KeNo's Housing and Economic Portal: Wednesday December 2 Housing and Economic stories

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TOP STORIES:

High costs drive major trade show out of Chicago - (www.wbbm780.com) Chicago ditched. Tens of thousands of outsiders say it's too expensive to spend their money here; $52 million would have been pumped into our economy by some 28,000 visitors. Instead, a major trade show says it's leaving Chicago behind for good. This week, CBS 2 reported on outrage over the hundred dollar case of Pepsi. Exhibitors feeling ripped off. Threatening not to come back. Now, it's happened. McCormick Place electricians were the straw that broke the camel's back for one Chicagoan who says he reluctantly said "no" to bringing his convention back home. The Tribune reports the Healthcare Information and Management Systems Society, which held its annual meeting at McCormick Place for the first time in April, is taking its 2012 show to Las Vegas instead. Healthcare Information and Management Systems CEO Steve Lieber told CBS2 it's all because of the electricians. "This was the only reason why," Lieber said. It was a painful decision for the Chicago-based trade association, whose first trip here for its annual convention impressed its members, until they got the electricians' bills. "Our costs were about $200,000 more," said Lieber. "So it went from $40,000 to $240,000 for the electrical work alone." At McCormick Place on Wednesday, another trade group was wrapping up its show. It was a smaller convention, showcasing products to help aging seniors continue to lead independent lives. It's worth it to be in Chicago, organizers said, despite the higher cost. "To do something that takes one person," said Vice President Sharon Sullivan of the American Association of Homes and Service for the Aging, "...it's taking three people and that's expensive." It is a criticism Maribel Hopgood says the Metropolitan Pier and Exposition Authority is dealing with. "Any circumstance which would prevent attracting business into the city of Chicago is of great concern," Hopgood said. The city got the word Wednesday that the huge medical convention wouldn't return. They're also sweating out a decision by an even bigger show. The International Plastics Showcase has been in Chicago since 1971, but now a spokesman says: "We are looking at other options."

FHA’s Reserve Ratio Dives to 0.53% after ‘Significant’ Loss – (www.housingwire.com) Due to “significant losses” on mortgages closed before this year, the Federal Housing Administration’s (FHA) capital reserve ratio plummeted below the congressionally mandated 2% threshold, according to an actuarial study of FHA’s fiscal strength. Under “most” economic conditions modeled in the actuarial study, the capital reserve ratio would remain above zero, FHA said. The capital reserve ratio, which measures the reserves held in excess of what is needed to cover projected default-related losses over the next 30 years, now stands at 0.53% of total insurance-in-force as of September, compared with 3% in fall of 2008. These funds, held in the FHA’s Capital Reserve Account, are in excess of the funds held in the Financing Account to cover the “base case ” projection of capital needed to cover default-related losses on existing loans over the next 30 years. Combined, these accounts hold $31bn — more than 4.5% of FHA’s total insurance-in-force. The decline this year in the capital reserve ratio is partially due to the need to reserve more funds for anticipated claim costs on the current portfolio — essentially accounting for more funds in the Financing Account and less in the Capital Reserve Account, according to a report to Congress by US Department of Housing and Urban Development (HUD) secretary Shaun Donovan. FHA’s capital resources grew from $27.2bn at the start of the fiscal year to $30.7bn at the end of the year. HUD attributed the growth to premium revenues collected on new insurance in fiscal year 2009 — a record year of new insurance commitments.

New Rules Let Banks Hide Commercial Loans - (Mish at globaleconomicanalysis.blogspot.com) Commercial real estate is blowing up so what do regulators do? The answer of course is to come up with new rules and regulations that will allow banks to ignore losses. On October 31 the Wall Street Journal reported Banks Get New Rules on Property. Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount. The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties." Restructurings are often in the best interest of both lenders and borrowers, the guidelines point out. The new guidelines are targeted primarily at the hundreds of billions of dollars worth of loans that are coming due that can't be refinanced largely because the value of the properties have fallen below the loan amount. In many of these situations, the properties are still generating enough income to pay debt service. Banks have generally been keeping a lid on commercial real-estate losses by extending these mortgages upon maturity. However, that practice, billed by many industry observers as "extending and pretending," has come under criticism by some analysts and investors as it promises to put off the pains into the future. Now federal regulators are essentially sanctioning the practice as long as banks restructure loans prudently. The federal guidelines note that banks that conduct "prudent" loan workouts after looking at the borrower's financial condition "will not be subject to criticism (by regulators) for engaging in these efforts." In addition, loans to creditworthy borrowers that have been restructured and are current won't be reclassified as "high risk" by regulators solely because the collateral backing them has declined to an amount less than the loan balance, the new guidelines state.

Trouble in the Land of the Rising Sun - (www.huffingtonpost.com) In a global financial system, the collapse or even perceived weakness of a large economy such as Japan would be catastrophic. And Japan is not doing well. For a while now it has been coasting towards a crisis, flirting with its own financial ruin. One way to measure what the market thinks about the risk inherent in Japan's financial instruments are Credit Default Swaps (CDS). They are insurance policies against Japan's possible default. A CDS on five-year Japanese debt have risen from 35 to 63 basis points since early September (meaning that to insure $10,000 worth of Japanese five year bonds, you recently had to pay $63). The fact that market participants are willing to pay significantly higher prices for insurance on Japan's fiscal strength is an important cautionary tale (for comparison, the price of insurance on Germany is 21 basis points; the U.S., 22). In 2009, Japan's budget deficit was 10% of GDP. Total government debt is close to 200% of GDP. Economic growth has been slow for years and previous stimulus plans have been failing. The Japanese pension funds have been selling assets to meet the needs of the country's retirees, as the demographic situation in Japan is not improving. The country is aging, and with no immigration to speak of and one of the world's lowest birth rates, the elderly workers are simply not being replaced. Typically, when a country's debt rises, interest rates it has to pay on that debt are rising as well. That makes intuitive sense: as the fiscal situation becomes more precarious, the odds of the government defaulting on its debt rise, and lenders require more compensation for their increased risk. But in Japan, the cultural phenomenon of robust saving habits created a situation where Japanese themselves buy most of their government's debt. That has driven interest rates down from 7.1% in 1990 to 1.4% today. Because prices have been declining, people accept low interest rates. And somehow, investors, at least so far, have not been fearful that their money might not be paid back. What would happen if they became fearful of that? Interest rate would skyrocket, further imperiling the Japanese economy. And taxes would have to go up, making economic growth even harder to achieve. Japan is walking down the same path other countries that have defaulted on sovereign debt have pursued before. Yet its interest rates are still low, and the Yen has risen about 10% over the last 12 months.

The Lie: Treas Sec Geithner reiterates "strong dollar" bullshit - (www.baltimoresun.com) The dollar edged up in trading against other currencies Thursday as the Chinese government appeared to signal that it may be willing to let the value of its currency rise. The United States and other countries would benefit from a rise in the value of the Chinese yuan because their exports would become cheaper for Chinese consumers to buy and could help stimulate their economies. The surprise announcement in a quarterly report from China's central bank came only days before a visit to China by President Barack Obama. If the Chinese did let their currency resume rising against the dollar, it would be a victory for the Obama administration. The administration is under political pressure to do more to battle unemployment in the United States. U.S. manufacturers contend that the Chinese yuan, which Beijing has effectively pegged to the dollar, is undervalued by up to 40 percent. This makes Chinese goods cheaper for consumers and businesses in the United States to buy. But it makes American products more expensive in China. U.S. companies argue that this disparity contributes to America's huge trade deficit with China, which hit a record $268 billion last year. The Chinese, under prodding from the Bush administration, had begun to let their currency rise in value against the dollar in mid-2005. But Beijing halted that rise in the summer of 2008, once the global economic crisis began to cut into its exports. The administration had said that Obama would raise the currency issue during his talks next week in Beijing with President Hu Jintao. On Thursday, the Chinese central bank said in a quarterly report that it planned to revamp the yuan exchange-rate process. It said it would do so by taking into account changes in other major currencies, not just the dollar. The report also omitted language it has used in the past that the goal was to keep the yuan "basically stable at a reasonable and balanced level." Many analysts saw these subtle changes as a hint that China was preparing to resume allowing the yuan to rise and had timed the announcement to occur right before Obama's visit. "It is kind of a welcoming gift for Obama," said Nariman Behravesh, chief economist at IHS Global Insight, a forecasting firm. "They are getting the markets prepared for the fact that they are going to be more flexible going forward, but it may not happen overnight."

Why Some Countries Are Stopping Their Stimulus - (www.time.com) In a global financial system, the collapse or even perceived weakness of a large economy such as Japan would be catastrophic. And Japan is not doing well. For a while now it has been coasting towards a crisis, flirting with its own financial ruin. One way to measure what the market thinks about the risk inherent in Japan's financial instruments are Credit Default Swaps (CDS). They are insurance policies against Japan's possible default. A CDS on five-year Japanese debt have risen from 35 to 63 basis points since early September (meaning that to insure $10,000 worth of Japanese five year bonds, you recently had to pay $63). The fact that market participants are willing to pay significantly higher prices for insurance on Japan's fiscal strength is an important cautionary tale (for comparison, the price of insurance on Germany is 21 basis points; the U.S., 22). In 2009, Japan's budget deficit was 10% of GDP. Total government debt is close to 200% of GDP. Economic growth has been slow for years and previous stimulus plans have been failing. The Japanese pension funds have been selling assets to meet the needs of the country's retirees, as the demographic situation in Japan is not improving. The country is aging, and with no immigration to speak of and one of the world's lowest birth rates, the elderly workers are simply not being replaced. Typically, when a country's debt rises, interest rates it has to pay on that debt are rising as well. That makes intuitive sense: as the fiscal situation becomes more precarious, the odds of the government defaulting on its debt rise, and lenders require more compensation for their increased risk. But in Japan, the cultural phenomenon of robust saving habits created a situation where Japanese themselves buy most of their government's debt. That has driven interest rates down from 7.1% in 1990 to 1.4% today. Because prices have been declining, people accept low interest rates. And somehow, investors, at least so far, have not been fearful that their money might not be paid back. What would happen if they became fearful of that? Interest rate would skyrocket, further imperiling the Japanese economy. And taxes would have to go up, making economic growth even harder to achieve. Japan is walking down the same path other countries that have defaulted on sovereign debt have pursued before. Yet its interest rates are still low, and the Yen has risen about 10% over the last 12 months.

OTHER STORIES:

A second Great Depression is still possible - (www.ft.com)

US risks following Japan's example of stagnancy - (www.google.com/hostednews/ap)

Barrick shuts hedge book as world gold supply runs out - (www.telegraph.co.uk)

Default On Mortgage, Get Unsolicited Loan Reduction Offer - (www.calculatedriskblog.com)

Portland foreclosure rate more than doubles in year - (blog.oregonlive.com)

Orange County foreclosure notices hit record 8,800 - (mortgage.freedomblogging.com)

Housing market still faces a big glut - (www.money.cnn.com)

Commercial Real Estate Crisis Looming for U.S. - (www.bloomberg.com)

10 states face looming budget disasters - (www.news.yahoo.com)

Fannie and Freddie Waste Taxpayer Money - (www.online.wsj.com)

Life on Severance: Comfort, Then Crisis - (online.wsj.com)