Who Will Benefit From HARP II Modifications?

The Mortgage Corner

Who will benefit from HARP II, the latest attempt at loan modification? President Obama announced in Las Vegas that Fannie Mae and Freddie Mac would loosen their loan modification rules, which could enable up to one million homeowners with Fannie or Freddie-owned loans to reduce their interest rate and/or “accelerate the reduction of principal”.

Since it’s estimated there are up to 11 million homeowners that are ‘underwater’ (have negative equity in their homes), who will this really help? Firstly, it will spur more refinance activity, which means many homeowners might finally be able to sell their homes and move to better job locations. Part of the reason for the 3.1 million job openings according the Labor Department’s JOLTS report is that employers can’t match their skill requirements to the local applicant pool.

Secondly, it will help the banks that are holding the underwater mortgages by giving more certainty to valuations in their mortgage portfolio. And lastly, it should lower default and foreclose rates, which have been a major reason for RE values continuing to fall.

Graphs: Calculated Risk Blog

The delinquency rate has been declining from its peak of almost 12 percent in 2009 to 8.13 percent in August 2011, but foreclosures are stuck in the low 4 percent range, whereas historical delinquency and default rates were in the 4 and 1 percent range, respectively. Fannie and Freddie’s default and foreclosure rates, on the other hand, have remained within historical levels because of their stricter qualification requirements that have always required income and asset verification.

Calculated Risk’s take is, “What this program does do is remove many of the stumbling blocks to refinancing Fannie and Freddie loans (eliminate reps and warrants, reduce or eliminate fees, automatic 2nd subordination, minimal qualifying). These were all deal killers for HARP, and hopefully these changes will smooth the refinance road.”

Then questions remain on what to do with all the non-agency, or private label securities (PLS). They are where almost all of the subprime mortgages originated by the likes of Countrywide, Bank of American and Wells Fargo remain, and where most of the foreclosures occur.

One solution being worked out by the State Attorneys General, as reported by Jon Prior’s Housing Wire, is a reduction in the principal of the existing mortgage. “As part of the negotiations, the AGs are working to force servicers to refinance current borrowers into lower-rate mortgages,” said Prior. “A source said last week principal reductions were also very much a part of the talks, which some states began to split from, including foreclosure heavy California and New York…”The settlement negotiation is also going to be focused on significantly accelerating the reduction of principal," Department of Housing and Urban Development Secretary Shaun Donovan said Monday.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

How does one find out who qualifies for the HARP II loan modification? The first step is to find out if the borrower has a Fannie or Freddie-owned mortgage. Homeowners can use mortgage “look-up tools” to determine if Fannie or Freddie owns their loan.

• Freddie Mac loan look-up
• Fannie Mae loan look-up

Homeowners can also contact their current lender or loan servicer, to find out if the loan is backed by Fannie or Freddie. It’s a key requirement for HARP 2.0 and will likely remain in place throughout 2012, says the Home Buying Institute.

“Put those three programs together: HARP refinance for GSE loans, a HARP like refinance program as part of the mortgage settlement for many non-GSE loans, and an REO dispositions program that keeps many occupants in place as renters and I think that will help,” said Calculated Risk.

Harlan Green © 2011

Third Quarter Growth Will Be Better

Popular Economics Weekly

We now know the reasons for this summer’s growth pause, but growth is picking up for the rest of the year. The Japanese earthquake and Tsunami disrupted a fragile recovery at the same time as Europeans found out they had a fragile banking system. And several stimulus programs had expired—such as the housing tax credits while much of the ARRA $800 billion had been spent. Top that off with congressional gridlock, the U.S. credit downgrade, with consumers and businesses still paying down their debt, and we can see why many pundits were calling for a second recession.

But that ain’t happening, folks, as I’ve said. In part, because of so much cash being held by corporations with record profits, and banks in excess reserves. Economic growth for the second quarter ended up stronger than previously estimated but remained anemic, as I’ve said.

And we will see better third quarter economic growth—in the 2 to 3 percent range—as the steady increase in consumer spending (read retail sales) means more businesses will be hiring, while manufacturing is holding up. One reason is industrial production. Manufacturing data point to a stronger third quarter—and no recession. Manufacturing—especially autos—continues to lead industrial production.

Manufacturing has even outpaced growth for the overall economy over the past year. On a seasonally adjusted year-on-year basis, overall industrial production was up 3.2 percent in September, compared to 3.3 percent in August.  Through the second quarter, real GDP growth was 1.6 percent on a year-ago basis.  Basically, manufacturing is leading the recovery and at the national level is running stronger than implied by manufacturing surveys.

Obama’s new push on allowing more homeowners to refinance—up to 1 million by some estimates—can also breathe new life into the housing market.  Expansion of his Home Affordable Refinance Program (HARP) will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments, said President Obama at his Las Vegas unveiling. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.

Pricing details won't be published until mid-November, and lenders could begin refinancing loans under the retooled program as soon as Dec. 1, according to Calculated Risk. Loans that exceed the current limit of 125 percent of the property's value won't be able to participate until early next year. HARP is only open to loans that Fannie and Freddie guaranteed as of June 2009.

It seems that businesses have chosen to get the most out of their current workforce rather than hire new workers. It shows in the flagging productivity numbers and rising unit labor costs (ULC) seen in Econoday’s graph, which means their existing employees cannot produce much more per worker.

This means businesses aren’t hiring more workers because they don’t yet see increasing demand for their products. But the recent pickup in exports, capital goods orders and retail sales are telling us that the Third Quarter will look better. We are still in a deflationary cycle, as Krugman, et. al., have been saying ad nauseum. It is called a liquidity trap when businesses and consumers hold onto their savings rather than spend or invest out of the fear that conditions can worsen again. What will loosen their wallets is some confidence in the future.

Harlan Green © 2011

Real Estate Will Survive This

The Mortgage Corner

We are finally seeing some turnaround in housing—in those markets and regions that haven’t suffered as much from the housing bubble. That means of course where housing wasn’t overbuilt and unemployment not so severe. The boom and bust cycle occurred mostly in Florida, Nevada, California, and Arizona, where unemployment is highest. Michigan has the biggest drop in joblessness—from 14 percent to 11 percent, thanks to a recovering auto industry.

The latest S&P Case-Shiller Home Price survey tells us where are the winners and losers. Gambling capital Las Vegas still leads the losers, with Phoenix, Arizona, Miami and Tampa, Florida close behind. Dallas, Denver, and Boston suffered the least.

Graphs: Calculated Risk Blog

On a Not Seasonally Adjusted (NSA) basis, as of July, the Case-Shiller composite 10 index was 3.8 percent above the post-bubble low. The Composite 20 index was 3.7 percent above the post-bubble low (NSA). But the prices rises may be temporary due to a not very strong selling season and might fall to new lows (NSA) later this year or early in 2012, says Econoday.

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, tell us the overall state of housing. They declined 3.0 percent to a seasonally adjusted annual rate of 4.91 million in September from an upwardly revised 5.06 million in August, but are 11.3 percent above the 4.41 million unit pace in September 2010.

And we can see that sales have been hovering around 5 million after the huge volatility in 2009-10, with the end of the housing tax credit and fears of a double-dip recession. Housing sales seem to have stabilized, in other words, and probably won’t show much upside until the huge backlog of foreclosures is worked through. But very strict credit conditions are also dampening sales, according to the National Association of Realtors.

NAR chief economist Lawrence Yun also said the market has been stable although at low levels, and there is plenty of room for improvement. “Existing-home sales have bounced around this year, staying relatively close to the current level in most months,” he said. “The irony is affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010. Even so, the volume of successful buyers is higher than a year ago and is remaining fairly stable – this speaks to an unfulfilled demand.”

One key to future sales will be the for-sale inventory, which is also impacted by the large number of foreclosures coming on the market. Sales are still hovering around an 8 months’ supply, whereas 4 to 5 months is the historical norm, according to Calculated Risk.

Another plus was that builder confidence in the market for newly built, single-family homes rose four points to 18 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October. This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010, and is in line with the rise in housing construction.

"Builder confidence regained some ground in October due to modest improvements in buyer interest in select markets where economic recovery is starting to take hold and where foreclosure activity has remained comparatively subdued," said NAHB Chairman Bob Nielsen.

One reason for the increased builder optimism was that construction spending actually increased for the first time year-over-over year since the beginning of the recession. This was largely from the public sector although major private components also gained. August construction spending rebounded 1.4 percent, following a 1.4 percent drop in July. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease, again according to Econoday.

What about the future? Housing demand has historically depended mostly on household formation, largely a function of twenty-somethings leaving home to strike out with their own household. It has historically hovered around 1 million per year, but sunk to a 500,000 annual average during the recession. We will see a sharp increase in housing construction and sales when this generation feels confident about jobs and the economy to begin to buy again.

“Living in tight spaces is not sustainable”, says the NAR’s Lawrence Yun. “More people cannot be comfortably shoved into existing households.  Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes.  It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year.  There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements.  A stronger economy and job prospects will help in restoring normal household formation.”

Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years. One optimist on household formation is Warren Buffet, who believes it will take new household formation to bring back the housing market and economic growth in general.

We are already seeing that happen with the latest construction spending numbers, which showed a big jump in apartment construction, rising rents and a drop in vacancy rates. Predictions are that household formation could again reach the 1 million mark as early as next year, if jobs creation continues to improve.

Harlan Green © 2011

Who is Elizabeth Warren?

Financial FAQs

Now that Elizabeth Warren, Harvard Law Professor (Contracts) and creator of the barely born Bureau of Consumer Financial Protection, is running for Ted Kennedy’s former Senate seat, she should receive the attention she deserves. Professor Warren is perhaps the most eloquent spokesperson for rebalancing 30 years of policies that tilted income and wealth from the middle class to the investor class (i.e, to producers/investors, rather than consumers) of our economy.

A recent New York Times’ editorial said it best: “Ms. Warren talks about the nation’s growing income inequality in a way that channels the force of the Occupy Wall Street movement but makes it palatable and understandable to a far wider swath of voters. She is provocative and assertive in her critique of corporate power and the well-paid lobbyists who protect it in Washington, and eloquent in her defense of an eroding middle class.”

But really, even the New York Times misses the point. Not only has income inequality destabilized our financial system, but the economy as a whole. Don’t take my word for it. Clinton Labor Secretary Robert Reich, and many others have pointed out the results of too much inequality that puts us near the bottom of developed countries. We are 97^th of the 136 countries ranked—next to Cameroon and a handful of other African countries, according to the CIA Factbook.

The more frequent financial destabilizations of late are but a symptom, while the redistribution of wealth itself is the core illness that has in fact directly lowered economic growth by reducing overall aggregate demand—which is the willingness of consumers, investors and government to spend or invest.

In other words, the supply-side theories implemented by Milton Friedman, Ronald Reagan, et. al., have taken away the wealth of those who create most demand—middle class wage and salary earners. Their incomes have become stagnant, and may result in a permanent underclass, if Elizabeth Warren doesn’t have her way.

The remedies are available. Bring back a more progressive tax structure that existed even as recently as the Clinton era. And re-regulate the banking and shadow banking systems as mandated by Dodd-Frank—specifically implement the so-called Volcker Rule that won’t allow banks to trade for their own profit—as well as other measures that reduce the size of the too-big-to-fail financial sector. The bloated financial sector was the real cause of the Great Recession, and reducing it will return resources and capital taken away from the productive sectors of our economy.

Professor Warren fought this battle when creating the Consumer Financial Protection Bureau, which is within the U.S. Treasury. Her message was simple in creating the Bureau: the consumer “market” for financial products does not operate like a proper market because leading firms (bigger banks and also nonbanks, like some payday lenders) have figured out how to make a great deal of money by confusing their customers.

“If someone attempted to sell boxed cereal in the same fashion that many financial products are now sold, that person would be drummed out of the cereal business.  The norms of that sector (and many other nonfinancial sectors in the United States) would not stand for this degree of deception and malpractice”, said one critic of the successful Republican campaign against her nomination as first Bureau Director.

Transparency is an issue with all financial markets, not just mortgage and payday loans, of course. The multi-trillion dollar derivatives’ business is controlled by a self-appointed consortium of the major banks. And they have resisted providing a record of their transactions to a central clearing house, a provision of the Dodd-Frank bill that is still being developed.

So let us listen to Elizabeth Warren for Massachusetts Senator in her campaign to reoccupy Ted Kennedy’s Senate seat. The principles she espouses to restore the middle class will actually restore economic growth for all of us, if carried out.

Harlan Green © 2011

STOP Blaming the Consumers

Financial FAQs

It’s time to stop blaming consumers for the jobless recovery. The pundits have come up with too many reasons for their depressed confidence to list here, (at least according to the polls).

"Hopes for full global recovery in the next 12 months substantially weakened in the second quarter as the majority of consumers around the world remained in a recessionary mindset", said one survey.

Then why are U.S. consumers actually spending more, as evidenced by the latest retail sales in almost every area, almost as much as during boom times—7.9 percent annually? They are also paying down their debts and saving more. Maybe it’s their way of railing against the system that gives rewards to the wealthiest, like the #OccupyWallStreet protesters are doing.

Graph: Inside Debt

Overall retail sales in September jumped 1.1 percent, following a 0.3 percent increase (originally no change). The September number topped consensus expectations for a 0.8 percent surge. Retail sales on a year-ago basis in September stood at 7.9 percent, compared to 7.5 percent in August. Excluding motor vehicles, sales were up 7.8 percent on a year-on-year basis, compared to 7.9 percent the prior month.

Today's sales numbers are a relief for equities, says Econoday, adding to the argument that the economy is gradually improving and not returning to recession. Based in these numbers, third quarter GDP growth estimates are already being revised upward.

The biggest increase was in motor vehicle sales. Inventories previously held back by disrupted supply in Japan are flowing again.  Car buyers responded by boosting overall unit new motor vehicle sales to an annualized 13.1 million units which were up 8.0 percent from August’s 12.1 million units.

So what is holding back job growth, if not consumer spending? Total personal consumption expenditures are running at maybe half normal, but business investment is still rising—witness the strong capital goods numbers. So it is really technology investments that have boosted production instead of new workers, and of course globalization that has exported so much production overseas.

The 1.1 percent rebound in nondefense capital goods excluding aircraft was a big plus, following a 0.2 percent decline in July.  Shipments for this series jumped 2.8 percent in August after a 0.4 percent rise the month before. Overall, manufacturing remains on a moderate uptrend, taking into account the volatility of durables orders.

So while businesses may not be hiring people, it clearly looks like they are “hiring” equipment with the rise in nondefense capital goods excluding aircraft, says Econoday. 

New York Times columnist Joe Nocera recently reread a book on the history of the Great Depression by Frederick Lewis Allen, and the problems were just the same.

 “In “Since Yesterday,” he says, “bankers are vilified; homes are foreclosed on; people desperately search for work — just like today. Businessmen speak of the need for “confidence,” a word that “enters the vocabulary only when confidence is lacking.” Elsewhere Allen writes, “No longer were vital economic decisions made at international conferences of bankers; now they were made only by the political leaders of states.”

And…“while small business suffered terribly during the Great Depression, big corporations did well. When large companies needed to lay off workers to maintain profitability, they did so ruthlessly. Bursts of economic growth, however, were rarely accompanied by an increase in employment. Why? Because new technology allowed companies to increase productivity at the expense of workers. Just like today”, said Nocera.

So it is a wondrous thing to see consumers hanging in there, in spite of chaotic markets and dysfunctional politicians. Maybe we are seeing some of the innate optimism Americans are famous for. So watch out, politicians. Consumers seem to be finding a way around the economic and political gridlock that is stopping this recovery from putting more people back to work.

Harlan Green © 2011

Why Dumb Down Our Government?

Should it surprise us that we, the people, are smarter than the politicians we’ve elected? Maybe the money machine it takes to get elected these days has discouraged more Mr. Smith’s from going to Washington. Or, maybe the Facebook revolution that is connecting youth and students worldwide has enabled us to circumvent the corporate-owned mass media that controlled the ‘message’ the moneyed interests wanted us to hear.

In fact, it looks like educated citizens, at least, are way ahead of the politicians in knowing what to change to insure a future for US. It is our government that has been dumbed down, and Main Street has outdistanced the pols because 99 percent of US see a decent future slipping away.

So it is no wonder that many are staging protests all over the world, as in #OccupyWallStreet. They see politicians who are blatantly ignorant of the most basic science—who ignore global warming and evolution, for instance. Or of basic accounting rules, or a working health care system. It doesn’t take a graduate degree to know how to pay down our record debt that is holding back a recovery, or bring down health care costs, yet politicians can’t seem to figure it out.

The dumbing down is non-partisan. Even some Democrats are opposing Obama’s new American Jobs Bill that would create 1.9 million jobs and grow economic growth an additional 1 percent, according to the White House.

And #OccupyWallStreet is nonpartisan. Interviewees have stated on NPR and other venues that they didn’t want to be labeled Democrat or Republican. Why? Because the winner-take-all American political system needs at least a third party to get around the sclerosis of a two-party system that is locked into their respective ideologies.

How did it start? Back in July, an idea by Kalle Lasn and his colleagues at Adbusters, a nonprofit magazine run by social activists, had started to come together, said a Washington Post Blog article. It was to bring about our own Egyptian Tahrir Square protest via the Internet that has been spreading to other cities and other countries. Why has it caught fire?

‘They look at the future and see just one big black hole,” said Kalle Lasn, in the Post interview. “They look at a world with climate change that will be much hotter when they get older, at a political crisis and corruption in Washington, at the American democracy not working any more at a time when America is in decline, and at a financial crisis in which the Dow Jones could plummet tomorrow. If we don’t stand up and fight for a different kind of future, they realize, we won’t get one.”

The list of demands is familiar, per CoupMedia.org:

• Restore the Glass Steagall Act repealed in 1999 that separated banks from investment banks that made risky bets.
• Punish the Wall Street wrongdoers who caused the financial markets to crash.
• Give some mortgage relief to the 11 million homeowners with underwater mortgages from the unused $billions that were set aside for mortgage modification but never used.
• Congress should enact legislation to protect our Democracy by reversing the effects of the Citizens United Supreme Court Decision which essentially said corporations can spend as much as they want on elections.
• Congress should pass the Buffett Rule on fair taxation so the rich and corporations pay their fair share & close corporate tax loop holes and enact a prohibition on hiding funds off shore

The list of demands goes on and on, from Universal Health Care to greater environmental protection, but the intent of #OccupyWallStreet protesters is clear. Bring back the democracy that has been lost to the special interests. We are seeing a public consciousness that is rising above those private interests that have tried to stamp out the public sector’s interest in a responsive government, and sustainable future growth.

Alas, much of the dumbing down we see is intentional. It is an anti-intellectualism of the far right including the Republican leadership that hopes their electorate, at least, will not notice the world crumbling around them. Paul Krugman, for one, calls it terrifying should one of the anti-intellectuals succeed to the White House.

“It’s a terrible thing when an individual loses his or her grip on reality,” he said. “But it’s much worse when the same thing happens to a whole political party, one that already has the power to block anything the president proposes — and which may soon control the whole government.”

But that doesn’t have to happen. Intelligence will win in the end, if we are to preserve the real world. The dumbing down of government will be reversed when it comes to represent our common intelligence. For what else can bring back hope in any future, but citizens taking back their power?

Harlan Green © 2011

Where Are All the Jobs?

Popular Economics Weekly

Friday’s Labor Dept. employment report was good for several reasons, but tight credit is holding back small business hiring, where most jobs are created. The loss of government jobs is also holding back substantial jobs’ growth, but prior months’ jobs creation was much better than forecast. Payroll jobs advanced 103,000 in September, following a revised 57,000 rise in August (originally flat) and revised 127,000 increase in July (previously 85,000). 

And revisions to Labor’s JOLTS Report (Job Openings, Layoff and Turnover Survey) show that 3.228 million jobs were available in July, an increase of 275,000 job openings just since April, the low point of the current slowdown.

Another good sign was that wages rebounded 0.2 percent in September after dipping 0.2 percent the prior month.  On a year-ago basis, average hourly earnings are up 1.9 percent, compared to 1.8 percent in August.   The average workweek for all workers in September ticked up to 34.3 hours from 34.2 hours in August. Looking ahead, September’s numbers point to a healthy private wages & salaries component in the upcoming personal income report, says Econoday.  Aggregate private weekly earnings jumped 0.6 percent in September.

So where are the jobs, and why all the corrections? Actual job creation has been rising much faster than reported, but the Bureau of Labor Statistics doesn’t always get it right when it subtracts so-called Seasonal Adjustments of up to 1 million jobs per months during summers when students tend to flood the jobs market. Hence the revisions in past months when state unemployment insurance claims are finally tallied. So this is a case where initial employment reports are always subject to revisions, whereas longer term averages are more accurate.

And though there are more than 14 million unemployed, the 3.2 million job openings in America are largely due to the rapidly changing need for skills. A recent CNBC article highlighted the misfit between job openings and skill shortages. Over the past few weeks a number of CEOs have appeared on CNBC and told the same story: they have job openings they can’t fill because they’re unable to find workers whose skills match the job.

But that does beg the question. Companies can always train new workers to fill their job slots. The National Federation of Independent Business (NFIB) business conditions index (a small business survey) highlights a deeper reason for the so-called skill disparities. It is a lack of available credit that small businesses in particular need to expand, since small businesses provide most of the job creation in any recovery.

The NFIB’s business conditions index September increase wasn’t large (+0.8 points to 88.9), but was better than a seventh straight decline would have been, said Wrightson ICAP.  In August, the net percentage of small business respondents reporting that credit was harder to obtain jumped three points to an 11-month high of 13 percent, and the percentage expecting credit conditions to deteriorate also rose.

The culprit? Our S&P debt downgrade and European debt problems have scared the debt markets so that little new debt is being issued, which all businesses need to expand. Per Wrightson ICAP: “In the wake of the debt ceiling default scare, the index for general economic expectations fell to -26 in August, versus a previous cyclical low of -23 in 2008. The September “recovery” brought it back only to -22.”

In another revision, economic growth for the second quarter actually did end up stronger than previously estimated but still anemic.  The Commerce Department’s final estimate for second quarter GDP growth was bumped up to a rise of 1.3 percent annualized, compared to the prior estimate of 1.0 percent annualized and to first quarter growth of 0.4 percent.  The anemic growth was due to declining incomes, which have been dropping since their high in January. This is what is being described as the ‘new normal’ for economic growth—i.e., not enough growth to keep up with population growth

There is also some recovery in real estate, as construction made a comeback in August, largely from the public sector although major private components also gained. Construction spending in August rebounded 1.4 percent in August, following a 1.4 percent drop in July, and is in positive growth territory for the first time in more than a year.

And both the service sector and manufacturing ISM surveys were looking better in September. Business activity in the service sector, that is production, rose 1.4 points to a 57.1 level that shows the strongest rate of monthly growth in six months. The manufacturing sector also continues to improve, with employment and production up, but orders in the manufacturing sector flat at the very best, according to September data from the Institute For Supply Management.

The bottom line? We must find more ways to ease credit conditions. Lenders are scared that Europe may default on its debts, and that the U.S. might suffer a further S&P downgrade, at least, if Congress can’t agree on a budget for the new fiscal year that began on September 1.

We can stimulate faster growth if we will all pull together, as Fed Chairman Bernanke so eloquently said in his latest congressional testimony: “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector”.

Harlan Green © 2011

What is the ‘New Normal’?—Part II

There is no reason we have to accept predictions of a slower growth ‘new normal’, as I said in a recent column, unless we react as the Japanese government did with too little stimulus spending until it was too late. Most pundits define the current slowdown as a growth recession mirroring the Japanese malaise that resulted in falling wages and prices from 1996 to the present, due mostly to massive debt accumulated during the bubble years.

Why not accept it? Firstly, Bernanke’s Federal Reserve just announced another bond buy back of $400 billion that will keep long term interest rates low for an extended period. Secondly, manufacturing and exports are still growing. It is true that personal incomes have been falling in line with declining employment, which is typical as businesses keep cutting their costs. But that also means no danger of inflation, as wages make up 70 percent of product costs.

And the economic indicators are improving, in spite of the euro crisis, political stalemate, falling stock prices, and the more than 16 million unemployed or underemployed? So it would take much less to stimulate more new normal growth, such as Obama’s $440 billion jobs bill presented to Congress.

So we can stimulate faster growth if we will all pull together, as Fed Chairman Bernanke so eloquently said in his latest congressional testimony: “Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy. Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

Economic growth for the second quarter actually did end up stronger than previously estimated but remained anemic.  The Commerce Department’s final estimate for second quarter GDP growth was bumped up to a rise of 1.3 percent annualized, compared to the prior estimate of 1.0 percent annualized and to first quarter growth of 0.4 percent.  The anemic growth was due to declining incomes, which have been dropping since their high in January. This is what is being described as the ‘new normal’ for economic growth—i.e., not enough growth to keep up with population growth.

There is also some recovery in real estate, as construction made a comeback in August, largely from the public sector although major private components also gained. Construction spending in August rebounded 1.4 percent in August, following a 1.4 percent drop in July, and is in positive growth territory for the first time in more than a year. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease.

The latest month's rebound was led by a 3.1 percent jump in public sector outlays, following a 1.5 percent dip in July. Private residential construction spending made a partial rebound of 0.7 percent, following a 3.2 percent fall the prior month. Private nonresidential outlays edged up 0.2 percent after a 0.3 percent advance the prior month.
On a year-ago basis, overall construction outlays improved to up 0.9 percent in August from down 0.1 percent in July.

The ISM survey on overall non-manufacturing (service sector) activity is also looking better. Rates of monthly growth in orders are accelerating though employment is now contracting in what is a mixed report on the non-manufacturing sector for September. New orders rose a very solid 3.7 points to 56.5, over 50 to indicate monthly growth and well above August to indicate an accelerating rate of monthly growth. Backlog orders are now over 50, up five points to 52.5 to end three months of contraction. These are solid readings that point to rising overall strength for the sector in the months ahead.

Business activity, that is production, rose 1.4 points to a 57.1 level that shows the strongest rate of monthly growth in six months. Yet despite the rise in output, non-manufacturers are not hiring with the employment index falling 2.9 points to a sub-50 reading of 48.7 that indicates contraction in the sample's workforce. This is the first contraction in employment since August last year, and tells us that the service sector is not expanding fast enough to warrant more hiring.

And the manufacturing sector continues to improve, with employment and production up, but orders in the manufacturing sector flat at the very best, according to September data from the Institute For Supply Management. Its composite index came in slightly higher. The employment component rose two full points to 53.8 to indicate a tangible increase in hiring. This is in line with a tangible increase in production which rose more than 2-1/2 points to 51.2. One plus on the order side is a pick up in new export orders which rose two points to 53.5, signaling that exports are on the rise again.

What is the real reason for the current slow growth new normal that has continued since January? It could be that consumers haven’t paid down enough debt and are saving more, while incomes have been declining, as we have said. So to grow out of it more jobs must be created, and right now the rest of government isn’t doing its job to stimulate growth.

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Harlan Green © 2011

What will Boost Real Estate?

The Mortgage Corner

Never in my 30 years as a Mortgage Banker did I think I would see interest rates this low—as low as during Harry Truman’s Presidency. Yet very few homeowners are able to take advantage of those rates, which have dropped more than 2 percent since 1997, the beginning of the market crash. And we know why; whether it was the loss of a job, health insurance, or equity in their home with housing values down as much as 50 percent in some states.

This is while the foreclosure backlog is so great it could take more than 60 years in some states to work through, according to New York Times reporter David Streitfeld.

So when two Presidents—President Obama in his new jobs plan, and former President Clinton on the Sunday TV talk shows touting his Clinton Global Initiative—say that real estate has to recover for our economy to recover, it should take precedence in discussions on how to boost economy growth.

And there are concrete steps we can take now to cure much of the housing malaise of vacant homes and deteriorating neighborhoods. Obama’s inclusion of $15 billion in his new jobs plan to rehabilitate depressed neighborhoods is one such. But much more can be done if he can convince Fannie Mae and Freddie Mac to cooperate in loosening some of their almost draconian qualification requirements for both purchase and refinance transactions made more restrictive after the housing crash.

Credit scores, for instance, do not have to be 680 or better, if there are other so-called compensating factors, such as long term employment, or good assets. Or, the almost set-in-stone 45 percent maximum overall debt-to-income ratio could be more flexible with good job security and assets.

And much more can also be done with HARP, the Housing Affordable Refinance Program that was touted to help millions of homeowners, but has helped just 838,000 to date. Hence President Obama’s pronouncement that loan modifications would be allowed for “responsible applicants” can mean that compensating factors should be considered when qualifying borrowers.

But there is another restriction keeping many homeowners from refinancing or buying—the declining equity in their current home. Whereas just 10 years ago average equity was 61 percent, it is now just 38.6 percent, according to the Federal Reserve’s latest Flow of Funds report. If Fannie and Freddie would qualify someone with good credit and assets that is, say, 50 percent underwater, the case in many neighborhoods, then they should be allowed a haircut—meaning a reduction in their principal balance—that would enable them to refinance at today’s record low rates with a new loan that brought it back to 100 percent of current value. The 30-year conforming fixed rate today is hovering at 4 percent.

What is holding Freddie and Fannie back from offering this now, which could in fact refinance an additional 2.9 million homes without significantly increasing tax payers’ liability, according to a recent CBO report? Once again, it seems to be Republicans’ opposition to any more government liabilities, and the fact that an independent agency, the Federal Housing Finance Authority is Fannie and Freddie’s administrator, charged with limiting their losses now that they are government-owned.

But the CBO study showed that it could save homeowners about $7.4 billion in just the first year and help about 111,000 homeowners avoid default with just a net cost of $600 million. What’s not to like about this program?

Harlan Green © 2011