A very short history of how we got here:
All of the turmoil in the CDO, hedge fund, and subprime space has come about due to a very simple reason: An inordinate number of recent home buyers have been defaulting on their mortgages.
The why of this is rather simple: These are the folks who historically have not been home owners due to their debt obligations, low income, and/or poor credit. In the past, they were known as renters.
The ultra-low rates that Easy Al put into place when he dropped the Fed Funds to 1% started an entire chain reaction of events: If high rates keep home prices down, well you can guess what ultra-low rates do. Home prices rose due to the lower monthly carrying costs, and we were off to the races..
But the boom begat a feeding frenzy, and corruption soon followed. The appraisers faked values to get loans approved (making a 100% LTV look like a 80%). Mortgage brokers quickly learned how to get nearly anyone approved through no doc/no income check loans, AKA liar loans. A bunch-o-new mortgage products came out — Interest only ARMs, LIBOR based, etc. I am not sure what legitimate purposes these very profitable products served, but we know what they accomplished: They got people into homes THEY COULD NOT AFFORD.
Hence, when rates ticked up, when prices stopped rising, when people could no longer bootstrap paying their mortgages by taking out more home equity loans, the foreclosure rate began to rise.
When this happens, the RMBS/CDOs that have been sliced and diced and resold by iBanks to funds start to devalue. Since so many of these funds use huge leverage, the problem gets magnified.
Hence, the recent Bear Stearns and other fund problems.
~~~
To put this into a geographic context, here is where the foreclosures are coming from:
2007 Q2 Delinquencies:
click for larger maps
Source:
Mortgage Delinquencies
WSJ, July 19, 2007
http://online.wsj.com/article/SB118481288641971250.html
The Bear Facts: Mortgage Woes Are Apt to Worsen
RANDALL W. FORSYTH
Barron’s JULY 18, 2007 10:45 a.m. EDT
http://online.barrons.com/article/SB118470690240369216.html
Barry,
I am not a well paid wall street analyst or economist, but just from listening to knuckleheads I know talk about housing and seeing all of the “Flip this House” shows on the idiot box, I could tell something wasn’t right. I then did some research and came to the conclusion you write about. This was 18 months ago. When Hank Paulson and Ben Bernanke said the housing market had hit bottom several months ago, I knew they were full of crap.
So…last night on Bloomberg there was a show on about the Subprime issue and it featured a discussion between Marc Faber, Jim Rogers, and Ken Fisher. Faber and Rogers said what they always say, buy gold and commodities…the dollar is toast, the debt bubble will be popping for years.
Fisher, on the other hand, said this problem won’t even be big enough to cause a ripple in the boom that is going on right now. Despite his goofy hand gestures, his reasons are compelling.
The vid clip is over at Bloomberg if you want to see it. Could it be that this whole subprime mess will be “contained” to a dollar amount of damage that really won’t have any impact?
sven you got it right with faber he’s on the sell side
fisher’s latest book shows he’s not his father
but do you really think very highly geared trillions of dollars don’t matter
and you are not alone no one can exactly value one cdo let alone how many that are out there
rgds pcm
I was chatting with a CEO of a bank, saying that with securitization of mortages there is much less reason for lenders to worry about credit worthiness and so more dubious loans get made. That is to say, if Jimmy Stewart’s S & L made a loan, he knew he would hold it for 30 years, but when a bank today lends for a mortgage, they know they will hold it for a week.
He replied that securitization may well make lenders less cautious but on the other hand, if the loans go south, investors get burned but the banks are okay which means that there won’t be a classic credit crunch, thus much less chance that defaults will trigger a recession.
What do you think?
Lets not forget that the new $250,000/$500,000 tax-free income from selling a house also increased the frenzy. Where else in our economy can you make that kind of money tax-free? I personally know that it led to a lot of money-laundering–pay for all the upgrades/remodeling with cash and keep the proceeds tax-free. This is one reason that I think A paper may be in trouble too. Many otherwise sober people made big bets because they couldn’t resist the tax-free idea. Will they walk or hold out for years?
“if the loans go south, investors get burned but the banks are okay”
They’re okay if they don’t get sued ’til death separate them from their cashola. Judging by the amount of negligence and outright deceptive lending practices of the banks during the housing boom, and the amount of money in play, this whole affair could get truly ugly.
As long as the current Administration is in place, the banks are safe. After January 2009, all bets are off baby!
Barry:
this market looks unbeatable.
china produced another 11% GDP growth yesterday.
It “feels” like this will go on for some time.
employment is low yet inflation is reported to be low.That means stocks are the only place where your dollars don’t get eroded.
Meaning unless you speculate, you are a chump. I hate such circumstances.
tom:
what about “putbacks”.. i know some lenders were forced to take back the loan from the investment houses. So it is not clear cut.
In early 2005, Bennie and June wanted to marry and set up housekeeping. Bennie rented a small studio and June was still living with her sister. They went looking for a two bedroom apartment and found one for $1250 a month. They were told they needed to pay first and last months rent plus a $750 deposit. They did not have $3250 in cash. June was a secretary and earned about $28,000 a year pretax. Bennie was a salesman for a tote the note used car dealer and averaged close to $38,000. They were bright young kids and knew from their parents to keep their housing expense to about a quarter of their after tax income.
Bennie’s Uncle Vinny had a solution for their dilemma. He knew of this house that had just gone on the market,, by owner in a very nice neighborhood in Phoenix. It was priced at $600,000 and was just two years old. Uncle Vinny told Bennie to go to the owner and offer him $625,000 on the condition that the house would be financed for $700,000 and that the day after closing the seller would kickback $75,000 to Bennie and June. Bennie would have to pay cousin Lennie, a certified appraiser, $15,000 which would leave Bennie and June about $60,000 to set up housekeeping. Their loan would be No doc no closing cost 100% with a two year teaser rate of 3.75%. It would reset in January 07 at 4.5% above Libor.
Uncle Vinny recommended that Bennie save the amount they would have paid for an apartment to pay taxes and insurance on their new home and use the $60,000 to help pay the monthly mortgage. It was a done deal.
Every January for the past two years, Bennie and June’s insurance company raised their coverage on the house by $100,000 assuming like all insurance companies that homes only appreciate in value. Besides structural damage now at $900,000, the contents package was equal to 40% of the house value or $560,000.
Bennie and June were happy. Their house payment of $2187 a month was $937 more than rent but that money came from the $60,000 they banked at closing with about $7500 left over after two years which they spent for furniture and patio furniture by the pool. Then came the shocker. Their mortgage holder informed them that their loan had re set to 9.8% which increased their monthly to $5,716 a month.
Bennie went to Uncle Vinny for advice. Uncle Vinny told them to refi but the market had collapsed and Bennie and Junes house was only worth $600,000. Uncle Vinny then recommended a visit to his second cousin Denny who was the son of great Aunt Winnie. Denny specialized in mortgage equity extractions.
Denny told Bennie and June to plan a vacation, purchase two potted palm trees and a space heater to keep them alive in their garage while they were away. Curiously Denny told them to make sure the car they left in the garage had a full tank of gas……..
Upon arriving home from vacation, Bennie and June were aghast to find their beautiful four bedroom three and a half bath home utterly destroyed by fire! Poor heartbroken Bennie and June collected $1,360,000 from insurance and paid off their $700,000 mortgage. A small gift of $50,000 to Uncle Vinny and Denny for consulting on this matter still left them with $510,000, enough to completely rebuild their home on their own lot and foundation which did not burn. Fire equity extraction. FEW coming to a neighborhood near YOU ?…………….
when a bank today lends for a mortgage, they know they will hold it for a week.
unless they sold it to a hedge fund run by the parent company.
All the while the dollar gets fed to the wolves …
Like Y2k that was suppose to destroy the world, Avian Flu that was suppose to kill 100 million, and now a day’s voodoo Global warming that is suppose to help accelerated melting of the North Pole, sub prime is a new and the latest ‘false tool’ of doom and gloom .
Just go fast backward, in 2005 and 2006 it was all about impending recession and exploding deficits. One needs to be well aware of ‘left-wing Keynesian economics’ crying wolf for quite a long time.
On needs to know more about the historical propaganda of ‘left-wing Keynesian economics.’ Numbers involved in the subprime issue aside the same cable of left wing liberals today make a mountain out of a molehill. Their Paul Krugman Op-Ed column wrote in 2003 ‘for 20 months United States economy has been operating in twilight zone: growing too fast to meet classic definition of recession, but too slowly to meet usual criteria for economic recovery; says recent spate of optimistic pronouncements only show that things are getting worse more slowly; expects growth in second half of year to be faster than in first half, but not high enough to make jobs easier to find; calls this indictment of Bush administration’s economic policy.’
Donald Luskin their nemesis wrote a piece in Jan 2004 highlighting their errors of prediction.
http://www.nationalreview.com/nrof_luskin/kts200406141035.asp
In November 1982, when Krugman was a staff economist in Reagan’s Council of Economic Advisors, he co-authored with Larry Summers (later to be Clinton’s Treasury secretary) a memo warning of a coming “inflation time bomb.” Krugman and Summers wrote, “It is reasonable to expect a significant reacceleration of inflation in the near future … A significant portion of the slowing of consumer price inflation since 1980 does not represent a reduction in the underlying rate.” the “stagflation” of the 1970s — the combination of high inflation and low economic growth — utterly confounded the Keynesian orthodoxy, which would have predicted that such a combination was utterly impossible. Then in the 1980s the Keynesian model predicted that the combination of falling interest rates and Reagan’s tax cuts should have created a massive stimulus to aggregate demand that would send inflation even higher. Yet inflation fell dramatically over the 1990s.
At that point inflation had fallen from a maximum of 14.6 percent in March 1980 to 4.5 percent. Its average for the rest of Reagan’s presidency was 3.5 percent. The “inflation time bomb” Krugman predicted didn’t go off. It still hasn’t.
Please read this from 2004…
<>
All the above have come out to be false.
With probably economic growth making the deficit disappear.
.”I think the deficit for fiscal 2007 will be a lot lower: $135 billion (i.e., a harmless 1.0% of GDP). I also see that if the current trends continue, the unified budget would move into balance in October 2008.”
http://www.optimist123.com/optimist/2007/07/deficit-watch-j.html
Last fall Edward Lazear, the Bush administration’s top economist, explained that what’s good for corporations is good for America. “Profits,” he declared, “provide the incentive for physical capital investment, and physical capital growth contributes to productivity growth. Thus profits are important not only for investors but also for the workers who benefit from the growth in productivity.” Economic growth is a function of domestic demand and global demand, with 1 billion new consumers awaiting US products from China, Brazil and India , Russia we are looking at robust earning growth of technology unseen before.
Subprime as a percentage of debt is already a unrated debt, the diversions of the corporate yields point to long standing market practice of shooting first and asking questions later, market is efficient and will deal with the problem and excesses in the best possible manner. Underlying this strategy is the fact that overall ‘growth’ begets more growth and cash settles most of the problems of corporate excesses. The CDO graph represents a picture where nearly 15% or even less forms the ‘toxic waste portion, the one which is not investment grade. Now if we see the total market of CDO’s at 503 billion $’s, and even the whole 15% of the toxic waste defaults we are here looking at 80 billion $ say 100 billion $ spread as follows…
32% Banks and brokers…Equals 32 billion $
22% Asset managers….. Equals 22 billion $
19% Insurance………. Equals 19 billion $
18% Pension funds…… Equals 18 billion $
10% Hedge funds…….. Equals 10 billion $
In a world where monetary assets have grown to 145 trillion $, the amount of ‘toxic waste portion’ of CDO’s as a proportion is very negligible and forms anyway the riskiest part of the CDO universe and well provided for. Those who will suffer loss will be the ones who have an inbuilt appetite for larger risks. The markets being primed for efficiencies take their own toll, sensationalism and herd mentality will take its due course, whoever said it is easy to make money through pyramids of leverage.
We’ve had several suspicious fires located at condo developments that have not quite been finished yet. FEW already starting here.
As far as the long post above..
Luskin?????? That’s where I stopped reading.
I do not even know where to begin with that…
Ciao
MS
If the original bond investors bail and the fund or other investors buy their position at 2 cents on the dollar, so what? Wouldn’t
these new investors still have a claim to the mortgages that make up the bonds? So, when the house sells at auction for half
the original price, the proceeds distributed will be far north of the 2 cents they paid, Yes? No?
Question from a small potatoes guy: How “contained” is “contained enough”? We know that sub-prime debt is already toast, and the REOs are starting to pile up. But when do we really say that we’re in deep doo doo?
I work for CurrentForeclosures.com, a foreclosures site and have seen a huge increase in the number of foreclosures in the past 7 months. I believe it is a combination of not only sub-prime and ARM mortgages, but also the high number of people who have gotten loans with interest rates at an all time low… in addition to the rapid depreciation in some areas and the difficulty some are experiencing in selling their homes.
The thing is…it seems, is that to determine the worth or worthlessness of these securities you literally have to dig through the “collateral” (mortgages/homes) determine their value and then write them down. No one is going to know ANYTHING for years cause no one on wall street is going to do that work.
All that is going on now is a couple groups trying to rid themselves of the problem.
There are plenty of deficits but the largest ones are dealing with information
The aggregates deterioration are to be seen on a trend (please see the Ned Davis research ratios of US debts to GDP 177 PCT or ratios of commercial debts to GDP 332 pct) , the financial risks are systemic whenever concentrated (please see the P/L of banks which can afford to publish their losses HSBC), the assumption that they are diluted throughout titrisation is ill fated (please see as a sample 60 subprime lenders foreclosure and see the Bear and Stern funds where around 3 Billion USD were deemed to be injected when B/Stern market cap is 20 BILLION USD small in size? Small in sample? Small in leverage?), to be diluted throughout aggregate GDP’s is a wishful thinking the US GDP is of around 13 trillion USD the World GDP of major economies 52 trillion USD and JP Morgan total derivatives exposure of 45 Trillion USD.
The main problems are issues which have been hidden from the public, built up in artificial profits and contained through « a plaster on a wooden leg » the equities markets. The productive world need clarity and explanation not the sake of rejoicing but to have better understanding of the operational environment, and I dare to think that economic agents are as mature as the wall street of the world and as productive as their administrations .
You left one thing out of your analysis, Barry. The loose lending standards, low rates and liar loans allowed people to overbid for homes, pushing prices higher, which only tempted more people into the market to get in on the “sure thing” in real estate.
Contrary to your analysis, I don’t think it was primarily low interest rates that fed this frenzy; it was the loose lending standards that Big Al nurtured that caused the big problems. Low rates by themselves weren’t enough to inflate the bubble; it took a lot of looking the other way by the Fed, Wall Street, S&P, Moody’s, your local mortgage broker and the local appraiser to create this bubble.
I’m watching Bernanke talk today. I really don’t understand how he can continually downplay the negative savings rate. He persistently talks about the average Joe having untapped savings in his home, yet downplays the fact that the average Joe must take on more debt, or sale his home, to tap that equity.
Come on Ben, savings is real and tangible, it is not something that you must incur more debt to benefit from. If we were going to use Bernanke’s logic, one’s savings would be subject to the highest bid in a declining market were a third party (mortgage co) dictates the value of the asset.
In economics, personal saving has been defined as personal disposable income minus personal consumption expenditure.
Hey Ben, let me clarify:
Income – Expenses = Savings
All this makes me wonder what the FEDs longterm intent is.
Ross,
I think you have spotted the next major economic “device” to keep the bull market rolling.
I’m actually quite surprised we didn’t have more “accidental” fires in upside-down neighborhoods on the 4th of July.
“Really officer, I saw that bottle-rocket lodge itself right in the eaves, and the whole place went up like a tinder-box…”
The Fed’s longterm intent is to see no evil, hear no evil, speak no evil….while making sure the evil doesn’t impact the banks.
You, however, are on your own.
The purpose of the Fed is to protect the banking system and not individuals.
I agree 100% with Tom.
In theory, RMBS/CDOs are a wonderful innovation because they enable the transfer and sharing of risk. Unfortunately, because everyone in the underwriting process believes risk is being offloaded to the next link in the chain, a perverse situation develops where nobody is incented to say “no” at any step.
It is too oversimplified, and intellectually dishonest, to lay all the blame for this at Greenspan’s feet. Greenspan was on no credit committee that approved a single mortgage loan. He was on no credit committee that approved extending a mortgage loan warehouse facility to any mortgage originators. He didn’t approve the creation of a single RMBS. And he didn’t approve bringing a single CDO to market.
I blame the perverse incentive structures along the entire chain.
hey Igbal
i wish you would post more often
regards to Tom and Grody’s comments I agree about the mechanics of the shift in ownership however it still represents value that no longer is there. At some point, who knows when, the ever shrinking value of the RMBS/CDO market is and will catch up to the market. Whether a bank lost it or an individual it still was lost and is not available to place value on. This is the shell game of Wall Street……convincing people that they are ok while everyone else is not and then doing the exact opposite of what they tell the client. Bear Stearns tanking of the ABX market on Monday is a classic example…and when do the people who have money at Bear Stearns find out about it? Tuesday night when there is virtually no value left.
“Our money is safe and secure…..Safe and orderly exit…blah,blah,blah……you have none left”- Essence of the letter from BS to clients. That was hardly a safe and orderly exit monday BTW.
They (BS) managed to keep that off the 2nd qtr books (the no value part-lol). I wonder what the actual books show as to the closing value on June 30th- The inflated bulshit value or something in between?
thats; ok we’ll just keep raising values of stock that have 2% margins and pe ratios well over 100, makes alot of sense…..
Ciao
MS
Philippe – “There are plenty of deficits but the largest ones are dealing with information”
I agree. Our gracious host says in relation to delinquencies…
“These are the folks who historically have not been home owners due to their debt obligations, low income, and/or poor credit. In the past, they were known as renters.”
It may well be true that the increase in foreclosures is mainly in new homeowners, but do we KNOW this or are we assuming facts not in evidence. BR?
Is it possible, for example, that the rise in foreclosures isn’t primarily driven (yet) by owner occupiers at all, but by speculators walking away from underwater properties with negative cashflow?
BTW one problem with the mortgage industry (in California at least) is that the license to become a real estate agent (not that hard to begin with) is the same one used for a loan broker. So with little or no background in Finance you to can become a loan broker or a real estate agent. The two are most certainly not the same. However they both rely on one thing: closing the sale. Which sort of adds to the problem of incentivizing the entire industry rightly or wrongly.
Ciao
MS
Great post! I call it “the cycle of greed:”
http://financialphilosopher.typepad.com/thefinancialphilosopher/2007/06/weekend-wisdom.html
“Luskin??????”
AKA: The stupidest man alive?
That Luskin?
I don’t know, but would suspect the spike in foreclosures in the Rust Belt is more cash out refis and the spike on the coasts is more purchases by optimists and investors. It’d be interesting to see the mix of purchase and refis by market. I suspect we’re dealing with 2 or 3 related phenomena.
I am not an expert in the derivative mortgage markets.
I have a question regarding the massive shorting in the ABX markets, that I understand to be “credit default swaps”. They are not selling/hedging mortgages, or CDO’s — they’re making a macro hedge.
My question is — given that the “braver” (read: smarter?) side of the trade is the buyer (not “forced” like the seller), couldn’t there be a whipsaw back on these default swaps at some point? IOW, the price level on these swap trades is not necessarily relational to the actual (illiquid) mortgage pools in question. So what would be the effect if the market for these credit default swaps improves (as they should)?
PS…this question is (humbly) directed at anyone involved in the derivitives market…
TIA
From Subaru Legacy to Paris Hilton cartoon…
Out and About on the Net ~~~~~~~~~~~~~~~~~~~ Hey guys its true – I like performance and millage on my ’97 2.2 liter Legacy….[Note to Subaru: no one drives a Subaru for the gas mileage; they drive them in SPITE of
The Fed and it’s FCB cousin’s have really done a job creating and sustaining the mortgage bust.
In their zeal to ignite inflation, they destroyed the incentive to save while igniting a housing bubble with ultra-low interest rates. Their appalling lack of oversight allowed the banking system to invent, develop, and operate the mortgage credit scams.
The monetary and fiscal stimulation has finally ignited inflation where interest rates have no where to go but up until the only remedy for inflation, ie; recession, sets in.
Meanwhile the ARM reset is mowing down borrowers. Commodities inflation is busting the bank.
Stay tuned. Speculative excesses, asset price inflation, and deteriorating credit quality are a predicted reaction to credit bubbles created to sustain mis-guided supply side economics.
C’mon give us a break. How the hell does one go from Triple A to Triple B and hope to retain a shred of credibility. Lord love a duck. How…rhetorical question. Unbloodybelievable.
NEW YORK, July 19 (Reuters) – Standard & Poor’s slashed ratings on some top-rated mortgage bonds by eight notches on Thursday as it increased assumptions for losses on closed-end second-lien loans.
Eight classes of mortgage bonds, including some issued by a Goldman Sachs Group Inc. trust, were cut to “BBB” from “AAA” as S&P applied its new assumptions, it said.
Long story short, I perchance spoke to a guy who works for one of the big banks on the Eastern seaboard who handles all their foreclosures. I was calling him about a rather high-end house the bank had to purchase back at sheriff’s sale, but was outside of the regional states they write mortgages in. During the course of the conversation he explained that the bank had “purchased a whole bunch of bundled mortgages, and at the time they were laughing all the way to the bank” (the last part said with heavy sarcasm). We both laughed at some length.
Anyway, he said he is swamped with foreclosures from all over the country and is getting further and further behind processing the properties.
.
Sven,
“Fisher, on the other hand, said this problem won’t even be big enough to cause a ripple in the boom that is going on right now.”
“Boom” ?
Where ?
.
sam,
“It ‘feels’ like this will go on for some time. employment is low yet inflation is reported to be low.”
I assume you meant that unemployment is low, but it must have been a ‘Freudian slip’, as we are down by millions of jobs from where we were in 2000, as unemployment is high. Don’t even get me started on inflation that is “reported to be low”.
.
Iqbal posted:
“Donald Luskin their nemesis wrote a piece in Jan 2004 highlighting their errors of prediction.”
Luskin needs to try a mirror. And hire a fact-checker. And stop drinkin’ the Purple Kool-Aid.
“in the 1980s the Keynesian model predicted that the combination of falling interest rates and Reagan’s tax cuts should have created a massive stimulus to aggregate demand that would send inflation even higher. Yet inflation fell dramatically over the 1990s.”
Because tax rate cuts were reversed and the exploding federal deficits were turned into federal surpluses and federal debt was paid down in the 1990s.
“Its average for the rest of Reagan’s presidency was 3.5 percent.”
The CPI was 3.8% in 1982 and 4.4% in 1987 and 1988. The average CPI from 1981 through 1988 was 4.26%, whereas the average CPI from 1993 through 2000 was 2.58%.
“I think the deficit for fiscal 2007 will be a lot lower: $135 billion (i.e., a harmless 1.0% of GDP)”
At least five times that (still the largest in history), and would be even higher if a corporate tax cut had not expired, thereby raising taxes, which of course raises revenue.
.
So much is left out of the budget that it is a near meaningless economic figure. It’s much more a political figure.
“Crash2Deflation2Depression”
By 2010-2015=(vs.top)
50-70% off Homes
60-80% off condo+townhouse
80-95% off land,lots,acres
30-70% off commercial(all)
Experience=3ups+3downs
Deals since 17(thanks dad)
1160% Avg.Gross profits10+yrs
2 year Avg. hold last 10+ yrs
196 Repo deals last 10 years
66 countries Researched & Visited
Read 100+ business books/year &
20k+pages/yr=law+economics+finance
As Warren Buffett wrote:“Be fearful
when others are greedy & be greedy
when others are fearful.”
BBA Finance & Real Estate, Hawaii
Ccim Cria Cam Ems Gri xParalegal-Ca
xTaxLic-Ca xRealtor-CaHi xInsAgt-CaHi
xNASD-CaHi http://www.johnjasonchun.com
~~~
BR: Ouch!
Florida foreclosures looking awful
More bad news on the housing front. Here are some maps and charts. Note Florida and Nevada. Not that Michigan, Ohio, Pennsylvania, or New Mexico are doing well. These charts are from the WSJ, via The Big Picture.
These might also make taking back a co…
Over the weekend I spoke to a recruiting coordinator (who I met at a BBQ) and I learned their hiring phase for banks has changed from loan officers two years ago, to foreclosure council officers, who are going to help those facing trouble in this market. Just this conversation gave me the whole picture! How long will this be going on for, months, years, decades?
“….He replied that securitization may well make lenders less cautious but on the other hand, if the loans go south, investors get burned but the banks are okay ….”
Not necessarily true. As defaults rise Wall street is getting jittery buying these toxic loans. If the banks can’t sell them, them wouldn’t make them or would have to cut back on them.
There are two spam posts in this conversation. Both TSmith and repo4sale’s posts should be deleted. Otherwise, thanks for the site.
I think this is going to be a long and slow process. If banks can no longer sell the loans, they’re going to slowly cut back on whom they loan money to, which will have ripple effects on consumers. At the same time, we’ll gradually find out who all the investors who bought these securities are. I think that’s where the real trouble lies (and lawsuits begin).
soon or later everywhere will be red, Some cities just don’t want to show the real figure.
Is this subprime issue kind of like Y2K with “experts” analogous to Ed Yardeni and Gary North telling us that the world is going to end? Where are the losses going to be concentrated in the mortgage derivatives market. If they are mostly overseas, who cares?
Is this subprime issue kind of like Y2K with “experts” analogous to Ed Yardeni and Gary North telling us that the world is going to end? Where are the losses going to be concentrated in the mortgage derivatives market. If they are mostly overseas, who cares?
What trouble. Just because my neighbor who is a gardener and makes min wage owns a $560,000 house. The market is in GOOD shape, The forclosure market. A gardener in Northern california owns a 560,000 house!! Liar-loan special goes down in flames.
repeat 2,000,000 times welcome to California housing market.
Barry – friggin’ brilliant summary. It was all about the mortgage bubble from 2004-2006 that caused the housing run-up that many are paying for now.
Has anyone compared the map here with the red/blue election maps of 2000 and, particularly, 2004? As a casual observer, it sure seems likely to me that part of the Republican strategy was to manipulate the market to keep the public fat and happy. Because Bushco has manipulated every other aspect of public policy based solely on political expediency, why wouldn’t they do the same with monetary policy? I mean, if you can fiddle with stuff to get more folks access to a nice house, and a nice car and a plasma tv financed by a second mortgage on that nice house, who really gives a damn that they can’t afford any of it? They will be happy and happy people don’t vote to change the government.
I’m sure the big explanation is a bit more complicated than that, but still, it seems the only logical explanation for a lot of things that have gone on over the past few years, such as Greenspan’s mysterious love affair with ARM’s. Occam’s Razor points to hidden agendas when smart people do stupid shit–especially when they do that stupid shit again and again. And with this administration, when smart people (which excludes, for example, people like Mike Brown) do stupid shit, Occam’s Razor points to politics.
It seems to me that this issue is in some respects identical to the “peak oil” issue. The Peak Oil issue simply posits that since oil is a finite commodity, then there must be some point at which the world will run out, or at least, if price determines allocation, make it so expensive as to be unusuable as a fuel source.
This issue is about the value of money versus the value of the underlying commodity, which is presently real estate.
In the US most of what is called “money” is actually credit, or debt. In reality there is very little actual “money” around–only about $800 billion–of which about half is actually held overseas as a sort of “reserve”. This is the stuff you have in your pocket–so-called “street money” Everything else is credit.
The vast majority of “money” that is passed between central banks is actually credit. Credit is actually a claim on future production. Credit depends on the ability to pay.
Here is where the problem begins to get very convoluted. First, there are obviously the easy targets–those who couldn’t repay the loans, those who should never have been given credit to begin with. But they aren’t the villians here, for the villians are those who only sought to place any loan under any circumstance because they worked on a percentage basis, IOW, they made more money by placing more people in debt.
This easy credit drove up the price of real estate in comparable areas, which in turn drove up prices in adjoining areas. The disease spread. Now many people own property they think will bring a certain price, but the underlying value of the property is actually much less than that.
I simply mean that the market clearing price of most real estate is much less than the real estate is appraised for, for a wide variety of reasons.
No one wants to hear this, for many people use their homes as an ATM, drawing out equity as the price inflated. Now there is the very real effect that the property is worth less tomorrow than it is today.
Not a pleasant thought, I know, but true nevertheless.
More Convolution:
“Here is where the problem begins to get very convoluted. First, there are obviously the easy targets–those who couldn’t repay the loans, those who should never have been given credit to begin with. But they aren’t the villians here, for the villians are those who only sought to place any loan under any circumstance because they worked on a percentage basis, IOW, they made more money by placing more people in debt.”
The “originators” then sold the loan to others and got paid for this loan. That is to say, they exchanged the loan papers for money, and shifted the loan onto someone else. They got they money and the buyer got the loan. Multiply by several hundreds of thousands. Big problem.
This problem will not be assuaged by having the various states make the mortgages good, in effect bailing out the lenders. The lenders in this scheme need to go straight to jail, for they are thieves of the highest order.
Fun with Mortgages
The Big Picture (great blog) sums up the story of the subprime meltdown very nicely in this post. Check out the nice graphs of Q2 delinquency rates and where they are occurring. All told, it had a troubling (though deserved) effect on investment bank s…
Yeah the whole subprime problem is because of Bush. Just like how he was responsible for the tech crash of 2001 and 9/11…sure!..idiot. I bet from the minute you get up each morning you’re thinking to yourself..hmm I wonder how Bush and those evil Republican’s are going to ruin my day. I bet if someone cuts you off in traffic you blame Bush for that too. Get a life and visit some websites other than moveon.org.
has anyone heard of the foreclosure council of america? From what I hear they are a new service that screens investors so that homeowners know they are dealing with someone legitimate..please let me know if you have any info.
Do you think that due to media-hyping foreclosures banks are tougher to negotiate with?
It is important to realize that help is always available – it is never too late. But the sooner action is taken, the better. When it comes to foreclosures, time is your enemy.
I love this stuff. Thanks for your post. I hope people realize how valuable this kind of information is.