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powayseller
ParticipantThe total mortgage debt in the US is $9.1 trillion (2005).
10% of all mortgages will reset in 2007.
“The Federal Reserve estimates that 20% of outstanding mortgages have variable rates. Half of those are set to change interest rates this year, Fed Chairman Ben Bernanke told lawmakers earlier this year.”$9.1 trillion x 6.25% = $ 568 billion in losses, assuming you can sell the house at a 25% average loss. In the last downturn, just one bank in LA had 560 houses on its books that it could not sell, because there were not enough buyers. My friend was a realtor in LA at the time, and she managed those properties and rented them out. Then over time, as the market picked up, they started selling small groups of those homes. These were nice homes, in Laguna Niguel, in Pacific Palisades, on the beach. There were no buyers at the bottom of the market. Some homes were just boarded up until the market turned around. So we can’t assume the bank will get back 75%. They may end up holding the house for *years*.
Also, let’s add the unearned interest income that is on the books of the “stupid banks”, the ones that did not offload the risk to the MBS (mortgage backed securities) market. Washington Mutual has, by my estimates, $ 1 billion of unearned interest income that is will not get, not ever get in my opinion. When they take that $ 1billion or greater loss in the next few years, I shudder to think of the fallout. Think back to the 1980s S&L bailout and multiply by 10 or more.
However, the biggest problem from the housing bust will be the rising unemployment as we lose 1/3 of all jobs created since 2000 (since they are real estate related), the ripple effect to corporations and the stock market. Think about Home Depot, Shaw Carpet, Pacific Kitchen Sales, all those lumber yards, copper and other commodities, stock market, credit card companies… they are all going to take big losses.
The rising unemployment rate will put extra burden on the government for social assistance at a time their own revenue from property taxes and sales taxes is shrinking. The Voice of San Diego just had an Opinion piece this morning about Chula Vista’s unreasonable promises, based on a forecast of ever rising property taxes flowing to their coffers. Even Jerry Sanders needs property taxes for SD to grow at 2% annually to meet his stripped down budget. How will San Diego handle 10% annual declines to its budget?
Oh, and another stock market collape, at it loses 30% of its value by next summer, will wipe out even more savings.
What I don’t know is the effect of our reducing housing prices on foreigners’ willingness to keep lending us money. If they stop, how will that affect our interest rates?
Did I leave anything out?
sdr, nice thread. I’d like to know your opinion on something. How long do you think we Americans can consume more than we produce, why can’t we be more productive, and how will our lives change when we are forced to create that balance?
ParticipantNow I know why builders don’t like to lower prices: when they lower prices, they risk getting sued from prior buyers.
ParticipantLindi, just to clarify, I’m not convinced that free trade is a good thing. If we had kept free trade in check, and not allowed so many imports, we would have higher inflation, but we’d also have kept more of our manufacturing base and better jobs in this country. Maybe we’d be able to produce as much as we consume. I don’t understand why free trade is a good thing. I’d like someone to explain to me how we are better off today than in 1980. Maybe I’m even against trading with lower wage countries. They exploit their labor and environment to make things cheaper, and I think we just should boycott products made in that fashion.
Anyway, so we really have fair, free trade? When we give handouts to our farmers, we are not engaging in free trade at all, because we give our farmers a competitive advantage over Africa’s farmers. China doesn’t care about violating copyright laws, so where is the free trade when they just copy our music, hardware, drugs?
ParticipantNice thread. Check out the “Shorting WaMu” thread, which has similar concerns about neg-am loans.
The big banks, like Citibank, and the Federal Reserve member banks (who are *they*?) were too smart for this gig. They offloaded their mortgages to the MBS market, so Federated and WaMu can go under/get bailed out, but the truly rich in this country won’t lose a penny. They just profit off the ignorant and poor.
Since you are a whiz at reading 10-Qs, what do you think about the exposure of the banks like Citibank, JP Morgan to mortgages? Won’t they just get richer when this housing market collapses, because they’ll buy up banks and real estate for pennies on the dollar in 2010-2015?
December 13, 2006 at 9:37 AM in reply to: Secrets of the Federal Reserve – We need to Wake Up! #41576ParticipantI feel like a total idiot for not thinking about this before. I started reading The Creature on Jekyll Island, a book about the Federal Reserve, but got bored 1/4 through. But without knowing what these guys do, and understanding their motives, we lose one very important factor in predicting the economy.
The big banks, like Citibank have pawned off their mortgages into the MBS market. See their Annual Report. “The Company’s mortgage loan securitizations are primarily non-recourse, thereby effectively transferring the risk of future credit losses to the purchasers of the securities issued by the trust.”
Citbank has a total of $163 B in fixed income securities, of which $13 B are MBSs, which they state are mainly GSE. If I understand their statements correctly, they have only $8.5 B in retained interests in mortgages. On the other hand, they made $24 B in profit in 2005. So, even if they lost their entire mortgage portfolio, and nobody paid back a penny, they would still have had $16B in profits – roughly.
So the big banks are not dependent on mortgages? They’ve pawned them all off on the public – their balance sheet also shows they *originated* $131 B in real estate loans.
Forget about the banks like WaMu, which could fold when the bubble collapses, and someone like Citibank, international banks, or the East-Coast money center banks will buy them up for pennies on the dollar. The large banks that have big mortgage exposure will be easy acquisition targets for the banks which really control the banking system (and our economy).
Why are there so many secrets in banking, about the Federal Reserve, about the money supply? Why are we never told by our government about the true inflation, about how much money is issued (M3 growth no longer published), who are the member banks? But mainly, why are we, including me, so intellectually lazy as to not question the role of the Federal Reserve, and realize they are not federal at all!
Now, here’s a little conspiracy theory. Consider the possibility that the rich want to get richer. I think we can agree that is a realistic motive. So they will come out ahead when this housing bubble busts. They will end up with more property and lease it to the poor.
After this housing bubble busts, we’ll see millions of foreclosures. The rich (banks or investors) will buy those homes for pennies on the dollar, while the former homeowner turns into a renter.
My friend suggests this is how they do it:
“But there is a problem – how do you take homes away from the people? Well – I think this is a pretty clever solution, let people mortgage their house by giving them 5% interest rates on their homes, plus a tax deduction, whilst they pay 23% on credit cards (after the 2% teaser rates expire).So if you, say, had a strategy to get your hands on people’s homes in the US, and you were rich and powerful, how might you do it?
– get people into deep debt using teaser rates and lowering lending standards
– raise the rates
– create a housing bubble
– crash the housing bubble
– increase unemployment
– change the bankruptcy laws so they can’t walk away from the debt
– start buying houses when the prices drop”As I am typing this, my TV is on, and some simple talk show is going on and on about trivial news: how to avoid flus, how to decorate for Christmas, gift giving, the weather. Useless drivel. Meanwhile, the broadcasters don’t show the truly important stuff, like helping us learn how the Federal Reserve really works. Don’t they know? Do they think we wouldn’t understand? Are they afraid to expose the scam?
I feel like such an idot for not realizing this sooner.
ParticipantThe guy loses, but who wins? Banks? Rich people? Bankruptcy does not wipe out your debt does it? Lindi, can you find out from your brother who ends up with all the money when these houses are foreclosed on?
ParticipantIt’s “imprudent” for investors to keep their holdings in one currency, Greenspan said. – Bloomberg, Dec 11, 2006′
He expects the dollar to continue declining until the current account deficit is reduced.
Why would Greenspan talk down the dollar? I’m a total novice at this stuff, but a possibility is that he wants to reduce investments into US Treasuries (so the yield will finally go up) and mortgages (to stop all that exotic money funding home loans).
ParticipantI didn’t mean to imply these cars belong to realtors. I just noticed the cars in the past few weeks have been fairly standard, but this past weekend I saw a couple higher-end vehicles. Maybe just a one-week data point.
ParticipantI still wonder how many people with Option ARMs put any money down. Why would you put down 5% or 10%, and then reverse all that equity downpayment by increasing your debt every month? (Option ARMs allow you to pay only some of the interest, so the part that you don’t pay is added to your mortgage balance, and your mortgage balance gets bigger every month. So any downpayment made is eventually wiped out. Once the loan gets 15% – 20% bigger than the original loan, the payment schedule goes up, and the borrower has to start repaying the entire loan, including the past interest and the principal.)
Anyone who cares enough about building equity and paying down principal to make a deposit, wouldn’t blow it by going negative-am, would they?
ParticipantIf you count births and illegals, population growth is positive, but net domestic migration out of San Diego is negative since 2001. So we’ve got births and illegal aliens contributing to population gain, neither of which is helping the housing market.
San Diego is dependent on the first time buyer to start the chain of sales, and I don’t see babies or illegals helping in that regard. Educated adults are leaving, and that is bad for our economy. Eventually, after prices fall in half, people will come back.
By the way, I think it’s entirely possible that we have a 10 – 15 year housing price drop like Japan just experienced. Japan’s prices had gone up even more than ours, and nobody thought they could ever drop. Well, they did. At one point, Japan’s Imperial Gardens property was worth more than all of California! Then prices plummeted by 80%!
ParticipantGLD is an ETF that holds gold. If you think the dollar will go down, can’t you invest in the dollar index ETF? A quick google search yielded Hedging Against a Dollar Dive. Roger Nusbaum recommends Rydex Euro Currency Trust FXE and several others (be careful with Profunds products, as outatthepeak and I had some bad experience – use piggington search for the whole story). Peter Schiff recommends the Merck Hard Currency Fund (MERKX).
Today I read that Bill Gross predicts the dollar will fall at least 5% next year, and that the U.S. housing bubble will take 1-2 years to play out.
Marketwatch reports assets of pure currency open-end mutual-funds and ETFs doubled to $1.4 billion in the past 6 months, and most of the new money comes from RETAIL, not institutional investors. I suppose everyday investors like us are getting nervous about all the media news about foreign diversification out of the US dollar.
ParticipantThanks for the link, murray. Census Bureau data shows outmigration since 2001 (San Diego). High housing costs relative to wages are motivating people to pack up and leave. Others are cashing out and retiring in cheaper cities.
ParticipantI passed that stretch of road today. My family noticed several newer model BMWs and Mercedes along the Car For Sale By Owner section of R.B. Road. I’ve been watching that area for signs of more cars for sale. But I also think that people are losing their cars, just as they are losing their homes. Does anyone have any data on auto repos?
ParticipantForeign countries are not only talking about diversifying out of US dollars, but they are actually doing it.
Why should we care? Inflation and higher taxes to pay the higher interest on the federal debt. Lots of inflation as the Federal Reserve has to print money to buy the Treasury debt that the foreigners are not buying. If the dollar does fall a lot more, big profits can be made by putting some cash now into gold, euros, swiss francs, or the British pound, and then converting the money back when needed after the dollar falls lower.
As the dollar falls, the price of oil will keep rising, and the cost of most goods will rise.
Any other comments about the falling dollar?
Oil Producers Shun Dollar
“Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements. The revelation in the latest BIS quarterly review, published on Monday, confirms market speculation about a move out of dollars and could put new pressure on the ailing US currency. ”Iran Okays Replacement of US Dollar with Euros
“In case the West pulls through with its planned economic sanctions on Iran, Tamaddon said the country would still have access to its monetary accounts based on the euro.
Iran’s minister of finance announced last week that the government had decided to replace the US dollar with the euro in its international transactions.
He said that the move was in response to the Bush administration’s hostile policies towards Iran. “ -
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