Liquidity

You've gotta love The Economist!

A wing and a prayer

From the Detroit News: Home prices fall sharply in second quarter; Detroit posts worst decline.

U.S. home prices fell 3.2 percent in the second quarter, the steepest rate of decline since Standard & Poor's began its nationwide housing index in 1987, the research group said today.

Detroit led the cities with the biggest price declines, with an 11 percent drop from June of last year.

It's pray-to-Baby-Jebus time!

Say what?

As desperation sets in, the quotes are becoming more and more ridiculous.

From the Beacon in Montana: Montana Tip-Toes Around Housing Lull.

“For sale” signs are propping up all around Flathead Valley, but Ted Dykstra, president of the Northwest Montana Association of Realtors, attributed that to an excessive number of homes on the market, not slow sales."

OK, you get the "Genius"-of-the-Day award!

From the San Francisco Chronicle: Hardworking Oakland family can't sell 'sweet little house' located in real estate 'dead zone'

"Luckily, they have equity," said their Realtor, Mary Dresser of Prudential California Realty. "But if they can't sell, they don't really have any equity, or at least they can't gain access to their equity."

If you "can't gain access to your equity", that would be because you "don't have any equity".

These reporters are all in the "Why does it hurt when I pee?"-category of reporters!

Debunking Conspiracies

So there seems to be a lot of hoo-hah about the Fed bailing out Countrywide under the guise of Bank of America, blah blah blah, tin-foil hat nonsense.

First, the facts from Bloomberg: Countrywide Rises on Bank of America Stock Purchase.

Countrywide Financial Corp. rose about 1 percent after Bank of America Corp. bought $2 billion of preferred stock in the company, erasing concern the nation's largest mortgage lender will go bankrupt.

Bank of America, the second-biggest U.S. bank by assets, gets shares that yield 7.25 percent and can be converted into common stock at a price of $18, Countrywide said yesterday in a statement. The shares are convertible at any time, though Bank of America will be subject to trading restrictions for 18 months, according to a regulatory filing by Countrywide today.

OK, now let's roll up our sleeves, and dig in to how this works.

Imagine you're Mozilo (CEO of Countrywide). You're in deep doo-doo. You need money badly, and you need the money now. So you make this deal.

What's in it for BofA?

They give Countrywide $2B, and get bonds yielding 7.25%. They can be converted to roughly 111 million shares ($2B / $18). So here's what BofA will do. They will short 111 million shares right now which will yield them roughly $2.4B on the open market ($22 share price right now.)

Now, you get the coupons from the Countrywide preferred, and the $2.4B you just netted.

Please note that this deal is "self-financing". You gave them $2B and netted $2.4B right now.

There are two scenarios:

If the company goes bankrupt, and the stock goes to zero, you just made a $400M bundle plus you get coupons till they die. You also get first picking over the carcass of the company before anyone else. Not bad for a day's work.

If the stock survives, and the stock rises, after 18 months, you can always exercise the convertible right, get the stock at $18, and you've made $400M plus all the coupons until you exercise the rights. Not bad either.

What's in it for the CEO?

The company lives to fight another day. If the executives and the board are smart cookies, and I assure you they will be, they will cash out all their options, stock, etc. and fuck the hell off.

Well, then since there are no free lunches, somebody must be getting screwed. That would be the current stockholders, and also the current bondholders. (If I were either of them, I'd get the fuck out of this piece of shit pronto!!!)

See? No conspiracies needed to explain this lipstick on a pig?

Confessional in Print

Well, this blog has shat all over newspaper reporters but it takes a particularly "special" reporter to shit all over himself.

Folks, from the Washington Post: Was the Mortgage a Mistake?

Two years ago, my wife and I sat at a long conference table in a mortgage-title office in Bethesda. Sitting next to us: our real estate agent, who drew up our bid on a townhouse in Germantown two days after showing it to us. We didn't get an inspection, and I don't recall going back for a second look. We had to act fast or someone else would get it.

Our bid won the house -- our very own first home -- and now we had to close the deal. The owners sat across the table. They seemed more nervous than we did, perhaps fearing we would have second thoughts -- about our risky interest-only mortgage, about seeing them walk away with a $120,000 profit, about buying a house just as "bubble" was entering the regional lexicon.

They signed. We signed. Price tag: $459,275.

And then, as the saying sort of goes, the stuff hit the fan. The sizzling home market almost immediately began to cool off, which my wife and I sort of ignored. Interest rates started to creep up, and we sort of blew that off, too. We have time. This too shall pass. No worries. Life is good! We bought a flat-panel television, took a nice vacation, bought a dog, hired him a daily dog-walker, and then we got pregnant. We have time. This too shall pass.

But now, with our baby due in six weeks, the stock market has taken a serious drive south, with the Standard & Poor's 500-stock index dropping 6.9 percent since its high on July 19 after problems emerged for subprime lenders, who gave loans to people with spotty credit at the height of the frothy housing market. The contagion from the busted subprime sector has hit credit markets hard, and now Brian Williams and Charlie Gibson and Katie Couric are talking every night on the national news about how hard it will be to get credit, perhaps leading to more problems in the housing market.

I walked in the door one night last week, and Brian Williams was talking to my wife. I heard the word "subprime" from the TV. She looked at me and said, "Should we be worried?" I said, "We have plenty of time." But the truth is, I am getting nervous. And a few days later, when I told my wife I was indeed worried and writing about it for this newspaper, she said, "You're going to give me a panic attack." She paused and then added, "Did we really mess up?"

My wife, who is a physician, asked a question that thousands of other people in the region must be asking now, too.

A reporter and a doctor. The ultimate "dumb money", if there ever was one. Always do homework after the fact.

Besides all that, our mortgage broker and real estate agent kept confirming what we wanted to believe: nothing to worry about.

What a fuckin' shocker! People who make money on commission kept confirming what you wanted to believe so that they can make the commission.

The world is a tricky place, and nobody teaches you this in school.

Ya fuckin' think?!?

Geting pole-d

From the Wall Street Journal, we have How the Mortgage Bar
Keeps Moving Higher.

Frankie Van Cleave says she has paid all her bills on time for more than three decades, save one car payment that got delayed in Christmas mail. But neither solid credit nor her track record running a number of businesses is sparing the 70-year-old from the turmoil in the home-mortgage market.

Several mortgage brokers had courted her to refinance a $1 million adjustable-rate mortgage she currently carries on her home, on two acres of prime riverfront property in Marietta, Ga.

Her bank of three decades won't help her after her monthly mortgage payments recently ballooned to nearly $8,200, so Ms. Van Cleave is working 80 hours a week as a technical writer to make ends meet.

In Marietta, Ga., Ms. Van Cleave doesn't have cash for a refinancing down payment, and she faces a problem hitting more consumers: Appraisers say her home is worth less than her current $1 million mortgage. Ms. Van Cleave concedes she took a risk, borrowing close to the appraised value of her home two years ago -- at the market's peak -- to help fund a start-up company that sells a patented fishing-rod holder. She opted for a two-year ARM, with a piggyback mortgage at nearly 12%, and planned to refinance.

Who, in their right mind, would loan a 70-year old woman a million dollars?

Who, in their right mind, would work 80 hours a week to "make ends meet" at age 70?

Who, in their right mind, would help fund a company that makes "fishing-rod holders"?

I fucking shit you not -- patented fishing-rod holders! Most people would just cut out a length of PVC, and two circular tins on each end, and a few loops of metal to hold it which costs, what, $5?

I guess we could argue that she's getting hosed!

Crashing Credibility

From Bloomerg, we have Moody's, S&P Lose Credibility on CPDOs They Rated.

Moody's Investors Service and Standard & Poor's, the arbiters of creditworthiness, are losing their credibility in the fastest growing part of the bond market.

Really?!? No way, dude!

The New York-based ratings firms last month gave a new breed of credit derivatives triple-A ratings, indicating they were as safe as U.S. Treasuries. Now, investors are being offered as little as 70 cents on the dollar for the constant proportion debt obligations, securities that use credit-default swaps to speculate that companies with investment-grade ratings will be able to repay their debt.

``The rating doesn't tell me anything,'' said Bas Kragten, who helps manage the equivalent of about $380 billion as head of asset-backed securities at ING Investment Management in The Hague. ``The chance that a CPDO won't be triple-A tomorrow is a lot greater than it is for the government of Germany.''

S&P's rankings ``are appropriate for existing CPDO structures,'' S&P spokeswoman Felicity Albert in London said.

You'd have to have an IQ of a lobotomized amoeba to believe these ratings.

On the bright side, you will get a job running a pension fund.

Fear, reason and greed

From the Chicago Sun Times, we have Sentinel ices funds as 'fear has overtaken reason'.

Sentinel Management Group Inc., the Northbrook-based cash-management firm, froze a $1.5 billion fund, saying too many investors are trying to withdraw their money.

Sentinel Management, which boasts on its Web site that no client has ever lost money in its fund, makes money mainly by betting on overnight interest rates outpacing yields on short-term Treasury bonds.

A "cash management" firm is losing money. Extraordinary, innit?!?

The fund told clients in a letter that ''fear has overtaken reason'' and most investments have no buyers.

No, sweetheart, fear has not overtaken reason; reason has overtaken greed.

Nouveau Riche University

Sometimes the world is just too stupid. Words fail me.

From CNN Money: A last chance to get rich in real estate?

Several months ago Silvia Cuevas took stock of her life, and it was a profoundly unsettling experience. At 40 she had a solid job with a modest salary at the public library in Santa Ana, Calif. She'd carefully squirreled away some savings and bought herself a little house. She was financially secure - and utterly dissatisfied. All around her, Santa Ana throbbed with the feverish energy of recent immigrants eager to cash in on the promises of America. A short drive from Disneyland, Santa Ana boasts one of the highest concentrations of Latinos of any city in the U.S., and these days it is a hotbed of entrepreneurial activity. Cuevas, though, felt as conservative, meek, and, well, dull as a church mouse in Vegas. "I was going nowhere," she recalls. "How was I going to find my fortune?" Then a girlfriend introduced her to Nouveau Riche University.

Not exactly a university, Nouveau Riche offers real estate investment classes -and a host of related products and services - to would-be tycoons. In April, Cuevas plunked down tuition of $16,000 and attended a weeklong program in Phoenix. Two weeks later, emboldened by her instructors and an advisor assigned by the university, she refinanced her home, taking out $200,000 - a large share of her equity. She used the money for down payments to buy - sight unseen in one case - three investment properties through a real estate agency controlled by Nouveau Riche. By midsummer Cuevas' portfolio of investments had grown to include a condo in Colorado, three acres of undeveloped land in the Smoky Mountains, and a three-bedroom house in San Antonio. Her debt load has grown too, thanks to the hundreds of thousands of dollars in loans she took out on the properties, but she doesn't worry. "I learned how to be bold at Nouveau Riche," Cuevas says. "They're the market experts, so I trust them to help me buy. I can't wait to make my next purchase!"

That's the kind of rah-rah spirit visitors encounter at Nouveau Riche (nruniversity.com), where the lectures are more like pep rallies, the tests are sometimes self-graded, and the homework is optional. Nouveau Riche has reason to cheer too. Co-founder and CEO Jim Piccolo claims that revenues will top $80 million in 2007, up tenfold since 2005, when the company was founded and the real estate market peaked. Piccolo makes money not only from tuitions but also from commissions on the properties his students buy and from the fees he charges for accounting, finance, and property-management services.

Remarkably, Nouveau Riche is able to attract huge crowds (a recent class in Phoenix lured 2,479 students) in a market that is declining rapidly. The Standard & Poor's Case-Shiller home price index (homeprice.standard-andpoors.com) shows that nationally prices fell 2.7% in the first quarter, more than in any quarter since 1990. In a late July conference call with analysts, Countrywide CEO Angelo R. Mozilo, who runs the nation's largest mortgage firm, said home prices were falling "almost like never before, with the exception of the Great Depression." That's not all. PMI Mortgage Insurance (pmigroup.com), a financial firm that tracks the market, predicts two more years of decline across much of the U.S.

Given those grim stats, why would anyone want to invest in real estate? Nouveau Riche borrows heavily from the investment philosophy popularized over the past several years by real estate guru Robert Kiyosaki, who wrote the bestselling advice book Rich Dad, Poor Dad. Like Kiyosaki, Nouveau Riche teaches that working for a salary is a fool's game; the road to riches requires leveraging debt to amass a portfolio of income-generating properties. Yet investing in rental properties, like all entrepreneurial endeavors, is hard work. A successful landlord has to know the market, maintain his properties, and retain paying tenants.

That doesn't seem to bother Nouveau Riche students, many of whom have seen their neighbors get rich flipping houses or renting them out during the boom. Judging from the callused hands and well-worn work boots spotted at a recent Nouveau Riche event, it attracts a blue-collar crowd for whom the promise of riches from real estate rings true at a gut level that stocks and bonds don't reach. "I know I'm not going to get wealthy working for the fire department," says Hector Magallanes, a firefighter from Los Angeles. "I'm working up the courage to take the risks I need to take to be financially independent."

Nouveau Riche makes it easy for would-be tycoons to get started. "We learned through our research that most students of real estate seminars never actually buy any property because they don't have the tools to take that first step," Piccolo says, "so we are offering them all the tools they need to build their portfolios."

At a recent seminar at a Hilton in Phoenix, Fix 'n Flip - a daylong course in the art of the fixer-upper - was standing room only. So was Creative Financing, in which students learned how to tap their retirement savings and their home equity for money to invest. Between classes, throngs of students flocked to the lobby to booths featuring affiliates of Nouveau Riche. Save Our Scores (or SOS, as it is called) helps high-risk borrowers boost low credit scores so that they can borrow more money at lower rates. (Fees range from $600 to $1,200.) Investor Concierge, the real estate brokerage firm owned by Piccolo and his associates, helps students buy houses and condos, arranges financing, then provides management services for their far-flung properties. (The firm's slogan: "Click a mouse, buy a house.") Meanwhile, the Nouveau Riche University Store did a brisk business in polo shirts, plus jackets with the college logo, a stylized eagle.

These days alumni groups are springing up in Atlanta, Boise, Tacoma, and other cities. What's on the agenda at their meetings? "We boast about our portfolios," Heather Echevarria, 29, of Boise, says. "We shop deals too." Echevarria and her husband, Ben, specialize in pre-foreclosure properties - that is, buying houses from cash-strapped owners who can no longer afford to pay their mortgages. Typically, she says, they buy houses for half their appraised value. Last year, the pair claim, they bought-and quickly resold for a profit - 75 homes in Idaho and Nevada.

But will other graduates of Nouveau Riche do as well? What happens if interest rates rise and the monthly payments on a variable-rate loan soar, or a tenant leaves? Will the investor be able to sell at a profit in a market where home prices are falling? Casey Serin, a 24-year-old programmer from Sacramento, had already invested in property (although not through Nouveau Riche) before he enrolled in one of its classes last year. "What they teach there is dangerous," he says. "They're selling you on getting rich fast-and that's a risky game to play."

Piccolo retorts, "There is no better time to buy, because real estate is on sale. You can never go wrong with real estate in the U.S. of A." He admits, though, that he has not bought any property lately.

The way the Michigan real estate market is headed, it might not be so easy. According to Judy Brant, a broker in Fenton for more than 20 years with Coldwell Banker, the inventory of homes in Genesee County, which includes Fenton, averaged 2,000 units in 2005. Today it is 8,000, up 300%. When Brant heard that Nouveau Riche students had bought 60 condo units in her town - sight unseen - she said, "I'm speechless. The housing market here is tied to the auto industry, and prices are falling faster than you can imagine: 10% last year and another 10% this year. Who knows when it will reach rock bottom? As far as rental properties, it's hard to rent anything here now. Houses and apartments sit empty all over town. People are leaving because there are no jobs here. We're really suffering."

Despite these risky deals, Nouveau Riche's enrollment keeps booming and Piccolo's pockets keep filling, which lets him plan big for the future. The company bought 24 acres on top of a black-lava mountain north of Phoenix. In 2008, Piccolo intends to break ground on a new campus with modern steel and glass classrooms and four luxury dorms, each with its own pool and barbecue pit. The pools will be linked by a man-made river; students will be able to float from dorm to dorm, riding the river on inner tubes. "It'll be very theme-y," he says. "We're going to build a Disneyworld for investors and entrepreneurs."

Down Under is down under

From the Herald Sun in Australia: Sharp spike in loan defaults.

AUSTRALIA'S insurance regulator has drawn attention to a spike in the number of stressed home buyers, confirming that claims for mortgage defaults soared by 329 per cent in 2006.

The Toupee Talks

From CNBC, we have the Trump talking about Manhattan: Trump Tells CNBC: New York Real Estate May Be Vulnerable.

The billionaire developer told CNBC's Erin Burnett that despite the weakening housing market across the U.S., "certain small luxury niches" remain strong, including Manhattan and Palm Beach, Fla. The Gotham market "is stronger than I've ever seen it," Trump said, adding, "but next week, I may have an entirely different story."

Holy housing crisis, Batman! Manhattan's gonna get hosed.

Chest-thumping Pride

From USA Today, we have Mortgage crisis: Home loans are harder to get.

Patrick Jones, a 49-year-old baker in the Denver area, bought his home three years ago and has paid his mortgage on time every month.

This month, his adjustable-rate loan reset for the first time, to $1,800, up $450. Loan terms in the current market mean that he can't get relief if he were to refinance.

"Now, I'm just barely making it," he says. "I used to have a steak once or twice a week; now, I'm going to have hot dogs and beans. We used to go to the movies, but we're giving that up."

But, but, but...

Aren't you proud that you "possess" your "own" home? Whatever happened to the "pride" of ownership?

Congratulations! You're part of the American Dream.

Smells like...

Sometimes you need a break from the non-stop bad news from the regular economy. That's the time for some light-hearted economic nonsense.

That's also the time you have trouble believing the news but rest assured, it's real.

From Reuters, we have China seeks profit from panda poo

A Chinese wildlife research centre has come up with a novel idea to profit from panda poo -- make Olympic souvenirs out of it.

Researchers at the centre in Chengdu, capital of mountainous Sichuan province, had sculpted photo frames, bookmarks, fans and panda statues out of the 300 metric tons of the stuff produced by 60 giant pandas each year, state media said on Tuesday.

Jing Shimin, assistant to the director of the base, proudly declared that the souvenirs would be relatively odor-free.

"They don't smell too bad because 70 percent of the dung is just remains of the bamboo that the pandas are unable to digest," he told Xinhua news agency.

Capital Crisis

Well, the Washington Post has finally admitted the obvious and capitulated: Little Kid on the Block.

Shauntise Harris expected competition when she put her one-bedroom condominium on the market in April.

But she didn't know how intense that competition would get. Not only was she up against some of her neighbors at 555 MassAve, a 246-unit luxury building in the District's Mount Vernon Triangle neighborhood, but she also was competing with the project's developer, the JBG Cos. Nineteen months after starting sales, JBG still had units to unload and was offering a year of no condo fees on one-bedroom units -- an incentive Harris could not match.

Please note the pair of graphics that they include:




Number of units for sale: roughly 20K
Number of units sold last year: roughly 2.5K

That sounds like a 8-year supply to me (assuming continued demand) which is terribly unlikely because the last few years have seen above average demand because of speculation.

If we include, the number of units coming ahead of us, and we assume only 50% of them actually get built, we're talking about a 12 year supply of condos.

The market is not only going to choke; it's going to end up drowning it its own vomit.

Case-Shiller's Data

These are medians but you can clearly see who's been partying a little too hard!

Just for the record, the correct way to interpret the data about Detroit, Cleveland, and Denver is not that they had no housing bubble but that they would've (and still will) have had an outright depression starting 2000 had it not been for the credit bubble. They're still headed down that same path.

Dreaming the Undreamable Dream

From the Washington Post (another ass-rag), we have California: Golden dream or foreclosures by the sea?

Whatever experts call it, Dorothy Hicks, 74, a retired federal employee in Oakland, California, is seeing her American dream of owning a home teetering on the edge of collapse. After refinancing into an adjustable-rate mortgage last year, she faces possible foreclosure on her home of nearly 40 years.

She's "owned" the home for 40 years so why did she refinance?

She thought a house was a magic ATM that spits out dollar bills.

She can't pay the loan now.

She's teetering on the edge of collapse.

She's dreamed the dream for 40 years, and now it's time to pay the piper.

This is such a crock of shit!