Upside Down

by Larry Levin



Housing is a very large part of the US economy so when housing reports are released, people tend to pay attention. Increasing housing starts equate to a great deal of economic activity some of which would include; construction labor of all types, heavy equipment sales, wiring, lumber, concrete, paint, appliances, carpet, furniture, legal advice, as well as support staff for the aforementioned groups. Clearly, when this sector of the economy stagnates, it gets people’s attention.

Up to this point, however, there hasn’t been a major nationwide housing recession. Because it hasn’t happened before doesn’t mean it cannot happen, yet that was the delusion that ran rampant from Main Street to Fraud Street. Otherwise extremely intelligent people actually thought that their home would go up in value, perhaps at 15% per annum....FOREVER. Main Street wanted to “get rich quick” while Fraud Street was willing to give anyone who could fog a mirror insane amounts of money to buy an overvalued home.

Of course the latter wanted to keep getting rich, but for Fraud Street it was in the form of fees and securitization. Reality has set in on Main Street and Fraud Street, but not in Washington DC. The average Joe bought too much house and is now “upside down” in his mortgage, owing more than the home is worth. With the help of the leeches that are continually reelected in Congress, Fraud Street doesn’t have to recognize its mortgage portfolios being “upside down:”

Fraud Street is allowed to legally use “make-it-up-as-you-go-along accounting, which allows them to keep the bonuses coming. Almost everyone reading this knows the score, but did you know just how far “upside down” the US mortgage holder is? A recent report by First American CoreLogic puts the number at 11.3 million homeowners, which is nearly 25% of all Americans who rent from their bank - excuse me - who have a mortgage.

That’s right, nearly one-quarter of mortgages are underwater, or upside down, while more than 10% of people with mortgages owe a staggering 25% more than their home is worth. The report goes on to read that once a homeowner owes 25% more than the house is worth, foreclosure rates rise sharply, and negative equity exceeded 25% in six states and topped 20% in six others.

To be sure, it is a sad state of affairs but let’s get real folks; trees do not grow in to the sky, NASDAQ stocks with no revenue are not worth $100/share (1999 anyone?), money doesn’t grow on trees (except in the Federal Reserve courtyard), and housing prices do NOT go up forever. The bad debt must be cleared - it must default - and that includes the scumbag bankers who hustled individuals, institutional investors, and even sovereign nations, to buy their CDOs, etc.

But what have the intelligencia of Washington DC done instead? You know that score too: massive bank bailouts, massive homeowner financial help that gets gobbled up by bureaucracy, Fannie & Freddie quasi-nationalization, HAMP, and the Federal Reserve buying over $1 TRILLION in FNM/FRE debt.

It has not worked. But does that stop the self important intelligencia from doubling its efforts? Of course not, they’re nearly brain dead. In fact, I fully expect QE 2.0 soon after the Fed ends the original QE (quantitative easing) program. Before QE 2.0 is started and the printing press goes into maximum overdrive, however, president Obama’s staff has recently suggested an amazing idea: home foreclosures will be illegal.

Uh-huh…not allowed. Wow!

I guess since Obama’s foreclosure prevention initiative, announced one year ago, is a total failure; he’ll try this new route. That program was supposed to help 4 million Americans avert foreclosure, but has only modified 116,297 loans so far...2.9%. Since the HAMP program and TRILLIONS of dollars in GSE support hasn’t done a thing, I guess the next logical step is to just make it illegal. Right?

It’s not to simply let the market clear the debt on its own - the only thing that will work - no, it’s for even more government intrusion. Ok, ok, it’s not quite that straight forward but could be if the initial proposal fails. The proposal says that banks will not be allowed to foreclose on homeowners (temporarily illegal) until the mortgage holder goes through the government’s heretofore failed HAMP program. What then? Outright bans on home foreclosures probably won’t be out of the question.

According to Bloomberg, "The Treasury proposal would require all borrowers who are 60 or more days delinquent on their mortgage to be sought out for participation in HAMP. Mortgage companies would need to try to contact the borrower at least four times by phone and twice by certified mail over 30 or more days before going to foreclosure."

It’s terrible when anyone gets “upside down” on their mortgage, but this is not the answer. And this hot of the presses...the FHA’s own HARP program will be extended by another year, INCLUDING 125% loan to value mortgages. Federal Housing Finance Agency Acting Director Ed DeMarco today announced the extension of the Home Affordable Refinance Program, (HARP), a refinancing program administered by Fannie Mae and Freddie Mac, to June 30, 2011. The program is a key component of the Administration's Making Home Affordable Program announced last
February.

The HARP program expands access to refinancing for qualified individuals and families whose homes have lost value. The program was set to expire on June 10 of this year. "FHFA has reviewed the current market situation and the state of mortgage insurance availability and has determined that the market conditions that necessitated the actions taken last year have not materially changed," said DeMarco. "Accordingly, to support and promote market stability, and to encourage lenders and other mortgage market participants to fully adopt the HARP program, including the implementation of the October 2009 expansion of loan-to-value ratios (LTVs) to 125 percent, FHFA is authorizing the extension of HARP until June 30, 2011."

If it doesn’t work - try again with MORE fake money. If it doesn’t work, extend and pretend to 125% LTV ratios. It’s sickening, really. Next up, 100-year mortgages.



Previous Day's Trading Room Results:

Trade Date: 3/1/10

E-Mini S&P Trades*
(before fees and commissions):

1) OTF sell @ 12:33pm at 1113.00 = -1.25 (1 lot)

2) Algorithm positions (5)

3) "Reading the Tape" positions (6)...combined Secret’s, Algo, & "Reading the Tape" total...-5.75



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