in the housing market just keeps piling up. Sales of existing
homes in October dipped 23.5 per cent from last year. Prices on
new homes dropped 13 per cent year over year. Third quarter foreclosures
skyrocketed to 635,000, a 94 per cent increase over last October
and an all-time high on the Misery-Meter. The real estate market
is in free-fall and the real trouble hasn't even begun yet.
Nevada, Arizona and Florida are mired in a full-blown housing
depression. Inventory is off-the-chart. Presently, there's a 10.8-month
backlog and the numbers are steadily rising. If foreclosures continue
at the current pace, by the end of 2008, there'll be a 14-month
inventory. That means that every builder in the country could
take off his tool-belt right now and stop working FOR MORE THAN
A YEAR before the market would clear. Contractors would be filling
out job-applications at Red Lobster or looking for an empty street-corner
with a tin cup.
entering the crisis phase of the biggest housing bust in US history;
Greenspan's remake of Three Mile Island; only this time the whole
country will be vaporised by a subprime-radioactive cloud.
As bad as
the housing market is now; it's going to get a whole lot worse.
Judith Levy sums it up in her article "ARM Resets to Hit
Fan in 2008":
2008 interest rates will be reset upward on US$362 billion worth
of adjustable-rate subprime mortgages [ARMs]... The 'real crest
of the reset wave' has yet to take place, which promises more
pain for borrowers, lenders and Wall Street... In addition to
the $362 billion of subprime ARMs, $152 billion of other adjustable-rate
loans are scheduled to reset in 2008, including jumbo mortgages
and Alt-A loans. The Mortgage Bankers Association estimates that
1.35 million homes will enter foreclosure in 2007 and another
1.44 million in 2008, up from 705,000 in 2005."
in resets. 3.5 million foreclosures.
Did I say
Three Mile Island? I meant Nagasaki.
is bound to be the state that's hardest hit by the housing slump.
Homeowners can expect to see price depreciation that could rival
the Great Depression. As Broderick Perkins says,
California Association of Realtors reported the median price of
an existing, single-family, detached home in California dropped
9.9 per cent in October, compared to the same month a year ago.
The decline was the largest year-to-year decline in CAR's history
believe that a downturn is imminent, with sales volumes down 52
per cent from the peak (in January 2005) and inventory (11.8 months)
up 100 per cent since last year. House price depreciation and
credit deterioration go hand-in-hand. We anticipate residential
mortgage credit deterioration to follow house price declines in
California. Presently, credit quality (in absolute terms) is better
in California versus the national average, but the rate of deterioration
is much worse. For instance, in the second quarter of 2007 delinquency
rates for prime ARMs and subprime ARMs rose 92 per cent and 73
per cent year-on-year respectively in California, versus 53 per
cent and 38 per cent nationally, Goldman Sachs reported."
(Broderick Perkins, "Record Home Price Declines Portend Extended
Downturn", Seeking Alpha)
prices dropped 10 per cent in a MONTH! Inventory is up 100 per
cent. Sales volumes are down 52 per cent. It's the trifecta!
so hard to sell a house in California, that people are resorting
to divine intervention. A number of websites have popped up on
the Internet promoting transcendental or occult techniques for
attracting potential buyers. Luckymojo.com recommends an old favorite;
"burying a statue of Saint Joseph upside down in the yard".
The site even features its own "Real Estate Spell Kit"
and Blessed Saint Joseph Candle
Statuette of Saint Joseph
1 Bottle Saint Joseph Oil
1 Saint Joseph Chromo Print
1 Saint Joseph Holy Card
even provides an optional prayer that can be recited during the
ceremonial burying of St. Joseph:
Joseph, I am going to place you
a difficult position
with your head in darkness
and you will suffer as our Lord suffered,
until this [house/property] is sold.
Then, Saint Joseph, I swear
before the cross and God Almighty,
that I will redeem you
and you will receive my gratitude
and a place of honor in my home.
the prayer, the supplicant takes the statue of Saint Joseph and
plugs him into the ground upside down and waits for the phone
to start ringing. Who needs a realtor anyway? "If there's
no yard, then dig a hole in a large potted plant." St. Joe
won't mind. All of this can be done without chanting, amulets,
prostrations, or messy sacrificial animals.
does Paulson think he's kidding?... Why would homeowners
opt to make outrageous monthly payments on homes that are
quickly losing value, when they can just park the keys on
the kitchen counter and vamoose. There's no incentive for
them to be shackled to a home if prices are going down.
sorcery won't work for everyone and the deteriorating housing
market is sending tremors through the broader economy. In fact,
the accelerating rate of foreclosures has put Washington in full
panic-mode. Treasury Secretary Henry Paulson has been frantically
trying to put together a bail-out package that will keep millions
of homeowners from losing their homes. Here's Paulson's statement
from earlier in the week:
we are all aware, the housing and mortgage markets are working
through a period of turmoil, as are other credit markets, as risk
is being reassessed and re-priced. We expect that this turbulence
will take some time to work through, and we expect some penalty
on our short-term economic growth.
speed up the modification process, Treasury is working through
the 'HOPE NOW' alliance with the American Securitization Forum
to convene servicers and investors so they can develop categories
of borrowers eligible for appropriate modifications and refinancings,
and an industry-wide solution... I am confident they will finalize
these standards soon. And I expect all servicers will implement
them quickly, and create benchmarks to measure their progress
along the way. As a result, what was a fragmented, cumbersome
process can be a coordinated effort which more quickly helps able
Paulson think he's kidding? He knows the plan is a non-starter.
Why would homeowners opt to make outrageous monthly payments on
homes that are quickly losing value, when they can just park the
keys on the kitchen counter and vamoose. There's no incentive
for them to be shackled to a home if prices are going down. They'd
be better off loading up the U-Haul, grabbing the dog, and letting
the bank worry about it. That's who Paulson is really worried
about anyway. "Helping the homeowner" is is just a red
a number of glitches to Paulson's scheme. For example, if he freezes
monthly mortgage payments, then bondholders won't get what they
bargained for and the market for mortgage-backed securities (MBS)
will dry up. As Tom Deutsch, deputy executive director of the
American Securitization Forum, said, "If they no longer invest
in mortgage-backed securities, you've cut off the credit available
for refinancing, you cut off the lifeblood of being able to give
better loans." (Bloomberg)
If investors don't get the returns they were promised - or if
the government arbitrarily changes the terms of the deal - bondholders
will just take their money and put it somewhere else. It's as
simple as that. That would trigger a run on the MBS market and
put the kibosh on Paulson's plan.
is certain, investors will not sit by quietly while their rights
are trampled and their profits are slashed so that people can
stay in their homes. That won't happen. Any viable bailout plan
will have to be evenhanded, so that everyone shoulders part of
the burden. Besides, these bonds are covered under contract law
and the investors have rights. Paulson seems to think he can just
make up the rules as he goes along. But he's wrong. If he tries
to void or rewrite the contracts he'll be hit with class-action
lawsuits that will stop him in his tracks.
summary of Paulson's plan appeared in the Wall Street Journal:
whole scheme is an act of eminent domain, except the government
isn't formally seizing property rights, but emboldening private
parties to do so. Why is no one calling a spade a spade?"
that the biggest boosters of free enterprise - like Paulson -
are the first to do an about-face at the first whiff of grapeshot.
Whatever happened to principles? Does Paulson really want to promote
a scheme that forces the revision of contracts as well as repeals
basic property rights? Needless to say, Paulson's metamorphosis
into Leon Trotsky has not been warmly received on Wall Street
where he has been lambasted by friend and foe alike.
blowup is having dire effects on global financial markets. The
credit crunch has spread throughout Europe where lending standards
are tightening and industrial growth is threatened by the falling
dollar. Consumer confidence has plummeted in Europe just like
in the US. Last week, the Dow Jones slipped below its August low
of 12,850 following the path of the Transports. The stock market
continues to lurch back and forth furiously like an overloaded
washing machine; soaring 100 points one day and then, plunging
200 the next. The volatility is just another indication that we
are entering a primary bear market. Dow Theory suggests that the
trajectory will continue downward into recession.
stock market continues to lurch back and forth furiously
like an overloaded washing machine; soaring 100 points one
day and then, plunging 200 the next. The volatility is just
another indication that we are entering a primary bear market.
Dow Theory suggests that the trajectory will continue downward
subprime debacle has cast doubt on whether the "structured
finance" model of securitizing debt will survive. On December
3, 2007, there were crucial new developments in this story that
will have profound effects on the future of many the country's
largest investment banks. E*Trade Financial has been forced to
liquidate $3 billion of its mortgage-backed securities. Up to
now, the banks, hedge funds an other holders of these toxic MBS
and CDOs have been reluctant to sell, fearing that trillions of
dollars in asset value would be immediately wiped out (for similar
investments) once a firm "market price" is established.
Day of Reckoning arrived on Monday and the only thing missing
was the funereal dirge and the wreath of fresh lilies.
analysts on Friday said E*Trade got anywhere from 11 cents to
27 cents on the dollar for its $3.1 billion portfolio of asset-backed
securities. The portfolio sale was part of a $2.5 billion capital
infusion from a group led by hedge fund Citadel investment Group.
sale, one of the few observable trades of such assets, has very
clear, generally negative, implications for the valuation of like
assets on brokers' balance sheets," Credit Suisse analyst Susan
Roth Katzke said.
$.27 on the
dollar! Yikes. No doubt they'll be pulling a few weepy bankers
off the ledge before the week is out.
particularly distressing about the E*Trade sale is that over 60
per cent of the $3 billion portfolio "WERE RATED DOUBLE-A
OR HIGHER". That means that even the best of these mortgage-backed
bonds are pure, unalloyed garbage. This is really the worst possible
news for Wall Street. It means that trillions of dollars of bonds
which are currently held by banks, insurance companies, retirement
funds, foreign banks and hedge funds will be slashed to $.27 on
the dollar OR LOWER.
Banks will have to hoard reserves to meet the new capital requirements
on the falling value of their assets, which means that they'll
have less money to loan to businesses and consumers. In fact,
this is already taking place (which is the real reason the Fed
keeps injecting money into the banking system). The E*Trade "firesale"
confirms that the country - and perhaps the world - is now headed
into a downward deflationary spiral. The Fed will HAVE to cut
interest rates 50 basis points on December 11, just to keep the
financial system from freezing up entirely. That will, of course,
further emasculate the dollar and send food and energy prices
through the roof.
really no way to overstate the importance of the E*Trade sell-off.
It is the equivalent of a neutron bomb detonating in the heart
of the financial district. Yes, everyone is still milling around
with their caramel Macchiatos clutching their Blackberries just
like before. But the game is over. Trillions of dollars of market
capitalization will be lost and some of the biggest names in banking
will be carted off to the boneyard. It will be a miracle if the
Fed's interest rate cuts are enough to keep the economy sputtering
along while the losses are written-down and the country recovers
$.27 on the
dollar should be inscribed on the headstone of every Wall Street
fraudster and every chiseling "financial innovator"
who transformed the world's most powerful and resilient markets
into a carnival sideshow. It should include every subprime "no
doc-no down" homeowner who lied on his loan application to
goose the system and get another 50 grand for a jet-ski and 42-inch
liquid TV; every cheesy realtor who fudged the paperwork to put
unemployed busboys with bad credit in $550 McMasions in Loma Verde;
every ratings agency stooge who got carpal-tunnel from stamping
each shaky subprime loan with with AAA seal of approval; every
lacquer-hair banker in a two-toned shirt who bundled up garbage
loans and dumped them on Wall Street; every shabby hedge fund
manager who used the subprime loans to beef-up his own personal
administrative fees by leveraging the MBSs and CDOs at rates of
10 to 1; every regulator who serenely looked the other way while
the market was dousing itself in jet-fuel and reaching for the
matches; and, of course - above all - the Federal Reserve, who
initiated this whole boondoggle by producing trillions of dollars
of low interest credit which flooded the system creating the greatest
speculative frenzy in the world history. Alan Greenspan - the
Ponzi Ringleader - deserves a place of honor at the head of the
chain-gang as they are frog-marched to some remote black site
where they can pay for their transgressions.
of us will have to stay put and endure the fallout from a "completely
avoidable" Great Depression. We're dead ducks.
bundling of dodgy subprime liabilities and selling them
as valuable assets to unsuspecting investors is a scam that
any competent regulator should have spotted immediately.
And stopped. It doesn't take genius to see that offloading
sketchy MBSs and "marked to model" CDOs to gullible
institutions is wrong and a danger to the entire system.
Director of Pimco Managed Funds, Bill Gross, summarized our present
conundrum in a recent article:
we are witnessing is essentially the BREAKDOWN OF OUR MODERN DAY
BANKING SYSTEM, a complex of levered lending so hard to understand
that Fed Chairman Ben Bernanke required a face-to-face refresher
course from hedge fund managers in mid-August. My PIMCO colleague,
Paul McCulley, has labeled it the "SHADOW BANKING SYSTEM" because
it has lain hidden for years - untouched by regulation - yet free
to magically and mystically create and then package subprime mortgages
into a host of three-letter conduits that only Wall Street wizards
could explain." (Bill Gross, "The Shadow Knows",
A few months
ago, Gross's observations would have been dismissed as the ravings
of a doomsday alarmist. Now they are part of mainstream analysis.
Gross is a realist. The financial markets are broken; it's time
to strap the patient to the gurney and wheel it in to I.C.U. No
more band aids, thank you.
of the St. Louis Fed, William Poole, discussed many of these issues
in a speech last week. Poole insisted that it is not the Fed's
intention to "pump up the stock market" or to protect
investors from losses by lowering the Fed's Fund Rate. Rather,
the rate cuts are supposed "to restore normal market processes.
He said, "An active financial market is central to the process
of economic growth and it is that growth, not prices in financial
markets per se, that the Fed cares about."
"One of the most reliable and predictable features of the
Feds monetary policy is action to PREVENT SYSTEMIC FINANCIAL
COLLAPSE. If this regularity of policy is what is meant by the
"Fed put," then so be it, but the term seems to me to
be extremely misleading. The Fed does not have the desire or tools
to prevent widespread losses in a particular sector but should
not sit by while a financial upset becomes a financial calamity
affecting the entire economy."
Reserve is now actively trying to forestall "a systemic financial
crisis". (Poole's words) The trillions of dollars that were
loaned to mortgage applicants - and which ignored traditional
criteria for lending - have created the likelihood of a decades-long
downturn in the housing industry as well as a meltdown in the
broader financial markets. The bundling of dodgy subprime liabilities
and selling them as valuable assets to unsuspecting investors
is a scam that any competent regulator should have spotted immediately.
And stopped. It doesn't take genius to see that offloading sketchy
MBSs and "marked to model" CDOs to gullible institutions
is wrong and a danger to the entire system.
innovation has created a dilemma for which there is no easy solution.
The Genie cannot be put back in the lamp. Paulson's remedies have
no chance of succeeding. Mortgage-backed securities have been
so chopped up and spread throughout the system; it would be easier
to to unravel a bowl of spaghetti , separate each strand, one
by one, and lie them next to each other without touching. It can't
be done. The bad debts will have to be written down, banks will
have to fail, and government will have to investigate affordable
housing alternatives for millions of defaulting homeowners.
has created a monster. The prevailing Reagan-era, "supply
side", free market doctrine has removed tariffs, subsidies
and other state-created price-distortions, but it has also eliminated
all oversight and accountability. Government agencies no longer
play an active role in policing the markets and, as a result,
US financial institutions have fallen into disrepute.
first of all, a credibility problem and it will require astute
leaders with a strong moral foundation, not evasive bureaucrats
who're looking for a painless way to "cut their losses"
and and keep the wheels of industry clanking along. Asset-backed
commercial paper - a $2 trillion business - "is hardly trading
at all." The securitization of credit card debt, mortgages
and car loans has slowed to a crawl and is in danger of stopping
Many of the main engines for generating revenue for the banks
- the repackaging of debt and amplifying it through levered derivatives
- has vanished overnight. The financial markets have never been
under such stress. There's so much mortgage-backed gunk in the
plumbing, the system is grinding to a halt. This is no the time
for "business as usual" "garbage in, garbage out".
We need people who really understand what is going on to step
up to the plate and propose coherent "fiscal" policy
options that will steer the global economy away from the reef.
Paulson's "quick fix" snake oil. It's utter bunkum.
The credibility of the system is at at stake. It's time to get
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at email@example.com.
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