Federal Reserve | timiacono.com - Part 55

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.

New Home Sales Rise from 2013 Low

The Commerce Department reported(.pdf) that new home sales rose 7.9 percent last month, from a nine-month low of a 390,000 annual rate in August to 421,000 in September, a figure that now ranks as the second worst month of the year for sales of newly constructed homes.

The inventory of unsold homes rose by 3.6 percent to its highest level in more than two years, though the months-of-supply metric fell from an 18-month high of 5.2 to 5.0.

New Home Sales

Sales were in line with expectations for a 425,000 rate and this offers more confirmation that rising mortgage rates are having an impact on home builders, the two-month average sales rate of 406,000 now down almost 10 percent from the rate earlier in the year.

Recall that mortgage rates surged in May and June as the Federal Reserve began talking about tapering its bond purchase program that held long-term interest rates artificially depressed at or near record lows. Since new home sales are reported at the time of contract signing, July was the first month to reflect the lower demand caused by rising finance costs.

Not surprisingly, the median new home price fell for the fourth straight month, down 0.7 percent to $254,600, while the year-over-year change barely stayed positive at +0.6 percent. Though new home prices are often unduly influenced by builder incentives (or the lack thereof), it’s worth pointing out that the median new home sales price was nearly $280,000 as recently as April.

Shiller on “Bubbly” Housing Markets

Yale Professor Robert Shiller says “it’s looking bubbly now” for some cities in the latest Case-Shiller home price index (as detailed here yesterday), noting that he’s “starting to worry more about bubbles” than any developing slowdown in the U.S. housing market.

According to Zillow, the price of our home here in Montana continues to rise by thousands of dollars each month and, for the first time, a check on the California home we sold about nine years ago shows it has reached the price at which we sold it, up about 20 percent from a year ago. It’s nice to see that things are back to normal.

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