Tag Archives: money markets

Today’s Housing Bubble Post – What A Bank Run Looks Like

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This is filed under Housing Bubble, because this is more fallout from the bubble’s bursting. Here’s the deal: financial institutions loan out money to people (and companies and countries, etc.) who, because of the “credit crunch,” might not be able to pay it back. That means that the financial institutions might not be able to pay back the money THEY owe, including to depositors.
It’s housing bubble burst time – do you know where YOUR money is?
Calculated Risk: Northern Rock Bank Run, with photos:

From Bloomberg: Northern Rock Customers Crowd London Branches, Withdraw Money

Hundreds of Northern Rock Plc customers crowded into branches in London today to pull out their savings after the mortgage-loan provider sought emergency funding from the Bank of England …

A bank run happens when people feel that a bank might be having trouble, and realize they might not be able to get THEIR money out of the bank if they don’t hurry. Everyone knows that a bank (money market, stockbroker, etc.) only keeps so much cash on hand. So they show up to withdraw their money before it is too late. It is a “run” because you have to run down to the bank to get your cash before other people get their cash. Only the first people in line are going to get their money.
In the US bank deposits up to $100,000 are insured by the government, so if the worst happens you will eventually get your money (up to $100,000) — after all the paperwork gets done. So if you feel like running down to the bank, you don’t really need to take out more than you will need to pay you bills for a few months.

Today’s Housing Bubble Post – Big Houses Cost More To Heat And Cool, Bad For Environment

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Here is one more problem from the housing bubble – all those big houses they built cost much more to heat and cool than regular houses. As utility costs rise this will compound the monthly-payment problem. Then, on top of that there’s the maintenance costs like eventually re-roofing them, watering the lawns, etc.
And then there is the terrible environmental impact. Very few were built withing walking distance of stores and public transportation so cars are required. How many of the world’s trees were cut down to build them?
And, if the public somehow manages to regain their senses, these house monstrosities – like the huge, pre-oil-embargo land-barge cars of the 1970s – will become even harder to sell.
AlterNet: Environment: Big Houses Are Not Green: America’s McMansion Problem,

The just-popped housing bubble has left behind a couple of million families in danger of losing their homes to foreclosure. It has also spawned a new generation of big, deluxe, under-occupied houses bulked up on low-interest steroids.
The National Association of Home Builders (NAHB) estimates that 42 percent of newly built houses now have more than 2,400 square feet of floorspace, compared with only 10 percent in 1970. In 1970 there were so few three-bathroom houses that they didn’t even to show up in NAHB statistics. By 2005, one out of every four new houses had at least three bathrooms.
…the manufacture and transportation of concrete to build a typical 2,500-square-foot house generates the equivalent of 36 metric tons of carbon dioxide.

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Today’s Housing Bubble Post – Foreclosures Set record

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New Mortgage Foreclosures Set Record,

The number of homeowners receiving foreclosure notices hit a record high in the spring, driven up by problems with subprime mortgages.
The Mortgage Bankers Association reported Thursday that mortgage-holders starting the foreclosure process in the April-June quarter reached 0.65 percent, marking the third consecutive quarter that this figure has set an all-time high.
The delinquency rate, which tracks the number of people who are behind in their payments but have not yet entered the foreclosure process, was also up sharply during the spring, rising to 5.12 percent of all loans, up nearly three-fourths of a percentage point from the same period a year ago.

And don’t forget, NEXT year is when MOST adjustable mortgages reset upwards, greatly increasing monthly payments. This is just the very tip of what is coming.

Today’s Housing Bubble Post – The Tip – JUST the Tip of the Iceberg

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An “ARM Reset” occurs when an adjustable loan (ARM) changes (resets) from its initial “qualifying” rate, and goes up to its real interest rate. This reset can cause the monthly payments on the mortgage to as much as double.
Much of the trouble we are seeing now in the mortgage markets now is coming from people not being able to meet their payments. But the problem of this rise in payments has only just barely started! Many, many more mortgages reset through the rest of this year — and then the number really takes off next year.
How many more mortgages reset next year than this year? Go look at the chart of upcoming ARM resets: Calculated Risk: ARM Reset Charts. This is huge. We have only seen the smallest beginning of the problem. This is going to be really, really big next year. A really bad problem.
And the reason there was a “qualifying” rate? The buyer couldn’t afford to buy the house and needed something to get around this limit. So they used a “qualifying rate” to accomplish this – to make it look like the buyer could afford the payments. In other words, after an ARM reset, people can’t afford to make their monthly payments. Se can talk about the reasons loans were given to people who can’t afford to make the payment in another post.
Update – Bonddad shows the same graph with some explanation, in this post.

Today’s Housing Bubble Post – Record Price Drop

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Home prices fall record 3.2% nationally, Case-Shiller says,

U.S. home prices fell 3.2% in the second quarter compared with a year earlier, Standard & Poor’s reported Tuesday.
It’s the largest decline ever in the 20-year history of the Case-Shiller home price index.
A year ago, home prices were rising at a 7.5% pace nationally.
… Meanwhile, prices fell 3.5% in the past year in 20 major cities and 4.1% in 10 major cities.

It’s only the beginning. The psychology hasn’t set in yet. What happens next is sellers hear this news and start to realize that the game is up. So they’ll start to accept that they have to lower prices if they are going to sell. And this doesn’t even take into account that foreclosures are going to start serious price drops soon.
I’mnot trying to be doom and gloom here, I’m just describing what has to happen when we have seen the kind of price bubble we have seen. Prices have to revert to the mean.

Today’s Housing Bubble Post – Credit Cards Now

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Credit-card defaults on rise in US

US consumers are defaulting on credit-card payments at a significantly higher rate than last year, raising the prospect of problems in the stricken US subprime mortgage market spreading to other types of consumer debt.
Credit-card companies were forced to write off 4.58 per cent of payments as uncollectable in the first half of 2007, almost 30 per cent higher year-on-year. Late payments also rose, and the quarterly payment rate – a measure of cardholders’ willingness and ability to repay their debt – fell for the first time in more than four years.

Ripples.

Today’s Housing Bubble Post – Spreads to Jumbo Loans

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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 – Another Another Another One

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Bloomberg.com: U.S.,Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs.

Today’s Housing Bubble Post – Foreclosures Rise 58%

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U.S. foreclosures rise 58 percent in first half of 2007,

The number of U.S. homes facing foreclosure surged 58 percent in the first six months of the year, the latest sign of mounting problems in the mortgage industry, a data firm said Monday.
… “We could easily surpass 2 million foreclosure filings by the end of the year, which would represent a year-over-year increase of over 65 percent,” said RealtyTrac CEO James J. Saccacio.
California, Florida, Texas and Ohio were among the states with the highest number of homes receiving foreclosure-related notices, the firm said.

Today’s Housing Bubble Post – Another Another One

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Accredited Home Fires 1,600, Shuts Most Operations,

Accredited Home Lenders Holding Co., reeling from the collapse of its planned sale to Lone Star Funds, will shut more than half of its mortgage operations and fire about 1,600 people.
The subprime lender expects to close its 60 retail branches and five support centers within two weeks and halted for now U.S. wholesale mortgage applications from brokers, San Diego-based Accredited said in a statement today. The cuts will shrink Accredited’s workforce to 1,000 from 2,600.

And another Capital One to shutter mortgage-banking unit, cut 1,900 jobs,

The battered residential mortgage market and slumping housing sector are claiming victims left and right these days, and the Washington area is feeling some of that pain.
The latest news comes from McLean-based Capital One Financial Corp., which is ceasing operations at its wholesale mortgage-banking unit, GreenPoint Mortgage Funding Inc., resulting in the elimination of 1,900 positions.
Capital One will close GreenPoint’s Novato, Calif., headquarters along with 31 locations across 19 states.

Update — Sorry – I had Capital One yesterday. Substitute this: HSBC to close Indiana mortgage office,

The U.S. mortgage unit of HSBC Holdings PLC said on Wednesday it will close an office in Indiana, a move that will affect about 600 workers, amid a severe downturn in U.S. credit and housing markets.

And this: Ariz.-based finance firm to lay off 541, shut mortgage unit,

The widening mortgage slump hit the Valley again Tuesday as one of Arizona’s largest financial firms announced the layoffs of 541 people.
Scottsdale-based 1st National Bank Holding Co. said it will discontinue its national wholesale-mortgage unit and close mortgage centers in Virginia, North Carolina and Nevada, keeping open just one operations facility, in Tempe.

Today’s Housing Bubble Post – Companies Folding, Workers Laid Off

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We’re seeing the tip of the tip of the iceberg of the debt bomb. The “subprimes” were the first to surface, and we’re seeing the ripples of that spreading.
Mortgage Mess Toll Rises,

First National Bank of Arizona has become the latest casualty in the mortgage collapse that is gripping U.S. lenders.
The privately held bank has shuttered its wholesale mortgage lending division, according to mortgage brokers who have spoken with the lender.

And more, More Mortgage Firms Fire Workers,

Trouble in the mortgage market spread Monday as Capital One cof said it will shut its GreenPoint Mortgage unit and fire 1,900 employees because it expects tighter credit to squeeze both lenders and home buyers out of the market.
SunTrust Banks sti also said Monday it expects to lay off about 7% of its workforce to cut costs…
The news follows an announcement Friday that First Magnus Financial was closing down and had let go its nearly 6,000 employees. And Countrywide Financial, cfc the nation’s largest mortgage lender, told employees it would cut an unspecified number of jobs in its unit that specializes in loans for those with good credit but often undocumented income or assets, The Wall Street Journal reported.

More and more bad news as the ripples spread, Thornburg Loses $930M Selling Mostly AAA Mortgage Securities,

Thornburg Mortgage Inc. said on Monday that it lost roughly $930 million selling billions of dollars worth of AAA rated mortgage securities, while reducing borrowing and unwinding interest-rate hedges.

Later this year and throughout next year many, many adjustable mortgages reset to current rates from their initial “qualifying” rates, and many mortgage-holders will find themselves with whopping payment increases. And even THAT is only the first wave of the debt bomb.

Today’s Housing Bubble Post – The Wall Street Debt Mess

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I strongly recommend reading The Rise and Collapse of Wall Street’s House of Debt | The Agonist,

To understand the accelerating financial crisis that is afflicting various global markets you have to realize there are two credit creation processes at work in the world today. The first is the traditional one run by the central banks through the commercial banking system. This process has increasingly been shunt aside in the past ten years by a new credit creation mechanism run by the Wall Street investment banks. It is this new lending machine which is now imploding, and which threatens to impose severe economic pain.

The unwinding of the housing bubble takes us way beyond mortgages and into the financial markets of Wall Street. That’s why I titled this Today’s Housing Bubble Post. (By the way, it’s a generic title. We can have several Today’s Housing Bubble Posts on a given day.)
Reading this, iIt strikes me that it is describing a situation in which investors are borrowing to purchase these instruments, and to some extent the instruments are a repackaging of the loans that went to the investors tp purchase them.