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Thread: FDIC quietly making plans ...

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    Default FDIC quietly making plans ...

    (snip)" Three Key Economic and Banking Risk Concerns

    Despite a favorable outlook, there are at least three widely acknowledged areas of near-term concern that could pose risks to the economy going forward: a spike in energy prices, a decline in home prices, and a retrenchment in consumer spending arising from record consumer indebtedness. The consequences that any of these developments might have for economic growth could range from modest to severe, depending on how events play out over the next few years. It should be noted that these three areas are by no means the only potential sources of risk. Financial market panics, natural disasters, terrorism, war, and even changes to policy are among many other potential sources of disruption to the currently benign economic and banking environment. It is difficult to assess many of these risks before they occur, but in 2005 the FDIC did examine so-called “stroke-of-the-pen” risk, or risk that arises when tax, monetary, accounting and other policy changes produce unintended consequences for the economy and banking."(snip)

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    Default Re: FDIC quietly making plans ...

    Great Article Melonie!

    It really points out all the concerns we have about the housing market. I will point out a link of a transcript from one the speakers. There are so many good points here I didnt know where to begin.

    http://www.fdic.gov/news/conferences...k/whitney.html


    Yesterday we saw that a subsidiary of First Franklin, which is one of the largest subprime mortgage originators, reported that it still has over 70 percent of its mortgage originations coming through adjustable-rate mortgages.

    So as you see adjustable-rate mortgages decline in terms of total purchases, you will see subprime mortgages decline in terms of total originations. You already see declining home equity balances. You will begin to see declining mortgage balances.

    The factor through which liquidity is challenged in the credit card market is the change in minimum payment guidelines, which prior to 2003 took the independent credit card lenders out of negative amortization.

    In 2005, the OCC required all of the big banks to become compliant with negative amortization extraction in that, if you were a customer, you had to start paying down your principal. You could no longer continue to contribute to your debt burden each month. Well, that's a liquidity squeeze for the consumer, and we'll get into that in a second. It also shrinks balances at the credit card lenders.

    I'm going to give a little background here. We believe credit cards have become the loan product of adverse selection, based on the expansion in homeownership (see Chart 54). The age-old rule by banks is that 80 percent of your losses come from 20 percent of your borrowers—the so-called "80/20 rule."

    Five percent of the U.S. consumer market is made up of folks that are new homebuyers. This is the 5 percent of the U.S. consumer market that Greenspan is worried about, that have such little equity in their homes that if home prices decline in any way, they owe more than they own. That's a bad situation, particularly as most of these guys are in adjustable-rate mortgage products, and they are going to be squeezed as rates continue to rise.

    Then we add the other 5 percent of households, including the folks that are playing credit card roulette, who are going to be squeezed by this minimum payment guideline, who have never had access to credit before, who have gotten a lot richer over the past decade, and are about to get a lot poorer because of liquidity strain.

    So when you look at this 10 percent of the market which we qualify as subprime, what does it mean to the total economy at large? Well, 40 percent of discretionary spending is done by the top 20 percent of the consumers. We don't think the subprime market correlates to the top 20 percent of the consumers.

    The way I refer to this market is that these are probably the Wal-Mart customers. It's one level above the dollar stores, and probably one level below a Target store. And you've already seen spending at Wal-Mart contract somewhat. Many of these numbers can be confirmed by just looking at general trends in retail sales. You see no blip whatsoever at Nordstrom's and Neiman Marcus, all of the higher-end retailers, that have really been carrying a lot of the consumer spending. So we think consumer spending in a finite portion of the market will slow, and credit deterioration will increase dramatically in a finite segment of bank portfolios.

    Again, we think 10 percent of the U.S. consumers will definitely go into a segmented recession, but the rest of corporate and consumer America looks pretty good


    I think saying 10 percent is a bit conservative though.

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    Default Re: FDIC quietly making plans ...

    Another great article I couldnt resist passing along.

    Up to 15 percent of subprime borrowers have credit scores that qualify them for traditional loans, estimates Freddie Mac, a company that invests in mortgages. Unsophisticated borrowers grappling with complex loan terms and pressure to refinance quickly can have ''a vulnerable moment," said Peter Zorn, a Freddie Mac vice president.

    ''You just got a tax bill. You don't really know you have sterling credit, or you don't understand what the costs are, because they focus on the monthly costs," he said.

    http://www.boston.com/business/perso...ubprime_loans/

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    Default Re: FDIC quietly making plans ...

    I would tend to think that your 10% figure will be on the 'light' side. As commuting costs, home heating/cooling/utility costs, and costs of everything involving a major oil/energy input (like food) continue to rise much faster than the 'core' inflation rate, and as local property and sales taxes continue to rise to offset rising costs of funding local social welfare programs, and as decent paying union jobs turn into non-union replacement jobs paying half as much, I would argue that the potential segment of Americans who could quickly find themselves 'in over their heads' will be more like 20%.

    I also agree with your comments on Nordstrom vs. WalMart sales. The rich get richer and the poor get welfare benefits, subsidized housing and subsidized utilities. It is the working middle class who will be most affected by the coming 'squeeze' and the FDIC is worried - because it is the working middle class who also have the biggest home and car loans vs their income level, have the least amount of equity, and have the least amount of uncommitted income left over to absorb rising energy costs and rising taxes.

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