The Haiku of Finance for 02/09/16

All cash real estate
Great plan for lifetime homestead
No mortgage needed

The Limerick of Finance for 02/07/16

Wells Fargo's big mortgage fraud due
Resolved after folks went to sue
Now they're clear for new scams
Ignore credit exams
Underwriters must still get a clue

Financial Sarcasm Roundup for 02/05/16

I avoid watching politicians debate each other on TV because I have more important business tasks to accomplish. I realize I'm giving up a huge source of inspiration for sarcasm. Oh well, we can't have it all in life.

Here comes a new oil barrel tax to fund green technologies. The UN COP21 architects would be proud. I have no problem with this fee. It will destroy part of the US shale industry, but that's to be expected after years of overinvestment in wells that are only economically viable at higher oil prices. Kermit the Frog once said that it's not easy being green, but he didn't mean green energy.

The IMF lectures China on getting into better financial shape. Good luck with that one. China is flailing around for a workable economic policy. Beijing cannot admit that its Ponzi scheme is unraveling because it can't afford to frighten away the Western investors who were dumb enough to start trading the yuan onshore. The IMF can't afford to look bad after adding the yuan to its reserve basket. It all looks like two poker players in a televised tournament who know they can't bluff each other anymore but are still bluffing the audience.

The mortgage bond market just isn't much fun anymore. Taking the punch bowl away is good news for responsible homeowners because there will be fewer secondary bids for mortgage products that should not exist. Issuing paper backed by other paper is usually pretty dumb. Of course, if the Federal Reserve ever had to sell a big chunk of its MBS holdings, the banks would have to hire back MBS traders in a hurry. Catching a falling knife is usually pretty dumb.

More political debates are ahead. They won't mention any of the issues I blogged about here. That's too bad.

The Haiku of Finance for 01/25/16

Private mortgage deals
Real estate notes and trust deeds
Weird and hard to do

Amateur Private Real Estate Finance Includes Notes And Trust Deeds

Private lending has been around for property developers ever since those ancient Pharaohs built their pyramids. Our capital markets today allow for much more public participation and transparency. Bank depositors provide capital for secured mortgages. Real estate investment trust (REIT) investors provide capital for property developers, augmenting the capital available from syndicated bank loans. The private capital market for small-scale real estate investors is now fragmented with boutique solutions. Many such creative real estate investing solutions are complex and not intended for amateurs. They are even fertile grounds for scams.

The assignment of a contract for the purchase of real estate sounds to me like brokering a transaction without being a properly licensed Realtor. I would not want to be in the shoes of an assignor or assignee if a property they're flipping was on some Realtor's multiple listing service and the Realtor files a complaint with their state's regulatory body. Private parties who are not licensed and do not adhere to government regulations or the National Association of Realtors' code of ethics open themselves up to serious risks if they can't complete an assignment deal.

Hard money loans are more expensive for borrowers than bank mortgages. These loans do not conform to standard credit guidelines and default at higher rates. Inexperienced hard money lenders can easily become suckers for a fast-talking sales pitch. Even experienced lenders can be stuck with a non-performing loan book in a significant market downturn, and they may not always have recourse to a bank that can help them offload troubled properties.

Seller financing strikes me as being just plain dumb. A borrower who cannot get a mortgage from a conventional source probably should not qualify for any loan at all, even from a private source. A seller willing to trust such a person's creditworthiness is trading the speed of an easy title transfer for the huge risk of non-payment. The advantages of this deal type all skew towards an unethical buyer: easy money, fast ownership, and rent-free living space if they never intended to pay up. Perhaps a desperate seller would do such a deal just to get rid of a very bad property, which would be just as unethical if the property had serious deficiencies.

The so-called "subject to" real estate deal sounds unbelievably complex for anyone who is not an experienced real estate attorney. The paperwork needed to get iron-clad agreements looks daunting. I looked for authoritative sources in my "subject to" Web search and found mostly amateurish promotions for this deal category that did not adequately describe risks.

Mortgage assumption is possible in some situations where the FHA or VA is involved. The good news is that banks and government regulators have rules for this quasi-official process. Buyers meeting conventional mortgage standards can use assumable mortgages if they meet lending standards and have enough cash to make any needed down payments.

These types of deals can lead investors to participation in real estate notes and trust deeds. Mortgage notes are a form of securitization paralleling the real estate sector's whole-hog embrace of mortgage-backed securities. Real estate trust deeds serve as security for loans that avoid third party participation. Notes and trust deeds are small-scale versions of the financing that mortgage REITs and trust deed investment companies (TDICs) provide. I will never understand why amateur investors would spend their precious time pursuing small lot notes and single trust deeds when professionally managed REITs and TDICs are diversified, well-capitalized alternatives.

Modern finance has tamed what used to be the wild world of real estate finance. Investing in real estate today is as easy as selecting REITs in a brokerage account. REITs come in multiple flavors: commercial, residential, mortgage-only, ETFs, you name it. The publicly traded ones all have prospectuses and histories of SEC filings for transparency. Privately originated notes, trust deeds, and other financing methods are less liquid and transparent than publicly traded securities. Some amateur investors will insist on biting off more risk than they can chew, just to fulfill their fantasies of becoming real estate moguls from their living rooms.

The Haiku of Finance for 08/25/14

Buying mortgage note
Workout payments or foreclose
Not a passive play

Avenues to Real Estate Paper Notes

Passive income from real estate is a fascinating topic.  Anyone who finds income from property-secured notes boring is free to stop reading now.  I pick up tips from real estate sources every so often about how cash flow notes work.  I have never invested in one but I know just enough to figure out where to start.

Beginning with cash flow notes means finding reliable information.  Personal Real Estate Investor magazine has plenty of articles on strategies for selecting properties and avoiding bad decisions, but I didn't find anything there on cash flow notes.  Google searches for "cash flow note investing" and related word combos reveal plenty of sites claiming to offer education on note investing.  The most realistic introduction to the topic I've found is W.J. Mencarow's The Paper Source, which offers plenty of free background information on researching notes.

Brokering notes seems more difficult than buy-and-hold investing because it requires a constant search for counterparties.  Investing in a note for the long term simply requires a search for available inventories.  The secondary market for notes linked to real estate are private placements, but I suspect that crowdfunding portals covering real estate will eventually list them for sale.  That would be a huge step forward for transparency.

Professional investment managers offer funds that buy pools of available notes and work with homeowners who are delinquent on payments.  This turns non-performing notes into performing notes after a few months of renewed payments.  The key to success for these firms is their ability to buy nonperforming notes at large discounts.  I do not have firm data on the size of this market; banks obviously have some non-performing notes they want to remove from their balance sheets to avoid impairments.  Fannie Mae and Freddie Mac sell large blocks of notes as "tapes" priced in nine figures.  Hedge funds and private equity firms buy these tapes and resell them in smaller lots to private money managers.  Fund managers who refuse some non-performing loans in those tapes may give the large private equity firms the chance to foreclose on homes and become landlords.  Foreclosing on hundreds of houses is a lot of work, which is why most private equity firms getting into landlording prefer to make all-cash offers on normal home sales.  A smaller fund that buys their non-performing notes directly from a bank has a similar opportunity to become a landlord.

Investing in these notes reminds me of tax lien investing.  The similarity with tax liens is that purchasing one allows the opportunity to foreclose and take possession of real property.  The difference is that investors must purchase tax liens from municipal government agencies, and must purchase notes from banks or large asset managers.  Purchasing liens may offer an investor seniority over a mortgage note owner, although I have read conflicting interpretations on how one is senior to the other.  Nolo's discussion of liens and mortgages in foreclosure illustrates how recording dates can complicate matters.  That is a very important thing to know if competing investors seek the most expeditious route to foreclosure.  Nolo's discussion of mortgages and deeds of trust will be of interest to investors purchasing notes outside their own state.  Knowing which category prevails for a note will determine whether the foreclosure process is attractive.

Foreclosing on delinquent notes is not the only result of a note investing strategy.  Buying and holding them to collect the cash flow is the stated rationale of the private funds lining up to buy them and restructure their payment terms.  Retail investors who do not qualify for the gates in privately managed note funds always have the option of buying publicly traded funds that manage ABS and MBS paper.  That route does not involve the cumbersome, labor-intensive approach through private placements.  Privately managed pooled note funds have defined life spans and high fees.  They are not transparent and the field is prey for scams.

I would consider cash flow notes for my own portfolio in normal economic times.  These are not normal times.  The strong possibility of hyperinflation in the US means debtors can pay back liabilities with future dollars that are worth much less.  Owning a cash flow note backed by real estate exposes the holder to asset destruction during hyperinflation.  The underlying real estate remains but the note becomes worthless.  Aspiring landlords should remember how high inflation can turn their pile of notes into a pile of manure.

Nota bene:  None of this discussion constitutes investment advice.  I have to state that out of concern that some nutcase will make false claims against me.  I do not give personal financial advice.

Fed's Mild Taper Leaves ZIRP In Place

Well, I'm surprised that the FOMC decided to dial back its securities purchases by $10B per month.  I'm further surprised that US stock markets rallied on this news.  I did not expect them to change course.  Market analysts are taking that as a vote of confidence in the economy's health.  It's too bad they rely on rigged statistics to gauge the economy's health; they should read Shadow Government Statistics instead. The more significant news is that the Fed is leaving the target federal funds rate at zero.  That ensures that banks will still be able to borrow at almost no cost and hold Treasuries, maintaining their risk-free carry trade.  Perhaps the bond-buying program isn't as crucial to the economy as ZIRP.  It's still worth $75B each month and it's not ending all at once.

I wonder whether the inventory of agency MBS available from GSEs was a factor in the Fed's decision.  This May 2013 research paper from the Federal Reserve Bank of New York finds that the MBS market has plenty of liquidity.  The housing market's recovery (which in turn is driven by ZIRP making mortgages cheap) also means MBS look more attractive to institutions.  If that's really the case, the Fed won't have to work as hard to support MBS valuations.  Lots of banks and pension funds own MBSs, so the taper means the Fed seems less worried now about supporting bank balance sheets and keeping pension funds solvent.  The Mortgage News Daily MBS Dashboard shows that MBS prices fell slightly across the board today and Treasury yields rose slightly.  Less Fed demand for agency paper means the prices fall.  These price moves are a more relevant measure of the FOMC's taper decision.   

The Haiku of Finance for 09/27/13

Reverse mortgage loss
Housing agency bailout
Here we go again

Financial Sarcasm Roundup for 09/23/13

This should add some flair to the finance sector.  I know for a fact that the wealth management brokerage where I once worked would have been more intelligent if cats and dogs were running that show.

Greece and its lenders have agreed to falsify a budget surplus.  Calculating a budget surplus before paying interest reminds me of the '90s era dot-coms who claimed they were profitable based on EBITDA.  It's fiction, people!  They're even going to falsify a joint economic growth forecast.  The creditors and government officials who are party to this chicanery are committing frauds against the taxpayers of Germany and other European countries backstopping the troika bailout.  This is infuriating to watch!  Just imagine the Federal Reserve dollar swap lines underpinning the European troika bailout and how the never-ending Greek mountain of baloney piling up will eventually trigger their activation.  Is it now obvious to everyone why I'm bearish on the euro?!

Give credit to Ireland for not following the Greek example.  The Irish are sticking to austerity and Moody's upgraded its sovereign debt rating.  Maybe Irish whiskey doesn't rot the brain as thoroughly as Greek ouzo.  If they keep it up we can remove Ireland from the PIIGS acronym and just focus on the other four hair triggers of European insolvency.

US mortgage lenders are going for the subprime market again.  They're just not using that label.  I soon expect lenders to start accepting piles of manure as collateral.  This is the end result of the Fed buying all the GSE-backed mortgage paper in sight.  Banks will once again stretch for riskier income because the Fed creates moral hazard by absolving them of risk.

Washington is playing games with the nation's credit rating again.  It may come to nothing if regulatory threats against the rating agencies frighten them into inaction.  The markets won't be fooled for long.  The change to the GDP calculation won't fool future historians.

Enjoy this stuff, folks.  I put all of twenty minutes into making this so you'd better appreciate my hard work.  Expect a lot more of this stuff in the future from Alfidi Capital.  Finance makes me LOL.  

Why I Do Not Want To Be a Landlord

I've been doing a lot of thinking about real estate lately.  Some years ago I attended free seminars that were totally worthless.  Lately I've been listening to experienced real estate professionals.  I now have more sources and references for my knowledge base than I could ever use.  One of the more common avenues to success in real estate is owning income-producing residential property.  This means investors have to manage their property and tenants as a landlord.  Once I started learning about all of the responsibilities a landlord must fulfill, I realized it's a poor fit for my negative attitude toward human beings.  The feudal appeal of having serfs as tenants on my land has lost its shine.  Let me describe the ways in which landlording would complicate my life and inconvenience me to no end.

I wish I could charge people an arm and a leg for living under my benevolent protection, but alas many communities have rent control laws that prevent landlords from raising rents on long-term occupants.  San Francisco is one such town.  The City has a rent board that determines what private property owners may do with the property they own.  The City is also home to a very vocal tenants union that agitates for rent control.  The union's symbol is the classic workers' fist smashing a cartoonish landlord.  The clear message is that radicals who believe property is theft and profit is evil will use every means available to destroy the capitalists who provide them with climate-controlled shelter from the elements.  No thanks.  I will not be a landlord in San Francisco if it means I become the target of idiots with no life.

Owning rental property in less restrictive areas means figuring out how much to charge for rent.  Figure extra charges for after-hours service calls, inspections, and non-routine maintenance.  Having a live response to an overnight maintenance call may be worth the expense if it prevents water damage from destroying property.  Watch out for those leaks above the ground floor.  Fees for late rents are of course limited by local laws.  I'd like to charge people double rent for wasting my time and insulting my intelligence but that's probably prohibited by some do-gooder San Francisco ordinance.

Locked-out tenants are a pain in the behind.  I don't want to get calls at oh-dark-thirty from someone who lost their key or left it on the kitchen counter.  Having a locksmith on call is not something I relish.  I can just imagine a nosy neighbor snooping as the locksmith opens the tenant's door, then calling the cops to report a break-in, and then snickering as the locksmith calls me to complain about wasted time.  Yeah, Neighborhood Watch would be all about busybodies watching me lose money.  That is a headache I do not need.

Keeping tenants informed is another landlord task I don't want to do.  Many tenants are dumb enough to need reminders of when their rent is due, so landlords need to time their newsletter publishing so the reminder ends up at the top of the shoebox, or hatbox, or breadbox, or glovebox, or wherever ghetto tenants like to stuff their overdue bills.  Landlords can sometimes use this retardation to their advantage.  If the newsletter contains requests for confirmation of safety measures like smoke detectors or carbon monoxide detectors, keeping proof of confirmations can limit landlords' liability in the aftermath of emergencies.  Furnaces and air conditioning units are among landlords' most expensive repairs, but I worry that reminding tenants to change filters will fall on deaf ears.  Having laundry facilities on site means more maintenance expenses, plus complaints from some tenant who claims a machine ate too many quarters.

Competent businesses consider the cost of acquiring new customers.  Landlording as a business means figuring the cost of acquiring new tenants through advertising.  Window signs might be more effective than lawn signs that get kicked over, and some high school kid on the corner holding a sign and waving might be a source of amusement.  I would give an illiterate tenant a cheeseburger just to see them wave a big sign on the street corner with my name on it.  Selecting new tenants means abiding by HUD's Fair Housing regulations.  Some tenants fall into legally protected classes.  Others that aren't protected don't have to live with me if I don't want them around.  Frankly, I don't want anyone around.  I don't want animals around either and they're not a protected class, so landlords can have special fees and insurance requirements for our furry friends.

I always wondered why the rental applications I've filled out were so detailed.  It turns out that landlords need to collect as much info during the intake process as possible to allow them to garnish wages and collect judgments.  County tax records provide a public record of tenants' true addresses, which makes sending judgment notices easier.  I sure don't want any known drug offenders on my property, because law enforcement could execute a civil asset forfeiture action against me if I rent to them in full knowledge of their activity.  Checking the sheriff's records helps keep the riff-raff away.  I'd rather save myself the trouble and keep everyone away.

I have difficulty believing any of the so-called asset protection strategies real estate professionals claim they use.  I had an LLC structure until very recently for Alfidi Capital until I determined that paying the $800 per year to the State of California wasn't getting me any benefit.  I did not have the time to treat the LLC as a separate entity that would give it corporate veil status.  It also obviously carried my name, and I was the registered agent because I don't need to retain a lawyer for routine business functions.  My LLC was useless and I'm in the final stages of converting Alfidi Capital from an LLC to a sole proprietorship.  I will never again waste time and money using an LLC for anything that I can handle myself, including real estate.  Insurance policies are probably cheaper than an LLC and land trusts are probably more anonymous.  I'm no expert on land trusts but I'm wary of their potential for misuse.  Would a property management company be willing to accept designation as a trustee of a land trust if the named beneficiary is the landlord's LLC, but the landlord has no property insurance?  Who would sue who if something goes wrong?  I don't want to spend time in court just to find out.

I'd rather take a less costly stance with my asset protection posture.  The California superior court system has searchable databases of civil cases online.  I've searched San Francisco Superior Court's records many times for the names of local troublemakers whom I do not wish to have in my life.  It's educational to see who pops up as the initiator of frivolous lawsuits.  I don't want litigation addicts as business associates.  Landlords should beware of having them as tenants.

Landlords also have to manage the cash they receive and spend.  It comes in by check, money order, electronic payment, etc.  It goes out any way you like.  You're the boss and you're running this business.  I'm not.  The process of evicting a bad tenant and preparing a unit for the next occupancy takes time, requiring cash reserves on hand to cover an estimated tenant failure rate.  I suspect that corporate experience with uncollectible accounts receivable would be helpful here.  Credit card companies sell their charge-off accounts to judgment collectors and other miscellaneous investors.  Maybe landlords who don't want to pursue deadbeat tenants are a good source of deal flow for judgment recovery aficionados.

Disaster-prone areas call for their own category of Darwin Awards.  I've always been fascinated by the stupidity of developers who build there, investors who buy there, insurers who underwrite there, and tenants who live there.  I will never buy developed property on a floodplain.  I will never buy property in the San Francisco Bay Area that does not meet seismic code requirements.  I sometimes wonder whether architects who design structures that resist hurricanes and tornadoes have disruptive ideas for real estate developers in the Gulf states and Midwest.  Somebody could make a buck.

Limits on landlording turn me off.  Some paychecks are resistant to garnishment (like Social Security).  Lawsuits and judgment collections can be a landlord's best friend.  Landlords may have to pay interest on the deposits they collect.  Limiting the deposit to cover first and last month's rent may or may not be helpful in avoiding interest charges.  I have no desire to maintain records for thirty years that will allow me to calculate the return of some granny's deposit to her estate's executor once she croaks.

Tenants turn me off too.  Low income properties are full of risky tenants who cause nightmares.  I remember living in a Richmond, California apartment complex near the Hilltop Auto Mall.  The City of Richmond bought it in 2003 to convert it into Section 8 housing while they spent tax dollars renovating the real low-income projects downtown.  Life in my apartment complex soon deteriorated from an already low status.  Tenants would enter the rental office bragging about being late on payments.  Druggies left their detritus in the entryways and tenants left their human waste in the hallways.  These people really were human waste with all of their behavioral problems.  Section 8 of the Housing Act of 1937 now has a devoted constituency in the underclass.  Housing voucher recipients strike me as the equivalent of parolees, people who leave and reenter the Section 8 program through revolving doors that affirm their victimhood.  HUD even goes so far as to provide links to tenants' rights organizations, advocating against property owners whose taxes help fund HUD's operations.  Bottom feeders are disgusting.  I moved out of the ghetto in 2004 and I'll never live that way again.  No way will any low-income tenant ever occupy my radar as a business professional.  

Want to hire a property manager to do all of this work for you?  Well, that requires work too.  You'll have to consider how long they've been in business and whether they have the staff to handle all of the properties they manage.  If they manage property out of your area, that means you're on the hook for long-distance absentee landlord status. If they have judgments against them, well, guess who they pass their bills to for payment.  I'm not paying even a fraction of my income from an investment to someone else.

I had fun as a kid playing fake landlording with the Monopoly board game.  The secret to success in that game is to own everything on a given street to capture renters who are highly mobile.  Owning more properties means reinvesting your rent in improvements (houses, hotels) until you own the board and win by bankrupting everyone.  In real life, the have-not takers will hamstring the landlord makers with regulations and lawsuits.  They will also empower their political allies with subsidy vouchers, non-profit advocacy groups that subsist on foundation grants, and loudmouth activists.  Everyone wants to be on the side of the angels as long as it means a free lunch.  Real landlording isn't like Monopoly.  The real world makes it difficult to win.

Some investors thrive as landlords.  They love tracking all of the daily details and solving human problems.  Good for them.  They have the skills and patience to perform a very necessary market function and deserve handsome rewards for their results.  They are welcome to own all of the income-producing residential property which will never see a bid from me.  There are many strategies available to real estate investors who do not want to be landlords.  I'd rather develop land, manage human-scale agribusiness projects, own oil and gas leases, rehabilitate vacant buildings, own rights-of-way and easements, purchase tax liens, buy REITs and ETFs, or do just about anything else.  Any of those choices are more preferable to me than dealing with live human beings.  Even dealing with dead human beings as a cemetery owner requires adherence to special regulations.  I do not want people on my property, living or deceased.  I can't wait to tell those kids to get off my lawn.  All I need is the lawn so I can start yelling.

Full disclosure:  I do not own real estate at this time.  

The Haiku of Finance for 04/09/13

Foreclosure relief
Won't happen for most people
Just an empty stunt

The Haiku of Finance for 02/01/13

Put no money down
Get worse deal on a mortgage
Such a clear trade-off

No-Money-Down Mortgages Can Destroy Affluent

Here comes another lame idea in finance, made especially for affluent investors with little sense.  Banks are offering no-money-down mortgages secured by portions of an investor's portfolio.  Maybe this is a sign of how desperate high-end homebuilders have become to move new inventory.  It's definitely a sign that parties to mortgages are once again throwing common sense out the window.

Limiting the stock portion of the mortgage's collateral to 50% means little in the event of a stock market decline.  Let's say a flash crash hits the market and the investor's stock portfolio takes a 5% hit.  Now the stock collateral is (0.95 x 50) is at 47.5% of the loan's original balance.  The servicing financial institution can presumably see the investor's portfolio if it's been pledged as collateral, and is most likely custodied with the servicer if it's a TBTF bank.  If less than 2.5% of the loan's principal has been amortized with principal payments up to that point, the homeowner will face the equivalent of a margin call to put in cash that will restore the value of the collateral.  The danger here is that affluent investor pledged securities because they didn't have the cash or were unwilling to sell securities to raise cash.  Forcing a margin call would be the equivalent of an unpayable balloon payment and probably put the home into foreclosure.

Collateralizing 80% of the mortgage's value with bonds is likewise no sure thing.  High inflation could reduce the real value of that fixed-income collateral faster than it reduces the real value of the loan's balance.  It's an unpredictable relationship because this country has gone so long without serious inflation.

Securing a mortgage with liquid securities rather than cold cash is a dangerous "innovation" in an extremely unstable macroeconomic environment.  I've blogged before about the risks of an equity market crash and  hyperinflation in the U.S.  A sudden reversal of fortune for the economy would jeopardize a mortgage whose down payment is secured with anything other than a large cash payment at the beginning.  Some affluent people will go for this anyway.  I'll quietly await their distressed asset sales.

Nota bene:  This is not any kind of advice to either use such a mortgage or avoid one.  I'm sketching out a possible scenario and I risk nothing by watching to see what happens with these instruments.

The Haiku of Finance for 01/16/13

Mortgage help program
Just a stealth banker bailout
Caveat fine print

Financial Sarcasm Roundup for 12/26/12

It's one day after Christmas and I'm not any less sarcastic than I was yesterday.

The fiscal cliff is approaching and the relevant parties just can't stop launching trial balloons to impress the folks back home.  Both parties want to lower corporate tax rates in the name of competitiveness.  There's no way such a complicated reform will get done this year but that won't stop the preening and posturing.  Lowering the corporate tax rate while eliminating deductions probably won't raise revenue but it will make CFOs' jobs easier, so maybe some grateful corporate treasuries will step up their giving to super-PACs.

Japan is going nuts.  Their ruling political coalition has voted specifically to destroy the yen with monetary stimulus.  That's like putting some anemic patient on a cocaine diet in the hope that it will accelerate their metabolism.  Forget about structural reforms.  I'm so glad I don't own Japanese stocks or yen.

Some New Jersey union pension fund is suing to block the NYSE-ICE merger.  Come on already.  They should be grateful anyone wants to buy an American exchange at what is likely the high point of the U.S. equity market.  That means ICE is probably at its high-water mark too, and competition from dark pools and internal crossing networks make this merger all the more fortuitous for both exchanges' shareholders.

Here comes the mother of all re-fis.  The Administration is considering a refinancing handout to even more borrowers, along with nationalizing the rest of the secondary mortgage market.  I knew all along that Washington was going for it but it's still thrilling to see my suspicions confirmed in print.  I invite my readers to search my blog articles throughout 2011 and 2012.  You'll find several articles where I propose that large-scale mortgage modification programs would be a transmission mechanism for a wage-price spiral if the federal government flooded them with cash.  If this latest policy boondoggle is enacted, the necessary mechanism to launch hyperinflation will be in place.

The primary Treasury dealers are dumber than ever.  They're hoarding bonds and reducing sales to the Fed. This is the wrong thing for a dealer to do with the U.S. bond market at an all-time high.  The smart thing to do is unload winning positions onto the last sucker in the room - the Fed, of course - and shift the bank's business lines into things like non-dollar debt from emerging markets.

Shoppers didn't come through for retailers this year.  I've been waiting for a downturn in retail activity and this one's been a long time in coming.  Better late than never.  The average American probably has enough unused stuff in their closets and storage sheds to equip several emerging market households, and yet buying more stuff is in our cultural DNA.  The silver lining to any hyperinflationary period is that ordinary folks will be cured of their impulse to consume with abandon.

Finally, the SEC gets my Alfidi Capital award of the day (okay, there's no such thing but it sounds generous) for innovation.  The agency charged with regulating our capital markets is finally acquiring a system that allows it to watch the capital markets.  Funny, I've been using ordinary financial websites and online brokerages for almost two decades.  In true government contracting fashion, they bought a complete system rather than subscribe to terminals and feeds from Bloomberg and Dow Jones.  I recall reading during the financial crisis of 2008 that the Treasury Secretary had the ability to monitor credit markets in real time from his desk.  I don't have to name the Wall Street players who have a vested interest in the keeping the SEC blinded, in exchange for future private employment for the agency's top investigators.  In that context, I expect the SEC's new market monitoring system to work exactly as intended, especially since initial access to the system will be limited to a handful of people.  Read between those lines.

FHA Going Broke, Thankfully

The insolvency of the federal government's middle class entitlement programs is well-documented, at least for  the high-information component of the electorate.  We can now add home mortgage guarantees to the mix.  The FHA does not maintain the required minimum capital reserves for the loan portfolios it supports.  Credit rating agency analysts will be loathe to note this in the footnotes of whatever reports they publish.  

Banks will ignore this news because they don't want to frighten their corporate clients into thinking they're just one mouse click away from a global credit market freeze.  Maybe the Fed can extend the FHA a credit line and then hyperinflate it down to nothing.  Maybe the two major political parties can pass a hat around among their donors and take up a collection to fill the FHA's hole.  My preferred alternative is to let the FHA go bust when the next foreclosure round forces banks to write off mortgages, which means we can use Dodd-Frank to forcibly collapse some financial institutions that shouldn't exist.

The Haiku of Finance for 10/24/12

Mortgage suit shakedown
Chasing bank scam paper trail
Pre-election show

The Haiku of Finance for 10/12/12

Fed QE helps banks
Low-cost loans raise bank profits
Not for rate relief

The Haiku of Finance for 07/04/12

Seizing mortgages
Will destroy bank balance sheets
Go ahead, nuke 'em