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Making Home Affordable a disaster
Critics of the Obama administration’s $75 billion program to protect homeowners from foreclosure increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes, and some economists and real estate experts now contend it has done more harm than good. They say many desperate homeowners have sent payments to banks in efforts to keep their homes, wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system. “The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.” Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.
Jobless claims down
The Labor Department says there were 432,000 initial jobless claims filed in the week ended Dec. 26, down 22,000 from the previous week's revised 454,000, and the lowest since July 19, 2008, when there were 413,000 claims filed. A consensus estimate of economists surveyed by Briefing.com expected claims to jump to 460,000. Jobless claims have been trending downward since the end of March, when they peaked at 674,000, the highest figure since 1982. 4,981,000 people filed continuing claims in the week ended Dec. 19, the most recent data available. That's 57,000 down from the preceding week's revised 5,038,000 claims. The 4-week moving average for ongoing claims fell by 122,250 to 5,101,250 from the previous week's revised 5,223,250. However, the fact that employers are running out of people to lay off isn't necessarily a good thing. The slide may signal that more filers are dropping off those rolls into extended benefits. The employment picture will continue to improve as jobless claims continue to fall, but Tim Quinlan, economic analyst at Wells Fargo, said they will need to drop near 350,000 for positive job growth.
Not in 2010
Experts from a range of political leanings, speaking at American Economic Association's annual gathering, were in agreement when it came to the chances for a robust and sustained expansion in 2010. It won't happen. Many predicted U.S. gross domestic product would expand less than 2% per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake. Housing was at the heart of the nation's worst recession since the 1930s, with median home values falling over 30% from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada. The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country's growth pattern. The steep drop in home prices has also boosted their propensity to save. "It's very hard to see what will replace it," said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. "It's going to take a number of years." One reason is that U.S. consumers remain heavily indebted. Another is that many of the country's largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department. He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines. "There's something of an illusion of profitability," he said.
Small business delinquencies rise again
Severe delinquencies by small and medium-sized U.S. businesses on the loans, leases and lines of credit to finance capital equipment rose again in November as lenders remained reluctant to extend fresh financing, PayNet Inc reported on Monday. Accounts behind 180 days or more, and unlikely ever to be paid, rose to 0.91% in November from 0.87% in October, according to PayNet, which provides risk-management tools to the commercial lending industry. It was the 22nd consecutive monthly increase in loans so far in arrears they ultimately may have to be written off by lenders. Accounts in moderate delinquency, or those behind by 30 days or more, rose in November to 4.33% from 4.19% in October, according to PayNet. But accounts 90 days or more behind in payment, or in severe delinquency, improved modestly in November, slipping to 1.40% from 1.43% in October. It was the fourth consecutive improvement in the measurement. That was not the only glimmer of light in PayNet's monthly report. The company's Small Business Lending Index, which measures the overall volume of financing, fell just 11% year-over-year in November. While that indicates that lenders remain reluctant to extend credit to small and medium-sized businesses, it was the smallest decline in the index since the recession began. "We're not out of this slump yet," said Bill Phelan, president and founder of Skokie, Illinois-based PayNet. "But the year-over-year decline in the small-business lending index is smallest so far in this downturn and continues an encouraging trend line. From January through May, the index was falling 25 to 33%. And then from June to October, we saw moderating declines of 16 to 21%. So 11% is really another step in the right direction."
Everyone on government payroll?
"Why don't we just put everyone in the United States on the federal government payroll and call it a day?" asks Rep. Jerry Lewis, R-Calif. He's talking about the latest "Jobs for Main Street Act" title that House Democrats put on their $174 billion package last month. Republicans are calling it "son of the stimulus," the $787 billion economic recovery plan of nearly a year ago that they say was ineffective at producing jobs. Jobs from the House bill's $75 billion in infrastructure and public sector spending include tens of thousands of new construction jobs, 5,500 more police officers, 25,000 additional AmeriCorps members, 250,000 summer jobs for disadvantaged youth, 14,000 part-time jobs for parks and forestry workers - basically all government jobs in one form or another. Absent from the House plan were President Barack Obama's proposals to attack unemployment through tax credits for small businesses that create jobs and for homeowners who make their dwellings more energy efficient.
Even the investment in "shovel-ready" highway and bridge projects may not immediately translate into a reduction in the nation's 10 percent unemployment rate. Republicans cited government figures showing that, as of Sept. 30, only 9 percent of $27.5 billion for highways in the first stimulus bill had been spent. The Congressional Budget Office estimates that of the $39 billion in the new House jobs bill directed to the departments of Transportation and Housing and Urban Development, only $1.7 billion will get spent before next October. A lot of the money "hasn't even gotten out of Washington yet," said Rep. Eric Cantor of Virginia, the House's second-ranked Republican. "Why is it still here if it was designed to create jobs?"
Wall Street Journal scorches Obama
The Wall Street Journal released an editorial today that doesn't have nice things to say about " the Treasury's Christmas Eve taxpayer massacre." It's referring to the lifting of the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow. According to the editorial, "The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter." And that's not all the WSJ has to say, either. " The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers. Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages—half the market—that the companies either own or guarantee.
The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance. This subterfuge also explains the Christmas Eve timing. After December 31, Team Obama would have needed the consent of Congress to raise the taxpayer exposure beyond $400 billion. By law, negative net worth at the companies forces them into "receivership," which means they have to be wound down. Unlimited bailouts will now allow the Treasury to keep them in conservatorship, which means they can help to conserve the Democratic majority in Congress by increasing their role in housing finance. With the Federal Reserve planning to step back as early as March from buying $1.25 trillion in mortgage-backed securities, Team Obama is counting on Fan and Fred to help reflate the housing bubble." Surely "hope and change" didn't mean the sort of slimy Chicago politics the WSJ claims the Obama administration is playing? The editorial ends with this scorcher: "In today's Washington, we suppose, it only makes sense that the companies that did the most to cause the meltdown are being kept alive to lose even more money. The politicians have used the panic as an excuse to reform everything but themselves."
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Above Post Written by: Chris Mclaughlin with Short Sale Riches.com
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