Yesterday, Obama said the need for government funds to stabilize the economy "is waning." Mortgage lenders across the country disagree.
One Denver-based home lender says government-backed mortgage loans (so-called Federal Housing Administration loans) currently account for over 80% of his business – up from 20% at the height of the boom. He considers himself a "government contractor" now. He says his employees had better embrace that idea because their only other option is to "sell pencils on the corner."
Another lender, serving Kentucky and Ohio, says 95% of her loans are FHA... "It's all government loans... That's all that can be done anymore."
In addition to FHA loans, people are buying houses because of the $8,000 first-time homebuyer tax credit and mortgage rates just above 5% – which are artificially depressed because the government pledged to buy $1.45 trillion in mortgage-backed securities and $300 billion in Treasuries.
Kenneth Rosen, who chairs the Fisher Center for Real Estate and Urban Economics at UC Berkeley, argues the government stimuli are just pulling demand forward... "All [the tax credit] does is move demand forward in time." Rosen says the housing stabilization we've seen in the past six months could "easily" disappear.
Rosen is right. The "Home Affordable Modification Program" (HAMP) has pushed foreclosures farther out in the future. That'll mean more of them rather than less – exactly the opposite of HAMP's intent, and exactly the kind of perverted unforeseen outcome you get when the government interferes.
According to housing and mortgage researcher Mark Hanson, the number of homes in the foreclosure pipeline has never been greater. Hanson has been expecting a wave of foreclosures. Now, he's calling it a tsunami. Just like with a real tsunami, the ocean is swelling as HAMP acts as a foreclosure moratorium.
HAMP was first announced in February and finally rolled out in August. Mortgage servicers pushed back foreclosures while they retooled for the program. Re-default rates for modified loans are as high as 70% in some areas.
Billionaire investor Wilbur Ross isn't afraid of investing in banks, even if they're loaded with bad mortgages. He was among a group that bought Florida's BankUnited, a huge player in the market for option adjustable-rate mortgages. Now, Ross is reported to be one of the top bidders for United Guaranty, the country's fifth-largest mortgage insurer.
Retail sales, up 2.7% in August, are also inflated by government funds. Excluding "cash for clunkers" car sales and a subsequent increase in gasoline prices, U.S. retail sales only rose 0.6%. And that 0.6% was largely supported by many state governments' decisions to cut sales tax in August for back-to-school shopping.
But it's not all bad news in the retail world: Spam is selling well... Food company Hormel recently reported stronger profit margins, due to lower feed and other commodity costs. Sales were helped by demand for Spam and Dinty Moore canned meat products.
Big Brother is watching you. And if you don't turn yourself in, he's going to be very unhappy...
If you're hiding any offshore assets from the government, you've got until September 23 to come clean, pay a fine, and avoid criminal prosecution. And if you're emboldened by strength in numbers, the IRS said in one week of July, around 400 individuals turned themselves in – more than the number of tax evaders who came forward in all of 2008.
We started covering the commercial real estate (CRE) crisis in the March issue of Extreme Value. Since then, the crisis has made numerous headlines, and now, two more big names have joined the CRE bear camp...
Lewis Ranieri, who invented the mortgage-backed security, said the U.S. housing market is "still very fragile" and commercial real estate is at the beginning of a major downturn. Agreeing with our assessment, Ranieri says the economy "only looks like it's fixed." Ranieri says most banks' small-business loans are secured by the real-estate holdings of borrowers, and "small-business values evaporate like mist in the sun." As the economy continues tumbling and small businesses close, banks will be left holding vacant buildings.
Karl Case, co-founder of the S&P/Case-Shiller Home Price Index, says CRE "absolutely" could be the next shoe to fall, though it will not cause as much damage as the residential crash... "You can look at the number of workers lost in the service sector, certainly the office and retail sectors. And you can count the number of square feet out there. It's inventory that doesn't go away when you don't fill it up."
He says the value of buildings will fall "very, very quickly" if vacancies rise and rents fall. I'm betting on this in Extreme Value. I tried to short weak banks once this year and got burned. But I know there's no way they can survive, at least not without raising a lot more capital.
Either way, common shareholders are toast. So as of yesterday, my readers are once again selling short what I believe is the weakest regional bank in the country. I think the FDIC's "night stalkers," the agents who show up on Friday nights to shut down failed banks, could show up at one or more of this bank's subsidiaries soon. To get access to Extreme Value, including the July 2009 report titled, "The Night Stalkers," which explains why I think this particular bank could fail soon, click here.
If you're looking to buy more gold, make sure to read The Daily Crux's interview with Casey Research gold expert Jeff Clark (not to be confused with S&A's Jeff Clark).
In the interview, Jeff covers his favorite bullion dealers, the best options for storing gold, and the world's easiest way to "internationalize" your gold holdings. This interview, called The World's Best Places to Buy and Store Physical Gold, is probably the most useful thing you'll read all month. It's free to all subscribers of The Daily Crux. Learn how to receive it here.
New highs: Morgan Stanley Emerging Markets (EDD), Hatteras (HTS), Cresud (CRESY), Kinder Morgan Energy Partners (KMP), Fairfax Financial (FFH), International Royalty (ROY).
In the mailbag... If you don't mind facing the odd unpleasant truth and getting to know it intimately, purely for your own edification, please send us an e-mail so we know you're out there: feedback@stansberryresearch.com.
"Hey FWIW guys, I have been a subscriber for years and use to read the S&A Digest every day. Now it is more like once a week, as it has become the most consistent daily depressing piece of internet news I get. Once a week is about all I can stomach. Got to believe at least a couple of the guys writing that thing including Porter are now on Prozac!!!" – Paid-up subscriber REI
Ferris comment: So let me get this straight. It's less depressing to read lies than to read an honest attempt to get at the heart of what's going on?
"I don't think Rich fully understands the theory of a Contrarian; When everybody loves it, sell it. When everybody hates it, buy it." – Paid-up subscriber Jim
"I just wanted to give you an update. You published a letter of mine in the S&A Digest on April 22, 2009... Well, all I can say is things continue to go very with the strategy and your stock picks and some of mine thrown in there. From the end of February to my August 31st brokerage statement my account balance is up 126%. I have been doing some other trades besides selling puts and covered calls but that is a majority of what I am doing. I could never done it without your help! You were correct in that it has been harder to find good deals on puts but it always seems like if I look long enough and hard enough I can find a good stock that the premium is higher than usual and a good opportunity to get in. CHEERS!" – Paid-up subscriber Richard Anderson
Regards,
Dan Ferris
Medford, Oregon
September 15, 2009