Boom, Bust And Recrimination
Some housing bubble news from Wall Street and Washington. Associated Press, “Mortgage defaults are slamming the savings and loan industry. Troubled assets, loans that are 90 or more days past due, jumped to $14.2 billion last quarter, up from $9.2 billion in the same quarter last year, the Office of Thrift Supervision said. And troubled assets rose to 0.95 percent of total assets in the quarter, up from 0.62 percent in the second quarter of 2006.”
“The numbers are particularly attention-getting considering that thrifts, which take in savings deposits and make mortgage loans, are not big players in the subprime mortgage sector of loans made to borrowers with riskier credit.”
“Capital One Financial Corp. said Monday that it will cut 1,900 jobs and shutter its wholesale mortgage banking business. The McLean, Va.-based company will close 31 GreenPoint locations in 19 states and ‘cease residential mortgage origination’ effective immediately.”
“‘Over the past few months, we have experienced an unprecedented disruption in the secondary mortgage markets,’ Capital One’s CEO Richard D. Fairbank wrote in an internal memo to employees.”
“GreenPoint, based in Novato, Calif., specializes in no-documentation and ‘Alternative A’ mortgage loans. The decision to close GreenPoint will hit the company with an $860 million charge.”
The San Francisco Chronicle. “Headlands Mortgage was founded by Larkspur’s Peter Paul in 1986. Paul took the company public in 1998 and it merged with GreenPoint in 1999. Paul is considered by some to be the father of the mortgage market that serves the gap between prime and subprime.”
“‘These are strange times,’ Paul told The Chronicle. ‘In the last month there’s been a major change in liquidity for mortgages.’”
From Reuters. “Struggling subprime mortgage lender Accredited Home Lenders Holding Co on Tuesday said it agreed to sell $1 billion of home loans to an unnamed investor, a move it said would limit its exposure to margin calls.”
“‘If the market improves to a rational level, our intention is to repurchase these quality loans by mid-November and sell or securitize them,’ CEO James Konrath said.”
“Washington-based private-equity firm Carlyle Group has been forced to lend money to Carlyle Capital Corp. Ltd., a highly leveraged fund listed in Amsterdam that invests in residential mortgage-backed securities, to meet margin calls.”
“In a statement Tuesday, Carlyle Capital said Carlyle Group has extended a $100 million one-year loan to help it fund itself, and that it has already tapped the loan for $10 million.”
“The move underscores how sharp drops in the market value of asset-backed securities have raised financing costs for funds and institutions using these kinds of securities as collateral.”
“Carlyle Capital CEO John Stomber in a statement said the fair value of these assets has declined, ‘due to diminished demand for these securities in the market.’”
“At its listing, the company said it would set aside a liquidity cushion of around 20 percent, or about $176 million, ‘to meet reasonably foreseeable margin calls.’”
From Bloomberg. “Dexia SA, which owns U.S. bond insurer Financial Security Assurance Holdings Ltd., (saw) shares fall after CEO Axel Miller said he expects ‘months of uncertainty’ in the markets as the U.S. subprime loans debacle hurts more financial companies. ‘There is a lack of knowledge about who is exposed and for how much,’ Miller said in an interview today.”
“‘There’s a crisis of confidence, notably among financials,’ said Franck Hennin, a fund manager at Richelieu Finance in Paris, which oversees $5 billion in assets. ‘We’re having trouble estimating the damage for financial companies.’”
“Marsh Inc. the world’s largest insurance broker and risk adviser, on Monday warned financial institutions they may face more claims as a result of the subprime mortgage crisis.”
“Marsh said in a statement that insurers, banks and rating agencies could face greater liability claims under directors and officers and errors and omissions policies.”
“‘Although this market has been largely stable, if there are a high number of costly claims, the trend may reverse and costs rise,’ said Siobhan O’Brien, a senior VP of Marsh.”
“Countrywide Financial Corp., the largest U.S. mortgage lender, has already seen several lawsuits. Attorneys in the insurance industry agreed with the Marsh study. ‘This is a big deal,’ said James Wood, co-chair of the insurance practice at LeBoeuf, Lamb, Greene & MacRae in San Francisco. ‘We expect this to grow in terms of litigation.’”
From CNN Money. “Job cuts have begun at Bear Stearns and that could mark the start of a broader wave of layoffs across Wall Street as firms survey the damage caused by the recent downturn in financial markets. Some 240 employees at a Bear Stearns lending unit were laid off Wednesday, according to a company spokesperson.”
“Alan Johnson, managing director of a New York compensation consulting firm, expects layoffs in the mortgage and structured products divisions of the big banks before the end of the year.”
“Instead of splurging on Ferraris and fine art, Wall Street professionals may want to start saving. Johnson expects bonuses to start falling, by as much as 10 to 15 percent, in 2008, although others say it’s still too early to forecast a downturn.”
“‘A lot of the problems in subprime and mortgages, most of that is not going to show up until next year,’ said. That’s also when financial losses from loan-related write offs will start to pressure firm wide compensation at the brokerages.”
“The credit crunch triggered by a rout in the U.S. subprime housing market doesn’t pose a ’systemic’ threat to banks, Moody’s Investors Service said.”
“The Moody’s statement comes as it, Standard & Poor’s and Fitch Ratings come under criticism from fund managers and politicians who say the companies failed to provide timely warnings to investors about problems in the subprime market.”
“The credit assessors must ’shoulder some responsibility’ for the subprime debacle, Senator Richard Shelby said this week. Credit-rating companies face congressional scrutiny for an ‘inherent conflict’ in helping construct loan-backed securities, then issuing ratings on them, Shelby said.”
“Global financial markets and the world economy are at ‘panic stations,’ HSBC Holdings Plc, Europe’s biggest bank by market value, said in a report published yesterday.”
“‘Should the panic exhibited over the last few days turn into revulsion, the markets may never be the same again,’ wrote HSBC economist Stephen King and strategist Richard Cookson. ‘The implied liquidity drain might leave the financial system, and the broader economy, more vulnerable than we currently believe.’”
“Moody’s said the banking system may be more dependent on ‘episodic liquidity assistance’ from central banks than originally thought.”
The Denver Post. “Federal Reserve Chairman Ben Bernanke repeatedly told us our subprime woes would not spill into the broader U.S. economy. Now, the Fed is sandbagging the levee.”
“So why is the Federal Reserve so busy managing our economy? Or is it simply bailing out a bunch of high rollers who made bad bets on subprime loans? So what if Bear Stearns, Goldman Sachs and some of the biggest investors in the world are reeling from their own stupidity?”
“Who cares if Countrywide and other major mortgage lenders go belly up because of their risky lending practices? And if you can’t pay your mortgage or get a new one - well, geez, didn’t you ever play Monopoly as a kid?”
“I’m not sure he’s right, but I like what Richard X. Bove, a Florida-based analyst with New York investment-banking firm Punk, Ziegel & Co., had to say.”
“In a report cited by Bloomberg News, Bove opines that the Fed’s move may prevent a 1987-style stock-market crash, but it may also start a 1973-style recession. ‘I believe that the Fed acted precipitously to protect monied interests and bad business policies,’ he wrote. ‘It may have certified rather than prevented a recession.’”
“Earlier this year, a Wisconsin couple won a judgment against Chevy Chase Bank that said the bank deceived them over the terms of their mortgage. The judge ordered Chevy Chase to rescind the loan and certified the lawsuit as class-action, which could potentially release thousands of other borrowers who felt misled.”
“Chevy Chase is appealing the judgment, and did not respond for comment for this article.”
“‘It’s a three-part business cycle now,’ said Don Lampe, a partner with the law firm Womble Carlyle, whose specialty is mortgage matters. ‘Boom, bust and recrimination. We’re moving into the recrimination phase.’”
“‘Most claims will be against mortgage brokers for putting them into loans where they shouldn’t have been,’ said Dan Mulligan, a California-based real estate attorney.”
“Aside from bad advice, out-and-out lying also seems to have added to the mess. Borrowers often exaggerated income in order to qualify for larger loans. ‘We’re running into stated-income loans where brokers got borrowers to sign blank forms that the brokers filled in; they often did not accurately reflect the borrowers’ incomes,’ said Michael Seng, a professor with the John Marshall School of Law.”
“Richard Hagar, a veteran real estate appraiser and expert witness, also blames appraisers. According to him, many of them puffed up home values to make deals work. ‘We saw some really Mickey-Mouse things,’ he said, ‘A $200,000 house would come in at $300,000. When appraisers puff up values, they can be sued; I heartily recommend it.’”
Could investing in Forclosure Managment Companies be a good bet. Anyone know of any companies that are traded that specialize in foreclosure? Any other industries that do well during a bad economy such as Cash America Pawn?
Thanks
Forensic firms (specializing in building structures or data recovery) will do quite well for the foreseeable future….
A friend of mine noted PRAA and CCRT as two companies that specialize in recovering bad debts. I haven’t done any research on them, but if they are good at what they do, they may be able to really take advantage of any potential overreactions in the market.
However, to my understanding, their success will be based on their ability to collect $ from these poor credit accounts, which may be difficult in any event. They had better be really good at selecting which accounts to pursue, otherwise, they are going to be trying to squeeze water from rocks over the next several years.
CCRT is very good at what they do, but their main business is issueing fee based credit cards (to people who have exceedingly bad credit) rather than debt recovery.
People with bad credit? Where would one find such people?
Front steps of the bankruptcy court generally.
A friend of mine does have shares in PRAA and ASFI in hopes of benefiting from the bad debts resulting from financial distress of the housing bubble.
PRAA and ASFI had a problem in that the margins of the business were good, and the barriers to entry are not great. So, over the last 1-3 years or so, competition was driving down the margins of the baskets of bad debts that they would purchase.
However, by his reckoning, there will be an explosion of collectible debt, and he thinks the quality of the debt will be better than average as you’ll have people pushed into this problem mainly because of housing (as opposed to a few years ago where you’d have a higher % of true deadbeats) and the tightened bankruptcy laws combined with their higher quality would relieve the competitive pressures.
What he didn’t figure was that the credit crunch could impair ASFI and PRAA’s ability to get funding for the debt purchases. And the accounting for these types of companies can be sketchy sometimes about the allowance for truly bad debts. ASFI and PRAA have been roughed up with the recent market downturn.
But he still thinks so long as the books aren’t cooked, that they have the scale to continue to buy these baskets and convert on them.
We’ll see.
Any collection agency worth their salt has complex scoring algorithms that take into account debtor demographics, debt types and age, probability of collecting, etc. Add to that the benefits of utilizing offshore resources and the technology that allows it. Good debt collectors understand the credit expansion and contraction cycles and prepare accordingly.
Iron Mountain should benefit….they store a lot of mortgage records.
And thus, the “everybody sues everyone about everything” phase begins.
If only law firms were publicly traded…
That was my thought.
“‘These are strange times,’ Paul told The Chronicle. ‘In the last month there’s been a major change in liquidity for mortgages.’”
http://www.youtube.com/watch?v=CE5jlskSVtA
Peter Paul minus Mary and NINJA the magic dragon, indeed, these
are strange times.
He shoulda stuck to making Mounds and Almond Joys.
http://money.cnn.com/2007/08/21/news/newsmakers/dodd.reut/index.htm?postversion=2007082111
Senator Dodd now wants Fannie and Freddie to increase their caps…
oh well! he is trying again.
Please somebody sent him again some “nice” e-mails and letters
People are so clueless about money issues. I was listening to NPR yesterday, and the story was about Bernanke and his expert knowledge concerning the depression. The piece claimed a lesson learned was that the solution to credit problems was to inject liquidity into the markets .
Hey what are the negative consequences newsboy??? Inflation on the middle class.
Was that brought up in the news piece on NPR. NO.
dude - what about inflation on the poor class?
When it comes to the housing bubble, we only have bad choices. Would you rather have the Fed cut rates aggressively and touch off inflation (bad) or standby as house prices drop nationally by 30% (depression)? The Fed won’t wait long to cut rates as housing rolls over. I’m not saying this is fair for the responsible among us, but we’re all in a terrible mess brought on by stupid lending, fraud and excess liquidity. If the Fed does nothing, we’ll get a depression. And nobody wants a depression; not even us renters.
There will be some better deals out there for buyers in the next 18 months with forced sellers dumping property. Combine that with lower interest rates and you’ll find that affordability starts to improve meaningfully.
There is also a third choice: cut the fund rate while increasing oversight/regulation of the whole mortgage business. No more liar loans, no more option ARMs, 20% down, 2.5 times yearly income, etc. Without this, the rate cuts are just refilling the punchbowl.
Actually I think it’s better to see houses prices drop 30% (or more in some areas) for the long run. It will be a temporary depression or recession and then we are done with it. Unless companies are willing to increase salaries by 30% for the regular folks the housing prices haircut is the best long term solution.
“Would you rather have the Fed cut rates aggressively and touch off inflation (bad) or standby as house prices drop nationally by 30% (depression)? ”
Ummm, I’m in San Diego and prices need to drop from July ‘05 highs at least 40% just to be in line with incomes. So maybe you’re thinking 70% losses in SD, but 30% won’t even get us back to fundamentals.
And maybe a return to the mean will cause a depression although I personally doubt it. But regardless, a credit correction is necessary to get rid of this insane overspending and entitlement mentality and I prefer a Depression with the same lessons learned in the last one, to the increasing debt slavery of the average person convinced they need whatever Madison Avenue is selling to make them “happy!”
We have two bad choices: inflation or a depression. The Fed won’t stand by as a big national drop in house prices sends the economy into a depression even if it results in higher inflation (inflation is certainly a bad outcome but better than a depression).
This may not be fair to the responsible among us who resisted dumb mortgages, buying at high prices, extracting equity, etc., but nobody wants a depression, not even us renters.
sorry for the repeat…i thought my first comment hadn’t posted.
I don’t really care about depressions or recessions. I’ve got nothing but old-fashioned cash savings and a few CD’s. Cash is king. I determined that years ago when I figured this monkey business was ultimately going to meet an untimely demise.
Everyone in this country wants money for nothing: Investing in stocks, retirement funds… houses.. The whole gamut when in reality, perhaps a depression would teach people to do what their grandparents did: sock away your nickles and dimes, and when you have enough saved up, then you buy what you want with what you can afford.
Depression? I don’t see that as a necessarily bad thing for someone like myself.
Except when cash becomes worthless with all that inflation.
“perhaps a depression would teach people to do what their grandparents did: sock away your nickles and dimes, and when you have enough saved up, then you buy what you want with what you can afford.”
“Depression? I don’t see that as a necessarily bad thing for someone like myself. ”
Unlike many of us here, you must not have any close relatives with tales of the Great Depression. There are two time tested ‘graceful’ exits from Depression- World War and New Deal/Populism. For the not so graceful exit, think Weimar Republic. (Also, money tastes lousy, doesn’t put off much heat when it burns and makes poor bandages)
“But earlier Tuesday, Paulson repeated the administration’s view that Congress must pass a law reforming both government-sponsored enterprises before lifting those caps.”
Amen
Dodd, Bernanke & Poulson had a meeting. They all came out spouting somewhat different information.
I don’t know about you but Dodd scares the hell out of me. Every time he talks you can hear Thomas Jefferson roll over in his grave.
“Allowing Fannie and Freddie to expand their mortgage portfolios would help stabilize housing markets, Dodd said, adding that it could be done by regulatory order without legislation.”
Regulatory order!!!??? Dodd sleezy sob…if his party (is he a dem or a rep) wins the 2008 election be ready for regulatory orders!! are we living in a dictatorship or what?
I for one don’t expect much to come out of Dodd’s proposals. He needs to create the illusion of doing something in the hopes of getting the nomination for President.
Getting this stuff implemented now will cause things to blow up in his face BEFORE the 2008 elections.
Dodd needs to give us all [false] hope in housing salvation but put off any action for the next 15 months.
I’ve always thought the best way to achieve energy independence would be to open the tombs of various Founding Fathers and hook their dead feet to generators.
Some of them are achieving some serious RPMs in their graves lately.
” Senate Banking chairman says Fed chief Bernanke pledged to ‘absolutely’ do everything possible to stabilize financial markets.”
Why, oh why, can’t we just let the markets be the markets, without all of this interference?? Grrr.
In the same vane as ‘affordable housing’ really making housing more expensive, ’stabilizing financial markets’ will continue to destabilize markets.
Ben Bernanke is like a school teacher who fell asleep in a classroom full of unruly students all of whom were shooting themselves with high grade heroin. He then wakes up and what does he do? He gives them more of the same stuff so that they don’t go cold turkey and smash up the whole school. Brilliant. Simply Brilliant.
Bernanke hasn’t done any such thing yet.
His 50bp move is meaningless. It means that if a bank is in trouble (Countrywide), they can borrow from them at only 50bps more than their target rate, not 100bps. I ready that the amount of borrowings on those funds amounted to about $300M last Wednesday before their rate cut on Friday. $300M is nothing.
It was a confidence move only. Nothing of real impact. Check out Mish’s blog today, I got the $300M number from the article he cites. The author there actually believes that the fed has reduced money supply in the past week or so…
I am a bit puzzled about which discount rate was dropped to 4.5%- which discount rate just got lowered? Did they drop the secondary discount rate (which is now 6.25%)- I can’t imagine Countrywide Bank would be eligible for primary rate.
http://www.frbdiscountwindow.org/index.cfm
Hmmm, the decision the other day (Aug. 17) included a decision to extend primary loans from overnight to 30 days. Perhaps the primary rate is being used for borrowers such as Countrywide. Curious.
Also, for those who are interested in the discount margins applied to MBSs used as collateral, the following table shows the discount (pdf warning):
http://www.frbdiscountwindow.org/discountmargins.pdf
When will we drop the “sub-prime” from the “sub-prime mortgage crisis” and call it what it is - a mortgage crisis. I have noticed some of the talking heads no longer use the word sub-prime and just refer to it as a mortgage crisis, which is what it is. GreenPoint was Alt-A king in these parts, and look where that got them. Yes, this is a mortgage crisis.
That is skipping over the question of a housing bubble. I realize it makes the PTB nervous, as it brings up many questions. IMO, there wouldn’t be a ‘credit crunch’ or a mortgage crisis had home prices stayed within historic norms. And if we never address the bubble itself, nothing will be fixed.
Exactly. What happened is an affordability crisis is abating. Bad for older sellers and HELOCers, but good for young buyers. Can’t the goverment give younger generartions a break?
But cheap money is what caused this bubble to be created. it was a catch 22. Rising home prices = less risk supposedly which = cheap credit. Cheap credit in turn = rising house prices.
We can safely assume the inverse is true.
Tightening credit = falling house prices
Rising foreclosures = falling house prices
Falling house price = Tightening Credit
Rising foreclosures = Tightening Credit
Tightening Credit = Rising foreclosures because people are unable to refinance to keep the ponzi scheme going.
What does all this mean? There is no way subprime could be contained. We are f**ked.
http://money.cnn.com/2007/08/20/real_estate/July_foreclosures_soar/index.htm
How does “Mortgage Meltdown” sound?
When does the lack of credit contagion spread to rank and file credit card users, each with an average debt of $9,000… that never goes down?
You stop credit cards, you stop America
What about people like Mean Ole Arizona Slim? I have a credit card (that’s right — just one) and I pay its balance down to zero every month.
I guess that from a credit card company’s standpoint, I’m just no fun.
No, you’re just a business model anomoly. People like you and me (anti-consumer, anti-American, anti-apple pie in the sky financial realists) are not only no fun we’re no profit.
That is right turnoutthelights. The system is predicated on the fact if you do not want to go into debt, consume and spend money, it would prefer you dead since you are eventually going to cost them pension and health benefits….i.e. cost the powers that be $$$. Your just a consuming debt object to them.
A man just wanting to live his life unemcumbered by the early 21st century craven consumerism is a great threat to the system.
Quit buying.
Quit borrowing.
Quit consuming into other institutions dreams and subterfuges.
And to think that I’m just living the way my parents raised me.
Supposedly half of Americans pay their balance every month. Much higher than I expected.
That may be true, but easily available credit is often makes it much easier for people (who don’t have strict self-discipline) to spend more than they would if they had NO access to credit at all.
I was.
Then I got married.
Then my wife decided financial suicide was a good idea.
Now, I’m digging out from under 12G in CC debt. Should be done by next June.
I had a wife who did exactly the same. She is no longer my wife. It took me 2 years after the divorce to dig my way out of the debt. The last few years I have been living debt-free, built up some small but liquid net-worth, and have had absolute peace of mind.
It is a horrible feeling being married to a debt machine, who will try hard to put you in even more debt (via alimony, child-suppor etc) should you try to divorce her. Luckily we had no kids, and I had a good lawyer.
Never again!
Luckily we had no kids…
You have had your financial azz handed to you by the Mazzholeland divorce court system if you did.
I went out on an i-net date with a 50YO woman, who said she’s been astounded at the number of men in their late 40’s and 50’s who live in apartments.
I’m sure all these dudes would agree with your “Never Again”.
Hey probably know some of those dudes!
How many of those “paid off” cards are zero balance anyways? I know I have a couple cards that haven’t been used in years, but I keep them open just for the credit limit to be included on the credit reports. Would all of those out there be included in that number?
Exactly. I have 8 lines of credit open. Only one I ever use (Wachovia CC) and it gets paid off each month. People like me must mess up the data.
That’s because most journalists don’t understand statistics so they don’t ask the right questions. Median and mean are always pretty wide when you have a power distribution.
CC debt:
http://www.creditslips.org/creditslips/2007/08/pulliam-weston-.html
I was, until I decided to finish my English degree. Unfortunately, the better job I envisioned never materialized. I ended up taking on more debt to go back to school for a 3rd time. I’m graduating from nursing school in May.
“What about people like Mean Ole Arizona Slim? I have a credit card (that’s right — just one) and I pay its balance down to zero every month.”
You deadbeat!!!
When does the lack of credit contagion spread to rank and file credit card users, each with an average debt of $9,000… that never goes down?
hehehe…I’m getting to play the interest re-set game even without a mortgage!
Just received notice Capital 1 will be jacking my purchase rate from 7.99% to 15.6% on Oct. 1st.
And this is with a 740 credit score.
Adios, MF!
I’ve been quoting the 9K cc debt figure and I don’t think that that’s the whole story. Check out
http://www.creditslips.org/creditslips/2007/08/pulliam-weston-.html
posted above.
They are going to be sorry for these junk rated statements. Don’t they have a PR department. Rubbing everybody’s face in sh!t and saying everything is going to be all right. That’s just stupid at this juncture. These statements are going to make a lot of important people upset, very, very, upset.
“The credit crunch triggered by a rout in the U.S. subprime housing market doesn’t pose a “systemic” threat to banks, Moody’s Investors Service said.”
all is well
subprime contained
global growth
low inflation
low interest rates
ready for the pain?
Bagdad Ben
Bagdad Ben
Like it was inferred in the article, if these idiot ratings companies are incapable of rating mortgage debt properly why should they be asked for their “expert” advice on the effects of MBS failures ?
This all starting to sound very 1984-lke. In truth, serious and crushing inflation is only a bad Fed move away. The billions (combined trillion+)of deflating dollars held by China and Japan will make their appearance either through Asian wage inflation, Asian export inflation or overseas purchases.
CALL Senator Dodd and tell him what you think of his new Fannie Mae bail out proposal:
202-224-2823.
Does Fannie need to be bailed out? I thought the proposal was to raise the loan amounts made available?
Sorry for the confusion, that’s what I meant. Not a bailout of Fannie Mae, but a Fannie Mae bailout of the lenders, to be followed 2+ years out by a taxpayer bailout of FNMA.
I called, details on another thread. But I will re-iterate. EVERY ONE OF US SHOULD CALL!!!!!
I just called and left a message voicing my STRONG DISAPPROVAL of his plan.
can you explain why raising the cap would be a problem? i’m not arguing… i’m just not sure i understand. thx.
My understanding is that Fannie and Freddie have pretty tight underwriting criteria. If that’s the case, then increasing the limit would serve only to expand Fannie and Freddie, but wouldn’t help the current problems.
So is the objection to increasing the overall size of the agencies or to increasing the $417,000 cap on individual loans.
Or would those two have to go hand-in-hand?
And how is this seen as a bailout for FBs/or the real estate industry?
At most it seems to me irrelevant. But i’m sure i am missing something. Lifting the ceiling on conforming loans would ease the downward pressure in some localities like the bay area (my home) but wouldn’t touch most of the country.
expanding the overall size of the agencies… i’m foggy on what that would do.
agencies?
FNMA is a corporation.. it’s the ninth largest business entity in the world..
It basically makes money by charging a guarantee fee on loans that they bundle up and sell to investors as MBSs.. but there’s no longer any govt backing their so called “guarantee”.. hasn’t been one since the late ’60s i believe, when FNMA went private..
sorry… had to follow with this quote:
http://www.smartmoney.com/bn/ON/index.cfm?story=ON-20070820-000345-1309
“We have…pending legislation that would really help the Federal Housing Administration here provide additional avenues for people to get cheaper, more reasonable, safer credit to move into homeownership without having to rely on subprime borrowing,”
umm, it’s the borrower that makes the loan sub-prime, not the lender. talk like that wouldn’t make me confident to buy agency securities.
If the loans they’d be buying are so great, why isn’t there a demand for them in the truly private sector?
There’s nothing special about the loans they will buy.. but theres a reason people will likely buy them.
They have a huge advantage when marketing these loans.. FNMA might sucessfully sell MBS that nobody in their right mind would touch if coming from any other lender.
First and foremost, imo, is they are considered by soooo many people as having govt backing.. as if the govt is guaranteeing these lonas like they do Treasuries. (Keeping the old name “Federal National Mortgage Association” after they disconnected from the govt. doesn’t serve to correct the misconception..) This alone makes sales much easier.
Another advantage is FNMA can sell MBS with only half as much capital backing them up as other financial institutions must have.. The govt regulations on FNMA are somewhat more lenient than on other lenders.. probably just residual govt familiarity and affection for them since the old days when FDR’s New Deal used these entities to fix the Depression’s economy.
Allowing FNMA to get into larger loans/Jumbos now just opens a larger market up to the corporation and will likely increase it’s size and profitability, imo. But, since it seems they don’t like to waste time keeping accurate books, who could tell for sure..
“Federal Reserve Chairman Ben Bernanke repeatedly told us our subprime woes would not spill into the broader U.S. economy. Now, the Fed is sandbagging the levee.”
And, anyone brave enough to short the stock market.
cant bet against the house in a rigged game.
I mean you can, but why?
Richard Hagar, a veteran real estate appraiser and expert witness, also blames appraisers. According to him, many of them puffed up home values to make deals work. ‘We saw some really Mickey-Mouse things,’ he said, ‘A $200,000 house would come in at $300,000. When appraisers puff up values, they can be sued; I heartily recommend it.’”
Hmmm..what about the realtors and mortgage brokers..when are they going to take responsibility for their actions? You know what goes around comes around I am glad that all three of these “careers” are reaping the “benefits” of the game they participated in…how many of them are losing their homes, cars and possessions..See how strong the media is..no one is asking how any of those people are doing in their own personal lives…We have to protect NAR and MBA!!!
I know we’ve discussed this before, but they keep saying on CNBC that the percentage of loans that are subprime and/or at risk is such a tiny percentage of the outstanding loan pool that it’s not a big deal in the scheme of the overall housing market and economy, does anyone recall offhand what the numbers are?
10% of - ALL - houses (mortgaged or free and clear) are at risk of being lost according to the FDIC. Since 40% of ALL houses are free and clear, then 17% of all houses with mortgages are at risk of default - not just subprime.
FDIC: Scenarios for the next recession March, 2006
So, if 17% default, how big of a calamity is that (not trying to be sarcastic), how many normally default in a RE downturn?
Best question today. Does anybody have data on the percentages of houses foreclosed during other bust phases? Total numbers would also be nice.
2%
Uh, wow, really? That’s kind of a big difference.
“Uh, wow, really? That’s kind of a big difference.”
LMFAO!! That has got to be the funniest thing I have read today. Still LMFAO!!!
Hoz — Got a source? That’s huge.
Scenarios for the Next U.S. Recession
FDIC
http://tinyurl.com/qm5rq
click on the additional links especially
Comments by Meredith Whitney
“…Just from an anecdotal perspective, if you know short-term rates are rising, and long-term rates are declining or at least staying static, wouldn’t it be prudent to lock in a long-term mortgage? Why is 30 percent of the mortgage market still booking into adjustable-rate mortgages? Because we believe they couldn’t otherwise afford to squeeze themselves into a home or they’re squeezing themselves into a more expensive home for affordability factors….”
…We estimate that 26 percent of the U.S. population lives at, near, or below the poverty level (see Chart 42). The number for the poverty level is living below $23,000 a year, and that covers 13 percent of the population. We go on to estimate, actually, that 26 percent of the population lives at, near, or below the poverty level. Now, these guys have no access to credit….
….Of course, you know that 69 percent of the U.S. population today owns homes. Greenspan, in his paper on the mortgage industry in September, targeted 5 percent of the U.S. population at risk in terms of very low equity levels in homes. Sixty-nine minus 64 is 5 percent. So these are the new, first-time homebuyers, which we see at risk….
…In 1994, the standards through which an individual could qualify for a home really relaxed considerably. And from that time, 15 million new homeowners were created in the United States. So it’s not just a matter of money going from the equity market into the housing market. It’s also the fact that 15 million new households became homebuyers, and an increased demand versus supply clearly sent home prices higher. So an expansion of 8 percent in the size of the market cannot be overestimated in terms of its impact on the market …
…It’s interesting that the National Association of Realtors recently came out and said that 43 percent of all new homes are purchased with no money down. You wouldn’t have heard about that prior to 1994. So the ability to access credit has expanded dramatically.
Something I referenced a little bit earlier relates to the hazards of adopting an adjustable-rate mortgage and the negative amortization that is now associated with a lot of the adjustable-rate mortgage products…
…Again, I want to talk about why someone would do this to themselves, why someone would take on an adjustable-rate product when you know short-term rates are rising. That doesn’t make any sense. The only conclusion that you can draw from this is that, otherwise, these homes would not be affordable to these consumers.
Home equity, which has really been the consumer’s ATM over the last certainly five to ten years, has enabled a lot of this affordability. A lot of the new home mortgages that are originated come with piggyback home equity loan features.
Now, I want to point out that [Chart 49] is only talking about revolving home equity lines. The total home equity number is closer to about $800 billion. So a lot of this home equity is acting like sort of a new version of a credit card for consumers.”
The Federal Reserve knew this, Greenspan knew that 5% (subprime borrowers) were in trouble, Then you have another 5% in trouble through ARMs. So I am totally upset when I read transcripts to Congress that “we are doing something to protect the homebuyers.” They did not get protection from the Federal Reserve Bank.
I hope this is the reference you needed.
If you need something else let me know.
CNBC are idiot bubblevision cheerleaders. Try this view on for size.
http://www.oftwominds.com/blog.html
CNBC could report this if they only had a brain
I don’t recall the official numbers, but I believe Ben Stein was saying sub-prime was 5% of the market, and only 5% of THEM would default. It was a low number, and a low point for his career. Maybe I shouldn’t falsely call the bottom on that one!
I guess Ben hasn’t heard about Alt-A no doc (liars) loans or Alt-A ARM’s with low teaser rates that are about to reset (teaser time bombs). Alt-A was the loan of choice for speculators and anybody who thinks that these loans will be OK should put down the cup and step away from the Kool-Aid.
If the number of troubled borrowers was insignificant then how is it there are so many foreclosures (and rising)?
If they were insignificant wouldn’t there be plenty of untroubled borrowers available to buy their properties?
Everything happens at the margin. Everyone who could become, marginally, a home buyer did so over the last few years. Now that margin is going to shrink and its going to shrink the margin back so dramatically that prices will decline significantly more than “expected”.
Where there once was “slack” will be no more. The only bidders for RE will be sober, financially sound and miserly people. They won’t be likely to bid until they’re pretty comfortable their exposure is very, very, low.
Just the opposite of the behavior at the peak. So, it isn’t just the lost number of “buyers”, its the attitude towards buying that counts (that and the lack of availability of money).
5% of 5% failing might make sense if Stein didn’t predict falling market prices… but instead, predicting just a flatting of the market at the then current price level. What changed things was when prices actually fell.
I think what caused it is there were so many speculators in up to their eyeballs, that when the prices stopped rising, these flippers / speculators and anyone else who was counting on price increasing to make a profit (or just to survive) had to bailed out.. After this first domino of panic sales tipped over, the price drop spread to entire neighborhoods .. to cities.. prices/comps spiraled downward.. and the music stopped for the enabling lenders… and everyone sobered up, looked aroung and saw the bodies.. and wondered when the party went out of control.
“The credit crunch triggered by a rout in the U.S. subprime housing market doesn’t pose a ’systemic’ threat to banks, Moody’s Investors Service said.”
————————
“Yes, yes. Zees financial companies– see zey are fabulous, yes? We give zem our treeple A plus rating! See? Buy buy buy! Everybody see? No problem whatsoever. Buy buy buy!”
Looking at the bigger picture, didn’t we go through this EXACT same scenario during the last housing debacle in the early 90’s with the concomitant banking failures and S&L mess? Here we are 15 years later in the same EXACT mess except much larger. It should make everyone here ponder the idea that this entire mess is contrived. Further, WHO are the men responsible? WHO are the men Bush I, Clinton and Bush II working for? This entire BS is no accident and in case you believe it is, you should look back in history as you don’t have to look to far. The Federal Reserve Chairman is appointed by the WhiteHouse but who chooses the Governors? And the FOMC? I’m not a conspiracy nut by any stretch but it seems to me that it’s been many many years since our elected officials have respresented us.
The Presidents work for the bankers and mega corps of course. JP Morgan and Rockefeller were instrumental in the establishment of the federal income tax, the creation of the FED and the establishment of public schooling. It’s no accident that there is no fiscal education in public schools.
I’m now off to my conspiracy meeting - if you don’t hear from me again then the feds got me!
“public schools”
Let’s call them what they are - “government schools.”
Another reason why we homeschool. If the polluted morals of our society being imported to the playground wasn’t enough of a reason to school at home, then failing organization called public education is certainly enough by itself.
We considered homeschooling but we were concerned with the risk of retardation of social skills that home-schooled kids face.
“Public schools are bad, but my kid’s school is different.” Unfortunately far too many parents believe that.
Just like, ” I’m not worried about house prices going down because it’s different here.”
The other night we were visiting friends who have two kids in public school and as assuredly as the sun rises in the East, the parents insist that their kids’ school is “different.” Later that evening I noticed the 8 year old’s math homework so I quizzed her with a few of the addition problems she had worked. She paused and told me she needs to get her calculator. The parents weren’t around and I didn’t say anything, but there really isn’t anything to say. Math is perhaps one of the most wonderful tools to teach critical thought. I guess that’s why it’s imperative that we remove the thought process from math if we are to educate a generation of intellectual idiots.
I had a 13-year-old cousin in Christian school that was being taught 4th grade math by his teacher and the teacher was a complete idiot. My father and I hounded him all summer to try and get his math up to snuff. He goes to public school now and does much better.
Not saying some public schools aren’t bad, just that a lot of private schools aren’t any better.
Private schools are sometimes the worst offenders and I’m speaking from experience. I run into parents who like to think that just because they write a check each month that somehow that personal payment equates to an educational gain for their children. No thought is given to what is really going on; they just are content to believe that the desired result is actually what’s happening. It’s identical to the mindset that owning is always better than renting.
Exeter,
There are two lines of response to your concern about “social retardation.”
1. Any social retardation coincident with homeschooling is caused by some particular parents’ method of homeschooling, not homeschooling itself. If you know any kind of cross-section of homeschooled children, you will find that most of them have much BETTER social skills than kids in school. Reason: they are forced to deal with a cross-section of ages (adults and kids other ages than their own). They also tend to get more attentive instruction, so their academic skills (especially communication skills) are often light-years ahead of their age “peer group.”
This leads to the second line of response:
2. Schools lead to far more social retardation than homeschooling, because they create an artificial environment of age-isolated children. Where else in the rest of life are you restricted with people your exact own age? This is a hotbed for peer pressure and breeds mass movement from an early age.
Exeter,
I suggest this article re: homeschool and socialization. I can attest with my own young children the truth of what this author has written. It might change your attitude towards homeschooling. I’d be happy to chat offline if you’re interested.
http://www.hslda.org/courtreport/V23N4/V23N411.asp
“Let’s call them what they are - “government schools.” ”
Which is why we pledged allegiance to the flag, even though we didn’t know what the hell it meant.
Pledging allegiance to a piece of cloth (rag) is blasphemous.
In the words of George Carlin:
I leave symbols, to the symbol minded.
Better Yet “Gubment Skewls”
Public schools in OK? I’d have never guessed….
It’s no accident that there is no fiscal education in public schools.
Some public schools have fiscal education. One of my cousins teaches it as part of Home Ec in suburban Maryland.
The Bilderberg Group.
http://en.wikipedia.org/wiki/Bilderberg_Group
There was no conspiracy to get individuals to take out loans well beyond their means to pay for them. Individuals didn’t have to take out the loans, they each assessed the risk on their own accord.
That they miscalculated is unfortunate. But it isn’t conspiratorial.
“Washington-based private-equity firm Carlyle Group has been forced to lend money to Carlyle Capital Corp. Ltd., a highly leveraged fund listed in Amsterdam that invests in residential mortgage-backed securities, to meet margin calls.”
Well, at least they still have their…”Return On Investments” with Push/Cheney’s “audit proof” use of the American Tax payers $$$$$$$$$Billions in the global war toilet that’s being used in designing Democracy in prime foreign countries like: Irag & Afghanistan…Disney & Starbucks need to setup shop and show the rest of the world how to live… the “Good Life”
“Instead of splurging on Ferraris and fine art, Wall Street professionals may want to start saving. Johnson expects bonuses to start falling, by as much as 10 to 15 percent, in 2008, although others say it’s still too early to forecast a downturn.”
“‘A lot of the problems in subprime and mortgages, most of that is not going to show up until next year,’ said. That’s also when financial losses from loan-related write offs will start to pressure firm wide compensation at the brokerages.”
Don’t you just love trickle down economics?
“Don’t you just love trickle down economics?”
BINGO…. more babbling balderdash.
““Don’t you just love trickle down economics?”
BINGO…. more babbling balderdash. ”
I feel it trickling down on my head whenever I buy food, gas, real estate, or pay my taxes. Psssssssssss
DP
But what is fascinating is that there is still a very vocal, vociferous minorty who insist that cutting taxes on the wealthy increases revenue. Even when Bernanke stated in January 2007, under oath, in front of Congress that “tax cuts don’t increase revenue” when asked by the committee chair.
Tax cuts would be fine. The problem is what people have been quoting for the last few weeks - “Privatize the gains, socialize the losses.” If the gov’t would let the losses in the market play out, we wouldn’t need massive tax increases.
Don’t be so sure about that Greg. Tax cuts for who? How are those revenue losses to be covered? I think the priveleged elite have had more than their fair share of cash from the US Treasury.
Would they still want the tax cuts if ALL of the loop holes for tax sheltering were eliminated? My guess is that this is a question that they don’t wish to hear, so I will go with a no on that.
“But what is fascinating is that there is still a very vocal, vociferous minorty who insist that cutting taxes on the wealthy increases revenue.”
Straw man. The Laffer Curve argument is not that tax cuts always increase tax revenues. The argument is that the relationship between marginal tax rates and tax revenues is a curve, and that at some point — when tax rates are high enough — cutting them can actually increase revenue.
Obviously, if tax rates were at 100%, cutting them to 90% could be expected to produce additional revenue. People generally don’t work or risk capital for nothing, and a 100% tax rate leaves you with just that — nothing. So cutting that rate means at least some people would start working or risking capital, and you’d start getting tax revenues.
The argument isn’t over whether “tax cuts always increase revenue” — nobody serious is arguing that. (That’s just as obviously false as the argument that a 100% tax rate will increase revenue over a 90% tax rate; after all, reduce the tax rate to zero, and you get zero revenues.) The argument is over how the curve is shaped, and where the ideal place along the curve is for both economic growth and tax revenues to be maximized.
My thinking is that you can’t go much higher than 30% of income paid in total taxes without retarding economic growth. In addition (although I hate to say this, being unrich myself), if you want a tax cut to have any macroeconomic effect, it will have to apply at least partially to upper-income households, since they (1) pay the vast majority of income taxes; and (2) are the likeliest to invest additional capital as opposed to consuming it. (Investment spending, if it increases productivity, is more useful to the economy than mere Keynesian “pump-priming” consumption spending. In the immortal words of (I think) Dan Quayle, it makes the pie higher.)
That said, I suspect the 2003 tax cuts may have had something to do with the inflation of the housing bubble. Inflation is sometimes defined as “too much money chasing too few goods.” But if the additional money goes to people who already have all the “goods” they need, it will be invested. It’s possible that too much money in investment markets may overwhelm their ability to allocate it to worthwhile, productivity-increasing capital formation. Simplistically put, asset bubbles may be a function of too much money chasing too few worthwhile investment opportunities. The result is irrational inflation of asset prices. The tragedy of this bubble is that this process latched onto the half-asset, half-consumption item of housing, with the result that consumption-minded buyers often were priced out because of the speculative premium attached to housing by the monied investor classes.
I know some folks that fit into your box of “upper-income” households (Republicans). When I talk with them tax rates, their general view is that we are under-taxed and the government is over-spending.
I understand that there is a curve, and that individual views vary widely.
That said, 15% capital gains rate is SO low that moving it to 20%, or even 25% would have very little impact on the amount of investing taking place.
Thomas, your ideology is doing the talking for you.
Enuff said.
“When I talk with them tax rates, their general view is that we are under-taxed and the government is over-spending.”
This what I hate when people talk about taxes needing to be raised. If you or in your friends’ cases believe that they are “under-taxed” then by all means write a check to the U.S. Treasury for the amount you believe you’re under taxed. I’m sure they won’t reject your money. My taxes are high enough.
There is a reason our taxes are “high enough” Observer. The priveleged elite have shift their burden on to us.
Exeter — So you think you could raise taxes to 100% and get more money?
I doubt my “fellow ideologues” in the VRWC would agree with my last paragraph. “Enuff said” my ass.
You included “Always” in your silly strawman defense. Aren’t attorneys suppose to be capable in that regard?
Off to school with you.
This is a distraction, but…
“But what is fascinating is that there is still a very vocal, vociferous minorty who insist that cutting taxes on the wealthy increases revenue”
Count me one of said “vociferous minorty” [sic], because silly ol’ me, I do think that cutting taxes on the wealth can — sometimes — increase tax revenues. The case of a tax cut from a 100% marginal rate is irrefutable evidence of this.
What you, Sir, are doing, is implying that those awful wascally supply-siders insist that “cutting taxes on the wealthy increases revenue.” Since that statement is not restricted (by the word “sometimes,” for example, or “often”), it is implied that it applies across the board: Tax Cuts On The Wealthy Increase Revenue. Period, full stop. Of course, nobody seriously argues this.
Now, back to charm school with you — along with whatever formal education may be required to disabuse you of the notion that an effective argument can be constructed out of three lines and a sneer.
Argh. If I’m going to be obnoxious about someone’s typos, I probably shouldn’t make one of my own in the next line. That’s “wealthy,” not “wealth.”
Now, back to our regular scheduled programming of beating up on (1) The Fed; (2) wannabe bailer-outer politicians; (3) FBs, and (4) anyone within three degrees of consanguinuity of a card-carrying Realtor, may they rot in the eighth circle of hell, &ca, &ca.
Nice try Pumpkin but only you are talking about a 100% marginal rate. An extremist at the extreme margins. How typical.
Commercial Paper “Seizing Up”. Oh, well. Nothing Dodd can do about this.
“The $1.1 trillion market for commercial paper used to buy assets from mortgages to car loans has seized up just as more than half of that amount comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe’s largest bank.
Those sales would drive down prices in a market where investors have already lost $44 billion, based on Merrill Lynch & Co.’s broadest index of floating-rate securities backed by home- equity loans. That may hurt the 38.4 million individual and institutional investors in money market funds, the biggest owners of commercial paper. ”
(Per Bloomberg)
Maybe the Fed can start buying up all debt. We’ll just go straight to Communism with the bankers as the Party Leaders.
Don’t give ‘em any ideas….they may like a dictatorship of the proletariat bankers.
I just had a vision of throngs of unhappy masses waiting in line during a snow storm at Greenspan’s tomb.
The Tomb of the Unknown Banker
A bottomless black hole.
Credit-rating companies face congressional scrutiny for an ‘inherent conflict’ in helping construct loan-backed securities, then issuing ratings on them, Shelby said.”
Congressional scutiny?
Uh, I think the markets move way faster than this so-called “scutiny”….by the time they get the microphones on the congressional scutinizers and the bottled water in front of them, as they pose on C-Span, this train wreck will have already happened. This aftermath of recrimination is laughable. The pointing of fingers, the lawsuits, the smug, “I KNEW this was gonna happen!” means nothing.
mmmm…. The horse has already bolted!
So far, the only thing that this blog has not correctly predicted is the amount of toxic waste sold to European banks and pension funds.
Other than that, the costs and effects of the housing bubble have all been laid out on this blog, over the past two years, from the unhappy and foreclosed FBs with their trashed credit and 1099’s from the IRS to the systemic market risk. Nice going Ben.
“the only thing that this blog has not correctly predicted is the amount of toxic waste sold to European banks and pension funds.”
This blog did mention that pension funds, like CA and the NY teachers, were buying MBS, and that they would be scre — in trouble in a few years.
And nhz has been keeping on top of Europe for us.
And that’s why this blog is such an addiction — um, I mean it’s a valuable public service.
It IS an addiction. I have way too much to do today to keep reading. Couldn’t everyone start arguing about the PPT or something so I can tear myself away and get some work done?
It certainly is. Got totally hooked the last couple weeks. A whole group of folks who like to talk about what I like to talk about. I love it.
I think a popular view on this blog was that the US trade and federal government deficits would lead to rising interest rates and that would trigger the housing collapse. But the mortgage defaults and fraud were already so bad that they’ve touched off a global crisis even though interest rates remain relatively low. In fact the 10-yr note is way below the 5% turning point many were watching. Investors got so scared they stampeded into Treasurys.
Foreign Investors View Dollar As ‘Refuge Currency’ Despite Recent TumultWSJ, August 20, 2007.
—————————
Still, a crisis that began with U.S. mortgage debt and U.S. hedge funds has rapidly become at least as much of a problem for the financial system in Europe and points beyond, prompting global investors to do what they have traditionally done when crises hit — flee into dollars and U.S. Treasurys. As a result, the dollar has gained in value against the euro and the British pound, while the yield on a 10-year U.S. Treasury note has plummeted to 4.673% from about 5.2% in early July. The dollar has lost value against the Japanese yen, but that mainly reflects investors’ rush to unwind trades in which they borrowed yen to invest in other currencies, rather than a flight into Japanese assets.
Nobody is saying that the market for securities backed by risky U.S. mortgages will snap back, or that the U.S. economy won’t suffer from credit woes or succumb to a deepening housing slump. Many forecasters still expect the dollar to lose value over the longer term. But the markets’ latest behavior does shed some light on a few of the decade’s biggest economic questions: why the U.S. current-account deficit got so big, how long it can be sustained and what dangers it presents.
They keep saying on CNBC that the subprime/at risk loans are a tiny fraction of the outstanding loans…anyone have any data on this?
Same line on FOX. They claim it’s less than 1%. I can’t remember the exact number, ask Ben Stein. The problem with that talking point is that they are ignoring future resets. It’s painfully obvious that it’s going to get worse.
Yeah, just anecdotally looking around my friends and neighborhood, I really have a hard time believing this.
I do the same thing and find that nearly everyone I know has a 15 year fixed with a rate from 2003 lows. Only one would qualify as an FB — spends her spare money on lottery tickets. Depends on who you know.
I don’t know anyone like that, except myself and my grandparents. Other than that, I’m surrounded by HELOC-paid for $50,000 cars, mcmansions and wannabe-Architectural Digest remodels.
I don’t know anyone like that either. I think that’s a rarity around here.
when you take a tiny fraction and lever that somebitch up 10 time 10,000+…….
Whatya mean ya dont do it?
EDverybody does it.
I just did it and Im ready to do it again
Its good to be the King.
The Pareto Principle- 20% of salesman are responsible for 80% of sales.
ALt A, over supply, incresing risk profiles and subprime together are enough to effect the margins. In fact any one of them would effect the margins.
There is some debate about how much recovery there can be, what percentage of loans will fail and how pricing is set in the margins.
Basically a small over-supply will cause significant movement in prices. A large oversupply will be ugly. The other effect is the reverse wealth effect kicks in. People don’t feel secure taking on more debt on their assets. Banks see risk in giving out loans against the assets. So, the small percentage of the houses on sale set the price for the houses not on sale. The comps get force fed to the banks eventually as fraud burns them.
Poof. Mortgage equity withdrawl disapears.
Type “credit suisse ARM graph” into Google and click on the first link.
I haven’t done the detailed math, but it looks like about $1.5 Trillion of loans will be adjusting in the next 5 years. I remember reading that the average increase in the loans is more than 2%.
Total US mortgage market was something like $10T or so.
Looks like 15% of the money is in ARMs.
If you assume that a fair number of those used an ARM because the rate was cheaper, and they can afford the increase, say, two-thirds, then you have 5% of the mortgages in trouble over the next 5 years.
If you further assume that more small borrowers (first time buyers who stretched–didn’t have equity to move) will be in trouble than larger buyers, then the 5% of the mortgages represents more than 5% of households who own their home.
I don’t see how 1% is possible. I even think my 5% is low. I wouldn’t be surprised if the number gets to 10% or more.
That sounds about right. Total mortgage market is about 10 T. Subprime is about 10% of that total or about 1T. Subprime defaults run historically about 15% so 150 bn since underwriting was bad the defaults will be higher than that so say 450 billion. You’re up to all of 4% of the mortgage market.
The problem however is twofold. First that last trillion was what set the market price for housing in the nation (and that is too high so lots of homeowners will be underwater for a while). There’s substantial risk that the underwater homeowners will increase defaults on prime loans to above their normal 1-2% levels.
In addition because the $400 billion in subprime losses are securitized no one knows who has them, but that someone defintely does so they don’t want to make loans to anyone for fear that that counterparty is the one holding the bad loans.
Would you play old maid if you won $10,000 if you lose it costs %$1,000,000?
“Wisconsin couple won a judgment against Chevy Chase Bank that said the bank deceived them over the terms of their mortgage. The judge ordered Chevy Chase to rescind the loan and certified the lawsuit as class-action, which could potentially release thousands of other borrowers who felt misled”
Great, stupid FBs get to break their contracts, keep their houses. Banking system takes the loss which hurts everyone. Responsible renters and others who waited get screwed once again. What a system.
Here’s the money quote from the article -
“They can’t refinance it, they can’t sell it, and they can’t afford it,” said Paul Hancock, a Florida attorney specializing in mortgage brokering and real estate law.
Chevy Chase should stick to making movies.
How come Frank Raines was not part of that meeting? If we needed some good advice we should be asking him.
“‘Should the panic exhibited over the last few days turn into revulsion, the markets may never be the same again,’ wrote HSBC economist Stephen King
——————————
These names are just too good to be made up.
“An economy in panic is an eerie thing. Like a brain, in darkness and silence, that can hear its very blood pumping in. Sustaining, only for the next second the heart that feeds it. Then followed by a silence, pleasant for the moment of energy. But the unknowing, uncertain calm– will the next pump come? Lungs expand to let in a breath, while a bead of sweat trickles down in a spidering slow motion stream.
And when panic comes, the heart seizes first. Unable to pump regularly, a dark static noise takes over the vision, as the brain wallows in its own stagnance. Its blood betrayal. Acid fills in as cells suffer on a microscopic scale the same fate as the rest of the rapidly dying body. Millions of individual pockets of beauty and experience screaming and returning to dust.
And through the spasming dream-conscious hysteria, that brain might catch a glimpse, maybe for a second… maybe not, of the doctor inching closer with his needle.”
It is nice to see the gov’t takle these problems head on. I’m very much relieved. And now have no worry going forward. It surely looks like my financial investments are safe and will continue to grow even beyond my expectations.
Nice.
How do you say recession, Hank was asked slupmingly?
“We have the benefit of having a very strong economy to absorb some of the losses along the way,” he said.
However, turmoil in capital markets will likely take a toll on economic growth, Paulson said.
“Economic growth will be less than it ordinarily would have been,” he said.
http://money.cnn.com/2007/08/21/news/economy/job_cuts.reut/index.htm?postversion=2007082112
Job cuts at financial services firms surge
More than 11,000 layoffs have been announced since Friday, according to a consulting firm; housing slump, mortgage-market troubles blamed.
How do you say NO to the created USA Gov’t of lobbyist’s …you rise up the like “Great Pumpkin”… you leave the comfort of the “Great Pumpkin Patch” for one night & headout to your “local” Voting place.
Like the Drug Czar say’s: “Just say No!”
Re: “The Bailout Theory of Redemption”
Remember? (And as Prof Bear noted: include & add with that 34% group… those tax paying US of A renters!)
“Federal aid ‘would come at a cost,’ said Douglas Duncan, chief economist at the Mortgage Bankers Association. ‘It has to be paid for and the question is would the 34 percent of homeowners who have no mortgage be willing to pay taxes to support the bailout of people who traditionally have not managed credit well?’”
&
“A lot of activities within the private sector, hedge funds, private equity — we are not sure where it’s going and what it’s doing,” said Andrew Crockett, the former head of the forum for central banks - the Bank for International Settlements - and now president of JP Morgan Chase International.”
If “they” don’t know what’s in the “Mud” then… I’m heading straight into a “Fourth Day”, I can just feel it.
How bad are the layoffs?
pretty ugly
“Challenger, Gray & Christmas Inc., the consulting firm, on Tuesday said the U.S. financial industry has announced 87,962 job cuts this year, 75 percent more than in all of 2006. It said about 35,830, or 41 percent, of the cuts related to housing market problems. Nearly one-fourth of this year’s cuts have been announced in August alone.”
Reuters
By e Bye Wall Street bonuses. Bye Bye NYC housing prices.
Something else is also happening. A family member has had three pay cuts in the last six months. $48k down to 32k and that is if it stops there. Base plus commission, with the commission structure being reworked so most of the 42 thousand employees are effectively receiving pay cuts.
Then that minimizes the possibility of rampant inflation in the near term.
Got cash?
I am told everybody at work is freaking out. Some are brown bagging, others are looking for jobs elsewhere, future vacations are not being planned, and some are running up the credit cards to make up the difference.
“…and some are running up credit cards to make up the difference.”
Always a good sign.
“Nearly one-fourth of this year’s cuts have been announced in August alone”
And we’re only two thirds of the way through the month!
Anybody care to have a gentlepersons wager on Mr. Cramer this evening? I suspect that his theatrics will be for the Federal Reserve to do something to save his friends jobs.
Mr. Cramer the Federal Reserve has limited control over $800B, your friends are sitting with $415T in contaminated issues. This is just the beginning.
ALL of CNBC all day long has been stating it as a fact that the FED will cut.
He’s calling for Poole’s resignation and using the smallest violin of trying to save peoples homes as oil for his fire. Sen. Kent Conrad is agreeing with Cramer right now.
He’s claiming that Poole should have warned everyone about the mortgage crisis. Like Cramer didn’t know?
I hope the FED doesn’t cut if for no other reason than to see Cramer’s head explode.
Can someone start an online petition urging the government not to allow fannie or freddie to bail the market out? I would sign it, we could also post it on other housing blogs, start email chains, and also add it to digg and reddit. I don’t know what kind of weight it would carry but I imagine we could easily get a few hundred thousand sigs and maybe even a few million.
Sounds GREAT to me, but I’m not an IT guy. Ben?. . .
Over at Marketwatch, the headline is that the Fed is serving mixed greens…..makes it sound like the credit meltdown is a salad bar experience.
With brain trusts like these guys and their snappy headlines we are doomed.
“Florida Homes on South Beach Diet, Fed serving mixed greens, stock market wilting.”
Here is some massaged text from http://www.patrick.net
“Please do not support the efforts to bail out mortgage holders and mortgage lenders with my tax dollars. As a responsible citizen, I do not believe it is right for you to ask me to pay for other peoples’ financial excesses, especially since a bailout encourages lenders to continue making predatory loans, with the assumption that taxpayers are on the hook. Further, we believe that the liability of the mortgage mess should NOT be shifted to GSE’s Freddie and Fannie.
I appreciate the goal of helping people to have access to housing, but any proposed bailout will only reward lenders and borrowers who acted irresponsibly, and it will punish people who work hard and diligently manage their finances by not buying houses which they cannot afford.
The housing market has begun a process of correction. This is necessary in order to keep housing affordable in the long-term. Let the market correct so we can achieve
stability again, and people are able to save and afford the house of their dreams over time. That really is the true American Dream.”
http://www.petitiononline.com/create_petition.html
Oops… This was for Tom 2 posts above.
I will create one now.
Thanks!
Thanks for the text. I just sent it off to Dodd and my congressional reps and senators in D.C.
I sent it to my reps and local paper.
“Johnson expects bonuses to start falling, by as much as 10 to 15 percent, in 2008…”
So they only get 85% of 1-2 M? Boo-f**king-hoo. Cry me a river.
Tidbit from one of the stupid Yahoo finance articles:
“Last Friday, the Fed cut the discount rate in a surprise move, causing stocks to rally. Now Wall Street hopes the Fed will cut the target for the federal funds rate, which banks charge each other on overnight loans.”
Well, gee, that’s probably not going to do much, because home loan rates are rising regardless of the fact that the “target” Fed funds rate is unchanged. Seems to me that it would only, again, serve the purposes of the banks. Am I missing something? Screw the damned banks!
It gives the banks more margins and more profits. The banks made loans at rates that were too low. Not enough yield to cover defaults. Now they are essentially asking the FED to bail them out. This will not provide more liquidity to the homeowner unless Fannie and Freddie start pushing junk on people.
“GreenPoint, based in Novato, Calif., specializes in no-documentation and ‘Alternative A’ mortgage loans. The decision to close GreenPoint will hit the company with an $860 million charge.”
- The world follows the lead of the United States.
The United States follows the lead of California. California will lead theway to the next ‘Big Thing.’ It may evolve as ‘Juans Crib Loans’ or whatever - we don’t have to let you in on the next move we will do. Your only responsibility is to continue to buy IPods, IPhones, watch ‘Flip that House’ and Rap videos on the BET. The Subprime loan center of the world was here in Irvine and we are presently working on the ‘Next Big Thing’.
BB = Sandbagger in Chief? Boy do I ever agree 110% with this Denver Post writer!
“Now, the Fed is sandbagging the levee.”
“‘I believe that the Fed acted precipitously to protect monied interests and bad business policies,’ he (Richard X. Bove) wrote. ‘It may have certified rather than prevented a recession.’”
“So why is the Federal Reserve so busy managing our economy? Or is it simply bailing out a bunch of high rollers who made bad bets on subprime loans? So what if Bear Stearns, Goldman Sachs and some of the biggest investors in the world are reeling from their own stupidity?”
“Who cares if Countrywide and other major mortgage lenders go belly up because of their risky lending practices? And if you can’t pay your mortgage or get a new one - well, geez, didn’t you ever play Monopoly as a kid?”
BusinessWeek Online
Did Countrywide Get a Hand from the Fed?
“…Analysts say two things could help ease the long-term credit crunch. First, banks and investors need to see the mortgage delinquencies and defaults slow. Most analysts say they have little sense of how much damage risky loans from the last few years still could cause.
Second, even if defaults keep rising, a Fed cut in interest rates would help by lowering everybody’s cost of borrowing. It would let homeowners refinance, rather than default, on high-interest mortgages. And it might help revive the housing markets, by spurring new buyers to go house hunting. Unfortunately for Countrywide and its investors, the timing of that recovery is still a big question.”
Aug 21
“…a Fed cut in interest rates would help by lowering everybody’s cost of borrowing.”
I would think they would have to also squash the inflation risk premium on l-t T-bonds as part of that strategy. Any thoughts?
I take door number 1) “First, banks and investors need to see the mortgage delinquencies and defaults slow” - it is not going to happen. Did I guess right?
see video from Smithappens
Worst Price is Right Bid EVER
http://tinyurl.com/3yp5kw
Just a tidbit to upset the Professor G.S. Bear or whoever you are today -
“The Federal Reserve Bank of New York said Tuesday it is lowering the fee it charges when lending securities from its holdings, in a move market participants say is another step aimed at improving market liquidity.
“Effective immediately” the New York Fed said “the minimum fee rate is decreased” to 0.5 percent from 1 percent as part of its lending of securities from the System Open Market Account. “All other program terms remain unchanged,” the New York Fed said.
The Fed has long lent securities — Treasurys, agencies and other fixed-income issues — from its SOMA portfolio. The lending program was begun in part to help alleviate shortages of collateral that appear from time to time in what’s called the repo market….”
Businessweek online
How many ways is it possible to bail out Wall Street and yet maintain plausible deniability with the untutored masses? I suppose there are many, many ways…
Sadly, Professor, there are probably many ways. Partly because the masses don’t have a clue to what’s going on. I quiz all my friends now, and none have a clue what’s going on in the credit markets. Not a one.
The only person I know personally who understands what is going on is my divorce attorney, who also owns three rental houses. He told me last week he had so many people call him about one rental house he advertised that he brought them all in together to show it to them. I’m not sure how he picked out who was going to be allowed to rent it.
I have to hand it to him: he doesn’t charge me as much as other attorneys in the area charge, and he also lives in a very modest house himself.
Oh my. Where’s a Clownifornian when you need one?
http://dallas.craigslist.org/rfs/402459189.html
It is listed for 3.4 million and they will ‘Consider’ offers of 2.6 million…..what a deal! You will have ‘Instant’ Equity of 800k!
I would ‘consider’ offering 0.6 million. But then I’d remember I don’t want to live in Dallas.
LOL, the realtors name is Suzanne so it MUST be a good deal that’s been thoroughly researched.
TX, it’s on 1/3 of an acre!
“The credit crunch triggered by a rout in the U.S. subprime housing market doesn’t pose a ’systemic’ threat to banks, Moody’s Investors Service said.”
Funny they would bother to comment on the ’systemic’ threat of subprime, given that they believe it to be fully contained.
Went short WM this afternoon.
Did anyone know of a petition already started regarding no bailout by govt? Great comments by all.
Partly because of this blog I am now a huge Ron Paul Supporter (and I traditionally have been a Democrat).
Im glad some of you are calling congressmen (i.e. Dodd). I sent Schumer an email last week. Please keep up the pressure on our elected officials.
This might be too personal, but I got somewhat depressed because of the current financial situation in this country. I learned alot on this blog and on the calculated risk blog. I think the best way to respond is to first learn, then do something positive (write/call senators, get involved politically). Our politicians need to hear people supporting them to do the right thing. I believe that talking to them positively is better than screaming (i.e. ghandi approach versus a riot approach). If we all sit back, then yes the ship will sink. Each one of us doesnt need to save the world, but each of us should try to something reasonable (i.e. write one letter a week, call your congressman, tell a neighbor/friend about this blog)
Im not advocating supporting one policital party over another, I just think we need to get involved more in grassroots efforts. As more people get involved its much harder for politicians to spout lies and help just their business friends. The government is for the people and we can get it back.
anyway just my .02
-Mark
But the smartest thing you can do is protect yourself. The banks and politicians of any stripe don’t have your best interests at heart.
well phrased.
Frankly, I think we’ve had enough Texans in the White House for a long time.
Frankly, I think we’ve had enough Texans in the White House for a long time.
‘We saw some really Mickey-Mouse things,’ he said, ‘A $200,000 house would come in at $300,000. When appraisers puff up values, they can be sued; I heartily recommend it.’”
It’s more like Goofy! In Florida, you might as well throw out the comps because most areas are tainted with this type of fraud. I would only add one more suggestion in addition to taking civil legal action against the appraiser and that is to file a fraud complaint against the appraiser with the FDLE in Florida. FDLE is the Florida Department Law Enforcement and ther is no question that they will investigate the matter and take action if there is probable cause.
I told you it was fraud!
Seen on a Florida tombstone: “See, I told you I was sick”