KeNo's Housing and Economic Portal: Tuesday December 29 Housing and Economic stories

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TOP STORIES:

California's Debt May be a half a trillion dollars - (www.sacbee.com) Just days before Gov. Arnold Schwarzeneggerand legislators finalized a water package, including an $11.1 billion bond issue, state Treasurer Bill Lockyer warned them not to do it. California is already deeply in debt, Lockyer warned, has huge budget deficits and can't afford another big bond issue. "The days of blithely heaping more and more debt burden on the general fund are over – at least they should be," Lockyer said. The earmark-laden bond issue, the package's single most controversial element, raises an interesting question: Just how deeply in debt are our state and local governments? The answer: No one knows for certain, since debt is scattered through myriad agencies in many forms, but well over a half-trillion dollars is a fair estimate. Lockyer's warning pertained to the state's "general obligation debt," which currently stands at $59 billion, and there are an additional $50-plus billion in general obligation bonds that have not yet been sold. The biggest chunks of debt, however, are the unfunded obligations for pensions and health care of retired public employees. The latest annual pension report from the state controller covers 2006, when the unfunded liability was $64 billion. But since then, state and local pension funds have lost at least $150 billion on investments, so a reasonable estimate of today's unfunded liability is $200-plus billion. A state commission, meanwhile, says the state-local liability for retiree health care is about $100 billion. No one keeps complete data on local government general obligation debt, but it appears to be roughly the same as the state's, perhaps $50 billion, plus several billion dollars in debt incurred by local redevelopment agencies. There are tens of billions in specialized state debt, such as veteran home loan bonds, "securitization" of tobacco lawsuit proceeds, and budget deficit bonds. The interest that must be paid on all that state and local debt is probably an additional $100 billion, so we're already talking about well over $500 billion. Then there are the off-the-books debts incurred to paper over years of state budget deficits, such as speeding up tax collections that will have to be refunded later, postponing periodic payments to schools, making promises to schools about levels of future financing, borrowing money from special funds and taking local government funds that must be repaid later. The state's unemployment insurance fund, meanwhile, is about $7 billion in the red, and that deficit is expected to more than double in the next year and quadruple by the end of 2011. The state has been borrowing from the federal government, but sooner or later it will have to repay the feds, probably by taxing employers. Conservatively, then, California is probably more than $600 billion in debt. Perhaps we shouldn't sweat another $11.1 billion. Or perhaps it will be the straw that breaks our back.

If You Thought the Housing Meltdown Was Bad - (www.escapefromamerica.com) …wait until you see what’s in the cards for commercial real estate. That’s right, the next train wreck will be in commercial real estate. Couldn’t be worse than last year’s residential market crash? That remains to be seen. But it’s coming soon, probably as early as the second quarter of next year, and there’s nothing that can prevent it. The government will intervene, trying desperately to delay the day of reckoning, and may even succeed. For a while. But make no mistake about it, that train is going off the tracks no matter what. Every part of the sector – from multifamily apartment buildings to retail shopping centers, suburban office buildings, industrial facilities, and hotels – has accumulated a huge amount of defaulted or nonperforming paper. It’s an impossible, swaying structure that cannot long stand. Just ask Andy Miller. Andy is one of the most knowledgeable people around when it comes to commercial real estate. Co-founder of the Miller Fishman Group of Denver, he has spent twenty years buying and developing apartment communities, shopping centers, office buildings, and warehouses throughout the country. He’s also worked extensively – especially lately – with asset managers and special servicers (those who handle commercial mortgage-backed securities, or CMBS) from insurance companies, conduits, and the biggest banks in the U.S., advising them on default scenarios, helping them develop realistic pricing structures, and making hold or sell recommendations. It isn’t easy. Commercial real estate sales are off a staggering 82% in 2009, compared with 2008, and last year was worse than ’07. No one is selling at depressed prices, but it hardly matters as there are no buyers, either because they’re afraid of the market or can’t meet more stringent loan requirements. Two years ago, the value of all commercial real estate in the U.S. was about $6.5 trillion. Against that was laid $3-3.5 trillion in loans. The latter figure hasn’t changed much. But the former has sunk like a bar of lead in the lake, so that now between half and two-thirds of those loans will have to be written down, Andy estimates. “If the banks had to take that hit all at once, there wouldn’t be any banks,” he says. And it’s actually worse than that. As even average citizens became aware during the subprime meltdown, loans in recent years were bundled into exotic financial vehicles that could be sold and resold, a class generically known as conduits. These commercial mortgage-backed securities, while less well known than their cousins built upon home loans, are nonetheless ubiquitous.

Geithner: "none ... would have survived" - (www.blogs.reuters.com) Secretary Geithner acknowledges what most doomsdayers were saying last fall, that without the government’s extraordinary rescue measures, the entire financial system was on the verge of collapse. (Miller/Harper, Bloomberg) “None of [the big Wall Street insitutions] would have survived” had the government stood aside and let the crisis run its course, he said. “The entire U.S. financial system and all the major firms in the country, and even small banks across the country, were at that moment at the middle of a classic run, a classic bank run.” Some have said this recent financial crisis wasn’t as bad as the 1930s’. I disagree, and have posted the following chart to make the point. If you add JP Morgan and Wells Fargo to the chart, it looks much worse. Goldman and Morgan Stanley don’t have deposits, but did have $2 trillion in liabilities between them as of August 31, ‘08. Geithner made his point when asked about Blankfein and Gary Cohn’s comments to Bethany McLean that Goldman would have survived without government help. They need to tell themselves that to justify the stupendous compensation accruals they’ve put aside. It’s helpful that Geithner calls bull. But the right way to fix this isn’t to erect some clumsy compensation apparatus to control pay on Wall Street (which won’t affect Goldman anyway because they don’t qualify as having received extraordinary assistance). The right way is to let them fail, as messy as that would be. Additional resolution authority as envisioned in House/Senate legislation is helpful, but won’t do much good unless the size/complexity of these banks can be reduced dramatically before they’re on the verge of collapse…

Banks Take Losses on Short Sales as Foreclosures Soar - (www.bloomberg.com) Drew Schlosser tried for two years to sell his three-bedroom Punta Gorda, Florida, waterfront condominium for less than he owed on its two mortgages. The deal only went through last month when Wells Fargo & Co. agreed to take a $165,000 loss on the loans. Even after he had an offer of $155,000 for the property, it took five months for the San Francisco-based lender to approve the purchase, a so-called short sale, in which the bank accepts less than the balance owed on a property. Schlosser said earlier offers had fallen through as bidders lost faith the bank would take less than the $320,000 in two mortgages. “It was just kind of a mess,” said Schlosser, 31, a market research company director living in Estero, Florida. “You really have to get buyers who are patient.” Banks are beginning to go along with short sales in increasing numbers, three years into a U.S. housing slump that pushed the economy into a recession and cut resale values by 30 percent from the peak in July 2006. Short sales almost tripled to 40,000 in the first six months of 2009 from the same period a year earlier. Yet for each short sale, there were 25 foreclosures started or completed in the first half of this year, according to data from the Office of Thrift Supervision and the Office of the Comptroller of the Currency. “It’s really finally dawning on banks that they’re better off with a short sale,” said Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles. “I think banks were in denial.” Obama Pressure: Wells Fargo, Bank of America Corp. and JPMorgan Chase & Co. this year have hired and trained more staff, developed software systems for expediting short sales, and increased marketing of short sales to delinquent borrowers. Banks are increasing such sales under pressure from the Obama administration and lawmakers who criticized them for favoring foreclosures and delaying short sales, Green said. Lenders and loan servicers also stand to receive up to $2,000 in incentives to close short sales under a Treasury Department plan unveiled Nov. 30.

Why Didn't Canada's Housing Market Go Bust? - (www.clevelandfed.org) Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust. Despite their many points of similarity, housing markets in the United States and Canada have fared quite differently since the onset of the financial crisis. Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. As a result, observers such as The Economist have pointed to Canada as “a country that got things right.” The different housing market outcomes in Canada and the U.S. can tell us something about the underlying causes of the housing boom and subsequent bust. In particular, they can be used to evaluate the roles that low interest rates and relaxed lending standards played in the boom and bust. Some observers blame monetary policy for lowering interest rates over 2002–2005, pushing up housing demand, increasing residential investment, and raising housing prices. In this view, the monetary-policy-induced housing boom thus set the stage for an inevitable housing bust.

Others contend that relaxed lending standards, highlighted by the rise in subprime lending, played a critical role. This loosening of standards led to an increase in housing demand, as mortgages were issued to households that were likely to have trouble making the mortgage payments. This extension of credit to risky borrowers helped fuel a housing boom and set the stage for the resulting surge in defaults, which were a big factor in the housing “bust.” The Canada and U.S. housing market comparison suggests that relaxed lending standards likely played a critical role in the U.S. housing bust. Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust. A likely candidate is cross-country differences in the structure and regulation of subprime lending markets. That mortgage delinquencies began to climb before the recession in the U.S. but only began to rise recently in Canada (after the economic slowdown began), points to the significance of those structural and regulatory differences in explaining the U.S. housing crash.

Canada has no mortgage interest deduction - (www.theglobeandmail.com) Canada is doing much better than the United States today on many fronts. The latest indicator came today in the form of unemployment data. U.S. payrolls shrank, albeit by significantly less than expected, while Canadian employers added 79,000 positions. Some of the differences between the two countries may be attributable to plain good luck, but without question policy makers here have made some better calls than those in the U.S. in recent years. U.S. experts are now asking 'why?' In the matter of real estate, we know that the Canadian financial system has proved superior. The Federal Reserve Bank of Cleveland has just published a paper trying to pinpoint the key differences. The report is an interesting read on what was done differently in the two countries. Thanks to David Rosenberg at Gluskin Sheff + Associates for drawing attention to it. “Monetary policy was very similar in both countries from 2000 to 2008, but housing prices rose much faster in the U.S. than in Canada. This suggests that some other factor both drove the more rapid appreciation in U.S. prices and set the stage for the housing bust. A likely candidate is cross-country differences in the structure and regulation of subprime lending markets. That mortgage delinquencies began to climb before the recession in the U.S. but only began to rise recently in Canada (after the economic slowdown began), points to the significance of those structural and regulatory differences in explaining the U.S. housing crash.”

OTHER STORIES:

Raw Story: Senators Team Up to Block Bernanke (Where are the Democrats?) - (www.rawstory.com)

US Retail Sales off to Slow Start - (finance.yahoo.com)

Bernanke's statement on Social Security: "It's only mandatory until Congress says it's not mandatory." Also applies to the Fed. 'Doh! - (www.huffingtonpost.com)

Don't Buy a House Yet - (www.realestate.yahoo.com)

Foreclosures: Filings up 50 percent in Fort Morgan, CO - (www.fortmorgantimes.com)

Uptick In Suburban Chicago Foreclosure Filings - (www.journal-topics.com)

Walking away makes sense - (www.sfgate.com)

Quarter of borrowers in anti-foreclosure plan are behind - (www.washingtonpost.com)

Nothing Down Flamed the California Real Estate Bonfire - (www.doctorhousingbubble.com)

FDIC Fire Sale! 11 Houses For Under $10,000 - (www.huffingtonpost.com)

Why Treasury Needs a Plan B for Mortgages - (www.nytimes.com)