(snip)"One Trick Pony Blow Back
Friday, August 3rd, 2007 at 12:03 AM
Florida offers a case study of what happens when One Trick Pony Bubble economics bust. There are clues here for all levels of government as inflated Bully assets correct. Look for massive tax revenue shortfalls and ballooning deficits across the board.
The end of Florida’s long-running, high-flying housing boom drilled a $1.5 billion sinkhole in state revenue projections for legislators to patch in a special budget-cutting session next month. A panel of economic forecasters spent about four hours going over charts and graphs Wednesday, agreeing that revenue for the fiscal year that ended on June 30 was $380.5 million short of expectations. And for the fiscal year that started July 1, the planners shaved $1.1 billion off of their previous projections.
Boats sales are typically the domain of wealthier more affluent people, and would tend to be a good indicator of One Trick Pony economics as well. The 7-10% down figure seems to be the pattern with a lot of the non Ministry of Truth data right now.
U.S. boat sales are projected to be off between 7 percent and 10 percent from 2004, according to data from the National Marine Manufacturers Association..
Another blow to One Trick Pony comes from Wells Fargo who is just battening down the hatches generally on exotic loans such as Alt A favored by the well to do.
In a notice distributed Tuesday, Wells Fargo informed mortgage brokers that it is curtailing its exposure to so-called “alt-A” home loans - a product that typically doesn’t require borrowers to fully document their incomes. The decision comes just a few days after Wells Fargo pulled out of the risky business of relying on brokers to finance “subprime” home loans for borrowers with bad credit records.
Elsewhere others are also backing away from Alt A mortgages:
-Aug. 2 (Bloomberg) — IndyMac Bancorp Inc. is joining rival lenders in making “very major changes'’ to loan standards and raising interest rates because of a slump in mortgage securities, an e-mail to the company’s employees said. The market for mortgage bonds has become “very panicked and illiquid,'’ Chief Executive Officer Michael Perry wrote in the Aug. 1 e-mail. National City Corp. yesterday told companies from which it buys loans that it won’t accept second mortgages and some low-documentation loans, according to a notice on its Web site. Wachovia Corp. today decided to stop making Alt A mortgages through brokers in one of its mortgage units.
-Charlotte, North Carolina-based Wachovia, the seventh largest home lender, discontinued making Alt A mortgages through brokers because “it’s becoming more difficult to sell these mortgages in the secondary market.
-Atlanta-based SunTrust Banks Inc., the 14th largest home lender, has “pretty much gotten out of Alt A'’ for now, said Sterling Edmunds, who heads its mortgage unit. “Over the past week there’s been no liquidity in the non-conforming mortgage market.
-Lenders also are dropping so-called piggyback mortgages, said David Stevens, head of a home-lending venture for Fairfax, Virginia-based realty firm Long & Foster Cos.“There’s just no market'’ for the loans, second mortgages used in lieu of down payments or mortgage insurance, he said today. “Nobody’s taking them. They’re radioactive.'’ About 40 percent of new mortgage debt used to buy homes last year involved piggyback loans, more than double the level in 2001, according to SMR Research Corp., a Hackettstown, New Jersey-based research firm.
Moody’s finally got the Big Chief Tablets out and connects the dots on Alt A mortgages.
July 31 (Bloomberg) — Moody’s Investors Service described some so-called Alt A mortgages as no better than subprime home loans, and said it will change how it rates related securities after failing to predict how far delinquencies would rise.
That’s $2 TRILLION in subprime and Alt A originations in 2005 and 2006, but thank God the Ministry of Truth tells us it’s confined to only that, as thinking people might worry."(snip)
from
To save you looking up the author's 'Winterisms', the 'One Trick Pony' being referred to in the article is the over-dependence of state/local gov'ts in previous years on state/local tax revenues which stemmed from real estate transactions, auto sales, boat sales etc. Secondary to this were state taxes on capital gains (i.e. real estate, stocks and bonds increasing in price between purchase and sale), plus local sales taxes on unbridled consumer spending of often borrowed money (the infamous home equity loan pays for new car, new boat, vacation etc. scenario).
Now that mortgage lenders are pulling back from making loans that are 'non-conforming' i.e. where the borrower's income is less than fully verifiable, where the 'down payment' for the primary loan is actually a second loan, where the borrower's creditworthiness is not sufficient to cover monthly payments under future adverse circumstances re rising interest rates etc. The resulting lack of credit and requirement for substantial 'cash' down payments is going to put an even larger damper on real estate transactions, on auto sales, on boat sales, and on spending in general. This in turn will cause an immediate reduction in state/local tax revenues.
And while state/local gov'ts will put on a good media show in regard to spending cuts, between mandated expenses (like welfare/medicaid/education) and basic politician's desire to buy votes via pork spending, the only way for states and localities to balance their budgets will be to increase their tax rates. Unlike the federal gov't which can print money out of nothingness and which can run seemingly permanent deficits, state and local gov'ts do not have this luxury and must actually balance their budgets by one means or another.
~



Reply With Quote
Bookmarks