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Soros and Ross -- Where Have You Been?

And please ignore Geithner... He Doesn't Have a Clue

Tuesday, November 3rd, 2009 - By Ian Cooper

For months, we've pounded the table over the risks of commercial real estate... and for good reason. It's a trillion dollar time bomb... And it's exploding as we speak.

But it seems Ross and Soros are just realizing this.

Ross sees a "huge crash in commercial real estate coming" and Soros spoke of a "bloodletting yet to come." Makes you wonder how these guys became so filthy rich when they can't see what's happening.

"In commercial real estate and leveraged buyouts, the bloodletting is yet to come," Soros said. "These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy."

That's interesting, Soros... because the bloodletting started a long time ago.

There have been bankruptcies, bank failures, foreclosures, destroyed property values, and so on and so forth. And there's more pain to come for commercial real estate and the greater economy. I don't care what Geithner would have you believe about the economy's ability to handle any CRE hits it takes.

But I digress...

Here's what we reiterated in early September, months after the collapse already began:

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks (especially regional banks, which hold more than $1 trillion of mortgages backed by CRE that is quickly losing value).

The sector will suffer from two things, one of which is bad underwriting. CMBS owners were lent money on the assumption that occupancy and rents would keep rising. But that never happened. The opposite did. "The result is that a growing number of properties aren't generating enough cash to make principal and interest payments."

And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren't exactly jumping up to refinance deals.

Even Steve Christ will tell you that all of this is a recipe for disaster. . . and that industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will close their doors over the next year.

That means that we're maybe only in the second inning here as this crisis unfolds.

So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, you have to wonder how it will all get done, says Steve.

The brutal answer: it won't.

"Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat," said a recent Wall Street Journal article. But "their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds."

And, according to Deutsche Bank AG, "as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks' $1 trillion "core" commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion."

"So far, banks in general have been reluctant to take losses on their commercial books," says the Wall Street Journal. "This "delay and pray" strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses..."

It's bad... real bad. But there are ways to profit from the coming disaster... which you can check out in Options Trading Pit.

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Even Insiders Think Market is Overvalued

Not exactly the kind of "confidence" you'd expect in a recovery...

Wednesday, October 28th, 2009 - By Ian Cooper

Tough week, huh?

Any one would think the markets were suffering from the onset of schizophrenia the way they've been acting this week. One second, all is well. Buyers line up to chase the recovery. The next - buyers are swimming for the exits in a sea of red ink.

It didn't help that consumer confidence fell unexpectedly to 47.7 in October from 53.4 in September thanks to worsening unemployment numbers... or that new home sales plunged 3.6%, as the effects of the temporary tax credits begin to die off.

Not exactly the kind of "confidence" you'd expect in a recovery, is it?

But don't tell that to those buying anything that confirms the delusion of a "jobless" or "consumer-less" recovery...

Even corporate insiders know better than to chase this rally higher.

Insider selling just about tripled last week to $846 million, as insider buying came in at a pathetic $14.7 million from $32 million. That's a clear message. Even insiders believe their company share prices are overvalued... and they're cashing in before the next leg down that we have been calling for.

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FHA on the Brink of Disaster

What Have we Learned?

Monday, October 12th, 2009 - By Ian Cooper

More than a year after the government took control of Fannie Mae and Freddie Mac, both of which were on the brink of disaster, what have we learned?

Absolutely nothing.

According to a congressional hearing, the Federal Housing Administration "appears destined for a taxpayer bailout in the next 24 - 36 months."

And believe me - this should go over really well with taxpayers.

But it didn't take a genius to see this one coming. A year after bailing out the over-leveraged Fannie and Freddie, the FHA has managed to put itself in the same predicament.

You see, when our market stopped issuing easy money last year, the "geniuses" at the FHA stepped in and became the big player in the mortgage loan business. So, FHA went from insuring 6% of new mortgages to 21% in 2008... .and even more in 2009.

Genius.

Nowadays, the FHA insures 5.4 million mortgages - most of which only required 3.5% down payment at a value of "only" $675 billion. Unfortunately, the FHA forgot to beef up its cash position, which sits at just $30 billion. That's about a 20:1 leverage... and should end well, as insured loans only begin to deteriorate.

So what happens when the FHA goes down the drain? Unfortunately, we can't let that happen because there'd be no mortgage market.

Dig deep in your pockets, folks. We'll be paying for another failure.

None of this should come as a shock, though. We first brought this to your attention in late September:

Be prepared to fork over more of your hard earned dollars to Uncle Sam, who continues to guarantee and insure loans to just about any one who wanted a house. The financial decay continues... and this time, it isn't Fannie or Freddie on the chop block, it's the Federal Housing Administration.

The Federal Housing Administration has said its cash cushion will dip below mandated levels for the first time... but insists that it won't need a taxpayer rescue (where have I heard this before?).

The agency, a source of income for first-time home buyers is facing mounting concerns that it will need a taxpayer bailout, despite what it's telling the public. As of this summer, 17% of FHA borrowers were at least a month behind or in foreclosure, as compared with 13% for all loans.

Those rising defaults mean FHA reserves could sink below the 2% mark required by federal law. And a study being sent to Congress this November is expected to show that percentage dipping below required levels for the first time.

According to the Wall Street Journal:

It isn't clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don't have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. "They're probably going to need a bailout at some point because they're making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "...I've never seen an entity successfully outrun a situation like this."

But hey, it's only money, right?

When you have trillions in debt, what's a few billion dollars more?

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Tax Nightmare: A National Sales Tax may be Coming

As long as it stimulates growth... oh wait.

Monday, October 5th, 2009 - By Ian Cooper

President Obama, who wants to stimulate consumer spending and revive the economy, may consider a consumption tax with a national sales tax...

That's absolutely brilliant...

It should do wonders for his approval ratings if he takes it seriously... not to mention how well it'll impact our wallets.

This Wednesday the Center for American Progress, led by John Podesta (an Obama adviser), will recommend that:

The Administration should consider a tax on consumption, such as a value-added tax [VAT] system similar to that in use in the European Union. Mr. Podesta suggested that its impact should be limited to protect lower-income people, who otherwise might be hit particularly hard.

With the federal budget deficit ballooning, the Obama administration and congressional leaders could look to tax-code changes to generate more revenues for the government.

But hey, as long as it stimulates the economy and consumer spending... oh wait.

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Recovery? What Recovery?

Credit Card Defaults are Skyrocketing

Monday, September 21st, 2009 - By Ian Cooper

Just where is this recovery that every one's talking about?

Because it doesn't exist.

Bank of America and Citigroup - which make up 35% of the credit card industry - just announced that consumers are defaulting on credit cards at rates no seen since the recession began. Bank of America's charge off rate was 14.5%.

Other banks like JP Morgan, and creditors like Discover and American Express have recently revealed similar August numbers. This is reality. And we're not surprised... just shocked at the naivety of Wall Street bulls that think the worst is over.

Credit card defaults typically track unemployment, which just rose to a 26 year high of 9.7% (really 16%) in August. The jobless rate isn't expected to peak soon.

Consumers are in trouble. There is no recovery.

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The Next Ticking Time Bomb

Prepare for Things to Get Ugly... Real Ugly.

Monday, September 21st, 2009 - By Ian Cooper

It's almost funny.

We've been warning about the coming fallout from Option ARMs and showing readers how to profit... and explaining that there's further downside for housing.

And now, after all this time, the federal government and states are just now preparing themselves for the next foreclosure crisis in our housing malaise.

Payment option ARMs are about to explode, according to the Iowa Attorney General after meeting with members of President Obama's administration. "That's the next round of potential foreclosures in our country."

Option ARMs are considered one of the riskiest loans made during the housing boom and have left many borrowers owing much more than their homes are actually worth. These underwater mortgages have and will continue to be the driving force behind defaults and foreclosures.

And you want us to believe there's a bottom in housing, or that a recovery is taking place? Come on.

As we said earlier this year.

The next phase of the real estate disaster is upon us. It's just shifted from subprime to Option ARM.

And with many economists predicting unemployment will rise into the double digits, foreclosures will only accelerate, which will add to bank losses, which will add pressure to the financial system and broader economy.

The Fed is well aware of what's coming. Why do you think they're so desperate to pump up the economy before the next fiasco?

Truth is, the amount of debt wrapped up in these Option ARMs is much worse than that of subprime.

And if the government or the banks fail to understand this, the second round we've been warning about will begin and banking instability will wreak havoc yet again.

Option ARM resets will be tougher for the economy to handle than subprime. And we will see greater numbers of bank failures, job losses, foreclosures, delinquencies, and economic hardships.

Honest.

The Year of Option ARM Resets. . . and Why There's No Foreseeable Bottom.

Just as 2007 and 2008 were the years of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARM resets in 2009 and 2010, this crisis is about to unleash a fury no one's prepared for.

It won't be as bad as subprime, of course. It'll be worse.

That's because lenders created these ARMs with "teaser" features for borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule. And if that weren't bad enough, there was another feature called "negative amortization," which meant you weren't paying back any principal.

In fact, with negative amortization loans, your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn't otherwise afford.

As for speculators, they may use negative amortization loans if they believe prices will increase at a fast pace. But with the opposite happening, they're out of luck.

And the banks will be left holding the bag.

What should concern you is that about $750 billion worth of option adjustable mortgages (option ARMs) were issued between 2004 and 2007. . . and will begin resetting shortly. And banks like Bank of America, JP Morgan Chase, and Wells Fargo are in for a rough ride, given their exposure to option ARMs.

Worse, as of December 2008, about 28% of option ARMs were delinquent or in foreclosure, according to reports. Compare that to the 23% default rate in September 2008. And nearly 61% of option ARMs originated in 2007 "will eventually default," according to a Goldman Sachs report.

What will happen is this: many borrowers, if they haven't already, will start throwing in the towel as they realize just how far under water they really are. And the likes of JP Morgan (JPM) could be heavily and negatively impacted.

One thing's for certain. . . we'll be paying for someone else's mistake yet again.

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Is this the Next Bailout?

And they insist they don't need rescue...

Monday, September 21st, 2009 - By Ian Cooper

Here we go again...

The Federal Housing Administration has said its cash cushion will dip below mandated levels for the first time... but insists that it won't need a taxpayer rescue (where have I heard this before?).

According to the Wall Street Journal:

It isn't clear how the rising losses may affect home buyers. Options for the agency could include politically unpalatable choices, such as asking for taxpayer funds to boost reserves or increasing the premiums borrowers pay for the insurance offered by the agency. Agency officials say if there is a shortfall, they don't have to do anything except report it to lawmakers. But some mortgage and housing analysts see trouble ahead. "They're probably going to need a bailout at some point because they're making loans in a riskier environment," says Edward Pinto, a mortgage-industry consultant and former chief credit officer at Fannie Mae. "...I've never seen an entity successfully outrun a situation like this."

But hey, it's only money, right?

When you have trillions in debt, what's a few billion dollars more?

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The Trillion Dollar Time Bomb

Tic Toc... Tic Toc...

Wednesday, September 2nd, 2009 - By Ian Cooper

For months, we've pounded the table over the risks of commercial real estate... and for good reason. It's a trillion dollar time bomb... And it's exploding as we speak.

Without a doubt, this problem has emerged as the biggest threat to our economic rebound and banks

(especially regional banks, which hold more than $1 trillion of mortgages backed by CRE that is quickly losing value).

The sector will suffer from two things, one of which is bad underwriting. CMBS owners were lent money on the assumption that occupancy and rents would keep rising. But that never happened. The opposite did. "The result is that a growing number of properties aren't generating enough cash to make principal and interest payments."

And with values sinking, vacancies soaring, and a recession making it unlikely for us to see demand pick up, banks aren't exactly jumping up to refinance deals.

Even Steve Christ will tell you that all of this is a recipe for disaster. . . and that industry leaders have estimated that 200,000 businesses and 10 percent of the nation's shopping malls will close their doors over the next year.

That means that we're maybe only in the second inning here as this crisis unfolds.

So, with roughly $530 billion in commercial mortgages coming due for refinancing in 2009-2011, and some estimates showing that as many as 68% of loans maturing during that time will fail to qualify for refinancing, you have to wonder how it will all get done, says Steve.

The brutal answer: it won't.

"Federal Reserve and Treasury officials are scrambling to prevent the commercial real estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat," said a recent Wall Street Journal article. But "their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds."

And, according to Deutsche Bank AG, "as property value declines and scarce credit continue to drive commercial property developers and investors into default, total lifetime losses on banks' $1 trillion "core" commercial-mortgage holdings, or those backed by income-producing properties, would reach between 11.6% and 15.3%, or $115 billion and $150 billion."

"So far, banks in general have been reluctant to take losses on their commercial books," says the Wall Street Journal. "This "delay and pray" strategy is preventing most banks from issuing new loans as they prepare their balance sheets for potential future losses..."

It's bad... real bad. But there are ways to profit from the coming disaster... which you can check out in Options Trading Pit.

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