"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Friday, March 23, 2007

US housing stocks 20% higher than 1 year ago - coitus interruptus - a messy way to go

The National Association of Realtors (NAR) report Total US home sales were at 6.94 million-unit per year rate in February 2006 and has dropped to 6.69 Mn, this year.

US Housing stock rose to 3.7 mn ( 3.0 Mn in Feb 206) existing homes for sale equivalent to a supply of 6.7 months sales . Current inventory is way down from October's record of 3.86 Mn.

The 5 year nationwide housing boom expanded home - ownership to a record number of U.S. households - a record 69.3 % of U.S. households are home owners. Now the defaulters are kicking in , failing uber optimistic subprime mortgage companies are going bust or being sold at deep discounts.....and those unsold houses keep stacking up. 3 Mn. 12 months ago, 3.75 Mn. today.

Reality Bite No 1-From July 1989 to January 1991 new house home sales slumped 45% and about 1.1 Mn. jobs or 1% of all U.S. jobs were lost.
Subprime lenders :
Ameriquest Mortgage Co. in Irvine
California; Ownit Mortgage Solutions LLC
WMC Mortgage Corp., a subsidiary of General Electric Co., in Woodland Hills, California Mortgage Lenders Network USA Inc. in Middletown, Connecticut
Fremont General Corp (U.S. Federal Deposit Insurance Corp. stopped them making loans 2 weeks ago)
..... have between them slimmed payrolls by more than 5,600 workers in the past year and many more are going daily.

It is now increasingly accepted that the aggressive sub prime market is going to see foreclosures between 1.5 Mn and 2.00 Mn in the next 18n months. The main causes ;

1. Borrowers didn't have to provide tax returns or other evidence of income
2. Finance exceeded 100 % or more of the home's value
Adjustable-rate mortgages with artificially low introductory “teaser” rates
4. "Option” payment plans that allowed borrowers to defer interest
5. Fraud by purchasers who
misrepresented themselves or their finances to a lender - often buyers "flipping" sales to generate capital returns.
6. Re-mortgaging , so folks could treat their house as an ATM - buy that boat, take that break, pay for the bride's dress etc., (variation on point 2 above) Cry of "this one's on the House!"

Reality Bite No 2-
Outstanding mortgage debt has increased by $9.5 trillion in the past 4 years

Securitisation and Credit Derivatives

Of course the debt starts with Mr & Mrs John Doe - it leads to a long trail of what the Wall Street Money Jugglers called credit derivatives and a strange beast called collateralized debt obligations, or CDOs.

Apparently it all began many years ago when a smart guy called Lewis Ranieri, was working as an investment banker at the old Salomon Brothers. His BIG idea was to buy mortgages from bank lenders, bundling them up and issuing bonds.

The bonds were "secured" on property - monthly payments from homeowners was used to pay interest on the bonds, and, hey presto!, when the bonds matured the principal was repaid once all the mortgages had been paid down or refinanced.

Great idea and it worked well, but like all good ideas it got copied and now those parcels of mortgages, sliced'n'diced up into parcels (or collateralized debt obligations, or CDOs) of AAA down to -ZZZZ and sold on, and on, offering higher yields and greater risk all along the way. (The other trick was to call these things asset-backed securities AKA ABS's made the people who handled these things..well..happy, if not secure)

Great idea, but like all great ideas it was based on certain market assumptions - the principal assumption was based on an ignorance that the sub-prime market was set to explode - for a really good explanation go here to Sudden Debt how Mr & Mrs John Doe's mortgage fed the flames kindled by the Financial Engineers in the back orifices of Wall / Threadneedle Street.

The reason this market has exploded was simple ... there was no other way to keep the market afloat while everyone was seeing the purchasing power of their (frozen) pay cut as the twin deficits soared and latterly as the Fed stepped up and doubled interest rates.

The result ? Predictable and predicted -from bubble creation to bubble popping .. it has imply been just another one way funnel to channel wealth to the elite It has been intentional ... those in the know made out like bandits - the trick now the market is well and truly fucked ... is coitus interruptus - just judging the right time to pull out.

The kicker is ... this bust coincides with the biggest and costliest fuck up in US Foreign Policy. This bust isn't like 1991 - then the US had won the Cold War and went on to win the Gulf War.
Now it's hard to find anything the United States is in the process of winning.

The good news is that Dubya is safe (asassinations / impeachment excluded ) for another 2 years... just keep your eyes on the Bond auctions and the Euro/Dollar/Sterling rates.


Nouriel Roubin @ RGE Monior has a succesion of recent and worthy articles about the sub-prime fall-out....

“I Am Shocked, Shocked to Find that Abusive Lending, Fraud, Predatory Lending Fueled the Subprime Disaster!”

"Effectively measured subprime, near prime and dangerous lending was close to 50% of mortgage originations in 2005-2006"

"From the Subprime Mortgage Carnage to the Coming Subprime Credit Cards and Subprime Auto Loans Meltdown "

" .....already serious signs of contagion to other credit spreads (CDS spreads on major brokers being now near junk, CDX, Itraxx, CMBX, swap spreads all significantly up); and increases in all sorts of measures of market volatility and risk aversion."

"Who is to Blame for the Mortgage Carnage and Coming Financial Disaster? Unregulated Free Market Fundamentalism Zealotry"

"The bubble party is over. It will be a bumpy ride from now on for global financial markets and for the US and global economy.

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