Today’s Housing Bubble Post – The Bailout: Just Another Fraud

From today’s SF Chronicle, MORTGAGE MELTDOWN / Interest rate ‘freeze’ – the real story is fraud / Bankers pay lip service to families while scurrying to avert suits, prison,

It sounds good: For five years, mortgage lenders will freeze interest rates on a limited number of “teaser” subprime loans. Other homeowners facing foreclosure will be offered assistance from the Federal Housing Administration.
But unfortunately, the “freeze” is just another fraud – and like the other bailout proposals, it has nothing to do with U.S. house prices, with “working families,” keeping people in their homes or any of that nonsense.
The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value – right now almost 10 times their market worth.
The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

It’s widespread:

The catastrophic consequences of bond investors forcing originators to buy back loans at face value are beyond the current media discussion. The loans at issue dwarf the capital available at the largest U.S. banks combined, and investor lawsuits would raise stunning liability sufficient to cause even the largest U.S. banks to fail, resulting in massive taxpayer-funded bailouts of Fannie and Freddie, and even FDIC.

So why the “freeze?” What does that really accomplish?

The goal of the freeze may be to delay bond investors from suing by putting off the big foreclosure wave for several years. But it may also be to stop bond investors from suing. If the investors agreed to loan modifications with the “real” wage and asset information from refinancing borrowers, mortgage originators and bundlers would have an excuse once the foreclosure occurred. They could say, “Fraud? What fraud?! You knew the borrower’s real income and asset information later when he refinanced!”

Cuomo in New York is going after some of the fraud – the inflated appraisals, for example. If I had money in these mortgage-backed investments rated AAA I would be demanding MY money back – and if you are in a money-market fund, you just might be who I am talking about.
But you wouldn’t have any money in a money-market fund NOW, would you? You’re smarter than that.
Update – Mish’s Global Economic Trend Analysis says the fraud / lawsuit avoidance theory from the above article is “preposterous.”

The goal of the freeze is not to “stop bond investors from suing”. The goal of the freeze is to Peddle a Sucker Trap Disguised as Hope.
However, so few people will qualify for the program (see Little Hope For Hope Now Alliance) that no one can possibly claim it will stop much of anything, including lawsuits or foreclosures.

Go read.

Today’s Housing Bubble Post – Foreclosures At Record High

U.S. mortgage foreclosures at record high: Mortgage Bankers

A record number of U.S. mortgages were somewhere in the foreclosure process in the third quarter, with 1.69% of all residential borrowers facing the loss of a home, the Mortgage Bankers Association said Thursday. The percentage of homes that entered foreclosure in the third quarter also hit a record at 0.78%, the trade group said. Mortgage delinquencies, those loans with payments that were more than 30 days past due, shot up to a 21-year high at 5.59%, MBA’s quarterly survey showed. Although all types of loans showed an increase in foreclosure starts in the third quarter, subprime adjustable-rate loans remained the biggest problem, accounting for 43% of all new foreclosures, even though they comprise just 6.8% of all loans outstanding, the MBA said.

And the REAL wave of foreclosures is expected next year…

Today’s Housing Bubble Post – Is Your Money Safe?

Fallout from the bursting of the housing bubble is rippling further and further out. In the last few days three state government funds have realized they are in big trouble and are experiencing “runs.” And as a result, in the next few days we are likely to hear about the same thing happening in many other states. These are funds that cities put their cash into until it is needed to pay city employees, teachers, etc. The cities have people who understand finance watching the money, and they understood this so they started getting their money out. And because the fund had lost some of the money in mortgage-backed securities, it couldn’t give money back to all of the cities, and had to say “no more withdrawals until this gets sorted out.” The ones who asked for their cash first are OK, the ones who didn’t will lose out.
This is exactly what could happen to money markets and banks as people realize this is their money everyone is talking about in the news. YOUR money. Find out where your money is, your parents’ money, etc..
Florida moves to stop run on fund

The crisis underscores how the upheaval in credit markets could spread to affect mainstream investors, institutions and their employees. In recent weeks, local authorities in regions as disparate as Australia and Norway have reported similar problems.
[. . .] Most of the securities were short-term debt backed by mortgages and other assets, and issued by off-balance sheet investment vehicles, many of which have run aground in the credit squeeze. Lehman Brothers sold most of the distressed assets to the Florida fund, people familiar with the sales said.

and Florida freezes $15 billion fund as subprime crisis hits,

Florida halted withdrawals from a $15 billion local-government fund Thursday after concerns over losses related to subprime mortgages prompted investors to pull roughly $10 billion out of the fund in recent weeks.
. . . The decision shows how far this year’s subprime-fueled credit crisis has spread. Florida’s Local Government Investment Pool, which had more than $27 billion in assets at the end of September, is like a money-market fund that’s supposed to invest in ultrasafe assets to provide participants with a secure place to stash spare cash. But even these types of funds have been hit by the widening crunch.
“It’s spreading into areas that people didn’t expect and this is a good example,” Richard Larkin, a municipal bond expert at JB Hanauer & Co., said.

Maine Treasurer Criticizes Merrill for Subprime Bet,

Controversy is heating up in the state over who is at fault for having put $20 million, about 3 percent, of the state’s roughly $725 million cash pool this summer into an investment fund called Mainsail II — two weeks before its sterling ratings crumbled to junk.
The investment met all of the state’s investment criteria, but exposed the state to the mortgage market-related losses that have roiled credit markets for a few months.

And Run on Montana Fund,

Montana school districts, cities and counties withdrew $247 million from the state’s $2.4 billion investment fund over the past three days after officials said the rating on one of the pool’s holdings was lowered to default.

But don’t think for even a minute this is limited to state government funds. It’s just that the municipalities that had cash in those funds understood what was happening. MANY holders of money, especially money-market funds are in exactly the same situation, except the depositors in money-market funds are not necessarily as sophisticated as municipal finance officers, and don’t yet realize what all of this means.
But it is starting to hit the news.
How safe is your money market fund?,

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Today’s Housing Bubble Post – How Far The Fall?

Calculated Risk: LA Times: How Far Will House Prices Fall?

If SoCal prices fall 25%, then prices in other areas – like Miami and Las Vegas – will probably decline a similar amount.

Keep in mind my own observation that houses near here are not selling even after a price cut of almost a third.
OTHER bubbles, like the “dot com” bubble, have seen prices fall right back to where they would have been without the bubble. In fact, haven’t ALL other bubble fallen like that? Why will this one be different? And that means you’re looking at 50% or more.

Today’s Housing Bubble Post – Marked Down From $725K To $495K, Still Not Selling

A for-sale house around the corner from us (SF Bay peninsula) has gone through all the stages, and now even the “price reduced” sign is gone. The house is empty. The flyers are still there, however. Walking the dog the other day I picked one up to see what they’re offering.
The house, a modest three-bedroom in a modest neighborhood, was originally listed at $725,000. Now that is crossed off by hand on every flyer and $495,000 is written in.
So, marked down from $725,000 to $495,000 it still isn’t selling. No one is looking at it. It is still priced higher than the average person can or will pay for a house like this to live in this neighborhood. House prices around here still have a long way to fall, but you can’t expect other houses around here to sell for a lot more than $495,000 now – not with that one sitting there. But most of them are still priced in the $600-700,000 range.
That leaves a long way left to fall.

Money Market Funds

I guess I’m just ahead of my time… I’ve been warning about money market funds, and now it’s really hitting the news:
Mounting concern about money-market funds,

Millions of U.S. investors with cash in these mainstream vehicles are asking that question as some leading banks, investment managers and mutual-fund companies take steps to shield money funds from potential losses on troubled debt in their portfolios.

Do you want your money in a place where managers are “taking steps”?
So what can you do?

… if you are concerned about your money fund, experts say there are some ways to investigate.
The first — calling the company to ask about the fund’s holdings — might seem daunting given the complexities of many of these portfolios. But in fact the request can test a company’s responsiveness to its customers, observes Bruce Bent, who created the money fund 37 years ago.
“A number of funds will say ‘we don’t give that out,'” said Bent, whose New York-based firm, The Reserve, has about $80 billion in money-fund assets, none of which, he adds, is exposed to subprime loans or SIVs.
If the fund company isn’t forthcoming, he says, “take your money out and say goodbye.”

No shit.
And there’s always what I have been recommending:

The ultimate safe move would be to put your cash in a bank money-market or savings account – they’re insured up to $100,000 and sport comparable yields to money funds, which recently averaged about 4.6% for taxable investors.

Meanwhile, Advisers aren’t ready to dump money-market funds yet – MarketWatch

,With money-market mutual funds scrambling to cover their costs as credit meltdowns spread, some advisers say they’re seeing more interest from high net-worth clients in short-term, bond exchange-traded funds.
One of those is Jerry Slusiewicz. But the president of Pacific Financial Planners in Newport Beach, Calif., doesn’t recommend investors pull out of their money-market funds just yet.

Not just yet?

Several major financial services firms have moved to protect money-market assets in recent months. The latest is Bank of America Corp., which on Tuesday said that it plans to use a $600 million reserve to shore up a group of its money-market funds. Another big financial-services firm, Legg Mason Inc. has made public plans to establish credit lines of roughly $238 million to keep intact credit ratings of two money-market funds.

Did I read that right? They’re putting hundreds of millions in to cover their money market funds so people don’t lose money? So if you have money in one of those funds the only reason you aren’t losing money is because the fund managers are pumping their own money in to shore it up? So what happens if the parent companies are in trouble – which they certainly will be if they’reputting in hundreds of millions to cover the money market funds!
Remember, the money you have in a money-market fund can drop – you can lose principal.
And Atrios has found a General Electric managed fund that is already in such trouble it is paying its depositors only 96 cents on the dollar.

Today’s Housing Bubble Post – Foreclosures Double

Ypu’ll be seeing this headline every month for a while, I expect: Foreclosures nearly double from year ago: report,

Cities in California, Florida and Ohio dominated the 25 U.S. metro areas with the highest home foreclosure rates, though rates jumped in most of the top regions during the third quarter, RealtyTrac said on Wednesday.
. . . A broad credit and liquidity crisis during the third quarter exacerbated U.S. housing industry troubles, pushing sales sharply lower and unsold inventory to record highs.
Overall, residential foreclosure filings nearly doubled in the third quarter from a year earlier, RealtyTrac reported earlier this month.

HOW many foreclosures?

Stockton’s rate of one foreclosure filing for every 31 households, the highest of the metro areas, was a surge of more than 30 percent from the prior quarter. A total of 7,116 filings on 4,409 properties were reported in the metro area during the quarter.
In Detroit, the foreclosure rate of one filing for every 33 households ranked second and was more than double the number of filings reported in the previous quarter, RealtyTrac said. A total of 25,708 filings on 16,079 properties were reported.

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 – Model Refuses Dollars

This is actually a very big story. The world’s richest model (earned $30 million in 6 months this year) is now refusing to take her pay in dollars. She is insisting on Euros. This is huge because it will penetrate past the financial pages and cause people to start understanding what is going on – possibly starting a stampede from the dollar.
gisele-3.jpg
Supermodel ‘rejects dollar pay’:

The world’s richest model has reportedly reacted in her own way to the sliding value of the US dollar – by refusing to be paid in the currency.
Gisele Bündchen is said to be keen to avoid the US currency because of uncertainty over its strength.
The Brazilian, thought to have earned about $30m in the year to June, prefers to be paid in euros, her sister and manager told the Bloomberg news agency.

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Today’s Housing Bubble Post – Who Bails Out The Smart Ones Who Did The Right Thing?

Smrat people got 7% fixed-rate loans because ARMs were obviously trouble. Their defaulting neighbors had 1% “teaser” rates and now get 5% loans as a bailout. The smart ones lose out all the way around.
Homeowners who actually pay their mortgage on time are getting ticked of at talk about bail-outs – AMERICAblog:

Right, because in a free market, capitalist economy it would be wrong for home prices to drop and for me to have to spend less on the condo I’m looking to buy. Since when was it anybody’s job to artificially drive up the prices of homes in my or any other neighborhood? Since when is it wrong for someone else to have their home value decrease because of a market adjustment, but it’s right for me to have my future home cost increase because of an artificial intervention? They lose money, it’s wrong – I lose money, it’s right. Uh huh. I am just increasingly sick and tired of every bail out of the rich and the poor, from the right and the left, coming at the expense of those of us in the middle who never seem to get anything, except an increasingly large bill for helping everyone else at our own expense. I’m not opposed to helping others. I am opposed to never being on the receiving end of such help. The Republicans help one side, the Dems the other, and no one thinks of the middle.

People who did the RIGHT thing is losing out now. On Wall Street people who took depositor and stockholder money, gambled it away, and got rich in the process are getting sweet bailout deals. Fairness should become an issue in this.

Today’s Housing Bubble Post – Citigroup

In the continuing story of the bursting of the housing bubble, this weekend at an emergency Board meeting Citigroup President Charles Prince “resigned” and the company announced it will write down up to $11 billion more for mortgage losses. But guess what? Citigroup problems grow,

Citigroup Inc’s (C.N) problems deepened on Monday as it was unable to assure investors a potential $11 billion write-down for subprime mortgages won’t grow, and its nearly pristine credit rating was downgraded.
The largest U.S. bank also reduced previously reported third-quarter profit because of credit market problems that it said could reduce future cash flow.

Also, Citigroup is sitting on $134.8 billion in questionable assets. A lot of that could go, too.
In my opinion it is urgent that everyone understand how FDIC limits work. This is a time when you need to know that your own money is safe. The limit is $100,000 per bank, $200,000 per couple, and $250,000 for retirement accounts. If you are lucky enough to have more than that in one bank, split it up. Ad I did say bank – not brokerage. And tell your friends and relatives to do the same.

Today’s Housing Bubble Post -Foreclosures Double

UPDATE 1-US Q3 foreclosures almost doubled from ’06 -report,

U.S. residential foreclosure filings nearly doubled last quarter from a year earlier, and appear set to increase into 2008, a report said on Thursday.
Foreclosure filings for July-September rose to 635,159, representing one in every 196 households and a 30 percent jump from the second quarter, according to RealtyTrac, a marketer of foreclosure properties based in Irvine, California.

One results: soon there will be many more homes on the market. And remember, MOST of the “ARM resets” – loans with low “teaser” or “qualifying” initial rates that reset to high interest rates – happen into next year. So expect the foreclosures to continue to increase for at least a year. The housing market is nowhere near a “bottom.”