Lots of politics in the news these days. So here goes, in no particular order.
McCain is in Phase Two of the textbook Presidential Candidate's Strategy, which is to hang out in the center through the primaries, then run to the extreme - in his case, the right - when you've got the nomination sewn up.
During primary season, he touted his ability to cross the aisle. Now, in an effort to shore up support from his party's base, he's announced an economic plan that would go well beyond just extending the Bush tax cuts. That will have broad appeal with the Republican base, but it won't excite Independents much, and it'll definitely turn off liberals. Tax cuts in general are a good thing, but may not be the best thing right now.
McCain has also announced that he won't entertain a VP candidate who's pro-choice. That rules out Rudy Giuliani, and in the eyes of some, it also rules out winning California. But a certain Ronald Reagan carried the Golden State, and he was pro-life. Of course, he was also from California.
Some observers have started to harp on McCain's age, trying to raise concerns as to whether he can handle the job of Commander-in-Chief at his ripe old age.
For one thing, this guy has survived stuff that you and I probably couldn't even imagine in our worst nightmares. And second, as his defenders have pointed out, he's handled the rigors of a Presidential campaign - a pretty exhausting undertaking - rather well.
In fact, he's fared better than at least one of his opponents: he hasn't gotten so tired that he "mis-spoke," or broke down in tears.
Speaking of Hillary, she's really trying to get maximum mileage out of Obama's gaffe about Pennsylvanians. She's released a series of ads talking about how we cling to our religion all the time, not just in times of trouble.
That sounds great, but I saw her interviewed last weekend at a Jewish college, and someone asked her what her favorite Bible passage was. She rambled on at length about Esther - what a great book it was, how she asked her mother to read it to her every night, how many great stories were in it, what a role model Esther was, how much she'd like to learn even more about Esther than just what's in the Bible. But she couldn't cite a single verse. She probably forgot the ones she knew when she was dodging bullets in Bosnia.
As for Obama, his explanation of his comments was pretty lame. He said in last night's debate that this wasn't the first time one of his statements "got mangled up." That sounds to me like a classic responsibility dodge: he didn't say, "I mangled my statement," he said it "got mangled." That implies to me that he's blaming the media.
His initial response was to stand by his statements, until somebody pointed out to him, "Uhh, Barack, some people in Pennsylvania are a bit peeved at you." So then he began to back-pedal. He did the same thing after the Rev. Wright debacle.
The more somebody has to explain their comments, the more weight I tend to place on the original comments as being indicative of their true character and convictions, and the less credence I lend to the explanations. Explanations benefit from the time to reflect, gauge reaction to the initial comments, and be coached by one's handlers. Increasingly, this guy is showing more audacity than hope.
Meanwhile, the Democratic leadership is stepping up its calls for the super-delegates to make a choice in early June. Hillary doesn't like that, of course; she'd rather seal a GOP victory and take another shot in four years than concede before the convention. Meanwhile, it's "pass the popcorn" time for the Republicans.
Thursday, April 17, 2008
Wednesday, April 16, 2008
What Goes Around, Comes Around
The Mortgage Bankers' Association is a trade group for mortgage lenders - you know, the people who spent the last several years writing loans with shaky terms to buyers with even shakier credit. It seems last year, they decided to build a new headquarters in pricey Washington, DC. They figured if they built a bigger, fancier building, they could lease the excess space in the hot DC commercial real estate market, thereby making the building affordable. Besides, money was cheap, and their revenues were swollen by the hordes of people that had joined the mortgage lending business, lured by the promise of an endless stream of fat commissions.
That was then. This is now.
Money's not so cheap anymore, and their own lender wants an extra 10% down on the $100 million, 160,000 square foot building. Gulp.
Their revenues are down 10-15%, because of all their member firms that have gone belly-up and/or fired scores of loan officers. Double gulp.
And the housing-bubble-caused recession has resulted in such softening of the commercial real estate market in DC - which is undoubtedly as overbuilt as the subdivisions the mortgage bankers tried to fill - that the MBA can't lease their vacant space. Ouch.
As a result of this triple-whammy, the Mortgage Bankers' Association may face difficulty paying their own mortgage.
Cost of a new building in Washington, DC for the Mortgage Bankers' Association: $100 million.
Additional down payment required by commercial mortgage lender: $10 million.
The prospect of the Mortgage Bankers' Association defaulted on its own mortgage: Priceless.
That was then. This is now.
Money's not so cheap anymore, and their own lender wants an extra 10% down on the $100 million, 160,000 square foot building. Gulp.
Their revenues are down 10-15%, because of all their member firms that have gone belly-up and/or fired scores of loan officers. Double gulp.
And the housing-bubble-caused recession has resulted in such softening of the commercial real estate market in DC - which is undoubtedly as overbuilt as the subdivisions the mortgage bankers tried to fill - that the MBA can't lease their vacant space. Ouch.
As a result of this triple-whammy, the Mortgage Bankers' Association may face difficulty paying their own mortgage.
Cost of a new building in Washington, DC for the Mortgage Bankers' Association: $100 million.
Additional down payment required by commercial mortgage lender: $10 million.
The prospect of the Mortgage Bankers' Association defaulted on its own mortgage: Priceless.
Thursday, April 10, 2008
Your Tax Dollars at Work
Congress is at it again. The Senate passed a bill that would, among other things, give a $7,000 tax credit to buyers of foreclosed homes. This is the stupidest idea yet for dealing with the housing crisis.
Let's say I'm a mortgage lender, and I've got a borrower who's behind on the payment on his adjustable-rate mortgage, which has reset to a rate he can't afford. I'm supposed to be working with him to keep him in the house, right (yet another stupid idea)?
Well, if I foreclose on the house, it's suddenly more attractive to a prospective buyer than the house next door, which also happens to be for sale, but the seller is a responsible homeowner who didn't buy more house than she could afford, always made her payments on time, and now just wants to move to a bigger place.
Why is the foreclosed property more valuable? Simple. If I buy the responsible lady's house, I just get the usual tax breaks associated with homeownership. If I buy the foreclosed house, I get those benefits, plus a $7,000 credit. Easy choice.
So this results in another foreclosure, one that perhaps could have been avoided with a workout. Multiply it by the huge numbers of serious delinquencies out there - which, for the first time in history, are double the number of foreclosures because of the bulging backlog of serious delinquencies that lenders face - and you have a sizeable increase in foreclosures on your hands. The Senate, in other words, would basically provide an incentive to lenders to become foreclosure trigger-happy.
It also hurts the responsible lady who's always made her payments on time, in that it will require her to discount her house to offset the advantage to the buyer of the tax break on the foreclosed property. And it brings with it the usual problems of increased foreclosure, such as devaluation of properties in the neighborhood, vandalism of the unoccupied foreclosed house, etc.
The bill's backers say that it would move foreclosed homes off the market more quickly, and they point out that it would "only" cost taxpayers $1.6 billion. But they're missing the point that it would increase foreclosures, as noted above. More foreclosures means more tax breaks. More tax breaks means higher costs. Potentially much higher.
This is yet another taxpayer bailout, and even worse, it only bails out the lenders, who were among the most culpable parties to begin with. Thankfully, the bill will likely either get modified beyond all recognition by the House, or vetoed.
********
Thought for the day: the credit crisis is the new Mark Twain - rumors of its demise are greatly exaggerated.
And we have another stupid rally in equities today, with the Dow up about 100 points. Why? Because Wal-Mart reported higher-than-expected sales for the first quarter. And why did Wal-Mart do so well? Because other retailers sales have fallen out of bed, as recession-wary Americans do their shopping on the cheap. In other words, the economy is so bad that everyone's shopping at Wal-Mart to save as much money as they can. This is bad for the economy overall, but good for Wal-Mart.
So of course, the entire market rallies. I'm still glad I'm short.
Let's say I'm a mortgage lender, and I've got a borrower who's behind on the payment on his adjustable-rate mortgage, which has reset to a rate he can't afford. I'm supposed to be working with him to keep him in the house, right (yet another stupid idea)?
Well, if I foreclose on the house, it's suddenly more attractive to a prospective buyer than the house next door, which also happens to be for sale, but the seller is a responsible homeowner who didn't buy more house than she could afford, always made her payments on time, and now just wants to move to a bigger place.
Why is the foreclosed property more valuable? Simple. If I buy the responsible lady's house, I just get the usual tax breaks associated with homeownership. If I buy the foreclosed house, I get those benefits, plus a $7,000 credit. Easy choice.
So this results in another foreclosure, one that perhaps could have been avoided with a workout. Multiply it by the huge numbers of serious delinquencies out there - which, for the first time in history, are double the number of foreclosures because of the bulging backlog of serious delinquencies that lenders face - and you have a sizeable increase in foreclosures on your hands. The Senate, in other words, would basically provide an incentive to lenders to become foreclosure trigger-happy.
It also hurts the responsible lady who's always made her payments on time, in that it will require her to discount her house to offset the advantage to the buyer of the tax break on the foreclosed property. And it brings with it the usual problems of increased foreclosure, such as devaluation of properties in the neighborhood, vandalism of the unoccupied foreclosed house, etc.
The bill's backers say that it would move foreclosed homes off the market more quickly, and they point out that it would "only" cost taxpayers $1.6 billion. But they're missing the point that it would increase foreclosures, as noted above. More foreclosures means more tax breaks. More tax breaks means higher costs. Potentially much higher.
This is yet another taxpayer bailout, and even worse, it only bails out the lenders, who were among the most culpable parties to begin with. Thankfully, the bill will likely either get modified beyond all recognition by the House, or vetoed.
********
Thought for the day: the credit crisis is the new Mark Twain - rumors of its demise are greatly exaggerated.
And we have another stupid rally in equities today, with the Dow up about 100 points. Why? Because Wal-Mart reported higher-than-expected sales for the first quarter. And why did Wal-Mart do so well? Because other retailers sales have fallen out of bed, as recession-wary Americans do their shopping on the cheap. In other words, the economy is so bad that everyone's shopping at Wal-Mart to save as much money as they can. This is bad for the economy overall, but good for Wal-Mart.
So of course, the entire market rallies. I'm still glad I'm short.
Mister, We Could Use A Man Like ...
Paul Volcker again. But first, let me turn my attention to his successor (though the inclusion of the word, "success" in that title is grossly misleading).
Greenspan recently said that US home prices will likely stabilize "well before" the end of this year, and that inventories will correct by "early 2009."
Wait - isn't this the guy who inflated the housing bubble in the first place, by holding the Fed funds target at a too-low level for too long? And in recent statements, he's said that's not what created the bubble? Meaning he's either dodging blame, or so disconnected from economic reality as to be rendered irrelevant?
Do we really want to place any more faith in what Alan Greenspan has to say about housing than we already have?
The housing inventory glut has worsened recently, not gotten better. It took us almost three years to get from the long-term average of months' supply of homes for sale to the present level of more than two times that average. We will not work that off by early 2009. And prices will not stabilize until we have.
Now, as for Dr. Volcker, he recently spoke at the Harvard Club, and correctly pointed out the cause of the current financial crisis in the US (that is increasingly being exported throughout the globe):
"Financial crises do not happen in a vacuum and the current US banking debacle is linked to imbalances in an economy that favored spending at the expense of saving. You can't go on forever spending more than you're producing. You have to rely on unorthodox finance to sustain it. There's a fascination with a lot of risk management tools that this situation has demonstrably proved false."
I have nothing to add. But if one of the three Presidential candidates were to sign a binding agreement to appoint Paul Volcker as Fed Chair on inauguration day, they'd have my vote, I don't care who the candidate is.
Greenspan recently said that US home prices will likely stabilize "well before" the end of this year, and that inventories will correct by "early 2009."
Wait - isn't this the guy who inflated the housing bubble in the first place, by holding the Fed funds target at a too-low level for too long? And in recent statements, he's said that's not what created the bubble? Meaning he's either dodging blame, or so disconnected from economic reality as to be rendered irrelevant?
Do we really want to place any more faith in what Alan Greenspan has to say about housing than we already have?
The housing inventory glut has worsened recently, not gotten better. It took us almost three years to get from the long-term average of months' supply of homes for sale to the present level of more than two times that average. We will not work that off by early 2009. And prices will not stabilize until we have.
Now, as for Dr. Volcker, he recently spoke at the Harvard Club, and correctly pointed out the cause of the current financial crisis in the US (that is increasingly being exported throughout the globe):
"Financial crises do not happen in a vacuum and the current US banking debacle is linked to imbalances in an economy that favored spending at the expense of saving. You can't go on forever spending more than you're producing. You have to rely on unorthodox finance to sustain it. There's a fascination with a lot of risk management tools that this situation has demonstrably proved false."
I have nothing to add. But if one of the three Presidential candidates were to sign a binding agreement to appoint Paul Volcker as Fed Chair on inauguration day, they'd have my vote, I don't care who the candidate is.
Thursday, April 3, 2008
Random Musings
Just a few tidbits from recent developments. First, the Paulson plan to revamp financial regulation. This thing will never see the light of day. Like most of Paulson's plans (HOPE NOW, etc., ad nauseum), it's meant to be a politically expedient show of action that will result in inertia. But it's the show that counts, especially in an election year.
None other than Chairman of the House Financial Services Committee Barney Frank has pledged that credit unions won't be abolished, as was suggested in the Paulson plan, which would combine all consumer financial institutions under a single charter and regulator. Other protected interests will also be preserved, so the plan will never come to fruition. Bush Administration officials have already acknowledged that it won't become law this year, and with a new administration in place next year - possibly a Democratic one - you can bet we'll never see anything that looks remotely like this plan become a reality.
Speaking of Paulson's plans, guess what the tab at the post office was for the notification letters of the coming tax rebate checks? Not the checks themselves, mind you, just the letters letting taxpayers know they might - or might not - be receiving a rebate? How about $42 million? Hey guys, I already knew I wasn't getting a rebate, so you could have saved a stamp on me. After all, it's my money.
********
What a week for stocks. This market just doesn't get the fundamentals. UBS takes the biggest write-downs in its history, cans its Chairman, says it's going to raise additional capital (which will just cover the write-downs), and the Dow goes up 400 points. Everybody (but me) says the write-downs show the worst is over - a total disconnect - and that the capital plan demonstrates that there is liquidity in the system. I'd prefer we wait until they actually get the capital to conclude that, especially given that the LIBOR-Fed funds spread is at its widest point of the year. Somebody out there doesn't think liquidity is ample, and there's a giant sucking sound coming out of wholesale financial institutions to prove it.
********
Bernanke (who is a pansy) got called on the carpet by the Joint Economic Committee last week for bailing out Bear Stearns. Thank God. Ben said Bear announced it was going to file bankruptcy the next day, so he had to act. Maybe I should announce I'm going to file bankruptcy tomorrow - can I get a bailout too? Just like Bear's - take all my debt and place it in a Delaware corporation owned by the Fed so the taxpayer can take the hit when I don't pay it, and write me a ten-year loan that I don't have to start paying back for two years, at the discount rate.
Iowa Senator Charles Grassley earned some respect points from me when he told Bernanke, "We want to know about precedent." (There is none, Chuck, this is bold new territory for the Fed.) Grassley said if the Fed is going to bail out other Street firms, it's "a very dangerous signal." (Yep.) And, correctly noting the moral hazard in Bernanke's reckless action, he said:
"People are willing to take chances if they think that the federal government is going to step in and bail them out all the time." (Emphasis added, and you're darn skippy.)
********
Hillary needs to fire whoever came up with the "3 a.m." ad series. The latest one is plain stupid: this time, the White House phone once again rings at 3 a.m., "only this time, it's a financial crisis." Let's see, the markets are closed, the banking system is closed, the Fed isn't meeting ... exactly what kind of financial crisis are we having at 3 a.m.?
********
The publication "Advisor Perspectives" recently contrasted two subprime analyses, one which said the worst is over and one which said we've only seen the tip of the iceberg (guess which camp I'm in?). The highlights:
The rose-colored glasses guy, Richard Bove, who recently said "the financial crisis is over," cites these reasons. First, he says the Fed's "brilliant" and "innovative" actions to date (more accurately described as "ill-conceived," "reckless," and "desperate") "go to the heart of the credit problem and, 'unlike printing money,' are not inflationary." Really? Since when is slashing the funds target not the same thing as printing money? And if it's not inflationary, why's inflation going up?
Second, he calls the notion that housing prices will continue to fall "dead wrong." He says that's "inconsistent with historical evidence, which shows that real estate prices do not drop during a period of commodity inflation." Fine, Dick, show me a period of commodity inflation which has featured an 11-month supply of empty houses, with a million more foreclosures forecast, in which housing prices were stable, and I'm in your camp. Until then, recognize that this is not your father's period of commodity inflation. The particular stew that has led to this combination is unprecedented.
Third, Bove expects a bailout of the housing industry. Fine. But if that happens, things will get much, much worse, even if they get a little better for a little while. Besides, how is the government going to bail out the housing industry? Buy all those empty houses? As support of this notion, Bove thinks the Paulson plan will become law, which is about as likely as me winning Olympic gold in speed skating. He actually cites the fact that it's an election year as making this more likely. If anything, it makes it far less likely, especially with a lame-duck Republican President and a Democratic Congress that's salivating at the prospect of winning the White House back.
Bove then compares the current crisis to the 1990 credit crisis, which was fueled by the S&L crisis. He notes differences between then and now that he argues tell us that things aren't nearly as bad now as they were then. For one, he says there are no problems with third-world debt, as there were back then. (Yet. But as this thing migrates throughout the world, it's coming.)
Two, he notes there have been no private equity failures this time. (Again, yet. But that industry is among the next dominoes to fall.) He notes that commodity prices are rising, not falling as they were in 1990. (And this is a good thing? Does he not recall the 1970s? Can he say "stagflation?") And he says the commercial real estate market doesn't appear to be facing "real problems and the default rates are low." (Again, yet. This is another domino that's already on its way down.)
Finally, he notes that unlike the prior crisis, no banks have failed. (Again, yet. Arguably, one already has, but the Fed bailed it out. And more are on the way. And not just banks and investment banks.)
In short, Bove can't come up with one supportable argument to make his case.
By contrast, Whitney Tilson says we're "in the early stages of the 'bursting of the Great Mortgage Bubble,'" with which yours truly wholeheartedly agrees. He notes that home prices have to fall 34% to return to their long-term trend (and I've noted that we overbuilt so much during the bubble that builders could just sit absolutely idle for a year and a half before we caught up with supply). He cites foreclosures up 57% and repossessions up 90% year-over-year as of January, and notes that 8.8 million homeowners are upside-down in their house, with 30% of subprime loans underwater.
That last statistic is frightening, as we've entered a new world of homeownership. It used to be that the home loan was the last thing Americans would default on. Now, it's the car payment and the credit card, with the rationale being "I need my car to go to work, and I need my credit card to float from month to month, but I can live anywhere." These days, everyone's a speculator when it comes to their mortgage: if the house is worth less than the mortgage today, people are just dropping the keys in the mailbox and walking. Apparently they don't understand that, long-term, the house price will appreciate, while mortgages amortize (well, except for negative-am subprime option ARMs). Of course, who thinks long-term anymore?
Tilson further notes that about $440 billion of ARMs will reset this year, and in spite of the Fed's rate cuts, mortgage rates aren't going down. (In fact, I predict they'll go up throughout the year, even as the Fed continues to ease, due to inflation pressures at the long end of the curve and continued widening of credit spreads as other loan types show increasing default rates, something that's already showing up in credit cards and auto loans.)
Tilson cites the worst of these loans, those with two-year teasers, the bulk of which were underwritten in 2005 and 2006. Noting that there's about a 15-month lag between the first missed payment and foreclosure, he projects at least two years of trouble from this cohort of loans. His data illustrates that "the best quality two-year teaser loans made in 2005 are defaulting at annualized rates of 35%-46%. The worst quality of these two-year teaser loans are defaulting at 48% annually before the reset kicks in, and at 7%-8% per month immediately thereafter." Yikes.
For what it's worth, "Advisor Perspectives" agrees with Tilson, and thinks Bove's all wet. And so do I.
None other than Chairman of the House Financial Services Committee Barney Frank has pledged that credit unions won't be abolished, as was suggested in the Paulson plan, which would combine all consumer financial institutions under a single charter and regulator. Other protected interests will also be preserved, so the plan will never come to fruition. Bush Administration officials have already acknowledged that it won't become law this year, and with a new administration in place next year - possibly a Democratic one - you can bet we'll never see anything that looks remotely like this plan become a reality.
Speaking of Paulson's plans, guess what the tab at the post office was for the notification letters of the coming tax rebate checks? Not the checks themselves, mind you, just the letters letting taxpayers know they might - or might not - be receiving a rebate? How about $42 million? Hey guys, I already knew I wasn't getting a rebate, so you could have saved a stamp on me. After all, it's my money.
********
What a week for stocks. This market just doesn't get the fundamentals. UBS takes the biggest write-downs in its history, cans its Chairman, says it's going to raise additional capital (which will just cover the write-downs), and the Dow goes up 400 points. Everybody (but me) says the write-downs show the worst is over - a total disconnect - and that the capital plan demonstrates that there is liquidity in the system. I'd prefer we wait until they actually get the capital to conclude that, especially given that the LIBOR-Fed funds spread is at its widest point of the year. Somebody out there doesn't think liquidity is ample, and there's a giant sucking sound coming out of wholesale financial institutions to prove it.
********
Bernanke (who is a pansy) got called on the carpet by the Joint Economic Committee last week for bailing out Bear Stearns. Thank God. Ben said Bear announced it was going to file bankruptcy the next day, so he had to act. Maybe I should announce I'm going to file bankruptcy tomorrow - can I get a bailout too? Just like Bear's - take all my debt and place it in a Delaware corporation owned by the Fed so the taxpayer can take the hit when I don't pay it, and write me a ten-year loan that I don't have to start paying back for two years, at the discount rate.
Iowa Senator Charles Grassley earned some respect points from me when he told Bernanke, "We want to know about precedent." (There is none, Chuck, this is bold new territory for the Fed.) Grassley said if the Fed is going to bail out other Street firms, it's "a very dangerous signal." (Yep.) And, correctly noting the moral hazard in Bernanke's reckless action, he said:
"People are willing to take chances if they think that the federal government is going to step in and bail them out all the time." (Emphasis added, and you're darn skippy.)
********
Hillary needs to fire whoever came up with the "3 a.m." ad series. The latest one is plain stupid: this time, the White House phone once again rings at 3 a.m., "only this time, it's a financial crisis." Let's see, the markets are closed, the banking system is closed, the Fed isn't meeting ... exactly what kind of financial crisis are we having at 3 a.m.?
********
The publication "Advisor Perspectives" recently contrasted two subprime analyses, one which said the worst is over and one which said we've only seen the tip of the iceberg (guess which camp I'm in?). The highlights:
The rose-colored glasses guy, Richard Bove, who recently said "the financial crisis is over," cites these reasons. First, he says the Fed's "brilliant" and "innovative" actions to date (more accurately described as "ill-conceived," "reckless," and "desperate") "go to the heart of the credit problem and, 'unlike printing money,' are not inflationary." Really? Since when is slashing the funds target not the same thing as printing money? And if it's not inflationary, why's inflation going up?
Second, he calls the notion that housing prices will continue to fall "dead wrong." He says that's "inconsistent with historical evidence, which shows that real estate prices do not drop during a period of commodity inflation." Fine, Dick, show me a period of commodity inflation which has featured an 11-month supply of empty houses, with a million more foreclosures forecast, in which housing prices were stable, and I'm in your camp. Until then, recognize that this is not your father's period of commodity inflation. The particular stew that has led to this combination is unprecedented.
Third, Bove expects a bailout of the housing industry. Fine. But if that happens, things will get much, much worse, even if they get a little better for a little while. Besides, how is the government going to bail out the housing industry? Buy all those empty houses? As support of this notion, Bove thinks the Paulson plan will become law, which is about as likely as me winning Olympic gold in speed skating. He actually cites the fact that it's an election year as making this more likely. If anything, it makes it far less likely, especially with a lame-duck Republican President and a Democratic Congress that's salivating at the prospect of winning the White House back.
Bove then compares the current crisis to the 1990 credit crisis, which was fueled by the S&L crisis. He notes differences between then and now that he argues tell us that things aren't nearly as bad now as they were then. For one, he says there are no problems with third-world debt, as there were back then. (Yet. But as this thing migrates throughout the world, it's coming.)
Two, he notes there have been no private equity failures this time. (Again, yet. But that industry is among the next dominoes to fall.) He notes that commodity prices are rising, not falling as they were in 1990. (And this is a good thing? Does he not recall the 1970s? Can he say "stagflation?") And he says the commercial real estate market doesn't appear to be facing "real problems and the default rates are low." (Again, yet. This is another domino that's already on its way down.)
Finally, he notes that unlike the prior crisis, no banks have failed. (Again, yet. Arguably, one already has, but the Fed bailed it out. And more are on the way. And not just banks and investment banks.)
In short, Bove can't come up with one supportable argument to make his case.
By contrast, Whitney Tilson says we're "in the early stages of the 'bursting of the Great Mortgage Bubble,'" with which yours truly wholeheartedly agrees. He notes that home prices have to fall 34% to return to their long-term trend (and I've noted that we overbuilt so much during the bubble that builders could just sit absolutely idle for a year and a half before we caught up with supply). He cites foreclosures up 57% and repossessions up 90% year-over-year as of January, and notes that 8.8 million homeowners are upside-down in their house, with 30% of subprime loans underwater.
That last statistic is frightening, as we've entered a new world of homeownership. It used to be that the home loan was the last thing Americans would default on. Now, it's the car payment and the credit card, with the rationale being "I need my car to go to work, and I need my credit card to float from month to month, but I can live anywhere." These days, everyone's a speculator when it comes to their mortgage: if the house is worth less than the mortgage today, people are just dropping the keys in the mailbox and walking. Apparently they don't understand that, long-term, the house price will appreciate, while mortgages amortize (well, except for negative-am subprime option ARMs). Of course, who thinks long-term anymore?
Tilson further notes that about $440 billion of ARMs will reset this year, and in spite of the Fed's rate cuts, mortgage rates aren't going down. (In fact, I predict they'll go up throughout the year, even as the Fed continues to ease, due to inflation pressures at the long end of the curve and continued widening of credit spreads as other loan types show increasing default rates, something that's already showing up in credit cards and auto loans.)
Tilson cites the worst of these loans, those with two-year teasers, the bulk of which were underwritten in 2005 and 2006. Noting that there's about a 15-month lag between the first missed payment and foreclosure, he projects at least two years of trouble from this cohort of loans. His data illustrates that "the best quality two-year teaser loans made in 2005 are defaulting at annualized rates of 35%-46%. The worst quality of these two-year teaser loans are defaulting at 48% annually before the reset kicks in, and at 7%-8% per month immediately thereafter." Yikes.
For what it's worth, "Advisor Perspectives" agrees with Tilson, and thinks Bove's all wet. And so do I.
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