US mortgage crisis goes into meltdown By Ambrose Evans-Pritchard Last Updated: 1:15am GMT 24/02/2007 Panic has begun to sweep the sub-prime mortgage sector in the United States after the bankruptcy of 22 lenders over the past two months, setting off mass liquidation of housing loans packaged as securities. Analysts say the housing bust is pulling America into recession, citing a 14.4pc drop in housing starts The rapid deterioration could not come at a worse time for British bank HSBC, which has set aside $10.5bn (£5.4bn) to cover bad loans in the US. The cost of insuring against default on these loans has rocketed in recent weeks, from 50 basis points over Libor to 1,200, raising fears that a credit crunch could spread to the rest of the property market. Low-grade BBB-rated securities - measured by the ABX index - have crashed from near par of 100 in early November to 72.5 this week. Peter Schiff, head of Euro Pacific Capital, said the sector was in an unstoppable meltdown. "It's a self-perpetuating spiral: as sub-prime companies tighten lending they create even more defaults," he said. advertisementCalifornia's ResMae Mortgage filed for bankruptcy last week as it struggled to cope with defaults on a $7.7bn book of sub-prime loans issued last year, while Accredited Home Lenders in San Diego warned that bad debts had reached 7.18pc of its portfolio. HSBC chief executive Michael Geoghegan, who stepped in to take control of the US division earlier this month claiming "The buck stops at my door", has ousted top executives. But the worst may not be over for Household International, the property arm it acquired for $14.4bn in 2003 to capitalise on the housing boom. Rating agency Standard & Poor's is shifting its focus to the tier of debt above sub-prime, eyeing loans covering people viewed as better credit risks but who lack the steady income needed for prime status. S&P has placed 11 loan packages worth $146m on watch for a possible downgrade this week, saying it was most worried about "piggyback" second mortgages. "There is a potential danger of default on these deals," said credit strategist Robert Pollson. For now, the US Federal Reserve believes the damage can be contained. "I don't think there'll be a large impact on prime mortgages from the sub-prime market," said governor Susan Schmidt Bies. However, she warned of a "hidden" problem caused by sellers pulling property off the market. " The percentage of homes where nobody is living in them is at a record level. So the potential for inventory correction is still very high," she said. Nouriel Roubini, economics professor at New York University, says the housing bust is slowly pulling America into recession. He cites a 14.4pc drop in housing starts last month; an expected loss of 600,000 real estate jobs in 2007; a sharp fall in home equity withdrawals - down from 6pc of GDP at the top of the boom; and a squeeze as $1,000bn of mortgages are adjusted upwards this year to higher interest rates. Mr Roubini said: "America faces a 'reverse cycle' where a credit crunch has hit before the slowdown, a rare pattern. Normally, recession comes first, setting off credit troubles in its wake. We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present. If all this happening in what the consensus terms as a 'Goldilocks economy', what would happen if the economy slows down?"
I'm clueless. But my first question, somebody has to be on the opposite side of this "trade" (even if it the US govt to bail us out) Seems somebody has to be making money from the fallout. Aren't people hedged against this?
can a crises go into meltdown? Is that an oxymoron.......a crises that melts down is ending .........erm........and yes, every ying has a profitable yang......exactly what hedging is about.........
This is just the beginning. This process could easily take 3 years to resolve, causing much liquidity to dry up and GDP to slow dramatically in that interim period. Anyone who claims this will be contained to just subprime lending either lacks the empirical data, or is being disingenuous. http://www.bloomberg.com/news/marketsmag/mandl.pdf
we haven't even reached the creschendo of pain yet... the mbs indices on bloomberg workstation point that this recent upturn is still below 2002 highs.......... the "cds" of mbs's is trading higher and higher everyday...its costing more to insure against default in the portfolios and the dealers are making out like crazy on it.... all i can say to the rest of america.... smile like a doughnut and take it in....cause it's at the front door now, and it aint stoppin :eek:
Every real estate cycle is the same. Interest rates fall, houses become affordable, the smart money buys when the prices are at the lows before the interest rates even start falling, then buying picks up, people see that the prices are rising and the sales go off first at the asking price, then above the ask for a little while, then the central banks tighten and the market corrects because affordability is affected very dramatically by interest rates. Then the realtors are quoted as saying, "it is only temporary, etc." and then the subprime lenders start to get shaken out, prices continue to fall, realtors and lenders continue to live in the glory of the good days while sales fall to a trickle. Some will continue to believe that the glory will return shortly and sit in their realtors offices for years with almost no income, eventually you will see the realty offices shutting down and being converted to boutiques, or 99 cent stores. It averages a 7 to 12 year long cycle. We are at the part where some realtors are starting to try to hang on and the subprime lenders are getting shaken out and "analysts" are stumbling in saying "geez, there is a shakeout going on and prices/the sky is falling".
I think people tend to forget how long a trend will persist for. Given the size of the overhang in the market (supply of houses), it appears it will take many more years for this market to 'clear'. Throw in the fact that the demand side is now impacted by lenders reducing available credit, and you have a cycle which isn't close to being finished. Just think about commodity prices throughout the 90's. It took years of low prices and under-underinvestment before the economics of the industry improved. I don't think the housing market is even close to this level. But on the other, David Lereah says...
Yeah cause' you can refi when the rates come back...but you can't do much about too high of a purchase price...trouble is I am missing two things...the Smart and the Money... the smart money buys when the prices are at the lows before the interest rates even start falling