Saturday, November 24, 2007

Snarky Commentary

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.


Yes, the 12% of the mortgage debt that is ‘sub-prime’ is a big problem, but what percentage of the other 88% is held by investors or rational landowners who are upside down?

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

In 1928, people were not addicted to government benefits and were relatively ethnically homogeneous. We had a positive trade balance, other countries did not lend us money to pay off our dependent masses.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Prices have already fallen up to 40%.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

A nation cannot sustain itself by spending at the mall.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Too bad about those civil servants.


Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

Colombo, you are the sucker. The banks weren’t doing you a favor by finding a way to make you happy to keep sending them money on an asset in which you are probably upside down. Your neighbors likely walked away because they were rational and had a calculator.


This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

The number is closer to $2 trillion


There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

Insert sexist comment here.

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

If Schumer was really looking out for his constituents, he would tell them to walk away from negative equity situations. Schumer is making good with his banking friends. Screwd.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

Translated print money. Gold up. Dollar down. Wheelbarrows futures up.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

The dumbest thing for our elected representatives to do.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

And who should be hanging from a highway overpass.

"We've never been in this situation before."

Technology Bubble.
Housing Bubble.
Government Bubble.
Democracy Bubble.

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