Friday, August 14, 2009

Goldilocks Is In Foreclosure

CNBC's squawk box this morning featured an in depth interview with two titans of the commercial real estate world; Richard LeFrak and Ivanka Trump. (Ivanka is the daughter of Donald and now runs a significant portion of his real estate empire.)

Listening to people that spend their days actually involved in the business of real estate you get a much different picture than the talking bubble heads that the media spends most of their time interviewing.

Ivanka and LeFrak said that the banks have ceased lending on new projects across the board, and that they are essentially in full crisis mode. They both agreed that the commercial real estate meltdown has yet to even begin. There are $500 billion in loans scheduled to roll over this year and the market as a whole is about a $3.5 trillion problem that will run through 2012.

Meanwhile foreclosure data yesterday reported the highest month ever on record. Each month we receive the data we get a new record. One of the surprises to hit the list was Kansas, who reported a 97% increase in year over year foreclosures. Number 2 on the list in % gains.

How has this been spun by the media? They have now announced that we will have a "foreclosure" recovery in housing prices. The same notion has been spun for the overall economy. Perhaps you have heard the term "jobless" recovery in the past few weeks as the stock market has spiraled upward toward the insane asylum.

70% of our economy is based on consumer spending. We have had recent "better than expected" numbers from companies across the board as they have slashed expenses. That cannot continue forever as some point revenue has to grow. That revenue needs to come from the American consumer, the backbone of our economy.

The only problem is that the American consumer is completely broke and unemployment is growing relentlessly. Do not pay attention to the weekly jobless claims that show a decrease in the total number of people showing up to collect unemployment checks. The reason that number is falling is because a growing number of people are no longer qualifying for these checks because they have been unemployed for too long. As these people are no longer qualified they are skewing the numbers downward.

The truth is that our economy is heading toward full disintegration, not recovery. Larry Kudlow has continued to report on his nightly CNBC show that Americans not buying stocks today are going to miss their last chance to jump aboard the train to DOW 14,000. He should be put in jail.

The time to buy American stocks will be when CNBC has to shut down because the advertising dollars no longer support the network. Where will the DOW be at that point? I don't know where the actually number will be, but the value of the stock market will be around 1:1 DOW to Gold, as I've mentioned in the past. My best guess for that number will probably be around DOW 11,000, Gold 11,000, based on the money printing thus far and what's coming down the road.

We continue to move forward in the eye of the storm. As mentioned this morning by Ivanka Trump, banks and debt holders are currently both just looking at each other, with either side not sure what to do.

All the commercial loans were structured with 5 year balloons, (the loans have to be refinanced after 5 years) and the buildings are no longer worth what the bank debt was given for. It is estimated that commercial real estate has fallen in value by over 37% since the peak in 2007. Any loan given during 2004-2007 is either underwater or very close.

There is no money to refinance these buildings as the loans come due. The banks are hemorrhaging.

Or, maybe Goldilocks is real, and we will have a "foreclosure" led "jobless" recovery. Last chance to jump aboard DOW 14,000.

Wednesday, August 12, 2009

The Four Headed Monster

I'm sure you've read and heard countless stories over the past year regarding Fannie Mae and Freddie Mac. These are the two government created machines that purchased or guaranteed $5.4 trillion in residential mortgages through 2008. The were the buyer of first, second, and last resort for any mortgage that entered the market place.

Two names which you may not have heard are Ginnie Mae and FHA, or the Federal Housing Administration. However, last week Ginnie Mae announced that it had issued a monthly record of $43 billion in mortgage-backed securities in June. Their size is growing at an exponential pace and they have essentially taken the form of a new Fannie Mae.

Ginnie's main function is to be a partner with the FHA who guarantees a vast majority of new mortgages currently being issued. Ginnie will purchase these loans and do its best to sell them into the market.

What may strike some observers as troubling are the underwriting standards for FHA loans. Borrowers need only to put down 3.5% when making a purchase, and many of the borrowers have lower credit qualifications. Subprime borrowers.

After watching what has recently taken place in the mortgage market you would assume FHA is very well capitalized and is capable of withstanding massive losses should they occur. The reality is the exact opposite.

The FHA just recently reported that its reserve fund has now dwindled down to 3%. That means they are leveraged 33 to 1. If that sounds familiar it is the leverage Bear Stears was at before it self combusted. The FHA's default rate has just recently grown to 7%. They are on a collision course with disaster.

Get ready for something even more frightening:

FHA, Ginnie Mae, Fannie Mae and Freddie Mac now guarantee 9 out of every 10 new mortgages in America. They are now guaranteed by the tax payer.

9 out of 10.

Meanwhile, as these new loans are purchased and guaranteed by the government, the Federal Reserve is purchasing huge pools of these loans from the agencies. They announced today that they will continue their purchase of $1.25 trillion in mortgages through the rest of this year.

Here is a simple flow chart to see the process:

1. Homeowners purchase home with mortgage

2. That bank then sells that loan to Fannie, Freddie, Ginnie, or FHA (9 out of 10)

3. These agencies then sell the loans to the Federal Reserve

Where does the Fed get the money to purchase mortgages? It prints the money.

The same concept is currently happening with treasury debt. The following chart shows the new expenses taken on by government vs. the income that is coming in through taxes:

One is skyrocketing and the other crashing.

No worries however because the government can issue as much debt as it wants. Why? Because a large portion of the debt is being purchased by a new buyer: The Federal Reserve. They announced today they will continue with their treasury purchase program through October. After that? They will buy more of course.

Where does the Fed get money to buy Treasury bonds? It prints it. Here is the flow chart:

1. The government wants to spend money so it issues debt.

2. An auction is held to sell the debt to investors.

3. The Fed shows up to this auction and adds treasury debt to its balance sheet.

I'm am not exaggerating with any of this. As we speak, they are currently working on expanding a program to buy commercial mortgages. A program called TALF. This market is on the verge of collapse with over $500 billion in debt set to roll over this year. There is no money right now to refinance these buildings because they were all bought with short term financing at bubble prices.

Who will buy the debt? Yep. Where will they get the money? Yep, you've got it now.

Monday, August 10, 2009


It amazes me to hear the "success" stories of our new cash for clunkers program. The good part is that years from now when we study the causes of America's fall in classrooms the clunkers program will be an easy way for students to begin in economics.

On the surface it seems like a great program. A customer brings in their gas guzzling car and they buy a new one with a $4,500 credit. This program works out well for everyone in view. The buyer now has a new car at a great price. The seller now has a car sold and still makes a profit due to the $4,500 government subsidy. This will strengthen the economy in that the car dealership can now higher new workers and everyone in the car business now has additional revenue to spend into the economy. Those new workers will buy other goods, and so on.

One major piece is missing, however. Where did the $4,500 come from? Remember, the government does not have any money, it collects money from the public. That means that $4,500 was taken from someone else or another business in order to give it to a car dealership. That other business or individual now has to suffer higher taxes in order to pay for cars to be purchased. They have lost purchasing power.

Is this use of $4,500 the most efficient use in the market. It is about the absolute worst. Not only are they taking money from another source, but they are then destroying the cars that are being turned in. The sum total is a massive loss of wealth to the economy as a whole. How about giving the cars to the poor or young people instead of destroying them?

The concept is blurred in that the United States is viewed by its own citizens as a country of unlimited spending. This year we will spend close to $4 trillion and take in $2 trillion in revenue. That leaves us at a $2 trillion deficit for the year. (This does not included social security or medicare. For an in depth look at our balance sheet, click on the tab to the left titled "Ticking Time Bomb.") The July totals were just released and we ran a $183 billion deficit for the month.

Revenues (taxes) are falling rapidly as the phony economy continues to slow and spending is on overdrive.

As of September of last year our country stood at a $75 trillion deficit. (Since then it has exploded upward due to the financial crisis bail outs) If we could continue to bring in $2 trillion a year in revenue, it would take us about 37 years to pay off our debts if we spent nothing. That means no schools, no police, no military, no construction, no hospitals, and no government workers. 37 years.

However, we are going the exact opposite direction. The deficit is rising rapidly toward $100 trillion and new spending programs are being launched by the week.

There are two ways out of our current fiscal crisis:

1. Declare bankruptcy as a country
2. Print the money needed to pay the debt

The second option devalues the currency and allows us to pay our creditors with cheaper dollars. It also allows us a pain free option to balance our books.

Pain free for some.

Since I have begun working at an apartment community over the past year I have seen a new world of lower living standards. Just about everyone I work with needs to scrape together the deposit for an apartment and most people just barely qualify with their income to rent. These people are on fixed salaries and many of them are retired and living off of social security payments.

What would an increase in the cost of living do to these people? It is going to wipe out an entire class. I shudder to think about how they will react when they realize what has been done to them by our government.

As our creditors continue to move away from our debt and our spending grows by the day, this new world is approaching like a freight train toward us. If we do not change direction right now, the best possible solution for many will be to leave the country and leave the bloodshed with Obama.