The Great American Credit Catastrophe

The 911 of the Middle Class is the consumer credit debacle. It is the gift that keeps on giving. The reality is that the housing crisis is just one piece of this really big, ugly mess. It seems to me that our President MUST call for immediate reform and take action through executive order. Call me politically naïve, but we need action. Unemployment continues to hover close to 10%, and higher in badly hit areas. Interest paid by the banks on savings ranges from less than 1% to maybe 2.5% on a good day. The consumer credit card companies, though regulated now sort of, ran naked through the streets jacking up everyone’s interest rates to over 15 to 30%. Yes they have to notify the poor, irresponsible slobs now before they do things, but the banks still get to burn kerosene in the town square with no permits. And we haven’t even gotten to the health insurance yahoos that have four more years for their trickery. Oh Nelly, bar the door! It’s the Wild West again as the cattle are corralled – only this time it’s the American people being herded to ruin by the giddy-up bankers and health insurance companies, not just the mortgage guys.
People are getting sick from worry. Their backs hurt, their necks are out, and they are grinding their pearly whites. Few sleep well at night. Pharmaceutical sales are up. The banks we saved are savaging us. They are bulldozing the Middle Class under mountains of debt. People are losing their homes, divorces are up, businesses are closing, and unemployment is rampant. The consumer credit world and their FICO scores are broken. They are based on a world that no longer exists. In two short years, many consumers have watched their scores collapse under an avalanche of debt. The FICO scores were calibrated for a different time when consumer credit cards were not the only source of money available, mortgages were not under water, and unemployment was not soaring. If we are ever to unwind this situation, these algorithms must be reset. Otherwise the banks will never lend again. The Middle Class needs a do-over, just like the banks got.
Yes sir, Obama stood up against the broad sweeping foreclosure legislation, and Bank of America seized the moment halting foreclosures nationwide. But we’re all holding our breath waiting for the other shoe to fall as even Progressive strategist Mike Lux gens up the netroots to re-engage with the President and Congress. It is inconceivable that people have not taken to streets in protest over their lost pensions, and the absence of any kind of interest bearing bank account — except on consumer credit cards. In fact, this week Robert Sheer wrote brilliantly about Obama’s “No Banker Left Behind” — while every normal person has been thrown under the bank bus. How did we allow the bail-out of every financial institution, while abandoning the common folk? Why are Democrats — whether conservative, moderate or netroots – not able to channel this collective anger, rage and disappointment other than to take aim at one another? Given the data, there is no way out for the once resilient Middle Class without a do-over. Instead of “No Banker Left Behind” let us heal the Middle Class by fixing the credit industry; restricting the health care industry now, not in four years; and making those banks lend the money we gave them and not hide behind FICO scores. All of the Democrats are writing, but no one is demanding change now. The Tea Party has successfully harnessed the anger and rage, but has no plan. Frankly, they are just another distraction taking our attention away from the gravity of the problems.
Mr. President, come back to us as Mike Lux laments. We need you. We, in the Middle Class, are living this nightmare everyday of our lives. Figure it out, and get the Middle Class out from under. The numbers do not lie. This is our emergency, our call to action, our 911. Friends and neighbors are collapsing from the stress when they can ill afford it. Unemployment is not going away. Consumer debt is skyrocketing. Mr. Obama, Americans are not being frivolous and irresponsible as Dr. Summers would like you to believe. They are boxed in with no escape hatch. Consider enacting a nationwide job core like the WPA, putting the banks on real notice, corralling those nasty health insurance folks, redoing the credit industry, and loosening up cash. No one is sleeping at night. People are nervous and cannot see a future.
Please, inspire us again, show emotion, get messy, and let the wrinkles show. Mr. President raise your voice in outrage. Give us voice. Come back to us. The time is now.
This was originally published on the Huffington Post earlier today.
See the pearltree below for the references for this article.
US Economy

m4s0n501

Today’s Housing Bubble Post – Foreclosures Up 57%

Foreclosures jump 57 percent in last 12 months,

Home foreclosure filings surged 57 percent in the 12 month-period ended in March and bank repossessions soared 129 percent from a year ago, as homeowners struggled to make mortgage payments, real estate data firm RealtyTrac said on Tuesday.

This brings up something I have been thinking about. So many people are “looking for the bottom.” (Signs the bottom is behind us?) They think things are “leveling off.” Well guess what, all the problems, all the foreclosures, all the credit card debt, all developed before the economic downturn began. And now we are entering a recession. No question. And a recession means that people are going to lose jobs, companies are going to go under, etc. And those people and companies are not going to be able to make their payments.
So no, we are not looking at a “bottom.” We’re looking at the beginning.

Again – Get Out Of Money Markets And Into Insured Bank Accounts

I’m not going to tell you again. (Maybe I will…) Get your money out of money market funds(and brokerages) and into federally insured accounts at banks.
Fast summary – as far as I can figure out what is going on: mortgages (and other debts) were grouped together and sold as investment “instruments.” These instruments were called “collateralized debt obligations” (CDOs) – or collections of obligations to pay back loans, backed by collateral. The grouping contained levels of good, medium and subprime mortgages and other debt. These levels of quality in each of the instruments are called “tranches.” So there is a good tranche, a medium tranche, etc. (Lots of tranches in a CDO)
The instruments were very complicated so buyers depended on rating agencies instead of looking into each loan (and the documentation backing up the loan) that was in them. The rating agencies rated them as high-grade. (Rating agencies made their money from the companies who were selling the instruments, and possibly rated them up for that reason.)
The investment value came from the idea that these CDOs would provide a regular cash income for a certain number of years as the debtors made their payments.
There were well over a trillion dollars worth of these sold. Maybe a few trillion. But they are very thinly “traded” so one knows what they are worth now. (Something that is traded can be “marked to market,” meaning you can find a mark or price by looking at what the last one sold for.) No one is sure what is in these, they are not sold after the initial sale, and as foreclosures rise they are looking worse and worse. But no one knows. And of course no one will buy one now. So no one knows, and no one is going to know until every single loan in each of these instruments is evaluated. (Does Tom Whitmore really make $90,000 a year? And was the appraiser accurate when he said the 2br 1ba was worth $860,000?)
So now the bigger problem is that with so many companies, etc. owning these CDOs, no one knows who will be able to pay their bills, and they certainly can’t use the CDOs as collateral now, so no one is willing to extend credit. Hence, the “credit crunch.” And hence all the uncertainty about who is solvent or not.
Finally, go read this entire post: The Agonist: The Wile E. Coyote Economy.

It all started coming apart with the subprime mortgage crisis. It should be emphasized that problems extend far, far beyond subprime, but it’s there that they first showed up, where they first became undeniable. It’s then that Wile, scanning the horizon, though to himself, “Gee, I don’t see any ground. Maybe I should look down.” As people realized there was no “there,” there; that many of these mortgage backed securities were worth cents on the dollar, they stopped being willing to buy them. The defaults started occurring and as people kept looking more and more they began to be forced to actually consider “How much is this worth?” And they didn’t stop at subprime mortgages.
Now the reason this mattered is that most Wall Street firms (and many banks) have a ton of this paper, and they are also heavily leveraged with loans. Those loans are loaned against the value of their portfolios. So when other firms and various banks started realizing the paper was worthless they stopped wanting to continue to extend loans. When the loans came due (and most loans these days are short term, from days to months) they didn’t just roll them over.
Without the loans firms began to face the possibility that to meet their obligations, to pay back the non-rolled-over loans, they might have to actually come up with cash. Which means they might actually have to sell some of this paper. And if they sold it, they’d know what it was worth. And if they knew what it was worth, they’d have to mark down all of it in their portfolio And if it’s really worth cents on the dollar, well that could wipe out billions. In fact, it could wipe out the entire capital of firms.

Today’s Housing Bubble Post – Spreads to Jumbo Loans

The effect of the “credit crunch” are starting to ripple out.
You’ve probably been reading the houses “at the top” are still selling. Expensive houses require big mortgages – called “Jumbo” loans. And getting a jumbo loan has gotten much harder, which means there will be fewer buyers for the houses at the top, which means they are going to sell fewer of them, which means prices there will also have to start dropping. Growing mortgage crisis spreads to jumbo loans,

The evening before their home purchase was to close, Gary Becker and his wife, Amy Dacus, learned their mortgage to buy a Woodinville home had evaporated.
Unlike subprime borrowers defaulting on loans, the couple had a stellar credit score, a 20 percent down payment, strong employment history and had effortlessly purchased three prior homes.
But their new home’s $670,000 sales price was large enough to require a “jumbo” loan, so named because it was for more than $417,000, the limit the nation’s largest mortgage backers will fund.

Why is this happening?

The credit crunch isn’t universal.
Borrowers with good credit scores, good jobs and a down payment still have ready access to 30-year “conforming” loans — those funded through banks and mortgage brokerages by Fannie Mae and Freddie Mac, the giant federally chartered companies that fund the bulk of the nation’s mortgages.
But Fannie and Freddie cap their loans at $417,000, which means that banks and mortgage companies must tap other sources, such as mortgage-backed securities, for jumbo funds.
In recent weeks a skittish Wall Street has loudly signaled its unwillingness to invest in these securities.

Update – I just have to add this. Maybe we need a version of the Darwin Awards for people who just refuse to keep up with the news and try to buy a house in this market. The people who are not getting the jumbo loans are dodging a huge bullet. What kind of idiot is trying to buy an expensive house in a market where every single news story talks about how no one can sell a house, no one can make their payments, and prices are going to drop dramatically in the next few years?

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Today’s Housing Bubble Post – ‘Downward Spiral’

Mortgage problems are causing a tightening of credit, which means fewer people can purchase houses, even as inventories are already at an all-time high. In other words, no one can sell their houses, which causes more foreclosures which means more credit tightening and higher interest rates which means prices drop which means buyers stop buying which means no one can sell their houses which means more foreclosures which means…
U.S. mortgage, housing markets seen caught in ‘vicious cycle’,

Problems in the nation’s mortgage and housing markets are feeding off each other and creating a “vicious cycle,” analysts at Stifel Nicolaus & Co. said Monday.
“The rapidly increasing scope and depth of the problems in the mortgage market suggest that the entire sector has plunged into a downward spiral similar to the subprime woes whereby each negative development feeds further deterioration,” wrote analysts Chris Brendler and Michael Widner in a research note.
[. . .] Underscoring the shaky conditions in housing, Stifel Nicolaus said its earlier forecast calling for home-price deprecation between 10% and 15% may prove optimistic.
The analysts see a worsening tailspin as housing prices fall harder, leading to more credit deterioration.