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Wednesday, March 23, 2011

Uninteneded Consequences: BAC and Housing QE Programs

Sometimes the outcome of an event is not what was expected at all

A man with a shaky marriage goes on a crazy trip with his buddies to Atlantic City.  During the trip he gets hammered at a questionable strip club and goes into the champagne room with some dame named Sky.  After a $300 lap dance, sky whispers something about a 'special' room where they can 'play a little longer.'  The man gives Sky another $600 and enters the room with a smile...

Flash forward 5 weeks.  The guy is home with his family, but he has developed a rash and a cough.  His wife has as well.  He knows what the problem is, but lives in denial.  His wife however, is skeptical and will be going to the MD.  She will soon find out that she has a VD that is only curable by spinach that is laced with radiation in the afterlife. 

As the man walks in his kitchen that morning, scratching his crotch, he looks over the dining room to his two kids munching down on sugary-o's as they get ready for school.  His wife leaves the house without saying good-bye.

Later that same evening the man will have to live with the unintended consequences of his actions in Atlantic City.  When his wife come home he will be confronted and his whole world will collapse...

Unintended consequences happen all the time after big decisions-- whether good or bad-- they dramatically affect the future.  In the example above, the risks of cheating on one's wife are obvious, but only if caught.  If one does not see any risk of being caught, the perceived consequence of the action has no negative result.

BAC STILL CRAP FROM COUNTRYWIDE = No Dividend Increase from the US Gov't.

Bank of America is still a load of crap.  While all the other big banks have hiked dividends in the sunshine and cookies glow of a QE induced speculative stock market bubble, BAC got shot down.  BAC was asking for the dividend increase more than any bank, but they were told no.
BofA had hoped to be in a second wave of banks raising dividends in the second half of this year, but unlike some of its major rivals, it is still struggling to be consistently profitable.

The largest U.S. bank by assets said on Wednesday it still hopes to increase its dividend in the second half and intends to submit a revised proposal to the Fed.

The news highlights the split between the largest U.S. banks. While some are aggressively boosting dividends, others are still coping with loan losses and looking to post consistent profits as they recover from the financial crisis.
This was the unintended consequence of BAC buying Countrywide in 2008, paying way too much for the dying mortgage company and failing to audit the books and see the losses from the sea of questionable mortgage loans. 

Bank of America should not be paying a dividend (though if Citi can, does it really matter?).  BAC is still holding more mortgage trash on their books than any other bank and due to this, their name is trash as well due to the MERS foreclosure disasters.  As the housing market shoots down for a double-dip (unintended consequence of housing QE in 09/10), BAC will have to take on more and more losses.  Is BAC insolvent due to loan losses?  Probably.  If not today, it very well could be if the housing market continues to deteriorate in a rapid fashion (Ben Wizzie may play his 7th Ace on the housing market, however, in my opinion, to avoid this-- in what fashion?  That is for wizards to decide.).

Holding BAC is questionable in today's market-- They seem to be the junk of the big banks.  On the flip side, as Citi goes forward with it's 10:1 share split, BAC may take over the volume trade that Citi has had the joy of holding since the financial crisis.  This may help BAC later this year, but in the short term BAC looks to keep deteriorating due to the dividend news and overall sentiment from stress test results.  I personally would rather stab myself in the scissors than buy BAC at these levels.  If we dip into the single digits, however, I would put my feet into the water.     

BAC continues to pay the price for the Countrywide disaster vs the other big banks.  Note that none of these banks have been a good buy over the last 12 months, nor do they look to be in the near future. 


While Wall Street sucks in the exhaust fumes of the printing presses of QE2, the housing market is reeling fast and falling into a double-dip. 

New home sales dip in Feb to a 50 Year Low.  No way new homes can compete with foreclosures-- they will fall further.
The median price of a new home dropped nearly 14 percent to $202,100, the lowest since December 2003. The median is now 30 percent higher than the median price of resold homes - twice the markup typical in healthy housing markets.
Existing Home sales are trapped in a spiral of loss due to rampant foreclosure problems. 
NAR said the median home price dropped 5.2 percent in February from a year earlier to $156,100, the lowest since April 2002, in a sign of the relentless downward pressure on prices from a market flooded with foreclosure sales. "If the price declines persist, even with the job market recovery, that could hamper recovery in the housing market,"
Easy--Housing is failing in the shadow of no housing QE.  The Housing QE (tax credits for the most part) pushed ALL The demand forward in 2009 and 2010 and now that there is no QE left, there are no home sales.  Call a realtor and ask them if they can show you houses-- thier schedule will be WIDE open. 

All of this despite lower interest rates than during Feds MBS trillion dollar+ purchases and home- buyer tax credits.

The real question about housing QE is 'what next?'  Do the feds allow the housing market to crash... again, or do they release another round of stimulus. 

I say stimulus.  The Feds own the housing market-- literally.  They have a blank check with Fannie and Freddie and they own a good portion of the MBS written over the last few years.  They have a vested interest in propping up the housing market.

I really don't think it will matter though.  Housing is supply and demand.  Housing interventions piled buyers into a 2 year period instead of allowing the buyers to slowly enter into the market.  On top of that, tax credit recipients have to repay the credit if they move in the first few years.  These buyers are 100% out of the game.  Price declines make it impossible for step-up buyers to sell and underwriting guidelines make it near impossible for anyone with self-employed income or any credit dings to be approved for a loan.

To top it off, new Dodd-Frank laws are threatening to shrink the mortgage market with excessive capital requirements and restricted compensation.  This will drive medium and small mortgage players, who provide many niche finance options, out of the game.  Essentially, the goal of the government seems to be to drive all mortgages to the big banks.  Sadly, all the big banks are terrible mortgage lenders-- You may know this if you tried to buy or refinance, obtaining a loan from Chase, Wells, BAC or Citi in the last few years.  You probably enjoyed your last prostate exam more than your lending experience. 

If all mortgages are driven to the banks, expect underwriting to get tighter and fundings to become less and less common.  

Housing QE will be the ultimate fail when the dust settles.  It did NOTHING for the housing market.  Can the Feds ever unwind the MBS purchases and will the tax credits ever be justifiable?  No... No to both.  Taxpayers will be paying for the housing bust for years-- just another case of QE failure.  The losses for the housing market will be more excessive due to QE.  Recovery is far off-- Las Vegas is off another 7% in Feb and a report came out saying that if you bought Las Vegas in 2005 it will take 30 years to gain back the value you purchased at (sorry can't find the link-- it was on cnbc this morning).  Prices are still down $110,000 from the peak in Vegas and 4 out of 5 sales are distressed. 
Nothing new here, just the unintended consequence of the government failing to see the future results of their actions.

QEII will look the same soon-- unless you believe that record high food prices, speculative stock bubbles and rampant commodity bubbles are already the unintended consequence of the latest Fed disaster.

QEIII:  Coming soon.  See QEII above.   

1 comment:

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