US mortgage situation getting worse...

[Michael]

This thread was originally posted on August 8th, 2008.

Much of the present problems in the US mortgage and mortgage securities markets over the last year were caused by some seriously shoddy mortgages issued back in 2006.

Apparently, it is now becoming clear that mortgages issued in 2007 are actually worse. These mortgages are showing delinquent rates several times higher than the 2006 vintage that has caused so much trouble already (Countrywide Financial, Bear Sterns and IndyMac and now Fannie Mae and Freddie Mac)

This does not bode well for the US banking and/or housing sector...

Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30.

Source WSJ (http://online.wsj.com/article/SB121805947661818327.html?mod=hps_us_whats_news)

[Michael]

Here are some recovered posts from this thread...

Whenever you here a guest economist on say NPR or other media outlets they usually say when they think this will all blow over and economic growth will pick back up and it seems like every time the estimates in general are pushed back. Now they are saying hopefully next year. Now people are starting to default on loans that are given to people with better credit.

The American economy is running on huge public and private debt for many years. An enormous current-account deficit has made them depended on foreign capital. Unless some drastic changes happen it was never a question of if but when this system would face a massive crisis. The mortgage/credit crisis is a chance to make some painful but necessary changes. But I doubt that the powers that be will take this opportunity.

Yes, this the way I see it too. That long running 'current accounts' deficit shows that the US economy is totally dependent on foreign capital coming in. The loss of the 'premium' on US currency is reducing the rate of foreign capital coming in and that seems to have created a downward spiral that is deflating or stagnating the value of fixed assets (ie. property). That in turn has popped a speculative housing bubble that was being driven by too-easy mortgage terms.

Indeed, degregulation seems to be a potential source of the problem. The guarentees given to Fannie Mae and Freddy Mac seems to have given retail banks a free ride in giving out bad-credit-risk mortgages and just handing off that mortage-risk onto the big mortgage securities companies (Fannie and Freddie) who bundle the mortgages up for further reselling on the mortgage-backed securities market (i.e. the game Bear Stearns was playing).

At Fannie and Freddie .... and even at the private investment banks .... the profits were privatized but the risks were socialized. The collapse of Fannie and Freddie would have caused a catastrophe. The government didn't have much of a choice rather than bailing them out. But the whole thing is a good example for bad regulation. The best solution for the taxpayer and the economy would have been to nationalize Fannie and Freddie, break them up and sell them on. Of course the problem would have been, that formally nationalizing the twins would have doubled the public debt. But only in bookkeeping terms, the liability is already implicit anyway with the guarantees they were given.


Well, the problems at Fannie and Freddie seem to be just getting worse.

The earlier 'first attempt' to deal with the problem was a half-assed solution and didn't really work. It is getting close to full bailout time...

Fannie and Freddie need to be 'nationalized' and let the shareholders get burned. There is no other solution available. Anything else is just more trouble. Letting Fannie and Freddie play an undefined hybrid role of state agent and private enterprise is just not working. The debt already belongs to the state, the problem has to be dealt with.

NEW YORK (CNNMoney.com) -- The number of troubled banks on the government's watch list grew dramatically last quarter.

The Federal Deposit Insurance Corp. reported Tuesday that the number of firms on its so-called problem bank list grew to 117 during the second quarter - its highest level since the middle of 2003. There were 90 banks on the problem list in the first quarter.

Read More (http://money.cnn.com/2008/08/26/news/economy/fdic_banks/index.htm)

This is further evidence that the US economy is not anywhere close to launching a recovery (as the cheerleaders on Wall Street and the media analysts always predict is just around the corner).

While the US is clearly entering a protracted period of a 'recessionary' like environment, and by most measures the present US situation is eerily like the Japanese situation (circa 1991/92), I think it is reasonable to suggest that the US economy is in for a longer and harder recession than it has seen in many decades, but overall, it is still likely to recover faster than Japan's decade-long slump. I'd say that forecasts of a US recovery in the 1st quarter of 2010 seems on target.

What's up with the US economy anywy?

Car makers, airlines, banks ... wherever you look .... it's all in a shambles.

US Defense contractors are doing very well - record profits. US multinational energy companies are all doing very well - record profits. US multinational agriculture is also doing very well. Any company that is connected to the US government is generally doing very well. "Government contracting" is the fastest growing source of 'nouveau billionaires' in the US.

I'd say the problem with US cars and airlines is a problem that was easily predicted ten years ago. With autos, it is the Big-3 automakers that are to blame (totally incompetant management - shareholders ought to sue). With airlines, it is Reagan's deregulation of airlines that is the culpret. It is darn near impossible for any airline to profit under the present US regulatory regime.

[partofme]

For the most part I stick with my previous statement in that according to most analysts we are not getting close to a turnaround and that the worst has yet to hit most people. One thing that did surprise me is that Warren Buffet wrote a column in The New York Times the other day suggesting it's a great time to buy stocks although he did say that is for a much longer term prospect than the likely length of this downturn.

[Dominick]

One aspect of this is that some banks are raising their interest rate towards people who save money in short term low risk products in an effort to compete for the remaining or dislodged investors.
A clear case of fighting a disease with more of it. Can these banks afford the increased pay-outs ? Maybe in the short term, but they're creating a new bubble here.
Nope, the basic problem isn't gone.

[Americano]

For the most part I stick with my previous statement in that according to most analysts we are not getting close to a turnaround and that the worst has yet to hit most people. One thing that did surprise me is that Warren Buffet wrote a column in The New York Times the other day suggesting it's a great time to buy stocks although he did say that is for a much longer term prospect than the likely length of this downturn.

Easy for Warren Buffett to say as his recent 'stock' investments are preferred shares with warrants. That means he receives a predetermined 'dividend', 10% in instances I've read about, regardless of company performance. In the event of liquidation he's at the top of the list for repayment, actually in front of traditional creditors, and if the companies flourish the warrants allow a conversion of his preferred shares to equity.

[Michael]

One aspect of this is that some banks are raising their interest rate towards people who save money in short term low risk products in an effort to compete for the remaining or dislodged investors.
A clear case of fighting a disease with more of it. Can these banks afford the increased pay-outs ? Maybe in the short term, but they're creating a new bubble here.
Nope, the basic problem isn't gone.
Not really. I think this is good news actually.

One big problem with banking lately has been the way banks have distained 'boring old despostors' as a source of finance - prefering to borrow on overnight markets and money market funds and whatnot to finance their game.

Good to see bankers getting back to the 'old way' of doing banking.

[Michael]

Easy for Warren Buffett to say as his recent 'stock' investments are preferred shares with warrants. That means he receives a predetermined 'dividend', 10% in instances I've read about, regardless of company performance. In the event of liquidation he's at the top of the list for repayment, actually in front of traditional creditors, and if the companies flourish the warrants allow a conversion of his preferred shares to equity.
I must say that this is the first time I've seen a legitimate critique raised about Warren Buffett. Normally, he's very kosher about everything.

But writing newspaper editorials about 'its a good time to invest' coming from someone getting preferential investment treatment does leave a bad taste. That's not how Buffett earned his reputation. A few more things like this and he won't have any reputation at all - other than just another self-serving plutocrat (and there's no shortage of those around).

[Americano]

I must say that this is the first time I've seen a legitimate critique raised about Warren Buffett. Normally, he's very kosher about everything.

But writing newspaper editorials about 'its a good time to invest' coming from someone getting preferential investment treatment does leave a bad taste. That's not how Buffett earned his reputation. A few more things like this and he won't have any reputation at all - other than just another self-serving plutocrat (and there's no shortage of those around).

I admire Buffett, he's the one who originally, years ago, sounded the alarm about engineered financial derivatives. IMO he feels patriotic with his comment about trying to shore up equity markets and the average person wouldn't know the difference between common and preferred shares.