“Fixing” American Housing

by Addison Wiggin & Ian Mathias

  • Washington’s housing fix… Brace yourself for next Tuesday, and next January

  • How to play D.C.’s next round of meddling in the mortgage market

  • “The worm has turned” — Sarnoff on the big sell-off

  • Dual risk trade of 2010 back on… Buy the dollar, says our currency adviser

  • More about Glenn Beck: Readers urge us to be “more tolerant” of the “almost psychotic”


  Sometime early next year, the Obama administration will propose how to revamp the U.S. mortgage market. Next Tuesday, the White House will hold a “summit” on the issue.

It’s safe to guess that none of the invitees will suggest the government should simply get the heck out of the mortgage market… so this morning, we’re left to speculate which options are more likely to be tried, and to tease out the resulting investment implications.

  First, some relevant data: 325,229 U.S. properties got a notice of default, auction, or repossession last month — down 10% from the previous year, but up 4% from the previous month.

92,858 properties were repossessed — up both month to month and year to year, indeed setting the second-highest total since RealtyTrac started keeping numbers in early 2005. So banks are working through their foreclosure backlog before sending out a truckload of new notices.

The numbers will “get a lot worse unless we see some job creation,” says RealtyTrac’s Rick Sharga, pointing out the obvious. Whoops, no luck on that score…

  First-time jobless claims “unexpectedly” grew last week to a five-month high, the Labor Department reports this morning.

  Home sellers are cutting their asking prices at an accelerating pace. 25% of the listings on the market as of Aug. 1 have had at least one price reduction, according to Trulia.com. This is the fourth straight month in which price cuts have grown. As in so many other things housing these days, Vegas leads the way…

“If buyers are unqualified to buy, it doesn’t matter how low interest rates are or how discounted a home is,” says Trulia’s CEO, also pointing out the obvious. Thus…

  Mortgage applications (both purchase and refinance) rose a meager 1% last week, despite rates on a 30-year fixed falling to 4.57% — a record low in 20 years of record keeping by the Mortgage Bankers Association.

“The homebuyer tax credit pulled forward future demand into late 2009/early 2010,” our stock market vigilante Dan Amoss explained in this space last Friday. “Now that the tax credit has elapsed, demand is snapping right back to a very depressed level.” Record-low rates aren’t enough to get people in the tent. Nor will still lower rates that might result from the Fed’s plan to roll over its maturing mortgage securities into Treasuries.

  Just yesterday, we saw a handful of initiatives that offer a hint of the direction things are going.

  • The White House plans to spend another $2 billion in unspent TARP money to help homeowners in 17 states with the highest unemployment

  • HUD will launch a $1 billion program offering unemployed homeowners a zero-interest loan of up to $50,000 for up to two years.

Wrapped in the language of “helping the unemployed,” the real aim of these programs is to prolong the extend-and-pretend games that keep the mortgage market from looking even more sickly than it is.


And they probably won’t even accomplish that, judging by the latest developments with the White House’s signature Home Affordable Modification Program. HAMP aims to help 4 million homeowners, but only 1.3 million have qualified for trial modifications… and a mere 390,000 have been granted permanent modifications.

It gets worse: Treasury reported last month that 8% of permanent modifications from Q3 2009 were 60 days delinquent, and 2% were 90 days delinquent. Then Treasury fessed up last week that Fannie Mae used “flawed methodology.” The actual figures are that 20% of the permanent mods are 60 days delinquent, and 15% are 90 days in arrears.

So the new initiatives amount to Band-Aids. The Washington crowd knows this. So they’re thinking bigger.

  A rumor swept Washington last week about “instant forgiveness” on the underwater portion of all Fannie- and Freddie-backed mortgages. Well, that might encourage a few more “homeowners” to keep up their mortgage payments. But it would instantly screw anyone holding mortgage-backed securities.

That’s an awful lot of pension funds, Chinese sovereign wealth funds, etc., who’d be forced to write down principal on the loans they hold. True, this administration has a history of hosing bondholders (GM and Chrysler), but this seems like a bridge too far.

Mortgage consultant Mark Hanson, who we’ve cited in these pages before, calls the rumor “hogwash,” because every federal housing bailout to date has been carefully constructed to require the consent of lien holders.

  An economist at Morgan Stanley has floated a less-ambitious scheme: Lower the interest rate on all Fannie- and Freddie-backed mortgages to current record-low rates. Just give 37 million mortgage holders an automatic refi with no closing costs.

But this too would cost bondholders — to the tune of $350 billion, by one estimate. It would also mean less revenue coming in to Fannie and Freddie — about $75 billion less, by one estimate.

Last week, Fannie said it needed another $1.5 billion in aid from Treasury, and this week, Freddie said it needs another $1.8 billion. But Treasury went on record (last Christmas Eve, when no one would notice) that there are essentially no limits to Fannie and Freddie bailouts.

  Bond king Bill Gross, who will attend the White House summit on Tuesday, says he won’t buy mortgage bonds without a continued explicit backing by Uncle Sam.

“Without a government guarantee, as a private investor, I’d require borrowers to put at least 30% down, and most first-time homebuyers can’t afford that,” he tells the Financial Times.

We might not know what the government’s going to do… but at least we know where one of the biggest nongovernment players stands.


  No matter what the White House decides to do, it doesn’t add up to a recovering housing market. Again, it’s all about jobs… and every jobs indicator we have is going in the wrong direction, even after fudging by the Bureau of Labor Statistics.

You want to position yourself for continued housing weakness. “We’re pursuing this theme in 2010,” says Dan Amoss, “because we’re trying to stay one step ahead of the market in anticipating the consequences of ‘extend and pretend’ in the banking system.”

Events are starting to move quickly. One of Dan’s recommended plays is up 67% in less than a month. But there’s still time to take advantage of another housing-themed recommendation he issued last week.

With the market sell-off yesterday, Dan just recommended his readers take 90% gains on put options in a sickly trucking firm. Between a soft stock market and a soft housing market, there’s no better time to seek out shelter with Strategic Short Report.

  The jobless claims number combined with a rotten forecast from Cisco to take down the stock market another 0.6% on the open today.

“After grinding higher through July and into August,” our options specialist Steve Sarnoff wrote last night, “it looks like the worm has turned. Two weeks of upside was taken out just today. The euro cracked, and the bond market is screaming weakness and trouble ahead for equities and the economy.

“Hearing the blather today on the financial news, telling the public not to fear and that this is another buying opportunity, is an indication we have more downside to come. Technically, the stock market can go a long way down from here. Do not be surprised if we revisit some of those good ole panic days of 2008.”

(Which was a pretty good time for Steve’s readers — including gains on Nasdaq puts of 439% in five days. Check out Options Hotline here.) 


  Not helping the stock market yesterday: Updated trade deficit figures for June — which rose from $42 billion to $49.9 billion. That puts the 2.4% GDP growth the government reported last Friday in a whole other light. Factor in these new trade numbers and a more realistic figure is 1.3%.

  The dual risk trade of 2010 is back in play: Gold has perked up to $1,215, while the dollar index is back within a hair of 82.5.

“There is so much bad news about the U.S. economy that it's time to look to buying the U.S. dollar,” says our currency specialist Abe Cofnas. “No, that is not a typo. Technically, the U.S. dollar index, which is used as a barometer of sentiment on the U.S. dollar, is holding at the key 80 level, which is technical support. In fact, it's rebounded a bit on the bad news!

“The U.S dollar is considered a safe haven, even if our economy is in trouble. It happened in September '08 after the Lehman Bros. collapse, when the U.S. dollar rose significantly even though we were at a near-depression.”

“You hit a sore nerve there,” a reader writes about our take this week on Glenn Beck. “His followers are almost psychotic. I know: My dad is one of them. A stable person watching his show would see it only uses the pieces of data that suit him and most of his arguments are a total stretch. He whips up hysteria and fear. I think he is a fascist whipping up fear and anger, and tell my dad to quit being a zombie believing all that crap.

“Bottom line: The guy makes $28 million a year sensationalizing weak arguments. You poked the Fox News crowd and can see their almost violent reaction!”

  A Beck follower who did not react violently writes: “By stating, ‘You care about Glenn Beck, “Liberal America” and screaming Wieners far more than we do,’ you have both ‘succeeded’ in lumping them altogether and at the same time elevating yourself above the fray. But is that ‘success’? And don’t tell me you’re not interesting in being ‘successful.’ THAT would be hogwash.

“So I encourage you to be a little more tolerant of those who are attempting the bring some fresh perspective to the average Joe, actually connect the dots among the various corrupted players in D.C. and NYC and let the rest of us in on it. I believe that is at the core of Agora Financial’s value system and would encourage you to consider the Glenn Beck program as being on the same team in that respect.”

  “I think that you nailed it, almost,” a reader writes on who’s behind the sudden dip in the productivity figures. “Then you trudged down the wrong path… You said, ‘There's just no reason to work so hard. In other words, demand for our products and services is less than our current productivity rate.’

“Personally, I am not motivated to work any harder when I see that I'll get taxed a lot more soon and I see my government pissing it away far faster than we taxpayers can supply it. So I've decided to make do with less, earn less and be taxed less. For me, it's more of a subtle tax revolt than anything else.

“Keep up the good work: I like most of it, and what I don't like is still entertaining!”

The 5: You bring up an important point… but all the same, we don’t think we’re on the “wrong path,” judging by what we see in the latest monthly survey from the National Federation of Independent Business.

Asked what’s the single most important problem they face, 22% of small-business owners say taxes… while a plurality, 29%, says poor sales. Unfortunately for all of us, there’s ample room for both you and The 5 to be right!


Dave Gonigam

The 5 Min. Forecast

P.S. "I have found all the ideas solid and the service an excellent one." That's what reader C. P. wrote to tell us about his experience with Greg Guenthner's Bulletin Board Elite. BBE, as we call it, dips in and out of lucrative microcap stocks. You can tag along for huge, fast gains.

Greg is set to release his newest play on Sunday. You can get it if you act before midnight on Saturday. This new play, in combination with just two others, could be your ticket to $15.1 million in gains in just 30 days. Yes, this has happened before. Check out Greg's new presentation before we're forced to take it down at midnight on Saturday.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More