In his State of the Union speech, the President said:

Millions of innocent Americans have seen their home values decline. And while government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.

And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.  No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.

I found this interesting, and can’t wait to see the legislation that the Prez is going to offer up.

I have written four articles on the topic of a Mega ReFi (here, here, here and here). The first one was back in August. At first I thought there might be something behind all this talk. Now, five months later, I think it’s all gas. We’re not going to see any big ReFi plan until after the next election. These are the issues as I see it:

The Administration has been trying to come up with programs that would aid underwater homeowners. This problem is, by far, the biggest domestic drag on the economy. So it makes sense that the Obama team is looking for ways to deal with it. There is one enormous impediment that they face in achieving this lofty objective. They don’t have the money to fill this very big bucket. If they tried to pass a bill that would raise the odd $200-300 billion needed, they’d fall flat on their face.

The Administration’s thinking has been that underwater borrowers should get the benefit of today’s lower interest rates, and it should not matter if the borrowers are underwater by 25% or more. The White House would like the unrealized losses to be rolled over at a low enough interest rate to let those borrowers dig their way out of the negative equity hole in five or ten years.

To achieve all this, the President’s men leaned hard on the one guy who had to sign off on the plan. The President had to ask the permission of Edward DeMarco, the Acting Director of FHFA. DeMarco is ultimately responsible for what happens with our dear friends, Fannie Mae and Freddie Mac.

I have followed DeMarco’s words since he was appointed Acting Director. He repeats the same thing every time he has a chance to describe the goal of his job:

As FHFA has noted on numerous occasions, with taxpayers providing the capital supporting the Enterprises’ operations, this “preserve and conserve” mandate directs us to minimize losses on behalf of taxpayers.

In my opinion DeMarco has lived up to that. He has taken steps that have reduced the risks and the ultimate costs that the taxpayers face with Fannie and Freddie (F/F) . It’s for that same reason that he has not allowed F/F to be the agencies of the Administration’s economic plans.

These plans would force F/F to reduce interest rates on outstanding mortgages. As some of those mortgages are in inventory at F/F, the ReFi will result in additional losses. More importantly, the ReFi’s will require a waiver of many existing representations, and warranties of existing borrowers. In the end, there would have been a cost to all of this. The plan was for F/F to absorb the costs over time, and therefore kick the can down the road. (Why the President said there would be no cost)

DeMarco has nixed those plans. I’m amazed by this. DeMarco has been beaten up by the likes of Elijal Cummings (the new wanna-be Barney Frank of housing, ….only in America…)

The President can send powerful forces wherever he likes. 

He has very tough guys available to do the really hard jobs when needed.  

But even the President can’t bend Ed DeMarco. The reason, I believe, is that Mr. DeMarco has “protection”.

I thought the appointment was a shoo-in at the time. That was not the case. The appointment was squashed by one of the strongest hands in D.C.  – Senator Richard Shelby (R. Al) put his thumbs down. Without Shelby’s support in the Senate, no appointment was going through. So DeMarco kept his job, and the Administration’s plans got checked by powerful forces. The question is, “Is this check mate?”

The legislation that the President promised in his SOTU address can’t be a rehash of what was previously tried with Fannie and Freddie. That door is closed, at least until the next election. Therefore, I anticipate that the President will attempt to use the other big D.C. player in the mortgage business, the Federal Housing Authority (FHA). This entity could, in theory, be used to achieve Obama’s objectives. It could guarantee the payment of the new mortgages that would be required. In the process, it would transfer risk (both credit and interest rate) from F/F to FHA. That would make DeMarco happy.

While this plan is a possibility, it will never happen. The FHA is already in financial jeopardy (link). It needs a capital injection into its reserve fund for the existing book of business ($1T).

FHA would need a very big slug of additional capital to handle the ReFis that the President wants. (There are approximately 10mm homeowners, all underwater who would be eligible.) There is no way in hell that the FHA could get that much money this year. To do so would require the blessings of Senator Shelby. He has already tipped his hand; he won’t back off in 2012.

I think we will see some legislation on this from the WH. It will get talked about on TV, but it’s dead on arrival. The President will claim that he tried, and he will blame Republicans for the failed effort. I wonder if the upcoming failed effort is not a “planned failure”. One that has been put “out there” purely for the political theater that will come with it.

President Clinton abused used F/F. He wanted the Agencies to be an engine of his social objectives. Bush also abused used F/F. He wanted F/F to be an economic engine while the country was at war. Obama also would like to use abuse F/F. He’s trying to trump what the last two Presidents did. He wants F/F to be the vehicle (and the loss generator) for a big ReFi plan, and he wants to use the Agencies to push his social agenda. I’m amazed that after all of the history with the Agencies that this Administration is repeating the sins mistakes of the past.

Bully for Ed DeMarco for standing up on behalf of the folks that will foot this bill, the poor taxpayers.

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Economist James Hamilton at Econbrowser has the most succinct analysis of this week’s Fed announcement:

So the FOMC is saying that it would like inflation to be about 2% annually, but is expecting it only to be 1.4 to 2.0% over the next 3 years. Putting 2 and (less than) 2 together, the FOMC is telling us that, based on its price stability objective alone, the Fed is expecting inflation to be lower than it would like. In other words, even if the economy were at full employment, a little more stimulus would be called for. And of course, nobody thinks the U.S. is anywhere close to full employment.

The Fed’s forecast is for an unemployment rate between 7.4 and 8.1% for 2013. Interpretation: the Fed is expecting to exert some additional stimulus. Large-scale asset purchases– referred to popularly as more “quantitative easing”– are the primary tool available. So, if your motto is “don’t bet against the Fed,” then I wouldn’t bet against more QE during 2012.

Read the full post >

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Raoul Ruparel is the latest economist to denigrate ideas that the European Central Bank has introduced some kind of back-door bailout with its new liquidity support measures.

While the plan buys time, there is no indication that EU leaders will actually step up to the plate and use that time effectively.

“Lower ECB interest rates and more liquidity to banks may be welcome in the short-term since this could help stave off another credit crunch. However, hopes, and plans, that this funding will lead to a boost in purchases of sovereign debt look misguided. It would be a spectacular own goal for the eurozone if banks waste the opportunity to clean up their balance sheets by loading up on risky sovereign debt, just to keep the eurozone ticking over in the short term.”

“The ECB’s exposure to the PIIGS now tops €705bn, and has increased by over 50% in the past six months, highlighting how risk continues to be transferred from banks and investors to taxpayer-backed institutions. But instead of utilising the time the ECB has bought them to come up with a sensible plan, eurozone leaders have continued their bickering.”

Ultimately, he writes in a briefing note, the ECB will probably have to step in. But that won’t happen until the situation has worsened significantly.

If the eurozone crisis continues to worsen, there will be a point where the ECB cannot completely put off intervening. However, by this point ECB funding would ultimately only be a stop gap on the path to a new restructured eurozone, most likely with fewer members and probably following the default of at least one member. 

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With no end to the foreclosure crisis in sight, it’s no wonder consumers are still falling for shady mortgage relief scams.

They’re desperate to keep a roof over their head and even banks are struggling to keep up with their needs.

Just this week, six defendants agreed to hand over a combined $6 million to settle FTC charges they ran bogus businesses claiming they’d help consumers claw their way out of foreclosure. 

Call it an FTC victory or whatever you like, but the case highlights how just how susceptible homeowners can be to fraud when they find themselves on the brink of losing their homes.

The victims who fell for this scam missed several red flags along the way. 

First of all, the defendants claimed their companies were part of a government-backed mortgage relief program called “U.S. Homeowners Relief.” 

Although the Obama administration did launch a relief organization for struggling homeowners in March 2010, a simple web search would have shown them it was never called U.S. Homeowners Relief.

It was part of the Making Home Affordable program, which offered consumers loan modification assistance through the Federal Housing Administration.

The next red flag was that the so-called “relief” company declared a 90 percent success rate. That’s a big no-no since the FTC made it illegal to sway consumers with misleading advertising. 

Now for the kicker: They also asked for $4,250 upfront from their clients–before they even rendered services. That’s also illegal. 

Once you’ve handed over that check, the damage is pretty much done. Sure, they’ll promise to refund the cash if they don’t get your payments and interest rates lowered, but by the time you realize they’re a fake, they’ve already taken off.

In this case, the defendants cut their phone lines, stopped answering their clients’ emails and changed their business’ name.

If you believe your home was foreclosed in error, it’s not too late to submit to the government’s independent foreclosure review. It’s open to 4.5 million homeowners and all submissions are due by April 2012.

If you’ve dealt with a loan modification business you feel is up to no good, alert the FTC or call 1-877-FTC-HELP (1-877-382-4357). 

Now meet the neighbors from hell that can seriously trash your home value >

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The Bank of England’s latest inflation attitudes survey suggests that fewer people believe inflation is being controlled effectively with interest rates.

In August, when the survey was last carried out, the proportion satisfied that the Bank was doing its job to set interest rates to control inflation, versus those dissatisfied, was 16 per cent, but this figure fell to just 9 per cent in the November survey.

The represents the lowest level of satisfaction since the survey started in November 1999.

Consumers who participated in the November survey said they expected prices to rise by 4.1 per cent over the next year.

They expect an inflation rate of 4.1 per cent over the same period, a slight fall from expectations of 4.2 per cent inflation recorded in the August survey.

Those surveyed said they expected inflation to be a median of 3.4 per cent in 2013, increasing slightly to 3.5 per cent in five years’ time.

The proportion of those surveyed who expect interest rates to fall over the next year fell to six per cent in the November survey, compared with 7 per cent in August, while 39 per cent said they expected interest rates to increase, compared with 38 per cent in August.

Although inflation fell to 4.8 per cent last month, the survey showed that people perceive it to be 5 per cent.

The results are based on a survey carried out by GfK NOP on behalf of the Bank of England, of 1,853 people in the UK aged 16 and over between November 3 and 8.

Meanwhile, in the eurozone inflation reached 3 per cent in November, the third consecutive month it has hit this level.

The eurozone economy is expected to have contracted by 0.6 per cent in the final three months of 2011.

High levels of interest on payday loans are helping to create ‘Zombie’ debtors – people who can only afford to pay the interest on their debts each month and not the debts themselves.

Based on a study of 2,000 adults, insolvency trade body R3 suggests that around 45 per cent of the population struggle to make their income last until payday and around 3.5 million adults are thinking about taking out a payday loan over the next six months.

Payday loans are short-term unsecured loans, averaging around £300 in value.

According to R3, sixty per cent those who take out a payday loan regret the decision and nearly half believe the loan made their financial situation worse.

The survey also found that young people were most likely to be attracted by a payday loan, with people between the ages of 16 and 24 using this form of credit.

R3 also announced its latest Personal Debt Snapshot, which revealed an increase in the number of people without savings from 19 per cent last quarter to 27 per cent this quarter.

Consumer charity Citizens Advice recently warned of a four-fold increase in the number of people running into debt after taking out a payday loan, between May and July this year, compared with the same period in 2009.

The charity is calling on the government to introduce tighter regulations to protect consumers from payday loan companies who may charge interest rates of more than 4,000 per cent.

While these loans are reasonable if they are paid off as soon as the payment is due, debts quickly escalate if the loan is rolled over.

There are also often associated fees which can sometimes exceed the loan amount.

However Consumer Minister Ed Davey has expressed concern that tighter regulation could lead to people having to turn to illegal loan sharks.

As the European crisis gets worse, banks are getting more cautious about lending to one another.

The “TED Spread,” which is the difference between Treasury yields and LIBOR (the London Interbank Offered Rate), is thought to be a good indicator of the direction of credit availability in the economy. When the TED Spread is rising, as it is now, banks are demanding higher interest rates for lending to one another and credit is tightening. When the TED Spread dropping, credit is becoming looser.

The TED Spread has been rising all year.

From Bloomberg, here’s the TED Spread over the past month:

And here’s the past year:

As the longer term chart below shows, we’re nowhere near the extreme levels we hit in the 2008 crisis, but we’ve now hit the upper bound of normal. And as the longer term chart also shows, we can go from “concern” to “crisis” literally overnight.

Here’s the past 5 years:

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Campaign group Save our Savers today revealed the cost to savers of the Bank of England’s decision to hold the base rate at 0.5% for the 33rd successive month.

The group estimates that the low interest rate combined with a retail price index at 5.6 per cent, its highest level for 20 years, and a consumer prices index rate of 5.2% will cost savers £43 billion over the next year.

Save our Savers believes that the Bank of England’s strategy has caused the value of sterling to fall by 25 per cent since 2007.

According to Moneyfacts.co.uk the average new instant access account offers 0.93% interest, compared with 4.21 per cent in November 2007.

These low interest rates, together with a high level of inflation mean that it is impossible for savers to protect the value of their savings.

Save our Savers has accused the Bank of England of “failing in its statutory duty” and it wants the government to intervene.

It believes that the Monetary Policy Committee may have acted illegally in letting inflation exceed its stated target of 2 per cent.

According to analysts, an increase in the base rate is unlikely until mid-2013 in the face of the weak UK economy and the ongoing crisis in the eurozone.

In addition to maintaining a low base rate, the Bank of England pumped another £75 billion into the economy last month through its quantitative easing programme.

New figures from the ONS revealing that producer price inflation fell to 5.7% on October, compared with 6.3% in September.

The reduction in producer price inflation, which reflects the price of goods at the factory gate, together with poor September trade figures, is likely to be seen by the Bank of England as an indication that the quantitative easing programme should continue despite high consumer price inflation.

The Bank of England’s Monetary Policy Committee is due to meet today, when it is expected to keep interest rates at a record low of 0.5 per cent, despite inflation soaring.

It will be the 32nd consecutive month that the interest rate has been held at this level.

According to the Consumer Price Index, inflation hit 5.2 per cent in September, almost triple the Government’s target.

There is increasing concern that the UK economy could fall into recession in the final quarter of 2011, but a further increase in quantitative easing (QE) is not anticipated.

Last month the MPS increased QE by £75 billion in an effort to boost the economy, but the situation has continued to deteriorate.

However, analysts believe that further action could be taken early next year if the economy continues to flounder.

The ongoing eurozone crisis is considered by the Bank of England to be a major threat to the UK’s economic recovery, and EU leaders remain unable to agree on a solution.

Greece, Portugal and Ireland have already sought bailout funding after their borrowing costs reached critical levels and there is now concern that Italy could also be forced to seek help.

Italy’s difficulties caused the Confederation of British Industry to reduce its growth forecasts for the UK economy from 1.3 per cent to 0.9 per cent for 2011.

It also downgraded its forecast for 2012, from 2.2 per cent to 1.2 per cent.

The crisis in the eurozone has caused international demand for UK goods to fall, with the trade deficit widening to £9.8 billion in September from £8.6 billion in August.

This morning, there was speculation that Germany was planning to create a two-tier eurozone, with struggling countries leaving the single currency.

This has been denied by Germany’s chancellor, Angela Merkel.