Thursday, January 22, 2009

The problem of the American non-recourse mortgage

In Britain (and most of the world), all mortgages are "recourse mortgages". That is, the borrower is personally liable for all debts, whether secured or non-secured. Therefore, if a borrower gets into difficulty and their home is repossessed and then sold, if the sale of the property yields less than the loan, the borrower is still liable for the difference, and the courts can attach their future earnings. This is one of the main reasons the UK has a low repossession rate. It makes sense to try to meet your mortgage payments instead of having to pay rent plus repay outstanding debt on your repossessed property. Even strict banks such as Northern Rock only repossessd 0.56% of the loans on their books in 2008 - and their rate was three times that of the other banks.

In the USA though, uniquely in the world, they operate non-recourse mortgages in 27 states, including California and Florida. With a non-recourse mortgage, you only need to return the keys to your home, and you are no longer liable for the debt. While property prices are rising and there is equity in the home, it's rational to continue paying the mortgage. But if your home is "underwater" as the Americans like to call negative equity, and you are struggling with the payments, it is rational to simply return the keys and let the lender deal with the problem. The lender then has to sell the house - but increasing supply of homes for sale into a falling market simply depresses house prices even more, and increases the losses the lenders incur on that property. Hence the reason why US house prices have been falling continuously since 2006. In non-recourse states such as Nevada, 7.3% of all it's housing units received a foreclosure notice in 2008.

No wonder the American lenders were so keen to sell on their mortgage portfolios to guillible European banks! And this is why the losses are mounting up.

The Obama administration is likely to take drastic action to solve the problem and simply legislate to reduce the homeowners mortgage to below the market price so that they are no longer "underwater" and no longer have an incentive to default. A write down figure of 20% has been bandied about together with a clause making the new loan a "recourse" one, so that is the limit on the losses. American banks are worried about this as they will lose on the mortgages that haven't yet defaulted. But the upside is that there won't be this glut of foreclosed homes coming onto the market to depress prices and house prices should stabalise. Those holding the liabilities (mainly our silly banks) will take a hit, but reducing the foreclosures should mean that those losses are confined to the 20% or so write down in the loans. Given that the banks are currently suffering from uncertainty about how big their losses could get, stating now that their losses will be about 20% and writing it all down in one hit should mean that the banks should stabalise too.

The true solution for the future of course is to end all non-recourse mortgages - but there are so many vested interests in America who want to keep them that this is unlikely to happen.

Sunday, January 18, 2009

At last Obama's inauguration draws near...

It seems like an aon since the US general election. I wish they had a system like ours where the newly elected government took control the day after the election. The last three months might have been so different, from the point of view of the economy and foreign policy.

But still, on Tuesday 20th, Le Président du Mort, (whose death toll includes 2752 dead in 9/11, 1836 dead in Hurricane Katrina, 4227 Americans dead in Iraq, about 100,000 Iraqis dead, 640 Americans dead in Afghanistan plus unknown Afghans dead), finally exits the scene. Of course Bush isn't entirely responsible for all the deaths on his watch. But his incompetence made difficult situations worse. The ancients would have concluded that the gods on Olympus were displeased with him, and would have dispatched him a long time ago.

Obama, who symbolises hope, will finally take control. It's natural that expectations are running sky-high. And it will be natural that he will disappoint some people. But he seems to have the competence to make his own luck. Lets hope the gods love him and that his presidency is a success. He faces heavy-duty problems, but he just has to do better than Bush to be a success.

He comes to power with so much goodwill - according to Gallup, he has an 83% approval rating, compared to 68% for Clinton in Jan 1993 and 61% for Bush in Jan 2001 - that his mere presence in the White House is bound to have an effect on American confidence, which should immediately start to feed through to the economy.

Anyway, we are all holding our breath, and wish him well.

Saturday, January 10, 2009

Is the Guardian becoming an internationally renowned publication?

I ask because there's a bit of a moan piece in today's New York Times, entitled Who leaked to The Guardian and Why, with respect to reports that the new Obama administration is willing to talk to Hamas.

Most of the American newspapers are busily denying that there is any fundamental change in policy over Israel/Palestine - but the NYTimes piece also notes that it was the Guardian that broke the news that Hillary Clinton was to be the new Secretary of State and American publications spent a lot of time rubbishing that idea before it was officially announced and it turned out that the Guardian was right.

It's possible that the Guardian has developed close links with someone in the Obama administration, and if so, the next few years will be very interesting indeed. The characteristic of the last eight years has been the primacy of Murdoch's News International media (particularly Fox News), with American papers such as the Washington Post and New York Times being very careful not to upset the Bush Administration (most notably over Iraq). The Guardian by contrast takes a much more robust attitude in criticising governments both British and American (especially over Iraq), and if loads of Americans start to read it because they think they have an inside line to the Obama administration...

I very much hope that is the case. It will be nice to see a British publication really break through to become a major international player, and especially as the Guardian is independently owned by the Scott Trust Limited (formerly the Scott Trust) and is not dominated by a "tycoon" or single personality the way the rest of the British (and American) media is.

Tuesday, January 06, 2009

Christmas Retail Sales turn out OK

It was a bit of a nerve racking wait for results. Prior to the VAT cut, John Lewis had reported that their sales had been 13% down on the same period last year. It looked like there would be a proper bloodbath on the high street. However, immediately post VAT cut, their sales were only down 6.7% on the previous year, and they finally reported that in the five weeks to Jan 3rd, their sales were up 2.9% on the year before.

Other retailers posted a similar story - New Look had like for like sales increasing 2.8% in the 14 weeks to January, Debenhams had posted a 3.5% drop in sales, but said their profit had risen thanks to tight stock control, Ocado, the online grocer had it's sales up 25% compared to last year, Co-Op Group had like for like sales up 5.2% over fourth quarter, and even home furnishings firm Dunhelm managed to maintain margins and was down only 5.6% in sales, despite the housing market being stagnant.

Twas the VAT cut that did it - Alistair Darling saved Christmas for the retailers. It brought people out to shop and it reassured the customer that government would do whatever it took to keep the economy going and therefore brought confidence back into the system. So many armchair analysts tended to assume that people wouldn't turn out for a 2.5% VAT cut when there was a 50% sale on. But the actual shopper (as opposed to those who opine but avoid shopping) understands first-hand that the 50% sales were very much selective. Some things were on sale, but never the stuff you really wanted to buy - no change there from previous years! Shoppers are used to these sales and sceptical about them, even assuming that some retailers deliberately put some prices up, in order to then cut more spectacularly and justify the sales posters. But the VAT cut was very real, it was real money off, and people appreciated it.

The good Christmas also has tax implications - the Treasury might be down on tax revenue from the Banks, but at least VAT should hold up, and retail corporate profits shouldn't be too badly down. It would have been a rout though had the government not acted.

I know the naysayers are going to rush to point to Waterford Wedgewood and Woolworths - but Waterford Wedgewood made six years consecutive losses (i.e. they were doing badly in the boom), and Woolworths were similarly badly placed - nothing could have saved them, apart from someone changing their business models, and that is not usually the job of government. Some businesses go bust even in boom time (Rover anyone?), it is a normal part of the commercial environment.

US Christmas sales figures come out on 7th Jan, and it will be interesting to see how they have fared, as they did not make any attempt to stimulate sales.

Finally, I must comment on Germany. After lashing out, and complaining about Britain "tossing around billions" in an act of "crass Keynesianism ", they have now U-turned. They are going for a €50bn package (much bigger than ours as a % of GDP), which they are borrowing to fund and they include some tax cuts. The Germans have gone for raising income tax personal allowances. Not sure how that will help them though. The American experience with income tax cuts showed people hoarding the money, and the Germans are even more inclined to hoard than the Americans. But I suppose a VAT cut was ruled out after all the fuss they made earlier...

Update: 7th Jan. Car registration figures came out today. They were bad, new car registrations fell 21.2%, but everyone had expected a drop of 35%. According to the FT,

"The Society of Motor Manufacturers and Traders said the cut in value added tax from 17.5 per cent to 15 per cent on December 1 may have been a contributory factor in the smaller than expected dip in sales.

Until December, the slide in car sales had accelerating, from a fall of 18.6 per cent in August to a 36.8 per cent drop in November.

....The better-than-expected UK figures contrasted with much bigger falls elsewhere in the final month of 2008. Earlier this week, all the leading US carmakers reported declines of more than 30 per cent in December, while sales in Japan dropped 22 per cent to the lowest December level on record.

In Europe, registrations fell by almost half in Spain, by 24 per cent in France and 13.2 per cent in Italy"

So VAT cut to the rescue again. Of course some of the benefit will go to those ungrateful Germans, but hopefully the Nissan and Mini plants here were supported too.