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06.18.12 www.bloombergbriefs.com Bloomberg Brief | Economics

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KEENES 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. Ill 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. Its 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 dont 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 Ill do well. That doesnt mean you set it and forget it. That doesnt 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 hasnt 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.)

Todays guests: John Ryding, RDQ Economics; Athanasios Orphanides; Richard Clarida, PIMCO; Carl Weinberg, HFE; Olli Rehn, European Commission; Jim OSullivan, HFE

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