Containment Is Spreading

In spite of Bernanke’s claims that problems in housing are “well contained,” most of the evidence appears to be contrary.

State Tax Revenues Slump

In “Housing Slump Pinches States in Pocketbook,” The New York Times is reporting on tax shortfalls:

  • In Florida, tax revenue is “projected to drop this year for the first time since the energy crisis of the 1970s”
  • “New Jersey could face a $2.5 billion shortfall by mid-2008,” according to Gov. Jon S. Corzine, and “may lease its turnpike or its lottery to a private company to raise money”
  • In California, “income tax receipts in January were $1 billion less than forecast”
  • “Maryland’s real estate transfer tax revenue has tumbled by 22% this fiscal year”
  • “Connecticut’s real estate transfer tax revenue, which state budget analysts predicted would fall by 3.6%, is down by 13.3% so far.”

“‘It’s the year of the housing hangover,’ said Sean M. Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida.”

Lower Earnings, Less Capital Spending, Less Hiring

MarketWatch is reporting, “Lower earnings could cut into capital spending, hiring”:

“U.S. corporate profits fell in the fourth quarter of 2006, signaling the end of one of the greatest profit cycles in postwar era, economists say.

“Economic growth is slowing, hurting corporations’ top line. Meanwhile, costs are rising, squeezing profit margins.

“‘Profits growth has turned decisively down, and the end is not yet in sight,’ wrote Gabriel Stein, an economist for Lombard Street Research.

“‘As the expansion matures and unit labor costs rise, profit margins will be under pressure,’ said Stephen Stanley, chief economist for RBS Greenwich Capital…

“‘The deceleration of profits may be dramatic,’ wrote Mickey Levy, chief economist for Bank of America, in a research note. ‘If so, weaker profit growth may affect business hiring and capital spending decisions, and will likely influence financial markets.’

“‘Weaker profits may undercut any rebound in capital spending,’ Levy said.”

Pink Slips Litter Loan Industry

The Chicago Tribune is reporting, “Turmoil in the subprime mortgage sector hits some workers as hard as borrowers”:

“The tumult in the subprime mortgage sector has hit some of the industry’s employees as hard as its borrowers.

 “Nationwide, job losses in the category that includes mortgage lending, real estate, and construction climbed 346% in the first quarter, to 21,245 from 4,764 in the same period last year, according to outplacement firm Challenger, Gray & Christmas Inc.

“‘It’s a whole sector of the economy that’s leaking,’ Chief Executive John A. Challenger said.

“In California, the 3,679 mortgage industry jobs lost in the quarter pales compared with the 70,000 construction jobs that economists figure could disappear over the next two years. When considered individually, though, the loss of a higher-paying white-collar position can be more significant for the economy.

“‘Each one of these finance jobs is worth at least two construction jobs,’ said Ryan Ratcliff, an economist with UCLA’s Anderson School of Business.

“Added Esmael Adibi, director of the Center for Economic Research at Chapman University in Orange: ‘The ripple effect is significant.’

“The layoff wave began about a year ago, when Ameriquest Mortgage Co. fired one-third of its employees. In December, Ownit unloaded 800 workers. Last month, the Orange-based parent of Ameriquest Mortgage and Argent Mortgage Co. announced major layoffs, as did Fremont General Corp. of Santa Monica. General Electric Co.’s WMC mortgage unit, a major player in the subprime business, said it would snip 20% of its payroll.

“‘We went on a big real estate bender,’ Ratcliff said. ‘And this is sort of the beginning of the hangover.’

“Shelly Dusing of Aliso Viejo, who lost her $48,000-a-year job at Ameriquest last month, said she would not return to the industry. In fact, she said she would work ‘anywhere but’ because mortgage lending was too volatile, ‘whether you’re prime or subprime.’

“For Dusing, who’s nearly eight months pregnant, the situation at Ameriquest became so tense that getting fired was a relief.

“‘You go to work every day and you don’t know if you’re going to have a job or not. You don’t know if your badge is going to open the door,’ she said. ‘We knew bad things were coming and it was just a matter of time'”…

“The abrupt end is a bitter memory for Tamika Williams, her family’s primary breadwinner when Ownit collapsed shortly after she bought a home in Phoenix.

“The 29-year-old mother of four lost a job that paid $21 an hour, plus commissions. Williams landed a new job March 2, making $12 an hour handling collections for a bank.

“‘I’m surprised I haven’t called myself yet,’ she said.

“The end came quickly at Ownit, said Lisa Seeley, another former employee.

“‘Now you wake up every morning and wonder, “Who’s wheezed their last today?,”‘ she said. ‘If there’s anybody who isn’t wondering about their job today, they’re not paying attention.'”

Property Tax Soup

The Orange County Register is asking, “Are Property Taxes in Subprime Soup?”:

“If you’ve got a mortgage from a subprime lender in deep financial trouble — and that’s a good-sized bunch — you may want to gulp.

“The county’s tax collector is concerned that some ailing lenders may be unable to get borrowers’ payments to their rightful place, such as prepaid property tax payments.

“‘This is a very serious issue,’ says [tax collector Chris] Street, who adds the unsettling notion that property owners are still liable for a tax bill — even it goes unpaid due to a lender’s failure to forward your cash to the tax collector.

“Street’s not yet seen evidence in his tax collecting efforts of such mistakes or misappropriations. Still, O.C.’s overall late tax payments are already running at an 11-year high. But one company in the subprime game claims they’ve witnessed borrowers’ mortgage payments go awry.

“Wall Street banker UBS sued New Century Financial, the once subprime giant now mired in bankruptcy. The UBS beef? That the Irvine [Calif.] lender failed to forward $3.8 million in borrowers’ payments — plus $1.7 million in escrow payments for house expenses — to UBS-sponsored owners of certain mortgages.

“A New Century spokeswoman would not comment on the UBS allegations. She did say that protections are in place to keep borrower payments separate from New Century’s other financial obligations. Court filings indicate that New Century has the right to continue forwarding prepaid bills to tax officials.

“‘I’m just being prepared that one, two or many of these lenders will have used the money that should have been set aside,’ says Street, who notes that New Century forwarded its borrowers’ tax payments to his office on Friday. The current installment of tax bills is due Tuesday.”

Imagine you are a subprime borrower who paid taxes to New Century Finance or some other now bankrupt subprime lender and you wake up and find that those tax escrows you made were not paid. Subprime being what it is, exactly how are you going to come up with $2,000-4,000 or more to pay tax bills you have already paid?

Some borrowers have avoided escrow payments simply because they could not afford those on top of a mortgage. Where are those borrowers going to come up with the money to pay property taxes?

California Foreclosure Sales Near $2 Billion in March

The Central Valley Business Times is reporting, “Unprecedented’ foreclosure activity”:

“Foreclosure sales are now 15% of all home sales in California.”

“5,316 homes were lost to foreclosure sales in March in California, according to figures compiled by Foreclosure Radar, a Discovery Bay-based foreclosure listings and software company.

“The homes sold at auction last month represented a 27% increase from February and a 264% increase in the last six months, the company says. Of the $2 billion worth of properties sold in March, 4,796 went back to the lender after receiving no bids, representing $1.82 billion, it says.”

4,796 homes out of 5,316 homes at foreclosure sales received no bid. That is a pretty stunning 90% of homes at foreclosures auctions receiving no bid. Obviously, those homes have a bigger mortgage than what they are worth.

Hot Employment Numbers?

In regards to the highly touted 180,000 March payroll numbers, there are some anomalies that need to be addressed. I talked about this in “March Employment Numbers & Leading Indicators,” and Paul Kasriel talked about the job numbers in “An Autopsy on the March 2007 Employment Situation Report.” From the latter:

“With regard to the 35,800 person increase in general merchandising retail, it seems odd that this accounted for all but 100 positions in the net monthly increase in total retail payrolls. Something very volatile appears to be going on in general merchandizing hiring.General merchandise employment in relation to total retail employment has gone from 18.81% in November 2006 to 19.25% in March 2007, a very sharp reversal, as shown in Chart 5 [below]. I wonder if there are not some seasonal adjustment issues in play here. Whatever the case, if a lot of our job growth is occurring in retailing in general, then this is unlikely to result in strong consumer spending from income growth inasmuch as the average hourly wage in this sector is only $12.74, with only leisure and hospitality paying less ($10.19 per hour). If Circuit City’s hourly pay cut plan is successful, other retailers might opt for a variation of it, which will lower the wages in this hotbed of employment growth even more.


“Now, let’s turn to the March 2007 Household Survey, which also provided a surprise in the form of a 0.1 point decline in the unemployment rate, to 4.4% — matching a cycle low. In terms of age groups, the largest decline in the unemployment rate occurred among teenagers, where the rate fell to 14.5% in March, from 14.9% in February. But the ‘adult’ unemployment rate also fell a tick, to 3.9%, matching its cycle low. Did teenage employment increase in March? No, it declined by 59,000. What was driving force behind the sharp decline in the teenage unemployment rate? A 0.6 point decline in the teenage participation rate to a cycle low 41.6%. In fact, as shown in Chart 6, the March 2007 teenage participation rate of 41.6% is a post-WWII low”…


Judging from the enormous drop in the teenage participation rate, the latest drop in the unemployment rate is a complete fabrication of reality. While Kasriel and I focus on different aspects of the payroll numbers, we both reach the same conclusion, expressed by Kasriel: “In sum, an autopsy of the March 2007 Employment Situation report suggests that labor market conditions are not nearly as robust as the headlines that accompanied the report.”

Now factor in the fact that 2.1 million homeowners missed a mortgage payment in 2006, according to USA Today. Does that look like containment? I suggest that the containment is spreading, even as Bernanke and others deny its existence.


April 10, 2007

The Daily Reckoning