"Foreclosures were bad last year? It's going to get worse," University of Wisconsin professor Morris A. Davis told the New York Times. And this time, the problem lies within the more numerous and more creditworthy prime loans. Economists are referring to this next round of foreclosures as the "third wave," different from the first round, when speculators dumped property because of plunging prices, and the second wave, when subprime borrowers' introductory interest rates reset.
Now, due to layoffs, creditworthy and conservative borrowers simply can't afford their mortgage payments. Moody's macro website, Economy.com, predicts 60% of all mortgage defaults this year will be caused primarily by unemployment – up from 29% last year.
According to the NYT:
From November to February, the number of prime mortgages that were delinquent at least 90 days, were in foreclosure or had deteriorated to the point that the lender took possession of the home increased more than 473,000, exceeding 1.5 million, according to a New York Times analysis of data provided by First American CoreLogic, a real estate research group. Those loans totaled more than $224 billion.
Over the same time period, subprime mortgages in those three categories only increased by 14,000, to 1.65 million. Alt-A loans increased 159,000 to 836,000. In total, more than 4 million loans worth $717 billion were in the three distressed categories in February – up more than 60% from last year.
And what is the government doing to combat the problem? In February, OBAMA! announced a $75 billion program to reduce payments for troubled borrowers, which would spare 4 million homeowners. Three months later, the number of modified loans is "more than 10,000 but fewer than 55,000," according to a Treasury spokesperson. Meanwhile, another 313,000 homes entered foreclosure.
... and yet, PIMCO's Scott Simon says mortgages are still "stupidly cheap." Simon says, "You can run some pretty draconian scenarios and get awfully high yields still." Simon's comments don't apply to government-guaranteed securities. He's buying nongovernment-guaranteed jumbo mortgage securities. They've rebounded 32%, to about 83 cents on the dollar, ever since the Treasury and Fed announced the PPIP plan in late March. The gist of the plan is the government loans to and co-invests with private investors in mortgage-backed securities.
Me? I think the amount and severity of mortgage losses will continue to shock the daylights out of banks and investors. The foreclosure moratorium is off, and that steamroller will continue to pick up speed as unemployment rises, getting us up to around 1.8 million foreclosures this year.
Seasonal factors are causing some people to think housing is making a comeback or may be near a bottom, but the supply is so utterly enormous that it's much more reasonable to expect prices to keep falling. Remember, too, the U.S. mortgage market is the largest debt market in the world. The $1 trillion subprime market sent world debt markets into a tailspin. What'll happen when the $3.5 trillion prime market continues to erode?
People continue to underestimate the severity of the mortgage crisis. I doubt it's half over. I'm not looking for long bets among financials. I'm only looking for shorts. I should have another one in the next issue of Extreme Value, due out the second week of June.
Another government social insurance scheme is imploding. Last week, the Pension Benefit Guaranty Corporation reported a $33.5 billion deficit, the largest in its 35-year history. The future doesn't look rosy, either. Automobile industry pensions are underfunded by about $77 billion, according to the latest issue of Business Insurance. If the plans were terminated, the PBGC would be on the hook for about $42 billion of that total.
The government created the PBGC in 1974 to insure pension programs. It's imploding for the same reason the FDIC, Social Security, Medicare, and other social insurance schemes are doomed to implode. The risks are uninsurable, so it's impossible to ever charge enough premium to adequately capitalize. Money printing is the only real backing for all these inherently broken programs.
The PBGC story hasn't made the headlines yet, but it has to sooner or later. When it does, can a bailout be far away?
If the OBAMA! administration doesn't like Wall Street executives to make big bonuses, Morgan Stanley has the answer: big salaries! Five top executives who had base salaries of $300,000 to $600,000 will now get raises to between $750,000 and $800,000 annually. One thousand Morgan Stanley managing directors will get raises from about $250,000 a year to about $400,000 a year.
In an SEC filing on Friday, Morgan Stanley said it wasn't trying to raise total annual compensation. It's merely adjusting the mix between fixed and variable compensation. It also said the adjustments to base salaries were to get Morgan Stanley base salaries up to those of the firm's peers (i.e., Goldman Sachs). Why everyone at Morgan Stanley has to get paid the same as everyone at Goldman Sachs, it didn't say.
Doc Eifrig just published his latest issue of Retirement Millionaire. As always, it's got some great money-saving secrets. Are you planning on traveling by car this summer? Eifrig shows you how to get cash back on gas, hotels, and food for up to two months on the road. He's also found a way to travel across the country on Amtrak for nearly free – many shorter trips are completely free using his method.
These two tips alone could save you hundreds of dollars, more than justifying the $49.50 price tag for a year's subscription. In addition to his money-saving ideas every month, Doc Eifrig also recommends some of the safest and best investments for retirees, making his advisory one of the greatest values we offer. To learn more about Retirement Millionaire, click here...
No surprise here, but the biggest winners in the upcoming GM bankruptcy case – the company has until June 1 to restructure – will be the bankers and lawyers. GM's bankruptcy would be the most complicated bankruptcy any American company has ever gone through – bigger than Lehman Brothers, Chrysler, and even Enron. And advisors for GM, the Treasury Department, the United Automobile Workers, suppliers, dealers, vendors, etc. will reap hundreds of millions of dollars in fees. Weil, Gotshal & Manges, the firm handling the Lehman case, recently sought approval for billing $55 million for only three months' work. Weil is one of the firms representing GM.
The bankruptcy case is expected to generate so much economic activity – hotels, restaurants, office rentals – that Detroit is hoping the case will be filed in local bankruptcy court. It will probably be filed in Delaware or New York, where most companies are incorporated, and the courts have more experience handling massive bankruptcy cases.
And the biggest losers in the GM bankruptcy case? You and me, pilgrim. In total, GM will require $40 billion to $70 billion in financing to make the company viable again.
New highs: none.
In today's 'bag: Where to turn for the latest in government stupidity? Our colleagues at the Crux are chronicling every woeful development. Send your questions to: feedback@stansberryresearch.com.
"Where can I find the above article [on Congress canceling Social Security benefits if you make more than $60,000 plus] I read recently in the Daily Crux, I think?" – Paid-up subscriber Arnold Cordts
Ferris comment: If you search for "social security" on the Crux homepage, it's the first story that pops up. Here's the link. It's one of the many entries we've tagged as "Government Stupidity." Be sure to read what else is on the Crux today, like How to make 40% a year investing in one of Jim Rogers' favorite countries, and Obama tells nation "We are out of money."
Regards,
Dan Ferris
Medford, Oregon
May 26, 2009