To the DOJ, a $13 billion receipt is the "largest ever settlement with a single entity." To #AskJPM, a $13 billion outlay is a 100%+ IRR. And perhaps more relevant, let's recall that JPM holds $550 billion in Fed excess reserves, on which it is paid 0.25% interest, or $1.4 billion annually. In other words, out of the Fed's pocket, through JPM, and back into the government. Luckily, this is not considered outright government financing.
With Richmond, CA's plans to use eminent domain to "help" underwater homeowners still ongoing (as suits from mortgage-backed securities owners such as PIMCO, Blackrock, and DoubleLine having been initially dismissed), it appears the "wealth transfer" scheme is gaining traction around the nation. As we warned it would, the appeal of this "bailout" - with no thought to the unintended consequence of crushing an entire investing class out of the market (and its implicit rate-increasing result) - is just too strong for local government and sure nough New Jersey town Irvington is moving in that direction. As AP reports, Irvington's plan would focus on using eminent domain to purchase so-called "private label" security mortgages, or ones that are not backed by the U.S. government.
In a nutshell:
- Relatively low unemployment rates for the “Western Leaders” aren’t just an artifact of recent strength in, say, energy production and commodities. These states have consistently outperformed the rest of the country.
- Abysmally high unemployment rates for the “Eastern Super-laggards” have also persisted for over two decades, exceeding all other parts of the country.
- The “Northern Coastal and Great Lakes Laggards” and “Western Laggards and Southeast” fall somewhere between the other two regions, but always favoring the southern states over the northern states.
Not surprisingly, California, Nevada and Florida are more volatile than the other regions, cycling well above and then back toward the Western Leaders in each of the past two decades. Also, the unemployment problems in California and Nevada have been consistently worse than Florida’s unemployment. These trends may or may not persist in coming years. But if your goal is to anticipate the next Stockton, San Bernardino or Detroit, watch the unemployment data closely and pay particular attention to the cities listed here.
While one can have sympathy for the over-levered, underwater homeowners that took free-money with both hands and feet as house prices surged in the mid-2000s (just like they are now) but the latest moves to 'save' people from themselves in the city of Richmond, CA is raising both market and constitutional concerns. As NYTimes reports, the city is the first to use eminent domain by the local government (in partnership with a 'friendly' mortgage provider) to seize homes, force investors to take a loss on the mortgages, re-issue a new 'lower' mortgage, and allow the homeowner back with positive equity (ready to lever-it-back-up into a new Harley). As Guggenheim notes, this is likely to hurt supply of new mortgages and as we noted previously (here and here), it seems clear that private-label MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.
We first discussed the possibility of state and local governments using eminent domain to 'save us' from further housing issues a year ago but now the NY Fed has gone one step further with an academic-based justification for why this process is not a "zero-sum-game" and will render all stakeholders better off. We can hear echoes of "trust us" in this commentary as the authors explain how multiple valuation methods will be used to ascertain "fair-value" - which has always worked so well in the past - and that we have "little to fear" from the resultant long-term contraction in liquidity or credit as bubbles can only inflate during times of easy credit availability (and that will never happen!) Paying for all this? Don't worry - resources to fund purchases of loans/liens can be raised from public, private sources or a combination of the two. It seems to us that MBS holders will not be happy, consumers hurt as mortgage costs would rise (this 'risk' has to be priced in), and taxpayers unhappy as this is yet another transfer payment scheme to bailout underwater loans.
How Another Housing Bubble Was Blown … And Why
“Facts do not cease to exist because they are ignored.” – Aldous Huxley
The entire system is corrupt to its core. Both political parties, regulatory agencies, Wall Street, the Federal Reserve, and mainstream media are participants in this enormous fraud. They grow more desperate and bold by the day. The lies, misinformation and propaganda being spewed on a daily basis become more outrageous and audacious. They are using the Big Lie method on a grand scale. They frantically need to lure the muppets into the stock market and the housing market to keep the game going a little longer. You can sense we are reaching a tipping point. The system they have created is mathematically unsustainable. Therefore, it will not be sustained.
Since 2009 all cash buyers have purchased roughly one third of all Southern California home sales. This is a significant number and unlike the early 2000s, many of these buyers are looking to hold onto properties as rentals. A good portion of buying has come from larger hedge funds and an increase of foreign money has caused competition on an already low selection of homes to become more pronounced. The latest inventory report for California is telling in many ways. Many of the larger metro areas in California are seeing annual inventory drops of 50 to 70 percent. Those looking to buy are facing added competition from a variety of unlikely sources. Last year in February we set a record with the number of homes sold to absentee buyers (29.9 percent). Where is all the inventory going in California?
The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market. It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak. The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins. While many hopes have been pinned on the 2012 stimulus fueled, China investing, and supply-deprived housing recovery as "the" driver of economic growth in 2013 - the data suggest that may be quite a bit of wishful thinking.
Moments ago Ben Bernanke released a speech titled "Challenges in Housing and Mortgage Markets" in which he said that while the US housing revival faces significant obstacles, the Fed will do everything it can to back the "housing recovery" (supposedly on top of the $40 billion in MBS it monetizes each month, and/or QEternity+1?). He then goes on to say that tight lenders may be thwarting the recovery, and is concerned about high unemployment, things that should be prevented as housing is a "powerful headwind to the recovery." In other words - the same canned gibberish he has been showering upon those stupid and naive enough to listen and/or believe him, because once the current downtrend in the market is confirmed to be a long-term decline, the 4th dead cat bounce in housing will end. But perhaps what is most amusing is that the Fed is now accusing none other than the US household for not doing their patriotic duty to reflate the peak bubble. To wit: "The Federal Reserve will continue to do what we can to support the housing recovery, both through our monetary policy and our regulatory and supervisory actions. But, as I have discussed, not all of the responsibility lies with the government; households, the financial services industry, and those in the nonprofit sector must play their part as well." So "get to work, Mr. Household: Benny and the Inkjets, not to mention Chuck Schumer's careers rest on your bubble-reflation skills."
A hallmark of Obama’s second term will be wide scale mortgage debt relief.
It is easy to get swept into the momentum of the housing market. The Federal Reserve has managed to push interest rates to historically low levels creating additional buying power for US households. As we enter the slower fall and winter selling season, there is unlikely to be any major changes until 2013 as the election year concludes. We do face major challenges ahead. This current momentum in housing isn’t being caused by flush state budgets or solid wage growth. No, this is being caused by low inventory, big investors crowding out households, and a concerted effort to push mortgage rates lower. If you simply follow the herd, you would think that prices are now near peak levels again (or soon will be) and household incomes are hitting record levels. Let us examine where things stand today deep in 2012.
HARP, The Home Affordable Refinance Program, is a streamline refinance program developed to help borrowers who have continued to make their mortgage payments, but have be unable to refinance due to a decline in their home value. While it is encouraging that more and more underwater homeowners are gaining the benefits of today’s low interest rates, tremendous profits are being made at their expense. Lack of competition is the primary catalyst, but the underlying economics of the large “too big to fail” banks will do nothing but stoke additional anger in the general public. Expect this trend to continue until the dynamics of the program is changed once again, possibly in HARP 3.0. Until then, the cash cow will continue for the TBTF banks.
And you can restructure all you like, but many underwater homeowners with a serious income shortfall will still not be able to pay their mortgages. Who carries the can? If the mortgage has been sold on then the loss will be on the new owner. In reality this is far more likely to be the taxpayer. Simply, the taxpayer may well end up carrying the can for a whole lot of bust mortgages. What Taibbi — who usually has a very good sense of moral hazard — and MRP effectively seem to be considering is not only the continuation and expansion of Kelo, but also potentially the transfer of liability from bust irresponsible lenders to the taxpayer. While this is sure to enrich the bureaucracy and well-connected insiders — and admittedly, while it may help some underwater homeowners — it seems incredibly risky for the taxpayer. While debt-forgiveness is one way out of the debt trap, we should be careful and recognise that many so-called debt-forgiveness schemes may instead be dressed-up scams and frauds that end up enriching special interests while putting the taxpayer deeper into a hole.
Forty five years after the War on Poverty began, there are 49 million Americans living in poverty. That’s a solid good return on the $16 trillion spent so far. It’s on par with the 16 year zero percent real return in the stock market. We have produced a vast underclass of ignorant, uneducated, illiterate, dependent people who have become a huge voting block for the Democratic Party. Politicians, on the left, promise more entitlements to these people in order to get elected. Politicians on the right will not cut the entitlements for fear of being branded as uncaring. The Republicans agree to keep the welfare state growing and the Democrats agree to keep the warfare state growing -bipartisanship in all its glory. And the middle class has been caught in a pincer movement between the free shit entitlement army and the free shit corporate army. The oligarchs have been incredibly effective at using their control of the media, academia and ideological think tanks to keep the middle class ire focused upon the lower classes. While the middle class is fixated on people making $13,400 per year, the ultra-wealthy are bribing politicians to pass laws and create tax loopholes, netting them billions of ill-gotten loot. These specialists at Edward Bernays propaganda techniques were actually able to gain overwhelming support from the middle class for the repeal of estate taxes by rebranding them “death taxes”, even though the estate tax only impacts 15,000 households out of 117 million households in the U.S. The .01% won again.