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Brief ECO Newsletter 2012186 1 (2)

Brief ECO Newsletter 2012186 1 (2)

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06.18.12 www.bloombergbriefs.com Bloomberg Brief | Economics

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KEENE’S CORNER
Barry Ritholtz, chief executive officer/director of equity research, FusionIQ, talks to Tom Keene and Ken Prewitt about why the foreclosure machinery is clicking back into gear.

Q: You say the foreclosure machinery is clicking back into gear. Why are we seeing more foreclosures now? A: During the 12-to-14 months of negotiations on the robo-signing settlement, the banks had voluntarily agreed to stop a foreclosure machinery that had, to be blunt, run amok with a lot of illegality and a lot of fraud. This is the banks’ outside lawyers and service processors and everybody else. They had just turned them into an ongoing assembly line when it really should not have been. So we had a voluntary stop for well over a year, and during that period the number of foreclosure initiations and the number of distressed sales dropped dramatically. I’ll give you a great data point from the April existing home sales. For April 2012 existing home sales, 29 percent of the total sales were distressed. The same period 12 months earlier, it was 38 percent. Distressed sales sell for about a fifth lower than the comparable house next door. Q: Are you suggesting a house price decline in the next 12 months? A: Well, here is what we see. The RealtyTrac monthly foreclosure start report came out earlier this week, and for the first time in a long time we saw a monthover-month increase. That was a 9 percent increase and is probably just the leading edge of the reversion back to the normal foreclosure process that we see. Earlier this week you had Laurie Goodman of Amherst Securities on and she had an astonishing data point: In the U.S., there are 2.8 million people living in homes with mortgages where they have not made a payment for 12 months or longer. Q: What do you make of that Federal Reserve report showing that in the first quarter home equity in the U.S. went up to $6.7 trillion. People are not only

refinancing, but they are throwing more cash into the house to lower their mortgage rates. A: Number one, it obviously reflects record low mortgage rates. And it is good for the people who have good credit scores, good payment history, good income, who can take advantage of those rates. But one in five people who have a mortgage or who qualified for a mortgage since 2007 have fallen 90 days behind at some point over those intervening months. Because of that, those people will not qualify for a new mortgage or a refi. So you have these record low rates and nine million people that simply cannot take advantage of it. Q: Right now 3.88 percent is the average on a 30-year fixed rate loan. You are looking for rates to go up? A: No, but rates at this level are likely to be as attractive as it gets. Is there is a probability that rates tick down? Well, maybe they go a little lower if we see QE5 and Operation Twist 2 and who knows what else, but statistically, at unprecedented low levels of mortgage rates, the risk of rates moving higher are better than seeing an appreciable move down. I mean how much lower can mortgage rates go? Are you going to go to 3.7 percent or 3.6 percent? That is a possibility. But sliding higher is a greater risk at these levels. Q: What do you do with your 401K? A: You know, we always use the example that the time to read where the emergency exits are and where the flotation devices are is when you are on the tarmac waiting to take off. It’s not at 30,000 feet when an engine goes out and the captain announces there is trouble. With your 401K, you want to own as low-cost holdings as you can. You don’t want to pay a lot of big internal fees and expenses, that is number one. Number two, you want to own the broad market. You want to own some emerging markets, some small cap, some tech, and some fixed income. All you can do is look forward and say, statistically, if I am in the market over the long haul I’ll do well. That doesn’t mean you set it and forget it. That doesn’t mean during a secular bear market you just buy and hold and close your eyes. You know, we lowered our equity exposure about two months ago and we have been slowly, over the past four weeks, bringing it back up. We recently added Wal-Mart, which is back at levels it hasn’t seen since January 2006. If the boys at ECRI are right

and we do see a recession in 2013, 2014, Wal-Mart is where the American consumer tends to end up when things get tight.
(This interview was condensed and edited.)

Today’s guests: John Ryding, RDQ Economics; Athanasios Orphanides; Richard Clarida, PIMCO; Carl Weinberg, HFE; Olli Rehn, European Commission; Jim O’Sullivan, HFE

On Air Listen on the radio at these regularly scheduled times and dates.
■ SURVEILLANCE

Weekdays 7:00 AM-10:00 AM. Tom Keene joins Ken Prewitt for Bloomberg Surveillance
■ BLOOMBERG

ON THE ECONOMY Monday–Thursday 7:00-8:00 PM. Tom Keene interviews high-profile guests and looks at the economy.

PodCast Listen on the web at http://www.bloomberg.com/podcasts/surveillance/
Also available on the Bloomberg terminal: BPOD <GO>

Twitter / On Demand

Full interviews are available at Tom Keene on Demand http://www.bloomberg.com/tvradio/radio/ and follow him on twitter @tomkeene

Bloomberg Brief Economics Newsletter Ted Merz Executive Editor tmerz@bloomberg.net 212-617-2309 Bloomberg News Dan Moss Executive Editor dmoss@bloomberg.net 202-624-1881 Economics Kevin Depew Newsletter Editors kdepew2@bloomberg.net 212-617-3131 Nipa Piboontanasawat Chris Kirkham npiboontanas@bloomberg.net ckirkham@bloomberg.net +852-2977-6628 +44-20-7673-2464 Staff Economists Joseph Brusuelas David Powell jbrusuelas3@bloomberg.net dpowell24@bloomberg.net 212-617-7664 +44-20-7073-3769 Michael McDonough Richard Yamarone mmcdonough10@bloomberg.net ryamarone@bloomberg.net +852-2977-6733 212-617-8737 Tamara Henderson Niraj Shah thenderson14@bloomberg.net nshah185@bloomberg.net +65-6212-1140 +44-171-330-7500 Newsletter Nick Ferris Business Manager nferris2@bloomberg.net 212-617-6975 Advertising bbrief@bloomberg.net 212-617-6975 Reprints & Permissions Lori Husted lori.husted@theygsgroup.com 717-505-9701 To subscribe via the Bloomberg Terminal type BRIEF <GO> or on the web at www.bloombergbriefs.com. To contact the editors: econbrief@bloomberg.net
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