Have nothing to do with the [evil] things that people do, things that belong to the darkness. Instead, bring them out to the light... [For] when all things are brought out into the light, then their true nature is clearly revealed...

-Ephesians 5:11-13

Tag Archives: Interest Rates

Santa Clara’s Field of Dreams

This article was first published at The McAlvany Intelligence Advisor on Monday, July 21, 2014:

Cover of "Field of Dreams (Widescreen Two...

Ray Kinsella, meet the Mayor of Santa Clara, California, home of the brand new Levi’s Stadium where the San Francisco 49ers are scheduled to play their home games starting this fall. And where, it is predicted, their fans will come to watch.

Whether enough of them will is an open question.

Already nearly a third of the 49ers’ season ticket holders have

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Taxpayers On the Hook for New 49ers Stadium in Santa Clara

This article first appeared at TheNewAmerican.com on Monday, July 21, 2014:

A custom San Francisco 49ers GMC Yukon XL at t...

A custom San Francisco 49ers GMC Yukon XL at team headquarters in Santa Clara, California.

Last Thursday every politician, every bigwig, every banker, every individual with any interest whatsoever in the new Levi’s Stadium in Santa Clara, California, showed up for the invitation-only celebration of its grand opening. The beer was flowing, the confetti was flying, and self-congratulatory exuberance was on every lip.

Present were Santa Clara Mayor Jamie Matthews, San Francisco 49ers CEO Jed York, John York (Jed’s father and co-chairman of the team), 49ers president Paraag Marathe, NFL Commissioner Roger Goodell, 49ers coach Jim Harbaugh, and some of his star players including Patrick Willis and Joe Staley. In the background were executives from Levi Strauss, who paid big bucks to name the stadium.

The only people not in the audience were the ordinary taxpayers, who could find themselves on the short end of one of the most massive financial disasters in modern history.

In a toast to the fans who are expected to fill the 70,000-seat extravagance starting with preseason games in early August, Jed York said, “You deserve to have the best stadium in the world. And now you have it!” 49ers president Marathe added, “You can feel the difference [here] and you know the fans are going to feel the difference.”

At one point in the ceremony, noted Mike Rosenberg, a writer for the San Jose Mercury News who attended the affair,

Hundreds of workers wearing white “I built Levi’s Stadium” shirts and hard hats marched down two red-carpeted giant staircases. Thousands of white, red and gold pieces of confetti burst into the air at the end of the event, as dozens of cheerleaders waved their pom-poms and guests rushed to take selfies in front of a giant screen on stage.

The deal has been in the works for years, with initial plans to demolish Candlestick Park and replace it with an updated version in its parking lot. Financial squabbles and traffic glitches finally deep-sixed those plans, and in 2006 the team’s new owners announced they were moving 40 miles south to the tiny burg of Santa Clara, home of the 49ers’ administration offices.

Negotiations with the city council began in earnest the next year, with promises that no new taxes would be needed and that the huge stadium would bring in additional revenues without liability. Free money, in other words.

On June 8, 2010 Measure J was passed, with 15,000 voters in favor and 10,000 against. Those voting for it were persuaded by the language in the ballot which said, in part:

No use of City General or Enterprise funds for construction; no new taxes for residents for stadium; private party pays all construction cost overruns; no City/Agency obligation for stadium operation/maintenance.

Within a year that ballot language had already been breached: Twelve percent of the cost of the $1.3 billion stadium was provided by the city, with another $330 million to be borrowed by the city’s Stadium Authority. Goldman Sachs headed up a consortium of banks that provided some $850 million in construction financing (with Goldman taking its usual 10-percent fee) while Levi Strauss ponied up another $200 million to be paid out over the next 10 years. The NFL itself loaned the Stadium Authority $200 million to help out, expecting to be paid back out of gate revenues, seat leases, trinket and beer sales, and so on.

The assumptions underlying the project are mind-boggling: First, it is assumed that the 49ers will continue to have a winning team for as far as the eye can see into the future, drawing fans from not only San Francisco but also other cities within a 100-mile radius of the stadium. That expectation, however, is already flawed, as more than 30 percent of those loyal fans in San Francisco holding season tickets have given them up, as the 40-mile drive each way and the potential traffic jams on game day were just too daunting.

Second, the interest rate on the financing is short-term, and most of the loans will have to be refinanced no later than 2015. Even a small uptick in short-term interest rates could put debt service requirements out of reach of the authority.

Third, the cost of subsidies negotiated to bring the 49ers to Santa Clara haven’t been measured but include the NFL’s requirement that all revenue from its events “be exempt from sales, amusement or entertainment taxes or other surcharge obligations.”

Judith Long, who teaches urban planning at Harvard, concluded that even these costs are usually underestimated when proposed to the taxpayers:

Governments pay far more to participate in the development of major league sports facilities than is commonly understood due to the routine omission of public subsidies for land and infrastructure, and the ongoing costs of operations, capital improvements, municipal services and foregone property taxes.

Adjusting for these omissions increases the average public subsidy by $50 million.

That would bring the taxpayers’ cost for the “free” Levi’s Stadium to more than $200 million, not counting any obligation incurred by the Stadium Authority. Another part of the risk is that Santa Clara itself is such a small town, with such a small tax base. Even adding in the county, its population is just 10 percent of the 17 million populating metro San Francisco. No matter how one does the math, the town is making a massive bet on everything turning out just right. As writers Darrell Preston and Aaron Kuriloff of Bloomberg expressed it, “The city is taking what may be the largest per-capita risk for any municipal sports facility [in the country].” The budget for the city itself is just barely $140 million a year.

Roger Noll, a retired professor of economics at Stanford University, looked at the numbers and came to the same conclusion:

The thing that makes this such a dog is that Santa Clara first of all is a small town. There’s some amount of financial hit the city could probably pay [if things don’t pan out as projected], but the probability that it’s going to exceed that is certainly not zero.

That is how a retired college professor says that Santa Clara is taking a huge risk. Within the next three to five years, after “normalization” about attendance, winning games, traffic congestion, interest rates, and maintenance expenses, the taxpayers will know.

Now that the stadium is finished, all the people behind the massive project are counting on those fans to come. Just because they built it doesn’t mean they will.

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Chinese Economist at IMF warns of Global Housing Bubble

Board of Governors - International Monetary Fu...

Board of Governors – International Monetary Fund (IMF) (Photo credit: Wikipedia)

The false assumption that regulators can be safely counted upon to steer economies – local, national or global – to full employment with minimal inflation while avoiding booms and busts was unknowingly exposed in the latest yelp from the Deputy Managing Director of the International Monetary Fund (IMF), Zhu Min. In Chinese, his name means “people rule” or “democracy” but his ideology is firmly rooted in the Keynesian fallacy that economies can be successfully managed by experts without assistance or input from the common folk.

In announcing that the IMF has launched a new website, Global Housing Watch, Min delights in thinking that the world’s economy can be driven by looking through the rear view mirror. He said:

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ARMs are Costing People their Homes

Subprime Crisis No Barrier to Affordable Housing

Subprime Crisis (Photo credit: woodleywonderworks)

Back in September, the Associated Press took a close look at U.S. census data and learned that the supposed economic recovery was leaving an awful lot of people behind. One segment is homeowners who bought the dream of owning a home using ARMs – adjustable rate mortgages – and who are now finding out how these sub-prime mortgages really work. They are working to

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Fed Transcripts from 2008 Reveal Experts to be Clueless and Confused

English: President Barack Obama confers with F...

President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Followers of the Fed have carefully analyzed the 1,865 pages of transcripts it released in February of its eight regularly scheduled meetings and six emergency meetings in 2008 and have concluded that these experts were clueless and unaware of the opening economic abyss yawning before them. Even the New York Times was forced to admit, following its review of the documents, that

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Detroit’s Bankruptcy plan Reveals Fraud in Funding Pensions

Once Kevyn Orr, Detroit’s emergency financial manager during the city’s bankruptcy, presented his “plan of adjustment” – code for compromise in which no one is going to be happy – criticism was most loudly proclaimed by two people who have no financial interest in the outcome:

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Latest CBO Outlook Ignores Birth Rates and Tipping Points

This article first appeared at The McAlvany Intelligence Advisor on Wednesday, February 5, 2014:

Just reading the headlines, the average citizen is likely to think that now that the deficits are under control Washington can focus on problems elsewhere. The Congressional Budget Office (CBO) estimated in May that the current year’s deficit would come in at $560 billion, half what it was just two years ago. In its report released on Tuesday, it was pleased to note that

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Rosy CBO Report Leaves out Critical Factors

At first reading the latest report on the government budget and the economy released on Tuesday by the Congressional Budget Office (CBO) is all sunshine and roses. In its summary of the 182-page report the CBO noted that deficits this year (from last October to next September) will be even lower than initially estimated, dropping to $514 billion, down from $680 billion last year and $1.1 trillion in 2012. And, in the very short run at least, further declines in deficits are expected through 2015, perhaps touching a low of

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S&P Downgrades France’s Debt again, to Third Tier, Halfway to Junk

In its announcement that credit rating agency Standard and Poor’s (S&P) was cutting its rating on France’s debt for the second time in less than two years, the agency minced no words:

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The Bubble in the Caribbean: Puerto Rico

This article was first published at The McAlvany Intelligence Advisor on Wednesday, October 30, 2013:

The complacency of municipal bond holders ended in July with the filing for bankruptcy by Detroit, an unhappy town of just 700,000 owing more than $18 billion to investors. Haircuts there have variously been estimated to be between 15 and 60 percent.

Since then, those holders have been looking around to find the next shoe to fall, and they have found it:

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Why are Puerto Rico’s Bond Prices Falling?

Despite the fact that Puerto Rican (PR) municipal bonds are triple-tax-exempt (no federal, state or local income taxes apply on their interest), those interest rates have skyrocketed since the Detroit bankruptcy first ended the complacency among municipal bond investors in July. High quality municipal bonds are paying little more than 1 percent annually but PR bonds, even though they remain investment grade (barely), have spiked

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Scary Default Scenarios Based on Faulty Treasury Department Release

Within hours of the “brinkmanship” press release by the U.S. Department of the Treasury, major media began to repeat the highly dubious risks outlined by the department without reading carefully exactly what it contained. The headline and opening paragraph were all that the echo chambers needed:

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Home Ownership Rates Continue to Fall; New Plans to Reflate Underway

When the Census Bureau announced on Tuesday that the rate of homeownership in the US continued its nearly 9-year decline, pundits were quick to lay the blame on higher lending requirements, bankers reluctant to make loans, increasing interest rates and a weak economy with slow job growth. In addition, young people are living at home longer due to student loan debt and poor job prospects. As a result, according to the Census Bureau, rental rates are climbing as families needing a place to live have few other options.

Having fallen from the peak of 69 percent reached in 2004, current home ownership has dropped to 65 percent, back to where it was in 1995. Robert Schiller, economics professor at Yale, thinks the rate will continue to fall further.

Home prices are increasing not because of demand by new buyers but because of investors seeing the opportunities in buying distressed properties and turning them into rentals. In some places in the country one out of every two home purchases are paid for in cash.

But something else is afoot: fewer citizens are buying into the notion that home ownership makes economic sense and is equivalent to a savings plan that can be turned into income in later years. As Emily Badger noted at The Atlantic Cities, “We have traditionally considered homeownership to be a sign of the health of the economy. But some of these people who would have been homeowners 10 years ago … have concluded that they would rather rent [today]…”

Some have no doubt been so badly mauled financially in the recession that they have few options. Others have long memories and remember the pain and suffering they endured as a result of deliberate government policies instituted to make homeownership possible to millions of unqualified buyers.

One of those with long memories is Henry Cisneros, a key player in developing the “National Homeownership Strategy” while he was Secretary of Housing and Urban Development (HUD) under Bill Clinton. Unanimously confirmed by the Senate, Cisneros took over at HUD in January, 1993 and by 1997 had boosted the US homeownership rate from 63.7 percent to 65.7 percent. Even after leaving office, his strategies continued blowing up the real estate bubble so that by the time Clinton left office in 2001 home ownership was at 67.5 percent on its way to peaking during the summer and fall of 2004.

In a remarkably candid and forthright article about Cisneros’ role in creating the real estate bubble, The New York Times told the story of a compassionate government bureaucrat with big dreams of providing home ownership to people who couldn’t afford them under current rules. So he changed the rules and invited bankers, realtors and homebuilders to participate in the party guaranteed by taxpayers. In 2008 as he contemplated the damage he had wrought while head of HUD, Cisneros claimed that his intentions were honorable, at least in the beginning, but that his plans to provide low-interest loans and much weaker underwriting requirements through Fannie Mae and Freddie Mac were hijacked by “unscrupulous participants – bankers, brokers, secondary market people. The country is paying for that, and families are hurt because we … did not draw line.” He expressed regret that his efforts had not only lured people into homes they couldn’t afford, but that his policies ultimately ejected them from those homes as a result. He said, “I’ve been waiting for someone to put all the blame on my doorstep.”

His strategy was to lower underwriting standards by allowing Fannie Mae and Freddie Mac to require less documentation and approve higher debt to income levels than normal. He reduced down payment requirements from 20 percent to 10 percent, and then to 5 percent, then down to 3 percent and ultimately to 0 percent. His strategy allowed these unqualified buyers to cover their closing costs with another loan, putting them into a home with truly nothing out of the own pockets. Lenders were happy with the new rules as the US taxpayer stood behind the loans bought by Fannie Mae and Freddie Mac.

Cisneros created a monster.

Once the ball got rolling, it was impossible to stop or even slow down. Said Cisneros:

You think you have a finely tuned instrument that you can use to say: Stop! We’re at 69 percent homeownership. We should go no further. There are people who should remain renters.

But you really are given a sledgehammer and an ax. They are blunt tools.

I’m not sure you can regulate when we’re talking about an entire nation of 300 million people and this behavior becomes viral.

Cisneros drank his own Kool-Aid. He joined with a major homebuilder to develop a housing project in San Antonio, Texas which made him wealthy but which turned sour during the collapse.

Those lessons are about to be learned again as there are new efforts to reflate the ownership bubble. Under the Dodd-Frank Act there’s something called the Qualified Mortgage Rule (QMR) which requires lenders to keep part of the loans they make in their own portfolios – they must have “skin in the game” to reduce the chances of another bubble. But more than 50 organizations tied to the real estate industry are advocating a softening of that rule, putting more government money into the market, with less risk to the lenders. One of those supporting such softening is Sarah Rosen Wartell, president of the Urban Institute, who sounds an awful lot like Cisneros:

I’m not suggesting indiscriminate access to home ownership, but there are many borrowers who are capable of demonstrating the capacity to pay…

[They include] those who had a job loss or foreclosure, in many cases through no fault of their own [and a result are] being shut out of a rising market.

Gary Thomas, the president of the National Association of Homebuilders, expressed his delight at the softening of the rules:

If what we’re heard about the [weakening of] the proposed QMR rule is true, the we are very pleased that the agencies are moving towards a broad definition that will benefit the American people by ensuring access to safe, affordable options for buying a home.

And then of course there’s the inevitable college professor who hasn’t learned from history, or from Cisneros. Christopher Mayer, professor of real estate at Columbia Business School, exulted:

Having a path that people can become a homeowner is an important path. And it’s really important for middle to lower-income folks who have a hard time saving…

At present efforts to reflate the real estate bubble through relaxing underwriting requirements and low-interest loans don’t appear to be working very well. But Washington has a mission where past experience and lessons and pain and hardship don’t matter. The Cisneros mentality remains alive and well in Foggy Bottom.

 

 

 

Slowing Economy Confirmed

The report from Automatic Data Processing (ADP) on Wednesday morning surprised economists once again by coming in substantially below their expectations. The 135,000 new private sector jobs created in May were way below the

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A very smart guy reviews Stockman’s massive new book

Whenever someone as smart as David Stockman (President Reagan’s Director of the Office of Management and Budget) writes a 768-page book (The Great Deformation), it makes me nervous, for two reasons: I don’t have the time to read 768 pages, but if I don’t I might miss something important. So I was gratified that

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3 percent down payment mortgages are back

You probably saw it on the news last night: Fannie Mae turned a profit last quarter, the first profit since the real estate bubble burst in 2007. Yahoo explains why:

Lenders are increasingly approving

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Does the Fed have a Plan B if inflation gets out of hand?

Two smart people from Cato don’t think so, and it makes them nervous. Henry Manne and Richard Rahn have a crystal ball but it’s cloudy. They stayed awake nights dreaming up scenarios that would trigger hyperinflation – a roaring escalation of prices at the retail level – and then ask

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More brain damage from Maxine

This girl’s in serious trouble. Maxine Waters (D-Calif.)  just attended a meeting with Fed chairman Ben Bernanke who gave her the inside scoop on the impact of the sequester and she was only too happy to tell us all about it:

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Some of Warren Buffett’s insights from his shareholders’ letter

Years ago I was invited to attend one of Berkshire Hathaway’s annual shareholder meetings with a friend who owned 100 “A” shares of the company. You can do the math.

It was an amazing meeting. Thousands of raving fans were there. They had every right to rave.

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Britain enters third recession in four years

You would think that politicians and central bankers would learn from their mistakes, wouldn’t you? They would learn that if something doesn’t work then try something else (or try doing nothing, instead!). But no, despite warnings from Moody’s (I wrote about their downgrade of Great Britain on Monday here), which is simply a rear-view mirror of what’s already happened and their very late recognition of their faltering economy, they continue to

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Many of the articles on Light from the Right first appeared on either The New American or the McAlvany Intelligence Advisor.