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Thread: Could this happen?

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    Featured Member Vamp's Avatar
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    Default Could this happen?

    Mortgage Failures Could Create Nightmare
    Saturday November 24, 12:02 am ET
    By Joe Bel Bruno, AP Business Writer 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.

    Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he'll be OK -- but the future is less certain for the rest of us.

    In the months ahead, millions of other adjustable-rate mortgages like Colombo's will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

    The worst-case scenario is anyone's guess, but some believe it could become very bad.

    "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.

    "Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

    Some 2 million homeowners hold $600 billion of subprime adjustable-rate mortgage loans, known as ARMs, that are due to reset at higher amounts during the next eight months. Subprime loans are those made to people with poor credit. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before.

    Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

    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.

    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.

    Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

    By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

    There is increasing evidence that another downturn has begun.
    Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

    Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

    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.

    Some homebuyers gambled on interest-only loans. The mortgages, which allowed buyers to pay just interest at a low rate for two years, were too good to pass up. But with that initial term now expiring, many homeowners find they can't make the payments. The hopes that went along with those mortgages -- that they'd be able to refinance because the equity in their homes would appreciate -- have been dashed as home prices skidded across the country.

    "It's been said a lot of people have been using their homes as ATM machines," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant. "The risk has a lot of tentacles."

    This example illustrates the distress many homeowners are in or will find themselves in: A subprime adjustable-rate mortgage on a $400,000 home could have payments of about $2,200 a month, with borrowers paying 6.5 percent, interest only. When the teaser period expires, that payment becomes $4,000, with the homeowner paying 12 percent and now having to come up with principal as well as interest.

    Minneapolis resident Chad Raskovich found himself in a such a situation. He hoped -- it turned out, in vain -- to gain more equity in his home and that a strong record of payments would enable him to secure a better loan later on.
    "It's not just me, it's a lot of people I know. The housing market in the Twin Cities has dramatically changed for the worse in the years since I purchased my home. Now we're just looking for a solution," he said.

    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.

    But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

    Today's financial system is interconnected: Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments.

    When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

    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.

    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."

    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.

    "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.
    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.

    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.

    "We've never been in this situation before."
    Nature knows no indecencies; man invents them. ~ Mark Twain


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    God/dess VenusGoddess's Avatar
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    Default Re: Could this happen?

    ^ Just so you know, you're not allowed to post a full article...only a snippet...and you have to include the link for the rest. Otherwise it's copyright violation and some websites take that seriously.

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    Default Re: Could this happen?

    Great post Vamp, but gotta second VenusGoddess. If we want to keep this kind of information flowing in the future, the sources gots to get their ad dollars.

    I think we are going to come to a day when many are homeless surrounded by empty vinyl monstrosities no one can afford and the powers that be won't allow the price to come down to the median.

    It is going to be an interesting future for the US.

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    Banned Melonie's Avatar
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    Default Re: Could this happen?

    ^^^ I would also add that the vicious cycle of foreclosures referred to in your (excellent) article are only the tip of the iceberg. Since these mortgages have been resold to the US GSE's and investment banks and hedge fund investors, and since derivatives of these mortgages have been sold to local gov't entities, retirement funds, mutual funds yada yada yada, the financial losses created by every additional foreclosure must eventually come home to roost somewhere.

    According to many sources, there are 2 million additional ARM mortgage homeowners representing 2.5 to 3 TRILLION dollars worth of shaky loans that are due to reset before the end of 2008. So far the major investment banks have written off only a few billion dollars worth of subprime losses (with the biggest being Citibank I think which is up to $15 billion). If you conservatively figure that 25% of next year's resetting ARMs will drive the homeowner into bankrupcy, you're talking about $600-$750 BILLION dollars worth of ADDITIONAL losses. You're talking about at least 500,000 additional homeowners being evicted from their houses. This stuff is easy to see and understand.

    Obviously all industries directly related to the housing industry will be toast. This will obviously include home building contractors, real estate agents, bank employees servicing mortgages etc. Not as obvious but just as certain will be huge downturns in industries that provide products and services that go along with housing - i.e. appliances, furniture, lumber, concrete. About the only 'loss' in this area that doesn't break my heart is that lots of real estate LAWYERS are being given pink slips ! The only positive in this area is a rapidly rising increased demand for lawn mowing services, pool cleaning services etc. as banks / mortgage lenders who are stuck with foreclosed properties that they cannot resell ( so called REO's) are now being forced by local gov'ts to maintain these properties (or at least prevent them from becoming toxic / dangerous) now that the homeowner isn't living there anymore. Also, business is apparently booming for scrap metal dealers who are cashing in as thieves rip off copper plumbing / wiring and aluminum siding from vacant foreclosed properties !

    But the aforementioned $600-750 billion dollars of ADDITIONAL 'subprime' mortgage losses will also trickle back to the secondary mortgage market and the derivatives market. This will cause all of the mortgage insurers to go bankrupt as there is no way they can afford to make the actual dollar amounts of payouts required. Next the investment banks will be extremely hard pressed, because they will be stuck in the middle having to buy back their packaged mortgaged bonds (due to too many deadbeat mortgages in the package, and too little monthly cash flow to service bond interest payments due to homeowners no longer making payments) plus NOT receiving insurance payouts due to underwriter bankruptcies. Then, the retirement funds, local gov't agencies, etc. that have invested in these packaged mortgage bonds or their derivatives will take big losses as well ... which must then be made up for by higher taxes (gov't) or lower business profits / paychecks (retirement funds). And this does not address the future tax increases necessary to cover the billions of dollars in losses incurred by the GSE's Fannie and Freddie. Thus the total losses associated with 'subprime' will be many times greater than the direct losses resulting from foreclosure and liquidation shortfall.

    If my stupid senator Chuck Schumer's plan winds up going into effect at the federal level, it will expand on Der Governators plan already starting to go into effect at the state level. Both of these plans basically bar the mortgage lender from recovering their collateral at all when a loan has gone into default by barring foreclosures even though the deadbeat homeowner can't make mortgage payments. A variation of this is also that these plans forcibly coerce mortgage lenders to alter the existing terms of mortgage loans that have already been repackaged and resold. In both cases, these new gov't mandates effectively further reduce the value of mortgaged properties as collateral, and also reduce the incoming cash flow relative to the size of the loan thus reducing the value of mortgage bonds and CDO's even further. These changes will absolutely trickle into the secondary mortgage and derivatives markets and vastly compound the losses. In essence, where the 'private' banking industry is concerned, these new gov't mandates effectively force bank stockholders, and secondary market bond and derivative owners, to eat bigger losses. Where the GSE's are concerned, if Fannie and Freddie are forced to accept even larger 'shaky' mortgages, these larger losses will eventually circle around in the form of larger tax increases for US taxpayers to bail Fannie and Freddie out. Without Fannie and Freddie as a backstop, the entire mortgage / banking system would indeed be at risk of collapse.

    And if you find that your local gov't / school system has bought mortgage bonds or mortgage based CDO's and has taken big losses, prepare for some monumental tax increases. See . The ensuing local gov't losses and defaults will also result in wholesale cuts in public services i.e. the firing of teachers, the firing of public service workers, the firing of gov't contractors as public projects are cancelled etc.

    There is no free lunch. In point of fact there are millions of 'subprime' homeowners out there that are one step away from bankruptcy. In point of fact, these 'subprime' homeowners should never have been approved for mortgages in the first place, and would not have been approved for mortgages prior to the US gov't enacting HUD programs and 'bank community service' programs in the 90's which effectively forced mortgage lenders to write 'shaky' mortgage loans in order to increase minority / urban home ownership rates. For the past several years, the financial industry has in fact been playing a game of 'musical chairs' in regard to the transfer of risk from these 'shaky' loans. But our slowing economy, and the rising default rate of these 'subprime' mortgage borrowers, has now started to 'remove some chairs'. Unfortunately, there will be very few players who still have chairs by the end of next year.

    I would further add that, based on economic theory, there are really only two alternatives in regard to how this situation will eventually turn out. The first is that the mortgage losses will push America (and by implication the entire global economy) into a deflationary depression ... where prices for everything will drop but at the same time very few people will have any money to afford paying the lower prices. The second is that the mortgage losses will be 'made good' by the US gov't either by stealth injection of newly printed money or by taxing more money away from working Americans to directly fund bailouts. Based on recent gov't actions i.e. the Fed donating $80 billion to the Super SIV fund, the Fed now accepting toxic mortgage paper from banks in exchange for newly printed cash loans, Fed 'temporary' open market operations that wind up being permanent, Fed currency market interventions (or lack thereof) re the US dollar's exchange rate etc. it appears that the latter course is being pursued. I suppose the logic is that if the Fed can manage to inflate the US dollar far enough fast enough, that fewer 'subprime' homeowners will wind up going into default in the future thus alleviating the necessity of a huge gov't bailout of Fannie / Freddie / investment banks. The side effect of course will be $10 gallons of gasoline, $12 gallons of milk, 25% interest rates on PLATINUM credit cards, $40,000 Honda Civics and $40,000 Volkswagens etc. See

    ultimately, this blurb pretty well sums up the shape of things to come ...

    "We're All Subprime now'


    ~
    Last edited by Melonie; 11-24-2007 at 06:15 PM.

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    Default Re: Could this happen?

    Quote Originally Posted by Melonie View Post
    ^^^ I would also add that the vicious cycle of foreclosures referred to in your (excellent) article are only the tip of the iceberg. Since these mortgages have been resold to the US GSE's and investment banks and hedge fund investors, and since derivatives of these mortgages have been sold to local gov't entities, retirement funds, mutual funds yada yada yada, the financial losses created by every additional foreclosure must eventually come home to roost somewhere.

    According to many sources, there are 2 million additional ARM mortgage homeowners representing 2.5 to 3 TRILLION dollars worth of shaky loans that are due to reset before the end of 2008. So far the major investment banks have written off only a few billion dollars worth of subprime losses (with the biggest being Citibank I think which is up to $15 billion). If you conservatively figure that 25% of next year's resetting ARMs will drive the homeowner into bankrupcy

    ~
    * 25% is not a conservative number. Many ARMs have a cap on them. Not all ARM holders aren't near bankruptcy. I would put that number close to 10%
    10% of 3 Trillion Dollars is $300 Billion Dollars
    But those $300 Billion Dollars have Collateral in them. i.e they have a solid real estate asset covering the loan. Even if you take out 20% drop in home value you get a loss of close $60 Billion Dollars
    Of the $60 Billion Dollars some losses are eaten by the home owner, some by builders which leaves around $40 Billion Dollars to be eaten by various banks as losses

    Another approach
    The paper losses that happened in the sub-prime mortgage mess can simply be calculated by
    # of foreclosures * loss in Real Estate Value of those foreclosed homes
    Back of the Envelope Calculation,
    1,500,000 * $40,000
    =$60 Billion

    These losses are shared by Home Owners, Banks, Speculators, Builders and Probably some Tax payers.

    It is hard to stretch those numbers beyond $100B

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    Banned Melonie's Avatar
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    Default Re: Could this happen?

    ^^^ no way. First of all, best sources are estimating that the investment banks themselves will take losses of $400 billion from defaults on mortgages they hold plus mortgage bonds and CDO's they hold that are valued based on those mortgages ---> These estimates are based on default rates of 25-30% on the low side.

    plus you are not counting the 'secondary' losses to mortgage bond and CDO owners outside of the banking community ---> to see how widespread this problem is and ---> to see that it's likely to hit close to home as well.

    plus you are not counting the direct or indirect costs to US consumers / taxpayers stemming from the Super SIV bailout as well as other Fed interventions with newly printed dollars --->

    next you are not counting mortgage and mortgage bond losses to the GSE's , up to and including losses on Triple A rated bonds --> . Admittedly, nobody has a clue as to the true scope of Freddie / Fannie losses, since their accounting is already a joke. Eventual Fannie / Freddie bailouts will add further to the US taxpayer's bailout burden as well.

    and lastly, if the property is located in California (so far - may be nationwide if Schumer has his way), it's recovered collateral value in the event of a mortgage default is essentially zero since Schwarzenegger's 'deal' with mortgage lenders precludes evictions and foreclosures and therefore prevents liquidation and recovery. These 'relief for poor strapped homeowner' laws effectively turn the banks into involuntary landlords of rental houses at below market 'regulated' rent prices ... i.e. the 'poor strapped homeowner' gets to keep paying his teaser rate mortgage payment indefinitely and the banks have to accept it even though it constitutes a larger and larger loss with each passing month vs their actual carrying cost of the mortgage principal.

    Actually, there will be additional 'tertiary' losses well ... among them additional losses to Citibank stockholder equity for example !

    ~
    Last edited by Melonie; 11-24-2007 at 07:11 PM.

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    Default Re: Could this happen?

    Quote Originally Posted by Melonie View Post
    ^^^ no way. First of all, best sources are estimating that the investment banks themselves will take losses of $400 billion from defaults on mortgages they hold plus mortgage bonds and CDO's they hold that are valued based on those mortgages ---> http://www.cnbc.com/id/21753805 These estimates are based on default rates of 25-30% on the low side.

    plus you are not counting the 'secondary' losses to mortgage bond and CDO owners outside of the banking community ---> http://globaleconomicanalysis.blogsp...townships.html to see how widespread this problem is and ---> http://globaleconomicanalysis.blogsp...ic-school.html to see that it's likely to hit close to home as well.

    plus you are not counting the direct or indirect costs to US consumers / taxpayers stemming from the Super SIV bailout as well as other Fed interventions with newly printed dollars ---> http://www.bloggingstocks.com/2007/1...s-pay-for-ram/

    next you are not counting mortgage and mortgage bond losses to the GSE's , up to and including losses on Triple A rated bonds --> http://www.reuters.com/article/ousiv...27015520071119 . Admittedly, nobody has a clue as to the true scope of Freddie / Fannie losses, since their accounting is already a joke. Eventual Fannie / Freddie bailouts will add further to the US taxpayer's bailout burden as well.

    and lastly, if the property is located in California (so far - may be nationwide if Schumer has his way), it's recovered collateral value in the event of a mortgage default is essentially zero since Schwarzenegger's 'deal' with mortgage lenders precludes evictions and foreclosures and therefore prevents liquidation and recovery. These 'relief for poor strapped homeowner' laws effectively turn the banks into involuntary landlords of rental houses at below market 'regulated' rent prices ... i.e. the 'poor strapped homeowner' gets to keep paying his teaser rate mortgage payment indefinitely and the banks have to accept it even though it constitutes a larger and larger loss with each passing month vs their actual carrying cost of the mortgage principal.

    Actually, there will be additional 'tertiary' losses well ... among them additional losses to Citibank stockholder equity for example !

    ~
    Why make things complicated?. The only wealth loss that happened to Americans in 2007 was when a large California fire destroyed many homes and forests.

    All the remaining losses are either on paper or pure wealth transfer. i.e Americans didn't become less wealthy because of the Sub-Prime crisis.
    Is there a loss of confidence? Absolutely. Will the economy go into a recession because of this? Yes. But this is exactly the kind of recession you can get out by printing money which fed will do if they feel there is any chance of a recession

    The only real loss happens when Physical assets or destroyed or when Oil prices go up (These recessions can't be fixed by printing money as fed found out in the 80s).
    In the current crisis, If there is one thing that is a real cause of worry it is Oil Prices. Sub-Prime mess is just media hype. (Of course people are hurt by it, but it is no more evil than shutting down unprofitable plants)

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    Default Re: Could this happen?

    ^^^ again, no way. Physical assets don't have to be destroyed in order to lose value / wealth. A few examples ... how much is Amana's appliance factory in Indiana worth, since it became unable to economically compete with Asian appliance products due to higher US labor, environmental, and mandated benefit costs ? How much is AEP's coal fired power plant worth now that it must be closed down for excessive stack emissions under new EPA rules ... or requiring that AEP (or a new owner) invest in millions of dollars worth of new higher removal scrubbers in order to continue operating it ? How much is a vacation property in the Adirondacks worth now that the State of NY DEC will no longer permit any sort of additional construction on the property ? How much is an inner city apartment building worth now that property taxes have been raised sky high but regulated rents have not ? My point is that physical assets have a value that is directly proportional to their desireability or cash generation potential. Both of these can change quickly.

    I understand that you hold a peculiar definition of 'value'. By that definition, the market price increases which took place in properties of all sorts over the past decade were not increases in 'value' they were merely inflated dollar prices. By the same definition, I suppose that market price decreases now happening with those same properties is not a decrease in 'value'. However, mortgage lenders and the IRS hold a more traditional view !!!

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    Featured Member Wwanderer's Avatar
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    Default Re: Could this happen?

    Quote Originally Posted by xanfiles1 View Post
    Why make things complicated?. The only wealth loss that happened to Americans in 2007 was when a large California fire destroyed many homes and forests.

    All the remaining losses are either on paper or pure wealth transfer. i.e Americans didn't become less wealthy because of the Sub-Prime crisis.
    Is there a loss of confidence? Absolutely. Will the economy go into a recession because of this? Yes. But this is exactly the kind of recession you can get out by printing money which fed will do if they feel there is any chance of a recession

    The only real loss happens when Physical assets or destroyed or when Oil prices go up (These recessions can't be fixed by printing money as fed found out in the 80s).
    In the current crisis, If there is one thing that is a real cause of worry it is Oil Prices. Sub-Prime mess is just media hype. (Of course people are hurt by it, but it is no more evil than shutting down unprofitable plants)
    Although a bit over-simplified imo, this is basically correct. Moving numbers around in computers (i.e., paper losses and nominal wealth transfers) cannot *directly* cause changes/problems in the real (physical) world unless people believe the doomsayers, panic and begin to behave irrationally (i.e., start acting as if civilization has come to an end due soley to the numbers printed on their bank statements).

    The spectacular crash of the Japanese bubble

    http://en.wikipedia.org/wiki/Japanes...t_price_bubble

    is a prime example. Most Tokyo real estate lost 90 to 99 % of its peak value, as bad or worse than the most dire scenarios for the US real estate market. Did it cause a long and serious recession? Yes. Did it cause real economic pain to many people? Yes. Did it affect Japan's standing in and influence on the world economy? Yes. Did many/most people lose their jobs? No. Did most people become homeless or not have enough to eat? No. Did life for the most Japanese become miserable due to economic problems? No. Did crime skyrocket? No. Did life expectancies fall? No. Did most banks and businesses fail? No, some did, but most survived. Did Japan become a third world country? No. Etc.

    In other words, it wasn't good, but it also wasn't a total catastrophe. And the reason is simple. When those numbers in computers start telling people to do manifestly foolish and silly things (e.g., foreclosing on some large fraction of the homes in the country), then people simply change the rules in one or more ways. Again using the Tokyo real estate market crash as an example, there was a point at which almost all real estate in the city was worth a **small** fraction of the mortgages which it was supposed to secure. Many people held, say, US$2 million dollar loans on property worth US$200 thousand or less. Did they simply walk away from their property (which would have improved their net worht ***on paper*** at the cost of leaving them with no place to live in the real ***physical*** world)? No. Did the banks foreclose on everyone unable to make their mortgage payments and thus end up holding vast tracts of empty and unproductive homes and buildings? No. Mortgages were "re-negotiated"; govt intervened with various complex financial manuvers that essential "reset the zero" of the Japanese economy, and so forth. Basically and in a variety of ways, the disappearance of all of that paper wealth was just ignored, or more precisely, was intentionally limited to tolerable, though still painful, levels. The bubble ended, but both life in general and the standard of living of most Japanese did not change dramatically. I see no reason that we should expect worse, or even as bad, here.

    It is also worth keeping in mind that it probably is not possible to avoid the pain of economic contractions without giving up the benefits of economic expansions...so be careful what you wish for.

    -Ww
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    As the Truth eternally reveals itself,
    This very place is the Lotus Land of Purity,
    This very body is the Body of the Buddha."
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    Default Re: Could this happen?

    Quote Originally Posted by Wwanderer View Post
    And the reason is simple. When those numbers in computers start telling people to do manifestly foolish and silly things (e.g., foreclosing on some large fraction of the homes in the country), then people simply change the rules in one or more ways. ...
    Please forgive the faux pas of self-quotation and see below:

    (snip)"The U.S. Treasury Department and mortgage industry leaders are putting the final touches on a plan that could save struggling homeowners from foreclosure by freezing interest rates before they reset sharply higher.

    With more than 2 million subprime borrowers facing higher mortgage costs and possible foreclosure, Treasury Secretary Henry Paulson is expected to announce details of the plan as soon as Wednesday, sources familiar with the matter told Reuters.
    " (snip)

    http://www.cnbc.com/id/22039476

    I don't mean to imply that the whole problem is about to disappear entirely into a cloud of "new rules of the game", but this is both a good example and, perhaps only the leading edge, of the "adjustments" of the system that can deal with a problem which is only in the numbers the computers pass around and not, as xf1 astutely points out, due to anything changing in the real/physical world.

    And, btw, the fact that there are particularly large numbers of at-risk subprime home owners in states that will play a key role in the 2008 election (e.g., Ohio, Florida and California) makes strong and broadly based political support for such "fixes" highly probable.

    -Ww
    "At this moment what more need we seek?
    As the Truth eternally reveals itself,
    This very place is the Lotus Land of Purity,
    This very body is the Body of the Buddha."
    - Zazen Wasan

  11. #11
    Banned Melonie's Avatar
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    Default Re: Could this happen?

    ^^^ yes, but ... these new laws allowing homeowners who were only able to afford to buy a house by 'lying' on their loan application plus getting a 'teaser rate' loan to keep living in their houses forever while continuing to only pay the 'teaser' rate monthly payments is not a free lunch. In effect it forces the mortgage lender to accept a 1% or 2% profit on his money, and denies the mortgage lender the right to foreclose - to recover his loan capital by sale / auction - and to redeploy that loan capital elsewhere where he might actually earn enough money to exceed the inflation rate. In this scenario, anybody with loan capital is NOT going to use it to make new mortgage loans that's for sure. As a result, it will be damn near impossible for anybody with less than perfect credit to obtain a home mortgage in the future if these proposed laws are actually enacted. I suppose that's of no consequence to 'subprime' homeowners who have already obtained their 'teaser' rate loan and who already have a home to live in, though.

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    Featured Member Wwanderer's Avatar
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    Default Re: Could this happen?

    Quote Originally Posted by Melonie View Post
    ^^^ yes, but ... these new laws allowing homeowners who were only able to afford to buy a house by 'lying' on their loan application plus getting a 'teaser rate' loan to keep living in their houses forever while continuing to only pay the 'teaser' rate monthly payments is not a free lunch. In effect it forces the mortgage lender to accept a 1% or 2% profit on his money, and denies the mortgage lender the right to foreclose - to recover his loan capital by sale / auction - and to redeploy that loan capital elsewhere where he might actually earn enough money to exceed the inflation rate..
    I agree, no free lunch. And some people's interests do get damaged significantly. But it does avoid the "collapse of the (financial) world as we know it" scenarios that are being peddled in some Dollar Den posts, among other places. It is (a first) step towards the sort of measures which allowed Japan to muddle through a truly gigantic real estate bubble collapse with only modest discomfort, rather than total ruin.

    In effect, the whole situation is an illustration of the old adage that if you borrow enough you end up owning the bank. These lenders are (apparently) voluntarily going along with the plan and giving up their foreclosure rights for the simple reason that foreclosures on a massive scale would not allow them to recover their loan capital by sale/auction...because there would not be enough buyers with enough credit to allow resale of the foreclosed properties.

    -Ww
    "At this moment what more need we seek?
    As the Truth eternally reveals itself,
    This very place is the Lotus Land of Purity,
    This very body is the Body of the Buddha."
    - Zazen Wasan

  13. #13
    Banned Melonie's Avatar
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    Default Re: Could this happen?

    In effect, the whole situation is an illustration of the old adage that if you borrow enough you end up owning the bank. These lenders are (apparently) voluntarily going along with the plan and giving up their foreclosure rights for the simple reason that foreclosures on a massive scale would not allow them to recover their loan capital by sale/auction...because there would not be enough buyers with enough credit to allow resale of the foreclosed properties.
    The risk here of course is much the same as it was in Japan ... that while people who are currently occupying houses that they really could not afford are allowed to continue living in them (while making 'teaser' rate monthly payments forever), people who don't yet 'own' a home of their own will have a much, much more difficult time obtaining mortgage financing in the future (at virtually any level of income / creditworthiness) as banks make sure that their losses as a result of this foreclosure 'trap' doesn't ever happen again. This will be even more likely if the banks weren't using their own capital to make these loans in the first place, thus being 'stuck in the middle' between a deadbeat homeowner paying a de-facto 1-2% interest rate and a mortgage bond / CDO investor expecting a 6%-7% interest / dividend payment ! Thus the unresolved question in this bailout plan is whether the banks get stuck with the short return, or whether the secondary market capital investors get stuck with the short return instead. Since Americans save nothing thus mortgage lenders have little or no capital of their own, I suspect that it will be the latter. If that is the case, then the capital investors will quickly take their capital elsewhere to avoid similar future 'losses', causing money for future US mortgage loans to be in very short supply and in turn causing US mortgage lenders to become extremely selective in regard to future mortgage approvals.

    Like Japan this will eventually lead to 30 year olds still living with their parents because they can't earn enough money to save up a 20% down payment + closing costs, and/or because they won't be able to earn enough money to qualify for a future mortgage, if they also have to pay the 'going price' for rent + cost of living. As living with parents for years and years won't fly in America as well as it does in Japan, a more likely scenario is that this will create a future generation of permanent 'working class' renters, and the end of the 'American dream' for those who weren't fortunate enough to buy a house when zero down payments and questionable ability to repay didn't matter to lenders. By the same mechanism (much higher creditworthiness and equity requirements) it will also create a permanent class of 'landlords'. Welcome to a 'third world' economy, well not really but certainly a 'Rentier' economy. There is certainly ample historical precedent.



    (snip)"Comparing the current situation in the U.S. to previous eras such as the Roman Empire, the dominance of Spain, the Dutch Republic, and the British Empire, the most striking point (to me at least) was the tendency for all of these fading powers to transform into "financial" economies at the apex of their power and influence.

    The Precariousness of Rentier Cultures

    The word "rentier" - meaning a person living off unearned income - comes from the French, as do many other words connected with money and plunder: financier, profiteer, buccaneer. Over the last four centuries however, it was first Spain, then Holland, and Great Britain, and now the United States that created the most notable rentier cultures. Each ultimately became vulnerable as a result.

    Spain needs little further discussion, save for how its mounds of indebtedness bred an unproductive economic culture. When the initial large amounts of gold and silver arrived between 1540 and 1560, the financial system of Castile was late medieval, not commercially adept in the manner of Renaissance Italy's mercantile and banking centers. However, the flood of bullion enabled the Crown to borrow hitherto unimaginable sums for grandiose purposes, often military campaigns... Debt instruments, most of them juros in at least a dozen varieties, had been the official money-raising tools since the days of Ferdinand and Isabella.
    ...
    The volume of juros swelled rapidly. In the words of one economic historian, never before had western Europe enjoyed the buoyant sense of access to such unparalleled financial resources promising liquidity for both private and public enterprise... The upshot, said a second historian, was the "growth of a powerful rentier class in Castile, investing its money not in trade or industry, but in bonds, the redemption of which most holders strongly opposed. In 1617 the Council of Finance acknowledged seeing no chance for an economic revival in Castile so long as censos and juros paid better interest than that to be had from investments in agriculture, industry, and trade. A few decades later, the debt economy itself came unglued.

    Similar stories for both the Dutch and the British are recounted in extraordinary detail. The historical precedent for what comes after the good times associated with massive debt buildup and the transformation into a financial economy is as follows:

    Understandable as this cockiness might be, history teaches a crucial distinction: nations could marshal the necessary debt-defying high-wire walks and comebacks during their youth and early middle age, when their industries, exports, capitalizations, and animal spirits were vital and expansive, but they became less resilient in later years. During these periods, as their societies polarized and their arteries clogged with rentier and debt buildups, wars and financial crises stopped being manageable."(snip)
    Last edited by Melonie; 12-01-2007 at 04:31 AM.

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