Sunday, January 15, 2012

notes on housing policy & other econ news, week ended Jan 14th

there have been a few papers & pronouncements on housing policy & the mortgage crisis over the past few weeks, so maybe its worth taking a look at what's been advised & proposed, & what among all that may actually come to fruition...the catalyst for a lot of this seemed to be a 26-page white paper (pdf) from the Fed that first made the news on the 4th, although subsequent announced actions by other agencies may have been co-incidental...the Fed appears to have finally realized that not much they have attempted to do to alleviate the mortgage crisis, whether it be plain vanilla quantitative easing, direct buying of MBS (mortgage backed securities), or the lowering of long term interest rates by their "Twist" operations has produced results, so the paper was directed to the financial services committees in both houses of congress, suggesting policy changes to be initiated by them or by the administration, which is a move fraught with peril, as the Fed is already being accused of meddling in matters fiscal...out of the dozen initiatives they suggested, the one that seems to have received the most attention has been the proposal to convert the significant inventory of REO (real estate owned) by the GSEs (Fannie & Freddie) and FHA into rental units...since we're talking something on the order of a quarter million homes that are in effect owned by government agencies, it would mean unloading a lot of properties relatively quickly...this would be done by bulk sales of such houses so that investors could obtain "geographically proximate properties to achieve efficiencies of scale" ...a similar proposal was made that would allow banks to rent properties rather than sell them that could in effect turn them into landlords...while there is a developing shortage of rental apartments (the 5.2% vacancy rate is now as low as it was in 2001), one wonders if this would be just another program create risk free opportunities for the well-connected elites & socialize any losses...maybe its entirely coincidental, but yesterday it was reported that Philip Angelides, former chair of the FCIC, has just formed a company to buy distressed mortgages, promising to use "legal and political leverage" to acquire the loans could generate a 20 percent annual return for investors...

  the release of that Fed white paper was followed by a number of speeches on housing policy by Fed officials that went further than the housing proposals sent to congress; most notable among them was NY Fed president dudley's suggestion to allow principle writedowns, for which homeowners would give up rights to any future capital gains, and Fed Board Governor Sarah Bloom Raskin's speech recommending the Fed & other regulators impose penalties on mortgage servicers for deficiencies that resulted in "unsafe & unsound practices", which apparently is Fed speak for the widespread robosigning & document fabrication in foreclosure proceedings...

  among other housing policy initiatives, Fannie Mae will now require mortgage servicers to provide at least 6 months and up to a year’s relief to homeowners who have become unemployed; the FHFA, which supervises fannie & freddie, is starting to initiate some changes to HARP to allow homeowners with GSE loans and with negative equity who are current on their mortgages to refinance at lower interest rates, which co-incidentally hit new lows this week at 3.89% for a 30 year fixed mortgage, & 3.16% for a 15 year fixed; the CFPB put out a 20 page guidebook instructing its examiners on procedures to crack down on non-bank lenders who are in violation of consumer protection laws, & the justice department got on the bandwagon by calling for more funding and support for state foreclosure mediation programs

  the so called “50 state” mortgage settlement that the administration has been pushing also hit a pretty big bump this week, as at least a dozen state attorney generals started holding separate talks on how they could jointly investigate and potentially file lawsuits against abusive mortgage lenders and fraudulent servicers; joining prosecutors from NY, Delaware, California, & Mass were attorney generals from Hawaii, New Hampshire, Missouri, Mississippi, Maryland, Kentucky and Minnesota, with rumors that Colorado & Oregon might also join this breakaway group…obviously, with attorneys representing about a third of the US mortgage market now out of the national settlement, the immunity from future liability & prosecution the banks had hoped would come out a national settlement has gone by the boards…

Click to View  there wasnt any clear direction discernable from the hodgepodge of reports that came out this week, which in each case surprised economists by reversing previous trends...we’ll start by looking at the november consumer credit report from the Fed, which showed a seasonally adjusted 9.9% rise over the october report, which was the biggest surge in consumer borrowing in 11 years; and it wasnt just people pulling out the plastic to charge black friday purchases, either, because although revolving credit was up the most in years at +8.5%, the real strength in this report was in non-revolving credit, which included longer term loans for cars, mobile homes, yachts, education, et al, which was up a seasonally adjusted 10.7%…although the financial press all thought it was great to see consumers spending, it was borrowing beyond our means was the problem that got us here…it’s still hard to guess what to make of this isolated report, because these credit numbers had been negative through 2009 & 2010, and had seen relatively modest increases in previous months this year…which leads us to the december retail sales report from the commerce dept (pdf)…total sales for the month were anemic, rising only a seasonally adjusted 0.1% (±0.5%) over november sales, but the weakness was especially pronounced in the types of sales that december is known for; there was a 0.8% decline in general merchandise, including a 0.2% decline in sales at department stores…while building material sales increased 1.6%, sales at electronic stores were off 3.9%, & even online sales fell 0.4%…so excluding a 1.5% gain in car sales, and a 1.7% increase in gasoline purchases, retail sales for the month actually fell 0.2% from november’s levels…YoY data looked a bit better; this december’s sales were up 6.5% (±0.7%) from those of december 2010...it’s important to recognize that these reported numbers are all nominal sales, & dont allow for price increases…so while most analysts are reporting sales up from the precession high, when the effects of inflation are taken into account, sales are still well off the peak…the above chart, from d.short at advisor perspectives, shows per capita retail sales adjusted for inflation; by that metric, sales are still 7% below their 2006 high (click for a larger image)…in the same post he includes a similar chart stripping gasoline sales out, & sans gas, retail sales are still 8.7% off the peak…according to demographer Harry Dent, we may be heading into a new paradigm for retail as well; Dent's website includes a PDF file illustrating the buying habits of households by the age of the head of household for about 240 different product categories; and according to his analysis, the aging of the boomers means that we’ve passed what he has identified at the peak spending years of those 45 to 50 years old...

   to look at some other economic data points from this week, the Ceridian-UCLA diesel fuel index for december showed a gain of 0.2%, the third positive month in a row for this index, but still not high enough to offset weakness in trucking this past summer; for the 1st week in january, rail traffic was down -9.3% while carloads declined -3.7%.; what we’re talking about here are significant declines of 20% in shipments of grain and 17% in steel scrap…the other major report out this week was for the trade deficit for november, which surprised to the upside at $47.8 billion, up from $43.3 billion in october; major factors in this gap were higher oil prices, which averaged $102.50 in november, and a 6.9% decline in exports to europe…

the facade of stability that european leaders had achieved after a series of december summits and the agreement to rewrite their treaty to insure austerity shattered on friday after S&P downgraded france and 8 other european countries; italy, portugal, cyprus and spain were downgraded by 2 notches, leaving portuguese & cypriot debt at a junk level, & austria, france, malta, slovakia & slovenia were cut by 1 notch each…as S&P explained “Today's rating actions are primarily driven by our assessment that the policy initiatives that have been taken by European policymakers in recent weeks may be insufficient to fully address ongoing systemic stresses in the eurozone."...with both france & austria cut from AAA to AA, the bonds of the European Financial Stability Facility (EFSF) which they back, are almost certainly to be cut to AA as well, making the proposed leveraging of that bailout fund well nigh impossible…and the downgrades werent the only bad news; talks between Greece & its consortium of creditor banks also broke off on friday, increasing the likelihood of a greek default; the market responded by pushing rates on one year greek debt to 408%...meanwhile, Fitch warned that if Italy didnt solved it's debt refunding the collapse of the euro would  be "cataclysmic", & btw, those overnight deposits by eurozone banks have continued to set new records almost every day during the past two weeks, indicating that despite the best efforts of the Fed & the ECB, the european banking system is still far from being out of the woods...

this is my weekly commentary that accompanied my sunday morning links mailing, which in turn was mostly selected from my weekly blog post on the global glass onion, and also includes other links of interest…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me


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