Wednesday, July 1, 2009

Inflation it is a Coming

Today, people who are current on their Mortgages from Freddie Mac and Fannie Mae can now refinance at up to 125% of the current value of their house. No, that is not a misprint…

This is the endgame to Obama bringing in yet another Wall Street clown to run the Fed – Geithner. I warned you this was coming. Just keep kicking the can down the road. China is pissed.

http://www.cnbc.com/id/31685244

Here is a chart of the delinquency rates for mortgages by year of origination. As you can see, the delinquency rates for 2007 and 2008 are parabolic. Not a good sign if you are a lender… Freddie and Fannie are lending on behalf of the US Taxpayer.

I think the average default rate for defaulted mortgages that were restructured last year is already above 50%. It might be 60%, I am not certain. I am certain that a lot of those were factored into this chart.

Why is The Fed Doing This (with our money)?
Housing prices have imploded and that has put a lot of homeowners in a position of Negative Equity (your mortgage is worth more than your house).
This chart of inflation-adjusted housing prices is what is referred to as an “Eiffel Tower Top” – straight up and straight down.

The implosion in housing prices has made it impossible for homeowners with negative equity to refinance their homes. Think of all the people who have variable rate mortgages that will reset to much higher rates in 2009 – 2011. They are toast if they can’t refinance. That is an enormous pile of losses that will bankrupt a lot of banks.

Look at how many people now have negative equity (Loan to value > 100%)! If housing prices still have farther to fall (The chart above shows you that prices can still fall another 30% before reaching their historic levels of affordability.

Mortgages are now an incredibly large part of the Bond Market. That means that they are owned by lots of Pension Plans, Mutual Funds, Insurance Companies, Banks and Individual Investors. The Fed feels compelled to not allow these bonds to default and is now going to refinance existing loans at any cost.

The Fed is already buying Mortgages from those same investors. They have already bought nearly $970 billion of them. Notice the maturity dates of these purchased mortgages. They are all fairly short term paper (6 years or less). That means the Fed has been buying variable mortgages – the toxic crap that is virtually worthless.

There is no way to know exactly what was paid for it, but you can bet the boys at PIMCO and Blackrock made a killing. The Fed will now try and refi a huge percentage of this debt via this new program.

You are probably wondering why this is such a bad idea – I mean it keep people in their houses, right?

I’m just going to do the math to show you how what the Fed is doing is propping up real estate prices for as long as they can.

Say you have a $100,000 ARM and it will recast in 2009. Your current Interest Rate is 4% and it will recast at 9%.

Your current monthly payment is $333
Your monthly payment starting in January 2010 will be $804

But Uncle Sam has been artificially holding rates down by buying $960 billion in Mortgages and another $330 billion in US Treasuries to help you refi at these below-market rates.

So you can now refi at 5.3% on a 30-year Fixed and have a monthly payment of only $555 per month. That is a lot more than $333, but it will allow a lot of people to stay in their houses.

Is that a Good Thing?
The claim is that the Government is doing this to make housing “more affordable” – bs.

How do you make things more affordable by making credit artificially cheap?
If I make $100k and I want to buy a house, the old matrix was that I could spend 28% of my income on the cost of housing (mortgage, insurance and taxes). The average now is 40% - even after the collapse in housing prices.

That would mean that at a 7% interest rate (where things would probably be right now without Government intervention in the Credit Market), I would be able to buy a house worth $435k.

However, at 5.3%, I would be able to buy a home worth $521,100. The lower rates are artificailly propping up prices by 20%. How the heck does capping Interest Rates make housing more affordable? It doesn’t, of course.

My concern is that some yutz is going to refi a house he can’t afford at 125% Loan to Value and the poor slob will spend the rest of his life as a slave to his house. The bankers will get rich, yet again.

The whole point of all of the Mortgage Mod Plans and Purchase Plans is to try and get cash into the hands of consumers – just like they did it is 2003. You can see how the Fed is creating a Credit Bubble that is several times larger than the one that just popped.

The issue for me is that the last go around, the bonds were purchased by Hedge Funds and Banks – now they are being bought by the US Treasury and US Agencies (SIVs to the US Government Balance Sheet). The Dollar is toast - it is simply a matter of when, not if. Your Dollar-denominated asset (like Real Estate) are going to get crushed... You had better find ways of hedging for a falling Dollar.

So how is this all going to end?
I came across an interview of Peter Boockvar today on Bloomberg (ht zerohedge). This is not me being interviewed, but he sure uses a lot of my phrases.

http://www.clipsyndicate.com/video/play/1004277

“Inflation is the symptom of a weak currency.”

“There’s this Global race to debase one’s currency, in order to inflate our way out of this mess. Gold is a beneficiary of that.”

The market is “betting" that inflation “will come”.

“Ben Bernanke and the Fed are not going to stop, until this economy gains traction.”

“If the economy gets better, then inflation is going to follow us like this dark shadow.”

“The S&P 500 is up 15% since the middle of March. The CRB Index (Commodities) is up 15%. So on an inflation adjusted term, the market has done nothing since the middle of March. This is an inflation-type rally, egged on by the Fed’s Quantitative Easing and printing of money.”

“There are 3 different ways of dealing with the debt that we have – you can pay it down, you can write it off or you can inflate your way out. The Fed has chosen the third (I have been saying exactly the same thing for years).”

“By inflating your way out – by artificially keeping rates low, you’re preventing the deleveraging process from occurring. If I cut rates to zero, you’re not going to pay down debt - you’re just going to refinance it. You’re going to push it out to 2012, instead of 2010. WE ARE KICKING THE CAN DOWN THE ROAD (capitalized by me for emphasis). That’s what the Fed is doing.
We need to extinguish debt in this country… but all we are doing is refinancing – a loan modification. It’s just a refinancing .
People should be renting, that can’t afford to live in (an existing home). We are kicking the can down the road. It’s going to be good for Gold, because there is going to be constantly more printing of money.”

“We’ve seen a pullback in spending because demand is not there. The economy needs to readjust. So, the Government is trying to put Humpty Dumpty back together again (I know I wrote this line in several previous posts). And it’s not going to happen. Because the consumer can’t handle any more debt, businesses can’t handle any more debt and right now the government can – because foreigners and investors are buying it, but who knows how much longer that will last.”

“We are on a dangerous path right now and unfortunately, I don’t think the Fed fully understands. They are living in this World where there’s Deflation – Janet Yellen last night said that she’s more worried that inflation is going to stay low for years. Gold is 7% from $1,000 and you have a Fed member who is saying that Inflation is not a concern… One of them will be wrong.

I love this guy. I will be reading him in the future and linking what I think is beneficial.

China wants a new reserve currency to be brought up at the next G8 meeting. I have news for them, we already have one – and it is called Gold.

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