Guest post by Doug Short.
I’ve updated the charts below through today’s close. The S&P 500 is now 7.66% off its interim high set on September 14th, the day after QE3 was announced. We’re still above the 10% correction benchmark. The 10-year note closed today at 1.58, which is 30 basis points off its interim high of 1.88, also set the day after QE3 was announced. The historic closing low was 1.43 on July 25th. But the big news today is Freddie Mac’s Weekly Primary Mortgage Market Survey. The 30-year fixed has set an all-time low of 3.34 percent.
Are yields heading lower? If the post-election selloff in equities continues, the 10-year yield could certainly revisit the levels of late July. Japan is an example (admittedly an extreme one) of a developed nation with its own currency that has experienced a relentless demand for government bonds, as this chart illustrates. Currently Japan’s 10-year yield is around 0.75, less than half that if its US counterpart.
Here is a snapshot of selected yields and the 30-year fixed mortgage one week after the Fed announced its latest round of Quantitative Easing.
Latest research by Ice Cap Asset Management.
Imagine a World where all bank tellers, bank voicemail messages, bank emails and even bank faxes all end with – “Dude, I owe you big time.”
“Thank you, have a nice day, sincerely yours, and do not hesitate to contact us” will all become niceties from the past.
As far as we are concerned, there have only been two dudes in the history of the World. The 1982 Hollywood hit Fast Times at Ridgemont High produced Jeff Spicoli as the World’s very first dude. It wasn’t until 16 years later we were gifted the dude of all dudes – Jeff Lebowski from The Big Lebowski.
Yet, today, for some strange reason the big banks feel the need to expand their World domination strategy and position themselves right next to the dude. And with that, the righteous title of dude will be tarnished forever more.
Of course, to understand the big banks sudden interest in becoming dudes, we have to step deep into the cryptic World of the London Interbank Offered Rate, or LIBOR for short, or soon to become LieBOR for everyone else.
Guest post by Azizonomics.
Something very interesting is happening.
There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.
But there’s something brewing that looks like it might be a blueprint to effectively take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well the program will work, but it’s certaily been effective in scaring the hell out of Wall Street.
Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble.
Almost 24% of homes with a mortgage in the United States are underwater, meaning that more is owed on the loan than the property is currently worth. A new company known as Mortgage Resolution Partners is proposing to work with municipal governments to use eminent domain to seize underwater mortgage loans and restructure them at a discount to the borrower. Eminent domain has never been used to obtain mortgage loans. Richard Leland and Robert Hockett talk with Bloomberg Law’s Lee Pacchia about the legalities surrounding this plan.
Must see video below.
Guest post by Azizonomics.
Meet James. James bought a house. It cost him $150,000, of which $30,000 had come from his own savings, leaving him with a $120,000 30-year fixed-rate mortgage from the WTF Bank, with a final cost (after 30 years of interest) of $200,000. Now, up until the ’80s, a mortgage was just a mortgage. Banks would lend the funds and profit from interest as the mortgage is paid back.
Not so today. James’s $200,000 mortgage was packaged up with 1,000 other mortgages into a £180 million MBS, (mortgage backed security), and sold for an immediate gain by WTF Bank to Privet Asset Management, a hedge fund. Privet then placed this MBS with Sacks of Gold, an investment bank, in return for a $18 billion short-term collateralised (“hypothecated”) loan. Two days later Sacks of Gold faced a margin call, and so re-hypothecated this collateral for another short-term collateralised $18 billion loan with J.P. Morecocaine, another investment bank. Three weeks later, a huge stock market crash resulted in a liquidity panic, resulting in more margin calls, more forced selling, which left Privet Asset Management — who had already lost a lot of money betting stocks would go up — completely insolvent.
You should be. This is of course a fictitious story. But the really freaky thing is that this kind of scenario — the packaging up of fairly ordinary debt into exotic financial products, which are then traded by hundreds or even thousands of different parties, has occurred millions and millions of times. And it is extremely dangerous. When everybody is in debt to everybody else through a complex web of debt one small shock could break the entire system. The $18 billion debt that Privet owed to Sacks of Gold could be the difference between Sacks of Gold having enough money to survive, or not survive. And if they didn’t survive, then all the money that they owed to other parties, like J.P. Morecocaine, would go unpaid, thus threatening those parties with insolvency, and so on. This is called systemic risk, and shadow banking has done for systemic risk what did the Beatles did for rock & roll: blow it up, and spread it everywhere.
Neel Kashkari on the very few housing winners.
Since the housing downturn that began in 2007, policymakers in both parties have implemented numerous programs to modify loans and help homeowners avoid foreclosures. Sadly, none of these programs has lived up to its goals. With each missed expectation, advocates identified the next impediment and offered the next silver bullet. But there is a reason all these programs have fallen short — and why in-kind successors will, too.
When I worked in the Treasury Department, my colleagues and I evaluated hundreds of mortgage modification proposals and started several. At the same time, Congress and several states put in place their own plans. Hope Now. The rate-freeze plan. Hope for Homeowners. The basic thesis behind such programs is that foreclosures are very costly to everyone involved: Tens of thousands of dollars are needlessly poured down the drain when a house goes through foreclosure. A bank’s recovery on its loan is severely impaired. Homeowners are out on the street. Neighborhoods are blighted. If, however, a compromise is reached, everyone wins: Banks recover more, families stay in their homes and neighborhoods are strengthened. With so many different modification programs, why haven’t more struggling homeowners been helped?
Full article here.
Spain is reaching that “when it rains…” moment. Unemployment is taking out new highs, PMI is falling off the cliff, the new PMs honeymoon is over and the property collapse is about to happen. Prices have come off from their highs, but it is not until this year we can expect the real downturn as the banks are forced to start hitting the market with their inventories of empty properties. If you think the US had a bubble, Spain is much worse. The big elephant in the European room is in motion. From Bloomberg.
Spanish home prices are poised to fall the most on record this year, leaving one in four homeowners owing more than their properties are worth, as the government forces banks to sell real-estate holdings.
Home prices will decline 12 percent to 14 percent, according to research and advisory company R.R. de Acuna & Asociados, after Economy Minister Luis de Guindos in February gave lenders two years to make 50 billion euros ($67 billion) of additional provisions and capital charges for losses linked to real estate. That’s the most since the National Statistics Institute started tracking values in 2007. Standard & Poor’s forecasts borrowers with negative equity may rise to 25 percent this year from 8 percent in 2010, based on an analysis of 800,000 mortgages.
As our readers know, The Trader has been very negative on the Spanish Economy and the Spanish markets. The focus seems to be shifting towards the Iberian Peninsula in an intensive fashion over the past days. Monti is out talking negatively of Spain, as well as other Eurocrats. The huge problems Spain is facing are probably too big to quick fix. The unemployment is a structural issue and will take many years to fix. The property sector, bottoming out by many pundits, creating great value buys for the cash rich investor, is a total fallacy according to us. The sector has come down, but the big sell off is still to come. There are simply way too many empty properties, not attracting buyers. These prices will need to change drastically, in order to start attracting real buyers. Many homeowners are not willing to realize that the Spanish property market will start selling under construction cost. Buying land and putting a house on it, won’t trade at a net premium, but on the contrary, will trade at discount. This is taking private owners time to realize, just as the banks are finding it hard to realize, their stock of unsold homes, is not worth where they “think” it is. Latest on the Spanish mortgages, from El Pais (via Google).
The number of home mortgages fell 41.3% in January to reach 29,167, according to data released this morning by the National Institute of Statistics. Thus, the amount of 21 months mortgaged leads downwards.The decline experienced in January was more pronounced than that of December, when the number dropped by 32%.
The average mortgage in January reached the 107,217 euros, 9.5% less than the same month last year, while the borrowed capital was reduced by 46.9% to 3,127,000. Year despite the drop in rate compared to December rose 18.5%, from 24,610 till 29,167.