More On The Housing Sector

Of course Obama didn't hesitate to release his taxes, any politician who has never had a real job or worked as a builder of businesses in the private sector is always happy to release their taxes.  But then again, I guess Obama made Romney's businesses happen for him. - friend of mine from NY

I wanted to do a quick follow-up to yesterday's post on housing.  I have been postulating since late last year that the housing market "stability" was completely a function of the foreclosure moratorium that went from the middle of last year until the mortgage fraud settlement early this year plus the low/no down payment mortgage products rolled out by the FHA - and subsidized by you and me.

Yesterday I posted an article which showed that FHA mortgage delinquencies jumped 26% from last year.  Now foreclosures are ramping up:

"Thousands of foreclosures that were stuck in process due to delays over the so-called "Robo-signing" paperwork scandal are working their way through a revamped banking system and heading toward final bank repossession."

Here's the report: LINK  Even more troubling:

Even more indicative of this new surge in processing is that repeat foreclosures hit an all-time high in January, representing 47 percent of all starts, according to LPS. Repeat foreclosures are either failed loan modifications, or loans that banks were attempting to modify but couldn't.

Delinquencies and foreclosures are ramping back up.  Inventory will ramp back up as well.  And then we get today's monthly existing home sales report which showed that existing home sales dropped "unexpectedly" by 5.4% to an 8-month low.  It was not unexpected by me as I've been tracking mortgage purchase applications on this blog, which has indicated that home buying activity is in decline (refinancings are going through the roof because the Fed, in combination with FHA refi programs, has made money almost free with near-zero interest rates out to 10-years).

But wait, isn't this supposed to be the seasonal peak of the home buying season?  If home sales are declining through the peak selling season, imagine how bad it could get for the rest of the year.  And combine that with seriously deteriorating economic fundamentals and we are setting up for another housing/bank catastrophe.  2008-squared.

Circling back the quote at the top, make no mistake by thinking that I support Romney.  I actually don't care who wins the election at this point because it's irrelevant.  Either candidate is controlled by the banking and defense company interests that pay for their election (see Citizens United v Federal Election Commission for why this so:  LINK).  I wish Romney would select Herman Cain to be his running mate because then at least we would have some serious entertainment.  As it is, my only interest in this election is to see just how brutal the mud-slinging will become.

The Housing Market Black Hole

We have reached a profound point in economic history where the truth is unpalatable to the political class  -  and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them...Bad things are going to happen.  - Hugh Hendry on CNBC

Once again we're going through another wash, rinse, repeat cycle with the housing market fairy tales.  People who bother to pay attention to the news woke up this morning to a report from the Commerce Dept that housing starts rose the highest level since 2008 in June LINK.  I'm not sure why that would be considered good news, since 2008 is when the bottom really fell out of the housing market.  The other anomaly that contradicts this Government-compiled data is that mortgage purchase applications continue to decline on a weekly basis.  Note:  the mortgage application data is compiled and released by a private, free enterprise organization so we can safely assume that the data report is infinitely more reliable than that of the Government's Commerce Department.

The other myth being propagated by the media and the economic wizards is that the housing inventory is declining.  In fact, this housing inventory has largely been converted to rentals.  In particular Fannie Mae and Freddie Mac have been unloading their foreclosed inventory into institutional investors using Taxpayer money to subsidize the transactions.  Interestingly and anecdotally, I was perusing the home rental listings in the Denver area for a friend who may be moving to Denver and I noticed that rents had decreased by about 10% from just 6 months ago, when I was looking for a new rental.  If in fact the total housing inventory, for sale + rentals, was declining then we would expect that rents would be stable or increasing.

So where's the black hole disconnect?  For one, the data is highly suspect, especially since mortgage purchase applications do not correlated with sales and starts.  To be sure, I'm sure home builders are taking advantage of near-zero interest rates and borrowing as much as they can to build.  But, as zerohedge crunched this morning's housing starts numbers, the number of homes actually completed is well below the run-rate of starts:  LINK.  A form of "channel stuffing" for home builders is to start a lot of homes but take a long time to complete them, since the stock market and investors only care about the headline "starts" data.

Even uglier, the "shadow" inventory of housing market is going to start rising rapidly this year.  The "shadow" inventory primarily is composed of homes in which the homeowner is in some form of delinquency or technical default.  These are homes where the lender/bank has opted to sit on the non-paying mortgage rather take on the ownership responsibilities of foreclosing, primarily real estate tax and HOA dues expenses.  If banks thought they could foreclose and sell quickly without incurring a big capital hit, they would.  But instead they let the homeowner live "rent free" but still on the hook for taxes and HOA dues.  This is especially true in the jumbo-mortgage segment (anything over $417k).  In fact, I know of several people who are sitting in high 6-digit and low 7-digit value homes who have not made mortgage payments for at least a year.

These delinquent/default mortgage homes are just part of the shadow inventory.  The other primary part is actual foreclosures.  We had a moratorium in foreclosures while the mortgage fraud litigation was being settled, of course on favorable terms for the banks.  FNM/FRE also delayed their foreclosure process while they unloaded substantial REO on the market.   So what is the data showing us?  From Bloomberg:

The shadow inventory of homes – those in foreclosure plus those 90 days late on mortgage payments – is on the rise again, a further indication that the supply side has not yet healed. According to RealtyTrac, foreclosure starts jumped 6 percent on a year ago basis in the second quarter, the first year-over-year increase since 2009. There are roughly 4.16 million homes that could begin to flow to market.

What's even more troubling is that the Government's FHA filled in the lending void created by the massive financial troubles at FNM/FRE.  In fact, over the past few years, the Government subsidization of the housing market shifted from FNM/FRE to the use of the FHA.  The FHA became the predominant source for mortgages and rolled out several no-down-payment/3.5% down payment programs.  And now, predictably FHA delinquencies are rising quickly, up a frightening 26% from last year:  LINK.   Why is this "frightening?"  One, because it means that the FHA will be forced to foreclose on a huge number of homes, further contributing to the housing market inventory;  and two, because the FHA is going to require a massive taxpayer bailout.

How can the housing market possibly be "stabilizing" and inventories be "returning to a healthy level" given all of this evidence to the contrary?   The housing market is one giant black hole of wasted resources and fraudulent representation of the numbers.  What's worse is that via the FHA, the Government has been using taxpayer money to subsidize a significant portion of the mortgages that have been used to purchase homes since 2008.  And now it's the FHA's turn to blow up.

It will be impossible for the housing market to ever bottom and stabilize until this country recovers economically.  This means real jobs are created which create real income growth and real employment growth.  Furthermore, the totality of the existing REAL inventory has to clear the market.  This requires demographic growth that our system can not possibly support until all the problems we know about are solved and put behind us.  THAT, my friends, will never happen in my lifetime or your's.

Nothing Is, But What Is Not (Shakespeare/Macbeth)

If you’ve got a business -- you didn’t build that. Somebody else made that happen - Barack Obama, July 13, 2012

You know, I have maintained for a long time that Barack Obama is the poster child for affirmative action.  That quote from a speech by him on Friday serves to reinforce my view.  If ever there was an apologetic statement for big Government, welfare and wealth redistribution, that is it.  I fell off my chair when I read that quote.  I guess everyone on field day gets a ribbon and now that policy has become firmly entrenched in our Government.  Barack Obama has had his entire career handed to him by others so I guess no one should be surprised that he made that remark.  What's sadly ironic is that, if you go by the income distribution numbers in our country since Obama was elected, it would appear that he is nothing more than a dish rag for the wealthy entitled, as an even greater percentage of income has trickled up to the 1% than before Obama was elected.

I had to sneak in a tribute to Shakespeare since I'm going to see the Colorado Shakespeare Company perform Richard III on Thursday evening in Boulder.  I've always loved that particular quote from Macbeth because it succinctly and cleverly encapsulates the idea of truth vs. appearance.  In fact, Obama is emblematic of form vs. substance.  He's all form and zero substance.

In a similar fashion, the existence and being of JP Morgan as a capitalistic enterprise also is the perfection of fiction vs. reality.  I recall that about 9 years ago, a good friend and colleague of mine and I discussed the fact that JP Morgan was littered with bad derivatives positions and off-balance-sheet debt and would eventually implode.  But we also knew that JP Morgan was the Fed's primary tool for manipulating the markets and because of that fact the public would never see the extent of which JP Morgan would be bailed out behind the scenes.  The TARP/Fed bailout of JP Morgan (and the other too big to fail banks) was just a glimpse of the bigger behind-the-scenes bailouts that are coming.

JP Morgan reported 67 cents per share earnings on Friday.  Of that, 45 cents was fully disclosed fictitious accounting gains.  I'll explain without delving in too deep.  12 cents of JPM's net income came from a neat little trick known as Debt Valuation Adjustment.  Essentially what this means is that the bonds issued by JP Morgan to raise money declined in market value last quarter (went up in yield).  So JP Morgan pretends that it goes into the market and buys back all of its bonds at a price level less than par (100), and therefore reaps income because they could have saved money buying them back below par rather than waiting until maturity and having to pay par.  Get it?  "What is not" about this bullshit little accounting fiction is that JP Morgan never purchased any bonds during the quarter.  It's 100% fictitious income.

The bigger source of income was 33 cents attributed to "loan loss depletion."  What this means is that JP Morgan accumulated charges to income over the past few years in anticipation of some of its loans and trading bets going bad over time.  For some reason, they decided they over-reserved for loan losses and therefore reduced the amount of loan loss reserves, which then gets translated into accounting (GAAP) income.  The charges to income over time were originally non-cash and the reversal of these charges are non-cash.  However, you have to ask yourself if the use of this loan loss reversal to generate paper income makes sense.  All of the too big to fail banks are using this gimmick to generate a lot of "income" over the past few quarters.

But let's see if it makes rational sense for JPM to do this.  What we know is that JPM incurred a $4.4 billion loss on its London derivatives bet, despite telling us a few weeks ago that the loss was $2 billion.  For me this raises a red flag and I've demonstrated in past  posts how JPM's position marks are fraudulent.  So let's assume this loss is only $4.4 billion.  It's a lot bigger and everyone I know who has worked on a trading desk - including me - knows that it is.  But what about all of its other derivatives bets and loan assets?  Are we supposed to give them the benefit of doubt and trust that all the other assets on and off balance sheet are accurately marked?  I think one would have to be supremely stupid or appallingly naive to believe that JP Morgan and its drunken CEO Jamie Dimon will ever tell us the truth about anything.  The truth is that JP Morgan's assets are hopelessly marked too high in value and the bank will eventually have to recognize massive losses.  They should not have been allowed to reverse their loan loss reserve like this because the facts to not match the action taken by JPM.

My point here is that JPM's earnings reports are completely fictitious and fraudulent.  And if I know this, it means that the people at JPM who are in upper management know this, Jamie Dimon knows this,  many JPM board members likely know this, Bernanke knows this and people in the Treasury and SEC with some modicum of intelligence know this (Geithner and Mary Shapiro are too stupid).  This gets back to the discussions about JPM that I used to have back in 2002 and 2003.  We knew JPM was technically insolvent back then.  Nine years later that level of insolvency is significantly higher by many multiples, which means the smoke being blown to cover it is substantially thicker.  And worse, the tax payer and middle class wealth being confiscated to keep JP Morgan from collapsing is unimaginably large.  This is why JP Morgan is being allowed to steal customer assets that were being used as hypothecated collateral at places like Lehman, MF Global and PFGBest.  This will get worse - expect it.

Un po 'di questo e un po' di quella (A Little Of This And A Little Of That)

The few who understand the system, will either be so interested in its profits, or so dependent on its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantages...will bear its burden without complaint, and perhaps without suspecting that the system is inimical (harmful) to their best interests  - The Rothschild brothers of London writing to associates in New York, 1863

Lest anyone think that I'm a Romney supporter, given all the criticism of Obama that I issue, I found this to be not only funny but truly awesome:   “Romney has a Koch problem” (the name is pronounced "coke").  That was the banner being towed by an airplane over the Hamptons, where a couple fundraisers were being conducted for Romney this past weeekend:  LINK

If you ever want to figure out who the puppeteers are that control the puppet strings of a politician, look to the biggest campaign donors.  So for instance, with Obama it's several Wall Street firms and individuals like JP Morgan, Goldman Sachs, Jon Corzine and Warren Buffet.  Now we see that the Koch brothers will have a heavy influence on Romney, should he be elected.  In addition to the double dose of social and moral regulation and control that will come with a Romney White House, the Kochs are truly the modern day equivalent of robber barons.  I'd rather have my teeth pulled out one by one with no novacaine than live in a country influenced by Romney and the Kochs.

How are your muni bonds looking?  LINK  San Bernardino is going to be the 3rd city in California to file bankruptcy in the last two weeks.  It starts slowly and then avalanches.  Anyone who thinks this can't happen in their own city is either hopelessly naive or tragically ignorant.  Most municipalities are running some kind of spending deficit.  If you look into the San Bernardino situation, the city council was given fraudulent budget reports for 13 of the last 16 years. Imagine that?   San Bernardino isn't unique in this regard.  This is going on across the country.

A few months ago I wrote some commentary explaining why the housing market had not bottomed and showed how the recent "stabilization" being promoted in the media as a "bounce in housing" was really nothing more than a big moratorium on foreclosures.  I suggested that 2012 would see a resumption in the escalation of foreclosures.  Well wouldn't you know it: "FHA's mortgage delinquencies soar"  LINK.  The banks and FNM/FRE have been working overtime to work off their REO foreclosure inventory, mostly selling them as rentals to "investors," in order to prepare for the next cycle of foreclosures.  As an aside, it was reported that over 45% of the mortgages in San Bernardino are under water.  Look out below.  If you bought a house in the last 12 months thinking it was "a great value and investment," my condolences.

Finally, I wanted to share some thoughts I sent to GATA's Bill Murphy last night, as he had reflected in his nightly "Midas" report LINK that something about the markets "spooked" him last night:

I just read where you felt "spooked" all day.  Same here.  I can't put my finger exactly on it but I think it has to do with the PFG thing.  That this happened after Madoff and MF Global is just incomprehensible.  Either the people enforcing the laws are retarded or are in on this looting.  My bet with Gary Gensler is the latter.

If Obama was merely just doing his job as President, he would make Gensler step down from the CFTC and go away.  If Obama is worth anything at all as an ethical, principled, moral human being  he would have Gensler investigated.  This would include all email correspondence and phone logs at the CFTC AND his private residence/cell phone.

What is "spooky" about what is going is that our system is being completely looted while the Government stands by and enables it.  The fraud and corruption runs deeper than any of us can possibly comprehend.  The public in general is clueless other than to know vaguely that "things ain't right."

Our country is disintegrating before our eyes.  Buona sera a tutti (Good evening to everyone).

Systematic Wealth Confiscation

"[S]ome accounting irregularities are being investigated regarding company accounts...What this means is no customers are able to trade except to liquidate positions. Until further notice, PFGBEST is not authorized to release any funds" - that is the notice given to brokerage customers of PFGBest, Peregrine Financial Group.

"PFGBest is not authorized to release any funds."   Get used to seeing brokerage notices like that.  That is what happened with MF Global.  It's also, in part, what happened with Lehman.  There's also a common thread behind these brokerage firm collapses:  JP Morgan and the systematic confiscation of your wealth.  JP Morgan was one of Lehman's big custodial banks, JP Morgan was the custodian for MF Global's failed book of investments and JP Morgan is the custodian for PFGBest's FX business, which is around $220 million - the amount of missing client funds.

If anyone wants to read about the details, including PFG's CEO's attempted suicide, you can do so here: LINK.  If the PFG CEO really wants to end his life, I'd be happy to be his Dr. Kevorkian.

This whole situation is almost boilerplate like MF Global.  What surprises me the most is that no one in blogosphere or the media has connected this "boilerplate" to the Lehman collapse.  JP Morgan made off with several billion in Lehman assets then.

This kind of adventure, if the Obama Administration does not start dismantling JP Morgan and cracking down on this extreme financial fraud, will be become a weekly event.  The beauty of the MF Global situation is that it set up the boilerplate for customer funds to be confiscated within a rigged jurisprudence framework.

It gets back to the necessity for everyone to unload their IRAs, get out of their 401k's to the extent possible, and get as much of their invested wealth IN to precious metals and OUT of the financial system.  People can "pooh pooh" this advice, but they'll regret it.

Back in 2002, I made the statement that the insider elitists would hold up the system to loot every last crumb of middle class wealth and that the IRA's/401k's would be the last go.  It's starting to look like I was right.  In fact, I just got off the phone with a very good, long time friend who accused me back in 2003 of "seeing black helicopters in the sky" (i.e. I was a whacked out conspiracy theorist).  His greeting this morning was: "I can't believe how right you've been about all of this."

By the way, anyone keeping their precious metals IRA account, or any other precious metals-related account, at PFG Precious Metals, you can probably kiss it good-bye.  Will Monex be next?

The Obama Government Bends You Over In Ways Not Obvious

First, I'd like to congratulate Roger Federer for his win at Wimbeldon.  He's certainly in the "the greatest of all-time" conversation with a lot of tennis observers.

The Government takes your money and gives it to others often in ways that are not apparent.  In fact, often economic news which has a positive "spin" put on it is, in truth, a product of the Government redistributing your tax money to those who do not earn it.

General Motors, aka Government Motors, reported June sales a few days ago.  The company reported a 16% gain over June 2011 sales.  The "quality" of the sales was described as "broad based."  But let's take a look "under the hood," so to speak, at real quality of those sales.  Many of you have read the dealer inventory gimmick which zerohedge.com does a good job reporting.  But zerohedge misses a huge component of Government subsidy that I'll get to in a moment.

As it turns out, a GM's domestic sales were stimulated by a large increase in fleet purchases by the Government. There's no telling if the Government really needed these cars - and it probably did not - but what a great way to boost the ability of Obama to use GM as a campaign tool.  In addition, as zerohedge chronicles, GM engages in an accounting gimmick known as "channel stuffing:"  LINK  To review the accounting, an auto manufacturer records sales when the car trailer loaded up for dealer deliveries leaves the factory parking lot.  GAAP accounting permits this.  The way it should really work is that a sale is not recorded until the end-user buys the car.  As you can see from the link, the inventory of vehicles at GM dealers has ballooned, increasing almost every month, ever since Obama used your tax money to bail out GM.

When GM assesses its sales in the middle of a given month, it can generate an increase in "sales" to dealers by slapping incentives and dealer "floor financing" to month-end sales for dealers and loading up the car trailers and sending them on their way. To be sure, some of those trailers are still on the highway going to dealers after the end of a month/quarter. You can see in that chart that dealer inventory has increased almost every month since GM was bailed out.  We don't know what true end-user "organic" sales are, and therefore thanks to liberal, fraudulent accounting rules, we can't tell for sure if GM is doing a good job managing the tax payers' investment.  To the extent that GM stock is down 40% since GM went public, GM's turnaround is failing.  Currently the tax payer investment in the stocks is $35 billion under water. There's also $10's of billions in direct bailout money that will never paid back. But you wouldn't know it if you only listen to Obama's accounting of GM.  He promotes the bailout as an example of his successful economic policies.

But there's another insidious way in which the Government misallocates your tax money to prop up General Motors.  One which zerohedge misses.  Ever wonder why the monthly lease payment advertised on GM cars seems so low?  It's because the Government, as part of GM's bailout, guarantees the residual value of those car leases.  To review briefly, the residual value of a lease is the assigned value of a car at the end of the lease.  Lease payments are determined by the length of the lease, the amount of the down payment and the residual value.  The size of the lease payment can be reduced by increasing the amount of the assigned residual value.  But if a dealer sets it too high, it will lose money at the end of the lease.  Dealers don't typically lose money on any part of a transaction.  Enter Obama.  The Obama Government put in a program when GM was bailed out to guarantee the residual of GM leases.  So dealers can set the residual value unrealistically high in order to create a low payment lease and the Government managers can look the other way on this because it's taxpayer money, not their own money.  It's a massive taxpayer subsidy of GM sales, because at the end of the lease term the dealer unloads the car at the prevailing used car market price and any loss vs. the residual value is reimbursed by Obama.  Neat trick huh?

This Obama-contrived monkey business is an egregious and substantial taxpayer subsidy of the large compensation packages received by both GM's upper management AND GM's unionized labor force.  Think about this way:  it is true that the GM bailout saved some jobs; BUT, the end result of this bailout is that Obama is taking money from your pocket and giving it to the upper management and workforce at General Motors.  The average GM union worker makes far more than the average non-union American worker, especially when the generous pension package is factored in.  This is an appalling and tragic transfer of wealth from bona fide workers in the economy to a business that would not have otherwise survived and should have been allowed to fail.  It also creates a significant amount "collateral" damage to the system that won't be apparent for a few more years.  To the extent that there was a need for GM to exist, private capital should have been allowed to pick up the pieces and create real business with real sales and thereby create real "value-added" to our economic system.

Next time you hear Obama congratulate himself over GM's "success,"  think about all the managers and employees who are living a good life thanks to your hard work and tax dollars.

Obamacare/Entitlement Programs In One Picture