Did you ever notice, people that wake up with a feeling of gloom seem to spread it to others? Now imagine if the country was in a major depression. Do you think government is going to point out the fact?
Depressions are self-fulfilling. The acceptance of the fact that you are in one, tends to exacerbate it. One tends to save more and spend less in anticipation of bad times that may lie ahead. Most politicians are doing the correct thing by not acknowledging the economic mess, it would only make things worse.
Obama in Detroit today shown in a car plant, said sales were up and things were getting better. Detroit is a city where they are tearing down so many houses that they want to rezone 60 acre portions into farm land. I not sure how true that is, but the Paul Bunyan folklore story tellers are known to be from around there and they tend to stretch the truth a bit.
So, everything is just great. The only problem is that the rest of the world is on life support. And it is getting worse. Europe could barely afford to finance their health care plans for their populations. Now they have 20 million immigrants that have no place to go. The support institutions of Europe will not be able to meet the demands put upon them. And nobody will believe that until it happens.
We have unrest in several Middle Eastern countries and with the price of oil falling out of bed, there is no support for the poor. Farmers can’t plant in war torn areas. People are fleeing to areas where there are so many refugees that there is a guaranteed impossibility of employment.
The only part of the global economy that governments cannot really control is the stock market. This world market has kind of taken on a mind of its own lately. We are not sure of where it is going tomorrow, but it doesn’t look good for the long run. We do know one thing, in 1929 most of the investors were individuals. In today’s market, most of the investors are fund managers. They need to keep in the market, to have a reason to keep their job, as a fund manager. For that reason, I don’t see a panic, just a very continuous steep sell off into oblivion. Plus, your stock fund manager isn't old enough to have ever experienced a bear market. And naturally, there will be one or two spectacular "recoveries" on the way to the bottom. Where to from here? Not sure. We have been here before in history, I’m sure of it. The only trouble is; you can only see the outcome from the rear view mirror.
I think we have time to go back to the snack bar and get a refill on the popcorn, you won't miss much of the movie even if you really wanted to watch it.
Wednesday, January 20, 2016
Wednesday, January 13, 2016
Who Is Financing Real Estate Loans?
The question arises, what bank is nuts enough to write home loans at even 4% for 30 years. The answer absolutely none. The savings and loan fiasco of the 1990’s was caused by Savings institutions loaning long and paying short term depositors interest. They loaned money for 30 years at 5%. When short term rates went to 6% their depositors move their funds to a bank paying higher rates and we had massive failures of Savings and Loans.
The banks could do 4% loans, but why bother with the potential risk, when you can make 12% to 36% on credit card loans.
The invisible banker in this whole mess is the Federal Reserve. They are financing the current real estate bubble. It’s kind of a peculiar arrangement. The Federal Reserve can keep a loan on the books for 30 years at zero percent interest and when it gets paid off, they get their money. Now if an investor has a 100k 30-year Treasury at 1% interest and rates go to 8% the current value of that bond is reduced to about $12,500. If they need cash, they will be eaten alive. If they can wait like the government can, they get every penny back in 30 years. Receiving interests on a loan is a human gratification, not a governmental expectation.
Most home loans end up being for about 5 years, the buyer sells (moves gets divorced, etc). So a loan written for 30 years, ends up being a 5 year loan after the home is sold and repurchased by a new owner. The Federal Reserve has amassed about 3 to 6 trillion dollars’ worth of real estate debt. The interest rate is really irrelevant to the Federal Reserve, they are not a bank, and do not have to show a profit. Time is an option that they don’t have to bother with. But the financing pool of money has to be very large. So when a bank writes a loan, they farm it out to a buyer like the Federal Reserve. The Fed has to buy all loans offered in order to keep interest rates low, just like what they are doing with T-Bills. If they don’t, prices rise until a buyer appears and purchases the note.
If you are following retirement funds and other investment operations, many are becoming involved in rental real estate. Notice the zero overhead of purchasing renting real estate for the Investment funds. They have the purchase money and need an investment return, plus they get to depreciate the investment. The base line return can be as high as 15% and most appear to be around 8%. In bad economic times projecting an 8% return just might not float the boat. But right now, the investment funds have a 4 percent hedge on potential home buyers; whose cost of funds is at 4 percent and no depreciation.
If we reduce it down to a personal level, for every dollar the Fed loans out, it will get one dollar back (if it waits long enough). Where you and I depend on the interest generated on loaning out dollars to create investment income for our retirement.
The real problem starts when the Federal Reserve stops buying real estate loans. The question now being asked, “Do they dare?” The questions of a lot of bystanders, is, “How can these crap shacks be worth so much?” Zero interest rates have distorted real estate values.
Just maybe, the Feds will be forced to take possession of the bad crap shack loans--- If this real estate bubble pops, they own it all, the only problem is the "they" bit; its you and me, AKA Taxpayer.
Reality might have “left the building” 20 years ago, but it will return. Stocks, bonds and real estate will return to historic norms. Once government influence drops from the equation, the mis-allocation of resources will stop. Just how this will happen is up for debate, but the drop in the world stock markets and the fall of oil prices seem to point to an uncertainty that could speed up the process a bit.
The banks could do 4% loans, but why bother with the potential risk, when you can make 12% to 36% on credit card loans.
The invisible banker in this whole mess is the Federal Reserve. They are financing the current real estate bubble. It’s kind of a peculiar arrangement. The Federal Reserve can keep a loan on the books for 30 years at zero percent interest and when it gets paid off, they get their money. Now if an investor has a 100k 30-year Treasury at 1% interest and rates go to 8% the current value of that bond is reduced to about $12,500. If they need cash, they will be eaten alive. If they can wait like the government can, they get every penny back in 30 years. Receiving interests on a loan is a human gratification, not a governmental expectation.
Most home loans end up being for about 5 years, the buyer sells (moves gets divorced, etc). So a loan written for 30 years, ends up being a 5 year loan after the home is sold and repurchased by a new owner. The Federal Reserve has amassed about 3 to 6 trillion dollars’ worth of real estate debt. The interest rate is really irrelevant to the Federal Reserve, they are not a bank, and do not have to show a profit. Time is an option that they don’t have to bother with. But the financing pool of money has to be very large. So when a bank writes a loan, they farm it out to a buyer like the Federal Reserve. The Fed has to buy all loans offered in order to keep interest rates low, just like what they are doing with T-Bills. If they don’t, prices rise until a buyer appears and purchases the note.
If you are following retirement funds and other investment operations, many are becoming involved in rental real estate. Notice the zero overhead of purchasing renting real estate for the Investment funds. They have the purchase money and need an investment return, plus they get to depreciate the investment. The base line return can be as high as 15% and most appear to be around 8%. In bad economic times projecting an 8% return just might not float the boat. But right now, the investment funds have a 4 percent hedge on potential home buyers; whose cost of funds is at 4 percent and no depreciation.
If we reduce it down to a personal level, for every dollar the Fed loans out, it will get one dollar back (if it waits long enough). Where you and I depend on the interest generated on loaning out dollars to create investment income for our retirement.
The real problem starts when the Federal Reserve stops buying real estate loans. The question now being asked, “Do they dare?” The questions of a lot of bystanders, is, “How can these crap shacks be worth so much?” Zero interest rates have distorted real estate values.
Just maybe, the Feds will be forced to take possession of the bad crap shack loans--- If this real estate bubble pops, they own it all, the only problem is the "they" bit; its you and me, AKA Taxpayer.
Reality might have “left the building” 20 years ago, but it will return. Stocks, bonds and real estate will return to historic norms. Once government influence drops from the equation, the mis-allocation of resources will stop. Just how this will happen is up for debate, but the drop in the world stock markets and the fall of oil prices seem to point to an uncertainty that could speed up the process a bit.
Sunday, January 10, 2016
A Readers Perspective
"The Mortgage Guy” put this letter in the remarks section of my last post. He spent some effort writing it, and it may be a refreshing break to my murder of English grammar and punctuation. Here is his letter:
Jim I've been a lurker here since 2008. I stumbled upon your site while searching for truth in a desert of deliberate media obfuscation at the least and out right propaganda at worst. Your site was one of the many oases of veracity that I came upon both back in 08 and presently.
I had a front line seat to the financial devastation of that time, these times, and early on I might add. I owned a mortgage origination company back then having migrated from the financial planning field. The earliest signs of things to come became apparent shortly after 9/11, a time that witnessed unwarranted easy monetary policy that helped inflate the ill-fated bubble. The initial easing was warranted in light of the terrorists attacks. There was no reason however not reverse that easy policy a couple of years later.
It was around 2003 when we started to see our wholesalers buying ridiculous mortgage paper. Our wholesalers wanted to buy loans that didn't require proof of a job, proof of income or proof of assets. The only things required was a 620ish credit score and a solid appraisal. We also saw demand for 100% loan to value loans, on both a first and second mortgage basis. Purchase money mortgages were equally ridiculous with 103% loan to value loans as well as a plethora of similar offerings.
On a number of occasions, I would come right out and ask my wholesalers "what are you guys doing buying this garbage paper?" The most common answer was "we're not holding it" or "we sell the loans to Wall Street" (Bear, Lehman, etc.). It became apparent that the proliferation of these toxic time bombs was due not to consumer demand necessarily but due to Wall Street's ravenous appetite to securitize debt. It's interesting to note, that had Glass Steagall not been repealed by the signature of Bill Clinton, these toxic loans could not exist and what is erroneously referred to as the Bush recession, would not have happened. It is equally interesting that these loans could not have proliferated without their fraudulent securitization, which is the second biggest reason after Clinton, for the economic meltdown of 2008/09.
Having provided some background, let me state that not only has "depression grade" financial devastation been inflicted all along, very little if anything has changed. That is because nothing has been done to address the problems at hand, rather all efforts taken were to paper over the damage.
The mirage of economic expansion is primarily due to a leftist media meme that brainwashed masses to believe the stock market is the economy as is the unemployment rate. Anyone with any financial acumen will tell you that the stock is one of the poorest economic indicators in existence. They will also tell you that the stock market's precipitous rise isn't due to economic or business fundamentals but to an unprecedented printing of trillions that were funneled into the market via insolvent banks. Thus benefiting the very entities that created the economic woe while starving Main Street of any trickle down.
As for the unemployment rate, that is a statistic rendered useless by its historically skewed shrinkage in the labor force. By some estimates, 80% to 85% of the unemployment rate drop isn't due to job creation but rather labor force shrinkage. This phenomenon is due to the way the unemployment rate formula works. Based on the way the formula works, it is possible to lower the unemployment rate to zero without creating a single job. This is accomplished through the labor participation rate falling to the necessary degree. One can duplicate this phenomenon with the jobs calculator on the Federal Reserve of Atlanta website. https://www.frbatlanta.org/chcs/calculator.aspx?panel=1
Taking away the two most used economic indicators used by the media to present a false sense of prosperity, we are faced with a majority of indicators that present are more sobering view of the economy. Even the highly touted 298,000 jobs (supposedly) created in the latest jobs report is a sham. All of the jobs were created by the BLS through voodoo seasonal adjustments; and not by actual businesses. The raw numbers show a loss of in excess of 60,000 jobs.
Since the end of Clinton's great recession, job creation has failed to keep up with population growth, an important metric that only lost its importance since the advent of the state owned media. The jobs that have been created are part time and low paying. The kind of jobs you can't buy a house with, as evidenced by the historically low home ownership rate. Not only are these jobs so bad that people cannot afford to buy homes, over half of all U.S. twenty-five years olds live in their parent's basement.
For the first time in history, the middle class is a minority in America. For the first time in history business failures out number new business creation. Half of the working people in the United States earn less than $30,000. Not only are incomes down on a purchasing power basis but wealth is down as well. 62% of Americans have less than $1,000 in savings.
Add to this that one in five children are on food stamps and UNICEF ranks the U.S. 35 out of 41 wealthy countries for percentage of children living below poverty. One in three children do. In 1950 80% of American men held jobs. Today only 62% hold jobs.
We still have the QE time bombs to deal with, bank solvency (papered over now but not in the impending meltdown) as well as the pension plan deficiencies. All of which will rumble through the economy on the days of reckoning.
What you/our detractors fail to realize is that the absence of bread lines (due to ebt and mail) and the lack of tanks in the streets doesn't mean we have not and are not in a depression. Even in Greece, there are no tanks in the street.
Jim, you and I were right all along. Take comfort in former Federal Reserve Governor, Richard Fischer's confession as to what they did to paper over the apocalyptic destruction to our economy. http://globaleconomicanalysis.blogspot.com/2016/01/former-dallas-fed-governor-richard.html#RjxLAsdKayftg64C99. Please keep your sanity when encountering the masses that have been brainwashed with a concerted media effort in order to hide our sad reality and please keep up the fine work.
A Happy and Prosperous New Year to you and your readers.
Jim I've been a lurker here since 2008. I stumbled upon your site while searching for truth in a desert of deliberate media obfuscation at the least and out right propaganda at worst. Your site was one of the many oases of veracity that I came upon both back in 08 and presently.
I had a front line seat to the financial devastation of that time, these times, and early on I might add. I owned a mortgage origination company back then having migrated from the financial planning field. The earliest signs of things to come became apparent shortly after 9/11, a time that witnessed unwarranted easy monetary policy that helped inflate the ill-fated bubble. The initial easing was warranted in light of the terrorists attacks. There was no reason however not reverse that easy policy a couple of years later.
It was around 2003 when we started to see our wholesalers buying ridiculous mortgage paper. Our wholesalers wanted to buy loans that didn't require proof of a job, proof of income or proof of assets. The only things required was a 620ish credit score and a solid appraisal. We also saw demand for 100% loan to value loans, on both a first and second mortgage basis. Purchase money mortgages were equally ridiculous with 103% loan to value loans as well as a plethora of similar offerings.
On a number of occasions, I would come right out and ask my wholesalers "what are you guys doing buying this garbage paper?" The most common answer was "we're not holding it" or "we sell the loans to Wall Street" (Bear, Lehman, etc.). It became apparent that the proliferation of these toxic time bombs was due not to consumer demand necessarily but due to Wall Street's ravenous appetite to securitize debt. It's interesting to note, that had Glass Steagall not been repealed by the signature of Bill Clinton, these toxic loans could not exist and what is erroneously referred to as the Bush recession, would not have happened. It is equally interesting that these loans could not have proliferated without their fraudulent securitization, which is the second biggest reason after Clinton, for the economic meltdown of 2008/09.
Having provided some background, let me state that not only has "depression grade" financial devastation been inflicted all along, very little if anything has changed. That is because nothing has been done to address the problems at hand, rather all efforts taken were to paper over the damage.
The mirage of economic expansion is primarily due to a leftist media meme that brainwashed masses to believe the stock market is the economy as is the unemployment rate. Anyone with any financial acumen will tell you that the stock is one of the poorest economic indicators in existence. They will also tell you that the stock market's precipitous rise isn't due to economic or business fundamentals but to an unprecedented printing of trillions that were funneled into the market via insolvent banks. Thus benefiting the very entities that created the economic woe while starving Main Street of any trickle down.
As for the unemployment rate, that is a statistic rendered useless by its historically skewed shrinkage in the labor force. By some estimates, 80% to 85% of the unemployment rate drop isn't due to job creation but rather labor force shrinkage. This phenomenon is due to the way the unemployment rate formula works. Based on the way the formula works, it is possible to lower the unemployment rate to zero without creating a single job. This is accomplished through the labor participation rate falling to the necessary degree. One can duplicate this phenomenon with the jobs calculator on the Federal Reserve of Atlanta website. https://www.frbatlanta.org/chcs/calculator.aspx?panel=1
Taking away the two most used economic indicators used by the media to present a false sense of prosperity, we are faced with a majority of indicators that present are more sobering view of the economy. Even the highly touted 298,000 jobs (supposedly) created in the latest jobs report is a sham. All of the jobs were created by the BLS through voodoo seasonal adjustments; and not by actual businesses. The raw numbers show a loss of in excess of 60,000 jobs.
Since the end of Clinton's great recession, job creation has failed to keep up with population growth, an important metric that only lost its importance since the advent of the state owned media. The jobs that have been created are part time and low paying. The kind of jobs you can't buy a house with, as evidenced by the historically low home ownership rate. Not only are these jobs so bad that people cannot afford to buy homes, over half of all U.S. twenty-five years olds live in their parent's basement.
For the first time in history, the middle class is a minority in America. For the first time in history business failures out number new business creation. Half of the working people in the United States earn less than $30,000. Not only are incomes down on a purchasing power basis but wealth is down as well. 62% of Americans have less than $1,000 in savings.
Add to this that one in five children are on food stamps and UNICEF ranks the U.S. 35 out of 41 wealthy countries for percentage of children living below poverty. One in three children do. In 1950 80% of American men held jobs. Today only 62% hold jobs.
We still have the QE time bombs to deal with, bank solvency (papered over now but not in the impending meltdown) as well as the pension plan deficiencies. All of which will rumble through the economy on the days of reckoning.
What you/our detractors fail to realize is that the absence of bread lines (due to ebt and mail) and the lack of tanks in the streets doesn't mean we have not and are not in a depression. Even in Greece, there are no tanks in the street.
Jim, you and I were right all along. Take comfort in former Federal Reserve Governor, Richard Fischer's confession as to what they did to paper over the apocalyptic destruction to our economy. http://globaleconomicanalysis.blogspot.com/2016/01/former-dallas-fed-governor-richard.html#RjxLAsdKayftg64C99. Please keep your sanity when encountering the masses that have been brainwashed with a concerted media effort in order to hide our sad reality and please keep up the fine work.
A Happy and Prosperous New Year to you and your readers.
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