Saturday, May 10, 2008

Debt Rattle, May 10 2008: When there’s no future how can there be sin?

Dorothea Lange, April 13, 1940
These shacktown residents are waiting for their State relief pay. This will be the first check to be received under the new State law of $58 maximun relief payment. The building they are in is used for the Worker's Alliance meetings, Church of Christ services, and headquarters for distribution of S.R.A. checks.

Ilargi: I stole a Sex Pistols line for the title today. I thought of it when I was wondering how much longer it will take for fights to break out on the streets of Britain over new-found poverty and misery vs a bloated sense of entitlement. And how much longer till we will see in the US what has already happened in China: the resurgence of child labor.

For now, we're still just preparing for these things, but the trends are irreversible, no matter what the financial world tries to make you believe. We can't rebuild this society by flipping each other's burgers.

Freddie Mac seen raising funds after Fannie Mae deal
Freddie Mac, the second-largest U.S. home funding company, may copy Fannie Mae's recent multibillion dollar capital raising after reporting its own results next week. Freddie Mac on Wednesday is expected to report a loss in its first-quarter results, a week after Fannie Mae divulged a bigger-than-expected net loss of $2.51 billion for the same period.

Fannie Mae sold $2.25 billion in convertible preferred stock as well as $2.25 billion of common stock this week to shore up its balance sheet, as it grapples with the worst U.S. housing market downturn since the Great Depression. Fresh on the heels of those well-received offerings, Freddie Mac may announce a similar sale, investors said.

"It would be reasonable to expect that Freddie Mac will look to raise capital next week," said Moshe Orenbuch, equity research managing director at Credit Suisse in New York. Freddie Mac will look to raise between $4 billion and $5 billion if the McLean, Virginia-based company does not have to take the write-downs on their asset-backed securities portfolio, Orenbuch said.

"It could be higher than that if they did," adding between $3 billion and $5 billion, he added. Even so, demand for Freddie Mac's won't be dampened by Fannie Mae's offerings. "You are not just getting a little yield from Fannie Mae and Freddie Mac -- but a lot," said Andrew Harding, chief investment officer for fixed-income at Allegiant Asset Management in Cleveland, Ohio.

Washington D.C.-based Fannie Mae still may have more to sell as well, and is expected to tap financial markets again next week with at least $1.5 billion of preferred stock as part of an overall plan to raise $6 billion. Before this week's sale, Fannie Mae raised a record $7 billion in capital in December, paying a fixed dividend of 8.25 percent for three years. Freddie Mac in November sold $6 billion in preferred stock at an 8.375 percent dividend for five years.

Ilargi: Translation: bail-out inevitable if home prices drop by more than an additional 10%. Which is inevitable.

Regulator: Fannie, Freddie bailout not likely
Mortgage financing giants Fannie Mae and Freddie Mac could face further problems if home prices continue to plummet, but a taxpayer bailout is not likely, said the federal regulator charged with overseeing the two firms. James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told CNNMoney that the overwhelming problem for Fannie Mae and Freddie Mac is the decline in home prices in recent years and forecasts of further declines this year.

The firms don't originate mortgages themselves, but they buy loans made by lenders, providing a key source of funds flowing into the mortgages that follow their relatively tight credit standards. They then bundled those loans together and sold securities backed by the flow of payments owed on those mortgages, known as mortgage-backed securities. To make those securities more attractive, they offered investors guarantees on those securities.

He said the home price declines are a bigger problem for the firms than other issues, including: credit market volatility; billions in unrecognized losses on their books; and hundreds of billions in investments in securities backed by subprime mortgages.

The decline in home prices reduces the value of mortgage-backed securities held by the firms, leading to losses, as well as causing a higher default rate in the loans that the firms have guaranteed. In addition, lax regulatory oversight of the firms - which operated with their own set of rules - led to a series of accounting problems and resulted in massive restatements of previous earnings and a lack of financial information made available to investors.

Lockhart said despite all those shortcomings, the firms' current capital position can help them weather at least some further declines. "If house prices fall another 10%, the capital that they are raising now should see them through those kinds of problems. If housing prices fell [another] 20%, obviously there'd be a whole different scenario out there," he said.

Ilargi: The competition for the stupidest plan in housing is not over yet; in fact, it’s heating up. Fannie is betting with your money that prices will recover, soon.

Fannie to Aid Underwater Loans
Fannie Mae is preparing to introduce by midyear a program of refinancing mortgages for people who owe more than the current value of their homes, a situation known as being "underwater." The plan is the latest twist in efforts to contain the surge in foreclosures on homes in much of the U.S.

It differs from a bill approved by the House on Thursday that would authorize the Federal Housing Administration to insure loans for distressed borrowers only after the lender has written down the principal -- something many lenders are reluctant to do. Fannie's refinance plan would result in new loans of equivalent size, leaving the borrower underwater but giving him or her a lower monthly payment or at least a fixed rate.

Officials of Fannie, a government-sponsored provider of funding for home loans, said the new program is limited to people who have kept up on their payments so far and whose loans are owned or guaranteed by the company. Normally, it is impossible for underwater borrowers to qualify for refinancing because the collateral isn't worth enough to support new loans that would let them fully pay off the old ones.

But Fannie officials say in some cases it can make sense to refinance such people if the new loan will reduce their interest rate or let them lock into a fixed rate rather than risking future upward adjustments. "We're saying to the consumer, 'You're not trapped any more,'" said Jeff Hayward, a senior vice president at Fannie.

The program will allow refinancing loans of as much as 120% of the property value. Fannie officials project that 150,000 households could qualify for such refinancings. Rather than reducing the principal due on the loan and taking an immediate loss, Fannie is betting that these people will be able to keep up on their new loans and prices will recover.

The National Association of Home Builders and the National Association of Realtors praised the program, and many politicians have been pushing Fannie and rival Freddie Mac to do more to help borrowers. The companies want to avoid immediate loan losses that would further erode their meager capital cushions.

The End Of The Housing Crisis? Huh?
Recently, reports are surfacing everywhere about ‘THE END OF THE HOUSING CRISIS’ by the press, Government, hedgefunds and former Fed officials talking their books. Most are looking at inventories of listed homes shrinking somewhat, while sales numbers are not falling as fast, as one of their primary indicators. I say ‘hogwash!’.

First, the ‘listed’ universe in not representative of the entire ‘for sale’ universe.  For example, DataQuick reported that in CA in March 24,565 new and existing homes sold of which 38.4% had foreclosure activity within the past year, meaning much was bank REO (Real Estate Owned). Most bank owned REO, including homes sold through the major auction aggregators such as REDC, never make it to the official MLS. 

Bank REO is the shadow inventory on which very few have a handle, and that is growing much faster than sales.  This inventory, flooding onto the market at 20-60% below appraised values and/or note amounts, is ‘correcting’ prices in entire neighborhood’s overnight. These ‘non-organic’ sales are reeking havoc with appraisers and mortgage lenders across the nation and in my opinion, one of the largest threats to buying a home today.

We can track future shadow inventory relatively easily through the Notice-of-Default (NOD) and Trustee Sale (foreclosure) data at firms such as ForeclosureRadar. However, this still does not account for all the shadow inventory, just the bulk of it. NOD’s are the first step to a foreclosure, filed when a borrower misses payments for 90-120-days. If that is not cured in 30-90 days, it goes to Trustee Sale. If it doesn’t sell, the bank gets it as REO. Once per month, Foreclosure Radar puts out a free foreclosure report. The findings for March, which was the last month reported due to the time lag in the data, were startling. High-level findings include:
  1. Notices of Default - the first step in California’s foreclosure process - jumped 14.3 percent during March, reaching a record high of 42,704. These new entries into the foreclosure pipeline will produce a jump in foreclosure sales and bank owned (REO) properties for months to come.
  2. Notices of Trustee Sale, which are issued approximately 3 months following a Notice of Default, jumped 47.9 percent in March setting a record high of 27,571 filings.
  3. Foreclosure sales at auction declined 6.5 percent in March to 15,833 with a combined loan value of $6.87 Billion. Lender inventories continue to swell as they failed to sell 97.7 percent of these properties despite offering an average discount of 21 percent off of loan value.

Bank REO sales are picking up in total BUT also as a percentage of total homes sold. That latter is the scary part. Bank-owned sales far below present market are essentially distress sales, not organic sales and are quickly becomming ‘the market’. But sales are not picking up as quickly as homes will be foreclosed upon in the near future according the NOD data above. The NOD count above at nearly 43k, dwarfs the total sales number in March of 24,565. NOD’s turn into Trustee Sales in about 75% of cases and in Trustee Sales turn into bank REO in 97.7% of the cases according to the data above.

The data also show we have a wave of foreclosures coming to CA (and likely other bubble states) that is much larger than the sales activity for months to come, unless sales can increase high double-digits in the next few months. But even at that, the sales pace would only keep up with the foreclosure activity and not account for any homeowner sales and builder inventory, which has not even been discussed in this report. Builder inventory, which is tough to get a handle on, also have to be added to the total inventory.

As sales prices of REO steadily drop, prices are reaching a point that are attracting buyers, that’s for sure. But, not at a large enough pace to solve our problems. Another side-effect of prices ‘correcting’ so quickly is the negative-equity snowball effect from other home owners that all of a suddent find themselves underwater, prompting even more defaults and foreclosures.
But even as prices fall, buyers are leery of foreclosures.

Recently, came out with a survey about buyer sentiment over foreclosures.  In summary. interest in buying a foreclosed home is rising, but 69% of consumers have reservations about such a purchase. The survey found that more than half of U.S. adults would be at least “somewhat likely” to consider buying a foreclosed home despite concerns about hidden costs (expressed by 69%), risk (35%), and home depreciation (33%). “What’s striking about these findings is that while U.S. consumers recognize the purchasing opportunity presented by foreclosed homes, there are definitely some reservations about the process,” said Pete Flint, co-founder and chief executive officer of Trulia.

Empty Homes Spur Cities' Suits
Homeowners aren't the only ones claiming they were victimized by the subprime foreclosure debacle sweeping the nation. Cities now dealing with scores of abandoned, foreclosed homes have started suing banks and mortgage companies to recoup their costs, while other cities are hauling lenders before code enforcement boards and county courts to force them to maintain abandoned properties.

The innovative legal tactics are designed to recoup the city's lost property taxes as well as the cost of fire departments, police, code enforcement or even demolition -- any city services needed to clean up or deal with the foreclosed properties. Cleveland; Baltimore; Buffalo, N.Y.; and Minneapolis, Minn., have all filed lawsuits against lenders or developers based on the devastating effects foreclosures have wreaked on their communities. The lawsuits were filed in recent months under different theories, in state and federal court.

Cleveland and Buffalo filed suits under public nuisance laws. Minneapolis' suit was brought on consumer fraud grounds, while Baltimore took the unusual approach of filing suit in federal court under alleged Fair Housing Act violations. In addition to filing a lawsuit in February, Buffalo city prosecutors routinely haul banking officials before the local housing court to force them to fix up foreclosed and abandoned properties.

John Relman, a Washington attorney, was hired by the city of Baltimore to file suit against Wells Fargo. He has received inquiries from other cities and expects more foreclosure suits to be filed in the future. "You can look at almost any of the major cities and see significant foreclosure trends, stretching across the country," said Relman of Relman & Dane. "Any city that has racially segregated housing patterns and high levels of foreclosure could wind up suing -- cities across the Midwest, cities in California. It's almost everywhere."

The notion that cities are also victims of the subprime foreclosure crisis started to catch on at the beginning of the year. While the details of the suits differ, they all allege that cities are losing tax revenue from foreclosed and neighboring homes whose values are reduced, and from having to keep the abandoned houses free from rats, vagrants and disrepair -- and from potentially turning into crack houses.

Cleveland and Baltimore filed their suits in early January. Cleveland's suit was filed in state court against 21 investment banks and lenders, essentially pitting middle America against Wall Street. It appears to be the first to be filed on the foreclosure issue using public nuisance laws. City of Cleveland v. Deutsche Bank, No. CV08646970 (Cuyahoga Co., Ohio, Ct. C.P.).

Public nuisance is one of the oldest common law torts and grants people the right to "quiet enjoyment." Such suits are brought on behalf of the public, alleging that the defendant caused an unreasonable interference with the health, safety and peace of comfort of the general public.

Cleveland alleges that, after suffering more than 7,500 foreclosures last year -- an average of 20 a day -- the city now has "entire streets, blocks and neighborhoods" of abandoned homes that have become "eyesores ... fire hazards ... and targets for looters and criminals." The city hired a team of lawyers with Cohen Rosenthal & Kramer of Cleveland, headed up by Joshua Cohen, to assist. The firm is working on a contingency basis.

Cleveland is seeking to hold lenders accountable for predatory lending practices. "The purveyors of subprime loans could have or should have ... foreseen a foreclosure crisis as inescapable consequence of their conduct," the lawsuit states. The lenders -- which have labeled the Cleveland suit without merit in countersuits -- include the biggest financial institutions in the United States, including Bear Stearns, Bank of America, Citigroup, Merrill Lynch, Lehman Brothers and Wells Fargo.

Citi Starts the Death March of Stated Loans in Earnest
Citi released some guideline changes in the wholesale changes that can be described easily as the first big step towards killing stated income loans. I’m not sure if these are reflected on the retail side as well.

The big changes? 75% max loan-to-value on rate and term refinances with a minimum FICO score of 720. That guideline change essentially narrows the universe of qualified borrowers to a thin sliver of the home-owning population these days.

Other details on the stated income guideline restrictions:
  • 70% max LTV on cash-out refinances
  • Increased FICO requirements from 660-720 to 680-720 for SIVA
  • Increased FICO requirements from 660-720 to 700-740 for SISA
Click to enlarge

Mortgage credit losses could total $500 billion: Goldman
Goldman Sachs economists expect a total of $500 billion in residential mortgage credit losses, a renewed slowdown in economic activity after the near-term boost from fiscal stimulus, and no monetary policy tightening in 2008 or 2009, according to a research note from the firm.

Despite a setback in recent days, many financial market indicators have recovered substantially since the Bear Stearns/JPMorgan Chase & Co deal in mid-March, Goldman Sachs chief U.S. economist Jan Hatzius said. Still, "we think that overall mortgage credit losses will end up being larger than generally believed," Hatzius said.

"Excess supply in the housing market is still growing; home prices are already falling at rates that are very rapid by the standards of previous housing downturns around the world; and U.S. loan-to-value ratios are much higher than in those previous downturns," he said. "Ultimately, a painful adjustment needs to take place, certainly in the housing and credit markets and likely in the broader economy as well," Hatzius said.

Even if the shock is moderate, it can have large multiplier effects if it reduces the equity capital of highly leveraged financial institutions that mark their balance sheets to market, he said. Although the leveraged losses story sounds dire, its implications for the U.S. economic outlook are actually somewhat encouraging at present, Hatzius said.

Reduced selling pressure or outright purchases of beaten-down assets will eventually support asset prices, this will push down leverage, and the resulting balance sheet relaxation will facilitate further asset purchases, he said. "This means that good news can continue to feed on itself," he said, with "positive spillover effects on sentiment and activity in the broader economy."

Still, the increase in mortgage credit defaults is large and has further to go and the "locus of pain" tied to losses related to further mortgage credit defaults is likely to shift away from subprime mortgages, where the markets are already discounting very large losses, to other residential mortgage debt, including prime mortgages, Hatzius said.

"This is one reason why we expect a renewed slowdown in economic activity after the stimulus-fueled bounce in mid- to late 2008," Hatzius said. That "makes us fairly confident that Fed officials will not start tightening policy at that time, as markets now seem to believe," he said. "If anything, they may come under pressure to ease further, though at present this is not our base case."

2008 growth outlook deteriorated: Blue Chip
Even with some signs of improvement in the U.S. financial markets and a temporary boost from the economic stimulus package, the growth outlook for the second half of this year has deteriorated, according to a panel of economic forecasters. The weakest annual consumer spending since 1991 will lead to a darker outlook, the Blue Chip Economic Indicators found.

The consensus of economists polled between May 5 and 6 in the survey said the economy will grow at a 1.7 percent annual rate in the third quarter, down from the 2.0 percent forecast a month ago. For the fourth quarter, GDP is expected to grow by 1.5 percent, down from 1.9 percent seen earlier.

The outlook for 2009 has also darkened, with economists expecting growth of just 2.0 percent, down from 2.2 percent forecast earlier. Consumer spending, which accounts for 70 percent of economic growth, is expected to grow by a weak 1.5 percent for the year. That would be the smallest rise since 1991 and will, in turn, impact corporate profits.

"Given the erosion in the outlook for consumer spending and business investment, the consensus now predicts pre-tax corporate profits will contract by 2.9 percent this year and register growth of 5.3 percent in 2009," the newsletter said. Business inventories are expected to subtract from GDP growth through the third quarter but then add to growth in the final quarter and into next year.

However, total industrial production will grow only 0.7 percent this year, the worst performance since 2002, according to the consensus. Even so, the economists do not anticipate further monetary easing from the federal reserve, which since last September has reduced its target interest rate by 3.25 percentage points. "Indeed, the consensus, seems to think the Federal Open Market Committee will begin to raise interest rates by late next spring," the newsletter wrote.

Higher Prices for Smaller Portions
Bill Bonner here at The Daily Reckoning figures that we are going to get, as he puts it, "flation", and says. "'flation' is inevitable in the financial system. And our guess is that this 'flation' will show itself in rising prices for gold, commodities, and emerging markets...but lower (relative) prices for stocks, property and financial assets, generally."

And why is "'flation" inevitable? Mr. Bonner says it is "because there are, probably trillions...of dollars worth of financial mistakes in need of correction and a world full of financial authorities trying to prevent it." And then he gets to housing prices, and he asks, "What is a no-money-down mortgage but an option to buy a house later? And now that house prices are going down, the mom-and-pop options are expiring worthless."

And as a guy who once traded options as a living, options expiring worthless means just what it seems; it's all irretrievably gone, like my youth, my optimism, my looks, my hair, the respect and love of my family, my knees, my teeth, my hearing, several internal organs and most of my money. In short, all the money is gone, and the bad news from is that this is already spilling over into the most important half of the economy; the governments.

The article reveals that "U.S. states expect to have at least $26 billion less than they need to pay their bills during the next budget year as a slumping economy erodes tax receipts", according to a "study by the National Conference of State Legislatures" which "shows that pressure is mounting in nearly half of the states as businesses fire workers, fuel prices soar and consumers grow more worried about the economy."
How pervasive is all of this?

The article says, "Deficits are forecast in 23 states for the 2009 budget year." In short, in half of the states, in a country where government spending is half of the economy, there is going to be a $26 billion-dollar hole in aggregate spending, and all because tax receipts were down to start with? And you think that the stock market and the economy will thrive from here? Hahahaha! That's funny! Thanks! I needed the laugh!

Allianz Is Examining 'All Options' for Dresdner Bank
Allianz SE is mulling over all options for Dresdner Bank after losses at the unit dragged down profit at Europe's biggest insurer. "We need to look at all options and not just focus on one," Chief Financial Officer Helmut Perlet said on a conference call today, when asked whether the insurer wants to merge Dresdner with Deutsche Postbank AG or Citigroup Inc.'s German retail business if either is sold.

The Munich-based insurer has already said it aims to place Dresdner's private and commercial client units into a separate entity by the end of August. The move will enable it to play an "active role" in German banking consolidation, Perlet said, reiterating previous comments by the company.

Allianz reported a 65 percent decline in first-quarter earnings today after losses at Dresdner Bank, which it bought in 2001 for 23.5 billion euros ($36.3 billion.) The Frankfurt-based bank wrote down asset-backed securities by 845 million euros in the quarter as the U.S. subprime crisis eroded the value of debt investments.

"Something has to be done" about Dresdner Bank, said Manfred Jakob, a Frankfurt-based analyst at SEB AG. "It all depends on consolidation in the banking market and what happens with Postbank." Allianz fell 1.32 euros, or 1 percent, to 129.05 euros in Frankfurt trading. The shares have declined 20 percent over the last 12 months, valuing the insurer at about 58.4 billion euros.

Deutsche Post AG, majority owner of Bonn-based Postbank, said it's assessing a possible sale. Deutsche Bank AG and Commerzbank AG, Germany's two biggest banks by assets, have expressed an interest in the bank, Germany's biggest retail lender with more than 14.5 million customers and 850 branches.

"We welcome the recognition that consolidation needs to happen," Perlet said, adding that the market share of private banks in Germany is too small. "There is a window of opportunity and the time is ripe" for banking consolidation.

European banks turn the screws on borrowers
Consumers and businesses across Europe have cut their borrowing in the wake rising petrol and food prices while house prices fall and banks tighten lending conditions. The latest quarterly report from the European Central Bank (ECB) said today that lenders had continued to set tougher credit standards in the first three months of the year.

While banks said their own access to wholesale funding had deteriorated over the quarter, particularly their ability to securitise debt to raise cash. The report said: “The percentage of banking reporting that events in financial markets are having a consierable impact on the cost related to their capital position and some impact on lending has increased over the past three months.”

The ECB's data showed that 49 per cent of banks tightened standards on lending to companies in the first quarter, while 33 per cent of lenders tightened credit standards on loans for house purchases. A total 19 per cent of banks said that the credit crunch had prompted them to set tougher conditions for unsecured consumer credit.

At the same time, demand from consumers for mortgages fell. Ken Wattret, economist at BNP Paribas, said: “A deterioration has been evident for some while now but the latest survey shows a collapse, in tune with rapidly deteriorating housing market prospects in some national economies and the plunge in consumer confidence”.

The ECB said that banks would continue to tighten their lending criteria over the second quarter but not as viciously as in the first three months of the year. “Expectations point to the net tightening of credit standards ... being somewhat weaker,” the central bank said. The report was based on information from 113 banks across the Eurozone area and covers the three months up to April 8. It is the ECB’s main source of information on how Eurozone banks are lending and whether they expect to change their practices.

The figues were at odds with information released by the ECB on money supply, which showed that corporate lending had increased in the first quarter. But Jean-Claude Trichet, the ECB president, said that the “paradox” could be due to the fact that some companies were making use of lending lines agreed with banks before the credit crunch.

UK home repossessions to double this year for mortgage defaulters
The number of people who are losing their homes because they cannot meet rising mortgage bills is set to double this year, experts said yesterday. Dearer mortgage costs in the log-jammed home loans market were blamed for a rise of almost 20 per cent over the past year in court orders allowing lenders to seize properties.

The number of repossession orders granted in England and Wales in the first three months of the year climbed to levels not seen since the early 1990s, reaching 27,530. That was up by 17 per cent on a year earlier, and by 9 per cent since the final quarter of last year alone. In a further sign of the growing financial distress, the number of new court actions started by lenders seeking repossession also leapt sharply. It rose to 38,688 in the first three months of the year, up by 16 per cent on a year ago, and by 7 per cent on the previous quarter.

The news will spark fears that a new wave of repossessions this year will aggravate rapidly worsening conditions in the housing market at a time when prices have already begun to tumble. The latest survey from Halifax, the biggest mortgage lender, showed that average house prices dropped by 1.3 per cent in April, and are down by 0.9 per cent on levels a year ago. Rising numbers of cheap, discounted properties being offloaded by lenders after repossession will only increase the downward pressure on prices, economists said.

Not all orders granted by the courts for lenders to take back homes from borrowers in financial trouble lead to actual repossessions. But experts sounded warnings that after numbers of homes seized soared last year by 21 per cent, a further sharp rise seemed inevitable given the trend in court actions and orders.

Over the past three years, numbers of repossessions have trebled and the Council of Mortgage Lenders estimates that about 45,000 homes could be seized this year. However, this forecast was made before the full scale of the credit crisis became clear, so that the eventual figure may now be much higher, economists cautioned.

“The financial pressure on many homeowners is increasing and it seems certain that repossessions will trend up appreciably over the coming months, particularly if the economy suffers an extended, marked slowdown and unemployment starts rising, which seems likely,” Howard Archer, of Global Insight, a leading economics consultancy, said.

“A significant number of people have had to stretch themselves to the absolute limit to get into the housing market in recent times as prices have soared. This means that they are particularly vulnerable to any adverse shock to their finances.” Experts also urged a sense of perspective, pointing out that the present level of repossessions remains considerably below the peak of 75,540 homes seized during 1991, at the peak of the last recession.

About 142,900 repossession orders were made that year. However, the scale of the looming problem was emphasised as Citizens Advice revealed that its advisers have experienced a rise of more than a third in problem cases over mortgage arrears in just the first two months of this year.

Ilargi: The Brits have been stupid enough to believe that buy-to-let was some kind of solid deal. God knows what went on in their heads. One borrowed property as collateral for the next. Over here, we call this a Ponzi scheme. Meanwhile, this insanity drove up home prices beyond any normal person’s reach.

That is a mighty steep cliff you’re about to fall off, guys, and your government works overtime to make sure you will be stuck with the bill, not their City friends. I wish I saw some more reality sense out there, but I don’t. And that is scary.

Thousands in Leeds left out of pocket by the buy-to-let crash
It seemed so easy: you slapped down the deposit for a flat in the new tower block rising from a vacant plot in the centre of a thriving northern city, sat back and watched your money grow. Rental income would more than cover the cost of your low-interest mortgage. The capital value of the property would soar. It sounded almost too good to be true. And it was.

The bursting of the bubble fuelled by the middle-class stampede into buy-to-let investment has caused a surge in repossessions of city-centre apartments across the country. Nowhere is the impact more visible than in Leeds, whose landscape has been transformed since it belatedly embraced the concept of city-centre living at the turn of the century. Giant cranes on the latest urban-chic developments still dominate the skyline, but squint at them through this week’s dazzling sunlight and it was tempting to cast a passing flock of birds as an army of bloated chickens coming home to roost.

In 1996 Leeds had a mere handful of city centre apartments. In the six years to 2002, a further 1,035 flats were built and the five years from 2002 to 2007 brought an additional 5,900. The city centre now has 7,070 flats, with a further 2,096 under construction, 8,514 with planning consent and 1,362 awaiting planning permission. If all the proposed developments go ahead, Leeds will have more than 19,000, mainly one or two-bedroom flats in which to house the young workforce of its burgeoning concrete metropolis.

And yet it is estimated that more than 1,000 of the city centre’s existing flats are lying vacant. Property prices in some apartment blocks have plunged, rental fees are static and mortgage costs have leapt. High-quality developments in the best locations continue to flourish, but cautionary tales from elsewhere suggest, in the words of one estate agent, that some so-called luxury apartments “are in danger of becoming inner-city slums of the future”.

The consensus among the city’s property professionals is that Leeds is learning a harsh lesson. Flats should be built for the people who are going to live in them, not for investors seeking to make a quick buck. An estimated 80 per cent of the city centre flats in Leeds were bought as buy-to-let investments, many by members of investment clubs. More than 1,000 were purchased by members of one such club, Instant Access Properties, whose sister company, Inside Track Seminars, went into administration recently. Many buy-to-let investors bought flats off plan without even visiting Leeds.

Members of one property club bought a significant chunk of the 235 flats built by Bryant Homes in a huge complex that opened in 2003 under the name of Aspect 14. Of the 11 flats in the block that have been sold most recently, the average price fetched was £129,000. A few years earlier their average purchase price was £166,000. Aspect 14 is on the northeast fringe of the city centre, next to a busy dual carriageway and on the edge of Little London, one of the most deprived housing estates in Leeds.

At another isolated but even newer development of 400 flats, City Island, completed in 2005, properties are selling for £50,000 less than their purchase price. It has already gained the unhappy nickname of “S****y Island”. George Wimpey set further alarm bells ringing when it announced in November that it was mothballing its plans to build 800 city-centre apartments as part of a £100 million, mixed-use development called Green Bank. It blamed its decision on “the current uncertain market conditions for high-rise apartments in central Leeds”.

Ilargi: Talk about credit destruction. UK banks lost $13-14 billion on bad loans last year, and this year that will rise to $16-17 billion. $30 billion in two years. Pretty soon you’ll be talking real money.

Market for offloading bad debt balloons as banks free up capital
British banks will sell £9 billion of bad consumer debt to debt collectors this year in an effort to free up capital on their balance sheets. Meanwhile, investment banks are expected to join the market for impaired credit with renewed enthusiasm as they seek to replace the income lost from the collapse of sub-prime mortgages in the United States.

TDX Group, which acts as a bad debt broker on the banks' behalf, calculated that banks sold about £7.4 billion of underperforming debt, such as unpaid credit card bills and personal loans, last year. The market has ballooned in the past three years - in 2004, only £2 billion of loans passed into debt collectors' hands.

Mark Onyett, the chief executive of TDX, expects the market to grow by a further 25 per cent this year as banks continue to feel a squeeze on capital. Under accounting rules, banks must make provisions for bad debts, which eats up cash that could be used on profitable lines of business. In a credit-constrained world, it is better to move the debt off your balance sheet and free up the capital, Mr Onyett said.

Debt collectors are also expecting a boom year. Ken Maynard, chief executive of Cabot Financial, which buys multimillion-pound packages of debt from banks, said that $2.5 billion (£1.28 billion) of debt came up for sale in the first quarter. “It was the busiest first quarter we've ever seen,” he said.

Most banks reported increased bad debt provisions in their full-year 2007 results. Mr Maynard expected to see these impaired loans come up for sale in about six months. “There's a lot of bad debt rolling through,” he said. The debt packages are typically about £500,000 to £2.5 million in size. TDX cuts the unsecured loans into different tranches, including “gone-away debts”, where the borrower has no forwarding address, and “international”, where the borrower has moved overseas after running up debts.

Debt collectors, such as Cabot Financial, pay anything from 3 per cent to 20 per cent of the face value of the debt to secure their preferred tranches. The amount of discount offered on the face value depends on the age of the debt and perceived difficulty of recovery. Mr Onyett said that most banks sold their debts after trying for at least a year to recover the cash. Mr Maynard said that banks increasingly were selling “fresh” debt of six months' impairment, or less.

“Capital adequacy rules under Basle II have made some banks think harder and longer about holding this debt on their balance sheets,” he said. Debt collectors will usually wait up to five years to collect on their investment. Investments banks are taking an increasing interest in the purchase of unsecured consumer debt, according to TDX's research, either through direct acquisitions of debt packages, or by backing debt collectors.

Mr Onyett said: “Instead of investing in a collateralised debt obligation connected by several layers to a debt in the US, they can see exactly what they're buying in the unsecured market.” Deutsche Bank, Lehman Brothers and Goldman Sachs are known to have played in the unsecured consumer loan market in the past.

Mr Maynard said that banks were concerned about their brand being damaged by overzealous collectors. However, he said that only a small proportion of debts required a visit from a bailiff. “If you approach it in a certain way, you can get money from people where they haven't been willing to pay up in the past,” he said. “You just have to be patient.”

Corn stocks expected to fall sharply to 13-year low
Next year's corn stocks are expected to drop steeply to a 13-year low, the Department of Agriculture reported on Friday, as U.S. farmers cut back on corn acreage this spring to grow more soybeans. The anticipated shift in crop plantings comes after soybeans prices hit record highs in March. Corn futures, however, traded slightly lower Friday on the Chicago Board of Trade, following a record close in the previous session as the projected drop in corn stocks had been widely expected by traders.

Corn futures for July delivery were closed down 1 cent at $6.2925 a bushel. The contract had ended Thursday's session at $6.3025 a bushel, an all-time high. Corn futures have gained nearly 40% this year. The USDA, in its monthly World Agricultural Supply and Demand report, said corn stocks at the end of the 2009 crop season will fall 45% from a year ago to 763 million bushels, the lowest since 1996. For soybeans, stocks are likely to increase 28% to 185 million bushels. The corn and soybean crop season both ends on Aug. 31.

Some analysts predicted markets' neutral reaction to the USDA report. In a research note released Thursday, Citigroup analyst David Driscoll said corn stockpiles would not be "tight enough to generate substantial increases in corn prices. "The grain markets have already priced in reasonably tight corn supplies." But other analysts said corn prices could rise in the next week. "I won't say this is the end of the higher trend at all," said Elaine Kub, an analyst with DTN, a commodities information provider. "Wait till Monday and that turn will pick up."

Corn prices hit record highs last spring, while soybeans prices were trading at relatively low levels. This encouraged farmers to grow fewer soybeans last spring. But the opposite's occurred this spring, with soybeans prices soaring due to lower production, while corn prices moved lower. Picking up on the price signal, farmers increased their soybean acreages and cut corn plantings.

Farmers are forecast to reduce their corn planting acreage this year by nearly 10% to 86 million acres, offsetting a modest increase in yield. As a result, corn production is to fall nearly 1 billion bushels, to 12.1 billion, in the 2009 crop season. Soybean acreage, meanwhile, is expected to surge nearly 20%, boosting next year's production by 520 million bushels to a total of 3.1 billion.

Ilargi: How long till we see this over here?

Child Labor Rings Reach China’s Distant Villages
The mud and brick schoolhouses in the lush mountain villages of this remote part of southwestern China are dark and barebones in the best of times. These days, they also lack students. Residents say children as young as 12 have been recruited by child labor rings, equipped with fake identification cards, and transported hundreds of miles across the country to booming coastal cities, where they work 12-hour shifts to produce much of the world’s toys, clothes and electronics.

“Last year I had 30 students. This year there are only 14. All the others went outside to find work,” said Ji Ke Xiaoming, 35, a primary school teacher whose students in Erwu Village are mostly ages 12 to 14. “You know, we are very poor. Some families can’t even afford a bag of salt.”

China is now investigating whether hundreds, perhaps thousands, of poor children of the Yi ethnic minority group in Liangshan were lured or even kidnapped to work in factories that are increasingly desperate for the kind of cheap labor that powered China to prosperity over the past two decades.

Labor recruiters — government investigators and some local residents portray them as con men — have connected two radically different parts of China’s turbulent society. They have brought together ethnic minorities untouched by economic development in their mountainous isolation, and factory owners in the prime export manufacturing zones of southern Guangdong Province, near Hong Kong.

Exporters have struggled to adjust to soaring inflation, a fast-rising currency and, with some irony, stricter enforcement of labor laws that make it harder to hire regular workers on a seasonal basis. Using child workers from a remote region, many of whom cannot even speak Mandarin, the country’s main national dialect, have provided a temporary, albeit illegal, solution.

A scandal involving Liangshan’s children first came to light late last month, when Southern Metropolis, a state-run newspaper, reported that as many as 1,000 school-age workers from the area were employed in manufacturing zones near Hong Kong.

The report was deeply embarrassing for Beijing, which is preparing to host the Olympics and coping with international criticism of its handling of riots in Tibet. Last week, the authorities in Liangshan said they had detained several people for recruiting children and illegally ferrying them off to factories. And officials in Dongguan, one of the manufacturing zones where the children worked, said that they had “rescued” more than 160 young people from factories. The legal minimum working age in China is 16.

Now, officials have begun to play down the scandal, saying there is little evidence of widespread violations of child labor laws. A two-day government sweep involving more than 3,000 factories around Dongguan, which was conducted after the initial raids, turned up only 6 to 10 children, officials said.

But residents of Liangshan say abject poverty, drug abuse and a lack of jobs have forced many children to head for factories. Sometimes it is with their parents’ permission. Other times, children disappear, on their own or with job recruiters, and then call home from a factory dormitory, hundreds of miles away.


Bigelow said...

Never considers a derivatives implosion trumping inflation, or what if big time bank runs occur. Definitions are loose: “Deflation. A decrease in the prices of goods and services, usually tied to a contraction of money in circulation.” Some great graphs.

HYPERINFLATION SPECIAL REPORT, John Williams Shadow Government Statistics

“Net of gimmicked methodologies that have reduced CPI inflation reporting and inflated GDP reporting, the U.S. economy has been in a recession since late-2006, entering the second down-leg of a multiple-dip economic contraction, where the first downleg was the recession of 2001 that really began back in late-1999. Annual CPI inflation currently is running around 11.6%, again, facing further upside pressures.

The current outlook does not exclude further bounces and dips in economic activity. As was seen during the Great Depression, in severe contractions the economy can hit bottom and then bounce briefly until it falls again, finding a new bottom. As discussed in the Depression/Great Depression section, the current economic downturn reflects a structural shift, which increasingly has constrained consumer activity during the last several decades, and which cannot be turned quickly. The current downturn, by my numbers, already is halfway to qualifying as a depression. The evolving depression quickly will move to great depression status, when the hyperinflation hits, as such will be extremely disruptive to the conduct of normal commerce.

The government’s finances not only are out of control, but the actual deficit is not containable. Put into perspective, if the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis. In like manner, given current revenues, if it stopped spending every penny (including defense and homeland security) other than for Social Security and Medicare obligations, the government still would be showing an annual deficit.

By the time hyperinflation kicks in, the economy already should be in depression, and the hyperinflation quickly should pull the economy into a great depression. Uncontained inflation is likely to bring normal commercial activity to a halt. Such is consistent with the final graph in this group, which shows household income dispersion at historic highs.

Therein lies an early problem for a system headed into hyperinflation: adequate currency. Where the Fed may hold roughly $210 billion in currency (sharply increased in the last year) outside of $50 billion in commercial bank vault cash, the bulk of roughly $780 billion in currency outside the banks is not in the United States. Back in 2000, the Fed estimated that 50% to 70% of U.S. dollar cash was outside the system. That number probably is higher today, with perhaps as little as $200 billion in physical cash in circulation in the United States, or roughly 1.5% of M3.”

Ilargi said...

Hey Bigelow,

Yes, John Williams is spectacularly confused. His definition of deflation sort of says it all. He has some very good numbers, but someone should keep him away from drawing his own conclusions from them.

His focus on M3 is a tad worrisome, I think. Mike Shedlock has torn into that bright and clear.

So we have to read Williams, since he's good at collecting data, but forget what he says about them. That can't be easy for everyone.

EBrown said...

Link to SFgate article at teh heart of the housing bust - wow. 98% decline in building permits YoY. Wow.

. said...

The bailout is just juicy - welfare for banks so they keep moving another year or two, those losing their homes still lose them, just a little later, and then they get to keep paying due to the tax burden for the bailout.

We are so clever; a perfect little trap where every solution of the day brings more suffering the next year.