June 19, 2012

US: The Great Correction Continues Correcting


Bill Bonner
Reckoning today from Baltimore, Maryland...

Overpaid b**tards!

You gotta love this Great Correction. It's gotten so much bad press. And so many people trying to stop it. But it just keeps going...doing its work. From Barry Ritholtz...

— There have been an average of 1.6 million nationwide foreclosure starts per year for the past five years.

— Foreclosure starts nationwide increased on an annual basis after 27 consecutive months of year-over-year declines.

— Bank repossessions are still down 18% year over year. Voluntary foreclosure freezes and increasing pre-foreclosure sales are the primary factors.

...2.8 million Americans are 12 months or more behind on their mortgages.

This truly amazing data point represents a very sad fact of the housing market. Once a homeowner falls that far behind in their mortgage, the odds are that they will never catch up. (Mortgage mods are likely to fail at an exceedingly high rate as well). Nearly all of these 2.8 million homes are likely to be some sort of distressed sale — short sale, auction, walkaway or foreclosure.

The bottom line is it means we are looking at a minimum of another 3 million homes going into foreclosure (or some variant) over the next few years.

Beyond the coming wave of foreclosures, credit availability is another factor holding housing activity down:

Since 2007, 19% of all borrowers (~9 million borrowers) have gone >90 days delinquent on their mortgages, or have had their mortgage liquidated.

In other words, one in five people who held or qualified for a mortgage not too long ago would not today. The 90 days delinquency on their credit reports prevents them from qualifying for a new mortgage.

This is a very significant data point to the idea of a housing turnaround. Why? Based on this delinquency alone, nearly all of these borrowers — about 9 million current homeowners — would be unable to qualify for [a] bank loan today. That is 9 million potential home buyers who are effectively barred from the market due to their credit scores. Removing that many people as potential home buyers amounts to a huge reduction in demand.

Isn't that terrible? No, it's just a correction correcting the overbuilding and overbuying in the housing market. And here's more correcting.... 
(Reuters) — New claims for US state jobless benefits rose for the fifth time in six weeks and consumer prices fell in May...
Terrible again, right? Wrong...the correction is doing what it's supposed to do. Bloomberg:
Americans are digging themselves out of mortgage debt. 

Home equity in the first quarter rose to $6.7 trillion, the highest level since 2008, as homeowners taking advantage of record-low borrowing costs to refinance their loans brought cash to the table to pay down principal. The 7.3 percent gain was the biggest jump in more than 60 years, according to an analysis by Bloomberg of Federal Reserve data. 

Residential mortgage debt peaked in 2007 at $10.6 trillion, doubling in six years, according to Fed data. Since then, it has fallen 7 percent as the value [of] all residential property has dropped 23 percent.
But the correction is not correcting the sector that needs correction most. The financial sector. Why? The feds protect it.

While the private sector digs out from under the burden of a debt bubble, the financial sector profits from federal giveaways. Wall Street CEO pay rose 20% in 2011. And here's our new friend, Barry Dyke, reporting and commenting:
...while Main Street net worth has been pummeled, Wall Street asset managers' compensation is soaring. In his new book, the author documents the explosion of the investment asset management business — which he calls the "asset management industrial complex" where managers are guaranteed Olympian paydays and consumers are left holding the bag with poor investment performance.

The current financial report card for Main Street Americans is grim. In June 2012, the Federal Reserve reported that the median net worth of families plunged by 39% in just three years from $126,400 in 2007 to $77,000 in 2010. According to the Fed, the financial crisis, which began in 2007, wiped out nearly two decades of wealth — with middle class families bearing the brunt of the decline. This puts Americans roughly in the financial position they were in 1992. In three years, Americans saw two decades of economic efforts vaporize. 

Much of Americans' wealth resides in retirement plans managed by the asset management industrial complex (mutual funds, private equity, hedge funds, banks, etc.) — which the author estimates to be a minimum $18 trillion. However, management fees eat up investor returns — creating headwinds virtually impossible to overcome. The author, citing Morningstar data, estimates that mutual fund shareholders — where most 401(k) funds reside — pay a minimum of 0.90 percent for every $10 thousand invested (and much higher when trading costs and other costs are factored in). Private equity and hedge fund managers—extract a much higher fee schedule, commanding 2 to 3% manager fee, plus 20 to 30% incentive compensation fee known as "carried interest." [Private equity is where Presidential Candidate Mitt Romney made his fortune]. 

The author comments, "On a whole, investment performance from highly paid investment managers has been horrible over extended periods of time. According to Morningstar, over 61 percent of stock mutual funds have lagged the S&P 500 index over the past five years. In 2011, only 20 percent of funds beat the Standard & Poor's 500-stock index, the worst showing for active fund manages in over a decade. Returns for private equity and hedge funds [both get much of their money from state pension funds] have been inconsistent, opaque, self-serving and hard to measure." 

However, asset managers saw their compensation soar. According to reports filed with the SEC in 2012, in reporting to go public, the private equity firm The Carlyle Group [which gets a great of investment money from state pension giant CalPERS] reported that three billionaire founders David Rubinstein, William Conway and Daniel D'Aniello reported a combined payday of $402 million in 2011. Most of this compensation was in cash dividends, where financiers enjoy a highly favorable 15% capital gains taxation rate on income. 

The author details one of the greatest compensation crimes in 2008 when Citigroup and Merrill Lynch blew up and had to be bailed out by taxpayers for their failed cataclysmic bets in subprime mortgages. Citigroup lost $27.7 billion yet paid its top bankers $5.33 billion in bonuses. [In the same year Citigroup froze its cash balance pension plan for rank-and-file employees]. Merrill Lynch lost $27.6 billion and paid its top bankers $3.6 billion in bonuses. In 2011, Robert P. Kelly, CEO of Bank of NYMellon, a giant asset manager, got $33.8 million in severance and benefits as an exit package in 2011 just prior to the bank being sued by the US Justice Department for allegedly overcharging pension clients as much as $2 billion over a ten year period. Prior to this, Kelly was CFO of Wachovia, a failed bank which is now part of Wells Fargo. Not only were the banks bailed out during the crisis, most of the mutual industry was bailed out by the Federal Reserve.

Bill Bonner
for The Daily Reckoning


Anonymous said...

The U.S.A doesn't understand karma,dismissing it as hindu fatalism.

Anonymous said...

While there are certainly two or three other places, this is the primary area when the Obama administration has failed to lead! The foreclosure mess has stalled out any normal national recovery for a decade or longer, and that includes Cleveland. Tight credit, a flood of properties, and homeowners under water all add up to slow-to-no-growth in the housing market. Many Americans have watched for 5 years now their nest egg for retirement crumble. For many Americans their homes represented their largest and most secure asset.

Instead, all Obama did was shake down the banks this year to come up with some faux recovery/relief thing that simply was a Son of Sam Stimulus program to throw money into the economy. This man has to go. He has failed to understand, to lead, and then to do.

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