I thought this was obvious...

If you are paying a mortgage at a certain rate r% and the rate changes to r + δr, then how much will your payment increase?

Well, it's complicated but to first approximation:

δp/p ≈ δr/r

Which means if the rates go from 5% to 6%, your payment doesn't go up by 1%; it goes up by 20%. (120% of 5 = 6.)

I thought this was obvious. I have been informed that this is not obvious, and the vast majority of people think it goes up 1%.

Crikey! These fucked borrowers are truly fucked!

Is it all "contained"?

Take a look at the latest numbers published by the Fed: Assets and Liabilities of Commercial Banks in the United States.

Scroll down to page 13, and note line 34.

Magically, ending the week of July 11th, the banks seem to have $1,214.6B of securitized real estate loans on their books.

That's 1.2 trillion dollars. Let's say it again for emphasis: 1.2 treeeleeon dollairs.

Before July 4th, they didn't exist as liabilities. Then they magically appeared. The banks managed to accumulate 13 digits worth of "liabilities" in less than a week.

That's quite impressive, isn't it?

Doing Your Homework

From Michigan, we have Plainfield Twp.: Builder switches to condos.

Meahney, co-owner of the site and owner of the Thousand Oaks Golf Club adjacent to the 23-acre development, said market demand for 20,000-square-foot houses has suffered a sustained nosedive.

Folks, this is the same Michigan whose current unemployment rate is the same as the worst times of unemployment in the depths of the Great Depression. This is the same Michigan whose winters make the East Coast look like Acapulco.

What possible demand can there be for a 20,000 sq-ft house in this place? Who's going to buy it, and more importantly who can afford to heat and cool it?

He said condominiums averaging 1,200 to 1,500 square feet should be more attractive to baby boomers who don't want upkeep responsibilities of a larger home. Prices will start at $300,000, and the density might drop to 55 condos once the project gets under way, he said.

There are very few people who can afford $300K in Michigan. In fact, there are very few people who can afford $300K in all of the United States. In fact, there are virtually no people who can afford $300K in all of the world.

What planet are these people coming from?

Whiners of the World, Unite!

From "down under", a brave "barefoot" soldier for the Ozzie Herald Sun writes: Perils in easy cash.

WEDDINGS are wonderful things - even better when you're not signing on the bottom line (either at the altar, or at the bar later in the evening).

I recently attended one where I saw first hand the commitment between two young lovebirds - not only the bride and groom mind you, but a couple sitting next to me at the reception.

They had just purchased their first home in inner city Sydney, and you could see the look of envy on the rest of the table of twentysomethings.

The young woman explained that although it needed a little work, their new abode was "a bargain at $1.1 million" - which caused Barefoot to almost choke on his cocktail frankfurt.

That rolled a little too easily off the tongue for my liking, so I suggested that we all say it together - one million, one hundred thousand dollars - and for dramatic effect I emptied the salt shaker and drew the numbers for all to see. Clearly annoyed, she retorted with, "it's only $7000 a month in repayments".

It wasn't until I asked whether they were planning on using the first home buyers' grant to purchase a flower arrangement for their entry hall that I picked up on the daggers I was drawing from my date.

Realising that I had yet again put myself in an awkward social situation, I made a hasty exit to the bar.

To my surprise, the deeply indebted boyfriend followed. After we'd knocked back a schooner or three he confided to me that he was a little worried about taking on so much debt.

My advice was for both of them to score jobs at Macquarie Bank - failing that there was little he could do other than sit back and enjoy the free beer while he could.

You are a brave man, my Barefoot compatriot! You have smitten them right inside the she-wolf's lair.

Over the past month on my regular gig on national youth broadcaster Triple J, I took a listener through the steps that were required to get into her first home - establishing a budget, starting a savings program and paying off credit cards.

A caller rang and said that a real estate agent had advised him that saving for a deposit was a waste of time, given that the value of housing would increase faster than he could save. Herein lay the real problem.

While the regulators have zealously cleaned up the compliance procedures of investment advisors to protect the baby boomers' bounty, nothing has been done to protect first-home buyers, who are making the biggest financial decision of their lives.

Instead of receiving reliable financial advice, first-home buyers are subjected to self-serving pitches from unregulated salesman.

For a taste of this tripe, just go to an auction and listen to the auctioneer tell the crowd the house will not only "double in price'' but that "capital gains are assured".

Next comes the largely unregulated mortgage brokers, who get a kickback for every mortgage they sell - typically via an upfront payment and a trailing commission each year.

Using a mortgage of $400,000, this could translate to $2800 upfront and $1000 a year coming (indirectly) out of your pocket. So long as you pay the mortgage insurance - which protects them in the event of things going pear-shaped, they have every reason to encourage you to borrow more.

The more they can get you to borrow, the more money they make.

Apart from the uptake in low documentation, and no documentation (liar) loans, the slowdown of the housing market has brought increased competition as lenders jostle to win over first-home buyers.

One offer doing the rounds gives recent university graduates the opportunity not only to purchase a home with zero money down, but they'll even throw in a bit extra (debt) to pay off your HECS.

Hex, indeed!

Perhaps it was the booze, but as the night wore on my deeply-indebted mate stopped thinking about his McMansion and started looking at all the things he would be giving up to maintain his million-dollar mortgage - travel, starting his own business, spending time with his family.

This is where I could lend a helping hand. I promised I'd hip and shoulder his princess when the bouquet was thrown - he couldn't afford the ramifications anyway.

Alright! He's going to offer "comfort" to the she-wolf. Nice touch. You're a man after my own heart.

The "Special" Manhattanites

From the toilet paper that prints anything, we have Should Co-op Boards Set ‘Floor Prices’?.

IT is an open secret in New York that some co-op boards have adopted what are known as “floor prices” — minimum sales prices for apartments in their buildings.

Oooh, this is gonna be bad.

Let's see how this works out. What happens if Bill Gates mandates a minimum price of $100 for Microsoft shares?

The market is currently valuing each share roughly around $31.

From the point of view of a seller, Bill Gates's theoretical strategy is great. They will advertise their shares for sale at $100. But the buyer would think, "why would I buy something at $100 when the price is roughly $31?"

Please note that the buyer doesn't need to know the exact price. Even if they guess that the price is "something between $25 and $50", they will not transact. Precision is not needed in this game.

Effectively, you will have no market at all to trade this stuff (or equivalently, the bid-ask spread would be enormous, and only greater fools would end up transacting.)

So, the only thing the co-ops are ensuring is that sellers are locked in. They will ride the market down into the crash without being able to get out. And that will just make a bad problem morph into a total clusterfuck.

Good luck, lemmings!

The "New" Economic Reality

A Tiny Preview into the Future

Interested in knowing what stories will hit the press in a years' time?

Here's my list:

Abandoned Pets.

The "New Simplicity" (living within your means; watch for a "Time" article!)

People re-embracing religion

Any fool can predict this. Too bad you can't make money off of it!

Reverse Psychology

From the Palm Beach Post, we have Builders huddle on slack sales.

Getting back to Ara Hovnanian, we see him at every major home building industry event.

"Raise prices," he said. "Buyers aren't buying because they think you're going to lower prices again. There's interest but there's fear. Raise prices 3-4 percent. And quit giving discounts.''

Supply has overwhelmed demand. In fact, it has overwhelmed "projected" demand for the next 15 odd years in Florida, and the solution is to raise prices?

You go right ahead and do that, sparky! We'll check back after a year to see how that works out for you.

As I understand it...

• Subprime is contained, except when it is not.
  
• The housing crisis is contained, except when it is not.
  
• Inflation is contained, except when it is not.
  
• The containment is spreading.

Princeton is not what it used to be! (except when it is?)

We all need to take a few lessons from Bernanke. The key point as I understand it is:

There are no problems, except when there are.

Soundness

From the Financial Times (one of the few newspapers worth paying for!): Australian hedge fund ‘tightens gate’ on withdrawals.

An Australian hedge fund manager has issued a pre-emptive warning in response to the widening US subprime lending turmoil. The move came as some hedge fund investors warned that more funds were likely to limit redemptions to prevent forced sales of illiquid assets at low prices, but that the true scale of the problem might not become clear until September, reports the FT.

In a letter sent this week to investors, Basis said it had been hit by “indiscriminate” repricing of  “otherwise fundamentally sound collateral” amid fresh fears of US subprime lending turmoil. It said it had deliberately avoided the worst-hit 2006 subprime loans.

If it's so fuckin' sound, how about returning the investors' collateral?

Ha ha ha hahahahahahhahhhh!!!

When Realization Strikes

OK, everyone here is sick of this; so am I but this is too funny.

From the Southwest FL Herald Tribune: Realty's summer slowdown hits early.

A condo at Grand Preserve on Lemon Bay looked like a hot deal when Dave Weam picked up the contract in 2005.

"I paid $650,000 for it and I owe less than $300,000 and it is costing me $3,000 a month, with the maintenance fee and property tax and payment (principal and interest)," he said. "I would rent it for $2,200. That is where we are at."

"If I lowered the price to $525,000 or $550,000, I still don't think I'd be able to sell it," Weam said. "And if I am willing to rent it for $2,200 a month, why would somebody want to buy it? It is a lose-lose for me."

Ooooh, it's almost too funny when you see the gears whirling.

Firstly, there's the cost of capital of the first $350K. You could be earning a hefty $1200 or so after taxes. Even after that, the rent is $800 less than the outlay. So he's in the hole for roughly $2000 each month.

You can see that he can see the dots but he can't draw the lines connecting it all up.

The answer, of course, is obvious.

DOH!!!

Too Honest?

From Reuters, we have Home builders pare down to weather storm.

There is no good news for some the largest home building companies in the United States.

"We do think if you're dumb enough to buy a home builder (share), you ought to buy us," Ryland Group Inc. Chairman and Chief Executive Officer R. Chad Dreier, told an investor audience.

No more commentary is needed.

Talk to the hand!

Diana Whorelick on CNBC is surprised that the home builders will no longer talk to the media:
Homebuilder's New Mantra: Don't Talk To The Media!

Apparently, I personally blew up the housing market. Here's what the CEO of Ryland Homes (RYL) said when I asked for a quick interview: "No, you guys make us look like idiots, absolutely not."

Said the CEO of D.R. Horton (DHI) "NO, not now, not after the presentation, NO."

Said the CEO of Standard Pacific Corp. (SPF) "Thanks for asking, uh, I don't think so, no, real busy today, back to back meetings, nope can't do it."

Heh, heh, heh!

Strip-tacular

From the Minnesota Star Tribune: 'Straw buyer' deals fuel tidal wave of foreclosures.

She was 22 and tired of exotic dancing for a living. So Irene Thomas bet her future on real estate, hoping that becoming a landlord would be her first step toward exiting the stage.

With the help of Universal Mortgage Inc., a brokerage company in Brooklyn Park, Thomas signed the papers to buy a house early last year. And she kept signing. And signing.

In 90 days, with none of her money down, Thomas had $2.4 million in debt and 10 houses in her name, most in north Minneapolis. Nine belonged to officials of Universal, the same company that handled the transactions for her.

Less than 18 months later, Thomas was losing every property to foreclosure after the monthly payments weren't made. Her credit ruined, she now says she was duped by a group of real estate insiders who sold houses at inflated prices.

Ya can't make this stuff up, ya know!

Haul thee back to thine "cash" business, babe!

The Gold Rush Endeth

green : pre-foreclosure
blue : auction
red : bank-owned

California Climbing

The level of manipulation should be obvious. The ad was on the front page of Yahoo! Finance.

Twirlissimo

YouTube shows you how to sell a house.

Hostage Horror

From the Denver Post, we have: Protesters demand Fed mortgage aid.

Melvin and Katie Scott and their 12- year-old son, Alexander, spent Wednesday in front of the Denver branch of the Federal Reserve Bank. If the Scott family cannot raise nearly $6,000 soon, their Green Valley Ranch home will go on sale June 19.

The Scotts and about 12 other demonstrators - in a rally organized by the Association of Community Organizations for Reform Now, also known as ACORN - demanded the Federal Reserve crack down on high-rate mortgages.

ACORN groups across the country gathered in front of Federal Reserve Bank branches with a list of demands, including the elimination of prepayment penalties in subprime loans and a one- year moratorium on foreclosures so borrowers late on their mortgages could set up payment plans.

Oooooh! Banks that issue mortgages (not the Fed) are really scared now. 15 protestors!!!

Shiver, ye, shiver against the wrath of those that can't borrow money.

This is almost as funny as the time a few artists went on strike promising to produce no art in protest of the NEA.

Blinding Flash of the Obvious

From the Chicago Tribune, we have: Banking on home dangerous.

First the byline: Americans spend too much money on houses and too little on retirement savings

No shit!

When Eva Polydoris looks back at the four decades before she retired, she recalls everything that stood in the way of amassing a comfortable level of retirement savings: At first, it was the usual struggles of life, like raising three children and putting them through college.

Then came financial setbacks, such as her husband's early death, substantial medical expenses that drained savings, caring for an ill mother, Kmart stock that went bad when the company went into bankruptcy and losing a job at age 66 and not being able to find another one that paid adequately.

"Things turn out very strange in life; you never know what will happen," she said.

Still, through the emotional hardships and financial disruptions, she—like many Americans—drew comfort from her home. Over the years, she watched its value rise, and subconsciously it provided a sense that she would be fine—even if other forms of saving lagged.

Now that retirement has arrived—earlier than she expected because of the job loss—she is discovering that tapping your home to cover basic living expenses is easier said than done. She is starting to envision her 70s and 80s, and wondering where cash will come from when her nest egg is locked into countertops, walls and floors that can't easily be turned into grocery money.

Aside from their homes, half of households within 10 years of retirement age have accumulated no more than $88,000 in retirement savings, according to the Congressional Research Service. That could translate into $653 a month for living expenses, if converted into an annuity.

After all, Polydoris says she still needs a place to live. And she would like to stay close to the area where she's spent most of her life and has family and friends. Consequently, even if she sells her home, she would need to use a significant portion of the proceeds to buy a replacement residence. She has looked around enough to know it won't be cheap. A multiyear housing boom has pushed home and condo prices to still-lofty levels.

On the face of it, she said, Baby Boomers are better prepared for retirement than generations before them because they have a higher net worth. But when she subtracted housing equity, she found that the median household has lower wealth than the previous generation.

When asked in surveys to think about their financial future, "people think of their wealth in housing," said Nicola Fuchs-Schundeln, a Harvard University professor of economics. But when they are asked about accessing that wealth for retirement, most say there is zero chance that they will sell their home.

"It's interesting," Fuchs-Schundeln noted, that people feel security from an asset, but also have no plan to tap it.

There is so much stupidity here that even I am overwhelmed.

Firstly, let me state flat out that this magical notion that Americans have had that somehow the home is going to pay for retirement has always seemed a little mysterious to me. Nobody expects a depreciating asset like a car to pay for retirement. So why a house?

The answer is leverage.

With leverage, you are magnifying gains (and also losses,) and it is true that a rising population and huge monetary inflation has worked out so far. But it is by no means a sure thing (as we have witnessed twice in the last 30 years, and are soon to witness again.)

Secondly, you still have to live somewhere so a home should be seen for what it is. A place to live, not a magic ATM that spits out $100 bills.

Thirdly, the notion that after living all your life in a certain place, you're going to move away to a different (cheaper) location seems, well, silly. What about your friends and family? What about your lifestyle? I can understand if you're forced to do it for fiscal reasons but for everyone else, well, this seems more than a little absurd.

Fourth, what happens if styles for houses change dramatically? Or that people have more or fewer kids? They may not like your house design, or they may demand far more energy-efficient houses. Fashions change; styles evolve. Anyone remember those godawful avocado kitchen instruments from the 70's that were all the rage? The granite countertops and stainless steel appliances are doomed to be the avocado kitchen instruments of 2017.

Fifth, what happens if that area is hit by a massive recession? Think Detroit or Rochester. Both were one industry towns, the former driven by automobiles, the latter by Kodak. To whom exactly are you going to sell your house when there are no jobs to be had?

Sixth, as we have pointed out, something ain't worth shit until you actually sell it. The fancy term is that you must "monetize" something otherwise its worth might as well be zero, or a "zillion bazillion" dollars. Without the monetization, you can claim anything for its worth but it's irrelevant.

Seventh, and this is one of the most subtle points.

The notion that all the Boomers can sell their houses and move to cheaper locations is absurd. If everyone does something, that something must fail. This is just elementary demand/supply in motion. Everyone in Chicago cannot sell and move to Florida. If they do, prices in Chicago must fall, and Florida rise. You can only make money by doing something that somebody else is NOT doing.

The corollary to the last two statements above is that stated prices are fictitious. Everyone cannot monetize at the same time. The supply would overwhelm demand. It has to be spread out in time, and time is the one luxury that retirees don't have. Normally, this doesn't matter because you roughly have a small fraction of people retiring each year, but the Boomer wave is larger than historical fractions, and they are singularly ill prepared for retirement (read the median savings above.)

Add to that the fact that median wages are falling in real terms (because of competition, offshoring, etc.) and you realize that prices must fall even further because the average worker cannot afford these absurd prices. And no amount of "financial engineering" can change this basic affordability equation.

In other words, if most homes are unaffordable for most people, what is the mechanism by which they can be "monetized"?

Until somebody answers that basic question, the above strategy is doomed.

Lastly, the reason this sorta kinda worked out for most people was that buying a house was a form of forced savings. Most people are singularly bad at saving. Given a choice, they will piss every cent away. By buying a house, they were forced to pay down the principal, and at the end of the term, many owned an asset free and clear. With the rise of "liberate your home equity", and "interest-only" loans, even this minimal amount of fiscal responsibility has vanished. They are now debt serfs, plain and simple, and they face a bleak future. A really bleak future!

Someday, this is going to be recognized for what it is. One of the stupidest ideas ever!

Skooling

From the venerable and venereal New York Times, we have Private Loans Deepen a Crisis in Student Debt.

As the first in her immigrant family to attend college, Lucia DiPoi said she had few clues about financing her college education. So when financial aid and low-interest government loans did not stretch far enough, Ms. DiPoi applied for $49,000 in private loans, too. “How bad could it be?” she recalls thinking.

When Ms. DiPoi graduated from Tufts University in Boston, she found out. With interest, her private loans had reached $65,000 and she owed an additional $19,000 in federal loans. Her monthly tab is $900, with interest rates topping 13 percent on the private loans.

Ms. DiPoi, now 24, quickly gave up her dream to work in an overseas refugee camp. The pay, she said, “would have been enough for me but not for Sallie Mae,” her lender.

And while federal loans come with safeguards against students’ overextending themselves, private loans have no such limits. Students are piling up debts as high as $100,000.

Did someone put a gun to this kid's head to sign the loan?

If you're going to pay top dollar for your education at an expensive school like Tufts, you better have a way to pay it back (unless the "Bank of Mom & Pop" is financing you.)

Nobody made you go to Tufts, and nobody made you be a missionary at $19K a year. These are choices you have made, and these are choices that you have to live with. If you can't, go make real money, pay back the loans, and then go be a missionary.

Screw you, kid! You're going to have to learn economics the hard way.

“It’s a huge problem,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “When a student signs the paper for these loans, they are basically signing an indenture,” Mr. Nassirian said. “We’re indebting these kids for life.”

No, they are indebting themselves. It's "their" problem.

The Big Duh!

From Business Week, we have Foreclosure's Filthy Aftermath.

The article even comes with pictures. (Do not miss this!!!)

The mortgage mess is getting even messier. Literally.

Malnourished and flea-ridden animals, feces-covered floors and urine-soaked furniture, piles of rotting garbage, swarms of diseased mosquitoes—these are the horrors that may await the ill-fated sheriff, property inspector, Realtor, or passerby making that first visit to a deserted home.

"They know they are going to lose their house, so they have no pride of ownership anymore," Mitchell says. "They'll leave the water on so there's flooding and mold everywhere, they'll tear the chandelier or the ceiling fan out of the ceiling, kick the doors and walls in. Then the critters start taking over—ants, scorpions, and Black Widow spiders."

Sometimes, frustrated homeowners get creative. A man in Eagle Creek, Ore., recently put three 200-pound pigs in his repossessed home. They quickly tore up the place, ripping away the foundation and reducing the back porch to rubble. When police found the pigs, the animals were unharmed, if a little cranky.

In the month of May alone, authorities found 23 abandoned animals in a house in Lake Carmel, N.Y.; three pigs trapped in an Oregon home; 20 birds in a Lorain (Ohio) house; 24 horses on a Bixby (Okla.) property; and more than 60 cats in a home in Cincinnati.

Well, like DUHHHHHHHH!

In the last housing collapse of the early 90's people stuffed cheap fish between the walls, and under the flooring, stinking up the place. The dominant response was, "let the freakin' bank deal with that."

And so it was, and so it will be again...

Global Voodoo Finance

From Bloomberg, we have Ghost Towns Appear in Spain as Decade-Long Boom Ends.

Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see.

``We came to look at apartments but found ghost towns,'' said Usua, a 27-year-old taxi driver. ``You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe so we turned around and left.''

``We live in a country where everybody understands that appraisals are poetry,'' said Jesus Encinar, chief executive officer and founder of Idealista.com, a property Web site that tracks existing home prices in Madrid, Barcelona and Valencia. ``Bankers have said to me, `Why do you care if the appraisal is fake? It will be true in the future.'''

Appraisals are poetry?

WTF?!?

And why bother if the appraisal is fake? It will be true in the future!!!

In Sanchinarro and Las Tablas, Esperanza Aguirre, president of the regional government of Madrid, opened the first light railway stop last month. No passengers descended from or boarded the bright red-and-blue train this week when it stopped at the station during lunch time. Spaniards traditionally go home for lunch.

``Not even God lives here,'' Usua said.

God's on holiday, babe!

The Retard's 'Rong 'Rithmetic

From the paper which has the widest circulation in the US, USA Today, we have Matt Krantz writing on: S&P's run leaves Wal-Mart, other big caps behind.

For a quarter of the stock market, the celebration about the Standard & Poor's 500's charge back to record levels for the first time in more than seven years is an example of history being written by the victors.

Even though the benchmark S&P index last week finally took out its old high from March 2000, investors who own 23% of its stocks have completely missed out. A total of 115 stocks in the S&P 500-stock index are still below where they were in March 2000, according to data from Bridge Information and S&P.

Oh my fuckin' god! This is by far the stoopidest thing I have seen in the MSM, and this blog has seen some spectacularly stoopid things.

The S&P 500 is an index; hence it's a weighted average of the prices of 500 stocks.

The main property of an average (either weighted or unweighted) is that some of the values must be greater than or equal to it, and some of them must be less than or equal to it.

Quite specifically, the largest value must be greater than or equal to the average, and the smallest value must be less than or equal to the average.

Hence, some of the stocks of the index must lead the index, and some must lag the index (unless all 500 have exactly the same return in which case they will be equal to the index.)

That's what makes the average the fuckin' average!

So the statement that "first time in seven years ... history written by victors" is completely ridiculous.

The point is that the "victors lead the index" is always true at all points in time because it's a mathematical tautology. And forget the S&P because it is true of all indices that are averages (stocks, bonds, currencies, whatever!)

This is the most content-free article I have seen in a long time, and speaks volumes about the quality of mathematics education in this country, and it speaks even larger volumes about the intended audience because they are too stoopid to read a paper critically.

They are truly sheeple!

Roll over, Baden Powell

From the Oregon Mail Tribune, we have House might put Scout council into debt.

A well-intentioned attempt to cash in on a red-hot real estate market has turned sour as the unsold home's mortgage now gobbles up a big chunk of the regional Boy Scout council's budget.

The "Scout house" at 1653 Kentucky Court was built to raise funds for the organization's Crater Lake Council, headquartered in Central Point. But rather than selling quickly for a profit, the house has sat vacant for about a year. If it doesn't sell soon, Boy Scout officials fear the project may end up costing them money, said Scout Executive Rick Burr.

The Crater Lake Council already has made about $30,000 in interest payments to South Valley Bank & Trust, Burr said. The council co-signed a $426,000 loan with local contractor Brian Monroe, an Eagle Scout and former Scout master. Monroe said he is not going to see any profit because he agreed to donate labor and solicited about $125,000 in materials, all to benefit the Scouts.

"There was too many houses on the market," he said.

After paying $140,000 for the lot in Blue Grass Downs subdivision, Monroe started building the house in summer 2005 and finished it a year ago. Listed with Coldwell Banker Pro West before completion, the two-story home is priced at $499,900, a figure that's been reduced several times.

"Every month, it's going down," Monroe said.

Guess the Boy Scouts were caught with their pants down, and the expression is being used in a figurative sense (which is quite rare when talking about the Boy Scouts.)

Shall we give them a "Housing Bubble Merit Badge", or a "Financial Foolery Merit Badge"?

Bungee jumping in Beantown

And this is good old Boston
The home of the bean and the cod,
Where the Lowells talk to the Cabots,
And the Cabots talk only to God.
Here's a lovely article on Boston (from the Sacramento Bee!!!): Neighborhood swayed by 'liar's loans'.

Upstairs at Victory Chapel Church - a cinderblock bunker converted from a long-ago Ford dealership - the pews are reserved for praising heaven. But downstairs, in a basement rental hall, a pair of women preached of worldly wonders.

At 11 a.m. on alternating Saturdays, they set out rows of folding chairs and spread tables with urns of coffee and boxes of Dunkin' Donuts. And they offered testimony to the bounty of real estate, encouraging their growing flock to buy the wood-frame walk-ups and rowhouses surrounding this workaday stretch of Columbia Road, just down from the OJ Car Wash.

The key was trust, they told the faithful, as the voices of the practicing choir rang through the building.

Do I hear a Halleluia?!?

Still, Valerie Hayes was a little skeptical.

"I really was thinking it would be at least a year before I'd get a mortgage," says Hayes, an executive secretary and mother of two. She was wary of borrowing because she was saddled with her own student loans.

But "on Saturday I went to the seminar," she says. By Sunday, she was preapproved to buy.

Soon after, Hayes did buy. The problem, prosecutors say, is that the women put Hayes and others into homes they couldn't possible afford. They did so by filling their loan applications with details of jobs, paychecks and bank accounts that were all so much fiction.

God wants you to be happy, sister!

Frances Darden dreamed of buying a house. And not just any house.

It would be in Boston, because this was home now. But it would look and feel like her grandparents' place in the South Carolina of her childhood, because that's what home meant.

It would have a backyard for barbecues and a front porch for conversation. Its French doors would usher visitors from living room to dining room. It would not be a grand place, mind you, but thinking about it made Darden feel just grand.

It only took a few weeks for Frances Darden to find her dream house - a two-family set on a corner of Harvard Street with pale yellow siding, a small front porch and another on the back. But could she afford it?

Darden says Roberta Robinson calmly reassured her.

"I have always been about educating the consumer regarding real estate since I hit the scene," Robinson wrote of herself in an advertising directory. "I feel the first step in homeownership is working with an informed client."

Robinson did not return calls and her attorney declined to comment.

When another bidder pulled out of a deal for the house, Darden says Robinson called with more good news.

"She said, 'You have some good credit, girl, because you got approved for two houses,'" Darden recalls.

It only took a few weeks for Frances Darden to find her dream house - a two-family set on a corner of Harvard Street with pale yellow siding, a small front porch and another on the back. But could she afford it?

Darden says Roberta Robinson calmly reassured her.

"I have always been about educating the consumer regarding real estate since I hit the scene," Robinson wrote of herself in an advertising directory. "I feel the first step in homeownership is working with an informed client."

Robinson did not return calls and her attorney declined to comment.

When another bidder pulled out of a deal for the house, Darden says Robinson called with more good news.

"She said, 'You have some good credit, girl, because you got approved for two houses,'" Darden recalls.

God wants you to have two houses, girl!

"How is that possible?" wondered Darden, who says she first told the agents she could afford only $1,500 to $2,000 a month in payments.

It would cost her $7,194 a month.

God will provide, sister!

Mortgage fraud is most visible in the spectacular cases that draw prosecutorial muscle, involving fake buyers, property flipping, vast amounts of money. But that overlooks smaller-scale foul play now costing many subprime borrowers their homes, experts say.

Often it's not considered fraud. It's pushing the envelope. It's a dollop of distortion topped with a measure of creative exaggeration. It's doing whatever it takes.

God wants you to push the envelope. After that, he'll push the foreclosure button.

Love the logo!

"Working for you. Not for profit."

Roll me over!

From Yahoo, we have American Express to let cardholders charge mortgage payments.

In what is considered to be a first for the credit card and mortgage industries, American Express on Wednesday said it will now allow cardholders with any of its charge or credit cards and a prime loan from American Home Mortgage to charge their mortgage payments and earn reward points for doing so.

Rolling over a secured loan at a lower rate into an unsecured loan at a higher rate.

Why not? Let's just keep rolling over debt at higher and higher rates, and we never have to pay it back. Yeah, baby! That's the ticket.

Screw this! I wanna get to the point where I can pay my Mastercard with my Mastercard.

Bitching about balance sheets

This is somewhat of a pet peeve; something that drives me crazy so don't bring it up or I might just pop you one!

I go nuts when people say they can borrow against the "equity" in whatever they financed.

Folks, remember the accounting equation:

assets = liabilities + equity
That means that "equity" is on the liabilities side of the balance sheet, and you can't borrow against a liability.

Put in other words, the "equity" has already been "spent" because it's a claim of the shareholders against assets. The only way to raise more money is to sell off some assets, or take on more debt (presumably by putting down assets as collateral.)

This is not idle semantic hair-splitting, or a nose-picking contest.

If even one home owner understood this, they would've been more careful about "liberating their equity".

Meet the Flippers

From Yahoo! via Money magazine, we have Retirement interrupted.

Such perfect afternoons are exactly what Steve, 61, and Carol, 60, had in mind when they retired to Florida from Virginia two years ago. But those days are rare. Instead, the Daimlers spend most of their time consumed with selling two investment properties they bought shortly after the move - holding open houses, distributing fliers, cold-calling realtors and catering to prospective buyers.

A more typical day: On a midweek afternoon, Carol got a call from a prospect who said he and his wife were just outside one of the houses and wanted to see the interior. The only hitch: The house is an hour's drive from where the Daimlers live. The caller said he'd wait, so Carol and Steve jumped in the car. But by the time they arrived, the phantom buyers had disappeared - the frantic trip was a bust.

To this day, the properties remain unsold, draining nearly $6,000 a month from the Daimlers' dwindling retirement kitty. The couple had thought the properties would help finance the lovely new life they planned to lead in Florida.

To supplement their retirement savings of $260,000, they figured they'd buy fixer-upper homes to renovate, then sell at a profit in the state's hot housing market. "We thought we'd make $100,000 without batting an eye," says Carol.

But when the housing bubble burst, so did their dreams of a real-estate funded retirement. The properties have been on the market for nine months without a serious offer, and the carrying costs are killer: The Daimlers pay more than $65,000 a year on their mortgages (including loans for their primary residence and a vacation house in North Carolina), plus tens of thousands more for property taxes, insurance and maintenance.

The couple are pulling out $15,000 a month from savings to cover their expenses, and they've already run through more than half of their nest egg. The irony: On paper they seem to be in great shape, with a net worth of $1.6 million.

Money is so tight that Carol has stopped filling prescriptions for her cholesterol medicine. Steve says he has no choice but to go back to work. "The financial pressure is too great," he says.

In the early 1990's they sold one of the houses and used the proceeds to build a vacation home in the Outer Banks. Current estimated value: $900,000.

Michael Cirino, a financial planner with Lincoln Financial Group in Jacksonville, Fla., urges the Daimlers to sell their beach house in the Outer Banks. Probable net: $650,000. But while Steve is open to the idea, Carol is reluctant. "I have an emotional attachment to that home," she says, "and I don't want to make any more fast decisions."

One thing hasn't changed: The Daimlers remain staunch believers in real estate. "If the financial pressure was off, we'd still look for opportunities to invest," says Steve. "For now, though, we just don't have the means to hang on."

They're in their 60's.

They thought they would make an "easy" $100,000.

They're bleeding $15,000 a month from their "dwindling retirement kitty".

They've run through half their "nest egg".

She prefers her vacation home to her cholesterol medicine. Looks like her heart is in the right place.

Their theoretical worth is $1.6M. It's theoretical because things ain't worth shit until you sell them.

They call them "investments". Now, I understand investments as something that produces increasing amounts of positive "free cash flow". However, what the fuck do I know? I probably need to drink the New Era Kool-Aid™.

However, they remain "staunch believers in real estate".

Hope springs eternal!

Cents, percents, and lack of sense

A reader has contributed a stunning article from CNN on: 4 gas-saving myths.

Removing excess weight from your car can also help save you gas. The Department of Energy estimates that drivers can save anywhere between 3 and 6 cents a gallon (assuming gas prices of $2.97 a gallon) just by removing those golf clubs and other unnecessary weight from your trunk.

"Hello, Bob! I don't have my golf clubs today in the back of my trunk so please make my gas 3 to 6 cents cheaper."

I think the study was probably something of the nature that you save 1 to 2 percent in fuel efficiency if your car were less heavy. Certainly within the realm of the possible.

However, cents or no sense, I think we can all agree that the journalist is a few cents short on the dollar.

A History Lesson on Interest Rates

There is a 19th century saying attributed to Walter Bagehot, an early journalist for The Economist: "John Bull can stand many things, but he can't stand 2%."

In order to understand this, rewind the clock, and think back to the 19th century when the British were bankers to the world. On a gold standard, there was no meaningful inflation so nominal interest rates were the same as real interest rates.

Interest rates are determined by the credit-worthiness of the borrower. In other words, they incorporate the risk that the counter-party will default on the debt. It goes without saying that when you had a longish period of prosperity, and no forward looking prospect of war, famine or distress, people gazed on the future with infinite complacency and interest rates dropped.

Whenever rates plunged down to below 2%, a speculative frenzy would break out because people relied on the income produced by their investments to fund their lifestyle.

Time after time, people rushed into speculative investments which promised the illusion of larger returns, and each time they were burnt, and the episode ended badly in a brutal deflation.

Please note very clearly that this has nothing to do with the gold standard as long as we think in real rates not nominal ones. The only thing a gold standard does is exarcebate a deflation.

Also note carefully that the "central banks" in a fiat currency world cannot really "mop up" after the fact because all they are doing is screwing the lender in favor of the borrower, or vice versa -- this is never ever going to change the basic economic fact that the speculative object was never worth the price paid for it. (Once again, you don't need a gold standard as long as you think in real terms not nominal terms.)

Most importantly, if the speculative money has flown into multiple channels, there's no mechanism to preserve every single one of those prices in nominal terms. You can at best favor some over others, and while this is totally arbitrary, they must all collapse in real terms (as pointed out above because they were never truly worth what people paid for them.)

It should be obvious to any student of history what happened when the Federal Reserve slashed the rate down to 1% in 2003, effectively driving the real rate into negative territory.

Staggering Insight

From eFinanceDirectory.com: 60 Percent of Liar Loan Applicants Exaggerate Income.

The use of stated income loans, or liar loans as they are known throughout the industry, has increased exponentially over the last few years. Analysts at Credit Suisse Group say that liar loans account for 46 percent of the subprime mortgage loans being granted to borrowers.

Liar loans do not require borrowers to prove their income to qualify for a mortgage loan; borrowers merely state what they do and how much they earn doing it on the application.

An April 2006 Mortgage Asset Research Institute study found that 60 percent of applicants who apply for liar loans exaggerate their income by more than 50 percent.

People lied on "stated income" loans? Get out! That's impossible.

Now, let's read the article critically.

60% of applicants exaggerated income by more than 50%.

What about the remaining 40% of applicants?

Chances are they exaggerated their income too but they were relatively less criminal in that they didn't exaggerate their income by more than 50%.

So it looks like most of these people with "liar loans" have exaggerated their income.

What's the probability that they can pay back the loan?

Hmmmm....

The Cookie Jar Excuse

From the Mercury News, we have More homeowners struggle with mortgages they can't afford.

Sarah Portales wants to keep paying her mortgage on time, but she's got a problem. Her monthly payments are $3,500 and her income is slightly less than that. All the efforts this San Jose custodial supervisor has made to find a way to refinance her loan into something she can afford have so far led nowhere.

A custodial supervisor at San Jose State University, Portales bought her first home, on San Jose's East Side, in October 2005. She paid about $589,000, according to public records.

"I was ignorant; I didn't know how it all worked," said Portales, 48, a single parent who also lives with and cares for her 83-year-old mother.

Ignorant, eh?

Who would've guessed that taken on a loan for more than you can repay would get you into trouble? What exactly made you think that buying a $589K on a $40K salary was a good idea?

You're not ignorant; you're functionally illiterate, and a fuckin' retard to boot!

Now, that you've been caught with your hand in the cookie jar, the best excuse you can make is that you were ignorant?

C'mon, lady! How about the Martians made me do it? Throw in an anal probe story, and you might even get a book deal out of it.

The Bond Disaster Loometh

From Bloomberg, we have Junk Bonds May Repeat Crash of 2002 on LBO Credits.

More than half of the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions, according to Barclays Capital. Money is so easy to come by that for the first time some investors agreed to let borrowers choose to make interest payments in cash or in additional bonds.

Univision Communications Inc., the Los Angeles-based Spanish-language broadcaster, and real estate broker Realogy Corp. of Parsippany, New Jersey, financed their takeovers in part with so-called toggle bonds that give the issuer the option to pay interest with more bonds.

Univision sold $1.5 billion of toggle notes on March 1 that are rated B3 by Moody's and CCC+ by S&P. The notes pay cash interest of 9.75 percent and a pay-in-kind coupon rate of 10.5 percent.

Realogy sold $550 million of the securities on April 5 with an 11 percent cash coupon and an 11.75 percent rate if paid in extra notes. They are rated Caa1 by Moody's and B- by S&P.

There have been 10 sales of toggle bonds this year, amounting to $5.14 billion, the most ever, according to S&P's Leveraged Commentary and Data unit. There were five sales totaling $4.05 billion completed in November and December of last year. Before that, only luxury retailer Neiman Marcus Group had issued the securities, in September 2005.

I hope readers can understand the lunacy of this correctly.

If these companies can't make the payment, they'll issue more bonds, and that will be the payment. And if they can't service that, they'll issue even more bonds, and those bonds will be the payment.

And what happens when (and it's always when) the market chokes, and won't accept any more bonds?

The answer is obvious.

You'd have to be an absolute moron to fund these bonds, and yet investors have funded them. There's going to be a lot of bloodletting in the next 5-10 years.

Put down the doobie, dude!

From the Arizona Republic, we have Residents turning houses into vacation homes.

Some people tour Europe.

Some lie about on beaches in Hawaii or Thailand.

And then there are others who want to unwind in a stucco house near the end of a cul-de-sac in Pinal County.

Some Johnson Ranch residents might see their houses as average, everyday homes in an average, everyday subdivision. But to people coming from other parts of the country, it's a vacation in paradise.

Some homeowners in Pinal County are turning their investments into vacation homes. They're investing in high thread-count sheets, stocking refrigerators with continental breakfasts and renting to visitors who stay for a few days or weeks.

Pinal County?!? You're comparing Pinal County to Paris, Rome, Hawaii or Thailand?

BWAAA HAHAHAHA HAHAHAHAAAA!!!

Why Certain Kinds of Liberalism are Doomed to Fail

From the Providence Journal, we have a "heartrending" story: Reed's bill would assist homeowners facing mortgage foreclosures.

A death in the family, a divorce or even a big jump in property taxes are among the situations which could qualify homeowners for mortgage assistance under a new bill to provide $615 million in foreclosure-prevention assistance filed yesterday by U.S. Sen. Jack Reed.

The Home Ownership Protection Enhancement Act of 2007 would expand the eligibility requirements — and available funds — for homeowners who cannot make their monthly mortgage payments to include all low- and moderate-income homeowners, as well as those with higher incomes who face a serious financial setback.

The homeowners are people such as Aida Maria Jansen, 77, who got a no-down-payment loan less than a year ago to buy a $250,000 house that she cannot afford.

“I didn’t even have a job,” she said at the news conference. “They told me my payments would be $1,200 a month and to get a roommate.”

Aida’s mortgage was actually two loans which totaled about $2,000 a month. Last year, Jansen earned $11,212, according to her tax returns.

“I have money for two more payments and them I’m totally broke,” Jansen said after the hearing. “In nine months I’ve paid $18,000 on that house…I’m exhausting everything.”

Jansen, who has visited a food pantry twice in the last two months, said she is in the process of applying with the state to adopt a child so that she can get some extra income to pay her mortgage. “They pay about $102 a week,” she said.

Jansen said that she never should have qualified for the loan. “They all ripped me off,” she said. “They put double my income to get this mortgage.”

Let's analyze the facts.

She's 77.

She bought a $250K house.

She didn't have a job, and got a mortgage.

She had payments totalling $24K a year, and her income was $11K.

"They" made her sign the contract. (She didn't mention what kind of gun "they" used.)

She's going to adopt a child at age 77 so that she can get $102/week from the state.

To quote Oscar Wilde, "you'd have to have a heart of stone not to laugh."

How to take care of your Money Tree

From MSN.com, we have Mortgage brokers cashed in on U.S. housing bounty.

Money may not grow on trees but for a while it seemed to grow on houses, and Colleen Moorhead knew exactly where to turn when she needed to harvest some cash.

With a few phone calls, broker Joyce DeAngelo could put Moorhead and her husband into a new mortgage and cut them a check. They used more than $100,000 in cash they netted from the refinancing for living expenses and renovations.

Between 2001 and 2006, the Moorheads refinanced their three-bedroom San Diego home at least nine times, county records show.

This is such a beautiful little tale for children.

Kids, if you plant yourself a house, the house will soon sprout dollar bills, and then you can harvest some cash. If you water the house, and make sure it stays alive, you can keep harvesting cash all your life.

Looks like the Moorheads didn't take care of their money tree. The tree died after only nine harvests.

Kids, always make sure to water your house, and you too can live happily ever after.

The BOHICA Moment

From Bloomberg, we have two astounding statements from CEO's: Bank of America's Lewis Calls for Lending `Sanity'.

Bank of America Corp. Chief Executive Officer Ken Lewis said a so-called credit bubble is about to break after six years of historically low interest rates and relaxed lending criteria.

``We are close to a time when we'll look back and say we did some stupid things,'' Lewis said, speaking at a lunch at the Swiss-American Chamber of Commerce in Zurich. ``We need a little more sanity in a period in which everyone feels invincible and thinks this is different.''

Lewis's comments were preceded by some pessimism from Wells Fargo & Co. Chief Executive Officer Richard Kovacevich who said in December that ``I am not a forecaster of the future; I'm a historian. And history says this will blow up. It always has. And there will be some blood on the street.''

Microeconomics in Action

From the Economist: To do with the price of fish.

This is a sensational article! It illustrates the free market in action perfectly. (It also illustrates what the author does on a daily basis.)

YOU are a fisherman off the coast of northern Kerala, a region in the south of India. Visiting your usual fishing ground, you bring in an unusually good catch of sardines. That means other fishermen in the area will probably have done well too, so there will be plenty of supply at the local beach market: prices will be low, and you may not even be able to sell your catch. Should you head for the usual market anyway, or should you go down the coast in the hope that fishermen in that area will not have done so well and your fish will fetch a better price? If you make the wrong choice you cannot visit another market because fuel is costly and each market is open for only a couple of hours before dawn—and it takes that long for your boat to putter from one to the next. Since fish are perishable, any that cannot be sold will have to be dumped into the sea.

This, in a nutshell, was the situation facing Kerala's fishermen until 1997. The result was far from ideal for both fishermen and their customers. In practice, fishermen chose to stick with their home markets all the time. This was wasteful because when a particular market is oversupplied, fish are thrown away, even though there may be buyers for them a little farther along the coast. On average, 5-8% of the total catch was wasted, says Robert Jensen, a development economist at Harvard University who has surveyed the price of sardines at 15 beach markets along Kerala's coast. On January 14th 1997, for example, 11 fishermen at Badagara beach ended up throwing away their catches, yet on that day there were 27 buyers at markets within 15km (about nine miles) who would have bought their fish. There were also wide variations in the price of sardines along the coast.

But starting in 1997 mobile phones were introduced in Kerala. Since coverage spread gradually, this provided an ideal way to gauge the effect of mobile phones on the fishermen's behaviour, the price of fish, and the amount of waste. For many years, anecdotes have abounded about the ways in which mobile phones promote more efficient markets and encourage economic activity. One particularly popular tale is that of the fisherman who is able to call several nearby markets from his boat to establish where his catch will fetch the highest price. Mr Jensen's paper* adds some numbers to the familiar stories and shows precisely how mobile phones support economic growth.

As phone coverage spread between 1997 and 2000, fishermen started to buy phones and use them to call coastal markets while still at sea. (The area of coverage reaches 20-25km off the coast.) Instead of selling their fish at beach auctions, the fishermen would call around to find the best price. Dividing the coast into three regions, Mr Jensen found that the proportion of fishermen who ventured beyond their home markets to sell their catches jumped from zero to around 35% as soon as coverage became available in each region. At that point, no fish were wasted and the variation in prices fell dramatically. By the end of the study coverage was available in all three regions. Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast.

This more efficient market benefited everyone. Fishermen's profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months. And the benefits are enduring, rather than one-off. All of this, says Mr Jensen, shows the importance of the free flow of information to ensure that markets work efficiently. “Information makes markets work, and markets improve welfare,” he concludes.

The Paris Hilton Approach to Real Estate

From Seattle PI, we have Home sales in city shoot up 14% in April.

Sahrah Marcantonio was pessimistic about the market, but didn't care.

"I think it's a bubble, we're at the peak of the bubble, and yet, I want a house now," she said. "It's for the long term."

Extraordinary, isn't it?

Foreclosures in San Diego

Speculation in the South

The Chicago Tribune reports on speculation in South America: Nicaragua coast screams 'ground floor' to investors.

What second-home buyers yearn for in Central America is Costa Rica before the building boom. They want ocean views and unspoiled land, without the steep prices, crime and American fast-food chains. They want Panama before Donald Trump.

Adventurous Americans, Canadians and Europeans willing to dodge livestock and potholes for the two-hour car ride south from Managua to this sleepy fishing village on the west coast of Nicaragua are finding just that. Three-bedroom homes with unfettered views of shimmering bays and turquoise water start at $155,000, condos from $129,000. Undeveloped land with ocean views -- sites of a quarter-acre -- start at $35,000. Construction costs generally range from $55 to $75 per square foot. To investors, it simply screams "ground floor."

Nothing could deter Jan and Duane Sanow from purchasing land in Nicaragua. The Minnesota owners of a manufactured-home dealership, 50 and 49, respectively, had searched the coasts of Mexico and in Panama for an investment/vacation property for 10 years.

"We were always at the tail end of the development boom," Jan Sanow said. "This time, we're at the front end."

When their complex is completed -- at a construction cost of about $800,000 -- there will be a swimming pool, on-site laundry, air conditioning and gated parking. Just don't look for a grocery store. There's always the traveling vegetable vendor, however, and an al fresco restaurant down the beach. The two-bedroom condos, in 1,300 square feet, will sell for $275,000.

The Sanows say they're thrilled to have found a beachfront investment they can afford, a 45-minute drive north from Costa Rica's border. And they like to emphasize the positives. "There's a strong sense of community here," Jan said. "It's a great place for expats."

Fasten your seat belts, though. The 20-minute drive from San Juan del Sur south to Coco Beach winds along a spine-fusing dirt road. Plans call for that road, over the next few years, to become a paved coastal thoroughfare connecting Nicaragua and Costa Rica.

For now, the bumpy camino is festooned with a canopy of tropical trees that serve as a playground for howler monkeys and screeching parrots. Four-wheel-drive vehicles scramble around ox- and mule-drawn carts. New developments dot the way.

Nicaragua?!? You've got to be fucking joking!

This is one of the poorest countries in the West rivalled only by Honduras or Haiti.

And two-bedroom condos for $275K rivalling prices in Chicago? You've got to be fucking kidding me.

There's an old saying among investors (as opposed to speculators): "I'm not interested in the return ON my money; I'm more interested in the return OF my money."

In Nicaragua or Haiti, I'd be even more interested in making sure I came home with limbs, ears and fingers still intact. And heaven forbid if the government decides that the "extranjeros" are neo-colonialists, and need to be sent home.

The other Zapato falls

From the Florida Sun-Sentinel, we have: Low-income families: Lenders steered us to high-risk mortgages we couldn't afford.

When a mortgage broker convinced Erik Zapata he could own a home, he quickly signed on the dotted line.

He and his girlfriend moved their two children out of a low-income housing project in Pompano Beach and settled into their new Coconut Creek condo.

But as the numbers on his monthly statements soared, Zapata found himself in a sinkhole of debt. He says he did not clearly understand what he signed: a deferred-interest loan that adds thousands of dollars in unpaid interest to his mortgage.

"The dream home becomes the nightmare," said Tino Diaz, a mortgage lender who is starting a Broward County chapter of the National Association of Hispanic Real Estate Professionals. "We need to raise Hispanics' level of homeownership. But if we're putting people into homes they can't afford, we're wrecking them. You have lenders out there saying, `If you're breathing and you've got a paycheck, let me give you a home.'"

Really?!?

I thought even the "paycheck" was optional; and wasn't there a dead homeless guy in Florida who had bought five houses? So it looks like breathing is optional too!

Of course, all of this is part of the Federal Reserve's glorious "democratization of credit".

Houses for everyone, says I, houses for everyone!

Strawberry Fields Forever

From Hollister, CA, we have a bucolic story: Minorities Hit Hard by Foreclosure Crunch.

Despite making only $14,000 a year, strawberry picker Alberto Ramirez managed to buy his own slice of the American Dream. But his Hollister home came with a hefty price tag - $720,000.

So how did Ramirez, the strawberry picker with an annual income of just $14,000, purchase a $720,000 home in Hollister without any money down?

He had help, for one thing. Although Alberto Ramirez was the only one to sign the purchase agreement and the only one named on the loan documents, he actually bought the house with his wife Rosa Ramirez, as well as their friends Jesus Martinez and his wife. However, even in a good month, the Ramirezes and Martinezes together don't earn much more than a combined $6,500, and their official monthly payments were around $5,200.

With their combined incomes, the Ramirezes and the Martinezes estimated that they could afford monthly payments of $3,000 - around 50 percent of their income. However, the Ramirezes said Rancho Grande real estate agent Maria Avila promised they could refinance their home in three to six months to an affordable rate; until then, Rosa Ramirez said, Avila said she would pay for whatever they couldn't afford.

Avila did supplement the mortgage payments on the Hollister home, paying about $2,200 per month for nine months.

But the refinance never happened, and Martinez said Avila stopped helping with the payments at the end of 2006. A notice of default has been filed on the home, but no foreclosure date has been set, and the Ramirezes and the Martinezes are hoping they can sell the house before they lose it in a repossession.

Cebrero said the Ramirezes' and Martinezes' situation is an unfortunate one, but he said Rancho Grande was only trying to help the two families buy the home they wanted.

"We feel we have done as much or more than we can do for these clients," he said.

I think Senator Dodd should be bailing out these nose-pickers strawberry-pickers!

Alternately, the Mazzhole governor (or his equal in California) should allow them to postpone foreclosure for six months so that they can live in their $720K "dream" house on their $14K annual salary.

Why not? This is America. Everyone deserves to have a piece of the "American Dream". And if that means buying a $700K+ house on a $14K salary, I think the politicians should be enabling that option. In fact, it would be downright criminal if people making $14K are not allowed to buy $700K houses!

Why stop there?

Homeless? No problem. You get to "buy" in Malibu.

Make less than $10K a year? No problem. You get to "buy" in Malibu too.

No income, no job, no assets? No problem! There's a mansion in Malibu for you too.

Pull up a chair, folks. Pour yourself a whisky. There's a long way down to go!

Credit Contraction in Mazzhole-land

From the Boston Herald, we have Gov’s move may delay Mass. foreclosures.

Massachusetts has effectively become the first state in the nation to put a moratorium on foreclosures in the wake of a groundbreaking announcement by Gov. Deval Patrick yesterday, a top housing activist contends.

Patrick ordered state banking regulators to seek delays of up to two months in foreclosure proceedings against homeowners who have filed complaints with the Division of Banks.

Marks predicted that as many as 1,000 struggling homeowners working with his organization alone would soon be filing complaints with state regulators. There were roughly 20,000 foreclosure filings in the state last year amid an explosion in high-risk - and high interest rate - subprime mortgages.

This is one of the stupidest ideas ever.

Firstly, it makes a mockery of contract law (so expect a challenge in a court soon.)

Secondly, would you issue credit in this state if the contracts can retroactively be rescinded?

This means credit is going to contracting faster than the tightest, most fearful sphincter. And that's going to make a bad situation morph into a disaster.

Please remember that credit contraction is deflation.

Effectively, Mazzhole-land is voting itself out of the national mortgage market (just like New Jersey did with insurance in the 80's.)

“It is effectively a moratorium on foreclosures in Massachusetts,” said Marks, whose Jamaica Plain-based nonprofit has a nationwide network of offices. “It is a very big deal. We will bring the Massachusetts standard nationwide.”

Heaven forbid!

Trendy Trends

From CBS Marketwatch, we have news on Centex: Mixed results for Centex Corp.

"We continue to balance our sales pace with margins, offering incentives in some neighborhoods and holding on price in others," said Cathy Smith, Centex's chief financial officer. Sales trends softened in March "as buyers became cautious due to the reports of subprime concerns and tighter lending standards."

She said the cancellation rate in the latest quarter was 34%, "which improved a few percentage points from the last two quarters but was still choppy within the quarter." The historical average for cancellations runs between about 20% to 25%, the CFO said.

"The main reason buyers are canceling remains the inability to secure financing or sell their existing homes," Smith said.

"Considering the lack of clear directional trends in the market, tighter mortgage lending standards, and soft results in March, we don't believe it's prudent to provide earnings guidance for fiscal 2008 at this time," she said.

(Ed: emphasis mine.)

How high does the cancellation rate (currently 34%) have to go about the historic norm (20-25%) before the directional trend becomes clear?

Can you say bullshit? I knew you could.

Adios, Amigo!

Reuters reports the exit of Mr. Diarrhoea, Gonorrhea, Liarreah in this article: Realtors' upbeat economist, Lereah, steps down.

The economist who prodded investors into the U.S. housing boom and has been skewered by bloggers during the bust is leaving a top real estate trade association, the group said Monday.

David Lereah, the author of 'Are You Missing the Real Estate Boom?', will leave the the National Association of Realtors' by the middle of next month after serving as the head economist for seven years, a spokesman said.

After leaving NAR, Lereah will become a senior executive at Move Inc., an online real estate service, said Lucien Salvant of the real estate agent trade group.

One blog, David Lereah Watch, cites passages from Lereah's books and his encouraging words about the housing market and asks him to "admit he cheerleaded this destructive housing bubble."

In October, Lereah said that he expected "sales activity to pick up early next year." In recent months, Lereah has pushed his expectations for recovery deeper into 2007 and has trimmed his forecast for home sales for the year.

Salvant said Lereah was traveling Monday and could not be reached but noted that the economist "works for the Realtors' association and people should not be surprised that he would take a Realtors' point of view."

Can you feel the love?

Stripping (Part 1)

Not the good kind. It's copper as predicted in Scorched Earth Policy.

From WCCO in Minnesota, we have Lawmakers Working To Cut Down Copper Stripping.

State legislators in both houses are working on new laws to cut down on copper stripping. It is the epidemic of thieves stealing industrial metal from vacant homes. Law enforcement says it is a public safety issue and needs help from the Capitol.

With 400 vacant houses in Minneapolis, police want to stop thieves who are stripping out copper wiring and piping. There have already been 115 that have been stripped. And at least four houses blew up when gas from a stripped pipe ignited. Police want lawmakers to fight back.

And from sunny San Diego, we have Copper thieves preying on schools.

Copper thieves are hitting East County schools – hard.

At least 10 schools and district facilities have been struck, some repeatedly, since December, officials said.

“Any copper is what they're looking for,” said Bob Kiesling, director of facilities for the Grossmont Union High School District, where five campuses have been vandalized.

From Las Vegas, we have 'Scrapping' for copper, other metals, helps feed meth habit.

Rising prices for copper are making the once lowly metal a target for thieves, who hit construction sites and abandoned buildings for the element, often to feed methamphetamine habits.

"Scrapping," as meth addicts call it, involves stripping copper and other metals from utility poles, pipes in empty buildings and materials at construction sites.

"It's such quick money, and there are so many places to steal from," Reno police Lt. Jon Catalano said. "They just cut it in pieces and stuff it in their backpacks."

From Arizona: Copper, metal thieves targeted in Mesa campaign.

A recent spree in theft of copper, brass and aluminum from construction sites, farms and businesses around the Valley.

The solution: Paint metal to reduce its value or cage and lock metal units.

These are the suggestions by Mesa's newly implemented "Stop the Metal-ing In Mesa" campaign, raising awareness of the crime.

From Tennessee: Copper theft causes fire.

It appears to be easy to steal and easy to sell and thieves stripping copper from air conditioning units are costing area businesses big time. Thursday fire fighters responded to a fire at the Winchester Office Plaza after someone turned on an air conditioning unit that had been vandalized.

In the last two months the Winchester Office Plaza has been hit three times by thieves stripping air condition units for copper and yesterday their handy work led to a fire in a beauty shop in the complex. Managers of the complex say thieves who vandalized one unit clipped the wires to another. They say Thursday when someone turned on the air conditioning loose wires in the wall sparked a fire.

"We had went to lunch and we had just finished up lunch and started smelling some smoke thru the air vents," said Tina Chism, who works in the plaza.

And just so we are clear, this is global. From Leeds in the UK: Thieves in the night target copper.

THIEVES are stealing copper gas pipes from homes while residents are asleep.

The criminals have targeted dozens of houses on a Leeds estate, leaving families without heating or the means to cook.

Victims have included a 77-year-old woman who is now terrified the thieves will return, and a mum of two-year-old twins who was left without central heating.

"We woke up in the morning and the house was freezing," said the mother, who did not want to be named.

"At first we thought the pilot light was out but when I went outside I realised all the piping had gone overnight.

The First Ka-boom!

Literally!!!

From KSL TV: Homeowner Arrested for Arson Following House Explosion.

A home explodes in Salt Lake City, leaving nothing but a pile of rubble. Now the homeowner is being charged with arson.

The blast was enormous, completely wiping out the home near 600 East Wilmington Avenue (2200 South) and igniting two neighboring houses.

The owner of the home that exploded is a man in his 30s.

Heitkemper said he had talked with the homeowner in the past. "He was talking about trying to take a mortgage out of his house, trying to do something to gain some money," Heitkemper told us.

The homeowner's wife is totally distraught. Apparently she was not living in the house with her husband at the time of the fire. This morning she told us she does not know why the homeowner may have set the house on fire. But she indicated there were financial and emotional issues.

What fun the Federal Reserve hath wrought!

Adult Delinquents

From the Wall Street Journal. Everything seems to be going according to plan.

Why bother with knowledge?

From the New York Times editorial: Challenging China.

The administration announced yesterday that it was filing two cases against China at the World Trade Organization. The first is over China’s failure to crack down on pirated goods like movies and books. It will also challenge Chinese restrictions on the distribution of foreign films, music and more.

A trade war would do more harm to American business than to China’s subsidies. What would happen to Boeing if the steel used in its jets became more expensive?

What fuckin' steel?

Steel is way too heavy to make airplanes out of. Everyone knows that they are made out of aluminum, titanium, and other composite materials (which are both lightweight and strong.)

Secondly, the vast majority of that is manufactured right here in America (even if the companies are global, or the raw materials sourced from elsewhere.)

Have the editors heard of Kaiser Aluminum? or Toray?

The irony of ironies is that while a trade war is definitely a bad thing, the one beneficiary of a "weak-dollar policy" would be Boeing (in the short term.) They actually make a product that the world wants, and have the capacity to build it.

Quelle grande surprise!

Lastly, cracking down on subsidies is exactly the right thing to do from an economic standpoint. Subsidized industries hardly constitute "free trade".

But why bother checking facts when you can fulminate inanely on the pulpit?

Man! Even toilet paper is more useful than the "paper of record"!

The Stages of Truth

From CBS Marketwatch, we have No surprise : End of housing bubble should have been obvious to everyone.

In response, policymakers and lenders devised ways to make borrowing easier, since interest expense is the biggest cost of owning a home. These helped a bit - but they really didn't kick in until the Federal Reserve began cutting interest rates in early 2000, eventually pushing them to 45-year lows by 2003.

Since short-term rates were well below long-term rates, many people borrowed at adjustable rates, believing that rates would stay low indefinitely, or that housing prices would continue to rise indefinitely, thus enabling them to refinance at a fixed rate at some future date.

Needless to say, home prices rose even faster than before, as these lower rates (along with new types of loans and creative sales tactics) increased the effective demand for housing faster than supply.

Rising rates reduced the demand for housing, causing prices in some areas to top out and start falling. Readers of this column were informed that the party was over and that some homeowners would soon have difficulty paying off their loans.

Others missed this sign until it was too late. Now they are trying to shut the barn door after the horse has escaped.

"All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

Schopenhauer would be proud!

When will people get the freakin' point?

From the New York Times, we have Vikas Bajaj talking about Defaults Rise in Next Level of Mortgages.

Some of the problems afflicting mortgages sold to borrowers with weak, or subprime, credit increasingly appear to be cropping up in loans made to homeowners who were thought to be less risky.

Until recently, Alt-A loans were considered by many investors to be only slightly more risky than prime mortgages, and losses in bonds backed by the mortgages were small and rare, said Zach Gast, an analyst at the Center for Financial Research and Analysis.

When will people learn that credit scores don't matter? What matters is how much debt you borrowed compared to your income! How hard can it be to figure out this basic point?

“The credit markets were showering the mortgage market with capital, and now that’s just evaporating,” said Mark Zandi, chief economist at Moody’s Economy.com. “The capital markets are going to exacerbate the problem, seemingly"

The capital markets are going to exarcebate the problem? That's the job of the capital markets, you fuckin' idiot! And he's the "chief economist" of Economy.com?

What dope are all these people smoking?

Here comes the choo-choo train...

And from the BBC right on time, we have World growth to 'resist US blip'.

The global economy should be able to withstand a slowdown in the US and wobbles in its housing market, the International Monetary Fund (IMF) says.

However, the IMF said that the problems were US specific and should not spread.

"Most countries should be in a position to decouple from the US economy and sustain strong growth if the US slowdown remains moderate as expected," the IMF said in its World Economic Outlook report.

Ah, yes! The "decoupling" hypothesis.

Let's review the progression of events:

There is no problem.

There is a problem but it will be contained within subprime.

There is a problem but the US slowdown will be moderate.

There will be a 'US blip' but the world will decouple.

So when the US is rockin' and rollin', the global economy is the beneficiary, but when the shit hits the fan, they will decouple?

Chuffa, Puffa, Chuffa, Puffa! The bullshit train's right on time.

Accounting and Mathematics

If you ever find yourself having to analyze the financial statements, you will need to learn how to read it.

There is a lot of mumbo-jumbo in the accounting world (for historical and legal reasons,) but there is a very powerful way of thinking about it.

If you have even a slighly mathematical bent, there is great advantage to looking at it from the viewpoint of calculus. (In fact, I am ashamed to admit how many years it took me to grasp this basic point.)

There are two components to the financial statement:

Firstly, the balance sheet which is the snapshot about the financial entity (say, a company) at a particular moment of time.

Secondly, there is the income statement which is about the flow of money through time.

On the balance sheet, there are two things -- assets and liabilities.

assets - liabilities = equity (net worth)

Traditionally, this is always written as:

assets = liabilities + equity

Similarly, on the income statement, you have two things: income and expenses. Traditionally, this is always written as (similar to above):

income = expenses + earnings (net income)

Here's the key point:

The income statement is the derivative of the balance sheet with respect to time.

Or equivalently, the balance sheet is the integral over time of all the income statements from the beginning to the instance of the balance sheet.

If you integrate the second equation:

∑ income = ∑ expenses + ∑ earnings

you will end up at the balance sheet:

assets = liabilities + equity

After this, the big bad bold world of accounting will hold no horrors for you!

Depreciation? Pah! nothing but a delta of writedown, etc. etc.

Now, both of these are complicated (for a real company) but if you think in the language of calculus, you will grasp the mumbo-jumbo far faster than if you think in strictly accounting notation (which uses the language of law not mathematics!)

In fact, the mumbo-jumbo originates because accounting is a subject far older than calculus.

The elegant part about all of this is that because we're talking about money (M), there are only two things: M and ∂M (although the second derivative (∂²M) does show up from time to time -- earnings growth, for example.)

So you can use the old physics trick of using dimensional analysis to see if both sides of the equation match.

Nifty, eh?

(In fact, you can use all the calculus tricks you learnt, and the results are powerful and amazing!)

I just use calculus notation but nobody understands me so I have had to learn to translate it back into "accountant speak", and "trader speak", and ...

Indian Rope Trick

From Bloomberg, we have news about India: India's Mortgage Borrowers Face the Big Squeeze.

The Indian central bank's monetary shock therapy has left the country's newly leveraged middle class gasping for breath.

Last weekend, ICICI Bank Ltd., which commands a 30 percent share of retail lending in India, raised the benchmark interest rate on all floating-rate loans, including mortgages, by 1 percentage point to 12.75 percent.

This move came on top of a similar increase in February, and a half-percentage-point one in December.

A new homeowner who took out a 2 million-rupee ($46,200), 15-year variable-rate mortgage, say, two months ago was better off as a tenant. His loan's maturity, according to ICICI Bank's ``impact calculator,'' has increased by about eight years.

A 200-basis-point increase in a mortgage rate in less than two months is unbearable even in a high-wage-growth country such as India. It translates into a 20 percent jump in what a family has to pay the bank every month, according to Credit Suisse Group research.

A 20% jump in payment is a disaster. The impact on retail has to be breathtaking.

Where are all the analysts who were predicting that Indian consumers would take over where the US left off?

Of course, this blog had already predicted this in: Hello, Deflation!, and The Goldilocks Economy.

That Creaking Sound

From Forbes, we have the first reporting of a "teensy-weensy" problem: M&T Filing Highlights Mortgage Squeeze.

Last week, Federal Reserve Chairman Ben Bernanke marched up to Capitol Hill where he said he didin't see any significant indications that the headline-grabbing problems in the subprime sector had leaked into the prime loan market, mortgages made to creditworthty borrowers.

But recent news from Buffalo-based M&T Bank (nyse: MTB) could cause the Fed chief to reconsider his opinion.

The bank reported in a Securities and Exchange Commission filing that its first quarter financial results will be impacted by what it said were "current adverse market conditions."

What's the reason for the bad news?

M&T told investors that problems in the subprime residential mortgage lending market have had a negative effect on the rest of the residential mortgage marketplace, specifically with regard to alternative, or Alt-A, residential mortgage loans that M&T originates for sale in the secondary market.

"Unfavorable market conditions and lack of market liquidity impacted M&T's willingness to sell Alt-A loans in the first quarter," the company said in the filing. "At a recent auction of such loans fewer bids than normal were received and the pricing of those bids was lower than expected."

Alt-A loans are the highest of the below-prime category, generally comprising mortgages made to creditworthy borrowers but with limited documentation. M&T's filing means that the bank thinks the loans it has recently originated are worth more than investors in mortgage-backed debt are willing to pay for them, another way of saying that the ocean of money that floated the U.S. housing market for the past few years is evaporating.

M&T said that, in accordance with generally accepted accounting principles, loans held for sale must be recorded at the lower of cost or market value. The result: the carrying value of M&T's Alt-A portfolio that had been held for sale was reduced by $12 million in the first quarter, which M&T estimates will result in an after-tax reduction of net income of $7 million in the quarter, or 7 cents per diluted share.

Investors didn't like what they heard. On Monday morning, the bank's shares nose-dived 8.1%, or $9.41, to $106.42.

Houston, we have a problem!

St. Joseph spotted at Walmart

What's $2.93 (+ tax) if St. Joseph will sell your house for you?

Looks like Walmart is getting in on fleecing the last sheep for their last few pennies (which they will charge to a credit card, of course!)

Needless to say, it's made of plastic, and imported from China (which the US will charge to its even larger credit card, of course!)

Sweet!!!