A Sacramento mortgage lender's vision

General Motors is now openly seeking emergency Government assistance, saying "[it] may not have enough cash to keep operating this year and will fall ``significantly short'' of the amount needed by the end of June unless the auto market improves or it raises more capital".

Land America and Fidelity National title announced a merger today to the tune of 128 million. This deal would consolidate a combined market share of 46% of all nationwide transactions. The real estate industry greets this with a collective sigh...title and escrow orders on REO (bank owned) transactions have been slow, mistake prone and badly affected by poor customer service. One wonders if the inevitable layoffs resulting from this merger will help the situation.

Berkshire Hathaway, Warren Buffet's investment vehicle posted a 4th straight consecutive decline...this time a 77% decline in profits.  I mentioned earlier that Buffet has been running around making all sorts of investments...28 billion this year so far. If you consider his impressive track record this is no surprise at all...Buffet seems to thrive in down markets.Can we expect anything less from the guy who owned land when he was 11, made millionaire in his 20's and bought the Washington Post in his 30's, the paper he delivered as a child.

In other news, Barrack Obama showed some restraint by not jumping fully into the economy issue, and instead vowed to push an economic stimulus package through Congress  "immediately after'' taking office in January if lawmakers and the Bush administration can't agree on one before then. This comes on the dismal news that U.S. unemployment rate for October rose to the highest level since 1994 as companies slashed payrolls...to 6.5% from 6.1% (September). It seems that Obama has inherited quite the red headed stepchild. We need a FDR style leader to get us out of this jam- Obama has shown his charisma and political savvy, but can he lead? The jury is out....

1. The New York-based Conference Board’s index of consumer confidence was at 38 in November, matching the lowest level since monthly data began in 1967.

2. In emergency action over the weekend, the Federal Reserve rescued  Citigroup, giving the bank government guarantees for troubled mortgages and toxic assets plus $20 billion in cash. This equates to the US taxpayer taking responsibility for over $306 billion in illiquid and highly dangerous Citigroup securities.

3. Global financial firms have reported about $969 billion in losses linked to the meltdown in the U.S. subprime mortgage market to date.

4. 10 Year bond yields dropped to 2.99 percent on Nov. 20, the lowest since Fed records on the figure started in 1962.

5. A report from S&P/Case-Shiller may show a record 16.9 percent drop in home prices in the 12 months ended Sept. 30.

6. A separate government report confirmed the decline in property values accelerated. Home prices fell 1.3 percent in September from the previous month, the biggest one-month drop since records began in 1991, FHA said today. The GDP report also showed consumer spending, which accounts for more than two-thirds of the economy, dropped at a revised 3.7 percent annual rate in the third quarter, more than the 3.1 percent decrease estimated by Commerce last month.

7. The Federal Reserve took two new steps to unfreeze credit today for homebuyers, consumers and small businesses, committing up to $800 billion. The central bank will purchase as much as $600 billion of debt issued or backed by government-chartered housing-finance companies, such as Fannie, Freddie and Ginne Mae.

8. According to preliminary data, the funding and liquidity crisis is spreading to the credit card and student loan markets.

9. Interest rates on U.S. commercial paper fell to the lowest in at least 12 years.

10. The U.S. dollar will be ``devalued'' as policy makers seek to weaken it, undermining the greenback's role as an international reserve currency, said Jim Rogers, chairman of Rogers Holdings in Singapore. Every action taken by the Federal Reserve has an immediate negative effect on the dollar.

citations here here and here, thanks to www.bloomberg.com

The Dow closed at 7,552 today, after breaking through the 8K support level yesterday. This was on continued concerns of a faltering economy which was signaled by a drop in inflation, at least in reported CPI numbers. We are seing a ripple effect by the always important price of oil, which has continued to remain low. Low oil means low gas, and low gas means lower transport costs, driving the overhead of the food, transportation and retail industries down for example. Meanwhile, this lower consumer price data is indicating a possible recession, fueling another flight to the relative safety of US government bonds. In fact, the benchmark 10-year yield dropped 31 basis points to 3.02 percent at 4:48 p.m. in New York, according to BGCantor Market Data. This is the lowest since at least 1962. 

It is important to note that the US Government has revised several times the way it measures CPI (core price inflation)

Another new low: the S&P 500 closed at the lowest today in 11 years. The Dow is near it's lowest in 6 years, which would be 7,286.27 on October 9, 2002. (the depths of the .com bust).

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by the U.S. government, are suspending foreclosures beginning next week through Jan. 9. It is unknown how much benefit this 6 month moratorium will provide.

SacBee reports Sacramento's median home price falls below $200,000 The symbolic drop -- to $195,000 -- came exactly one year after the county's median sales price for the same category fell below $300,000.  The numbers (provided by dataquick) are downright frightening. These prices however are fueling a buying frenzy, which has been showing regular increases in sale volume over the past 7 months.  Anyone involved in real estate below the magic $250,000 threshold can tell you that foreclosures are red hot...some sitting on the market for as little as 1 day before generating multiple offers.

Finally, this disturbing article from MarketWatch reports the findings of Lender Processing Services, a company which tracks payment histories of loan modifications on modified mortgages, states that even after a lender renegotiates terms on a mortgage, over half of the borrowers default again after a few payments.  This may be a bitter taste for the handful of lenders who are making things easier for their borrowers by reducing rates or modifying terms. After all, if half the people you try to help will simply default again, what's the point of trying to help at all?

A global conference on the economic crisis started today in Washington. World leaders could agree on little except to continue efforts to "spend their way out of recession". Statistics published within the last 24 hours showed deterioration in economies around the world. The 15-nation euro area fell into its first recession in 15 years; retail sales in the U.S. fell by the most on record in October; and Chinese industrial production gained last month at the slowest pace in seven years.

Oil Slides to $56/barrel, devastating 3rd world countries such as Ecuador, who today announced they were considering defaulting on some of their Government debt.

Oil is off peak more than 50% from just 3 months ago. This can be attributed mainly to speculators, who buy and sell futures contracts promising to purchase set amounts of barrels sometime in the future. Since the economy is showing weakness, it's expected the demand will fall. Yet the ironic thing is its not the actual demand slowing that is causing this fall in oil price, it's speculators expecting the demand to slow and closing out their positions.  In this way, the price of oil usually has little relevance to it's actual value as a commodity.

In other headlines: October Retail sales and prices of goods imported to the U.S. dropped by the most on record. This triggered a run on retail based US companies such as Sears. Federal Reserve Chairman Ben S. Bernanke said central bankers worldwide are prepared to take additional actions as needed to unfreeze credit markets. There does seem to be minor improvements in the cash flow and liquidity of our private and government banks. In this bloc article I noted the disturbing spike in the LIBOR benchmark rate...the 1 month LIBOR has now fallen to 1.48% from 4.47% a month ago. This is great news...but the commercial paper market seems to be in seizure still, and the bond yield curves are still out of whack, and for good reason.

The good news is these factors are combining to make housing prices quite attractive to the people that can qualify.

The program applies to loans held by Fannie Mae/Freddie Mac only. Slated to go into effect December 15th, and administered by the Federal Housing Finance Agency, this is the latest life preserver being thrown at the mortgage titanic.  Public perception of this latest action is negative, with some voicing the opinion of "too little, too late".

Matter of fact the original Economic Stimulus package (which raised both FHA and conventional loan limits) that passed last year hardly went as intended. The idea was to get lenders to write loans in the higher amounts and free up the markets. What instead happened is lenders do write these larger loans but impose much higher credit score, down payment, and debt-to-income restrictions on them, with the result that they go to almost nobody that needed them. A similar story played out with the FHA Secure program, which offered help to people behind on their mortgage payments. But the caveat was, to be eligible, you could miss not more than 3 payments, they had to be consecutive, could not have missed any other credit payments, and you had to have a minimum credit score.  In other words it is extremely unlikely that anyone who actually needs it qualifies. 

Another brilliant execution is the Hope for Homeowners program, which to this date no lender will fund, meaning no broker or bank can offer it to the consumer. The few people getting help under the program are working directly with the servicers of their loans.  Meanwhile, unscrupulous, unregulated loan modification companies are charging exorbitant fees to desperate consumers.  The situation is bleak...experts agree a concerted, unanimous, effort needs to be made by the ENTIRE Government and ALL banks and servicers.

Compounding the problem is the actions of US Secretary of the Treasury Henry Paulson. Not only is the Troubled Asset Relief Program funds going places other than promised, but Paulson continues to refuse to disclose Treasury actions. This goes against his promise to do so and continues to spark outrage. Paulson said today that the second half of the 700 billion (slated to purchase mortgage backed securities) will now be instead sent to lenders in the credit card, auto and student loan industries.  An example would be the 25 Billion dollar rescue plan proposed by House Financial Services Committee Chairman Barney Frank today. Can this get anymore insane? Let's review:

1. The bailout plan gets passed under extreme pressure and emergency, just like the Patriot act and the Iraqi war.
2. Command of the funds is given to a 32 year veteran of Wall Street, who served as CEO of Goldman Sachs just a couple years ago, who has a net worth of $700,000,000.00.
3. Transparency, disclosure and oversight is promised to Congress. It is not delivered, just like the Iraqi war.
4. The application of the funds and authority is nothing like as promised, just as before.

What is wrong with this picture?

In an astounding move, the Federal Reserve today appointed American Express as its de facto bank holding company. This is strange because AMEX only operates a very small bank, American Express Centurion Bank, as well as a savings and loan, American Express Bank. Originally designed to assist banking institutions only, the Fed has been throwing it's borrowing windows open to a variety of industries; to date Securities, Brokerages, Insurance and now Credit Cards. It is open to speculation what the outcome of this might be.

This comes on the heels of public outrage at failure by the Fed to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.  A lawsuit filed by Bloomberg News last week speaks for the fact that Americans have no idea where their money is going or what securities the banks are pledging in return.

Other news that won't let you sleep at night: A very deep connection between Obama and Google has been revealed. From massive campaign contributions to Google CEO Eric Schmidt flanking President-elect Barrack Obama during his first post-election press conference, this is bad news indeed for what little competition Google does have(currently Google has 60-70% market share).

As it turns out, China is taking a beating along with everyone else. it seems an end to the phenomenal bull run the Chinese markets have been on has come, with their announcement of their own "Stimulus Package" last week. Interestingly enough a nation with huge trade imbalances in its favor and enormous export production needs a solid market to sell those goods to. This is bad for many reasons. First, Chinese buyers are the largest purchaser of US treasury bonds, a funding source we desperately need. Second, as the world's 4th largest economy, China is a huge market for commodities and our goods and Third, it underscores the point that we are now one global economy. There is no isolationism now, if one domino falls, we all fall.

According to this New York Times article, "In country after country, elation at Obama's victory was palpable, the hunger for a change of American leadership as strong outside the U.S. as in it. "

I for one was not aware of how closely the rest of the world was following this. World leaders everywhere lent their support. A German press article quoted someone as saying that [americans] "were electing a president, but also the new world leader". (Cannot find the source of this, sorry.) Perhaps America forgets sometimes what massive effect it has around the global. Certainly the subprime fallout has been a obvious example.

In California news, it looks like Proposition 7, a mandate to increase Alternative energy sources for utilities is passing, on the heels of the apparent defeat of Prop 11, which would provide funding for alternative fuels implementation and research. This is a mixed blessing for industries like Solar Power. Controversial Prop 8 is looking like it will pass, to the amazement of political analysts.

Enough Politics! U.S. Stocks Post Biggest Post-Election Drop on Economic Concern  as the bond market races to the bottom. As of the close in the Tbills markets, yields are down across the board. Why? "[...] concern the economy will worsen even as President-elect Barack Obama moves to spur growth". Yes, the economy continues to come up with dismal numbers...this week has seen worse than expected manufacturing index reports, redbook retail sales, factory orders and mortgage applications among other things. When the market comes to a consensus, it will usually react depending upon how far the reported information differs from the consensus...and lately things have been significantly off.

Some good news: It appears that the credit crunch, at least in larger banks, is easing. Short term rates plunge and big banks rely less on the Federal Reserve for commercial paper. This is good, because the Fed is intended to be a "lender of last resort". The fact that most of the commercial paper was coming from the Fed meant that the banking system was frozen, dang near completely locked up. Now that banks are starting to lend to each other again, we hope to see that trickle down into the much needed municipal and consumer arenas.

Unless of course the foreclosure boom continues to rear its ugly head. These dataquick numbers for Q3 indicate that the decrease in CA foreclosure filings was due to a foreclosure procedure change. Had this change not be implemented sooner(making it more difficult for lenders to file), foreclosure filings would have continued to increase at the rate they did in Q1 and Q2.

In closing, we offer this graph by Credit Suisse

Normally this blog is about money matters...today we're turning political again in honor of election week.

This excellent CNN article: How the economy stole the election is a time machine look back 2 years, when the housing market was hitting record highs and everything was moving smoothly. Trek forward to the here and now, and the number one issue cited by voters is the economy and what to do about it.

CNN politics reports that the race between Obama and McCain is close, but with a definitive edge to Obama. It is still up in the air who will win.

Bond Market

Treasuries gain on economy woes- manufacturing index falls...outlook gloomy. As indicated by the market, traders expect the efforts of the Treasury to mitigate the recession to fail.

I've often written about the treasury supply issue caused by the 700bn bailout, and how this is affecting the market for those bonds. This interesting analysis of a report by Barclay's Capital, finds that the declining issuance in the mortgage backed securities and municipal bonds (among others) should help offset the ballooning Tbills.  This is a textbook example of a self correcting economy shades of Adam Smith and his "invisible hand" theories.