From "Liar Loans" to "Liar Subsidies"

Big late rally in the markets based on a Reuters report that the government will work towards subsidizing mortgage payments of troubled homeowners before they go delinquent. Touted by bulls as finally addressing (arguably) the real root of the problems.

"Under the evolving plan, sources said homes would undergo a standardized reappraisal and homeowners would face a uniform eligibility test. The administration may also lower the trigger level that decides who would be eligible for relief. Under an existing program, loans are reworked if a borrower is spending more than 38 percent of their gross income on their mortgage." - Reuters

Makes sense - to my mind, even if in negative equity, most homeowners would rather pay up and keep their homes than go delinquent, if at all possible. So that's cool.

BUT all those people who lied about how much they were making? So they would be given those juicy balloon mortgages that all got packaged off? They can start to tell the truth now. meanwhile, everybody else will probably can start to lie about how little they are making... Makes sense, right?!

-------------

Argh - stopped out of EDU before the 23% drop overnight... Looks like I picked a bad day to stop being undisciplined with my stops...

.
::

"Don’t be fooled..."

All seems well in the world, as I return from the CNY break... yes, we're heading into the Year of the Ox, which is basically the same as the Year of the Bull, right? They look the same, more or less, and the character's the same, so we should be set for a cracker, I guess.

Except that apparently, an ox is a castrated bull. Crudely snipped, then all set to toil 24/7 its entire sad, sexless life, and, when too old or weak and no longer of any use to its owners, slaughtered and consumed by those for whom he'd been working. (Sound/feel familiar?)

But all's well in the overnight markets, at least - we have the S&P500 up the last 3 days we've been away, with mega-buck M&A, a storming 52% of companies that've reported coming in ahead of expectations (BTE!), Leading Indicators bottoming and existing home sales on the up-and-up!

Except...

From my new BFF, David Rosenberg of Merrill in his must-read Morning Market Memo:

Don’t be fooled by the home sales data
The resale data for December came in better than expected to be sure at 4.74 million units, a 6.5% bounce from the 4.45 million print in November. But distressed properties accounted for 45% of all sales, according to the National
Association of Realtors, so this is not exactly ‘organic’ activity as much as
investors looking for a deal on foreclosed units – look for these to be put back on
the market at the first hint of revival (or will be converted to rentals). So the sales
activity did indeed help drag the inventory backlog to 9.3 months’ from 11.2
months’ in November, but then again, we know that this data is also undercounted
by as much as 15% as property holdings at the banks are not counted in this data
(i.e. the unsold inventory is still close to 11 months’ supply). Moreover, median
home prices deflated 2.7% in November – the sixth month in a row of decline
during which they have sunk at a record 33.5% annual rate (median home values
are no higher today than they were in December 2002). The YoY trend is -15% so
as you can see, the trend is becoming even more negative.

Don’t be fooled by the leading indicator either
Another case where the devil was in the details. Yes, yes, the LEI managed to
rise 0.3% in December after two months of hefty declines. First, half of the 10
components were negative and three were flat. The real money supply soared
(of course as the CPI deflated) and added 0.99% to the headline, and the steeper
yield curve added 0.22%. So basically, a deflating CPI and a rise in bond yields
is supposedly good for the economic outlook (come again?). So outside of the
curve and real M2, the LEI would have declined 0.9% in December. Very
lopsided. Moreover, we see that the coincident-to-lagging index, which has this
habit of leading the leader, actually dipped for the second month in a row to 91.9
from 92 in November and 92.3 in October.

Hmmm...


-----------
Meanwhile, more (and more) layoffs.
.
::

Highly recommended...

... taking a week off to ski where there's no (GPRS) Blackberry coverage...

Merry Christmas, all!

---

Meanwhile, MBA mortgage applications came in +48% from under +3% the previous week, with over 80% (a record, this decade) coming from refinancing. Yes, just week-on-week numbers, but it does show that actually, with mortgage rates finally coming down, people are - if not rushing out and buying homes at market clearing prices (wherever they may happen to settle,) taking the opportunity to lower household expenses. Gotta be net positive for the still-flat-on-its-back US consumer, and that has to help us out here in Asia... provided, of course, that at least some of those applications actually get approved.


.
::

The central cause of American economic distress

The NYT has an Saturday opinion piece entitled 'But Will it Work?': 

If the plan works, it will attack the central cause of American economic distress - the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

"It's easy to forget amid all the fancy stuff - credit derivatives, swaps - that the root cause of all this is declining house prices," Mr. Blinder said.

I agree, the immediate "root cause of all this is declining house prices" but I maintain that the "central cause of American economic distress" was that people who were not in an economic position to own their own homes had been seduced/ frightened/ duped into doing so by bankers who were way way liberal enough with their lending... because they could almost instantly shove the risk (and moral responsibility?) off to some other sucker through securitization - ie to other financial institutions (aka shills), investors and... er... The US taxpayer.

So any solution that does not address, directly or indirectly, the "central cause" is doomed to fail.

.

::

"Housing: Are We Near the Bottom?" (Nope.)

The always readable & thought-provoking (and free) John Mauldin is not bullish:  "Housing: Are We Near the Bottom?"

"By now, everyone in the world is aware of how bad the subprime mortgage business was. But now it is time to get ready to hear the same tale, told again, about Alt-A mortgages. These are mortgages made to borrowers with better credit scores than subprime borrowers, but who could not or decided not to document their income. One estimate is that 70% of Alt-A borrowers may have exaggerated their incomes (Wholesale Access). More than half of those were people who exaggerated their incomes by 50% or more! (Mortgage Asset Research Institute)

"How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late. Many of these loans (around $270 billion) were interest-only or with a low teaser rate, and the resets were at 3- and 5-year lengths. These are called Option ARMs. That means starting next year we are going to see a wave of mortgages resetting to new rates. And it is no modest increase. Rates can jump 4-8% or more from teaser rates. Some Option ARMs are resetting at 12.25%. That can double a payment."

So how much worse will it get, and for how much longer can we expect to experience the pain?

"Burns (of www.realestateconsulting.com) thinks that home prices will drop by 22%, 12% of which has already occurred...  He thinks it will be 2011 before housing prices begin to turn back up on a nationwide basis, with national prices continuing to fall into 2010."

So there.  (And if you can actually find a buyer, now you know what to do...)

.
Stumble It!
::

::

FNM/FRE rescue? We must be "Truly up the..."

Not by coincidence, the band SQUEEZE came to mind this morning as the equity markets went stratospheric on open, and then continued to trade higher. 

And not too surprisingly, given the truly MASSIVE short base out there, we hear that most of the active buying today is from short covering... more interestingly, long trades (whether long onlies or fast money) are pretty sparse.  So either the market is going to be unanimously right, which would be a first, or the markets actually could squeeze higher.

I don't like the fundamentals out there, as you can tell from my previous posts (eg this one, and this one), but technically we could be seeing a market with... yes... legs (though I am a lot less comfortable than I was back in July!!!)

===========

Besides the basic problem with US housing markets and climbing unemployment (don't tell me it's a backward looking indicator), you have the credit worthiness of the Treasury on the line... so even if spreads DO come down, and there miraculously IS some kind of fresh demand for housing in the foreseeable future, a weakened USD /higher Treasury yields could undo all that.  Early trading in 10Y today not too encouraging...

Medium term?  IMHO, we're "Truly up the Junction..."

.

Stumble It!
::

::

US Unemployment high and rising... not good...

US unemployment in white, S&P500 index in yellow

Until unemployment clearly peaks, it's hard to see strong, sustained equity market performance form the US... not to mention any kind of surge in housing take-up (or even decline in inventory.)

.
Stumble It!
::

::

US houses... Gotta be cheap now, right?

With US home prices down close to 20% from its peak, you'd think there'd be more buyers sucked in, wouldn't you? After all, in equity space we're looking at 20% as the marker point for a bear market, and smart long term buyers should be coming in, right?

Unfortunately, you'd be wrong, as the repercussions of the credit crisis on bank balance sheets and tolerance for risk have led, particularly since the start of this year, to a startlingly sharp increase in mortgage rates.

Hence, affordability, which as recently as a year (or less) ago, had started to look pretty decent, has gone back to pretty difficult levels... and all that in the face of job uncertainty, higher prices for staples and wealth destruction... not to mention the shutting off of the home-equity-for-groceries-SUVs-and-LCD-TVs spigot.

(And, as Floyd Norris of the NYT points out, the number of Prime foreclosures has just surpassed Subprime ones.)

NOT a good sign for US consumption, and all those in Asia counting on a rebound (i.e. everybody.)

.
Stumble It!
::

::

Wishful thinking in US real estate

Mike Luckovitch, via NEWSWEEK

OK - a bit slow with these items off CNBC and Bloomberg the last couple of days. So a quickie:

First off - Almost One-Third of Homeowners Who Bought in the Past Five Years Underwater

• "Almost one-third of U.S. homeowners who bought in the last five years now owe more on their than their properties are worth". ie Negative equity. "For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said. Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss"...
  

Then - More Homeowners Have Problems Paying Mortgage

• "Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent." Unclear if this is just for borrowers of option adjustable-rate mortgages, but either way it's not looking good.
  

Followed by - Mortgage Applications Fall as Loan Rates Jump

• "Applications for U.S. home mortgages edged lower last week as home loan rates jumped, an industry group said on Wednesday." Well, this is off surprising firmness... which was a positive sign... or a sign that those who were applying for loans kept getting turned away? And now they're giving up as they maybe don't quite feel like buying a home now that they need to look for a job? I don't think it's simply a function of higher rates - all that does is make it more painful for existing borrowers.

... then Finally - Home Prices Start to Show Signs of a Turnaround

• "... a slew of factors suggest the worst may soon be over.Among the strongest signs that the the hard-hit sector could be recovering, home prices in many regions of the country are now falling at a slower rate"

Huh? "Signs of a turnaround"?

I borrowed to buy into a rising market way beyond what I could afford, lived off capital appreciation by borrowing even more, watched prices disappear down the toilet along with my home equity line - grocery and transport prices have shot up, and I just gotta hope I don't lose my job. I can't sell now because then I'd have nowhere to live and still owe the bank money... should have sold, should have sold... held out too long... as soon as I break even, I'm getting the ^%$# out...

=============

Meanwhile, Merrill Lynch strategist Rich Bernstein is saying that the credit crisis, which he has been warning the whole world about (except, evidently, for anybody in Merrill management) since at least the middle of last year, will be "broad, deep and global" - which seems to have become the broker sound-bite of the day. (Was he on CNBC or something?)

• "The problems in the Financial sector appear to us to be far from over, and we are skeptical that trying to bottom-fish will prove to be profitable. However, we continue to think that there quite a few over-looked and unexploited opportunities. Among them are companies in more-stable, cash-generating areas (Health Care, Consumer Staples) and “chicken cyclical” sectors (Telecom, Industrials, and Technology)."

.
..
Stumble It!
::

PBoC will stay tight (=>China property names getting caned)

Pretty tough talk from the PBoC chief Zhou Xiaochuan over the weekend, saying again that there's room for rate increases.

That's as you would expect, of course - there's no chance Chinese officials will say they are loosening policy while inflation remains above 8%, though in reality there may be minor moves in regulations and reserve requirements (each way) in the meantime.

Number to watch for is Wednesday's March CPI figure, which is expected to come in at 8.3% ("whisper") from February's 8.7%... but food inflation will be the key.


(Here's Frank Gong's note from last week on China inflation, incidentally, in which he comments on why food inflation is NOT what we should be so worried about.)