Thursday, December 10, 2009

Japan, Railcars and Ginnie Mae

One of the problems with saying things are getting better when they may really be just getting "worse more slowly" is that since the trajectory is still downward you can reaccelerate at any point.

The Bank of Japan’s Tankan business confidence index may rise the least since the economy emerged from its worst postwar recession as companies become more concerned the yen’s gains will erode profits.

The Tankan index of sentiment among large manufacturers will climb 6 points to minus 27 in December, according to the median forecast of 16 economists
surveyed by Bloomberg News. It would be the smallest improvement since the first quarter. A negative number means pessimists outnumber optimists.

“We may start to see that the recovery is slipping into a standstill,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. “The result will be an important factor for the government and BOJ when deciding how to act in this economic slowdown.”

Railcar traffic is a pretty good indicator of future economic activity. After a period of inventory restocking in the summer, rail traffic has dipped again and is trending below last year -- although much of the dip is due lower coal shipments.

In November 2009, U.S. freight railroads originated 1,089,077 carloads down 8.2%, or 96,900 carloads, from November 2008’s 1,185,977 carloads and down 17.4% from November
2007’s 1,318,023 total.

• Coal had 78,535 fewer carloads in November 2009 than November 2008,
accounting for most of the 96,900 total carload decline for the month.

• U.S. intermodal traffic (which isn’t included in carload figures) totaled 794,184 trailers and containers in November 2009 down 6.7% from November 2008 and down 14.1% from November 2007.

The trendline is still upward sloping despite the dip in November. I think it will be interesting to see what level of inventory restocking occurs after the holiday season.

I've spent a fair number of pixels detailing the rush of the FHA into the housing market in 2009 and highlighting the fact that many of these loans are being made to riskier borrowers with little money down and FHA guarantees.

Now enter another layer of intrigue... GNMA or Ginnie Mae.

GNMA has long existed as an integral part of the financial system, enabling FHA loans to be securitized. However, GNMA has morphed into a mortgage giant in 2009 guaranteeing roughly 20% of all new mortgages that were securitized this year. This is different the issues faced by Fannie Mae or Freddie Mac, because this rush into the market has come after the housing bust and has served to artificially support home prices. Markets tend not to like artificial supports :(

"Ginnie Mae's ongoing relationship with these firms allows them to swap the home loans they've made for new cash so they can make more loans, which can then be traded for even more cash to make even more loans. Housing experts say this dynamic turbocharges the type of bad mortgage lending that first helped trigger the financial crisis that battered global markets over the past two years. And ultimately, taxpayers are on the hook for the troubled mortgages.

"Ginnie is like an accelerant to a fire," said Anthony Sanders, professor of real estate finance at George Mason University.

More than a dozen lenders with Ginnie's endorsement have made loans that are now delinquent at rates far in excess of what regulators consider acceptable. And some of these lenders have been accused of misleading both borrowers and the government about these loans."


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