A contrary opinion on HELOC's and banks

I recently posted an article about the concern HELOC's may have on bank capital positions. Here's a contrary opinion from another blog I follow, Calculatedrisk

The following report is from housing economist Tom Lawler:
In a House Financial Services Committee meeting today on “Second Liens and Other Barriers to Principal Reduction as an Effective Foreclosure Mitigation Program, spokespersons from BoA, Citi, JPMorgan Chase, and Wells Fargo explained the potential dangers of broad principal reductions, as well as tried to dismiss the silly claim that many second mortgages have “virtually no value” because so many borrowers with seconds have total mortgage balances at or exceeding the value of the home collateralizing those mortgages. Below are some observations on BoA’s and Chase’s testimony.

I'd read the whole article as it provides some counter points to my previous post. 

Greek bond yields widen further

Greek bond yield widened further today, blowing past the pre bailout highs.  The attached chart does not show today's print which was 7.61% 

Goldman Sachs' news has overwhelmed the news cycle while Greece slowly sinks . . .

Some Friday Links -- Fun for all. A physics lesson tossed in as well.

Been busy with tax day but here's some links and comments . . .

Greece 10 year bond yields keep rising and are very close to piercing pre bailout yields. 
Some German profs are preparing a lawsuit.  -- Telegraph.co.uk
Has Greece hit the Chandrasekhar limit and just doesn't know it yet?  Once you go passed the limit there is no turning back.

Some back and forth on strategic defaults fueling consumer spending:
Pro Tinfoil: Creditwritedowns
Anti Tinfoil: The Big Picture

Creditwritedowns pulls together a lot of subjects and puts a nice bow on top describing a theory I agree with:  We are in a balance sheet recession that will not produce a strong rebound and will take a long time to reconcile.  I posted the Koo and Chanos videos recently but Mr. Harrison does more work tying it all together. 

Total copper inventories have now risen for 2 weeks straight and are close to penetrating their recent peak level; LME inventories have dramatically slowed their decline and Shanghai inventories hit new highs today.  Copper's getting smacked today.  I'll write more about this soon(tm).

Inflation update - - The slow slide continues

Inflation numbers were just released and continue to show the slow slide downwards in core CPI numbers.    I modified the chart to highlight core CPI.  As you can see it is still trending downwards along with the housing subcomponent. 

Core CPI touched the 1% yoy level in 2004.  Considering the direction of core CPI we may penetrate that lower level soon(tm)

Housing CPI is still deflating and I don't see that changing anytime soon.

While headline CPI is still higher than core I don't foresee it rising too much more without putting a serious dent in the economy.  $150 oil helped knock the economy over last time and if oil prices continue to rise it will start to crimp the economy again.

German legal threats may ruin Greek aid

As I mention on the side bar to the right the German courts may not approve of aid to Greece.  Here's the details (Reuters)

Greek 10 year spreads widened Tuesday and Wednesday after the weekend announcement of aid to Greece.  If this trends keeps up bond spreads will very quickly be wider than before the aid announcement.

I have no idea how much longer this can go on.  The IMF may swoop in and provide their share of the funding immediately or a political showdown in Germany may resolve the lending issue.  Even if aid does arrive will it do any good?  They are so far in debt that some sort of default / currency depreciation (that means leaving the euro) may be the only solution.

ht Credit Writedowns

China lending continues to slow

China lending continues to slow down after the dramatic increase beginning December 2008.  Chinese banks take lending orders from the Government so this is not a suprise to the powers that be in the Middle Kingdom. 

Considering the peak lending was November of last year it may take several more months for the slowdown to work its way through and finally start to be felt 'on the ground'

Will the lending slowdown be enough to tamp down on rising property prices?  Or will they raise interest or reserve rates?  Inflation and growth in China are on the hot side right now so they may be forced to tamp on the brakes a little harder than just slowing lending.

As I have mentioned previously the peaks and valleys of bank lending have coincided rather closely to the peaks and valleys of the Shanghai stock exchange (the local exchange, not etf's like FXI)  This time around Shanghai peaked (so far at least)  in early August, preceeding peak lending by several months.   I'm wondering if this connection will hold again . . .


Additional reading:
China daily - Lending slowdown
China daily - Chinese banks will need more capital.  Considering all the money they lent out more capital will be needed to provide future leverage

Popular media discovering where all those delinquent mortgage payments are going

I was going to blog about this yesterday afternoon but fundmymutualfund yet again scooped me on the entry and added his usual commentary to the matter.  As I have implied before the money NOT going to paying a mortgage is just being spent by Joe and Jane Consumer. 

Diana Olick of CNBC:

Okay, so 7.9 million Americans are not paying their mortgages.

Are we really thinking about the implications of that?
I've already reported studies that show Americans are now far more likely to pay their other bills first before their mortgage (which is a big turnaround historically speaking.)
That means they pay off their credit cards, cable bills, car loans in place of their home loans. Some are forced to, while others are doing so strategically. Don't get me started again on strategic defaults...
Paul Jackson, publisher of Housingwire.com, wrote a fascinating article last week that put this into real cash perspective.
First he describes a case study of someone who applied for the government's Home Affordable Modification Program.
The person had an $1,880.00 monthly mortgage payment on which they'd defaulted, but said person's monthly bank statement showed payments to a tanning salon, nail spa, liquor stores, DirecTV bill with premium charges, and $1,700.00 in retail purchases from The Gap, Old Navy, Home Depot, Sears, etc.
Writes Jackson:
Even if you assume that just half of the current 7.4 million currently delinquent mortgages fit this sort of ’spending profile’ (that is, they are spending their mortgage) and you assume a $1,000 median monthly mortgage payment for most U.S. homeowners — you get a $3.7 billion boost per month to consumer spending. It’s certainly enough spending to matter in the overall scheme of things.

To sum up the program as described by fundmymutualfund:

So for newer readers here is the 'game' as I've outlined many times.


1.Home'owners' default.. many of which are owners only in practice (not putting a dime down on their home).
2.That money once used to pay mortgages can now go into the economy as a form of permanent stimulus via consumption. Back in November I figured the number to be akin to the spring 2008 Bush stimulus - but instead of a 1x benefit, it's a permanent stimulus.
3.The banks drag feet on foreclosures because to make their balance sheet look good they will only take so many foreclosures over in any 1 quarter. Since the FASB (accounting board) rule change, they can do this since they don't have to mark the mortgages to reality - they can pretend... until of course the actual foreclosure. So the majority of mortgages on their books are still at "their discretion" and only the % they foreclose on, do they have to mark to "market" (i.e. reality). Hence the 6 months foreclosure now turns into the 18+ month foreclosure.
4.The market could care less about losses for large banks or the reality of the balance sheet because the US government stands behind all major banks... they are too big to fail. So the banks have nothing to worry about. Buy financial stocks - they are risk free, like Treasuries.
5.In the meantime Ben Bernanke will keep rates at 0% so the banks can "out earn" the losses. [Apr 20, 2009: How Banks Will "Outearn" Their Losses] Borrow from Fed at 0%, invest in anything (stocks, bonds...heck even do some loans), and make the spread. Use that 'free money' to offset foreclosure losses.
Presto magic!

So tell me what you think will happen to consumer spending when those 10% of people with late mortgages finally get kicked out of their homes and the banks are finally forced to realize the loss on the loan?  You wonder why the banks are not lending?  Extend and pretend only works so long. . .