A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a satirical look at marketing and business.

Latest news has it that the Treasury Dept. is thinking really hard about maybe using some of the $700 billion from the Troubled Assets Relief Program (TARP) to do something about home foreclosures.

Neel Kashkari, who has to administer the Troubled Assets Relief Program, told Senators, “We continue to aggressively examine strategies to mitigate foreclosures and maximize loan modifications.” It is well worth noting that Kashkari offered no actual details as to what this might mean.

This doesn’t seem to indicate any change in Henry Paulson’s willingness to consider an FDIC plan to help homeowners. “Under the FDIC proposal, the government would seek to encourage lenders to modify loans by offering to share the cost of any defaults. The FDIC has said its proposal could prevent about 1.5 million foreclosures.” Paulson has said that use of TARP money for this would be a misuse of the funds. This is odd given his willingness to spend the money on just about anything except homeowners.

LATE UPDATE: NYT reports Ben Bernanke sketched out a range of options, including buying delinquent mortgages in bulk and refinancing them into government-backed programs, writing down the value of a loan’s principal amount in “cases of badly underwater mortgages,” to reflect the decay in real estate values, and bolstering a program run by the Federal Deposit Insurance Corporation that seeks to lower homeowners’ monthly payments on delinquent mortgages.

Fortunately FDIC chair Sheila Bair does seem to be the only major player in all this concerned with only helping homeowners. And she wants to know how we will get out of all this, too. On Tuesday Bair said that if the government doesn’t devise a way out of its massive financial rescue plan it runs the risk of  becoming a crutch for banks and other institutions over the long term.

“We really need to think through the exit strategy because (government guarantees) could become a crutch,” she said. Weaker financial institutions “need to be allowed to fail,” Bair added.

Bair certainly does seem to be leaning towards some sort of plan built around the Bank of North Dakota model. What’s that, you ask?

Maybe it’s time to try something new. Maybe it’s time for state governments–with federal help–to start some new banks with clean balance sheets that can begin lending on the day they open their doors. There is precedent for this.

There is the Bank of North Dakota. The BND was established by the state of North Dakota, which owns it, in 1919. The reason for its existence is that the farmers and small businessmen of the state were confounded by the same impossibility to secure loans back then that has frozen the nation in place in 2008. The banks were not lending, so the state started a bank which did lend and does to this day. It is making student loans and other kinds of loans that are unavailable elsewhere. The bank is the depository institution for the State of North Dakota’s funds and it also accepts deposits from ordinary people and businesses. Since it is a socialistic institution, not intended to make a profit, it does not have a motive to misbehave, as our private enterprise banks have done.

Any state can start its own bank using the funds it has deposited in private banks. That comes to many billions, and withdrawing so much money at one time could be all that is needed to send any number of banks into death throes. So the switchover would have to be carried out gradually with the federal government, which is so free and easy with its cash, supplying the startup money. (Nepotism alert: author of the above is Nick von Hoffman, my father.)

The BND is a non-profit with very limited services and is not FDIC insured, so it isn’t really a competitor to the commercial banks. It is worth noting that the BND has never in 90 years lost money.

In the spirit of bipartisanship — and common sense — why didn’t Bair get a Cabinet post?

Source [blownmortgage]

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Filed under: Rants and raves, General Electric (GE), Berkshire Hathaway (BRK.A), Goldman Sachs Group (GS), Chasing Value, Best Stocks for 2008

It was only seven weeks ago that I posted Chasing Value: Considering Berkshire Hathaway… again. At the time, Berkshire Hathaway (NYSE: BRK.B) was trading around $3,850 for the “B” shares.

Well, I think the time for consideration is over and this morning I placed a limit order for the stock. I think the time is right when stories like Berkshire Hathaway at Lowest Close Since Feb. 2007 and my colleague Peter Cohan’s Warren Buffett is not perfect are being trumpeted in the media.

For those who have followed “my pal Warren” Buffett for years, or even decades, these cautionary stories of him losing his edge are as silly as trying to predict where the DJIA will be on a given date. As for Peter suggesting that he was early buying into Goldman Sachs Group (NYSE: GS) or General Electric (NYSE: GE) three weeks ago, well my gosh, it has only been three weeks!

I understand that the prevailing wisdom seems to be running against the buy and hold approach. But three weeks is kind of short to be passing judgment, don’t you think? The DJIA is down 42% while Berkshire is only down 31% from its high of $5059.

Perhaps investors have punished the stock because GS and GE are down. Maybe it is because Berkshire has been buying up railroads and that strategy is less important with oil prices falling 55% since the summer high of $147 a barrel. It could also be because people have lost their minds — who knows?

Continue reading Chasing Value: Berkshire - you’re selling, I’m buying!

Chasing Value: Berkshire - you’re selling, I’m buying! originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:10:00 EST. Please see our terms for use of feeds.

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Filed under: Rants and raves, General Electric (GE), Berkshire Hathaway (BRK.A), Goldman Sachs Group (GS), Chasing Value, Best Stocks for 2008

It was only seven weeks ago that I posted Chasing Value: Considering Berkshire Hathaway… again. At the time, Berkshire Hathaway (NYSE: BRK.B) was trading around $3,850 for the “B” shares.

Well, I think the time for consideration is over and this morning I placed a limit order for the stock. I think the time is right when stories like Berkshire Hathaway at Lowest Close Since Feb. 2007 and my colleague Peter Cohan’s Warren Buffett is not perfect are being trumpeted in the media.

For those who have followed “my pal Warren” Buffett for years, or even decades, these cautionary stories of him losing his edge are as silly as trying to predict where the DJIA will be on a given date. As for Peter suggesting that he was early buying into Goldman Sachs Group (NYSE: GS) or General Electric (NYSE: GE) three weeks ago, well my gosh, it has only been three weeks!

I understand that the prevailing wisdom seems to be running against the buy and hold approach. But three weeks is kind of short to be passing judgment, don’t you think? The DJIA is down 42% while Berkshire is only down 31% from its high of $5059.

Perhaps investors have punished the stock because GS and GE are down. Maybe it is because Berkshire has been buying up railroads and that strategy is less important with oil prices falling 55% since the summer high of $147 a barrel. It could also be because people have lost their minds — who knows?

Continue reading Chasing Value: Berkshire - you’re selling, I’m buying!

Chasing Value: Berkshire - you’re selling, I’m buying! originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:10:00 EST. Please see our terms for use of feeds.

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Filed under: TD AmeriTrade Holding (AMTD), Financial Crisis

Here is a frightening statistic: about 63% of people with retirement accounts have stopped contributing to them. That little nugget comes courtesy of a recent survey conducted for TD Ameritrade (NASDAQ: AMTD).

Half of those who stopped contributing to their retirement accounts cited “financial strain due to the economic downturn.” Another 32% cited unemployment, while 25% mentioned health care costs, according to a company press release. Of those polled, 34% had less than $50,000 in investable assets.

Many of the people who’ve quit or curtailed contributing — nearly one in four — are aged 35 to 44, which should be prime earning years. I am not going to bore you with financial planning 101, but the earlier you start to save (absent a market meltdown), the better because over time the stock market is your friend. Lately, though, it has not been much of one.

Mulling over this survey got me thinking that whoever is elected president is going to face the gargantuan challenge of rebuilding the financial security of millions of Americans who are being forced to push back their retirement plans or who have mortgages they can no longer afford. It’s going to take years for people to rebuild their nest eggs and undo the damage they have done to their credit by over-extending themselves. Many people may never be able to return to their former lifestyles.

Of course, that may not be such a bad thing. If this crisis has taught us anything, it’s that people need to live within their means.

Many people stop contributing to their retirement plans originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:27:00 EST. Please see our terms for use of feeds.

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Filed under: Consumer experience, Housing, Recession, Financial Crisis

Are you better off than you were a year ago? Probably not. Since then, global markets have lost roughly half, or $30 trillion worth of their value. House prices fell 16.6% between August 2007 and August 2008 and 3.4 million people are expected to have foreclosed on their houses by the end of 2009. So you can’t retire as soon as you thought and if you still own it, you can’t borrow money against your house.

Looking ahead to the holiday season and witnessing thousands of people losing their jobs could put you in a bad mood. After all, median income is down since 2000 while it still costs much more to fill your gas tank than it did back then — not to mention pay for health care. So it should come as no surprise to learn that consumer confidence is lower than it has been in the last 41 years.

But consumers are not smart. As John McCain advisor, Phil Gramm has said, Americans are whiners. And McCain himself has made it clear that the economic fundamentals are strong. After all, McCain (or more likely his wife) owns seven houses and thirteen cars. So the point is that his economic fundamentals are strong. And that’s all that really matters.

As for American workers, let them eat cake.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

With house prices down 16.6%, consumer confidence at lowest level in 41 years originally appeared on BloggingStocks on Tue, 28 Oct 2008 12:32:00 EST. Please see our terms for use of feeds.

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The Securities and Exchange Commission (SEC) is getting tough on credit rating agencies. A series of measures announced on Wednesday, December 3, would impose additional requirements on the credit reporting agencies in an effort to increase transparency and accountability. Consumers, investors and lenders may even end up getting more meaningful ratings.

These comprehensive rules touch every aspect of the credit rating process - from conflicts of interest, to publication of ratings methodologies to disclosure of ratings track records,” explains SEC Chariman Christopher Cox.

The proposed rules are the result of an extensive examination of the three major credit ratings agencies recently concluded by the SEC. The examination, which lasted 10 months, revealed significant weaknesses in ratings practices.

“One of the significant weaknesses in the credit rating process has been that while the credit rating agencies often relied on other to verify the quality of assets underlying structured products - and thus their ratings were vulnerable to reliance on incorrect information - there was frequently inadequate explanation of the limitations of the ratings of these products,” Chairman Cox said. “Just as significantly, conflicts of interest ingrained into the business models of credit rating agencies were amplified as structured products were specifically designed to achieve high ratings for certain tranches and as credit rating agencies sought to gain business and market share by assisting in this process.”

This is the second set of reforms proposed by the SEC since June 2007 when Congress granted the Commision the authority to Register and oversee credit rating agencies. The Credit Rating Reform Act ended nearly a century of self-policing by the credit rating agencies who act as financial gatekeepers determining who can borrow funds and at what cost (interest rate). Some would also say that credit ratings have become a means of assessing a person’s or an organization’s trustworthiness and moral character.

Credit scoring cannot help but provide a moral context for making credit decisions. To be creditworthy is to be trusworthy,” says credit evaluation and financial identity researcher Josh Lauer, assistant professor of communication at the University of New Hampshire. “At a fundamental level, credit evaluation is an effort to determine whether a given person can be trusted.”

According to Chairman Cox, ten credit rating agencies have registered with the SEC since the Act passed in 2007. This represents an increase of 43 percent in the number of nationally recognized statistical rating organizations. Despite the increase in competition, three firms - Fitch Ratings, Standard & Poor’s and Moody’s - continue to dominate the 45 billion-a-year credit rating industry, according to the Associated Press (AP).

The public has 45 days from the date the proposed amendments are published in the Federal Register to submit comments to the SEC. The AP reports that some critics are already sayign the proposed rules do not go far enough while spokespersons for the three major credit rating agencies have already expressed their support for the measures.

A Fact Sheet containing additional details on the proposed rules can be found on the SEC website at www.sec.gov.

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Mighty kings rise and fall like the sun.  Southern California decided to take an ancient recipe from the books of history and followed in this time honored path.  Except our king came riding in on a pair of 24 inch spinning rims in a Cadillac Escalade.  The only problem is all of it was mortgaged […]
Related Posts:
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Short Sale Report Volume 3: Another Week and Another Record. SoCal Short Sales up over 12,000.
■Think Housing Can’t Go Down Significantly in Southern California?
■Southern California Housing Report: New Housing Motto: Foreclosure Data is so Bad, it has to be Good! Median Price Down 31% to $348,000.
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!

Mighty kings rise and fall like the sun.  Southern California decided to take an ancient recipe from the books of history and followed in this time honored path.  Except our king came riding in on a pair of 24 inch spinning rims in a Cadillac Escalade.  The only problem is all of it was mortgaged on a kingdom of sand that is now quickly eroding.  For anyone in Southern California the minor consolation we can take is that this will go down in the history books of financial exuberance like those who lived through the Dutch tulip mania in 1637.  Tulip contracts were selling at 20 times the annual income of a skilled craftsman.  Remember the story about a farm worker who made $14,000 a year and was able to buy a $720,000 home back in May of 2007?  Why stop at a 20 ratio when we can go over 50 times?

Now this is the story of glamour and glitz.  The rise and fall of a housing market in a few short years.  In today’s article I am going to use graphs and data to try to examine the Southern California housing market.  I have been covering the housing market since 2006 in the heat of the insanity and the psychology now is incredibly different.  Prices declining by 40 percent in one year will do that to you.

Southern California according to DataQuick reached a peak median price of $505,000 in July of 2007.  Since that time, the median price has fallen to $300,000.  Keep in mind the median household income for Southern California is under $50,000.  So at the peak, it would take the median household income 10 times their annual earnings to purchase a home in the region.  20 times for a tulip contract, 10 times for a glorious shack.  We will now have our place in the history of magnificent bubbles right their next to the tulip bulb mania from 371 years ago.

So let us get to work since we have a lot to cover.  First, I have compiled a chart showing the median prices for each county in Southern California since the start of the decade.  I have yet to see a chart break out the counties individually like this so the chart should provide a fresh perspective of the data:

(Click for a sharper image)

As you can see from the chart, the pace of growth for the entire region was uniform up until the summer of 2007.  Like a plateau, we hit a steady pricing trend from 2006 to 2007 before falling off the cliff.  The dotted yellow line is the aggregate of all counties in Southern California.  Many counties are now back to 2003 price levels without adjusting for inflation.  Given the last few months of data, we are looking at least in the short term to heavy and strong deflation in practically every investment vehicle on the market.  What this means is price drops are even worse than they look.

What else can we learn from the chart?  Without prejudice every region rose at nearly the same pace.  This is the stunning thing to notice when you break the data out.  Every upward county trend in the chart above shows a similar movement upward.  It didn’t matter whether it was Orange County or San Bernardino, the bubble took hold of each county.  The actual nominal price peaks for Orange County and Ventura are simply stunning.

The next chart should sum up nearly an entire decade of housing mania for the region.  I’ve put together a chart showing the median price for Southern California and the monthly sales for the region:

A couple of things I want to highlight first.  You will notice that for sales, there is always a seasonal drop in the winter and peak in the summer.  That is typical.  It goes up and goes down based on common real estate sales patterns.  Why?  Many people move during the summer season and most people buy homes during their “family forming” years so pulling a kid out of school isn’t the smartest move.  In addition, many people buy homes who are planning on having a family so in general it causes an upsurge during this time.

What you’ll notice that since 2000, the troughs were higher during the winter and the peaks were stronger in the summer all the way until 2006.  That is the first time the summer bounce wasn’t as strong as it once was in the heat of the bubble.  It is also the time when you see the median price plateau.  Once this happened, it took about one year for the entire market to collapse and as you can see above, both prices and sales fell off a cliff.

So why are sales now moving up?  Simple.  Prices have gotten cheaper.  Drastically cheaper.  Even with the amazing upsurge in sales, you can see that we are still very far behind the curve from the bubble days.  Keep in mind we are now entering the typical slow season of winter so it will be interesting to see what happens here.  I maintain that housing prices for Southern California will not bottom out until 2011.  Now sure, we may hit a bottom in price in 2009 or 2010 but that price will probably be the same in 2011.  The problem with finding the bottom is you won’t know until maybe one year has passed.  But when bubbles burst, especially one this size that has caused so much financial trauma, we will be swimming in scuba gear near the bottom for a few years.

Most kings have a sense when they are facing trouble.  In most cases, a king won’t look out his castle’s window and see thousands of angry peasants with pitchforks and say, “wow, I didn’t see that coming!”  We have many early warning signs.  One thing that is simply laughable from the mainstream media is when they say, “no one can possibly have seen this coming.”  Well many economists, bloggers, and some politicians saw this coming so there goes that “no” one argument.  In many cases, that is why many media outlets are slashing and burning staff because how can they claim to be credible when many independent sources have done the research they didn’t and have issued many siren calls in the past?  Many readers are smart enough to see who is credible and who is simply playing catch up.  Why pay a writer a high six figure salary when a blogger knowledgeable in the subject is already writing about it?

What was one thing that was missed that approached like an angry mob screaming and chanting?  Notice of defaults and foreclosures:

Take a look at the chart above very carefully.  You notice that tiny red sliver of foreclosures in Q2 of 2006?  That was the wake up call.  These foreclosures were probably the most egregious fraud cases because look at the peak prices above.  Practically anyone could sell a home at peak price with little work.  After this point in 2006, a trend was noticeably appearing.  No one saw this coming?  Maybe they didn’t but many who actually understand these trends tried to echo a warning but bubbles are hard to burst.  It is like the party with no parent and the punchbowl needs to be taken away because people are way too drunk.  Who will be the one to end the fun?  You would hope that regulators such as the Fed or our government would have something to say but instead, we have Alan Greenspan saying how fantastic adjustable rate mortgages are!  So that has already passed.  Yet the problem is they are still doing the same mistake!  How so?  For example, during these last few upsurges in sale they made it appear that it was somehow a gigantic jump.  No, if you pulled data back from 2000 where the bubble started, you would quickly see the “upsurge” was simply a trend back to normalcy.

You’ll notice with the above chart that as time went on, many of the notice of defaults (NODs) started going into foreclosures.  This is significant.  If you look at say Q1 of 2005 we have nearly 17,025 (NODs) but practically no foreclosures.  Why?  Anyone in trouble can just sell their home.  Simple.  Not the case anymore.  You may be wondering why NODs suddenly fell off in Q3.  This as I have stated is because of SB 1137 which is simply a dull legislation requiring lenders to kick the can down the road a few more months.  It basically tells lenders, “hey you.  Contact the borrower and tell them what’s up.  Now go forth and collect.”  Yet how are you going to squeeze cash out of a cash strapped California homeowner?  That is why each subsequent bailout gets dumber and dumber on an exponential scale because consumers simply are financially strapped.

Another key chart to look at is the median price versus the California unemployment rate:

What you’ll notice almost perfectly is the unemployment rate dropping sharply right at the peak of the bubble.  Right when the bubble burst, you see unemployment rising sharply.  So what came first, high unemployment or the peak price?  No need for a chicken or egg debate but let us point out the obvious.  First, you’ll notice that once the plateau of peak prices was reached it stayed high into 2007.  Unemployment started creeping up in 2006.  Why?  Well many builders were getting out of dodge while the going was good while many people were still pretending they lived in Wonderland hoping a borrower would jump into the rabbit hole and pay their outrageous price.

This above chart is crucial since the trend is almost perfect now.  That is, higher unemployment will lead to lower prices.  That is normally how housing markets play out during tough times.  This case is unique in that California built an industry around this bubble with construction, finance, home building, equity withdrawals, and industries that catered to the housing bubble.  Now that the bubble is gone there isn’t enough other jobs in the non-bubble economy to absorb these people back.  That is why I just don’t see how California gets out of this bubble until 2011.  Maybe nationwide we may see a price bottom in 2009 or 2010 but certainly not for us.

The above charts paint a rather clear picture of the longer term trend.  But how are things today?  Well let us look at the current market snapshot:

This next chart has data from September of 2007.  You’ll notice an upsurge in July of 2008 but you should ignore that because I added San Diego county distress sales at this point.  However, the trend is unmistakable.  Inventory is falling and distress sales are rising.  The only reason you have seen then taper off recently again is because of the legislation.  But even then, you can see how tiny this is even when it is simply pushing problems 1 or 2 quarters away.

This chart also shows that psychologically those that do not need to sell are pulling their homes off the market.  Why in world would you sell right now?  This is a horrid market.  Yet, waiting until a few months down the road you may actually lose even more.  Think of it this way.  The chart with price above shows massive gains since 2000.  That is across all counties.  A high percentage of people that own bought before this time so they would still make a profit today.  Now you have people willing to wait hoping next summer the bubble makes a triumphant return.  Or you can sell now.  This chart above tells you one major thing.  Many think they’ll be able to get higher prices tomorrow.  Yet distress properties keep hitting the market because these are forced sales.

I hope the above gives you a deep perspective of Southern California and hopefully provides you some insight in where we are heading.  We haven’t seen this kind of economic turmoil since the Great Depression so it is hard to say when we will bottom out.  Yet one thing is certain and that is we are going to go down in the history books for generations to come right next to those beautiful tulip bulbs.

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Post from: Dr. Housing Bubble Blog

The Rise and Fall of the Southern California Housing Empire: Foreclosures, Bad Investments, and Psychological Deception.

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Related Posts:
■Foreclosures? Housing Bubble? In Southern California? Impossible!
■Short Sale Report Volume 3: Another Week and Another Record. SoCal Short Sales up over 12,000.
■Think Housing Can’t Go Down Significantly in Southern California?
■Southern California Housing Report: New Housing Motto: Foreclosure Data is so Bad, it has to be Good! Median Price Down 31% to $348,000.
■Foreclosures jump statewide by 40% in California in just one quarter! Welcome to California’s Gold!

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