Another Fine Mess! At Least Half of Students Defaulted or Failed to Pay Down Debt Within 7 Years

Another fine mess … when the Federal government takes over the student loan market which is now over $1 trillion.


But at least the YoY growth is slowing down.


“Many more students have defaulted on or failed to pay back their college loans than the U.S. government previously believed.  Last Friday, the Education Department released a memo saying that it had overstated student loan repayment rates at most colleges and trade schools and provided updated numbers.” 

Not exactly a surprise, particularly when we are experiencing the WORST wage recovery from a recession since 1965.


Student loan already are the worst performing of the major debt classes (and that is BEFORE the data is adjusted for the recent revelation of underreporting).


The far more dire implications, however, are for broader student loan market, because if the latest unfabricated data suggesting that loan delinquencies are rapidly rising toward 50% across most of America’s colleges, then the US is facing a default problem of staggering proportions. Recall that back in December 2014, The Treasury Borrowing Advisory Committee forecast that in an aggressive scenario, as much as $3.3 trillion in student loans could be oustanding by 2024. Incidentally, that is the scenario that has captured the growth of student loans since it was presented.


And then there are alleged problems with the largest student loan servicer, Navient.  Wait a minute! The Department of Education wasn’t paying attention to the student loan SERVICERS?????

Perhaps this should be the new themesong of the Department of Education.


Pittsburgh Mills Galleria Mall Sold For $100 At Foreclosure Auction (Formerly Valued At $190 Million)

A Pittsburgh PA area shopping mall just sold for a whopping $100, ten years after it was valued at $190 million. And was appraised at $11 million in August.

I wonder if the $190 million to $100 decrease is reflected in the Moody’s/RCA retail real estate index?


Remember, that the NY Fed’s Bill Dudley sounded an alarm on retail sales .. and what to do about it. But when average hourly earnings YoY is the worst recovery from a recession since 1965, it is difficult for a retail mall (NON-elite) to succeed.


But $190 million to $100? Let’s throw in locational factors as an impediment to success as well. But in the Obama “Recovery” era of low wage growth and add in Amazon for online shopping, this is not a fairy tale that ends well.

I certainly hope this property not held by a pension fund! They have enough problems with massive underfunding already. (The property was held in a trust MSCI 2007 HQ11 recently).





NY Fed’s Dudley, Retail Sales, Home Prices And … Bubbles

Is the New York Fed’s Bill Dudley calling for another home price bubble to solve the malaise in retail sales in the USA?

The fate of U.S retailers, many of whom are under siege from online competitors, may rest in the prospects for the U.S. housing market, said William Dudley, president and CEO of the Federal Reserve Bank of New York, in an interview done on Tuesday morning by Macy’s CEO Terry Lundgren at the National Retail Federation’s (NRF) annual convention about evolving consumer behavior.

The second most important asset on the balance sheet of many households is housing equity. So, in addition to being a source of shelter, housing can be a major form of collateral for borrowing for many households. In fact, for those households that have collateral available to secure loans, housing equity is by far the most important form of collateral.

So, that more home prices rise, the more equity is available for home equity EXTRACTION. Remember the housing bubble?

If we look at Bill McBride’s chart of mortgage equity withdrawal, as of Q3 2016, mortgage equity withdrawal (as a percent of disposable personal income) is FINALLY positive again


And home prices are now higher (on average) than during the disastrous house price bubble … that exploded. But the GOOD NEWS is that negative equity share in housing is the lowest it has been since 2009.


Here is the problem, Terry. For most Americans, it has been the WORST wage recovery after a recession since 1965. THAT is a major reason why retail sales are in a malaise.


So if wage growth is the worst since 1965, who you gonna call to stimulate retail sales? Debt busters!!

We have already suffered through a catestrophic mortgage debt bubble and 1-4 unit mortgage debt outstanding growth is finally back in positive territory again. So I hope Dudley is NOT calling for another massive expansion in mortgage credit!


The worst wage recovery after a recession is the real cause of the retail malaise, not the lack of extractable home equity.



Whack-a-mole! The Case For Covered Bonds And Why It Is Difficult in the USA

My friend John Wake from Phoenix Arizona asked me about mortgage finance legend Jack Guttentag’s stance on covered bonds. I must say that I am a proponent of covered bonds for the US mortgage market.

What is a covered bond? A covered bond is a debt security backed by cash flows from mortgages or public sector loans. They are similar in ways to asset-backed securities created in securitization, but covered bond assets remain on the issuer’s consolidated balance sheet.  A covered bond continues as an obligation of the issuer (usually a bank).


This is in stark contrast to the experience of the housing bubble where non-bank lenders originated loans, sold them to investment banks who then issued asset-back securities. The non-bank lenders, in this case, kept little or none of the loans on their balance sheets.


Guttentag (whose blog I highly recommend) advocates for a Danish type of covered bond market. In a perfect world, I agree.

But the US mortgage market is anything but a perfect world (or market). It is dominated by The Federal government in the form of mortgage giants Fannie Mae and Freddie Mac and the Federal Housing Administration (FHA).  But lest we forget, there is also the Department of Agriculture and the Federal Home Loan Bank system playing in this market. Not to mention a myriad of regulators (The Fed, Office of the Comproller of the Currency, FDIC, Consumer Financial Protection Bureau, etc).

Like in the game “Whack-a-mole,” you can get rid of, for example, Fannie Mae and Freddie Mac, but you still have the FHA, the Federal Home Loan Banks, the Department of Agriculture remaining. Each provides taxpayer-subsidized financing and have low cost of financing.

How can a superior model like covered bonds compete with the Federal government leviathan of subsidized mortgage financing? At Professor Guttentag suggests, it will take time.

But the tangled web of bank and mortgage regulators makes it even more difficult. Hopefully, stripping the Consumer Financial Protection Bureau of some of their regulatory bite will help.  But there has to be a “meeting of the minds” between the numerous regulatory bodies to make covered bonds work.

Yes, the US mortgage market remains like a “Whack-a-mole” game. You knock down one Federal entity (and taxpayer subsidy) and another one jumps out. Not to mention regulators.



97 Consecutive Weeks of Initial Claims Below 300,000! (But 91 Consecutive MONTHS of Wage Growth Below 3%!)

The headlines scream “97 consecutive weeks of initial claims below 300,000!” 

In the week ending January 7, the advance figure for seasonally adjusted initial claims was 247,000, an increase of 10,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 235,000 to 237,000. The 4-week moving average was 256,500, a decrease of 1,750 from the previous week’s revised average. The previous week’s average was revised up by 1,500 from 256,750 to 258,250.

There were no special factors impacting this week’s initial claims. This marks 97 consecutive weeks of initial claims below 300,000, the longest streak since 1970.

The last week of initial jobless claims of above 300,000 was in February 2015. That make 97 consecutive weeks of initial claims below 300,000.

While that sounds impressive, the counterpoint is that the US has experienced 91 consecutive months of sub-3% wage growth for the majority of the population. In fact, the last month of YoY hourly earnings growth for production and nonsupervisory employees above 3% was in May 2009, shortly before the end of The Great Recession.


So, while the initial jobless claims have been 300,000 since February 2015, hourly earnings have been below 3% since May 2009.

Translation, The Obama Administration and The Fed threw a no-good-paying-jobber against the American middle class.



Is The Fed REALLY Tightening? The Monetary Shell Game (Hint: M1 Money Growing at 8-10% YoY)

The Federal Reservc Open Market Committee (FOMC) has “tightened” the Fed Funds Target rate twice since December 2015. One in December 2015 and once in December 2016.


Well, 75 basis points is hardly “tight.” But what about The Fed’s asset purchases? The Fed ended their third round of asset purchases in October 2014.  While QE expansion has stoppped (for the moment), The Fed’s balance sheet is being reduced very slowly. Hardly monetary tightening, but not loosening either.


But if we look at a third measure of monetary easing, M1 money supply, it is growing at a rapid rate.


M1 money is growing at around 8-10% YoY. M1 includes funds that are readily accessible for spending. M1 consists of: (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler’s checks of nonbank issuers; (3) demand deposits; and (4) other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts. Seasonally adjusted M1 is calculated by summing currency, traveler’s checks, demand deposits, and OCDs, each seasonally adjusted separately.


So while The Fed Funds Target rate is slowly risening and Fed asset purchases have curtailed, M1 Money Stock continues to grow at an unpredented rate YoY since the end of The Great Recession in June 2009.


The M1 Money Multiplier remains below 1 thanks to The Fed’s easing efforts. An M1 Money Multiplier of less than 1 means that every dollar created by the FED (an increase in the monetary base M0) will result in a <1 dollar increase of the money supply (M1). So, the credit and deposit creation of commercial banks is limited in this case. The banks are still holding on to a lot of excess reserves.

At least Excess Reserves of Depository Institutions has been falling since August 2014.


It is a shame that while M1 money grows at 8-10% YoY, average hourly earnings for 84% of the population are growing at only 2.5% YoY.


So while The Fed signals monetary “tightening,” check the third cup to find the EXPANSION pea!






FHA Lowers Mortgage Insurance Premiums (MIPs) By 31.25%

HUD Secretary (for the moment) Julian Castro just lowered the Mortgage Insurance Premiums (MIPs) across the board by 31.25%. The purpose? To lower lending costs, partially offseting the increase in mortgage rates.


The FHFA Home Prince is now officially above the peak of the home price index prior to The Great Recession. And serious delinquencies on FHA-insured loans is less than half of was at the peak (good news), but remains over twice as high as Freddie Mac’s (and Fannie Mae’s) serious delinquency rates).


It is strange to me that the FHA is still insuring 30 year fixed-rate mortgages for loans in excess of $625,000. Ordinarily, that should be the domain of private mortgage insurers (PMI). While FHA share has diminshed during the housing bubble, it expanded greatly during and after the financial crisis. While it has been generally shrinking since 2010, FHA share remains higher today than during 2002.


Here is current HUD Secretary Julian Castro saying “It was fun while it lasted!”