Was Last Week’s Housing-Market Crash Worse Than You Think? — New York Magazine — This is a long article worth reading if you like to track financial change. Could things be as bad as this article says?
This spring, as many homeowners stopped paying, the mortgage bonds—for the first time—starting losing value. Hundreds of billions in bonds that were thought to be worth more or less the price they were sold at, it turns out, are worthless. That’s triggered a chain reaction: Brokers like JPMorgan, Goldman Sachs, and Merrill Lynch that lent money to the firms that bought the bogus loans—most famously, Bear Stearns—basically foreclosed on those firms to get their cash back. But the firms, which are always running full tilt, didn’t have the money to pay up. Bear, at the direction of the now-fired former co-president Warren Spector, let one fund just go down the drain. But Spector thought the other was still worth a great deal, so he put up $1.3 billion to pay back what the fund owed to the lenders and take direct control of the mortgage bonds. Spector, maybe one of the best minds in the bond business, genuinely believed that these mortgage-backed bonds still had substantial value. If someone as savvy as Spector thought these bonds were still good when they were actually worthless, that tells you that thousands of other managers are simply dreaming if they think their portfolios are worth anything near what they claim they’re worth. In other words, we’re looking at the start, not the end, of the lending meltdown.
found by John Ligums
I can tell you this much. This guy sure thinks so. If you have not seen the Jim Cramer meltdown, have a peek.
Fed Honcho and Hank Kingsley lookalike Ben Bernanke was formerly GW Bush’s top economic advisor.
Hey Now!
Hi, permanent renter here.
I always wondered why people with $2600 monthly payments call themselves ‘homeowners’. Really they are ‘mortgage owners’.
This insane move of cheap loans and speculation drove prices to ridiculous heights, out of reach for many here in the land of outrageous property costs…
enjoy your credit score.
This whole issue with the mortgage industry is the chickens coming home to roost. Mortgage brokers, lending companies, real estate investors and the rest were in it to make some money and lot very quickly. They gambled and the piper has asked his due.
The market would be better if there was a huge amount of profit taking done right now. Drop the market a good 2000 points, grab the money and then start back up in a bear market. Take it from that plateau and start all over and let it build.
I promise if they would just do that, stablise it and build from a lower plateau it will double quickly back up. It is far too unstable. Cut the rate a down to 5 percent, take the profits to bring the Dow back to around 10-11k and go bear for the next two years. This country needs to once again become fiscally conservative, this roller coaster is killing us and taking the world with it.
China and India have markets that are growing so fast that Tokyo, London and The US need to apply some brakes and retain balance. If we do not do this we will escalate to disasterous results.
Profit taking must occur, the prime rate must be lowered to 5% and we need to level the field of the Dow to 10-11k. We do that and we will be better. We are off kilter and we need balance.
Cursor_
I haven’t figured out the rationale, the logic, of family heads sitting down, doing the math, and knowing that in six months, or whenever the teasers expire, their income will not equal the monthly payments required to maintain their house, cars, etc. Maybe they’re counting on the Easter Bunny, the lottery or maybe God to come through and save them. Even dumber (and dumber) are the people who make these loans, knowing these folks ain’t gonna make it. The blind and greedy leading the blind and stupid.
The interesting question now being, after the coming wholesale evictions, who gets the houses? A million foreclosures do not remove a million homes, in a logical world it would just make them a lot cheaper. In a logical world…
The mortgage industry has been in sort of an unethical “sell, sell, sell” posture the last few years.
For example, they have been pushing HARD “interest-only” mortgages under the guise that while you are not paying off any principal, the property appreciation will make up for it. But what happens if it is an adjustable rate interest-only mortgage? Where is the cushion 5 years late that accumulates by paying off prinicpal?
Unfortunately, the consumer bares a large part of the blame unless one holds the view that some of these practices should require more disclosure, like the warning on a cigarette box that says “Adjustable rate interest only mortgages may be dangerous to your financial health”.
These mortgages really caused some people to not have an appropriate amount of cushion in their finances.
Oh … I needed to add to this:
What happens when someone can no longer afford an interest-only mortgage? Well, they have no equity in the property so they forfeit the property in bankruptcy, which is not typical for a homeowner because equity in a primary residence is usually protected.
Hence, housing crash.
Your link is to page 2 of the article.
#2, Curser,
Correct me if I’m wrong, but I understand you want to reward the follies of those lived on the edge and are falling over. Corporate Welfare for those who were financially irresponsible? I can understand Cramer wants a Welfare handout to his friends.
*
The problems are first of all the revamped bankruptcy law doesn’t protect the homeowner. They are walking away or having their house repossessed in a saturated market. Before they could work out payment schemes so the creditors at least got some money. Now, they are stuck with property they can’t sell.
The biggest cause of bankruptcies and extreme financial hardships are excessive medical costs. Yes, even those with insurance are hurting. Medical emergencies are not planned and will hurt anyone.
Third, the loss of a well paying job. There is no job security anymore and next to no job protection. A company can fire you because they don’t like your hair style and hire a fresh from college replacement for half as much. Going from a $60,000 / yr salary to $25,000 is hard. Yet it happens too often.
Most people in this country live from paycheck to paycheck. It doesn’t take much of a financial setback to really screw up their life. A $1500 car repair, a storm damaged roof, a heart attack, a two week layoff, property tax reform hit, or a burst water pipe.
This has been of the horizon for the last 5 years..
but it’s prolly just a blip.. before the real crash..
even terrorists know it now.. the market will crash on its own
time and time again
erm.. act accordingly
P.S.
Someday, I’ll grow up and type in full sentences.
This has been brewing for over a decade. I for one have been waiting for the other shoe to drop the whole time.
After the dot com crash boomers who still had money to invest bought real estate. Real estate has always increased value in the long term. However Market values have been bouyed up by an influx of wealthy immigrants from Hong Kong and the former Soviet Union. Add to this the Boomer echo buying there first houses at low interest rates and it’s a recipe for disaster.
The chain reaction starts with climbing interest rates chilling the market. A cold market decreases home values. Decreased home values erode equity. Next thing u know Bob’s your uncle and you owe $300k on a house worth $150k worse for you if you bought another as investment.
As home owners default on mortgages a glut of homes go on the market further decreasing prices. All the while interest rates rising due to low confidence in mortgages. This at a time when the USA has no real domestic industry but construction and retail.
I’m glad I have no debt.
More and more.. real estate has been bought on the shoulders of profit from stocks.. and stocks are a shady deal.. like real estate already wasn’t a shady deal.. and when this marriage goes bust.. someone is surprised?
#7 – “The biggest cause of bankruptcies and extreme financial hardships are excessive medical costs.”
While what you say is very true, indeed medical reasons top the list of bankruptcies, the mortgage lenders push the “have your cake and eat too mentality” and as you probably well know, there is a significant portion of the population that can be enticed by such a proposition.
Almost all large banks have evolved to be essentially predatory lenders that prey on the youth in this country and hope to take advantage of the naive (college students).
Yes, yes, YES. Take out an ARM and then have your rates so ridiculously high, that you’re only paying off the interest each month. Lose your $750,000 home along with the BMW’s you tacked on to the mortgage, then I can turn around, buy your home and cars for dirt cheap, then rent them BACK to you!
Fail-safe!
The BIG question is..
Does this just affect the USA? Or is it a worldwide phenomenon
Outside the USA atm.. this isn’t really a problem
I’m looking to buy a house but real estates prices are way too high around here, There is nothing around this town and I don’t even have any idea why the prices are so high.
Hopefully this crash will foreclose some houses around here and I’ll be able to get in for cheap, before some tycoon buy every single one of them!
This is total BS. The affected loans are less then 5% of the total loans made. While the equity maybe is less then the loan it is not a total loss. If you really look at the numbers they do not add up to the sky is falling story I am reading. Lowering the interest rate will not fix this problem. Low interest rates caused the problem. One reason people do not save is because interest rates are so low. I say raise the interest rate give people an incentive to save. Then banks will have money to lend.
RUn those credit cards UP…Then stop payment…
ALL in, lets break the bank…
13, An old question I have asked…
HOW many of the other nations, Charge for Property taxes…
Last I heard, it WASNT a HIGH NUMBER..
It becomes everyones problem eventually, theres just a little lag.
The USA is the biggest consumer of products of all kinds world wide. I’m too tired to find you statistic just now, so google it yourself. What happens to China’s economy when Americans tighten their belts and decide they don’t need quite as many TVs, DVD players, lawn chairs, etc. next year.
Domestic markets will fluctuate until they reach a new equilibrium but people who are heavily invested risk ruin. Those with liquid assets have an opportunity to seize tremendous assets at cut rate prices.
Coincidentally(or not) the Federal Reserve Board Ceased publishing M3 monetary aggregate reports on Sept 23, 2006
I know it’s all Geek to u right? Well the distinct components of M3 monetary aggregates are: Institutional money market mutual fund balances and managed liabilities of depositories consisting of large time deposits, repurchase agreements, and Eurodollars.
Which is pretty much everything but cash in circulation, checking and savings accounts, small time deposits, and retail money market mutual funds(exclusive of balances held in IRA and Keogh accounts).
In other words the Private bank called the “Federal Reserve Bank” hasn’t been reporting how much money it’s been creating to satisfy institutional investment funds for almost a whole year now.
Coincidentally 2 weeks ago Treasury Secretary Henry Paulson asked Congress to raise the US federal debt ceiling as were about to crest $9 trillion dollars (our current limit).
With a population of 302,600,000 or so thats about $30k debt for each living American citizen.
Hold the phone, I just remembered about 30 million residents aren’t citizens so up the anti to $33k each 😀
#1 “Hi, permanent renter here.
I always wondered why people with $2600 monthly payments call themselves ‘homeowners’. Really they are ‘mortgage owners’.”
Not until the mortgage is paid off then they own it.
#2 China and India have markets that are growing so fast …
Its scary in China (India I don’t know) Right now in Shanghai to buy a decent apartment in a decent area you are looking at about US$400,000 plus to US$600,000 and it still goes much higher.
So that’s only Shanghai? No its not, anywhere where there is economic growth in China its going up, up up! Shaoxing a small city 2 hours from Shanghai we were looking at the only track of free standing houses (outside the city) and they are $400,000 to $600,000 with new apartments in the city going for at least US$150,000 to 200,000 plus.
Asians flush with cash are buying into western property markets.
nightstar, you would know this in Australia as property investment from Japan, HK and Indonesia and south east Asians drove the price beyond what the average Australian could afford in the 80’s and it hasn’t stopped. (I assumed you are Aussie when you used the term “Bob’s your uncle”)
It seems to me that when economies are buoyed up by imaginary money the risk of collapse is a real risk. A jam factory only has so much jam in its warehouse and can only manufacture so much but with investment and stock trading the value of the jam far exceeds the its real value and then…opps! Putting it simply.
A country is like a business and for businesses to be successful it needs to sell products or services to other businesses at a profit. Selling the jam from the jam business to its employees does not generate income and buying jam from other businesses cause its cheaper (than the jam it can produce) to sell to its employees is even worse! Oversimplified I know…but…
America needs to start producing products that can be sold to other countries, that’s it. This is what China and India are doing and it see the result. If a country only produces for domestic consumption the money only circulates domestically and the economy can never grow – and the problem is if economic growth stems from inflation and bullish markets – its still only paper money. 😉
Cheers
Jim Cramer – have a cup of tea already, listen to some Cat Stevens…
A house of cards no matter how strong it looks, is still made of cards.
Someone needs to pay the US$2,000,000,000,000 (2 Trillion) for the Iraq war…
Americans think the Chinese are stupid? Sorry, that was too easy. 😉
Cheers
#7 Mr. Fusion. The fact remains that the Dow IS the indicator of how much the investors have gambled right now. Its their money really now so let them take it out of the exchange, put it into other investments and generally send it loose into the wild. That was the WHOLE idea of investing anyway. To make more money while stimulating the economy.
Think of it this way, for the past 20 years investors have been betting at a craps table. With every successful win they have been collectively stating “LET IT RIDE”. They have overall been very fortunate to not have such a huge adjustment come along and smoke all of their profits.
What I am saying is that instead of risking all their winnings, they need to take back some chips in the tune of what they have MADE over their investments, and start over with their initial out of pocket amounts.
Any GOOD gambler knows that you MUST not let everything ride on every chance. That to be smart you take back your money and then some and play with the house’s money.
Its time to manually readjust the market instead of waiting for some big slide to adjust it for them. That is what happened in 1929 and the world went belly up. We don’t need a repeat.
Take the money and run, don’t just sit there and keep betting the 1000 percent in profits you made to try and get 5000 percent! This whole issue of the world’s economy has been a huge sweep of avarice. It is a recipe for disaster. Get you cash, use it elsewhere, slow it down and rebuild from there. It worked well in the 1950’s and the 1960’s where we saw slower growth that was more controlable. That is because most of the investors had gone THROUGH the crash and they learned.
We have new generations that have let a good thing go to their heads. Fiscal Conservativism MUST be used now after these debaucles in corporate america and the loan industry. Restraint should now be the mantra.
Cursor_
Maybe if we translated the word mortgage to it’s literal meaning in English, people would take the commitment more seriously.
1 of the Universal constants: “The bigger they are, the harder they fall.”
As the economy collapses over the next few years (election years tend to be bad), the people sitting on much of the dough will lose a lot. The people without much don’t have much to lose, so their fall will be shorter and not as bad. The people on the bottom won’t even notice, nor will the people on the top.
Those of us somewhere in the middle, we’re screwed – as usual…
Hold on to your hats, the next recession (whenever it comes) will be as bad as the ’89 recession (George Bush #1 at the time) or worse.
with all the inflated pricing NOW…
LETS show that PEOPLE can control the market, and Pull the Brick out…
Take them to the cleaners, and let them BE confused…
They will blame it on Any/everything EXCEPT, their OWN greed.
#19 no I’m not an Aussie I’m an American ex pat in Canada.
I think most people miss the point of this market correction although Tihz_HO definitely recounted it’s effects accurately.
This is globalization in action. The so called “Free Market Economy” which is none other than the abdication of national sovereignty for corporate stewardship. The private taking of the commons.
America has privatized everything. Even her military and domestic infrastructure. Those assets and entities previously held by “we the people” are now hold by they the shareholders. The shareholders are concerned with generating profits and the world is their customer.
So don’t be dismayed at your come-upance(sp?) America. You bought your comforts with child labour from third world countries and now it’s time to pay the piper.
In the video – seems to me the woman, by constantly interrupting him to add nothing of value to the topic, brought out the growling and yelling.
If he’s talked to every CEO “out there” in the last 72 hours, he hasn’t had much sleep, and he’s seeing his portfolio “melt” in dollar value.
To me, he’s going berzerk – instead of being level headed. However, after calming down, he made more sense.
Wow, 7 million people only paying interest, in the last three years.
I blame the people making those loans to the “common” people.
Of course you’ll get lousy payers.
Of course property values fluctuate.
Of course you get less $$ for the foreclosed property when it’s sold.
Of course lenders lose money.
Here in Canada, Interest Only Mortgages don’t exist (yet) from the major lenders – banks & insurance companies.
However, we do have loans at 100%, that are usually 1% higher than the going rate. The 1% higher interest rate is “traded in” for a cash-back, used to buy the house.
Nice post-mortem on mortgages…
http://tinyurl.com/225l4k
Cheers
Just imagine how bad it would be if we didn’t have the first MBA for president.
Thus why I have a 15 year fixed that I can actually afford. Amazing concept.