I don't understand the outrage here. The over-riding of a home equity loan is that you have some equity in your home. If house prices fall, wiping out home equity,then on can hardly be surprised that banks stop lending HELOCs.
At the risk of making a tangential point, should HELOCs be used to finance pre-school feews, as the woman in this article from the WAPO seems to be doing?
Homeowners Losing Equity Lines As House Values Fall, Some Banks Withdraw Credit
Nancy Corazzi was told by her lender, USAA Federal Savings Bank, that her equity line of credit was suspended because her Howard County home had dropped in value. In one brief phone call, Nancy Corazzi's lender yanked away what was left of the $95,000 home equity line of credit that she and her husband took out five months ago.
The lender informed her that her Howard County home had plummeted in value and the company did not want the risk that she would owe more than the house was worth. "I got off the phone and I was shaking," said Corazzi, who was using the money to pay preschool tuition for her twins ."I was near tears. We needed this credit line to get us through some tough times."
Several of the nation's largest lenders, along with smaller ones, are shutting off access to home equity lines in areas where home values are declining. It's an unusually aggressive move as the industry grapples with fallout from the mortgage crisis that began unfolding last year.
With the Fed, we are looking at a repeat offender; one mistake begets another
WASHINGTON — Even as the Federal Reserve grapples with the collapse of a speculative bubble in housing — the second speculative bust in less than a decade — is it at risk of repeating recent mistakes?
One day after the Fed slashed its benchmark interest rate to head off a possible recession, a small minority of economists warned on Wednesday that the central bank was in danger of invoking the same remedies that it did after the bubble in dot-com stocks burst seven years ago.
Though most experts agree that the economy is on the brink of a recession, and some even contend the recession has already begun, critics say the Fed’s attempted rescue looks uncomfortably similar to the aggressive rate reductions that aggravated the speculative bubble in housing.
Labels:
Will the collapse of bond insurers usher in the next stage of financial collapse? It certainly looks like it.....from the New York Times....
Even as stocks ended five days of losses with a surprising recovery on Wednesday, officials began moving to defuse another potential time bomb in the markets: the weakened condition of two large insurance companies that have guaranteed buyers against losses on more than $1 trillion of bonds.
Regulators fear a possible chain of events in which the troubled bond insurers, MBIA and Ambac, might be unable to keep their promise to pay investors if borrowers default on their debt.
That could leave the buyers of the bonds — including many banks and pension funds — on the hook for untold billions of dollars in losses, shaking confidence in the financial system.
To avoid a possible crisis, insurance regulators met with representatives of about a dozen banks on Wednesday to discuss ways to shore up the insurers by injecting fresh capital, much as Wall Street firms have turned to outside investors recently after suffering steep losses related to subprime mortgages.
While it is unclear what steps, if any, the banks and regulators may ultimately take, the talks focused on raising as much as $15 billion for the companies, according to several people briefed on the discussion who asked not to be identified because of the sensitive nature of the discussions.
The notion that the failure of even one big bond insurer might touch off a chain reaction of losses across the financial world has unnerved Wall Street and Washington. It was a factor in the Federal Reserve’s decision on Tuesday to calm investors by reducing interest rates by three-quarters of a point, to 3.5 percent
Labels:
It is not just the poor who are losing out from the housing crash; the rich are also taking a hit. Caliber Global Investment Ltd., a $908 million fund, will close after running up losses in the sub prime mortgage market. The fund reported an almost $9 million loss in the second-quarter. Meanwhile, another London based hedge fund - Queen's Walk Investment Ltd - stacked up a $91 million loss during the first quarter of this year. Again, most of the losses were due to rising defaults in the US sub prime market.
Thus, it would seem that investors have suddenly rediscovered that risk exists in the housing market. Between 2001-06, investors had systematically and wilfully mispriced the potential losses from the US housing bubble. Now, investors are desperately running for the exit, frantically avoiding the investment products that they purchased with abandon during the exuberant years of double digit house price inflation.
Yet, here is the great mystery of today's housing crash - risk is not a difficult thing to understand. If a financial institution gives a borrower with a poor credit history a massive loan to finance an overpriced house, then the probability of default is rather high. In principle, this increased risk should be reflected in the interest rate charged to the borrower. This simple observation seems obvious now, as default rates are rocketing. Yet somehow, this was all forgotten during the crazy hazy speculation of 2003-5.
Unfortunately, mispricing risk wasn't the only stupid thing that mortgage lenders were doing. They were also backend loading interest charges through teaser rates and complex adjustable rate mortgages. In effect, institutions pushed their problems out two years by offering inappropriate mortgages to people who didn't understand the financial products they were buying. It was as if the sub prime industry had designed a marketing strategy that would maximise the chances of a wave of defaults.
Now, losses are piling up, and default rates are undermining any prospect of a recovery in the housing market. Not that the prospects for a recovery were ever going to be particularly high. The market remains fundamentally imbalanced. With inventory rising to all-time highs, and prices falling, the correction has a long way to go yet. Nevertheless, the sub prime crash has the potential to undermine housing finance for years to come. With investment funds abandoning the sub prime market, stung by a large losses, it will take a long time before investors feel confident enough to return. As the supply of funds drying up, the number available mortgages will likewise diminish.
Today's housing market has become one massive wealth destruction machine. The poor sub prime borrowers can't afford the houses they are living in. As they default, they incur personal losses which they cannot cover. These losses end up on the balance sheets of sub prime lenders, whose investors ultimately take the hit. Everyone loses; all are to blame; all are punished.
Labels:
After years of easy money, cheap credit, and reckless monetary policy, central banks are coming to the realisation that an old ghost has returned to haunt us - inflation. The Bank of International Settlements, the organisation that acts as the central bank for central banks warned that central banks must act now and push interest rates higher. The warning was especially directed towards countries with high current-account deficits, in other words, the United States.
The BIS also provided a stark assessment of the US housing market. It said that "The impact of the downturn in the US housing market might not yet have been fully felt." The organisation was right on the money with this one. Housing data from May shows that the crisis is deepening with no end in sight.
The warning from the BIS is welcome, but it is way too late. It would be much better if it had explained the dangers of low interest rates five years ago. All over the world, central banks are now confronted with increasing inflationary pressures, and reluctantly they are beginning to push interest rates up. However, central banks continue to seek the line of least resistance. Rather than aggressively pushing up rates, central banks are doing it slowly, in a forlorn hope that they can avoid recessions.
This reluctance to deal with the problem aggressively threatens to prolong a recession rather than avoid one. It would be better if interest rates were hiked quickly, rather than this low and passive approach that we are witnessing now. People would understand that central banks across the world were serious about tackling inflation, and adjust their behaviour accordingly. Firms would avoid hiking prices, workers would moderate their wage claims, and global imbalances would adjust more quickly and with less pain.
Labels:
Today, Bloomberg provided a neat summary of the state of today's housing market.
June 20 (Bloomberg) -- The worst is yet to come for the U.S. housing market. The jump in 30-year mortgage rates by more than a half a percentage point to 6.74 percent in the past five weeks is putting a crimp on borrowers with the best credit just as a crackdown in subprime lending standards limits the pool of qualified buyers. The national median home price is poised for its first annual decline since the Great Depression, and the supply of unsold homes is at a record 4.2 million, according to the National Association of Realtors.
Confidence among U.S. homebuilders fell in June to the lowest since February 1991, according to the National Association of Home Builders/Wells Fargo index released this week. Housing starts declined in May for the first time in four months, the Commerce Department reported yesterday. New-home sales will decline 33 percent from 2005's peak to the end of this year, according to the Realtors' group, exceeding the 25 percent three-year drop in 1991 that helped spark a recession.
Goldman Sachs Group Inc., the world's biggest securities firm, and Bear Stearns Cos., the largest underwriter of mortgage-backed securities in 2006, said last week that rising foreclosures reduced their earnings. Bear Stearns said profit fell 10 percent, and Goldman reported a 1 percent gain, the smallest in three quarters. Both firms are based in New York.
The investment banks, insurance companies, pension funds and asset-management firms that hold some of the U.S.'s $6 trillion of mortgage-backed securities have yet to suffer the full effect of subprime loans gone bad, said David Viniar, Goldman's chief financial officer. Subprime mortgages, given to people with bad or limited credit histories, account for about $800 billion of the market.
Homebuilding stocks are down 20 percent this year after falling 20 percent in 2006, according to the Standard & Poor's Supercomposite Homebuilding Index of 16 companies. Before last year, the index had gained sixfold in five years.
The average U.S. rate for a 30-year fixed mortgage was 6.74 percent last week, up from 6.15 percent at the beginning of May, according to Freddie Mac, the second-largest source of money for home loans. That adds $116 a month to the payment for a $300,000 loan and about $42,000 over the life of the mortgage.
The recent increase in mortgage rates is the biggest spike since 2004. The change means buyers can afford 8 percent less house than they could five weeks ago, Kiesel said.
In addition to their primary mortgages, homeowners had $913.7 billion of debt in home equity loans in 2005, more than double the $445.1 billion in 2001, according to a paper by former Federal Reserve Chairman Alan Greenspan and James Kennedy on equity extraction issued by the Fed three months ago.
About a third of that money, extracted as home values surged 53 percent from 2000 to 2005, was used to buy cars and other consumer goods, according to the paper. The interest rate on those loans doubled to 8.25 percent in 2006 from 4 percent in 2003.
Homebuyers who got an adjustable-rate mortgage, a so-called ARM, in 2004 have seen their rate climb by about 40 percent. That's enough to add $288 to the monthly payment for a $300,000 mortgage. The average adjustable rate last week was 5.75 percent, an 11-month high, according to Freddie Mac.
A Fed survey of senior loan officers issued in April said that 45 percent of lenders had restricted ``nontraditional'' lending, such as interest-only mortgages, and 15 percent had tightened standards for the most creditworthy, or prime, borrowers. More than half had raised standards for subprime borrowers, according to the survey.
Subprime mortgages have rates that are at least 2 or 3 percentage points above the safest so-called prime loans. Such loans made up about a fifth of all new mortgages last year, according to the Mortgage Bankers Association in Washington.
The median U.S. price for a previously owned home fell 1.4 percent in the first quarter from a year earlier, the third consecutive decline, according to the National Association of Realtors. Before the third quarter of 2006 prices hadn't dropped since 1993. The quarterly median may dip another 2.4 percent in the current period, the Chicago-based industry trade group said in its June forecast. Measured annually, the national median hasn't dropped since the Great Depression in the 1930s, according to Lawrence Yun, an economist with the trade group.
The share of mortgages entering foreclosure rose to 0.58 percent in the first quarter, the highest on record, from 0.54 percent in the final three months of 2006, the Mortgage Bankers Association said in a report last week. Subprime loans going into default rose to a five-year high of 2.43 percent, up from 2 percent, and late payments from borrowers with poor credit histories rose to almost 13.8 percent, the highest since 2002.
Prime loans entering foreclosure increased to 0.25 percent, the highest in a survey that goes back to 1972. That's a sign that even the most creditworthy borrowers are being squeezed, Roubini said.
These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.
Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.
For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.
However, few of us will be outraged. It is what we have come to expect from the American housing industry.
NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.
Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.
What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.
Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"
Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."
GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.
US homebuilder confidence is at a 16 year low. The industry isn't short of misery; rising inventory, falling sales, rising defaults, falling profitability, rising interest rates, and falling prices. Who could hold a happy face after that litany of problems?
June 18 (Bloomberg) -- Confidence among U.S. homebuilders fell this month to the lowest since February 1991 as interest rates climbed and delinquencies surged. The National Association of Home Builders/Wells Fargo index of sentiment declined to 28 this month from 30 in May, the Washington-based association said today. Readings below 50 mean most respondents view conditions as poor. Economists surveyed by Bloomberg News forecast the gauge to stay unchanged this month.
Homebuilders including Hovnanian Enterprises Inc. are losing money as they cut prices to stem a slide in sales amid stricter standards for getting mortgages. Builders have scaled back projects to work off bloated inventories, a sign housing construction will weigh on growth for the rest of the year, economists say.
The median forecast of 35 economists surveyed by Bloomberg was for the index to stay at 30. Predictions ranged from 28 to 32. The group's measure of single-family home sales fell to 29 from 31. The index of traffic of prospective buyers slipped to 21 from 22. A gauge of sales expectations for the next six months declined to 39 from 41.
Federal Reserve policy makers last month acknowledged that the housing recession will hold down growth longer than they had anticipated. At the same time, officials have kept their outlook for ``moderate'' growth in the overall economy as consumer spending gains and manufacturing accelerates.
Some reports in recent weeks pointed to reviving demand for homes. The Mortgage Bankers Association's index of applications for mortgages to purchase homes rose an average 5 percent in May from the prior month and was up 6 percent from a year ago. Purchases of new homes unexpectedly jumped in April by the most in 14 years from April, the government reported last month.
Still, a large stock of unsold homes means that builders are reducing their projects. Inventories in April equaled 6.5 months' worth of sales, down from a record high of 8.1 months' worth in March.
Building permits, which signal intentions of starting projects, fell in April to the lowest since June 1997. The Commerce Department may say tomorrow that housing starts fell last month to an annual rate of 1.473 million, from 1.528 million in April, according to the median forecast. The housing market also must deal with the burdens of rising mortgage rates and tighter lending standards.
Thirty-year mortgage rates at the end of May averaged 6.37 percent, rising further to an average 6.74 percent at the end of last week, according to Freddie Mac, the second-largest purchaser of U.S. mortgages.
The number of U.S. homeowners who face possible eviction because of late mortgage payments rose to an all-time high in the first quarter, led by subprime borrowers, the Mortgage Bankers Association said in a report last week. U.S. foreclosure filings surged 90 percent in May from a year ago, RealtyTrac Inc., which monitors foreclosures, said June 12. The failure of at least 50 subprime lenders, who make loans to consumers with poor or limited credit history, raised concern homes will be thrown back on the market as foreclosures rise.
From liar loans to FICO scores, the housing market is riddled with dishonesty. Things are so bad that you begin to sorry for the poor hapless mortgage brokers out there. Is there anyone out there that they can trust?
Here is one scam that needs to be stopped quickly. People with poor credit can boost their credit scores by linking up with people with good credit histories. The trick is quite straightforward; people with good credit histories attach people with poor credit histories onto their credit cards. Furthermore, the Internet is there, ready to match up the credit cripples with the people with beautiful FICO scores.
The scam has some interesting implications for the current foreclosure crisis. Suppose that a large number of low interest mortgages were extended to people who should have received high interest subprime loans on account of the poor credit history. Superficially, this might mean that these pseudo-high quality borrowers have a lower probability of default, since the interest on their loans is lower than it otherwise would have been.
However, it is more likely that these irredeemably irresponsible borrowers maxed out on their credit limits. They probably took out larger loans in the otherwise could have, leaving them just as vulnerable to default, regardless of their fake credit scores.
Will this have an impact on the fast imploding housing market? It comes down to a question of how many subprime borrowers infiltrated the quality mortgage market. One thing is for sure: mortgage brokers were not asking too many searching questions about default risk. Perhaps, we shouldn't feel so sorry for them after all.
(Washington Post, June 16) The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points. Fair Isaac, the developer of the widely used FICO score, plans to introduce key changes designed to derail schemes that transplant high-quality credit card histories to the files of people with low FICO scores.
The credit-boost companies, easily found on the Web by searching for "credit trade line," claim that they violate no federal laws and are not seeking to defraud mortgage lenders. But mortgage industry groups, federal and state regulators, and credit industry leaders say the programs represent significant threats to the home lending system -- opening the door to fraudulent home loan applications.
Using a FICO-boost service, for example, a mortgage applicant with a history of late and missed payments and a FICO score in the 500s could puff up his or her score well above 700 and be eligible for the best interest rates and fees.
How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers cardholders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.
Although the add-on users receive no access to the credit card and cannot rack up charges, Fair Isaac's FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users -- even though the add-on users may still be poor credit risks.
I don't know how Casey Serin does it. Everyday, I promise myself that I will not look at his blog. However, at some point in the day, my fingers move faster than my brain, and I end up clicking on his link and having a quick look. He never disappoints; he always has some crazy story about some madcap financial wheeze.
One recent post absolutely blew me away. It concerned the foreclosure sale on his Larchmont property. According to Casey, he bought the property for $330,000 in March 2006, with 100 percent financing. Casey claims that the property was irresistible because he negotiated a $50,000 cashback. He wanted the money to “float other properties” that he was buying at the time.
Like all of Casey's real estate investments, this one went into foreclosure. Recently, the bank sold the property for $199,000, meaning that our friend Casey now owes the bank a cool $131,000. What is more, Casey has seven other real estate investments that probably lost a similar amount of cash.
It is worth stepping back from and thinking through what actually happened here. Casey went into a bank, probably misled the bank about his true financial status and walked out with $330,000. He then bought a house that was at least $50,000 overvalued at the time of sale. A year later, he loses the house, and stacked up a debt equivalent to almost 4 ½ times his previous annual income (Casey was earning around $30,000 before he became a property tycoon).
So who gained from this ridiculous enterprise? Top of the list comes the Realtor, who probably pulled out 6 percent of the sale value. The original owner of the house also did well; selling an asset for $270,000, when a year later it was only worth $199,000.
However, the bank shareholders were the big loser. The bank has no prospect of getting back the $131,000 it lost on this loan. That loss will mean a lower dividend for shareholders this year. However, there remains a mystery; why have bank shareholders been so quiet in the face of this overwhelming mismanagement of their assets? The bank management who presided over this loan transactions are totally incompetent. How could they have allowed someone like Casey could to walk into their bank and convince a loan officer to give him such a massive loan with 100% financing? If I were a shareholder, I would be outraged at this incredible misuse of my investment.
Over the last couple of months, Casey has been the subject of an extraordinary wave of abuse. However, Casey's financial idiocy could only have taken place because there were even greater finanial idiots out there - the banks and in particular, their loan officers. This explains why I keep coming back to his blog, I keep searching for the answer to the question how could anyone seriously give Casey a loan? Unfortunately, I haven't yet found the answer on his blog, so I keep coming back.
Labels:
Lax lending standards, that is why there is a subprime crisis. Lenders ignored risks, and concentrated on increasing volumes.
(THE ORANGE COUNTY REGISTER )Just five years ago he was selling cars. Then, in January 2002, he anted up $250 for a state lender license and started selling home loans through his company, Quick Loan Funding. Over the next five years, Quick Loan wrote $3.8 billion in mortgages, lending money fast – and often on onerous terms – to people with shaky credit.
Boosted by high fees and interest rates – high even for the subprime industry – Quick Loan's after-tax profits averaged 29 percent of revenue. In 2005, Quick Loan's biggest year, profit topped $37 million. Sadek used the earnings to live the high life, buying a fleet of Ferraris, Lamborghinis and Porsches, dating a soap opera starlet and producing movies. He flew private jets to Las Vegas, where he gambled with high rollers at the Bellagio Resort.
He cultivated a rebel image, wearing a beard and hair to his shoulders, dressing in T-shirts and flip-flops, eschewing the typical mortgage banker's pinstripes. "How many thieves are wearing a suit?" he asks, sitting in the kitchen of his $4 million Newport Coast mansion.
Quick Loan Funding's name still crowns a Costa Mesa office tower. But Sadek, like the subprime lending industry, is holding a bad hand. His staff, once 700 strong, has shriveled to about 125. Monthly loan volume plunged to $30 million from a record $218 million in December 2005.
"I've sold all my cars to keep the company going," says Sadek, 38. "Every property I own is mortgaged to the max." Sadek is more than a poster child for the riches produced in the Orange County-centered subprime industry. His career arc shows how:
In California, almost anyone could open a lending business. It's harder to get a barber's license. Subprime lenders reaped billions in profits by charging high fees and interest rates. For the most part, these practices are legal. Borrowers often either misunderstood, were misinformed or simply paid no attention to the loan terms. Thousands would lose their homes.
State oversight is almost non-existent, with 58 examiners to oversee 5,000 lenders, some doing billions in business. Quick Loan has been accused of predatory lending, deceptive underwriting and fraud in at least eight lawsuits. In addition, Department of Corporations records show 33 complaints against Quick Loan, most alleging unfair business practices. Most of the lawsuits were settled out of court. And state regulators have never disciplined Quick Loan.
Sadek denies that Quick Loan ever broke the law or engaged in unfair business practices.
"I work very hard to do the best I can, to keep the mortgage company as clean as possible," he says. "Simple as that. I can't say it to you any better."
Californian pending sales took another major hit in market. According to a new report from Hanley Wood Market intelligence, sales fell by almost 4 percent between February and March. Compared to the same month last year, pending sales are down almost 40 percent. Throughout the state in March, around 5,775 pending sales were agreed. During March last year, buyers agreed to purchase 9,160.
Labels:
In the run-up to this week's FOMC meeting, several commentators have suggested that the Fed may be delaying a necessary cut in interest rates. The story goes something like this; recent data tells us that economy is slowing rapidly, whilst inflationary pressure is subsiding, and if the Fed doesn't do something soon, then the economy will slip into a nasty recession by the end of the year.
The problem at the story is that it's only half true. Certainly, the economy is slowing, but inflationary pressures remain rather strong. Just take a look at gas prices if you own any doubt about that. The consumer still keeps on consuming, as the chart above suggests. There is a slight post-holiday dip consumption,but by March everything is back to normal. Certainly, the housing market is looking into the abyss, but the stock market is doing fine, so the overall effect on wealth is redistributive, rather than a growth reducing.
However, if you think about a little further, you will realise that it is consumer spending that is the problem, not inflation. There is a nasty story behind that retail sales chart. It is a story of declining personal savings. Low interest rates have discouraged savings, and encouraged consumption, which in turn has been fuelled by an accumulation of private-sector debt. The counterpart of this declining savings rate is found in the US current account. The federal government has also done its part to accumulate a large stock of debt. For several years, the government has run large fiscal deficits, financed by treasury bills, largely bought by foreigners.
Private and public sector balance sheets need to recover, which is just a fancy way of saying that people need to save more and the government should reduce spending. The only thing that will make people save more is a higher return on their savings. This is why the Fed needs to raise rates, and at a minimum, keep them at the current level for the foreseeable future.
What would happen if the Fed decided to cut rates prematurely as some would suggest? Simply, the consumer would keep on doing what she has done the last five or six years. She would keep on borrowing, keep on spending, and keep on building up debt. The US current account will continue to be high. In the short term, foreign central banks will keep financing that deficit, until one day they will have had enough, and suddenly start selling dollars. At this point, the current account will adjust very rapidly indeed, and the US economy could sink into a calamitous recession.
Currently, the economy is slowing, but that is a good thing. It is better to have a gradual slowdown in growth, coupled with an orderly repair of private balance sheets, rather an a disorderly financial crisis. Let's hope that the Fed ignores these shortsighted calls for a cut in interest rates.
Here is another shocker - 8 out of 10 subprime loans have variable interest rates. Sit back in your chair and think about that one for a moment. Lets repeat; eight out of ten loans given to people with bad credit will shortly reset to higher rates. This means just one thing; the US housing market is sitting on a foreclosure time bomb.
May 7 (Bloomberg) -- U.S. homeowners entered the foreclosure process in April at more than double the rate of a year ago as tightening credit made it more difficult to refinance and a swelling supply of unsold homes made it tough to sell.
The number of homeowners in all three phases of foreclosure rose last month over the same period a year ago, according to Sacramento-based Foreclosures.com, which gathers data from county courthouses nationwide. Those receiving their first notice of foreclosure from a bank climbed 127 percent, those with homes going up for sale by auction jumped 164 percent and those whose homes were repossessed by banks went up 40 percent.
Eight of 10 subprime loans, given to borrowers with bad or limited credit histories, adjust over time to higher interest rates and many homeowners can no longer afford their mortgages. With existing home sales at a four-year low, it's more difficult to sell because there are so many homes on the market.
Here are the five housing data trends that you need to know:
1. Housing construction has slumped. - New-home construction starts dropped 14.3 percent from December to January, putting them 37.8 percent below the same time a year earlier. Building permits dropped 28.6 percent from a year ago.
2. Sales volumes are down. - Last month's sales of existing homes were down 4.3 percent from January 2006. There are about 1 million homes on the market.
3. Home builders can't shift their inventory. - Between January 2006 and January 2007, new home sales dropped 20 percent, according to the Commerce Department.
4. Risk premia (i.e. long term mortgage rates) are rising. - The National Association of Realtors predicts the cost of a 30-year fixed mortgage will jump to about 6.6% by the end of the year.
5. Mortgage resets will accelerate.- Of the $8 trillion to $9 trillion in mortgage debt outstanding in the country, a half-trillion dollars' worth is about to be converted to higher interest rates now that introductory teaser periods are expiring
Labels:
It was long speculated that California would be the epicentre of the housing crash. So far, it hasn't disappointed. California was the nation's leader in exotic, strange, and default prone mortgage products. Now, in one Californian city after another, the local press are reporting an explosion in defaults and foreclosures.
San Diego is one such city.......
In the fourth quarter of 2006, San Diego County experienced a 169 percent increase in homes receiving notices of loan default from a year ago. Default notices the first step in the foreclosure process - were up to 3,150 from 1,173 for the like quarter 2005, according to DataQuick Information Systems, which compiles home property data.
Throughout California, there were 37,273 default notices - notifying homeowners 90 days behind on payments sent from October to December 2006, marking the most foreclosure activity since the third quarter of 1998, when the number of default notices hit 38,053.
The study, released in January, states that foreclosures tend to occur a year or two after the loan is made. Most of the loans currently entering default originated between January 2005 and February 2006. After the first year or two, many home buyers who took out adjustable rate mortgages and other "inventive loans" experienced the "reset" of their payments; when a buyer's introductory interest rate shifts, and monthly payments increase.
Labels:
Check this link out from the Minneapolis Star Tribune see the extent of foreclosures in the city. It contains an extraordinary graph illustrating the housing disaster in the city. Since January 2006, over 2,500 homes have been sold in foreclosure sales.
This article reports that there "have been 1,400 foreclosure sales in North Minneapolis since January 2006. This is an area of less than 9 square miles that contains 12,810 single family residences. Meaning: 10.9% of the houses in North Minneapolis have already gone through a foreclosure sale since the real estate collapse began."
One house in ten? This has got to be a national record. Is there anywhere in the US with a higher foreclosure rate?
Labels:
Living in the city can be expensive. Over the last four years, the inflation rate in America's largest cities has been significantly faster than for the US as a whole. Cumulatively, LA has experienced 3 percentage points of additional inflation relative to the rest of the country. In Chicago, the situation is even worse; the city has accumulated at least 4.5 percentage points of inflation.
Taking this unlikely scenario a stage further, suppose that you won a massive payout. What do you then do with the money? Well, putting it in a broadly based set of mutual funds wouldn't be such a bad idea. Alternatively, you could go down to an investment advisor and see the money invested in loser tech stocks. This is exactly what happened to one lottery winner from Milwaukee. Moreover, it is common for lottery winners to blow their ill-deserved winnings on poor investments. Read on....
"From $5.5 million to living on a pension
On the day he rode home in a limousine from his security-guard job 12 years ago with a winning $5.5 million lottery ticket in his hand, Andrew Cicero of Muskego figured he had it made. But he finds himself now in far different straits than he imagined when he accepted a giant Wisconsin Megabucks novelty check.
Cicero, 72, has sold his Waukesha County house and lives in a Milwaukee apartment on a pension and Social Security income while he takes an investment counselor to arbitration. This month, he sued a Milwaukee accounting firm over tax advice he claims cost him at least $170,000.
His fiscal downfall followed what has emerged as something of a pattern among lottery winners nationally: Someone with little training in dealing with vast sums of money gets a sudden windfall, only to see it tumble maddeningly into the wind.
Court and arbitration documents tell part of Cicero's story. Under the state's rules at the time, the $5.5 million prize he won in 1995 was to be paid out as 25 annual payments that would start at $98,000 and increase each year. But by 2000, he decided on a different approach: sell the future annual payments off to a private firm for an immediate lump sum - in his case, about $2 million - that he could roll into investments. He'd just live off the earnings and interest.
He alleges that within a few months, the Smith-Barney advisers had 98 percent of his money invested in individual stocks, substantially technology companies. The year was 2000, which would prove a spectacularly bad time to sink one's entire fortune into tech stocks. Cicero's lawyer has alleged the advisers were "breathtakingly irresponsible" to put a lottery winner's windfall wholly into individual stocks. The court and financial-arbitration filings tell the story in flat terms, claiming Cicero lost $600,000 or more in bad investments. And he ended up paying $240,000 more to the IRS for penalties and interest after he learned the hard way that a lump-sum lottery buyout doesn't count as capital-gains income."
Labels:
GMAC - the financial services wing of General Motors - have just reported a huge drop in profits. Again, the subprime market is to blame.
"The slump in the US property market has hit General Motors hard, with first-quarter profits dropping 90 per cent as losses at its mortgage lending business offset improved sales of cars.
Profits of $62 million (£31 million) at the world's second-largest carmaker for the first three months of the year were sharply down from $602 million in the same period a year earlier.
The company attributed the decline to a $305 million loss by GMAC Financial Services, compared with a profit of $495 million a year earlier. The main factor behind the deficit was the fallout from a collapse in the US sub-prime mortgage market.
GM sold a 51 per cent stake in GMAC to private equity investors last year, but still owns 49 per cent of the business. The group said in a statement: “The decline in reported GM earnings is more than accounted for by losses in the residential mortgage business of GMAC Financial Services (GMAC), driven by continued weakness in the US non-prime mortgage sector.”
Hey! You've won a ride back to the top
2