Sunday, November 25, 2007
The Chickens Are On Their Way
The chickens are coming home to roost. All the turbulence in the realm of mortgages is about to increase. Maybe I am being too hard, but when I read about folks who don't do due diligence and/or don't consider the truth about what they can really afford, and then take on a risk that blows up in their face I just can't bring myself to believe that I need to bail them out. Unfortunately, these fools and the banks that catered to them in the name of the almighty dollar have made this my concern too. I know what I'd like to say about all this, but it's unprintable.
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The coming year will be very turbulent indeed, because there are $950 BILLION worth of mortgages resetting in the next eleven months,not including the $50 Billion that reset in October.
None of these show in the current foreclosure statistics. You can figure that the foreclosures showing up in the stats now started in process a year ago or more,for it takes about a year from NOD(notice of default) to REO (bank ownership). Yet, foreclosures are already at record highs. We have never, never seen foreclosure rates like now, not even after the bursting of the farm bubble of the twenties that probably did more to trigger the collapse of credit in the early
30s and the onset of the Great Depression, that the collapse of the stock market a few years previous.
"Bailouts" of sorts have already been arranged, to the detriment of our currency and to the credibility of our financial system. For example, the loan limit for Freddie Mac is now $417,000, which means you can now get a bigger FHA loan than ever, and there is pressure to increase that to $1MM. That means that moderate-income FHA loan borrowers will have to pay loan fees for insurance for loans to help expand and extend the bursting credit bubble.
Worse, something like 77% of all loans written 2004-2006 are adjustable, which simply means that 77% of all buyers could not afford the places they bought, or they surely would have obtained a fixed- unless, of course, they were FLIPPERS, who are in even worse case that homebuyers who mererly bought over their heads. The flippers tend to own MANY homes that they bought no-down with adjustable loans, and they will be most unlikely to be able to carry these homes and will be looking at substantial losses when they sell to beat foreclosure, as will many homeowners who bought over their heads to pretend to be richer than they were.
I expect price rollbacks to 2001 levels. Given that the median income nationwide has fallen 1% since 1999, and that most homes purchased in the past 4 years were purchased with questionable loans that the buyer will be unable to refinance, that is not really farfetched.
All the online rent vs. buy calculators I've used are figuring 30% depreciation in home prices in this area for the next year.
It will take 10 years to work through this, but that does not justify a "bailout" for self-indulgent homeborrowers OR the unscrupulous loan brokers that made the loans, or dishonest hedge funds that bought the paper that, for a while, enable them to pay their managers and traders salaries and bonuses in the hundreds of millions of dollars.
Because that is who the Clinton-Dodd-Schumer bailout is really for- the financial firms that profited from the five-year rampage of greed and fraud.
What I find interesting (no pun intended) about this is that the Fed is under pressure to lower interest rates again, as a way of dealing with the falling value of the dollar. That, of course, will lower interest rates again, by definintion, creating pressure toward another such "boom." It will be interesting to see what happens if & when there's another spate of low interest, but combined this time with a crash from the last one.
My prediction for the upcoming "bailout" is that it will effectively be a bailout for the banks who foolishly lent the money, and along the way with the massive corporate bailout, some individuals may incidentally receive some benefit as well.
Tom - sorry for the late post, am on the road again - I totally agree with your assessment. And I think we are about to find out if you are correct.
Kheris and Tom,
Yes, it is absolutely a bailout for the lenders AND the investors who bought their mortgage paper... all the hedge fund managers who made big enough bonuses off this rampage to build $12MM mansions on Howe St. and the Hamptons.
And it won't work. It makes a joke out contract law and makes lending even riskier.
Count on it- if you don't have at least 30% down, you won't get written. Lending is going to be tighter than ever because of this and that will be a massive blow to first-time buyers. Most of them will be effectively squeezed out even if prices drop 40% off the peak, which they are looking to do.
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