.comment-link {margin-left:.6em;}
Visit Freedom's Zone Donate To Project Valour

Sunday, December 31, 2006

Happy New Year!

I wish you all a successful, happy, stable New Year with no hangover :>

There are times when no news is good news, so I'll defer the news till tomorrow!
New Year's resolutions present and past.
Most popular Babylonian New Year's resolution - to return borrowed farm equipment. Give your neighbor's drill back!

Saturday, December 30, 2006

The NGU Principle

Never Give Up = NGU. It's an important principle to follow in life, and Randal McCloy, Jr. shows us how it works:
He was brought out of the darkness of the Sago Mine in the middle of the night, comatose and battered -- and straight into the unyielding glare of unwanted fame.
The 27-year-old survivor of West Virginia's worst mining accident in four decades can walk and talk again, but neither he nor pregnant wife Anna is granting interviews, says family spokeswoman Aly Goodwin Gregg. His family has also closed ranks, on doctors' advice.
No Oprah for him - just rehab and plugging away. Congrats on the new baby!

Saddam Hussein's Execution

Saddam Hussein's execution was merciful beyond compare, a grace note of a civilization struggling to emerge from the effects of his bestial life. He lived like an animal and was granted a death kinder than that he offered to his victims.

If only - if only the suffering of his victims ended now, with his death. But it doesn't. The children of Halabja will bear their suffering their entire lives.

If only it were just Halabja, but it wasn't. If only Saddam hadn't started military training for kids as young as 10, but he did, and the most successful graduates of that program became Fedayeen Saddam, already versed in the arts of torture and terror in their teens.

If only Saddam Hussein's corruption of the life of the Iraqi people, the Iranian people, and the Kuwaiti people were limited to the toxins produced by burning oil wells and chemical weapons - but it isn't. Saddam Hussein's control of the country and its elite was so pervasive that the doctors of Iraq wanted an exile to head the new department of health post-war. It's understandable. One of the crimes punishable by amputation of a hand or a foot, in Saddam's Iraq, was performing plastic surgery on an amputated limb. HIV patients, who officially did not exist, were locked away to die. A question asked by a House committee member in hearings:
Mr. JANKLOW. Given the fact you are all so highly educated and worldly, what is the difference between being a junior Baathist, if I can call it that, a young Baathist or a member of the Hitler Youth? I mean, what was—is there any difference at all?

Dr. ALATTAR. I don't think so.

Mr. JANKLOW. What was expected of you if you joined the Baath Party? Could you tell me? Once you said yes, what happened?

Dr. ALATTAR. Sure. The major reason why they wanted everybody to join is you are expected to submit reports on your families and friends of their activities. This was a way to break down the networks of the family to create suspicion, to collect reports and activities so they can hold different individuals in prisons. The Communists used that method very effectively to break the nutshell of society.

Mr. JANKLOW. Given the fact—and I ask these questions out of ignorance. You people are helpful. Given the fact that there is such a contemporary professed deep-seated religious base within the country, recognizing that may or may not be accurate, but at least there is a contemporary claim, how does one rationalize any kind of public acceptance for the systematic rape, the systematic torture, and the methodology that was utilized to torture and kill people? I mean, how does that comport with anything that is civilized or accepted in anybody's religion anyway?

Ms. SIRKIN. If I may respectfully respond to that, this really was a society that was completely reined in by fear and anyone who resisted was killed. And we have ourselves interviewed surgeons, for example, who were forced to amputate the ears of those who refused to serve in the Army or those who deserted, and many of the surgeons we interviewed knew that obviously this was a complete and utter violation of medical ethics and a terrible thing for a surgeon to do and yet many of them had to perform these procedures under fear of death or torture themselves. And I don't think it is at all legitimate to say that people accepted what was done. It is impossible to understand the level of constraint that people live under when a regime that is this totalitarian is in place.
Eason Jordan's tales of what happened to powerful people within the regime should give everyone pause, because it wasn't just the innocent and the young who were brutalized:
Each time I visited, I became more distressed by what I saw and heard — awful things that could not be reported because doing so would have jeopardized the lives of Iraqis, particularly those on our Baghdad staff.

For example, in the mid-1990's one of our Iraqi cameramen was abducted. For weeks he was beaten and subjected to electroshock torture in the basement of a secret police headquarters because he refused to confirm the government's ludicrous suspicion that I was the Central Intelligence Agency's Iraq station chief. CNN had been in Baghdad long enough to know that telling the world about the torture of one of its employees would almost certainly have gotten him killed and put his family and co-workers at grave risk.
One Foreign Ministry officer told me of a colleague who, finding out his brother had been executed by the regime, was forced, as a test of loyalty, to write a letter of congratulations on the act to Saddam Hussein. An aide to Uday once told me why he had no front teeth: henchmen had ripped them out with pliers and told him never to wear dentures, so he would always remember the price to be paid for upsetting his boss. Again, we could not broadcast anything these men said to us.
A 31-year-old Kuwaiti woman, Asrar Qabandi, was captured by Iraqi secret police occupying her country in 1990 for "crimes," one of which included speaking with CNN on the phone. They beat her daily for two months, forcing her father to watch. In January 1991, on the eve of the American-led offensive, they smashed her skull and tore her body apart limb by limb. A plastic bag containing her body parts was left on the doorstep of her family's home.
Saddam Hussein presided over a regime so depraved that even protests by foreign human rights organizations could lead to mass murder:
In 1999, a complaint about prison overcrowding led to an instruction from the Iraqi leader for a "prison cleansing" drive. This resulted, according to human rights groups, in hundreds, and possibly thousands, of executions.

Using a satanic arithmetic, prison governors worked out how many prisoners would have to be hanged to bring the numbers down to stipulated levels, even taking into account the time remaining in the inmates' sentences. As 20 and 30 prisoners at a time were executed at Abu Ghraib and elsewhere, warders trailed through cities like Baghdad, "selling" exemption from execution to shocked families, according to people in Iraq who said they had spoken to relatives of those involved. Bribes of money, furniture, cars and even property titles brought only temporary stays.
If only one-tenth of the energy spent in condemning Saddam Hussein's execution could be directed toward the healing of his victims - but it won't be. Saddam Hussein is dead, but his brutalized people are still alive and still struggling to emerge from their suffering, and his victims have shown more mercy in victory than Saddam Hussein ever did.

Update: Via The Anchoress, Dearborn, MI, celebrates:
"Peace," he said, smiling and laughing. "Now there will be peace for my family."

Alwatan, 32, an Iraqi-American, said Saddam's forces tortured and killed family members that were left behind when he left Iraq in 1991.

Others expressed a similar sense of relief.

"I feel like I lost something all my life and today it is found," said Moshtaq al-Bazaz, of Windsor, Ontario, who used to live in Dearborn and still prays at the mosque.
Yeah. What was missing all his life was sanity, because only in an insane and perverse world can a man like Saddam Hussein not be stopped in his criminal course.

Friday, December 29, 2006

Here's An Idea

Clearly what the world needs now is a new reality TV concept (I can write this safely, because I don't watch TV).

How about this one: a "creative" lending shop is followed through its life cycle. Last Account Executive to cash a pay check that doesn't bounce wins a million dollars. I believe there's a catchy theme song that will work with a little adaptation "Bad loans, bad loans, whatcha gonna do when they pull funding on you...."

MLN looks to be the latest casualty. The rumors have been going on since the second week of December, but now they seem to be postponing closings. I never did see a refutation that they had cut AE compensation by 75%, either. UPDATE: It's confirmed. They are no longer funding residential mortgage loans. Their own people didn't get the word until late today. The rumors were right, even as the company employees were being told they were false.

The Lending Insanity Continues

Over at Calculated Risk they are discussing lending standards in the comments to this post.

Here's a thread at Broker Outpost which ought to explain just why Casey Serin believes he can continue to borrow by establishing a corporate identity. A broker needs to know if this loan can be funded:
598 Mid Score
Purchase-Full Doc
Past Foreclosure - 07/2006
Need the highest LTV Possible- Will anyone do fico only program?
Borrower was foreclosed on six months ago, and has a credit score below 600. And the reply:
I know New Century will. I just did a purchase where the borrower's down payment came from money from their prior house after it was foreclosed on.
Heh, heh, heh. Fannie Mae wants to loosen its underwriting standards, too.... OFHEO is upset about it. Guess who is going to win? Not OFHEO! For years now, the GSEs have been objects of concern. Treasury's latest attempt has been to get debt approval authority (scroll down to Treasury Wants GSE Review). It's going to fail.

A commenter in the Calculated Risk thread writes:
Just talked to a realtor who sells houses for his son who is in charge of forclosures for Coldwell Banker in San Diego Area. He said that his son had almost 0 houses to sell a year ago. He now has over 100! He says that banks are in now hurry to deal yet. I have seen a rise in Bank Owned signs in the area and in my patrols check on them frequently. Not one has sold or even come down in price. Not sure what is up with that.
It's not over as long as anyone will buy pathetic paper, and if FNMA will hold the paper or guarantee the paper, that means you, the taxpayer, ultimately take the loss.

Here's an example of this house of cards. These are real mortgages being written under real terms. Note the flim-flam:
One of the keys with the COFI, COSI and CODI program is their yearly 7.5% "PAYMENT Cap" vs. the LIBOR's or various other Adjustable Rate Mortgage/2nd mortgage/HELOC "Interest-Rate" Cap.

Unlike the majority of all other loans, the COFI, COSI, and CODI mortgage (99% of the time) is never sold or transferred to another Lender/Servicer. Most mortgages are sold at or before the Settlement Table because the Lender/Servicer does not have confidence in the Index, e.g., One year T-Bill or the Prime Rate, because they are too volatile. Because these and other Interest Rates/Indexes are unstable, the Lender/Servicer will place an Interest-Rate Cap for "their" protection.

However, our COFI, COSI, and CODI Lenders have so much confidence that their Indexes will never increase rapidly, they do not implement the traditional yearly Interest-Rate caps (e.g., 2/6, or 5/1/6.) Instead, they use a yearly Payment cap.

The "Payment Cap" is designed to protect both the Lender and the Borrower in the event that the Interest Rate/fully Indexed-Rate (Index + Margin) was rising so rapidly that the Borrower could be forced to default on the loan. With a Payment Cap, the next year's monthly "Minimum," "Interest-Only" or "fully-Indexed" payments could never rise above 7.5% of the prior year’s monthly "Minimum," "Interest-Only" or "fully-Indexed" payments. This "flexibility" with making the payment can keep the Borrower's credit score intact and most importantly; the Borrower can keep their house. A Lender/Servicer will lose much money if they must foreclose on a house. Moreover, if many foreclosures are happening to that Lender, they could go out of business. This is again, why most ARM loans are sold and sold quickly, but not so with the COFI, COSI, or CODI mortgage.
All these are is adjustable-rate mortgages that allow the lender to accrue more interest on the loan than the borrower is required to repay. How this is supposed to be protection for the borrower I cannot fathom, and I don't think the average borrower would understand the terms of such a loan or what would happen with it.

Off-beat Stuff!

China is going to use a 24-hour video feed from a snake farm as part of its earthquake warning system.

There are a lot of promising developments on the flu vaccination front, and this is one of them. It uses a different production method as well as a different protein, so it actually offers the possibility of mass immunization to prevent a pandemic.

I don't know what MoDo will have to say about this.... European researchers claim that housework reduces a woman's chances of developing breast cancer. The bad news? To get the full benefit cited, you have to do 17 hours a week.

Spain's Islamic Board petitioned the Pope to allow Muslims to worship in an ecumenical area in the cathedral in Cordoba. It used to be a mosque when Spain was ruled by Muslims. The local bishop said no. Of course, Hagia Sophia in Turkey used to be a Christian church. I wonder what would happen if local Christians petitioned to allow Christian worship there?

Chavez of Venezuela says he's going to shut down Radio Caracas Television because it has "conspired" against him. Chavez is a little confused about free speech issues for his opponents.

Hezbollah is paying bonuses
to Palestinian rocketeers based on the count of Israelis killed or injured. The "truce" has not been observed in Gaza, although the Israeli PM had ordered the army not to respond. A few days ago two teenagers were severely injured in a rocket attack in Sderot, and now the Israeli army is allowed to respond in a limited fashion. Sderot has taken the worst of the rocket attacks from Gaza for months; they have been under a continual bombardment for years. The situation there is serious and daily life is greatly impacted. There are casualties and bomb shelters in school yards; they have had to turn the schools into bunkers. Of course, the international media does not cover the reality. Joel Mowbray does.

Iran is in desperate straits, because its ability to extract its own oil is crumbling. Who was the banker that promised Hezbollah money to hand out in Lebanon if they started a war with Israel last summer? Cui bono?

Thursday, December 28, 2006

More Later, But Two Things

Neither the existing home sales release or the new home release looked very encouraging to me. I'm with Rosenberg, per Sperling, hat tip The Housing Bubble Blog:
In a Nov. 27 comment, Rosenberg notes that in addition to the record 4.3 million residential units for sale as of October, there were 1.95 million home completions, the 12th-highest month since 1979. Units under construction were through the roof as well. Rather than seeing supply dwindle and prices start to firm up in early 2007, Rosenberg says ``it could be a year before the reduction in starts begins to put a meaningful dent into the inventory backlog.''

John Mauldin, an investment adviser and frequent contributor to Investors Insight, a financial-data publisher, throws an extra log on the fire. According to Mauldin, even the current projection of housing sales may be overstated and thus the existing supply of homes greater than what is reported in the official data. The reason is that the Census Bureau, one of the Commerce Department's statistical agencies, fails to account for cancellations in home sales contracts. Cancellations ran as high as 40 percent for some major homebuilding firms last quarter.
More about the actual releases later, but for now I encourage you to check reality through the Housing Tracker, which aggregates list prices. Check out San Diego, for example, and see what a 3.1% year over year decline in price actually means.
In general, you can expect to pay 6% commission when selling real estate. So if you took out one of those adjustable loans with a $25,000 downpayment, and now are looking to sell a house you bought in August of 2005 for $545,000, your minimum loss is likely to be somewhere around $65,000 - $85,000. You will probably have to bring upwards of $40,000 in cash to the table in order to pay off your loan balance and the real estate commission. That's assuming that you had an amortizing loan, and that you can sell at the average listing, and that you are not also paying seller's closing costs, which is probably not so.

The carnage in the funny money capitals is just beginning. This will be historic.

If you need a good laugh after that, Casey Serin just discovered that a bank might offset overdue payments on a credit line with funds in his checking account.... He's outraged! The bank picked his pocket!

Tuesday, December 26, 2006

The Grinch Who Stole The Home Equity

This is what has worried me about homebuilder stocks. The Denver Post article points out the correlation between new developments, loans from homebuilder mortgage arms, and foreclosures. All over the country, I have found extremely dangerous loan programs being offered in conjunction with new housing:
A computer-assisted geographic analysis of Weld and metro-area foreclosures by The Denver Post found many concentrated in new neighborhoods developed by local builders. Others clustered in new neighborhoods where national builders doubled as lenders. In one, more than 90 percent of foreclosures on the original buyers involved loans from the builder.
Pay off your credit card bills. A 1.875 percent interest rate with a free washer, dryer and refrigerator. Win a 2007 Ford Escape!

These are some of the lures national builders dangled as the supply of unsold homes in metro Denver hit record levels this year.
In a Northglenn neighborhood built by KB Home, 56 of the original buyers have been foreclosed. Fifty-one, or 91 percent, got their loans from KB's mortgage company.
It's not just one builders. Most of them seem to have pushed sales using extremely creative financing. Spanish speakers seem to be targeted; we are getting reams of calls home in Spanish about homes and home loans (because of Chief No-Nag's last name). I strongly recommend this article in particular; it is very long and detailed. The valuation drops listed may eventually show up in many areas across the country in which a high percentage of new homes have been sold with non-traditional mortgages.

The Housing Bubble Blog has excellent coverage; this aggregation of housing news from Massachusetts should be a reality check for those who believe that the worst is over. For most of the country, 2007 will be a much worse year for housing than 2006. In New Jersey, the pain is just beginning. Their worst problem is ridiculous property taxes.

I have a busy week, so don't look for timely stuff. Tomorrow we get the new homes report, on Thursday we get existing homes (a larger sample, so more indicative), and next week we get pending homes. Today crude oil and natural gas both fell, even though the news that the UN might be saying no to Iran caused an early rise. Gas prices in my area are up almost 20 cents from their low this year.

If you feel depressed, it might not be the economic news. It might be a virus; the flu is hitting the southeast hard. It seems to be causing a problem in kids in Alabama, so if your kids get sick get them to bed fast, and to the doctor if necessary. Ten critically ill kids from flu is unusual. I'm on the road this week, so I bought some Airborne today. It really does seem to help, and you can take it if you are around sick people at work.

Sunday, December 24, 2006

Merry Christmas!

Friday, December 22, 2006

Do The Right Thing!

Christopher Montgomery, a student, was cleaning a movie theater. He found $24,000 in a bank deposit bag, and returned it to the manager. This led to a very happy business owner:
On Friday, she still hadn't made it to the bank when it came time to accompany her 8-year-old daughter, Sabrina, to see "Happy Feet" at 7:15 p.m.

Halfway through the film, Sabrina climbed onto Limoncelli's lap. To make room for her daughter, Limoncelli slid the purse under her seat, where it tipped over. The bank pouch must have fallen out in the dark, she said.

On the way home, mother and daughter stopped for ice cream. In line at the cash register, pint of Häagen-Dazs in hand, Limoncelli made the the blood-chilling discovery. The deposit bag was gone.
"It was like the longest two minutes of my life," she said. "I screamed at the operator when she tried to give me the address and I said, 'I don't care, just give me the number!' ... I was hysterical, crying."
I bet.

Yes I DID!

I did. I did finish up my projects. I did do tree stuff, baking, presents, mailing (got there, even). I did. I did it.

I think I'm gonna take a nap.

If you're looking for news, try Calculated Risk, The Housing Bubble Blog and these items:
Fieldstone (subprime):
The new terms with JP Morgan Chase & Co., Credit Suisse Group and Lehman Brothers Holdings Inc. require Fieldstone to maintain its tangible net worth at $365 million, as opposed to the $400 million set previously. In addition, the lenders agreed that the operating loss projected by Fieldstone for the second half of this year will not result in a breach of agreements. Fieldstone said it is continuing to negotiate with the lenders to extend the current terms beyond Jan. 31.
HMIC folds (subprime).
Raleigh Durham's housing is slumping due to the national housing recession. This is significant; the region itself has some of the best economic fundamentals in the nation:
"Now that we've seen a second month of similar data, this confirms where we are heading," Moody's.com economist Michael Helmar said. "The forces pulling the nation down will pull Raleigh and Durham down, just not as low. Slower job growth, spent up demand for housing and higher adjustable rate mortgages will impact your area."
Last month 35% of all listings had reduced in the Triangle. I had not expected to see this until spring.

We are not even close to a bottom. While permits have fallen sharply, starts have remained strong as builders try to build on and clear land liabilities. In the general economy, things are just quietly slowing. Aircraft remains the growth sector. I don't think it's going to be able to pull the whole economic train.

Wednesday, December 20, 2006

Holding Our Hands

I have been laughing to myself as I read much of the commentary on the latest economic statistics. Sometimes I have the feeling that they are holding our hands to make us feel better, but the clammy grasp of a economist doesn't convey the same benefits as holding your husband's hand. When your husband holds your hand, you are better able to deal with adverse reality. An economist can only make you feel better by holding your hand if he or she is dealing with reality. There's quite a difference.

Now every happily married woman already knew that holding her husband's hand made her feel better, and these latest rounds of economic stats also seem to confirm what we already knew -
Some pressing questions remain. Is MoDo going to have a shrieking fit of hysteria in the NY Times newsroom over the news that holding her husband's hand when under stress makes a woman better able to cope? Will film of the hysterical fit be released on the internet? Will a feminazi fatwa be issued against the study authors? Will I get all my Christmas baking done?

There are also open questions regarding the economy. One of those is whether the Alt-A high-adventure class of mortgages is destined for a meltdown similar to subprime. My guess is yes. If you are sitting with an interest-only/option ARM taken out last year on a house that's now worth eighty or a hundred thousand less than your loan amount, your refinancing options are sharply limited, to say the least.

Another, rather positive economic question regards the cushioning effect of small business on the economic downturn. My feeling is that it will be major. I can't quantify that, and I can't prove it. Also, my viewpoint might be skewed because personally, I'm facing a problem of an overload of business which is escalating rapidly. However, when I talk to other people in knowledge/expertise businesses, they seem to be reporting similar outlooks. Contractors might be pounding on our doors looking for business, but we are all in the position of hunting for people who fit our needs. They are scarce.

A third potential positive question is the role of private capital in cushioning the credit contraction destined to occur in bank lending. This is seen everywhere from the hard-money lending business (and they have dropped their lending margins on average from about 70-75% to 60-65%) to small business lending to large takeover deals. The growth in this type of activity is immense. This parallels the shift in real estate mortgage funding from GSEs to MBS. Let us all hope that the underrating of risk that occurred in mortgage lending doesn't spring up in this market. When losses can't be offloaded, it tends to keep people more honest. The big dealmakers can and do offload their risks, but most of the smaller segment doesn't.

Finally, the outlook for legal firms relating to the mortgage mess couldn't be brighter. The lawsuits should proliferate for the next decade, according to mortgage gossip.

Monday, December 18, 2006

Add To It

I'm sorry to be so silent, but several things came up and I'm pushing hard.

So here's something for you. The original was posted (and augmented) at Bankers Online:
My first job was in an orange juice factory, but I couldn't concentrate.
Then I worked as a lumberjack but I couldn't hack it, so they gave me the ax.
After that, I tried to be a tailor, but I just wasn't suited for it.
Next I tried working in a muf(f)ler factory, but this was exhausting.
Then I tried to be a chef, but didn't have the thyme.
I attempted to be a deli worker but any way I sliced it, I just couldn't cut the mustard.
My best job was as a musician, but eventually I found I wasn't noteworthy.
I studied a long time to be a doctor, but I didn't have any patience.
I became a fisherman, but couldn't live on my net income.
I managed to find work with a pool company, but the work was too draining.
So then I got a job with a health club, but they said I wasn't fit for the job.
My last job was at Starbucks, but it was the same old grind.
Eventually, I got a job as a historian, but there was no future in it.
A commenter there added:
And now you're a banker......until you lose interest.
I think it could use some further additions. How about...
I was successful at the bakery, but the owner just wouldn't give me a slice of the pie, or
I tried trading futures, but my past trades drove me out of the business?
Update: Added by commenter "I thought about belly dancing, but I just couldn't stomach it."

Thursday, December 14, 2006

More Good Economic News

More good news: Continuing unemployment claims fell 33,000; initial unemployment claims fell 20,000; the four-week average for initial claims fell slightly from 328,750 to 327,250.

These numbers tend to support yesterday's retail sales, IMO. Mortgage rates are up, though.

In other news, I have been informed that I am an exponent of "the bubbling looniness simmering beneath the thin shell of rationality in this country" for this post. Unfortunately I am too busy to have time to enjoy the attention.

Wednesday, December 13, 2006

MBA Mortgage Delinquency Release

This is already being spun so heavily that I thought I'd just give you the actual. When you've got to spin your own press release, you have problems. This is what made me laugh:
"Only 7 percent of all loans out there are subprime adjustable loans. We're talking about a 12 percent delinquency rate on 7 percent of all home mortgages and the foreclosure rate is much lower than that," said MBA Chief Economist Doug Duncan.
That's literally wrong. The rate for ALL subprime is 12.56%. It's 13.22% for subprime ARMS, and 9.56% for fixed subprime.

Note the defensiveness about legislative proposals, as well as the comment that the problem is not "non-traditional" option-ARMs and interest-onlies. Here it is:
The delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 4.67 percent of all loans outstanding in the third quarter of 2006 on a seasonally adjusted (SA) basis, up 28 basis points from the second quarter, and up 23 basis points from one year ago, according to MBA’s National Delinquency Survey.

The increase was driven by increases in delinquencies for all major loan types, most notably for subprime and FHA loans. Delinquency rates for prime, subprime, and FHA loans increased on a seasonally adjusted basis relative to the second quarter.

The percentage of loans in the foreclosure process was 1.05 percent of all loans outstanding at the end of the third quarter, an increase of six basis points from the second quarter of 2006, while the SA rate of loans entering the foreclosure process was 0.46 percent, three basis points higher than the previous quarter. Compared with the third quarter of 2005, the percentage of loans in the foreclosure process was up eight basis points while the percentage of loans entering the foreclosure process was up five basis points. This quarter’s NDS results cover over 42.6 million loans (32.6 million prime loans, 5.8 million subprime loans and 4.2 million government loans).

“The housing market continued to normalize in the third quarter of 2006. Although labor markets remain strong, the pace of job growth has slowed, as has the home price appreciation rate which has decreased in response to higher interest rates and rising inventories of unsold homes. Some states experienced home price declines in the third quarter, and a few have experienced declines over the past six months,” said Doug Duncan, MBA’s Chief Economist and Senior Vice President of Research and Business Development.

“As we had expected, in the third quarter delinquency rates increased across the board. However, increases in delinquency rates were noticeably larger for subprime loans, particularly for subprime ARMs. This is not surprising given that subprime borrowers are more likely to be susceptible to the cumulative increases in rates we’ve experienced, and the slowing of home price appreciation that has resulted. It is important to remember that delinquency and foreclosure rates have been quite low the last two years. “

Some context for these results are emphasized by four points:

1) First, the market is working. In response to mortgage payment performance that has deteriorated somewhat from the very strong performance of recent years, investors have demanded higher returns in the form of wider credit spreads, particularly for loans originated in the second half of 2006. These price signals from the capital markets directly and immediately impact the rates that mortgage lenders can offer to borrowers, in this case particularly to borrowers with blemished credit. The result of these adjustments in the capital markets will be that risk-adjusted returns will be equalized across segments of the market. Far from being a problem, these clear market signals will help the market to more efficiently regain its equilibrium.

2) Second, this widening of credit spreads in the secondary markets passes back through to new borrowers in the form of higher rates. This means lenders reduce credit to less creditworthy or subprime borrowers first.

3) Third, we have no evidence that the increases we have seen in delinquency and foreclosure rates are the result of non-traditional products such as interest-only or payment-option mortgages. These products have made up a significant portion of originations in recent quarters. However, we do not have and are not aware of information that would indicate significant deterioration in performance related to the non-traditional products.

4) Finally, given the first three points, we would strongly caution policymakers to avoid any regulatory or legislative actions that would impede the ability of the market to respond to changes in underlying economic conditions. An important role of public policy should be to facilitate efficient markets, as these will ultimately benefit consumers.

“We expect the housing market to fully regain its footing in the middle of 2007. In the meantime, we anticipate some further increases in delinquency and foreclosure rates in the quarters ahead,” said Duncan.

Change from last quarter (second quarter of 2006)

All adjustable rate (ARM) as well as fixed rate (FRM) loans had higher SA delinquency rates compared to the second quarter of 2006. The SA delinquency rate for prime ARMs increased 36 basis points (from 2.70 percent to 3.06) and the rate for prime FRM loans increased ten basis points (from 2.00 to 2.10 percent). The SA delinquency rate for the subprime FRM loans increased 35 basis points (9.23 percent to 9.56 percent), whereas the rate for subprime ARMs increased 98 basis points (12.24 percent to 13.22 percent).

The SA delinquency rate increased during the third quarter for all loan types. The delinquency rate increased 15 basis points for prime loans (from 2.29 percent to 2.44 percent), increased 86 basis points for subprime loans (from 11.70 percent to 12.56 percent), increased 35 basis points for FHA loans (from 12.45 percent to 12.80 percent), and increased 23 basis points for VA loans (from 6.35 percent to 6.58 percent).

During the third quarter of 2006, the foreclosure inventory rate increased across the range of loans. The foreclosure inventory rate increased three basis points for prime loans (from 0.41 percent to 0.44 percent), 30 basis points for subprime loans (from 3.56 percent to 3.86 percent), eight basis points for FHA loans (from 2.20 percent to 2.28 percent), and two basis points for VA loans (from 1.10 percent to 1.12 percent).

By loan type, the percent of new foreclosures increased one basis point for prime loans (from 0.18 percent to 0.19 percent), three basis points for subprime loans (from 1.79 percent to 1.82 percent), four basis points for FHA loans (from 0.75 percent to 0.79 percent) and decreased three basis points for VA loans (from 0.35 to 0.32 percent).

In the third quarter of 2006, the percent of loans that were seriously delinquent, which is defined as the non-seasonally adjusted (NSA) percentage of loans that are 90 days or more delinquent or in the process of foreclosure, was 2 percent, 11 basis points higher than for the second quarter of 2006. This measure is designed to account for inter-company differences on when a loan enters the foreclosure process.

Change from last year (third quarter of 2005)

Since the third quarter of 2005, the SA delinquency rate increased for prime loans, subprime loans and FHA loans, while decreasing for VA loans. The delinquency rate increased ten basis points for prime loans, 180 basis points for subprime loans, and five basis points for FHA loans, whereas the delinquency rate fell 54 basis points among VA loans.

Compared with the third quarter of 2005, the delinquency rate increased 76 basis points for prime ARM loans and 267 basis points for subprime ARM loans. The delinquency rate decreased one basis point for prime fixed loans, while the delinquency rate for subprime fixed loans increased 80 basis points.

The percentage of loans in the foreclosure process increased for all loan categories except VA since the third quarter of 2005, which increased three basis points for prime loans, 55 basis points for subprime loans, and three basis points for FHA loans. Among VA loans, the percentage of loans in foreclosure decreased seven basis points since the third quarter of 2005.

Over the course of the year, the SA percentage of new foreclosures increased one basis point for prime loans and 43 basis points for subprime loans. The percentage of new foreclosures decreased seven basis points for VA loans and decreased by nine basis points for FHA loans.

State and Regional

Across all loan types, the states with the highest overall delinquency rates were Mississippi (11.05 percent), Louisiana (9.50 percent) and Michigan (6.68 percent). Based on foreclosure inventory rates across all loan types, the top three states were Ohio (3.32 percent), Indiana (2.90 percent) and Michigan (2.20 percent). All state level results are not adjusted for seasonal effects.
The states with the largest increase in overall delinquency rate in the past year were Michigan (135 basis points), Rhode Island (128 basis points), and Ohio (96 basis points). The states with the largest increase in foreclosure inventory rate were Michigan (59 basis points), Rhode Island (46 basis points), and Maine (43 basis points).
From the third quarter of 2005, 44 out of 51 states saw their delinquency rate increase, while 35 states saw an increase in the foreclosure inventory rate.

At the regional level, the Northeast region had an overall SA delinquency rate of 4.39 percent, the North Central region had a delinquency rate of 5.44 percent, the South had a delinquency rate of 5.37 percent and the West had a delinquency rate of 2.81 percent, compared to the national rate of 4.67. For the foreclosure inventory rate, the Northeast region had a rate of 1.06 percent, the North Central region had a rate of 1.89 percent, the South had a rate of 0.99 percent and the West had a rate of 0.49 percent, compared to the national foreclosure inventory rate of 1.05 percent of all loans.

A Range Of Good Economic News

Retail sales came in higher than projected; oil is stabilizing back to somewhere around $61, and the trend on Purchase Money mortgage apps continues sharply upward. In three weeks, the Purchase Index has gone from 406.7 to 426.6 and the latest release shows a roaring 463.8. Over the last 4 months, affordability ratios for new and existing homes have moved up nearly 5%. This is the last hoorah, and one thing about the USA, we sure do know how to throw a consumption party.

Conventional and government indexes increased. Points for traditional (20% down) increased and the associated mortgage rate inched up. Borrowers are using these rates to refi into more stable loans, which is a good indication. However, it does imply that the cash-out stimulus is going to weaken further in the first quarter. (Any time you have a lot of refis these days, you have a lot of money in borrower's hands.)

As I wrote earlier this week, I believe we have reached the low in mortgage rates and that they will now turn and move higher. The low mortgage rates are what has stimulated this last hoorah. If for some reason rates remain this low, then all bets are off. I believe, however, that the reality of continuing losses will prevent that from occurring.

The sub/non-prime origination market remains extremely hot, and will only be suppressed when people refuse to buy the paper. That will only happen when the packagers become afraid of being stuck with the losses. I believe that enough international angst has been generated to slow the appetite for the marginal stuff, so I expect the same pattern of the wild, wild west on the street being slowly curbed by the gatekeepers which, at this point are primarily the bond raters. Over the last few months, they have been quietly downgrading the riskiest paper quite consistently. Prime defaults are also inching up - for the last few years we have been trading on optimism, and now the day of reckoning is at hand.

I wonder if bonds will go down today? At this point, it's all about spreads.

Tuesday, December 12, 2006

Because Laughter Is Divine

Photon Courier linked to Killian's Cover Letters From Hell page. Killian & Company is in the advertising business.

Mamacita, where are you when we need you? This company is looking for more examples in order to publish a book! (Ask for a percentage.) They write that they often get examples from frustrated teachers:
True story – a number of college teachers tell us variations of this: they red-pencil and downgrade students for glaring errors in grammar, usage, spelling. Students go to the Dean to complain. Dean reprimands teacher for being hard on the tuition-paying future donors. Teacher (not tenured) shuts up, fumes, then collects samples to send to us.

Maybe students send incoherent gibberish to potential employers because nobody ever told them not to. Now, there's a scary thought.
The examples are laugh-out-loud funny, but it also makes for sobering reading. Killian comments:
An error-free letter is now so rare that the minimal care required to send a letter with zero defects, combined with a few crisply written simple declarative sentences, will, alone, guarantee a respectful reading of a résumé.
That should provide a bit of motivation to students, shouldn't it? While you're laughing, these samples demonstrate some cultural problems, such as...

the Dunning Effect:
"Strong writing abilities. Able to analysis data and problem solve."
the culture of self-esteem:
"I need real world experience and after reviewing your web site I get the impressing that your company believes in maintain a lax work environment while efficiently meeting the needs of it's customers (right?)." [We replied to this college senior, on an ill-advised rescue impulse, gently suggesting he get some remedial help with his writing, since he had an error in every single sentence of his three-page letter. His furious four-page reply included some amazing stuff, such as]

"...you should be straight forward and ... simply state that your company is seeking a grammar teacher who lacks creativity but knows how to properly write a letter and knows exactly where to place punctuation. If your company takes such a serious position towards proper grammar then I think you guys are in the wrong profession. I believe even the leader of this country that we live in lacks proper grammar yet he is still our leader. I can assure you that he leaves grammar and punctuation to the proper authorities such as his receptionist or grade school English teacher. ...I am not precisely sure why you choose to take such a stance perhaps because you have nothing better to do, or maybe because you have personal insecurities that seep out and you feel the need to degrade or target others based on stupid little infractions to make yourself feel better, I don't know what the case is ... if I am out of line please let me know but if I recall properly your companies web site is not the most professional site there is. If you guys are trying to project a laid back yet hard working image through your site and request the same from prospective employees then you should not be so prudent about minor infractions such as punctuation and grammar.... (I reread it before sending it and it states my point clearly and unless you lack the mental capacity to make out the meaning without having exact and precisise grammar maybe you should seek a new proffsion, I hear this country lacks alot of grammar school teachers perhaps that would be a better fit for you) In conclusion I have indeed made many mistakes in this e-mail many on purpose and many accidentaly I did not have the time nor the patientce to deal with it I will leave the grammer checking to the professionals such as yourself."
narcissism raised to an art form:
"That I offer my services at all, you may take as a complement, since I am one of the new wave of workers more interested in the quality of my work than the new fangaled fast buck concepts of the past few years."
the 60's, the decade that just won't die:
"... But that's the past. I've given them a year of my life in a minimum security work camp and I'm nearing work release status where I'll be for the next 15 months or so... I need to connect with open-minded people like myself! My crime was a 'non-violent, victimless' one. I'm hoping this letter is reaching people who have or do smoke weed ..."
(Heck, the above applicant just wants a company that isn't going to be "prudent about minor infractions", right?)

Is this a Freudian slip? It does show why an advertising company needs someone who is willing to be "prudent about minor (linguistic) infractions:
"I am getting to my goal, slowly but surly."
I have had to deal with a few of those "slow but surly" employees in my time. A most evocative error!

The writing is appalling, but the clueless mindset displayed in some of these excerpts is even more appalling.

For an example of dam good writing, I refer you to this page containing an exchange of dam letters.

The Roots Of Leftist Anti-Semitism?

Russia is basically seizing control of a gas field from Shell. This strikes me as being an important story, because it says a great deal about Russia's future intentions. It has used fuel supplies as a political weapon recently, too. I would say that the circle is drawing in....

AVI writes about the Christian theology of the left. He finds it lacking:
For Christians, vague “peace on earth, good will toward chipmunks” isn’t enough. We are not allowed the cheap righteousness of warm feelings and liking beauty. It is simplistic, feel-good theology. Christians do not have that option. What we advocate and work for has to take all foreseeable consequences into account.
Dr. M. writes about Carter's anti-Israel bias:
Carter is a classic Southern Red-Neck bigot throw-back. He hardly represents todays evangelical Christians or the Baptists. The man calls himself Christian while spewing sentiments that would find a comfortable home in any Islamic extremist group. Why, his sentiments would be comfortable with the Third Reich's members. And the Left calls Bush Hitler. That, I would call classic projection.
Amen to that. I wonder if Carter isn't, at this point, morally insane. I am sure that the man does not want to be destructive, but he advocates a unrealistic political belief system which, if it succeeds, will produce destruction on a massive scale. I found myself speculating that Carter is projecting his own guilt about Jim Crow South upon the Israelis, because rationally speaking, wouldn't you want to be an Arab citizen of Israel rather than trapped in the continuing maelstrom of misery and the culture of death that controls the Palestinian territory? Israel doesn't persecute Christians (that's a Carter fantasy). Israeli Arabs are protected by the laws of Israel, and have civil rights.

Beth of MVRWC wonders about religious atheism (the kind that wants to demand that everyone be atheistic):
Religious belief has always existed. It’s a distinctly human trait, if you want to look at it from a purely rational perspective. Nobody is EVER going to “do away with” religious belief–the Soviets tried, but they couldn’t eliminate it. It’s part of the human spirit. And again, from a purely rational perspective, why should it bother anyone?
Jeff (who sparked the original post) replies:
If there truly is a god, he’s a total asshole for letting billions of people suffer throughout history due to conflicting beliefs. All-knowing and all-powerful…but for the last 2,006 years he’s been stuck in a Verizon commercial, i.e., “Can you hear me now?” Waiting for his only cellphone (Jesus) to fall from Heaven so that He has someone to talk to who can send all non-Christians to an eternity in hell fire while whisking believers up to a magical fairyland hidden in the sky. Nothing could be more violent, BTW.
That's religious atheism in a nutshell. It's less a matter of a determined disbelief in God than a deep inability to envision a loving God who would allow people to behave badly. Beth had already responded quite logically to this argument in her post:
HUMANS are divisive, not religion. You know the line, “guns don’t kill people, people kill people”–it’s the same thing, amplified. It’s not religion that causes wars or discord, it’s fallible humans that do it. The Soviet Union, to use them as just one example once again, was officially atheist and they certainly had no shortage of violence, discord, or war.
So much for the logic of religious atheism. Their problem is really that they don't accept the doctrine of original sin or free will; they want to blame God for our sorrows. It really comes down to that. If there is a God, they think God should force us all to behave correctly, and if God won't, then God must be evil, therefore they won't believe in God under the rubric of plausible deniability.

This represents a war on rationality, human responsibility, and ultimately the freedom of man, because Beth's point is irrefutable.
Needless to say, I don't find religious atheists attractive characters, and I certainly don't find them logical. It may be entirely logical for a person not to believe in God, because she or he has seen no proof he or she finds convincing at this point. But it cannot be logical to then blame God for humanity's problems, and if religion is not well-correlated with bad human behavior, then why fixate upon religion and ignore the real problem - bad human behavior?

Religious atheists are stuck in a lala land of denying human responsibility for our fate and therefore the human potential to change. It's not surprising that many religious people view them as basically harmful characters. Their worldview (not the atheism, but the denial of responsibility and their overwhelming drive to try to force their worldview upon others) is harmful. It is completely illogical and unrealistic. Rather than focusing on people's behaviors, they focus on the one thing that cannot change society or the future - people's private cosmologies.

It's not generally the religious people who want to force every individual to change their belief structures; it's the totalitarian left. Jeff's original comment:
Is it so hard for conservative republicans to recognize the utter nonsense that is the belief in god? A belief which is shared with terrorists. A belief which divides and makes peace impossible. A belief which has no basis in reality or facts. A belief which could one day destroy the human race.
It's not the belief system which will destroy the human race, it's our own behavior. Now, the Judaic tradition is severely rational. It focuses very little upon belief, but has a rigid focus upon behavior - upon following moral law. This, I think, accounts for the growing anti-Semitism of the left. The Judaic tradition of focusing upon behavior is extremely powerful, because it is our own behavior which changes our individual circumstances and, collectively, changes the future of our societies. It is this truth that anti-Semitism hates and fears.

If you don't want to find yourself in the position of having to tell your spouse that he or she needs to get tested for some STD, don't sleep around. If you don't want STD's, then don't sleep around. If you don't want to be lied to, then don't lie to others. If you don't want to lose your property to theft, then don't steal. If you don't want to be cheated, then don't cheat. If you want to live in a loving society, then act out love and generosity in your own life. If poverty bothers you, then give to charity, or directly to poor people. If you don't want to live in a violent, merciless society, then don't behave violently and mercilessly. This is what works.

Leftists seem to want the outcomes of good behavior to appear miraculously without humans having to behave well, and that is not going to happen. The code of moral law contained in the Judaic tradition is the most direct threat to this fantasy, and so I think they find themselves constrained unwillingly and even unconsciously to anti-Semitism.

Update: Dr. M. comments. Pharyngula comments.

Monday, December 11, 2006

RE: Is Subprime About To Go Splat?

I honestly cannot tell.
[Update: there is an excellent post at Calculated Risk that details characteristics of various recent mortgage vintages with commentary on Fitch's 2007 outlook. If you wil read it you will see why this is not sustainable. The only question is when and at what velocity we are going to hit the wall, not whether we will. Far too many loans originated now are degrading borrower's future economic prospects. TSHTF.]

It's true that a few subprime lenders have gone belly up, but the subprime market is growing rapidly. If you look on the origination side, it's booming due to immense demand from people who need subprime loans. Broker Outpost is a place for brokers to find someone to make a loan. I strongly suggest spending some time at this forum if you have "skin in this game". For those not in the industry, NOO= Non Owner Occupancy, OO=Owner Occupancy, LTV is Loan to Home Value ratio. It goes by state. When you see some of the dreck being underwritten....

From a thread at Broker Outpost:
It is amazing what kind of mood one is in on a Saturday morning after a week with 4 closings. One more later today, and 2 next week. We hired an extra processor about 3 weeks ago and loans are just flying out here with Superman speed!
Bleak future?!?!?!? HARDLY!

There are so many loans setting to adjust in the next couple of years, I am not sweating it. You just change your target audience from A paper to Alt-A and sub-prime.

I know that we are not the only ones seeing this, but so many borrowers that were A paper, have now run up debt, pushed down their scores, and their income has not kept pace.

Bring 'em on!
Doing loans? I thought the industry was about to collapse. Well, at least that's what everyone has been saying. My office for one has not slowed down one bit (well, with the exception of one LO that has preached on how slow this fall and winter is going to be - she has 1 loan in her pipeline). As a matter of fact, this MAY be the best month since July...
Now there is growing concern on the broker byways and highways about the subprime shops. See this thread.
The quality of subprime originations has dropped severely this year, but this is an extension of a three-year trend. Overall, almost 8% of subprime loans are 60 days or more delinquent. For 2006 subprimes, the 60 day rate is now close to 4%. According to this article, 2% of 2006 subs are already in foreclosure proceedings. That is sky-high.

Over at least the first 5 years, delinquency rates rise in all mortgage portfolios, and defaults are strongly correlated to whether the borrower is underwater (owes more than the value of his or her home). Expected principal losses from severe defaults are even more strongly related to how much the borrower is underwater. The lienholder may and usually will do a minor shortsale (allow the homeowner to sell for less than the total lien value to avoid having to foreclose), but will usually foreclose if the total loss will be much higher. The 2006 vintage of subs may well end up with five year default rates of 15% or so. The alternative is for lienholders to convert these loans to save payment, and when so many loans are written stated-income, the odds are high that at least half of the borrowers won't qualify for workouts or conversions.

This is why I predicted the "historically unprecedented" national drop in home values earlier this year - values in markets dominated by this type of lending cannot flatten. They can only take a minimum 10% drop once the music stops, because subprime borrowers in these types of loans default in large numbers if they don't have high home appreciation EACH YEAR, and once they start defaulting, a self-reinforcing cycle is set up.

Overall, over 10% of all mortgages out there are classified as subprime. I would say that it is going to reach 15% quite quickly due to the factors noted above (more and more primes being refied as subs). Worse, the subs are written for relatively low home equity transactions and relatively high dollar volumes. The expectation has always been that most sub borrowers will refi out relatively quickly, but the ability to do so is falling with home values. (See this pdf, which deals largely with 2004 stats, for a comparison between prime and subprime.)

The current mortgage market is dominated by sub or nonprime loans with risky charateristics.
RGE has a useful compendium of 2005 stats (and 2006 is worse):
...in 2005 a good third of all new mortgages and home equity loans became interest rate only; over 40% of all first-time home buyer were putting no money down; at least 15% of buyers had negative equity; and an increasing fraction of mortgage came with negative amortization (i.e. debt service payments were not covering interest charges, so the shortfall was added to principal in a Ponzi game of accumulating debt).
Because the areas where these loans predominate are in the "hot" areas, the dollar volume is higher for subs and nons than for primes. When I look at the default figures, I feel sure that the underlying funders are going to start pulling funding for the bottom 50% of these originations, one right after another. However, I may be wrong - because it is almost impossible to stop writing subprime once you are stuck with a certain amount of it. Seriously, you cannot get off this bucking bronco without recognizing huge losses. The originators and the funders have to buyback early defaults or scratch-and-dents, and so they must keep writing in order to have the money to do this. It looks like Own It folded when their buybacks exceeded their ability to pay for those, and so their funder pulled funding because they didn't want to end up stuck holding the bag. (The funder usually packages these up for resale as securitized obligations. The funder will have to take the rejects back, and then will return them to the originator. This can be a three or even four step process, and it usually drops down to the firm that has the least ability to pay for losses without continuing to write new loans.)

Portfolios of high interest mortgages and home equity loans have lethal aging characteristics. The underlying loan terms act like a giant sifter; within a few years, all the borrowers that have relatively good characteristics (some equity, or the ability to pay up to 0% equity, cash to pay refi costs, the ability to service the loan, a decent credit score) move out of the worst loans and into somewhat better ones. Year by year, the underlying credit quality of these portfolios drops. Fitch's warning on ACC (Ameriquest parent) clearly outlines these concerns:
Fitch believes that ACH's financial flexibility is constrained by significant settlement and restructuring charges taken in recent quarters as well as the increasingly challenging operating environment in the subprime mortgage market. While other originators and servicers face these challenges as well, AMC's sharp decline in origination volume has caused considerable seasoning of the servicing portfolio which is resulting in increasing delinquency levels and contributing to a cost of servicing that is significantly higher than the industry average. This rating action reflects Fitch's concern that unless this trend is reversed in a reasonable timeframe, AMC may face difficulty maintaining servicing quality
When I think about this reality, I think that the whole thing will go on for much longer than anyone now believes to be possible, because otherwise firms are abruptly going to have take large losses. ACC is selling both Ameriquest & Argent (mortgage originations) and Long Beach (auto loans), but keeping AMC (mortgage servicing). Fieldstone is now on the block:
Fieldstone joins a slew of subprime lenders that are up for grabs including industry volume leaders Argent Mortgage and its retail affiliate, Ameriquest, and Option One Mortgage Corp.

A month ago Fieldstone - a publicly traded REIT - posted a $45 million loss in the third quarter, citing an increase in reserves due to 'accelerated delinquencies.'
In one other recent deal, a private-equity fund - through an asset sale - purchased, for an undisclosed sum, Millennium Funding of Washington state. The private equity fund, said a source, also owns Ace Mortgage Funding of Indiana.
Stock prices for firms in these areas seem to have tracked homebuilders in a reckless rise. I think that the Street has not recognized risk, which raises a number of questions about overall risk valuations. An example of a firm that is cutting its losses is Fifth Third, which announced at the end of November that it was selling out at a loss:
'Fifth Third Bank has announced they are selling $11.4 billion in securities (all or almost all MBS, mostly short collateralized mortgage obligations, we suspect) before year-end 2006 and [is] taking a loss of approximately $500 million. This is the next move in the bank de-levering arena,' said Alec Crawford, head of agency MBS strategy at RBS Greenwich Capital in a Nov. 21 report.

'Banks bought a lot of MBS over the past few years, and now some of them are realizing they don't have the retail deposits to support such a large securities portfolio. With cheap (transaction) deposit growth slowing at the banks, some have no option but to sell their securities and take a loss, otherwise, suffer through large negative net interest margins,' he said.
However, the only firms that can afford to make these shifts are the ones that are not concentrated in this area.

Historically, mortgage originators and funders have faced these circumstances only as a result of economic downturns or a period of very high mortgage rates, and most of them tend to hold on until the economic conditions improve. What is unique about the current situation is that we reached this point in boom times, and that underlying economic conditions are going to continue to worsen, which will reinforce risks and place increasing pressure on rewards. One of the reasons that I am so negative on homebuilders is that I believe that they have constructed a similar (although less severe) dynamic for themselves with the types of incentives and loan assistance they have been offering over the last year.

The raging debate over the eventual effect on the broader economy continues (see Calculated Risk for a rather optimistic view from one analyst). But one thing is clear - the payout from the bottom half of the subprime originations must rise in order to make them a good investment, and that would indicate a creeping credit contraction from the bottom up, which will cut the effective demand for homes in high-priced markets, in turn forcing home prices downwards in these markets. Therefore I don't believe that the housing market will improve in 2007, although the local conditions in the housing market will vary widely. Instead, I expect the last few bright spots to come under increasing pressure as the fallout from the "hot" areas continues to spread.

Credit conditions, however, are national. I expect the rating agencies to next turn their concern to commercial paper, which is has been developing some interesting characteristics of its own.

Everyone is going to have to make their own decisions about this situation. The risks in the marketplace are high, and current pricing levels don't reflect these risks. Yields don't reflect the appropriate risk pricing either. This will change more rapidly than most analysts expect, IMO. Mortgage News releases are well worth your time and effort at this juncture. One bright spot over the last few months has been lower mortgage rates; I expect that we have just about reached the end of that cycle and that they are about to turn and head upwards for some months. Money is going for a premium (see CD rates), and the spread between rates offered for deposits and lending yields must rise.

If you are still reading and don't grasp what I am trying to convey, consider this. Home prices are sure to take at least a 5% drop, and lending standards must tighten, and will probably effectively tighten along the lines of lower LTV ratios. If average home prices drop 5%, and if the average LTV drops 5%, the pool of effective home equity borrowing power is slated to drop about 10%. With housing stock value reported to be about 22.5 trillion, that translates to over 2 trillion less potential borrowing power.

We have not seen this type of reckless risk acquistion since the run-up to the Great Depression. However, our economy is very diversified in comparison to that period, and one of the points of difference is that we have a large cohort of older individuals with high skills, education and relatively high economic resources. This demographic segment seems to have cushioned the 2001 recession by going into private consulting or contracting when large corporate employment dropped.

However, the basic funding mechanism for this type of business is based on home equity, and if this tightens, the vibrant and extraordinarily flexible small business sector will be constrained. Extremely high household debt levels suggest that this will be a major factor in the next two years. The major pressure on this group is insurance costs, ensuring that they will be in the marketplace as long as they can recover at least $15,000-$20,000 gross return a year. It's called "scratching a living". But they will not be spending on consumer goods if they cannot draw on credit lines; they will be banking their money for future costs. They also may be forced to draw on 401K/IRA funds, which would indicate selling pressures on equities above and beyond those projected by analysts. The rise in UI state employment versus survey employment surely must mean that small contractors and servicers are picking up the employment slack.

We appear to be set for a trickle-up recession of no mean proportions. The gap in most analyses I see is that it ignores demographics (which are clearly a major input in housing), and that it greatly underestimates the radiative effect of a nationwide drop in home prices. One cannot borrow against 401K or IRA funds; doing so is treated as a withdrawal. This means that home equity has become the primary bank for pressed consumers, and credit constraints on home equity will exert a much stronger net effect on the overall economy than most analysts seem to think.

Sunday, December 10, 2006

How Buffalo Bill Saved The Planet

Sniff. It's rare that the UN produces anything complimentary to the Great Satan, a.k.a. the United States, so I was particularly pleased to note its recent panegyric to Buffalo Bill. For those of you who slept through elementary school, Buffalo Bill and his concomittant horde of Evil White Guys slaughtered 60 million buffalo. Now I know that if you remained awake in elementary school, you were supposed to feel sorry for the buffalo. But, as it turns out (cue ominous music of your choice)...

The UN has determined that cattle (buffalo are cattle) are an awesome methane-emitting threat to the future of the planet. The Independent Online has the story:
Meet the world's top destroyer of the environment. It is not the car, or the plane,or even George Bush: it is the cow. (Worse even than George Bush!!!)

A United Nations report has identified the world's rapidly growing herds of cattle as the greatest threat to the climate, forests and wildlife.
Livestock are responsible for 18 per cent of the greenhouse gases that cause global warming, more than cars, planes and all other forms of transport put together.
I suppose the logical conclusion is that if Buffalo Bill hadn't come along, we'd all have been roasted long before today. Cow fart gas is the worst global threat to Gaia, according to the UN.

Whether this is true or not I don't know; I have the wary suspicion that PETA and the Carter Peanut Lobby are behind this one. I lived through Carter's presidency, and the undeniable fact was that peanuts started showing up everywhere, including in school cafeterias, although the school cafeterias did remain blessedly free of Billy Beer. The Peanut Lobby was just running hog-wild back at that time, and I would guess that resurrected vegetarian-fascists are behind this UN Screamoid report. Back then they were loping around claiming that eating meat was a terrible waste of resources, and that half the planet was going to starve to death no later than the 1980's. Then Ronald Reagan got elected, defeated the Evil Soviet Empire, and now the UN is worrying about the global epidemic of obesity.

I doubt the global carrying capacity of ruminants has changed all that much over the last 1000 years. If it's not cattle on a range, it will be goats, elk, deer, antelope or buffalo. For those who are about to launch into hysterics about the terrible dangers of the American meat-eating culture, think again. North America (Canada plus the United States) and Central America only account for 14% of the world's cattle. Overall, the largest emitter of methane into the atmosphere is not ruminants anyway:
Natural wetlands are the world's largest methane source, and the only one whose emissions are controlled almost exclusively by climate. The mean annual emission from wetlands averages about 30% of the global source strength of about 525 Tg (1 Tg =1012 g) over the last 20 years and shows large interannual variations (Walter et al., 2001). Wetlands have been shown to explain large positive and negative anomalies in interannual growth rates of atmospheric methane (Dlugokencky et al., 2001), but they do not explain the trend of declining growth rates in atmospheric concentrations.
There's another little factoid neglected in the UN screamoid release, but the NASA GISS report mentions it. The yearly annual increase of methane into the atmosphere is already declining. Partly this is due to recoveries of methane from oil wells and landfills, but here's another factor:
Ruminant animals, which produce close to 20% of total annual methane emission, consist of bovines (cattle and dairy cows), goats, sheep, pigs, camels, and water buffalo, although bovines account for about 80% of methane emissions from ruminants. Historical emissions from ruminant animals show a slow and steady increase over the last 2 decades. This trend is the result of two developments. Animal populations in developed countries, where emissions per head tend to be large because large animals are fed high-quality feed, are slowing while those in developing countries, where per capita emissions tend to be lower due to smaller animals consuming lower-quality feed, are increasing. The global result is large increases in bovine populations and small increases in emissions. Thus, emissions are becoming progressively decoupled from absolute population growth of animals.
And here's another interesting fact omitted from the UN screamoid:
Mitigation of emissions from ruminant animals has also been identified with co-benefits: since methane emission represents incomplete conversion of food intake to dairy or meat products, reduction of emissions is associated with higher productivity or lower feed requirements. However, controlling emissions has been researched and accomplished in management systems such as those in the US where feed and activity are carefully controlled and where amount (dairy and beef animals) and speed (beef animals) of product are maximized via expensive cash inputs.
Here's an Australian article from the 1990's discussing how to reduce methane emissions from cattle, and it makes the same point with much greater detail. The bottom line? Intensive cattle-farming operations produce much more meat or milk per bovine fart than free-range buffalo eating a pure forage diet did. I just thought you'd want to know all this. As of 1997, methane emissions in the US were dropping, not rising. Relatively, US pasturage is low compared to the global average.

The real question is whether we should drain the wetlands, obviously. Methane is a far more powerful greenhouse gas than CO2. For a better understanding of the relative effects of methane emissions, CO2 and water vapor, I recommend this link, especially Table 4a. Graphically presented, it shows:

Granted, it's hard to see why an anthropogenic increase of .28% of all greenhouse gases would have much effect on our climate, but manmade methane is a very significant component of that very small total. If manmade greenhouse gases are really having a measurable effect on climate, then reducing methane emissions, no matter how, would be an important part of the solution. Maybe we need a Wetlands Filler and Drainer of today to save the planet.

Sniff. Just think of how a mild-mannered property developer could suddenly be revealed as Marsh-Drainer Mack, the Man Who Saved The Planet. Where is Heinlein when you need him?

This page is powered by Blogger. Isn't yours?