Rate Watch #779 Maybe We Need More Foreclosures.

June 10, 2011
by Dick Lepre
 dicklepre@rpm-mtg.com
www.loanmine.com

 

Import & Export Prices:

Export Prices - Month/Month change +0.2 %
Export Prices - Year/Year change +9.0 %
Import Prices - Month/Month change +0.2 %
Import Prices - Year/Year change +12.5 %

This is largely a story of commodity prices and commodity prices have been affected by changes in the value of the U.S. Dollar. Most commodities are traded in U.S. dollars. Fed monetary policy does not concentrate on stability of U.S. dollar value but on inflation containment and keeping unemployment low. With QEII ending there should be less volatility in dollar value and more stable commodity prices.

Jobs:
Initial Jobless Claims 427,000
4-week Moving Average 424,000

This data indicates a continuing weak jobs market.

 

European Central Bank President Trichet indicated that the ECB would raise interest rates next month in order to contain inflation.

April U.S. Trade Deficit (Exports-Imports) dropped to $43.7 billion. Presumably, most of the drop was due to lower oil prices. Keep in mind that if the trade deficit is $43.7 billion then the capital surplus was $43.7 billion meaning that people outside the U.S. own $43.7 billion more U.S. capital than they did a month before. This can be debt of the U.S. Treasury or U.S. corporations, real estate, or equity in U.S. corporations.

 

MBA Mortgage Applications:
Purchase Index - Week/Week Change -4.4 %
Refinance Index - Week/Week Change +1.3 %
Composite Index - Week/Week Change -0.4 %

Consumer Credit was +$6.3 billion for April. This was mainly driven by auto sales and student loans. Revolving credit contracted $0.9 billion as folks were using less plastic to purchase stuff.

Retail Metrics:
ICSC Goldman Store Sales
Week/Week change +0.4 %
Year/Year +2.5 %
Redbook Year/Year +4.2%

 

Is Fed Policy Preventing Economic Growth?

I suggested a few weeks ago that current Fed policy - expanded money supply, very low rates and paying 25 BPS on excess reserves may be discouraging lending. Most all of the big Wall Street investment banks are now either part of commercial bank holding companies or morphed into banks and are now Fed members.

 

What seems troubling is that banks are making large profits but are not doing so by lending. They are making money by trading. What do they trade? Everything: equities, Treasuries, commodities and FOREX. The fact that banks are making profits is good because this is making them stronger. The the question is this: is this simply a cyclic thing? Is confidence in the economy so lacking that it makes sense for banks not to make any bad loans? What I say "loans" here I mean commercial loans not residential real estate loans which can be sold to FNMA.

 

The choice is this: do we leave banks alone and let the cycle of making money on trading come to an end so that banks will rediscover lending for profit of do we have another round of "blame the banks" and new rules and regulations to encourage lending.

 

We are in what may well prove to be an extended period of economic stagnation. It may be the case that the only thing which will bring back the confidence of the public is time. Monetary policy and fiscal policy have not healed the damages to the public psyche. This is not a delusion on the part of the populace. The fact is that the population is not buying the notion that we are in a recovery and all is well. This is a population suffering 9%+ unemployment, loss of equity in their homes and, in fact, being much more realistic about the consequences of many years of bad fiscal policy than are the leaders.

 

It appears that in the past week or two the media have actually awakened to just how bad the economy is. The Consumer Metrics Daily Composite Index has showed year-over-year contraction every day since May 3, 2010.

Do We Need More Foreclosures?

The interactions of the Federal government with the economy have been shortsighted. Looking at the housing sector (something which must recover in order for the economy to recover) the federal government has refused to acknowledge that its own policies mandated bad mortgage lending practices. Policy has recently concentrated on blaming lenders for robosigning foreclosure documentation and on finding ways to have lenders accommodate borrowers who cannot make payments. The effect of all of these policies is to delay the date on which the housing market will recover. An alternative might be to allow foreclosures to proceed expeditiously and not remove most owners from their home but instead turn them into renters. Keeping the occupants in these home as renters would 1) diminish the personal and social dislocation associated with foreclosure and eviction and 2) prevent erosion in housing prices by preventing these units from coming onto the market.

I am not suggesting that this is easy. Foreclosures take place under state laws which are many and varied and most banks are not geared to be landlords. But unless policy starts to accommodate reality the housing market will resemble my Chihuahua spinning in endless circles chasing his tail.

 

The "it's all the fault of greedy bankers" may make people feel better and may even get votes but all of the effort to abate foreclosures serves only to prolong the agony of the housing market and the economy in general.

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Dick Lepre
RPM - SF
1400 Van Ness Avenue
San Francisco, CA 94109
DRE License # 01143973
NMLS Individual ID 302379
California Department of Real Estate - real estate broker license #01201643
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 244-9383
(866) 488-2051 fax

 

Comments

[Ed]

I actually received a phone call from a distressed property owner today, who blames the lender for his woes. Yes, that evil lender must have forced him at gunpoint to take that $200,000 cash out second. He is now facing foreclosure. Amazing!!

[John Rowe]

The problem with turning bankrupt owners into renters is very regional. According to a WSJ article a couple of days ago, homes in Las Vegas sell for a multiple of six times annual rents. In NYC the multiple is 39; here in Cupertino, CA it is over 30. So the idea makes no sense here. And renting a house to a bankrupt is certain trouble regarding collecting the rent.
Good idea, though. Thank you for all, Dick.

[Dick Lepre]

John,

I agree but foreclosures are much more of a problem in the places where values are low compared to annual rents. These are the places which are hurting and would benefit by taking those units off the market as sales.