Financial Meltdown Part Deux
If you look at the graph, you will note how Alt A mortgages will soon reset in droves toward the end of this year. What are Alt A mortgages? Many credit worthy borrowers failed to provide full documentation during the housing boom. As a result, they could not qualify for prime mortgage loans. At the same time, they had an adequate credit score and so subprime status did not apply either. To a large extent, Alt A mortgages were this 'in between' status given to borrowers for a number of different reasons, but largely because of inadequacies in documentation.
Typically, if a mortgage resets above what a person can afford, then it will take a couple of months before delinquency begins. The foreclosure process may occur sometime thereafter if another solution cannot be found. The thing to note is the timing of it all. Expect another mortgage meltdown to begin about one year from now as it relates to Alt A mortgages. True, these mortgages have already caused havoc. It's just that the problems are going to resurface in a big way. I am fully flabbergasted at economists or so-called financial experts that believe we will see a turnaround at the end of this year. Perhaps it's done to maintain consumer confidence. Or it's the same brand of ignorance that led us down this road in the first place, i.e. a complete disregard for fundamental investing.
This debacle is far from over. People might want to consider talking to the Consumer Credit Counseling Services of Oregon to review personal finances in order to get prepared for what will be a long haul.
Round deux . . .
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March 22, 2009 |
Jenson Hagen | Comments (26 so far)
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Posted by: Sebastian | Mar 22, 2009 1:03:06 PM
I think this is a very interesting post. But shouldn't people with Alt A mortgages be exactly the people who could refinance under the administration's mortgage plan? Or would "improper documentation" cause problems?
Also, wouldn't the mortgage be reset at a low interest rate, because the interest rates are currently extremely low?
It also appears to me that less than 5 % percent of those mortgages are reset in the last three months of the year, so shouldn't we be able to work this out?
Anyways, I never heard of these mortgages before and have never before taken out mortgages, so I don't really know much about the details. So I am glad you are bringing this to our attention.
Posted by: Jamie | Mar 22, 2009 1:42:10 PM
re: "failed to provide full documentation"
This could mean a few things. I wonder which is the more common situation:
(1) failed to provide the documentation because it was difficult or inconvenient to get a hold of it (like when past years' taxable income information was not available due to not having filed returns, or because it would take too long to get copies from IRS).
(2) failed to provide the documentation because the documentation would have shown a disqualifying situation (like when taxable income information would have shown an insufficient income to qualify for the loan).
Posted by: pacnwjay | Mar 22, 2009 2:11:25 PM
During the run-up to this fiasco, mortgage brokers LOVED doing these no-doc or limited doc loans. My mortgage broker kept pushing me in this direction, "to get a better rate".
The reason they loved these loans? Less work! Check your credit score... and done. Brokers could push these through in an instant, and the idiot banks (who weren't going to hold onto it anyway) were happy to approve.
It also made it convenient for people who might find it difficult to get approval (the self-employed, waiters, bartenders; commission-based employees) to fly through the process.
I've heard a bit about the new "mortgage reset option" (on progressive radio) but I haven't heard much about any rules/stipulations, other than it has limits on how much value your home has lost. Can you reset if you've lost your job? Can you reset if you wouldn't normally qualify for a normal fixed mortgage? It doesn't seem to me that they're out there promoting this, or communicating it to the public.
Posted by: Dan Petegorsky | Mar 22, 2009 2:21:25 PM
Kari - since the CDOs were written to hedge investments in very highly leveraged mortgage backed securities, the default rate on the mortgages that were packaged into those securities is indeed highly relevant.
The models that the geniuses who devised these securities used assumed historically normal default rates and ever increasing home values. So the combination of the housing bubble bursting along with the prospect of abnormally high default rates on suspect mortgages wreaked havoc with those assumptions.
Ironically, my understanding is that to date the institutions that have gone under or are at risk as a result of the CDOs are in deep doodoo not so much (yet!) because of actual losses in the securities themselves, but because the issuers of the CDOs - both because of the huge shifts in market assumptions and, in the case of, say, AIG, the downgrading in their ratings - combined to force them to put up a LOT more collateral in margin calls required under their contracts.
That said, I admit that I've found some of the latest information/details on this both confusing and contradictory. For example - one of the things we kept hearing about the humongous AIG bailout is that it was necessary primarily because if AIG collapsed the real victims would the counterparties to whom it had sold the credit default swaps - including banks around the world, pension funds, states and municipalities, etc.
BUT: just the other day one of the very largest recipients of pass-through money from AIG, Goldman Sachs, claimed that it actually stood to have lost very little if AIG went down. Maybe one of our more astute and far more economically literate readers than I can help explain this seeming anomaly/contradiction?
Posted by: Dan Petegorsky | Mar 22, 2009 2:29:34 PM
oops - that should have been CDS's (credit default swaps) in my comment, not CDO's.
Posted by: regulararmyfool | Mar 22, 2009 2:31:32 PM
A crummy couple of billion are involved in these adjustable rates. Wait until people who have always had a job and paid their bills on time and had honest mortgages can not pay their bills.
The final wave is going to come when someone actually audits the books of the big insurance companies. I predict that AIG will be at best a little ponzie schemer when the big wave breaks. You can stop paying for any insurance now because it is an excellent bet that they will never be able to pay off car accident claims, hospital and doctor bills, homes burning down (yes, Virginia, in tough times homes and business burn down like crazy) or anything else.
Well it was sorta a fun ride. Too bad the train wrecked but it was going like hell when it ran off the tracks. Now let's decide who is going to ride in the cab. The poor who have always been shoved to the danger spot or the rich who stole. Let the Bushvilles grow.
People living on the street while a presidential candidate could not even remember how many homes he had.
The perfect American metaphor.
Yep, old Karl Marx was dead on. Read Das Kapital, it is a hard read but the only intelligent conclusion it brings to mind is that capitalism will not stop sucking the life out of the world until only one owner is left with everything. Then it may become apparent that the whole thing was a huge damn joke.
There is plenty for everyone on this mudball. We all live here. Unfortunately, there are some really greedy bastards running the place.
I weep for the human race.
Posted by: Jenson | Mar 22, 2009 3:28:00 PM
Right!
Many borrowers will be able to refinance and avoid disaster. But a significant enough percentage of borrowers will not be able to refinance because (1) they have lost their job (2) their income has decreased (3) they have seen a decline in credit score or (4) the documentation they need to supply would have been and still is fully inadequate.
Another really important concept to remember is this whole equation: money supply x velocity = GDP. The loss of a few billion in loans means that this money does not circulate around and around and create many more billions in purchasing power. That is why the banking system is so crucial to our overall economy: it is the only source of "new" money.
Yes, the government can make spend borrowed money, but that is all old money that was at some point created by the fractional reserve banking process. Yes, the Federal reserve can monetize assets, place them in a vault somewhere and provide paper cash to use in replacement that is more liquid and easier to exchange for an economy. But the Federal Reserve does not create "new" value for an economy, nor does it really create "new" money for that matter.
This TARP program started by the Federal Reserve is incredibly dangerous because it has allowed the exchange of paper money for toxic bonds. Instead of money being a reflection of high-grade assets like gold or US Treasuries held in vault, the Federal Reserve has taken toxic assets out of the economy and provided paper money it their replacement. That means though that the paper money derives its value from assets declining in value themselves.
In short, expect a major bailout of the Federal Reserve and significant global blowback when that occurs.
Posted by: Steve | Mar 22, 2009 4:58:05 PM
"it seems to me that the biggest culprit are these nonsensical credit default swaps - these unregulated, private contracts that are essentially massive side bets, rather than actual assets."
Credit swaps are not non-sensical. They are device designed to provide "insurance" on yield. The real issue is that these artificially dropped the interest rates and allowed people who shouldn't have qualified normally, to get loans. Whatever, we have a money supply that is constricted (velocity = 0) and have to do something besides passing a law.
"This TARP program started by the Federal Reserve is incredibly dangerous because it has allowed the exchange of paper money for toxic bonds."
Jenson - I think the latest metamorphosis of TARP is pretty bad, but ultimately, isn't that what it was set up for was to buy bad debt? By monetizing the debt, they can at least push some cash onto banks (that sounds sickening) where they have to do something with it (like loan it out or increase velocity.) Just hope they can do it right and not flood us with dollars (or inflation.)
You have to admit, its a lot better than just "giving" a bank a few billions hoping they'd loan it out. That didn't work out so hot. Most banks either kept it to shore up resreves or built a slush fund to buy other banks.
Once we get done with this, then we can start dealing with the smoke and mirrrors used to construct public employee pension funds, if you think this is bad. Neither of which increased money velocity.
Posted by: Jenson | Mar 22, 2009 8:07:59 PM
Steve,
It's not the TARP program monetizing bonds that concerns me. It is that fact the the choice of bonds is so bad. Instead of gold, silver, US treasuries or even high grade municipal bonds being monetized (converted into more liquid paper money), the Federal Reserve is monetizing junk. They have even paid above the current market rate for some of these mortgage back securities. The Federal Reserve has little capacity for losses since all they do is monetize assets. When the time comes to "unmonetize" meaning retire the cash paper money and reintroduce the real assets back into the economy, we will all bear witness to a huge mistake that is being made.
Posted by: George Anonymuncule Seldes | Mar 23, 2009 12:05:35 AM
The best thing written yet for a lay audience on all this:
http://www.rollingstone.com/politics/story/26793903/the_big_takeover/1
Posted by: rlw | Mar 23, 2009 12:49:33 AM
... and we are being told we must honor the contracts for bonuses for the criminals who masterminded this mess?
What an upside-down world we live in.
I'm a simple minded woman who wonders why we need those evil geniuses. COuld not the think tank economists and brightest minds teaching the other brightest minds take this on after the politicos and professional con men are booted? Would not a shift of view do wonders for the management of an issue that developed under a twisted line of thought?
Posted by: Adipose Army of America | Mar 23, 2009 2:34:26 AM
Many credit worthy borrowers failed to provide full documentation during the housing boom.
Every bit of this is just simple fraud. They were only credit worthy, because they failed to provide the documentation that would have shown that they were risks.
Kari scratches the surface of the problem (then gets predictably ignored). In the beginning, you had a service/product to sell, you start a business. Then, the movers and shakers decided that you could make a lot more, if you concentrated on the business of business, without all that sentimental emotion. They started selling widgets and moving product. Now, we've entered the third phase. In it, you only have a business and raise capital to invest in various markets.
It's kind of like the computer "substitution", as opposed to revolution. Used to be you went to a boat show, you saw new boats. Go to a copy machine show, you saw new copiers. Go to a dentists convention, you see new drills. Now, little of the working hardware changes; the new products offered at those conventions consist of new computer hardware and new software. Oh, yeah, we do some core business on the side. This has become the same deal with cash flow businesses, that even the business of business has become a side line to playing the markets.
Bottom line, there's one simple thing consumers can do. Simply throw a hissy fit whenever you get third party marketing or a company puts some investment scheme ahead of doing what you pay them to do. I ordered a pizza online the other day. Before the confirmation screen even displayed, I was barraged with third party marketing, tied to the "exit" functionality. I promptly called the restaurant, canceled the order, and wrote the company. You do that, a lot of the attitude will change overnight. It won't though, because, progress to date has shown, you will not do anything other than talk about this. That's the difference between you and the money men. They know it too.
Posted by: Kari Chisholm | Mar 23, 2009 2:44:04 AM
Dan P & "Steve" --
I understand entirely that the swaps were designed to provide 'insurance' for pools of iffy mortgages.
And if that's all they were doing, we wouldn't be in this mess.
As I understand it - and I'm far from an expert - they're called "swaps" precisely to avoid calling them "insurance", and thus avoid regulations that keep insurance products from getting out of whack.
Also, as I understand it, these side bets vastly exceeded the value of the underlying mortages they were designed to hedge against. With side bets exceeding $62 trillion - or more than $200,000 per man, woman, and child in America - there's simply no way that that bet makes any damn sense.
And finally, as I understand it, this all happened because these are private contracts that aren't traded on the open market. In many cases, they're not even listed anywhere.
Posted by: Eric Parker | Mar 23, 2009 7:20:24 AM
"Many credit worthy borrowers failed to provide full documentation during the housing boom.
Every bit of this is just simple fraud. They were only credit worthy, because they failed to provide the documentation that would have shown that they were risks."
Whatever happened to 'if you can't afford it, don't buy it'? Just because you have a family does not entitle you to recieve a home. Has common sense become an oxy-moron now?
While the blame is mostly on the people who gave the loans (banks, ect), some blame has to be put on those who signed the loans in spite of not being able to afford the payments in the future. Just because you have a family, does not actually entitle you to have a home automatically.
I have no trouble right now with my finances simply because I resisted the idiots who told me "you need this" simply because "you have that". If I can't afford it, I don't buy it.
I have no sympathy for people who got into this mess simply because someone in 'authority' told them they had to have a home when common sense clearly showed them otherwise.
Sometime, you have no one to blame but yourself.
Posted by: gl | Mar 23, 2009 10:07:41 AM
"...as I understand it"
Its too easy to put all the causation on CDS, without understanding what they are. Also any discussion on the CDS needs to include the issues of risk mitiagation, and liquidity. If you want to find something to blame - we are in a situation with such multi faceted components that just to pull out torches and pitch forks and blame I bankers or derivatives is disingenuous. The causes are just as complex and deep rooted as the problem.
Posted by: andy | Mar 23, 2009 12:48:10 PM
There isn't anything wrong with an Alt-A mortgage as long as the person who applied for the mortgage can make the payments. If people were stupid enough to take out loans that they can't repay then I guess they're in trouble.
Can't fix stupid, can't even legislate it away. People really should read the loan agreements that they are signing. If they can't make the payments then they shouldn't sign the loan. Couldn't be much easier than that.
Posted by: Harry Kershner | Mar 23, 2009 2:14:35 PM
Fundamental change is necessary, and throwing money at the rich is what we're getting.
In a Bush-lite moment last night on 60 Minutes, "New Democrat" Obama said the equivalent of "Geighty, you're doing a heck of a job", because he and his corporatist crew desperately want to maintain the present system, even if it produces a New Orleans outcome for us all.
Much of the discussion on these issues is dominated by stage-magic-like convoluted attempts to shift attention from what can easily be understood.
It's the current underpricing of systemic risk that would be adjusted if we were to break up the corporate entities that are "too big to fail". Then we need law enforcement for the rich, including anti-trust action; prohibition of fiduciary institutions from speculating in derivatives; and a small tax on derivative transactions to make Wall Streeters pay for their own bailouts.
Markets can only work when they are properly regulated and when risks that endanger us all are borne by those who would take them. That ain't rocket science, but it's being ignored by the kleptocrats who are stealing us blind.
Posted by: Harry Kershner | Mar 23, 2009 2:28:03 PM
For those who care about their neighbors being thrown into the street (obviously not the "conservatives" who have been trying to dominate the conversation): Yes On SB 628, which will require lenders to enter into mediation with homeowners before foreclosing on their homes. Call your state reps.
Posted by: Steve | Mar 24, 2009 6:19:16 AM
"they're called "swaps" precisely to avoid calling them "insurance", and thus avoid regulations that keep insurance products from getting out of whack."
Since your issue seems to be regulation, even if we regulated it, would it have helped.
Suppose you had property insurance in Cali and they wanted to add full earthquake insurance in cas LAX fell into the ocean (maybe while the Lakers are in town.)
I guess the options would be to make insurance rates 10x what they are now and then complain about the excess money in case there is not an earthquake or leave teh rates alone and hope/pray this doesn't happen.
That's the problem with the swaps. They didn't take into account risk and traded too cheap. This allowed effective interest rates to end users that were either too low or too easy to qualify for. In effect, we ended up with borrowers that really shouldn't have been lent money.
So now we have portfolios with who knows how much bad debt (1%, 20%, 50% or 100%) and no one wants to buy something that they can't determine what the value is. So the lucky taxpayer gets these.
My biggest issue is how Mr Geithner decides what to apy for these things.
The only thing I can think of would be somehting like a Dutch auction and let the banks decide what is the stinkiest paper in their pile. That is, if a bank really wants to get rid of some loans, they can sell it to someone for $0.10 on the dollar, while a better looking peice of paper may go for $0.50.
Jenson probably understand these things better, so I'd defer to him.
Posted by: Steve | Mar 24, 2009 6:21:42 AM
"There isn't anything wrong with an Alt-A mortgage as long as the person who applied for the mortgage can make the payments."
That brings another interesting point on these mortgages I'd love to find out. Of the people who want out how many are:
1) Can't really make the payments
2) Can make the payments, but are looking at a house they paid $500K for now worth $300K. Throwing bakc the keys may look more palatable than making payment on something they are upside down on.
Posted by: GWeiss | Mar 24, 2009 12:45:05 PM
Why can't the AIG and other bailout firms' bonuses be paid using the CDOs that AIG and other executives created? Use the booked value of the CDOs and pay the boys their bonuses. They stole them fair and square.
Posted by: Zarathustra | Mar 26, 2009 6:45:42 PM
Bottom line, fraud is as fraud does.
Posted by: Ted | Mar 26, 2009 8:18:49 PM
Kari - Thanks for teeing off with the first comment, and getting it right.
So when you hear about how "quants" believed they had cured all risk from the system, you can begin to understand it with the Credit Defaut Swaps. It was hyper-hedging with the Investment Bank A in the middle always looking to make a fee. So let's say you (Hedge Fund Q) bought a CDS on Z Company bonds. Now if it looks like Z Co will default, Investment Bank A buys a CDS on what it thinks it will lose on the CDS it sold to Hedge Fund Q from Investment Bank B. Now Investment Bank A is protected, right?
Wrong! Because the "greater fool" theory is a lot like splitting atoms. Eventually the chain reaction is done. Knowing that, the various players start making CDS bets against the market. So much for the "Quants" little Eutopia (sic) of unlimited leverage and prosperity. Now you have what Warren Buffet called "financial weapons of mass destruction."
...Right back to the splitting atoms analogy.
What MUST be done is NOT what Obama and Geithner are proposing. On the contrary, the progressive thing do do here is exactly what Libs like Ron Paul are saying. Let the thing run its course in the Bikini Atols of Citi, BofA, etc. Those banking giants will die, but that's as it should be. Propping them up is welfare for the banking elite. The free market WANTS to act in the most progressive and egalitarian of ways right now. It WANTS, actually NEEDS, to burn itself out and destroy the risky entities at Ground Zero of this conflagration.
What's really happening is the Obama Admin showing it answers to the same financial power behind the curtain as did the Bush Admin. Don't get me wrong, I'm happier now that we have a smarter man like Obama playing the president's role, but it should be enough by now to shatter any wise person's view of the American democracy we were taught to believe in.
Posted by: Damon Getsman | Mar 30, 2009 11:12:11 PM
Horrifying. Seriously horrifying.
I have a son that's going to be getting ready to go to school in a few years here. Are they teaching any of the common sense and logic now, as opposed to when I went to school, that allows kids to think out the answers to conundrums such as these?
Posted by: ep | Apr 4, 2009 7:22:25 AM
Everyone points the reason for the financial mess at the banks or credit institutions for lending sub prime loans to people who couldn't afford them. The question and digging towards the root of the problem is: WHY? The underlying reason is called SPECULATION & GREED.. Average people where forced to borrow from these financial instruments because the REAL ESTATE SPECULATORS, over time, drove up the home prices too high..
So when financial institutions created these financial instruments to fuel this elevated housing market; they were just playing along... The point is...its not necessarily because the borrowers where not fit to qualify, but rather because they where forced to borrow too much. Many of these where average families with average income, who need average homes... The problem is the "Flip this house" mentality, made those average homes, too expensive for average people... Of course, these loans "principles" where then traded as commodities all around the world which COMPLICATES THE ISSUE into what it is now....
Thus we are seeing the SELF CORRECTION trigger from this real estate greed. So, if you dont want to experience this again in the future... Understand that it is this pipe dream of constantly flipping real estate for gain, that is the real underlying cause of this mess.
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Posted by: Kari Chisholm | Mar 22, 2009 12:52:52 PM
While the mortgage crisis is a major player in our economic situation, it seems to me that the biggest culprit are these nonsensical credit default swaps - these unregulated, private contracts that are essentially massive side bets, rather than actual assets.