As wave after wave of empty loan modification promises and false homeowner rescue plans wash over us like the hot breath of a Southern Baptist preacher, precious little help arrives from on high.  It’s the dichotomy of consequence.  Americans on Main St. fight for scraps while those on Wall Street sip champagne and caviar purchased with tax payer dollars.

Amidst the wreckage of the mortgage industry, no real help for homeowners has materialized.  Legislators talk about helping Main St. Americans, but little actually trickles down.  It turns out that we were only invited to the poker game to make the pot bigger.  And as many have discovered, you can’t beat the house.  Now, as the banking industry brags about all the loans it has modified, it hides the ugly truth that the majority of these modified loans end up right back in default.  Why? Because lowering the interest rate for a few years or tacking a few payments on to the end of the loan aren’t designed to fix the problem.  These are palliative measures designed to relieve the legislative pressures.

From the excellent FHA Mortgage Guide:

“After three months,” says Comptroller John C. Dugan, “nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”

Too little, and much too late.

Ironically, very few of the people I talk with took risky loans or speculated in the same way Wall Street Bankers did.  Their moral crime was to have pursued the American dream and bought a home at the peak of the market. Timing is everything.  Many of them qualified for and chose responsible fixed rate mortgages.  But the collapse vaporized their remaining equity and savings, and in many cases claimed their jobs or took a big bite out of their income.  Under those circumstances it doesn’t matter what kind of mortgage you have.   You’re done.

And as they go over the cliff with their families in tow and their American dream in pieces, the morally righteous shake an angry finger and preach the gospel of personal responsibility.  “If we bail you out, you’ll just do it again!”  Why doesn’t somebody say that to Wall Street

And yet, it took only the slightest hint of improvement in this train wreck economy to start the banking industry calls for halting the stimulus, dumping proposed reregulation, and getting back to business as usual.

According to Bloomberg, Morgan Stanley analysts report that

“A remarkable change in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month.”

Does that term sound familiar?  It should.

“CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return.”

In other words, CLOs are kissing cousins to the collateralized debt obligations at the core of the global economic meltdown.  Cooked up by the greedy Wall Street alchemists to juice yields and fees while burying and passing the hidden risk  of incomprehensible derivatives along to foreign investors, this toxic stew of credit garbage finally boiled over and ripped apart the lab.  But hey, that was soooo last year. For now, bailouts, loans, and loan guarantees safely in place, it’s time to start pushing for this quarter’s multi-million dollar bonus.

This morning’s release of the Labor Dept. report for November jobs shows non-farm payrolls sliding by 533,000 jobs, just a smidge more than the expected loss of 350,000.     Despite this, bonds are selling off at the open…

The most discouraging thing about the recent bailout is that it has done nothing to help troubled homeowners, while passing gobs of tax payer money to Wall Street so that Goldman Sachs can pay huge executive bonuses and surreptitiously reopening tax loopholes that provide $25b in tax incentives for Wells Fargo to buy Wachovia Bank.  Coming on the heels of a year’s worth of hollow promises, this is unconscionable.

Peter Miller of the FHA Mortgage Guide offers some updated statistics.

“Meanwhile, in case anyone missed it, RealtyTrac.com reports that homeowners received 279,561 foreclosure filings in the month of October. That’s up 25 percent when compared with October 2007.

While foreclosure numbers are going through the roof — or they would go through the roof if more people had such things. HUD reports that during the last two weeks of October it refinanced 54 — FIFTY-FOUR — delinquent conventional borrowers, about one per state.

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Picking through the pile of offerings that claim to help struggling homeowners, there is still sadly very little of substance. Billowing columns of smoke, but no fire.  I do have some hope that after all the cash we’ve thrown at the banks, somebody will be embarrassed enough to figure out a way to stop the foreclosure hemorrhage before the patient dies. As much as it makes common sense, the prevailing logic–that banks will lose less money helping homeowners than they will foreclosing–just isn’t playing well with that audience.

Sure, there is a moral hazard to contend with, along with the potential for gross inequity. How do we distinguish the deserving from the undeserving? Everyone is struggling right now. So how will the responsible homeowner feel if help ultimately goes to the profligate neighbor who sucked out their home equity to buy more toys? So I understand this is a tough one, but meanwhile…

THE BAILOUT: BANKS BUYING BANKS

We all have misgivings about the bailout. How could things have suddenly gotten so bad that we needed to cough up $700b in two days or the sky would fall in. After it didn’t fall in and after the EU’s decisive action forced Paulson to restructure from “bailout” to “buy in”, the immense cash infusion still failed to restore investor confidence and unfreeze the credit markets.

And there was Allen Greenspan claiming “shocked disbelief” at the banks’ failure to self regulate and admitting that the whole greedy affair represents a failure of the ideology of unregulated free markets. Don’t get me wrong. Capitalism is good. But adult supervision is needed to avoid the Lord of the Flies ending we have just witnessed.

And finally to my point. One of the things that the bailout did very quietly was to open a tax window that allows profitable companies to buy unprofitable companies and write off the latter’s losses to avoid taxes. The estimated $25b in tax savings may have induced Wells Fargo to pay only $13b for Wachovia. But that corrupts the intent of the bailout and costs the taxpayers more.

And in the long run, further consolidation in the banking industry is exactly what should not be allowed to happen. Fewer, larger banks mean more of the same kinds of trouble. What comes after “too big to fail”? Maybe “too big to save”. Now that’s scary.

Is it right to call this thing bailout or is it really as some would prefer, a rescue?   Is it prudent to surrender $700 b of taxpayer money at gunpoint under the imminent threat of a global economic collapse?  Is it wise to give the checkbook–no strings attached–to an out-going Treasury Secretary with short-timers attitude and a pile of Goldman Sachs stock still in his portfolio?  Are there better ways to solve the issue than just buying the toxic waste of the sub-prime meltdown at a discount in the hopes of selling it to investors for a profit?  And if we agree to the deal, is this the end of it or are there yet waves of Alt-A and option-arm defaults still forming at sea?

The opinions range from the scornful to the apocalyptic.  It’s the only non-partisan slug fest in evidence during this election season.  One thing seems true at the heart of it all:  $700 b is no small amount of money to throw at the problem without at least a little discussion.  I for one am thankful for the bickering and balking that has carved out a few days to deliberate on a matter of such importance.

Judging by the level of pain and worry I encounter in my day to day conversations, something must be done fairly soon.  A tough-love stance will not see us through the credit freeze, much as I believe in personal responsibility, the value of experiencing consequences, and the moral hazard of confirming for Wall Street CEOs that their over-leveraged, profit-crazed gamble fest was a party too big for the cops to bust.   So let’s get on with it, but in the process let’s not forget the lessons that are all too obvious:  deregulation and self-interest will not create free markets.

As for mortgage rates, after yesterday’s stock market free fall and today’s rally, 30 yr fixed rate are back around 6%.  The markets are extremely volatile, and lenders are changing rates in both direction throughout the day.  If you have time and feel lucky, float your rate in hopes of more delays on the bailout– excuse me, the “rescue”–otherwise lock with a lender who has a lock renegotiation policy and will let you float down if things get better.

I just received some statistics on the Sacramento County market that confirm what we in the Sacramento valley have been feeling: buyers have emerged like a dragonfly hatch and are swarming around a veritable feast of low-priced, bank-owned properties. Has Sacramento taken the worst of its lumps?

For April, new escrows rose 33%, and closed escrows skyrocketed by 35% from the previous month and 68% from the same time last year. But the number of new listings fell 30%, reducing the inventory level to 5.9 months from 8.3. To further underscore the market’s keen interest in foreclosures, 90% of April’s sales were under $400k, 85% under $350k. Activity is certainly on the rise. But how deep is the pool of buyers?

Is the Financial Crisis Over?

Lately, Wall Street murmurs suggest that the worst may be over for the financial crisis. This theory has found support in the March and April retail sales numbers. Sales, ex-auto, grew by 0.5% in April, faster that analysts’ expected, on the heels of a 0.4% gain in March. This week’s CPI figures will give further clues as to impending threat of inflation and whether the Fed will soon have to begin reversing the direction of interest rates.

However, there is a big question about whether the financial dislocation will disrupt employment, further reducing consumer spending at the same time that “import inflation” is redirecting consumer dollars from luxuries to necessities. Mohamed El-Erian from Pimco makes this point is his excellent article Why This Crisis Is Still Far From Finished.

As far as mortgage rates are concerned, don’t bet on lower rates any time soon. The “Treasury bubble” will certainly burst if investors begin to feel like the storm has passed. But if the economy gets worse, mortgage rates will remain high to keep MBS investors in the game. Keep your seatbelt fastened; it’s going to be a bumpy ride.

I hope you occasionally read Bill Gross’s Investment Outlook. On the occasion of his birthday, he writes When I’m Sixty-Four.

Unlike all the excessively formal sounding pundits who wax unintelligibly about the financial markets (yes, I’m reading the Age of Turbulance right now), Mr. Gross is always delightfully down to earth and understandable, despite dishing up a heaping plateful of insight and common sense.

Do check it out if you’re looking for clarity about the current banking crisis. I think you’ll enjoy it.

Other than a brief rise in February’s existing home sales that sparked Monday’s stock rally the rest of the economic news has been bad. New home sales fell in February, and remember that new homes are considered “sold” at Contract, not at close. Cancellations are never acknowledged in the numbers; they are simply left to sort themselves out in the long run. This leads to a short-term overstatement of sales and and understatement of inventory. As Credit Union National Association’s Mike Schenk so aptly put it, “We have two problems: supply and demand.”

Sliding consumer confidence, no decline in the inventory levels of homes, and today’s drop in durable goods all point the same direction. Monday’s stock market rally has turned sour, and money is flowing into bonds. Treasuries are up this morning, and the Fannie Mae MBS 5.5% coupon is up 8/32nd’s, indicating a possible slight improvement in mortgage rates today. We’ll see how stingy and cautious the banks are about passing that along to the consumer.

So mortgage rates fell a bit this week. Freddie Mac says the average 30 yr fixed was around 5.875% with 1/2 point and the 5/1 ARM around 5.5% with 1 point. The new conforming jumbo rates–between $417k and $580k in the Sacramento MSA–were about 1% higher, and regular jumbo rates about 1% higher than that. Jumbo rates have gotten even uglier in the recent crisis of confidence surrounded the Bear Stearns collapse and the stampede for the exits of MBS investors.

What’s Next for Mortgage Rates?

Well, we’ll get a look at the inflation factor this next week. Expect the bond market to be hypersensitive to any signs that the recent Fed easing is igniting inflation again. Bernanke is clearly in a pickle now, having had to bail out the investment banks to prevent a bank run that would have rivaled the 1930’s. If inflation fears catch fire, the Fed will have a tough choice to make. This may be bottom for mortgage rates, and by summer the Fed may have to begin the painful process of tightening. It sucks being Ben right now.

Buying Activity Picks Up

It might be premature to call it a trend just yet, but I’ve seen an increasing level of purchase activity the past two weeks across all price ranges. Investors and home owners alike seem to feel like the bottom is near and don’t want to wait for the competition to drive up prices. If I’m right and rates are as low as they’re going to get, this is the time.

Anyway, I hope you have a Happy Easter!

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The Labor Department released October’s Consumer Price Index (CPI) today on the heels of yesterday’s PPI.    The overall index was up 0.3%; the core rate was up 0.2%, matching consensus estimates.  This left the market to digest other news as it searched for direction.

That news came in the form of more credit market troubles that sent money into the safety of bonds this morning as Applied Material and J.C. Penny put out weak forecasts and Barclays announced a $2.7 billion write-down from its subprime lending activities and related credit issues. 

The flight to quality is pushing mortgage rates a bit lower.