONDON WHALE. DUH. |
DealBook thinks it sees the beginnings of a boardroom revolt at JPMorgan:
[A] small fraction of the 11-member board is unhappy with Mr. Dimon, according to the people briefed on the board’s thinking. Those members fault the chief executive for relying on assurances from his deputies that trades were manageable. There is also concern about the bank’s relationship with its regulators.
A “small fraction”? I can’t imagine that anyone on the board—Jamie Dimon included—is thrilled with how he handled the whale thing. If he hadn’t made the tempest-in-a-teapot crack to begin with, none of this would likely even have had to be disclosed. That does not add up to a brewing insurrection. . . . P.S. The ongoing calls for splitting the CEO’s and chairman’s role at JPMorgan are basically feel-good governance kabuki hogwash. If there’s any evidence that such a move improves either shareholder returns or governance, I’ve yet to see it. Meanwhile, if John Liu thinks it’s a good idea, you can be sure it almost certainly is not. . .
| 3:26 PM |
Posted 02/26/2013 By Matt Stichnoth
|WASHINGTON HAS-BEENS RECOMMEND WINDING DOWN GSES AND REPLACING THEM WITH GUARANTEE PROGRAM. GOOD IDEA.|
Something called the Bipartisan Policy Center—basically a bunch of ex-Senators—has issued a report on what the government should do about the GSEs and, believe it or not, the report actually makes sense. Short version: wind down Fannie and Freddie and replace them with a federal guarantee program. Lest you object that the government has no business at all in housing finance, I’m with you in theory. In a real-world panic, though, the absence of a federal backstop in a market as large and important as residential mortgages would take a bad situation and make it infinitely worse. I rationalize my regrettable free-market deviationism by including the proviso that the government not be shy about charging originators through the nose for the coverage. There. I feel better. . . . |
| 11:52 AM |
Posted 02/04/2013 By Matt Stichnoth
|SOME INDUSTRIES REALLY ARE MORE EQUAL THAN OTHERS|
This seems wrong-headed
in a very basic way:
. . . There is a pervasive myth that banks are different -- special, somehow -- from all other companies and industries in the economy. Anyone who questions this is at risk of being declared incompetent.
In fact, many claims made by leading bankers and banking experts, including academics, have as much substance as the emperor’s new clothes. But most people don’t challenge these claims, even as the claims affect policy. The specialists’ confidence is too intimidating. Even people who know better fail to speak up. The public is taken in. [Emph. added]
No! The reason the financial crisis was the big deal that it was is that banks—or, more properly, the financial services industry--are different from other industries. They facilitate the creation of credit for the entire economy. Recall that when the commercial paper market seized up after Lehman’s collapse, even companies like General Electric faced a funding crisis and possible insolvency. That’s different from what happens when, say, the automakers used to shut down every August. An apt analogy is electric power generation: if the nation’s electric companies all of a sudden went dark, the macroeconomic effect would be beyond massive. Subsitute “credit” for “electricity,” and you’ll get the picture. Admati and Hellwig are simply wrong. I don’t think I’ll be buying their book. . . . P.S. If pro-banking industry specialists have been doing a lot of intimidating lately, I must have missed it. . . .
| 3:16 PM |
Posted 02/04/2013 By Matt Stichnoth
|YOUR TAX DOLLARS AT WORK: SUBPRIME-LENDING DIVISION|
Reminder: subprime mortgage lending is alive and well, thanks to the federal government:
According to Pinto, the FHA charges the same premium for all borrowers regardless of credit score. That allows the agency to use the premiums from more creditworthy borrowers to cover the losses from risky ones. It also masks to the borrower the true risk he undertakes in taking a loan.
And while on average it looks like the risk profile of the FHA's lending has improved, about 40% of the borrowers in fiscal 2012 had a FICO score below 660 or a debt ratio above 50%. "Either of those would have been called subprime back in 2000," Pinto notes. [Emph. added]
Recall too that the FHA requires down payments of as little as 3.5%. What could go wrong?
| 3:00 PM |
Posted 01/30/2013 By Matt Stichnoth
|IT SURE DIDN'T SEEM LIKE THEY WERE GETTING OFF EASY AT THE TIME|
Writing in The Atlantic, the highly overrated Mohamed El-Erian warns that banks aren’t out of the woods yet:
[T]here is the even trickier challenge of restoring trust in the role of banks in a vibrant and growing economy. Because banks got off way too easily in 2009-2010 -- even escaping a windfall profit tax -- society remains suspicious of bankers and their motivations. The longer this persists, the greater the setback to a complete recovery from the global financial crisis. [Emph. added]
Odd. I don’t remember Wachovia, National City, Washington Mutual, Countrywide, Lehman Brothers, or Bear Stearns getting off especially easily in 2009 and 2010—or even Citi or BofA, for that matter. And in the wake of the CARD Act, the Durbin Amendment, the advent of the CFPB, and Dodd-Frank generally, I doubt bankers need to worry much about any windfall-profits tax, or the risk of generating any windfall profits that might be subject to it. . . .
| 2:40 PM |
Posted 01/18/2013 By Matt Stichnoth
|PEOPLE ARE FORMING HOUSEHOLDS AGAIN. GOOD. |
More happy news for the housing market. The rate of household formation is back to its old self:
Household growth averaged about 500,000 per year from 2008 through 2010 - less than half the rate seen at the height of the housing boom in the years just before that. The pace in 2010 was the weakest since 1947.
But the rate at which individuals or families are getting their own homes picked up over the past two years, underpinned by a steady if tepid economic recovery and gradual labor market gains. In 2011, households increased 1.1 million and they grew closer to 1.2 million last year. [Emph. added]
Meanwhile, the Cleveland Fed estimates that the pent-up demand from the low-formation years in 2008 through 2010 comes to 2.6 additional households. Those people aren’t going to live with their parents forever. . . . .
| 11:40 AM |
Posted 01/17/2013 By Matt Stichnoth
|BAY AREA HOMEBUYERS SUDDENLY ACTING LIKE HOUSING BUST NEVER HAPPENED|
Speaking of housing, the Bay Area market sure is bouncing back nicely.
The Bay Area's housing market posted strong gains in December, capping off a year of sharp improvement in that region's real estate market.
Rising at its fastest rate in more than 25 years, the region's median home price soared 32% from the same month a year prior to hit $442,750, real estate firm DataQuick reported Tuesday. [Emph. added.]
Up 32%! I await the warnings about a new bubble. . .
| 2:18 PM |
Posted 01/17/2013 By Matt Stichnoth
|THE CFPB'S ABILITY-TO-PAY RULE IS EVEN MORE USELESS THAN YOU THOUGHT|
Despite the housing crackup and everything that followed from it, the federal government just can’t bring itself to stop pushing homeownership for subprime borrowers. Caroline Baum notes that the CFPB’s new “ability-to-pay” rule, which is supposed to prevent the next housing bust by ensuring that lenders only write loans that borrowers can “afford,” takes an oddly myopic view of credit underwriting.
New regulations will never prevent the next crisis. They can’t. The [ability-to-pay] rule writers, as instructed by Congress, didn’t even try this time, according to Edward Pinto, a resident scholar at the American Enterprise Institute in Washington: They ignored two of the three C’s of underwriting.
A borrower’s credit reputation (credit score and history), capacity (things like debt ratios and cash reserves) and collateral (total equity or down payment) must all be acceptable for the mortgage to qualify for sale to Freddie Mac, according to the government-sponsored enterprise.
Yet the new rule, as prescribed by Dodd-Frank, “focuses on debt ratios at the expense of everything else,” Pinto said. “There’s no standard for credit quality. Lenders have to verify the source of the down payment, but a down payment isn’t required.” That’s because Congress viewed it as discriminating against the poor, Pinto said. [Emph. added]
So as far as the government is concerned, it’s perfectly ok for lenders to make low-downpayment loans to people with sketchy credit histories, as long as the borrowers meet some semi-arbitrary income threshold. What could go wrong? You may believe (as I do) that the CFPB’s new rule is an unneeded intrusion into a private transaction in the first place, and that the unfettered market will adequately deal with whatever problems occur. But it’s still kind of maddening, just the same, that implicit in the CFPB’s new rule are the same homeownership-for-all government policies that did so much to cause the trouble in the first place. Some people really never do learn.
| 1:58 PM |
Posted 01/14/2013 By Matt Stichnoth
|THAT DIDN'T TAKE LONG. INCOMING TREASURY SECRETARY ALREADY A GOP NON-FAVORITE. |
John Boehner is apparently no Jack Lew fan, says Rober Samuelson:
Lew once had a reputation as a technocrat who bridged partisan differences. But this image has faded as he's risen to positions of greater responsibility. In "The Price of Politics," his book about the 2011 budget negotiations, journalist Bob Woodward reports that Republicans felt that Lew impeded success. Here's Woodward's version of one meeting between Obama and House Speaker John Boehner:
"And Mr. President, the speaker added, please don't send Jack Lew. The budget director talked too much, was uncompromising, and Boehner's staff did not believe he could get to yes.
"In an interview a year later, Boehner still had strong feelings about Lew. ‘Jack Lew said no 999,000 times out of a million,' Boehner said, chuckling. Then he corrected himself, ‘999,999. It was unbelievable. At one point I told the president, keep him out of here. I don't need somebody who just knows how to say no.'?" [Emph. added]
Wonderful! The coming debt-ceiling negotiations ought to go swimmingly. . . .
| 3:24 PM |
Posted 01/09/2013 By Matt Stichnoth
|TO ABSOLUTELY NO ONE'S SURPRISE, SMALL-BANK M&A STARTS TO STIR IN EARNEST|
In Minnesota, this cycle’s dynamic of bank M&A is emerging right on schedule:
Several community bankers in the buyer's seat said they think the growing regulatory burden is motivating sellers to sit down at the table in earnest.
"The regulation has finally got to the point where I think a lot of folks have gotten tired," said Mark Bragelman, president of Liberty Savings Bank in St. Cloud.
Whatever the main driver, the price gap between buyers and sellers has narrowed. [Emph. added]
Duh! The new regulatory burden imposed by Dodd-Frank has made the smallest small banks inherently uneconomic, and the people who run those banks know it. They have one choice: sell. And as regards price (at least in Minnesota), sellers and buyers aren’t as far apart as you’d think at this stage of the game
According to [local banking lawyer] Grandstrand, many bids have been in the range of 120 percent to 140 percent of a bank's book value, with some going over 150 percent. Her conversations with investors, accountants and others who monitor M&A pricing indicates prices will get into the range of 170 to 180 percent.
As gaps between reality and expectations go, that one doesn’t look unbridgeable. The sellers won’t (and can’t!) wait around forever. Let the mini-deals begin, and we’ll all work our way up from there. . . .
| 11:40 AM |
Posted 12/19/2012 By Matt Stichnoth
|IT'S OFFICIAL: GOVERNMENT INVESTMENT IN G.M. IS A STINKER|
Let me get this straight: the government forces the big banks to take TARP infusions they neither want nor need, makes money on the deal, and the banking industry gets vilified in the media for having to get bailed out. Yet when the government bails out General Motors, screws bondholders in the process to help the UAW, and then loses 50% or so on its investment, the outrage meter barely budges. Got it. . . . P.S. This is not to say the government shouldn’t have provided G.M. with special assistance during its bankruptcy. It should have. But the end result should have been a company that’s fully cost competitive with foreign transplants. That didn’t happen. G.M. is still a basket case and will likely need more help from the feds down the road. . .
| 1:20 PM |
Posted 12/19/2012 By Matt Stichnoth
|HOMEBUILDERS REBOUNDING, BUT COULD USE A LITTLE HELP FROM THE BANKS|
Builder confidence hits its highest level in more than six years, says the National Association of Homebuilders. But the things could be even better than the are:
“Builders across the country are reporting some of the best sales conditions they’ve seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market,” observed NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “However, one thing that is still holding back potential home sales is the difficulty that many families are encountering in getting qualified for a mortgage due to today’s overly stringent lending standards.” [Emph. added]
“Overly stringent lending standards” is something of an understatement. Semi-related data point, for perspective: since September 2008, when Lehman Brothers failed, bank deposits have risen by 29%. Over that same period, bank loans have jumped by . . . 2%. On reason for the paltry increase is of course that demand for credit is light as companies hoard cash. But another reason is surely that the credit-underwriting pendulum has swung too far toward caution (likely at the behest of regulators). Not good. It’s a serious impediment to economic growth. . . . .
| 1:02 PM |
Posted 12/17/2012 By Matt Stichnoth
|"COUNTERPRODUCTIVE" DOESN'T BEGIN TO DESCRIBE WHAT THE FED IS UP TO|
Andy Kessler has had it up to here with the Fed’s zero-interest-rate policy:
ZIRP is the problem, not the solution. Money is not stupid. Corporations are sitting on almost $2 trillion in cash. The humps in strategic planning or business development at every Fortune 500 company run spreadsheets that forecast the return potential of new projects or factories and compare that against the cost of capital or the risk-free rate of return before pitching said projects to upper management. But because of ZIRP, the risk-free rate of return is zero, so, in Excel anyway, it looks like every project or factory makes financial sense. But that can’t be right. This is what causes uncertainty, a financial compass that spins round and round rather than pointing to value creation. Which means managers sit on their hands. So in the real world, none of the projects makes sense. In other words, the very Fed policy aimed at growing the economy and creating jobs is instead causing cash to be held until morale improves. . . .
[W]hy not junk the ZIRP today and let interest rates rise, most likely to 2-2.5 percent, reflecting current inflation expectations? Several things will happen?—?rising rates would restore a generation of savers, unleash a torrent of corporate spending, which will create jobs, and yes, cause federal interest payments to rise, which may force rationalization of unnecessary government spending. Why is any of this a bad thing? [Emph. added]
There’s also something inherently worthwhile, one would think, in having a Treasury market that’s not rigged in the first place. . . More: Peter Schiff (Latest effort: “At This Point There's No Way Out For the Fed”) is not nearly so sanguine. Then again, he never is. . . .
| 2:59 PM |
Posted 12/14/2012 By Matt Stichnoth
|WEIRD BUT TRUE: ALARMISM ON CALIF HOUSING MARKET ALREADY TAKING HOLD |
California home prices are up 19% year-on-year and—I kid you not—at least one person is already worried about a new bubble inflating there.
The run-up in prices caught the attention of Dean Baker, co-director of the Center for Economic Policy and Research in Washington, who regarded the trend as “serious grounds for concern that these markets are being driven by speculation.”
“While some speculators buying up homes at a bottom can be positive, the sort of price rises that you are seeing there may be excessive,” Baker said in an email to The Times.
Still, Baker said he thought the California market could experience “serious gyrations” because of the heavy purchases by investors hoping to sooner or later flip the homes at a profit.
“The speculators likely have pushed prices above where the market would put them in some markets,” he said. [Emph. added.]
Calm down, Sparky. The speculation that has this fellow Baker so agitated isn’t the old-fashioned tulip-bulb kind that always ends in disaster, wherein buyers (often highly levered) flock to a market simply because prices are rising fast and are supposed to keep on rising--until everyone’s in and things comes crashing down. It’s a much more basic proposition. Residential real estate "speculators" in California (and Arizona and several other beat-up housing markets) are making money from Day 1 because they can charge more in rent on their properties than their cost of carrying them. Simple. No greater fool needed! That’s not speculation at all. It’s called investing. . . .
| 12:24 PM |
Posted 12/12/2012 By Matt Stichnoth
|CALL IT THE MIRACLE OF COMPOUND INTEREST IN REVERSE|
I’m not sure I follow Bruce Bartlett’s logic when he says that the G.A.O’s forecast of Medicare spending rising to 5.9% of GDP in 2040, compared to 3.0% now, is evidence federal entitlements are only “rising gently.” Actually, it’s evidence of the opposite. But another point Bartlett makes can’t be denied: if current financing trends continue, interest on the national debt will eventually explode. Net interest accounts for just 1.4% of GDP now, in part, one presumes, because interest rates are artificially low (thanks, Ben!). But even under benign assumptions (3.4% on the 10-Year in the near-term; 5% longer-term), net interest will account 10.9% of GDP by 2040 and (cover your eyes!) 41% by 2080. That won’t really happen, of course. If current budgetary trends continue as they are, the economy will have collapsed long before 2080 actually arrives:
One is reminded of Herbert Stein. . . .
| 2:29 PM |
Posted 11/19/2012 By Matt Stichnoth
|SURPRISE! ONE MORE INSOLVENT GOVERNMENT HOUSING AGENCY FOR TAXPAYERS TO BAIL OUT|
At The Atlantic, Edward J. Pinto points out the open secret that the FHA is all set to go the way of Fannie and Freddie:
The housing crisis supposedly chastened the complex, but a close look at the FHA's figures show that it's still following this tragic playbook. Over 1 in 6 FHA loans are delinquent 30 days or more. Most of these were originated in 2008, 2009 and 2010, well after the bubble had burst. Today, the agency is still targeting low-income borrowers, pushing them into mortgages with ruinous consequences. [Emph. added]
What’s the definition of insanity, again? Oh, right. . . .
| 2:32 PM |
Posted 11/16/2012 By Matt Stichnoth
|BERNANKE, IN ATLANTA, BELABORS THE OBVIOUS|
Except that he’s talking to the wrong crowd:
Federal Reserve Chairman Ben Bernanke said Thursday that banks' overly tight lending standards may be holding back the U.S. economy by preventing creditworthy borrowers from buying homes.
Some tightening of credit standards was needed after the 2008 financial crisis, but "the pendulum has swung too far the other way." Bernanke said. Qualified borrowers are being prevented from getting home loans, he said during a speech to the Operation HOPE Global Financial Dignity Summit in Atlanta. [Emph. added]
“The pendulum has swung too far the other way” puts things rather mildly. Guess what the borrower’s average FICO score is on a new mortgage these days: 750! That implies that the vast majority of applicants simply can’t get access to mortgage credit on any terms. The main reason lending standards have become so stringent is of course that regulators have insisted on it. They were burned badly in the runup to the housing crunch and are determined not to be burned again. It is pure bureaucratic keister-covering. Bernanke shouldn’t be making his comments about how far the pendulum ought to be swinging to the Operation HOPE people—they’ve gotten the message!—but to his own examiners, instead. . . .
| 1:26 PM |