June 7, 2008
MetLife has announced the purchase of First Horizon’s residential mortgage business. The volatility of the market and risk involved has made First Horizon nervous and they felt their shareholders were better served by getting out of the business.
Conversely, indications coming out of MetLife is that we are near the bottom of the mortgage crisis. Like buying real estate, once the price of an asset comes down to a certain level, most of the risk is then removed. MetLife obviously thinks there are some solid assets in the deal and has the size to absorb some of the losses in order to recognize the larger gains.
Either that or they are the greater fool.
The purchase includes the home loan unit of First Horizon’s Tennessee Bank National Association outside of that state, with 230 offices in the U.S., the New York-based insurer said today in a statement. MetLife said it isn’t acquiring any subprime or Alt- A mortgages in the purchase. Terms weren’t disclosed.
MetLife is expanding its banking services after agreeing in April to buy a reverse mortgage specialist from Jacksonville, Florida-based EverBank Financial Corp. Life insurers including No. 2 Prudential Financial Inc. and Principal Financial Group Inc. reiterated last month their strategies of investing in mortgages even after the meltdown of the subprime home market prompted writedowns and stock drops. via Bloomberg.com
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June 7, 2008
Just a word to my readers about the new redesign.
After 5 years of blogging, nearly 3 here, I keep running into the same problem. How can I keep the good stuff front and center? Face it, some of the best posts get knocked down to the bottom of the page before many readers can see it when posting is slower.
(Side note, every blogger has an ego. And we all go nuts when we write something that we think is great and no one notices. When it falls of the main page with a whimper, we all groan.)
When I found this theme I was thrilled. It allows me to take my favorite 5 posts and have them remain at the top of my front page! So when I write something that I think you the reader will really enjoy (and who knows, might learn something from), I can mark it as a feature. This means it shelf life will be extended (and my ego will be mollified).
It also means is that I can also start posting more on stories that will be interesting to a specific niche of the market without having my best content fall off the page. This has always been my conundrum. During the day I may have 20 things that I want to post on but know that it will inundate you and force you to search for nuggets. Never my intention or my goal.
So please let me know what you think of the new design. I will be tweaking it for the next week or so trying to make it as enjoyable for you read.
RSS readers, please stop in and take a look, your feedback is also greatly appreciated.
It has been nearly 3 years since I started the Real Estate Bloggers and it has been a wonderful part of my life. Thank you for being a part of it!
Tom
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June 7, 2008
The power of the government is a wonder to behold, especially when the actions of said government invokes the law of unintended consequences.
The city of Philadelphia is about to launch a new plan to help those facing foreclosure. Instead of the sheriff auctioning off the properties as charged to by law, the city sheriff will refer the homes to local bureaucrats to renegotiate the terms with the lenders for a few more months.
Can you imagine working in a mortgage office as a highly motivated city employee calls you to tell you the auction of the foreclosed home is on hold and they want new terms for the borrowers who is already in a default position? What do you do?
Obviously this official has no standing in the matter nor can you divulge private information to them without breaking a myriad of privacy laws. So if you do negotiate with them you will need releases. And then any agreement reached with the nameless bureaucrat would need to be signed off with their boss and then the homeowner (not to mention your boss and bosses boss).
So what we do have is a government meddling to look good, cause more trouble for lenders in the city, and potentially raise rates for other borrowers to cover the hassle factor added by the city.
You have got to love the mind of a politician. Of course, Councilman Smith’s cousin Eddie just got hired to make the phone calls to the mortgage companies, so it is not all bad.
The plan, which officials said is the first U.S. municipal program of its kind, requires houses put up for sheriff’s sale to be referred to city officials who would work with lenders with the aim of restructuring the loan so the borrower can stay in the property.
City Sheriff John Green, whose office sells foreclosed properties, has delayed sales that had been scheduled for April and May until July to give borrowers time to negotiate with lenders. Of about 1,200 properties that were due for sale in April and May, 800 are owner-occupied, said Ian Phillips of the housing advocacy group Acorn. via Reuters.
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June 7, 2008
Ed McMahon, famous sidekick to Johnny Carson, is facing financial turmoil and may lose his house. McMahon has had his Los Angeles mansion for sale for over 2 years but has been unable to find a buyer.
Since suffering a terrible accident in which he has suffered a broken neck 18 months ago he has been unable to work and earn an income. It is amazing that for all the income McMahon has had to have earned in his long career as a pitchman that he is in this distress.
ReconTrust, a unit of mortgage lender Countrywide Financial, on Feb. 28 filed a notice of default on a $4.8 million Countrywide loan backed by Mr. McMahon’s home. The notice was filed with the Los Angeles County Recorder’s Office but hasn’t previously come to light. According to the filing, Mr. McMahon was then about $644,000 in arrears on the loan. It isn’t clear whether Countrywide still owns the loan or is acting on behalf of investors who acquired it. Public records also show that Mr. McMahon had a separate home-equity line of credit from Countrywide of up to $300,000 secured by the same house.
Mr. McMahon’s home has been on the market for about two years, his real-estate agent Alex Davis said. Mr. Davis said the price had been reduced, but he couldn’t immediately provide details. The Christie’s Great Estates Web site, which includes homes listed by Mr. Davis, lists the asking price at $5.75 million and says it has a canyon view and a master-bedroom suite with his and her bathrooms. via WSJ.com.
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Tags: Los+Angeles, Canyon, Ed+McMahon, Foreclosure, McMahan
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June 7, 2008
Today we get the stunning announcement that unemployment “surged” from 5 percent to 5.5 percent in one month. Of course, given the way the government calculates its shoddy employment numbers this is only shocking to folks that believe in the absurd government Kool-Aid. The reality of the current market arena is we are floating in a sort of no-man’s-land where Wall Street and Washington simply do not have an idea of how trying things are on the streets of America. I’m sure many politicians get their ideas of certain cities from YouTube or the regular tube and think that the OC is all like Newport Coast or Laguna Hills and conveniently leave out Santa Ana, Stanton, Westminster, and Anaheim which make a more accurate representation.
The current shift that is occurring is rather stunning. You need to remember that right now is usually the best seasonal time for real estate. Remember only a few months ago all the optimistic hogwash being put out by the housing complex that somehow California was going to bounce back? Really hard to jump back in at any price when California has the 3rd highest unemployment rate of all states. And the recent trend of distress with prime mortgages is simply reflecting the general malaise in our economy.
I was hearing on the radio yesterday an ad saying, “oil has peaked! The recent trend back down to $122 is a perfect time to get in [X company]! Don’t wait! Act now.” The irony is the ad was produced probably on the $122 day, jumped up yesterday, and today is now back near the all time high of $135. That is how quick things are changing. Now let us give you some raw numbers so you can sink your teeth in:
Inventory steadily is going lower and short sales are going up. How can that be? What we are seeing is the psychological component of real estate playing out in full force. Here are three quick observations that we can derive from the data:
1. Distress sales are going up. Banks with REOs are having to place homes on the market at a time when prices are free falling.
2. Those teetering on the edge represented by notice of defaults:
Demonstrate that we have a steady pipeline for the near future of distressed properties. The rise in short-sale numbers only reflects this reality.
3. Those that do have some equity and want higher prices are simply removing their homes from the market. This group is most likely the reason why overall inventory is falling. Sales are not the reason:
4. The quick realization that prices were at an all time bubble are forcing the market to correct at a devastating pace. Homes are expensive at any price if unemployment is rising and good jobs are being lost. The employment report today demonstrates that. In a symbiotic relationship, the jobs that are being lost are very dependent on housing being good but housing can’t be good without those jobs. Welcome Catch-22 for housing.
And now we enter the next stage of the housing crisis when folks that were supposedly prime realize that they weren’t. Not sure if anyone caught the piece on NPR yesterday about folks cutting back on their groceries. They interviewed a couple of families about the rising cost of food. One family with a lower income was struggling simply to make ends meet and was even buying old boxes of cereal for $1 which at times, wasn’t exactly edible. The other case which ties into today’s article, was an affluent woman and what she said simply struck me. She was talking about how she only buys organic and spends about $300 per week on groceries. However, she was now having a hard time paying that bill. She went on and to paraphrase said something to the effect of, “well we have a home on the lake, a vacation home in another state, and live in a relatively affluent neighborhood so I guess we are upper-middle class?” Yes, the inflexion at the end isn’t necessary. But you better hope that your household income can support all that is going out to maintain that image.
The story went on and she mentioned that she no longer shopped at the organic store; the organic store which she mentioned is the only food she would eat. Welcome to the new reality. People are going to get a slow and painful education between needs and wants.
Today we salute you Beverly Hills with our Real Homes of Genius Award.
Beverly Hills, 90210 Distress
The 90210 area code is getting a lot of mention in the last few days with the story of Ed McMahon going into default for $4.8 million with a Countrywide loan. Yet he isn’t the only one realizing that a posh zip code is not going to move a home without a qualified buyer. When Hollywood is impacted, you can rest assured that you’ll be hearing about it on the media.
Today’s home is a 3 bedroom 2 bath home in Beverly Hills. A nice home and by looking at the specs, would be a starter home in any neighborhood in the U.S. Yet this isn’t any area. This is the 90210 don’t you know? The ad tells us that this place is not a short sale or a bank owned property which makes us suspect if we dig deeper into the data. Let us first look at the sales history:
Sale History
10/17/2006: $1,350,000
12/19/2003: $825,000
07/16/2003: $775,000
Nothing odd about this. A pricey area that saw extraordinary appreciation during the boom. Like I mentioned before, leverage is a very heavy sword and cuts both ways. 10 percent on $100,000 doesn’t seem like much but use that same percent on $1 million and we’re talking real money. Let us look at the current pricing action on this place:
Price Reduced: 05/01/08 — $1,128,000 to $1,049,000
Price Reduced: 06/04/08 — $1,049,000 to $999,000
Now we can only arrive at two conclusions here. If this isn’t a short sale, then the buyer in 2006 must have put enough money down to have an equity cushion. In this case $300,000+. But is this really what is going on? It is hard to say without having further information but all we know is that it was purchased in 2006 for $1.35 million and is currently listed at $999,999 (essentially $1 million).
California is going to have a few challenging years. This coming recession is going to change the way people approach finances and perceive the Golden State. Today we salute you Beverly Hills with our Real Homes of Genius Award.
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■3 Captivating Housing Stories: Trouble in the 90210: When Beverly Hills Isn’t Prime. Vote yes for Multiple Foreclosures. The Coming Bank Failues.
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■Real Homes of Genius: Today we Salute you Baldwin Park. When you Only Need to Show Concrete to Sell at $400,000+.
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June 7, 2008
The bigger they are, the harder they fall. That mantra is now being witnessed first hand by many prime areas of Los Angeles County. Luxury properties have a very specific and niche based market. They cater to a very unique audience that usually resides outside the confines of the average American. The story making the rounds this week is the foreclosure of Ed McMahon. He is in arrears by an eye popping $644,000 on his $4.8 million dollar home in Beverly Hills. The loan is brought to you by no other than Countrywide Financial. The problem that is now occurring with these big daddy mortgages is that once they fail, they fail big. For example, let assume in Ohio 10 bad mortgages were made and each constituted a $10,000 loss for the bank. So on that deal, the bank is out $100,000. With this one single deal, Countrywide and many other similar lenders are facing the same financial destruction as having 100 median priced homes in other parts of the country.
Aside from the celebrity theatre, this is big news because this isn’t the only home in the 90210 area code that is having difficulty. In fact, Ed McMahon’s home has been on the market for 2 years according to the Wall Street Journal. The case study this home is providing is also that once these big homes go down, the amount to catch the loan is simply eye stunning and exponentially hits the bottom line of the lenders like a ton of bricks. Unbelievably this home also has a $300,000 home equity line of credit.
According to the WSJ, Countrywide and Ed McMahon are in talks about what to do. My first observation is that there may not be much to talk about. There are two simple solutions. Either modify the loan to a manageable size (which given the size of arrears seems that the mortgage has been behind for sometime) or sell the home in a market that already has the 90210 area code down by a stunning 12.8 percent on a yearly basis. Since the home has been on the market for 2 years, my simple observation is that trying to keep up with a loan that has a PITI of approximately $30,000 to $35,000 per month, trouble has been occurring for a long time. Ed McMahon sadly was injured about 18 months ago as reported in the Wall Street Journal and this just strikes at the heart of the issue; no matter how large your income it is always important to have a buffer zone.
Just take a look at a map showing foreclosures, preforeclosures, and auction sales in the 90210 area code:
As you can quickly tell, Ed McMahon is not the only one person in this area that is facing hard times.
We The People Elect Foreclosures
In light of these defaults even in prime areas, that is why the zero down payment market has been just a sad state of affairs for the housing market. Life happens as we all know. Divorce. Job transfers. Health issues. Some of these things are in our control like choosing to over pay for a home and some are not like coming down with an illness. We also know about the case of a Long Beach Congresswoman that has a clear pattern of not paying her mortgage on time:
“(LA Times) “I understand that these homeownership issues are a reflection of what many Americans are going through as they fight to keep their homes and to remain financially stable,” she said in a news release.
But while the foreclosure of the two-story Sacramento home she bought shortly after being elected to the Assembly in 2006 may have been the first time she lost a house, it was not the first time Richardson had fallen behind on her payments. It continued a pattern started eight years ago.
Since then, the homes she still owns in San Pedro, where her mother lives, and Long Beach have fallen into default six times. The amount she owed ranged from $5,742 to almost $20,000, according to documents on file with Los Angeles County.
“She has this habit of missing payments and then trying to catch up instead of doing it monthly,” said Verla Saylor, who sold Richardson the Long Beach house and carried a second mortgage.
The defaults have come at a quick pace lately, five in the last 13 months and the most recent March 28. The five defaults totaled nearly $71,000. During much of that time, Richardson was bankrolling her political career, lending her campaigns for Congress and Assembly a total of $177,500.”
Looking at the data most Americans are diligent about paying their obligations. About one-third of Americans own their home free and clear. Approximately 23 percent rent. And the vast majority of those with mortgages are actually making their payments on time. The problem is that a small subset of people have swallowed so much toxic waste that it is going to impact the majority. They have made a colossal financial faux pas in cahoots with a corrupt Wall Street culture.
Congresswoman Richardson’s experience is not a reflection of what most Americans are going through. Most Americans do not make a $169,000 congressional salary. And isn’t that the irony? We collectively are paying for her to go out and default on homes that we are going to bailout! Bwahahaha! And this Tuesday she not only won reelection but she won it convincingly with 74 percent of the vote:
Through much of this campaign season one thing has come to mind and that is the majority of Americans hate learning about finances. That is simply a fact. Even though Americans overwhelmingly mention that the economy is the number 1 issue they simply do not back that up with education or action. How else can we attribute the incredibly boneheaded financial moves done by many in our country over this past decade? Sometimes when I talk to folks, they tell me, “I want to go back to school but it is too expensive.” And in the same year, they go out and buy an overpriced SUV which costs more than the education that was supposedly too expensive! In California there is no excuse to not learn. We have community colleges that cost $20 per unit for crying out loud and the California State University system which offers bachelor’s and master’s degrees in practically every field for approximately $3,500 to $4,000 per year.
Education is such an important cornerstone of the success of America. 28 percent of the adult American population has a college degree. You can view this as the highest in the world for which it is, or you can view this as a need to do better. This is not to say that education is needed to make money (heck, just look at GED mortgage brokers yanking in six-figure incomes this past decade) but it does bode well for a population that can think critically to confront the challenges of today. This past decade will probably be viewed as a decade of incredible financial imprudence.
I think the reason that Laura Richardson’s story hits so hard is that she is not a poor American struggling to manage a modest budget and doing everything she can to make ends meet. She has an MBA from USC (not a cheap school like a CSU). She is also in the top 10 percent of income earners with multiple mortgages and financially keeps tapping her home equity for her political aspirations. We all have aspirations and I am certain of it. Now wouldn’t you like a $169,000 salary funded by the U.S. taxpayer for studying marine biology in Australia? Or what about going to Europe to study Anthropology on the back of taxpayers? For one, we hope that our politicians reflect the better core of what we are. We hold them to a higher standard because they have decided by their own freewill to carry that challenge. When she tells us that she is a typical American and her challenges are just like your own, all I can do is shake my head. She has failed a basic test of being a worthy politician and that is a shame.
The double whammy of course is the push for the bailout legislation. During these last few months she actually had the funds to pay her mortgages since she is behind by $71,000 according to the L.A. Times but decided to lend her campaign $177,500. Is this personal responsibility? I may have an idea of adding some funds for a bailout and they include slashing a $169,000 salary.
More Bank Failures
Today Fed Vice Chairman Donald Kohn testified regarding the state and condition of the banking system in the United States:
“(Federal Reserve) Consistent with trends in commercial banks overall, conditions at state member banks have weakened over the past year. Problems in residential mortgage, home equity, and loans to home builders have pushed the nonperforming assets ratio at these banks to 1.57 percent, more than twice the level of one year ago and the highest rate since 1993. Loan loss provisions have also accelerated, rising to a high of 1.14 percent of average loans during the first quarter of 2008 in large part reflecting the deterioration in residential real estate-related loan portfolios. Despite this deterioration, state member banks still reported aggregate net income of $3.7 billion and a return on assets of about one percent for the first quarter of 2008. Moreover, more than 98 percent of these banks reported risk-based capital ratios consistent with a “well-capitalized” designation under prompt corrective action standards.
Over the coming months, we expect banking institutions to continue to face deteriorating loan quality. House prices are still declining sharply in many localities and losses related to residential real estate–including loans to builders and developers–are bound to increase further. In addition, weak economic conditions could well extend problems to other segments of lending portfolios including consumer installment or credit card loans, as well as corporate loan portfolios. Moreover, banking organizations must be prepared for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly. Accordingly, we anticipate that the number of banks with less than satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years and we are monitoring developments at all supervised institutions closely.”
So much for housing hitting a bottom. We also find in the Federal Funds report released this week that in the first quarter, American household wealth dropped by $1.7 trillion. Things are still difficult and until housing improves, the market will be tenuous in regards to direction. The problem with this relative lull in the market is that it is only calm because every possible measure was used to prop the market up. The Fed with all the term auction facilities, the bailing out of Bear Stearns, potential mortgage bailouts, and other backstops that are putting a bandaid on a broken bone. Take a look at recent bank failures from the FDIC:
Expect this list to increase. We haven’t seen anything yet. The FDIC has tapped into former retired members and has brought them back in preparation for additional bank failures. Now why would the FDIC do this if things were at a bottom? How is the market going to respond to potentially 50 to 300 banks failing in the next few years? If the market is this bad with only 4 relatively small failures this year, what is going to happen when a larger player goes under?
There are many things going on in this market that seem surreal but make no mistake, these stories are only at the vanguard of what is to come.
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■Real Homes of Genius: Today we Salute you Beverly Hills. When the 90210 Simply Isn’t Enough.
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.
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June 7, 2008
I think the best way to discuss the “reemergence” of the credit crisis is to remember a childhood story. Remember that time your family was throwing a party and you were concerned about crazy grandma going off on her usual rants? You thought carefully about what you were going to do since you wanted to have a pleasant evening but you also wanted to be cognizant of lovely grandma’s feelings. And suddenly a light bulb ignited over your head with the solution. Lock grandma up in the attic. Sure she wouldn’t be happy for a few hours but the guest will have a great time!
During the evening, the guests hear faint sounds emanating from upstairs. You quickly turn up the music and chatter louder to drown out the noise. The guests slowly ignore the sound yet you can still hear the noise because you know what lurks in the attic. As the guests leave, they are oblivious to the situation and leave with a grand smile on their faces. You run up stairs and open the attic door to be confronted by a furious grandma. This was expected and you knew once the party was over that reality would need to be confronted. Good times.
Well given what is going on with the current credit market, it is safe to say that we’ve locked up our own credit grandma in the attic trying to enjoy the party while ignoring the faint sounds in the background. Grandma not only is angry but has been training in mixed martial arts while being in the attic and is going to open up a can once we let her out on the first unsuspecting soul that opens the door.
Ever since we locked Bear Stearns away in the attic, a collective sigh of relief was heard across all the financial markets. It seemed as if the Fed some how found the panacea to this credit debacle. Unfortunately all it did was prolong the misery that would need to be confronted. If we really want to see what is in the attic let us take a look at some of the Level 2 and Level 3 assets of the largest financial firms:
*Hat tip to Anon Reader
From this list we can see the attic of debt still not accurately being reflect on the balance sheets of many companies. The fact of the matter with the Bear Stearns deal is that essentially this problematic debt was shifted from one institution to another; except it had a back stop by our own Federal Reserve. We saw similar problems hit the BofA and Countrywide deal when BofA mentioned they may not back up some of Countrywide’s debt:
“(Bloomberg) Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.’s debt after taking over the mortgage lender, fueling speculation that Countrywide’s bondholders face renewed risk of default.
“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the Charlotte, North Carolina- based bank said in an April 30 regulatory filing, adding that no decision has been reached….
Countrywide’s $1 billion of 6.25 percent notes maturing in 2016 traded at 90.25 cents on the dollar yesterday with a yield of about 7.9 percent, according to Bloomberg data. The debt traded as low as 46 cents in January, with a yield of 20 percent, just before Bank of America announced the purchase.”
From what we are seeing we can expect to see many of these shotgun weddings in the next year with the unique caveat of firms picking the meat from the carcass while the U.S. Taxpayer is relegated to the role of being a vulture with only bones and guts to devour once the best parts are gone. Either way, the rules from FASB 157 or the fair value measurements is also putting pressure on the market. This is part of where we get the entire mark-to-market idea but there is a slight issue here as well:
“This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability.
This Statement clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. A fair value measurement for a restricted asset should consider the effect of the restriction if market participants would consider the effect of the restriction in pricing the asset. That guidance applies for stock with restrictions on sale that terminate within one year that is measured at fair value under FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations.”
The problem with using fair market risk assessments or valuation is that these institutions actually have to have an idea of the fair market value of their assets. Are you kidding me? These are the folks that bought up all the asset backed crap and now we want them to accurately asses a Real Home of Genius in East Los Angeles? Well we already know that we are witnessing the steepest housing correction ever, even worse than the Great Depression in terms of its speed of severity. We can only take a wild guess at what is lurking in those off balance sheet accounts but I think we can all hear that faint echo in the attic of what we can expect.
Many experts are expecting $400 to $1 trillion in credit market writedowns before this thing is over. As of April of 2008, we’ve had a total of $231 billion in credit writedowns (a bit higher given the additional writedowns in the past few months). Since people are now liking this thing to a baseball game, I see it more like game 1 of the NBA Finals. We’ve finally narrowed the field from 16 teams to 2. Now we find out that only one can stand and it isn’t going to be debt. Here is the list of writedowns as of April and all figures are in billions:
| Firm |
Writedown |
Credit Loss (a) |
Total |
| UBS |
38
|
|
38
|
| Merrill Lynch |
25.1
|
|
25.1
|
| Citigroup |
21.4
|
2.5
|
23.9
|
| HSBC |
3
|
9.4
|
12.4
|
| Morgan Stanley |
11.7
|
|
11.7
|
| IKB Deutsche |
9
|
|
9
|
| Bank of America |
7.3
|
0.9
|
8.2
|
| Deutsche Bank |
7.4
|
|
7.4
|
| Credit Agricole |
6.5
|
|
6.5
|
| Credit Suisse |
6.3
|
|
6.3
|
| Washington Mutual |
0.3
|
5.5
|
5.8
|
| JPMorgan Chase |
2.9
|
2.1
|
5
|
| Wachovia |
2.9
|
2
|
4.9
|
| Canadian Imperial (CIBC) |
4
|
|
4
|
| Societe Generale |
3.8
|
|
3.8
|
| Mizuho Financial Group |
3.4
|
|
3.4
|
| Lehman Brothers |
3.3
|
|
3.3
|
| Barclays |
3.2
|
|
3.2
|
| Royal Bank of Scotland |
3.1
|
|
3.1
|
| Goldman Sachs |
3
|
|
3
|
| Dresdner |
2.7
|
|
2.7
|
| Bear Stearns |
2.6
|
|
2.6
|
| ABN Amro |
2.4
|
|
2.4
|
| Fortis |
2.3
|
|
2.3
|
| Natixis |
1.9
|
|
1.9
|
| HSH Nordbank |
1.7
|
|
1.7
|
| Wells Fargo |
0.3
|
1.4
|
1.7
|
| BNP Paribas |
1.3
|
0.3
|
1.6
|
| DZ Bank |
1.5
|
|
1.5
|
| National City |
0.4
|
1
|
1.4
|
| Bank of China |
1.3
|
|
1.3
|
| Bayerische Landesbank |
1.3
|
|
1.3
|
| Caisse d`Epargne |
1.3
|
|
1.3
|
| LB Baden-Wuerttemberg |
1.3
|
|
1.3
|
| Nomura Holdings |
1
|
|
1
|
| Sumitomo Mitsui |
1
|
|
1
|
| Gulf International |
1
|
|
1
|
| European banks not listed above (b) |
8.4
|
|
8.4
|
| Asian banks not listed above © |
4
|
0.7
|
4.7
|
| Canadian banks excluding CIBC (d) |
2.4
|
0.1
|
2.5
|
| Totals |
206
|
25.8
|
231.8
|
So as we look at the amount of off balance sheet debt, the magnitude of the contraction in housing, and finally the faltering impotence of the Fed we now know that reality is setting in for our summer superhero Joe six pack (J6P). We are now seeing the inevitable consequence of locking up grandma U.S. Dollar for too long in the attic; now we are seeing the vengeance on energy prices, money destruction with writedowns, and the overall general malaise in our markets. But fear not! Unemployment and inflation is under perfect control according to government data. Pay no attention to rising fuel, higher grocery bills, ever more expensive healthcare, and a steadily increasing education bill.
Seems like our government has their own method of putting things off the books. If you hear that creaking door sound you may need to look up because grandma debt just got out of the attic and the party is still going on.
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Related Posts:
■Two Faces of Housing Panic: Schadenfreude and the Lender of Last Resort.
■The Sham of our Current Unemployment Rate Numbers: Lessons from the Great Depression: Part X. Data Mining.
■Manias, Panics, and Crashes: 2007 First Quarter All-Stars – Foreclosures, Subprime, and Politics. Five Characteristics of a Housing Bubble.
■A Bubble That Broke the World: Lessons from the Great Depression Part IX. When Credit is Debt.
■Just Because you Crawl Today, Doesn’t Mean you Won’t Walk Away Tomorrow from a Home: The Next Chapter in the Foreclosure Crisis.
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June 7, 2008
Housing corrections are sticky on the downside. Did you ever hear that statement being made during the last few years? Over and over like a fire alarm going off some form of this message was continually beat into the head of prospective real estate moguls. “Oh yeah. Housing prices never go down quickly because come on, it’s housing! Plus, we own the rights to the sun here in Southern California haven’t you heard?” I also loved the argument that given the overall homes in the United States, only a potential 2 percent of all homes are in foreclosure. That means 98 percent of homes are healthy! Let us all go out and purchase homes.
Incredibly these rallying cries worked because they played on the human psychological attraction to greed. Let us face it, Ponzi Schemes occur over and over because people want to believe in a great deal. Typically these schemes will promise to double your money in a few months and when you receive a check with your money doubled, many folks in these situations will plunk down a much larger sum of money. Doubling down chasing more quick gains. Little do they know (or care) that the money being paid to them is coming from new unsuspecting players. The game all ends when the scheme gets too big and the greed finally implodes the entire structure.
This housing market was a Ponzi Scheme. In many cases people wanted something for nothing. They fervently believed that a home in which all they did was signed a contract and paid diligently for one year was somehow now worth $50,000 more struck at the entitlement mentality behind the housing market. Keep in mind that this $50,000, which in many cases happened in countless Southern California cities for many years in a row, is more than the median income of an American family. The idea of ditching work and living in your home took on an entirely different meaning.
There is a false sense of assurance even when studying Ponzi Schemes that people involved in the scam “didn’t see it coming.” Of course they didn’t. People want to believe in the Money Easter Bunny. You know, that furry friend that gives you money for nothing. Most of these schemes suck in a few million dollars from many unsuspecting folks before collapsing. Yet this decade we somehow allowed this scheme to become a global beast with trillions of dollars put at risk. The get rich quick mentality went mainstream.
The housing market is not only “correcting” but now crashing. Back in March I threw out a few numbers to at least attempt to quantify the difference between a correction and a crash:
“Now you would think that with every poll telling us the economy is the number one issue, many folks would be tuning into things that would help us understand this. Yet it seems many are relying on the media once again to tell them how to think and how to operate their lives. And let me be clear here on what a “crash” is in regards to housing. California as a state has already seen a year-over-year 21.9% median price decline in January of 2008. If we want to quantify this further, let us say the following:
10 percent decline: Correction
20 percent decline: Severe Correction
30 percent decline: Crash
40 percent decline: Severe Crash”
We are already in the crash phase. In fact, the Economist just noted that our national year over price decline is actually worse than the Great Depression:
“Unfortunately, new figures this week reveal that house prices have already fallen by more over the past 12 months than in any year during the Great Depression. The S&P/Case-Shiller national index fell by 14.1% in the year to the first quarter. Admittedly, other property indices show smaller drops, but most economists now favour this measure. The index goes back only 20 years, but Robert Shiller, an economist at Yale University and co-inventor of the index, has compiled a version that stretches back more than a century. This shows that the latest fall in nominal prices is already much bigger than the 10.5% drop in 1932, at the worst point of the Depression.”
And yet we have people still saying we won’t be in a recession? Bwahaha! What are they smoking?! Does anyone really think that California has hit bottom? And sometimes people forget that a 50 percent decline is similar to a 100 percent gain. Say what? This is how many housing pundits try to spin the data. But let us look at the numbers:
2002: Buy home for $200,000
2004: Sold home for $400,000 (a 100% gain)
2008: Sold home for $200,000 (a 50% correction)
You can easily see how playing with words and putting spin on anything can make a complete loss seem not so bad. Think the above example is extreme? Let us use a real world example to show this in action. Today we salute you East Los Angeles with our Real Homes of Genius Award.
Born in East L.A.
Many of you not from Southern California may be familiar with East Los Angeles via the academy award winning movie Born in East L.A. by the acclaimed director Cheech Marin from the formerly Cheech and Chong team. East L.A. participated in this housing bubble as if it were smoking some of the substances normally seen in the Cheech and Chong movies. As a matter of fact, the entire Southern California region was taking a puff from the housing Ponzi bong. This home, a 2 bedroom and 1 bath place sits on 1,088 square feet. It looks to be updated and is currently a short sale. We are told that this place is close to shopping which of course for any SoCal buyer is vitally important.
To have a bit of context on this place, let us look at the sales history:
Sale History
07/03/2006: $435,000
12/08/2005: $270,000
A nice 61 percent gain in 8 months! In how many places can you make $165,000 simply for buying and selling a home? Not many but SoCal was certainly sweeter than fudge on a hot sundae and gave money like hitting all 7s on a slot machine. At this rate, there is no need to work and all you will need to do is buy and sell a home once a year into perpetuity and you’ll be the next Trump! How is this home doing now?
Price Reduced: 03/04/08 — $389,900 to $349,000
Price Reduced: 04/08/08 — $349,000 to $289,000
Ouch. You mean real estate can go down as well? Try telling the buyer of this place that prices are sticky on the downside. A $100,000 price reduction in one month has nothing slow or methodical about it; this is rock bottom desperation prices to get the place to move. From its peak, it is now down by 33 percent which nearly eliminates that 61 percent gain. Of course, that is assuming it sells for the current price.
This is simply one example of the 125,000 homes currently for sale in the Southern California area. You’d have to smoke something out of a Cheech and Chong movie to think prices aren’t crashing in Southern California.
Today we salute you East Los Angeles with our Real Homes of Genius Award.
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June 7, 2008
When you look at the current unemployment rate of 5 percent, you would think that our economy would be humming along. Yet the way that they calculate the official unemployment rate is such a joke, you are almost left guessing how many people are really out of work. Are you looking for work and simply can’t find a job and gave up? Consider yourself not counted in the numbers. Are you working part-time although you want full-time employment? Guess what? You are not counted either! It is patently absurd and frustrating to see what kind of gimmicks the government uses to massage the unemployment data.
Mish over at Global Economic Trend analysis on a monthly basis has to dig into the data to point out the stupidity of the unemployment numbers:
It is such an utter disturbance that people are quoting 5 percent as the unemployment rate when 9.2 percent of our population is either underemployed, working part-time, or flat out given up and not working. Also, what about all the people in finance, construction, lending, or any fields associated to the credit bubble that are now receiving a lot less simply because they are commissioned based or depend on their being easy credit? These people are still hanging on by a thread with a massively reduced income yet they are still counted as fully employed. That is the issue with our current unemployment rate. So if our current rate is closer to 10 percent, wouldn’t that change the perception of our current economy?
This is part X in our continuing Great Depression series:
1. Personal Story by a Lawyer from a Previous Asset Bubble. Can we Learn from the Past and How will the Housing Decline Impact You?
2. Lessons From the Great Depression: A Letter from a former Banking President Discussing the Bubble.
3. Florida Housing 1920s Redux: History repeating in Florida and Lessons from the Roaring 20s.
4. The Menace of Mortgage Debts: Lessons from the Great Depression Series: Part IV: Where do we go After the Housing Crash?
5. Business Devours its Young: Lessons from the Great Depression: Part V: Destroying the Working Class.
6. Crash! The Housing Market Free Fall and Client #10 Contagion.
7. Winston Smith and the Bailouts in Oceania: Lessons from the Great Depression Part VII.
8. Sheep Back to the Slaughter: Lessons from the Great Depression Part VIII: All the Change and Bear
Market Rallies.
9. A Bubble That Broke the World
It may help to take a look at the unemployment rate during the Great Depression:
*Soucre: Gold Ocean
“The Great Depression began in 1929 when the entire world suffered an enormous drop in output and an unprecedented rise in unemployment. World economic output continued to decline until 1932 when it clinked bottom at 50% of its 1929 level. Unemployment soared, in the United States it peaked at 24.9% in 1933. It remained above 20% for two more years, reluctantly declining to 14.3% by 1937. It then leapt back to 19% before its long-term decline. Since most households had only one income earner the equivalent modern unemployment rates would likely be much higher. Real economic output (real GDP) fell by 29% from 1929 to 1933 and the US stock market lost 89.5% of its value.”
The chart above is disturbing. Yet you also need to remember that the job losses came fast and furious during this time. If you were unemployed, you were unemployed. In today’s market, anyone can get a minimum wage job with our so-called service industry yet struggle along as a walking zombie. What happens when you go from a $100,000 a year real estate career to earning $9 an hour in a service sector job? If you dig into the previous jobs report from the BLS you’ll notice that the larger increase of jobs is in service oriented jobs that pay less than the other important sectors such as finance and manufacturing. Either way, the sham of the current job report is that it covers up the true reality of the situation.
You may also be shocked to hear that California now has the nation’s third-highest unemployment rate only behind Michigan and Alaska:
“(LA Times) Although April’s unemployment rate was unchanged from March, it represented a full percentage point increase above April 2007. Almost 200,000 more people were out of work than last year, giving the state the third-highest unemployment rate in the nation, behind Michigan and Alaska.
California lost 800 nonfarm jobs in April from the previous month. But seasonally adjusted numbers for the month were up slightly — 0.2% — over a year earlier, according to the Employment Development Department.”
The Great Depression also hit hard throughout the country on farmland that was mortgaged and many local banks going into default. But we had a backup plan then. We were a lender as a nation! Now we are a massive debtor. We also witnessed deflation during the Great Depression which we are already seeing asset deflation with real estate:
“Another unusual aspect of the Great Depression was deflation. Prices fell 25%, 30%, 30%, and 40% in the UK, Germany, the US, and France respectively from 1929 to 1933. These were the four largest economies in the world at that time.
To put the severity of the depression in modern perspective, consider the following. Real US GDP went down 4.4% in the five years that it declined since 1959, all added together! Unemployment has never exceeded 9.7% and we have not had one year of deflation. Maybe you’re thinking, “what’s wrong with a little price deflation?” Depending on how much and how unexpected, deflation can be a devastating economic event. Imagine wages falling by 30% and the value of debts simultaneously increasing by that much.
In the great depression it would have been nice if the suffering had been so evenly distributed. Instead the deflation caused bankruptcies, which in turn led to, more bankruptcies! Millions of people and companies were wiped out completely. The lack of adequate social programs left people of all social strata depending on relatives and friends for charity. Spending became paralyzed with fear as the downturn was so unexpected, so severe, and the bad news just kept coming for years.
Many did not realize how severe the downturn was until 1932 or 1933 when the economy had technically hit bottom and even begun to chug forward. People’s resources were depleted by then and so were many of their friends’. So the human misery caused by the Depression really started in the mid-1930s.”
The problem inherent in today’s market is as follows:
First - Unemployment is understated by underemployment and shadow workers (those that have given up looking for work). It also does not reflect the loss of income in once high paying jobs.
Second - The FDIC although providing protection to depositors has created a sort of moral hazard. If you look on sites like Bankrate, you’ll notice that the highest savings rates normally come from the most capital impaired institutions. Many on the list will probably go bankrupt in 1 or 2 years. Now why would anyone invest their money in these institutions if they knew that their money wasn’t protected? If it weren’t for the FDIC, these lenders would be bankrupt and rightfully so; they have horrible and flawed business models and should be allowed to fail. Instead, they offer you a nice yield on a 6 month CD.
Third - Underemployment is just as bad as unemployment. In terms of economic data and spin, it is probably worse since it gives many a false sense of security. We are not at a 5 percent unemployment rate. It is simply an absurd number and even the fact that the CPI told us last month that energy prices dropped, I think that even the lay person now gets that there is something rotten in Denmark. If you look at the report, how can you consider someone working part-time but wanting full-time employment as part of the official unemployment number? The current number that should be quoted is the 9.2 percent number. As we’ve gone along, we’ve managed to allow the Ministry of Truth to massage out every kink out of the most important statistics of our economy.
Forth - Banks are being propped up on a crutch. There will be more bank failures. Think this is just hyperbole? Then why is the FDIC bringing out folks from retirement who lived through the S & L collapse to gear up for the next phase of the debt crisis?
“(MarketWatch) He’d built a new home by a lake in Texas, bought a boat and was working on his golf game. While taking on some part-time work, Holloway also traveled for months across the U.S. with his wife, from Seattle to Washington D.C., catching up with old friends and family.
That life of leisure abruptly changed about six weeks ago when Holloway got a phone call from his former employer, the Federal Deposit Insurance Corp., or FDIC, which regulates U.S. banks and insures deposits.
Holloway, a 30-year FDIC veteran, had worked extensively with failed lenders in Houston during the savings and loan crisis in the late 1980s and early 1990s, when thousands of thrifts collapsed.
Earlier this year, the FDIC began trying to lure roughly 25 retirees like Holloway back to prepare for an increase in bank failures. It’s also hiring about 75 new staff.
Holloway quickly went back to work. ANB Financial N.A., a bank in Bentonville, Ark. with $2.1 billion in assets and $1.8 billion in customer deposits, was failing and an expert like Holloway was needed to value the assets and find a stronger institution to take them on.”
No problem folks! Any comparison to the Great Depression is doom and gloom. Listen. I know that folks like to make light of this but the problem of complacency and mind numbing control from drones on the media is that people are now content to be under slavery to debt. Do you really own that car? Try missing a payment. Do you really own that $700,000 McMansion? Try missing your mortgage payment. The false guise of security is that consumer inflation is non-existent (hello $4 gas!), that unemployment is at 5 percent (you mean I can kick back at home and watch Montel and not be considered unemployed?), and finally assuming that things from the past cannot occur again.
Simply from looking at the data it looks like we are going to have our own lost decade like Japan. The data has gotten so out of whack, that you have rely on other measures like income to triangulated your assumptions. If we are simply to look at the CPI and employment numbers from the government we’d assume the economy is perfect like a bowl of warm porridge.
I’m not the only one that is waking up to this insanity:
“(Harper’s Magazine) If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.
The corruption has tainted the very measures that most shape public perception of the economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.”
So the most relied upon measures for the health of the economy are completed screwed up. Like the entire ownership society myth that was pushed (and by the way homeownership is now back to 2002 levels, pre-dating the ownership society speech in 2003). The problem that is going on is we have a silent destruction of our treasured U.S. Dollar and our productive base is being dismantled piece by piece. People were placated since they felt somehow that pushing papers around and flipping houses was somehow going to keep us competitive with nations that are pumping out engineers and scientist on an incredible basis. Time to rethink our numbers and demand the truth be reflected but it would appear that most folks simply want access to a credit card, a television, and a burger in the hand. Time to get real and focus on improving the balance sheet of our country.
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■Real Homes of Genius: Today we Salute you Beverly Hills. When the 90210 Simply Isn’t Enough.
■Credit Crisis Part Deux: The Noise in the Housing Attic.
■The Short Sale Report: Volume 1 – The True Barometer of the Housing Market
■A Bubble That Broke the World: Lessons from the Great Depression Part IX. When Credit is Debt.
■The Menace of Mortgage Debts: Lessons from the Great Depression Series: Part IV: Where do we go After the Housing Crash?
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June 7, 2008
I’m not one to beat a dead horse but I don’t mind kicking it a little. Last week I posed the question, What’s The Answer?
I surrounded the question with information and thoughts about valuation. Today I’d like to surround the question with a theory. It’s called the “We Are Desensitized Theory” and I put it on the table for your thoughts.
If memory serves correctly, Yogi Berra is credited with this jewel: “A nickel just isn’t worth a dime anymore.” He has so many Berraisms it is hard to keep track of all of them.
My son and I co-own an insurance agency and we bump against this wisdom at least once a week. One would think in an industry as straight forward as insurance, a nickel would be worth a dime. After all, a premium is a premium is a premium. The only difference is the company charging it.
Premiums are set by the insurance company and approved by the Insurance Commissioner. No law says they have to be uniform for a particular coverage type. I’ll use auto insurance as my example.
Everyday people come in for a quote and tell us so and so agency said it would cost $XXX a month. We go to our computer and “shop” their auto. We almost always beat the quoted premium. The customer looks at us and says words to the effect, wow, I save $YY a month.
One would think, on the surface, they mean the $YY dollars means something to them. But when you get to the under belly of the scenario, they are simply thrilled spitless they do not have to go to another agency in an attempt to find a premium that is lower than the one they are paying.
In other words, they don’t give a hoot they are saving $YY, they are just happy their insurance ordeal is over. They are completely desensitized to the numbers. They know the law requires insurance and insurance costs money.
The $YY is immaterial as a meaningful number because it does not have any relevance in the long term. It is a short term, read the here and now, reason for them to buy.
Here is another real life insurance scenario from our world. A 20 year old male drives by our office every morning to drop off his girlfriend who is employed in the day care center in our plaza. He drives a souped-up pickup truck that uses at least a tank of gas a week.
My son stopped him the other day and asked how much he was paying for his insurance. The young man said $250 per month. Yes, $250 a month. You read that correctly.
My son did some research and found we could insure him for $185 per month. A savings of $65 per month or $780 a year. So, my son stops him the next day and presents him with the figures.
The young man’s response was a mind blower, at least to me. He looked at my son and said words to the effect, yeah, man, I’ll have to stop by one of these days.
At first blush it looks like the kid, as I call him, is a moron. $65 a month would buy him at least a tank of gas or dinner out for him and his sweetie with change to spare. But, like I said that is at first blush.
This kid at 20 is already desensitized. Money doesn’t have any value. He has been paying $250 for probably all of his driving life so what difference does it make we can lower his premium (create free money?) by $65 a month.
Saving money has been relegated to old school thinking. It is old school because money was our store of value. It was our measure of value. We could wrap our heads around the numbers behind the money amount.
Today, or at least this period in time, money has no value. It simply buys stuff. The foreclosure scenario is a perfect example. We simply bought houses for whatever reason. The numbers behind the money amount had no value so we agreed to any price and got a loan for that amount. A house has never been a store of value no matter what the late night buy my course pitchmen say.
We knew we could get a loan without too many obstacles because everybody and his sister was on TV telling us we could and by golly they were making the loans. We became desensitized to the numbers.
Its result shows in the aggregate value of the foreclosed properties we are seeing at this moment. The numbers weren’t meaningful. We had become desensitized to the figures so we simply walked away when we couldn’t meet the required monthly number.
I will agree this is philosophical and open to all sorts of interpretations and arguments but I believe it is also a grain of truth we will have to live with for a long time. It doesn’t answer my question but it does put a train of thought on the table we can add to the solution quest.
I’d love to hear your opinions and thoughts.
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Do Valuations Continue to Slide for Years? What’s The Answer? - PART 2
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