The Housing Crash Recession of 2007

[97silverlsc]

The Housing Crash Recession of 2007
By Dean Baker
t r u t h o u t | Columnist
http://www.truthout.org/docs_2006/120506S.shtml
Tuesday 05 December 2006

As we approach the end of 2006, the economy's prospects for next year appear more gloomy with each new piece of economic data. And, just like President Bush in his assessment of the situation in Iraq, the economic forecasters are gradually revising their forecasts downward, as it no longer appears credible to present the rosy pictures that they had been trying to sell.

The trouble began early in the year, when the housing boom that was supposed to continue forever turned into a housing bust. The rate of house price appreciation didn't just slow, as most economists predicted, nor did prices simply flatten in accordance with their revised predictions. House prices began to fall. Nationwide, house prices are now down between 1 percent and 2 percent from their levels at the same point in 2005. (The decline is between 4 percent and 5 percent, if we adjust for inflation.) The price declines in some of the most over-valued areas, like Washington, DC, and parts of Florida and California, have been considerably sharper.

In fact, the price declines are even larger than is shown in the data, because sellers now routinely make payments that are not captured in the contracted price, such as picking up some of the buyer's closing costs or making repairs to the house before the sale. Such practices were unheard of a year ago.

When the downturn in the housing market could no longer be denied, the economic forecasters assured us that the rest of the economy would remain strong. They noted the strength in non-residential construction, strong investment in equipment and software, and of course the resilience of consumers.

This picture is not panning out well either. The non-residential sector experienced a short boom earlier in the year. This should not have been a surprise. The housing boom pulled resources (workers and construction materials) away from the non-residential sector. In some of the areas with the most over-heated housing markets, it wasn't possible to get the workers needed to build stores, offices or other non-residential structures. This meant that when demand in the residential sector eased, resources could switch to meet the pent-up demand in the non-residential sector.

But, it was predictable that this boom would be short-lived. The residential sector is twice as large as the non-residential sector. And there just is not that much pent-up demand. There was serious overbuilding in the office and retail sectors in the late-90s boom, and the continued decline in manufacturing means demand for factory construction is limited. According to the most recent data, construction in the non-residential sector was already falling off by the end of the third quarter.

The boom in equipment and software investment also seems to have disappeared. The latest numbers in this sector have been negative also, suggesting that investment will be at best a very small positive in the economy in the next year.

This leaves us with our resilient consumer. The economic forecasters assure us that strong job growth, coupled with healthy wage growth and falling gas prices, will give consumers the money they need to keep spending.

Well this story does not look very good either. Job growth has actually been slowing over the course of the year, with the private sector adding less than 100,000 jobs on average for the last two months. Falling gas prices are a positive, but since no one had expected gas prices to soar to $3 a gallon, the fact that prices have fallen back to last year's levels does not give consumers that much of a boost. Finally, we are looking at modest real wage growth (at 1 percent annually), but this is not extraordinary and not enough to provide a very large boost to demand.

The more important part of the story for consumers is that they are losing the ability to borrow against their homes. Last year, consumers pulled more than $800 billion in equity out of their homes. Many people bought their homes with little or no money down, and then borrowed against their equity as quickly as their house price rose. Now that house prices have turned down, they have no further equity against which to borrow. This means that these consumers have no choice but to curtail their consumption.

The evidence for this falloff is spreading by the day. Projections of weak holiday sales and slumping car sales top the list. Throw in the reports of rapidly rising rates of mortgage delinquencies and defaults and you get a clear picture of rapidly growing distress.

Of course, with all sources of demand showing weakness, job growth will slump further, and we'll get our classic downward spiral: declining employment, falling income, falling consumption, and then further job loss. The story is not pretty, but unfortunately there is no way to prevent it. This downturn will be especially painful because it is associated with a crash of the housing bubble. This means both that many people will lose their life's savings and also that the recession is likely to be longer lasting than most.

The picture would not have been so dire if economists had been better able to do their job. Unfortunately, economic forecasters seem more interested in happy talk than economic analysis. Not one of the "Blue-Chip 50" forecasters saw the 2001 recession coming. The record seems no better this time around.

Unfortunately, no one ever holds the forecasters accountable. Even though they all missed the last recession, and just about all of them will have missed this recession, the same group will probably still be around to miss the next recession. Some workers, like dishwashers and custodians, teachers and truck drivers, have to meet performance standards. Economic forecasters apparently just have to show up to collect their paychecks.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.

 

[MAC1]

The Housing Crash Recession of 2007
By Dean Baker
t r u t h o u t | Columnist
http://www.truthout.org/docs_2006/120506S.shtml
Tuesday 05 December 2006
The more important part of the story for consumers is that they are losing the ability to borrow against their homes. Last year, consumers pulled more than $800 billion in equity out of their homes. Many people bought their homes with little or no money down, and then borrowed against their equity as quickly as their house price rose. Now that house prices have turned down, they have no further equity against which to borrow. This means that these consumers have no choice but to curtail their consumption.

And whose fault is it that consumers are borrowing too much money? President Bush's, of course! These Libs can't make up their minds. First, they say there's too much personal debt. Now the complaint is that Americans will have less money to borrow. Come on—make up your minds.

It's obvious Liberals aren't happy unless they're either complaining about something or contemplating bad news or some sort. The truth is that these Nancy Pelosi, Harry Reid, and Howard Dean Libs are so angry that President Bush's tax cuts worked that they're hoping against all odds that the economy will crash within the next two years so they can finally relieve their overwhelming frustration and envy of having to eat crow for the last 3 years while the economy booms.

 

[formerknown]

President Bush: the loser's favorite scapegoat for their personal fvck-ups!

 

[fossten]

More doom and gloom predictions. It must really suck to wake up and be Phil every day, upset at the world.

Isn't this the same website that predicted Karl Rove's indictment?

:bowrofl:

 

[biglou71]

Funny, I work at a MAJOR mortgage firm... and we have been on Overtime for the last two weeks and have been told it will probably continue for the next couple of months at least.

 

[fossten]

Find any American economy story from 2006, every one of them says "...contrary to predictions..." or "...surprising experts..."

These people don't know what's going to happen. They are wrong all the time.

 

[MrScalia]

Funny, I work at a MAJOR mortgage firm... and we have been on Overtime for the last two weeks and have been told it will probably continue for the next couple of months at least.

right ..... Ppl are selling before it goes even lower

 

[Calabrio]

right ..... Ppl are selling before it goes even lower

If people are selling, that means people are also buying.

The supply and demand curve is a wonderfully simple way to represent complex market forces.

When prices continue to rise, supply increases.
With inflated home prices, everyone decides to sell.
When the supply gets too high, competition means the prices have to fall.
When there are six houses on one street all for sale, the prices drop.

Prices correct. Home sales aren't flat, they are increasing, it's just that prices are dropping in most markets. This is completely normal, and GOOD!

Low interest rates mean houses are cheap, people buy more, supply is limited, so prices on homes rise. High prices mean more houses come to market. High supply means that prices fall competitively.


And if this weren't the case, I'd be reading scores of stories in the liberal media about how women and minorities are being squeezed out of the housing market. How they can't afford homes because "Republican's hate minorities."

There's no winning in this atmosphere.

 

[fossten]

Nice job of trolling, Phil. I noticed you haven't offered any of your own thoughts, but hey, why start now, right?

 

[97silverlsc]

Find any American economy story from 2006, every one of them says "...contrary to predictions..." or "...surprising experts..."

These people don't know what's going to happen. They are wrong all the time.

So you agree with the article?

 

[97silverlsc]

And whose fault is it that consumers are borrowing too much money? President Bush's, of course! These Libs can't make up their minds. First, they say there's too much personal debt. Now the complaint is that Americans will have less money to borrow. Come on—make up your minds.

It's obvious Liberals aren't happy unless they're either complaining about something or contemplating bad news or some sort. The truth is that these Nancy Pelosi, Harry Reid, and Howard Dean Libs are so angry that President Bush's tax cuts worked that they're hoping against all odds that the economy will crash within the next two years so they can finally relieve their overwhelming frustration and envy of having to eat crow for the last 3 years while the economy booms.

Where, o great one, does it say its Shrubs fault? Sheesh, you repugs need to get over your bitterness about losing the election already and move on.

 

[Vitas]

Where, o great one, does it say its Shrubs fault? Sheesh, you repugs need to get over your bitterness about losing the election already and move on.

Phil,

Please tell us in your own words what you see as the salient points of the article that inspired you to post it.

 

[97silverlsc]

I posted the article to point out that the rosy picture being painted about the economy by analysts just might not be so rosy.

 

[fossten]

So you agree with the article?

Still can't insert any original thoughts of your own, eh? Not falling for your drive-by trolling tactics.

 

[97silverlsc]

'No Money Down' Falls Flat
http://www.washingtonpost.com/wp-dyn/content/article/2007/03/13/AR2007031301733.html
By Steven Pearlstein
Wednesday, March 14, 2007; Page D01

Today's pop quiz involves some potentially exciting new products that mortgage bankers have come up with to make homeownership a reality for cash-strapped first-time buyers.


(a) The "balloon mortgage," in which the borrower pays only interest for 10 years before a big lump-sum payment is due.

(b) The "liar loan," in which the borrower is asked merely to state his annual income, without presenting any documentation.

(c) The "option ARM" loan, in which the borrower can pay less than the agreed-upon interest and principal payment, simply by adding to the outstanding balance of the loan.

(d) The "piggyback loan," in which a combination of a first and second mortgage eliminates the need for any down payment.

(e) The "teaser loan," which qualifies a borrower for a loan based on an artificially low initial interest rate, even though he or she doesn't have sufficient income to make the monthly payments when the interest rate is reset in two years.

(f) The "stretch loan," in which the borrower has to commit more than 50 percent of gross income to make the monthly payments.

(g) All of the above.

If you answered (g), congratulations! Not only do you qualify for a job as a mortgage banker, but you may also have a future as a Wall Street investment banker and a bank regulator.

No, folks, I'm not making this up. Not only has the industry embraced these "innovations," but it has also begun to combine various features into a single loan and offer it to high-risk borrowers. One cheeky lender went so far as to advertise what it dubbed its "NINJA" loan -- NINJA standing for "No Income, No Job and No Assets."

In fact, these innovative products are now so commonplace, they have been the driving force in the boom in the housing industry at least since 2005. They are a big reason why homeownership has increased from 65 percent of households to a record 69 percent. They help explain why outstanding mortgage debt has increased by $9.5 trillion in the past four years. And they are, unquestionably, a big factor behind the incredible run-up in home prices.


Now they are also a major reason the subprime mortgage market is melting down, why 1.5 million Americans may lose their homes to foreclosure and why hundreds of thousands of homes could be dumped on an already glutted market. They also represent a huge cloud hanging over Wall Street investment houses, which packaged and sold these mortgages to investors around the world.

How did we get to this point?

It began years ago when Lewis Ranieri, an investment banker at the old Salomon Brothers, dreamed up the idea of buying mortgages from bank lenders, bundling them and issuing bonds with the bundles as collateral. The monthly payments from homeowners were used to pay interest on the bonds, and principal was repaid once all the mortgages had been paid down or refinanced.

Thanks to Ranieri and his successors, almost anyone can originate a mortgage loan -- not just banks and big mortgage lenders, but any mortgage broker with a Web site and a phone. Some banks still keep the mortgages they write. But most other originators sell them to investment banks that package and "securitize" them. And because the originators make their money from fees and from selling the loans, they don't have much at risk if borrowers can't keep up with their payments.

And therein lies the problem: an incentive structure that encourages originators to write risky loans, collect the big fees and let someone else suffer the consequences.

This "moral hazard," as economists call it, has been magnified by another innovation in the capital markets. Instead of packaging entire mortgages, Wall Street came up with the idea of dividing them into "tranches." The safest tranche, which offers investors a relatively low interest rate, will be the first to be paid off if too many borrowers default and their houses are sold at foreclosure auction. The owners of the riskiest tranche, in contrast, will be the last to be paid, and thus have the biggest risk if too many houses are auctioned for less than the value of their loans. In return for this risk, their bonds offer the highest yield.

It was this ability to chop packages of mortgages into different risk tranches that really enabled the mortgage industry to rush headlong into all those new products and new markets -- in particular, the subprime market for borrowers with sketchy credit histories. Selling the safe tranches was easy, while the riskiest tranches appealed to the booming hedge-fund industry and other investors like pension funds desperate for anything offering a higher yield. So eager were global investors for these securities that when the housing market began to slow, they practically invited the mortgage bankers to keep generating new loans even if it meant they were riskier. The mortgage bankers were only too happy to oblige.

By the spring of 2005, the deterioration of lending standards was pretty clear. They were the subject of numerous eye-popping articles in The Post by my colleague Kirstin Downey. Regulators began to warn publicly of the problem, among them Fed Chairman Alan Greenspan. Several members of Congress called for a clampdown. Mortgage insurers and numerous independent analysts warned of a gathering crisis.

But it wasn't until December 2005 that the four bank regulatory agencies were able to hash out their differences and offer for public comment some "guidance" for what they politely called "nontraditional mortgages." Months ensued as the mortgage bankers fought the proposed rules with all the usual bogus arguments, accusing the agencies of "regulatory overreach," "stifling innovation" and substituting the judgment of bureaucrats for the collective wisdom of thousands of experienced lenders and millions of sophisticated investors. And they warned that any tightening of standards would trigger a credit crunch and burst the housing bubble that their loosey-goosey lending had helped spawn.

The industry campaign didn't sway the regulators, but it did delay final implementation of the guidance until September 2006, both by federal and many state regulators. And even now, with the market for subprime mortgages collapsing around them, the mortgage bankers and their highly paid enablers on Wall Street continue to deny there is a serious problem, or that they have any responsibility for it. In substance and tone, they sound almost exactly like the accounting firms and investment banks back when Enron and WorldCom were crashing around them.

What we have here is a failure of common sense. With occasional exceptions, bankers shouldn't make -- or be allowed to make -- mortgage loans that require no money down and no documentation of income to people who won't be able to afford the monthly payments if interest rates rise, house prices fall or the roof springs a leak. It's not a whole lot more complicated than that.

 

[97silverlsc]

Hey Fossie, Lead article seem a little bit more relevant now, in light of the effect the mortgage industry is having on the markets???
" A yes" you say, " but greed, errr a, capitalism is good".

 

[JohnnyBz00LS]

Hey Fossie, Lead article seem a little bit more relevant now, in light of the effect the mortgage industry is having on the markets???
" A yes" you say, " but greed, errr a, capitalism is good".

Looks like this house of straw is catching on fire.

 

[decibels5]

I am in the process of buying a house right now. Same house around the corner sold for 174500 last year. The same house also has a yard about half the size of mine. It is an older house and is only a 4/1 but is in great condition (appraisers words exactly) I am buying it for 105000. Interest rate isnt great, but we are hoping to close around 6.5 to 6.8 with a Va Loan

 

[MonsterMark]

I am in the process of buying a house right now.

Congratulations. Home ownership is great. Fix it up and make a tidy little profit.

You know, if you were doing this during the Clinton years, you'd be hard pressed to rent a single wide trailer!

 

[MAC1]

I posted the article to point out that the rosy picture being painted about the economy by analysts just might not be so rosy.

This is the just the same ol’, same ol’ that's been repeated over and over again by Doomsday Libs. Last year, for example, it was about whether the economy was producing enough jobs. When it appeared the job market was slowing due to lower than expected job creation democrats couldn't wait to add "poor job growth" to their list of talking points. But that point failed because the job market in reality was still healthy as proven by the month-to-month job figures.

Now as President Reagan used to say "here we go again." Liberals once again are scrounging for talking points. I suspect once again in a few months time this one will fall by the wayside like the rest, and once again Doomsday Liberals will be left eating crow.

Isn't it wonderful how some look for any excuse possible to predict bad news and relish in the hope that our economy will falter.

 

[fossten]

Hey Fossie, Lead article seem a little bit more relevant now, in light of the effect the mortgage industry is having on the markets???
" A yes" you say, " but greed, errr a, capitalism is good".

I happen to be quite knowledgeable in the subject of banks and mortgages, having done business on the bank side myself in the past. You'll get no argument from me that banks tend to prey on the sheeple of this country. You'll get no argument from me that people generally aren't money-savvy or disciplined enough to avoid being taken advantage of by the banks.

However, you won't get any agreement from me that it's somehow Bush's fault. The problem of banks and insurance companies in this country ripping off the public has been going on for over 100 years. As such, the problem is institutional and requires education of the public to solve. With our federal "education" system, that won't happen.

What I find interesting is the hypocrisy. You whine about the banks ripping people off, yet you don't have a problem with the confiscatory tax rates which throw good money after bad, funding entitlement programs, failed public schools, subsidies of inferior industries, and $250 million bridges to nowhere in Alaska. The federal government isn't just too big, it's bloated and less than inefficient. And global warming will be the next scam perpetrated on people in what will be the biggest money grab in history since social security.

 

[97silverlsc]

Fed Chairman Says ‘Uncertainties’ Have Grown
Doug Mills/The New York Times

http://www.nytimes.com/2007/03/29/business/29fed.web.html?hp
By EDMUND L. ANDREWS
Published: March 29, 2007

WASHINGTON, March 28 — The chairman of the Federal Reserve acknowledged today that “uncertainties” about the economic outlook have “increased somewhat in recent weeks” and that “turmoil” in the market for subprime home mortgages has created “severe financial problems for many individuals and families.”

But Ben S. Bernanke, the Fed chairman, reiterated in testimony before the Joint Economic Committee of Congress his broadly sanguine view that the United States economy was likely to expand at a moderate pace this year and that inflation was likely to slightly decline.

“The uncertainties around the outlook have increased somewhat in recent weeks,” Mr. Bernanke said. But in his prepared testimony, Mr. Bernanke offered little indication that he wanted to clamp down more tightly on subprime mortgage lenders, which lend money to people with poor credit, or on what a growing number of Democrats view as predatory mortgage lending practices.

“Thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to a significant extent to other sectors of the economy,” Mr. Bernanke said.

Mr. Bernanke said financial institutions were already tightening their lending standards, which would eventually help reduce the current glut of unsold homes on the market. But in the short term, he cautioned, tougher lending standards could further reduce the demand for housing and aggravate the bloated inventories of unsold homes.

Democrats and Republicans on the committee greeted Mr. Bernanke with blunt expressions of worry, particularly about the housing market.

“This is a terrible instance where a lack of oversight has led to a Wild West mentality among unscrupulous lenders and, frankly, the exploitation of large numbers of financially unsophisticated borrowers,” said Senator Charles E. Schumer of New York, the committee’s chairman.

Representative Carolyn B. Maloney, Democrat of New York, predicted a “tsunami” of defaults and foreclosures among overstretched homeowners. And Representative Jim Saxton, Republican of New Jersey, said “the possibility of policy mistakes undermining economic growth cannot be dismissed lightly.”

Mr. Bernanke essentially confirmed that the Fed, taking note of the increased economic uncertainty, was taking a more open mind about its past predisposition toward raising interest rates rather than lowering them.

He repeated the Fed’s statement after last week’s policy meeting that worries about rising inflation remained the central bank’s “predominant” concern. He noted that the core measures of consumer prices, excluding energy and food, were “somewhat elevated” and were 2.7 percent above their level one year ago.

The Federal Reserve’s unofficial comfort zone for inflation is between 1 and 2 percent a year.

 

[MAC1]

Fed Chairman Says ‘Uncertainties’ Have Grown
Doug Mills/The New York Times

http://www.nytimes.com/2007/03/29/business/29fed.web.html?hp
By EDMUND L. ANDREWS
Published: March 29, 2007

WASHINGTON, March 28 — The chairman of the Federal Reserve acknowledged today that “uncertainties” about the economic outlook have “increased somewhat in recent weeks” and that “turmoil” in the market for subprime home mortgages has created “severe financial problems for many individuals and families.”

But Ben S. Bernanke, the Fed chairman, reiterated in testimony before the Joint Economic Committee of Congress his broadly sanguine view that the United States economy was likely to expand at a moderate pace this year and that inflation was likely to slightly decline.

“The uncertainties around the outlook have increased somewhat in recent weeks,” Mr. Bernanke said. But in his prepared testimony, Mr. Bernanke offered little indication that he wanted to clamp down more tightly on subprime mortgage lenders, which lend money to people with poor credit, or on what a growing number of Democrats view as predatory mortgage lending practices.

“Thus far, the weakness in housing and in some parts of manufacturing does not appear to have spilled over to a significant extent to other sectors of the economy,” Mr. Bernanke said.

Mr. Bernanke said financial institutions were already tightening their lending standards, which would eventually help reduce the current glut of unsold homes on the market. But in the short term, he cautioned, tougher lending standards could further reduce the demand for housing and aggravate the bloated inventories of unsold homes.

Democrats and Republicans on the committee greeted Mr. Bernanke with blunt expressions of worry, particularly about the housing market.

“This is a terrible instance where a lack of oversight has led to a Wild West mentality among unscrupulous lenders and, frankly, the exploitation of large numbers of financially unsophisticated borrowers,” said Senator Charles E. Schumer of New York, the committee’s chairman.

Representative Carolyn B. Maloney, Democrat of New York, predicted a “tsunami” of defaults and foreclosures among overstretched homeowners. And Representative Jim Saxton, Republican of New Jersey, said “the possibility of policy mistakes undermining economic growth cannot be dismissed lightly.”

Mr. Bernanke essentially confirmed that the Fed, taking note of the increased economic uncertainty, was taking a more open mind about its past predisposition toward raising interest rates rather than lowering them.

He repeated the Fed’s statement after last week’s policy meeting that worries about rising inflation remained the central bank’s “predominant” concern. He noted that the core measures of consumer prices, excluding energy and food, were “somewhat elevated” and were 2.7 percent above their level one year ago.

The Federal Reserve’s unofficial comfort zone for inflation is between 1 and 2 percent a year.

And therefore...?

 

[97silverlsc]

Hey Fossie,
seem a little more relevant NOW??? Dow lost 6-700 points in a week or so and starting to impact world markets as well. Fed had to throw 35-38 billion in to attempt to ease fears, and it's nowhere near over yet.



Credit fears hit global markets


David Teather and Andrew Clark in New York
Thursday August 9, 2007
Guardian Unlimited
http://business.guardian.co.uk/story/0,,2145366,00.html

Central banks on both sides of the Atlantic pumped billions into the financial system to calm nerves over an impending credit crunch today - but their actions only served to heighten alarm, prompting a fresh plunge in global share prices.

The European Central Bank injected an emergency €95bn (£64.5bn) into the markets in its first intervention since the turmoil triggered by the 9/11 terrorist attacks on New York and Washington DC in 2001.

In America, the Federal Reserve added $24bn (£12bn) in temporary reserves to the US banking system to shore up liquidity and bring down short-term interest rates, while the Bank of Canada mounted a similar operation.

The moves, however, seemed to fuel a sense of crisis over defaults in America's mortgage lending industry which are causing a ripple effect through the banking industry as much of the debt is bundled up and sold on.

On Wall Street, blue chip shares suffered their worst day for four months as the Dow Jones Industrial Average plummeted by 387 points to 13,270. Stock prices swung wildly and trading volumes hit an all-time record with 2.8bn shares changing hands. Of the Dow's 30 component stocks, 29 ended the day lower.

Bourses across Europe fell, with the FTSE 100 in London finishing down 122.7 at 6271.2. The nervousness spread to all assets that appeared risky, including commodities.

The fresh sell-off was sparked by an announcement from the French bank, BNP Paribas, that it had blocked withdrawals from three investment funds worth €2bn owing to the "complete evaporation" of liquidity. A spokesman for the bank described it as a technical issue and said he hoped it would be a temporary situation.

There were also reports that the US bank, Goldman Sachs, has suffered losses in two of its hedge funds. Goldman is said to have sold down positions at its North American Equity Opportunities and Global Alpha funds, both of which rely on computer models rumoured to have struggled with recent volatility.

Nick Parsons, head of markets strategy at nabCapital, said one of the reasons investors are so nervous is the sheer complexity of today's financial markets with the growth of instruments such as securitisiation and credit derivatives.

"The problem for the markets is they don't know where this is heading. It is like walking blindfold through a minefield. There is no way of knowing who owns this stuff. But what is clear is that this is not just a US problem. This debt is owned by a huge variety of institutions, some you've heard of, some you've never heard of and some you are probably going to hear of soon."

The ECB's intervention was the largest one-day amount ever stumped up by the institution. It lent the cash to banks at a bargain rate of 4%. The last time the ECB took this kind of measure was when it pumped €100bn into the markets over two days following the September 11 attacks. It described the intervention as a "fine-tuning operation" to ensure "orderly conditions in the euro money market".

US president George Bush tried to calm the situation, telling reporters that the problems in sub-prime mortgages were unlikely to spread to the wider credit market. "The fundamentals of our economy are strong," he said, although he accepted that there was a need for better financial education on the part of mortgage borrowers whose struggle to keep up repayments is at the root of the crisis.

"Anyone who loses their house is someone we've got to show enormous empathy for," he said. "A lot of people have signed up for things when they've not been sure what they're agreeing to."

Earlier this week, America's 10th biggest home lender, American Home Mortgage, filed for bankruptcy, while Bear Stearns co-president Warren Spector resigned following the meltdown of two mortgage hedge funds that his department ran. The world's biggest insurer, AIG, felt obliged to reassure investors that it had ample cash today, saying it did not need to sell any of its securities to raise cash in a "chaotic market".

Mervyn King, the governor of the Bank of England, went against the prevailing winds yesterday, when he maintained that there was no international financial crisis.

The Bundesbank meanwhile hosted a meeting with banks involved in the rescue of Europe's highest profile sub-prime victim, the lender IKB, to arrange details of its €3.5bn bailout. The market in Germany was rife with rumours of particular banks being in trouble. West LB was forced to deny that it was heavily exposed to the sub-prime market. The US Treasury said it "remains vigilant".

Dutch bank NIBC called off a planned initial public offering, blaming exposure to the US credit markets. Market sources suggested last night that Britain's hedge fund operator Man Group was delaying plans for a flotation of one of its funds because of deteriorating market conditions.

 

[97silverlsc]

Bernanke Was Wrong: Subprime Contagion Is Spreading (Update2)
http://www.bloomberg.com/apps/news?pid=20601206&sid=abxvzZgdV5.I&refer=realestate
By Bob Ivry
Enlarge Image
Federal Reserve Chairman Ben S. Bernanke

Aug. 10 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke was wrong.

So were U.S. Treasury Secretary Henry Paulson and Merrill Lynch & Co. Chief Executive Officer Stanley O'Neal.

The subprime mortgage industry's problems were contained, they all said. It turns out that the turmoil was contagious.

The $2 trillion market for mortgages not backed by government- sponsored agencies is at a standstill. That's just the beginning. Other types of mortgages are suffering. So are firms and banks that package the debt for investors. The ripples were felt in Europe and Asia, where central banks offered cash to banks amid a credit crunch. And some corporations, from countertop makers to railroads, are blaming the mortgage meltdown and housing slump for earnings that fell short of analysts' estimates.

Even a mobile-phone company, Dallas-based MetroPCS Communications Inc., says it's feeling the pinch from customers facing foreclosure. And experts such as William Ford, former president of the Federal Reserve Bank of Atlanta, say the chance of a recession is growing.

``Housing created a lot of ancillary economic activity and jobs, and now we are in the reverse process,'' says Paul Kasriel, chief economist at Northern Trust Corp. in Chicago and a former Fed economist.

Fed Intervention

The Federal Reserve today provided $38 billion of reserves to the banking system and pledged further funds ``as necessary,'' in a statement unprecedented since the aftermath of the Sept. 11, 2001, attacks. The Fed had released $24 billion in temporary funds yesterday, the most since April.

The European Central Bank today made a second loan to banks to alleviate a money shortage sparked by concerns over investments in U.S. mortgages. Today's loan of 61.05 billion euros ($83.4 billion) brings the two-day total of money lent to 155.85 billion euros ($212.9 billion).

The ECB's unprecedented move followed the freezing of three funds managed by BNP Paribas, France's largest bank, because the bank couldn't calculate how much the funds' holdings were worth due to a lack of buyers.

Today, the Bank of Japan made similar moves to supply cash.

`Spreading to Banks'

``The subprime mess is now spreading to banks,'' says Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts. ``A lot of international banks, especially those in Europe, did invest a lot in the collateralized debt markets, especially the subprime situation here in the U.S., so they're suffering.''

Peter Lynch, chairman of private equity fund Prime Active Capital Plc in Dublin, said the ECB was ``treating this like an emergency.''

Bernanke told Congress on March 28 that subprime defaults were ``likely to be contained.'' The Fed chief, who declined to comment for this story, changed his assessment last month.

On July 18, he told Congress that ``rising delinquencies and foreclosures are creating personal, economic and social distress for many homeowners and communities -- problems that likely will get worse before they get better.''

Paulson Comment

Paulson said June 20 that subprime fallout ``will not affect the economy overall.''

This week on CNBC, he provided a less definitive assessment, saying that markets have been ``unsettled largely because of disruption in the subprime space.''

``We've had a major correction in that housing sector,'' Paulson said. ``It will take a while for the impact of that to ripple through the economy as mortgages reset.''

O'Neal on June 27 called subprime defaults ``reasonably well contained.'' Merrill spokeswoman Jessica Oppenheim said this week that the company is confident his words accurately reflected the market at the time. O'Neal declined to comment.

Among the other executives joining the chorus was Bank of America Corp. CEO Kenneth Lewis, who said June 20 that the housing slump was just about over.

``We're seeing the worst of it,'' Lewis said.

Within the week, he was contradicted by a team of Bank of America analysts, who called losses in the mortgage market the ``tip of the iceberg'' and predicted ``broader fallout'' from adjustable-rate loans resetting at higher interest rates.

David Olson, president of Wholesale Access Mortgage Research & Consulting Inc. in Columbia, Maryland, is blunt about his current outlook. He says a third of the U.S. home-loan industry will disappear.

American Home Mortgage

With last week's collapse of American Home Mortgage Investment Corp., which sold $58.9 billion of loans to borrowers in 2006, the subprime contagion spread to so-called Alt-A mortgages, which are available to borrowers with good credit who don't want to verify their income with tax forms or pay stubs.

American Home couldn't find Wall Street firms willing to buy these mortgages and package them into securities because of rising defaults. The Melville, New York-based company filed for bankruptcy Aug. 6.

``This is just the first, because all the Alt-A guys are going to go,'' Olson says. ``This is the most difficult mortgage environment I've seen in my 40 years in the business.''

This grade of loan made up 13 percent of all mortgages last year, according to Inside Mortgage Finance. Combined with subprime, they account for a third of the market. Both types of loan are rapidly disappearing.

Housing Prices

U.S. housing prices will fall this year, the first annual decline since the Great Depression of the 1930s, according to the National Association of Realtors, based in Chicago.

The inventory of unsold U.S. homes in May was the largest since the realtors group started counting them in 1999. Defaults and foreclosures may increase because about $1 trillion of payments on adjustable-rate mortgages are scheduled to rise this year, hitting a peak in October, according to Credit Suisse.

Housing and related industries generate almost a quarter of U.S. gross domestic product, according to the Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts.

The mortgage fallout ``ensures the economy will grow well below its potential through the remainder of the year and next,'' says Mark Zandi, chief economist for Moody's Economy.com in West Chester, Pennsylvania, who predicts GDP growth of 2.5 percent this quarter and next. Second-quarter growth was 3.4 percent.

Lowered Forecast

Demand for loans to bundle into mortgage-backed securities came to a halt, crippling the subprime and Alt-A lending businesses. The exception was prime loans conforming to rules set by the biggest government-chartered agencies, Fannie Mae in Washington and Freddie Mac in McLean, Virginia.

Doug Duncan, the Mortgage Bankers Association's chief economist, says he's lowering the group's forecast on the total dollar value of new U.S. mortgages.

The association said July 12 that the value of mortgages sold would decline 7 percent this year to $2.6 trillion and 18 percent in 2008 to $2.3 trillion, from $2.8 trillion last year.

``Most of the market has shut down,'' Duncan says. ``This is not a normal event.''

Peter Hebert, a broker with Houston-based Allied Home Mortgage Capital Corp. in Ellicott City, Maryland, says it's getting tougher to find mortgages for his clients.

`Use a Credit Card'

For one self-employed borrower in Pennsylvania, with a 626 credit score, just above what's considered subprime, Hebert says he contacted three lenders. Last year, the borrower would have qualified for a 7.99 percent loan, Hebert says. This week, he received one offer for a 10.5 percent loan with a three-year prepayment penalty, meaning that if the borrower refinanced during that time he would be required to make six months of payments to the original lender.

``It would have been cheaper to use a credit card to pay for his house,'' Hebert says.

When it came time to lock in the rate, the lender pulled out, Hebert says.

``It was a hard thing to do, an emotional thing, to tell my borrower he was turned down for a rate that was high to begin with,'' he says.

The market is shifting, too, for firms that package loans into securities and sell them to investors. About $11.2 billion of private-label, or ``non-agency'' mortgage bonds -- those not guaranteed by Fannie Mae, Freddie Mac or Washington-based Ginnie Mae -- were sold in July, according to Michael D. Youngblood, portfolio manager and analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia. That's down from $41.6 billion in June and from a monthly average of $86.6 billion this year.

Margin Calls

Luminent Mortgage Capital Inc., a San Francisco-based firm that packages mortgages for investors, cited ``a significant increase in margin calls'' for canceling its dividend.

Such firms borrowed money from banks to buy loans to create securities. When investors stopped buying the securities, the banks that made the original loan demanded their money back.

Many such firms that package securities will leave the business this year, says Guy Cecala, publisher of Inside Mortgage Finance.

``If you're an investment bank and you're losing stock value every week because of your connection to the mortgage industry, isn't it easier to cut ties?'' Cecala says.

Bank Stocks

Shares of the top 12 U.S. banks have declined 17 percent since June 1.

Yesterday, Countrywide Financial Corp., the biggest U.S. mortgage lender, said in a filing that ``unprecedented disruptions'' in the U.S. home-loan market may crimp its ability to lend. The company said it may be forced to retain more of the loans it makes to homeowners rather than selling them to investors and that it may have difficulty obtaining financing from its creditors.

Corporations outside the mortgage industry are taking a hit, too, as housing slumps. Burlington Northern Santa Fe Corp., the second-biggest U.S. railroad, said it shipped less lumber for homebuilding in the second quarter. DuPont Chief Executive Officer Charles O. Holliday Jr. said July 24 that the housing recession eroded demand for Tyvek weather barriers, used in 40 percent of new homes, and Corian countertops.

Steak n Shake

Steak n Shake Co., an Indianapolis-based fast-food chain, blamed a 4.3 percent decline in same-store sales in the third quarter partly on credit markets. ``Some segments of Steak n Shake consumers continue to be sensitive to high gasoline prices and mortgage interest rates,'' the company said in a statement yesterday.

Shares of MetroPCS, a prepaid mobile-phone service, fell 20 percent Aug. 3 after second-quarter sales missed analyst estimates. Chief Financial Officer J. Braxton Carter blamed customers' ``short-term economic disruptions,'' such as defaulting on their subprime loans.

As for the faulty initial predictions by Bernanke and others, go easy on them, says Josh Rosner, managing director at the New York investment research firm Graham Fisher & Co.

``There's no model for what's happening now in the housing and mortgage industries,'' Rosner says. ``We have to give Bernanke a chance. He is a reasoned and traditional central banker. He knows how to manage crazies.''