The White Paper - Housing

A few years ago, when I first started writing about housing and the problems that were developing, most people thought the word subprime meant a prehistoric species from some long ago period. But quickly, it was learned that subprime meant a mortgage loan given to someone with questionable credentials, and an even more questionable ability to pay the loan back. We also learned that if you could breath, you qualified, and the bankers, mortgage brokers, and any one else associated with housing, including politicians, were more than happy to help you get into the house of your dreams. Unfortunately, you know how the story played out. The Bible says a house built on a foundation of sand (debt)…well, you get the idea.

Now the pundits tell us we are at the bottom. Housing, both pricing and sales, are smoothing out, and in the not too distant future, the real estate asset class will once again be the catalyst for great wealth. Many of you believe this story. DON’T!

Subprime was just the first shot in the salvo of creative mortgage financing. In fact, the Federal Reserve and the U.S. Treasury may have expended all their tools on the mortgage industry’s opening act. Consider this scenario. Imagine if you sat down to a five course dinner, thinking all that was being served was the first course. You gorged yourself, feeling satisfied, and actually contented. So what happens when course two, three, four, and five, are served? Uh oh! For the mortgage markets, the next course is the option adjustable rate mortgage. (ARM) The problem is not interest rates or “resets.” The problem is “recasts,” which usually happens when you either reach 125% of the original loan balance on a negative amortization basis, or 5 years pass, whichever comes first. These loans were pushed (I mean sold), as “affordability” products to people who could not afford to buy the house they wanted. The lender expected the borrower would either re-finance with a new ARM, or sell the house before the recast. Worst case, the house would appreciate faster than the indebtedness, allowing them to pay it off. It didn’t happen. Appreciation occurred, but the borrower with the encouragement of the lender, refinanced again and again, pulling money out to buy SUVs, kitchen make-overs, or once-in-a-lifetime vacations. All things that gave a false sense of growth to our economy.

The pundits, including our political administration, are saying that if they can just keep interest rates low, all will be well. Au contraire. Here’s an example: For a $750,000 house purchased five years ago, even if you get a 4% interest rate based on current “adjustable rates,” you must amortize the 4% over the remaining 25 years. (average) The house is only worth $400,000 in today’s market, and could go lower. So the possibility to refinance into a conventional loan is zero, unless you have the $350,000 difference just “lying around.” Also, your payment goes from $1,000 per month, to $3,945.62, a near quadrupling overnight. Can you say…walk away.

Here’s more bad news. Most of these billions of dollars of mortgage recasts have not happened yet. They are scheduled for the latter part of 2009, 2010, and 2011. Keep in mind, the financial institutions almost blew up when a small portion came due. What happens when the majority shows up on the doorstep? Couple this with alt-a, prime, and agency paper, and you have the makings of one good brouhaha, making the zombie banks of Japan seem like the life of the party. Factor in the inevitable collapse of highly-leveraged traded real estate investment trusts, and you have a story line that could only be scripted in the mind of Steven King.

The collapse of real estate is not near the end. In fact, in the parlance of musical theater “the overture has just concluded, and the curtain is about to go up.”

Till next time,

Bill

P.S. - Next: Emerging markets and China.


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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

The White Paper

Two years ago, I wrote a lengthy white paper (one man’s personal opinion and exposé) on the significant topics confronting all investors. Given both the economic and political crossroads that we find ourselves at today, it would seem that now is the perfect time for another WHITE PAPER. Topics to be discussed will include housing, (un)employment, healthcare, emerging markets (and China), taxes, and the stock market, among others.

Stay tuned, and be ready to take notes. Class will be in session shortly.

Till next time,

Bill


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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Headlines as We Approach the Second-Half Recovery

“The Federal Reserve lost $5.25 billion in the first quarter on the securities they acquired with last year’s bailouts of Bear Stearns and insurer AIG, according to a report issued Wednesday.”
- Reuters

“More than 600,000 seniors are delinquent in their mortgage payments, or already in foreclosure.” - USA Today

"The National Delinquency Survey from the Mortgage Bankers Association found foreclosure activity was at an all-time high in the first quarter of 2009, when the delinquency rate, which excludes homes already in the foreclosure process, hit 9.12%.”
- Newsmax.com

“The number of first-time claims for state unemployment benefits fell 24,000 to 601,000 in the week ending June 6th, the Labor Department reported Thursday.”
- MarkewWatch.com (Stated another way: “601,000 new people filed for unemployment, bringing the four-week average of continuing claims to a record 6.75 million people”)
- Bill Tatro

“U.S. sales of retail stores increased 0.5 % in May, but much of the seasonally adjusted increase reflected higher gasoline prices.” - U.S. Commerce Department

“Watches synchronized? Good. Because three weeks from today, the second-half of the year starts. That’s when the economic recovery is supposed to get underway, according to Bernanke, Geithner, Obama, Cramer, Kass, Kudlow, economists, money managers, and other associated pundits.” – MarketWatch.com

Once again, it’s lonely being on the other side of the argument.

Have a nice day.

Till next time,

Bill


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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Same Old, Same Old

Who am I to disagree with National Association of Realtors chief economist Lawrence Yun, who said: “We expect greater activity in the months ahead.” This quote came this week after it was announced that the number of U.S. homebuyers who agreed to purchase a previously occupied home in April posted the largest monthly jump in nearly eight years. The news immediately made the talk-show circuit. It was declared the housing market bottom was in, and that price appreciation could be following right behind. Unfortunately, having observed this declaration many times in the past, I viewed this commentary with strong doubt.

Housing in many parts of the country is bottoming for three reasons. First, it’s the normal Spring-early-Summer selling season. Second, median prices are down in excess of 40% over the past two years from the peak, thereby making the LOW-END affordable. Third, and perhaps most important, foreclosures have been cut dramatically through moratoriums, thereby reducing supply.

However, the moratoriums have ended, short-sales are in disaster, and the number of pending foreclosures is massive. The backlog is gaining ground everyday, and could eventually become overwhelming. Notice of Defaults are at record highs (sorry, green shoot enthusiasts), and Notice of Trustee sales are back to nine-month highs. These escalating foreclosures are not only from the LOW-END (sub-prime alt-a), but also up to several million dollars in present value (prime.)

The latest housing numbers are showing strength in the ultra-low to mid-low range. As the foreclosures escalate in the upper range, the imbalance should crash the mid-to-upper priced properties. Early season hard data has already proven this. However, false bottoms with cash bonuses, and have-to sales, could prove illusory.

How will this play out? The red-hot LOW-END housing market will ultimately cool, as participants cannot, or will not, step up to the next level. For years, move-up buyers have been the life-blood of home sales, but now they are becoming extinct. That leaves the first time buyers to carry the bulk of the sales. Good luck on that one since all the incentives are being used up now. The mid-to-upper bands could experience additional declines of 40%. Investors who have been buying all the way down could get hurt on two fronts. First, falling rent rates, making their properties less attractive, and second, greater risk of default as supply enters the market.

It could get worse. A few years down the road all the loan adjustments and modifications which have been used to postpone the inevitable will start coming to fruition. These include teaser-rates, leverage, 1.5 times LTV, and balloon adjustments. You might call it Mortgage Implosion Armageddon Part II.

Remember, the demise of the LOWER-END of the housing market created ALL the economic havoc that we are currently experiencing. What happens when the MID-TO-UPPER housing market experiences the same precipice fall that happened in 2007?

You ain’t seen nothin’ yet.

Till next time,

Bill


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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Oh Ben! Oh Ben! Where For Art Thou?

As the Japanese discovered, once you’ve taken interest rates to zero, and your economic success is questionable, then you must try another tact. Step two for the Japanese was a tactic called quantitative easing, something the United States Federal Reserve is instituting today. Simply put, this policy can be defined as throwing as much money at the problem as needed. Millions? No. Billions? Not even close. Let’s try trillions.

Several weeks ago, the Fed announced they would be the purchaser of treasuries issued by the Treasury Department at the periodic auctions. In other words, if the world doesn’t buy our long-term paper, we’ll buy it ourselves. Historically speaking, from Rome to Britain, (and that includes us), that type of action has been tried and results in two unintended consequences. The first is total devaluation of one’s currency, and second, an inflationary spiral that is almost impossible to control. (Think of the Nixon and Carter years.)

At an alarming rate, the bond market has recently seen a selling of treasury bonds, including both the ten-year and thirty-year duration. People, institutions, and countries, do not want to hold paper of a country that’s headed toward currency devaluation and hyper-inflation. Unfortunately, as treasuries are being sold, interest rates are rising (remember the see-saw example.) This throws a monkey wrench into the Obama administration’s recovery plans for housing. Long-term treasuries have a direct influence on mortgage rates. Rising mortgage rates are the last thing Obama needs to make his housing plan (also questionable) work.

This is where Ben Bernanke comes in. In order to keep interest rates low, there has to be an overly large buyer of treasuries to drive prices up, and interest rates down. The only player in that game is not China, not some quant or hedge fund, and not the general public. The only player is the U.S. government. Ben knows he has to step up, but he also knows this vicious cycle we’ve embarked upon, has only one ending. Can you say Zimbabwe? *(Zimbabwe’s inflation rate has entered a zone where it is simply impossible to calculate the price of goods hour to hour.)

However, buy he will, and buy he must. The rational will be that they can fix it later. Unfortunately, history has proven that later never comes.

Till next time,

Bill


* The Times (South Africa) February 4, 2009



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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Pump and Dump

The robber barons of the late 1800’s, names such as Fisk, Gould, Carnegie, and Rockefeller, to name a few, were famous for touting the merits of the companies they owned. Their proclamations sent their stocks to stratospheric heights. However, what happened behind the scenes was a well orchestrated effort to sell their existing shares into the strength of the market, a strength created by their own publicity department. To add insult to injury, they would not only garner profits on the upside, but also short their own companies when the inevitable fall would come. This strategy, totally legal until securities laws were enacted in the 1930’s, was called pump-and-dump.

Unfortunately, the same scenario is happening today. For the past several weeks, the stock market has been led by companies that are fighting for their existence. These companies include banks, homebuilders, and highly leveraged real estate investment trusts. Their PR departments, their accounting departments, and even the Federal government, have been working overtime to paint a rosy picture of the “green chutes.” Sure, first quarter earnings results were positive. Never mind that accounting rules were changed, certain months were excluded, and losses simply ignored. The bank stress test resulted in passing grades for all, but never mind that government criteria was altered after objections from the participants.

With truth in knowledge comes understanding. Unfortunately, it’s too late for those suckered into the infamous pump. For the past eight weeks, insiders have been selling their shares. Most recently, several auto executives sold their last remaining shares of an American icon, GM ($1.15 – 5/12/09)

For those of you who walked into the classic pump, here comes what might be a classic dump. Look out below.

Fisk and the boys would have been proud.

Till next time,

Bill



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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Fact vs. Fiction

Within the past twenty-four hours, we have been treated to two remarkable fairy tales. Unfortunately, I don’t foresee a happy ending to either situation.

First, the bank stress tests. In order to determine how they would fair, nineteen banks tested under the new (old) mark-to-model rules by factoring in continued unemployment and housing problems. In essence, the banks were asked if they have enough capital to ride out the storm. Absolutely, the banks replied. Maybe you need a little bit more capital, the government said. So, to meet the need, stock will be sold to the public. Everyone breathed a sigh of relief, CNBC started cheerleading, and the stock market was off to the races.

I could dispute, and be challenged, on many of the assumptions and the results and opinions. Fair enough. However, indisputable, is that every bank has made no adjustments for the impairment of good-will on their balance sheets. For example, Bank of America ($13.51 - 5/7/09) is still carrying good-will as though Merrill Lynch, Countrywide, and Bank of America had a value at the peak of the stock market in 2006-2007. Since good-will makes up the lions share of assets, what happens when the crunch comes again? Cash, stocks, bonds, etc., are real. Good-will, however, is an accounting creation with no tangible value. It is supposed to be tested annually, to see if good-will (carrying value), is less than fair value. If it is, then impairments are required to be taken (charged off.) Done correctly, we would get a true picture of a company’s value. But since accounting rules allow a great deal of discretion and judgment, we can expect a great deal of liberty to be taken by the banks.

Does anyone really believe the valuations of good-will? Well, some people must. These banks will more than likely write-off a series of impairment charges which will create a slow bleeding death, thereby manipulating reality. This doesn’t even take into consideration the dilution of capital raises, sales of some of their most profitable enterprises, the impending tsunami of commercial real estate foreclosures, and credit card write-offs.

The second fairy tale is unemployment. Hooray, hooray. Only 539,000 people lost their jobs in April, a slowing in downsizing. Jubilation. We’ve turned the corner. Not so fast. First, the seasonal adjustments somehow created 65,000 new jobs. Where? Next, the announced 60,000 people hired by the census bureau, which by definition, is part-time work. No problem, we need the employment numbers, just create it by calling the part-timers full-timers! So, 539,000 + 65,000 + 60,000 = 664,000 of potential unemployed people. Also, keep in mind, previous months figures have been adjusted. 30,000 more unemployed in February and 30,000 in March, bringing their totals to 681,000 and 699,000, respectively. Somehow, they came in just under that 700,000 magic number that spells crisis. Oh, to have a pencil with an eraser!

One other point, the Birth/Death Model. This model is making an assumption that businesses too new, or too small, to participate in the employment measure have created a certain number of new jobs. It is not researched, it is not fact, it is only a guess. Where are these jobs? By the way, in the numbers reported today, 226,000 jobs were supposedly created under the Birth/Death Model. Give me a break!

Wishing and hoping doesn’t change the truth. When it comes to banks and jobs, it’s just pure fiction.

Till next time,

Bill



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A disclaimer: None of the content published on BillTatro.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers or their affiliates will advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the content published as part of BillTatro.com may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.