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Thread: chart of the week - Mortgage Equity Withdrawls

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    Default chart of the week - Mortgage Equity Withdrawls




    "MEW: Where’s the Beef?
    Saturday, May 5th, 2007 at 10:24 AM

    One of the key components of US Ponzi finance is the ability is extract so called equity (also called MEW) out of one’s home and use it mostly for consumption, and debt consolidation (code for more Ponzi finance to service old debts). The evidence has been clear that this factor has been greatly reduced from the peaks in 2005 and early 2006. With the tighter lending standards and actual declining collateral values evident on housing, the question then becomes how much and quickly will this disappear all together, thus throughly cratering the economy?

    As you can see from the following 4q, 2006 MEW chart, equity extraction was $308 billion annualized. Per the just released Freddie Mac report, first quarter equity extraction checked in at $282 billion. So even in early 2007, Joe Ultra Light Sixpack (JULS) was able to maintain his sputtering house as ATM program to add an illusionary 3.5% to his disposable personal income (DPI). Although the heyday of this borrow and spend orgy has long since gone, 3.5% DPI is still quite remarkable. Of course what’s really telling is how much the economy has already weakened, even with JULS still being able to get away with this much MEW borrowing.

    “This quarter we saw $70.5 billion cashed out, down from a revised $77.0 billion cashed out in the fourth quarter of 2006,” said Amy Crews Cutts, Freddie Mac deputy chief economist. (snip)

    (snip)"Even more astonishing was that 82% of these new mortgages were for cash outs of 5% or more than the old mortgage. But there is something else in this release that doesn’t quite add up. Look at the data chart provided in Freddie’s release, and notice that the median age of refinanced properties is stated as 3.3 years. In other words on average the last refi was based on late 2003 property values. The stink bomb aspect of this lies in the so called median appreciation of the refied property at 24%. Inquiring minds need to ask how could that be? Are property values really still up by that amount from the end of 2003? What will this look like for the current quarter and the rest of the year when the cohort comparison is with 2004? Can the answer be the same? Only if lenders are really pushing the envelope on inflated appraisals.

    As I have reported, the changes in lending standards from almost all the players tightened as the first quarter chugged along. By April, when the current quarter started the deed was largely done, so that might answer the question on appraisals. One also has to wonder how lagged the Freddie Mac data is especially in an environment where lending fell apart quickly in the first quarter? Will this end up being another in a series of downward revisions that has become evident in other economic reports of late?

    Evidence is also strong that housing prices have dropped 2-5% since year end 2006, adding more fuel to a contagion. Frankly, I think even I’m too conservative on what’s really go on, as local press is constantly reporting stories such as these ( ). Of course making an appraisal on a property is a far easier task than actually selling it at that same price. Therefore to maintain MEW activity at first quarter levels requires a tremendous willingness to fantasize and perhaps even lie about the collateral behind these loans. As the 2004 refi cohorts come up for more Ponzi MEW extractions are lenders still going to claim that these houses are up in value on the order of 20-25%, and authorize these mortgages? Where’s the beef, and at what point does this facade end?"(snip)


    The reason that MEW's are very significant is that the 'cashed out equity' has been a major facilitator for the purchase of big ticket items and luxury items. For example, one in six new cars sold in Florida last year was the result of 'cashed out equity'. Vacations, big screen TV's, etc. have been similarly paid for by 'cashed out equity' rather than actual paycheck earnings or consumer loan financing. Per the chart, in 2004 - 2005 surrogate income from MEW's basically provided almost a 10% 'pay raise' to every American. Last quarter that figure dropped to less than 4%. As the stagnation / decline of real estate values and greater due diligence in regard to creditworthiness brings MEW's to an eventual halt, this surrogate income source will be gone, the resulting spending on non-essential items will dry up, US economic activity will slow even more, but the (second) mortgage debt will remain and will consume an ever greater percentage of actual paycheck earnings !

    Dancers may find this of particular interest, since the service we are 'selling' clearly falls into the category of luxury items !

    ~
    Last edited by Melonie; 05-06-2007 at 05:19 AM.

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    Default Re: chart of the week - Mortgage Equity Withdrawls

    Just a reminder: When the credit runs out, the USA's major export (consumption) will slow down to a point where it is no longer beneficial for countries such as China to keep propping up the dollar, and they will switch to supporting the Euro, so that they can maintain some level exports to somewhere.

    $8 a gallon gasoline, DOW36000, and $12 dollar Starbucks latte's; here we come!

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