Yves Smith on "Mortgage Armageddon"

by Dollars and Sense

Yves Smith summarizes Frank Veneroso's views on why recovery in the mortgage market (and, presumably, for the rest of the economy) will be so very difficult.

Sunday, August 16, 2009
Guest Post: Frank Veneroso on Mortgage Armageddon

Frank Veneroso was kind enough to write as a result of seeing a guest post "Debtor's Revolt?" by his colleague Marshall Auerback. Veneroso also provided his latest newsletter and gave us permission to post it. It it pretty long (12 pages), I extracted the executive summary and other key bits. Be sure to read the final section, starting with the boldface heading "Why Resolving The Mortgage Armageddon Problem Will Be So Difficult:." (Enjoy!)

From Frank Veneroso:

1. Deutsche Bank now predicts that 48% of all mortgaged American homeowners will be "under water" by 2011.

2. One might assume that means that the aggregate loan-to-value ratio of all mortgaged households will be a little less than 100%.

3. I have been focusing first and foremost on the aggregate loan-to-value ratio of all households with mortgages rather than the number of mortgaged homeowners who will eventually be underwater.

4. I calculated that, on mean reversion in house prices, this aggregate loan-to-value ratio would rise to 120% to 125%--a lot worse than what the Deutsche Bank analysis seems to imply. So I studied their analysis to ascertain why I went wrong or why they went wrong.

5. Though their analysis has a somewhat different objective and employs a different methodology, their analysis in fact comes to almost exactly the same conclusion as I have reached: when one focuses not on the share of all homeowners who will be underwater but the aggregate of mortgaged home values that will be under water, on mean reversion in home prices the aggregate loan-to-value ratio will probably be north of 120%. Here is why.

6. Deutsche Bank admits that their data on total mortgage debt is incomplete. Using more complete mortgage data the percent of homeowners under water would be higher and the implied aggregate LTV might be closer to 110% than 100%.

7. Also there is skewing. Those who are underwater have negative equities that exceed in value the positive equities of those who are not underwater

8 There is skewing on more than one account. Because the highest shares of those underwater are in the regions with the highest home values and the greatest percentage home price declines the overall skewing might be very great. And this skewing increases as home prices fall further to the Case Shiller mean.

9. When one factors in this skewing the aggregate loan-to-value ratio of all mortgaged homeowners based on the Deutsche Bank analysis probably rises to 120% or more

Read the rest of the post

Labels: Deutsche Bank, foreclosures, Frank Veneroso, mortgage banking, mortgage meltdown, Yves Smith

 

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8/16/2009 02:58:00 PM 0 comments

 

Why Are AIG INVESTORS Getting Billions?

by Dollars and Sense

Before he went down for, ahem, going down, Eliot Spitzer was the guy Wall Street feared most. He's worth listening to.

From Salon.com

The Real AIG Scandal
It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
By Eliot Spitzer

Everybody is rushing to condemn AIG's bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG's counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman's collapse, they feared a systemic failure could be triggered by AIG's inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG's trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.

It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG's counterparties are justified with an appeal to the sanctity of contract. If AIG's contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Rest of article here.

Labels: AIG, bailout, Bank of America, Barclay's Bank, Deutsche Bank, Eliot Sptizer, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, UBS, Wall Street bonuses

 

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3/19/2009 12:36:00 PM 0 comments

 

Anatomy Of a Foreclosure In Cleveland

by Dollars and Sense

There's a fantastic site detailing the foreclosure crisis in Cleveland (with the straightforward name of Foreclosing Cleveland). They have a wonderfully depressing story detailing the varied interests involved in the foreclosure of one particular home. The result says a lot about how we got into this mess.

From the site:

Here’s 4111 Archwood, a vacant foreclosed house four blocks down the street from me.

The County Auditor’s database says the owner of this house is Deutsche Bank National Trust Company. It says Deutsche Bank NTC paid $50,000 for the house in a sheriff’s sale in March 2007. The sheriff’s sale was the outcome of Case CV-05-554639, an action for foreclosure against the previous owners, filed in Common Pleas Court in February 2005 by Deutsche Bank NTC “as Trustee”.

But Deutsche Bank never held a mortgage on 4111 Archwood. And Deutsche Bank doesn’t really own 4111 Archwood now.

We’ll get back to Case CV-05-554639 and that magic word “Trustee” in a minute. But first, a short tour of the New Mortgage Industry, courtesy of the Chairman of the Federal Deposit Insurance Corporation, Sheila Bair.

Read the full post here.

Labels: Deutsche Bank, foreclosures, mortgage meltdown, Polly Cleveland

 

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2/23/2009 04:17:00 PM 1 comments

 

Bank Turmoil Sinks Stocks (WSJ)

by Dollars and Sense

Just posted to the WSJ website. Citigroup's troubles register in the Dow; plus it sounds like Deutsche Bank is having problems too.

By GEOFFREY ROGOW, ROB CURRAN and PETER A. MCKAY

Stocks tumbled as more losses and upheaval in the banking sector and poor trade and retail data hinted at an economy at risk of a deflationary spiral.

The Dow Jones Industrial Average dropped 248.42 points, declining 3% to 8200.14, its sixth straight slide. The Standard & Poor's 500 fell 29.16, or 3.3%, to 842.63. All its sectors traded lower, led by a 5.8% drop in financials.

As stocks declined Wednesday afternoon, volatility surged; the Chicago Board Options Exchange Volatility Index jumped 14%. Traders said that the sell-off confirmed many of their fears that the market would retest long-held support.

Setting the tone for banks was a series of developments that underscored the feeling that the industry's woes aren't in the rearview mirror. Citigroup plunged 23% after moving toward a dismantling of the "financial supermarket" model that has long defined its business strategy.

The Citi move is "a wake-up call for the financial industry. I think we're going to see more merging and merging and merging until a few very strong firms survive," said Joe Kinahan, chief derivatives strategist at thinkorswim.

The Financial Select Sector SPDR Fund, a basket of brokers and lenders, fell 5.8%, with the sector also hit by a warning from Deutsche Bank that it would post a fourth-quarter loss of about $6.33 billion. Deutsche Bank's U.S. shares fell 9.2%.

Traders also continued to fret over when the government will release the second phase of its promised $750 billion in aid to troubled banks and what conditions might be attached.

"There's still a lot we don't know for sure at this point, but we know a few things that are likely: reduced dividends, lack of [mergers and acquisitions] and continued declines in earnings," said Peter McCorry of Keefe, Bruyette & Woods. "None of that is supportive of share prices."

Economic signals were grim. The Federal Reserve's regional beige book survey found the economy continued to weaken as discounts failed to revive consumer spending. "Most districts reported that layoffs continued," the Fed said, adding that in New York "a substantial number of job reductions in the financial sector have yet to show up in payroll statistics."

The Commerce Department said retail sales fell 2.7% in December and evidence of a slowdown in commercial activity showed up in trade numbers that revealed exports and imports in the U.S. slowing sharply from July to November. Among commodities and industrial stocks, aluminum maker Alcoa and General Electric fell more than 5% each.

Commodity prices also fell, with energy and materials stocks declining broadly as a result. Crude oil settled 50 cents, or 1.3%, lower at $37.28.

Treasury security prices climbed as investors sought safe havens. The two-year note was up 2/32 to yield 0.72%. The 10-year note climbed 28/32 to yield 2.20%.

Labels: banking system, Citigroup, Deutsche Bank, Dow Jones Industrial Average, financial crisis

 

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1/14/2009 04:38:00 PM 0 comments