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What We Read Today 20 July 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • U.S. Points to Russian Missile Connection in Malaysia Airlines Flight 17 Crash (Margaret Coker, Adam Entous, Robert Wall and Alan Cullison, The Wall Street Journal) U.S. officials say they suspect that Russia supplied the rebels with multiple SA-11 antiaircraft systems by smuggling them into eastern Ukraine with other military equipment, including tanks. The U.S. says the ground-to-air weaponry systems are now moved back across the border in to Russia. See also next article.

  • Russia supplied missile launchers to separatists, U.S. official says (Michael Birnbaum and Karen DeYoung, The Washington Post) The WaPo foes farther than other news sources to state that they have a statement from an unnamed U.S. official that the U.S. was "starting to get indications . . . a little more than a week ago" that several rocket launching systems had been moved into Ukraine. Onsite examination of the crash site has been hindered by denial of access by the Russian separatists who control the area and who have been identified by the U.S. and Ukraine as the party responsible for launching the fatal missile.
  • The 9 youngest billionaires in the world (Jessica Patel, Bankrate) Hat tip to Marvin Clark. Mark Zuckerberg is the richest young billionaire and three others have or have had some association with Facebook as well. Four others inherited their wealth. The only other person on the list, Robert Pera, founded Ubiquiti Networks after an early career stint with Apple.
  • Europe’s Debt Wish (Kenneth Rogoff, Project Syndicate) This is the second time this has been in WWRT. Rogoff says that two things are needed: (1) "restructuring or rescheduling" of exiting debt and (2) issuance of new debt needed for future growth (to finance infrastructure and education, for examples).
"President Obama's refusal to crack down on rampant asylum fraud is one of the many reasons we are witnessing a surge of Central Americans seeking to enter the U.S. illegally at the border."

There are 13 articles discussed today 'behind the wall'.

The final 3 articles discuss factors that are keeping the housing inventory at historic lows. Following those discussions is an addition Econintersect commentary on some of the puzzling disagreements between mortgage data from different sources.

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  • The Recovery for U.S. Heavy Truck Sales (Bill McBride, Calculated Risk) The recovery in sales of heavy trucks has been slow and the high peaks of the past 50 years are still far above current sales. But sales are definitely above the 50 percentile level of the last half century. Further improvement will depend in part on growth of construction, according to McBride..

Click on graph for large image at Calculated Risk.

  • Inflation is the Right Addiction (Cullen Roche, Pragmatic Capitalism) Further discussion of the Paul Krugman Op Ed which we had in WWRT yesterday. Roche expresses hope that the neanderthal thinking (Econintersect term, not Roche's) that "the U.S. can run out of money" will soon disappear from the conservative lexicon of talking points. Also needing banishment is the term "U.S. bankruptcy" according to Roche. He feels that the policy discussion needs to be focused on the real risk of aggressive government spending, inflation. Econintersect thought: And then, of course, we'll need some improvement in the ability of politicians (and also some who are purportedly economists) to understand what inflation is and under what conditions it can occur. Obviously those who have proclaimed high inflation is less than a year away incessantly starting way back in 2009 are lacking in the understanding department. A final thought from Roche:
Fearing that we are Greece was silly and misguided. It wasn't just wrong. It was based on a complete misunderstanding of the US monetary system.
The face of RMBS litigation took a dramatic turn last month when the focus of aggrieved mortgage bondholders moved beyond seeking recompense from the large banks who packaged and sold defective mortgage loans, and began targeting the other large banks that were hired to protect investors from such wrongdoing. On June 18, 2014, a large group of investors that includes BlackRock and PIMCO filed six largely identical lawsuits in New York State Supreme Court against the six most prominent mortgage bond Trustees: Bank of New York Mellon ("BNYM"), U.S. Bank ("USB"), Wells Fargo, Citibank, Deutsche Bank, and HSBC. The lawsuits collectively target over 2,200 residential mortgage-backed securities Trusts with an aggregate original principal balance of over $2 trillion, and alleged losses of over $250 billion. An exemplar complaint is available here.
  • Trustee Banks Sued for $250 Billion (L.Randall Wray, New Economic Perspectives) Hat tip to Rob Carter who sent this article with link to another website which had posted it. Wray points out that the trustee banks are being sued by the investment firms for fiduciary failure and subsequently the trustee banks are turning around and filing suit against their fellow banks who issued and securitized the mortgages and mortgaged backed securities for false "reps and warranties". And Wray concludes:

Meanwhile, US property records are in disarray. Banksters continue to steal homes. Real estate markets are turning down. And it looks like the economy is beginning to slow.

Looks like déjà vu all over again.

  • How To Profit From The Historic Big Tobacco Merger (Crista Huff, Street Authority) Here is a classic case of buy the rumor (end of February) and sell the news (last week). The rumor was Reynolds American (NYSE: RAI) agreed to buy Lorillard (NYSE: LO); the news was that the deal was going through. Another news story may weigh on Reynolds next week - on Saturday a Florida jury awarded the widow of a man who died of lung cancer in 1996 $23.6 billion in punitive damages. She had previously been awarded $17 million in compensatory damages.


  • Investors face big losses when the honeymoon is over (Duncan Hughes, The Sydney Morning Herald) Hat tip to Steve Keen. In Australia there has been a flurry of SMSFs (self-managed superannuation funds) in recent years marketed to investors seeking to bolster their retirement funds portfolios. These are real estate investments for which the investor puts up an amount such as $100,000 and then borrows up to $500,000 to establish highly leveraged positions in real estate. The sponsors of the investments then sell over-valued real estate that often does not create enough cash flow to make the loan payments. Some investors have already lost up to 75% of their original investment and still owe the money borrowed. And this has happened during a time of record low interest rates and a real estate boom. If the market turns these people not only will not have any retirement funds remaining but they can spend the rest of their lives trying to pay off the debt incurred. This article says that more than 3,000 people are still borrowing via their do-it-yourself super funds to purchase business or residential property
  • Low mortgage rates drag down U.S. housing market (Christopher S. Rugaber, Associated Press, Poughkeepsie Journal) Yes, the headline is correct. There have been a number of articles about how the large number of underwater homes are holding back owners from trying to sell their house (see next article), there is another reason which is inhibiting owners from selling. More than 1/3 of all mortgages in force today have interest rates below 4%, some as low as 3.3%. Those owners are reluctant to give up the low interest mortgage to move and take on a higher rate loan, which today averages 4.2% nationally. That is 18 million or more homes that are affected.
  • Negative Equity Continues to Fall, Concentrated in Bottom Tier (Svenji Gudell, Zillow Real Estate Research) Zillow says that negative equity condition applies to 9.7 million mortgages, 18.8% of all mortgages at the end of Q1 2014. CoreLogic says the total is 6.3 million homes (12.7% of all mortgages): See next article and commentary at the end of today's discussions.

The home equity inhibition of selling actually extends to nearly 37% of all mortgages, about 20 million homes. As shown in Figure 2 the average nationally for mortgages with effective negative equity is 36.9% as of the first quarter 2014. These people are inhibited from selling because after deducting selling and moving expenses from their meager equity the resources available for a new down payment are reduced. For example, if equity in the existing home is 10% and selling and moving expenses total 6% only 4% remains for a new down payment. If the existing home is sold for $200,000 then $8,000 remains for purchase of the new home. Assuming the home is sold for a trade-up and the new home is purchased for $250,000 the new mortgage could be $240,000. At the national average of 4.2% the monthly payments would be approximately $1,173. This would replace the previous mortgage payment (assume $196,000 with 29 years remaining @3.5%) of about $897. When the added insurance and property taxes are included the cost of moving could exceed $4,000 per year.

Click on map for larger graphic at

  • CoreLogic Equity Report First Quarter 2014 ( Research) According to CoreLogic the aggregate value of negative home equity was $383.7 billion at the end of Q1 2014. This was from nearly 6.3 million underwater equity homes (12.7% of all mortgaged homes). This is significantly less than the numbers published by Zillow (previous article). Also lower in the CoreLogic report are the national total for all mortgages with equity less than 20% added to the number underwater: 33.2%. Zillow reports 36.9% for the same metric (effective negative equity, see preceding article).


Commentary: The differences in home mortgage data (underwater homes and effective negative equity) might be attributed to different estimates of current home prices. Both research reports appear to be working off the same mortgage data. CoreLogic uses a propriety process that produces the CoreLogic Home Price Index (HPI). Econintersect tracks and reports HMI (see GEI News for latest report). Here is the price data from GEI News 01 July:


The value of HMI as of March 2014 is just under $170,000.

The Zillow calculations are based on the Zillow Home Value Index (HVI) which has a current value of $169,800 (end of Q1 2014). This data appears to be in almost exact agreement with the CoreLogic HMI at the present time - although there have been minor disagreements historically. See graph below from Experts Predict Home Value Gains Through 2018, Weigh In On Affordability (Meredith Miller, Zillow Real Estate Research):

Click on graph for larger image at Zillow website.

The disagreement between the CoreLogic (HMI) and Zillow (HVI) is insignificant. Both Zillow and CoreLogic claim to have mortgage data from "the public record" but it is obvious that they are dealing with significantly different mortgage data. CoreLogic calculates that 6.3 million mortgages are underwater while Zillow puts the number at 9.7 million (50% greater). The "effective net equity" from Corelogic is number approximately 18 million homes while Zillow calculates 20 million (11% greater).

There is no easy answer evident for these disagreements which puts a shadow over both sources. Both sources claim to include second mortgages in the debt calculation. Are the two estimates of second mortgages outstanding the source of part or all of the disagreement?

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