Capital Markets Update

By Louis S. Barnes Friday, July 1, 2011

Markets reversed this week, stocks and rates both rising fast. The immediate cause: Greece back from the brink. Not for long.
Deeper causes: last week stocks stared at the darkness below S&P 1256, a bottom that has held since last Halloween, and have run up to 1331 on the bodies of short-sellers forced to cover. The 10-year T-note bottomed at 2.91% last week after a straight-line drop from 3.60% on April 12; this week's bolt to 3.20% was overdue, ditto mortgages to 4.875%. The coup de grace: the June ISM rose to 55.3, beating forecast.
With Europe on hold again, interest rates will not decline unless the US economy does, and until it becomes clear who will buy $120 billion in net-new Treasurys each month, now that the Fed has stopped QE2.
The newest housing data has showed signs of bottom in price, delinquency, and sales volume. However, three questions apparently too impertinent to pose at the press conferences of either the Fed Chairman or the President:
1. How much distressed housing inventory has accumulated?
2. How fast are distressed homes selling versus new ones arriving?
3. If... if they are selling faster than piling up, but at a rate that will not clear for a decade or two, what are we going to do about it?
Variables are huge. Which will prevail: jobs-first, economy-first, or housing-first? Any of the three? And, given the mass and velocity of the distressed-housing pig leaving the south end of the python, how much damage to bystanders?
CoreLogic reports that shadow distressed inventory not listed fell in April from 1.9 million homes to 1.7, down from the 2.2 million peak in early 2010. Distress is defined as 90+days delinquent, in the foreclosure process, or foreclosed REO.
Meanwhile, LPS says the total distress count, listed and not, is 2 million 90+, and another 2.2 million in foreclosure, plus analysts’ guess at REO ranging 500,000 to 800,000. Conservative totus porcus: 4.8 million. However, LPS says that an astounding 70% of loans in foreclosure process have been there for more than a year, and almost that many 90+ are not yet in foreclosure. If that portion is frozen, the remainder of the distressed inventory is flying on and off the shelf at improbable warp speed.
The National Association of Realtors estimates (hah-hah) annual sales of existing homes at about 4.5 million, and total listed inventory (all kinds) at about 4 million. Given LPS' 4.8 million total distressed, minus CoreLogic's 1.7 million distressed-not-listed, that would leave 3.1 million distressed listed, 77% of all listings.
Nonsense. There must be a hell of a lot of distressed inventory not anywhere near a market. And in expanded distress definition, CoreLogi's underwaters, just those at least 50% OR $150,000 underwater, are another 2 million homes. Some pig.
At what rate are we barbequing the fat off this baby? CoreLogic says 30% of existing homes sold are distressed (two-thirds REO, one-third short sales). Say 1.5 million annually. If nobody else enters hopeless delinquency, or takes a strategic walk from underwater, three-plus years to clear. Realistically, based on declining new rates of delinquency, we are probably net-reducing inventory by a few hundred thousand homes annually, clearing in 2020 or something. Unless badly managed clearing itself caves-in the market some more.
What to do? Old stuff. Do not ever let a big, zombie pig hang around the yard. Only one way to run it off, as HUD began to do regionally in the '80s, and the RTC showed with commercial: modest fix-up, price it to sell, and finance it. Pre-packed financing, no appraisal. If that means Fannie and Freddie to finance REO buyers from servicers who cannot finance buyers (the whole subprime legacy), then do it. If the Fed has to buy those loans, do it. The FHA cleared the oil and S&L patch in two years by offering sweet terms: owner-occupant, $500 down; investor -- no limit on number -- 15% down. Got to qualify, for real. And knock off these pretend mitigations and procedural roadblocks.
Get... this... pig... OUT... of... here!