WSJ: Subprime Pullback May Crimp Consumer Spending
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CalculatedRisk on Mon, 04/02/2007 - 9:54am (51 comments)
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Duh.
Duh again.
The author suggests that middle class completely overlooked this source of ...ahem... "income" while only the poor were extracting equity???
Drop that crack-pipe and slowly back away from the editor.
Well, it may not be as definitive as the NIPA but new car sales for many really do represent discretionary income. So how many months of disappointing sales does it take to rule out "X number of months does not make a trend"?
Morgan & Company, Inc. providing automotive news, research, analysis and
forecast services
Consuming asset appreciation is not new. About 1970 I went on a business trip to San Jose Ca for the first time and returned to describe to my wife what I named the "California Model" which was to spend $10K more than you made each year but ,since houses were going up $20K/year, you actually had a $10K/year savings rate (numbers approximate as I recall 1970). This "Model" appeared limited to middle class professionals and above.
Since then, it appears the model has spread nationally and (recently) to lower classes but it has been around for a while.
If the spokesperson said it, it must be true :
"A GMAC spokeswoman says that the lender has seen a slight uptick in auto-loan delinquencies but that losses remain at historically low levels. The lender has "developed a very strategic approach to the subprime auto-finance market that includes assessing risk and pricing appropriately," she says. "We will continue to manage risk and act in a prudent manner going forward." The lending arms of other auto companies don't have similar subprime-mortgage exposure."
Now let's see, they did a GRAND job assessing the risk in subprime housing, for sure, so you really have to think they are doing just as good on the auto side, oh, yes indeed.
BARFFFF>>>>>>
My favorite quote from the article:
"That suggests that there is a higher propensity among lower-income families to spend more money than they make," Mr. Fellowes says.
Also this:
"Even if the poorest customers curtail their spending, it shouldn't be enough to shake the economy off of its trajectory of moderate growth. In the cold science of economics, rich people who have more to spend matter more to the economy than the poorer folks who don't. According to the Labor Department's 2005 consumer expenditure survey, the lowest 40% of earners represent about $1.1 trillion, just a fifth of total consumer spending."
Who the hell is going to be buying a lot of the products that the rich folks are making?
So this is what the "ownership" society is like...
1930's, here we come
Just when I thought we was done
By and by, it's here again
It ain't my friend!
The times, they are ripe
Some weird stuff coming down the pipe!
How bad can it get?
Don't gimmie no more debt!
Kett, it's worse than that once you see how they came to write this article.
It's the exact analogy for consumer spending that people are still trying to make about subprime lending in general. Despite the fact that not only low income borrowers are taking out subprime loans, they still want to confine this to the people that dont matter to the economy (which coincidentally, are the same people that don't matter to WSJ editorial readers). Perhaps they can sweep then under the rug or, put them out with the garbage or something. Geez. So pesky these poor folks.
As if there isnt enough evidence already that MEW isnt confined to poor people, in fact, largely isnt poor people at all...it's more than likely linked to higher home prices, which are correlated with higher incomes, and/or shoddier loan terms (tons of jumbos, 80/20s, IOs, negams, etc).
This article will be pinned up in my hall of fame of wishful thinking.
This thing pretty much boils down to people making $50k trying to live like they make $100k, and people making $150k trying to live like they make $300k. That's the sweet spot of this particular $^!%storm.
Do they explain in that, uh, story, how poor people and poor people alone caused the American savings rate to go negative?
And that Alan Greenspan only takes direction from poor people -they told him to make this mess!
We need to round up those poor people and detain 'em without trials!
The poor have invade the Alt-A sector! (Of course, you read it on CR first)
M&T Bank's Alt-A mortgage warning sparks industry selloff - MarketWatch
A solution for a number of problems would be a government program to give a $20,000 voucher to 1,000,000 deserving low income tax payers each year. The only caveat is that they have to use it to buy a fuel efficient car from GM, Ford or Chrysler. Won't help automaker profitability because they don't know how to make money producing a fuel efficient car, but it will keep a bunch of folks employed and maybe give them a chance to be taken over by Honda and Toyota.
The $20 billion per year cost is modest compared to, say a new aircraft carrier (I work in the defense industry, so this is arguing against self interest here). The 1 million (or 2 or 3 million if we need more pump priming) can be selected at random and can be eligible for reselection after five years. We can justify the cost based on national defense and carbon emission control.
I'm not sure about the overall affects of the possible slowdown or the drop in MEW/consumer spending will be. I am however reminded that, from a purely mathematical standpoint, you need numbers both above and below to have an average. So while the average historical savings rate of U.S. may not be amongst the world's best, we may be in for a nasty regression to that mean as future savings rates go up and debt is paid off.
That will not be good at all for the near-term outlook on consumer spending or our consumer-based economy as a whole.
(For the sake of this argument, I'm ignoring the possibility that consumer savings rates have fundamentally changed and that "things are different this time.")
"In the cold science of economics, rich people who have more to spend matter more to the economy than the poorer folks who don't."
So money velocity gets no weight, eh? Somebody needs to send the report writers back to school I think.
Money available to poor folks tends to be spent quickly and at home, recycling multiple times in the economy and generating considerably more economic activity than that generated by rich folks; this was probably true even back in the 'good old days' when rich folks were spending more time actually engaged in capital formation rather than seeking economic rents.
Fremont General (FMT) auditor, Grant Thouton, just resigned.
A massive wave of defaults is set to hit the CDO (collateralised debt obligation) market following the sub-prime mortgage meltdown in the U.S., although this could take a year to play out, a fund manager told Reuters.
I do think a massive default cycle is about to start in the CDO market. Its mad. Sub-prime will create massive defaults, Francois Barthelemy told Reuters. The event that will destroy the CDO market has already happened. But it will take another year to trickle down. They (the holders of the CDOs) dont realise whats going to happen.
Bear Stearns makes a mortage "mod squad" to deal with foreclosures:
Bear Stearns Unit Sets Up Team to Avert Foreclosures (Update2) - Bloomberg.com
FMT Update:
UPDATE:
U.S. Securities and Exchange Commission
Office of the Chief Accountant
100 F Street, NE Washington, DC 20549
Re: Fremont General Corporation File No. 001-08007
Dear Sir or Madam:
We have read Item 4.01 of Form 8-K of Fremont General Corporation dated March 27, 2007. We believe it should be supplemented and, in part, amended as follows.
We believe that our communications to the Company as described in the third paragraph is a reportable event as described in to Item 4.01 of Form 8-K in accordance with Item 3.04(a)(1)(v)(C)(1)(i). Additionally, we communicated to the Company that in addition to its current operating environment and industry conditions, there were other significant events that have occurred at the Company that were a factor in our determination to expand the scope of our audit.
The third paragraph also notes that ...at no time did the Company either fail to provide to Grant Thornton any requested information on a timely basis..... During the course of the audit there were instances where the Company did not provide certain requested information to Grant Thornton on dates previously agreed upon with management. Additionally, as we resigned prior to completion of the audit, we are unable to evaluate or determine the completeness, sufficiency or timeliness of the information provided in response to our requests.
Very truly yours, GRANT THORNTON LLP (signed manually)"
This is the orignal filing:
Expired
M&T Bank had a nice miss today. Share's down 8.53% on a lower than expected profit outlook. Why? Well I guess they got lower than expected bids for their Alt-A mortgage paper. Well, well, well....it appears the credit markets are starting to say "no mas". Banks don't want to hold this crap on their books and investors don't want to buy this train wreck. So if the banks can't sell-off this risk they'll stop lending or they'll start getting slammed with direct loan losses and/or increased provisioning. The Fed will be closely watching how open the credit markets really are.
Winners and losers in the subprime shakeout:
Who's winning, and who will lose in subprime shakeout - MarketWatch
GT also resigns from LEND:
Form 8-K
lloyd, that's a scary second paragraph. GT asked for more info, to do a more thorough job, and supposedly they got it, and THEN they resigned? Lord knows what they saw in that, but I suspect it was largely criminal.
arrrgh, sorry Lloyd, I meant CRISPY, and I also meant the third paragraph from the link.
I don't know what it is, but if it scares Grant Thornton then by God it scares me.
This is the crux of the issue isn't it? Will the consumer back off or not?
I was not participating in this bro-ha-ha. I save at least 25% of what I earn.
I just don't drive Ferrari, (even though I know that I probably can).
I bet the people who make and sell man toys like jet skis, ATVs, boats, RVs, Harleys, etc aren't real happy, but there's thousands on thousands of nice suburban driveways and side yards full of this crap that got used once or twice and now sits there getting dirty. great use of the house ATM, dimwits.
I used to wonder how the shop guys at my old job who made half what I did managed to "afford" their big ex-urban houses and boats and 4x4s and dirt bikes and snowmobiles and such, til I found out how the sub-prime and MEW schemes worked. what a deal...
--bitter renter "well my gosh willya lookit the size of that savings account!"
"This is the crux of the issue isn't it? Will the consumer back off or not?"
Duh
actually, the crux is more like, "how much will consumer spending slump when consumers inevitably pull back?" And that is a matter of how many do so and to what extent those who do, pare back their spending. Clearly a lot of folks are going to be paring back to Ramen level this year, after thinking "credit cards make me feel like a millionaire".
I think we are well beyond the "will the consumer pull back?" point of inquiry. What do you think they are going to do, go on a spending spree? With what, exactly?
Reading articles like this makes you realize just how poorly the wealthy economists understand the behaviors and motivations of the families in the lowest 20% of the income brackets. This is unfortunate for many reasons, but a key one is that unlike the past this group has been a big contributor to this economic up cycle -- so their behaviors can also affect the down cycle to a greater degree than before.
First, let's understand that there are some pretty intelligent people in the low income range who have low income for lifestyle choices. Common examples are those who work for the Park Service or for non-profits. In addition, there are those who have a huge nest egg who are chosing to "give back", for example by teaching in public school at a rookie salary, who are in the low income brackett. There are also some pretty industrious low income people who come from dirt poor backgrounds with no education but are smart money people -- like the illegal immigrants who run maid or gardening services.
But those are the minority. The vast majority of those in the lower income groups are not smart when it comes to money matters. They make the common mistakes of assessing a loan (either car or house) by looking only at the monthly payment. They have no savings and rely on credit cards for emergencies or even for predictable costs like vacations and Christmas. And they are easy targets for the quasi-legal swindlers.
When these people are stuck financially it means pressure on everything. Yes, they are missing house payments, but they are also unable to dump the oversize pickup (sorry for the stereotype -- but oh so true) without declaring bankruptcy because they are upside down in the truck load to the tune of $10k or more.
The truck and the house are very important status symbols. For someone who works construction or retail, there aren't a lot of kudos to be had from the job -- success is measured in material things. So, when the early financial warnings start most of these people won't take heed -- they won't want to admit failure -- so they extend by putting more $$ on the credit cards.
When payments start getting missed we can only hope that they get to a credible financial advisor -- usually one of the local non-profit groups -- who will probably advise them to sell the home and put them on a tight budget with some actual savings. Unfortunately, most don't go there -- they either try to solve it themselves or worse, end up with a financial sheister who temporarily seems to solve the problem with refinance that will ultimately guarantee bankruptcy.
The article suggests that it will be lower-income Americans who cut back on their consumption, and the impact on the economy will be minor.
Not true. These lower-income Americans prop up a large number of businesses throughout the economy -- mostly in the retail sector -- and as the above analysis suggests, for most of those affected the "cut backs" will b
1930's, here we come
Just when I thought we was done
By and by, it's here again
It ain't my friend!
The times, they are ripe
Some weird stuff coming down the pipe!
How bad can it get?
Don't gimmie no more debt!
Yes it does look like 1930 all over again...especially in the Grammar Department.
There's a lot of low-income Americans who drink two lattes a day, rent videos, eat cheap restaurant meals, buy cars on EZ credit, buy PS3 consoles and games for the kiddies, clothing, and so on. If they cut back, the effect rolls up through the economy and multiplies itself through decreased employment, lower earnings and stock prices for consumer products corps, etc. And these factors all amplify each other.
As for the middle class homeowner: if he thinks that his home will not be the cash source that finances his retirement, he'll begin to (shudder) save. Look to further decreases in retail and service activity across the border, multiplied by loss of employment and reverse wealth effect on real estate and stock price drops.
I love our society: if you don't save for the future and you're broke when you're old, it's your own darned fault. But shopping is your patriotic duty, our prez and 99.7 percent of media messages say.
Brilliant commerical on the radio just now. This condo conversion project will give you 10x your credit score in incentives and you get the super special treatment if it is over 720.
I bet a lot more will be following suit on this offer trying to get better borrowers in the door.
No problem here, Starbucks just sent me a new HELOC credit card to charge my venti mocha no whip blah blah against.
Sorry to drift off topic, but Tanta had asked some questions in what is now a stale thread. Since some of us have day jobs, you, know, it's only now that I can get around to tossing in my 2 pfennings.
Commissioner's testimony on the FHA proposal
HUD Testimony - Michael Liu, Assistant Secretary for Public and Indian Housing, before the United States Senate Committee on Indian
Affairs, 2/25/04
Where the FHA proposal can be found, probably tomorrow
Search Results - THOMAS (Library of Congress)
GAO's take on FHA modernization
http://www.gao.gov/new.items/d07615t.pdf
Not exactly the epistomological hermaneutics of the econ profession's post post-modern ontology, but an anthropological take on the discipline
http://unicast.org/enclosures/life-econ-crop.pdf
And speaking of stale threads, for those of you who are producer fans, he pops up in a prior thread trying to get the last word. He does not succeed, at least so far. His stale posting, and my stale reply, at the bottom of the Comments in the following thread
Calculated Risk: Dr. Goolsbee: I’ll Stop Impersonating an Economist If You Quit Underwriting Mortgage Loans
People are still buying in sonoma county,and there are still a few 100% loans.not many,but some.i am a notary,among other things,and i'll be doing a signing tomorrow for an acquaintance who is buying a $600k fixer upper with a 100% 7 year i/o balloon.he plans to do the work himself,put 100k into it and sell for a profit in 2 years.yup.got it figured out.he told me it will assure that his retirement is comfortable.this is NOT someone who will look at the numbers,or ever admit he made a mistake.
there are still way too many stupid loans going through that will prevent any recovery even two years out...meanwhile, the garbage loans of two years back are tanking the current market...just no way in heck this turns out in any way but a long term disaster
more innovation ...
Home buyer's club
New down-payment funding idea draws regulators' attention
New down-payment funding idea draws regulators' attention - MarketWatch
Regarding DPFunder mentioned in that article
Mortgage Grapevine: DPFunder... A cautionary Tale.... MUST READ
Don't expect that fraud to be around for long. It is clearly a deceptive pratice.
How is dpfunder any more fraudulent than the seller providing a 'gift' to a 'nonprofit' who then 'gifts' the buyer? FHA has allowed that for 10 years. BTW - dpfunder was created by an exec from one of the 'nonprofits' - Ameridream, I think.
DPFunder sell a product of no value but only so the seller can 'earn' a commision. So instaed of it being reported as a 'gift', it is now 'earned income'. That sure sounds like a deceptive practice.
Correction, the buyer "earns" a commision.
(AP) LOS ANGELES The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.
We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole, Shulman wrote. For all practical purposes, the subprime market is in the process of shutting down.
Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.
For a housing market that has already witnessed housing starts decline
Well if Shulman is correct about housing starts @ 1.33M that will create quite a bit more vacant housing this year. Sales were running @ 848K in Feb. do the math
The so-called bottom feeders don't live on an island. Their contracted spending will be felt. No one mentions the prime buyers who lied and embezzled in order to get exotic loans that will cause foreclosure. There's more out there than anyone realizes.
As a dark hedge fund - Cerberus - snaps up GMAC and now maybe Chrysler do we recall that Cerberus guarded the gates of hell to ensure the dead could enter but never leave?
"This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
The best result in the end will be the worst in the beginning. We need a total collapse sooner rather than later...
This is interesting- from an article above:
"The riskiest, equity tranches are probably owned by Asian investors, such as Japanese institutions looking to higher yielding assets, Tintor added"
Very nice.. Japanese save meticuloulsly for years, only to have their MBS's defaulted on by subprime borrowers. Who get to keep all of their plasma TV's and Sony electronic goodies after they default on the loans.
Way to run an economy! Just give away your products basically to gain marketshare and give people lifetime employment...
Low income househols using MEWs? What is "Low Income" defined as in this case? Sorry jack, its middle class and upper middle class households going to the housing ATM.
An interesting article looking at subprime loan distribution in Ohio:
...73 percent of the subprime loans that have ignited the crisis were made in middle and upper income areas often suburbs in 2005, while just 27 percent were made in low and moderate income areas.
The trend applied in all area counties. Warren County had the highest percentage in the area 87 percent in middle and upper income areas.
Subprime lending has always been one of the steps to foreclosure. Usually a homeowner will refi a couple of times before finally losing the house, and the last couple loans will be subprime.
Fitch: Subprime Woes Extend to 2006 & Earlier Vintage SF CDOs
Fitch Ratings-Chicago/New York-02 April 2007: As the U.S. subprime market stresses continue to materialize, 2005 and 2006 vintage structured finance (SF) CDOs will be under greater ratings pressure as they have substantially larger concentrations of subprime RMBS, according to Fitch analysts in a new report. Ratings volatility arising from later vintage subprime RMBS will likely be experienced in 12-18 months as the actual loss experience becomes clearer, according to Senior Director Derek Miller.
'Though 2006 performance will be very poor, Fitch's more immediate concerns focus on near-term ratings volatility that will arise from earlier vintage subprime RMBS,' said Miller. 'Negative selection among borrowers due to prepayments is occurring simultaneously with the release of credit enhancement due to RMBS performance triggers passing, against the backdrop of a slowdown in the U.S. housing market.'
Mezzanine SF CDOs have the highest credit exposure to subprime RMBS through subordinate bonds (rated 'A' and lower) and appear to be most vulnerable, according to Fitch's study. More than 220 Fitch-rated high grade and mezzanine SF CDOs have exposure to U.S. subprime RMBS bonds, with U.S. CDOs averaging 44.7% exposure (compared to 22.7% for European SF CDOs). Of the 137 Fitch-rated SF CDOs currently with exposure to mezzanine subprime RMBS, 95 were issued in 2003 or after, with average exposure ranging from 43.3% to 71.3%
Approximately 3.2% of 2003 to 2006 vintage mezzanine SF CDO portfolios are comprised of below investment grade subprime RMBS, and 16% 'BBB-' assets. These RMBS assets, according to Senior Director Grant Bailey, 'are most at risk for default or downgrade due to their position in the capital structure.'
http://www.fitchratings.com/corporate/events/press_releases_detail.cfm?pr_id=350932