Update: Looks like the offices of CNB have been raided by the FBI. Maybe they got sick of waiting for the FDIC to act…
What the “new normal” will look like: This guest post from Zero Hedge lays out the issues facing American consumers and businesses in a concise and understandable manner. If you want a very logical and sober minded assessment of what the
James Surowiecki on foreclosures: I found this new piece from The New Yorker on Simoleon Sense. The article doesn’t contain much that those of who have been vigilantly following the housing bust don’t already know. But, there was one section that I found both interesting and somewhat misleading. In discussing the continuing failure of government polices to halt foreclosures and keep stressed borrowers in their homes, Surowiecki writes:
But the biggest problem may be that the programs are based on a faulty assumption: that modifying mortgages makes everyone—borrowers and lenders alike—better off. The idea is that since renegotiating a mortgage saves banks the hassle of foreclosing on a house, watching it sit empty, selling it at a bargain-basement price, and so on, renegotiation makes economic sense for lenders. Give lenders a nudge to start acting sensibly, and you can stop foreclosures at a relatively small cost.
It’s a comforting idea. Unfortunately, it isn’t true. In fact, according to a recent paper by economists at the Boston Fed, foreclosing is often more profitable for lenders than renegotiating is. There are two reasons for this. First, about thirty per cent of delinquent borrowers “self-cure”—after missing a payment or two, they get back on track without any help from the bank. Second, between thirty and forty-five per cent of people who do have their mortgages modified end up defaulting eventually anyway. In both cases, modification leaves the bank worse off. Reluctance to modify mortgages isn’t always a matter of obstinacy or ineptitude. It’s a matter of profit: banks are doing what makes sense for their bottom line.
The high re-default rate when it comes to modified mortgages obviously provides a disincetive for banks to negotiate with borrowers. But, let’s not kid ourselves. Nothing about foreclosure is “profitable.” I know that the author is describing profitabilty in a relative sense, but to clarify this point I think he also needs to explain that foreclosures can lead to severe losses, especially in areas in which prices have dropped dramatically. Also, negative amortization loans often cause the loan balance to be significantly higher than the value of the house. There is no question that individual bank’s incentives are likely the root cause of the failure to halt foreclosures. Banks aren’t necessarily being evil or stubborn. They are constantly comparing the costs and benefits of foreclosures versus modifications. However, readers who are not familiar with the costs of foreclosures and the damage to the value of the house that can occur during the long process need to remember that banks are still losing money on many of these reposessions, just maybe a little bit less than they do when modifcations don’t work out. So, this is not data that should be looked at as bullish.
Hussman’s latest commentary: It’s Monday and that means that we can all look forward to words of wisdom from John Hussman. Today John gives those of us who have missed the gigantic rally in equities a reason to feel better about our investing acumen:
Investors can point to various indicators that “flashed buy signals” near the March lows. The problem is that many of those also went positive during last year's plunge and then failed spectacularly (as also occurred in late January). More importantly, we can't find factors that would have made us more constructive since March and that would also have improved long-term returns if applied consistently on a historical basis.
Not that it excuses my paralysis during the freefall in stock prices in early March that led to some pretty ridiculous valuations, but I do take some solace in the fact that the “buy signals” at the time could have failed just as miserably as they did multiple times during the bear market. But, more importantly, I have learned a valuable lesson. I clearly see the importance of having done research on companies that you would like to own at a lower price so that when the market gets irrational you are able to pounce on the opportunity without worrying too much about the valuation of the overall market. As my buddy Steve always says, better to learn these lessons now when there are only a few zeros involved.
Forget your tiny NYC apartment and move to
(Picture courtesy of FDIC.gov)
(Picture courtesy of FDIC.gov)