The chickens have come home to roost

[NewHampshire Black Bears]

All of you, who have posted here, on this topic, are MUCH more knowledgeable than I(about economic matters), but one thing I do know(and everyone else for that matter), is that we've STILL got another.."14" more months of EL-CHIMPO at the helm !!!!!!!

Now because I don't know, could someone explain to me, that under the Reagan/GHW Bush era, the economy was'nt good. Under BILL, it was real good. UNDER EL-Chimpo, well "it" speaks for itself, and I'm assuming that the economy will rebound during the next POTUS, who's favored to be a Democrat.

What gives??

Just BAD GOP luck ??(I'm inclined to think NOT, though I'm not Qualified to prove it)

 

[Garfield1966]

I think it is more than bad luck.

Seems to be a pattern as of late.

 

[jerseyfinn]

Brilliant conclusion NH. It's all B43's fault.

Let's get some perspective on this mortgage thing.

Yes, it's a real problem because of the ripple effect which housing & housing sales/starts has on the US economy. So we should be concerned about how much this thing is gonna rock the boat . . . though I don't see us doing a Titanic any time soon. But there will be reprecussions which reach around the globe as world markets are interconnected and the currency issue also pops into the picture with an ever weakening dollar in world exchanges. Yet for now, most nations still want to hold US dollars.

As to the defaulting mortgagees. I think it's important to distinguish between the groups of individuals involved.

One group are the low-income wage earners who tried to get into the ownership game by purchasing their first home. Problem is some were not especially qualified to handle these loans once the discounted rate ended and the interest rates jacked up monthly payments. I feel sorry for many of these folks as their "sin" was not being able to qualify with conventional lenders and having to walk a slightly different route to ownership which turns out to be sharply rising payments which wre beyond their means. I'm gonna take a guess here, but I think that many lenders will identify these folks, and try to ferret out those who might still be able to work out a deal while also identifying those who have no ability to meet the payments. The former will end up with renegotiated loans and the later will have to face reality and sell their home ( likely at a loss ) and move one. The WSJ already speaks of banks delivering just this message to these unqualified buyers -- they're saying sell now, give us the money and we'll drop the outstanding interest -- in other words, all parties share the pain.

The other group who make up a big chunk of this mess are those individuals who watch too much TV and have been dabbling in the real estate market turning houses over. Problem here was that lenders extended too much easy credit to these folks who already own a primary home and were taking on additioinal mortgages for these quick turn around deals. Can't say I'm sympathetic to these folks as it's a clear case of the Bill of Rights. You did your individual thing, the market finally reared up and bites you in the ass, and now you gotta sell at a loss. The bad thing here is that these folks were partly responsible for fueling the real estate frenzy which kept driving prices up towards the bubble which markets warned would pop.

Now the interesting thing in this mortgage mess is that besides the people at the bottom, some of the big boys at the top take a hit. Of course their hit is for big bucks. This game is only for Goldman Sachs type brokers who buy all of these risky mortgages and turn them into derivatives which spread the risk into vague terms and cloudy portfolios which are purchased by other Wall Stree types in search of big profits. If the governemnt can keep their hands off of this side of things, these rich boys are gonna lose millions of their own money and the embarrassed banks and insurance companies are gonna learn a hard lesson just like those individual home owers do. Money does not grow on trees, and if it sounds too good to be true, it isn't true.

So yeah, all of us get to eat a turd or two on this one. But those who believe in Adam Smith's invisible hand ( which at the moment is up folks' whazoos ) will find that the market will take care of itself. The Catch 22 is that America's problems will indeed have a global impact which dinks us on the rebound . . . . . but the global economy has its own momentum which stands apart from America. They're gonna tug at each other and I suspect that the market will fall for a period before things begin to look up.

But good little boys and girls who have socked some money away will find some undervalued stocks out there which will indeed rebound. The only thing is that no one can say how long the downturn will last before you're rewarded for prudence and patience.

Barry

 

[KCFlyer]

Barry....you left out the folks who listen to the radio and fell for those "bill consolidation" loans, using the equity (125% in many cases) in your home. Seems nowhere during the "counseling" were those folks encouraged to cut up the credit cards that caused them to take out loans for more than the value of their homes in order to pay 6% versus 18% to 25% interest on a credit card. Now, they owe $250k on their $200k house AND they have another $30k in high interest credit card debt. This isn't good.

You also left out the folks who were watching in amazement as their $500k house suddenly was worth $600k...and boy, a new BWM 750 sure looked nice...and why not a nice boat to go along with it....THANK YOU house, for making it all possible. Now they've got a nice boat and cool car that won't fetch enough to pay off the equity they took out on their house...which is once again only worth $500k. That's not good.

What about all the Californians? I mean, for what they pay $500k for in LA, you can get for under $100k in Kansas City...and folks out there don't make THAT much more than a similar job in KC...Half a mil is pretty steep for a "starter home". Ah...but look "Interest only adjustable rate mortgages". Hey babe...suddenly home ownership is affordable. That ain't good either.

Bottom line...the US economy is powered by debt. When folks default on the fuel for the economy - it ain't gonna be a pretty sight.

 

[jerseyfinn]

Bottom line...the US economy is powered by debt. When folks default on the fuel for the economy - it ain't gonna be a pretty sight.

Might just as well say that every major industrial nation's economy is powered by debt. But that takes us back to Adam Smith doesn't it? And there's a thing called the multiplier effect in economics. That one dollar a bank loans to an individual/business actually behaves like there's five dollars more in the economy. So part of what's going on here is business as usual ( of course President Hoover simply says that the business of America is business ). The thing no one can gauge, is how this process might work in reverse when folks at the edges start pushing this normal business paradigm farther than was prudent.

Though folks point to the Great Depression at times like this, it's really more a matter of life, economics, and history moving through yet another cycle of "been there, done that". The only qualifying difference is the time in which you live. I do like your point about the effect of energy in the future upon the world economy. And energy may indeed have a huge effect upon the economies of the west and the emerging markets around the world. Of course the real issue about energy is not what America is doing about it ( sorry Al, go back to your 30,000 sq. ft. home and turn the heat back up ). This looming energy situation is about world consumption and not just America's energy policy.

Things like the World Bank, the European Union, and NAFTA are all part of an enlarging and increasingly interconnected global economy. America ain't gonna get to dictate all the rules and regulations ( our share of consumption of produced world goods is 19% and falling fast ). We're still a big player, but everyone is in for a rocky ride in the future.

Truth is, there's not a single politician on either side of the aisle who's willing to step up to the podium and admit that we need to raise fuel taxes. So if we can't concede that fundamental concept and instead adhere to our selfish " I have a constitutional right to drive my gas-sucking Hummer any time, any place, and it's hurting my self-esteem if I pay more than $1.50 a gallon ( and it's all B43's fault)", then I don't expect tranquility or especially strong growth in our economies. But neither do oI expect the end of the world.

My biggest fear is politicians of either ilk getting an itchy finger to over legislate and over regulate business. It doesn't take a rocket scientist to see that those refinance deals are stop gaps at best and most usually playing with fire because one doesn't comprehend the concept of "save for a rainy day" and " don't spend more than you earn". Human nature is such that there are always crooks out there trying to dupe you out of your money. But in a truely open society with a soft government hand, the stupid get duped ( coincidentally they also have trouble with chads & punch cards ), the greedy try to act, and a good chunk of the fools and crooks get what's coming to them. It's only when government gets overzealous do ordinary people get screwed by the foolish or bad behavior of others -- add government to that equation.

For folks who have some cash on the side line, it's time to do some homework and make a list and check it twice for those stocks and funds which are gonna get hammered down and will suddenly become value buys. Of course there's a certain party out there who wants to raise taxes & penalize individual investors who put their hard earned dollars up for risk in the markets which are starting to fly gale warning flags.

Barry

 

[KCFlyer]

...For folks who have some cash on the side...

The gist of this thread is that most Americans "cash on the side line" is borrowed money. Just a couple of years ago on a local "financial" talk show, the host was encouraging people to take out a home equity loan and "invest" in the stock market.

 

[777 fixer]

Its not a matter of If, the warning signs are abundantly clear!

Of course there's going to be a downturn. To say otherwise would be foolish. It's how the economy works. The economy goes up for a period of time then goes down.

 

[777 fixer]

777...I think that the debt that American's has taken on...the "wealth accumulation" they achieved by mortgaging their homes to the hilt...the "credit society" which encourages spend spend spend, but gives little regard to where the money they are spending is coming from. What would the 70's and 80's looked like if, instead of high interest rates (which discouraged borrowing to run the economy), we would have had artificially low interest rates and folks borrowed against the equity in their homes? I think the guy is spot on...if there are more hiccups in the mortgage industry...then we will see a quick end to a lot of the "income" that has been powering our economy. And the effects of that will be devastating. If the money you were spending was dependent on the speculation that your home value would just continue to rise...allowing you to "print money" in the form of home equity loans...and that source of spending is shut off....it will affect a LOT of industries.

In the seventies and early eighties in a lot areas borrowing money against the equity in you home was not an issue. That's because there was no equity from which to borrow. In areas hardest hit people could not even sell their homes when the local plant closed up let alone get a home equity loan. The ten percent of the working population that was unemployed at one point could not get a home loan or a home equity loan. You don't think that didn't have an affect on the economy do you?

The point I'm trying to make is that we have seen downturns like this before. In the seventies and eighties manufacturing got hammered. In 2000-2001 tech and transportation got hammered, as those of us in the airline industry know all to well. There are still a lot of what if's. If all these sub-prime loans default then yes we are going to have big problems. But as we saw in that article people like Mr. Colombo were able to refinance with a fixed rate loan.

I do agree with you on the point that people need to get their act together when it comes to credit. There is no such thing as free money.

 

[KCFlyer]

In the seventies and early eighties in a lot areas borrowing money against the equity in you home was not an issue. That's because there was no equity from which to borrow. In areas hardest hit people could not even sell their homes when the local plant closed up let alone get a home equity loan. The ten percent of the working population that was unemployed at one point could not get a home loan or a home equity loan. You don't think that didn't have an affect on the economy do you?

Of course it had an effect...but IMHO, because borrowing has become the engine of our economy, especially with folks taking out equity lines on their homes...that source has been tapped out. Will people quit spending, or will they turn to credit cards to fund the economy...too many people ran up credit card debt, the "consolidated" that debt in the form of a home refinance, then ran up more credit card debt. Their pay hasn't gone up exponentially. What happens when they have no more "income generation" from their house...and they can't afford the payments they've run up? I think there are a lot more folks in that situation than you seem to.

 

[777 fixer]

All I know is I am sitting on 4.5% on a fixed 15 yr loan (11 yrs left) and I am not planning on moving. he house is pleanty big for the two of us and our pets. I ought well below my approved level and I live with in my means (harder now since my means have decreased an expenses increased) and we are way ahead of the Jones's who everyone else seems to be trying to keep up with.

My wife and I are in the same boat you are. We qualified for more than what we actually ended up spending. Given the nature of the airline business I thought it better not to max out on a house payment every month. With the payment we have now we can put money aside for a rainy day. I know more than one person who is stretched to the max on house payments. God forbid they lose their job, they have little savings in which to cushion themselves. I also resisted the temptation a couple years ago to take out a home equity loan.

 

[Gilding the Lily]

My wife and I are in the same boat you are. We qualified for more than what we actually ended up spending. Given the nature of the airline business I thought it better not to max out on a house payment every month. With the payment we have now we can put money aside for a rainy day. I know more than one person who is stretched to the max on house payments. God forbid they lose their job, they have little savings in which to cushion themselves. I also resisted the temptation a couple years ago to take out a home equity loan.

I did take out a home equity revolver a few years ago and it worked like magic. The interest I earned on the money I borrowed was a full 2.7% more than the interest I was paying to the lender. Payed the lender in full and pocketed the rest. It is much more fun to play with other people's money; it is leverage at its best!

If I was younger and less risk adverse, I would consider dipping into the revolver again in order to short some things, wait a few months and then invest in choice currencies.

 

[NewHampshire Black Bears]

I did take out a home equity revolver a few years ago and it worked like magic. The interest I earned on the money I borrowed was a full 2.7% more than the interest I was paying to the lender. Payed the lender in full and pocketed the rest. It is much more fun to play with other people's money; it is leverage at its best!

If I was younger and less risk adverse, I would consider dipping into the revolver again in order to short some things, wait a few months and then invest in choice currencies.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I hear ya Lily.
But one currency for SURE(in the short run) that you WON'T be investing in, is the USD.

 

[NewHampshire Black Bears]

In the seventies and early eighties in a lot areas borrowing money against the equity in you home was not an issue. That's because there was no equity from which to borrow. In areas hardest hit people could not even sell their homes when the local plant closed up let alone get a home equity loan. The ten percent of the working population that was unemployed at one point could not get a home loan or a home equity loan. You don't think that didn't have an affect on the economy do you?

The point I'm trying to make is that we have seen downturns like this before. In the seventies and eighties manufacturing got hammered. In 2000-2001 tech and transportation got hammered, as those of us in the airline industry know all to well. There are still a lot of what if's. If all these sub-prime loans default then yes we are going to have big problems. But as we saw in that article people like Mr. Colombo were able to refinance with a fixed rate loan.

I do agree with you on the point that people need to get their act together when it comes to credit. There is no such thing as free money.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Your correct fixer....the 80/90's................and 2000/2001 were bad, BUT a big difference that shows how much worse it's become is;

There was'nt not the Mortgage scams then, as there are now,
AND,

as far as those fuuking CCards go...............back in the 80's, everyone could get a $300 Min. card.......then it was the $300 card, but you had to open a security account for a $100,.................NOW, it's a $250 Min. card,............but you have to pay UP FRONT a "one time" activation FEE, a "handling FEE", a "processing FEE" and a "Your sisters BUSH" FEE, then your left with an available balance of $24, with an Interest rate of "29%" !!!!!!!!!!!!!,

AND...we STILL have ANOTHER 14 months of..................EL-CHIMPO :down: :down:

 

[jerseyfinn]

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

as far as those fuuking CCards go...............back in the 80's, everyone could get a $300 Min. card.......then it was the $300 card, but you had to open a security account for a $100,.................NOW, it's a $250 Min. card,............but you have to pay UP FRONT a "one time" activation FEE, a "handling FEE", a "processing FEE" and a "Your sisters BUSH" FEE, then your left with an available balance of $24, with an Interest rate of "29%" !!!!!!!!!!!!!,

NH,

Did you ever notice that if you pay your credit card in full each month that you don't get charged with anything? Pay on time, no fee? Don't spend more on the card than you can afford to pay each month and ergo facto no fee, just the convenience of having the card?

The market and the banks are working just fine for folks who see credit as a tool and a privilige and not a way to play "sky is the limit" today and not worry about tomorrow. It is true that banks have thrown up some niggling fees which can trip one up if they don't keep their eyes open. But hey, the car dealer puts his car on the lot with a full sticker price to see if someone will pay it. Indeed credit became too easy to get in the 90s and after, but all one has to do is look at their bills and measure it against what income is coming in. Nothing wrong with Economic Darwinism in an open society. Folks just got remember try as they might, there's no free ride in life, just opportunities to tag along and tailgate if you work hard.

We're in a peculiar situation where if you owe the bank $100, it's your problem but if individuals owe the bank 100 million dollars it's the bank's problem.

Barry

 

[KCFlyer]

NH,

Did you ever notice that if you pay your credit card in full each month that you don't get charged with anything? Pay on time, no fee? Don't spend more on the card than you can afford to pay each month and ergo facto no fee, just the convenience of having the card?

The market and the banks are working just fine for folks who see credit as a tool and a privilige and not a way to play "sky is the limit" today and not worry about tomorrow. It is true that banks have thrown up some niggling fees which can trip one up if they don't keep their eyes open. But hey, the car dealer puts his car on the lot with a full sticker price to see if someone will pay it. Indeed credit became too easy to get in the 90s and after, but all one has to do is look at their bills and measure it against what income is coming in. Nothing wrong with Economic Darwinism in an open society. Folks just got remember try as they might, there's no free ride in life, just opportunities to tag along and tailgate if you work hard.

We're in a peculiar situation where if you owe the bank $100, it's your problem but if individuals owe the bank 100 million dollars it's the bank's problem.

Barry

Barry...no doubt about any of that...but MOST Americans have a NEGATIVE savings rate. That means they have been "powering the economy" on plastic, and turning to the home based ATM (equity lines). Economic Darwininsim is what threatens the US economy. I don't have debt (outside my home mortgage - with it's equity fully intact). but you and I are the exception rather than the rule. And this house of cards economy that we have is going to hurt even those like us.