At this rate, Congress could repeal the homebuyer tax credit today, instead of allowing it to lapse on April 30, and no one would notice.

Adding to the housing glut: An increase in the number of foreclosed homes that banks are looking to unload. That number was actually falling much of last year, as many homeowners were suspended in limbo, waiting to find out whether they qualified for permanent modifications under the HAMP program.

Now that HAMP has proven itself a miserable failure, some of those homes are coming to market. Thus, Barclays estimates the number of foreclosed homes held by banks and mortgage investors rose 4.6% between December and January.

Foreclosures now make up one out of every five homes listed for sale across the fruited plain.

And don’t forget the “strategic default” phenomenon. Professor Luigi Zingales at the University of Chicago estimates 35% of home mortgage defaults in December were by folks who could keep up their payments, but decided it just wasn’t worth their while on an underwater property. Nine months earlier, it was only 23%.

And as more people do it, the stigma once attached to it falls away. “The risk that the number of people doing this might explode is significant,” says the professor.

At this point, the housing glut appears to be self-reinforcing. The Census Bureau reports at least 6.6 million households had at least three generations under one roof in 2009. That was a 30% increase over 2000.

One in six Americans now lives in a home with at least two adult generations. Horror of horrors. What is becoming of the American Dream!?!

Addison Wiggin
for The Daily Reckoning

The Glut in the Mortgage Market: Self-Reinforced and Going Down originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The talented person with the sucker’s rally insight? No less than Rick Rule, founder and chairman of Global Resource Investments and regular Agora Financial Investment Symposium speaker, who recently shared his current thoughts on the economy.

Here’s a highlight from The Gold Report:

“Bottom line, though, Rick calls it “a bear market trap, a real sucker rally…driven by liquidity rather than valuation. And when the inevitable shock to liquidity hits—from additional foreclosures, a collapse in commercial real estate, implosion of municipal markets or wherever—this bull market will be over in a tremendous hurry.

“He sees a variety of potential catalysts that could take this market down. There’s no way of knowing when it will happen and how bad it will be, but he compares the likelihood of it happening to walking through a minefield. The odds are you’ll step on a mine and it will explode. ‘This is a minefield that it would be helpful if you were extremely drunk to stagger through. I do not like the probability of us getting through this without a couple more ugly, ugly, ugly shocks. The idea that we’re going to get through this unscathed just doesn’t make any sense.

“What could go wrong? Leveraged buyout loans in a weak economy. Additional reset loans in the residential market. Commercial real estate lending and commercial real estate capitalization rates. Municipal bond markets. Fundamentally, over the next 12 months Rick says, ‘I think we’re due for extraordinary volatility—volatility with a downward bias in equities markets in general.’”

As Rule indicates above, it’s not obvious what will trigger the necessary collapse. Or, for that matter, when it will happen or how bad it will be. It’s just clear that the fundamentals are not in place to support the market on its current trajectory.

You can read the rest of Rule’s insights in The Gold Report’s coverage of how systemic shock will kill the sucker rally.

Best,

Rocky Vega,
The Daily Reckoning

The “Sucker Rally” Will Come to an End originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Were they really snakes, or rather an unpopular religious sect? Was St. Patty even Irish?

We don’t care. It’s a good excuse for a drink…and inspiration to chase out some modern-day slithering here in I.O.U.S.A.:

The Fed did a whole lot of nothing yesterday at the FOMC meeting. Rates stayed the same, and one year after coining the phrase, the Fed insisted rates will stay “exceptionally low” for “an extended period.” In short, it was a snoozer.

“What in the shillelagh is the Fed actually thinking?” Dan Denning asked in response in this morning’s Australian Daily Reckoning.

“To be clear, a shillelagh is an Irish cudgel, used to beat things or threaten drunken bar patrons on St. Patrick’s Day. Ben Bernanke is not Irish, as far as we know. But the Fed has used its digital printing press to beat 10-year interest rates into submission. That’s kept a lid on US 30-year mortgage rates and prevented a further implosion in the American housing market…

“But do you really think the Fed can afford to withdraw its support of the US mortgage market? The Fed’s $1.75 trillion quantitative easing program has kept the US housing market from totally imploding. A spike in mortgage rates would dry up already anemic US housing sales. Prices would fall. Millions more who are hanging on for grim death would see their mortgages go under water. And they would begin to walk away.

“Putting aside the implications for bank collateral, we’re talking a serious systemic collapse of the US housing market…

“We think the Fed will find a way to fund, in some underhanded fashion, a new entity to centralize the risk of the US mortgage market. Risk has been concentrating in fewer and larger institutions over the last few years. But the mortgage debt is still too toxic to be borne by any institution that wants to appear healthy and well capitalized in the market.”

Addison Wiggin
for The Daily Reckoning

Drunken Spending to Keep the Housing Market Sober originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

However, Jim Jubak presents the case that just like any government, including the US — and perhaps more than most — China probably runs its balance sheet through “budget magicians” who don’t want to show you that “China is indeed broke.”

Here’s his description of one of several issues that he’s uncovered:

“By making loans to local companies, local governments could produce thousands of jobs and drive up the value of local enterprises. And by funding commercial and residential construction, they could drive up the price of land. Those results were important to local officials who often profited personally, but they were also essential to the survival of local governments.

“By law, those units also aren’t allowed to raise their own taxes for local expenditures. To meet local demands — and to fulfill the directives issued by Beijing — local governments are dependent on frequently inadequate revenue transfers from Beijing and what they can collect from such transactions as local real-estate sales.

“So how much did these investment companies borrow and then lend? Local-government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, estimates Victor Shih, an economist at Northwestern University and the author of ‘Factions and Finance in China.’ That’s equal to about 35% of China’s GDP in 2009.

“In addition, banks have agreed to an additional $1.9 trillion in credit lines for local investment companies that the companies haven’t yet drawn down, Shih says. Together the debt plus the credit lines come to $3.8 trillion. That’s roughly equal to 75% of China’s GDP.

“None of this, Shih points out, is included in the IMF calculation of China’s gross-debt-to-GDP figure of 22%. If it were, the number would be closer to 100%.”

One of the main problems with that debt, as Jubak goes on to point out, is that about 25 percent, or $439 billion, will likely go bad.

As mentioned above, this is just one red flag in what appears to be an ongoing habit of Chinese number shuffling. You can read more examples of China’s potential debt cover-ups at MSN Money.

Best,

Rocky Vega,
The Daily Reckoning

New Evidence Indicates China may be Bankrupt originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

The muttering over regulation sounds like putting the cart before the horse.

This cartoon came to our attention via The Mess That Greenspan Made in its post on financial market regulation getting even more difficult.

Making a lot of Noise but Getting Nowhere originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

From SNL Financial:

“Most of the resets are expected to occur through 2012. Between 2010 and 2012, the chart indicates that $253.25 billion of option ARMs will adjust, while Alt-A loans totaling $163.71 billion will reset over that time. Altogether, $1.010 trillion worth of ARMs will reset or recast during the three-year period…

“… [Greg McBride, senior financial analyst at Bankrate.com] told SNL he is more concerned about ARMs that do not even show up on Credit Suisse’s chart.

“Borrowers who already have seen their ARMs reset might be sitting on their hands and not refinancing into fixed-rate products, McBride said. Because mortgage rates have been so low recently, resets can actually lower, not raise, monthly payments.

“When that happens, borrowers might feel little urge to refinance into a fixed-rate product that would cost more per month. Alternatively, ARM borrowers might simply struggle to qualify for a refinance because of low or negative equity.

“The problem, McBride said, is that when interest rates increase — which many analysts expect to happen over the next year — borrowers’ monthly payments might increase beyond what is affordable for them.”

The situation appears to be a classic Catch-22. Eventually the Fed must raise interest rates in order to slow the growth in money supply and attempt to return the economy to some state of normalcy. Ironically, that step is likely to come during the period in which these ARMs will reset. The combination of rising interest rates and resetting ARMs would cause higher mortgage payments and potentially spawn a second mortgage meltdown… we’ll be watching closely.

You can read the post on $1 trillion worth of ARMs still facing resets in its entirety at SNL.

Best,

Rocky Vega,
The Daily Reckoning

$1 Trillion Mortgage Bomb Still Ticking Away originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

According to Irwin Kellner, chief economist at MarketWatch:

1. Both consumer confidence and sentiment have fallen unexpectedly.

2. After-tax personal incomes adjusted for inflation have flattened.

3. Sales of both new and existing homes took a surprising stumble.

4. Orders for most durable goods are down.

5. Manufacturing has slowed.

6. Jobless claims are up.

7. Fourth-quarter GDP growth came largely from a slower pace of inventory liquidation, not from an increase in consumer spending.

8. And, as a matter of fact, consumer spending weakened last quarter.

Kellner also points out that consumer confidence has dropped to a nearly 30-year low, new home sales hit record lows, existing home sales are at a seven-month low, and even unemployment claims rose six of the past eight weeks.

In case you need an updated dose of cold, hard reality about the economy, this MarketWatch coverage of the recovery running out of gas is a worthwhile read.

Best,

Rocky Vega,
The Daily Reckoning

7 Critical Data Points Show the US Economy is Hitting a Wall originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

It’s true; the economy does manage to get out of bed every morning. Some folks applaud this fact and declare, “Aha! A recovery!” Other folks, like your California editor, observe that the economy usually crawls right back into bed after brushing its teeth. Your editor sees no recovery. He sees a coach potato with a very bright smile. He sees an economy that still lacks essential qualities like jobs, corporate revenue growth and credit.

The visible effects of this widespread malaise are…well…widespread. Let’s take a peek at the housing market, for example.

Home sales are improving somewhat at the low-end of the market, where government-subsidized financing remains available, and where the federal government has been offering tax incentives. But the high end of the market still sticks.

“The latest existing-home sales data show transactions under $400,000 are 3% below year ago,” observes economist David Rosenberg. “However sales of homes priced at $750,000 or more have declined a whopping 47%. Outside of FHA, Fannie Mae and Freddie Mac, mortgages that do not have government backing are still experiencing a credit crunch. ‘Liars’ who need jumbo mortgages must pay interest rates that are nearly 2 percentage points higher than conventional financing; as a result, the high-end market is not moving.”

Rosenberg’s observation is not entirely correct. The high-end market is definitely moving; it is moving down. This distress is not only a consequence of obvious trauma like job losses. The distress is also a result of “truth discovery” in the nation’s liar loan portfolios.

• Discovery #1: People who lie about their financial health don’t always make their mortgage payments.
• Discovery #2: Liar loans are not the only loans based on a fatal deception. Even many of the most honest loans from the bubble era contained this implied deception: People who WERE good credits will remain good credits.

As we mentioned last week, “FICO, the outfit that computes your vaunted ‘credit score,’ has just noticed that consumers with high scores are more likely to default on their mortgages than their credit cards. Last year, the firm says, folks with FICO scores of 760 or higher defaulted on real estate loans at three times the pace they defaulted on plastic.

“Earth to FICO,” we continued, “If you’re in an underwater home, why wouldn’t you commit strategic default and use the difference between a mortgage payment and rent on a similar home to pay down those cards? You might not even have to move if your mortgage lender doesn’t want to follow through on foreclosure and book the loss!

“Still, FICO’s CEO told Bloomberg TV he’s stunned the phenomenon isn’t limited to subprime: ‘Now we’re starting to see at the high end of the marketplace people with good FICO scores having serious delinquency problems.’”

Shocking.

Eric Fry
for The Daily Reckoning

The High-End Market Moves Down originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

According to Reuters:

“James Dunne, senior managing principal of Sandler O’Neill, said 300 to 400 banks could be seized this year, especially as institutions start to deal with deteriorating commercial real estate loans.

“‘This is going to be a very slow recovery,’ Dunne said in an interview with Reuters.

“Regulators have seized 185 banks since January 2008. The Federal Deposit Insurance Corp has said the pace of failures is expected to peak this year.

“The agency said earlier this week that its ‘problem’ bank list jumped 27 percent during the fourth quarter to 702.”

The trajectory is not good… banks continue failing at a rapid rate and the FDIC’s deposit insurance fund has already had a negative balance for quite some time.

Read more about bank failures on the horizon in Reuters coverage of the tally hitting 1,000.

Crisis-Related Bank Failures Racing Toward 1,000 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."

Last year, the firm says, folks with FICO scores of 760 or higher defaulted on real estate loans at three times the pace they defaulted on plastic.

This shouldn’t be any surprise to FICO. We noticed a few days ago that the number of consumers current on their cards but delinquent on their mortgages exploded by 50% in the year after Lehman went belly up. FICO has access to this data in real time.

But it appears flabbergasted by this development, marveling in the first paragraph of a press release that “most credit cards are unsecured credit and mortgages are secured by real estate.”

Earth to FICO: If you’re in an underwater home, why wouldn’t you commit strategic default and use the difference between a mortgage payment and rent on a similar home to pay down those cards? You might not even have to move if your mortgage lender doesn’t want to follow through on foreclosure and book the loss!

Still, FICO’s CEO told Bloomberg TV he’s stunned the phenomenon isn’t limited to subprime: “Now we’re starting to see at the high end of the marketplace people with good FICO scores having serious delinquency problems.”

There’s a hint of panic in the man’s words, as if he senses his entire business model is going down the toilet. Good riddance. Millions of mortgages were issued in the last decade on the basis of nothing more than the “score” issued by this company, which reveals exactly nothing about a borrower’s income, or how his debt load compares to his income. FICO wasn’t the cause of the housing bubble, just a trifling enabler.

Regards,

Addison Wiggin
for The Daily Reckoning

FICO is Shocked by Default Data originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today's markets. Its been called "the most entertaining read of the day."