US Mortgage Crisis Goes Into Meltdown

[Dardedar]

DAR
My mother is a realtor with Lindsey. I knew things were slow but I was floored when she told me that Lindsey's gross real estate sales for the last year were aproximately one half of the previous year.

***
US Mortgage Crisis Goes Into Meltdown
By Ambrose Evans-Pritchard
The Telegraph UK

Saturday 24 February 2007

Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months, setting off mass liquidation of housing loans packaged as securities. Analysts say the housing bust is pulling America into recession, citing a 14.4pc drop in housing starts

The rapid deterioration could not come at a worse time for British bank HSBC, which has set aside $10.5bn (£5.4bn) to cover bad loans in the US.

The cost of insuring against default on these loans has rocketed in recent weeks, from 50 basis points over Libor to 1,200, raising fears that a credit crunch could spread to the rest of the property market.

Low-grade BBB-rated securities - measured by the ABX index - have crashed from near par of 100 in early November to 72.5 this week.

Peter Schiff, head of Euro Pacific Capital, said the sector was in an unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies tighten lending they create even more defaults," he said.

California's ResMae Mortgage filed for bankruptcy last week as it struggled to cope with defaults on a $7.7bn book of sub-prime loans issued last year, while Accredited Home Lenders in San Diego warned that bad debts had reached 7.18pc of its portfolio.

[Snip...]

Mr Roubini said: "America faces a 'reverse cycle' where a credit crunch has hit before the slowdown, a rare pattern. Normally, recession comes first, setting off credit troubles in its wake. We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present. If all this happening in what the consensus terms as a 'Goldilocks economy', what would happen if the economy slows down?"

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[Barbara Fitzpatrick]

They've been calling it a "jobless recover" for 5 years now. If they weren't using Arthur Anderson accountants, there wouldn't be any of this "goldilocks economy" garbage. What has made things look like they were even vaguely thinking of improving doesn't look so good when you see they were fueled by credit. It's the 1920s all over again - complete with dustbowl-severity loss of topsoil in the midwest farm states - just waiting for the stock market to tank. And our government is in much more - and international - debt than we were in the 1920s. Add to that our population is 97% urban instead of 55% urban and is over twice the size... As the Americans of the 1930s looked back nostalgically on the depression of the 1880-90s, Americans of the next one will talk longingly of the their great-grandparents' Depression. The history books may start showing GD I and GDII, like with the world wars.

[Dardedar]

DAR
More on this:

As rates soar, 2.2 million Americans risk losing homes this year

WASHINGTON (AFP) - In the heady days of the US real estate boom, it seemed like a safe bet to use her house as collateral for a loan. Today, Sharon Edwardsen risks losing her Staten Island, New York home, trapped by spiraling payments.

Edwardsen, a 47-year-old assistant optician, was tempted to take out a special high-risk loan targeted at people with low credit ratings. Today her monthly repayments have soared to 2,800 dollars, yet she only takes home 1,600 dollars.

She is among 2.2 million people across the US who risk forfeiting their homes by the end of the year as they struggle to meet monthly repayments swollen by rising interest rates, and triggering fears that a financial crisis could sweep US lenders.
...
In 2005 these so-called subprime mortgages, offering a short-termed fixed interest rate which then converts into a variable rate of about 12 percent, accounted for some 20 percent of all US mortgage deals.

As the real estate market boomed, they enabled some of the country's poorest citizens to get a toehold on the property ladder. Some of the loans dubbed "ninas" for "no income, no assets," were seen as an innovative way for people to realize the dream of owning their own home.

But now as interest rates rise, one in five borrowers of these high-risk exotic loans is set to default and see their homes seized by creditors.
...
During the boom years, when the repayments got too high, home owners could even refinance their loans borrowing against the increased value of their house.

That's exactly what Edwardsen did, remortgaging her home three times between 2002 and 2006.

Each time she got into difficulties, her mortgage broker would offer a new deal. From an original loan of 103,000 dollars, she now owes the credit company some 285,000 dollars even though her monthly income has remained the same.
...
"Blinded by their own greed and the incredible amount of money that was being provided by Wall Street, mortgage companies were making loans that were abusive," agreed Ira Rheingold, of the National Association of Consumer Advocates which has taken up Edwardsen's case.

Some companies were filling out false applications to ensure the credit was agreed. In Edwardsen's case, she became a doctor with a monthly income of 6,000 dollars.

"They were making loans and they knew people couldn't afford it and they made them anyway," Rheingold said, blaming "greedy deregulation, failure of the government to intervene and Wall Street's incredible appetite for high risk bonds that would pay them a lot of money."
...
Last week as the shaky mortgage market dragged down the US stock market, US financial authorities toughened up conditions for approving such high-risk loans.

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[Barbara Fitzpatrick]

Same thing happened to family farms in the Reagan years. Farm prices were good and farmers were looking to expand, but a loan for new equipment or a new field would be made against the whole farm and based, not on the farmer's income or the field or equipment purchased, but on the development value of the property. That should have told the farmer something right there, of course. When prices dropped again, there went the farms.

[LaWood]

U.S. goes thru the housing boon and bust at about 20 year intervals.
In the optomistic Reagan first years 2nd mortgages were let on the kitchens
in new homes. When it came time to collect, how the hell do you foreclose
on a kitchen, esp with a 2nd mortgage? Finance companies went broke by the dozen.

I was in Dallas for 2-3 weeks in 86 and 87. Commercial building sites with half constructed buildings were sitting abandoned in fields of weeds due to loans being recalled. A few high rollers in Fayetteville took bankruptcy. It usu follows periods of high deficits and increasing inflation, then Fed Reserve steps in, raises interest rates to cool things down and the contraction begins like dominos. But now we have a Fed Reser chairman without much experience. He is bound to make a few mistakes. Lets hope they aren't big ones.

[Barbara Fitzpatrick]

Ever known a neocon who didn't make big mistakes with other people's money?

[Dardedar]

The Mortgage Mess

"In February alone, some 131,000 foreclosure filings were recorded by RealtyTrac, a Web site that compiles default notices, auction sales and bank repossessions. For all of 2006, the site logged more than 1.2 million foreclosure filings nationwide - or one in every 92 U.S. households, up 42 percent from 2005.

"Based on our numbers for the first two months of 2007, foreclosure activity is running at a rate that would project to a 33 percent increase over 2006," RealtyTrac's CEO James J. Saccacio, said in a news release last month. These statistics represent the end of a process that is costing many borrowers their homes."

link

[Hogeye]

A house costs less than a car in Detroit

Barbara, Fed chief Bernanke is no neocon by normal definitions - he's your basic economic policy wonk. No one can prevent eventual dollar hyperinflation or outright default. Either way the world monetary standard - the US dollar - dies, resulting in a worldwide economic crisis. Hopefully this will cause the US to devolve like the USSR did.

Here's a pretty good explanation by Ron Paul:

The Federal Reserve Monopoly Over Money

[Dardedar]

DAR
I wouldn't be interested in reading anything by Ron Paul but I thought I would put this chart in this thread (which is rather pessimistic about the near economic future of the US). To see how the American dollar has done during Bush's tenure, see this amazing chart.

[Doug]

Here's a pretty good explanation by Ron Paul:

The Federal Reserve Monopoly Over Money

That's like saying: "The Pope's Monopoly Over Catholicism." There are other forms of renegade Catholicism (such as that of Mel Gibson), but most Catholics go with what the Pope says because that is how they organize Catholicism.

There are other good taken in exchange for other goods, as in barter systems, but most people are not so stupid that they would use obscure monetary units instead of the widely accepted U.S. dollar when making purchases.

[Hogeye]

Both me and presumably Ron Paul agree with you totally, Doug, that the dollar is the world monetary standard, and that most purchases in the US can be done easiest by far with US dollars.

What we argue (and you didn't address) is that there are certain dangers to such a monopoly. In particular, the danger of hyperinflation and/or default, causing massive economic dislocation, if not large scale death and destruction. And the power that fiat money monopoly gives to the issuing States, to fund wars, domestic imprisonment, and destruction of both citizen's rights and wealth, in the meantime.

If I didn't know better, I'd think you reacted superficially to the title rather than reading the article. As Ron Paul puts it:

The greatest threat facing America today is not terrorism, or foreign economic competition, or illegal immigration. The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch – Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference – that threatens to impoverish us by further destroying the value of our dollars.

[LaWood]

"Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference"'

Someone needs to help me out here. The word "can tax" is being confused with willing to tax.

Second, the Congress is very willing to borrow otherwise the staggering debt would not exist. The FR does not print up money without issuance of a debt instrument, or commonly known as Treasury Bills or T-Bills or U.S. Bonds.

The greatest inflation of money supply in this nation is created by fractional reserve banking. A bank is given credit for all its actual deposits but does not have them "on hand." Hence only a fraction of the original reserves are on hand, the rest are loaned and repaid with interest all the while the bank is given credit for having its accounts balanced.

[Barbara Fitzpatrick]

And since 1932, there is a cap on the amount of money allowed to be "rented out" rather than actually on hand. So, while fractional reserve banking still exists, the kind of bank failure/monetary meltdown of the "Great Depression" is - I'm not going to say UN-likely - less likely. Of course, with our current foreign debt load, should those loans be "called in", we may be looking at the "Great" Depression through the definition of "good old days" rather than "large, or effecting a preponderance of the population".

[Hogeye]

LaWood, you seem to basically agree with Ron Paul's assertion, but you would express it more precisely. Instead of Paul's, "Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference," you might rephrase as: Congress spending more than it is willing to tax, preferring to borrow in a manner requiring future monetary inflation.

Your points are well taken. Politicians could fund their spending through taxation/plunder - if they wanted to lose power, prestige, and the next election! The US could repay debt - basically IOUs to itself laundered through its IRS dummy corporation - by taxation. But realistically we know that treasury notes are simply promises of future inflation.

Also, LaWood, your observation that more inflation is created by fractional reserve banking than the Fed is correct. The US gets the first cut off the top through monetary inflation, central banks get their cut, and consumer lending banks get their fractional reserve cut. Why do you think bankers, international and domestic, support the inflationary fiat money system?

Barbara, you are right that when the loans are called in (by central banks such as China's, Japan's, Russia's, etc.) that hyperinflation and/or default will happen, and there will be a worldwide financial crisis. The Great Depression may look good, since it was ameliorated by deflation, while the coming crisis will have inflation. I'm hoping (and predicting) that this will cause the breakup of the US, and after a transition period, more liberty for people in North America.

[LaWood]

"Why do you think bankers, international and domestic, support the inflationary fiat money system?"

Wise up Hog.
Who do you think created it?

And by the way, Paul did not say what you have reframed him to say. Wish on. Paul is a politician.

Under Clinton taxes were INCREASED to achieve temporary balance. Clinton had to forgo the promised tax reduction because Bush I had lied and hidden a large amount of public debt. Later Clinton came back and instituted a tax decrease, mostly for middle income, where it did not TRICKLE DOWN into the economy but came rushing in towards prosperity.
Today , the Bush-Rove kool-aid crowd have no idea of what happened, no ability to comprehend anything but fabricated lies. Now the great unread is
hurting but nevertheless praising the lord for Bush. It's like making a kid go get the belt a rogue parent will beat them with.

Btw can you name a single industrialized nation that DOES NOT use fiat money?
_

[Hogeye]

Hogeye> "Why do you think bankers, international and domestic, support the inflationary fiat money system?"

LaWood> Who do you think created it?

The Fed was created in 1913 by the US State. However the current dollar-based international fiat money system was born when Nixon defaulted on the Bretton Woods system and made dollars totally fiat in 1971. Only then was the dollar totally off commodity backing, i.e. completely fiat. For the first time in history, the world was on a fiat money standard (rather than gold, sometimes with silver auxilliary.) For the first time in history, the US State could simply print up money without worrying about backing it with anything. For power-hungry politicians, it beats the hell out of taxing people! And it's so easy to pay for foreign wars and occupations!

I think my paraphrase of Ron Paul was accurate. Paul was simply taking "borrow" to mean an intention to pay back the promised value, rather than in devalued paper.

Btw can you name a single industrialized nation that DOES NOT use fiat money?

Virtually all countries use US dollars (along with local currencies), so it is safe to say that no industrialized country does not use any fiat money. But a better question is: Can you name a single country (industrialized or not) that doesn't use hard money? The answer is no. Gold and silver are valued monetarily virtually everywhere in the world where significant trading is done. As might be expected, the more a local State inflates the fiat money, the more popular hard money becomes.

The US is probably the place where gold and silver are least used monetarily. People from China to the Middle East to Europe use gold/silver as money (though of course not as much as State-issued fiat money - cf: Gresham's law.) People in the US are starting to wise up, considering the USEmpire's massive spending binge, and are hoarding (and sometimes using) silver and gold coins. The Liberty Dollar is one that's been in the news lately. Better IMO are generic silver rounds. Then of course there are the specie backed digital currencies such as e-gold.

Doug, in a recent message, seemed to be under the misconception that the idea of using hard money is to suddenly overcome statist fiat money by the competition. In actuality, the idea is to have alternate currencies available when/if the fiat money inflates too much. Think of a town with one big grocery store and two little mom & pop groceries. It might be smart to patronize the little guys sometimes, just to keep the big one "honest", i.e. so it has some competition, can't charge monopoly prices, and you aren't SOL if the big one goes out of business.

[Doug]

Doug, in a recent message, seemed to be under the misconception that the idea of using hard money is to suddenly overcome statist fiat money by the competition. In actuality, the idea is to have alternate currencies available when/if the fiat money inflates too much.

DOUG
Few stores would know what to do if you offered silver or gold coins to pay for your goods. Few clerks know the current market values.

Dollars are accepted everywhere, so they are far better currency for daily use. That's why they are used.

Gold and silver coins rarely function as currency anymore. They are used as commodities. They could just as well be diamonds or works of art. They are not for use in buying goods. They are investments. That's why they will never replace common currency.

[LaWood]

Hogeye> "Why do you think bankers, international and domestic, support the inflationary fiat money system?"

LaWood> Who do you think created it?


Hog "The Fed was created in 1913 by the US State."

LaWood-"Wise up Hog."

Never mind.