The Housing Bubble

Sorry if this has been posted, but a few lines really tickled me.” Normal people with very little money are having a tough time” was one of them.

http://business.timesonline.co.uk/tol/business/markets/article2288878.ece

OT: I can entirely support the following homeowner “bailout”:
When an owner is forced to do a “short sale”, then the tax on the forgiven debt can be waived. The details would have to be worked out. An idiot that was speculating with 19 houses (one of the Pulte Homes developments in Las Vegas as I remember?) would have to go down the tubes all the way. Someone in San Diego with a subprime ARM on a house that they are living in? Just let them move on.
In any case, giving them direct payments would not help. Lowering the interest rate to previous levels is also a non-starter for me.
So, what cha’ think?
Roidy
P.S. That PIMCO guy is a silly old idiot. Did you catch him on CNBC? LOLOLOLOL

Someone posted these statistics yesterday about home ownership. I find them very interesting and wonder to myself why is it that so few people have any equity?

Machines build everything today and the internet boosts our productivity. These should be golden years. We should be living better than our parents and working less.

Why is it the norm to work 30 years to pay a mortgage on a freakin house?

“The total value of US residential property is now around $19 trillion, according to the Joint Center for Housing Studies at Harvard University. The US Census Bureau calculates that there are around 123.9m housing units in the US. (this includes condos and rental apartments)”

“Total household debt is $11 trillion: $9 trillion in mortgages and $2 trillion in revolving credit (credit cards, etc.) That means net equity for all 75 million American homeowners is $8 trillion ($19 T - $11 T = $8 T)–including the 25 million households who own their homes free and clear. What if we subtract those folks? Since 1/3 of all homes are owned free and clear, let’s assume about a 1/3 of the $19 trillion is represented by these mortgage-free homes.

That’s $6.5 trillion, which means all 50 million mortgage holders are left with a grand total of $1.5 trillion in net equity. If housing values decline 15%, that’s a $2.85 trillion haircut off net equity. If we set 2/3 of that against mortgaged real estate, (the other 1/3 being a decline in the value of free and clear homes), then the decline collectively suffered by all mortgage holders is $1.9 trillion–enough to put them in a negative equity hole. “

“We should be living better than our parents and working less”

I really don’t know if we should be living better than our parents and working less, it wouldn’t be bad just to live as well, I think we’ve gone backwards. My parents were from the so-called Greatest Generation. In corporate America (New York) back in the 1960s, 1970s, work was 9-5 with an hour for lunch. Weekends off. Time to spend with family and friends. Bonuses. Pensions. Social Security. Cash paid for automobiles. Two weeks vacation to start, more as seniority built up. Health insurance and before that, $5.00 for a doctor house call, then $10.00. Life was good in middle and upper middle class suburban America back in the day.

The petition is in the top 10 now. We are nearing 2000 signatures. All I can say is WOW!

Fed bends rules to help two big banks
If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America’s biggest banks. Fortune’s Peter Eavis documents an unusual Fed move.

http://tinyurl.com/yrkh2j

NEW YORK (Fortune) — In a clear sign that the credit crunch is still affecting the nation’s largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup (Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed’s web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup’s Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed’s move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don’t have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed’s discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

http://tinyurl.com/24rboz

Foreclosure fallout: Rescue scams.

Scammers are taking advantage of mortgage holders at their most vulnerable - when they’re about to lose their homes.

Jennifer Falke and her family had been in their Columbus, Ohio, home for nearly 12 years when they hit a rough patch in 2006. Falke was out of work and fell behind on the mortgage.

Falke said a flood of mailings and flyers then arrived at her door promising help from foreclosure rescue companies claiming to act as an intermediary between her and her lender to keep her from losing her home.

According to Falke, the company she contacted, Foreclosure Assistance Solutions (FAS), simply took her money and did nothing for her. And by delaying a workout with her lender, it made getting back on track harder and more expensive.

“I called the company, thinking it was the best thing I could do,” she said. “They told me they could help. But one of the first things they said was, ‘Don’t call your mortgage company. If you do they’ll tack on fees.’”

For a $1,200 payment, according to Falke, FAS claimed it would handle everything, including calls to the lender, but she charges it did nothing.

“Every time I got enough together to pay off the arrears, they would say the amount had increased.” Falke received an income tax refund that she wanted to put toward a payment. But according to her, FAS said her mortgage company said it wasn’t enough.

“Then they stopped answering my calls. I would leave a message every day,” Falke said. “One day, they told me, ‘We’re dropping your case’ and hung up on me.”

Only then did she call her lender. Falke found out the payoff was less than what FAS had told her - $2,600 instead of $3,500. And then she learned that the bank had dealt with many cases like hers.

“To prey on people at one of the most vulnerable points in their lives is despicable,” said Ohio Attorney General Mark Dann, who filed suit earlier this month against six foreclosure rescue companies, including FAS, who he claims snared Ohio residents in their webs.

Eliminate Mortgage Interest Deduction on McMansions…
Anybody else see this in San Diego’s newspaper? (Still can’t post links, from Prof. Bear’s fave local newspaper).

“Amid a severe housing market slump, Rep. John Dingell is raising eyebrows with a proposal to eliminate interest-tax deductions for owners of big houses.
The Michigan Democrat says doing so would discourage excess energy consumption and lessen emissions linked to climate change.
Dingell said Friday he plans to introduce legislation next month that would eliminate the tax deduction on mortgage interest for owners of so-called “McMansions” – houses bigger than 3,000 square feet. “

It’s all good again on Wall Street now that the Bernanke Fed has indicated a clear willingness to “step in and help out.”

Markets finish up following mild week
Reports on factory orders, new home sales spur rise
By Tim Paradis
ASSOCIATED PRESS
August 25, 2007
…
The stock market’s gains yesterday after several stable or positive sessions suggested that Federal Reserve policymakers and stock market investors have perhaps struck a truce – maybe only a tenuous one – with the Fed acknowledging it stands ready to try to fend off a calamitous seizing up of the credit markets and investors willing to focus on readings on the health of the economy before making decisions.

“I think we’ve stabilized a bit since the Fed has lowered the discount rate,” said Nicholas Raich, director of research at National City Private Client Group in Cleveland, referring to the Fed’s decision a week ago to cut the interest it charges to lend directly to banks. “That has calmed the market and eased some fears because we have a Fed that is willing to step in and help out.”

http://www.signonsandiego.com/uniontrib/20070825/news_1b25market.html

Now that the red hot summer sales season is sliding into the lukewarm fall sales season, SD’s ZipRealty.com inventory of SFRs+Condos appears to be steadily pulling away from the psychologically-important 20,000 level. The inventory growth rate has apparently picked up again since the credit crunch of early August.

“Your search has returned the first 200 of 20734 homes”

Heard about this book and it’s got glowing reviews and interesting subject matter, for sure…

“A year without “made in China”, one family’s true life adventure in the global economy”

http://www.amazon.com/dp/0470116137?tag=whiskegunpow-20&camp=14573&creative=327641&linkCode=as1&creativeASIN=0470116137&adid=095XV060CQREZCJAQAYM&

This is one government move that really makes sense.

“Powerful U.S. Rep. John Dingell revealed Tuesday new details of his plan to cut global warming, including adding a 50-cents-a-gallon tax on gasoline and ending the mortgage tax deduction on what he called “McMansions,” homes larger than 3,000 square feet.
Dingell, the auto industry’s staunchest defender in Washington, D.C., but a legislator who also has a strong environmental record, is faced with what he called the most difficult battle of his career, trying to persuade the country to accept fixes for greenhouse gases that will be unpopular and painful to people’s wallets.” From the Detroit News:

Saw this Florida license plate for the first time the other day. They should have added the word AFFORDABLE.
http://www3.hsmv.state.fl.us/Intranet/dmv/specialtytags/a.cfm?id=162

Came across this stupid Realtor trick:

“When I sold real estate I worked with a woman who would peruse the obituaries to look for potential clients..then she would show up at the funeral home, card in hand with flowers and so concerned it was nauseating. She never did see what was wrong with that.”

Mortgage crisis? What crisis?
No credit crunch seen in loan advertisements
By Nancy Trejos
THE WASHINGTON POST
August 25, 2007

On aol.com this week, Internet-based loan company Lending Tree offered “bad-credit options” and a $425,000 loan for $1,376 a month. And Countrywide Financial Corp., the nation’s largest lender, declared: “Bad Credit? Call Today. Refinance or Tap Into Your Home’s Equity” in an online ad from its Full Spectrum Lending Division.

No-money-down mortgages and subprime loans that catered to people with spotty credit are quickly disappearing as lenders tighten their standards in response to a rise in foreclosures. But you wouldn’t know that if you looked at the ads that some banks and loan companies have placed on the Internet and in newspapers, often right next to the very stories chronicling the meltdown of the mortgage industry. So what’s with the mixed messages?

“It’s been a common feature of advertising,” said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America. “They offer their products not around interest rates but among monthly payments, ease of access, among ‘you’re more likely to get a yes with us than with others.’ I don’t think that has changed in this environment.”

Even though dozens of lenders have shut down their mortgage operations or laid off employees, many others are trying to generate interest among potential borrowers even if they ultimately can’t qualify them for loans.

“It’s important to point out that there are loan options available for borrowers with lower credit scores in today’s market,” said Darren Beck, senior vice president of marketing for LendingTree.com, in a written response to questions.

So is it wrong to market no-money-down, interest-only or other alternative mortgages to people with poor credit?

“There’s nothing necessarily wrong about lending money to people with bad credit,” said David Nahmias, U.S. attorney for the Northern District of Georgia, who has worked on mortgage fraud cases. “Our concern is more the independent mortgage brokers who will try either to trick people into purchasing properties they really can’t afford, solicit those people to lie, let them use their identity or credit so they can perpetrate mortgage fraud.”

http://www.signonsandiego.com/uniontrib/20070825/news_1b25mortgage.html

Morgan Stanley slashes retail spending outlook
By Mae Anderson
ASSOCIATED PRESS
August 25, 2007

NEW YORK – Morgan Stanley yesterday sharply cut its forecast for retail sales growth in 2008, saying U.S. consumer spending will be restricted by declining home values, tighter credit standards and more modest job growth.

Analyst Gregory Melich now expects retail sales to grow 3 percent in 2008, down from a previous forecast of 4.5 percent. That would mark the slowest annual growth in retail sales since 2003.

http://www.signonsandiego.com/uniontrib/20070825/news_1b25retail.html

DEFAULT LINES
Condo Troubles Further Squeeze Property Lenders
Full Force of Glut Is Felt As Buyers Back Out;
‘More of the Iceberg’
By ALEX FRANGOS
August 25, 2007

For the nation’s real-estate lenders, the other shoe may be about to drop: condominiums.

Already plagued by rising home-loan defaults and foreclosures among overstretched consumers, major markets across the country — including parts of Florida, California and Washington, D.C. — are seeing rising foreclosures and bankruptcies of entire condo projects.
[Flodding the Market]

The problems are emerging as some buyers who signed contracts to buy new condos two to three years ago, when construction was just starting, seek ways to back out as they encounter trouble getting financing in the suddenly dicey mortgage market. Falling prices are forcing appraisals down, so banks aren’t willing to lend the full amounts that people committed to in the sales contract.

“Closings that are scheduled to take place are not taking place,” says Marvin Moss, a North Miami Beach real-estate attorney. He is suing several developers to help clients get out of contracts.

http://online.wsj.com/article/SB118799900508008451.html?mod=hpp_us_whats_news

When liquidity freezes over, the best instrument to use for quick thawing is a blow torch.

New York Fed Takes Step To Bolster Credit Market
By Greg Ip
Word Count: 780

In another step aimed at unfreezing the commercial paper market, the Federal Reserve Bank of New York clarified its discount window rules with the effect of enabling banks to pledge a broader range of commercial paper as collateral.

Under the clarification, issued verbally by New York Fed officials to market participants in the last day, banks may pledge asset-backed commercial paper for which they also provide the backup lines of credit.

http://online.wsj.com/article/SB118798079732208114.html?mod=hpp_us_whats_news

We all told ya so!
The next credit crunch?

Now that the easy money in home mortgages is all but over, consumers may soon be caught in a financial squeeze with their credit cards.

That’s the worry among some economists and credit counselors as home lending has shifted abruptly into low gear this summer. That leaves homeowners owing big sums to Visa or MasterCard without an important escape hatch—the ability to pay down the plastic by dashing off a check from their home equity line of credit or rolling the debt into a new, bigger mortgage.

“You’re not going to be able to get that mortgage loan. You’ll be stuck with the higher interest credit card debt,” warns Carl Steidtmann, chief economist with Deloitte Research. “We will have to live within our means. I know it’s a troubling phenomenon. But we’re not going to be able to spend at levels well above our income levels.”

Home mortgages have become much harder to get this summer as a wave of overleveraged homeowners, many of them with adjustable-rate loans, have defaulted on their home loans. As foreclosures soared, numerous lenders had difficulty raising new capital, and some have closed up shop. Others have tightened their requirements on borrowers and bumped up interest rates, which could decrease how much money a prospective buyer can borrow.

Mortgage debt and credit cards have become closely linked in recent years as interest rates hit post-war lows, and consumers were barraged with offers to use their home equity to pay off their high-cost credit cards. It was billed as a clean slate, but many homeowners went out and ran up new balances.
http://www.chicagotribune.com/business/chi-sun_crunch0826aug26,1,4908426.story?coll=chi_tab01_layout

This is a true story

I received a telephone call this past week to appraise a single family residence located in a community of 55 and over individuals. I was told to contact the sales office in order to receive information regarding the project and recent sales activity. I arrived at the sales office and was dutifully given the most recent sales sheet and data regarding the planned unit development. I went to the house and did my inspection.

When I returned to the office I decided to check the MLS figures regarding the project. I found several sales which had been from the national developer to individuals through MLS which had occurred over the past two months. These sales were substantially below the sales figures supplied by the sales office. With further review I learned that the sales given to me by the developer had actually occurred in 2006 but it had taken this long to complete the units.

I completely discounted the sales supplied by the sales office and used the most current sales in MLS as these represented a meeting of the minds in the current market. I then told my client, a lender, to be prepared for some screaming and yelling from the developer.

Approximately 1 week later I received a call from the Executive Vice President of this national builder calling me to task regarding my use of sales from MLS as opposed to the sales from their sales office. I explained that the sales supplied by representative of the developer had actually occurred in 2006 and not in 2007, and the sales in MLS represented the current market. She disputed my use of these sales and she suggested that I use the older sales. I had a question for her. Suppose the market had been going up since 2006 instead of going down. Would you expect me to use the older sales? “Of course not!” I asked her, “do you see the smoking hole in your shoe?” She then said, “well you know very well when we get these houses back because people walk away from their deposits we have to get rid of them.”

I told her that what she stated confirmed my use of the three sales in MLS and I would not change the report. She thanked me and hung up. She obviously had seen the foolishness of her argument.

The lady who contracted for the house in 2006 is now purchasing the same unit for $175,000 instead of $217,000. I feel pretty good about that.

Today’s Master Of The Obvious (MOTO)

“You’re not going to be able to get that mortgage loan. You’ll be stuck with the higher interest credit card debt,” warns Carl Steidtmann, chief economist with Deloitte Research. “We will have to live within our means. I know it’s a troubling phenomenon. But we’re not going to be able to spend at levels well above our income levels.”

Existing sales get released Monday morning. I have to wonder how (fun)Yun will spin the numbers.

‘Underpriced’ at $100 Million
Five houses are vying to be the most expensive ever sold, market slump notwithstanding. Ben Casselman and Christina S.N. Lewis handicap the race.
By BEN CASSELMAN and CHRISTINA S.N. LEWIS
August 24, 2007; Page W1

(See Corrections & Amplifications item below.)

It might seem foolish given the recent news from Wall Street, but a group of homeowners is holding firm on an ambitious goal — to break the record for the most expensive home sale in American history.

The price to beat is $103 million.

Two years ago, at the peak of the real-estate boom, only a handful of homes in the U.S. had ever been listed for $75 million, let alone $100 million. Even the highest residential sale to date — investor Ron Baron’s $103 million purchase earlier this year of a 40-acre compound in East Hampton, N.Y. — was never publicly listed. The deal was so secret that the brokers weren’t named.

http://online.wsj.com/article/SB118791696265107415.html?mod=todays_us_nonsub_weekendjournal

Don’t look now, but early warning signs of rampaging inflation are flashing red alert in the background to the giant helicopter drop of liquidity the world’s CBs are using to contain the credit crunch. Maybe the world’s markets are not as irrational as recent headline U.S. stock market index moves would suggest?

Growth Gauge: Offbeat Indexes On Commodities
By Ann Davis
Word Count: 525 | Companies Featured in This Article: BHP Billiton

Investors are watching every downtick in commodities prices as a potential sign that the credit crunch could torpedo global growth.

It might pay to glance at something else: the Baltic Exchange Dry Index, a lesser-known measure that is closely watched in grain and metals circles. Published by the Baltic Exchange, a ship-chartering marketplace in London for more than 250 years, the index reflects rates to transport bulk commodities such as coal, iron ore and grains in vessels from the relatively small to the gigantic.

Amid last Thursday’s stock-market selloff, which also hit commodities, this index set a record.

http://online.wsj.com/article/SB118791023542507207.html?mod=todays_us_nonsub_money_and_investing

A bad computer virus that attacked our network has shut me down from internet usage during work hours. I’m in big-time HBB withdrawal! How the heck am I going to be able to keep up in the evenings and on weekends only?!

Off to try to get a Reader’s Digest version of the week’s posts…

Blowback bites builder blather…

AFX News Limited
Centex, Lennar, Pulte Homes’ ratings on review for downgrade - Moody’s
08.23.07, 12:37 AM ET

MUMBAI (Thomson Financial) - Moody’s Investors Service placed all of the ratings of Centex Corp, Lennar Corp, and Pulte Homes Inc under review for downgrade. The review was prompted by the materially weaker operating environment facing homebuilders, the dramatic change in the credit environment surrounding the industry versus only a few weeks ago, and the possibility of a substantive spill over effect on the industry if the blowback from the structured products markets continues unabated.

http://www.forbes.com/markets/feeds/afx/2007/08/22/afx4046369.html

I’ve got something on my mind that I can’t shake lately and it’s not really housing related, but I wanted to get opinions on it. We often talk about consumers tapping their credit cards and how that’s been keeping the economy afloat. I’m sure most people would agree with the generalization that the economy has been doing very well in the short term by giving people apparently unlimited access to credit. Pile on more debt and you get lots and lots of spending, which stimulates the economy, and Ta Da, more production, jobs, etc.

So, my sleep-depriving thought on this subject is about a new possible end-game of all this lending that I haven’t seen discussed. I’ve seen a lot of discussion about how consumers will become “tapped out.” I’ve seen a lot of discussion about how lenders might tighten up the lines. These endings I understand and have predictable, short-term effects on the economy. But this little tidbit (posted above by BM, my other moniker) stimulated the recesses of my brain to a thought I had in graduate school about an overarching “end-game” for consumer credit.

One of the most attractive terms to customers and banks alike, according to Mr. Kahr, are higher credit lines. So in another innovation, Mr. Kahr saw that credit lines could be increased by slashing the required minimum payment. This increased revenue in two ways. First, since it would take longer to pay off balances, each dollar of principal would generate more interest income. Second, the principal itself would be increased because cardholders would be able to take on more debt while maintaining the same monthly payments.
With minimum payments cut from five percent to two percent, for example, a credit card company could increase a credit line to $5,000 from $2,000 and yet charge the same $100 minimum payment.

Simply put, I don’t believe lending agencies have appropriately modeled death. If the consumer is a debtor, the lender can’t collect Sh!t from the estate, and they can’t go after the children. We have MIT Ph.D.’s (Mr. Kahr) who recognize the short-term benefits (to the lender) of raising credit lines and lowering minimum monthly payments (like what is happening in housing, but on a grand scale). It’s great in the short term. The lender is making huge percentages of interest. It’s a great margin.

But when all lending institutions are playing the same game in many sectors, allowing you to keep the debt “alive” (e.g., credit card balance transfers, low payments keeping debt for 30 years, 50 year mortgages, rolling negative car equity into a new loan), they are putting themselves at risk in the long run when people die.

When the first generation of credit users dies off, I posit the banking industry will realize their folly. They will have to recognize that they need to be paid back on principal, not just maximize the interest return on the loaned out principal.

This would have a large consequence for the economy because it would tighten up the amount of credit available. It might be worth some back-of-the-envelope calculations to see how much.

Anyway, my 2 cents.

Cap’n Crunch

FYI-Total sales through 24th of this month in the Orlando metro area MLS..that is about 1.2 million people..747…down from 2400 last year. 40% won’t close for financial reasons. New Home Sales up? Freakin doubt it. I wish these statisticians were keeping track of the curve in my statistics class.

An article describing the global unraveling:

Sachsen LB, the second German bank to become embroiled in the credit-liquidity crunch, is in talks to sell itself to another German bank amid a souring investment in a London hedge fund also hurt by the fallout, according to people familiar with the situation.

The proposed sale of Sachsen to Landesbank Baden-Württemberg reflects how quickly the lack of short-term money has swept through the global financial system in the past month, forcing banks to take dramatic steps to cover failed investments, debt or the cash shortfalls of clients.

http://online.wsj.com/article/SB118800591269008634.html?mod=googlenews_wsj

OK people, this movie looks like a must see for everyone here:

http://www.calendarlive.com/movies/reviews/cl-et-closing24aug24,0,5595997.story

It opened yesterday in what is probably a very limited release, so those of you outside of major metros will have to wait for the DVD. For those in the Phoenix area, it’s playing at the Valley Art in downtown Tempe.

Hmmm…

Aug. 24 (Bloomberg) — The net asset value on your municipal bond funds fell 1 percent last week. What gives?

You thought they should have gone up, right? Didn’t interest rates decline?

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_mysak&sid=agqakBstyBM8

http://tinyurl.com/2pq4l8
In Helena, the pool of applicants has been shrinking even for jobs on the police force. For professional jobs, such as department managers, the city is considering hiring slightly underqualified people that can be trained on the job.

“This is the tightest market I have ever seen,” said Salty Payne, who has worked in the Helena City human resource office for 15 years.

Payne in part blames the area’s building boom, which is drawing workers to construction trades that are offering higher salaries.

Montana state lawmaker Art Noonan lives in the mining town of Butte - the epicenter of a big mining bust 20 years ago. Now, more people are moving in to build second homes and high paying jobs are coming back as copper prices go up.

LOL…this is a good read. Enjoy

This is a human interest story I sent to a friend who writes for the local paper. I dictated it using my voice recorder so forgive the typos etc. But you will get the idea. I am seeing this every day and it is hard to smile when you know as much as we do.

“I wanted to put a human face on this nightmare we are currently going through.

I am dictating this so please forgive any mistakes or typos.

I got a call a few days ago to appraise a property up near Ocala. I drove up there yesterday to meet with the owners who were a little old lady an old man. She spent the first few minutes I was there showing me the 50th anniversary memorabilia that they received for being married for 50 years. I noted that they were very quiet while I was there and basically went about their business. This is unusual. Normally the homeowners will show me through the property and give me all the basic details.

After I finished my inspection I was back inside to retrieve the check for $350. This is the standard fee. The lady said to me “this will be our last refinance. We will never refinance again. We should never have refinanced in the first place but they offered us all that cash.” At this point I get quite nervous about what was going on and I suddenly realized that they had refinanced two years ago using an option arm.

I went out to the car and began to look at my sales and I realized that the mortgage broker had estimated the value at $205,000. This was based upon the homeowners estimate. My sales showed a total value of approximately $150,000. It was obvious that these folks had refinanced using an option arm and their rate was about to reset. I call the broker and she stated that their interest rate would escalate to 13% as of next month. They currently owed approximately $175,000 on their house. Obviously, they are upside down.

This is a real tragedy. These people have no idea what they were getting into even though they are both educated people they are quite old and they had never seen a residential market actually lose value. As I left the house the old man looked down at the table and said “this is not the market it was two years ago.” Obviously, he knew very well what was coming but he was not going to make any effort to educate me.

These people are obviously in their 80s and are faced with the real prospect of losing their home and for that matter their future. This is only one household among millions who are faced with the same building tsunami. It is a damn shame. I am sending all of their money back to them, save $100 for my time and gas. It breaks my heart.

Subprime Slime - Rating Agency Magic Cartoon
http://www.toondoo.com/toondoo/View.toon?param=42492

Tangenelo - Good ‘ol Boys Cartoon
http://www.toondoo.com/toondoo/View.toon?param=42444

I went to my local WaMu branch this morning. They are really pimping savings accounts right now. I am not making this up: A 7.01% savings rate. You have to open with $1,000 and a set amount has to be deducted from your checking account each month.

Last night I met a gal at a bar who is going through a divorce. We had some jagermeister bombers and chatted awhile. She admitted to me she lost a lot of money in real estate in the 1990s (rentals) and is now renting. We were talking real estate and she was saying it’s stupid to be overweighted in real estate. Now this is another instance where a random stranger is bragging about not being caught in the current real estate bubble. The table has turned, in my opinion. Just two years ago the braggers were talking about how their home values were going up!

I kidded her about her going to her Porsche later that evening. She began to take that line and go for it, but then quickly said actually it’s a Honda. Okay she scored some points with me.

We’re getting closer to the time when it’s a very cool or sexy thing to be money-wise and not greedy, while remaining free marketeers.

Man, Faux news has Kendra Todd on right now arguing that 2.2 million people losing their homes is no big deal, because in her words it is only 1% of American’s wealth…

I want to repost Darrell_in_PHX’s comment from late last evening. The similarities between the FB’s and FH’s (Foolish Hedgies) are very clear with the primary difference being only one of scale.

Comment by Darrell_in_PHX
2007-08-24 21:30:24
“Seems pretty simple: ascertain the real value of the collateral, raise the rates and continue making loans.”

But, I borroewd $1 billion in 3-month notes at 4%, from someone that borrowed it as Yen at .5% I used the $1 billion to buy 30-year Sub-Prime MBSs yielding 8%. $40 million a year pure profit for doing nothing!

Now those notes are only worth $600 million.

My 3-month notes are coming due, and I need to borrow $1 billion to roll over my debt. I can’t pay more than 8%, and with negative equity, no one will lend to me for that. I’m not going to just give away my toxic waste MBSs, Therfore, marking to market is not possible.

I surely am not giving $400 million of my own money to pay back my $1 billion.

I can’t be broke, therefore, the Fed must lower rates as low as necessary to get people to loan me $1 billion at less than 8% even though I have -$400 equity.

Not to get too far off track into a religious discussion, but as an atheist I’ve had many discussions with religious people. This current market is taking on a very religious like feel to it to me. The data supported conclusion is repugnant, so the data supported conclusion is wrong. Truth is whatever feels like it has the best outcome to me.

If houses drop 50% in value, then I’m destroyed… therefore all historical precedent and fundamentals guiding markets are wrong… Prices will fall no more than 10%.

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Now I want every person and that means You! to stop making fun of Mr. Angelo Mozilo because of his tan - it is a serious illness.

“In a study released in 2005, a team of researchers at the University of Texas Medical Branch, Galveston, modified the criteria that doctors use to assess substance-abuse disorders. They found that 53 percent of 145 beach-goers studied demonstrated the signs of dependence… on tanning.

Naturally, the next step is to determine precisely what’s behind this biological response. Recent studies have found that the skin can produce endorphins, which led researchers to theorize that UV exposure stimulates endorphin-production to create a sense of well-being in tanners.”

Mr. Mozilo has an addiction to tanning.

So we are referring him into a 12 step program.

Tanners Anonymous.

I won’t say what company I work for, but it is an software company that sells to other companies… We have a solid base in healthcare, and are breaking into govt and finance business.

First quarter, as sub-prime was just surfacing and stocks were rocked… we had very poor sales. (still better than last year, but off trend)

Second quarter, as it looked like things had stabalized in market, awesome sales. We hit our targets, and made up about half our short fall from 1st qtr.

This qtr… we’ve added a few more healthcare, and a new govt contract. But the press releases announcing new customers have slowed “significantly”.

I think everyone, even businesses, are looking to hoard cash and/or pay off debt.

Bill Gross Wants PIMCO Bailout
Mike Mish Shedlock Aug 24, 2007 1:15 pm

The logical conclusion is that Bill Gross is overweight mortgages and wants a taxpayer bailout of PIMCO.

PIMCO’s Bill Gross was asking Where’s Waldo? in his investment outlook for September 2007.

If we can bail out Chrysler, why can’t we support the American homeowner? The time has come to acknowledge that there are precedents aplenty in the long and even recent history of American policy making. This rescue, which admittedly might bail out speculators who deserve much worse, would support millions of hard working Americans whose recent hours have become ones of frantic desperation.

Get with it Mr. President and Mr. Treasury Secretary. This is your moment to one-up Barney Frank and the Democrats. Reestablish not the RFC or the RTC, but create an RMC – Reconstruction Mortgage Corporation. If not, make some modifications in the existing FHA program, long discarded as ineffective. Write some checks, bail ‘em out, prevent a destructive housing deflation that Ben Bernanke is unable to do. After all “W”, you’re “the Decider,” aren’t you?

http://www.minyanville.com/articles/PIMCO-FNM-PTTRX-FRE-mortgage/index/a/13864

I’m calling SAP >; )

http://cosprings.craigslist.org/wan/381189138.html

More FB begging on Craigslist.

Sarcastic response (not by me) to someone begging for free tires on Craigslist.

http://cosprings.craigslist.org/wan/403857977.html

Commentary
Your House Is Worth Less? Good
Thursday, Aug. 23, 2007 By MICHAL KINSLEY

The last time we had this feeling of financial vertigo was when the Internet bubble popped seven years ago. But this is much worse: the value of our homes is collapsing. For generations, rising home prices have been central to our general sense of well-being.

So why is the real estate collapse a good thing? First, because the collapse of any financial bubble can be interpreted as a morality play: greed gets its comeuppance. Subprime mortgages play the role that used to be played by junk bonds. They represent easy money–too easy, in retrospect. Borrowed money, if it gets out of hand, puts economic history on speed: everything rises faster, then collapses harder. Foolish lenders become the enablers of foolish borrowers. In the 1990s, people came to believe that stock prices would rise forever. They learned differently. And now we are learning differently about real estate as well. Whenever the price people will pay today depends on the belief that other people will pay even more tomorrow, you’ve got a bubble. It takes only a slight letdown in those expectations to send the whole delightful, self-feeding process into reverse.

http://www.time.com/time/magazine/article/0,9171,1655723,00.html

A former Treasury official was still keeping the faith as of two weeks ago.

P.S. Did he misspell Mozilla?

August 10, 2007
Today Is a Great Day in Finance!

Today is a great day in finance! That is, it is a great intellectual day for those of us who are friends of and committed to the intellectual project of Shleifer and Vishny, for today one of their theories is made flesh, and stomps about Wall Street like Godzilla:

Andrei Shleifer and Robert W. Vishny (1997), “The Limits of Arbitrage,” Journal of Finance, 52:1, pp. 35-55. Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people’s capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them…

Yes, today we have reached the limits to arbitrage: most of the people who spend their lives trying to buy low and sell high using other people’s money and leverage have given up extending their positions (and so pushing prices back toward normal-time fundamentals), and are hunkered down simply hoping to survive the next month.

Whether this will have macroeconomic implications is unclear, but I would bet not. The Fed and the ECB are pegging the prices of liquid securities, and injecting as much in the way of safe, liquid, short-term assets into the system as needed to keep that so. They are also in the market in other ways. And the nightmare scenarios always involved a simultaneous collapse in the dollar and in consumer demand, and a Fed that couldn’t decide whether to fight the inflation coming from rising import prices or the unemployment coming from collapsing consumer spending. Neither of those show any signs of happening.

Yet.

http://delong.typepad.com/sdj/2007/08/today-is-a-grea.html

August 10, 2007
The Fed Is Buying Mortgage-Backed Securities? Hoisted from Comments

PSP: Hoisted from Comments http://delong.typepad.com/sdj/2007/08/central-banking.html#comment-79038528:

Fri morning’s N.Y. Times online edition:

The E.C.B. injected another 61 billion euros ($84 billion) into the banking system, after providing 95 billion euros the day before. The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then $16 billion in three-day repurchase agreements. The Fed also added money on Thursday.

I thought the Fed only bought and sold Federal debt. This says it is intervening directly in the mortgage-backed securities market. Is this as unusual as I think it is?

Yes.

http://delong.typepad.com/sdj/2007/08/the-fed-is-buyi.html

With all due respect to Professor DeLong, Ben’s comments would confirm Professor Bear spotted the financial panic weeks earlier.

August 25, 2007

Notes on the Federal Reserve’s Current Actions
…
My view is that the FOMC is likely to cut the federal funds rate by 25 basis points at its September meeting, but it will do so reluctantly, because markets expect it, not because it believes the situation warrants it.

Of course, if the financial panic-in-embryo starts to affect spending and to slow the real economy, the FOMC will start cutting rates much further and faster.

http://delong.typepad.com/sdj/2007/08/notes-on-the-fe.html

http://www.atimes.com/atimes/Global_Economy/IH25Dj01.html

Page 1 of 2
‘Cracks’ in credit
By Chan Akya

Not a day goes by without a major European or US bank announcing some kind of financial complication or the other. While much of the problem lies with exposures to the US subprime market, it is perhaps no exaggeration to point out that when banks cannot or will not lend to one another, the global financial system is for all intent and purposes broken.

There are multiple facets of this problem, as I described in recent articles: first, [1] the penchant of Asian countries to preserve fixed
currency values against the US dollar, which has caused the massive and unnecessary reserves buildup that underpins the whole deck of cards that the financial system is today. The second issue is the repackaging of billions of dollars of US housing (mortgage) debt, the defaults on which threaten to wipe out many years of already meager investment returns for Asian central and commercial banks. [2] Third, we have the reactions from the Western central banks such as the US Federal Reserve and the European Central Bank that are aimed at stabilizing the financial system but draw much on the implicit support of Asian savers. [3]

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