The percentage of defaults in the housing market is not that great so blaming everything on the subprime market is an oversimplification. So is the slow down in the sale of homes.
What is really going on is that hedge funds borrowed money with little in the way of liquid assets to back it up. This is exactly what happened in 1929 when the margin rate was 10%.
Hedge funds have been bragging over the past few years about how highly leveraged they were. This is, of course, a sign of risky behavior, not something to boast about.
I will be very surprised it this non-productive behavior spills over into the real economy. Profitable firms that need to finance new operations will find the capital. Takeover deals and debt-financed stock buybacks won't.
The real danger is the same one that caused the stagflation in the 1970's - a guns and butter deficit spending policy. The debt must be paid. There are only two ways: raise taxes or devalue the currency. Last time it was inflation and I'm guessing that is what will happen this time as well.
Many low risk, fixed income, securities are now selling at a discount. Buyers are betting that inflation will cause the real value of these instruments to drop and are demanding the discount to compensate.
Can societies deliberately bring about economic disaster? Well one only has to look at Germany in the 1920's to see how even an advanced society can do it with the right mix of incompetents at the top.
I think the US is already in a recession. The signs are everywhere. Just yesterday Macy's, a middle scale department store chain, reported an earnings drop. This was preceded by similar news from Walmart. Walmart even went so far as to admit that their customers were running out of money before the end of the month.
One thing is sure that if all those who were dead wrong last week are now explaining what is really going on they are still clueless. Policies not Politics ---- Daily Landscape
The percentage of defaults is not great _yet. Buyers with negative equity have never been so numerous (40% of 2006 borrowers), and that's a population highly unlikely to fully repay their loans.
The subprime boosted the market, helped boost prices and fuelled the price spiral which created the "wealth effect" for many and underpinned consumption for many with otherwise stagnant incomes.
Profitable firms that need to finance new operations will find the capital.
Well, it's not clear today that they will. Not at the conditions they expected. and many firms that are in marginal situations will find it a lot more difficult. In the long run, we're all dead. John Maynard Keynes
Borrowers hit as refinancing options vanish As world stock markets reel from the collapse in the subprime lending market and Countrywide, the biggest US mortgage lender, struggles to stay afloat, borrowers such as Cynthia and Joe Esperaza are grappling with problems of their own. The Esperazas have two children and live in Santa Clarita in California's San Fernando Valley. They took out a Countrywide loan three years ago after having been sent promotional literature by a local mortgage broker. The Esperazas were given a teaser rate of 1 per cent for the first two months of the mortgage. But then, they say, the rate rose in stages - from 2.8 per cent at first, all the way to 8 per cent currently. Eventually it will hit 9.95 per cent. As a result, the Esperazas say, they cannot keep up. They are paying each month only part of the interest that they owe - not the principal - and that means their debt is continuing to grow. In the mortgage industry this is known as negative amortisation or "neg am". For the Esperazas, it means that having borrowed $326,000 three years ago, they now owe $344,000. (... In California, where Countrywide is based, foreclosures have soared 800 per cent as borrowers fall behind in their payments. (...)Their loan was fixed at 5.9 per cent for the first two years. After the two-year teaser period lapsed, the rate rose to 8.9 per cent. It will increase by an additional percentage point every six months until it reaches 12.4 per cent. "They didn't tell us this was going to happen," says the father of the family. His wife adds that she was told she would be able to refinance the loan before the end of the two-year introductory period.
As world stock markets reel from the collapse in the subprime lending market and Countrywide, the biggest US mortgage lender, struggles to stay afloat, borrowers such as Cynthia and Joe Esperaza are grappling with problems of their own.
The Esperazas have two children and live in Santa Clarita in California's San Fernando Valley. They took out a Countrywide loan three years ago after having been sent promotional literature by a local mortgage broker.
The Esperazas were given a teaser rate of 1 per cent for the first two months of the mortgage. But then, they say, the rate rose in stages - from 2.8 per cent at first, all the way to 8 per cent currently. Eventually it will hit 9.95 per cent.
As a result, the Esperazas say, they cannot keep up. They are paying each month only part of the interest that they owe - not the principal - and that means their debt is continuing to grow. In the mortgage industry this is known as negative amortisation or "neg am". For the Esperazas, it means that having borrowed $326,000 three years ago, they now owe $344,000.
(... In California, where Countrywide is based, foreclosures have soared 800 per cent as borrowers fall behind in their payments.
(...)Their loan was fixed at 5.9 per cent for the first two years. After the two-year teaser period lapsed, the rate rose to 8.9 per cent. It will increase by an additional percentage point every six months until it reaches 12.4 per cent.
"They didn't tell us this was going to happen," says the father of the family. His wife adds that she was told she would be able to refinance the loan before the end of the two-year introductory period.
Can these people really pretend that a 1% rate was a reality? Or even 5.9%? They were counting on cheap money as far as the eye can see and closed their eyes to the risk. It's a sin that brokers preyed on their hopes but they are partially culpable for not having the sense to understand variable means variable. Not variable only if it moves in my direction and someone will show up to bail me out in a year or so. Just what did the notice that the max could be 12.4% mean to them?
Their real problem is the house probably isn't worth $344k. Time to call the bank and work out a better deal or hand them the keys and face reality. They've lost their down payment but probably gotten cheap rent as their interest payments were tax deductible.
Which is exactly what a mortgage broker said to me three years ago.
I don't think the ignorant have an exclusive franchise on gullibility. You can't be me, I'm taken
But it will take longer than you might think for that negative influence to decrease. Let's take a look at the following table. This shows the amount of adjustable rate mortgages that reset each month for the first half of this year and will reset for the next 18 months. Note that these reset numbers are a driving factor in the increasing rise in foreclosures. Pay attention to the numbers I highlight in red [sorry, no red-ed] for January through June of 2008. The largest portion of mortgage resets is not until next year. (in dollars, billions) Jan 2007 $22 Feb 25 Mar 35 Apr 37 May 36 Jun 42 July 43 Aug 52 Sep 58 Oct 55 Nov 52 Dec 58 Jan 2008 80 Feb 88 Mar 110 Apr 92 May 76 Jun 75 Jul 50 Aug 35 Sept 26 Oct 20 Nov 15 Dec 17 We have just seen $197 billion of mortgage resets so far this year. That is less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007 or $521 billion. This suggests to me that the number of foreclosures is due to rise dramatically from the already high current levels, putting more homes into a weak housing environment. These homes that are going to see reset prices are for the most part not going to be able to be rolled over into a traditional 30 year mortgage because there is not going to be enough equity to get a traditional mortgage. While the total increase in payments is an estimated $42 billion, which is not all that large in the grand scheme of things, to the individuals who are paying the increase it is a large increase in their housing costs. My estimate is that this is about one-half of 1% of total consumer spending. Along with inflationary rises in food and energy, this is going to continue to put pressure on consumer spending.
(in dollars, billions) Jan 2007 $22 Feb 25 Mar 35 Apr 37 May 36 Jun 42 July 43 Aug 52 Sep 58 Oct 55 Nov 52 Dec 58 Jan 2008 80 Feb 88 Mar 110 Apr 92 May 76 Jun 75 Jul 50 Aug 35 Sept 26 Oct 20 Nov 15 Dec 17
We have just seen $197 billion of mortgage resets so far this year. That is less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007 or $521 billion. This suggests to me that the number of foreclosures is due to rise dramatically from the already high current levels, putting more homes into a weak housing environment.
These homes that are going to see reset prices are for the most part not going to be able to be rolled over into a traditional 30 year mortgage because there is not going to be enough equity to get a traditional mortgage. While the total increase in payments is an estimated $42 billion, which is not all that large in the grand scheme of things, to the individuals who are paying the increase it is a large increase in their housing costs. My estimate is that this is about one-half of 1% of total consumer spending. Along with inflationary rises in food and energy, this is going to continue to put pressure on consumer spending.
One theory says that the tumble never went far enough last time, that the stock market went from bubble to froth, and still needs to go to its norm. Not that I want to see anyone in misery, myself included, but it would be much better for this to happen during these days of the Bush malAdministration. He still has over 500 days to screw things up. It would be best if he is completely discredited by a completely shaken economy, than him stirring up trouble with what little credit he has. Never underestimate their intelligence, always underestimate their knowledge.
Frank Delaney ~ Ireland
