More on Bank Exposure to Real Estate
Submitted by
CalculatedRisk on Mon, 03/19/2007 - 12:13pm (46 comments)
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To those of you who are getting a little quivery over the stock market, superimpose
^GSPC (S&P 500) over EURUSD=X (the euro)
Gosh, in Euro terms the S&P is down over the last 52 weeks. How can that be?
And I'm beginning to get a very strong feeling about which way Uncle Ben is going to turn on rates. It doesn't rhyme with "gown".
Tanta says the premise was RE was always going to go up. I would say it was more like, "The people who are telling me that real estate is always going to go up are really impressive."
Nobody was born thinking real estate was always going to go up. There was no invasion of the body snatchers where the pod people, in addition to lacking emotions and coincidentally being from another planet, also believed that real estate was always going to go up.
Banks have skin in the game? No big deal, the Fed and government will come to the rescue with a bailout under the premise it is saving society.
The question I would like the solons to answer is: if the banks start to suffer, will it make any difference if the Fed pumps money into the system?
I have heard opposing answers to that question.
Actually it will make an astounding difference in how the fed commences reliquidity. Should they provide liquidity by buying up treasuries right left and center, the banks will be buying bonds to replace those removed securities- now if they reopen the discount window to allow cheap funds to subsidize interest rates through borrow cheap short and lend long....that could be very dangerous to the long term health of the banks.
As to the short term health, well any change from last year's perfect weather is a bit of shock and will lead to some, shall we say, revaluation issues?
The real question is how the toxic waste of a million empty foreclosed homes is going to hang over the economy.
Can't wait to see it.
Thinsg are stabelizing in the mortgage industry.
Toady was the first day that I noticecd hte counter at ml-implode.com did not go up.
I wonder if the trend continue - imagined a new record of a whole week with the counter at 41 (it was 23 when I first started to look at it nearly 3 weeks ago)
CR- thanks for posting the Kash articles, I have learned much from visiting his website and glad that he is getting some attention.
ron, my pleasure. Kash gets very busy at times and doesn't post for long periods - young kids can do that to you. But when he does post, it is worth reading.
Best Wishes.
I know at least ONE bank that has exposure. We have a 31-yr old niece in Sarasota whose husband is a great cook with a lunch counter business in a quiet neighborhood. Her dad is rich. She commissioned two spec houses of the McMansion variety 8 months ago using liars' loans and the houses are just coming on the market today, and they bought a big house too which is interest-only payments.
Another niece who's recovering from cancer has a 17-yr old daughter getting out of high school. 2nd niece is a school teacher, and has two root canals to pay for with no insurance. First niece called up 2nd niece and suggested kid go for a year in Europe, since all the European kids did that after high school.
I'm waiting for the Sarasota lender to Implode - they ought to!
arbogast:The question I would like the solons to answer is: if the banks start to suffer, will it make any difference if the Fed pumps money into the system?
Reading list:
Essays On The Great Depression
Bailout
Too Big Too Fail
Devil Take The Hindmost
Money Mischief
Bernanke's book makes it quite clear that the gold standard caused excessive pain during the Great Depression. The quicker a nation got down off their cross of gold, the quicker their respective economies recovered. That was back when the idea of making more money out of thin air offended the senses of just about everybody. In our free lunch for speculators era, I would expect continued attempts at saving the financial speculators until the extreme wealth distribution leads to widespread populism. Lou Dobbs, Barney Frank, Iraq For Sale. The signs are everywhere and growing. M-M' making ALL the money is not sustainable. Obviously, there is an upper bound to the Gini coefficient in a democracy.
Some people can't see any way for more money/credit to reach the people. They are autistically bound to what they perceive to be hard and fast rules. If things become bad, creative solutions will probably be taken. It's still in the early innings and Senators are climbing all over themselves to bail somebody, anybody, everybody out.
Economic napalm to rid the forest of bad loans is coming.
Slightly tangential, as the Roman empire corrupted and decayed, bribery in the legions at the periphery was widespread. Keep that in mind as you watch the segment in Iraq For Sale where the Army interrogator is talking about their strategy of over-eating in order to be discharged due to obesity so that they could start working for Blackwater making the big bucks. For the corporations, By the corporations indeed. Too bad corporations are cowards and have no interest in defending liberty. Slavery is their optimal state.
OT
For those of you wondering whether the public servants in Camden NJ could sink any lower than keeping payroll records in pencil, the answer is a resounding yes! This doesn't appear to have made it onto the public Bloomberg site yet, but I'm sure it will shortly. I guess the next step is a 3 card monte game on the school steps to swindle the kids out of their lunch money.
"Camden, New Jersey Principal Charged With Stealing From Parents
March 19 (Bloomberg) -- An elementary school principal and
his assistant in Camden, New Jersey, the poorest U.S. city, were
indicted on charges they allegedly stole $14,298 from parents by
tricking them into paying for 13 field trips already covered by
the school district, the state attorney general said.
Michael Hailey, 65, who was suspended in July from his job
as principal of H.B. Wilson Elementary School, and assistant
Patricia Johnson, were charged with one count each of
conspiracy, official misconduct and theft by deception, and
tampering with records.
According to the indictment, Hailey and Johnson directed
teachers to collect money for the trips even though they
submitted paperwork to the district seeking funds to pay for
them.
Hailey and Johnson, along with teachers Juanita Worthy, 59,
of Evesham, and her daughter Keah Worthy, 31, were also charged
on separate counts of attempting to bill the Camden board of
education $25,000 for 13 teachers' attendance at eight meetings
that never took place."
Ameriquest Gives Up Rights to Rangers Park Amid Mortgage Crisis
Ameriquest Gives Up Naming Rights to Rangers Ballpark (Update1) - Bloomberg.com
Anyone know how much lunar real estate exposure the banks have?
China says no to more moon real estate
The company offered to sell individuals ownership of an acre of lunar land for 298 yuan ($48) each.
Within three days of opening for business, it was reported that 34 clients had bought 49 acres of land, earning the company more than 14,000 yuan ($2272).
So ends my dream of owning affordable vacation property in a secluded out of the way spot with incredible ocean views, lol.
Front page of Reuters
Houses cheaper than cars in Detroit
Houses cheaper than cars in Detroit
| Reuters
"After selling house after house in the Motor City for less than the $29,000 it costs to buy the average new car, the auctioneer tried a new line: "The lumber in the house is worth more than that!"
Looks like the pricing is moving down to intrinsic value of the materials. I doubt Detroit will be the last place that see this happen. We are just getting started.
Anecdotal point of reference . . . I got a call from my bank tonight during dinner. Large regional bank in the Northeast. They wanted to know if I was interested in that HELOC that they sent me information about. Told them I didnt request any information, hadnt read what they sent me, and wasnt interested in a HELOC. Thanks anyway. What was interesting to me is that Ive banked with this firm for about 10 years and never received a marketing call from them before. This is the best they can do to drum up business? Seems like desperation to me.
Broader investigation;
Expired
this is just beyond comprehension, this moron is ready to go again;
Topic Galleries -- Courant.com
Coming to a market near you;
Will Subprime Sneeze Cause High-Yield Flu? - Forbes.com
Top five US subprime lenders asked to testify -Dodd
http://tinyurl.com/2c62ek
As usual...late to the funeral...
Hey yall, Ive been a lurker for the past few weeks, but decided to join the discussion. Im a young professional who for the past five years has been kicking himself for missing out on the red-hot Washington, D.C. area housing market. Now, Im starting to think that what I thought was my great misfortune may soon be my very good luck
As part of the response to Anthony Flemings and arbogasts posts on the exposure of banks to some form of accountability for enabling this mess, I wanted to add another dimension: lawsuits. It would appear that the legal industry is sharpening its knives to strip the bones of the financial lending industry. Their tactics are to shift the focus to the millions of unsophisticated Americans (with lots of examples of minority and elderly borrowers with heart-wrenching stories) who were tricked into risky loans that they obviously cant be expected to re-pay once the rates reset. Ive linked and excerpted a few articles that popped up on Patricks Housing Crash blog. [http://patrick.net/housing/crash.html#links] Sorry, its a long post, but I think it offers some insight on things to come.
Topic Galleries -- chicagotribune.com
Subprime lending worries hit home
67-year-old widow Georgia Rhone missed payment on a mortgage that jumped from $974 to $1,850 a month...
Her lender now has begun foreclosure procedures as a result of a deal she realizes she never quite understood
.
Rhone is in danger of losing her home after years of caring for her parents and raising two grandchildren.
Because of a financial crunch [nice job of glossing over an important contributing element here Tribune ], she refinanced into a subprime loan in 2005, and had to refinance it again to keep ahead of spiraling payments.
Rhone said she told her broker the monthly payment on the most recent deal he brought her was "very, very steep for my budget."
The South Side widow cared for her parents in the house on Greenwood Avenue, where she is now raising her daughter's children, 10 and 17.
Having trusted her broker and signed for a loan she says she didn't understand, Rhone is one of a growing number of owners trying to hang on to her home.
Take Chicago semi-retiree Charlene Snow, 69, who pays $1,150 a month [at] a 10.75 percent interest rate
"I had refinanced, and it was a fixed rate for two years. And after two years, they said it would be adjustable, but at the time I didn't understand what that meant," said Snow, whose two children and granddaughter live with her.
Yahoo! 404 - Page Not Found
As subprime crisis deepens, some fight back
Thomas Hilchey and fiancee Robin Crevier started with a "teaser" -- an attractive interest rate for two years with a month
Yahoo! 404 - Page Not Found
As subprime crisis deepens, some fight back
Thomas Hilchey and fiancee Robin Crevier started with a "teaser" -- an attractive interest rate for two years with a monthly payment of $1,692 that was well within their budget.
The middle-class couple from Harwich, a village on Cape Cod in Massachusetts, were confident they could keep up with the adjustable-rate mortgage payments to refinance their home and signed papers with subprime lender Ameriquest Mortgage Co.
What happened next swept them into the property foreclosure wave spreading across the United States and sparked one of a growing number of legal fights against lenders such as Ameriquest that specialize in loans to higher-risk borrowers.
The rate was set to jump to 9.75 percent on March 1 would have pushed them into foreclosure. But Hilchey and Crevier fought back.
Accusing Ameriquest of deceit and negligent misrepresentation, among other charges, the couple sued the lender, saying its salesman failed to provide documents and disclosures on the loan required by state and federal law.
Across the nation, anger and litigation are growing against the tactics of subprime lenders, who offer easy credit for homes that are turning out to be too expensive for millions of Americans now that mortgage rates are going up.
If you go in and apply for a mortgage and get approved at 5.75 percent, how many people two years later are going to qualify for the same loan at 9.75 percent? Probably no one, unless you are extremely wealthy," said Bruce Bierhans, an lawyer representing Hilchey and Crevier.
The couple won a first round this month when a Massachusetts judge [of course its MA ] ordered Ameriquest to halt a $715 monthly increase refrain from repossessing their property until the lawsuit is resolved.
"I would expect more lawsuits like this," said Boston University law professor Tamar Frankel.
"People are going to lose their homes. Are they going to fight? Yes. Are there going to be lawyers who will help them fight? Sure. The question is going to be: Where will the courts draw the line?"
Mary Beyer, a 52-year-old divorced mother of four from Jenison, Michigan, said she was misled while refinancing her home with a subprime loan she could not afford.
The loan salesman, she said, listed her as employed on the application even though she told him she was out of work and surviving on Social Security payments of just $643 a month.
Beyer, who suffers from chronic asthma and receives disability payments, admits she did not read all of the fine print but said she was desperate for the loan after running out of money to pay her electricity bill. [WHO gives this woman a loan?]
This month, she was told her home of 20 years would be repossessed.
"I was too trusting when they said I could do this loan," she said.
"Now, every time someone talks about foreclosure or selling it, I
Housing groups warn of default ‘tsunami’ - Real estate- msnbc.com
Housing advocates warn of default tsunami
Speaking at [The National Community Reinvestment Coalition]s annual meeting in Washington, New York Sen. Hillary Rodham Clinton, a Democratic presidential candidate, said lenders should be required to clearly explain the terms of mortgages to borrowers, particularly for loans in which the rate can soar after the first few years.
This market is clearly broken, and if we dont fix it, it could threaten our entire housing market, which in turn would threaten our entire economy, Clinton said.
So, my question is, who wins the race to defend Americans from predatory subprime mortgage lenders? The politicians or the lawyers? My money is on the lawyers, but dont count out the Democratic Congress and presidential candidates.
Thoughts?
And thank you CR and Tanta, youve really opened my eyes. Ill be happy to make a PayPal donation for the many past (and future) pearls of wisdom you share.
stateman: most politicians are lawyers. With the glowing exception of our current MBA president.
This subprime-o-gasm is providing the market with a reason to climb the wall of worry - and provide the bulls with a much-appreciated buying opportunity.
Household net worth makes a new all-time high each and every quarter. Record high incomes, record high consumer spending, record low unemployment, record high college attendance, record high home ownership, record low interest rates, record high longevity and record high wealth and prosperity.
God bless America and free market capitalism. It been berry berry good to me and my family.
Kool Aid is here, bringing you berry berry good fun...but watch out for bitter aftertaste...
The real question buried in all this is just what was written on this blog over the past few days: to what extent is this a toxic loan problem and not a subprime problem? Those who believe this is a subprime loan problem calculate the scope and believe it will be contained. Those who see it as toxic loans overlaying a falling overpriced house market take the opposite approach.
arbogast and Anthony Fleming:
With regard to banks there are two circumstances which may be causing some confusion:
I fully expect to see the latter happen a few times this year.
bit from theHousingbubbleblog
From Fortune. Amid the chaos of the escalating subprime mortgage crisis, the three major credit-rating agencies, Fitch, Moodys and Standard & Poors, have been voices of calm. But what if theyre wrong? Its not just their reputations, already tarnished by their failure to give investors timely warning of the Enron or WorldCom implosions, that are at stake, but possibly the housing market itself.
Critics have their doubts. A paper co-authored by Rosner and Joseph Mason, a visiting scholar at the FDIC, argues that if home prices depreciate, even investment-grade CDOs will suffer significant losses.
Janet Tavakoli, who runs Tavakoli Structured Finance, points out that AA-rated tranches of CDOs backed by subprime mortgage paper now yield far more than AA-rated debt backed by other assets - a sign that the market doesnt trust the ratings.
No one believes the ratings have any value, she says. Opined Grants Interest Rate Observer: We are willing to bet that the agencies assigned too little weight to greed, ignorance, and soft criminality.
Yet another symptom of the housing sickness - crime:
"Homeowners are drawn to Antioch by its big, relatively inexpensive houses, new schools and suburban safety. But now the housing market is softening up. Antioch's big homes are vacant and absentee landlords are turning to Section 8 tenants to pay the rent.
abc7news.com: 3/19/07
Anthony Fleming, Ameriquest losing their name at the Rangers' stadium brings back fond memories of Y2K and the dotcom implosion. I knew back in 2000 when the negative-earnings negative-cashflow dotcoms were recklessly throwing unearned money away at every opportunity, the game was definitely over.
Same goes for the mortgage game.
wally- "The real question buried in all this is just what was written on this blog over the past few days: to what extent is this a toxic loan problem and not a subprime problem?"
Wally is absolutely right. Consider the media. They focused on the subprime segment, which not coincidentally was the initial focus of the financial community, and seem convinced that the problem is "containable". Now, the financial community is beginning to talk about a wider problem. It could take weeks, if not months, before the media gets the message and realizes that this is really a "toxic loan problem".
SD
"If the Fed anticipates a slowing for some reason in the economy they will flood the system with money to make borrowing easy." "Good example of this is the period right after 9/11."
The FED is not a proactive organization, they are reactive to old data and drive monetary policy by looking in the rear view mirror. I dont think they anticipated 9-11, the banking system was freezing up and they reacted by flooding the system with liquidity and other measures.
Sorry if that is what you meant but there is a difference between anticpating a shock or reacting after one has taken place.
When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and "predatory" mortgages. We'll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.
But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending.
Safe Haven | Don't Blame the Market for Housing Bubble
The only honest politician in Washington IMHOP.
The time bomb schedule:
http://www.autodogmatic.com/forum/viewtopic.php?p=1226#1226
ot to worry - option ARMs don't reset for two more years.
Truly amazing chart ...
In one sense Ron Paul is correct but in another sense he is i think naive about the implode scenario that would occur if the Fed did no carry on meddling.
Yal, Fred W, you know that CR provided a link to that Credit Suisse report, right? The folks on antidogmatic don't seem to be aware of that.
Sorry, autodogmatic, duh.
Another mortgage mystery...
If two homes in a tract sell for x dollars, then all other homes in that tract can simultaneously refi/HELOC up to x dollars. However, if all the homes in the tract were simultaneously put up for sale then none of them would fetch anywhere near x dollars.
Is it possible that companies, the private equity industry etc have also taken out toxic loans? maybe more subtley, but the same principles.
Citi HELOC:
Low rates
* Variable APR as low as Prime minus 2.26% (currently 5.99% variable APR) for 6 months1.
* The variable rate after 6 months can be as low as Prime minus 0.76% (currently 7.49% variable APR)1.
Flexible financing
* Loans range from $10,000 to $1,000,000.
* Withdraw funds as you need them.</i>
Another look back into history;
Franklin D. Roosevelt, First Fireside Chat—March 12, 1933
I am hearing that the new way to pay the DP is for the seller to provide "phantom equity".
The buyer can show that he is paying a down payment and does not need a 100% LTV loan.
Te seller makes the sale at "current market price" and his neighbors are not mad - he does not "loose face" for selling too low.
The R/E agent makes the commission even if he gives a 10% discount in form of "finder's fee" to the seller
The Loan broker just does not need to know.
Subprime lender gets a sub-subprime loan, this has got to be predatory lending;
MarketWatch.com
Yal,
Regarding the reset schedule you posted: it can be a bit misleading in the case of Option Arms.
Tanta's recent OA post showed there are two parallel "reset" tracks for this product. One is the normal reset schedule presumably captured by the autodogmatic chart. The second is the "recast" schedule. Loans made in '05 with a 110% cap will recast in '07, for instance.
Of the two, the recast schedule is MUCH more important, as it results in faster and steeper payment shock to the borrower.
not to worry - option ARMs don't reset for two more years.
The thing I read out of that chart is that the pain is gonna be extended.
We have our 1st wave of FCs starting, with another wave coming Q3-4. That action is gonna be nasty, and the only way they can get it off the books within 2 years is aggressive haircuts.
If that doesn't drown folks, the tide that starts rolling in July 09 will keep everybody underwater for a long, long time.
A REIT managed by a hedge fund swoops in to buy subprime mortgages.
Fortress-managed REIT steps into subprime mortgage crisis - MarketWatch
"Newcastle to buy $1.7 bln subprime portfolio
Mortgage crisis has created opportunity, Fortress-backed REIT says"
dr strangemoney add "Dark Ages America" by Morris Berman to the reading list. It is an excellent review of the destruction on national economies by the financialization of economy.
Berman analyzes the American economy and compares it to various historical economies from Rome forward. He presents a persuasive case that the American economy is following the same historical path of other economies that have been destroyed by financialization of their economy.