Chinese Economy Continues Strongly
Despite US trouble, it would appear that China has seen some incredible growth this last year. Here’s a brief excerpt from Bloomberg:
China’s economy, the biggest contributor to global growth, expanded 11.5 percent in the third quarter, adding pressure for faster currency appreciation and higher borrowing costs to curb inflation.
The increase in gross domestic product from a year earlier matched the median estimate of 26 economists surveyed by Bloomberg News and compared with an 11.9 percent gain in the second quarter, the fastest pace in 12 years. The statistics bureau released the figures in Beijing.
The CSI 300 Index of stocks fell the most in six weeks on speculation the central bank will raise interest rates for the sixth time this year. A record trade surplus helped drive a 26.4 percent surge in factory and property spending in the first nine months, raising the risk of idle plants and bad loans as the global economy slows.
“The central bank may raise interest rates immediately,” said Wang Qing, chief China economist at Morgan Stanley in Hong Kong. “We expect the yuan to appreciate more quickly over the next three months as part of measures to cool the economy.”
It would appear that China has managed to get inflation under control, a feat which the US is still struggling with. Sadly, America will continue to inflate as long as the US economy struggles to payoff mortgage debt.
American Hypocrisy Doesn’t Payoff Mortgage Problems
America has changed its mind yet again in regards to what is best for the world economy. BusinessStandard writes:
Asians could be excused for looking askance at Henry Paulson’s plan to calm credit markets. The reason: It’s the sort of thing that had US Treasury secretaries browbeating Asians a decade ago. One thinks back to the whistle-stop Asian tours then- Treasury Secretary Robert Rubin did 10 years ago. Such trips became more numerous as Asia’s financial crisis spread from Bangkok to Jakarta to Seoul to Kuala Lumpur and beyond. At every stop, Treasury bigwigs lectured leaders to scrap the financial socialism and crony capitalism feeding the excesses behind Asia’s turmoil. They counselled fiscal belt-tightening, higher interest rates, stronger currencies, avoiding asset bubbles and for limits on bailing out reckless investors. Basically, the US told Asia to avoid doing much of what the US is doing today amid its own crisis. Take the Federal Reserve, which cut interest rates twice and hinted at doing more. Investor Marc Faber is absolutely right when he says the Fed acted “like a bartender” and that its actions are contributing to asset bubbles. The US also has avoided reining in imbalances, including huge current-account and budget deficits.
It’s starting to seem that the United States has no real plan to payoff mortgage problems, which understandably worries other nations. ‘Winging it’ doesn’t seem good enough.
US Lenders Offered Chance to Get Out of Debt
The US government continues to work hard to help US lenders get out of debt caused by bad mortgage loans. How the government has managed to determine that lenders are more needing of a bailout than the homeowners about to lose their properties to foreclosure remains a mystery.
Bloomberg is writing:
Banks shut out of the market for short-term loans are finding salvation in a government lending program set up to revive housing during the Great Depression.
Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.
To meet the sudden demand, the institutions sold $143 billion of short-term debt in August and September, according to the FHLBs’ Office of Finance. The sales pushed outstanding debt up 21 percent to a record $1.15 trillion, an amount that may become a burden to U.S. taxpayers because almost half comes due before 2009.
The government is “taking a lot of risks through the Federal Home Loan Banks that are unnecessary,” according to Peter Wallison, a fellow at the American Enterprise Institute, a Washington-based organization that analyzes public policy, and general counsel at the Treasury Department from 1981 until 1985.
Hopefully homeowners will be shown the same mercy when the lenders that themselves have been bailed out, decide to foreclose upon the troubled borrower. Sadly, such seems unlikely.
Bank of America to Fire 3,000 Employees
In the wake of massive losses, Bank of America has announced that they will be ‘laying off’ roughly 3,000 employees. While carefully downplaying the layoffs as little more than coincidental removal of under performing employees, it seems clear that these firings are a result of housing incurred losses.
With one of the largest lenders of 1st and 2nd mortgage loans slicing staff, there seems to be a clear trend towards an banking breakdown in America. Yahoo has further details:
The cuts will affect less than 2 percent of the company’s staff. Most of them will be from Bank of America’s Global Corporate and Investment Banking unit, the company said.
The Charlotte-based bank also said Wednesday that it is launching a strategic review of its investment banking business.
Gene Taylor, head of Global Corporate and Investment Banking, will retire at the end of this year and be replaced by Brian Moynihan, who ran the company’s Global Wealth and Investment Management business.
Taylor, who had a 38-year career with the bank, will help Moynihan with the transition. Moynihan will be replaced by Keith Banks, who runs the Columbia Management mutual funds arm, which is part of Bank of America’s asset management organization. As of Wednesday night, no successor for Banks had been named.
Primary and Secondary Mortgage Fraud Hurts Economy
A wonderful editorial exposes the true damage caused to the American Economy by mortgage fraud within the primary and second mortgage lending industries.
Mortgage fraud is now a part of our lexicon, but few people understand what this means and the harm it causes. Mortgage fraud is a catch all phrase that encompasses schemes allowing one or more parties to a real estate transaction to obtain money through illegal or unethical means. Mortgage fraud cost us, as a society, somewhere between $946 million and $4.2 billion in 2006, and the cost will increase.
Residential mortgage transactions are particularly susceptible to fraud, since the mortgage lending industry relies on patterned transactions to simplify home sales and mortgage financing with as little cost and time as possible.
In a “normal” residential sale transaction, the buyer, seller, and real estate broker(s) negotiate a sale using a model purchase agreement. The buyer meets with a loan officer from a mortgage broker or lender, and chooses a standard loan product to finance the transaction. The lender obtains an appraisal of the property and a credit report for the borrower. An investor underwrites the loan with the assistance of an automated system, conditionally commits to purchase the loan after closing, and “locks” the loan terms. The mortgage broker or lender obtains a title insurance commitment and schedules the closing after the loan is approved. A closing agent (usually a title insurance agency) explains the closing documents, acknowledges the parties’ signatures, accounts for the parties’ funds, distributes the proceeds of the transaction, sends the deed and mortgage to the Register of Deeds for recording, and issues title insurance policies for the buyer and lender. The lender sells the loan to an investor, and the borrower makes monthly payments to the servicing agent selected by the investor. Because the documents are standard, and the roles of the parties are very uniform, nobody spends the time or money to perform much due diligence on the transaction. Hence, it is relatively easy to interject false documents or parties into the transaction to obtain money.
Obviously an industry-wide cleanup is needed. Sadly, the nation seems more focused on keeping large banks afloat, than in punishing them for their wrongdoings.
Unfortunately, such leniency will likely hurt America in the long run, just as it has in the short.
Problems in California
Further troubles are expected from the golden state, as startling statistics have been compiled. Here’s a blurb from the OnlineJournal:
Keep in mind, when studying the ARM reset graph that a “study commissioned by the AFL-CIO shows that nearly half of homeowners with ARMs don’t know how their loans will adjust, and three-quarters don’t know how much their payments will increase if the loan does reset. 73 percent of homeowners with ARM’s don’t even know how much their monthly payment will increase the next time the rate goes up.” (Calculated Risk)
The unwinding of the housing bubble is now beginning to show up in other areas of the economy. Credit card debt has skyrocketed to 17 percent annually now that homeowners are no longer able to tap into their vanishing home equity. Americans already owe over $500 billion on their credit cards. Now that debt is increasing faster than retail sales, which suggests that many people are so overextended they are using their cards for basic necessities and medical expenses. Industry analysts now expect an unprecedented wave of credit card defaults in the next six to 12 months. Unfortunately, for the tapped-out consumer, the credit card represents his last access to an unsecured loan.
We can also expect the downturn in housing to swell the unemployment lines. Oddly enough, while home sales have declined 40 percent from their peak in 2005, construction-related employment has only slipped 5 percent. That is really astonishing. It could be that the BLS is fabricating the numbers using its Birth-Death model, which magically produces millions of fictitious jobs. But we know that construction has accounted for two out of every five new jobs in the US for the last six years, so we are sure to see a significant rise in unemployment as the bubble deflates. The financial and mortgage industries have already experienced significant layoffs.
While here in Utah, many can avoid arm adjustments by simply taking out a Utah Home Equity Loan, it will be next to impossible for many Californians to do so with their larger jumbo loans.
Mortgage Lenders Permitted to Defraud
Major banks took full advantage of the housing boom, creating mortgage subsidiaries in an attempt to issue confusing adjustable mortgages and home equity line of credit loans to everyone.
Now, as the nation suffers from the fallout, many are starting to realize just how rampant fraud and deceit ran over the past few years.
Brandweek investigates:
In light of what many have termed America’s subprime mortgage crisis, the Federal Trade Commission has been keeping a close eye on mortgage companies’ advertising and marketing campaigns. Last month the FTC decided it had seen enough, and
warned more than 200 lenders about “potentially deceptive” mortgage advertisements that may give borrowers false impressions surrounding the cost of home loans. During a recent Morning Edition spot on National Public Radio, business reporter Jim Zarroli noted that over the past decade, the FTC has brought 21 actions against companies in the mortgage-lending industry, particularly in the subprime market. Several of these cases have resulted in large payouts from mortgage lenders, with courts collectively leveling more than $320 million in fines.
The FTC’s primary complaint? Many mortgage lenders have been hiding important loan terms and conditions in the fine print of advertisements. A Sept. 12, 2007 Associated Press article noted that experts on this issue believe that “this kind of advertising is one reason why consumers—particularly the elderly, minorities and the poor—signed up for subprime loans.”
And these are the companies which the nation is struggling to bailout? Something is definitely wrong with this picture.
Hyperinflation About to Hit England
Increasing concern is being expressed about the huge mortgage bailout which the Fed has proposed to pay off mortgage debt for British banks.
IntelDaily Speculates:
On Oct. 12, the U.S. Federal Reserve Board of Governors agreed to extend Federal Reserve contingency lines of credit to two {British} banks–$10 billion to the Royal Bank of Scotland (RBS), and $20 billion to Barclays, two of Britain’s Big 4 banks. The Federal Reserve would open these $30 billion facilities to the two banks, should the banks, in turn, need them to extend credit to their clients “in need of short-term liquidity to finance their holdings of securities and certain other assets,” the Federal Reserve said in a letter to the banks.
With respect to the Royal Bank of Scotland, the Fed said that the coverable assets could include “residential and commercial mortgage loans and mortgage-backed securities, asset-backed securities, commercial paper and structured products.” At the same time, the Fed lifted the limit on how much credit the RBS and Barclays could extend to their “affiliated broker-dealers,” to $10 billion for RBS, and $20 billion for Barclays, matching the size of the contingency lines of credit that the Fed would extend to them. RBS’ and Barclays’ affiliated broker-dealers would be the vehicles, which would then extend the funds to the two banks’ collapsing clients.
With such large amounts heading towards banks, it seems somewhat ironic that many of these banks will use these funds to issue more loans. A somewhat illogical solution to the problems caused by making too many bad loans.
MBIA fails to Dump Debt
MBIA has announced a loss as a result of their inability to get out of debt incurred by bad mortgages. MBIA is the largest bond issuer in the world, and up until recently had a fairly strong and successful reputation. Sadly, even they have been stung by the mortgage meltdown.
Bloomberg writes:
The third-quarter loss was $36.6 million, or 29 cents a share, the Armonk, New York-based company said in a statement. Excluding the markdowns, profit was $1.52 a share, short of the average analyst estimate for $1.59, a Bloomberg survey shows.
MBIA and Ambac Financial Group Inc., the world’s second- largest bond insurer, both reported their first losses as the prices of mortgage securities they guaranteed declined. The insurers write derivative contracts promising to pay holders in the event of a default. MBIA said its $342.1 million in pretax writedowns also included commercial mortgage securities.
The markdowns “were well above the $175 million we had expected given the recent preannouncements by its peers,” Ken Zerbe, an analyst with Morgan Stanley in New York wrote in a research report today.
MBIA will temporarily halt stock buybacks to retain capital because of the weakness in the housing and structured finance markets, and, potentially the economy, MBIA Chief Financial Officer Chuck Chaplin said on a conference call with investors.
Much of this debt was created by purchases of mortgage related securities, many of which have suffered heavy losses and writedowns.
Housing Stocks Soar…Upwards?
In a surprise which only serves to illustrate that random state of the Stock Market, the housing stock index jumped with it’s greatest one day gain in five years.
Unfortunately, this is not a sign of a housing recovery.
CNBC explains the reason for this odd event:
The Dow Jones U.S. Home Construction Index, a yardstick that measures home builder performance, rose 8.1 percent in mid-afternoon trading.
“When you see this kind of move it’s because the stocks are over-shorted,” said Alex Barron, Agency Trading Group analyst.
Investors who short stock bet that the price of the shares will fall. They borrow the shares on the hopes that they’ll replace them with shares they’ll purchase at a lower price.
“As soon as the stocks start to go in the opposite direction people rush to cover their gain,” Barron said.
While this is unlikely to signal a positive future for housing stocks, it did give a glimmer of home to builders and second mortgage lenders.