Not much time to post this past week, so here are some things that caught my eye along the way.
The emerging consensus seems to be that while the government can keep shooting bullets at the housing market for as long as they care to throw away tax payer dollars, their efforts are likely to produce the same sorry results that we’ve seen for the past couple of years. Therefore, why not just admit to reality, let prices find their own bottom and begin a sustainable recovery.
Tyler Cowen neatly sums up the problems with this approach:
Many smart people say we should. It seems increasingly clear that we must. For how long can the government prop them up? Are we never to have a private market in mortgages again?
Yet what happens if we let them fall? Arguably many banks would once again be “under water.” Enthusiasm for another set of bailouts is weak, to say the least. Our government would end up nationalizing these banks and it still would be on the hook for their debts. The blow to confidence would be a major one, especially if along the way we saw a recreation of a Lehman or Bear Stearns or A.I.G. episode.
I increasingly believe there is no easy way out of this dilemma and it is a major reason why the U.S. economy remains stuck. Housing prices must fall, yet…housing prices must not fall.
It would seem that if he is right then the only way out of the dilemma is to live with a dysfunctional housing market until such time as the banks have either slowly taken their losses or built up sufficient new capital and reserves to take the hit. Either way you set the larger economy up for years of sub par performance in order to “save” the banks yet again. So what else is new?
Yves Smith points to a potential problem with valid title to foreclosed properties. Seems that Wells Fargo is requiring borrowers who purchase its REO to sign an addendum that releases Wells from liability should the title conveyed in the transaction prove to be faulty. According to Smith and her sources, the foreclosing banks may well be selling property to which they have no valid title. The problem apparently involves incomplete documentation as a result of serial transfers of beneficial interest during the securitization process.
It’s an interesting proposition. One thought occurred to me after reading the article was what might be the implications for holders of second mortgages. If title was improperly conveyed and new owners interests not recorded, is it possible that second trust deed holders might in fact be in first position? There’s enough money on the table in supposedly worthless second mortgages to make it worthwhile for the legal profession to take a stab at finding a loophole, and if Yves is right that the chain of title is a hopelessly tangled plate of spaghetti, then that loophole probably exists.
The ever informative Diana Olick points out that the Fannie no money down mortgage is going to have a short life. This is the statement offered by Fannie’s regulator before Congress on Wednesday:
“This one got away from us. It was a miscommunication, and this agreement with these HFA’s was signed without my knowledge. When I learned about it after the fact, I reviewed what has been done. I saw that there was a legal contract with the HFA’s, and I made clear to Fannie Mae a couple of things: We are going to honor and respect that contract for its duration. It ends next March, and two, we are not doing this in the future. There were several other requests that had come into Fannie Mae from other parties for similar no down payment or very little down payment mortgages, and I said absolutely not, and so we have had nothing further on this. When this particular program with these HFA’s expire, it will not be renewed.”
Here’s my post on this program which I put up a couple of weeks ago. Olick finds it “mind-boggling” that given the monopoly the government has on mortgage finance they could let something like this get away from themselves. I couldn’t agree more, but at least they appear to be exercising some adult judgement in this case.
The WSJ reports that public and some private pension plans are convinced that the world we used to know is due for a comeback any day now.
Many of America’s largest pension funds are sticking to expectations of fat returns on their investments even after a decade of paltry gains, which could leave U.S. retirement plans facing an even deeper funding hole and taxpayers on the hook for huge additional contributions.
The median expected investment return for more than 100 U.S. public pension plans surveyed by the National Association of State Retirement Administrators remains 8%, the same level as in 2001, the association says.
The country’s 15 biggest public pension systems have an average expected return of 7.8%, and only a handful recently have changed or are reconsidering those return assumptions, according to a survey of those funds by The Wall Street Journal.
Corporate pension plans in many cases have been cutting expectations more quickly than public plans, but often they were starting from more-optimistic assumptions. Pension plans at companies in the Standard & Poor’s 500 stock index have trimmed expected returns by one-half of a percentage point over the past five years, but their average return assumption is also 8%, according to the Analyst’s Accounting Observer, a research firm.
Sigh. Is there anything else I need to say. Wait, there’s a couple other hidden gems in this article.
Mr. Smith (Washington state’s chief actuary) says he thinks Washington and other states eventually will lower expected returns, but that it will be a slow process because reduced assumptions “will increase the cost of pension benefits, and right now the budgetary environment is a big obstacle to that.”
So, the solution is to operate the state on false financial premises and hope you can make good on your promises at some future date. Talk about extend and pretend!
And then there’s this regarding the size of the problem:
Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor’s. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion.
I don’t know about you, but it seems to me that range of $500 billion to $1 trillion is a bit large. If that’s the best handle they have on their future liabilities then I would suggest to anyone planning to collect a public pension that they seriously consider developing job skills that will keep them employed well into their eighties.
Henry Blodget has an insightful piece about the prospects for inflation and deflation. He smartly points out that a good portion of the world is in the midst of a self-sustaining economic boom that is going to put continuing pressure on commodity prices, and includes this graph to sharply illustrate what’s going on:
Blodgett suggests that we may well see higher inflation as a result of this trend even as we suffer through below trend economic growth. In other words back to the Seventies. If you’re too young to remember them enjoy your ignorance while you can. It is not a pleasant sort of economic environment to live in.
Sorry, I know you’re up to your eyeballs in opinions on this one, but I can’t leave without throwing out a thought or two.
First, I don’t think the Obama team has any idea how badly these cute political ploys they seem enamored with play outside of Washington and New York. Yes, he might have the authority under the bill to appoint an interim director but it looks too slick to the rubes in fly over country. It just reinforces the image of an administration that seems willing to use just about any gimmick to get what they want.
Second, the few times I’ve seen Elizabeth Warren in action have impressed me. She seems bright and unafraid to take on the status quo. Probably, we could use more like her in government. But, when it comes to consumer protection she comes on like a true believer and I’m not at all sure we need that right now. The regulation of financial products is a new endeavor and is probably best approached in an incremental fashion. There are all sorts of secondary and tertiary consequences that will arise from new regs, so feeling our way through is not necessarily a bad approach. I don’t see that in Warren’t makeup and I don’t think she sees that as the mandate so far as the Left is concerned.
In my opinion, Obama marginalized her and she will have a hard time being taken seriously after the spotlight moves on. Some time next year she will probably pronounce her work done and the administration and new Congress will get about with choosing a permanent head of the agency they can both agree upon.
Finally, did Steve Jobs really have Ninja stars in his luggage? I want to believe that he did simply because we need more eccentric business people. I’m tired of reading about the sexploits of Ibankers. Those guys seem locked in some sort of college fascination with topless bars and groping associates. A few more nutcases like Howard Hughes would provide us all with some needed diversion. So, fess up to it, Steve, and we’ll love you for more than just great gadgets.