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Detroit in Bankruptcy After Years of Neglect and Lack of Leadership

Back in the last quarter of 2010, as the big three Auto manufacturers lobbied for bail outs, and later filed for bankruptcy, Detroit's fate was all but sealed. Well, the fat lady is singing, and this is a political and public relations mess. There are hints of mismanagement or misappropriation of funds and a fair share of finger pointing - but at the core of the municipality's fiscal crisis are the Pension funds. How will the courts handle retiree payouts: will they remain at par or will they be reduced? The residents of Detroit are in for an interesting turn of events. This is a serious wake up call, to say the least.
How did this filing come about? Well, from what I can tell, Snyder seemed to have been trying to quietly handle the crisis. Seeing the writing on the wall, Governor Snyder wanted to avoid a possible downgrade of Michigan’s credit rating, which is likely following a messy "unmanaged" bankruptcy. The crisis management strategy was to get ahead of the problem, so that the worst case scenario is a "Structured" bankruptcy - thereby minimizing the negative impact on the State's overall credit rating. The Wall St. Journal reported that Snyder brought in Kevyn Orr as an Emergency Money Manager to work aggressively to get Detroit’s fiscal house in order. Snyder's secret weapon, Orr, was apparently granted “dictatorship” style authority, essentially rendering the city’s finance department and controller powerless. Kevyn Orr was the lead attorney handling the Chrysler structured bankruptcy, so it could be construed as a sound decision. However, from another perspective, one might say that hiring a bankruptcy attorney is like appointing a wolf to watch over a hen house.
How serious is it when a city files for Bankruptcy? .

California has probably seen the most cases of bankruptcy than any other state - with city after city filing for bankruptcy protection as a result of the housing crisis and pour money management. The jury is still out as to whether California's troubled counties will recover gracefully. Whatever the case, the road back to solvency is a long and arduous one. As for Detroit, it was clearly heading in the wrong direction prior to the start of Great Recession. In fact, long before the Recession rocked the nation, and later Europe, Detroit was already showing obvious signs of fiscal discord. Their key source of jobs and tax revenue stemmed from the auto industry and ancillary products and services. Although many local businesses and retailers benefited from the economic "trickled down".
In all fairness, we can't place Detroit's troubles entirely on the shoulders of the auto industry. There are multiple factors playing into the city's demise. For example: tax revenues over the past 25 years have been on a steady decline as the population and businesses fled to greener pastures. The City of Detroit, at its peak (1950s), had a population of 1.8 million, but the most recent Census Bureau records illustrate a more than 65% decline. The disturbing reality is that Detroit presently has a population of merely 700 thousand - particularly considering the demographics and socio-economic landscape. Adding insult to injury, over the past 5 to 6 decades the population exodus happen to be primarily the middle class, leaving the city with a disproportionate number of low-income residents. What this boils down to is a dwindling tax revenue base, and increased spending for public assistance, healthcare and other subsidy programs. The economic cycle can only spirals downward from there, unless a drastic changes are made.
The “Economics-101” explanation would be as follows: When you have a predominately low-income or impoverished population, this translates to a largely unskilled and uneducated labor force – which means local-area businesses can’t fill higher paying jobs that require specialized skills or education. This distressed socio –economic environment drives business out. In turn, joblessness decreases consumer spending, which ultimately cause retailers to close down.
High unemployment was not Detroit’s biggest problem. Job creation doesn't help in this scenario unless there’s a strategy implemented to attract businesses and manufacturers with jobs that match the skills of the population. Sheer job creation (in a vacuum)is nothing unless there is also a comprehensive plan to educate or provide training to upgrade the skills of the local workforce.

Years of neglect and misguided development spending has come to a head. There's been ample time (we are talking decades) for anyone from the parade of politicians to step up and show real leadership. It’s hard to believe that none of the government agencies or organizations could have developed a long-term urban renewal strategy to transform Detroit into a thriving economic force. As far back as I can remember, Detroit was known for its high crime, and unemployment, but the combined burden of high unemployment, crime, foreclosures and abandon properties - against the backdrop of diminishing revenues, and $18 billion in debt obligations – you’re looking at a time bomb.
Political fallout is eminent, and everyone will be watching to see if Obama will extend an “bail out” to Detroit, since he was vehemently supportive of the big-3 auto makers in their time of need. With any luck, the people, politicians, unions, educators and activists will be open minded enough to work together and find a common ground for rebuilding Detroit. This may turn out to be for the best in the long run

K. Reilly
The Cohn-Reilly Report
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Dancing with the Devil: A Breach of Trust

Yet again, the Golden Child of Wall St. is revealed as a fox in sheep’s clothing.
I was engaged in a debate about the role Goldman Sachs may have played in the downfall of Greece’s economy with a relative (through marriage) who migrated from Greece to the United States when she was 10. My research on the near collapse of the US financial market clearly points to the gradual deregulation and the unethical banking practices. There are a number of factors that contributed to the fiscal crisis, particularly the securitization of subprime Housing Loans, re-packaged and sold Globally as “A” rated paper. Regardless of the fact that the underlying debt was “C” rated, banks had the audacity to sell the mortgage-backed securities as “A” rated, low risk bonds. Of course, we can’t ignore the rampant Securities and Banking fraud, which generated hundreds of charges and investigations by the SEC against Banks and Hedge Funds.
I’ve written numerous articles about the Euro crisis. Like many economists, I believe the U.S. fiscal crisis precipitated the downward spiral of a number of EU members. This is mainly because of large quantities of foreign investment in U.S. Housing securities, which went sour. Much to my surprise, in the process of gathering data surrounding the global crisis, I learned that EU members; Greece, Italy, Spain and France, carried out non-transparent, accounting practices for over a decade. No doubt the high debt ratios hidden by accounting loop-holes would have eventually brought the weakest EU members to fiscal ruin at some point anyway.Although, our financial calamity accelerated the timeline of the reveal. America's financial troubles was the equivalent of lighter fluid, igniting the masked problems of the EU’s weakest links.

Apparently the Greek-American community seem to have a different slant on how Greece's economy found itself engulfed in a fiscal and political battle for stability. The lack of transparency and debt-to-revenue ratio was certainly taking its toll on the weakest EU members. This was made worse when changing leadership was blind-sighted by the urgency of country’s debt portfolio – particularly the derivative-structured debt owed to Goldman Sachs. When the housing market collapsed, interest rates increased, drastically increasing the debt service on the Goldman/Sardelis deal
My Greek-American in-law (who shall remain nameless), vehemently contends that Goldman Sachs is the monster that brought her beloved country to its knees. This is hardly the case, since Greece's debt was already 127% of its GDP by 2009. Also, by that time, Greece was seeking a bailout for over 300 billion Euros. Nevertheless, She was referring to a secret transaction between Goldman and the Managing Director of Public Debt Management Agency (Christoforos Sardelis), back in 2001, where a masked loan of $2.8 billion Euros was signed, sealed and delivered. Executed completely under the radar. The loan, which was thought to be earmarked for the preparation of hosting the 2004 Olympics, was later revealed not to be the case. Although I admit, the unholy alliance with Goldman was a financial set back, it was not the smoking gun.

The under-the-radar transaction executed by Sardelis and Goldman was a Currency Swap. Given the variable rate structure, there was mounting debt service, as interest rates increased, making it difficult for Greece to contain. I appears that Greece’s Debt Management Agency didn’t thoroughly analyze the deal to determine the long-term impact of this type of debt structure for Greece, given their compromised economy. A simple “what if” analysis would have helped them to analyze the impact of increasing interest rates. The Currency Swap transaction belongs to the derivative family, which are always complicated to quantify or analyze given the fluctuating market, currency and structure. These are highly risky transactions, and certainly not recommended for unstable municipalities suffering from high debt, declining GDP, and 25% unemployment.

The secret deal between Sardelis and Goldman could be classified as irresponsible given the size of the debt, and the fact that it was tied to fluctuating interest rates. The operative word being, “fluctuating”. Regardless of Sardelis’ good intentions, “it takes two to tango”. Therefore, Sardelis is equally at fault. My Greek-American in-law may be reluctant to accept it, but the blame has to be shared.

Since 2010, when I initially started writing about the Euro crisis, I learned that Sardelis was motivated by the Maastricht Treaty, requiring all EU members to show “improvement” in their public finances. This Goldman swap was a "dance with the devil" and simply a desperate attempt to “hide” the debt from the country’s books to comply with the Maastricht Treaty. These swaps were one of several techniques that European governments used to meet the terms of the treaty. There were certainly alternatives techniques available, so why did Goldman push this particular structure? Whatever the case, Sardelis was out of his element, and out smarted by his trusted Bankers. It was reported in the Wall St. journal that Goldman served up fictitious, historical exchange rates for the transaction, which earned them $760 million in U.S. fees.

Attemps to Implement Austerity Measures Lead to Violent Protests.

By the time Spyros Papanicolaou took over the Public Debt Management Agency in 2005, the loan had ballooned to over 5 billion Euros. Given the role that Goldman played in the fiscal unraveling of the housing market, which sent trimmers across the globe, you would think that their CEO, Blankfein, would consider a forgiveness of some portion of the debt. Goldman and Papanicolaou did get around to restructuring the debt, but I’d be willing to bet there was no forgiveness of debt.

Goldman Sachs may soon be faced with a public image dilemma, but until then I supposed they’ll continue to carryout their Mission to squeeze clients for every possible dollar.

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To Be or Not To Be: EU Shows signs of cracking

Twenty years ago, when the idea was circulating about a unified currency in Europe, it seemed like such a brilliant concept, based upon sound economic and political arguments. Today, it almost seems like an impossible dream. Landon Thomas of the New York Times asks in his article "Can they muster the will and resources to keep the euro zone from breaking apart?

As the world looks on, and markets take defensive positions, the Euro crisis unfolds like the climax of a mystery novel. Greece's dramatic elections - where the people ousted Sarkozy, opting for an unlikely candidate, François Holland. The outcome of the election was a clear sign that the people were not ready for the strict austerity measures needed to turn their economy around. Bailout alone was not going to save Greece, it was only expected to buy them time to pull their policies, and fiscal plan together. The political and civil unrest in Greece, gave little hope for a turnaround. Instead the notion of Greece leaving the European Union resurfaced with somber overtones of reality.

By the end of May, Spain had decided to pump 19 billion Euros into its struggling Lender, Bankia, SA, as a strategy to illustrate stability, and quell any notion that the crisis continues for its financial sector, in light of Greece's downward slide. This is a prop-up strategy that is effective in influencing perception, which is crucial in the realm of investors and financial markets. The US equivalent of $24 billion, was a rich injection that is twice the amount Spain spent in the recent past to straighten out the banking sector during US housing market collapse - causing a global rippling affect. Spain is swiftly reacting to mitigate a repeat of the fiscal mayhem stemming from billions of dollars lost in toxic mortgage-backed securities.

Meanwhile, two weeks ago, S&P downgraded Bankia, and several other Spanish Banks, causing worldwide concern. The rating agency made matters worse by painting a gloomy near-term forecast for the region, citing their belief that Spain is heading toward a double dip recession. S&P also noted that there was a reasonable expectation of an increase in troubled assets. On the heels of Frances downgrade, and Spain’s fiscal concerns, the question becomes, was this unified currency such a sound economic and political move in the first place. Friday, the DOW closed 300 points lower, illustrating investor sensitivity to the Euro Crisis - although, it should be noted that market anxiety was further stimulated by the soft jobs report.

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Economic Stability: Still in Question in the U.S. & EU

The mixed economic indicators have been a source of much debate among analysts. The softer than expected Jobs Report, along with the spiking gas prices have turned the optimistic economic forecast on its head. An article in the Wall Street journal indicated the industries that were previously driving the economic recovery in the past year have slowed, noting that others economic indicators have stepped up their place. I'd say that's as accurate observation and interesting fodder for economists. For example: the housing market appears to be gaining a good deal of traction, and consumer spending has been consistently growing, and gaining momentum. Experts say that the up-beat consumer spending data is linked more to the unusual warm Winter, and thus not so much a real indication of a positive consumer outlook. The market has fluctuated in the last quarter of 2011, but it cannot be disputed that the DOW has flourished in spite of the slow economy to its highest levels above 13, 000. It also appears that the market seems to be a lot less sensitive to the news across the Atlantic than last year. The Ratings agency, S&P downgraded Spain's debt in January and again in March, but the market barely responded to the news. This is somewhat surprising considering the impact the Euro crisis would have on our economy if things were to spiral out of control. Perhaps the market had already compensated for the news in the last quarter of 2011, since the downgrade for France and Spain had been anticipated.

Indications That support Optimism

Consumer spending has been a great influence on the economy, having a direct impact on the retail industry revenues. It should be noted that two thirds of national GDP is made up revenues from consumer spending. Consumer spending is indeed an important aspect of analyzing the economic forecast. The Housing market is showing signs of life, as housing purchases in the first quarter increased 19%. More dramatic statistics have been coming out of Miami and New York, but it’s still too soon to exhale

Indications That support Pessimism

The rising oil prices have become an unavoidable threat to the recovery, but for some inexplicable reason consumers are taking advantage of the prices and low financing interest rates. The jobs report came in at 120,000 new jobs, which is the lowest number in several months. This could indicate that employers are not completely convinced that the economy is on the road to solid footing. Let's face it the perception of the economy is the most important aspect of the forecast. Economists and analyst can talk endlessly, but if the investors' perceptions do not concur, they stay out of the market, or get out.

The fact is there are both positive and negative influences at work, making it more challenging to decipher the indicators. If I had to take a stab at analyzing the economic indicators, I'd be likely to lean toward an optimistic forecast because of the sheer impact that consumer spending has on the GDP, and the deep discounts in the housing values which have spurred buying. Also, the earning reports illustrated that banks are thriving amid restrictive finance reforms, and retailers are reporting positive earnings that beat analysts' expectations. Tourism in the country reached an all-time high amounting to billions in added revenues in New York alone. We will just have to wait ad see, it could really go either direction in the coming months.

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Goldman Sachs: Filing for Moral Bankruptcy

The investment Banking community was stunned by the hard hitting statements made by Goldman’s former executive, Greg Smith. Smith's scathing, but heartfelt remarks, published in the OpEd section of the New York Times, was the topic of lively debates and criticism around the globe this week.
After reading Smith’s behind-closed-doors account of what’s really going on at Goldman, it would seem that Wall Street’s gold plated, celebrated investment bank of 143 years has somehow lost its core values on which they built their brand of “Trust” and “Integrity”. Goldman Sachs was once an awe inspiring investment bank, whose brain trust is referred to as “the best and the brightest”, but they have certainly suffered from a leadership deficiency. Strong leadership or the lack thereof, is the basis of the rise and fall of many businesses – regardless of their size. It is the “leadership” of Steve Jobs who, upon returning to Apple, was able to bring the company from the brink and take it to quintessential plateau, far beyond anyone’s imagination. That’s leadership.

Mr. Smith’s commentary might have easily been dismissed as a disgruntled employee, were it not for the fact that he was a highly regarded executive director, who has spent over a decade of his career there. From my perspective, Smith gains credibility for his tone, and the manner in which he described the pride he felt being a part of Goldman, and praised the company that once was. He was convincing because of his effort to be constructive in his criticism - disclosing examples of the troubling shift away from providing investment advice in the best interest of the client. Rather than simply throw destructive daggers and below-the-belt punches that serve only to damage the company, his rant was respectful but unyielding. Smith had the power to do a lot more damage than he did. Keep in mind, never once did he accuse Goldman of fraudulent practices.
Mr. Smith’s piece focused on Morals, Ethics and Integrity, which was summarily lacking, apparently much like the leadership. Smiths cited his leaving the company because he could no longer stomach the Goldman that has emerged. The shift in focus from Client-centered investment services to, revenue-driven “elephant hunting” (Smith, 2012) has eroded the company’s code of ethics to the bare bones. Having developed an unnatural preoccupation with taking every allowable advantage of the client, Goldman Sachs is left morally bankrupt.

Let us all be reminded of the Senate hearings, and the SEC investigations of 2010 and 2011, which resulted in fines and a multi-million dollar settlement. Meanwhile, the public has barely had a chance to digest the law suits that have come from international companies claiming Goldman mislead them about the rouge mortgage-backed securities they purchased from Goldman, without so much as a warning.
The firm’s Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn issued a statement more than 24 hours after the OpEd sent global shockwaves throughout the investment community. As expected, they were essentially denying the allegations made by Smith. Unfortunately, it was too little, and about $2.2 billion too late, as the value of the company took a dramatic hit after Smith's public resignation letter went viral. The stock recovered all but $800 million in value the following day, due to investor excitement about positive economic statements from the Federal Reserve, and stronger than expected retail data. Still, intangible losses are mounting where trust, good will, and brand are concerned. For this reason, many question the wisdon behind the delayed reaction from Goldman. It's too early to tell what the fall out will be, and Goldman's overall Damage Control Strategy is yet to be seen.

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Anonymous said......

Great article Katherine! The Goldman crew only needed 10 BILLION dollars (place pinky to corner of mouth)to stay afloat after the greatest heist on the planet by these guys: http://projects.propublica.org/bailout/list
It only took Goldman (Gold,man!)a couple of years to repay 10 Billion dollars... what does that tell me about how easy money comes to them?
At least one of them is admitting being morally bankrupt! It's about time!
We should have done what Iceland did instead of screwing over the people.
Now what?
http://projects.propublica.org/bailout/entities/237-goldman-sachs
Chris G / Mar 18, 2012 05:17 PM

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K. Reilly said......

Hey Chris G., thanks for your comment. I also checked out the propublica.org link, which I enjoyed scanning through. Sorry for the delayed response. :)

The Price of Deception: Settlement for Mortagage Underwriters Finalized

The Price of Deception: Settlement for Mortagage Underwriters Finalized
The big 5 mortgage services are forced to finally face music. In the past several months banks and underwriters were preparing to sign off on the highly anticipated settlement. As Attorney Generals nationwaide descended upon Washington to iron out the details of the settlement last month, industry analyst were left to speculate. We've reported about the widespread abuses in the mortgage industry, which culminated in thousands of forclosures being thrown out of court or temporarily halted. The housing industry which is the last of the economic indicators to show signs of a turnaround, is believed to be the catalyst for the financial callapse of 2008. As the rest of the financial markets began a massive melt-down, the foreclose rate was an an average of 45% nationwide by 2009. The Obama administration tried its best to stop the bleeding with several homeowner assistance programs, but it appeared the abuses had taken its toll on the market. It simply had to run its course.
It was later realized that many of the mortgage documents were not filled out properly, (leaving a questions as to what loan provider was attached to which property). This prompted intensified scrutiny, leading to a long over due investigation. During the investigation a freeze was placed on all foreclosures allowing homeowners to stay put for while until the matter was thoroughly reviewed. The implosion of the housing market slowly revealed a myriad of issues that involved abuse, fraud and deception, causing massive declines in property values. The term upside-down mortgages was commonly used to describe the steep depreciation property values that sank below the underlying mortagage owed. Later, the proliferation of foreclosures uncovered the ROBO signing scandal (mentioned above) involving, forged signatures and flawed paperwork which precipitated unfounded evictions. Imagine the devastation of homeowners being forced out of their homes, only to find it was due to erroneous paperwork.

An effort to correct the abusive behavior illustrated by the mortgage lenders and banks has finally come to a head. The "pow wow" of federal officials and attorney generals from all 50 states resulted in an outline of the terms of the settlement. Mortgage Servicers were bracing for a multi-billion dollar hit, which was announced yesterday (February.9th). The settlement is said to be a painful $25 billion in penalties and fines. News had circulated in December that there are a few sticking points in the deal, which was met with disapproval from a few of the Attorney Generals, namely Eric Schneiderman of New York.
The Obama Aministration was pushing to have the deal signed and sealed before the State of the Union Address, but that was a long shot. Surprisingly, he made no mention of it in his speech. Industry analysts and experts correctly speculated that fines would be around $25 billion, but were unclear as to the specifics of the homeowner assistance programs. I've been anxious to see the details of the settlement doe myself. Some aspects of the settlement will include limited aid from banks to overwhelmed homeowners, by reducing their loan principle. We can expect to see structured Principle Forgiveness programs, which will apply to a small number of mortgages that are wholely-owned by the banks, while Bank refinancings will be another form of aid to home owners.
The housing market woes of the past three years have eroded bank share prices and caused immeasurable blows to their reputation and goodwill. Trust and confidence of the public in Banks may be a thing of the past.


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Game Changer: Housing Market Forces Feds to Reassess

The Housing Market is pulling the economy down. Clearly the recent unveiling of the foreclosure debacle is a game changer in the Fed’s strategy to bring the economy back around. Any plan set for the last quarter of this year is null and void. The cost of unraveling the legal web is likely in the billions when it is all said and done. Ben Bernanke is no doubt under intense pressure to take action toward healing the economy. Although he has been suspiciously silent in the days leading up to the Foreclosure Freeze outbreak, he was quoted in the Wall Street Journal as saying he will take the measures necessary.

What about the rumors and speculation about Quantitative Easing? This is a monetary policy strategy that infuses money into the economy by purchasing securities. If the Federal Reserve buys bonds, banks will then have money from the sale of the bonds, which can then increase their ability/desire to lend to businesses and individuals. The domino effect will serve to speed up the economy. Unfortunately last year’s attempts to speed up the economy had little impact, so specialists are debating about whether or not quantitative easing will be enough at this point.

Nevertheless, the stock market is dancing to its own beat, seemingly not connected to the sluggish economy. In the meantime a lot will hinge on the two-day meeting held next week, , beginning November 3rd. Investors are not expecting the quantitative easing measures to have the traction needed to spur the economy. It will undoubtedly take more than throwing money at the problem, which is why next weeks Fed meeting is highly anticipated.

(See Interesting Article about the Currency War at Reuters)

K. Reilly
The Cohn-Reilly Report

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Home Sweet Home?: Foreclosure Freeze Incites Serious Concern

In New York , three of the largest banks implemented a freeze on foreclosures amid concerns of illegitimate filings and erroneous documents. According to the Mortgage Bankers Association, NY has upwards of 80,000 mortgage loans in foreclosure. When JP Morgan Chase, Bank of America and GMAC prompted the freeze, it certainly brought much needed attention to the problem. Last week, it was made public, although not officially announced. Shortly thereafter many other banks followed suit. Apparently Attorney Generals from forty states are calling for a freeze, including New York Attorney General Andrew Cuomo. It is widely reported that Cuomo stipulated that the biggest mortgage lenders immediately halt all foreclosures.

Just as the foreclosure crisis began a new wave of court proceedings, a more pressing crisis unfolds. Not only does Cuomo plan to extend the freeze beyond the BofA, JPM Chase and GMAC, but he wants the halt to include evictions, and foreclosure sales.

This is probably good news to hundreds of thousands of home owners across the country who are struggling to stay in their homes, with little or no alternatives. The freeze is anticipated to pause the process for at least one year - enabling homeowners to go without the pressure of making mortgage payments. At least for a few homeowners, this may be just the extra time they need to get their finances back on track, or at the very least prepare an alternative living situation for their families.

Why the Drastic Freeze?
Apparently what is described as “faulty” paperwork, ranges from affidavits that do not stipulate who originated or owns the loan, to forged documents. This could mean that countless foreclosures may be overturned, which puts the many recent buyers of foreclosed properties on shaky grounds at the very least. Oh What tangled web we weave, to quote Sir Walter Scott. This essentially puts the last two years of foreclosed property sales in uncertain territory. Meanwhile, Back on Wall Street, this spells deep trouble for the big three, and many other mortgage underwriters. Although Wells Fargo and CitiGroup maintain that their documents are straight, that remains to be seen. It is hard to phathom the entire mortgage industry is pausing to resolve a nationwide scandal involving erroneous foreclosure documents, yet Wells Fargo and CitiBank mortgage documents are 100% clear of any errors.

Massive Costly Clean Up Ahead: As courts from state-to-state take on the daunting task of sifting through thousands of documents to verify the true mortgage holders, banks will have to expend costly legal support to prove their position. The costs on both sides of the fence will ultimately translate to higher interest rates for borrowers, and yet another nightmare for tax payers. It is difficult to determine how deep this crisis really is, but I imagine that this is just the tip of the iceberg.

K. Reilly
Cohn-Reilly Report

Organized Crime: Countrywide Swindled Homeowners.

According to the Federal Trade Commission, Countrywide financial Corp, now owned by Bank of America, cheated hundreds of thousands of customers facing foreclosure. The FTC contends that Countrywide took advantage of homeowners by inflating the cost of services for property inspections and foreclosure services by as much as 400 percent. Sadly, I'm not surprised, given the avalanche of fraudulent activities by U.S. corporations these days. To add insult to injury, Countrywide went so far as to overstate the amounts borrowers owed when they were in bankruptcy, and covertly added fees and bogus charges to homeowners’ accounts. For taking advantage of homeowners at their most vulnerable point - when they are facing possible homelessness - these guys should be forced to shut down their operation altogether. These charges demonstrate an egregious act of greed, illustrating how callous some of the mortgage lenders were, which contributed to the breakdown of the housing industry, that nearly brought the country to a standstill. I have heard many arguments that place 50% of the blame for the millions of foreclosures on the borrowers. Meanwhile, when you really put in perspective the impact of this kind of organized crime that was sweeping mortgage industry, borrowers didn’t stand a chance against this tidal wave of predatory practices that escalated to fraud in some cases.

Although the charges against Countywide involved activities which took place prior to Bank of America’s acquisition, it has agreed to pay the $108 million judgment against Countrywide as a settlement. This just another reason why the congressional leaders must remain committed to finalizing the Financial Regulations overhaul. It is long over due.

K. Reilly
Cohn-Reilly Report

Will There be Another Housing Bubble?

According to some there will be, which is strange to hear, as the country struggles to shrug off the worst housing crash since the Great Depression. According to a CNN article, the nation is simply not building enough homes to keep up with potential demand. Only 672,000 new houses were started in April; less than half the long-term run rate needed to meet the nation's natural population growth.

"It is ironic, but there is a growing consensus that there may be a new housing shortage coming," said James Gaines, a real estate economist with Texas A&M". “So far, the shortfall has been masked by a weak economy that has put a damper on home buying. Once the job market rebounds, however, people will look to have their own homes again. This pent-up demand could get unleashed on unprepared markets, causing shortages and rising local prices.”

“Household formation, the technical term for people moving in together, has been on hold during the past few years as young people, especially, have been unable to find jobs. In the past, an average of more than 1.3 million households were formed each year, causing demand for 1.5 million new homes (more homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect.) In 2009, only 398,000 new households were formed, according to the Census Bureau. That is much lower than average and a quarter of the number formed just two years earlier.”

"The decline in household formation is artificial," said Gaines. "The young are moving in with their parents. There's even doubling up among working class people. There's a pent-up demand coming if and when the economy recovers."

Those doubting a new bubble point to a large inventory available. As many as 7 million homes are vacant but not for sale, according to the Census Bureau. That should provide a cushion to offset increased demand. "The housing market hasn't been this way before," said Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies. "The gravity of the problem is deeper and the challenges different. You have to get through that inventory."

The inventory number, however, can be deceiving for two reasons - people may not want to live in hard-hit areas, for example California exurbs and Detroit neighborhoods, or the homes may be beyond repair. "Many of these vacant homes may not be habitable or are in locations where nobody wants to live," Gaines said.

Ordinarily, the nation's homebuilders can react quickly to meet surges in demand. But several factors are preventing them from being nimble. The biggest is the difficulty getting loans, according to Jerry Howard, CEO of the National Association of Home Builders (NAHB). "When we came out of past recessions, there wasn't the difficulty of obtaining financing that there is now," he said. Many small builders have been unable to obtain construction loans or lost their financing in mid-project. That has prodded NAHB to support federal legislation that would make $15 billion in lending guarantees available for private builders.

Too many builders went out of business during the recession, so there will be fewer companies out there to do the building. The survivors will confront a transformed regulatory environment, according to Howard, that will make new homes harder to build and more expensive. "There is an increased focus on smart growth that will create regulatory barriers to the kind of sprawling development that has characterized a lot of recent building," said Retsinas.

Previous overbuilding of one-time boom towns, such as Las Vegas and Miami, should provide enough inventory of like-new homes to counter any strong pent-up demand that breaks free. It's the more constrained markets, where it's particularly hard to build such as New York, San Francisco and Seattle that will field the bulk of the new bubble problems, according to Retsinas. However, he is less worried about the purchase market than about rentals, the usual entree for the young buyers expected to lead the new housing market charge. "Nobody is building any rental inventory," said Retsinas.

Although there is still a surplus of houses for sale in many good areas, it is interesting to see people talking about a shortage in the not too distant future. That in itself is something that no one would have dared to mention, even a few months ago.

C. Cohn
Cohn-Reilly Report

Housing Market: Finding its Way Back (Part 2)

Although the housing market is lagging behind the economy, there are particular states with several markets that are lagging behind the national housing recovery ; i.e., Florida, Las Vegas, California, Michigan, Arizona, Illinois, New Jersey . The first quarter of 2010 is looking more glum than experts anticipated. Homes which Banks have started foreclosure or repossessed is up 2.2% year over year. That number increases 5 times that rate in some of the aforementioned markets. Keep in mind that the government programs to save home owners from the dreaded foreclosure were targeting low-income home owners, which left the middle class home owner hanging with little or no assistance. According to the First American Core Logic, (data firm that tracks 97% of U.S. Mortgage Transactions) there are 5 million mortgages that are delinquent, and 36% of them are over 180 day late. Further 1 out of 14 homes meet the criteria for foreclosure. That marks a fairly steep increase from 1 in 22 homes during the same period last year. We are facing the second wave of foreclosures, and appear to be in the eye of the storm. Lastest numbers out last week indicate that there are 11 million home owners who currently owe more on their home than they are worth. America, we should prepare ourselves for an even longer road to recovery where the housing housing is concernec.

Help is on the way. This past Friday, the federal government announced that they were adding a new series of programs to assist struggling home owners who have run out of options. David Stevens, commissioner of the Federal Housing Administration stated “We’re walking that delicate balance to make sure these solutions are sustainable and not temporary,” speaking of the new efforts the FHA is taking to get the housing market back on its feet, while helping homeowners stay in their homes. The programs are extensive, but there is a vital program that addresses the upside-down mortgage issue facing millions of Americans. With this Program. homes will we refinanced at 97% of the home actual values, which will significantly lower mortgage payments for homeowners. Will will also mean forgiveness of debt, which in essence homeowners bailout. Who says the government only thinks about saving the large corporations?
F.H.A. will likely use the $14 billion pay for mortgage insurance and cover a large portion of the write downs, so that lenders are not carrying the loss. There quite a few new programs on tap to help numb the pain for home owners. Nevertheless, the initial reaction to the refinancing program among lenders is less than enthusiastic. The F.H.A. may have to sweetin' the deal for lenders bolster their interest in making it work. Lets face it, if the lenders are not on board, it's just hot air. As the general economy gradually bounces back, the housing industry will need a lot more time to find its way back. see Part 1


K. Reilly
Cohn-Reilly Report

Housing Market: Struggling to Find Stability

The Federal Reserve Board of Governors is maintaining interest rates at or around zero percent, as an incentive to lure home buyers back into the market. The Feds are also buying up mortgage paper, which is a purchasing binge that is scheduled to end fairly soon. Nevertheless, the message is clear that the government is trying to do everything it can to stabilize the housing market. Two weeks ago housing analysts were overly excited about the rise in consumer spending in the housing sector during the 2nd quarter of this year. The reality eventually set in and we are now forced to face the fact that there will be no miracles or swift recoveries waiting around the bend.

The 30-year mortgage interest rates have declined in the last two weeks to 4.91 percent, down from 4.98 percent. Just one year ago the average 30-year mortgage interest rate was over 6 percent. There are signs that the housing market is improving, but we have previously noted that 80 percent of the FHA purchase loans this year have been first-time buyers, motivated by the tax incentives.

Determined to keep the ball rolling, the government has proposed a bill that will force banks to assist home owners who are facing foreclosure, in an effort to curtail the avalanche of foreclosures expected from the subprime loans underwritten in 2007 and 2008. Unfortunately, the Banking industry and real estate lobbyists’ made hefty donations amounting to over $350-million dollars to congressional campaigns during the height of the housing market, which may explain why the proposed bill appears to be on a slow path, and may never see the light of day. Let's hope, for the sake of the homeowners that will be facing foreclosure in the coming months, I am wrong.

k. Reilly