Housing Doom

Final risk. The increasing asset prices we’ve seen since March for everything: global equities; in US, equities; EM [emerging market] asset classes; commodity; credit; everything around the world is driven by one factor.

Doom Transcripts: Index & Guide

The penultimate risk was merely the prospect of World War III breaking out.  Fortunately Nouriel was running overtime so Alex had to cut him short just before he got to the scary bit

UPDATE (11/6): Here’s Nouriel’s Nov 4th expansion on the idea

Housing Doom is pleased to present a fourth selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

Dr. Doom was batting cleanup …

Nouriel Roubini: [0:37:03] OK. Tom spoke about housing and mortgages. What Chris spoke about — the banks. So I’ll try to speak about the economy and what’s going to happen to the economy looking ahead.

We’ve had the most severe recession and financial crisis since the Great Depression. Given the monetary and fiscal stimulus and the backstopping of the financial system now we’re close to the bottom, at least on a temporary basis.

And now the debate is, of course, on what’s going to happen — the shape of the recovery. Given what has happened in the markets I would say the markets are pricing now a V-shaped recovery with rapid return to potential growth, and that’s even what the macro forecasters’ consensus is.

There is a second view, which is the one I share, is that this recovery is going to be at best an anaemic, subpar, below trend, with growth well below trend for the next couple of years, much as in the US, but also in advanced economies. So more like a U-shaped recovery. That’s also the view of the IMF and the one of those folks at PIMCO who are talking about A New Normal.

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When no one calls to see a vacant listing for awhile, some agents don’t bother stopping by.  This can be the result: [Thanks L!]

A recent scam reported in the Phoenix area involves tenants moving into a pending short sale listing. The surprised listing agent contacted the owner who had not rented the property to anyone. The tenants (two women with two children) were physically moving in and had turned on utilities in their name. The sign and the lock box were removed, and all locks were re-keyed. 

The tenants responded to a "For Rent" sign in the yard. They gave someone $1,800 as rent and signed a lease. While the short sale was able to close, the unfortunate victims of this scam were out $1,800 with no place to live.
 
This down economy encourages some people to take advantage of others.  Listing agents should check their vacant listings regularly and provide neighbors their contact information in case they observe any suspicious activity.

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Doom Transcripts: Index & Guide

Housing Doom is pleased to present a third selection from our under-construction transcript of the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹

The event site has a number of resources, including an audio and video of the proceedings. There is as yet no official transcript.

This is the presentation by IRA co-founder Chris Whalen.  I see Nouriel on deck, but this one’s going to be a tough act to follow.

So this is what the commenters at Calculated Risk have been going on about …

Chris Whalen: [0:27:02] I’m going to talk a little bit about the industry because we’re in the middle of earnings season, and I apologize for not preparing something, but I’ve been reading bank earnings statements, so I will share some of my impressions of that. And then I want to talk a little bit about not only lessons, but some of the enduring trends that I see that have not been affected by the extensive bailout that the government has put together for our largest financial institutions.

In general, when you look at the industry you have to recall the words of Mr. Feinberg, and I don’t mean the guy who was in the newspaper today, I mean my friend Bob Feinberg in the back of the room, who predicted several years ago in an interview we published that the GSE would become the business model of choice for the United States.

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We’ve had hearings, and proposals and talk about ending the abuses of subprime lending.  At the end of the day though, whatever has been done has just been talk.  Toxic loans continue to be made every day.  This time around however it’s not the "greedy lenders" and "greedy mortgage brokers" seeking obscene profits that are driving the market- now it’s the government making the loans to try and perpetuate the illusion of a stabilizing mortgage market.

So you thought easy-money mortgages with little or no down paymentfor people with bad credit was a thing of the past? Think again.

You can get just such a loan today - and it’s guaranteed by the federal government.

Loans insured by the Federal Housing Administration (FHA) have become the new subprime, and these loans are exposing taxpayers to the same kinds of soaring default rates and losses that brought down Fannie Mae and Freddie Mac as well as destroyed many banks and the private market for mortgage loans.

While private lenders learned a lesson from the mortgage crisis and are shying away from easy-money loans, the FHA has stepped into the breach. The agency has provided backing for 37 percent of all mortgages used to buy homes this year.

Here’s one disturbing example of one of those "new subprime" loans:

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Every time I see one of these stories it breaks my heart.  How sad that anyone thinks that life isn’t worth living after losing a home.

Kurt Aho’s home was sold at a foreclosure auction on Tuesday.  When the new owners came by and asked him when he was going to vacate, he shot out their tires.  He had a beer with a neighbor right before the police came:

Jeffrey Hobson said he shared a final beer with Aho moments before the confrontation. He said he worried when Aho told him he wanted to die.

“He said, ‘When the cops get here either I’m gonna die by them or I’m gonna kill myself,’” said Hobson. “They gave him exactly what he wanted.”

Neighbors who witnessed the incident around 4:30 p.m. said Aho paced the cul-de-sac with gun in hand after chasing away the new owners. As officers ordered him to drop his weapon, the self-employed contractor ignored them, walking back to his home to fetch fresh beers.

Officers first shot Aho with rubber bullets, hitting him in the arm. Aho then fired twice at officers, striking the SWAT team’s armored vehicle with one shot, according to James Holmes, a Phoenix police spokesman.

Aho, who suffered from recurring bouts of cancer and was having a hard time finding work told neighbors he had nothing left to live for. 

L checked on the financing of Aho’s home and discovered that Aho refinanced in 2005 for $99,000.  In 2007 he took out a $176,000 HELOC.  L is a big advocate of people being responsible for their actions and not just blaming the lenders.  He did however have this comment:

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There are some who think it’s time for the central bank to exit the market. Others say such an abrupt end would undo the Fed’s efforts to keep mortgage rates low and instead suggest a gradual wind down of its purchases and an extension of the program into the early months of next year. - Nasdaq¹

A year ago last Friday, exactly 7 years and 7 days after 9/11, the US became a command economy.

Now, in a "fit of absent-mindedness," key agencies of American financial policy find themselves with side-businesses as Soviet-era economic secretariats, and they don’t quite know what to do about it.

Starting from zero eight and a half months ago, the Federal Reserve Board has gorged on $685 billion worth of mortgage-backed securities, making "the Fred" America’s dominant player in residential real estate.

Meanwhile, thanks to the 9/11 ‘09 collapse of Corus, the Federal Deposit Insurance Agency has suddenly been propelled into a leading role in commercial RE.

Dow Jones is covering both aspects of the story, framing it as an effort to return to capitalist business-as-usual, but Murdoch’s deploying his bigger guns² against the commercial side, as Ms Bair prepares to impersonate Jesse Jones, hopefully without "discovering" prices for strip malls in the Ghost Towns in the desert around Las Vegas that will send CMBS asset prices (and the holders of such assets) straight into the tank.

The Corus transaction is being structured as a partnership between the agency and winning bidder. The FDIC will hold a 60% stake and provide financing, according to people familiar with the matter. While seven other FDIC deals since 2008 have had similar partnership structures, the Corus deal is by far the largest. A similar arrangement was made in last week’s sale of $1.3 billion in residential mortgages to a venture between the FDIC and Residential Credit Solutions Inc., these people said.

The public-private partnership structure is modeled on about 70 such deals pioneered by Resolution Trust Corp., a federal agency formed to clean up the savings-and-loan mess of the late 1980s and early 1990s. Rising property values in the mid- and late-1990s enabled the RTC to reduce taxpayer losses.

Still, the partnerships expose the U.S. to more financial risk than it might face by selling assets completely to private investors. The Corus auction also is complicated by an oversupply of condos in some of the same states where Corus concentrated its lending, such as Florida, California and Nevada.

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“I’ve recently seen some cases where banks that participated in the CDARs program were cited for accepting third-party brokered accounts,” van Doorn said, referring to the Certificate of Deposit Account Registry Service that lets banks join a network and place funds into certificates issued by other network-member banks. “It’s still an open issue.” - NJ Biz¹

I had to go back a couple of weeks to find that single item suggesting that there may possibly be a moral hazard problem with CDARS.

Indeed, there seems to be an ominous reluctance in the mainstream media for bringing up CDARS in connection with the FDIC, even as the deposit insurance agency  is struggling⁴ against the perception that it may require a bailout of its deposit fund.  Nevertheless, if I’m reading the tea leaves correctly on this really obscure piece,² there’s a serious war going on under the covers between an alarmed regulatory community and a lot of bankers who don’t want to see this particular moral hazard gravy train pulled off the tracks.

Other recent comments include letters from: J.​P. Morgan Investor Services Co., who argues that the second business day filing deadline [​for portfolio holdings] may pose a significant logistical challenge; Fannie Mae, who worries that "preserving the interest rate reset maturity shortening provisions for government securities that have a maturity of 731 days or less will both minimize market disruption and enable issuers of government securities to continue to meet critical internal funding needs"; the Independent Community Bankers of America, who say they are "concerned that these amendments to Rule 2a-​7 may unnecessarily restrict MMF investments in FDIC-​insured certificates of deposit (​CDs) (​CDARS and similar programs are considered "​illiquid," ICBA explains); and, Nuveen Investments, who objects that the, "requirement that the underlying bond be rated in the highest short-​term or long-​term rating category represents a change from the current rule, which requires a rating ‘​within the NRSROs’ two highest short-​term or long-​term rating categories.’" (​Nuveen says, "​Such a change would greatly reduce the amount of tender option bonds that could be acquired by tax-​exempt money market funds.")

LATER: Just had a look at the Independent Bankers Association’s comment document.³ Short, but a fascinating read. These guys seem to think that the registry magically turns their CDs into US sovereign debt instruments, sort of private treasuries with higher yields. Cute.

Since the CDARS program provides an excellent source of liquidity and funding for community banks, we urge the SEC to consider treating fully-insured CDs as “liquid securities” for purposes of Rule 2a-7 so that MMFs can hold them without restriction. CDs acquired using CDARS are fully protected by the FDIC. Unlike other illiquid securities, MMFs do not need to rely on market quotations to determine the value of a CD. Fully-insured CDs should also be considered “government securities” since they are backed by the FDIC’s Deposit Insurance Fund, a line of credit from the U.S. Treasury Department, and the full faith and credit of the U.S. government.

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No wonder China is so angry about the derivatives losses being realized by their State Owned Enterpises. The manipulation around key prices and dates in many US markets has been apparent for some time, with a wink and a nod around option expirations for example.

Thank heavens for Creative Commons. "Jesse" is outraged here about some of the things I’ve been ranting about lately.  But "his" rants are so much more elegant

"Let’s Just Whack the Oil"

Jesse’s Café Américain

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Reading the NY Times article excerpted below, one finds that Optiver is a rather small time operation with a wonkish bent operating out of the Netherlands, with profits that barely match a decent US tradering department’s annual bonus.

But the method which they are using is similar to the techniques being used by many of the large ‘market makers’ who are ‘providing liquidity’ while reaping large and improbably consistent profits by manipulating markets.

The manipulation itself is nothing new. Large Wall Street banks have been using their size to push the markets around for many years, as in the case of Citigroup which was caught manipulating prices in European bond trading. Citigroup Fined Over ‘Dr. Evil Bond Strategy

Then of course there was the manipulation of the energy markets by Enron, which held the state of California hostage.

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“These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues. - NYT¹

Maybe Doomers should start paying attention to the Optiver Inquiry.^{2 3} The write-up¹ in the NY Times is both detailed and fascinating.  While the immediate issues seem to be limited to some species of flash options strategy on commodity markets, the Commodity Futures Trading Commission (CFTC) appears to be delving into low-latency, co-location and the whole High-Frequency Trading (HFT) package.

Indeed, this little gem could have come right out of the Aleynikov Affair / Teza playbook.

… And [Optiver] is so careful about preserving its secrets that when some traders and engineers left for a rival operation recently, Optiver hired private investigators and subsequently sued the former employees on charges of making off with intellectual property.

Perhaps the SEC can go to school on this one.  Is it possible that there may be players right at the center of the equities markets who bear a passing resemblance to Quast’s characterization?

LATER: OK, here’s the short version,⁴ (hat tip MoneyShow)

Why the little guy keeps getting killed:

1. High-Frequency Trading
2. Flash Orders
3. Dark Pools

………………………………………………

UPDATE (9/4): Jesse’s on the job (see the Doom repost) and ZeroHedge is all over it,⁵ including this wacky Optiver Australia recruiting video.

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After prompting from an IRS auditor, the agency will study whether it should make greater use of data on mortgage-interest payments provided to it by banks. The IRS currently uses such data to send notices to non-filers who it believes should have filed a return. - WSJ¹

No good deed goes unpunished, eh? 

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