Is A Second Stimulus Needed?

Moody's Economy.com chief economist Mark Zandi and former Congressional Budget Office Director Rupolph Penner both stated at the Urban Institute Conference recently, that another stimulus was required to stabilize the economy and ward off a double dip recession.

Zandi reports "Get the GDP growing first and forget about the debt. With unemployment at 10% and companies still shedding jobs growing the GDP should be the first priority". Zandi believes that the government needs an additional $200 Billion dollars, mainly for business lending, extensions of government programs such as unemployment, state and local governments and fix the foreclosure housing market.

Penner was a bit more Conservative in his estimates, claiming another $98 Billion was necessary and he believes the money should go to Medicaid, the states and creating jobs.

Either way these two both believe that without another stimulus we are heading for a double dip. The question is "Will Washington be able to sell this to the voters, November is only 9 months away.

4 More and Another 1 Billion in Loses

There was another bad sign today in the shaky Financial World. By day's end 4 more banks failed today with over 1 Billion Dollars in loses to the FDIC. That brings the running total at 13 so far this year, and another 580+ known to be in trouble.

Marshall Bank of Minnesota, Florida Community Bank of Florida, First National Bank of Georgia and Community Bank and Trust of Georgia. Total Cost to the taxpayer to pay the depositors is over 1 Billion Dollars. Stay tuned, more to come I'm sure...

Both Freddie and Fannie Post higher delinquencies

Both Fannie Mae and Freddie Mac have posted considerably higher defaults for loans. Fannie Mae, which lags in it's reporting one month behind Freddie, reported a sharp jump in delinquencies in November up to 5.29%, up from 4.98% in October and up from 2.13% in November of 2008. Freddie Mac reported delinquencies up to 3.87% in December 2009 from 3.72% in November and up from 1.72% in December of 2008. These figures are from the "Calculated Risk" newsletter Blog, and are concrete evidence of the vast problems ahead for these mortgage giants.

What this shows is that defaults have more than doubled from 2008 and the forecasts for 2010 are these defaults are going to go higher still, possibly doubling from these last reported levels. Despite the media reports of stabilization of the housing sector, this is a serious contradiction to the belief that housing market has stabilized.

Loan loss estimates for the pseudo Federal Companies are staggering, into the Trillions of dollars and although the President has stated he wants more loan modifications, the pace of relief for troubled homeowners is far out paced by the rising delinquencies. More of "We are here from the Government and we are here to help", which is just political rhetoric.

Fannie and Freddie need to retool, be revamped or better yet be eliminated before they further strain this troubled economy. No matter how you spin this, the worst, I'm afraid, is yet to come.

New home sales down, Fed to stop buying securities

Two recent reports on the housing sector is adding more fuel to the market deterioration. First new home sales figures dropped for the month of December, including the decline of mortgage applications and building permits, which are the traditional indicators of the market. Second is the Fed announcement that they will stop buying mortgage back securities this spring. What this means is that the Fed is buying these notes to keep mortgage rates down. Once this ceases the mortgage rates could jump quite a bit. Analysts project the rise of rates could jump as much as 1% or more. The Fed states this is due to stabilizing markets. Is it so? Or is this also due to the excessive spending has reached non sustainable levels of spending.

If consumers read the "tea leaves", home sales are likely to slow due to higher interest rates, continued high unemployment, more troubling signs from the economy and who knows what else. So what's a potential home buyer to do? BUY NOW, that's right, buy now. Economically if you can afford to, now might be the best opportunity. Even if the market values decline in the short term future, the savings will be more than offset by higher interest rates and possible inflation. No matter what is going to happen in the markets, at least you have a tangible asset land, brick and mortar, a home, something physical not a paper investment. Can Wall Street say that?

Just Walk Away

Yesterday one of New York's big Real Estate Developers who developed the Stuyvesant Town Complex stopped paying it's 3 Billion Dollar Mortgage for the complex. Big Developers do this all the time, and its more common than you may think. So I have a question. Why shouldn't every homeowner who is upside down on their properties, just stopped paying their mortgages? It seems that this is what University of Chicago Economist Richard Thaler recently said in the New York Times.

Mr. Thaler stated "It's not just alright to walk away from one's oversized mortgage, it may actually be a moral imperative". He went on to say "After all, lenders had no second thoughts about lending more than many borrowers could afford or than the homes might actually be worth. It's just not fair to expect borrowers to follow rules that lenders don't."

He goes on to say "The real risk to the banks and investors is that the people in those homes might just decide to walk away. And that's what we must do. Doesn't have to be everybody, of course; but anyone who finds themselves seriously underwater with no hope of ever recouping their investment-just walk away Renee. Morality has nothing to do with it. You are a clog in the wheel of a machine that is killing this country and if you remain a cog you enable it. Remove your cog and the machine will not keep running. Remove millions of cogs and the machine gets replaced."

An earlier NY Times article written by Roger Lowenstein said much of the same thing and recently the Daily Kos Blog stated "Remember burning draft cards? Burn Your Mortgage".
Heck there is even a web site called "You Walk Away.com". So what going on here, why can't I just modify my loan? Here is what's up with that...Let's talk reality here.

Here is what typical modifications do. First they reduce the interest rate and extend the life of the loan typically to 40 years. Then, if asked, they look at a principal reduction or a deferment. This caps out at 25%, but typically the most banks give here is 20% and less than 10% of all modifications have this. Lastly, this is probationary or trial for 3-6 months, in which case the modification will be readdressed. With more time afloat the banks rationale is hopeful to prevent the default. Currently over 56% of these trial modifications are going bust again. One of the reasons that you can't modify so many of these loans is that they were sold as investments to many different parties. If the servicing bank changes the note without all the investor approvals, they would be sued immediately. You are in fact trying to ask multiple investors, in multiple countries to all agree to lose money. Fat chance of that happening.

So for a small few homeowners, modifications can be a real option, but for the remaining 90% of homeowners in way over their heads, what's left. Three Options. 1 Deed in Lieu of Foreclosure, 2 short sale the property (sell property for less than the mortgage) or let it be foreclosed.

The banks themselves aren't helping the situation at all. Big bonuses, government bailouts, reckless business practices, are all making these trapped homeowners really mad. They get the diamond mine and we get the coal shaft.

So here we are. If your mortgage payments have or are going to go up, and your local property values are declining, what's one to do? I'll bet we'll see a lot of "Walk Aways" real soon.

Home Sales Drop in December.

Yesterday it was reported that home sales dropped in December. Nothing earth shaking here, or is it? Let's look at the real trend and numbers happening here.

December home sales dropped by over 17% from November, in what is the largest monthly drop in home sales in over 40 years. The press and trade folks are claiming that this is a direct result of home buyers believing that this drop was due to buyers believing the one time tax credit was going to expire at the end of November. (It is now extended to April 30th, 2010)

I think that there may be some truth to this but let's look at all the issues. Winter is traditionally the slowest time for real estate sales, so this should come as no surprise. The December unemployment figures were higher than expected, and the consumer confidence issue continues to deteriorate. Add this to banks not lending, Wall Street quick rise up and lackluster predictions across the board for 2010's general economy and this drop should come as no supply.

The FHA is now tightening it's lending rules as we move forward into the new year and folks I gotta tell you I have this gnawing feeling we are headed for real trouble in real estate. In some markets FHA loans amount to over 60% of all sales. Typically FHA requires only a 3.5% down payment whereas convention loans require 20% down payments.

With the jobless recovery becoming some sort of a real scenario, the rapidly declining consumer confidence, the housing market sales declines and the end of any stimulus results coming soon, makes me really nervous. Let's hope I am wrong but I think we could get to a point here real soon where we won't have buyers for the all the homes coming into this market. That spells real trouble for all those except the few who have jobs, down payment money and desire to own!

Unofficial Count 584

That's the unofficial count of Problem Banks in Financial Trouble in America right now. There are 584 insitutions that are under some sort of Federal Notice, from "Cease and Desist" to "Formal Agreements". Their combined cost estimate to cover the banks depositors is $305.3 Billion Dollars.

On Friday Jan. 22, 2010, 5 more Banks were taken over by the Feds in one day, bringing the total to 9 so far this year alone. I think this is staggering news about the solvency of the banking community still. True, most of these banks are small to midranged but California had 34 Banks alone on the list and these banks aren't part of the stimulus package or TARP, so this money is in addition to stimulus money.

This is one reason that the credit markets have made all loans more difficult to obtain. Most of these small to midsized banks are community oriented, meaning they made loans to buisness and commercial real estate as well as residential real estate. This is a direct compenent of the looming Commerical Real Estate market crash that have heard about, and these problems are beginning to show it. Some problem banks made commercial loans that are likely to have as much as 1/3 or more of loans going bad. If this trend continues there is going to be a crash in the commercial real estate market very soon.

So with 584 Banks in trouble and their loans likely to have a high amount of defaults, how many more banks, not on the list, are tetering on the brink of trouble now? I'll bet that number is frightning! Those unkown variables could be the difference between a second Market Crash or wheter we squeak on by, if we're very lucky! One thing is for sure, I'll bet lending will still be difficult for both the commercial and residential markets, and credit could freeze up again. Either way it looks like a very bumpy road ahead for banking, loans, commercial and residential real estate.

Housing Prices Continue to Fall

I have heard from many financial pundits that housing values are on the upswing. Modest forecasts for the values to rise in 2010 are abound. I just don't buy this and here is why.

One of the reports the Fed's use is the First American Core Logic Housing Index and monthly index tracking housing values on a monthly basis. (They also use the Case Shiller Reports, which are quarterly, hence First American is more timely).

The latest report from First American Core Logic Index shows a .2% decline in the latest national reports from October 2009 to November 2009.

Nationally the Home Price Index or HPI has dropped by 30% since it's peak in April 2006. This includes all homes sales including foreclosures and short sales. Excluding these distressed properties, the HPI has fallen 21.8% from the same peak.

This trend is expected to continue for some months to come, and although the banks have held back inventories referred to as "shadow inventories", the value losses have continued. This tells me that the housing decline is no longer the distressed homes driving the market downward, it is now more due to current economic conditions such as unemployment, and low consumer confidence.

The banking sector would be better advised to release these shadow inventories since most economists project the number of foreclosures is rising past it's highest levels on record, and a jobless recovery is where we are at due to high unemployment which is also expected to go even higher.

So to anyone speculating that home values are going to rise this year should pay attention to these facts. I live in the world of solid facts, not the belief or hope things are on the mend now.

Still having said all that, this is the best real estate market we will probably see in our lifetimes if we are willing to understand the facts. New home buyer or investor this is the time, flippers need not apply!

Bank Bonus' Up Again Time to Change the Rules.

Yesterday I read that Goldman Sachs was paying out $16.9 Billion Dollars in Bonus Pay. That is an average of $498,000 per employee. Or better yet that same amount would pay for unemployment benefits for 900,000 people for 1 year. The disconnect between Wall Street and Main Street is astonishing.

Remember Goldman Sachs former CEO Hank Paulson was the last treasury secretary, who set up Goldman Sachs as a primary recipient of the stimulus package, which by the way should be exposed and investigated further in the media, with the help of the the former NY Fed governor, Timmothy Guithner, the current Treasury Secretary. So it may not be of any surprise that in a recent PBS interview with Guithner, he was less than enthusiastic about the President's planned reform of banks, luke warm would be an overstatement.

I can't help but feel that since the election loss this week there is and will continue to be a mad scramble by Washington to save their proverbial butts. One problem with bank reform is that too many Wall Street Friendly folks have the positions of power. Guithner, Summers, etc.... are loyal to Wall Street not Main Street, so should they be a part of this.

Guithner is no friend of the American people. Remember he is being looked at while he was the NY Fed Governor when AIG got bailout funds and then didn't want the public to know about it. Also bear in mind that Goldman Sachs got some 30+ Billion dollars from AIG in payables at 100 cents on the dollar with no concessions, such as other creditor have given.

So if Obama wants bank reform, maybe he should look in his own house, determine who is Wall Street motivated, and replace them. Fat Chance of this, but it is worth venting about.

Now is the time to revamp the banks, put back regulations that were removed previously, and make the laws work for the people not the Wall Street Profits. Remember what happened in Massachusetts last Tuesday, it could happen all over the country in November.

Can You Hear Me Now!

Yesterday's victory in Massachusetts by Scott Brown was more about the voters anger than anything else. The Seat held by Senator Ted Kennedy for almost 50 years shows that voters are no longer interested in the insiders game. Martha Coakley sided with the Democrats, claimed she supported the policies, and took the election for granted. The result, She Lost. Not only did she lose but only 1 month ago she had over a 20 point lead in the polls. So what changed, to elect a republican who has values similar to Dick Cheney. (Scary isn't it)

Scott Brown campaigned on number 41, the deal breaker in the Senate to the President's Policies. Voters are so disgusted with the Washington Policies that are being forced by the President, Nancy Pelosi and Harry Reid. Don't get me wrong the Republican are the ones who got us into this mess but the Democrats have blown an opportunity due to their own agendas.

The next months leading up to the November Mid Term Elections are going to be a challenge for all Washington cronies, either change the way you pass legislation or face the wrath of the voters come November.

Last year the independent voters of America voted for change we can believe in. Since then Washington, both democratic and republican, have done little if anything to initiate this change. Yesterdays vote was more about the anger in America specifically the business practices in Washington and if voters can vote a guy like Brown into office because they are angry, imagine what could happen in November. Pelosi, Reid, Bohnner, Mc Connell and the rest of your idiots "CAN YOU HEAR ME NOW!"

5 Possible Problems Delaying Recovery

As all of the media touts the recovery is happening, all be it slowly, here are 5 major concerns that will cause more problems down the road.

1 Unemployment continues to decline. As the reports come out about declines in unemployment numbers we must remember that those figures are grossly under reported. They do not include those who are either unemployed beyond benefits period and those who are under employed. The National Federation of Independent Business' offers little support to the reports of declining unemployment. Their recent polls showed only 10% were hiring, whereas 22% reported the need for more layoffs. Either way the employment situation will continue to deteriorate.

2 Residential Real Estate Values are Increasing. One of the main reasons that there is an increase in some markets in real estate values is the deliberate holding back of inventories by the large financial institutions. These are refered to as shadow inventories and they are being held to try to stabilize real estate markets. This is creating an artificial belief that there is a recovery going on. Also the amount of foreclosures is expected to rise significantly this year adding to the pressure to release inventories. Once these inventories are released then values will most likely drop again, up to 10% declines projected in distressed markets.

3 Commercial Real Estate Foreclosures are on the rise - As the loses mount for the commercial real estate markets the loses will carry over to the banks, some of which can go out of business, causing more problems in the financial sector. Last year the Fed of Atlanta projected that 43% of all commercial loans were either going to go into foreclosure or need to be modified.

4 US sales tax revenues continue to decline - Revenues to the US via sales tax have declined and with a struggling economy, revenue forecasts for 2010 don't look much better. All of this leads to less money coming into the Treasury at a time when spending is at it's highest levels ever.

5 China's Real Estate Bubble Pops - Currently China's Real Estate Market is rising at an alarming rate, up to 58% increase in values in certain markets over the last 12 months. Now the Chinese Government is now tightening the loose controls which caused these escalations there is speculation that these gains could go south and fast. If that happens China would no longer have the resources to purchase foreign debt, mainly US debt.

All these factors are real and offer a clearer picture of the year ahead, unfortunately not good news yet.

More Foreclosures Ahead

Last week the Wall Street Journal reported over 2.8 million households had receive at least 1 foreclosure notice in 2009. That is the highest amount on record, and the projections are that 2010 will easily surpasse this figure, mainly due to high unemployment and rate resets. In addition President Obama's Loan modification program has resulted in only 700,000 loan modification requests of which nearly half are already back in default.

So what does this all mean. The housing sector is in no way near any recovery, despite what the media is reporting. This concept that there is a jobless recovery in the economy is no more than smoke and mirrors. The effects of the stimulus package have boosted only the largest wall street firms and those effects will be wearing off shortly. Then What?

The truth is not so rosey. The foreclosures being held back by banks in their "shadow inventories", the amount of new foreclosures occuring, the lack of any real loan modifications for the majority of distressed homeowners. high unemployment will all lead to the continuing decline in housing values and more bank owned properties will need to be marketed.

For some this will be what is needed to be able to afford buying a home, to others, this will mean they will walk away from their homes. Either way recovery in the housing market is at least 1-2 years away.

In my view this is just another example of the priorities of Wall Street and The Government and leaving main street far behind. Remember this come November!

Are They Kidding?

I had to think how ironic it is that the Banks testified before congress yesterday telling all they were sorry and didn't see the crisis coming. In addition they justify the enormous paychecks claiming that they were earned. "If we don't offer these high bonus' we will lose the talent needed to bring us out of this economic mess."

I don't know about most people but I am outraged by these comments. These were the crooks that got the country into this mess, the government gave them a blank check, and now we need to continue to endure this BS and believe this is what is best for the country. And I thought Bernie Madoff was the biggest crook in american finance.

Let me ask you this, Do think you can ever trust a bank to do what is the right thing for the common man. Do you find banks quickly reverse charges when customers complain about them? Do banks reduce interest on loans and credit cards because it is the right thing to do? Well, I think we all know the answers to these questions and now we should believe them because they go before congress and claim "We're Sorry". What arrogance!

The reality is that banks are driven to make money for their shareholders and the top executives are interested more in their own greed than anyone, including shareholders.

Financial Guru Suzie Ortman stated a few days ago that the best thing consumers could do is to move all their assets out of the large banks, Chase, BofA, Wells Fargo and Citibank and bank with local banks or credit unions. If that were to happen these greedy little pigs wouldn't have any excuses or better yet, no jobs. Credit Unions especially are good in that there are federal laws limiting the amount of interest banks can charge. (Capped at 18% Max.) Credit unions are beholden to their members, not shareholders and care about their members more than banks care about theirs. To this I say Brava, Suzie you got that one right! I'll be right back, I have to go and close some accounts now...