JP Morgan's Fraud Contributed Excessive Credit to the U.S. Bubble

E-Mails Imply JPMorgan Knew Some Mortgage Deals Were Bad

Rather than disclosing the full extent of problems like fraudulent home appraisals and overextended borrowers, the bank adjusted the critical reviews, according to documents filed early Tuesday in federal court in Manhattan. As a result, the mortgages, which JPMorgan bundled into complex securities, appeared healthier, making the deals more appealing to investors.

The trove of internal e-mails and employee interviews, filed as part of a lawsuit by one of the investors in the securities, offers a fresh glimpse into Wall Street’s mortgage machine, which churned out billions of dollars of securities that later imploded. The documents reveal that JPMorgan, as well as two firms the bank acquired during the credit crisis, Washington Mutual and Bear Stearns, flouted quality controls and ignored problems, sometimes hiding them entirely, in a quest for profit.

In an initiative called Project Scarlett, Washington Mutual slashed its due diligence staff by 25 percent as part of an effort to bolster profit. Such steps “tore the heart out” of quality controls, according to a November 2007 e-mail from a Washington Mutual executive. Executives who pushed back endured “harassment” when they tried to “keep our discipline and controls in place,” the e-mail said.

Even when flaws were flagged, JPMorgan and the other firms sometimes overlooked the warnings.

China's Phoenix Island Real Estate Market has Imploded

China’s riskiest property market just collapsed. Is this how it starts?

In some ways (but not all), China is even more exposed to the dangers of a real estate collapse than America was. Washington Post business reporter Jia Lynn Yang pointed out last fall that urban housing stock constituted 41 percent of Chinese household wealth of 2011. The number was 26 percent in the U.S. In other words, Chinese families tend to invest almost twice as much of their money in urban real estate than do American families. So, if you thought Americans were hit hard when that real estate suddenly lost value, it could be even worse for Chinese, who also tend to put much more of their earnings into long-term investments than do Americans. That said, it would also take a bigger drop in prices for the market to collapse, as Chinese buyers tend to put down larger down payments.

And here’s the really scary number: 13 percent of Chinese GDP in 2011 came from real estate investment. 13 percent! If that investment stalls abruptly, as it did in Phoenix Island, the rest of the Chinese economy could follow. That could cause political instability in China and, much more certainly, would set back the global economy.

“As long as the money supply keeps expanding aggressively (15%+ per year), and people (absent alternatives) are willing to plow that money into real estate and hold it, this [real estate market] can persist for some time,” Chovanec explains in an e-mail. “But when the flow of new money slows — either because of the need to rein in inflation, including housing inflation, or the need to roll over and refinance bad debt (often at rising rates of interest) — the whole thing begins to unravel.”

More on Phoenix Island Collapse

Chinese manufacturers once snapped up its luxury apartments, but with profits falling as a result of the global downturn many owners need to offload properties urgently and raise cash to repay business loans, estate agents said.

Now apartments on Phoenix Island which reached the dizzying heights of 150,000 yuan per square metre ($2,200 per square foot) in 2010 are on offer for just 70,000 yuan, said Sun Zhe, a local estate agent.

"China had a lending boom... and so if people are using property as a place to stash their cash, they had more cash to stash," said Patrick Chanovec, a professor at Beijing's Tsinghua university.

"At some point they want to get their money out, then you find out if there are really people who are willing to pay those high prices."

Surprise, it's only worth what someone can pay for it.

Current house price correction in Canada has couple more years to run

The correction currently underway will persist for next couple of years. More adjustment to come in home prices: Carney

“Real wealth is built through innovation, and it’s gained through hard work,” Mr. Carney explained in an interview taped before this weekend’s G20 finance ministers and central bankers meeting in Moscow. “It’s not through some magical asset inflation.”

Mr. Carney said the pace of debt accumulation has slowed to about 3 per cent a year from 10 per cent.

Mr. Carney rejected the suggestion that he may be remembered as Canada’s Alan Greenspan – the former U.S. Federal Reserve Bank chief who many critics blame for inflating the housing bubble in that country – if there’s a housing crash.

“I’m coming back, so I’ll take responsibility if, if, well, that’s not going to happen,” he said. “I’m also coming back, so I’m here to face the consequences, ultimately.”

Sure you will. We look forward to it.

IMF: Canadian Housing 10% overvalued, Currency 5-15% overvalued

IMF warns that Canadian houses are 10% overvalued on average with high variation by area. Also the currency is overvalued. IMF says Canada housing overvalued, urges more action if needed

The International Monetary Fund, in its annual report on Canada, also said the country's currency was between 5 and 15 percent higher than warranted by long-term economic fundamentals, lifted in part by commodity prices and the country's safe-haven status for investors.

Like Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty, the IMF worries that highly indebted Canadians make the country more vulnerable to an external shock that could lead to job losses and bankruptcies.

Hat tip: vangirl at vancouvercondo.info

Toronto Condos Skewing National Data

CMHC Preliminary Housing Start Data Graph of Absorption of Condo units.

The absorption rate has yet to be impacted, and if there are enough wealthy foreigners, perhaps it won't ever be, but the market has yet to be tested. This is quite a bubble of inventory coming in the pipeline, starting to build at around 17 months ago. Assuming 18-22 months is the shortest time from breaking ground to delivery, we have a few more months before people are going to have to get full financing or do a re-assignment, or bail, depending up on their circumstances. 

Netherlands House Prices down 6.3% for 2012

From Statistics Netherlands

House prices more than 6 percent down from twelve months previously

Prices of existing owner-occupied dwellings sold in December 2012 were on average 6.3 percent lower than in December 2011. The price drop relative to one year previously is again less substantial than in the preceding month. On average, house prices were 5.9 percent lower in 2012 than in 2011. 

Global Property Guide Netherlands

Mortgage market liberalization has also brought new competition. Since 1995, 90% of new mortgages have been not repayable till loan maturity, while 30% do not have to be repaid at all (“interest-only”).

Charts from Global Property Guide