He biggest dilemma(for me) is that so many people are at cross purposes with so much money at stake that the only response is legal with but one "winner".

"I would only post a chart like that with the caveot.."owner-occupied purchases are reported by loan originator"
alan

Exactly, so owner-occupied is really about 30% reported as such.

BTW, Bailout Ben is a little bitch. (Sorry, I had to get that off my chest).

Those maps are extraordinarily intersting to me, especially the piggy backed loans. That will help make me a lot of money.

Weatherman, it's been like a year or so since the classic CR "vicious cycle" charts and post, no? I mean it's not revolutionary or new, but something that every economist learns in Econ 101, no?

Those charts are proof that something can be beautiful and butt ugly at the same time. I'd make a containment joke, but I have to believe they're going to be going out of fashion.

I don't know which is worse - the spectacle of Komrade Ben "playing dumb", or the theater of the absurd that is our U.S. Congress.

Komrade Ben deliberately overlooks the obvious fact that it was 100% LTV, pick-a-payment and other non-traditional loans that created the conditions for homeowners to get quickly upside down. The fact that he has broken ranks with most of the GOP and is calling for banks to just "eat it" does seem to have a whiff of desperation to it.

Meanwhile, Barney Frank wants to hold hearings into why banks won't give you a loan to buy an overpriced, rapidly depreciating asset:

Why must we suffer fools like this?

I guess Barney couldn't be bothered to look into a few more serious matters, like the U.S. constitution being treated as toilet paper by Bernanke, Paulson and co.

In New Mexico, where I live, the red counties for a high percentage of loans for non owner occupied, correlates nicely with the vacation home areas. That seems like a different demographic than areas where it was speculative rental property. (Not that there hasn't been speculation in recreational property too.)

BTW somewhat OT:

I just got the biggest most monster electricity bill I've ever had this time of year.

Has this happened to anybody else?

Honestly if I were struggling to pay a mortgage it would probably break me.

If I had a mortgage and my neighbor was getting his principal reduced as a reward for not paying his mortgage, wouldn't it make sense for me to stop paying my mortgage?

"ac writes:

BTW somewhat OT:

I just got the biggest most monster electricity bill I've ever had this time of year.

Has this happened to anybody else?"

No, but let that be a lesson to you. Don't let Bailout Ben stay at your house with his electric vibrator.

If I had a mortgage and my neighbor was getting his principal reduced as a reward for not paying his mortgage, wouldn't it make sense for me to stop paying my mortgage?

That is correct.

In fact you might want to get a head start on having your principal reduced by stopping your payments now.

I suggest everybody with a mortgage just send your lender a copy of Bernanke's speech on principal reduction instead of a check.

These are great graphs, CR. You've really done some nifty analysis today.

Take a look at these maps through the lens of my theory that the permanent "toxic zone" in the U.S. is within 150 mile radius of Toledo, OH.

Toledo is in the northwest corner of Ohio. Look especially at the first two maps, Change in Mortgage Delinquency by County and Change in House Price Index by County. '

One of the more revealing trends shown by these graphs is the mortgage delinquency rates in New England. I've spent some time traveling through New England and it's a little shocking to see how low the standards of living of some people, particularly the elderly, have sunk. They have lost their manufacturing base in most of New England. But also, there is huge impact from winter home heating costs in these areas that could be impacting mortgage delinquency.

Along with Maine, New Hampshire and Vermont, I think the 150-mile radius of Toledo area has become toxic. That means: 1) manufacturing and jobs base is permanently gone; 2) taxes and govt. debts are high; 3) quality of life and services are declining; and 4) local economies will just keep getting worse, with no bottom. These are permanent economic dead zones of decay and Out-migration, and their urban and social infrastructures are already in the process of collapse.

Somebody asked if in a previous post if I have physic powers. No, I don't have any.

I just try to interpret incoming data with an open mind, including all the great stuff CR produces daily.

Nobody else (that I know of) has yet called the 150-mile dead zone around Toledo. Based on confirmation of these charts, I'm now calling the same decay dynamic in Maine, NH and VT.

As bad as AZ and FL are, they will eventually bounce back. CA is the big variable left, and what happens to CA may be the real wild card in how long and deep the coming recessions will be.

These are perfect for the map room in the new George Bush Presidential Library at SMU in Dallas.

In great part because we had a world war pull us out but at enormous social & personal cost - of course the BIGGEST factor in our favor was that 99.9% of that war was fought on other folks turf - that didn't hurt our chances..

I have a problem with the war argument after looking at the GDP data -- it appears to me that the US economy began growing very rapidly in 1934.

Was that driven by the War?

Also how about the 2 depressions prior to that? Were they brought to an end by wars or New Deals? (I don't know; I'm asking.) Or depressions that have occured in other countries (like the recent depression in Indonesia or the very severe recession in South Korea)?

I used make the war argument myself, but I don't buy into it as much now.

Before we get too hard on Komrade Ben, why is no one in Congress, save Ron Paul, even asking the right questions? Since when did the scope of the Federal Reserve chairman's job go from a fairly narrow one, making mundane decisions on monetary and fiscal policies, to morph into the power to decide which private institutions are worthy of public support through the levying of an implicit tax on the American people? What the bejeezus happened to the rule of law?

Will Congress stand idly by while the Federal reserve and the executive branch cuts their nuts off?

The Democrats could have had a field day holding hearings on this, from now 'til election day. Obama could have brought this up before Pennsylvania and instead weeks of shameless race baiting, we could have had debate about the future of the country.

Instead of lions, we have a bunch of neutered sheep running the country.

BTW, what is up with the word "quintile." I like my liquor and my maps in fifths.

I have a problem with the war argument after looking at the GDP data -- it appears to me that the US economy began growing very rapidly in 1934.

It fell back a lot by '36. Some of it was 'dust bowl' - some of it state budget cut backs offsetting federal stimulus. But by '36 it was almost back to the beginning. It wasn't until the late 30s that things really picked up - supporting the allied effort in the early days of the war prior to Pearl.

If you want to get an idea of how big the war effort was - economically - consider this: The Manhattan Project was consuming one seventh of all the electricity produced in the US circa 1944-45 (from Rhodes, 'The Making of the Atomic Bomb')... that was electrical capacity that was highly under-utilized or non-existent prior to the war. There are lots of war stories like that - from ship building to the B29 project. Huge ramp up

In the map of Change in House Price Index by County (Q. IV 2006 to Q. IV 2007), it looks like prices in the entire eastern half of Massachusetts got hammered, along with Ulster and Sullivan Counties, in New York.

(Good! Keep plunging!)

Anonymous 11:08 wuz me.

So let's say we are facing insolvency and a systematic banking failure...

mp said:
If something isn't done immediately, this thing will fall of its own weight. Gravity will do its job.

If gravity is allowed to solve the problem and the system liquidates, you can kiss the American middle class goodbye--and that's YOU--for at least a generation.

This was quoted from the thread on similar topic 2 months ago. It's been two month's, has anyone thought of something?

ac, understood that to the current crop of cretins we've elected, covering their asses is more important than doing their jobs, but this is no time to retreat into fatalism.

We have a system of checks and balances, where each branch of government has limits to its' authority. If one branch fails to check a blatant usurpation of its' power, it renders itself toothless and irrelevant, and lays the groundwork for a constitutional crisis. You can bet that Hillary is taking notes on how easily Congress can be "rolled".

Does anyone have an historical example of one branch of govt blowing off another so blatantly?
FDR's court packing attempt comes to mind.

"When the party is over who is going to clean up?"

I usually "hire" my children. I think our gov't wants to do the same.

Banking has never been a free market; it is a highly regulated business that governments have had to repeatedly bail out over the centuries. However, the only "realistic" alternative is to return to the barter system.
bond guy | 05.05.08 - 11:14 pm | #

Hell even barter isn't 'free' - you still have social rules & norms & 'conventions' rooted in socially acceptable practices.

There never was, is or will be a totally 'free market'... trade & transaction are cut from the same social cloth as 'governance' even if primitive. A totally 'free market' separate from social constraint is like one hand clapping or a magnetic 'monopole' - impossible by definition.

The question is how much social/political interference & who decides (arbitrates & regulates)?

So let's say we are facing insolvency and a systematic banking failure...

This was quoted from the thread on similar topic 2 months ago. It's been two month's, has anyone thought of something?

What gets me is that everybody talks like there's some clear cut solution that will avert disaster if we simply had the resolve to go that way.

But I don't see it.

I mean so far we've been doing something (cutting interest rates) that on the surface isn't really that controversial and has been taken for granted as something that's beneficial. And it's rapidly getting to the point where people won't be able to drive their cars after a few more months of this.

How am I supposed to belive that anyone really knows what the right thing to do is?

It seems like the "obvious" solution so far is making things worse, not better.

["Rep. Barney Frank, D-Mass., said Monday that the House Financial Services Committee that he chairs will hold a May 21 hearing to try to find out why so-called jumbo mortgages remain difficult to get, and continue to carry high interest rates, despite new rules that took effect April 1.

Frank will try to get answers from mortgage bankers, Wall Street financiers and government-sponsored mortgage firms Fannie Mae and Freddie Mac.

"I am disappointed," Frank said in response to an audience question after a speech to a Mortgage Bankers Association convention. "We fought very hard to raise the loan limits for Fannie and Freddie, and there have been a lot of problems in implementation."]

Has he thought about maybe, just maybe, the lenders are having trouble QUALIFYING people for these enormous loans! And, that perhaps, just perhaps, they are priced higher because they carry more RISK!

It seems like the "obvious" solution so far is making things worse, not better.

That we don't know 'cause we can't live the parallel path and compare outcomes... run a 'bail out BS' test then run a simultaneous 'BS fails' placebo under the same conditions and compare.

We'll never know - but that doesn't mean we won't live the test we choose (or have chosen for us). Good or bad.

So here is probably a good reason why Ben is so nervous :

DOUBTS RAISED ON BIG BACKERS OF MORTGAGES - NY Times

"Though the companies’ main regulator, James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, has voiced strong confidence in the companies, a high-ranking member of his staff said some officials had begun considering the worst. “It’s not irrational to be thinking about a bailout,” said that person, who requested anonymity, fearing dismissal. "

"$19.9 billion of “unrealized losses” on mortgage-related investments, neither company had reduced its earnings to reflect those declines. That is because they judged the losses to be temporary — in essence wagering that the mortgage market would recover before those assets were sold. Such a wager is permitted by the rules but difficult for outsiders to analyze."

"But the biggest risk, analysts say, is that both companies are betting that the housing market will rebound by 2010. If the housing malaise lasts longer, unexpected losses could overwhelm their reserves, starting a chain of events that could result in a federal bailout."

So, you see, with the AltA and option Arm wave coming soon to a theatre near you, that decline through 2010 could very well happen, especially if FM and FM are dealing with jumbos, which are likely to be in the worst markets. The thing is, just CA alone could sink these turds, due to the enormous relative market cap of the housing there and enormity of the extent of overvaluation.

I smell eventual taxpayer bailout.

"Imagine playing a board game with a friend.......at his place and it is his game.After awhile it is clear that you are winning and your friend is going to lose. What does he do? He simply changes the rules so that you lose. Hmm.
Anonymous"

What pansy do you play with? I knock the board over and start again.

Rep. Barney Frank, D-Mass., said Monday that the House Financial Services Committee that he chairs will hold a May 21 hearing to try to find out why so-called jumbo mortgages remain difficult to get, and continue to carry high interest rates, despite new rules that took effect April 1.

Because people in the United States aren't creditworthy or financially responsible?

Maybe his next hearing will be to investigate why we don't give more concealed handgun permits to 3-year-olds.

Falling home prices do not hurt the economy any more than falling car prices. After all, you don't think your car is worth more than you paid for it, do you? Why should a house ever be worth more than you paid for it? It's older, more weathered, and needs constant maintenance.

Robert Prechter has pointed out that after the Great Depression, in the early 1940s, there were great estates in Cape Cod and the other maritime areas of Massachusetts which sold for 5 cents on the dollar, compared to the 1920s.

Falling home prices do not hurt the economy any more than falling car prices. After all, you don't think your car is worth more than you paid for it, do you? Why should a house ever be worth more than you paid for it? It's older, more weathered, and needs constant maintenance.

Because this is how banks make money, and if banks don't make money than we are doomed!

I suppose people could all use prosper.com or some-similar service however... but in the meantime we need banks to make money. I don't understand either, I belong to a Credit Union... I think they are in trouble too but I can't tell how much trouble they are in.

DH@TH writes:
Has anyone looked at the possibility of illegal aliens in these Southwest states as being a contributing factor in fraudulent loans and the ability to walk away (and head south)?
DH@TH

Actually, guys I know who sell into this market say they make the best people to owner finance. They have cash for down payments, work hard and don't want to head south in any case.

I just moved to Contra Costa county, outside of SF, and the housing market is ugly. Houses that sold for $500K a year ago are being offered for $400K, and there must not be many offers because almost every street has one "for sale" sign. One condo complex I drive by has about six of them all right next to each other. Can't imagine what would happen if we went into a recession. Gotta stop building up inventory before we think of a recovery.

Elvis, even though you've got graphs (and maybe a few charts, too) past performance is no guarantee of future results.

But, seriously: Why should the value of a house go up? If a car has a limited useful life, so does a house.

Tanta touched on this some time back, and I can confirm her explanation. Mortgage traders don't know how to price the pre-payment risk on jumbos. There's even concerns about the modelling of prepayments on conventional MBS.

Well my kneejerk reaction is that people have caused so much damage and misery with mortgages it seems like we should have more hearings on why people are getting mortgages not on why people aren't getting them.

IIRC towards the end of the Great Depression people were horrified at the invention of 15 year home loans.

"One day these things are going to destroy the country."

That's how I remember it, but I'm too lazy to go back and look it up.

barely,
Yes and take away the Constitution and the president and the United States would probably have been a republic of France long ago. What ifs are moronic.

bond guy writes:

Tanta touched on this some time back, and I can confirm her explanation. Mortgage traders don't know how to price the pre-payment risk on jumbos. There's even concerns about the modelling of prepayments on conventional MBS.

I agree. I just finished Stone and Zissu's book and they don't really touch much on the effect of delinquencies/foreclosures on MBS/CMO prices. But if you take a 2% foreclosure rate forward 30 years (without adjusting for prepayments, interest rates, etc) that's not much of a survival rate. These babies are priced based on cash flows and when there's nobody in the house there's no cash a flowing. No wonder even the AAA stuff is down 50%. If you're under water, those piggybacks have pretty much fallen off to zero.

suppose people could all use prosper.com or some-similar service however... but in the meantime we need banks to make money. I don't understand either, I belong to a Credit Union... I think they are in trouble too but I can't tell how much trouble they are in.
YLSP | 05.05.08 - 11:45 pm | #

The trouble with a lot of folks on this board - myself included - is we don't understand the whole system. We can only see our own personal Idaho.

Banking is a lot more than just an ATM & place to get free toasters. Its all the commercial transactions - HUGE ON GOING EVERYDAY BEHIND THE SCENES transactions that they are worried about.

Like will the coal company ship coal to the power generating plant to sell power to your utility so you can turn on the lights... little sacks of money don't go with those rail cars to the power plant... nor do you have to slug nickels into a coin box on the light pole to get power to your house... it is all done on CREDIT... INVISIBLE UBIQUITOUS CREDIT... if we ever go to 'pay as you go'... we will then know what it is like to live in Zimbabwe.

Seriously - at the center of all this invisible infrastructure & commerce is the banking system - its how they all transfer stuff & services on nothing more than 'trust' - if these intermediaries go bonkers we all go down.

I believe that is what mp is suggesting - middle class existence is absolutely 100% dependent on a solid invisible banking system.

You have no idea how bad it can get until you've worked for a company that has to pay 'COD' for all its supplies. I've supplied some of these plants (COD no less)- it sucks beyond your imagination - for workers too, they get sent home w/no pay on moments notice if the company either runs out of stuff to work on ('cause the don't have cash to pay the supplier up front) OR they don't have cash to pay the workers...

The consumer banking system can go tits up and not have a huge impact... nuisance but not EOTWAWKI... but losing commercial banking & finance is a whole other thing. That's what they are trying to avoid at all cost.

El Cliffo,
I cannot imagine your point other than you are insane. I own a house, although I could care less. However, home prices historically increase when you buy low. All asset classes move in braod cycles, from greed to fear and back again. Buy low, sell high. If you don't like the history, maybe you should become God and start history over. Otherwise, your argument lacks anything except ignorance of asset cycles. When you buy low you should expect home prices to increase.

1913 - It is kinda hard to read.

I think saying "rhetorical question" is better than "hypothetical question" because I think there are some subtle reasons why the value of a house could be expected, but not necessarily predicted, to go up. One valid reason is that the Chairman of the Federal Reserve Board, Ben Bernanke, owns a house, and he'd probably like to see its value go up.

1913 - It is kinda hard to read.
awgee | 05.06.08 - 12:15 am | #

Got it - but it appears they are way beyond the original statutory mandate - even Volcker has suggested that. And from what I can see with my poor historical vision - beyond the established precedent too.

That's as I suspected.

Bernanke needs to grow a pair.

Where's Volcker when you need him?

Once, again, are you guys just drunk tonight or are you going to start arguing that a zebra should be solid instead of striped even though it is striped?
Elvis | 05.06.08 - 12:16 am | #

Patriot has changed a lot of things. Basically congress & the courts have laid down buns up for the executive. Not a good precedent. I suppose the fed is saying..."If Rummy & Dick can have fun, why not we too?"

The thing that really amazed me was that supposedly conservative GOP congress critters fought for Patriot so hard... I remember asking conservative buddies of mine who were for Patriot... if they'd STILL be in favor of it if Hillary was elected Pres & Patriot was still in effect for her... their reply was:

"Oh a GOP congress would never let HER have that kind of power... she'd ABUSE it!"

That was before the 2006 elections. I've talked to them since then - pretty grim bunch though I think they will luck out - McCain will be the beneficiary, not 'Billary'. If that's being lucky...

El Cliffo,
Why must there be rise and falls? I dunno? Maybe because there are. If you don't like history, just ignore it and maybe it will go away.

Once, again, are you guys just drunk tonight or are you going to start arguing that a zebra should be solid instead of striped even though it is striped?

images.ibsys.com/2004/0413/3000428_200X150.jpg

What was your point again?

or at least the gunshot murder rate would be lower.

Here's my answer to why house prices should go up:

They should go up if they provide residence in close proximity to an economy with rapidly-increasing incomes.

Period.

I don't think too many US cities have matched that criteria of late. Nor will they, I suspect, in the near future.

Crime and black market seems to do okay with very little credit however... invest in briefcases and guns!
YLSP | 05.06.08 - 12:30 am | #

My sister did white collar crime prosecution at DOJ... underworld is HUGELY dependent on commercial banking. Want to shut down the mafia - attack money laundering. Seriously.

She said that in the 80s something like 20-25% of the economic activity in south Florida was drug trade related... they couldn't prove it but it was highly suspected to be that high... and a lot of that 'activity' was financial services related to money laundering & such.

After this housing bust Florida might go back to its roots...

tj - It was all cast in stone years ago. The only question is whether we get there via fire or ice. Looks like Ben's thinking fire.

BTW, my last post was in response to this one, much earlier in the thread:

El Cliffo writes:
"Why should a house ever be worth more than you paid for it? It's older, more weathered, and needs constant maintenance."

Goodnight now.

I'm normally the naive patsy in these conversations however... the way I described it seemed to be more like the way things are done in Warcraft-type games...

Real life is weirder the WOW - believe me.

I'm not really trying to argue per se with what would really happen in the nuts&bolts, boots-on-the-ground sense, merely just thinking about what could rise up out of the ashes.

Look at a place like Argentina after their default they are about the best you can hope for after 'the ashes' - that is if we end up in real ashes.

Everyone points to Japan - we should be so lucky. Remember Japan never hit 'ashes'... they stagnated (smoldered)... lots better than ashes from a human perspective. If our banks really crash we'll blow past Japan's troubles fast.

If we are really unlucky & get bad leadership simultaneously it will look a lot more like Zimbabwe. That country was pretty prosperous once (built on injustice but prosperous none the less). No law says we can't do as badly if we have leadership that bad.

The fed is really, really trying hard to avoid an 'ashes' scenario. Commercial banking is at the core - for good or bad.

However as pointed out by many here - the fed's 'avoidance plan' might be the driver getting us there more assuredly if not faster too.

I don't know... but I get why they don't want to go there.

It's sort of a Catch-22.
ShortCourage | 05.06.08 - 1:16 am | #

Its moving from 'liquidity' to 'solvency'... the question is how many are incurably insolvent? A few, a lot, all?

Who knows.

Meanwhile BB wants to slow down the foreclosure train... good luck with that.

I was looking for one of my favorite songs from when I still really worked for a living ('I hate banks'). No luck there. However!

Elvis, if you're still out there, this is for you:

YouTube - Mojo Nixon & Skid Roper "(619) 239-KING"

Dryfly, I didn't see if anyone answered your question yet on the Fed's legal grounds. First of all I'm not a securities guy, and honestly, I have not read the Federal Reserves charter or enabling legislation (Sominex works much better for those sleepless nights). However, generally what you're talking about is something called Administrative law, an arcane legal area if there ever was one. It's a hybrid that evolved because Congress could not and did not want to legislate, or even predict, every microscopic detail in a proposed area of law. So they created the concept of Administrative law. The basic idea is that Congress specifies the fundamental structure and breath of powers for a governmental agency (such as the EPA) and then grants it a proxy to legislate in Congress' name in that area with what is called "rulemaking authority". The idea being that following a notice and comment process the agency can then "create" new law to govern the area it been given custody over by publishing these rules in the Federal Register so long as it follows due process, is reasonable, doesn't conflict with existing Congressional legislation, and is within the original grant of authority from Congress. As you can guess MANY battles have been fought over the years over just what is effective grant of authority and/or proper and reasonable rulemaking by an agency (I don't even want to discuss Federal Court deference to an agency's reasonable rulemaking, I've said enough already to get the libertarian's all stirred up).

Once Congress grant's powers to an agency and/or an effective rulemaking has occurred everything else is just agency use of those powers and/or agency enforcement actions of promulgated rules and laws.

From what I've seen commented on Bernanke and the Fed's actions recently, in particular in reference to Bear (and again I ain't read the Federal Reserve act myself), Gentle Ben was stretching his grant of Congressional Legislative authority until it squeaked to get the job done. Power versus authority - Did they have the power? Yep. Did they have the authority? Dunno, but arguably yes.

That being said, I don't think anyone is going to say he shouldn't have given what was going on and the lack of action from other Federal/Congressional parties. When the five alarm fire is going, no one is going to complain if the forestry service shows up to fight it long before the fire station does.

Interesting that Ben is still highlighting sub-prime as though the problem is largely ‘contained’ to the Untermensch.

‘About one quarter of subprime adjustable-rate mortgages are currently 90 days or more delinquent or in foreclosure. Delinquency rates also have increased in the prime and near-prime segments of the mortgage market, although not nearly so much as in the subprime sector.’

This is really a loan affordability problem. Downey Savings (which claims low exposure to sub-prime loans) reports the following in their recently filed Q1’08 10Q:

‘A higher incidence of delinquency is expected when the minimum payments reset on our adjustable rate loans subject to negative amortization or interest only payments ... . For example, as of March 31, 2008, there were $976 million of loans subject to negative amortization or with interest only payments within our loans held for investment that have not been modified but had first time payment recasts since December 31, 2006, of which 36.1% were delinquent 30 or more days at March 31, 2008.'

These are ALT-A and Prime loans - 1/3 of which go delinquent when they hit their recast. DSL forecasts $3,243M loans will recast in ’08 and another $1,958M in ’09.

Can't be much longer.

I think we are at the top of a bear rally here, and possible looking down the face of a steep cliff - in terms of equity valuations.

So I am responding with the ultra short ETF (QID) - but I would like some comments.

Mainly, I am staying away from futures because I do not want to fed-fight, or get stuck in another rally, with a expiration date looming ... So the idea is, I buy the QID and just sit on it. If I am wrong for 6-12 months, no problem - as long as I am right in the end.

Is this reasonable ? Or is there some erosion of capital, or other downside risk involved in long term holding of something like QID ?

Also, any comments as to what would happen to these ultra short ETFs (QID) if there was an actual market panic - exchange closed, 20-30% drop - etc. Any possibility they would behave in unexpected fashion ?

Mental Ben strikes again:

Oil futures rose to an all-time high near $121 a barrel in Asian electronic trading on Nymex, fueled by worries about threats to supply and a weakening dollar.

Also, any comments as to what would happen to these ultra short ETFs (QID) if there was an actual market panic - exchange closed, 20-30% drop - etc. Any possibility they would behave in unexpected fashion?

Well, I'm no forensic accountant ... but from what I know, they achieve their -2x through a combination of options and futures swaps. So in an October 1987 type scenario, your biggest potential risk to that 40-50% windfall would be counterparty risk.

If one or more counterparties to those swaps - or, worse yet, the options clearinghouse - goes, to use a memorable phrase from yesterday, "tango uniform", then I'd guess your ETF would wind up standing in a creditors' line, with no guarantee as to how much of that 50% you'd get your hands on, or how soon.

Rich could probably fill in the gaps better than I.

Re: ultrashorts and a meltdown. I took a quick look since I hold some of them. My impression is that they get the 2x leverage via futures. Their large cash balance is held in some kind of liquid asset (money market, treasuries, etc.). If things get bad enough that we have widespread counterparty failure or exchange failure, you are likely to be in a long line waiting for some or all of your upside. Your 'principal' would appear to be somewhat better protected. However, my guess is that riding them to the point the system is spitting out white hot sparks is a bad idea.

Unless I'm misinterpreting the data there seems to be a correlation among non-owner occupied homes, delinquencies and high LTV's as evidenced by piggyback loans. Missing from Bernanke's comments is any mention of targeting assistance in the form of principal reductions to owner occupied homes. Originally, there had seemed to be a general consensus that investors ought not to be bailed out. Has that gone by the boards?

Susan,

Two things.
1. Bill Gross is up to his eyeballs in morgage related paper. He isn't a disinterested observer so his comments tend to be a bit self-serving.
2. What hump are you worried about? You can make your payments! The house has utility beyond just an investment. It provides you with shelter. Get over the fact you made a bad investment and lost money. It happens every day in every kind of market. Would you whining if you lost money in the stock market?