“Record numbers late on US loans,” says a headline in The Financial Times.

The story is easy to understand. People without jobs can’t make mortgage payments. So, payments are late on 1 of every 6 FHA mortgages. Mortgage defaults are at a 3-decade high. Of all mortgages, nearly one homeowner in 10 is running late in his payments.

As predicted in this space, problems in the housing finance sector are now shifting from sub-prime to prime mortgages. The subprime borrower had few resources. He washed up as soon as the crisis began. But now the prime borrower, who lost his job and is running out of options, is sinking too.

What’s the smart money doing?

The Dow is now up more than 50% from its March low…and has regained more than 50% of what it lost. Are the insiders taking advantage of this dip to get bigger stakes in their own companies? No… They’re selling 18 times as many shares as they’re buying. Go figure.

The insiders know that their businesses are not really in good shape. They’ve been able to maintain profit margins by cutting staff. But sales are down. And they don’t see where additional sales will come from.

Meanwhile, investors have been hallucinating about a real recovery. They’ve bid up the price of shares as though they expected a stunning period of growth. Generally, earnings have held steady…but stock prices have gone up.

This has brought a 10-point increase in the P/E ratio, to greater than 27.

What would justify such an ambitious P/E? Only growth. Where might growth come from? We don’t know. David Rosenberg says stocks are priced as if investors expected profits to double next year. But it usually takes profits 5 years to double. And then, only when they have a reason to double – such as higher sales and lower costs.

Don’t count on it, dear reader.

Real Recovery Hallucinations originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Well, the government is trying to help… which is usually a bad sign. The Federal Housing Administration right now has an insurance reserve ratio of just 0.53 percent. Robert Toll of home builder Toll Brothers recently referred to the FHA as a “definite train wreck.”

The government is also supporting the housing market with the $8,000 first-time homebuyer tax credit. It’s been expanded to include previous homeowners and extended until March. Unfortunately, it’s an even bigger fiasco than Cash for Clunkers. Most homebuyers using the credit would have needed to purchase a home anyway, so each additional house sold through the program may just be costing the government about $43,000.

There are very few bright spots in housing, which Barron’s describes as getting a “disastrous batch of data”. The article also goes on to say…

“Even with housing affordability the highest in years from low mortgage rates and reduced home prices, there’s little reason to expect a revival in homebuilding as long as the inventory of unsold houses and foreclosures remain high, credit is tight and unemployment is in double digits.

“Perhaps that’s why the shares of the big public homebuilders, as represented by the SPDR S&P Homebuilders exchange-traded fund (XHB), topped out two months ago and have been moving sideways to lower since. That says more than economists’ misguided forecasts of rising housing starts.”

For more information on the real estate sector see the full coverage in this Barron’s article on how the housing recovery is built on sand.

Latest “Disastrous” Housing Data Shows Homebuilders are Hopeless originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

A survey showed that only 1 in 10 workers say his income is going up. This is the lowest reading since 1946.

Meanwhile, the news two days ago was that homebuilding took a dive in October. Work began on 11% fewer houses than the month before. On multi-family dwellings, the figures were worse – down 35%.

Why would homebuilding go down when the economy is supposedly gathering strength? Well, builders were wondering what would happen when they finished the houses. The new house tax credit was due to expire; they weren’t sure the politicians would be witless enough to renew it.

They need not have worried. Give the politicos a chance to do something stupid and they will come through every time. Since the end of October, Congress passed and President Obama signed an extension of the housing credit. Until next April, at least, first time buyers will get an $8,000 credit.

You’d think that would have revived animal spirits a bit in the residential construction industry. But today’s news tells us that mortgage applications are falling – even with lower interest rates.

How come interest rates are falling? Well, here again, we see the heavy hand of the feds. The “quantitative easing” has come to a halt…that is, the Fed is no longer buying US Treasury debt (it doesn’t need to). But its buying of mortgage backed securities continues. That program will last until March of next year.

Still…housing is not cooperating.

This news hasn’t had much impact on Wall Street. All that can be said is that investors have seemed to hesitate for the last couple of days.

Stocks fell softly yesterday, with the Dow down only 11 points. Oil stayed at $79. Gold rose to $1,141. And the euro remained at $1.49.

Investors must still believe in what The Washington Post calls a “lukewarm recovery.” It is like finding a body on the street. You feel for a pulse and discover that it has not quite reached room temperature. It is tepid… Not quite alive. Not quite dead.

Too close to the quick to bury…too close to the grave to boogaloo.

Housing Spurns the Fed’s Advances originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

In other words, the FHA has just $3.6 billion in reserves to back up a $679 billion book. That’s into the Fannie Mae stratosphere of leverage insanity, worse than anyone expected, and way, way beyond the Wall Street risk taking our government has so publicly vilified.

Of course, a huge portion of these loans are easy-money, 3.5%-down mortgages designed to replace the subprime market and keep housing afloat during the last few years… and we’ve chronicled before their alarming rates of delinquency. The FHA’s auditors said that under adverse housing conditions, the administration could be out of money by 2011 and require a $1.6 billion injection. We hasten to add last year’s audit forecast the FHA would have a $15.8 capital cushion today… only off the actual reserves by about fivefold.

But when the FHA comes to Capitol Hill with their tin cup, don’t call it a bailout. “There is no extraordinary action that Congress or anyone else needs to take,” said HUD Secretary Shaun Donovan. He’s right… long ago, Congress granted the FHA to borrow from the Treasury with relative impunity.

The FHA is also quick to point out that it has about $26 billion in a “financing fund” — a pool of money used to pay claims on defaulted loans. Coupled with reserves, they claim it’ll be enough because — of course — it’ll be different this time: “The story of FHA’s financial status at the end of FY 2009 is, then, the tale of two portfolios,” Donovan told Congress. “The older portfolio has high rates of delinquencies and is expected to have high rates of insurance claims in the future. The new portfolio, which soon will be larger than the older portfolio, is expected to have more modest claim rates over the life of the loan guarantees.”

FHA is SOL originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Heh, it didn’t even take actual removal of government intervention to sack mortgage applications, the MBA confirms today. As we noted earlier this week, the tax credit was extended and expanded into the spring of 2010. Just the anxiety of its Nov. 30 expiration alone (or perhaps savvy homebuyers waiting to see if they were going to get a better government deal) plunged the mortgage applications index to 220 last week, its lowest score since 2000.

And what a coincidence, too… the previous low was in early February of this year, right before our government enacted the homebuyer credit.

Stalled Stimulus originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

It’s not really…it’s just the point where this bounce will equal the bounce following the crash of ’29. No reason in particular that this bounce should be the same as the one 80 years ago. But no reason it shouldn’t either.

Gold rises with the stock market. The yellow metal hit a new record over $1,100 yesterday. Why is that that important? Well, it’s not important either. But gold still has another $1,000 or so to go before it equals the last bubble peak in gold, set in 1980 – on an inflation-adjusted basis.

The point is, there’s plenty of room on the upside for gold…and not much room left on the upside for stocks…

Stocks are going to be hit hard when people realize that the recovery is a fraud. When will that happen? We don’t know. But another big wave of foreclosures might be the thing that sets it off.

“The Second Wave Begins…”

This was the title of a report over the weekend from John Hussman. The gist of it is that the long-awaited ‘second wave’ of foreclosures has, perhaps, finally begun.

First, many of the Top 50 metro areas in the US are reporting “sharp increases in foreclosure activity.

“Rising unemployment and a new variety of mortgage resets continued to gradually shift the nation’s foreclosure epicenters in the third quarter away from the hot spots of the last two years and toward some metro areas that had avoided the brunt of the first foreclosure wave,” said James J. Saccacio, chief executive officer of RealtyTrac. “While toxic subprime mortgages drove much of that first wave of foreclosures, high unemployment and exotic Alt-A and Option ARMs are spreading the foreclosure flood to more metro areas in 2009.”

Hussman:

“While the news itself is no surprise in the sense that we have expected and written about this situation repeatedly in recent months, the phrase ‘sharp increases in foreclosure activity’ is notable in the context of widespread views that credit difficulties are abating. Below is a reminder of where we stand in relation to the reset curve. This news of a shift in the character of foreclosure activity comes precisely in tandem with the beginning of the predictable second wave. The pleasant lull in the reset schedule is decidedly behind us.

“The mortgages certainly do not reset at Treasury bill yields or even at standard spreads over LIBOR. Instead, they reset to a ‘premium’ spread above those rates. That ‘yield spread premium’ is precisely what the homeowners agreed to in return for the undocumented loan, and is particularly obnoxious at the point of reset if the mortgage itself is underwater (loan amount in excess of home value). Given that these mortgages were written during the last stages of the housing boom, at the highest prices, it is reasonable to assume they now sport very high loan-to-value ratios.”

So, there you go.

If Hussman is right, we’ll soon see real estate prices take another tumble.

Realizing the Fraud of Economic Recovery originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

More than one in every 10 Americans is out of work, the Labor Department reluctantly reported this morning. The official unemployment rate jumped from 9.8% to 10.2% in October. Not only is that the highest in 26 years, but it blew Wall Street clear out of the water — they had priced in a rise to 9.9%.

The Labor Department announced more job losses than expected as well — 190,000 lost jobs, instead of the anticipated 175,000. The number puts to rest a desperate hope from a few months back — that August’s surprisingly small job loss would mark one of the final months of contracting employment.

That brings the total to 15.7 million officially unemployed Americans, a record 35.6% of which have been out of work for more than six months.

The U6 unemployment number — our preferred gauge, which includes a broader section of the jobless and underemployed — soared half a percentage point in just one month, to a record 17.5%.

“Help-wanted advertising is contracting,” reports John Williams of Shadowstats, with one of his preferred employment metrics. “The Conference Board’s newspaper help-wanted advertising index for September (a leading indicator to October’s employment report) fell to a new record low of 9, from the prior low of 10 that had held for the preceding four months. This new 58-year low is a very negative signal for background employment conditions.

“While some of the weakness in this index of recent years has been due to ads shifting from newspapers to the Internet, near-term relative changes remain significant indicators of pending employment activity. The Conference Board’s online help-wanted advertising also has been in monthly decline, with year-to-year change for new ads down 24.6% in October, versus an annual decline of 25.7% in September. The declining online data are leading indicators of activity to both the October and November employment reports.”

But Llest you think we only tell one side of this story, a glimmer of hope from today’s jobs report: Temp agencies added 34,000 jobs in October, the first statistically notable increase since the recession officially kicked off 22 months ago. Temps have been decent leading indicators for the employment scene in the past, so we’ll keep an eye on ’em.

On to the other real barometer of the recession… the housing front ain’t pretty this morning, specially Fannie Mae’s ugly mug. The lender of last resort (not coincidentally now the largest dealer of U.S. home loans) turned in a $19 billion quarterly loss yesterday. Surprise, surprise… its government receivership has made Fannie WORSE, as it is now forced to accept more bad loans and participate in foreclosure prevention programs — the two major sources of its third-quarter loss.

Moments after its earnings announcement, Fannie asked the government for another $15 billion bailout. It’ll get it, which will bring its taxpayer tab up to $60 billion. The company is eligible for up to $200 billion in bailout bucks before further congressional approval is required. We’ll go way out on a limb here and forecast that Fannie will devour every last cent.

How desperate have Fannie and the federales become? Fannie Mae introduced a nationwide “Deed for Lease” program yesterday, where homeowners about to be foreclosed can transfer ownership to Fannie Mae and then rent the property from a third-party management company.

It’s a sweet deal for homeowners on the verge, but the same “extend and pretend” mentality we highlighted yesterday. Fannie gets to keep more cheap foreclosure properties from hitting the market by playing landlord for a year or so… surely, by then it’ll have all blown over, right?

The Two Things That Really Matter originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

They were valuable because they helped frame where we are in the mortgage crisis, which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry. The chart below shows you the ferocious fish may still have an appetite.

It shows you that we are past the viscous subprime crisis, when that shark chewed through the balance sheets of a number of banks and financial institutions, in some cases devouring them whole. However, it is not yet safe to get back in the water:

There are these other slices of mortgages that are not quite as risky as subprime that reset in the next couple of years. Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

Making all this worse is the fact that the housing has not yet recovered. The T2 duo made the case that the current “stabilization” of the housing market is a head fake. Mostly, it’s due to huge government support of the housing market. But there is still a large inventory of homes out there. And with these resets coming due, we’ve still got a large amount of foreclosures on the horizon.

All the while, the unemployment numbers are still poor. The T2 duo calls the unemployment situation the “most severe since the Great Depression.” The US economy has shed over 8 million jobs in this recession and unemployment – officially – is nearly 10%.

Plus, it’s not like the average US consumer is in a good position to sail through this crisis. Household liabilities are still high, as this next chart shows:

US consumers need to save and rebuild their financial strength. This is why the savings rate is on the rise. This is why, for the first time since the 1950s, household credit debt declined.

As investors, it seems clear that any idea that depends on discretionary consumer spending – say, buying trendy new sweaters or watches or expensive shoes – faces some big head winds. Better to the stick with the necessities, I say.

Also, it looks like the bounce in the stock prices of overleveraged banks and financial institutions is premature. Most bank stocks should be sold, not bought. The bounce in home building stocks looks ridiculous in light of what they have to look forward to. The T2 duo actually recommended shorting the home building stocks through the iShares Dow Jones US Home Construction ETF (ITB). By shorting it, you make money when the stock prices of the home builders go down.

They made a compelling case, of which I will highlight a few things. Exhibit A would be the fact that the average new home has been on the market for 12.9 months. Exhibit B is that we have about 2-3 years of existing home sales just to absorb the vacancies that exist. According to T2, about 6% of all homes built this decade are vacant.

Exhibit C is that the home builders themselves have too much debt and too much inventory relative to their thin equity cushions. The home builders are in the position of trying to hold up a bowling ball with a sheet of paper…in the rain.

Lastly, the home builder stocks are almost universally expensive on a price-to-book basis, as this chart shows:

Stocks with lots of debt, too much inventory and an awful market don’t deserve premiums over book value. Discounts are more like it.

So there you go. I like the idea of shorting the home builders. At the very least, I wouldn’t buy one. I’d also stay away from banks and financial institutions that hold mortgage assets. American real estate is not worth zero, as Dobson said, but it can be worth a lot less than today’s price.

I recommend staying with the sorts of companies that own essential assets and/or sell essential items. As I like to say, stick with what keeps civilization a going concern. And avoid any stock that is dependent on regular access to the credit markets. As we saw in 2008, a mortgage crisis can shut down the credit markets. We don’t want to be held hostage by lenders in that situation, so stick with excellent financial conditions.

Regards,

Chris Mayer,
for The Daily Reckoning

The Housing Bust – The Final Chapter originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

We start with this idiom today because it’s been taken to a new level… by our government.

Yesterday the Senate passed extensions of the unemployment insurance benefits — and the first-time homebuyer tax credit. We’ve seen this coming for some time. With a moribund economy, what else can they do? The whole thing still needs to get the OK from the House and President Obama, but here’s the deal as-is:

Senators want to extend unemployment insurance by 14 weeks in all states, 20 weeks in most. This will kick the can down the road for as many as one million people whose benefits are set to expire by yearend. Should this bill become aw, some Americans will be able to collect unemployment for up to 99 WEEKS, an all-time high.

The $2.4 billion cost of this extension will be funded by more unemployment taxes already paid by businesses. The logic: A business pays the government for every employee they hire… the government, in turn, gives money to people the company didn’t hire, hoping they will get hired by a different company… who will then pay more taxes for hiring that person. Brilliant.

Even the most conservative estimates don’t expect unemployment to peak until 2010… those benefits might even get extended again.

The Senate also agreed to extend — and expand — the homebuyer tax credit. The $8,000 in free money for first-time buyers will be extended for at least seven more months. And now current homeowners who have been living in their house for at least five years will be eligible for a $6,500 credit if they buy a new place.

The cost? At least $10 billion… but hey, whatever it takes to “get this economy back on track,” right?

“At a town hall meeting focused on ‘Recession Recovery’ last night,” Addison Wiggin writes, “we tried to explain that while on the surface the 3.5% GDP growth in the third quarter looked good, much of that figure was comprised of one-off government programs like ‘cash for clunkers’ and the housing credit. If the GDP were to continue to ‘rise’ Congress would have to go back to the public teat for more tax incentives and rebate programs. At least until the private economy started producing goods and jobs again.”

“’Really?’ was more or less the collective response. ‘How do we go about getting our share of those programs?’

“Oy. The town hall was hosted at the Sheppard Pratt mental health facility here in Baltimore. When you drove into the parking lot, the attendant asked you which event you wanted to attend, ‘Recession Recovery’… or a symposium on ‘negligence and alcoholism.’”

Uncle Sam Plays “Extend and Pretend” originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

One of the banks, Cal National, is the 4th largest bank failure so far this year. It has 68 branches and ran the kind of operation that sounds like a textbook real estate bubble-serving bank including, “five times as much foreclosed property on its books and twice as many non-current loans as it had a year earlier” and it “lost about $500 million on heavy investments in Fannie Mae and Freddie Mac preferred shares.” It’s a bank that probably didn’t get what it wanted, but pretty much got what it deserved.

The other banks are:

* Bank USA, National Association (Arizona)
* Citizens National Bank (Texas)
* Community Bank of Lemont (Illinois)
* Madisonville State Bank (Texas)
* North Houston Bank (Texas)
* Pacific National Bank (California)
* Park National Bank (Illinois)
* San Diego National Bank (California)

All nine were held by FBOP Corporation, a multi-bank holding company based in Illinois. Now their combined $18 billion in assets and $15 billion in deposits will be acquired by US Bank NA of Minneapolis, the main subsidiary of US Bancorp.

More coverage is available from Reuters on the nine banks seized in the crisis’ largest one-day haul.

9 Banks You and Your Family are Hopefully Not Banking With originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.