This was the biggest intraday decline since 1987:

Even for buying a book online, I usually get two confirmation windows making me double check the order.  You’re telling me those Bloomberg Terminals don’t have that?  Yeah right.  Some people will believe anything the crony banking system will feed to them.  In reality people are realizing in Greece that many other countries have similar debt structures.  Not as bad, but certainly detrimental to their future growth.  Too much debt is not a good thing.  Didn’t we learn that in the housing bubble?  Apparently not.

In other news, Freddie Mac didn’t misplace that “b” and came out with a $6.7 billion loss for the first quarter:

“(Freddie Mac) Net worth deficit was $10.5 billion at March 31, 2010, driven primarily by a significant adverse impact due to the change in accounting principles. …

The Federal Housing Finance Agency (FHFA), as Conservator, will submit a request on the company’s behalf to Treasury for a draw of $10.6 billion under the Senior Preferred Stock Purchase Agreement (Purchase Agreement).”

In other words, the big giant GSEs are now going back to the well for more money.  Remember those days when we were told we were going to turn a profit on Fannie Mae and Freddie Mac.  That at least served for a good laugh.  The bankers gave us the worst of nationalization by passing on the junk from the banks but kept the actual societal benefit of nationalization by keeping the profits (have you noticed that Wall Street is still pumping out bonuses?).

Make no mistake, this is a direct battle against the working class and middle class of America.  Some don’t want to acknowledge this because they enjoy the way the crony banking system is setup.  Who has done the best since the bailouts?

Source:  Bloomberg

“It seems incredible that financials are now scaling their 2006/2007 heights again,” Reid wrote in a research note published yesterday. “The dramatic imbalances are re- occurring.”

In July 2008, Reid said that U.S. banks had made “excess profits” of about $1.2 trillion in the previous decade, compared with how much they should have made based on economic growth, and that those excesses would be wiped out. Since then, U.S. financial firms have written down the value of their assets by about $1.15 trillion, according to Bloomberg data.”

Remember those arguments about bonuses and how we “had” to give their executives big bonuses because they would lose some of that grand talent?  After all, being unable to distinguish letters on the keyboard is certainly reason enough to offer someone a golden parachute.  Most Americans just need to look at what is really going on.  Housing values are still near their lows countrywide even in the face of unprecedented bailouts.  We have put out over $12 trillion in bailouts and backstops to Wall Street.  For this price, we could have paid off every single one of the 51+ million mortgages in the U.S.  Talk about freeing up consumer spending!  But the reality is, the money was never intended for you.  It was intended for the gamblers on Wall Street and more importantly, the banking gamblers that actually make money on the failure of our real productive economy.

Some fail to make the connection that when you incentivize bad behavior it will go unchecked.  Just look at the option ARMs and Alt-A loans.  This is the perfect example.  Useless toxic waste mortgages that were pushed by mortgage brokers because they got massive commissions instead of putting people into traditional mortgages.  These folks claim that they were doing their job but these same people wouldn’t have lent these borrowers one cent of their own money.  They didn’t care because it was ultimately the taxpayer that was going to pay the bill.  If you default in a year, what do they care?  Wall Street had a bigger fool and funneled this stuff into pension funds and other investors globally.  Hey, who cares if some poor Norwegian now owns a mortgage bond for a house in Atlanta that is now occupied by raccoons and feral cats?

When it all went bust, the bill came to you, the average and prudent American.  By the way, this is where the majority fall.  You have your crony criminal Wall Street bankers which represent a small portion of our population and on the other side you have the scammers in our population.  Yet the majority of Americans are sensible and they understand that what is occurring is a direct front to the middle class.  Think of everything that has gone up in your life; health care costs, education costs, food, and housing:

And wages have been stagnant for over a decade so the brunt has been felt by the majority.  But not for Wall Street.  And let us distinguish what we mean by Wall Street.  We have companies like Google or Apple that actually produce a product and most Americans are fine with them earning whatever they can get.  They aren’t asking for handouts or cheap government backed money.  Then you have the investment banks that are betting and creating toxic mortgage products and things like CDOs that actually made things worse.  How does this even help the market?  I hear from “free market” Ayn Rand believers that actually think we’ve been living in a free market for decades.  Really?  Social Security?  Medicare?  The U.S. Military?  They preach these hollow mantras because in their mind, things work out for them.  But when you look at surveys most Americans don’t believe this nonsense because they live in the actual economy:

Only 13 percent of Americans think economic conditions are good or excellent.  Yet we have a small group that is operating in a different universe, and this is the same group that came on bended knee to bailout the banks back in September of 2008, and somehow forgot about their free market promise.

Anyone that has taken basic courses in psychology and human behavior understands these people have a severe case of cognitive dissonance.  They are unable to see beyond their conviction that we are a free market when in fact, we are not in many large areas.  We heavily subsidize housing (have since the Great Depression).  We do this through tax breaks on mortgage interest deductions and cheap mortgages.  This is targeted government policy (aka not a free market).  Yet right now, we have the worst of both worlds since the government is basically operating as Wall Street’s lackey and raiding the taxpayer’s wallet.  Has any real reform happened?  Not at all and that is why we can actually have a 1,000 point drop in a day when someone didn’t close their Skype window correctly.

Glad today we lost $1 trillion but gained most of it back because someone was unable to use the keyboard correctly.  Aren’t you glad your tax dollars are going to investment bankers for this kind of casino finance?

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Wall Street is so out of touch with how bad things are in the real economy that they are fighting on the semantics if fraud actually occurred.  But to many Americans watching this circus, they are wondering how in the world someone could make billions of dollars by betting against the implosion of the American housing market (a market where 69 percent at one point owned a home).  That is the disturbing element now being leaked into the market and psyche of Americans.  Goldman was one of those lucky banks that received a nice chunk of the trillions in bailout money pumped out by the Federal Reserve and U.S. Treasury. So what people are coming to grips with is the idea that the government essentially bailed out the decade long gambling spree of the biggest cronies we have seen in modern finance.  Who benefitted from this kind of deal?  The bets in fact, actually made things worse.  In order to satisfy this gambling spree and make it even bigger, the message was sent out (with the implicit desire from Paulson and Goldman for junk mortgages) to brokers on the streets who kept pushing out option ARMs, Alt-As, and every other piece of crap we have come to witness so they can add it to one giant bet.  It would be one thing if it was only Goldman but virtually every investment bank got in the game.

So where are we today?  The market is still in complete disarray:

Source:  First American Core Logic

The latest data shows that in January of 2010 the U.S. market with all of its home sales, had 29 percent of all these sales come from the distress pool.  And as you can see from the chart above, a large number of distress sales will cut into the average sales price.  That recent bump has come from artificial stimulus through the tax credit, HAMP stalling, and the Federal Reserve buying $1.25 trillion in mortgage backed securities keeping mortgage rates artificially low.  But these things can’t last (the tax credit as of today has expired for new home purchases).

What is hard to understand from a psychological standpoint is how people can think things are good when we have over 7 million mortgages that are either 30+ days late or in some stage of foreclosure?  We are, as of today even with all these new measures, near the peak of the foreclosure problem.  Last month was the highest foreclosure filing month ever recorded!  This is not good.  How someone can interpret this as good news really baffles the senses.  Until that distress percentage creeps down into the single digits, the market is highly volatile.

If you think mortgage fraud has gone away because option ARMs and sub-prime mortgages have gone the way of the dinosaurs, think again:

Source:  CNN

“The report described several types of fraud that were detected most often. These include so-called “liar” loans, in which mortgage professionals knowingly listed false income claims for borrowers; inflated appraisals, in which mortgage loan officers or brokers pressure appraisers to overvalue a home so it would qualify for a bigger mortgage; and false occupancy claims, which is when buyers claim they will live in a home but are actually buying it for investment purposes.”

It isn’t like we have flushed out the industry with new rules and sensible financial regulation so why would we expect anything different?  And what a stunner that California ranks as number three in the nation for mortgage fraud.

Some of the hardest hit areas are in the “fab four” states of California, Florida, Arizona, and Nevada:

Source:  First American Core Logic

Riverside, the largest city in the Inland Empire had a distress sales rate of over 60 percent (the only large area to have this figure even beating out Detroit Michigan).  Aside from looking at this data as just a statistic, think of each family and household that is struggling to make their mortgage payments.  People don’t want to lose their homes (typically).  Sure we have a unique market in California where thousands of homeowners are strategically walking away from their homes even though they have enough income to pay their bills.  But the bulk of these distress cases are Americans that have lost jobs, have seen their mortgages recast/reset, or have seen their hours cut back.  1 out of 4 Americans with a mortgage is underwater on their mortgage.  And that is why the amount of equity Americans have in their home is near an all time low:

Source:  Calculated Risk

People forget that the housing bubble occurred at an arms distance.  How so?  Well follow the chain:

Borrower > (take on toxic loan with the hope that they would flip/sell before the mortgage payment went higher ideally with a much higher price).

Mortgage Broker > (didn’t care if you were unable to pay mortgage 1 year later, they get their commission upfront and higher for the more toxic loans).

Wall Street > (once they sliced it and diced it into crappy mortgage backed securities or other junk like CDOs, it was off their hands but not without a big fee – then they bet on it).

So who really was responsible for things once they went bust?  You and everyone else in this country.  Millions of borrowers have now lost their homes.  Mortgage brokers and lenders are now fighting for small spots to push out government backed loans.  Wall Street was the last untouched party but only thanks to trillions in bailout dollars.  Yet it looks like this last bastion of protection is being eroded away with the push against Goldman, the number one investment bank on Wall Street.

I stumbled upon an article from Dr. John Grohol over at PsychCentral showing the most heavily prescribed psychiatric medications in the U.S.:

From 2005 to 2009, the biggest jump occurred with Xanax, a medication that is largely aimed at helping calm anxiety and anxiety associated conditions.  44 million of these prescriptions were given out in 2009.  Without a doubt this economic recession is exacerbating underlying issues with many Americans (Xanax prescriptions jumped 29% from 2005 to 2009 even though our population only increased by 4%).

I look at indicators like this, or jobs, wages, cost of health care, food, and so far I haven’t seen what I would expect after pumping trillions of dollars into the economy.  The typical American family has seen very little relief or help.  Sure, Wall Street is up by over 70+ percent but that is because most of the money went to the crony bankers.  And now the investment banks and Treasury are trying to say how great we are doing with TARP and it is going to cost much less than expected.  Yet they don’t talk about the great mortgage casino:

$1.25 trillion in mortgage backed securities purchased by the Federal Reserve

$1 trillion in other loans and questionable debt the Fed took on through the alphabet soup of programs

$125+ billion to Fannie Mae and Freddie Mac that continue to support loans even though mortgage fraud is still rampant

4 out of 10 loans is now insured by the FHA which is seeing record defaults and is likely to see a bailout soon

Converting i-banks like Goldman and Morgan Stanley into bank holding companies to have access to the Fed so they can gamble even more

AIG?  $47.5 Billion and a big chunk of this went straight through to Goldman for additional bad bets (do you notice how often we use bets as if we are talking about a bad gambler in Vegas?)

Wells Fargo                         $25 billion

Bank of America               $45 billion

JP Morgan Chase             $25 billion

GMAC $16.3 billion

GM  $50 billion

And a long list of other items.  So people aren’t buying that absurd spin that the cost will be so small:

“(Moneynews) One Treasury estimate put a cost of $87 billion on the financial bailout, well below the $250 billion the Congressional Budget Office estimated last year or other analyses that put the all-in number at $1 trillion or more.

“If you are going to do a ledger, you have to do a full and complete ledger,” Whalen told The New York Times.

“To talk about making money on short-term transactions with the TARP while you have this huge cost to the nation is incongruous.”

Analysts say a major factor missing from Treasury’s math is the huge transfer of wealth from investors to banks that resulted from the Federal Reserve’s near-zero interest-rate policy.

Banks benefit because they earn fat profits on the spread between what they pay for their deposits and what they reap on their loans, especially credit cards, which have a current average rate of 14 percent.

Savers and investors lose, especially those on fixed incomes.”

Just like people look back on Tulip Mania or the technology bubble, people will be asking how in the world did we allow so much gambling to take place with mortgages?  But more importantly, they’ll be asking why we didn’t reform and fix such an obvious mistake even after so much economic pain was unleashed.

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In a first trial run of the public private investment program, we get a taste of government sponsored juice:

“(FDIC) The FDIC has signed a bid confirmation letter with Residential Credit Solutions (RCS), the winning bidder in a pilot sale of receivership assets that the FDIC is conducting to test the funding mechanism for the Legacy Loans Program (LLP). The pilot sale was conducted on a competitive bid basis, and final bids were received on Monday, August 31, 2009. A total of 12 consortiums bid to purchase an ownership interest in a limited liability company (LLC), to which the FDIC will convey a portfolio of residential mortgage loans with an unpaid principal balance of approximately $1.3 billion owned by the FDIC as Receiver of Franklin Bank, SSB, Houston, Texas. The pilot sale involves financing offered by the receivership to the LLC using an amortizing note guaranteed by the FDIC. Bidders for the pilot sale were given the chance to bid two different leverage options, 6-to-1 or 4-1, or to submit a cash bid for a 20 percent ownership interest.

The bid received from RCS for the financed sale of assets to the LLC using 6-to-1 leverage was determined to be the offer that would result in the greatest return for the receivership of all competing bids. RCS will pay a total of $64,215,000 in cash for a 50 percent equity stake in the LLC, and the LLC will issue a note of $727,770,000 to the FDIC as Receiver. The note will be guaranteed by FDIC in its corporate capacity. Based on the FDIC’s analysis and assumptions, the present value of this bid equals 70.63 percent of the outstanding principal balance of this portfolio. The FDIC received various other bids that were very competitive. The FDIC anticipates selling the note at a future date. After the closing, which is expected to occur later this month, RCS will manage the portfolio and service the loans under the Home Affordable Modification Program (HAMP) guidelines.”

What a mess.  I’m not even sure why they are touting this as a success.  The loan portfolio has unpaid principal of $1.3 billion.  To get a piece of the action, the winning bidder only had to front $64 million!  Did you get that?  The public private investment program is off to a perfectly stunning crony start.  So not only did we give some good financial crack to this bidder, but then we are going to offer the HAMP (hemp?) program on the loans thus costing more money!  The other people’s money mentality is alive and well.  The PPIP is a mess and it is now being called the Legacy Loans Program.  In other words, this is the toxic crap mortgage program.  The zombie assets.  The sewage filled nuclear mortgage waste.

Now coming back to California, there are many reasons for us to be cautious regarding the housing market.  Data for August was released and Southern California sales dropped yet the median price moved up a bit.  Let us look at the movement:

FHA loans made 37.4 percent of all home purchases.  The month to month sales drop was rather significant coming in at 10.8 percent.  Foreclosure resales made up 38 percent of all sold homes.  What we are seeing is a crossroads of low priced homes being sold through the system while the mid to upper tiers of the market remain stubbornly overpriced.  It would appear that the gas at the lower end may be running out.  At a certain point you run out of those lower priced areas that made up the bulk of the sales volume for the last year.  We are also entering the slower fall and winter selling seasons.

The U.S. Treasury and Federal Reserve have flooded the system with nearly $13 trillion.  It is astounding that the banking system has no shame in trying to make a PR campaign from paying back the few billion in TARP dollars.  Goldman Sachs is basically using the Federal Reserve as a piggy bank in juicing the system again and bonuses are back up to their boom levels.  The current narrative in the MSM is that “things are getting less worse and we’ve avoided financial Armageddon” yet we now have 26 million Americans that are unemployed or underemployed.  And companies hiring are at rock bottom rates.  Two years into the crisis and these are the things going on.

In what should be an even more popular issue HR 1207 to audit the Fed is garnering support from all camps that actually stand for common sense and what is right.  Ron Paul’s bill has the majority of the House support.  The bill is strikingly simple:

“Federal Reserve Transparency Act of 2009 – Repeals the authority of the Comptroller General to carry out an onsite examination of an open insured bank or bank holding company only if the appropriate federal regulatory agency has consented in writing. (Retains the authority of the Comptroller General to audit a federal agency.) Directs the Comptroller General to complete, before the end of 2010, an audit of the Board of Governors of the Federal Reserve System and of the federal reserve banks, followed by a detailed report to Congress.”

It should be a shock that this isn’t a law already.  Of course the Federal Reserve is fighting this because it has much to hide.  It would like to continue on the path of happy TARP repayment talks while the public is obvious to the trillions still backing the crony banking system.  It would ruin the TARP repayment lullaby when the public gets to see trillions back stopping the corrupt Wall Street machine.  Why else would you have such divergent figures like Ron Paul and Dennis Kucinich backing a similar bill?  This strikes at common sense.

In California, the state is teetering yet the housing market is being pumped by the same typical charlatans.  Let us examine 5 reasons to have caution with the current “recovery”:

Reason #1 – Tax Credit

The tax credit juice is expensive nonsense and horrible public policy.  Recent estimates put the taxpayer cost of each new home acquisition at $40,000 – much more than the touted $8,000 gimmick.  The typical cheerleaders are pushing this bill:

“(NY Times) The real estate industry, including the powerful 1.1 million-member National Association of Realtors, wants Congress to extend the credit at least through next summer. The group hopes to expand the program to $15,000 and to allow all buyers, not just those who have been out of the market for at least three years, to qualify. The price tag on that plan: $50 billion to $100 billion.

Joseph and Chassity Myers are among the two million buyers eligible for the credit this year. The newlyweds heard they could get money from the government for something they were tempted to do anyway.

“It was a no-brainer,” said Mr. Myers, a commercial underwriter. “Owning something is the American family dream.”

This kind of lobbyist led legislation is what is fundamentally wrong with our system.  The NAR spends a few million to oil up their Congress representatives and all of a sudden you have a bill worth billions.  It is money well spent, for the NAR.  Yet it does not help the average American.  A $15,000 tax credit is pure insanity when the median price of an American home is under $200,000.  Plus, removing the three year factor is only going to juice more sales.  As the last line highlights, Americans will spend anything they can get their hands on:

“The couple bought a two-bedroom condominium here in the spring for $171,000 and amended their 2008 taxes immediately, receiving their windfall by direct deposit a few weeks later.

Their home is now a monument to the government’s generosity. They bought a leather couch, a kitchen table, a bed, television stand, china cabinet, kitchen table, coffee table, grill and patio set.

“We did exactly what the government wanted us to do,” said Ms. Myers, a third grade teacher. “We stimulated the economy.”

Spending beyond our means is what got us into this mess.  So according to the government spending on crap is going to get us out.  Wall Street is all the more willing to sacrifice the long term stability of our nation for short-term Pavlovian consumer happiness.  This will be short lived.  This isn’t like 2007 when you had the vast majority drinking Kool-Aid.  Now, the public realizes something is rotten in Denmark when jobs are disappearing yet they are being told all is well.  The consumer hamster is now cognizant of the wheel.

These are one time injections.  So what happens when this juice runs out?  Are we then going to do a $30,000 tax credit?  If you remember, it started out with a $7,500 tax credit that had to be repaid over 15 years.  That didn’t intoxicate the market so then it went to the current $8,000 tax credit that was courtesy of the American public who didn’t purchase a home since the credit was enacted.  Dean Baker who called the bubble years ago, recently bought a place, and has been on point in many ways had this to say:

“Dean Baker of the Center for Economic and Policy Research called the credit “a questionable redistributive policy” from renters to home buyers, but said that he used it himself when he bought a house.

He wrote on his blog: “Thank you very much, suckers!”

Reason #2 – Supply of Lower Priced Homes

Last month in Southern California the typical monthly mortgage commitment of buyers was $1,200.  It is interesting that a year or so ago I had many people in the Inland Empire asking me whether it was time to buy.  In many cases it was.  Those e-mails are long gone.  In some areas rent versus owning your home were virtually the same.  It was a no-brainer if you had a stable job to purchase a home.  But the recent e-mails reveal a stalemate at the mid-tier of the market.  Mini bidding wars.  Prices coming over asking price.  The typical things of the bubble.  Many e-mails are from people itching to buy and are scared that they’ll miss out on another bubble.  Stop chasing the herd!  It is amazing that people that are mostly rational about everything else in life can be caught up in a mania.  Groucho Marx who by many accounts was frugal even after becoming a celebrity, could not resist jumping into the stock market mania right before the Great Depression hit.  Even during the good times he knew the gig was a “racket” of epic proportions.

Do the math above.  If the typical payment is $1,200 where do you think the bulk of people are buying?  And even if they are buying in so-called prime locations, are they buying the most expensive home?  Just take a look at some of the Real Homes of Genius examples and you will get a sense of what is occurring.

The drop in sales was largely based on lower priced home sales slowing down.  After a furious pace for a year, first time buyers or investors have bought up many places and are running out of fuel.  I expect this trend to continue.  But wait until you start seeing more foreclosures in the mid to upper tiers of the market.  To think a different pattern is going to happen is absurd.

Reason #3 – State Budget

If you have been caught up in bubble mania part two, the state once again is on path to missing budget projections.  The state missed estimates again by $237 million in the last estimate.  Personal income tax is down and so is sales tax.  Keep in mind this is occurring while the tax rate has gone up.  Unemployed people have less to spend and obviously won’t be paying any income tax, the biggest revenue line item for the state.

How is this news good for housing?  The state is cutting back.  There is already projections of more deficits for the next year.  Meaning more taxes or more cuts.  For example, fees are going up on state colleges and that will take away more discretionary income.  Plus, with accounting shenanigans the massive stock market losses can be carried over for years thus negating any casino like jumps of the current 60 percent rise.

Reason #4 – Unemployment

In more normal times, housing prices reflected actual employment growth and wage growth.  Someone claiming housing prices would be going up in the face of growing unemployment would appear to be out of their mind.  Now, it is the status quo of snake oil economist and real estate pundits.  Just logically think this out.  How is a rising unemployment rate good for housing?  It isn’t.

And the state has an official unemployment rate of 11.9% and a U-6 rate of 22%.  Of those working, wages are stagnant or hours are being cut for many.  Yet somehow in the casino calculus this is going to improve the housing market.

Until employment stabilizes talking about a housing bottom is non-sense.  In California, housing and employment are basically joined at the hip.  The last bubble was built on housing creating employment.  So now we are to expect that unemployment is going to create housing?  Whatever works to push more over priced homes.

Reason # 5 – Alt-A and Option ARMs

Finally we are left with the Alt-A and option ARM wave that is already here.  You might not be seeing it because the inventory is still not being put on the market in any significant numbers.  Right now, the banking cronies are dabbling with the Legacy Asset Program crap and the HAMP and trying to figure out how best they can screw the taxpayer for their own benefit.  The mark to market accounting suspension is criminal.  First, if you are going to trade mortgage backed securities like stocks, then you should value your assets as such.  If a bank really was going to hold a home for 30 years then yes, I agree that they should value it for the long term.  But right now the only folks buying mortgages in bulk is the U.S. Government.  The system is such where banks can basically do whatever they see fit.  After this triumphant collapse and having 300,000+ foreclosure filings a month, nothing has fundamentally changed.  That is why you are seeing both progressives and even small government advocates finding common ground.  Strange bedfellows.  Even strong progressive supporters of President Obama are frustrated that the status quo is remaining the same in Wall Street.

The Alt-A and option ARMs are already going delinquent:

All these circumstances will make for a horrible housing market in California in 2010.  Right now it may be hard to see with the government finance goggles on and Wall Street looking more attractive because of the juice.

One simple rule that you should live by is don’t get a mortgage that is 3 times more than your gross household income.  If you bring in $100,000 the upper limit of your mortgage should be $300,000.  I know this won’t be followed by many because it is too simple.  People want archaic acronyms and fancy financial products that in the end, take them for a ride and them leave them sitting on the curb with empty pockets.

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This story would be laughable if it weren’t for the fact that the banking industry is an absolute corrupt industry that will bring down the real U.S. economy merely to protect itself.   In a nutshell this is what happened:

“(L.A. Times) Bernard L. Madoff’s massive fraud stunned some of the wealthy denizens of Malibu Colony, especially when a couple devastated by the scheme surrendered their oceanfront home to Wells Fargo Bank.

But some neighbors say the real shocker came when they saw one of the bank’s top executives spending weekends in the $12-million beach house and hosting eye-catching parties there. What’s more, Wells Fargo spurned offers to show the property to prospective buyers, a real estate agent said.

“It’s outrageous to take over a property like that, not make it available and then put someone from the bank in it,” said Phillip Roman, an 18-year Colony resident who lives a few homes away from the property.

Residents identified the house’s occupant as Cheronda Guyton, a Wells Fargo senior vice president who is responsible for foreclosed commercial properties.

Guyton could not be reached at her downtown Los Angeles office. Wells Fargo declined to discuss Guyton, saying in a statement that representatives “don’t discuss specific team member situations/issues for privacy reasons.” But the bank said it would “conduct a thorough investigation of the allegations” by neighbors.

The bank also said its ethics code wouldn’t allow employees to make personal use of property that had been surrendered to satisfy debts.”

Bwahahahahaha!  This puts an exclamation mark on prime shadow inventory property.  You have all the key players here.  You have crony bailout recipient Wells Fargo having their senior VP who is responsible for foreclosed properties using the place for “eye-catching” parties.  You cannot make this stuff up.  Early in the day, Wells Fargo stated they would “conduct a thorough investigation” but apparently all it took was a few hours for them to come out with this statement to the L.A Times:

“(L.A. Times) Wells Fargo & Co., seeking to distance itself from a company executive’s alleged personal use of a $12-million beachfront Malibu home owned by the bank, said today that it would “take decisive action” against any employee “who may have violated Wells Fargo’s policies.”

The bank said in a statement that its rules of conduct prohibit employees from “personal use of properties held by Wells Fargo.” The company reiterated that it had launched a full investigation into the allegations.”

Seriously folks, all it takes is a bit of investigative journalism and my hat goes off to the L.A. Times reporters here.  But the real story is the thousands of homes sitting in the real shadow inventory in areas like Culver City, Pasadena, and other middle-class areas that will be slammed by the Alt-A and option ARM wave starting next year.  I love it how some people were saying that shadow inventory was essentially a thing of “poor” areas.  Well a $12 million beach front home in Malibu isn’t a poor property in my book.  Maybe the VP at those parties was trying to figure out how to sell the foreclosure to the party guests?  Let us keep an eye on this to see what kind of “decisive action” Wells Fargo is going to do.  Seriously, Bernard Madoff is in jail while you have another crony partying in his home.  This is the proud American banking system that we have back stopped with trillions of dollars.

I dug deep into the shadow inventory data again and it is simply growing.  But in a variety of ways.  First, many banks are simply not moving on homes.  That is, you can stop making your payments and depending on which incompetent bank you may have, you probably have a fifty-fifty chance that you will have no notice of default for 6 to 9 months.  The foreclosure process now takes 18 months to 2 years.  And for those properties that are taken back, some banks are going with rent to own options.  Or in other properties, banks are merely using them for Romanesque blowout parties.  But the most common option is doing absolutely nothing.  First, let us show you how absurd things are getting in Southern California:

At first glance, you might interpret this as solid news.  For Southern California, public MLS properties have been on a steady decline since September of 2007.  In fact, since the start of the year the MLS inventory has fallen by 41,000.  If we use last months sales of 24,000 we have less than 3 months worth of supply in Southern California.  Run out and buy a home before all the homes are sold!  Seriously folks, this is such a joke.  Now let us run some quick numbers for distress properties this year:

Distress property data is for the state.  As we know nearly 50 percent of all statewide sales are foreclosure re-sales.  Here in Southern California the number was 43.4 percent.  We can drill down on the data a bit:

August Sales:

Statewide:        45,709

SoCal:              24,104

Southern California makes up 52 percent of all sales in the state.  So let us apply this ratio to the data last month:

August Distress:

REOs:              14,590

NODs:             39,542

14,590 x .52 = 7,586 distress SoCal sales

Keep in mind that these are REOs going back to the bank, the foreclosure resales are happening with properties back in the pipeline from months ago.  If 43.4 percent of the properties last month were foreclosure resales that would mean:

24,104 x .434 = 10,461 properties sold from the foreclosure pile.  Let us apply this ratio for the entire REO inventory for the year:

2009 REOs statewide:

132,443 x .52 = 68,870 SoCal REOs
So by this approximate estimate, Southern California should have added 68,870 REOs as additional inventory throughout the year.  Total sales for the region:

138,599 SoCal 2009 sales x .434 (foreclosure count) = 60,151

So it does look like once the bank has the property as an REO, it is moving on it.  So all is well right?  Not exactly.  And keep in mind these are rough estimates since we are using data from various sources such as DataQuick, RealtyTrac, MLS, and foreclosure records and trying to arrive at a number.  If anything, simply looking at this tells us that yes, REOs are being moved and that isn’t necessarily the big part of the entire shadow inventory. But what is occurring is this.  Regular buyers are unable to see a vast amount of this inventory on the MLS.  Here is one part of the shadow.  We just saw that last month, by actual stats some 10,461 properties were foreclosure re-sales.  As of that sales period, approximately 5,000 properties were listed on the public MLS as foreclosures.  So where is the other property listed?  Some of it is being sold in bulk to investors in depressed markets.

That part of the equation should be a lot clearer now.  But the real shadow inventory is occurring with banks not moving on non-payers.  In fact, if we look at notice of defaults we can see a major storm brewing.  I have reconstructed the chart below with an average for Q3 of 2009 since we don’t have September data until October but the trend is unmistakable:

So far this year 370,000+ notice of defaults have been sent out.  Most of these as we know will end up as foreclosures.  A handful will be modified but those are crap modifications and will end up only buying a little bit more time for the borrower.  The chart above is unmistakable.  You notice that the only time that actual foreclosures increased steeply was in Q3 of 2008.  That was because of the spike in NOD from Q1 and Q2 of 2008.  But now, we have three elevated quarters of NODs running at peaks yet recorded foreclosures are still holding steady.  What gives?  Banks are not moving on the entire foreclosure process.  That is the ultimate point here.  That is why when I talked about the $1 trillion in toxic waste mortgages, much of it has been ignored.  Where do you think this property is going?  Banks are hoping for a bailout or some vehicle to dump this crap off on the taxpayer.

Looking at the chart above again, actual recorded foreclosure are going to be flat for four consecutive quarters!  Really?  This is such a convoluted mess.  The problem is we have to estimate how many people have stopped paying their mortgages.  The most recent data shows 1 out of every 10 homeowners now delinquent on their mortgage.  For Southern California, it is expected to jump to a stunning 14 percent.  So assuming that this ratio applies to California (it does and is most likely higher) that would mean of the 5.3 million homeowners with a mortgage 530,000 are now late on their payments.  That seems about right given how many people are underwater in the state:

My overall point with shadow inventory would be this.  It would be an enormous mistake to conclude that this is the bottom for the state.  If you only look at MLS data and the movement with REO data on properties banks have selectively moved on, you would think the system is efficient.  It is not.  There are hundreds of thousands of mortgage holders betting on a jump up in 2010 and 2011 so they can exit left as quick as possible.  Properties would have to appreciate like they did in the bubble for these people to exit.  That is not going to happen.  Already, hundreds of thousands have stopped paying on their mortgage and no where is this data being seen publicly but the bank knows full well that they are having cash flow problems.

We made a mistake going down this road of backing the corrupt banking system.  We are going to have a Japan like scenario.  Banks will not admit the true issue of the problem.  But every so often they will be hitting up the taxpayer for additional funds.  If it isn’t obvious what path we should have taken it would have been to gut the entire financial system and flush out the inventory from the market at once.  Those that didn’t favor temporary nationalization now realize this one fact.  The banks are still running the show with the same cronies at the helm.  And we are still paying!  The PR on TARP repayments is such a colossal joke since they have repaid a few billion while we have back stopped the system with nearly $13 trillion.  Have things really gotten better?  Let us look at nationwide foreclosure filings:

I took some heat when I recommended temporary nationalization a year ago.  This wasn’t something I welcomed but our options were as follows:

1.  Nationalize and remove every banking head and claw back every damn penny once we opened up their books

2.  Give the banks every penny they ask for and trust them to do the right thing

Option 2 is the path we took and look at what it has gotten us.  And what is happening is no shock to any of us who studied what happened in Japan’s lost decade.  We are now destined to a decade long malaise.  California has already witnessed a lost decade in job growth:

Yet people are willing to believe this is the bottom?  The only winners here are the banks and those in the real estate industry.  The major losers are the American taxpayers.  This is a story that is becoming all too familiar.

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“(University of Texas) Now, this bill also represents the first step in our administration’s comprehensive program of financial deregulation. I particularly want to commend the leadership of the chairman, Senator Garn, and Chairman St Germain, along with Secretary Regan and his fine team at Treasury. They did a remarkable job forging a consensus within the Congress and among affected industries in favor of the bill’s deregulatory provisions. I’d like to also thank Congressmen Stanton, Wylie, and LaFalce for their assistance.

What this legislation does is expand the powers of thrift institutions by permitting the industry to make commercial loans and increase their consumer lending. It reduces their exposure to changes in the housing market and in interest rate levels. This in turn will make the thrift industry a stronger, more effective force in financing housing for millions of Americans in the years to come.”

As we all know, the S&L industry became a wild casino and brought the United States economy to its knees.  Little did we know that only a few years later we would create an even bigger housing bubble that would bring the world to the verge of a new global recession.  I highlight this piece of legislation because this allowed for more creative financing but is really the mother of the Alt-A and option ARM disaster we are now facing.  With no adjustable rate mortgages there would be no Alt-A or option ARM problems.  That is the bottom line.  And without the Gramm-Leach-Bliley Act repealing the Glass-Steagall Act in 1999 there wouldn’t be the behemoth too big to fail institutions.  The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, and securities firms to consolidate.  Now what could possibly go wrong with all this in place and a corrupt and crony Wall Street using the U.S. Treasury and Fed as their personal loan shark?  You can almost mark it on the dot when the U.S. debt market exploded especially for consumers:

And keep in mind what major debt induced problems occurred during this time.  We had the S&L Crisis followed by the technology bubble and finally the epic housing bubble.  The historical record shows that when the U.S. government tries to get involved in cahoots with Wall Street bad things happen for the American consumer.  From 1945 to 1982 boring 30-year mortgages seemed to do well for our country.  Since that time we have bounced from one bubble to another.  Here in California some are celebrating because the state government has come to an agreement on how to balance the $26.3 billion deficit.  Why are some cheering?  They are doing their job and if you look at the agreement, it will mean more pain for the state.  More cuts and more borrowing.  How does this bode well for a state with 11.6 percent unemployment?  The reason California finds itself in such a challenging budget situation is a gigantic portion of the revenues brought in where completely based on a housing bubble.

You look at uber subprime mortgage lenders like New Century Financial that at one point had 7,200 employees and a market cap of $1.75 billion and you come to realize that some companies existed purely to feed the toxic mortgage industry.  I wonder how much money the state got in 2005 when New Century had a net income of $417 million?  Hundreds of these kinds of operations kicked the state down with funds brought on by financing people with subprime, Alt-A, and option ARM junk. At this point the state has failed to acknowledge that a large portion of those revenues will never come back (unless we have another bubble).  California was the hub for toxic mortgage lending.  The state pioneered the way for ultra-toxic mortgage all-stars like California based Countrywide Financial.

So when people try to understand the fall in revenues, it is hard to say what the true bottom is.  We have been at the center of the last two epic bubbles.  Without the technology bubble and the housing bubble it is hard to say where our true equilibrium is.  How much of the revenues brought into the state were based on bubble industries?  And now, the stock market is on a tear yet the fundamentals are still horrific.  We have yet to see the commercial real estate fallout.  The Alt-A and option ARM wave will rip into the mid to upper tier of the markets.  These are multi-trillion dollar problems.  Unemployment is still ticking up.  Yet the stock market rallies on like a runaway train.

S&P 500 Not Cheap

The only reason people are diving into the stock market, especially the turbo capitalism based financials is because of the bailout backstop.  The S&P 500 has gone up a stunning 41 percent since the March low!  This rally is based on Wall Street smoking the bailout crack provided by the taxpayer.  Without the taxpayer, they’d be toast.  As you can tell, bailing them out did nothing for the real economy.  It just allowed them to bet more rounds at their roulette table with your money.  At least we know who the U.S. Treasury and Federal Reserve work for.

If we look at the fundamentals of the S&P 500 we find a grim reality:

That is right.  At the end of last month the P/E ratio for the S&P 500 was 134!  That is not cheap by any stretch of the imagination.  When you put this on a chart it literally flies off the paper:

We are much higher than the tech bubble peak but hey, this is crony capitalism and who really cares about profits in the real economy.  All we care about is whether Goldman Sachs can hedge their bets and short the American people with their own money for the sake of capitalism.  This is not capitalism.  This is crony corporate welfare at its worst.  The real economy is in the dumps.  Those that jump for joy seeing Goldman Sachs rally suffer from a serious case of Stockholm syndrome.  Don’t fall in love with your captors.

California Budget Deal

Before jumping for joy, the California budget kicks the can down the road once again.  It is a painful budget.  The cuts are deep and the state will feel the repercussions.  Yet the major thematic problem with how the agreement is proposed is no one is acknowledging reality.  And that is, much of the revenues from this past decade were bubble based.  They are not coming back.  The tone of the budget deal is such that “we’ll be back to happy days in no time.”  If you know about therapy you will know that in Gestalt therapy one technique often used is the “empty chair.”  The client is asked to pretend someone is in the empty chair (maybe a father or mother) and to speak to the chair.  The therapist will observe the conversation and make notes at times guiding the client.  This helps to externalize thoughts that may be repressed and bring dialogue into the open.  What we need is to give California some solid Gestalt therapy.  If California citizens were asked to tell “California” their thoughts it would definitely reflect a very different reality.  They would probably tell the state to get real and create a budget that is based on non-bubble based revenues.  The state however isn’t having anything to do with the intervention.

Some deep cuts:

$6 billion to K-12 and community colleges

$3 billion to the UC and CSU systems

$1.3 billion to Medi-Cal

$1.3 billion through 3 day furloughs

$1.2 billion from state prisons

$528 million to CalWORKS

You’ve added it up and only see roughly $14 billion in cuts.  Another $4.7 billion will be taken from cities and counties and another $2 billion will be in good old fashion borrowing.  So this celebration should be more somber in tone because these cuts will have repercussions in the real economy.  Yet what else can you do?  You can only balance the budget in two ways.  Cuts (which are being taken) and more revenues (taxes).  That is it.  Borrowing is basically pushing the problems down the road.  If you look at the Alt-A and option ARM problems, a gigantic issue that is largely centered with California housing will be in the dumps for many years. Where is the money going to come from?

“The State started the fiscal year with a $1.45 billion cash deficit, which grew to $11.9 billion on June 30, 2009. Borrowed money from special funds provided enough cash to fund State operations through June 30. The Controller faced a large cash shortfall at the end of July, forcing his office to begin issuing registered warrants or “IOUs” to any General Fund payment that was not protected by the State Constitution, federal law, or court decision. Without IOUs, the State would have run out of cash and begun missing those protected payments at the end of July.”

This is a statement from the State Controller’s Office.  So we went from $1.45 billion to $11.9 billion in 6 months?  That means the state is leaking $2 billion a month.  And if we look at even a monthly estimate you will see why:

And a chart that is over 1.5 years old:

If you have a hard time figuring out what you bring in each month how are you going to plan out for one fiscal year?  The state is in a really tough bind.  All these signs point to a prolonged housing slump.  Those jumping in to buy right now simply are choosing to ignore the Alt-A and option ARM reality and the fiscal situation of the state.  A good round of fiscal therapy may help.

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