The Surge: The Untold Story

Understanding the Surge from ISW on Vimeo.

FHA Reserve Ratio Falls to 0.53%, Lowest in History

The Federal Housing Administration’s mortgage insurance reserves fell to the lowest level in history and the government said more steps are needed to shore up the agency that guarantees one of every five single-family loans.


The net capital ratio, or reserves after accounting for projected losses, fell to 0.53 percent in the year ended in September, from 3 percent in fiscal 2008 and 6.4 percent in 2007, according to an annual review sent today. While FHA said the fund “has good prospects,” it is changing its risk models to account for the possibility of the ratio falling below zero.

“Additional actions” will be needed to shore up the agency, Housing and Urban Development Secretary Shaun Donovan said at a news conference in Washington today. The insurance fund tripled in size last year and has taken on more risk as private industry sources for lenders to finance and insure home loans dried up and mortgage default rates rose to record highs.

“I don’t want to leave the impression that the reserves are adequate, that we have plenty of money,” said Donovan, whose department includes FHA. “FHA is not in the long-run self supporting, it isn’t returning money to the taxpayer.”

Donovan said the economy is worse than housing officials expected and projected claims against the insurance fund are higher than forecast. The fund is already below the 2 percent reserve threshold FHA is required to maintain by Congress and Donovan said it’s “critical” to build that cushion back up.

No Bailout 

Donovan specifically avoided using “the bailout word,” saying there is no extraordinary action Congress needs to take for FHA to continue covering claims.

“We have never had to make an appropriation and we can make adjustments to features of our loans to avoid that,” he said. “FHA is unique and the bailout term doesn’t apply the way most people think of it,” he said.

The 0.53 percent ratio is the lowest since FHA began publishing the data in 1990. FHA said under normal economic scenarios it expects the ratio to rise to 1.1 percent in fiscal 2010, according to the report. The ratio could dip to -1.03 percent if there is a significant drop in mortgage rates that cuts into premium revenue, the report shows.

Donovan said HUD postponed the initial release of the results by a week after instructing its auditors to remodel the projected losses with more pessimistic economic forecasts. The original audit showed the capital reserve ratio at 0.8 percent.

FHA Commissioner David H. Stevens said the forecasts used by auditors for home price declines, loss severities and interest rates accounted for the steeper projected fund losses.
The fund is “being depleted at a rate that gives us pause and caution.”

Temporary Role 

FHA, along with federally controlled mortgage-finance companies Fannie Mae and Freddie Mac, accounted for more than 90 percent of all U.S. home loans in the first half of this year.
Donovan said it was a temporary role FHA played in previous economic downturns, and the agency will scale back as private money returns to the market.

“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” Donovan said. “With this temporary increased role comes increased risk and responsibility.”

Stevens announced plans in September to tighten FHA’s underwriting criteria. The agency, which insured almost 50 percent of loans to first-time homebuyers in the second quarter, is increasing appraisal requirements and will have borrowers submit extra paperwork. Stevens also appointed a chief risk officer to help cope with the increased risk on its books.

Real Risks 

“There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” Stevens said in the statement.

FHA’s total reserves are more than $31 billion, giving it an overall capital resource ratio of 4.5 percent, according to the statement. The 0.53 percent net capital loan insurance ratio takes into account projected losses and is the yardstick Congress uses to determine the health of the fund.

FHA is required by Congress to maintain a loan reserve ratio of at least 2 percent to protect the insurance fund from defaults. FHA isn’t in danger of failing, and the mortgage insurance fund will likely recover on its own within two years without any policy changes, Stevens told reporters on a conference call in September.

- Via Bloomberg

FDA finds bits of steel, rubber in Genzyme drugs

Federal health regulators warned today that tiny foreign particles have been found in five drugs produced by Cambridge biotechnology firm Genzyme.

The Food and Drug Administration said particles including stainless steel fragments, non-latex rubber and fiber-like material were found in drug vials and could cause serious adverse health effects in patients.

The contaminated products, used to treat “rare, serious and life-threatening diseases,” are marketed as Cerezyme, Fabrazyme, Myozyme, Aldurazyme and Thyrogen.

Based on product lots tested to date, the particles were “believed to be found in less than 1 percent of products,” according to the FDA.

Genzyme notified the FDA about the contaminated drug vials through product quality reports that are required to be submitted by drug manufacturers.

“The FDA is actively investigating the nature of the contamination and seeking immediate implementation of corrective actions to mitigate the situation,” the federal agency said. “At this time, no adverse event reports attributed to foreign particle contamination have been received by FDA.”

Potential health affects from intramuscular injections of the contaminated drugs could include local pain, swelling and inflammation, according to the FDA. Potential adverse reactions from intravenous infusions of the contaminated products could be more serious, including damage to blood vessels or embolic events, and anaphylactic, allergic and immune-mediated reactions. The foreign particles also could affect how well the products work, the FDA said.

Shares of Genzyme Corp. dropped $3.67, or 6.9 percent, to $49.50 in afternoon trading.

The FDA announcement is the second case of contamination for Genzyme this year. In June, Genzyme was forced to shut down a key production facility due to viral contamination.

- Via Boston Herald

U.S. Posts $176.36 Billion Deficit for October

The federal government kicked off fiscal year 2010 by posting its widest-ever October budget deficit, the Treasury Department said Thursday.


The $176.36 billion gap is more than $20 billion wider than the shortfall recorded in October 2008, driven up by lower tax receipts, stimulus-related revenue reductions and consistently high government outlays.

Treasury's monthly budget statement shows receipts were $135.33 billion in October, down 18% from a year earlier and at the lowest level since October 2002. Meanwhile, outlays were $311.69 billion, down 3% from a year earlier and at their second-highest monthly level on record.

The October deficit figure is wider than the Congressional Budget Office's estimate for a $175 billion deficit in the month and wider than the $165.9 billion expected by analysts surveyed by Dow Jones Newswires.

The Treasury on Thursday also revised September's deficit to a slightly narrower $46.57 billion, from a previously reported $46.61 billion. Even with the revision, the U.S. in fiscal year 2009 posted a record total budget deficit of near $1.4 trillion -- three times its previous record.

At the equivalent of 9.9% of gross domestic product, the figure is the widest U.S. deficit as a share of GDP since 1945.

The staggering number has had U.S. Treasury Secretary Timothy Geithner pledging to rein in the deficit as the nation's economy recovers.

The U.S. at this point is expected to post a fiscal year 2010 deficit similar to that posted in fiscal year 2009.

The government paid $17.93 billion in net interest last month on the federal debt. Net interest on the federal debt excludes interest paid on nonmarketable government securities held by federal trust funds, such as Social Security.

- Via WSJ

There Is No Recovery

Yet more BS Fedspeak, this time in the mainstream media:

In separate speeches, Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.

That's because there is no real economic recovery at all.

So why is the stock market up so much?

More than happy to show 'ya.

Two charts should suffice:

That is an overlaid chart (as close as I can easily get them to register) on the dollar and The S&P 500 from the March lows to today.

Notice the near-perfect inverse correlation.  The Dollar goes up, the market goes down.  The Dollar goes down, the market goes up.

Now today, literally minute-by-minute:

Same correlation - near-perfect.

Folks, you don't have to engage in any sort of "conspiratorial" thinking on this whatsoever.  You only need examine the facts.

The rally in the market has exactly nothing to do with the economy and the outlook for it.  It is tied to one and only one thing - the decline in the dollar.   

A WEAKER, EVEN COLLAPSING, DOLLAR IS NOT COMMENSURATE WITH OR INDICATIVE OF A STRONGER ECONOMY.

You're free to believe in any thesis you'd like with regards to economic recovery.  But a strong economy is correlated with a stronger currency - that is, the underlying strength of America, along with her ability to support her currency via current and future production, which translates into the ability to raise tax revenues and thus cover debt.

Since March The Federal Reserve and Federal Government have in fact promulgated and prosecuted policies that do the exact opposite.  The stock market has responded not to forward economic prospects, as is often claimed, but rather to the "hot money" flows of foreign and domestic speculators and a dollar-based carry trade engendered by The Fed's zero-percent interest rates.

Yes, the stock market could go to all-time highs - for a short while - if this is allowed to continue.  But oil (priced in dollars) would be $300 and the dollar would be at 40 - everything you buy that is imported would literally double (or more) in price, and your standard of living, since energy is in everything, would be cut in half - or worse.

How well will the stock market do over the intermediate and longer term when the 70% of the economy that is consumer spending (that's you, dear reader!) is destroyed by ramping import costs - whether the government calls that "inflation" or not?

Japan tried this same game when they got in trouble 20 years ago and they failed to produce lasting economic growth and prosperity.  What they did produce was near-exact correlated market rallies and Yen devaluations, but 20 years later, despite huge rallies in the stock market as we have seen in ours, The Nikkei remains some 60% off it's all-time high, with no realistic prospect of reaching that high at any time in the foreseeable future.

The mainstream media will not show you the above charts, as they put the lie to any claim that the market is "foreshadowing" economic recovery in the next six to twelve months.

It is doing no such thing - it is responding to hot money flows that are being intentionally generated and, if you follow them as an investor (rather than as a minute-by-minute trader) you will be crushed, just as those who bet on recovery in Japan following their original collapse were.

Bernanke, Geithner and the other stooges in our government and media are intentionally misleading you.

Again.

- Via The Market Ticker