03/02/2012 archive

Despite what you hear about the economic growth, that silver lining is lightening. The negative equity in residential housing increased in the last quarter of 2011. In other words, 22.8% of all homes in the US are worth less than than they were when purchased. As per Core Logic that is an increase of 10.7 million homes, an increase of 0.7% from the third quarter.

CoreLogic … today released negative equity data showing that 11.1 million, or 22.8 percent, of all residential properties with a mortgage were in negative equity at the end of the fourth quarter of 2011. This is up from 10.7 million properties, 22.1 percent, in the third quarter of 2011. An additional 2.5 million borrowers had less than five percent equity, referred to as near-negative equity, in the fourth quarter. Together, negative equity and near-negative equity mortgages accounted for 27.8 percent of all residential properties with a mortgage nationwide in the fourth quarter, up from 27.1 in the previous quarter. Nationally, the total mortgage debt outstanding on properties in negative equity increased from $2.7 trillion in the third quarter to $2.8 trillion in the fourth quarter.

“Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011. The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology. The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline. While the economic recovery will reduce the propensity of the inability to pay trigger, negative equity will take an extended period of time to improve, and if there is a hiccup in the economic recovery, it could mean a rise in foreclosures.” said Mark Fleming, chief economist with CoreLogic.

h/t Calculated Risk

And there is no relief in site for the vast majority of these homeowners, not even from the Foreclosure Settlement, as the Brookings Institution points out:

First, the borrower must be underwater, meaning owing more in mortgage debt than the house is worth. According to CoreLogic, there are 11.1 million underwater borrowers. Second, loans backed by Fannie Mae or Freddie Mac are not eligible for the principal reduction. According to analysis by the Federal Reserve of data from LPS Applied Analytics and CoreLogic, as of December, 14.1 percent of Freddie Mae loans were underwater and 11.3 percent of Fannie Mae loans were underwater. Taking the midpoint, and assuming there are 26 million Fannie or Freddie loans (about half of the number of existing loans), then there are approximately 3.3 million Fannie and Freddie underwater loans, bringing us to 7.8 million remaining borrowers eligible for the principal reduction. Third, the borrower must be delinquent or facing imminent default to qualify for the principal reduction. According to the Federal Reserve (PDF), approximately 28 percent of underwater borrowers are not current on their payments, bringing us to 2.2 million remaining borrowers. Third, the agreement is with the five largest mortgage servicing banks. According to Inside Mortgage Finance, the five banks service 55 percent of all loans, bringing us to 1.2 million remaining borrowers. Fourth, only owner-occupied homes are eligible. According to CoreLogic, 82 percent of underwater borrowers are owner occupied, bringing us to 1 million remaining borrowers.

There is another complication, in that some of these loans are held on the banks’ balance sheets, and others are part of mortgage-backed securities owned by outside investors. For the latter, the banks are contractually obligated to minimize losses to the investors, meaning it is unlikely they can reduce principal on these loans without facing the ire (and possible lawsuits) from the investors. Department of Housing and Urban Development Secretary Donovan acknowledged this problem by suggesting that the banks will target the principal reductions to the loans that they hold on their balance sheets. According to CoreLogic, about 41 percent of underwater borrowers had home equity loans, which typically are held on banks balance sheets. So even if these borrowers’ first loans do not qualify for a principal reduction, their second loans – which represent the bulk of their negative equity – do. Also according to CoreLogic, about 9 percent of underwater borrowers had no second loan and had their first loan held on banks’ balance sheets. Applying this 50 percent leaves us an estimate of 500,000 loans eligible for the principal reduction.

That’s just half of the homes the settlement was supposed to help. Thanks, Barack

h/t David Dayen at FDL News Desk

“Punting the Pundits” is an Open Thread. It is a selection of editorials and opinions from around the news medium and the internet blogs. The intent is to provide a forum for your reactions and opinions, not just to the opinions presented, but to what ever you find important.

Thanks to ek hornbeck, click on the link and you can access all the past “Punting the Pundits”.

Paul Krugman: Four Fiscal Phonies

Mitt Romney is very concerned about budget deficits. Or at least that’s what he says; he likes to warn that President Obama’s deficits are leading us toward a “Greece-style collapse.”

So why is Mr. Romney offering a budget proposal that would lead to much larger debt and deficits than the corresponding proposal from the Obama administration?

Of course, Mr. Romney isn’t alone in his hypocrisy. In fact, all four significant Republican presidential candidates still standing are fiscal phonies. They issue apocalyptic warnings about the dangers of government debt and, in the name of deficit reduction, demand savage cuts in programs that protect the middle class and the poor. But then they propose squandering all the money thereby saved – and much, much more – on tax cuts for the rich.

New York Times Editorial: A Bad Amendment Defeated

Only one Senate Republican – Olympia Snowe of Maine, who is retiring – voted against a truly horrible measure on Thursday that would have crippled the expansion of preventive health care in America. The amendment, which was attached to a highway bill, was defeated on a narrow 48-to-51 vote. But it showed once again how far from the mainstream Republicans have strayed in their relentless efforts to undermine the separation of church and state, deny women access to essential health services and tear apart President Obama’s health care reform law.

The amendment, which was enthusiastically endorsed by Mitt Romney and Rick Santorum, would have allowed any employer or insurance company to refuse coverage for any activity to which they claim a religious or moral objection.

That would have meant that any employer who objects to cervical-cancer vaccines could have refused to provide health insurance that covers them. The same goes for prenatal sonograms for unmarried mothers, or birth control, H.I.V. screening or mammograms.

Officials Rule No Payout on Greek Swaps

By PETER EAVIS, The New York Times

March 1, 2012, 8:24 am

During the financial crisis of 2008, derivatives contributed to the mess. Banks feared that their trading partners might not make good on their obligations, a situation that panicked the markets and nearly brought the financial systems to its knees.

As part of Greece’s restructuring, bondholders will be required to take a 70 percent loss on their holdings. When first announced, the deal was proposed as a voluntary exchange, which would not have activated the credit-default swaps.

But in recent weeks, Greece has prepared to require all private bondholders to accept the losses through legal means. This would make the exchange involuntary and almost certainly set off the swaps.

…

One question the process faces is whether committee members will vote according to their economic interest. Many of the banks on the committee have recently reported substantial exposure to swaps on Greek government bonds. For instance, Barclays, which voted against swaps activation on Thursday, had sold default protection on $5.92 billion of swaps on Greek debt, and bought $5.81 billion of protection, as of Sept. 30 last year, according to the European Banking Authority.

…

Even so, the ruling – and the prospect that Greece could default without activating the swaps – could reignite the debate about the usefulness of the financial instruments. If borrowers can structure defaults to circumvent swaps payouts, investors may see the swaps as unreliable.

“The market has been harmed by people playing games to avoid events that would be covered by the insurance,” said John Sprow, chief risk officer at Smith Breeden Associates, a fund management firm.

As Felix Salmon points out, this could very well destroy the Credit Default Swap Market-

Understanding Greece’s default

By Felix Salmon, Reuters

March 1, 2012

At the WSJ, for instance, the news story on today’s official ISDA determination (“Greek Deal Won’t Trigger CDS Payouts, Panel Says”) is bad; the blog post about it by Charles Forelle (“ISDA’s Greek Ruling Not the Last Word”) is very good.

And in Europe, the range of sophistication within policymaking circles is even greater. At the lowest, most basic level, one finds a feeling that it’s a Bad Thing if a European sovereign nation were ever to default, and so therefore it would be a good thing if the bond exchange was organized so that there was no official market determination of default. (Never mind that Greece is already in selective default on its bonds, according to S&P.)

At a slightly higher level of sophistication one finds the short-sellers-are-bad crowd, who don’t like CDS because they allow hedge funds to easily bet against countries. If the messy Greek CDS situation helps to reduce the amount of trust that the markets have in sovereign CDS generally, then so much the better, on this view.

And then, finally, there’s Peter Eavis’s conspiracy theory: if the Greek bond exchange goes really smoothly, and the sun rises in the morning and Italian bond yields stay below 5%, then maybe that’s the most worrying outcome of all. Because at that point Greece will have managed to wipe out, at a stroke, debt amounting to some 54% of GDP. You can see how Portugal and Ireland might be a little jealous. You don’t want to make sovereign default too easy – not least because it would do extremely nasty things to European banks’ balance sheets.

That said, Greece has now broken the sovereign-default taboo; many countries both inside and outside Europe have way too much debt; and now that debt relief is an option for politicians to seriously consider, it’s pretty much certain that at some point another European government will end up choosing that option.

How Greece’s default could kill the sovereign CDS market

By Felix Salmon, Reuters

February 29, 2012

In the best-case scenario for Greece and Europe and bondholders, every €1,000 of old Greek bonds will get converted to new bonds with a face value of just €315. Those bonds will probably trade at about 30% of face value, which means the new-Greek-bond component of the exchange will be worth about 10 cents for every dollar in face value of old Greek bonds that you might currently hold. Add in another 15 cents of EFSF bonds, and the total value of the exchange will be about 25 cents on the dollar, which is why people are talking about a 75% “present value haircut”.

…

The way that CDS auctions are meant to work is that once a borrower defaults on its debt, that defaulted debt continues to be traded in the market, and its value then determines the amount that credit default swaps need to pay out. But in this case, Greece’s defaulted debt might well not continue to be traded in the market. In which case, when traders need to find a cheapest-to-deliver bond to bid on in the CDS auction, they’re going to have to use one of the new bonds, rather than one of the old ones.

…

In other words, Greece’s CDS really aren’t protecting holders of Greek bonds at all – or if they do, it’s more a matter of luck than of law. When they get paid out on their CDS holdings, people owning protection against a Greek default won’t get paid according to how much money they lost on their old bonds. Instead, they’ll get paid according to the nominal price of the new bonds.

What this means is that the CDS architecture is broken, and can’t cope with collective action clauses. And as a result, according to the hedge fund manager who tipped me off to the whole problem, “this Greece CDS imbroglio might be the final blow for sovereign CDS as a product.”

…

The whole point about credit default swaps is that they’re meant to behave in a predictable manner in the event of default; one thing we know for sure about Greece is that the behavior of its CDS is going to be anything but predictable. We don’t even know for sure whether they’ll be triggered, let alone what they’ll be worth if and when they are.

Now there are a lot of people, among them European policymakers, who would actually be quite happy if the Greek default killed off the sovereign CDS market as a side effect. But I actually believe that sovereign CDS, when they work, are rather useful things. It’s just that Greece is having the effect of showing that they don’t necessarily work. And if you can’t be sure that they’ll work when triggered, there’s really no point in buying them at all.

Since a majority of CDSes are issued by banks and they collect substantial fees for them, they may have just killed off the goose that lays their golden eggs.

This is your morning Open Thread. Pour your favorite beverage and review the past and comment on the future.

Find the past “On This Day in History” here.

March 2 is the 61st day of the year (62nd in leap years) in the Gregorian calendar. There are 304 days remaining until the end of the year.

On this day in 1836, the Republic of Texas declares its independence as in a nation from Mexico.

Formed as a break-away republic from Mexico by the Texas Revolution, the state claimed borders that encompassed an area that included all of the present U.S. state of Texas, as well as parts of present-day New Mexico, Oklahoma, Kansas, Colorado, and Wyoming based upon the Treaties of Velasco between the newly created Texas Republic and Mexico. The eastern boundary with the United States was defined by the Adams-Onís Treaty between the United States and Spain, in 1819. Its southern and western-most boundary with Mexico was under dispute throughout the existence of the Republic, with Texas claiming that the boundary was the Rio Grande, and Mexico claiming the Nueces River as the boundary. This dispute would later become a trigger for the Mexican-American War, after the annexation of Texas by the United States.

Establishment

The Republic of Texas was created from part of the Mexican state Coahuila y Tejas. Mexico was in turmoil as leaders attempted to determine an optimal form of government. In 1835, when President Antonio Lopez de Santa Anna abolished the Constitution of 1824, granting himself enormous powers over the government, wary colonists in Texas began forming Committees of Correspondence and Safety. A central committee in San Felipe de Austin coordinated their activities. In the Mexican interior, several states revolted against the new centralist policies. The Texas Revolution officially began on October 2, 1835, in the Battle of Gonzales. Although the Texians originally fought for the reinstatement of the Constitution of 1824, by 1836 the aim of the war had changed. The Convention of 1836 declared independence on March 2, 1836, and officially formed the Republic of Texas.

I know it’s very bad form to quote one’s own reviews, but I would like to mention something that The New York Times said about me a year ago which I’ve always treasured — they said:

Mr. Lehrer’s muse is not fettered by such inhibiting factors as taste.

Now we come to that peculiar bit of americana known as the football fight song. I was reminded not too long ago, upon returning from my lesson with the scrabble pro at the Harvard Club in Boston, in the days of my undergraduacy long ago when there used to be these very long Saturday afternoons in the fall with nothing to do — the library was closed — just waiting around for the cocktail parties to begin. and on occasions like that, some of us used to wander over to the… I believe it was called the stadium, to see if anything might be going on over there. and one did come to realize that the football fight songs that one hears in comparable stadia have a tendency to be somewhat uncouth, and even violent, and that it would be refreshing, to say the least, to find one that was a bit more genteel. And here it is, dedicated to my own alma mater, and called Fight Fiercely, Harvard.

What do we really know about the Saudi Arabian government’s involvement with the 9/11 attacks? We know that Osama bin Laden was Saudi, a member of a very wealthy family with close ties to the Bush family. We know his family denounced him and he was banished by the Saudis in 1992. we know that 15 of the 19 hijackers were citizens of Saudi Arabia. We know that the bin Laden family was allowed to leave the US after airspace had been re-opened but none of the family members were ever questioned by the FBI. That’s not a lot.

There has always been some speculation that the Saudi government, or at least some prominent members of the government, had some involvement with the attacks. It was dismissed out of hand as “conspiracy theory” and even in some parts of the left wing blogosphere, a banned topic. Now, two former US Senators have broken their silence on their high level of suspicion that the Saudi government had some direct involvement with the 9/11 attack:

For more than a decade, questions have lingered about the possible role of the Saudi government in the attacks on Sept. 11, 2001, even as the royal kingdom has made itself a crucial counterterrorism partner in the eyes of American diplomats.

Now, in sworn statements that seem likely to reignite the debate, two former senators who were privy to top secret information on the Saudis’ activities say they believe that the Saudi government might have played a direct role in the terrorist attacks.

“I am convinced that there was a direct line between at least some of the terrorists who carried out the September 11th attacks and the government of Saudi Arabia,” former Senator Bob Graham, Democrat of Florida, said in an affidavit filed as part of a lawsuit brought against the Saudi government and dozens of institutions in the country by families of Sept. 11 victims and others. Mr. Graham led a joint 2002 Congressional inquiry into the attacks.

His former Senate colleague, Bob Kerrey of Nebraska, a Democrat who served on the separate 9/11 Commission, said in a sworn affidavit of his own in the case that “significant questions remain unanswered” about the role of Saudi institutions. “Evidence relating to the plausible involvement of possible Saudi government agents in the September 11th attacks has never been fully pursued,” Mr. Kerrey said.

The sworn affidavits are part of a lawsuit against the Saudi Arabian government by some of the 9/11 families. Lawyers representing the Saudis, who have so far unsuccessfully tried to have the litigation dismissed, are trying to have the two statements suppressed. Neither the Saudi’s lawyers or the US State Department have commented on this revelation. Both Mr. Kerrey and Mr. Graham do not think that the 9/11 Commission’s conclusion that there was no evidence of Saudi support for Al Qaeda simply because evidence that they had was never fully investigated. What many have been saying all along, now has credibility.

Glenn Greenwald at Salon (h/t for the Scwartz tweet) observed:

Meanwhile, the U.S. in just the last three years alone – in the name of 9/11 and Terrorism – has dropped bombs on at least six Muslim countries whose governments had no connection whatsoever to 9/11 (often aimed at groups that did not even exist at the time of that attack). And now Washington is abuzz with exciting debates about the mechanics of how yet another country that had nothing whatsoever to do with 9/11 – Iran – should be aggressively attacked. As Jonathan Schwarz put it when the U.S. and the Saudis collaborated to depict the “Quds Forces plot” on U.S. soil as the latest proof of Persian aggression: “The funny thing is I’d bet the Saudi ambassador to the U.S. has closer ‘ties’ to Al Qaeda than 90% of the people we’ve killed with drones.” In sum, 9/11 has absolutely nothing to do with virtually all of the policies the U.S. has since undertaken in the name of Terrorism: except that it is exploited to justify them all.

I am not advocating that the United States bomb Saudi Arabia, that would exacerbate the current hatred of America beyond all imagination. What need to be done is a full investigation of the Saudi involvement and I’m sure that the Obama administration will intervene to block the 9/11 families’ lawsuit. That said, American’s still deserve to know the truth.

Good job, Barack