Depressions like the one we are about to experience are manufactured, not accidental. The central banks know exactly what they are doing. Its like a type of wealth confiscation.
Mortgage resets: Record bill coming due Billions in subprime ARMs will be subject to higher payments. By Les Christie, CNNMoney.com staff writer August 13 2007: 11:45 AM EDT NEW YORK (CNNMoney.com) -- More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market. Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low "teaser" rates for the first two or three years of the loan may see their monthly mortgage payments climb by35 percentor more. Consumer groups and politicians worry that hundreds of thousands of subprime ARM borrowers will be unable to keep up with their mortgage payments and will lose their homes. "In October alone more than $50 billion in ARMs will reset," according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi. A buyer in 2005 with poor credit and limited means might have signed on for a $200,000 2/28 hybrid ARM, locking in a fixed rate of 4 percent for two years. After paying $955 a month, the bill would now be set to spike to $1,331, a39 percent increase. Until recently, rising home prices bailed out many ARM borrowers in trouble. They could raise cash with cash-out refinancings or home equity lines of credit. If worse came to worse, they could sell the house and get some money back. But prices have stabilized or slipped in many markets. (Latest home prices.) As a result, Doug Duncan, chief economist for the Mortgage Bankers Association (MBA), is expecting as many as 600,000 home owners will get into trouble with perhaps half of them actually losing their homes. One of the reasons for the worsening situation, according to Zandi, is that just as the number of subprime ARMs being underwritten was reaching a high, the quality of loans was hitting new lows. "There were increasingly poor quality loans made starting in the spring of 2005," he said, "with the poorest of all made during the fall of 2006." Lenders approved many borrowers who had little chance of being able to afford the payments two and three years out. They approved applications without any proof of income or assets ("liar loans") and others that barely could make the low teaser-rate payments. Some borrowers chose interest-only ARMs, which left the principal of the loan untouched. Regulators are urging tighter standards. "Lenders wanted to keep the pipeline flowing," said Zandi, "and were hopeful that prices would grow again." The hardest hit areas will fall into two categories, according to Duncan. The regions battered by basic economic storms - think Detroit, Cleveland, St. Louis and other old industrial centers - and high-growth areas where home markets went crazy earlier in the 2000s and where home prices are now falling Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets. "Prices there are falling quickly, particularly in Florida and Las Vegas," he said. (Florida foreclosures are set to spike.) There will be more downward pressure on prices as delinquencies, foreclosures and short sales add inventory to markets. Another factor is that regulators and lenders are attempting to tighten loan underwriting standards, meaning fewer credit-damaged applicants will get approved, lowering demand for homes. The tightening mortgage-loan standards could also result in short-term foreclosure spikes. Home owners with resetting ARMs, for example, may not qualify for refinancing under the stricter oversight. That could lock borrowers into unaffordable loans and they could lose their homes. Another increase in supply, according to Josh Rosner, managing director at financial research firm Graham Fisher & Co, will be from investment properties coming back on the market. There was a precipitous burst of buying homes for investment purposes earlier in the decade. In 2005, about 40 percent of all purchases were of second homes and the majority of these were for investment purposes. As returns on these investment properties decline, owners will bail out, increasing the listing backlog and depressing prices further. The effect of a foreclosure rise and home price slide on the nation's economy may be hard to predict but it will have an impact. Pimco's Gross: Subprime crisis not isolated
Housing Bubble: Myth or Reality? By Frank Shostak Posted on 3/4/2003 Federal Reserve Chairman Alan Greenspan said on Thursday, during questioning by the Senate's special committee on aging, that he does not believe that a housing price bubble exists on a national level in the United States. "The notion of a bubble bursting and the whole price level coming down seems to me as far as a national nationwide phenomenon, is really quite unlikely," Greenspan said. He does say that it is unrealistic to believe that housing prices will increase at the current rate, but as for a bubble, he says no way. Is he right? To provide an answer to this one needs to establish, or define, exactly what a bubble is. We can define a bubble as activities that spring up on the back of loose monetary policy of the central bank. In other words, in the absence of monetary pumping these activities would not emerge. Since bubble activities are not self-funded, their emergence must come at the expense of various self-funded or productive activities. This means that less real funding is left for productive activities, which in turn undermines those activities. In short, monetary pumping gives rise to the misallocation of resources, which as a rule manifests itself through a relative increase in non-productive activities against productive activities. When new money is created, its effect is not felt instantaneously across all market sectors. The effect moves from one individual to another individual and thus from one market to another market. Monetary pumping generates bubble activities across all markets as time goes by. Once, however, the central bank tightens its monetary stance, i.e. reduces monetary pumping, this undermines various bubble activities. The bubble bursts. Since monetary pumping generates bubble activities across all markets, obviously the eventual bursting of the bubbles will permeate all marketsâincluding the housing market. As a rule the act of bursting bubbles, or the liquidation of nonproductive activities, is set in motion by a tighter monetary stance of the central bank. A tighter stance purges various nonproductive activities thereby eliminating past excesses, which in turn lowers the ratio of nonproductive-to-productive activities, so to speak. In short, a tighter stance brings harmony to the structure of production and sets the foundation for a sustainable economic revival. A situation however, can occur where the bursting of bubbles takes place despite an easy stance by the central bank. This can emerge when the pool of real funding begins to shrink. Historically, between 1970 to 1994 there was a 12-month lag between changes in the federal funds rate and its effect on industrial production (see chart). Since 1995 onward, the inverse correlation between the lagged fed funds rate and industrial activity ceased to exist. We suggest that this has something to do with the possibility that the pool of real funding is in trouble. In other words, as long as the pool of real funding is growing the loose monetary policies of the central bank appear to "work". This is because the nonproductive activities supported by loose monetary policies masquerade as wealth generating activities. However, this illusion is shattered once the pool of real funding stops growing. There is the possibility that this is what may be taking place at present. Despite the aggressive lowering of the fed funds rate since the end of 2000, industrial activity in relation to its long term trend has remained depressed We suspect that the prolonged monetary abuses of the Fed may have severely undermined the ability of the economy to generate sustainable real production in the future. In short, loose monetary policy sets in motion consumption that is not supported by a corresponding production and thereby dilutes the pool of real funding. A major increase in US monetary pumping began in the early 80's with the advent of financial deregulation, which, for all its merits in permitting financial entrepreneurship, also removed various restrictions on banks' lending "out of thin air." The quantity of money AMS in relation to the trend between 1959â1979; i.e., the trend prior to financial deregulation, can assist in assessing the magnitude of monetary pumping since 1980 onwards. Thus in December 2002, money AMS stood at 181% above the trend (see chart). This massive monetary expansion has been accompanied by a steep downtrend in the federal funds rate. From 17.61% reached in April 1980, the federal funds rate had collapsed to 1.25% as of February this year (see chart). If the pool of real funding is in trouble at present then this is likely to undermine various markets including the housing market. Moreover, the more aggressive the Fed's loose stance is, the worse it is for the productive capacity of the economy. This in turn raises the likelihood that the liquidation of past excesses is likely to be imposed in earnest this time around. Observe that the likely burst of the housing market bubble is on account of the decline in the pool of real funding and not a tighter stance on the part of the Fed. This contradicts the popular view, which holds that as long as the Fed keeps interest rates at low levels the housing market will remain strong. The magnitude of the housing price bubble is depicted in the following chart in terms of the median price of new houses in relation to the historical trend between 1963â1979. In this regard the median price stood at 73% above the trend in December 2002. There are already signs that the housing market may not be far from its peak. Purchases of new homes dipped to their lowest level in a year in January. The Commerce Department said new home sales fell to a seasonally adjusted annual rate of 914,000 units in January, the slowest pace since January 2002. The percentage drop, at 15.1 percent, was the biggest one-month decline in nine years. Our monetary analysis raises the likelihood that the cyclical component of home sales is likely to remain under pressure (see chart). Furthermore, year-on-year, the median price of new houses fell by 2.6% in January after rising by 6.7% in the previous month. Although commercial bank real estate loans remain buoyant, the likely weakening of the housing market will put a brake on the growth momentum of these loans (see chart). This in turn is likely to weaken the growth momentum of money AMS and further undermine various nonproductive activities. There are some indications that demand for mortgages may be weakening. The MBA mortgage applications index fell by 7.5% in the week ending February 21 from the previous week (see chart). Moreover in the week ending February 19 commercial bank real estate loans fell by almost $10 billion from the previous week. http://www.mises.org/story/1177#
what else is Al Grrenspan gonna say.... "yeah, i created the housing bubble, took FED rate to almost nothing and recommended that these dopes get ARMs right when rates were bottoming; and then i retired. ill be dead before you unravel tthis mess, good luck!"
this IS a housing bubble. absolutely zero doubt about it charts - it looks like a bubble market participants - behaved in a manic bubble-state it has every attribute of a classic asset bubble - EVERY one, ridiculous leverage, NEW PARADIGM (tm), etc. etc. for me, the defining moment was CNBC interviewed two vegas strippers who had become real estate speculators!! i am SO excited for it to pop. so many opp's out there
I'm taking Greenies side and will stick to the two later indictments that inflation psychos, the gold bugs and other mumblers hate him for. Just last night Faber said AG was as big a disaster for the nation as Bush. The first came generally at the time of Asian, Russian, LTCM crises. Those events required bold action by the preeminent CB to avoid world market panic. What has been lost to history imo is just how bad the Y2K banking problem was perceived to be. Starting around 1997, all the regulators - at the Fed's behest - put the banks through a schedule of hell that would have shocked Dante at how costly and rigorous the compliance demands were. The big banks spent billions of dollars (Wells Fargos' tab alone was either 300M or 500M I remember) to get ready and the costs as a % of capitalization for tiny banks and thrifts was as burdensome. Then when all was said and done, there was still a huge problem - what about every other bank outside of the US in this interconnected world - the ones in low tech or poor countries? Would wires, credits and international settlements work or would world trade and banking collapse? Next, the 9/11 attacks. Again, who could know how bad the worldwide fallout would be? His answer to everyone, including our enemies, was that of a great patriot and banker - We aren't going down over this! In both cases, he correctly responded with overwhelming financial force to the full resources of the preeminent CB to maintain banking confidence the world over. What's wrong with that? Would you want him to err on the side of undershooting threats like this? Yeah, Y2K seems silly now, but no one can say that about the horrible week when we awaited the reopening on 9/21. Finally, my memory may be bad on this but I think his speech on the ARMs has been misinterpreted years after. I'm almost sure from hearing it or reading it ac then that it was backward looking, not forward looking, or some kind of advice to Americans of any kind. Instead, he said something like if you had a fixed from roughly the mid to late 90s on down you paid thousands more in interest than you would have with an ARM - and that's accurate. People with fixed were smug losers whether they'll admit it now or not. Also, pretty sure he also a figure on how many billions Americans left on the table. It was a lot.
NEW YORK (CNNMoney.com) -- More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market. Just for amusement... I don't know what it is, but if the average mortgage was 1/2 million. 2 million x 1/2 million = 1,000,000,000,000 If 10% walk away from their loans, it is 10 trillion dollars that someone is going to have to float. They will need to sell the all this real estate in a market of descending prices and tighter borrowing standards. Then you have the next wave of rate adjustments...