Federal Reserve | timiacono.com - Part 55

Writing in the New York Times, Catherine Rampell details in Boom, Bust, Flip how it is becoming clear to many average Americans just how skewed the financial system is to the rich and powerful in the world of finance as Wall Street’s bailout has allowed investors to buy and then resell at a profit homes of ordinary Americans who didn’t get a bailout.

Now that, in some cases, home prices have risen back to levels that would make foreclosed homeowners whole again (had they gotten a bailout), they’re on the outside looking in.

Tim and Jenni Earll didn’t have a lot of money saved up, but they’d seen enough of their friends buy homes to feel like fools for burning their cash on rent. So they took out a 30-year mortgage and bought a fixer-upper on a quiet street in Seattle’s Roxhill neighborhood for $309,900. That was in the spring of 2007.

Where's My BailoutTim and a cousin spent the next couple of years trying to build some “sweat equity” by redoing the electrical wiring, plumbing and landscaping, but when Jenni lost her administrative position, they had to delay the improvements. Soon after, Tim’s work at a glass company began petering out, too. Desperate to hold on to their house, they sought a loan modification, but by the end of 2010, the bank refused to refinance. The following summer, it foreclosed and auctioned off their home to AKA Investors L.L.C., which paid $155,000 in cash for the house.

Now, five years after the start of the financial crisis, the housing market has come back, and many of these investors are cashing in. According to tabulations by Redfin, an online real estate listings site, banks have already sold about 1.5 million of the nearly 2 million homes that were foreclosed on during the past half-decade. Resales are becoming more common and can be hugely profitable. A house in Redwood City, Calif., for instance, was sold in a foreclosure auction in 2011 for less than half what the evicted owner paid in 2006. Ten months later, it was flipped for close to its previous price. Another house in Los Angeles went into foreclosure in 2012 and was flipped seven months later for a markup of $254,000, or 66 percent. Of the 87,062 foreclosures in the last five years that were bought by corporate investors and have been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid, according to Redfin. (Although it’s impossible to know how much investors spent on upgrades or renovations.)

That includes the Earlls’ house. Last year, AKA flipped it for $290,000, an 87% markup.

There’s more to this story, but what really grabbed my attention was the idea of the former homeowners driving by their old place, knowing that their lives would be fundamentally different today if they’d been given the same sort of help that big banks were given.

Faber: “We are the bubble”

Gloom, Boom, and Doomer Marc Faber  shared some thoughts during the CLSA Investor Forum in Hong Kong last week as reported in this story at the South China Morning Post.

We’ve gone through a period of huge asset inflation, in stocks, bonds, commodities, and real estate, and we essentially now have in the world, a huge asset bubble. So everything is grossly inflated.

The problem is I believe you and I are the bubble … the financial system is just too big, that is the problem. Maybe we can’t see where the next bubble is because we are the bubble – that is something to consider.

You can bet that when Faber uttered these words they came with a big smile and, most likely, a laugh or two along with his thick accent.

Also, this interview with Jesse of Jesse’s Cafe Americain was well worth the time spent reading it as he and I have much in common (e.g., early retirees from an engineering career who now write about financial markets and precious metals).  Here’s what he had to say about the Fed’s current effort to revive the economy:

The monetary policy that Bernanke has set is a trickle down approach, which is obviously failing because it is operating in a system that was already skewed by corruption and has not been reformed. It is like sending aid to a Third World country. The aid is seized by powerful warlords and used for their own advantage, with little reaching the people.

They know this, but they do not care. It is about personal advantage and careers.

I’m not sure that they know it.

Group think is a powerful force and when you’re as detached from the real world as the Fed is, it’s easy to come up with all sorts of handy rationalizations, something that, as Howard Gold quipped in The Big Chill, “are more important than sex”.

The Fed and Subprime Auto Loans

The underlying details of what continues to be one of the weakest economic recoveries in U.S. history don’t offer much hope for any substantive improvement anytime soon. The latest evidence of such is offered up in this special report by Reuters that helps to explain why auto sales have been booming over the last year.

Thanks largely to the U.S. Federal Reserve, Jeffrey Nelson was able to put up a shotgun as down payment on a car.

Money was tight last year for the school-bus driver and neighborhood constable in Jasper, Alabama, a beaten-down town of 14,000 people. One car had already been repossessed. Medical bills were piling up.

And still, though Nelson’s credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Wall Street-backed subprime lender Exeter Finance Corp so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.

All the Nelsons had to do was cover the $1,000 down payment. For most of it, Maloy accepted Jeffrey’s 12-gauge Mossberg & Sons shotgun, valued at about $700 online.

In the ensuing months, Nelson and his wife divorced, he moved into a mobile home, and, unable to cover mounting debts, he filed for personal bankruptcy. His ex-wife, who assumed responsibility for the $324-a-month car payment, said she will probably file for bankruptcy in a couple of months.

When they got the Exeter loan, Jeffrey, 44 years old, was happy “someone took a chance on us.” Now, he sees it as a contributor to his downfall. “Was it feasible? No,” he said.

At car dealers across the United States, loans to subprime borrowers like Nelson are surging – up 18 percent in 2012 from a year earlier, to 6.6 million borrowers, according to credit-reporting agency Equifax Inc. And as a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings, too.

It’s the Federal Reserve that’s made it all possible.

If you want to better understand the nature of this so-called economic recovery, read on.

Easy money is being summoned once again to counter the effects of the last burst asset bubble that was caused, in large part, by easy money. As if there weren’t enough things to worry about today, now we have a burgeoning business in high-yield bonds backed by subprime auto loans to be concerned about, compliments of the Fed.

Is the Fed Now Dysfunctional Too?

A frightening prospect has developed in just the last week, that is, since the Federal Reserve surprised nearly everyone by announcing it would leave its $85 billion per month money printing effort intact: the nation’s central bank might now be as dysfunctional as Congress.

Well, maybe not quite that dysfunctional, but headed in that direction.

Bernanke BubblesMarkets expected at least a token reduction in the Fed’s asset purchase program, if for no other reason than that this policy seems to be inflating asset bubbles and doing the real economy little good.

But, after making some bold pronouncements about “tapering” its bond purchases in the spring and saying little to dissuade anyone from that view over the summer, the Fed surprised markets by taking no action, raising more questions than it answered in their policy statement and during a press conference with Fed Chief Ben Bernanke last Wednesday.

Markets had already “priced in” a $10-$15 billion scale back and, unless no one at the Fed reads the financial news, they knew it at the central bank.

Yet, they went ahead and did what few economists expected and what virtually no market participants thought was coming.

Kansas City Fed Chief Esther George put it best on Friday when she noted, “Costly steps had been taken to begin to prepare markets for an adjustment in the pace of asset purchase. This week’s decision by the Fed to taper expectations and not bond buying surprised many and disappointed some like me.”

Combine this with comments from St. Louis Fed President James Bullard who said, “I’m a little dismayed at those in markets that are saying they’re surprised by this. If the economy was going to improve in the second half of the year, and if we saw that improvement, we would taper” and it’s easy to come away with the impression that the Fed is tone deaf with a lame duck leader who could care less about markets.

In short, dysfunctional, like Congress.


The Changing Nature of the Mortgage Market

The chart below from this item over at the WSJ economics blog the other day goes a long way in explaining why banks have been laying off so many workers in recent months.

With the sharp rise in long-term interest rates since about May, the 2013 refinancing boom is now about over and, despite rising home sales and home prices this year, there’s not been a big increase in the volume of mortgages since Wall Street investors (who don’t need mortgages) have been responsible for an unusually large share of home purchases.

Mortgage Market

What’s both funny and ironic to me when looking at the chart above is that, back when my wife and I had a mortgage, we were part of that 2003 refinancing boom. That was back when 30-year mortgage rates had just dropped to about 6 percent and the guy from the bank told me that I better lock in that rate because I’d probably never see it again in my lifetime.

Unfortunately, he may have been right … but for the wrong reason.

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