Weak Dollar is Encouraging Strong Tourism

A weak dollar is contributing to record numbers of foreign and domestic tourists to New York City. 

Foreign tourism growth has been particularly pronounced.  In 2010, the big Apple attracted 39 million domestic visitors representing a growth rate of close to 20% since 2003.  Foreign visitors numbered 9.7 million, reflecting a  growth rate of more than 100% for the same time period (see graph below). 

(source: NYC/the official Guide)

A quick stroll to Rockefeller Center will yield a cacophony of foreign languages.  According to NYC/the Official Guide, the top 6 countries by visitor provenance are the UK, Canada, France, Brazil, Germany and Australia.

The promenade at Rockefeller Center

Interestingly, many of the stores lining the promenade at Rockefeller Plaza are of European origin.  L’Occitane specializes in soaps, lotions and perfumes from Provence, a region of south-eastern France.   I questioned one of the salespersons there whether one would be better off purchasing their products in France.  She responded that in her experience, their store is typically overwhelmed by European and Asian tourists, attributing the demand to the weakness in the dollar and the absence of value added taxes.  Across the way is Crabtree and Evelyn, another international perfume and soap store.  The sales help there had a similar narrative.  There was no shortage of European tourists.  A little further down, abutting the skating rink, is Lego, the Danish toy construction store.  Upon exiting, several shoppers  attested to the attractive prices relative to their home country.

A weak dollar does not only mean more foreign tourists.  It also means fewer American tourists are traveling abroad.  Events & Co. is a Paris based company specializing in high end, specialized tours catering to wealthy Americans.  Rachel Kaplan, the company president, notes that her business mix is more diversified.  “I now have more Australian clients, and more from emerging markets. Many Americans convert funds from dollars into euros and have sticker shock.”

So while the growth in foreign tourists is off the charts, domestic visitors, who may have otherwise ventured abroad,  are also arriving in record numbers, albeit at a slower rate.  This all translates to record levels of tourist spending.  Visitor expenditures in 2010 totaled $31.5 billion, doubling the level attained in 2001.

In the absence of a major currency reversal, New York can expect a continued influx of visitors, both domestically and from abroad.

Sizing Up the Foreclosure Problem

These signs are not going away

Here are some interesting numbers published by Amherst Securities that help provide some context to our national housing problem.

The total value of the US residential housing market is approximately $17 trillion.  Against this, there is outstanding approximately $9.5 trillion in first lien debt and another $900 billion in second lien debt.  The $9.5 trillion of first lien debt is backed by approximately 55 million loans implying an average  loan balance of roughly $172,000.

As of June 2011, first lien mortgages totaling $943 billion were classified as non-performing and another $653 billion as re-performing. A re-performing loan is a loan that had been seriously delinquent (more than 60 days) but has since resumed making payments (oftentimes, the borrower has been placed on a bankruptcy plan or, increasingly, the loan has been modified).  The balance of the $7.35 trillion are categorized as always performing.

Of the always performing loans, Amherst calculates that 5% of the total have mark to market loan to values (LTV)  greater than 120%.  In other words, if the borrower purchased a home for $120,000 5 years ago, it is now worth $100,000.  Another 10% have mark to market LTV’s  between 100% and 120%.  All these borrowers are effectively in a negative equity position.

Amherst  projects a conservative scenario that suggests that close to 9 million homes will be foreclosed upon over the coming years.  To get to that number, they assume 80% of non-performing, 50% of reperforming, 30% of performing loans with LTV’s greater than 120%, 15% of performing loans with LTV’s between 100 and 120% and 4% of the balance will ultimately result in a processed foreclosure.  The results of the math imply 8.7 million homes will ultimately be foreclosed.  Amherst cautions that their assumptions are actually conservative.  More realistic scenarios would suggest total foreclosures approaching 11 million homes.

The social and economic fallout from this crisis cannot be overstated.

Judicial vs. Non-Judicial

Home foreclosure practices in the United States vary by state.  The main defining characteristic is whether a state is referred to as a judicial or non-judicial state.  In a judicial state, the lender is required to initiate and process the foreclosure action through the court system.  In a non-judicial state, the lender still needs to notify all the interested parties but can effectively auction off the property  after the relevant default time period (usually 90 to 120 days).

Foreclosure timelines in judicial states can be significantly longer and may extend well beyond a year.  The largest judicial states are: New York, Florida, Pennsylvania, Illinois, Massachusetts and New Jersey.  To the extent banks have extended temporary foreclosure moratoriums, these have typically been in judicial states.

Foreclosure filings back on the upswing

Realtytrac, the foreclosure listing service, reported that, for the month of August, foreclosure filings increased month over month by 33%, to 78,880, suggesting that banks and mortgage servicers are once again looking to flush the backlog of foreclosed and repossessed properties hanging over the residential real estate market.  The numbers are still down relative to a year ago but the August rate represents a nine month high in terms of new foreclosure actions.

According to Laurie Goodman at Amherst Securities, a specialist in the residential mortgage securities space, more than 10mm of the 55mm outstanding mortgage loans are at risk of default in the years ahead.

Do you remember Petula Clark's "Downtown"?

Today, as part of a  class exercise, our group of five NYU journalism students wandered the streets of the financial district.  The format was that of a scavenger hunt where we identified various landmarks interactively via a smartphone.  This was both an opportunity for team building and to get acquainted with some of the Wall Street district's landmarks.  What could be more appropriate for the discipline of Business and Economic Reporting?

As part of our hunt, we ran into a wonderful group of middle-aged Italians from Tuscany taking pictures in front of the New York Stock Exchange.  We volunteered to take a picture for them so that the whole group could be captured in a photo.  As it turned out, they weren't exactly sure they were near the Exchange and one of the gentlemen asked me for the "Borsa".   I pointed out the lettering on the facade of the 11 Wall Street building and they could clearly see the words, "New York Stock Exchange".  Needless to say, they were thrilled.

Only two days after the tenth anniversary of 9/11, it was a great feeling to see how much pleasure tourists derive from our city.  We tend to take our city for granted but for the millions of tourists that come here, it can be a very special place.

Over the years, I've discovered that most things in life can be explained by an excerpt from a Seinfeld episode.  Our Wall Street Treasure Hunt experience was no exception.  Please see the link below.


P.S.  http://www.youtube.com/watch?v=fzUICBMQBNU

Refinancing America's Mortgages

One of the recommendations President Obama outlined in his speech to Congress this evening was the notion of facilitating homeowners' ability to refinance their mortgages.  With the significant decline in the term structure of US interest rates, conventional 30 year mortgage rates are currently averaging around 4.125%.  For a homeowner with a $300,000 mortgage and a current interest rate of 6%, refinancing at current rates would translate to a pre-tax monthly savings of approximately $250 or $3000 per annum. 

The problem for many of these homeowners is that they don't have sufficient equity in their home to pass the credit underwriting criteria to refinance their property.  A simple example: 6 years ago, Samantha Treesdale purchased a home for $360,000 with a down payment of $60,000 with the balance financed thru a 30 year fully amortizing mortgage with a 6% interest rate.  With the decline in real estate prices, the property is currently appraised at $280,000, a full $20,000 below her current mortgage balance.  Result: no bank will  make her the new loan for $300,000 on collateral valued at $280,000.

Fannie Mae, Freddie Mac and Ginnie Mae are the US government agencies that, between them, guarantee the payment on close to $5 trillion in mortgage balances.  The idea that is being floated is that, since, the credit risk of these borrowers is already effectively on government balance sheets, allowing these same borrowers to refinance even though they are upside down on their real estate equity does not change the lender's risk profile. That lender is ultimately you and me,  i.e. the US tax payer.  In fact, one could argue that by lowering the borrower's payment, he or she is more likely to stay in their home and not walk away from their home and add to the supply of distressed properties.

The proposal's appeal is that it would have a stimulative impact on the economy, effectively putting hundreds if not thousands of dollars back in consumer pockets and would have no direct impact on the federal budget.  It would also improve the creditworthiness of many borrowers since with a lower payment, their debt to income ratios would decline.

This sounds like a complete win/win but unfortunately, there are some losers.  The main losers in this equation are the current investors holding these mortgage securities who will effectively see their investment returns decline.  A refinanced mortgage translates into a prepayment to the lender who then has to redeploy his capital at lower rates.  Additionally, one could argue that an arbitrary government intervention into one of the world's largest capital markets will anger investors who in turn will demand a higher return to compensate them for unpredictable government intervention in the mortgage market.  Over the long run, so the argument goes, mortgage rates to all borrowers will rise.  Finally, only borrowers whose mortgages are guaranteed by one of the US agencies could take advantage of this program.  Borrowers whose mortgage did not originally qualify for agency securitization would not have these refinancing options.


The proposal to streamline refinancing for agency guaranteed mortgages is not without winners and losers.  That said, at a time of growing concerns of a double-dip recession and where policy makers have a limited set of stimulative tools to address the nation's economic problems, the arguments for streamlined agency mortgage refinancing are arguably compelling.