Economic Despair

Why are mortgages so complicated? In principle, it is just a long term loan used to buy real estate. Yet, mortgage products have become so complex that no one understands them anymore.

A recent study by the Federal Trade Commission confirmed some of difficulties that people have in deciphering today's mortgage products. The commission surveyed 819 recent prime and subprime mortgage customers in 12 locations around the country. The findings of the study were disturbing:

· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.

· Four out of five could not explain why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.

· Two-thirds did not identify a potentially nasty trap lurking in the loan; a substantial penalty if they refinanced within the first two years.

· Nearly a quarter could not correctly identify the total amount of settlement costs.

Mortgage companies would argue that mortgage products now cater for a diverse customer base with different financing needs. However, this argument looks rather weak in the face of these survey results. If people don't understand the products, how can they identify which loan is best for them?

Is the following report too alarmist? Perhaps not. The subprime crash is rippling out and infecting the wider financial system. The danger is that higher defaults in the subprime market will lead to a banking crisis along the lines of the savings and loan crisis in the 1980s. All the ingredients are there already; poor asset quality, exploding foreclosure rates, liquidity tightening, and regulatory failure.

(UK Telegraph) The United States faces a severe credit crunch as mounting losses on risky forms of debt catch up with the banks and force them to curb lending and call in existing loans, according to a report by Lombard Street Research.

The group said the fast-moving crisis at two Bear Stearns hedge funds had exposed the underlying rot in the US sub-prime mortgage market, and the vast nexus of collateralised debt obligations known as CDOs.

"Excess liquidity in the global system will be slashed," it said. "Banks' capital is about to be decimated, which will require calling in a swathe of loans. This is going to aggravate the US hard landing."

Charles Dumas, the group's global strategist, said the failed auction of assets seized from one of the Bear Stearns funds by Merrill Lynch had revealed the dark secret of the CDO debt market. The sale had to be called off after buyers took just $200m of the $850m mix.

Abandoned by fellow banks, Bear Stearns has now put up $3.2bn of its own money to rescue one of the funds, a quarter of its capital.

Lombard Street’s warning comes as fresh data from the US National Association of Realtors shows that the glut of unsold homes reached a record of 8.9 months supply in May. Sales of existing homes slid to an annual rate of 5.99m.

The median price fell for the 10th month in a row to $223,700, down almost 14pc from its peak in April 2006. This is the steepest drop since the 1930s

It is not just the poor who are losing out from the housing crash; the rich are also taking a hit. Caliber Global Investment Ltd., a $908 million fund, will close after running up losses in the sub prime mortgage market. The fund reported an almost $9 million loss in the second-quarter. Meanwhile, another London based hedge fund - Queen's Walk Investment Ltd - stacked up a $91 million loss during the first quarter of this year. Again, most of the losses were due to rising defaults in the US sub prime market.

Thus, it would seem that investors have suddenly rediscovered that risk exists in the housing market. Between 2001-06, investors had systematically and wilfully mispriced the potential losses from the US housing bubble. Now, investors are desperately running for the exit, frantically avoiding the investment products that they purchased with abandon during the exuberant years of double digit house price inflation.

Yet, here is the great mystery of today's housing crash - risk is not a difficult thing to understand. If a financial institution gives a borrower with a poor credit history a massive loan to finance an overpriced house, then the probability of default is rather high. In principle, this increased risk should be reflected in the interest rate charged to the borrower. This simple observation seems obvious now, as default rates are rocketing. Yet somehow, this was all forgotten during the crazy hazy speculation of 2003-5.

Unfortunately, mispricing risk wasn't the only stupid thing that mortgage lenders were doing. They were also backend loading interest charges through teaser rates and complex adjustable rate mortgages. In effect, institutions pushed their problems out two years by offering inappropriate mortgages to people who didn't understand the financial products they were buying. It was as if the sub prime industry had designed a marketing strategy that would maximise the chances of a wave of defaults.

Now, losses are piling up, and default rates are undermining any prospect of a recovery in the housing market. Not that the prospects for a recovery were ever going to be particularly high. The market remains fundamentally imbalanced. With inventory rising to all-time highs, and prices falling, the correction has a long way to go yet. Nevertheless, the sub prime crash has the potential to undermine housing finance for years to come. With investment funds abandoning the sub prime market, stung by a large losses, it will take a long time before investors feel confident enough to return. As the supply of funds drying up, the number available mortgages will likewise diminish.

Today's housing market has become one massive wealth destruction machine. The poor sub prime borrowers can't afford the houses they are living in. As they default, they incur personal losses which they cannot cover. These losses end up on the balance sheets of sub prime lenders, whose investors ultimately take the hit. Everyone loses; all are to blame; all are punished.

Can the housing crash be quarantined? Will the economy keep on going as house prices decline, foreclosures explode and mortgage lenders go bust? If recent consumer confidence data is any guide, the US economy is sliding into recession.

June 26 (Bloomberg) Consumer confidence in the U.S. dropped more than forecast and two other reports signaled that demand for houses is still falling in the second year of the home-building slowdown.

The New York-based Conference Board's index of consumer confidence fell to 103.9 in June from a revised 108.5 the prior month. Purchases of new homes fell 1.6 percent last month to an annual pace of 915,000, the Commerce Department reported in Washington, and housing prices in 20 cities in April fell by the most in at least six years, according to S&P/Case-Shiller.

Dwindling property values may further erode the confidence of shoppers, whose spending kept the economy afloat for the past year. Further declines in sentiment would call into question forecasts for a pickup in economic growth by the Federal Reserve, which is likely to keep interest rates unchanged following its two-day meeting beginning tomorrow.

After years of easy money, cheap credit, and reckless monetary policy, central banks are coming to the realisation that an old ghost has returned to haunt us - inflation. The Bank of International Settlements, the organisation that acts as the central bank for central banks warned that central banks must act now and push interest rates higher. The warning was especially directed towards countries with high current-account deficits, in other words, the United States.

The BIS also provided a stark assessment of the US housing market. It said that "The impact of the downturn in the US housing market might not yet have been fully felt." The organisation was right on the money with this one. Housing data from May shows that the crisis is deepening with no end in sight.

The warning from the BIS is welcome, but it is way too late. It would be much better if it had explained the dangers of low interest rates five years ago. All over the world, central banks are now confronted with increasing inflationary pressures, and reluctantly they are beginning to push interest rates up. However, central banks continue to seek the line of least resistance. Rather than aggressively pushing up rates, central banks are doing it slowly, in a forlorn hope that they can avoid recessions.

This reluctance to deal with the problem aggressively threatens to prolong a recession rather than avoid one. It would be better if interest rates were hiked quickly, rather than this low and passive approach that we are witnessing now. People would understand that central banks across the world were serious about tackling inflation, and adjust their behaviour accordingly. Firms would avoid hiking prices, workers would moderate their wage claims, and global imbalances would adjust more quickly and with less pain.

The housing market took another battering in May. The slump in activity, which started last year, is now accelerating.

  • Home sales slumped to a four-year low.
  • From May 2006 to May 2007, sales dropped a staggering 10.3%.
  • Housing inventory is at a 15 year high.
  • The median price of a home dropped yet again, down 2.1% from May last year. It had been 11 years since home prices showed a year-over-year decline

    Will it get worse? This is only the beginning.
  • Today, Bloomberg carried a story suggesting that the losses experienced from the housing market could be "just the tip of the iceberg". Anyone who has followed the housing bubble blogs will know that this sorry reality has been known for quite some time.

    Too many adjustable mortgages, coupled with lax lending standards, and an explosion of property prices; that is hellish brew. It will lead to only one outcome; massive defaults followed by a financial crisis. This is what we see now emerging, with almost daily news stories highlighting banks in trouble and foreclosure rates going through the roof.

    June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

    Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

    Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported.

    Bear Stearns, the second-biggest underwriter of mortgage bonds, offered to provide $3.2 billion of financing to rescue one of its hedge funds. Concern about the collapse of the funds, which made bad bets on securities tied to mortgages, sent bonds and stocks of finance companies lower.

    Homeowners who can't afford to pay higher interest rates may struggle to sell their properties as home price increases slow, and stricter lending standards will make it harder to refinance, the Bank of America analysts wrote today. Interest payments on about $900 billion of the riskiest subprime home loans are due to increase this year and next, they said.

    Countrywide Financial Corp. and IndyMac Bancorp Inc., two of the largest U.S. home lenders, may suffer more than other finance companies because they hold mortgages as well as selling them off to investors, the analysts wrote. The companies may not have set aside enough money to cover losses, said Bank of America, which has a ``sell'' recommendation on both lenders.

    The proportion of income that U.S. households with mortgages used for making payments in the first quarter of 2007 was close to or above the previous high in the late 1980s and early 1990s, the analysts said. U.S. mortgage borrowers will continue to find it harder to pay their debts until the end of next year, the analysts said.

    How many times have you had a conversation that started something like this: "Yes, I have just sold my home for $100,000 more than I paid for it five years ago. I made soooooo much money from my house. However, all those loser renters have missed out"

    Invariably, the house-owner has spent little time contemplating the wider cost of house ownership. However, we no longer have to go through the tedious exercise of explaining that there are such things as utilities, local taxes, and realtor commissions. All we have to do now is refer them to this site.

    the last few months, for a fleeting moment, I have occasionally re-examined the possibility of buying. After all, "prices are coming down", I say to myself and at some point, "it has to make good financial sense to buy".

    However, the question remains in my mind for about as long as it takes to put in some numbers into a mortgage calculator and wait until the computer returns with the monthly mortgage repayment. Despite recent price declines, housing ownership numbers still don't come within a mile of making it better than renting. Mortgage costs are still way out of line relative to rents. When all the other housing-related costs such as repairs, and taxes are included, owning a house looks like stupidity.

    In contrast, renting is akin to having an undated option. It allows the owner of the renter to enter the market when he is "in the money". At the moment, home ownership is a wealth minimising strategy. It is a cash flow killer. With the current misaligned and tramatized market, no sane person would seriously consider buying.

    The subprime implosion is far from over. Here we have a story about some subprime mortgage backed assets that need to be sold, but no one wants to touch. What happens next; prices adjust downward, meaning that the yield on these types of assets rise. Sooner or later, these rising yields will feed into retail mortgage costs.

    The subprime market is slip-sliding away.....

    (MSN Money) The giant market for securities backed by US subprime mortgages was thrown into turmoil on Wednesday as lenders struggled to sell more than $1bn of assets seized from two Bear Stearns hedge funds that suffered heavy losses on subprime bets.

    The complex securities being auctioned are rarely traded and early attempts to sell the collateral met with mixed results. The prospect of the "fire sale" knocked down prices for similar mortgage-backed assets and sent a key derivative index for the market to record lows.

    The rout highlights the risks investors take when they buy illiquid and hard-to-value securities. Fire sales in times of stress can trigger dramatic changes in pricing in such markets, perhaps leading other holders of assets to mark their values down and triggering demands for additional collateral from lenders.

    Kathleen Shanley, analyst at research firm Gimme Credit, said the unravelling of the Bear Stearns funds was "at best an embarrassment for Bear Stearns, and at worst it threatens to have a ripple effect on valuations across the subprime sector".

    The sales began on Tuesday and were set to continue on Wednesday. Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds, corporate bonds, leveraged loans and sometimes other CDOs. Many of the CDOs the Bear Stearns funds invested in were backed by risky mortgage securities, which have suffered heavy losses and ratings downgrades in recent weeks.

    One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be "junk in investment-grade clothing".

    Merrill Lynch was set to auction $850m of such assets on Wednesday after rejecting a Bear Stearns offer to buy them directly, while Deutsche Bank was also planning to sell $350m of CDO assets seized from the funds. JPMorgan began selling seized collateral on Tuesday, but yesterday halted its sale and then made a private deal with Bear Stearns to eliminate its exposure to the fund.

    Paulson thinks that the housing correction is "at or near the bottom". That is a sure sign that the housing market has still got a long way to go before things stabilise.

    WASHINGTON (Thomson Financial) - The US housing market correction is 'at or near the bottom' but the fallout from problems in the subprime mortgage market will likely continue, Treasury Secretary Henry Paulson said. Paulson said losses related to foreclosures in the subprime market were to be expected in light of the 'major' housing correction the US has gone through. At the same time, he believes the risk in this area is 'largely contained,' and poses no threat to the overall economy.

    Today, Bloomberg provided a neat summary of the state of today's housing market.

    June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.

    Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.

    Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.

    The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.

    Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.

    The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.

    The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.

    In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.

    About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.

    Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.

    A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.

    Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.

    The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.

    The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.

    Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.

    Moody's investor services finally picked up on the reality confronting the US mortgage market; it downgraded 131 subprime mortgage investment products. It also put 237 under review.

    The downgrades will inevitably make it harder for lenders to finance subprime mortgages. It should push mortgage rates up, and put further pressure on an already deeply distressed housing market.

    To put it another way; it is just one more nail in the coffin.

    WASHINGTON (AP) -- Moody's Investors Service said Friday it downgraded 131 mortgage investments backed by loans issued to people with weak, or subprime, credit histories. More people who took out subprime mortgages, especially adjustable-rate loans issued over the past two years, have been defaulting on their monthly payments as their mortgages reset to higher rates. That, in turn, makes mortgages pooled into securities and sold to investors a riskier proposition.

    Moody's said it also put 237 securities on review for further downgrades, including 111 of those already downgraded Friday. The downgrades affects both investment-grade and below-investment grade debt, including securities that had been rated 'Aa', 'Aaa' or 'A' and below, Moody's said.

    The ratings agency's action affects mortgage securities issued by companies including Bear Stearns Cos., Merrill Lynch & Co., Credit Suisse Group, First Franklin Corp., and IndyMac Bancorp Inc.

    Moody's said the downgrades were a result of a higher-than-expected rate of defaults among second mortgages issued to subprime borrowers last year. Moody's said the loans "were originated in an environment of aggressive underwriting."

    Private house construction is definitely in recession. The housing start numbers for May were horrible. Here are the sorry details.

  • Total housing starts were at their second lowest level since 1996.
  • During the height of the bubble, the construction industry started an average of 1.96 million homes a month. During the first five months of this year, the industry started only 1.47 million homes. That represents a fall of 33 percent relative to the top of the bubble.

  • The blue line in the chart represents the trend in recent housing starts. It suggests that the housing slowdown has a lot of momentum, with little sign of recovery on the horizon.

    These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.

    Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.

    For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.

    However, few of us will be outraged. It is what we have come to expect from the American housing industry.

    NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.

    Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.

    What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.

    Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"

    Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."

    GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.

    US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?

    June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.

    Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.

    The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.

    Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.

    Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.

    Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.

    Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.

    Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.

    The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.

    This is my favorite fact about the bubble: the average price increase on the first day of trading of an IPO money waster was more than 70 percent. That is right; in just one day, the pump-and-dump practices of Wall Street returned a cool 70 percent return. What was the comparable one day return of an IPO between 1981-1996? It was about 8 percent. That fact alone should be sufficient to convince everyone that Wall Street was up to something very unpleasant.

    Today, the Supreme court dealt a serious blow to those investers who wanted to hold investment banks accountable for their anti-competitive practices. Here are the sorry details of justice denied.

    A sad day.......

    WASHINGTON - The Supreme Court on Monday dealt a setback to investors suing over their losses in the crash of technology stocks seven years ago. In a 7-1 decision, the court sided with Wall Street banks that allegedly conspired to drive up prices on 900 newly issued stocks.
    The justices reversed a federal appeals court decision that would have enabled investors to pursue their case for anticompetitive practices. The case deals with alleged industry misconduct during the dot-com bubble of the late 1990s. The outcome of the antitrust case was vital to Wall Street because damages in antitrust cases are tripled, in contrast to penalties under the securities laws.

    The question was whether conduct that is the focus of extensive federal regulation under securities laws is immune from liability under federal antitrust laws. An antitrust action raises "a substantial risk of injury to the securities market," Justice Stephen Breyer wrote. He said there is "a serious conflict" between applying antitrust law to the case and proper enforcement of the securities law.

    In dissent, Justice Clarence Thomas said the securities laws contain language that preserves the right to bring the kind of lawsuit investors filed against the Wall Street investment banks. In 2005, the 2nd U.S. Circuit Court of Appeals said the conduct alleged in the case is a means of "dangerous manipulation" and that there is no indication Congress contemplated repealing the antitrust laws to protect it.

    Investors allege that the investment banks, including Credit Suisse Securities (USA) LLC, agreed to impose illegal tie-ins, or "laddering" arrangements. Favored customers were able to obtain highly sought-after new stock issues in exchange for promises to make subsequent purchases at escalating prices. The investment banks allegedly conspired to levy additional charges for the stock.

    As a result of the conspiracy, the investors say, the average price increase on the first day of trading was more than 70 percent in 1999-2000, 8 1/2 times the level from 1981 to 1996.
    Private class-action lawsuits, say plaintiffs' attorneys, provide a significant supplement to the limited resources available to the Justice Department to enforce the antitrust laws.

    Lawyers for Wall Street investment banks say it is a highly technical matter where the line is drawn between legal and illegal activity in the sale of newly issued stock. It must be left to highly trained securities regulators to decide, rather than to courtroom juries in antitrust lawsuits brought by investors, the industry says.

    The Supreme Court concluded that "antitrust courts are likely to make unusually serious mistakes" that hurt defendants. As a result, investment banks must avoid "a wide range of joint conduct that the securities law permits or encourages."

    From liar loans to FICO scores, the housing market is riddled with dishonesty. Things are so bad that you begin to sorry for the poor hapless mortgage brokers out there. Is there anyone out there that they can trust?

    Here is one scam that needs to be stopped quickly. People with poor credit can boost their credit scores by linking up with people with good credit histories. The trick is quite straightforward; people with good credit histories attach people with poor credit histories onto their credit cards. Furthermore, the Internet is there, ready to match up the credit cripples with the people with beautiful FICO scores.

    The scam has some interesting implications for the current foreclosure crisis. Suppose that a large number of low interest mortgages were extended to people who should have received high interest subprime loans on account of the poor credit history. Superficially, this might mean that these pseudo-high quality borrowers have a lower probability of default, since the interest on their loans is lower than it otherwise would have been.

    However, it is more likely that these irredeemably irresponsible borrowers maxed out on their credit limits. They probably took out larger loans in the otherwise could have, leaving them just as vulnerable to default, regardless of their fake credit scores.

    Will this have an impact on the fast imploding housing market? It comes down to a question of how many subprime borrowers infiltrated the quality mortgage market. One thing is for sure: mortgage brokers were not asking too many searching questions about default risk. Perhaps, we shouldn't feel so sorry for them after all.

    (Washington Post, June 16) The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points. Fair Isaac, the developer of the widely used FICO score, plans to introduce key changes designed to derail schemes that transplant high-quality credit card histories to the files of people with low FICO scores.

    The credit-boost companies, easily found on the Web by searching for "credit trade line," claim that they violate no federal laws and are not seeking to defraud mortgage lenders. But mortgage industry groups, federal and state regulators, and credit industry leaders say the programs represent significant threats to the home lending system -- opening the door to fraudulent home loan applications.

    Using a FICO-boost service, for example, a mortgage applicant with a history of late and missed payments and a FICO score in the 500s could puff up his or her score well above 700 and be eligible for the best interest rates and fees.

    How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers cardholders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.

    Although the add-on users receive no access to the credit card and cannot rack up charges, Fair Isaac's FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users -- even though the add-on users may still be poor credit risks.

    These are desperate times for condo developers in Washington DC, and desperate times require desperate measures. This article in the Washington Post highlighted one particularly sad and desperate attempt to roll in some potential buyers. However, it is doubtful if lavish parties will save the DC property market.

    Condo sales numbers in the nation's capital are catastrophic. Currently, property developers are selling around 1,600 condos a quarter. During 2005, developers were shifting around 3,000 units a quarter. Think about those numbers for a moment. Imagine if the sales volumes in your business fell by almost half.

    Looking forward, the DC market will be saturated with unsold condominiums. Currently, there are about 21,000 under construction, and another 20,000 are slated to construction in the next three years.

    Taken together, property developers need to shift 41,000 units while current sales are standing at 1600 units. Given current sales volumes, it will take over six years for the excess inventory to clear. If parties are what it takes to shift condos, then it is party time in the nation's capital.

    (Washington Post) The valet parking attendants were at the ready as the SUVs and BMWs pulled up. Men in suits and women in cocktail dresses walked through a white tent into a lobby where bartenders poured Bellinis, Kir royals and orange sorbet mimosas. Waiters passed trays of shrimp, ahi tuna on toast points and cucumber slices with crabmeat.

    There was even a paparazzo in the form of Darren Santos. Posing for him in the tent was YouthAIDS founder Kate Roberts, fresh from a trip to India with a delegation that included actress Ashley Judd. "Glamorous and photogenic," Santos gushed.

    It was one of the glitziest social events of the week, drawing about 200 people on a Wednesday night. But it wasn't an embassy party or a charity event or a political fundraiser. This was the preview party for the Grant, a new condominium on Massachusetts Avenue NW.

    Some of the hottest D.C. parties this spring and summer have combined two of Washington's biggest obsessions: real estate and networking. With the condo market still in a slump, developers are throwing lavish affairs to create buzz for their projects, turning to a marketing technique more common in Miami and New York.

    "We're in Washington. People love their events and their black tie and their kind of sassy parties," said Tracy Danneberg, special events coordinator for Metropolis Development, builder of the 90-unit Metropole near Logan Circle. "You have to keep up with it and be different."

    Here's why: In the first quarter of 2007, developers sold 1,629 new condos, down from the more than 3,000 they sold each quarter of 2005, according to Gregory H. Leisch, chief executive of the Alexandria real estate research firm Delta Associates. Meanwhile, in the first quarter of 2007, there were 21,523 units under construction or being marketed, and another 20,469 units are planned over the next three years, Leisch said.

    Hence the parties, some of them lavish affairs with price tags of more than $50,000, others intimate Sunday champagne brunches. There are groundbreaking parties, preview parties, grand opening parties.

    A few weeks ago, Robert Kiyosaki wrote an extraordinarily stupid article entitled "Playing the Mutual Fund Lottery". Kiyosaki tried to argue that buying mutual funds was akin to playing the lottery. Recently, the hapless son of rich dad disowned the article; now he claims that it was a joke written by a friend. Regrettably, the rest of the world lacked his subtle sense of humour, and couldn't pick up on his joke.

    However, his most recent article shows an almost equal lack of understanding about the world of finance. This week, he tells us about another financial piece of wisdom, passed on to him by his mythical rich dad - the investor food chain. At the top of this chain we find the capitalists, followed by the bankers, then the bondholders, stockholders and mutual funds, with the workers sitting at the bottom. It is a perspective that Lenin and Marx would have endorsed; happy rich guy at the top, miserable worker at the bottom. The key question Kiyosaki poses is "where on the food chain are you?".

    Kiyosaki uses this dubious line of thinking to argue against mutual funds. He points out that "mutual fund investors are just above the bottom" and therefore inferior to banks and bondholders. In his uniquely clueless and incoherent way, Kiyosaki seems to be telling his readers that if they can't be capitalists, they shouldn't invest in equity but should choose fixed-income instead. He talks of the "power of debt in contrast to equity" and that "debt holds a higher position than equity, and bankers and bondholders are in debt positions. Preferred stocks, stocks, and mutual funds are in equity positions". Hopefully, most investors, even the amateur ones that Kiyosaki so contemptuously derides, know the difference between equity and debt.

    If only it were as easy as Kiyosaki suggests. The problem, however, is that the returns of fixed-income assets haven't been that impressive in the last five or so years. Certainly, the risks associated with fixed-income assets have been low, but returns have barely kept up with inflation. Until comparatively recently, equity hasn't done much better. Meanwhile some mutual funds have done well, while others have done badly.

    I love reading Kiyosaki's articles. His advice is so painful and so self-evident that it is hilarious Obviously, he understands real estate investing when housing prices are in the midst of a bubble. He runs into serious problems when the bubble bursts, and it's obvious to the whole world that real estate investing is a certain money loser. The housing crash has forced him to write about the more complex and wider world of investing. However, his lack of understanding is cruelly exposed. What he knows, everybody knows, and it is hardly worth saying. Keep reading his column, you will learn nothing useful about investing, but it will give you a unique insight into how the amateur property developer reconciles himself to a world of crashing real estate prices.

    What were US financial regulators doing when the subprime market was spinning out of control? Answer: sweet FA, nothing; they were sitting in their offices drinking coffee and waiting for the monthly paycheck.

    Once the subprime market began to crash, what does the Fed do? Why, it does what bureaucrats do when confronted with a crisis; it writes a report. Nevertheless, the report does contain some useful information. For example, no one has been censured for violating fair lending laws; half of all foreclosures are subprime borrowers; and minorities are invariably the victims.

    (Bloomberg) -- The U.S. agencies that supervise more than 8,000 banks haven't censured any of them for violating fair-lending laws, three years after Federal Reserve researchers began assembling data showing blacks and Hispanics are more likely than whites to be saddled with high-priced home loans.

    Minorities stand to be hardest hit by rising delinquencies and foreclosures in subprime loans. While Census Bureau data show that homeownership rates rose to records among blacks in 2004 and among Hispanics in 2005, they still trail whites by 25 percentage points, and the gap may widen in the current bust.

    "Black people and Hispanics have been targeted,'' said Alphonso Jackson, secretary of Housing and Urban Development, whose department is hiring to expand its own probe of discriminatory lending.

    Subprime loans -- those made at higher interest rates to people whom banks consider risky or who have sketchy credit histories -- accounted for more than half of the home foreclosures in the fourth quarter of last year. The Fed's review, conducted by economists from its research and statistics division, covered lending data from 2004 and 2005, the first two years of expanded disclosure requirements for banks and the final two years of Alan Greenspan's tenure as chairman.

    Fed researchers singled out 470 lenders for closer scrutiny over two years, with some lenders showing up in both 2004 and 2005. The Fed has turned the names over to the relevant regulators and other authorities, including in some cases state officials.

    The supervision of America's 8,650 banks is split among five agencies: the Fed, the Office of Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the National Credit Union Administration. Each has the power to uphold fair-lending laws and to punish offenders.

    None of the five national regulators has published an enforcement action based on the data, according to agency spokespeople. Some lenders have been referred to the Justice Department for possible action, and investigations are continuing.

    Consumer groups say minority neighborhoods may be intentionally marketed for high-cost loans by non-bank lenders, while poor financial literacy among low-income borrowers may lead to wrong choices. A legacy of discrimination that has kept minorities from owning assets, building wealth and improving credit history may also put them at a disadvantage when loans are priced.

    FDIC Chairman Sheila Bair said she is troubled by the data and may act on two cases. "I don't believe, and I don't know that I have ever heard my colleagues say, that these disparities -- and they are significant -- can all be explained away through risk-based pricing,'' Bair said in an interview in Washington.

    Consumer advocates using the Fed figures in their own research assert they do find evidence of discrimination. The Center for Responsible Lending in Durham, North Carolina, last year took the same mortgages analyzed by the Fed and matched them with its own proprietary information. The new data subset, of 177,487 subprime loans made in 2004, included credit scores, loan-to-value ratios and property locations.

    The model concluded that African-American and Latino borrowers were more likely to receive higher-rate loans than white borrowers with similar risk. The mortgage industry disputes the center's conclusions. ``We have some real questions about the accuracy of that study,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association in Washington. He called the loan match-ups a ``crude approximation.''

    Kevin Petrasic, a spokesman for the Office of Thrift Supervision, said no violations were found in the 20 lenders under his agency's jurisdiction that showed disparities along ethnic lines in 2004. The National Credit Union Administration fined some institutions for filing their loan reports late, according to spokesman Justin Grove.

    The Fed itself conducted a fair-lending review of several of the 35 lenders it supervises that it had flagged for 2004, according to spokeswoman Susan Stawick. Of the 45 institutions that surfaced in 2005, examiners did ``a full risk assessment for pricing discrimination on each,'' she added. The central bank is now studying figures for 2006.

    The Justice Department's 2006 fair-lending report shows that one Fed referral on red-lining -- where a lender refuses to write mortgages in certain neighborhoods -- remained under investigation. Stawick said the central bank referred a discrimination case this year.

    How the mighty have fallen; Goldman Sachs is hurting over the subprime crash. Its fixed income division took a beating over stupid investments in the US housing market. The bank should have stuck to doing business with its wealthier clients, who in constrast to subprime borrowers, tend to pay back their loans.

    (UK Telegraph) Goldman Sachs and Bear Stearns highlighted the problems in the US sub-prime mortgage market as both brokerages suffered large declines in their fixed-income trading businesses.

    Goldman Sachs reported a 24pc drop in its fixed income division, limiting overall second-quarter profits to a 1pc rise to $2.33bn (£1.18bn). Although the figure beat Wall Street expectations, Goldman Sachs has become used to blowing forecasts out of the water and failed to beat the record numbers of the first quarter.

    The dip reflected "continued weakness in the sub-prime sector", the company said, as well as tough comparisons from last year when it sold some of its electricity assets.

    This is a sad story, so to speak. Americans are more miserable than Europeans. We might have larger wage checks, but Europeans have more vacations and more friends. So it is better to be a socially successful lazy bum, than a lonely workaholic. I could believe that.

    What America needs is a comprehensive social security safety net like the ones they have in Europe. We need large unemployment benefits, a free public health care system and generous pensions. Then on Monday, I could pack in my job, and hang out with my buddies all day long.

    (Reuters Life!) - Americans are less happy today than they were 30 years ago thanks to longer working hours and a deterioration in the quality of their relationships with friends and neighbors, according to an Italian study.

    Researchers presenting their work at a conference on "policies for happiness" at Italy's Siena University honed in on two major forces that boost happiness-- higher income and better social relationships -- and put a dollar value on them.

    Based on that, they concluded a person with no friends or social relations with neighbors would have to earn $320,000 more each year than someone who did to enjoy the same level of happiness.

    And while the average American paycheck had risen over the past 30 years, its happiness-boosting benefits were more than offset by a drop in the quality of relationships over the period.

    "The main cause is a decline in the so-called social capital -- increased loneliness, increased perception of others as untrustworthy and unfair," said Stefano Bartolini, one of the authors of the study.

    "Social contacts have worsened, people have less and less relationships among neighbors, relatives and friends." He and two other Italian researchers looked at data from 1975 to 2004 collected by the annual General Social Surveys that monitors change in U.S. society through interviews with thousands of Americans.

    By contrast, it appeared that based on the limited data available the happiness trend had remained largely stable in Europe, which had apparently avoided some of the changes in the American workplace like longer hours and more pressure.

    "The increase in hours worked by Americans over the last 30 years has heavily affected their happiness because people who are more absorbed by work have less time and energy for relationships," said Bartolini.

    "Another important cause is that American society in the last 30 years has experienced a huge increase in competitive pressure compared to Europe. It's easier in the United States, if you belong to the middle class, to become poor than you would in Europe. This creates a state of insecurity."

    It isn't often that the Washington Post produces an alarmist article on the Housing Market. Over the last couple of years, the newspaper has earned the reputation for being the trade journal for the regions realtors. However, this story on the foreclosure rate certainly won't please many of their real estate advertisers.

    According to the post, the foreclosure rate is running at historically high levels "The percentage of US mortgages entering foreclosure in the first three months of the year was the highest in more than 50 years." This is shocking stuff

    The post also provided a nice graphic illustrating the key foreclosure numbers. And indeed, those foreclosure rates do little rather high.

    If you find yourself squinting at the graphic, click on it and it will expand in another internet explorer window.

    Consumer prices climbed 0.7 percent, the biggest increase since September 2005, led by a jump in gasoline costs. They were up 2.7 percent from the same time last year. These are bad numbers.

    However, the Fed aren't looking at the CPI. Those bozos are looking at "core inflation", which excludes food and energy. These numbers show only a 0.1 percent rise in prices.

    Lets get our concepts clear here; what is core inflation? It is a useless irrelevant measure that excludes all the prices that matter to ordinary Americans. It is con, a scam, a nonsense and a joke. Pay no attention to it. It tells us nothing about inflation. Do you know anyone who doesn't eat or doesn't need fuel?

    Core inflation is a distraction. Rather than focus on the real issue, i.e. rising prices, the Fed tracks this meaningless index. The Fed would like us to believe that gasoline and food price increases are something that simply happen by accident and that it has nothing to do with them. Let us remind ourselves how the Fed's monetary policy directly causes the prices of these key items to increase.

  • The Fed maintained a policy of low interest rates far too long.
  • Moreover, interest rates continue to be too low
  • Consumers are still borrowing too much, consumption continues to grow quickly.
  • This increased demand pushes prices up for key consumer items, like food and gasoline.
  • These prices will only stop growing when consumers stop borrowing and reduce demand.
  • This will only happen when interest rates rise again.

  • So, the lesson is simple; the Fed must raise rates and keep on raising them until they regain control of inflation.

    However, that is unlikely to happen because Bernanke is soft on inflation. He is weak.

    How soon before we have 7 percent mortgage rates. Currently, the 30 year fixed is at 6.74 percent. Not long.....

    CHICAGO (MarketWatch) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. Freddie Mac in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since July 2006.

    "Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.

    Three other loans tracked in the Freddie Mac survey also hit 11-month highs. The 15-year fixed-rate loan, a popular refinancing choice, hit 6.43%, up from 6.22%, its highest level in 11 months. A year ago the 15-year averaged 6.25%.

    Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.37% versus 6.24% a week ago. A year ago the loan averaged 6.23%. One-year Treasury-indexed ARMs averaged 5.75%, up from 5.65% and above its year-ago level of 5.66%.

    The two fixed-rate loans required the payment of an average 0.4 point to achieve the interest rate; the hybrid needed 0.5 point and the ARM 0.7 point. A point is 1% of the loan amount, charged as prepaid interest.

    The spike in mortgage rates comes at a bad time for the housing industry, as home builders struggle with excess inventory and sales of existing homes slump. Home prices are also falling in many markets. And the Mortgage Bankers Association Thursday said new foreclosures hit a record in the first quarter.


    How soon before we have 7 percent mortgage rates. Currently, the 30 year fixed is at

    CHICAGO (MarketWatch) -- U.S. mortgage rates jumped this week as a sell-off in the Treasury market pushed benchmark interest rates up sharply. Freddie Mac in its weekly survey Thursday said the national average on the 30-year fixed-rate mortgage hit 6.74%, up from 6.53% a week ago and the highest level since July 2006.

    "Mortgage rates moved sharply upward this week, with rates on 30-year fixed-rate mortgages jumping more than 20 basis points, the largest upward movement in over three years," said Frank Nothaft, "These moves parallel rising yields on Treasury securities, as concerns about inflation pressures and continuing strength of consumer and business spending have dimmed hopes for an interest rate cut," he said.
    Three other loans tracked in the Freddie Mac survey also hit 11-month highs. The 15-year fixed-rate loan, a popular refinancing choice, hit 6.43%, up from 6.22%, its highest level in 11 months. A year ago the 15-year averaged 6.25%.

    Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 6.37% versus 6.24% a week ago. A year ago the loan averaged 6.23%. One-year Treasury-indexed ARMs averaged 5.75%, up from 5.65% and above its year-ago level of 5.66%.

    The two fixed-rate loans required the payment of an average 0.4 point to achieve the interest rate; the hybrid needed 0.5 point and the ARM 0.7 point. A point is 1% of the loan amount, charged as prepaid interest.

    The spike in mortgage rates comes at a bad time for the housing industry, as home builders struggle with excess inventory and sales of existing homes slump. Home prices are also falling in many markets. And the Mortgage Bankers Association Thursday said new foreclosures hit a record in the first quarter.

    Does anyone out there still think that interest rates are coming down anytime soon. Forget it, inflation is still running around out there. The latest bad news came from wholesale prices, which screamed ahead in May. The monthly increase was 0.9 percent. That is almost a full percentage point increase in just one month. A few more months like May, and the US will have something like double digit inflation.

    Bernanke and the gang must have needed a toilet break when they heard about these numbers. To put it mildly, the Fed must have a few concerns about continuing inflation risks. The question is whether they have the backbone to put in anothe rate rate. The economy certainly needs one.

    The bond market knows what to do, even if the Fed has lost the plot. The data sent US government bond yields back up to near five-year highs. The benchmark US Treasury 10-year bond yield rose to 5.23% after the US report was released, continuing their recent upward trend.

    This judge in DC has found the ideal way to finance his divorce; sue his local Korean dry cleaners because they messed up his pants. You got to love the screwy math of this guy. Perhaps, he works as a realtor in his spare time.

    WASHINGTON (Reuters) - A judge in Washington pressed a $54 million lawsuit Tuesday against a dry cleaning shop which he said violated consumer-protection laws when it lost his pants.

    Roy L. Pearson, an administrative judge for the District of Columbia, told a local court that Custom Cleaners should pay the sum because a "satisfaction guaranteed" sign deceived consumers who, like him, were dissatisfied with their experience.

    "You will search the records of the District of Columbia courts in vain for a case of more egregious or willful misconduct," Pearson told D.C. Judge Judith Bartnoff.

    The lawyer for the Korean immigrants who run the dry cleaner said Pearson was looking for a way to resolve his financial difficulties after a divorce.

    "It's simply a frivolous lawsuit brought by an unhappy customer with a bone to pick," attorney Chris Manning said.

    Pearson filed suit after the cleaners lost his pants in 2005. Jin Chung, Soo Chung and Ki Chung said they located the pants a few days later, but Pearson said they were not his.

    Pearson counted 12 separate violations of a consumer-protection law over 1,200 days, multiplied by the three defendants. At $1,500 per day, that is $65 million. He also seeks $15,000 to rent a car to take his clothes to another cleaner for the next 10 years, among other charges. He has rejected several settlement offers.

    Is there any good news coming out of the housing market? Of course not.

    Freddie Mac didn't disappoint. It is losing money - no suprises there. The volatility in our results will continue," says Buddy Piszel, their chief financial officer. Overstatement of the day, perhaps?

    NEW YORK, June 14 (Reuters) - Freddie Mac, the No. 2 U.S. mortgage finance company, on Thursday reported an unexpected net loss of $211 million for the first quarter, citing a souring outlook for mortgage credit risk that widened credit spreads.

    The loss contrasts with a net gain of $2 billion the company reported for the same period in 2006. The company reported a net share loss of 46 cents in the first quarter. Excluding unusual items, Freddie Mac was expected to show a profit of $1.09 per share in the first quarter, according to Reuters Estimates.

    The company said mark-to-market losses tied to the wider credit spreads on the mortgages assets in its portfolio was the main driver of the first-quarter loss. "The volatility in our results will continue," Buddy Piszel, chief financial officer at Freddie Mac, said in an interview. The swings are driven by "the predominant impact of mark-to-market items on both our GAAP and fair value."

    It is not a good time to be in the mortgage lending business. Bear Stearns are finding that out the hard way. The investment bank quarterly earnings tumbled by a third as trouble in the mortgage market hurt bond trading revenue. The bank was also forced wrote down assets at a stock trading venture.

    Bear Sterns is one of the US's largest mortgage bond underwriters. Given the present conditions in the housing market, mortgage exposure is a bad thing right now.

    The Mortgage Bankers Association have just reported first quarter foreclosures data. Their numbers make grim reading. Foreclosures are now at record levels. The rate of loans entering the foreclosure process was 0.58 percent on a seasonally adjusted basis, or more than one out of 200 loans. The delinquency rate for mortgage loans on one- to four-unit residential properties stands at just below 5 percent of all loans outstanding in the first quarter.

    Mortgage brokers, stung by a surge in defaults, are at last begining to think about risk. Suddenly, they have learnt the power of that long neglected word - NO. Yes, brokers are beginning to turn undesirable borrowers down. They should have been doing five years ago, but better late than never. Borrowers who can't pay back loans should not get loans. When they are turned down, they win (no trauma of foreclosure or bankruptcy) and the bank wins.

    So lets here some more negative responses from brokers. It is what America needs right now.

    June 13 (Bloomberg) -- Josh Tullis, who in his eight years as a senior loan officer rarely felt compelled to reject a first-time home buyer's mortgage application, is sending people away empty- handed in 2007. Tullis's latest clients are a married couple that banks ought to love. Between them they make $70,000 a year and they've been renting the same apartment for three years with zero late payments, he said.

    Lenders won't approve them because they don't have enough money in the bank, said Tullis, Virginia sales director at A. Anderson Scott Mortgage Group in Falls Church. With mortgage companies cracking down due to rising subprime defaults, Tullis needs them to sock away two months of payments for the $500,000 townhouse in Fairfax. ``Six months ago, these folks might have qualified, a year ago, definitely,'' Tullis said. ``It's a lot, lot harder than it used to be for first-time home buyers.''

    Subprime mortgage lenders have tightened credit guidelines so much they're squeezing about 500,000 first-time buyers out of the market, according to the National Association of Home Builders. A decline of that magnitude would reduce sales of new homes by 4 percent and sales of existing homes by 7 percent, and deepen the worst housing slump since the Great Depression.

    The housing market numbers from San Diego are just horrible

  • Sales for May were down almost 30% from May 06 and down 43% from May 05. Year-to-date sales of 11,181 are down 16% from the same period last year.

  • Inventory was 20,904, over 9 months supply.

  • Supply is up 17% from last year and almost 100% from this time in 2005.

  • Year-to-date listings are up 40% from the same period in 2005.

  • Expired, cancelled and withdrawn listings totaled 17,382 up 224% from last years 7,763 and 525% from 2005. These numbers indicate how many times a home is re-listed before it sells or the sellers give up trying to sell.
  • The US housing market is sliding into the abyss. In May, home foreclosures rocketed 90 percent compared to a year earlier. Default notices, auction sale notices and bank repossessions totaled 176,137. Furthermore, foreclosures were up 19 percent from April, suggesting that the foreclosure rate is accelerating.

    Lets summarise; foreclosures up, interest rates up, inventory up, sales down, and prices tumbling. Can things get worse? Yes, they can get much worse.

    Today, the Wall Street Journal speculated that US interest rates might need to rise further. It seems that the current interest rates are not in "the restrictive zone". The WSJ speculate that 8 percent interest rates might be needed to push inflation below 2 percent.

    In terms of the housing market, there is perhaps little that the Fed can do right now. Long term interest rates are creeping up, and killing off what little hope there was for the market stabilizing.


    Investors are starting to worry that the U.S. Federal Reserve will have to push overnight interest rates up in order to get inflation under firm control. But how much higher than the current 5.25% will the central bank have to go? If New Zealand is any guide, something like 8% might be called for.

    Many economists think that overnight interest rates are "neutral," neither inflationary nor disinflationary, when they are two to three percentage points above the inflation rate. U.S. inflation is at 2.6%, measured by the consumer-price index, so the current overnight rate would still be within the neutral range.

    If the Fed starts thinking like its counterpart in New Zealand, it will want to move well into the restrictive zone. Until a few weeks ago, such extreme thinking seemed positively un-American. Investors were confident that Alan Greenspan and Ben Bernanke, his successor as Fed chairman, would manage to get inflation down without causing much financial pain.

    But with inflation trends creeping upward, in Europe as well as in the U.S., it may be time to think again. The Fed's policy of keeping rates low wasn't the only reason that prices crept up. The big U.S. trade deficit and less regulated financial markets also contributed. But the central bank's complacency in the early years of the decade increasingly looks like a mistake. It may take 8% rates to reverse

    I don't know how Casey Serin does it. Everyday, I promise myself that I will not look at his blog. However, at some point in the day, my fingers move faster than my brain, and I end up clicking on his link and having a quick look. He never disappoints; he always has some crazy story about some madcap financial wheeze.

    One recent post absolutely blew me away. It concerned the foreclosure sale on his Larchmont property. According to Casey, he bought the property for $330,000 in March 2006, with 100 percent financing. Casey claims that the property was irresistible because he negotiated a $50,000 cashback. He wanted the money to “float other properties” that he was buying at the time.

    Like all of Casey's real estate investments, this one went into foreclosure. Recently, the bank sold the property for $199,000, meaning that our friend Casey now owes the bank a cool $131,000. What is more, Casey has seven other real estate investments that probably lost a similar amount of cash.

    It is worth stepping back from and thinking through what actually happened here. Casey went into a bank, probably misled the bank about his true financial status and walked out with $330,000. He then bought a house that was at least $50,000 overvalued at the time of sale. A year later, he loses the house, and stacked up a debt equivalent to almost 4 ½ times his previous annual income (Casey was earning around $30,000 before he became a property tycoon).

    So who gained from this ridiculous enterprise? Top of the list comes the Realtor, who probably pulled out 6 percent of the sale value. The original owner of the house also did well; selling an asset for $270,000, when a year later it was only worth $199,000.

    However, the bank shareholders were the big loser. The bank has no prospect of getting back the $131,000 it lost on this loan. That loss will mean a lower dividend for shareholders this year. However, there remains a mystery; why have bank shareholders been so quiet in the face of this overwhelming mismanagement of their assets? The bank management who presided over this loan transactions are totally incompetent. How could they have allowed someone like Casey could to walk into their bank and convince a loan officer to give him such a massive loan with 100% financing? If I were a shareholder, I would be outraged at this incredible misuse of my investment.

    Over the last couple of months, Casey has been the subject of an extraordinary wave of abuse. However, Casey's financial idiocy could only have taken place because there were even greater finanial idiots out there - the banks and in particular, their loan officers. This explains why I keep coming back to his blog, I keep searching for the answer to the question how could anyone seriously give Casey a loan? Unfortunately, I haven't yet found the answer on his blog, so I keep coming back.

    I fell out of my chair laughing when I read this article from Realty Times. According to the joker who wrote this article, there is no risk in real estate; there is no real estate bubble; and that value is a complicated cocktail. In fact, this article is so ridiculous that one has to think that it is a spoof.

    I was also struck by the inverted conspiracy theory. Normally, we think of the media as being a cheer leader for the housing bubble. Not according to this article. Instead, the media has been talking real estate down way too much.

    Perspective can be a funny thing.

    Real Estate Sky Won't Fall: Here's Why

    Real estate hasn't made much of a case for itself lately and it's not getting much help from any of the sub industries, such as builders and mortgage makers. Just in the past few weeks, so called experts from the mortgage industry, the building industry, and the resale real estate industry have all been quoted as saying that the sky is falling. Nice job guys! And while real estate's reputation as the number one investment is on the ropes, the general media and other investment categories have stepped up their attacks on real estate value. What do you need to know?

    The real estate market always fluctuates.
    Real estate sales prices are largely determined by the principal of substitution and reflect the uniqueness of the property, at a specific point in time, competing against only those other similar properties that happen to be available for sale, at that point in time.

    If there are many similar homes available at that time, there will be downward pressure on sales prices. As an expanding population absorbs the excess, competition for a dwindling resource will cause selling prices to escalate.

    Real estate is unique.
    There's a reason that homes and real estate aren't traded like commodities on the Chicago Mercantile. They are too dissimilar. Even each tract home has a somewhat different location, orientation, lot dimension, proximity, and view.

    There is no bubble.
    The value of real estate isn't driven by speculation; it's driven by its utility. If the economy moves away, such as in the rust-belt, that utility may decline. If high paying jobs are headed into a region, the value of the scarcest of all commodities, real estate will rise. Increasing development costs absolutely guarantee that new construction will cost more than existing properties are selling for. This factor alone has caused many developers to mothball projects in the pipeline until shortages again push prices up.

    Value is a complicated cocktail.
    Assessed value, appraised value, market value, replacement value, and selling price all mean something different. When the media says that real estate values are falling, they really mean that the prices people paid for a small number of homes, last month, was less than what a different group of people paid for a different assortment the month before.

    There is always a baseline of demand.
    An increasing population must be housed. There is a natural ebb and flow, not a boom bust. At various times, demand outstrips supply; supply is increased until the surge recedes to baseline or below.

    There is always a baseline of mortgage defaults.
    There will always be unforeseen circumstances that will bring some homeowners into default. Even in good economic times. And even with good mortgage loans. In an appreciating market, they are able to sell in a short period of time. So, in most markets, foreclosure activity has been below the historic baseline.

    Now, it could increase, spiking a little to reflect those who can no longer survive on increasing equity and then may level out at baseline again. When the next rapid appreciation cycle begins, and it almost assuredly will, rates may fall back below the newly adjusted baseline.

    There is no risk.
    Save the term risk for high stakes poker in Vegas. Buying real estate isn't inherently risky. But it isn't a get-rich-quick scheme, either. It's a formula for building long term wealth.

    Real estate is a great way to build wealth.
    You have to live somewhere. If you rent, you are making some or all of someone else's mortgage payment. But even if you have to work two jobs and barely scrape by to make your own mortgage payment, you are building equity that over time will be quite substantial. So, perhaps, don't believe every "the sky if falling" report or article. Educate yourself on the market and happy wealth homeowning!

    I can't help laughing when I see stories like this one from Bloombergs. Bernanke thinks that tighter lending standards will delay the recovery in the housing market.

    I prefer to see things the other way round. Lax lending standards along with expansionary monetary policy created the housing bubble. If the mortgage market had been properly supervised in the first place, the current housing crisis would have been easily averted. If the Fed had done its job properly, the housing market would have been appreciating at a steady 5 percent year. Housing would have been just another quiet sector of the economy.

    Instead, housing suffered from an appalling chain of cheap interest rates, creating a speculative enviroment that led to a few unfortunate years of double digit appreciation. Mortgage lenders didn't care who received loans. The only criteria was whether they could sign the loan docs. What we see now is the clean-up following the party. Yes, "tighter lending" standards will "restrain housing demand". It will restrain demand from people who shouldn't be getting loans to pay for houses they can't afford.

    Let's say it again. The simple fact is that the housing crash could have been easily prevented. All that was needed was prudent monetary policy and reasonable oversight of mortgage lenders.

    June 5 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said ``tighter'' lending standards for mortgages will ``restrain'' housing demand for longer than policy makers anticipated.

    The Fed chairman said the housing slump hasn't spilled over into other parts of the economy and he maintained a forecast for ``moderate'' growth. Government and industry reports this month showed acceleration in job growth, manufacturing and personal spending and gains in services industries.

    ``The slowdown in residential construction now appears likely to remain a drag on economic growth for somewhat longer than previously expected,'' Bernanke said in remarks via satellite to a conference in Cape Town, South Africa. As subprime mortgage lenders make it tougher to get loans, that will ``restrain housing demand, although the magnitude of these effects is difficult to quantify,'' he said.

    Fed officials have repeatedly cited housing as a threat to their forecast for faster growth this year. At the same time, they continue to view inflation as the biggest risk, keeping interest rates unchanged since last raising them a year ago. Economists and investors abandoned forecasts for a cut as signs of strength emerged in other parts of the economy.

    ``We have also seen a gradual ebbing of core inflation, although its level remains somewhat elevated,'' Bernanke said to the International Monetary Conference. ``Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside.''

    Minutes of the May 9 Fed meeting released last week noted that the housing recession would continue longer than officials had anticipated. By contrast, Fed officials in January cited ``tentative signs of stabilization'' in home sales.

    Home building has fallen for six consecutive quarters, the worst slump since 1991. Residential investment also lopped almost a percentage point off of economic growth in the first quarter. Building permits in April fell to the lowest level in almost a decade, the Commerce Department reported last month. As defaults and mortgage delinquencies increased, lenders made it tougher to get loans.

    I've been on holiday, in a place where there were no computers, and few concerns about overpriced asset markets. It was great while it lasted, but now I'm back.

    And what misery confronted me when I returned home. The housing market continues to slump, while the economy edges toward recession.