Star Tribune's Board of Economists Are In Denial

In Sunday's Star Tribune, the Minnesota newspaper's "board of economists" downplayed the current economic indicators and basically said that everything is going to be great. The article is entitled, "Economists see trouble ahead, but no recession."

Now I mean no offense, because I recognize that economic forecasting is often more art than science, but none of the experts seem to acknowledge any of the major macro-economic indicators that are pointing toward a recession. Instead, what we got was the typical Wall Street bias, downplaying some major economic pain among the working poor and middle-class, and then ultimately concluding that it will all work out okay if the government stays out of the way.

Here are some dumbfounding quotes from the story.

Dan Laufenberg, chief economist for Ameriprise Financial (which has its own issues, by the way), provided this insight:

Unlike the savings and loan crisis of the 1980s, the mortgage mess is not solely a U.S. problem. Investors holding the bag on troubled U.S. home loans can also be found from Norway to China and scores of nations in between, noted Dan Laufenberg, chief economist of Ameriprise Financial.

"It sounds like a problem for a wide range of investors around the world," Laufenberg said. "Is it going to be enough of a deal to derail the [U.S.] economy? I would argue no."

So let me get this straight, because investors in other countries are taking major hits, the United States economy should be immune. That simply defies the fundamental underpinnings of a global economy, if anything, the global nature of the subprime crisis and our interconnected economies should indicate that there will be fewer safe havens for investors and that the crisis is a bigger problem, not less.

The University of Minnesota economist, Tim Kehoe, continued to trot out the Greenspan talking points and argued that the United States government should not help homeowners or anybody else effected by the subprime, mortgage crisis. That was nice of him, and the strategy has worked really well so far (that's sarcasm).

And, my favorite commentary came from Bill Melton of Melton Research. He said this:

"If you're going to sink this ship, with all the torpedoes that have been fired, you should be seeing more happening than you have," said Bill Melton, president of Melton Research in Edina.

So for Mr. Melton and the rest of the Star Tribune's Board of Economists, below are some of the latest macro-economic figures compiled by Nouriel Roubini. I believe that these are facts that somehow didn't trickle-up to the learned Board of Economists. Click here for Roubini's full post:

• Initial claims for unemployment benefits now at their recession level (i.e. level they had during the 2001 recession) and continued claims for unemployment benefits sharply up (signaling that workers losing jobs have a harder time finding new ones and are thus unemployed longer).
  

• Durable goods order falling – excluding transportation – for four months in a row; and non-defense capital goods orders and shipment falling too signaling that non-residential capex spending will show negative growth in the fourth quarter.

• Consumer confidence still plunging (ABC/WaPo index) or sharply depressed even in December (Conference Board measure). Polls showing that a majority of Americans expect a recession in the next 12 months.

• Oil prices in the $90 to 100 range and now closer to the upper part of this range.

• Retail sales falling in real terms during the holiday seasons (as mediocre nominal growth was lower than inflation) and all the other indicators of holiday sales – including retailers’ earnings and equity valuations showing serious gloom ahead.
  

• The worst housing recession since the Great Depression getting worse and uglier with starts, permits, sales, prices, mortgage applications all sharply down and falling more; the only thing going up in housing is defaults, foreclosures and delinquencies.

• Non-residential commercial real estate in serious trouble as a series of press reports and data suggest; CMBX index now at recession spreads.

• Forward looking indicators of economic activity (Richmond Fed, Philly Fed manufacturing surveys, Index of Leading Indicators, ECRI leading indicators index) signaling weakness ahead and manufacturing ISM likely to fall below 50 (contraction level).

• Corporate earnings falling 8.5% (y-o-y) in Q3 and expected to fall more in Q4 and ahead.
  

• Interbank spreads (Libor vs. policy rates, TED spreads, BOR/OIS spreads, etc.) still at very elevated levels in spite of massive central bank injections and policy rate easing by Fed, BoE and BoC.

• Bond yields curve and credit spreads pricing recession ahead.

• Credit markets dead (subprime and subprime-related RMBs issuabce, subprime related CDOs issuance, and SIVs), comatose (near prime and prime and most of CDO and ABS issuance) or frozen (LBO deals cancelled, postponed, restructured, hundreds of leveraged loans on the balance sheet of banks, CLO issuance sharply down).

• Unraveling of the $350 billion Structured Investment Vehicles ("SIVs") and collapse of the Super-SIV scheme forcing banks to bring back on balance sheet SIVs assets (re-intermediation), thus absorbing significant capital and liquidity and thus exacerbating the liquidity and credit crunch.

• Signs of sharply increasing default rates on credit cards, auto loans and student loans leading the spreading of the credit crunch from mortgages to overall consumer credit.

• Corporate risk spreads sharply up – over 500bps – for junk bonds that were issued in massive amounts by the corporate sector in the last few years.

• Bond insurance firms all under review for downgrade and one –-ACA--already downgraded to C and on the verge of bankruptcy. Risk of hundreds of billions of losses for the underlying securities and issuers of insured bonds.

• Massive further losses and writedowns by financial institutions that will increase as the crisis moves from subprime to near prime, prime, credit cards, auto loans, student loans, commercial real estate loans, leveraged loans, losses on ABS instruments, corporate loans. Unraveling of the Minsky credit cycle with losses reducing capital, reducing credit and exacerbating the credit crunch.

• Pressures, losses and runs on non-bank financial institutions “the shadow banking system” (hedge funds, money market funds, state funds, investment banks, SIVs and conduits) that borrowed short and illiquid and lent long and illiquid that do not have direct or indirect access to the central banks’ lender of last resort support.

• US dollar falling and most of the financing of the still massive US current account deficit coming from central banks and SWFs, not private sector investors.

• Geostrategic risks rising (being the assassination of Bhutto; unstable petro-states; high energy insecurity; political and policy uncertainty in the US as 2008 will be an election year).

Marijuana and Mortgage Fraud Don't Mix

The Star Tribune has an article about a Burnsville, Minnesota man, Mario Augustin Lewis, whose indoor marijuana-growing operation provided the first clues in a mortgage fraud case that resulted in 4 and a half years in prison. Here's an excerpt:

The ensuing investigation ultimately led to a 4½-year prison sentence Friday for Mario Augustin Lewis, whose indoor marijuana-growing operation provided the first clues in the mortgage fraud case.

Lewis, a former real estate agent at LHS Mortgage, apologized for his crimes, although he insisted that he was never out to hurt anyone, including the lenders who financed the nine houses he bought with proceeds from the fraud.

Lewis overstated the purchase price of homes and pocketed more than $430,000 in the fraud.

Click here for the whole story.

Marijuana and Morgage Fraud Don't Mix (Part II)

Here's the Pioneer Press story about Mario Lewis and LHS, which also includes a little bit about Parish.

Click here for the whole story.

Guess Who Is Threatening Our Liberty?

Mother Jones has a great article about the new boogey-men for corporate America...state attorneys general. Evidently, Public Enemy #1 is not a bank robber, a murderer, or even a terrorist. No, according to the latest corporate-funded propaganda, our state attorneys general are the biggest threat to democracy and freedom. We should be relieved, however, to know that neither Minnesota Attorney General Lori Swanson nor former Attorney General Mike Hatch made the top ten list of arch-enemies of liberty, click here to see the report from the Competitive Enterprise Institute.

Here's an excerpt from the Mother Jones article:

Cramer's tirade is just the latest attack on a state attorney general from the business world. As the Bush administration has largely gutted federal regulatory agencies and failed to respond to several major consumer crises—everything from the meltdown of the subprime-lending industry to the proliferation of lead-painted toys—state attorneys general have used their own state authority and consumer-protection laws to fill the regulatory void. In recent years, they've been increasingly aggressive in going to bat for consumers, policyholders, and homeowners who've been on the receiving end of unsavory business practices left unregulated by the feds.

They've also been at the forefront of controversial litigation designed to limit greenhouse gases and clean up housing contaminated by lead paint. And they've been especially tough in litigation against tobacco companies. Indeed, on Tuesday, several attorneys general filed suit against R.J. Reynolds, the maker of Camel cigarettes, for running an ad in Rolling Stone this month that violates the terms of its 1998 agreement to stop marketing cigarettes to children. (The ad uses cartoons, something explicitly banned in the agreement.)

In return, corporate America has accused the attorneys general of abusing their power, usurping the role of state legislatures and Congress, and getting in bed with the plaintiffs' bar. The nation's biggest companies have been working on a new backlash. In late October, the U.S. Chamber of Commerce's Institute for Legal Reform (ILR) held its annual summit, and this year's program featured a special panel on reining in state attorneys general.

Friday Funnies: Predatory Lenders Unite With Their Very Own Website and New Commercial

Predatory Lenders have united with their very own website so that they have an unfiltered avenue to tell their side of the story. Check it out by clicking here.

The Predatory Lending Association (PLA) is dedicated to extracting maximum profit from the working poor by increasing payday loan fees and debt traps. The working poor are an exciting, fast growing demographic that includes: military personnel, minorities, and most of the middle class.

Others are using commercials to spread their message.

Star Tribune: A southern Minnesota man is accused of plotting to use credit-card numbers to buy goods in the Burnsville area

The Star Tribune has a story about Mark A. Misgen, owner of M & S Auto and Maggio's Pizza in Ellendale, Minnesota. He was charged with felony counts of identity theft, financial transaction card fraud, aiding and abetting financial transaction card fraud, and aiding and abetting theft by swindle.

Here's an excerpt:

A man who runs an automobile dealership and parts business in southern Minnesota has been charged with stealing customers' credit-card numbers and racking up at least $20,000 in fraudulent charges in the Burnsville area with the help of an accomplice, according to authorities.

Is "Negative Equity" the new buzz word of 2008?

To impress friends and family, "Market Liquidity" or "Credit Crunch" were the economic buzz words of 2007. So here is my new year's prediction, "negative equity" will be the buzz word of 2008. As the housing market continues its painful decline and the Alt-A Option ARMs adjust to higher levels, we are going to start hearing more about people who are "underwater." That means they owe more on their house than their house is worth.

A person can survive being underwater, provided that circumstances do not change and they intended their home to be a long-term investment. When, however, they can't refinance when they had planned to refinance, there are medical costs, loss of a job, or major home repairs, then the risk of foreclosure becomes very real.

The blog "Calculated Risk" has an excellent description of where we are at and where we are going with regard to a housing market with a growing number of people with negative equity. Click here for the full post or here's an excerpt:

Since the end of 2006, U.S. home prices had fallen about 3.6% (by the end of Q3 2007), according to the S&P/Case-Shiller® U.S. National Home Price, and will probably decline 5% for all of 2007.

The price decline in 2007 would move the dashed line one column to the right, putting another 4% of U.S. homeowners into the no / negative equity category....At the end of 2006, there were approximately 3.5 million U.S. homeowners with no or negative equity. (approximately 7% of the 51 million household with mortgages). By the end of 2007, the number will have risen to about 5.6 million.

For the more visual-learners, click here for all the fancy charts.

So, to bring these ideas home to Minnesota, I think we will see the foreclosure crisis expand out into more affluent areas of the city (such as the lake neighborhoods in south Minneapolis; Summit/Cathedral Hill in Saint Paul; Bloomington, Lakeville, Minnetonka, in the suburbs, and Rogers or Ramsey in the exurbs). I picked these areas because these are the areas where people were more likely to have gotten piggy-back mortgages, have an extremely high loan-to-value ratio, an inflated appraisal or all of the above. They are also areas that saw double-digit appreciation every year during the boom.

I'm not saying that the foreclosure rates will be the same as what we've been seeing in the core urban neighborhoods, but the foreclosure rates will definitely be higher than they have ever been in such affluent areas in the past. These are bubble-neighborhoods or bubble-communities. If prices went from $250,000 to $500,000 in five years. It is not crazy to think that the price may drop by $50,000, which means that a homeowner that bought at the market peak or took out a big home-equity loan will now have negative equity and fewer options if there are unforeseen events in their lives.

If you think that I'm talking about a small handful of people, you're wrong. As the chart prepared by Credit Suisse below shows, in 2009 the amount of simultaneously adjusting "Alt-A" Adjustable Rate Mortgages will be the equivalent of the simultaneously adjusting Subprime Adjustable Rate Mortgages, which peaked this summer. The Alt-A adjustable rate mortgages were marketed to people with good credit but not enough money down to purchase houses in more affluent areas of the cities, which is the premise of my prediction above.



Here's a similar blog post by Paul Krugman about the importance of negative equity.

It's Christmas...

I'm on Christmas break for the next few days, but I'll be back soon.

Thanks, and please don't hesitate to take this opportunity to enjoy the yule log.

Bankruptcy, Foreclosure, and Depression

There was a sad article in the Star Tribune about a man who committed suicide and whose home was in foreclosure:

The man who died when his Elk River house burned set the fire on purpose in what police said today was a rare manner of suicide.

Corey R. Cook, 43, used a flammable liquid to start the fire Sunday morning in the 11400 block of 193rd Avenue, police said.

Police said Cook's home was under foreclosure. He died of smoke inhalation, police said.

This mirrors a recent post on Credit Slips about the isolation and shame that people who are in bankruptcy or foreclosure feel:

As of today, 700 telephone interviews have been completed as part of the current round of data collection on the Consumer Bankruptcy Project. Since I am overseeing this part of the process, I have had the privilege of being one of the first to hear about people's experiences with bankruptcy. One thing that has struck me repeatedly is the extreme loneliness and isolation that typically accompanies these families as they wind their way through bankruptcy. The people who are going through it often go it alone. They seldom turn to family members or friends for support. More often, they say that it would be a cold day in hell before they even told anyone else about their insolvency, let alone ask them for help. And there simply are no support groups for these people.

It's something to keep in mind as some holidays pass and other holidays approach: Provide support for those in need, and be thankful for the many blessings that each of us has.

Not feeling wealthy yet?

We've heard a lot about our booming economy these past few years (although not now), but I haven't exactly seen that in my day-to-day life and you probably haven't either. Paul Krugman, of course, has the answer related to how badly this booming economy favored people who were already pretty darn well-off and missed the rest of us. I guess we must continue to wait for the trickle:

You know you’re a serious wonk when you wait eagerly each year for the arrival of the CBO’s “Historical Effective Federal Tax Rates.” But it’s much more than a tax report — it’s the single best estimate we have of trends in income and income inequality.

....

Here’s what the numbers say about percentage gains in after-tax income from 2003 to 2005:

Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%

Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%

It was a boom, all right — but only for a few people.

Click here for his full post.

Indirect Costs of Foreclosures Will Hit Neighborhoods and Local Government Hard

For the past few years local school districts, counties, and municipalities have struggled against cuts in local government aid ("LGA"). The cuts in LGA have strained budgets and delayed routine maintenance projects. Now Minnesota neighborhoods and local government units will have to deal with the cost of dealing with foreclosed, vacant, and abandoned property.

An earlier post this week cited an article in the Star Tribune related to the direct costs of foreclosures. Specifically the cost of policing, boarding, and maintaining abandoned homes. What has not been mentioned are the indirect costs, which will be a far greater impact unless something is done fairly quickly.

First, there is the increased cost of borrowing money. A good story in the Washington Post outlined the new reality for local government units who were thinking about bonding for new projects, presumably this will also affect the State's bonding priorities as well. Here's an excerpt from a Washington Post story:

The widening credit crunch is making it harder for cities and school systems to get money for buildings, ballparks and other vital projects from the $2.5 trillion market for municipal bonds, a sector of Wall Street that rarely sees trouble.

....

Faced with the prospect of paying higher interest rates this month, Chicago canceled a $960 million bond. Miami-Dade County pulled a $540 million offering for its airport. And the District has a $350 million bond for schools, parks and roads scheduled for next month that could be delayed if credit conditions continue to deteriorate, a top D.C. finance official said.

Second, and even more dramatic, is the decrease in property taxes that will be collected as a result of the subprime, foreclosure crisis. There is an obvious loss of taxes for houses that are vacant and abandoned, because their value decreases dramatically, but there is also the decrease in value of neighboring property. These are houses that are not in foreclosure, but they are located next to homes that have been foreclosed.

The Center for Responsible Lending crunched the numbers and estimated (conservatively) that there will be a $1.29 billion total decrease in property values with an average decrease of $2,332 for just twenty-one Minnesota counties. That's a $1.29 billion drop in the total tax base, not even including the houses that have actually been foreclosed upon.

Here are the specific numbers by county:

County	Decrease in House Value/Tax Base from Foreclosure Effect ($)	Average Decrease per Housing Unit Affected ($)
Anoka	$99,770,460	$1,906
Benton	$2,371,805	$1,447
Carlton	$662,803	$1,258
Carver	$7,762,386	$2,572
Chisago	$1,695,919	$1,941
Clay	$3,807,775	$1,115
Dakota	$125,322,980	$2,219
Dodge	$268,211	$1,286
Hennepin	$670,245,312	$2,653
Houston	$227,756	$1,307
Isanti	$994,686	$1,637
Olmsted	$ 12,889,368	$1,310
Polk	$465,786	$1,094
Ramsey	$258,296,498	$2,311
Scott	$17,953,899	$2,244
Sherburne	$3,602,529	$2,012
St. Louis	$15,048,791	$984
Stearns	$10,102,882	$1,410
Wabasha	$661,846	$1,163
Washington	$51,948,309	$2,214
Wright	$6,759,747	$1,981
TOTAL/AVERAGE	$1,290,859,748	$2,332

Click here for the full report.

The Friday Funnies (Part II): The Future is Coal

If it's on television, it must be true... [click here]

Friday Funnies (Part I): The Magic of Voluntary Regulation

Okay, this is not exactly about consumers, but I figure that the total destruction of our planet will have a pretty big impact on consumers... so we have an environmental theme going today with our Friday Funnies.

Click here for a video/cartoon by Mark Fiore about the magic of voluntary regulation as the solution for global warming. It's worked so well with toys, sub-prime mortgages, dog food, and mass-processed meat, I think it truly may be magic!

Fed Issues New Rules For Subprime Lending

Our Federal Reserve Board issued new rules related to subprime lending today. Click here to read them, or you can read some choice quotes related to our top financial regulator's recent action. The quotes are a little more entertaining than the regulations.

Representative Barney Frank (D-MA) Chairman of the House Financial Services Committee:

“The staff of the Financial Services Committee and I have had a chance to review the Federal Reserve’s proposed rules regarding abusive subprime loans. We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other.”

Here are a few apt quotes from a New York Times article:

“Reading these proposals today is almost painful,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “These are all just simple, common sense regulation. Why couldn’t Greenspan have done this seven years ago?”

“The Federal Reserve’s proposed guidance is riddled with loopholes and exceptions that will undermine its effectiveness,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group in Durham, N.C. “The proposals fall far short of what was needed, and in some ways fall short of where the industry was already headed.”

A Billion Here A Billion There...

I don't think that I have seen the word "billion" quite as often before, but I think we're now talking about real money:

The Fed loaned "cash-strapped" banks $20 billion and will offer up another $20 billion today, the Washington Post has the story:

Cash-strapped banks took the Federal Reserve up on its offer of $20 billion in short-term loans to help them overcome credit problems, but the interest rate wasn't as low as some had hoped.

...

A second auction will be conducted on Thursday, offering banks another chance to get a slice of another $20 billion in 35-day loans. The Fed said it would conduct two more auctions in January and then assess whether the process was worth continuing.

Cost of Foreclosure on Saint Paul and Minneapolis

An article in the Star Tribune highlighted yet another cost of foreclosures, which provides further reasons why mortgage lending has to be regulated more closely and that we can't just let the homeowners slip into foreclosure. It effects everybody. Here's an excerpt:

Squatters, stolen pipes and broken windows have taken up a lot of police officer Dean Koehnen's time in the past year.

That's because more than 1,000 buildings -- most of them residential -- landed on St. Paul's list of vacant properties between Jan. 1 and Dec. 1. Add that to the 550 that were on the list at the start of 2007, and St. Paul has a costly and visible problem.

....

His department monitors vacant buildings once they're reported and makes sure they're in compliance with the city's nuisance code. The majority of the city's vacant houses have significant safety concerns and need to be secured, sometimes by being boarded up. A record $100,000 has gone to boarding up houses, a cost the city tries to recoup from the buildings' owners.

Magner's department has taken on additional workers and put lots of overtime into the issue. The budget for monitoring vacant buildings has jumped from $338,000 in 2005 to $607,000 for 2008.

Paper or Plastic?

Okay, so I'm not trying to be an alarmist---I have one of those cool Nalgene waterbottles in my house, too---but here is an interesting article in Mother Jones about whether that's such a good idea. Click here for the full article, below is an excerpt:

Then what to do about the alarming fact that plastic's chemical constituents are percolating throughout our bodies, apparently interfering with our metabolism, our sex organs, and our children's neurological and reproductive development? The Centers for Disease Control has found two compounds—phthalates, used in polyvinyl chloride (pvc) plastic, and bisphenol A, a building block of polycarbonate plastics—in the urine of a majority of Americans tested. Both chemicals are short-lived once they enter the environment, but they're being scrutinized for their potential to mimic and disrupt our hormones—even before we're born.

"Today there are no babies born without measurable levels of phthalates," says Dr. Shanna Swan, director of the Center for Reproductive Epidemiology at the University of Rochester School of Medicine and Dentistry. Phthalates, which are used to give flexibility to pvc ...., turn up in bath and teething toys, shower curtains, upholstery, flooring, medical equipment, and countless other products, including cosmetics. Animal studies have linked phthalates to the same genital abnormalities that are now among the most common birth defects in American baby boys. "We're not yet sure what level of exposure produces these adverse effects, but they are a real concern," explains Dr. Paul Foster, a senior researcher at the National Toxicology Program.

Are these people crazy?

I was surprised to see in the Star Tribune that five of the seven Minnesota "money managers" interviewed for an article about the direction of the market predicted that the market was going to go up in 2008. See the whole article here.

This is an incredible story, because the consensus among actual economists is not whether we are going to have a recession, but rather how bad the recession is going to be. Here's an excerpt from a good post by Nouriel Roubini summarizing the consensus among people a lot smarter than I am:

While a few months ago analysts were still heatedly debating whether the US would experience a soft landing or a hard landing (a recession) the center of the macro debate has now clearly shifted away from soft landing versus hard landing discussion to a recognition that a hard landing is the most likely scenario; thus, increasingly now the debate is on how deep and severe the forthcoming hard landing will be.

David Rosenberg of Merrill Lynch is now clearly predicting a recession for the US economy in 2008; Jan Hatzius at Goldman Sachs is not formally speaking of a certain recession in 2008 but most of his analysis is consistent with a high likelihood of a recession in 2008; Mark Zandi of Moody’s Economy.com is also very close to a hard landing view.

More interesting now even the thoughtful Richard Berner – who used to be strongly in the soft landing camp while his counterpart Steve Roach was in the hard landing camp – is now predicting a recession in the US in 2008, even if he expects such a recession to be mild. And even the soft-landing optimists at JPMorgan are now recognizing that the likelihood of a US recession is now at its highest level in years. When mainstream analysts such as Berner start to talk about a recession beng likely you know that the debate has clearly shifted towards a discussion of not whether a recession but rather how deep of a recession.

And in the academic camp some of the most senior economists in the profession – Bob Shiller, Marty Feldstein, Larry Summers, Paul Krugman – are all in various degrees in the hard landing camp or very concerned about a hard landing.

Don't get me wrong, I'm not rooting for a recession, but five out of seven?

Are subprime foreclosure rates higher than they should be?

Eric had a very good question in response to our post related to the Mortgage Bankers Association release of foreclosure rate numbers, particularly the fact that they are at an all time high. Here's the comment/question:

That number is high, certainly, but wouldn't we expect sub-prime mortgages to account for a larger percentage of foreclosures than their percentage of all loans? I mean, that's why they're "sub-prime," right? I guess I would also expect sub-prime ARMs to be higher even than sub-prime fixed mortgages, since the cost of a fixed mortgage doesn't change, making it at least somewhat easier for a prospective borrower to stay out of trouble.

Do you think that number is far larger than it ought to be?

The answer is yes for three reasons.

First, foreclosure rates are higher now than they typically are when we are in a full-blown recession. Supposedly we are not in a recession, and so we should be comparing the current foreclosure rates to non-recession market conditions. The fact that we are at the highest rate ever is cause for concern, particularly when other sectors of the economy are supposedly doing well.

Second, the subprime fixed and the subprime ARM foreclosure/delinquency rates typically mirror one another, as seen in the chart below. They rise and fall together. Now the subprime ARM rates are diverging dramatically from the subprime fixed rates. That is a big flashing warning sign that something isn't right.

Third, although these percentages of subprime mortgages going bad does not seem like a big change, it is. This importance is increased by the fact that the percentage of the subprime market as a percentage of the overall real estate market has gone from about 8% in 2000 to over 20% in the past seven years. The Alt-A (new option ARMS, interest only mortgages) and Sub-Prime markets when combined account for almost 40-50% of the overall market. So even if the foreclosure rate for subprime mortgages remained the same, which it has not, the overall impact to the economy and local communities has increased exponentially. Rather than talking about a discrete segment of the housing market, we are now talking about 40-50% of the housing market. And that is why many economists and Wall Street are concerned.

Here are a few good graphs looking at the historical foreclosure rates from Paul Krugman, click here for his full post:




I believe that the rates would have been much higher in 2002-2005, but people were refinancing every time they got into trouble or were facing a reset. This masked how rotten the housing market really was. Now that refinancing is not an option, because these exotic mortgages simply are not available, the people have damaged credit, and/or no equity in their homes. The housing bubble is also revealing an issue that most people don't want to talk about: debt. Are we carrying too high of a personal debt-load? And, is that debt-load due to lifestyle choice or non-discretionary spending? If it is discretionary spending or lifestyle choices, then we shouldn't be too concerned because the market will correct. If it is non-discretionary spending or fixed costs, such as health care, student loan repayments, or transportation, we are in bigger trouble.

Why subprime foreclosures matter to us and Minnesota...

After the release of the Treasury Departments' loan modification plan, I was taken aback by some of the criticism by other homeowners. Essentially, the argument was that the people in foreclosure deserve to be punished and that we were rewarding bad behavior.

This argument is really premised on the idea that the homeowners in foreclosure actually knew the terms of their mortgage, when, in fact, most of these homeowners were the victims of fraud. Certainly every homeowner in foreclosure is not "innocent," but the number of people who knowingly understood that they were getting an adjustable-rate mortgage that is pegged to the six-month average of the London Inter-Bank Offering Rate for U.S. Dollar denominated currency is simply crazy (with a built-in shock payment and negative amortization). Most people don't even know what that is, and often these homeowners relied upon and paid a broker to guide them through the process.

Setting these arguments aside, however, here is why it is in all of our interests to offer relief for homeowners. These statistics are from our friends at the Center for Responsible Lending, and demonstrate why we can't just sit back...

There will be a $1.29 billion decrease on our Minnesota tax base, and over 500,000 nearby homes (homes not in foreclosure, but living nearby) that will decrease in value by approximately $5,000 due to the foreclosure crisis.

If that isn't enough here is the broader economic impact:

• Nearly 45 million homes NOT facing foreclosure will decline in value by an estimated $233 billion with most of the decline hitting in 2008 and 2009 as subprime foreclosures lower the prices of surrounding homes.

• Because of property devaluations caused by subprime foreclosures, 24 states and 42 counties will lose over $1 billion each in local house prices and tax bases.
  

• More than 90 subprime mortgage lenders have gone out of business as of July.
  

• Up to half of the 450,000 families whose subprime adjustable rate mortgages will reset in the next three months will lose their home in foreclosures.

• Foreclosures cost lenders an estimate $50,000 per home in processing fees, liquadation-sale price cutes and other costs. "In 2003 this translated into approximately $25 billion in foreclosure-related costs for lenders alone---well before the 2006 foreclosure spike."

Click here to refer to the full Center for Responsible Lending fact sheet.

Friday Funnies: Always Christmas Time For Visa

As the personal savings rate for United States families has reached its lowest point since the Great Depression and we are encouraged to spend more money to keep our fragile economy going, let us take a moment to reflect upon a holiday message from Consumers Union...

H & R Block Writes Down More Debt Because of Subprime Mortgage Crisis

Pretty much lost in the economic news is the continuing trouble at H&R Block. Here's the brief from the Washington Post:

H&R Block, the nation's largest tax-preparation company, delayed its second-quarter earnings to give its new auditors more time. It said it expected a much larger loss than last year as its mortgage business continues to drag it down. A preliminary report said H&R Block expected a net loss of $502.3 million for the quarter ended Oct. 31, compared with a loss of $156.5 million in the corresponding period last year.

Star Tribune: Thousands of Minnesotans Stuck With Worthless Car Warranties

A good article in the Star Tribune highlights an on-going issue: worthless car warranties issued by financially dubious companies. Here's the scoop:

Some 137,000 people across the United States and Canada -- including more than 11,000 Minnesotans such as Lashbrook -- may be holding worthless car warranties from Ultimate Warranty Corp. The Ohio-based company has all but disappeared, leaving $15,000 in a loss fund to cover an expected $48 million in claims, according to South Carolina regulators who are investigating the company.

Its nationwide collapse has come with a new twist, as officials handling it plan to ask car dealers who sold the warranties to cover the repair claims themselves. That's because dealers pocket from one-tenth to more than half of every premium they sell, said Doug Hartz at the South Carolina Department of Insurance, which got involved because South Carolina is home to the company on the hook to insure Ultimate Warranty.

Was the Fed's Move To Stabilize The Economy Too Late?

Nouriel Roubini provides an interesting analysis of the Federal Reserve Board's move to coordinate with other central banks to create "liquidity" in the market (meaning injecting a bunch of cheap cash into the marketplace) and why it isn't going to work. Here's an excerpt:

First, you cannot use monetary policy to resolve credit and insolvency problems in the economy; and most of the crunch is due not just to illiquidity but rather to serious credit and solvency problems of many economic agents (households, mortgage borrowers, subprime, near prime and prime mortgage lenders, homebuilders, highly leveraged and distressed financial institutions, weak corporate sector firms).