October I started taking note of suspicious clues surrounding
the American housing bubble. None of these that I saw were in
the mainstream media. Rather, it was like working a jigsaw puzzle:
looking at miscellaneous comments in alternative sources, finding
"this piece with goes with that", and so on.
reading countless hundreds of articles on the housing bubble,
and comparing it to the leadup to the Great Depression, which
my parents and I lived through, I still find the mainstream media
media went along for some time with a "What, me worry?" attitude.
And even when Henry Paulson said on July 21 that "we were about
at the bottom of the housing slope," the mainstream media parroted
that 'wisdom'. Whistling in a graveyard, more likely.
shakiness of the market, however, there are any number of commentaries
about problems. Many of them are still in the recent past: it's
about the sub-prime sector. Ha!
of fact, the bubble is well past that point. The rot has spread
to Alt-A loans, and now a significant percentage of prime loans,
and even jumbos. Now, the seeds of this potential disaster were
planted in 1970 by the Department of Housing and Urban Development.
is the name of the game.
the day', when someone bought
a house, a bank usually supplied the loan
and held the mortgage. After World War II,
demand outpaced supply and investment
banking hit on the plan of developing
mortgage pools. This was a way to
spread risk over a range of securities
and seemed like a good idea at the time.
Comptroller of the Currency Administrator of National Banks, 1997,
"Asset Securitization Controller's Handbook":
is the structured process whereby interests in loans and other
receivables are packaged, underwritten, and sold in the form of
'In the day',
when someone bought a house, a bank usually supplied the loan
and held the mortgage. After World War II, demand outpaced supply
and investment banking hit on the plan of developing mortgage
pools. This was a way to spread risk over a range of securities
and seemed like a good idea at the time.
National Mortgage Association (GNMA or Ginnie Mae) issued securities
collateralized by a portfolio of mortgage loans.
loans became part of such security schemes. And then credit card
debt. By 2004, Asset Securitization had grown into an 800-pound
financial albatross: credit card-backed securities, 21 per cent;
home-equity backed, 25 per cent; auto backed, 13 per cent; and
collateralized debt obligations (CDOs), 15 per cent. Also, student
loans, 6 per cent; equipment leases, 4 per cent; manufactured
housing, 2 per cent; small business loans and aircraft leases.
the housing boom took off.
securitization is the structured process whereby interests in
loans and other receivables are packaged, underwritten, and sold
in the form of "asset-backed" securities."
- the true value of those assets.
credit courtesy of the Federal Reserve System, low interest rates
on loans, and new homes being built at an increasing pace, issuing
loans took on a more creative aspect. 'Interest only', the amusingly
labelled 'covenant-lite' (a.k.a. liar's loan), the ubiquitous
sub-prime loan, all became standard.
As the market
hot up, not only banks were providing blue-sky loans but even
construction companies. "Come buy our home and we'll give you
the money to do so!"
working Americans invest in
pension funds, building a good future
retirement. ExceptÉ the fund managers
are heavily into hedge funds and
sure-thing stocks. Uh huh.
Probably enterprises run by
more "smartest guys in the room."
to rise and speculation became rife. Hey, if you're flipping burgers
and you see a chance to grab the brass ring of the American Dream,
why not? Buy for little or nothing, ride the rising market and
sell for a handsome profit. The 'greed is good' attitude flourished
and already lax standards became even more so.
loan has the highest risk factor, due to the fact that those getting
such loans were already assessed as a credit risk. But who cares
if they default later, so long as you, the loan issuer, can sell
that mortgage on.
class of loan is intermediate, a marginal problem for many people.
And a prime loan is issued to, usually, someone with an excellent
credit rating. The problem with the latter is that all is well,
until the borrower loses a job. The usual quick fix is to try
to refinance, why not, with excellent credit rating to that point,
shouldn't be a problem? Wrong!
woman buys a house in 1998, up to date on mortgage payments, maybe
even ahead. Job gone. Innocently, she goes to bank to discuss
the problem. Nothing to do with them. They've sold that mortgage
on. And many others.
and her lawyer are trying to find out WHO does hold the mortgage.
No one knows, it's been passed through many hands.
case: couple receives a foreclosure notice, sure, they're in arrears.
Only the paperwork comes from some outfit that cannot even prove
they own the mortgage. Crazy stuff.
easy for some people not in strife to look at the housing bubble
crisis casually and say, foolish, naive and greedy people, let
them rot. But isn't the root of the problem those who initiate
questionable loans? And it's not only 'liar's loans' but construction
companies into corruption and fraud. Falsifying loan applications,
or doing a 'bait and switch'.
we get back to the aspect of 'asset'.
out from a reputable bank as a prime loan is leveraged. Same principle
as fractional reserve banking. Loan money that doesn't exist and
create a debt plus interest to be returned. And sell that mortgage
on so your fingers don't get burnt.
mortgage broker takes a bunch of these and passes them on. Because
the risk is spread, allegedly, the value is reckoned at maybe
10:1 and, ultimately, a hedge fund has many of these 'assets'
in the kitty. All well and good while the bubble continues to
inflate. But when the merry-go-round stops rotating and then starts
to run in reverse, it's oops time.
One of the Gordon Gecko-like Wall St. heroes sucked US$1.6 billion
out of this Ponzi scheme as his reward.
hard working Americans invest in pension funds, building a good
future retirement. Except
the fund managers are heavily
into hedge funds and sure-thing stocks. Uh huh. Probably enterprises
run by more "smartest guys in the room."
it's easy for some people
not in strife to look at the housing
bubble crisis casually and say, foolish,
naive and greedy people, let them rot.
But isn't the root of the problem
those who initiate questionable loans?
And it's not only 'liar's loans' but
construction companies into corruption
and fraud. Falsifying loan applications,
or doing a 'bait and switch'.
downturn has hit suppliers: hardware, Home Depot, insulation,
Owens Corning, USG, largest manufacturer of drywall in the US.
Their prices are down, production has been cut by 18 per cent
and they've laid off 1,100 workers in the past year. More to come.
None of this was hard to predict.
At the beginning
of the year, the pool of new homes for sale in California was
a three-week total. Now, it's one year. Ohio and Michigan fare
ever worse, due to plant closings. There are whole subdivisions
looking like ghost towns. Texas and Florida also lead the pack
of problem areas. Even so, three major highrise condo projects
continue to go up in Miami. But who will buy?
affluent are seeing hard times, comparatively. Now, you wouldn't
think any couple anticipating buying an $850,000 home in Washington
DC would have a financial problem. But the recent 'correction'
in the stock market brought on a rise in interest rate of the
jumbo loans. Overnight, their buying power dropped by 10 per cent
so it is time for second thoughts. Jumbo loans have no guarantee
protection, so even low-risk is now not so low.
not only individuals from all walks of life - the big boys are
feeling the pinch. Citicorp, Bear Stearns, Goldman Sachs and more
- imagine finding you've underwritten billions of dollars of corporate
loans, only to find no one wants the bonds you expected to sell!
And if the
domestic economy weren't shaky enough, Paulson is asking for a
new cap on the national debt, US$9 trillion isn't enough. And
our glorious leader plans billions of dollars of arms 'sales'
to several questionable regimes. As well, Mexico's Calderon now
needs help on the 'war on drugs' which will probably cost the
US five hundred million.
leave that for another time. A final visual of the housing market
mortgage backed securities. Note the government guarantees 48.6
per cent of these. Only a small percentage of the $3 trillion
plus is at risk but
Here's the big picture as of July, which is linked from this site.
(click on the graphic for a better view)
By the way,
in two examples of 'how to lie with statistics'... one clue was
the Fed dropping the M3 last year, 'the money supply'. And dropping
energy and food from the inflation figures, with those two items
showing 25 per cent and 33 cent increase respectively. Uh huh.
the Dow drops 387 in one debacle of trading and, at the same time,
the price of gold falls? What's going on? So there appear to be
lots of cracks in the economic edifice. But why should we worry
about threatening the Chinese, who own US$1.3 trillion of our
debt? Never mind Japan and India who have significant stakes as
Note: The above article is circulated by www.informationclearinghouse.info.