Will 2010 be the 2nd leg of the housing collapse?

Discussion in 'Economics' started by DisciplinedHedg, Jan 10, 2010.

  1. taken from seekingalpha:

    US Government's New Housing Bubble
    by Jeff Nielson
    December 11, 2009

    As readers here have heard regularly, it is absolutely certain that there will be another down-leg for the U.S. housing market, beginning no later than spring of next year. We already know the latest date, since that is when the next spike in U.S. mortgage resets kicks-in.

    There are two differences between the first spike in mortgage resets and the second. Not only will the second spike last for at least two years (longer than the first), but it will be much nastier. A chart from Credit Suisse spells this out perfectly.


    Roughly 75% of these mortgages are either “option-ARM” loans, “Alt-A” loans, or “agency” loans (i.e. from Fannie (FNM)/Freddie (FRE)/FHA), with still a few, remaining sub-prime loans sprinkled into the mix. Put another way, only about ¼ of the these mortgages are “prime” - a word which certainly doesn't mean what it used to, given that these “prime” mortgages are also experiencing their highest level of defaults in history.

    The largest category are the option-ARMs, the category of loans which has already had the highest level of defaults. With the vast majority of these mortgage-holders having made minimum payments (or less) on these mortgages, their monthly mortgage payments will increase to multiples of their current payments – even with interest rates at record-lows.

    The next-largest category in this group, the so-called “Alt-A” loans were supposed to be of a better quality than sub-prime. However, with default rates on Alt-A mortgages approaching the levels for sub-prime (given that many Alt-A mortgages were also “liar's loans”), it is clear that this supposed higher quality was yet one more fiction in this massive bubble.

    Then we have the “agency” mortgages, from the money-hemorrhaging entities Fannie Mae, Freddie Mac, and now the FHA. If the massive losses which these quasi-government entities have already suffered on previous loans isn't enough to frighten people about the future defaults coming from this source, then their current lending practices should certainly do the trick.

    Providing over 90% of all mortgage-funding for new home loans, the U.S. government has essentially nationalized the U.S. mortgage-market (“insured” by taxpayers), but with the free-loading banker-oligarchs able to insert themselves as “middlemen” - taking a cut of profits for themselves, while having zero, personal risk (the new “business model” for the U.S. banking oligarchy).

    If this level of risk for the U.S. government is not proof enough of insanity, in itself, then its “lending standards” (or lack thereof) clearly pushes it past that threshhold. The same U.S. government which is taking miniscule down-payments on these mortgages (90% of which are only 4% or less) with one hand, is handing out an $8,000 cheque (again paid for by taxpayers) with the other hand.

    The net effect is that for virtually every new mortgage which these government entities are initiating of $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.

    To perfect their new Ponzi-scheme for the U.S. housing market, the Federal Reserve allows the banksters to “borrow” money at 0%. The banksters then “deposit” this money with the Federal Reserve as a “savings account” for which they collect interest, while paying no interest on the “loan”. In other words the Federal Reserve is simply giving the banksters free money (they are currently collecting interest on over $1 trillion of these “loans”).

    But the money doesn't actually sit there. Instead the Fed uses that money to buy U.S. mortgage bonds – the only thing keeping U.S. mortgage rates several percent lower than they would be otherwise. So, to begin with, the new Ponzi-scheme implodes as soon as the U.S. government stops “buying” its own mortgage bonds (with 100% of the money used to “buy” those bonds simply being printed on Bernanke's magic printing-press).

    Obviously, even the U.S. government can only soak-up so many trillions of dollars in this manner without taking the U.S. dollar down to zero. So we already know this next Ponzi-scheme will end badly. The U.S. government is initiating millions of new mortgages, to questionable buyers, at interest rates which can only remain artificially low for as long as the U.S. keeps “buying” all of its own mortgage bonds.

    However, this new (and even more fraudulent) bubble is taking place at a time when:

    U.S. mortgage defaults and delinquencies are at all-time record levels

    U.S. banks are holding millions of foreclosed properties off the market

    Millions more homes are already in the “foreclosure pipeline”

    U.S. unemployment continues to worsen (even the phony numbers)

    U.S. banks are still starving the economy of credit

    Record numbers of homeowners are already “underwater”

    A second, larger, worse spike in U.S. mortgage resets is about to begin

    Retiring baby-boomers need to sell at least $1 trillion in real estate

    Does this seem like the time that U.S. taxpayers should be bank-rolling the entire U.S. mortgage market, with most of those new mortgages being zero down-payment loans (and in many cases to people of questionable creditworthiness)?

    Keep this analysis in mind the next time you hear some clueless, talking-head talk about a “bottom” in the U.S. housing market.
  2. In the comments section, there seems to be a valid reason why the chart may long be outdated and no longer as negative.

    A commentor is saying basically that alot of the option ARMS have already defaulted, refinanced, or modified, so that going forward, there will be significantly fewer defaults despite what the chart suggests.

    The commenter even says he contacted Ivy Zelman, who constructed the now famous reset chart. She said expected the 2nd wave of defaults to be knocked down substantially due to defaults, refinancing, etc. that have already taken place.

    What say you guys?

    Is the chart still greatly valid as when it was when it foretold the 1st leg of the housing crisis? Or is it so lacking in up to date data that the situation is significantly different now?
  3. joe4422


    Would it make matters much better if half of the latter group were now gone?
  4. also combine this with the fact that the margin rate on prime optionARMs was much lower than on subprime ARMs.

    there's no question the upcoming recast will put pressure on the housing market and economy, but it won't be as severe as subprime collapse.
  5. ba1


    Think Alt A will be worst in markets that are already really bad e.g. California, AZ, NV, MI. Not expecting so much negative effect in places like Texas that will have population and economic growth.
  6. Perhaps the more important question will be "how much will government intervene, and what impact will that have"?
  7. Guess its time to put DXD (dow ultra short) and SKF (ultra short finance sector) back up on the radar, huh? :)
  8. Those will be good when the sentiment moves away from the notion that "money pump and policy can fix all the wrongs"..
  9. Here is something to put things in perspective. Dow monthly chart

    1. We are at 50% fib level now, but even if we went to 11000, I see major resistance ahead.

    2. Momentum on a monthly basis, JUST NOW turned above zero, which means this whole time, we were trading upstream. If you put a momentum line, thats say 28 in length and not 14 like I used, we are still VERY much in the red, in terms of market strength.

    3. On a weekly basis, we are trading below the 200sma. 200sma tends to be a very important level, and is often respected.

    On a technical basis, there isnt much to be happy about, unless I get extremely f---in rich from the next drop :)

  10. Perhaps most importantly, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth -- in the process, affecting the level of prices and employment.
    #10     Jan 11, 2010