In an exclusive to Moneynews and Newsmax, Christopher Ruddy reveals the last financial memo written by the late legendary invester Sir John Templeton. Templeton not only predicted the financial meltdown before it happened, he also warned of economic catastrophe that would ripple across the globe for many years. Templeton concludes by offering a silver linning to savvy investors. read more below…
June 15, 2005
MEMORANDUM
Financial Chaos – probably in many nations in the next five years. The word chaos is chosen to express likelihood of reduced profit margin at the same time as acceleration in cost of living.
Increasingly often, people ask my opinion on what is likely to happen financially. I am now thinking that the dangers are more numerous and larger than ever before in my lifetime. Quite likely, in the early months of 2005, the peak of prosperity is behind us.
In the past century, protection could be obtained by keeping your net worth in cash or government bonds. Now, the surplus capacities are so great that most currencies and bonds are likely to continue losing their purchasing power.
Mortgages and other forms of debts are over tenfold greater now than ever before 1970, which can cause manifold increases in bankruptcy auctions.
Surplus capacity, which leads to intense competition, has already shown devastating effects on companies who operate airlines and is now beginning to show in companies in ocean shipping and other activities. Also, the present surpluses of cash and liquid assets have pushed yields on bonds and mortgages almost to zero when adjusted for higher cost of living. Clearly, major corrections are likely in the next few years.
Most of the methods of universities and other schools which require residence have become hopelessly obsolete. Probably over half of the universities in the world will disappear quickly over the next thirty years.
Obsolescence is likely to have a devastating effect in a wide variety of human activities, especially in those where advancement is hindered by labor unions or other bureaucracies or by government regulations.
Increasing freedom of competition is likely to cause most established institutions to disappear with the next fifty years, especially in nations where there are limits on free competition.
Accelerating competition is likely to cause profit margins to continue to decrease and even become negative in various industries. Over tenfold more persons hopelessly indebted leads to multiplying bankruptcies not only for them but for many businesses that extend credit without collateral. Voters are likely to enact rescue subsidies, which transfer the debts to governments, such as Fannie May and Freddie Mac.
Research and discoveries and efficiency are likely to continue to accelerate. Probably, as quickly as fifty years, as much as ninety percent of education will be done by electronics.
Now, with almost one hundred independent nations on earth and rapid advancements in communication, the top one percent of people are likely to progress more rapidly than the others. Such top one percent may consist of those who are multi-millionaires and also, those who are innovators and also, those with top intellectual abilities. Comparisons show that prosperity flows toward those nations having most freedom of competition.
Especially, electronic computers are likely to become helpful in all human activities including even persons who have not yet learned to read.
Hopefully, many of you can help us to find published journals and websites and electronic search engines to help us benefit from accelerating research and discoveries.
Not yet have I found any better method to prosper during the future financial chaos, which is likely to last many years, than to keep your net worth in shares of those corporations that have proven to have the widest profit margins and the most rapidly increasing profits. Earning power is likely to continue to be valuable, especially if diversified among many nations.
Is the love of money the root of all evil? Or, is the ignorance of money the root of all evil?
What did you learn about money in school? Have you ever wondered why our school systems do not teach us much- if anything- about money? Is the lack of financial education in our schools simply an oversight by our educational leaders? Or is it a part of a larger conspiracy?
Regardless, whether we are rich or poor, educated or uneducated, child or adult, retired or working, we all use money. Like it or not, money has a tremendous impact on our lives in today’s world. To omit the subject of money from our educational system is cruel and unconscionable.
The previous questions and statements came from a book by Robert Kiyosaki titled” Conspiracy of the Rich“ The 8 New Rules of Money… Does anyone think there are schools out there which are actually doing a good job teaching this incredibly important subject to its students?
In 1971, President Richard Nixon changed the rules of money; without the approval of Congress, he severed the U.S. dollars relationship with gold. He made this unilateral decision during a quietly held two day meeting on Minot Island in Maine, without consulting the State Dept. or the International Monetary System.
President Nixon change the rules because foreign countries being paid in U.S. dollars grew skeptical, because the U.S. treasury was printing more and more money to cover our debts, and they began exchanging their dollars directly for gold in earnest, depleting most of the U.S. gold reserves. The vault was being emptied because the gov’t was importing more than it was exporting and because of the costly Vietnam War. As our economy grew, we were also importing more and more oil.
In everyday terms, America was going bankrupt. We were spending more than we earned. The United States could not pay its bills-as long as our bills were to be paid in gold. By freeing the dollar from gold, and making it illegal to directly exchange dollars for gold Nixon created away for the U.S. to print its way out of debt.
In 1971, the world’s rules of money were changed and the biggest economic boom in the history of the world began. The boom continued as long as the world accepted our funny money money backed by nothing but a promise by the U.S. taxpayers to pay the bills of the United States.
Thanks to Nixon’s change in the rules of money, inflation took off. The party was on. As more and more money was printed each decade, the value of the dollar decreased and the prices of goods and assets went up. Even a middle class America became millionaires as home prices kept climbing. They received credit cards in the mail, money was flowing freely. To pay off their credit cards, people used their homes as ATMs. After all, houses always went up in value, right?
Blinded by greed and easy credit, however, many people either didn’t see or ignored the dire warning signs such a system created.
In 2007, a new term crept into our vocabulary: Subprime Borrower -a person who borrowed money to buy a house they could not afford. At first, people thought the problem of subprime borrowers were limited to poor, financially foolish individuals who dreamed of owning their own home. Or they thought it was limited to speculators trying to make a quick buck-flippers. Even Republican presidential candidate John Mccain did not take the crisis seriously in 2008, trying to reassure everyone by saying “The Fundamentals of Our Economy are Strong”. John Mccain, a man of character and compassion could not comprehend that, The System was NotWorking .
Around the same time, another word crept into our daily conversation: bailout-saving our biggest banks from the same problems that faced in subprime borrowers: too much debt and not enough cash. As the financial crisis spread, millions of people lost their jobs, their homes, their savings, their college funds, and their retirements. Those who so far have not lost anything are afraid they might be next. Even states felt the pinch: California governor Arnold Schwarzenegger began talking about issuing IOUs instead of paychecks to gov’t lawmakers because California, one of the biggest the economy’s in the world was going broke.
We will continue this blog for several weeks discussing the book Conspiracy of the Rich. I believe the information in this book is vital to all Americans, to have a better understanding of what is going on in the United States and the World at this time. I will be quoting and directly copying text from the book, as to not lose the continuity of the idea or theory being discussed.
Make no mistake about this we are headed for some economic troubles in our country. Follow along in the coming weeks, you won’t be disappointed.
David W iedemer and Robert Wiedemer two brothers published in 2006 a book called America’s Bubble Economy along with sidekick Cindy Spitzer. Their book predicted four bubbles in the American economy that would burst. Those four bubbles, the real estate bubble, the stock market bubble, the private debt bubble and the discretionary spending bubble all burst after 2006.
They’re back with another warning in a book titled, Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown. Their new book brings good news and bad news.
The bad news is, they write: “The worst is yet to come”. The good news is, the worst is yet to come(with the emphasis on the word, yet). There is still time for individuals and businesses to cover their assets and even find ways to profit in the Bubblequake an Aftershock. But first you have to see it coming.
What exactly do they see coming? Basically, they warn that U.S. governmen’t debt has been, “bubble” destined to burst, with far reaching consequences. Our thought is” with no plan to pay it off and not much ability to pay it off either, it is quickly becoming the world’s largest toxic asset.”
The authors foresee a collapse in U.S. government debt (the biggest bad loan in history) analogous to the collapse in subprime mortgage debt. This will also entail the collapse in the dollar as smart people rush to get their assets out of the United States.
Their warning is that the collapse may happen quickly.” When the dollar bubble falls, most foreign held investments in dollar denominated assets will not have a chance to run out of the United States. Instead, the capital will go to the same place your home equity went when the housing bubble popped. It will go to the same place your 401 K and other retirement account funds went when the stock bubble dropped to half its peak value. It will go to the same place all that bubble money goes when a bobble pops: It’s all going to “Money Heaven”.
Of course, this book may not sit well with the Obama Administration. They seem to be in a parallel universe of reality. While the administration and they hype- mongers on CNBC have pronounced the economy to be in recovery, a closer look shows trouble on the horizon. For one thing, but deleveraging process set in motion by the credit crisis is still unfolding. Consumer credit has contracted by a record amount and is destined to continue contracting as bankruptcies intensify in the months ahead.
But even if you don’t buy the deleveraging story, there is another compelling indicator of a deeper stage of contraction ahead. When ever the year to year change in inflation adjusted money growth has turned negative, the economy has always plunged into a major downturn.
Historically, the broad measure of money supply that was most often tracked was M3. Ben Bernanke has decided that M3 should no longer be published or revealed to the public by the Federal Reserve.
Consider that projections of recovery and stability within the U.S. banking system are dependent on positive economic growth in the year ahead. The economic and systemic solvency problems in the United States remains severe in scope and depth. The U.S. deficiencies also are much worse than those of its main trading partners, and the eventual recognition of same should have a negative impact on the U.S. dollar’s exchange rate vs. most major currencies.
A significant break in the dollar should begin to disrupt the abnormal relationships seen currently between the various financial markets in the United States, were a weak dollar is countered by strong stock prices and vice versa.
A weak U.S. economy and faltering fiscal conditions should result in U.S. dollar weakness, which in turn should be reflected in tightening domestic liquidity, higher interest rates, and lower equity prices.
In such a circumstance, the dollar’s intensified weakness also should be reflected in mounting inflation pressures and much higher gold and silver prices.
In short, a severe economic downturn, of the sort projected by the Wiedemers and Spitzer in Aftershock, is all too credible.
After reading this book myself I concur with everything written in this summary, and also advise all my readers too quickly go and read this book in order to better prepare yourself for what’s coming.
This summary came from an article written by: James Dale Davidson and his article in Financial Intelligence Report
The rate at which home prices are dropping may be slowly coming to a halt across the United States, with analyst at Barclays Capital predicting only a 4 or 5% dip left to go before stabilization. But the rate of appreciation on the back side of that bottoming out is likely to muddle along for the next few years.
This conclusion is based on expected aftershocks of the ”smoothed-out” Housing Supply model, where millions of potential foreclosures are being averted temporarily with governmen’t back programs or by suppliers slowing the rate in which foreclosures hit the market. On the positive side, they said this effort actually prevented some prices from falling considerably more.
But the “smoothed-out” method, while successful on the supply side, is coming at a cost. The overhang of distressed inventories is a huge negative technical-it suggests that any price rise will probably be met by increased distressed sales.
Meanwhile, home prices do seem a little cheap, using fundamental metrics like, price/rents and price/income ratios, but not extremely so. Obviously, a meaningful rise in prices would mean big changes on both the technical and fundamental fronts.
Home prices dipped only slightly in December, according to Standard and Poor’s Case Shiller U.S. National home price index. However, it is the recent drop in new home sales, down 11.2% from December to January that we find disappointing.
And in added response to claims that housing is becoming more and more affordable in the United States, the report adds that affordability indices are not good predictors of future moves in home prices.
The so called Great Recession has left Americans depending on the government dole like never before. Without record levels of welfare, unemployment and other government benefits as well as tax cuts last year, the income of U.S. households would have plunged by an astonishing $723,billion more than four times the record $167,billion dropped reported last month by the Commerce Department.
I noticed for the first time since the Great Depression, Americans actually took more aid from the government than they paid in taxes. I’ve discovered that figures show the devastating results of the massive job losses last year that indicate that the economic recovery began last summer is tenuous and has a long way to go before many Americans resume life as normal. Typically economic growth depends on consumer spending, which is fed by wages, rents, interest and other forms of income. The tentative revival of consumer spending in the second half of last year appears to have been fed largely by an extraordinary flood of government’s spending, as real growth in other kinds of income has disappeared.
Support from the government was critical in keeping the economy from completely collapsing during the crisis, particularly consumer spending. I am concerned that so much of the economic rebound is a direct result of government’s spending rather than a revival of private income and jobs. This situation is unsustainable, because the Governmet has had to borrow massively to prop up the economy and cannot continue that binge for long.
Last year wages and other job related income fell by a record $206 billion as compared to last years $7.84 trillion. Payments from the government such as unemployment checks and Social Security increased by$231 billion to a total of $2.1 tillion. Meanwhile the amount of taxes that individual Americans paid plummeted by $325 billion to $2.1 trillion as a result of middle class tax cuts and because nearly 6 million people were thrown out of work and are no longer paying their payroll taxes.
Commerce economists said last year’s unprecedented drop of $256 billion in private wages, was particulary dramatic and was more than 40 times larger than the drop in wages during the 2001 recession. An equally dramatic measure of the income that closely tracks the ravages of the recession also plummeted by an unprecedented$384 billion. That measure includes transfer payments and adjusts for inflation. Although it has stabilized at $9.1trillion since the middle of last year, which may be a sign that the worst of the job and income losses are over.
While most of the government benefits including Social Security, welfare, Medicaid, food stamps and regular unemployment benefits, are sent automatically to those who qualify, Congress is debating an extension of some benefits enacted as part of the stimulus package last year. Those could include jobless benefits and Health Insurance subsidies to the unemployed.
With more than 8 million workers laid off during the recession, unemployment benefits have quadrupled from $34 billion in January 2008 to $124 billion at the end of last year. And millions of Americans are now relying on unemployment benefits as their only source of income other than food stamps, they are unable to find work because there are more than six job seekers for every opening. There is literally nothing that most of these workers can do to get a job today. Unemployment benefits are often the only way they can make ends meet for their families and keep a roof over their heads.
As a side note my own daughter is in a situation very similar to this. With many skills and a great work ethic she is still unable to find a qualified job that will allow her to have day care and still show a profit for the household. Many grandparents, parents and children of all Americans are finding it ever increasingly hard to become employed. Many of our vulnerable families in America are suffering because of poor political decisions by our leaders.
As a result of record U.S. Government borrowing, total debt in the United States has soared to an all time high at 370% of yearly economic output, far exceeding its peak of 300% during the Great Depression.
While the gov’t was lavishing aid, banks were cutting credit to consumers by as much as $250 billion, nearly as much as the amount consumers gained from government transfer payments. This massive shift into dependence on the government, while essential in promoting an economic revival last year, has postponed a reckoning for many consumers who went too far into debt so they could maintain their lifestyles during those boom years. This shift only postpones a solution to the problem, by substituting Governmet that for consumer debt. It is evident these elevated debt loads will at least result in a sluggish growth or sluggish growth rates for the time being. I believe that if the problem is not tackled with determination, it might very well lead to another crisis. Other economists say the big shift towards dependence on Government spending and borrowing is only temporary.
On a brighter note Americans accumulated a record amount of saving last year as they stowed away funds out of fear of losing their jobs. The increase in savings now enables many consumers to increase spending while the 90% of workers who still have jobs can spend more because they are accumulating more income from overtime hours. The combination and interaction of all these factors, not just one, will promote more future spending by households and keep the economy going longer without Governmet aid, some believe.
Jobless benefits and other welfare spending for the unemployed will start to decline when job growth returns. Some economists predict that unemployment will increase this spring or summer in the next stage of the recovery. Because of bleak job prospects during the recession, some people were forced to count more permanently on the Government dole. As one result of this action many workers who were nearing retirement age and got laid off started drawing Social Security benefits. The number of retirees taking Social Security at age 62 grew by a record 19% last year, helping to push up Social Security outlays by $100 billion. I believe those spending levels will stay high and continue to increase as more baby boomers retire.
I’ve run for office three times, losing twice, winning once. Each time, when the campaign was over, I felt that I hadn’t done an adequate job communicating all that I had intended to say. Some of that is because debate answers are limited to sixty seconds, ads are thirty seconds, and lengthy position papers are rarely read at all.
This book gives me a chance to say more than I did during my campaign. That established, my interest in writing the book goes back well before my political life. My career in the private sector exposed me to developments abroad and conditions at home that were deeply troubling.
At the same time, I saw that most of us were not aware of the consequences of blithely continuing along our current course: We have become so accustomed to the benefits of America’s greatness that we cannot imagine any significant disruption of what we have known.
I was reminded of a book I had read when I was in France during the late 1960s. Jean- Jacques Servan-Schreiber was a journalist and a businessperson, and he became convinced that France and Europe were in danger of falling far and irretrievably behind the United States.
His book, “The American Challenge,” stirred his countrymen to action and helped galvanize pan-European economic and political collaboration. While I am sufficiently realistic to recognize that this volume is highly unlikely to have as great an impact as did his, it is my hope that it will affect the thinking and perspectives of those who read it.
Thus, this is not a collection of my positions on all the important issues of the day; in fact, a number of issues I care about are not included. This is not a policy book that explores issues in greater depth than do scholars and think tanks—I treat topics in a single chapter that others have made the subject of entire volumes. Nor is this an attack piece on all the policies of the Obama administration, although criticism is unavoidable with policies that I believe are the most harmful to the future generations of America.
This is a book about what I believe should be our primary national objective: to keep America strong and to preserve its place as the world’s leading nation. And it describes the course I believe we must take to strengthen the nation in order to remain prosperous, secure, and free.
There are some who may question the national objective I propose. I make no apology for my conviction that America’s economic and military leadership is not only good for America but also critical for freedom and peace across the world. Accordingly, as I consider the various issues before the nation, I evaluate our options largely by whether they would make America stronger or weaker.
In my first chapters, I consider geopolitical threats and lessons from the history of great nations of the past. In subsequent chapters, I describe domestic challenges to our national strength and propose actions to overcome them. My final chapter is intended to provide a means for future Americans to gauge whether we have been successful in setting a course that will preserve America’s greatness throughout the twenty-first century. It describes as well the source of my optimism for America’s future.
These are difficult times: homes have lost value, nest eggs have been eroded, retirees have become anxious about their future, and millions upon millions of Americans are out of work. Inexcusable mistakes and failures precipitated the descent that has hurt so many people. But even as we endure the current shocks, we know that this will not go on forever; we know that because America is a strong and prosperous nation, the economic cycle will eventually right itself and the future will be brighter than the present.
While I will touch upon today’s difficulties, my focus is on the growing challenges to the foundations of our national strength. How we confront these challenges will determine what kind of America and world we will bequeath to our children and grandchildren.
This is a book about securing that future of freedom, peace, and prosperity in the only way possible: by strengthening America. A strong America is our only assurance that prosperity will follow hardship and that our lives and liberty will always be secure.
The strength of the nation has been challenged before—at its birth, during the Civil War, in the peril of world wars. It is challenged again today. In our past, Americans have risen to the occasion by confronting the challenge honestly and laying their sacrifice upon the altar of freedom. We must do so again.
Facing Our Challenges Head-On
I can remember only one time during my life when most Americans presumed that we didn’t really have any great challenges. It was during the period that largely coincided with the Bill Clinton presidency. George H. W. Bush and Ronald Reagan had pushed the Soviet Union to the wall and won. The Berlin Wall had come down, the Soviet Union had dissolved, and here at home, there was talk of a “new economy” that sent the bulls running on Wall Street. Columnist Charles Krauthammer has called it our “holiday from history.” We believed that peace and prosperity were here to stay—without threat, without sacrifice.
In some ways, we advanced as a nation during these years. The Internet boomed, and the pockets of millions of average Americans grew deeper. But did these years of ease make us a stronger, more free or secure nation?
We shrunk our military by 400,000 troops during the 1990s, retired over one hundred ships from the navy, and decreased the size of our air force by more than a quarter. More ominously, we gutted our human intelligence capabilities, and never took any real steps to infiltrate the violent jihadist groups like al-Qaida that had declared war on America.
At home, births to teenage mothers rose to their highest levels in decades, teenage drug use climbed, and pornography became the Internet’s biggest business. Our dependence on foreign oil rose from 42 percent of our total consumption in 1990 to 58 percent today.
I don’t wish challenges and hard times on this nation, even though I believe they have made us the country and people we are today. But neither do I fear them. My sole concern is that Americans will choose not to act, not to face our challenges head-on, not to overcome them.
In the first decade of the twenty-first century, our economy has suffered its worst crisis since the Great Depression. We have amassed an unprecedented amount of debt and liabilities, and added to that, the Obama administration plans trillion-dollar deficits every year. Russian belligerence is on the rise. China holds over $750 billion of U.S. obligations. Iran and North Korea threaten the world with unbridled nuclear ambition. Violent jihadists like those who attacked us on 9/11 plot our destruction. The consequence of failure to act in response to these perils is unthinkable.
America will remain the leading nation in the world only if we overcome our challenges. We will be strong, free, prosperous, and safe. But if we do not face them, I suspect the United States will become the France of the twenty-first century— still a great country, but no longer the world’s leading nation. What’s chilling to consider is that if America is not the superpower, others will take our place. What nation or nations would rise, and what would be the consequences for our safety, freedom, and prosperity?
The world is a safer place when America is strong. Ronald Reagan remarked that “of the four wars in my lifetime, none came about because the U.S. was too strong.” America’s strength destroyed Hitler’s fascism. It stopped the North Koreans and Chinese at the 38th parallel and allowed South Koreans to claim their freedom and reach prosperity. American strength kicked Saddam Hussein out of Kuwait, and later pulled him out of his spider hole.
There are a number of thoughtful people around the world who don’t welcome America’s strength. In 2007, several reputable polls asked European citizens which nation they perceived as the greatest threat to international peace. Their answer was the United States. I was incredulous when I first read this, and presumed the respondents must have had the Iraq War on their minds when they answered. Surely they hadn’t considered what Russia would do in Eastern Europe if America was weak; what China would do in Taiwan; what the Taliban would do in Afghanistan; what Fidel Castro, Hugo Chávez, Kim Jong-Il, or Mahmoud Ahmadinejad would have in mind for their neighbors. The very existence of American power helps to hold tyrants in check and reduces the risk of precipitous war.
Does America make mistakes? Absolutely. We never fully understood the enormously complex political, economic, and military issues we faced in Vietnam, and we were wrong in our assessment of Iraq’s weapons of mass destruction programs. But in every case throughout modern history in which America has exercised military power, we have acted with good intention—not to colonize, not to subjugate, never to oppress.
During my tenure as governor of Massachusetts, I had the opportunity to join a small group of people in meeting Shimon Peres, Israel’s former prime minister and current president. In casual conversation, someone asked him what he thought about the ongoing conflict in Iraq. Given his American audience, I expected him to respond diplomatically but with a degree of criticism. But what he said caught me very much by surprise.
“First, I must put something in context,” he began. “America is unique in the history of the world. In the history of the world, whenever there has been war, the nation that is victorious has taken land from the nation that has been defeated— land has always been the basis of wealth on our planet.
Only one nation in history, and this during the last century, was willing to lay down hundreds of thousands of lives and take no land in its victory— no land from Germany, no land from Japan. America. America is unique in the history of the world for its willingness to sacrifice so many lives of its precious sons and daughters for liberty, not solely for itself but also for its friends.”
Everyone in the room was silent for a moment, and no one pressed him further on his opinion about Iraq. I was deeply moved. And I was reminded of former secretary of state Colin Powell’s observation that the only land America took after World War II was what was needed to bury our dead.
Some argue that the world would be safer if America’s strength were balanced by another superpower, or perhaps by two or three. And others believe that we should simply accept the notion that our power is limited.
British Marxist historian Eric Hobsbawm in his book, “On Empire,” asserts, “It is also troubling that there is no historical precedent for the global superiority that the American government has been trying to establish and it is quite clear to any good historian and to all rational observers of the world scene that this project will almost certainly fail.”
I take a different view. The United States is unique. American strength does not threaten world peace. American strength helps preserve world peace.
It is true that the emergence of other great powers is not entirely up to us— several other nations are building economic and military power and we will not stop them from doing so. But we can determine, entirely on our own, that we will not fall behind them. And the only way I know to stay even is to aim unabashedly at staying ahead.
Mitt Romney is a former governor of Massachusetts. Best known for his 2008 race for the Republican nomination for president, he has a remarkable career in private business, with his investment company, Bain Capital, helping to grow companies like Staples, Domino’s Pizza, FTD Florists and The Sports Authority, among others. In 1998 he left Bain to serve as CEO of the 2002 Winter Olympics in Salt Lake City. A frequent speaker and national television commentator, Mr. Romney has recently formed the Free And Strong America Political Action Committee. His latest book is “No Apology: The Case for American Greatness” from St. Martin’s Press.
Obama May Prohibit Home-Loan Foreclosures Without HAMP Review
By Dawn Kopecki
Feb. 25 (Bloomberg) — The Obama administration may expand efforts to ease the housing crisis by banning all foreclosures on home loans unless they have been screened and rejected by the government’s Home Affordable Modification Program.
The proposal, reviewed by lenders last week on a White House conference call, “prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed,” according to a Treasury Department document outlining the plan.
“It is one of the many ideas under consideration in the administration’s ongoing housing stabilization efforts,” Treasury spokeswoman Meg Reilly said in an e-mail. “This proposal has not been approved and there are no immediate planned announcements on the issue.”
She confirmed the authenticity of the document, which hasn’t been made public.
At present, lenders can initiate foreclosure proceedings on any loan that hasn’t been submitted for HAMP eligibility. Under current HAMP rules, foreclosure litigation can proceed while borrowers are under review for the program or even in a trial modification.
The proposed changes would prohibit lenders from initiating new foreclosure actions before loan screening by HAMP and would require lenders to halt existing proceedings for borrowers once they are in a trial repayment plan.
‘Improved Protections’
The Treasury Department will soon release guidance “which will include a set of improved protections for borrowers” in HAMP, Phyllis Caldwell, chief of Treasury’s Homeownership Preservation Office, said today in testimony prepared for a House Oversight and Government Reform subcommittee. She didn’t provide details.
The proposal goes further than rules adopted amid the crisis by federally controlled mortgage-finance companies Freddie Mac and Fannie Mae, which require lenders to review borrowers for a federal loan modification before a foreclosed property can be sold.
Foreclosure proceedings can still be initiated without a review, said Freddie Mac spokesman Doug Duvall. Fannie Mae spokeswoman Amy Bonitatibus said it adopted the same policy last March.
About 89 percent of outstanding residential mortgage loans are covered by the voluntary HAMP program.
About 2.82 million U.S. homeowners lost properties to foreclosure last year and 4.5 million filings are expected in 2010, RealtyTrac Inc., an Irvine, California data company, said last month.
Seven Million
Obama’s foreclosure prevention initiative, announced in February 2009 to help as many as 4 million Americans avert foreclosure, has modified 116,297 loans through steps such as lowering interest rates or lengthening repayment terms. More than 830,000 borrowers received trial repayment plans through January, according to Treasury data.
“Foreclosure processes differ among states, and the process is often confusing to homeowners already facing distress,” Caldwell said in her prepared testimony. “Treasury has been reviewing guidelines around outreach and the foreclosure process as part of its continual assessment of program effectiveness and transparency.”
Foreclosures may reach as many as 7 million mortgages, and an additional 5 million are at risk of default because borrowers owe more than the property is worth, Laurie Goodman, senior managing director at Amherst Securities Group LP in New York, said in a Feb. 17 interview.
Republican Criticism
“This is a problem of mammoth proportions,” Goodman said. “You can’t throw 12 million people out of their homes, so you need a successful modification program. My fear is that this isn’t it, but I’m highly confident that the administration will continue to iterate until they succeed.”
The Treasury proposal would require all borrowers who are 60 or more days delinquent on their mortgage to be sought out for participation in HAMP. Mortgage companies would need to try to contact the borrower at least four times by phone and twice by certified mail over 30 or more days before going to foreclosure.
Under current Treasury policy, foreclosure proceedings are only halted when a borrower receives a permanent modification plan.
House Republicans criticized HAMP as a failure today, saying in a report that it is prolonging the economic crisis and harming homeowners.
“By every empirical measure, HAMP has failed,” according to the 18-page report released by Republicans on the House Oversight and Government Reform Committee. “In its current form, HAMP both hurts homeowners who might otherwise spend their trial-period mortgage payments on rent and also distorts the housing market, delaying any recovery.”
If the Mortgage Bankers Association was hoping to show that it’s in touch with the needs of the mortgage servicing industry – and taxpayers, too – a proposal unveiled at last week’s servicing conference in San Diego may quickly have shot that notion to the ground.
MBA president and CEO John Courson used the show’s opening remarks to announce that the trade organization was backing what it called a “Bridge to HAMP” proposal for unemployed borrowers.
The shock and dismay from many servicers in the audience was actually audible, and I saw plenty of executives shaking their heads in collective dismay. Not because they don’t want to help troubled borrowers, mind you – but because they understood what capitulation looked like when they saw it.
We’ll get into the details, because details matter. What you need to know is this: the MBA, along with committee input from Fannie Mae, Freddie Mac (read: government) and others, are now pushing the U.S. Treasury to extend taxpayer-funded forbearances to unemployed owner-occupants. I say “taxpayer-funded” for a reason, as you’ll see.
Under the MBA proposal, unemployed borrowers would be asked to make nominal payments equal to 31% of whatever their remaining income is – which for many millions of Americans without savings would be 31% of their unemployment benefits, not nearly enough to cover their usual mortgage. In exchange for whatever they can afford, borrowers would receive forbearances for up to 9 months – with the servicer continuing to advance full principal and interest to investors the entire time.
But the servicer isn’t on their own in this proposal: servicers would have access to a mutant cousin of the discount window, called a Low Cost Advancing Vehicle (LCAV), which would see the U.S. Treasury “supply reasonable funds at a fixed rate to participating mortgage servicers to facilitate advances of principal, interest, taxes and insurance for the extended forbearance period.”
Leaving the more complex accounting minutiae aside for now (i.e., is a nine month forbearance a troubled-debt restructuring, thereby requiring a charge-off?), my comment is this: this proposal represents a dark day indeed for the mortgage industry, because it brings with it the distinct possibility of nationalizing our housing stock.
Let’s look at the fundamental question: by “bridging” unemployed borrowers to HAMP, are these borrowers really likely to be able to re-perform on their loan? To find the answer, we need look no further than an earlier attempt to tide borrowers over, a largely failed Fannie Mae program called HomeSaver Advance.
When HomeSaver Advance was rolled out in June of 2008, it was supposed to provide troubled borrowers with that needed jump start to get them on track to a performing mortgage. Borrowers could get a loan amount up to $15,000, unsecured, at a fixed 5% rate – with no payments and no interest for the first six months, and payments then spread over 174 months. The money was meant to cure any shortfalls due to temporary setbacks experienced by a borrower.
(You know, like loss of a job?)
Turning back the clock to the middle of 2008, HomeSaver Advance was Fannie’s primary tool for loss mitigation. In fact, 45 percent of all loss mitigation activity in the U.S. during the third quarter of 2008 was through the HomeSaver Advance program.
But by May of 2009, in a report to Congress, then-director of the Federal Housing Finance Agency James Lockhart indicated that roughly 70% of the mortgages tied to the HomeSaver Advance program had redefaulted and were in the foreclosure pipeline again.
The program still exists today, by the way, for borrowers facing temporary hardship that don’t qualify under HAMP – but it’s no longer a preferred alternative, guidelines have changed, and it’s clearly a shell of its former, short-lived glory.
To recap: under HomeSaver Advance, borrowers were directly given the means to cure their mortgages, and largely could not do it. I’m not sure how the MBA’s 2010 version of this program—which effectively bypasses the borrower and channels funds directly to investors—somehow changes that equation.
Way back in August of 2007—that’s now more than two and a half years ago—I first warned of the coming problem of millions of borrowers stuck in homes they could not afford, and argued against the futility of trying to keep those people in their homes. I suggested then that we begin considering the use of federal funds to help borrowers land on their feet as renters, enabling them to re-enter the home purchasing market at a later point—thereby enabling properties to move from weaker hands to stronger hands.
You know, the basic stuff that economic recovery is eventually made of.
Our housing market works, if it’s allowed to do so. Regular readers will know that I’ve been disappointed—but not altogether surprised—to see Capitol Hill reach into mortgage markets and regulate market activity. And some regulation was, and is, clearly warranted.
But this proposal from the MBA reaches a much darker level. What do you really think happens when Uncle Sam is in deep for investor advances, and millions of U.S. “homeowners” have been allowed to stay in their homes for next-to-nothing in payments?
I read an article recently written by Robert Wiedemer, the well known author of the book “ Aftershock”. I believe you’re going to find this very fascinating, and possibly frightening.
We all know the feeling. We are constantly hearing about the recovery, but it doesn’t really feel like it, especially in states such as Florida, Arizona, California and Nevada. Don’t worry, you’re not crazy because interestingly enough it isn’t a recovery. You can feel it in your gut-why the recovery doesn’t feel like a recovery no one needs to tell you that, you just know.
We lost an important part of ourselves in this recession: our wealth. Although the economy may have bottomed out last year, asset prices are still way down. That greatly affects our mood.
Sure, stock markets have recovered somewhat, but they are still down from the highs of 2007 and down almost 25% adjusted for inflation since 2000.
That’s a large loss over a long period of time, which makes it hard to feel terribly upbeat. If you were counting on stock market gains to help pay for your retirement or your kids’ college, you can’t feel very comfortable about that any more. Plus, the market did head into the 6,000’s last year. That’s scary, and who is to say it can’t possibly happen again?
Housing is down, and in some cities in Florida, Arizona, California and Nevada, its way down-more than 50%. That’s a big decline, but what’s most important is that the housing was never supposed to decline at all. It shakes your faith in what is most people’s fundamental source of economic stability and wealth creation. Real estate losses for the nation are more than $7 trillion and still increasing.
Asset losses are causing a lot of our anxiety, but the job situation is certainly adding to that anxiety. The unemployment rate is nearly 10%, but including the underemployed and discouraged unemployed pushes the rate to more than 17%. Almost one-third of 19-to 29-year-olds are unemployed.
Even if job losses are slowing down, hiring also has braked to its lowest point in more than 30 years. You have to be scared about losing your job in this environment. Many industries, such as housing and autos, aren’t recovering at all. In January, new home sales hit the lowest level on record dating back to 1963. Many companies in manufacturing are continuing a long- term downward spiral. When jobs are tight, prospects for moving up the ladder and increasing your pay get slimmer.
All of this loss in asset wealth and loss of job opportunities creates a natural unease about the economy and the future.
So don’t worry, you’re not crazy if you don’t feel the recovery because, for better or worse, you are simply very much in touch with the new reality of the Great Recession.
Short sales accounted for 15.9% of home purchases in January, surpassing the share of other distressed property activity, when real estate owned (REO) properties are measured separately, according to a monthly Campbell Inside Mortgage Finance (IMF) survey of more than 1,500 real estate agents, conducted by Campbell Surveys.
The share purchases taken up by short sales surpassed the share of move-in- ready REO purchases (13.8%0 and damaged REO (13.4%). These figures show a reversal from a recent trend of fairly even distressed sales across these categories. As recently as November 2009, according to the Campbell/IMF survey, short sales accounted for 12.4% of purchases, while move-in ready REO took 12.6% and damaged REO took 12.3%.
The January survey also showed first time homebuyers most often purchase short sales. Campbell/IMF attributed this trend to the fact first time homebuyers tend to only have one sale and closing timeline to work around, whereas existing homeowners often have to plan around selling a current residence at the same time of purchasing a new residence.
” Short sales activity took a temporary dip in November around the expected expiration of the first time home buyer tax credit” said Thomas Popik, research director for the Campbell/IMF survey.” Few first time homebuyers wanted to take that chance that their short sale transaction wouldn’t be approved by the November 30 deadline. But now that the tax credit has been extended, we see first time homebuyers once again snapping up attractively priced short sales”.
Housing Wire recently had an exclusive from Execellen REO president Cary Sternberg who warned of the risk involved with short sales as 2010 is looking to be” the year of the short sale”.
Short sales are likely to be the choice of borrowers deeply underwater on their mortgages-but these Sellers will likely not be able to become buyers again for 2 to 7 years because of their credit score and record of a short sale, Sternberg warns. This elimination of homebuyers may lead to a greater supply of homes for sale which could pressure prices further overtime.
Reprinted from an article by Diana Golobay published in Housing Wire February 22, 2010.
Studies keep showing what we have known for a long time: fighting foreclosures is a futile-and counter-productive use of resources.
New studies by John Burns Real Estate Consuling and Standard & Poor’s Financial Services conclude that loan modification efforts only serve to delay the inevitable, resulting in future foreclosures. The credit bubble allowed homebuyers to get in over their heads, to buy more house than they could afford. Once prices came down and the refi pipeline close down, it was game over for many of these buyers.
The latest estimates are for another five million delinquent mortgages to go through foreclosure (or alternatively, Short Sales ) over the next few years. Currently, there is an estimated 7.7 million households in some stage of predefault delinquency. Thus whatever grudging process that has been made in clearing out some of the excess housing inventory will likely suffer a setback as these five million homes, come out of the shadows and enter the real estate inventories of homes for sale. Five million homes represent approximately one new year’s sales.
John Burns, chief executive of the consuling firm, said investor demand for foreclosed homes remained strong. Thus, he said, prices were likely to be about level over the next few years, despite the looming foreclosure supply, if the economy continued to recover and mortgage interest rates did not rise sharply. But if the economy slumped anew and interest rates jumped, he said,” that’s going to cause prices to fall further”. The Standard &Poor’s study also says that the overhang of foreclosed homes expected to go on the market points to lower home prices. Some borrowers are catching up on payments after having their loan terms modified, but Standard &Poor’s says current trends suggest that 70% of such borrowers eventually will redefault.
As noted in Bailout Nation, there is a virtue to foreclosures – it helps drive over priced homes towards normal levels, increases sales, and removes the prior excess from the market.
It’s not pretty or pain free, but it is a necessary part of recovering from a bubble.
Charlie Munger, Warren Buffett’s longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning.
In an article penned for Slate.com, Munger uses the form of a parable to explain how Wall Street’s love affair with gambling has destroyed America’s Main Street.
The article leads with this headline: “Basically, It’s Over.”
The Berkshire Hathaway vice chairman describes the economic history of Basicland, which happens to match U.S. history.
Early in its history, debt is unknown except for home mortgages and some consumer loans, and people live within their means. Speculation is discouraged, and commodities markets are small and tightly regulated.
Under this rational system, economic growth skips merrily along at a steady 3 percent, Munger explains.
Taxes are limited and pay for only “essential services” like fire protection, courts, and defense. Most taxes are collected on imports, and government spending matches that tax income. Debt via government bonds is limited.
Then things take a turn for the worse.
“The extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland’s citizens more and more whiled away their time in the excitement of casino gambling,” Munger writes.
Financial services soon grow to account for too big a portion of the economy, Munger says.
“The winnings of the casinos eventually amounted to 25 percent of Basicland’s GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos, many of whom were engineers needed elsewhere.”
Then, a shock: Imported energy costs rise, and low-cost labor competition from abroad appears, Munger writes.
“Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors,” Munger writes.
The U.S. deficit — just the gap between spending and income in one year — is projected to hit $1.6 trillion in 2010. Total debt is project to exceed 100 percent of GDP starting in 2011.
In the parable, Munger strongly suggests that the United States take seriously the campaign of Reagan-era Fed Chairman Paul Volcker, who wants the big banks to cease pretending to be banks if they expect the freedom to trade securities on the side.
“He suggested that Basicland should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees — and former casino patrons — to produce and sell items that foreigners were willing to buy,” Munger writes.
As the parable ends, none of the politicians listen, and Basicland turned into “Sorrowland,” Munger concludes.
It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look in rents. Specifically it’s the rents Americans pay on condo’s, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.
” If you look at the trend in rents to see where housing prices are headed, you are looking at the right measure,” says Yale economist Robert Schuller. In recent reports, Deutsche bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The Deutsche bank research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a little bit more pain to go, in selected areas such as, California, Arizona, Nevada, Florida, and Michigan.
In normal times, people won’t pay much less to lease a house than to own it. After all, if you’re paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef’s kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That’s precisely what happened during the last bubble. And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent vs. what owners spend on the same property returns to its historic average.
On average family’s across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one. By mid 2006, with the craze in full swing, the figure fell below 60%. At that point Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets. In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange County, owners of monthly payments were triple those of their neighbors with leases instead of mortgages.
So how did that happen? During the bubble, rents the real engine that drives values were inching along at more or less their usual pace. From 1999 to 2007, apartment rents increased only 32%. But home prices jumped more than three times as fast, around 105%. What does that mean for future prices? Given the analysis, it’s likely that prices will fall another 5% or so Nationwide. The drop could even be slightly greater. One reason,Rents, the force that govern housing prices, are still falling. In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still – exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010. But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own of black magic. The numbers are back in alignment, or close to it. It had to happen. That’s what rents, housing’s great master, were telling us all along.
This article derived from CNN Money.Com February 12 2010
The Shadow inventories of bank- repossessed properties as well as distressed mortgages facing foreclosure, will take nearly three years to clear at the current sales rate according to a report from the credit rating agency Standard & Poor’s. The analysts add that during this period many servicers will likely shift their emphasis from mortgage modification to loan liquidation.
The shadow inventory of homes include all delinquent loans and real estate owned (REO) property that has not reached the market. REO property are foreclosed homes taken back by the bank for liquidation. As for the total amount of homes in the Shadow inventory Amherst Securities places the total at seven million. The Royal Bank of Scotland found 2.7 million and First American Core Logic counted 1.7 million.
Standard & Poor’s estimates the inventory to equal a 33 months’ supply of homes. Analyst added the estimate is actually conservative, as they did not assume homes not showing signs of distress would default and push the overhang of supply even further.
Furthermore, court delays, political pressure and servicing backlogs constricted the flow of foreclosures hitting the market to a trickle. These delinquent borrowers who have not received a foreclosure fuel the rapidly growing Shadow inventory of properties according to the report.
Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is updating abating, but rather should be attributed to the temporary limited supply of homes on the market.
