Can’t Get No Satisfaction
Libor, a key rate for Joe Ultra Light Sixpack, barely budged following the latest “liquidity” gambit from the Fed and other central banks. It currently checks in around 5.10%. This is important not only as a measure of interbanking confidence, but also because so many problematic toxic mortgages are tied to it.
A recent report from the Federal Reserve Bank of New York shows that the six-month Libor rate will determine the reset rates for an estimated 99% of subprime ARMs and 38% of Alt-A ARMs in the U.S. that have been securitized. A further 1% of subprime ARMs and 22% of Alt-A ARMs will reset based on the one-year Libor rate. Alt-A is a category between prime and subprime that often involves borrowers who don’t fully document their income or assets. About half of student lenders peg their private, variable-rate student loans to Libor.
Plagued by the multiple scourges of declining house as ATM card, and high inflation, American consumers sat out XMAS shopping for the second straight week. Following on a 4.4% decline the previous week, Shoppertrak releases this doozie.
U.S. retail sales fell 2.7 percent last week from a year earlier, as consumers delayed buying holiday gifts, a research firm said Wednesday. Sales were pressured by a 12 percent decline in shopper visits to stores in the week that ended Saturday, Chicago-based ShopperTrak RCT Corp. said.
As I have long anticipated, it now looks like California is in free fall. The changes in budget expectations in just one month is astonishing. As I discussed in this earlier post, California is already on the hock with some very large rob Peter to pay Paul, Ponzi finance schemes.
SACRAMENTO — Gov. Arnold Schwarzenegger told social service advocates Tuesday that the state’s anticipated budget shortfall — already feared to be the worst since he took office — has widened to $14 billion, according to people at the meetings. That new figure indicates that the state’s fiscal fortunes are declining even more rapidly than many leaders had expected. Less than a month ago, the Legislature’s chief budget analyst calculated that California is on track to come up $10 billion short by June 2009, when the state ends its next fiscal year. A $14-billion budget gap would translate to more than 12% of the state’s budget if spending continues to rise as projected.
Continuing my theme of some figures don’t lie, we see the true state of California’s economy. Year to date tax receipts from personal income are down 2.4%, and from sales 4.2%.
Despite all the “liquidity” fireworks, anyone would be hard pressed to call the response in the MBS default market even a dead cat bounce.
It would seem that the theory behind these attempted “liquidity” injections and the Hail Mary Alliance is to prop up housing prices. However, even separate from the obvious housing affordability issues, is the simple fact that just about every American who isn’t in abject poverty has already tapped into the prospect of home ownership.
Nov. 30, 2007 – Only 24 percent of households could afford to buy an entry-level home in California in the third quarter of 2007, the same level as a year ago, according to a report by the California Association of Realtors. To buy an entry-level home in California at $482,910 in the third quarter of 2007, buyers would need a household income of $99,590, based on an adjustable interest rate of 6.56 percent and assuming 10 percent down. The monthly payment including taxes and insurance would come out to about $3,320.
This is a classic last buyer in a bull market scenario. And this occurred with a Bubble economy in full throttle, and dangerous subprime lending going after the marginal borrower. This has everything to do with gravity, and nothing to do with “liquidity”. How many slip into the poverty category now, especially if California’s actual economic numbers are any indication? Without lending to (and indeed foreclosures) of marginal subprime and Alt A borrowers, does home ownership normalize back to 64%, instead of 69%? Who buys unaffordable houses now? Who buys the marginal 3-5% headed for foreclosure?
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