Most DB pension committees receive a quarterly performance report, and perhaps even a monthly performance snap shot, from their asset consultant or OCIO provider.  I would hazard a guess that the performance report begins with a view of the total fund’s performance versus a hybrid index that is based on the policy allocation of a variety of asset classes.  Should that be the first comparison they see?

We would suggest that the most important metric for any DB plan is how that plan’s asset base is performing versus the plan’s specific liabilities since it is the pension promise (benefit) that has to be funded.   Unfortunately, because most plans only get an annual snap shot through their plan’s actuary, this critical comparison is nearly impossible to create.

We would equate the lack of transparency on liabilities to trying to play a football game without knowing how many points your opponent has scored.  How does a plan sponsor adjust the fund’s asset allocation, which should be dynamic, if they don’t know whether or not they are winning the pension game?

Regrettably, plan sponsors continue to be handicapped by their lack of knowledge regarding the plan’s liabilities. This lack of focus on the most important element of their DB plan has contributed to the poor funded status of pension America.  With greater focus and clarity, we would suggest that most plans would have derisked in the late ’90s when a majority of plans were significantly over-funded.

It isn’t too late to start, but time is wasting!

In a recent KCS Fireside Chat article, we discussed cryptocurrencies (specifically Bitcoin), in which we raised concerns about the volatility in price being a possible deterrent that would likely keep these “currencies” from gaining greater mainstream use.  At the time of the article, bitcoins had declined in value from $3,018 to a little over $2,500.  Today, bitcoins are trading at just over $2,000 ($2,032) representing a 32.7% price decline since early June.  Bitcoin is not the only cryptocurrency falling in value, as the prices for most of the leading digital coins have fallen significantly in the last week.

According to a recent report by the St. Louis Federal Reserve, home ownership impacts racial groups differently, in terms of wealth creation. Both black and Latino families have greater wealth concentrated in their homes than do white and Asian families.  Roughly 42% of Latino and black family wealth is tied up in their homes versus white families (25%) or Asian families (32%).

Why is this an issue? The concentration of wealth in one’s house subjects these racial groups to greater risk should housing once again come under pressure. Furthermore, this concentration of wealth in housing has kept both black and Latino families from participating to a greater extent during the recovery.

As we’ve reported in recent posts, income growth has generally been non-existent since 1999, and the concentration of wealth among the top 0.1% versus the bottom 90% has been exacerbated by stock owenership and dividends. By having most of their wealth in housing, blacks and Latinos have little left to invest in equities, bonds, and alternatives.

Furthermore, inflation-adjusted home ownership equity appreciated by only 0.5% per annum for Latino families from 1989-2013, and actually declined -0.4% per year for black families during the same timeframe.  For white and Asian families home ownership equity grew 1.2% and 2.5%, respectively.  So, not only is wealth concentrated in their homes, but their homes have seen little to no inflation-adjusted growth, leading to a greater wealth divide.

I happened to see the following quote while watching the movie, “The Big Short”, and I thought that it was perfect for what is transpiring within DB pension plans.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

According to Alex Shephard, New Republic, Mark Twain never actually said this.  However, there is another quote that speaks to the same issue but is actually real.

“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”

That quote is credited to Leo Tolstoy, from 1897, and it appears in The Kingdom of God is Within You.

Both quotes resonated with me because the entire public and multi-employer pension industry have been sold on the concept that assets and liabilities have the same growth rate.  Given that “understanding”, naturally sponsors, consultants, and actuaries are singularly focused on achieving the return on asset assumption (ROA) to meet their funding needs.

Unfortunately, assets and liabilities don’t have the same growth rate, the ROA is not the holy grail, and DB pension plans will not survive unless a new course of action is taken.  However, as stated above, because everyone is “firmly persuaded that he knows already”, trying to change 40 years of pension orthodoxy has proven nearly impossible.

We, as a nation, cannot afford the social and economic cost of our failure to provide for adequate retirements, but that is certainly the path that we have taken.  I say it is long overdue that we choose the path less taken before it is too late.

It shouldn’t come as a surprise, but it still isn’t right that women save substantially less for retirement than men.  There are multiple factors, but the primary ones are unequal pay and time away from a paid job to raise children or to care for elders.  In fact, women also spend 65% more time doing unpaid work than men.

In an article, written by Amanda Eisenberg, she says that women on average make roughly 79 cents for every $1 earned by a male, and unfortunately, women of color make substantially less than that.  The lower wages and time away from the office impact not only retirement savings but social security wages, too.

Given that women tend to outlive men, this combination of lower retirement assets and smaller Social Security benefits is particularly onerous.  In fact, it is estimated that women over 65 years old have an annual median income that is about 42% less than men.  As a result, women tend to remain, if fortunate, in the workforce longer.

One proposal to help women would be for employers to offer guaranteed lifetime income options.  I’m skeptical of this suggestion, not because I don’t like lifetime income strategies, but because the ” income annuity” will be impacted by the same factors mentioned above.

As a husband and father of three daughters, I’d prefer that we pay women and men based on capability and not gender.  Furthermore, let’s figure out a way to compensate women for the considerable “free” work that they do.  Instead of giving them a big fat $0 in a quarter where they don’t “earn” wages that would factor into their Social Security credits/calculation, let’s actually credit them some sum of earnings for the incredibly important job of raising children and taking care of the elderly.

Saw an article this morning that floored me.  The gist of the story was related to a panel discussion on how to secure retirement options for younger employees.  The three suggestions included, work longer, cut benefits, and save more.  Well isn’t that just brilliant!  Why didn’t we, at KCS, think of those as being the way forward for our retirement industry? Shame on us!

Given that there are roughly 94+ million age-eligible workers on the sidelines (LPR of 62.7%), working longer may just not be available to the average employee.  With regard to benefits, the slashing of those has been taking place for a long time, as DB plans are replaced by glorified savings accounts (DC plans). In addition, the DOL is permitting “critical and declining” multi-employer DB plans to dramatically slash the benefits being received by those already retired.

Finally, why don’t we just ask everyone to save more? This should be really easy in this “robust” economic environment.  Here are two more data points to squash that assumption. First, the “bottom” 90% (based on wealth) in the U.S. have seen their share of the total pie fall from a high of 36% to today’s 23%, while at the same time the top 0.1% have seen their share grow to 22% from only 7% in 1977.

In addition, 91.2 million Americans are making less than $35,000, and the average wages for that quintile is only $14,600.  Last I looked, that is a level that would fall below the poverty line, and is certainly a lot less than what is needed to provide housing, food, education, transportation, healthcare, etc.  Where is the disposable income needed to save more?

Given the above information, it is now time that we do some real soul searching on what needs to be done to protect the masses because working longer, cutting benefits, and saving more is not what we need in this environment!

On April 7th, I wrote regarding my concerns about Italy’s banking system.  I had spoken the night before at Fordham’s Gabelli Graduate School and discussed my concerns. I feared that the terrible state of the banks could lead to the destabilization of the Eurozone and Euro, as a failure in Italy’s banking system would have a far greater impact than those problems posed by either Greece or Cyprus.

On Friday, Veneto Banca and Banca Popolare di Vicenza failed!  However, a little hocus-pocus by the Italian government is going to allow these banks to remain open. How? Well, they will be split into good and bad banks. What is the cost? It is currently estimated that it will take about $13.4 billion to rescue these entities.

The emergency action taken by Italy’s government may not be legal, and worse, this remediation is just another band-aid on a problem that needs a tourniquet.

According to an article on CNBC’s Personal Finance website roughly 57 million Americans have no savings.  However, according to Bankrate.com, we are supposed to cheer this news, as it is an improvement from last year.  I don’t know about you, but that stat doesn’t get me feeling any better about our economy or its prospects.

What I find most disconcerting is the fact that 32% of 53-62 year-olds haven’t saved anything. Zippo! This is the age group that should be finally able to sock away something for a rainy day, if not for retirement, and a whopping 32% have no savings.

It is not surprising then that another study by United Income would find that “older Americans have also become steadily more pessimistic about their economic prospects.”

Given the poor financial state that our consumer find themselves in, I can’t help but wonder where the consumption will come from that will drive our economy forward, given the fact that roughly 70% of U.S. GDP is driven by the consumer.  GDP growth of >3% seems to be a pipe dream these days.

As we’ve done in the past, we are pleased to have the opportunity to share with you another excellent research piece from Keith Jurow.

We’ve recently noticed that real estate related data has been coming in weaker, despite claims that the market it tight.  In fact, U.S. new-home construction declined for the third straight month in May, signaling a softening in home building.  As reported by the WSJ, housing starts dropped 5.5% in May from the prior month to a seasonally adjusted annual rate of 1.092 million.

Here is Keith’s article, and please don’t hesitate to check out his deep reservoir of research on his website at: http://www.keithjurow.com

“The Ugly Truth About Mortgage Delinquencies”

With the Mortgage Bankers Association’s (MBA) monthly report continuing to show a decline in the delinquency rate, pundits are more convinced than ever that the mortgage crisis is over.

Since I have written extensively about the growing delinquency problem in the New York City metro for more than six years, let me explain my skepticism and how the truth has been hidden from the public.

In 2009, the New York State legislature passed a statute compelling all mortgage servicers to send out a pre-foreclosure notice to all delinquent owner-occupants in the state. The notice warned them that they were in danger of foreclosure and explained how they could get help. Servicers were required to regularly send statistics back to the state’s Department of Financial Services for all notices sent out. The department published two reports in 2010 with a compilation of these numbers. That was the last time these statistics were officially reported. I strongly suspect that the numbers were a little too scary.

Undeterred, I was able to obtain the unpublished figures from the person in charge of compiling the pre-foreclosure notice filing statistics at the department. For six years, I have received quarterly updates from him and have published several articles using them. The actual numbers are mind-boggling and hard to believe. I speak to my contact regularly about them and I am convinced that they are complete and extremely accurate.

The latest update shows cumulative figures through the first quarter of 2017. It covers only the five counties of New York City as well as Nassau and Suffolk Counties on Long Island. Totals for the entire state are also included. Here is a brief summary of what the data reveals.

Since February 2010, mortgage servicers have sent out a cumulative total of 1,034,876 pre-foreclosure notices to delinquent owner-occupants in New York City and Long Island. That’s right – more than one million. This does not include delinquent investor-owners because that was not required under the 2009 law. Approximately 85% of these notices were for delinquent first liens and the remainder were for second liens.

Numerous phone conversations with my contact have made it clear that roughly 40% were second or third notices sent to the same property. These are not duplicate notices. The servicers have been sending repeat notices to owners who have not taken action to cure their delinquency for more than a year and have not yet been foreclosed.

This is confirmed by related figures published monthly in the Long Island Real Estate Report. For the last 18 months, nearly half of the formal notices of default filed in Suffolk County have been repeat notices. Why? In New York State, a default notice (known as a lis pendens) is only good for three years after which it expires. Hence lenders have had to file a new default notice for borrowers who have been delinquent for more than three years.

The Suffolk County statistics reveal how terrible the serious delinquency situation has become in the New York metro area. Although 297,000 cumulative pre-foreclosure notices have been sent to deadbeat borrowers in Suffolk County, less than 1,000 formal default notices have been filed each month on these properties since late 2009.

How is that possible? The answer is simple. Mortgage servicers have been compelled by statute to send out pre-foreclosure notices to all delinquent owner-occupants, but it is entirely up to the discretion of the mortgage servicer whether or not they file a formal default notice on the delinquent property to begin foreclosure proceedings. For almost seven years, the servicers have chosen not to foreclose.

Some of you may argue that these shocking pre-foreclosure notice numbers don’t reveal very much because many of these delinquencies must have been either (1) brought current by the borrower or (2) foreclosed by the servicing bank. That is a reasonable objection. But you would be wrong.

As for foreclosures, I have reliable figures from Property Shark that an average of only 1,548 properties were foreclosed annually in New York City between 2012 and 2016. From its 2015 State of New York City’s Housing and Neighborhoods Report, we learn from the well-respected Furman Center for Real Estate at New York University that an average of only 300 properties were foreclosed and re-possessed each year by the lenders annually from 2011 to 2014. This was in a city where more than 531,000 pre-foreclosure notices have been sent to deadbeats since early 2010. The Furman Center report also showed that an annual average of only 12,800 formal default notices were filed on delinquent NYC properties between 2011 and 2015.

What about the idea that many of these delinquent property owners have probably brought their loans current after receiving a pre-foreclosure notice? Remember what I explained earlier – roughly 40% of these pre-foreclosure notices are second or third notices sent to borrowers because they have not paid the arrears owed.

Furthermore, I published an article last November with figures from Fitch Ratings showing that 53% of all delinquent non-agency securitized loans in the entire state of New York had not made a payment for more than five years as of August 2016. New York City alone had roughly 225,000 of these non-agency loans outstanding. As of February 2016, 37% of them were seriously delinquent. That is the worst delinquency rate for any major metro in the nation. This percentage has climbed steadily for the last five years. The notion that many delinquent owners in the NYC metro have cured their delinquency just will not hold up.

Conclusion: Even if my analysis is rock solid, a legitimate question remains. Does it have implications for the delinquency situation of any other major metros? This is important.

No other metro in the nation has delinquency statistics as comprehensive and reliable as those for NYC. I would go so far as to assert that we are really in the dark when it comes to any of the other two dozen metros where the housing collapse was focused.

I would like to suggest two premises for you to think carefully about. One is that the delinquency statistics you read from the MBA’s monthly delinquency report are inaccurate, incomplete and quite useless. To rely on them in order to assess the state of mortgage markets is not a good idea.

My other premise is that the delinquency rate for most of the other major metros which had major housing collapses is much higher than you think. All data firms that claim to have solid delinquency figures are totally dependent on the numbers they obtain from mortgage servicers who are their clients. I have learned from seven years of digging deep for reliable data that numbers from the servicers are notoriously inaccurate, incomplete and often just made up.

If you dismiss these premises out of hand, you risk having your real estate portfolios decimated when the housing crash resumes.