Inquiring minds are digging deep into a 266 page PDF called USA Inc. a basic summary of America’s financial statements.

It is loaded with stunning graphs and charts on Social Security, Medicare, Medicaid, TARP Bailouts, Fannie Mae and Freddie Mac, military spending, tax revenues, and various projections. Here are a few images, but please give the document a closer look when you have a few moments.

Click on any chart to see a sharper image.

Cash Flow

Expenses at a Glance

Unfunded Liabilities

Federal Spending as Percent of GDP

Note this mess started with the creation of the Fed

Growth in Entitlement Spending

Take a step back, and imagine what the founding fathers would think if they saw how our country’s finances have changed. From 1790 to 1930, government spending on average accounted for just 3% of American GDP. Today, government spending absorbs closer to 24% of GDP.

Spending + Interest vs. Revenues

By 2025, entitlements plus net interest payments will absorb all – yes, all – of USA Inc.’s revenue, per CBO.

Less than 15 years from now, in other words, USA Inc. – based on current forecasts for revenue and expenses – would have nothing left over to spend on defense, education, infrastructure, and R&D, which today account for only 32% of USA Inc. spending, down from 69% forty years ago.

This critical juncture is getting ever closer. Just ten years ago, the CBO thought federal revenue would support entitlement spending and interest payments until 2060 – 35 years beyond its current projection.

To 25 Countries in Defense Spending

Entitlement Spending by Household

Medicaid Underfunding

When Medicaid was created in 1965 to provide health insurance to low income Americans, 1 in 50 Americans received Medicaid, now 1 in 6 Americans receives Medicaid.

Healthcare Spending

Social Security Workers vs. Retirees

Social Security Dependents

GSE, Fannie Mae, Freddie Mac Expansion

If that is not a shocking state of affairs, what is? There are lot more charts and graphs in the PDF.

Source article Mish

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth.

Data Highlights

Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms, California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans

Click on image for larger graph in new window.

This graph shows the negative equity and near negative equity by state.

Although the five states mentioned above have the largest percentgage of homeowners underwater, a number of other states have 20% or more homeowners with mortgages with little or negative equity.

Note: Louisiana, Maine, Mississippi, South Dakota, Vermont, West Virginia and Wyoming are NA in the graph above.

The second graph shows homeowners with severe negative equity for five states.

These homeowners are far more likely to default.

The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Here is figure 4 from the report.

The default rate increases sharply for homeowners with more than 20% negative equity.

This graph fits with figure 2 above and suggests a large number of future defaults in Nevada, Arizona, Florida and California.

Note below that negative equity is still a problem for buyers in 2009!

• The bulk of ‘upside down’ borrowers, as a group, share certain characteristics. They:

Financed their properties between 2005 and 2008, with 2006 being the peak year where 40 percent of borrowers were in negative equity (Figure 5). Negative equity continues to be a problem even for 2009 originations as evidenced by a negative equity share of 11 percent and another 5 percent near negative equity.

Purchased newly built homes that are concentrated in a small number of states. For homes built between 2006 and 2008, the negative equity share is over 40 percent.

Relied on adjustable rate mortgages (ARMs)

Bought less expensive properties. The average value for all properties with a mortgage is $270,200, but properties in negative equity have an average value of $210,300 or 22 percent less (Figure 8). The average prescription online mortgage debt for properties in negative in equity was $280,000 and borrowers that were in a negative equity position were upside down by an average of nearly $70,000. The aggregate property value for loans in a negative equity position was $2.2 trillion, which represents the total property value at risk of default, against which there was a total of $2.9 trillion of mortgage debt outstanding.

Most homeowners with negative equity will probably not default, but this does show that there could be several hundred billion more in losses coming from residential mortgages.

A week ago, he and a couple of buddies bought a two-unit apartment building for nearly a million dollars. They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary.

“It was kind of crazy we could get this big a loan,” said Mr. Rowland, 27. “If a government official came out here, I would slap him a high-five.”

In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default.

In 2007, the government did not insure a single mortgage in this city, one of the most expensive in the country. Buyers here, as well as in Manhattan, Santa Monica and every other wealthy area, were presumed to be able to handle the steep prices and correspondingly hefty down payments on their own.

Now the government is guaranteeing an average of six mortgages a week here. Real estate agents say the insurance is such a good deal that there will soon be many more.

Policy changes like the shift in insurance, while often introduced on a temporary basis, are becoming so popular that they could prove difficult to undo. With government finances already under great strain, the policy expansions are creating new risks for American taxpayers.

The Internal Revenue Service is giving tax rebates to first-time buyers, and soon to move-up buyers, in a program beset by accusations of fraud. And the government agency that issues mortgage insurance, the Federal Housing Administration, is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling. On Thursday, the Mortgage Bankers Association said more than one in six F.H.A. borrowers was behind on payments.

F.H.A. insurance was created for minority and low-income families on line pharmacies who could not come up with the traditional down payment of 20 percent required by private lenders. Buyers receive loans from government-approved lenders and are required to document their income and assets. They must pay a substantial insurance premium of 1.75 percent of the loan. But in return, their down payment can be as low as 3.5 percent.

For decades, most F.H.A. loans were in low-cost states like Texas and Michigan. Under the agency’s loan limits, houses along the coasts were usually too expensive to qualify. In 2007, fewer than 4,400 F.H.A. loans were made in California, according to the research firm MDA DataQuick, and none were in San Francisco.

The Economic Stimulus Act of 2008 helped change that by temporarily doubling the maximum loan the F.H.A. insured, to $729,750. A two-unit property like the one bought by Mr. Rowland and his friends can be insured for up to $934,200.

“F.H.A. financing was a lost language in San Francisco, the real estate equivalent of Aramaic,” said Michael Ackerman, the agent who represented Mr. Rowland and his friends. “Once the limits were raised, smart buyers started calling.”

The F.H.A. has insured more than 107,000 loans so far this year in the state, according to DataQuick, about 270 of them in San Francisco.

Condominium buildings approved for F.H.A. financing — a relative handful — trumpet the news on their Web sites. The Soma Grand, a new 246-unit building downtown where one-bedrooms cost in excess of $500,000, received F.H.A. certification early in the summer. A half-dozen buyers since then used F.H.A. insurance.

At Guarantee Mortgage Corporation, which has 150 mortgage brokers in the Bay Area, Seattle and Portland, Ore., F.H.A. loans have grown to about 15 percent of its business, from less than 3 percent a few years ago.

“It sure has helped us put a lot of deals together,” said Guarantee’s chief sales officer, Bob Siefert. He predicts that a quarter of Guarantee’s deals will soon be guaranteed by the F.H.A.

Some F.H.A. borrowers here say they have the cash for a full down payment but would rather invest it in the stock market or use it for remodeling. Others, like Mr. Rowland and his friends, simply do not have the money required by private lenders — which would have been nearly $200,000, in their case.

We were resigned to waiting another year,” said a second partner, Michael Bedar, 31. “Then we read about the F.H.A. I had never heard of it before, and couldn’t quite believe it. But it was the answer to our problems.” They put down about $33,000, split among the three of them.

While the F.H.A. is certainly strengthening the high-end market in the Bay Area by prompting more sales, there are growing concerns that it might become a destabilizing force.

Kenneth Donohue, inspector general for the Department of Housing and Urban Development, the parent agency of the F.H.A., said the higher loan limits were increasing the potential risk to the F.H.A. Last week, the agency said its cash reserves had fallen below their Congressionally mandated minimum because of the large volume of foreclosures.

“If one of these higher-limit loans fail, that’s equivalent to two or three cheaper loans,” Mr. Donohue said. “You have to ask yourself, was the F.H.A. ever intended to address these markets?”

He sees another risk: larger loans will be a greater draw for those who want to commit fraud. That would exacerbate a problem already besetting the agency.

Even some San Francisco agents who are doing F.H.A. deals worry about the long-term consequences. Real estate commissions are 6 percent. If the value of a property were to hold steady, a seller who put down the F.H.A. minimum would suffer a loss after fees. And while the Bay Area has traditionally been an excellent investment, the last few years have proved a big exception.

“Is this going to be the next wave of the housing downturn?” asked Eileen Bermingham, an agent with Pacific Union. “With such a minimal down payment, how do we make sure people don’t get in over their heads?”

The F.H.A. commissioner, David H. Stevens, said recently that its loans were relatively safe because the buyer was required to live in the property. They “are for shelter. They aren’t speculative-type investments,” Mr. Stevens said.

But the idea of a house as an investment dies hard. Mr. Bedar, Mr. Rowland and the third partner in their property, Jordan Kurland, are all in the technology field, but their dreams of wealth do not feature stock options.

“We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Mr. Kurland and Mr. Bedar, who are employed full time, are the buyers of record. Mr. Rowland, a freelancer, will have his interests protected by a legal agreement.

Their building, for which they paid $963,000, is on a quiet street in the up-and-coming Hayes Valley neighborhood, close to fashionable restaurants they have already been trying out. The friends plan to live in the bottom unit and rent out the top. Thanks to rock-bottom interest rates, none of them will pay much more than a thousand dollars a month. “Everyone should have the chance to do this,” Mr. Kurland said.

Everyone may get a chance.

A few weeks ago, Congress extended the higher lending limits for another year. Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that he planned to introduce legislation next year raising the maximum F.H.A. loan by $100,000, to $839,750.

His bill would make the new limits permanent.

Source Article

Home prices continued to decline across the nation as sales of heavily discounted foreclosed properties weighed down the market.

Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier, according to the National Association of Realtors. The national median price was $177,900, down 11.2% from the third quarter of 2008.

Distressed sales — mainly foreclosures and short sales — accounted for 30% of transactions in the third quarter, according to the NAR, which pulled down average prices because foreclosed homes sell at steep discounts. Short sales are transactions in which at-risk borrowers sell their homes for less than the loan amount, with the lender’s approval.

Metropolitan areas in Florida and Nevada continued to see the most severe price declines. In the Cape Coral-Fort Myers area, median prices were down 40% during the third quarter from a year earlier, to $98,000. In Las Vegas, median prices were down 34.5% in the third quarter to $138,500. In 2006, median prices were $268,200 in the Cape Coral-Fort Myers area and $317,400 in the Las Vegas area.

Still, home sales rose 11.4% nationwide to a seasonally adjusted annual rate of 5.3 million units during the third quarter, up from 4.76 million units in the second quarter.

See List of Home Prices

• See full chart of home prices in 153 metro areas.

Lawrence Yun, the NAR’s chief economist, attributed rising sales to the federal tax credit of up to $8,000 for first-time home buyers. “We can’t underestimate just how powerful a catalyst the first-time home buyer tax credit has been for the housing sector,” he said in statement.

President Barack Obama signed a bill last week extending and expanding the federal tax credit to include buyers with higher incomes and those who are existing homeowners.

Mr. Yun said that while foreclosures will continue to depress the market, “rising sales from the expanded tax credit should buy drugs on line stabilize home prices by next spring.”

Source article http://online.wsj.com/article/SB125790574094242915.html?mod=WSJ_hps_sections_realestate

Last fall, as the financial system was teetering and the biggest banks were tightening credit, Karen DeForte couldn’t find a lender to refinance the two mortgages on her New York home, until she received a phone call from Lend America.

Most banks rejected Ms. DeForte because her debt level was too high and her credit score too low. But Lend America put Ms. DeForte into a $402,000 loan backed by the Federal Housing Administration, a New Deal-era agency that Washington and Wall Street were relying upon to pick up the slack in the mortgage market as private lenders pulled back. Ms. DeForte fell behind on payments six months later and is seeking a loan modification. Taking the loan was “a stupid mistake,” the 46-year-old office manager said.

Source Article

In late 2007 and early 2008, thousands of borrowers with marginal credit were allowed to refinance via the government-insured FHA program, just as home-price declines began to accelerate. Policy makers were urging the agency to fill the gap left by the exit of private lenders, refinancing subprime borrowers out of loans that threatened to reset to unaffordable payments.

Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of drugs no prescription those backed in 2008. “The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place,” said Brian Montgomery, who served as the agency’s commissioner for four years ending in July.

This month, the FHA is to release the findings of its annual audit, which will show that the projected value of the agency’s reserves has fallen below a federally mandated level, raising concerns that the FHA may need taxpayer money for the first time in its 75-year history. FHA officials say the agency has enough capital to withstand expected losses.

The report is likely to reignite a debate over how aggressively the government should move to prop up the housing market by providing a steady source of mortgages that require little money down. The FHA, which doesn’t make loans but insures lenders against losses if a borrower defaults, is guaranteeing half of all home-purchase loans in some of the nation’s hardest-hit housing markets. That is helping to heal housing markets but puts taxpayers at risk if home-price declines resume.

Refinance loans are hitting the FHA hard. While delinquencies on refinance loans have been lower than those for purchases, that began to change in 2006, and delinquencies on refinance loans have risen faster than those on new loans in the past three years, according to First American CoreLogic.

The FHA began to take on riskier loans in 2007. By the end of 2007, the share of borrowers with credit scores of less than 600 had grown to 37%, up from 30% a year earlier, according to LPS Applied Analytics. The FHA says it is insuring better loans today, but that is primarily because lenders that originate FHA-backed loans began instituting their own minimum standards in 2008, several months after FHA volume surged. Average credit scores have jumped by nearly 70 points, to around 690.

David Stevens, a mortgage-industry veteran who became FHA commissioner in July, has moved aggressively to kick out lenders that the FHA blames for taking advantage of the government program. “What we have to do is eliminate players who prey on the industry in a way that is not legitimate,” Mr. Stevens said.

Last month, the Justice Department filed a civil fraud suit against Lend America of Melville, N.Y., a unit of Ideal Mortgage Bankers Ltd. that specialized in subprime lending until 2006. The suit, which cites 40 cases of alleged mortgage fraud committed by the company against the FHA, is seeking $14 million in claims against the mortgage bank. Executives of the company, which is fighting the suit, weren’t available to comment.

The new tax break for businesses signed into law on Friday will result in a windfall valued at hundreds of millions of dollars for the biggest home builders, boosting the cash hoard the companies are tapping as they limp toward recovery.

The tax break would give companies big refunds to help make up for recent losses. Specifically, it would let large firms claim cash refunds on taxes they paid going back five years, to offset current losses. Previously, the carry-back period for large firms was two years.

View Full Image

Bloomberg NewsMeritage expects a refund of about $60 million under the new tax break. Above, one of the firm’s construction sites in Roseville, Calif., in August.

Although the new tax break would apply to a variety of companies, it will be of particular benefit to home builders, whose earnings have gyrated more widely than companies in some other industries.

The big public builders began lobbying hard for the tax break after the housing market crashed and companies were struggling to survive on dwindling cash reserves. But these days, many builders are sitting on lots of cash after years of selling assets and hoarding money.

J.P. Morgan reports that 10 of the top builders currently have an average of $1.2 billion in cash, compared with $616 million as the market soured in late 2007.

In the past few years, builders were so desperate for cash that they were “moving everything out the door, regardless of price just to bring money in,” said Rob Stevenson, a real-estate analyst with Fox-Pitt Kelton, an investment bank. Giving them a tax break now is essentially “giving them free money.”

Pulte Homes Inc., in Bloomfield Hills, Mich., estimates that it could buy fertility drugs without a prescription receive a tax refund in excess of $450 million. Credit Suisse, which upgraded two home builders on Friday, predicts Miami-based Lennar Corp. could see between $200 million and $300 million. Meritage Homes Corp., based in Scottsdale, Ariz., expects about $60 million.

The upgrade, tax news and other developments lifted shares for several builders. Lennar ended up 63 cents, or 4.7%, at $14.14. Meritage rose $1.11, or 5.9%, to $19.90.

Smaller private builders, which have been hit harder than big builders, would receive smaller refunds, but the cash will have a bigger impact.

“They can take a breath,” said Bill Killmer, vice president of advocacy at the National Association of Home Builders. “Many of these guys would have to shutter and close their doors. They’ll be able to survive.”

The tax break isn’t without controversy. Although the NAHB fought hard for the tax break, some members also fretted that large builders might use the break to unload land at a discount to generate a tax loss and then buy the land back when the market recovers, potentially putting smaller players at a disadvantage. But that is no longer a big concern since builders already sold off large swaths of land.

The tax break is part of a package that would also extend the first-time home-buyer tax credit.

Source article www.wsjonline.com

The National Association of Realtors has called such an extension “essential.” The Mortgage Bankers Association agrees. The National Association of Home Builders says, “Failure to act now could derail the fragile housing recovery even before it has time to take root.”

I respectfully disagree for perhaps a dozen reasons. Let me offer five.

buy antibiotics alt=”Homeownership Rate” /> Click on graph for larger image in new window.

The homeownership rate increased slightly to 67.6% and is now at the levels of Q2 2000.

Note: graph starts at 60% to better show the change.

The homeownership rate increased in the ’90s and early ’00s because of changes in demographics and “innovations” in mortgage lending. The increase due to demographics (older population) will probably stick, so I expect the rate to decline to the 66% to 67% range – and not all the way back to 64% to 65%.

The small increase in the homeownership rate in Q3 might by related to the first-time home buyer tax credit, but I expect the rate to decline further.

The homeowner vacancy rate was 2.6% in Q3 2009.

A normal rate for recent years appears to be about 1.7%.

This leaves the homeowner vacancy rate about 0.9% above normal, and with approximately 75.3 million homeowner occupied homes; this suggests there are close to 675 thousand excess vacant homes.

And as expected, as a result of the first-time homebuyer tax credit …

The rental vacancy rate increased to a record 11.1% in Q3 2009.

It’s hard to define a “normal” rental vacancy rate based on the historical series, but we can probably expect the rate to trend back towards 8%. According to the Census Bureau there are close to 40 million rental units in the U.S. If the rental vacancy rate declined from 11.1% to 8%, there would be 3.1% X 40 million units or about 1.25 million units absorbed.

These excess units will keep pressure on rents and house prices for some time.

Source Article

U.S. House Prices Could Fall Another 10%

Guest Post by Oxford Analytica

Over the past few months, there have been suggestions that the US housing market might finally be bottoming out. Since July, the decline in sales of both new and existing homes has moderated. Moreover, over the past three months, there has been a very modest increase in home prices at the national level as measured by the 20-city S&P/Case-Shiller home price index. However, the high inventory of unsold homes, continuing foreclosures, and double-digit unemployment could mean that housing prices have further to fall.

 

Reasons for cheer. A number of ‘green shoots’ suggest cause for some optimism:

• Inventory reduction. Whereas housing starts are presently estimated to be running at a 600,000 annual rate, underlying US household formation is presently running at an annual rate of approximately 1.5 million units. Lower residential construction relative to household formation is allowing excessive home inventories to be gradually worked off.
• Cheap mortgages. As a result of the Federal Reserve’s highly accommodative monetary policy, and the activity of the government sponsored home lending enterprises, mortgage rates have declined to more affordable levels. For example, 30-year fixed rate mortgages have fallen below 5% for the first time in many years.
• Increased affordability. The slide in home values has brought prices more into line with their long-run fundamentals. Since September 2006, US home prices have fallen 27%, bringing prices back to the level prevailing in mid-2003. As a result, the ratios of home prices to rents and of home prices to incomes are now much more in line with historic levels. The index of housing affordability now stands at its most favourable level in the past 20 years.

Reasons for doubt. Despite these ‘green shoots’ there remain a number of factors that suggest that US home prices have not quite hit bottom:

• Inventories historically high. Despite small declines in recent months, the inventory of unsold homes at the national level remains at close to its historic high. A key indication of the degree of excess home inventory is that the number of vacant homes, in which neither an owner nor a renter presently dwells, exceeds its normal level by nearly 1 million units.

• Foreclosure crisis. The United States is presently suffering from a foreclosure crisis that is further adding more homes to a market already characterised by excess inventories. Forward looking indicators, such as the number of mortgages that are more than 90 days delinquent (ie behind payment) suggest that the pace of foreclosures could increase in the months ahead.

• High unemployment. A very weak labor market situation inhibits households from making the long-term financial commitments, such as buying a home. The Labor Department estimates that approximately 16.5% percent of the labour force is either unemployed or in involuntary part-time employment. At the same time, the huge slack presently affecting the labour market is exerting downward pressure on wage income growth. Most economists — including White House Council of Economic Advisers Chair Christina Romer — do not foresee much improvement in the labour market in 2010.

• Mortgage resets. Next year, approximately 200 billion dollars in ‘Option ARM’ mortgages (adjustable rate mortgages) are due to reset to higher rates. This is likely to add to the foreclosure problem, since these resets will produce a sharp jump in debt service payments.

• Default incentive. Finally, another factor adding to the foreclosure problem is that a growing number of US households now have ‘negative equity’ in their homes (ie their mortgage debt exceeds the value of their homes). Since mortgages in most US states are ‘non-recourse loans’ (the lender cannot pursue the borrowers’ other assets, beyond the home), negative equity gives homeowners a strong incentive to default on their mortgage loans.

Outlook. The present high level of unsold housing inventories, the poor state of the labour market and the current wave of foreclosures suggest that home prices may have a further 10% to fall (in real terms). This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.

This will add to the financial distress facing the banking sector, inhibiting a return to above trend GDP growth in 2010.