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Subprime contagion
August 11, 2007 10:24 PM   Subscribe

This isn't 1998. There's no model for what's happening now in the housing and mortgage industries. 116 mortgage lenders have imploded since 2006. 11 hedge funds have imploded in just the last couple months. Time to warm up the helicopters?
posted by wallstreet1929 (126 comments total) 10 users marked this as a favorite

 
You made your name just for this post, didn't you?
posted by OrangeDrink at 10:29 PM on August 11, 2007 [1 favorite]


perhaps, but people have shouted about falling skies before, best to take a wait-and-see approach I guess. What kinda squicks me out is how active the federal government gets in stabilizing the market (read, protecting the investments of those that generally have a lot of money), 50+ Billion dollars in two days. That's a shitload of money to have just lying about to essentially play socialized profit protection with. Shatters any pretense that there is about letting the market regulate prices.
posted by edgeways at 10:35 PM on August 11, 2007


Seems wallstreet has been around longer than that.

It's an amazing time. I can't fathom pumping that much cash into the economy. Having just watched the documentary on Enron the other night, it amazes me how bad things get before anyone notices. Bankers and investors are all so happy to be making cash that they never stop to think about the long-term.
posted by strangeleftydoublethink at 10:36 PM on August 11, 2007


The Dot Com crash turned people off tech stocks and even tech careers. Does this mortgage correction mean that people will no longer live in houses, and will go back to living in caves?
posted by KokuRyu at 10:39 PM on August 11, 2007 [6 favorites]


protecting investments?

How about funding those looking to cashout?
posted by Fupped Duck at 10:39 PM on August 11, 2007


The Dot Com crash turned people off tech stocks and even tech careers. Does this mortgage correction mean that people will no longer live in houses, and will go back to living in caves?

Probably not. Hopefully, Americans will start living within their means: cut up their credit cards, trade in the SUV for a more efficient car, rent until they can afford a home and then not count on gaining $300,000 of home equity in six months.

....


HAHAHAHHAHAHAHAHHAHAHAHAHAH

Oh gosh, I kill myself sometimes. Heh.

No, seriously, we're all fucked. Invest in canned food and shotguns.
posted by Avenger at 10:56 PM on August 11, 2007 [16 favorites]


I direct you all to this fine comment made on the previous subprime thread by bookie. The thread was a couple of days old at that point, but it's an excellent synopsis of some of the issues.

It's a freaky situation.
posted by blacklite at 11:02 PM on August 11, 2007


KokuRyu: "The Dot Com crash turned people off tech stocks and even tech careers. Does this mortgage correction mean that people will no longer live in houses, and will go back to living in caves?"

People still live in houses?
posted by koeselitz at 11:03 PM on August 11, 2007 [1 favorite]


Don't worry, middle class taxpayers will bail out the rich again.
posted by Blazecock Pileon at 11:10 PM on August 11, 2007 [12 favorites]


It's times like this when I'm glad I'm on the lower rungs of the socio-economic ladder, don't have investments, and have a cheap house financed at a normal bank. Yes, the economic situation affects me in general, but I don't panic when I see the stock reports.
posted by amyms at 11:15 PM on August 11, 2007


You made your name just for this post, didn't you?

No, he must have been planning ahead. He's been here since December of 2005.
posted by amyms at 11:17 PM on August 11, 2007


Do you think this is worse than the S&L Crisis? I seem to remember that as being pretty damned serious, but we survived it somehow and our economy didn't self-destruct.
posted by Steven C. Den Beste at 11:20 PM on August 11, 2007


At the onset of an inflationary spiral I think good things to buy are, gold, silver, and any kind of useful business assets. Not only does the Fed summoning money out of thin air lead to increased demand and inflation, but I'm starting to wonder if the expectation that the Fed will keep throwing money at the bubble might set off expectations of unchecked demand, and perhaps jump-start a period of severe inflation.
posted by rolypolyman at 11:25 PM on August 11, 2007


Useful business assets? Like desks and chairs and stuff?
posted by Smedleyman at 11:28 PM on August 11, 2007 [1 favorite]


Steven C. Den Beste: well, true, but as the S&L effects rippled out we saw a boom in IT/tech industry. Perhaps one cancelled out the other?
posted by rolypolyman at 11:28 PM on August 11, 2007


Useful business assets? Like desks and chairs and stuff?

Yeah, I say liquidate dollars and buy whatever you need to be self sufficient and run a subsistence-level business, as your purchasing power will be nil after inflation takes hold and you'll pretty much be working for the man. Maybe Grapes of Wrath style, if it's bad.
posted by rolypolyman at 11:32 PM on August 11, 2007


Actually, this feels an awful lot like 1998.
posted by caddis at 12:20 AM on August 12, 2007


Ok, I'm not an economist, but I don't get the inflation angle.
There's a ton of ARMs coming due, I heard on the radio some number above a trillion$ in 2008. Now, if these people are smart (I would think that most of them probably are) they will refinance to have a painful, but not back-breaking mortgage.
If this is true, then a lot of money will be sucked from the overall economy to pay for these mortgages. I thought inflation would be driven by an increase in money supply, not a decrease. Why isn't the threat deflation or stagflation or whatever term they use when economic activity dries up?
posted by forforf at 12:56 AM on August 12, 2007


SCDB: Well, the wikipedia page says the S&L crisis involved about $150 billion of loans and the like. In 2006 dollars (using relative share of GDP, which is usually a good way to calculate relative price of large-scale economic events like this) that's about $300 billion. So, if this involves $300b of mortgages fucking up, it will suck about as much as the S&L crisis.

The fact that the ripples are already being felt worldwide makes me pretty apprehensive, even before looking at the numbers.

This MSNBC story indicates that $1.3t of subprime mortgages are outstanding. In the Cramer thread, and in this wikipedia article, the $600b figure has been thrown around. This also doesn't take into account "Alt-A" mortgages, which aren't technically subprime but are part of the crunch.

"At the end of 2006, subprime and alt-A loans accounted for roughly 72% of ARM debt outstanding—that is roughly $2.5 trillion in debt, or 25% of the total mortgage debt outstanding," says an end-of-2006 Global Insight report. "The delinquency rate on all mortgages rose from 5.1% at the end of 2005 to 5.3% at the end of 2006, but on subprimes the rate jumped from 11.6% to 13.3%. Subprime delinquency rates jumped across all regions, but in the North Central region they rose to a record 16.8%."

It's a hell of a lot of money, and now that the Fed has decided to start forcing banks to use their "mortgage-backed securities" as collateral for federal loans, well... it's just more potential (these days, unvaluable) deficit for the government, on top of basically shovelling US Dollars into the global economy for securities which no one else will pay anything for.

Inflation control is supposed to be the Fed's central mission, but they're playing fast and loose with bank loans to keep things from becoming entirely valueless, and if they end up raising rates to compensate, every notch is going to be felt by every single person with an adjustable rate mortgage, and the foreclosure rates will go up even further. What do they do then? More bailing?

There are 789 google hits for "inflate their way out of it." The national debt is a couple bucks shy of USD$9,000,000,000,000. The war costs money every day. China's saber-rattling about the $1.3t of T-bonds they've got. US household debt is $12.8 trillion, and the banks of the world are loathe to lend each other money – hence ECB, the Fed, et al stepping in – because of the long tendrils of this problem.

I don't know. I can't predict the future, but I sure as hell wouldn't be investing in the USA right now.
posted by blacklite at 12:58 AM on August 12, 2007 [1 favorite]


So...should I close out my savings account and get cash before the banks go broke? And then buy gold with it?
posted by LooseFilter at 1:00 AM on August 12, 2007


I've been old enough to go through a few recessions now. It's not fun and I suspect we're about to get hit again. I don't know how hard though, and it really is not something that can be predicted. Yes, the internet is full of people predicting another recession, but it's also full of people who say homeopathy cures all ills.

The long, hard recession of the early 80s caused my family untold grief, but we're still here. I often find a lot of the "this is totally scary OMG" comments come from people too young too have been through an "economic contraction". For anyone here gearing up for their first recession, welcome to the economic cycle!

If you're hoarding gold and cash and stuff you're a freak. A FREAK. But if you're hoarding helicopters, well, then you're the kind of person I want to become friends with cause you're rich, and rich people are handy during high unemployment.
posted by Salmonberry at 1:10 AM on August 12, 2007 [3 favorites]


I had a good view of the S&L Crisis (at a financial institution that which also was destroyed by the 'Junk Bond Crash') and had long wondered what its total cost was. Well, according to this document that was linked from the Wikipedia article, the FDIC reported ...
As of December 31, 1999, total direct costs attributable
to the closing of insolvent thrift institutions over
the 1986–1995 period amounted to $145.7 billion.
That report also shows the total value of Trifts that failed at a little over $510 billion, so they recovered over two-thirds of their value by the time it was all over.

So how does that compare with current potential losses? Default on a half-trillion in loans? Drop the value of a million homes by a hundred grand? What does a "failure in liquidity" causing a dead stop of financial activity cost? What would it cost to restart it all? I'm not seeing anybody putting up predictive numbers... Economics may be "the dismal science" but I don't think anybody wants to hear the bad news...
posted by wendell at 1:12 AM on August 12, 2007 [1 favorite]


On non-preview, blacklite has some of the numbers I'm looking for. Bravo.
posted by wendell at 1:14 AM on August 12, 2007


Damn. I wish i was smart enough to understand this stuff.

I got $80,000 in the bank and zero debt... is that good?
posted by ELF Radio at 1:56 AM on August 12, 2007


I got $80,000 in the bank and zero debt... is that good?

No, if you have $80,000, it should not be in a bank. Or at least, not in one bank. But where best to put it? That's the real question. If there were a clear consensus on what to do with money, we'd all go do that, and therefore, doing it would become pointless. This seems to be now happening with real estate.

My suggestion (others will disagree): emulate Warren Buffett's investing strategies. The short summary is that money is made in the discrepancy between value and price.
posted by aeschenkarnos at 2:44 AM on August 12, 2007 [7 favorites]


I had a house once, then I got a divorce. Now i live in an apartment and cant buy a house, and won't be able to for 10-15 years now. In fact, a few guys at work are now divorced and all living in apartments and lost their houses....
posted by IronWolve at 3:14 AM on August 12, 2007


I got $80,000 in the bank and zero debt... is that good?

Depends on how old you are, and what you mean by 'good'.

No, if you have $80,000, it should not be in a bank. Or at least, not in one bank.

Depends on where you are. Here in Korea, the government-owned investment insurance corporation insures deposits of up to 40,000,000 won (or around US$40K) if I remember correctly, so people who are smart break up their accounts into chunks in different institutions. We had a credit union fail on us a couple of years back, and got the money back, with interest, eventually. I don't know what the equivalent number is in the US, or even if there is one, but I assume that's what aeschenkarnos is referring to.
posted by stavrosthewonderchicken at 3:35 AM on August 12, 2007


Subprime or Subcrime?
posted by hortense at 3:48 AM on August 12, 2007


To paraphrase Samuelson, randoms on the internet have correctly predicted nine out of the last zero collapses of the financial system.
posted by Aloysius Bear at 4:26 AM on August 12, 2007


It's times like this when I'm glad I'm on the lower rungs of the socio-economic ladder, don't have investments

I'm guessing your paid in dollars right? Well the value of those dollars is going to go down because of the fed rate cut (apparently). So you're fucked too! I do have about $5k in my 'retirement' account after about one year at my job. I thought putting it all in overseas stocks would help, but it's crashed too. But I should be immune to the long-term failings of the Bush administration's economic planning.
posted by delmoi at 4:43 AM on August 12, 2007


So...should I close out my savings account and get cash before the banks go broke? And then buy gold with it?


Not unless you think your gold supplier is more stable then the FDIC, or you plan on holding the gold yourself. Why not get a savings account backed by Euros?
posted by delmoi at 4:47 AM on August 12, 2007


I don't know what the equivalent number is in the US, or even if there is one, but I assume that's what aeschenkarnos is referring to.

It's $100k.
posted by delmoi at 4:51 AM on August 12, 2007


I also wish I completely understood this.

Yeah, I say liquidate dollars and buy whatever you need to be self sufficient and run a subsistence-level business

Is the dollar about to nose-dive? Should I move my dollars to my Pounds Sterling account?
posted by ukdanae at 4:57 AM on August 12, 2007


Ah, forgot to preview and think delmoi just answered my question.
posted by ukdanae at 4:57 AM on August 12, 2007


Will this make President Bush the first two recession president?

This will add to his long list of achievements.
posted by sien at 5:04 AM on August 12, 2007


But seriously, whilst things are bad, these things happen every 5-10 years.

I can remember the '87 crash, the '91 recession, the '94 Tequila crisis, the '97 Asian debt crisis, LTCM in '98, the bursting of the dot com bubble in '00.

Every time, every freakin time the finance folk go of like it's the end of the world and how their 'models' didn't imagine a crazy thing like whatever is happening.

People should retain some perspective. The houses that have been built won't vanish. People in China won't stop raising their standard of living even if the US goes into recession.

Nom ce change, plus ce change.
posted by sien at 5:10 AM on August 12, 2007


good resource here
posted by robbyrobs at 5:15 AM on August 12, 2007


It's hilarious/pathetic to watch the usual free marketeers whining for another nanny state bailout. Funny how that works when the "victims" are in suits and ties, but not when they're in t-shirts and jeans. And let's not forget the money quote from that 'Subprime or Subcrime?" article:

"What is most disturbing to me...is what appears to be a total lack of perception regarding the role of fraud, theft, and malicious intent in the American and global financial train wreck which has been exacerbating over recent decades."

There's a really cute (read: ugly) angle described near the beginning of this link from the Hedge Fund Implode-o-Meter:

In late 1997 the hedge fund Long Term Capital Management was Wall Street royalty. With not one, but two Nobel Prize winners in economics on staff, they consistently generated 40%+ returns for their investors. Their mathematical models seemed to have conquered all the mysteries of high finance.

Then they lost $4.8 Billion in 1998 and nearly became insolvent.

On September 21, 1998, the Federal Reserve called 16 major Wall Street investment banks together for an unprecedented meeting to bail out the hedge fund that they had all lent money to. The reason was because LTCM had leveraged their portfolio to $1 Trillion, and there was a real fear that the bond market would seize up as creditors rushed to the exits. Some of that was already happening. 11 of those banks signed off on the bailout. The Federal Reserve pushed billion of dollars of liquidity into the markets - almost exactly the same as what the Fed did yesterday. Bear Stearns refused to participate.

Fast forward nine years. Three hedge funds run by Bear Stearns become insolvent. Bear Stearns has the nerve to ask its other investment banks, many of them part of the LTCM bailout in 1998, for its own bailout. Instead, they seize the assets of those hedge funds, and Bear Stearns is force to use $3.2 Billion of its own reserves to cover its losses.


I love it.
posted by mediareport at 5:20 AM on August 12, 2007 [1 favorite]


Doug Noland's reports tend to be astoundingly badly structured, but I am finding this one to be an interesting retrospective. (Search for "A Run On Wall Street Finance" to get past the data spew to the start of his essay.) I don't have the background to judge his prognostications on the broader effects of this crisis, but his relatively detailed description of the role which government backing GSE debt has played in supporting the credit bubble has helped me to understand what's happened a little better.

Apologies for the repeated comment: Seems conversation has died down over there, and this thread is on essentially the same topic.
posted by Coventry at 5:22 AM on August 12, 2007


I don't quite get this. You go out and find people with bad credit, put them in a home with a 'teaser' rate, and then a rate that balloons two years later, and you expect everything to work out perfectly? A smart hedge-fund manager would have bet that a lot of those loans would default.
posted by delmoi at 5:22 AM on August 12, 2007 [2 favorites]


Why not get a savings account backed by Euros?

There are at least some European banks who are fairly heavily invested in CDOs to the tune of billions.
posted by Slothrup at 5:42 AM on August 12, 2007


What to do?- there is a relatively new type of mutual fund that locks in the market peak as a hedge against a 1929-style crash. It phases in over several years, making this a bit of a commitment (and mitigating risk for the fund, who presumably modeled against crash/recovery probabilities).

Commodities and precious metals should go up under the scenario of inflation or hyper-inflation.

Finally, sustainable technology is just getting started. After this correction plays out, all things Green shall be ascendant.

There are mutual funds geared towards all of the above. Disclaimer: I am not in the banking or investment industry, and the above is not intended as investment advice. Speak to an investment professional before making any monetary decisions.
posted by AppleSeed at 5:48 AM on August 12, 2007


if you have $80,000, it should not be in a bank. Or at least, not in one bank.

US banks usually have FDIC insurance up to $100,000. I would put that money into a 6-month CD which have rates around 5% right now which is excellent.
posted by stbalbach at 5:59 AM on August 12, 2007


US banks usually have FDIC insurance up toof at least $100,000.

Fixed that for you. Please reread your FDIC regulations. Each depositor is insured for at least $100k per ownership category. Your sole accounts, joint accounts, IRAs, and revocable trust accounts (ITF, POD, anything with a qualified beneficiary*) are all considered separate.

A, a single individual, gets $100k total between all of his sole accounts (checking, savings, MM, etc) at a given institution. He gets $250k for his IRA account. If A wants to open another account, he can open one with his sister as a BEN. Any account opened with that title gets a separate $100k. So far, A has 100+100+250 = $450k of FDIC coverage. Not bad.

Next, let's look at a family of four. J and K are married, and have two (2) kids, S and T. J and K get $100k each solely. J and K's joint account gets another $200k (100 each), unless they have other joint accounts. Say J signs on her brother M's $50k savings account. She is assumed to have another $25k (half, an equal share; it would be a third if there were three signers, and so on) in joint ownerships, meaning her account with K would be insured for $175 (75-J + 100-K). Then, and this is where it gets complex, POD (payable on death) accounts are insured by another rule. The magic formula is owners × qualified beneficiaries* × $100k. J and K ITF (in trust for) S and T gets $400k of FDIC insurance. Each beneficiary is insured seperately through each owner, since most couples don't die simultaneously. So it is assumed J has $100k each in trust for S and T, and K likewise. So now our loving couple, J and K, who have worked hard all their lives to accrue this cash, have 100 + 100 (sole accounts) + 200 (joint account) + 400 (POD/ITF/FBO/etc) + 250 + 250 (IRAs) = 1.3 mil. They can also open an account with J ITF K and vice-versa, for a total of 1.5 million dollars insured at a single institution. Now why someone would keep that much money in taxable accounts at a bank for long enough to worry about FDIC insurance is beyond me.

Now go forth and educate your parents and siblings, so that I will not have to go through this five to ten times a day when they come into my office.

* parent, sibling, spouse, child, grandchild
posted by Eideteker at 6:48 AM on August 12, 2007 [10 favorites]


Though if you sidebar that comment, please fix the "seperately". Grr, hate it when I do that.</derail>
posted by Eideteker at 6:50 AM on August 12, 2007


Fixed that for you

Nah-uh, you didn't fix it for me, your just saying that.
posted by stbalbach at 7:21 AM on August 12, 2007


rolypolyman: "...if the expectation that the Fed will keep throwing money at the bubble might set off expectations of unchecked demand, and perhaps jump-start a period of severe inflation."

I think that expectation definitely happens, without a doubt. In some cases it's a good thing (see FDIC), because it creates a certain amount of confidence in the system that would otherwise not be there, but in other situations (people presupposing that their hedge fund will be bailed out because it's 'too big to fail') it's not, and leads to irrational investing.

It's exactly that sort of attitude -- in part, anyway -- that has led is into this current situation. As others have pointed out, you didn't need to be a Nobel-winner to look at the loans that were being sold on the mortgage market and realize that something was going to have to give somewhere, and that buying up baskets of them to back your investment funds isn't a supremely bright idea.

Anyway -- just looking at what happened in the last few days -- it seems like people are fleeing into Blue Chips as the more volatile market sectors play themselves out. I have no interest in putting my investments into Krugerrands, but IBM stock...maybe.
posted by Kadin2048 at 7:28 AM on August 12, 2007


Getting bitch-slapped by the invisible hand.
posted by kirkaracha at 7:44 AM on August 12, 2007


Now, if these people are smart (I would think that most of them probably are) they will refinance to have a painful, but not back-breaking mortgage.

The plan : You, in three years, refi your teaser rate, or sell the property, which, because of the housing boom, has increased in value fairly dramatically. Hey, Money!

The reality (buyer): You, in three years, can't make the payments. Because of the bubble popping, you can't sell the house quickly, and you don't make a profit. Because of the liquidity crisis, you *cannot* refinance, because even people with prime credit ratings are having trouble getting loans, and you? Even if you *wanted* to pay 25%, you can't get the loan. You fail.

That's the current reality. As of basically Thursday, the ReFi game is over. If you're in a fixed 4-6% loan, and you can afford your payments, you win. If you're not in a fixed loan, well, I hope the jump doesn't kill you. If you're in a bad teaser loan, really, you're stuck. Hopefully, you can at least short sell and make it up with cash, otherwise, you're just going to have to try to ride out the nightmare payments that are coming your way, or give up and walk away, and forget about owning a home for at least a decade.

The hedge fund crisis? The liquidity crunch? That's not the crescendo. That's the fanfare. We are far from done with this mess.
posted by eriko at 7:55 AM on August 12, 2007 [2 favorites]


There ain't no free lunch market.
posted by Thorzdad at 8:00 AM on August 12, 2007 [1 favorite]


If anyone gives you any happy horseshit about free markets and the "invisible hand", point them here. This is the best synopsis I've seen on how Adam Smith's ideas have been misconstrued and subverted.
posted by Benny Andajetz at 8:24 AM on August 12, 2007


I don't quite get this. You go out and find people with bad credit, put them in a home with a 'teaser' rate, and then a rate that balloons two years later, and you expect everything to work out perfectly? A smart hedge-fund manager would have bet that a lot of those loans would default.

Suppose that one takes out a $400k loan for a "starter home" in california. With recent speculation/housing boom, areas could have 20%+ appreciation per year. In two years when one's 2/28 ARM gets said have a new rate, if there was that 20% appreciation, your house is now valued at $576k. Even with wrapping closing fees of a few thousand, and a 6% commission to the realtor on selling, one can easily come out ahead with this. And if one doesn't even have to put money down (and a lot of people did get 0 down loans), then who wouldn't want to jump into this game?

While, you might say that only a fool would think that an asset is going to eternally return 20% a year, a lot of people bought into it. And for a short time, from 2002-2005 that worked. And as such, default rates for subprime and alt-a loans originated at this time are historically low. Now that the unrealistic house price appreciation is over, default rates will not just reset to historical averages, but they'll likely over correct because for a time, the "fog a mirror" test was used to approve people for loans. If you owe 200K more on your house than it's worth, have nothing invested other than the interest payments (rent) that you've paid for a year, and can no longer afford the 20% higher rent, do you walk, or take the premium for the pride of ownership? I'd walk.

Eventually the banks will likely have to adopt sane underwriting standards. Which means that one has to go back to 20% down payment on a house, and buying a house within the range of 3x family income. Well, except in california, where 5x might rein.
posted by nobeagle at 8:35 AM on August 12, 2007


It's times like this when I'm glad I'm on the lower rungs of the socio-economic ladder, don't have investments, and have a cheap house financed at a normal bank.

It is the lower rungs of the ladder who took out ARM loans and are unable to make the payments, causing the loss of the home, which causes lowered house prices, and causes hedge funds that invested in these loans to lose money.

if these people are smart (I would think that most of them probably are) they will refinance to have a painful, but not back-breaking mortgage.

If these people had the money to refinance, they wouldn't have needed to get fool-hardy 100% financing ARM loans in the first place.
posted by eye of newt at 8:48 AM on August 12, 2007


A smart hedgefund manager is one who gets out before the music stops. More a character issue than pure smarts, though. And a lot of hedge fund guys are not really all that smart to begin with, fabulous salaries nothwithstanding.

For a bit of history, anyone here remember Lewis Ranieri?

Oh, and I did just read a headline (sorry, can't recall where) claiming that something like 35% of mortgage holders really do not have a clue what their deal actually is. (Of course, journalists love the ain't-it-awful angle, so take it with a grain of salt. That said, I do know people who are counting on fairy dust to close the gap when ARMs jack upwards in October. Christmas will be interesting this year....)
posted by IndigoJones at 9:00 AM on August 12, 2007


It's hilarious/pathetic to watch the usual free marketeers whining for another nanny state bailout

mediareport, you're usually a pretty fair guy, so you should note that plenty of free marketeers (I suppose that I am venturing into true scotsman territory) are holding to their guns.

I hope you're not suggesting that Wall Street is a free-market institution, because no one with any sense ever believed that it was. It's just another pig at the trough.
posted by Kwantsar at 9:02 AM on August 12, 2007


The one question I have about this mess and the ones that preceded it is this:

Who is really getting hurt by all this?

I'll bet dollars to donuts it isn't the absurdly over-paid fund managers, mortgage brokers, and other assorted multimultimillionaires. No, they'll continue to have absolutely no need to fear a depression.

It'll be the middle class that takes it up the ass, probably destroying them for all time. The USA is going to have a two-class system: brutally poor or unimaginably wealty.
posted by five fresh fish at 10:21 AM on August 12, 2007


This is basically the death knell for the middle class. Mission accomplished. Somewhere Grover Norquist is laughing his ass off that this was so easy.

Welcome to feudal society America...
posted by any major dude at 10:28 AM on August 12, 2007


Bush: No Bailout For Homeowners (WaPo)

"President Bush said Thursday concern should be shown those who've lost their homes but it's not the federal government's job to bail them out....In a wide-ranging news conference at the White House, the president also said that he's interested in exploring the possibility of providing tax relief to U.S. corporations."
posted by Avenger at 10:34 AM on August 12, 2007 [3 favorites]


Ben Stein tried to put some calming perspective on this today.

I kind of like how he's become this repentant capitalist lately; he's still a big free marketer but worries a lot about the class divide. YMMV.
posted by fungible at 11:19 AM on August 12, 2007


I kind of like how after the Big Collapse I'm going to eat Ben Stein.
posted by 235w103 at 11:31 AM on August 12, 2007 [9 favorites]


"While, you might say that only a fool would think that an asset is going to eternally return 20% a year, a lot of people bought into it. And for a short time, from 2002-2005 that worked."

Well, that was the trick, you had to be out by 2005 or early 2006 at the very latest.

"if these people are smart (I would think that most of them probably are) they will refinance to have a painful, but not back-breaking mortgage."


In response to that, here's something I posted in the last thread:
"Well, Riverside County seems to be a kind of outlier. It bubbled up a bit later than many parts of SoCal, and the population there is not the kind of middle class folks you'd find in LA, Orange or San Diego counties. The general understanding I'm getting from my readings is that that area boomed up from working-class people with relatively low incomes getting access to massive loans via the ol' "stated income" 100% LTV interest-only ARM which resets in 3-5 years. There is just no way that a household pulling in $40K, $50K, $60K can afford to buy a $400K house, let alone a $600-800K house - in the Real World of Mortgages. 30% of $60K gross is $18,000/year $1,500/month, which on a "conforming" fixed rate 30-year loan (the kind we used to have, remember?) would buy you about a $200,000 house.

Some of these people have borrowed $750,000 with no money down at a "teaser" rate of 1% or 2%, which their $1,500 payment will cover. When that rate resets up to the 8.5% or 9.5% rate, that payment might jump up to $5,000, $6,000 or more - and many of them will be in a house that's depreciated down to $500K value, with the principal now being more than $750K because of negative amortization."
This scenario, IMO, will be shown to be frighteningly common here in SoCal and other bubble areas, even among prime-level home borrowers. When you are $100K-plus underwater on your house, you don't get to refinance. You'll be lucky if the lender doesn't call the loan and foreclose.

Do you really consider a tripling (or better) of your mortgage payment to be "painful, but not back-breaking?" I remind you that we're talking about people who could barely afford a house that cost 1/3 of what they're in now, using a traditional 30-yr mortgage.

"Hopefully, you can at least short sell and make it up with cash, otherwise, you're just going to have to try to ride out the nightmare payments that are coming your way, or give up and walk away, and forget about owning a home for at least a decade."

The people I describe above will not be bringing any $150,000 checks to their short sale closings. I think of the people who don't just leave the keys in the mailbox and run away, we're going to see a lot of people going from living with one family in their 3000sf McMansion to living with 3, maybe 4 families there. When your mortgage payments jump from $2000 to $6000 a month, your options narrow quite a bit... :)

Lest I sound all doom & gloomy, I don't think it's going to be a short, sharp catastrophic nose-dive. IMO this thing is going to take years to shake out, so I think we'll all have time to adjust. There's definitely reason for immediate concern and for turning one's attention to this problem, and for making your contingency plans. This ugliness on Wall Street is going to stay ugly and get uglier.

"...the president also said that he's interested in exploring the possibility of providing tax relief to U.S. corporations."

What, the last 16 years of near-continuous corporate tax relief hasn't been enough? Letting everybody and their kid subsidiaries move their corporate offices to the Caribbean hasn't been enough? Aww, poor corporations, how I grieve for you.

Hey, I know! If this mess really turns into a financial crisis that forces many Americans into bankruptcy, let's all just file our bankruptcies in the Cayman Islands, like Bear Stearns!
posted by zoogleplex at 12:15 PM on August 12, 2007


It's times like this when I'm glad I'm on the lower rungs of the socio-economic ladder, don't have investments, and have a cheap house financed at a normal bank. Yes, the economic situation affects me in general, but I don't panic when I see the stock reports.

Same here. I understand, in the abstract, that a market crash is not so great. But I don't look at the business pages and think "OMG HOLY SHIT THERE GOES MY RETIREMENT."

I have to say that the time I spent as a painfully earnest pinko, finding auguries of the end of capitalism in every little strike or stock market dip has made me extremely skeptical of this sort of scare-mongering.

The system is stronger than you think it is. It isn't going away any time soon.
posted by jason's_planet at 12:26 PM on August 12, 2007


...does this mean that house prices might go down far enough that I might actually be able to buy something livable within city limits for less than 700K?
posted by jokeefe at 12:26 PM on August 12, 2007


What, the last 16 years of near-continuous corporate tax relief hasn't been enough? Letting everybody and their kid subsidiaries move their corporate offices to the Caribbean hasn't been enough? Aww, poor corporations, how I grieve for you.

Well, that's maybe not the best way to look at things.


Hey, I know! If this mess really turns into a financial crisis that forces many Americans into bankruptcy, let's all just file our bankruptcies in the Cayman Islands, like Bear Stearns!

That's kneejerk and stupid. The funds (not Bear Stearns itself) filed in the Caymans, because that's where they're incorporated. You can't seriously be shedding a tear for the poor, poor hedge fund investor?
posted by Kwantsar at 12:34 PM on August 12, 2007


I do hope you realize I was being silly with that last statement, Kwantsar.

And no, I'm not shedding tears. I do have sympathy for ordinary people whose pension funds and 401(k) funds are heavily invested in this mess, though.

That is an interesting link, too; I suppose one way to look at it is that the US hasn't had to lower corporate tax rates very much, because it's been allowing all sorts of major US corporations to move their offices offshore?
posted by zoogleplex at 12:48 PM on August 12, 2007


What happens to one's mortgage when their lender fails?
posted by Brian B. at 1:06 PM on August 12, 2007


I do hope you realize I was being silly with that last statement, Kwantsar.

This is Metafilter. One can never tell!

I do have sympathy for ordinary people whose pension funds and 401(k) funds are heavily invested in this mess, though.

Fair enough. But they didn't really "earn" the returns they made in the runup, either.

And from a policy perspective, I think we need more Bill Poole, and less George Bush.
posted by Kwantsar at 1:12 PM on August 12, 2007


It occurs to me that if people have been purchasing homes with next to no money down, then they don't lose much when they declare bankruptcy or get foreclosed. They pack up their belongings and go back to renting. Maybe a few thousand in closing costs and such; can't count the mortgage payments 'cause they can be considered equivalent to rent had they not purchased the house.
posted by five fresh fish at 1:39 PM on August 12, 2007




What happens to one's mortgage when their lender fails?
That's a good question.
NPR had a story this week about a middle-class family who had gotten into some flavor of these sweetheart ARMs...and then the lender went belly-up. The company that bought the loan then proceeded to jack-up the payments on a monthly basis...to the point where the family was faced with >$2000/mo mortgage payments. They are now facing foreclosure and loss of their home.

What I took from that story was that the terms you signed to don't mean squat.
posted by Thorzdad at 1:53 PM on August 12, 2007


"Fair enough. But they didn't really "earn" the returns they made in the runup, either."

We are in full agreement then! Excellent.

Meanwhile, this is from the latest California posting on TheHousingBubbleBlog.com, which I've found to be extremely informative about this whole RE thing:
“Ernest Williams, a part-time Realtor in El Sobrante, has a client in escrow on a home in Vallejo. In late May, the client was prequalified for a loan up to $450,000 with nothing down and no income verification. The client has ‘impeccable credit’ and a FICO score over 750, Williams says.”

“On June 29, the client offered $417,000 for the house and his offer was accepted. When the mortgage broker submitted his application to a lender the last week in July, he was turned down. The application was submitted to two more lenders last week and was rejected.”

“‘He was declined because they wouldn’t do stated-income loans above 90 percent anymore,’ Williams says. ‘If he provided full documentation for his income, he wouldn’t qualify for the loan because he doesn’t make enough money,’ Williams says.”
Well, well, well. So, what you're saying is, the guy really can't afford to buy this house, right Ernest?

An important point: $417,000 is the upper limit for what's called a "conforming" home loan; this is the most money that FHA will approve you for if you go through them. Everything larger than $417K is a "jumbo" mortgage, which FHA won't write. An FHA loan, AFAIK, is a 30-year fixed rate traditionally amortized mortgage (please to correct if I,m wrong)

So here we've got a loan which in "non-creative" mortgage land is the biggest loan your average person can get from the government agency that is dedicated to helping Americans become homeowners... and this guy cannot qualify for even that loan unless he LIES about his income.

Doing some idle figuring, this prospective buyer makes less than $122,000 per year, household - like most of us do. I'm guessing from this that he makes probably a good bit less than that. Median income in SoCal is about $47K/year.

Even combining our incomes, my girlfriend and I can't quite afford this house, by traditional methods. But a year or two ago, I had people trying to sell me $600K homes and condos, showing me how I could qualify for a "no-doc, stated income" ARM, and move into my dream home tomorrow! Buy now or be priced out forever!! I actually pulled out my calculator and figured out what would happen, nearly passed out in horror, then guffawed in their faces and told them to piss off and find some other sucker.

Well, they did.

The problem is that on the local end, hundreds of thousands of people, if not millions, went ahead and bought that $600K (or the local equivalent of that spending level) home on the neg-am teaser rate ARM; then on the Wall Street end the clever financial tricksters bundled all those outrageously risky mortgages into CDOs and MBSes and hedge funds.

Those local people are about to be handed their asses because of their inability to read contracts and do simple math, and as their ignorance unravels their mortgage, the myriad financial instruments that have been based on betting on these risky loans are coming apart on the the Street.

It ain't rocket science.

"It occurs to me that if people have been purchasing homes with next to no money down, then they don't lose much when they declare bankruptcy or get foreclosed. They pack up their belongings and go back to renting. Maybe a few thousand in closing costs and such; can't count the mortgage payments 'cause they can be considered equivalent to rent had they not purchased the house."

Yeah that's true, the borrowers can walk with relatively little pain, and you bet that's what's going to happen. But that leaves the house back in the hands of the bank or lender, a rapidly depreciating asset that they will need to get rid of as soon as possible to recover any sort of value for their balance sheets. This will result in short sales and foreclosure auctions which will eviscerate the value of all homes nearby.

If you bought your house in 2005 for $600K on an ARM, and Bob and Jane next door's mortgage resets, they walk away from their house and the lender puts it up for a short sale at $417K, guess what: your house is now effectively worth $417K. Even if you put down 20%, $120K, you are now underwater on the house - remember, you're paying $1,500 a month on your 1.5% teaser rate, not the $3,200 a month that a $480K mortgage would require, so even with that $120K down you've only paid maybe $36,000, $40K at most in mortgage payments, only a fraction of which went to principal and thus equity.

In this case, you've lost $120,000 plus, POOF. And you still may lose your house when your mortgage resets next year, because now you can't sell the house; you owe more than it's worth. If you do sell the house, you'll need to bring something like $23,000 to the closing to satisfy the lien.

If you went no money down, you're in slightly better shape as you've lost nothing on paper, but you now owe $560K on a house worth $417K or less - $150,000 underwater!

That's when you leave the keys in the mailbox for the sherriff and slink away to find out where Bob and Jane are renting. Maybe they've got an extra room there.

So there's likely to be a chain reaction; the more foreclosures and short sales, the more neighbors of these wind up underwater and foreclosed, short selling or walking away, and so on and so forth until equilibrium is reached again - with house prices rather substantially lower than they are now. Some people are predicting 50% losses (from the 2005 peak) in some of the worst bubble areas, and apparently some parts of SoCal are already at 20% or even 25% off peak prices.

"The company that bought the loan then proceeded to jack-up the payments on a monthly basis...to the point where the family was faced with >$2000/mo mortgage payments. They are now facing foreclosure and loss of their home.

What I took from that story was that the terms you signed to don't mean squat."


Ding! Correctamundo, Cunningham!

A lot of well-meaning folks got snowed by all this, and they're going to feel the pinch. It's hard to tell what will happen though... maybe the Fed will bail everyone out with our tax money - or more money borrowed from the Chinese...
posted by zoogleplex at 2:02 PM on August 12, 2007 [1 favorite]


This is slightly tangent I suppose but aside from things like hedge funds how would the financially wise among you view bank(not fund) ratings in light of all this? Are there banks deceptively rated as "really safe and swell for your CDs" because they have lots of investments in CDOs?

I know about FDIC but I'm also guessing that, all things considered, it would probably be better to have your cash in a bank that didn't need to be bailed out. If I have 100K in a CD at a FDIC insured bank and the bank fails, what actually happens? I have difficulty imagining that FDIC mails me a cashiers check a week after the bank managers commit suicide.
posted by well_balanced at 2:19 PM on August 12, 2007


zoogleplex, what kind of contingency plans do you have in mind? I haven't been able to think of anything to do, apart from watching the trainwreck, shorting the market, and considering doing my next postdoc in a country that's more likely to have an expanding medical research budget over the next few years. (And renting, I guess, but I'd probably be doing that anyway...)
posted by Coventry at 3:02 PM on August 12, 2007


Quite honestly, as a Canadian I'm looking south to the fiasco that is brewing and thinking that it may be wise to invest in the post-crash housing market. Scooping up a mansion at a cut-rate price and then renting it to the now-homeless middle class sounds like a money-maker to me.
posted by five fresh fish at 3:37 PM on August 12, 2007


Also, I should think most Americans would do well to put their money in one of the many Canadian-owned banks in the USA. I suspect they tend to keep themselves more out of trouble.
posted by five fresh fish at 3:40 PM on August 12, 2007


What happens to one's mortgage when their lender fails?

Adding to that, what happens in that case if it is a fixed rate mortgage and the lender fails? I've been reading up but can't quite sort out if I should be worried that my lender has stopped writing loans. (And dumb question, but my fixed rate will always remain a fixed rate for the life of the loan, right? Even in the face of a big old recession?)
posted by idigress at 3:52 PM on August 12, 2007


Adding to that, what happens in that case if it is a fixed rate mortgage and the lender fails? I've been reading up but can't quite sort out if I should be worried that my lender has stopped writing loans. (And dumb question, but my fixed rate will always remain a fixed rate for the life of the loan, right? Even in the face of a big old recession?)

I dunno. I was told once a long time ago by a guy that worked in the mortgage biz, that there is no such thing as a truly fixed-rate.
My guess is that, if the lender goes down and the loans are bought-up by someone else, you are at the mercy of whatever terms the new owner demands.
I think there is a big difference between what happens when a lender sells a mortgage as a matter of business (the normal day-to-day buying/selling of mortgages), and the sort of wholesale liquidation of assets that will happen after the first lender goes under.

The longer I read this thread, the worse I think things are going to be.
posted by Thorzdad at 4:09 PM on August 12, 2007


If I have 100K in a CD at a FDIC insured bank and the bank fails, what actually happens? I have difficulty imagining that FDIC mails me a cashiers check a week after the bank managers commit suicide.

As I mentioned upthread, this happened to my wife and I here in Korea. For what it's worth (I have no idea how it works in America), it took us about a year of getting our $40K or so back in dribs and drabs, but eventually we did, plus the interest that was owed for that period. It was cash that we didn't need for anything urgent, so we didn't mind too much -- we were just relieved that it didn't go poof when the credit union went down.
posted by stavrosthewonderchicken at 4:47 PM on August 12, 2007


Also, I should think most Americans would do well to put their money in one of the many Canadian-owned banks in the USA. I suspect they tend to keep themselves more out of trouble.

Ever heard of CIBC?
posted by Kwantsar at 4:58 PM on August 12, 2007


"zoogleplex, what kind of contingency plans do you have in mind?"

Oh, I'm not talking about The End of the World As We Know It type plans, I'm only talking about financial contingency plans. In my case, since the bulk of my savings is in retirement accounts made up of mutual funds, what I've been doing is looking very closely at what exactly the funds are invested in, and swapping out of funds that have exposure to the MBS stuff into funds that don't, wherever possible. Secondarily, I'm looking at all the other available funds in the retirement plans that present safer harbors, things like bond funds for the most part, where I can move the money and avoid big losses if the stock market takes a belly-flop. In any case, I did really well the last 5 years as the market has blown up to these record heights, so I can stand to lose a bit and still come out ahead.

I had one IRA get demolished by the dot-com bust (and a very lazy financial advisor, feh) 7 years ago, so I vowed not to let that happen again. I'm paying a lot more attention now.

Of course, even the safest positions in my retirement funds are not FDIC insured, so they're not really that safe if things really go to hell.

My non-retirement savings are all FDIC insured except for one account that I can move all the cash from overnight into a protected account.

So I've just made mentally ready some plans as to how to protect what I've got as best I can. That's what I was referring to by "contingency plans."

Stuff like what happens if I lose my job, or things like leaving the country, I'm not really worrying about so much. I'm definitely not panicking about all this because I don't have a lot of skin in the financial game and I've been living relatively simply for a long time - I'm in a rent-controlled apartment and I have almost no debt, I could pay what little I have off tomorrow out of savings. I have stuff I can sell, if necessary. I can adapt, if it comes to that, but I'm not really worried about a devastating New Great Depression as some others are.

I'm hoping that in a few years when the housing market does hit bottom, say 2010-2011, I'll be in a good position to buy a home at a reasonable price.

(and then of course the Mayan calendar will end in 2012, snuffing us all out of existence. oh well)
posted by zoogleplex at 4:59 PM on August 12, 2007


If I have 100K in a CD at a FDIC insured bank and the bank fails, what actually happens? I have difficulty imagining that FDIC mails me a cashiers check a week after the bank managers commit suicide.

The FDIC is a match maker, not a teller. It tries to find another bank they can strong-arm into taking up the failing bank's book and make good on the outstanding obligations. That is to say, your CD. It happens from time to time. Problem is, if everyone's bank is going south, there'd be no one left to strong arm, and we'd be back to 1929, and your bank manager would be fighting for ledge space with all the other jumpers.

Let's hope it doesn't happen that way.

It occurs to me that if people have been purchasing homes with next to no money down, then they don't lose much when they declare bankruptcy or get foreclosed.

You don't want to slight the consequences of declaring bankruptcy.
posted by IndigoJones at 5:07 PM on August 12, 2007


Indeed, especially now under the new rules where you may not be able to just walk away without owing anything.
posted by zoogleplex at 5:08 PM on August 12, 2007


Quite honestly, as a Canadian I'm looking south to the fiasco that is brewing and thinking that it may be wise to invest in the post-crash housing market.

Yeah, because there's just no bubble at all in Vancouver and Toronto.
posted by ROU_Xenophobe at 5:42 PM on August 12, 2007


Thanks for the explanation, zoogleplex.
posted by Coventry at 5:46 PM on August 12, 2007


I'm not an expert at this stuff but from what I've read the next inflection point in this story will be October when the first batch of ARMs reset. That's the date I'll be watching.
posted by scalefree at 5:50 PM on August 12, 2007


Thorzdad writes "NPR had a story this week about a middle-class family who had gotten into some flavor of these sweetheart ARMs...and then the lender went belly-up. The company that bought the loan then proceeded to jack-up the payments on a monthly basis...to the point where the family was faced with >$2000/mo mortgage payments. They are now facing foreclosure and loss of their home."

Anyone have any specifics on a mortgage that allows the lender to arbitrarily raise the payments. Breaking ones mortgage from the lendee's point of view works because the new lender pays off your old loan in full + penalties. I can't see how that could work in reverse. Aren't these ARMs tied to the prime rate or similiar? And why would anyone sign a mortgage that can be summed up as "trust the bank"?

five fresh fish writes "as a Canadian I'm looking south to the fiasco that is brewing and thinking that it may be wise to invest in the post-crash housing market. Scooping up a mansion at a cut-rate price and then renting it to the now-homeless middle class sounds like a money-maker to me."

You might want to keep the money for home, going to be lots of opportunity here in the next year or so. And besides, the green back is probably going to continue to decline vs. the loonie.
posted by Mitheral at 6:12 PM on August 12, 2007


What did CIBC go and do? I hope it wasn't too asinine, though I do note they completely lost me as a customer (via their purchase of Montreal Trust, which I really adored as a bank) when they asked me to play "scratch and win" with my mortgage.

I don't think Canadian mortgage laws allow for quite the same level of overextension the US does. Though I haven't been in the market for a mortgage lately, so perhaps things have changed.
posted by five fresh fish at 6:44 PM on August 12, 2007


Kwantsar, I enjoyed the link with all the Bill Poole quotes upthread. Thanks for that, eg:

“The punishment has been meted out to those who have done misdeeds and made bad judgments,” Poole told reporters in St Louis after a speech on the market for mortgages to borrowers with sketchy or weak credit histories.
“We are getting good evidence that the companies and hedge funds that are being hit are the ones who deserve it.”
posted by A dead Quaker at 7:03 PM on August 12, 2007


What did CIBC go and do?

This, and this, for starters.

And fff, I don't mean this as a snark, but it surprises me that you'd look fondly upon Canadian banks. The Big 5 are a bit of a state-sanctioned cartel, no?
posted by Kwantsar at 7:03 PM on August 12, 2007


It gets worse. Bloomberg has posted that WestLB AG (German, 3rd largest) and Deutch Postbank AG (German, largest) have both admitted to significant US subprime exposure -- €1.25 billion and €800 million, respectively, or around $2.8 billion USD total.

So far, these releases are of the "Yes, we have these issues, but they're well under control" varieties -- but that's one more rock for the landslide, should some bank actually crater because of this exposure.

I suspect we'll see more money from the ECB today, and quite possibly the Fed. I *really* want to see if any of the three day loans they made Thursday get rolled Monday.
posted by eriko at 7:25 PM on August 12, 2007


I don't think Canadian mortgage laws allow for quite the same level of overextension the US does.

Here's an article touching on that that I recently found.

I've been expecting for the last couple of years that when this shitstorm eventually started to happen in the US (it has been a matter of when, not if, of course) that it would also cool the nuttiness in BC housing prices, and in particular in Vancouver and area. We shall see, I guess.

Hopefully it means just that in Canada -- a cooldown and non-devastating retraction of recent bubbly runups -- not an economic meltdown. America, well, it's going to be pretty messy.
posted by stavrosthewonderchicken at 7:32 PM on August 12, 2007


Well the uptake hasn't been as high but since 2004 when the CMHC removed the requirement that your down payment be unencumbered you've been able to get creative mortgages like 0% down and 100% refinance (previous limit 90%). This brought with it teaser rate ARMs, builder incentive initial finacing, and other creative sales ploys.

Three years ago when was renewing one of my mortgages CIBC was all over me to sign up for one of their sub prime floating rate mortgages. A suckers bet considering rates were at a 20 odd year low.

Also anyone putting 0% is automatically in the hole because of the CMHC fees of 3.1% (+0.2% if you go for a 26-30 amortization, +0.4% for 35 and +0.6% for a 40 year) and if you're buying a new place 6% GST (and if you are in BC the 1% property transfer tax).

And of course there is a huge bubble looming over Vancouver (and many other places in BC from what I've seen). Alberta is equally bubbly. When that deflates, sooner rather than later I hope, all the people putting 0% down are going to be in trouble. And even though ARMs aren't as popular here how well are people who put 0% down foing to be able a 2-4% increase in rates when their mortgage is up for renewal.

Usually renewal is no sweat because you've spent the last 3-5 (10) years generating equity. If that gets blown away in a crash it'll be a lot harder especially if you started in the hole.
posted by Mitheral at 7:44 PM on August 12, 2007


I've been expecting for the last couple of years that when this shitstorm eventually started to happen in the US (it has been a matter of when, not if, of course) that it would also cool the nuttiness in BC housing prices, and in particular in Vancouver and area.

So maybe I will be able to buy something livable for under 700K!

Not that I'm looking, per se, though I've been watching the RE market here with a kind of transfixed incredulity for a year or two now.
posted by jokeefe at 7:49 PM on August 12, 2007


kwantsar, I don't particularly like the Canadian banks. Don't have an account with any of them. But I know they've been a whole lot more successful than most of the US banks, and have been on quite a shopping spree this past decade or so.

I am horrified our banks have been allowed to do 0% down and teaser rates. WTF, Canada?!
posted by five fresh fish at 8:05 PM on August 12, 2007


Yep. Anyone who needs a 0% down 40 year mortgage to buy a house most likely shouldn't be buying it anyways unless they've got rich parents with terminal cancer or something.
posted by Mitheral at 8:37 PM on August 12, 2007


Well, methinks a friend of mine is gonna get seriously burned if the Canadian market tanks. And here I was feeling that perhaps I've been far too conservative in my financial life. P'raps not, after all.
posted by five fresh fish at 8:54 PM on August 12, 2007


There was a quote recently from a prominent Australian financial columnist/economist, Ross Gittins.
The gist of it was, don't feel so bad for the folks with high mortgages now, because they will be on the receiving end of a significant inheritance when their boomer parents die.
Too bad for their kids, and anybody whose parents don't own a house, though.
posted by bystander at 9:13 PM on August 12, 2007


what I've read the next inflection point in this story will be October when the first batch of ARMs reset

ARMs are going off left & right now. The first peak, according to that chart at least, is November.

Some interesting things I've learned over the past few weeks:

Alt-A (good FICOs taking out suicide loans) are blowing up just as bad as subprime. The catchphrase their is any borrower, regardless of previous FICO goodness, is going to fail in a bad loan product.

Part of the skeevy subprime financial engineering was slicing up these loser subprime loans into tranches, and rating the upper tranches [with first & last dibs on the money coming in] AAA. This allowed normally quasi-conservative funds like pensions and OPEC types would buy this toxic garbage sight-unseen, but in a down market all this subprime crap is going to have to be settled for dimes, if not pennies on the dollar.
posted by Heywood Mogroot at 9:14 PM on August 12, 2007


Do you think this is worse than the S&L Crisis?

S&L was localized in the American SW. It laid waste to that area, but the rest of the world did not notice, let alone become affected.

The present liquidity and trust crisis is systemic and relatively uncontained given the financial flows of investment monies into these packaged mortgage-backed securities over the past 5+ years. Garbage was labelled AAA and now it's coming back to the bagholders, in Europe, China, OPEC countries, and even our own major pension funds.

For terms of scale, mortgage debt has rise from $6T in 2000, when we last had sane government oversight & regulation, to $12T today.

With a first-cut estimate of 10% of this debt going bad, that's $600B of unperforming assets on the books.

Subprime and Alt-A borrowing was 30-40% of the market during the peak, indeed, it was what drove the peak up once the interest rate cuts were digested.

Now that Subprime and Alt-A mortgages are going bye-bye, prices will either have to fall back to 2001-2003 levels or wages will have to be inflated up.
posted by Heywood Mogroot at 9:22 PM on August 12, 2007


^ the above about lenders changing loan terms. This can't happen unless the borrower defaults. Also, loans are non-callable, even if market prices go down. Also, who orginates the loan, who services it, and who "owns" it, are often different, variable entities. Should your lender fail, your loan will be moved to someone else.

People should retain some perspective. The houses that have been built won't vanish

The issue here is simply whether the 2003-2006 run-up bubble in prices will prove to be persistant or will we see the same souffle we saw 1989-1996, where most of the bubbly price rises of the 80s were beaten out of the system.

Additionally, the various feedback mechanisms in place: "affordability" loan products making home less affordable, banks getting more REOs in their portfolio than they are able to sell, the more banks FC and REO the more prices will be pressured, and of course the two jokers in the deck: the House & Senate.

Lemme retract something about Bush here: his "no bailouts" thing is the first statement I've liked from him since 1999.
posted by Heywood Mogroot at 9:37 PM on August 12, 2007


Also remember that even prime borrowers succumbed to the hype and did I/O ARMs on properties even they couldn't afford.

Y'know, people who might have been able to pay cash for a $1 million house, who simply couldn't bear the embarrassment of living in those neighborhoods, who instead did a teaser-rate ARM on a $10 million house.

OK, that's extreme. Guarantee there's at least a few of those, though.

How about this: I would have generally been considered a prime borrower - 790 FICO, ridiculously low Debt-To-Income ratio, relative to most - until, well probably last week. Had I gone ahead and bought that $600K home (as I describe above) in Santa Clarita in 2005 on a stated-income I/O 5-year ARM (which I could easily have done, I was offered this multiple times), you wouldn't even be seeing me on these charts yet.

However, right now my house is only worth $500K and falling, and I haven't paid any principal yet. I can't sell it, but I can still afford the payments for the next 2.5 years.

Unless my household income jumps up to around $200K/year, I'm just as f$%^ed as Bob and Jane out in Riverside who had to walk away when their 2/28 reset; you're just not going to see me lose my shirt until 2010.

I'm that smiling guy in that commercial, saying "I'm in debt up to my eyeballs. Please help me!" But I still look pretty good for now.

Alt-A is not going to be the end of it, most likely. So many people got sucked into this mania, a lot of generally good people just went along with the flow and bought more than they could really afford, because everyone was doing it.

That's what's going to be the rude shock - that lots of really nice people who had no intention of doing anything wrong have been complicit in a gigantic fleecing/grift operation.

I'm sure glad I stayed out of it. On the other hand, I do sure wish I'd been able to buy in 1998 when I moved to LA; lots of beautiful houses were on sale in my area for around $300-350K; they all jumped up to around a million bucks by 2005, and you bet I would have sold, banked/invested the cash, and gone back to renting in 2005. Of course, who knows what I'd have invested in... I might have still gotten screwed. :)
posted by zoogleplex at 9:52 PM on August 12, 2007


Report of a 50% haircut in a recent housing auction in a Florida neighborhood. (via a comment over here.)

Just an anecdote at best, of course.
posted by Coventry at 5:27 AM on August 13, 2007


Interesting graph Heywood Mogroot. I wonder why the shift from SubPrime ARM to Prime ARM.
posted by Mitheral at 6:34 AM on August 13, 2007


Regarding Heywood Mogroot's 10% number, take a look at this breakdown from the Ben Stein link above:
The total mortgage market in the United States is roughly $10.4 trillion. Of that, a little over 13 percent, or about $1.35 trillion, is subprime — certainly a large sum. Of this, nearly 14 percent is delinquent, meaning late in payment or in foreclosure. Of this amount, about 5 percent is actually in foreclosure, or about $67 billion. Of this amount, according to my friends in real estate, at least about half will be recovered in foreclosure. So now we are down to losses of about $33 billion to $34 billion.

The rate of loss in subprime mortgages keeps climbing. In time, perhaps it will double, maybe back to $67 billion. This is a large sum by absolute standards, and I would sure like to have it in my bank account.

But by the metrics of a large economy, it is nothing.
I know all about Stein's partisan hackery background, but in this case he sounds convincing that, at the national level, this is more of a momentary fear reaction than a real sea change.

Personally, I'm not too worried. We got one of the vilified interest only loans, but we've been using it as a means of being MORE conservative, since overpayments in the interest only window act like delayed downpayments that decrease future monthly payments. We'll be fine.
posted by NortonDC at 6:50 AM on August 13, 2007


NortonDC: the problem isn't contained to subprime. While Subprime was a small part of the market until the market exploded upwards 2004-2006, Alt-A paper of the boomtime vintages (2005-2006) is also starting to go bad just like subprime.

Subprime + Alt-A was ~50% of the lending 2004-2006.

Bernanke himself said losses on subprime could hit $100 billion.

Stein's usual hacklike analysis is ignoring the fact that my 10% / $600B estimate is a cumulative number over the next ~3 years, not a momentary snapshot we have now of a turning market. Each 1% drop in home valuation is going to push hundreds of thousands of loans into the red, and this is of course a self-reinforcing feedback cycle. And he ignores Alt-A, which was Prime without all the traditional lending safeguards (5%+ down, income & asset verification, owner-occupied) that made loans not fail.

btw, IO is not a bad product . . . the problem comes when people were using IO (or worse, negam) as a temporary "affordability" product.

And, this isn't about you. It's about the millions of people who bought in 2005-2006 into the teeth of a speculative market with suicide loans. They're NOT going to be fine.
posted by Heywood Mogroot at 8:29 AM on August 13, 2007


especially if they bought in the DC area (upwards of 30% to 40% decline in prices of high end homes)
posted by caddis at 9:52 AM on August 13, 2007


I see the FTSE's gone back up today. What happened to the three-day loans, eriko?
posted by bonaldi at 10:49 AM on August 13, 2007


What happened to the three-day loans, eriko?

All but ~$3B were paid back for this Fed cycle apparently.

From what I understand (which isn't much!), the system got into a "Mexican Standoff" late last week. An extra-market party was necessary to make some people liquid enough to start the chain of backing out the various positions the players had against each other.
posted by Heywood Mogroot at 12:06 PM on August 13, 2007


“Damn. I wish i was smart enough to understand this stuff.”

You and me both. I make decent money, but I don’t know money. Certainly not like most of the folks in this (and related) threads. What bothers me is I don’t think, given the skills I have (computer hacking skillz, numchuck skillz, girls love ‘em) I’ll ever go hungry. I mean if the feces impacts the ventilation system and we all go back to subsistance or feudal, I’ll probably still find work easy. And I have useful secondary skills e.g. armorer (I’d make a great D&D character, but gunsmithing, not y’know, plate mail).
But it strikes me that, I’d really not want to live in some sort of post-apocalyptic hole where I’m supplying guns to people.
I’d rather rob banks or something.

(Funny. Blackwater is taking over the site out here in Mt. Carroll. Y’know back in the 30’s during the depression guys like John Dillinger used to steal weapons from national guard armories....don’t know what makes me think of those two completely disparate things.)

Which is what I think might save us. I mean, I’m pretty much a bastard, but I’d rather not have the system collapse even if I’d thrive in it. And I think most people are like that. I’d rather cooperate, maybe make a little less, but have a nice stability.
Which makes me think the hard core money grabbing opportunists risking collapse of the system to make a buck really have a screw loose.
(Whether it’s short sighted stupidity or malice - same bottom line)
posted by Smedleyman at 12:13 PM on August 13, 2007


caddis, if your link is for me, don't fret.
Then consider that the D.C. and inner suburb (Arlington, Bethesda, parts of Alexandria and Falls Church) markets have been much healthier than the general suburban (Rockville, Fairfax, etc) market, which have in turn been much healthier than the outer suburban market.
That's us in the healthy inner market, near the metro, sfh, blah blah blah. Like I said, we're fine.

As for Wall Street, it turned out to be pretty boring today.
posted by NortonDC at 4:15 PM on August 13, 2007


Maybe, NortonDC. Maybe not. My darling girlfriend and I are looking around and we're on the cusp of what's reasonable to buy or rent, so we're lookin at both. And we're finding some very interesting things on Redfin, including places that you could throw a rock from the yard to the metro stop.

And some of them have been on the market a long time. Others have taken a 10% drop in asking price. Often that's townhomes but when it slows and/or drops it's condos first, townhomes second, then SFH.

So who knows what it's going to be in 6 months. The above linked chart showing all those ARMs coming due in the next 19 months is staggering.
posted by phearlez at 4:53 PM on August 13, 2007


he sounds convincing that, at the national level, this is more of a momentary fear reaction than a real sea change.

Well it is, what, about 7 million out of 115 million households?

Perhaps 5% of households will be facing foreclosure. While that is a startlingly large number compared to historical averages, it isn't all that many when compared against the massive size of the market.
posted by five fresh fish at 6:09 PM on August 13, 2007


I will bet, however, that some communities are going to be completely devastated.

The great thing about that is there are going to be terrific bargains in very desirable neighbourhoods. If you've managed your finances well during this past half-decade debacle, you might be able to snag a nice house in O.C. for next to nothing! And, guaranteed, it'll be back to a high price a decade or so from now.

There's money to be made if you're smart.
posted by five fresh fish at 6:11 PM on August 13, 2007


Perhaps 5% of households will be facing foreclosure

The issue is vintage, too. 2003-2007 is going to have higher FC rates than 1980-2002.

Except that many, many people refi cashed-out 2003-2006, to the tune of $1T/yr.

Given the velocity of money, the difference between GDP growth and recession was ENTIRELY the MEW $.

That carousel is spinning down now too.

As for bargains to be had, I think there's still billions of dollars of smart money on the sidelines waiting for the tide to go out enough . . . I don't have any hope of fire-sale pricing like from 1993-1995, but getting back to the 2001-2003 plateau would be nice.
posted by Heywood Mogroot at 6:22 PM on August 13, 2007


five fresh fish writes "Perhaps 5% of households will be facing foreclosure."

That's 1 in 20. To put it another way on an averagish SFH city block (I know, suburbs don't have blocks) of about 10 houses per side that's one foreclosure per block. That, uh, seems like a lot. Assuming 2.something kids per household thats 1 in 10 kids foreclosed on. 10% of kids in every school.
posted by Mitheral at 6:58 PM on August 13, 2007


actually the statistics will skew toward younger first-time buyers. With more kids, since these are the kinds of people who need(ed) to stretch to get into a better house.
posted by Heywood Mogroot at 7:21 PM on August 13, 2007


Perhaps 5% of households will be facing foreclosure. While that is a startlingly large number compared to historical averages, it isn't all that many when compared against the massive size of the market.
Thing is, there's no real, defensible reason any of this should ever have happened. People are going to lose their homes because of greed. Period. Greed on the part of the money men who invented this horrendous form of financing, and greed on the part of many of the home owners who don't have the brains god gave them to live within their means.

Problem is, a lot of other people are going to get due to the greedy's inability to think straight when confronted with the potential of a few extra dollars in the pocket.
posted by Thorzdad at 7:27 PM on August 13, 2007


Greed on the part of the money men who invented this horrendous form of financing

It's not the market makers' crime here, just the face-to-face salespeople who knowingly put underqualified people into exploding mortgages.

Even so, many people in the industry were operating on the assumption that the market would continue to zoom for the foreseeable future, which would cover the worst borrowers' nakedness.

Poor assumption, but hey, it's human nature to be stupid.
posted by Heywood Mogroot at 7:41 PM on August 13, 2007


There's money to be made if you're smart.

Yes, yes there is, and will be. Or if not money to be made, at least opportunities for getting a leg up as the cardhouse collapses. It's never a bad idea in the longish term to walk slowly and carefully in the exact opposite direction that everyone else is running (with their hair on fire), when it comes to the market, if you watch your timing.
posted by stavrosthewonderchicken at 10:28 PM on August 13, 2007


Here's an example of one sort of scenario that's happening, from Corona CA - Riverside County. (LA Times)

Choice bits:
"For a few years, the house fulfilled its traditional role: It was a place to sleep, to eat, to raise their two boys. "It was a blessing, a beautiful place," says Theodore Judice, a telecommunications worker.

Life threw some curveballs. Cassandra, a healthcare worker, had medical problems and left her job. Theodore had a year or two when he wasn't working full time. And, always, there were credit card bills and home equity loans to pay.

In 2000, they refinanced, drawing cash out in exchange for a bigger monthly mortgage.

Corona, and America, was soon full of people doing the same thing. Lenders have never been so careless with their loans, knowing they could easily resell them to Wall Street. With home values on the rise, houses took on a new role. They became ATMs where you never had to make a deposit but could withdraw endlessly, or so it seemed to many at the time.

Theodore would marvel at his neighbor's boats, their swimming pools, their toys. He and Cassandra did some remodeling -- getting the patio done, he remembers, was particularly urgent.

The offers to refinance came in the mail every day, sometimes two or three of them. Theodore would tear them up. Eventually, though, he would succumb.

The couple refinanced again in 2001, 2003 and 2004, borrowing larger sums each time. Each time they drew money out, Theodore would say, "We're not doing this again." And then they would need money, and they would do it again.

In September 2005, the Judices borrowed $447,500. Almost immediately after that, they put the house on the market for $480,000.

It was time to go: They had drawn so much cash out of their home they couldn't afford to live there anymore. The ATM had turned into a trap. With no equity cushion, they couldn't afford to cut their price either."
Short result (it will go behind paywall at some point): they walked away, were foreclosed upon. House is still not sold, even after recommended reductions down as far as $379K. Still sitting there, on GMAC's books, in an area that is glutted with homes for sale.

Get used to reading stuff like this. It's going to be very common.
posted by zoogleplex at 12:57 PM on August 14, 2007


Today's Housing Bubble Post - Another One--... Thornburg, which specializes in high-quality, prime jumbo mortgages, might need to sell assets or reduce its dividend because of a liquidity squeeze.
... The nation’s biggest lenders face a worsening cash shortage because investors who buy their loans are not bidding, and bankers have cut off credit lines. The fallout has toppled at least 70 mortgage companies.

Not just sub-primes...

posted by amberglow at 7:45 AM on August 15, 2007


Arlington [Virginia] Home Sales, Prices Up in July

Home sales across Arlington County continued to show more buoyancy than in the region as a whole, with both total sales and average sales prices higher in July than a year before.

A total of 303 properties changed hands across the county during the month, according to figures released by Metropolitan Regional Information Systems Inc. That's up 7.1 percent from the 283 properties sold during July 2006.

Condominiums were dominant during the month, representing 161 of the 303 closed transactions.

The average sales price for all properties sold during the month in Arlington was $574,427, up 9.7 percent from a year before.
posted by NortonDC at 4:58 PM on August 16, 2007


Hey, lots of government employees getting paid with all that borrowed government money! :)

Some places will stay bubbly longer than others; some might even pretty much stay flat because of local income disparity.
posted by zoogleplex at 6:26 PM on August 16, 2007




It's not the market makers' crime here, just the face-to-face salespeople who knowingly put underqualified people into exploding mortgages.

If the salespeople drank the koolaid, that doesn't necessarily make them malicious, just stupid. I have a friend who is a real estate broker, and she and her husband just signed a zero-down ARM mortgage, intrest-only, a textbook example of what they should not have gotten. They proudly told me about the deal they'd gotten, and I had to bite my lip and say, "congratulations." I think a lot of the salespeople have no idea what the reality of the situation is.
posted by lekvar at 2:08 PM on August 17, 2007




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