The concept of entropy is one of the most useful terms for understanding just about everything. While it has its origins in natural law – thermodynamics, specifically – the concept holds true pretty much across all closed systems.
In the simplest of terms, every closed system will ultimately degrade toward a state of maximum entropy. I’ll use the current political system of the U.S. as a convenient example. When American democracy was first shoved out of the nest by the founding fathers, it was new, fresh, and energetic. It took the world’s breath away at its boldness and unlimited promise, and set the wheels turning on tangible change across much of the world.
Before the ink dried on the Constitution, however, the degradation began. From the beginning, the country’s political operations fell into the hands of a strictly limited number of parties, which quickly coalesced into just two. Since then, they have essentially shared power, with only minor differences in policies between the two. Simply, absent a disruptive external force, the closed political system quickly matured into an institutionalized “sameness” that all but assures no serious challenges – leading, ultimately, to the certainty it will degrade to only a shell of its former self.
It was, perhaps, because of his own understanding of natural law that Thomas Jefferson was heard to remark, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is its natural manure.”
That doesn’t mean I am advocating revolution, dear reader – just pointing out the fact that any closed system, no matter how well constructed, will degrade. To expect the United States of America to avoid this fate is to expect the impossible. Switching to a corporate example, I used to be a regular buyer of Toyota cars. They were well made, innovative, and suited my changing needs over the years. And I wasn’t alone – in 2007 they became the world’s largest automobile maker, with a global manufacturing and distribution system that made them appear dominant. Behind the scenes, though, entropy was at work.
In 2008, when the time had come to lease a new car, I reflexively headed over to the local dealer fully expecting to drive off with yet another Toyota, just as I had done several times over the previous decade or more. But as I walked around the showroom, it was impossible not to notice that the company had lost its edge. The cars on offer were not only more expensive than the competition, but even the newest models had that “so yesterday” look about them.
As I said at the onset, you can see entropy at work in virtually every closed system. Consider the U.S. dollar, which became the world’s de facto reserve currency as a result of Bretton Woods. What an amazing advantage for the United States – this unique ability to provide the world’s central banks with their primary reserve component! And to have all the world’s commodities dealt in dollars. In short, the dollar became the centerpiece of the global economic system.
It was, of course, damned to entropy, with Nixon’s ending the dollar’s gold backing just being part of the natural progression. And if he hadn’t done it, one of his successors would have – due to some “emergency” or as a “temporary” measure, or some other flimsy political cover. Regardless, the degradation of the currency gained speed and, systematically, it’s been all downhill since.
We the people are no longer content with a free-market system that embraces periodically burning down the house in order to rebuild stronger and better – a system which has been proven to create wealth, and lots of it. Instead, we are hell bent on adopting the closed economic system of a socialist model where everything and everyone is tightly controlled.
On that point, an article in today’s edition of the Wall Street Journal titled “No Exit in Sight for U.S. as Fannie, Freddie Flail” sheds light on the continuing degradation in the free market that used to underpin the nation’s hugely important housing sector… Fannie and Freddie, for their part, remain at the core of a housing-finance system that inflated a dangerous housing bubble. After prices collapsed, sending shock waves around the world, the federal government put America's housing-finance system on life support. It has yet to decide how that troubled system should be rebuilt.
On Dec. 24, Treasury said there would be no limit to the taxpayer money it was willing to deploy over the next three years to keep the two companies afloat, doing away with the previous limit of $200 billion per company. So far, the government has handed the two companies a total of about $111 billion.
The government is willing to tolerate such open-ended exposure for two reasons. First, it sees the companies as essential cogs in the fragile housing market. Fannie and Freddie buy mortgages originated by others, holding some as investments and repackaging others for sale to investors as securities. Together with the Federal Housing Administration, they fund nine in 10 American mortgages. Worries about potential insolvency would cripple their ability to fund home loans, which would hamstring the market.
Second, the companies are a convenient tool for the administration to use in its campaign to clean up the housing mess. "We're making decisions on [loan modifications] and other issues, without being guided solely by profitability, that no purely private bank ever could," Mr. Haldeman said in late January in a speech to the Detroit Economic Club.
Besides playing a key role in the loan-modification program, Fannie and Freddie have jump-started lending by state and local housing-finance agencies by helping to guarantee $24 billion in debt. They also are lending support to the apartment sector by becoming the main funders of loans to builders and buyers of apartment buildings.
By using Fannie and Freddie for such initiatives, the White House doesn't have to go to Congress for funding. The Treasury and White House can simply issue instructions to Fannie and Freddie via their federal regulator, the Federal Housing Finance Agency, or FHFA.
The government is "running Fannie and Freddie as an instrument of national economic policy, not as a business," says Daniel Mudd, who was forced out as Fannie Mae's chief executive in September 2008 when the government took control.
(Full story here.)
Can’t you just smell the entropy? The results are not just predictable, they are evident – just look around.
As investors, it is, I would contend, important to understand the notion of entropy – and to watch for it in your portfolio companies, in your bureaucracies, and, on a more personal level, your relationships and your health. On that last point, the human body is very much a closed system and so, as we all are too painfully aware, will degrade until it ceases to exist.
You can slow the degradation by taking care of yourself. But it’s also worth remembering that it’s a one-way slope, so enjoy yourself while you are fit and able to.
======================================
Provided by Casey's Daily Dispatch
Showing posts with label mortgage crisis. Show all posts
Showing posts with label mortgage crisis. Show all posts
Wednesday, February 10, 2010
Friday, January 29, 2010
Banks Can No Longer Sing "What a Friend We Have in Washington"
These days, the financial industry's locus of power can't be found in London. It's not in New York City. Frankfurt? Tokyo? Davos, Switzerland? Nope, nope, and nope.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
The real decisions that impact the capital markets are being made in Washington. And they're sometimes being made by politicians who don't really have a clue about how the industry works, or what unintended consequences their actions may have. If that doesn't scare you, I don't know what will.
Look no further than last week's market carnage for proof of who's in charge. The market was continuing on its merry way — until Washington lobbed several curve balls at Wall Street.
The reaction was swift and severe: The overall market suffered its biggest hit in months, with financial stocks getting hammered particularly hard. Moreover, the "VIX" index of volatility surged 55 percent in a span of three days. We haven't seen a move that large, that quickly since 2007.
It's clear to me that the political tides are shifting for the financial industry — and not in a good way. This could have widespread implications for the markets I follow most closely, so I want to expand on some key points.
Bankers No Longer Free to Run Wild?
President Obama shocked the markets last week with a new plan designed to rein in the nation's banks. It would specifically bar banks from holding or investing in private equity and hedge funds that aren't related to customers they're serving. Banks also would have to shed so-called "proprietary trading" units that use their own capital to place bets on the market.
Combined, these moves could impact companies like JPMorgan. It runs a OneEquity Partners PE unit that makes $8 billion in investments. It could also hammer prop trading houses like Goldman Sachs and Morgan Stanley, which generate billions of dollars in revenue from such activities.
President Obama has shocked the markets with a plan to rein in the nation's banks.
In the bigger picture, as Martin noted earlier, this signals that the "Bailout Brigade" of Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke may be losing influence. The outrageous behavior of Wall Street firms and the banking industry — and Washington's coddling of them — have finally pushed average Americans over the edge.
They're sick of watching companies make stupid loans, arrange stupid deals, blow themselves up, take billions of dollars in taxpayer money, and then — in a move that defies all logic, morality, and sensitivity — turn around and pay themselves billions and billions in bonuses! So they're rising up in anger and trying to "vote the bums out."
Result: The policymakers in Washington are finally being forced to listen to the masses — and the bankers and their lobbyists are running scared. So are bank investors, who have grown accustomed to a steady diet of D.C. handouts.
FHA Tightening the Screws?
Change is also afoot in the housing and mortgage arenas. The Federal Housing Administration, or FHA, has been making overly lax loans for several quarters now — even as house prices fall and defaults rise. Its credit reserves are running at the lowest level in modern history, raising the risk of yet another massive bailout.
But in an about-face from the recent trend toward blindly marching off a cliff, this federally-backed mortgage lender is tightening the screws. It plans to soon implement higher down payment requirements for borrowers with lousy credit.
It's also jacking up the upfront premium borrowers have to pay into the program from 1.75 percent to 2.25 percent of the loan balance. Those premiums fund insurance that protects lenders for losses on FHA loans. Finally, FHA will ask Congress for authority to raise the monthly premiums that borrowers have to shell out along with their regular payments.
A few years ago, when the FHA program was a seldom-used option for mortgage borrowers, something like this would hardly matter. But FHA now guarantees roughly 3-in-10 of all mortgages being made. So its move could be significant.
At the same time, the administration isn't entirely cutting off the housing and mortgage industries — or borrowers, for that matter. Reports are now circulating that the Obama team will soon revamp either its $300 billion Hope for Homeowners (H4H) program or the larger Home Affordable Modification Program (HAMP). We may even see changes in both.
These programs are designed to reduce foreclosures through the use of loan modifications, or "mods." But they've failed to significantly — and permanently — stem the flood of home repossessions because they don't aggressively attack the "negative equity" problem.
Efforts are underway to reduce foreclosures through the use of loan modifications.
What do I mean? These days, borrowers who go to their lenders or the government for help typically get their interest rates cut, their loan terms extended, and/or their monthly payments lowered. But their lenders don't cut the amount of principal they owe.
That leaves borrowers owing, say, $450,000 on a house that was once worth $500,000 but now is worth just $300,000. The question isn't "Why WOULD you just mail the keys back to your lender?" in that situation. It's "Why WOULDN'T you?" Even if home prices immediately turn around and start rising at their historical rate of a few percentage points a year, it would take ages for you to build positive equity again.
I highlighted this as a critical flaw of the Obama plan almost a year ago in Money and Markets when I wrote: "Higher loan-to-value ratio mortgages have ALWAYS had higher default rates than lower LTV ones. Why? When borrowers have none of their money at risk — skin in the game, if you will — they have no vested interest in sticking with the property. They're giving up nothing by walking away.
"Sure, they'll take the lower payments they're going to be offered as part of the Obama modification plan. Sure, they'll stick around for a while. But if anything ... anything ... throws their financial situation off balance, a high percentage of them will resort to "jingle mail" — meaning, they'll pop their keys in an envelope and send it off to their lender"
Because neither H4H nor HAMP has lived up to expectations, the political pressure on the administration is reaching a tipping point. And if the administration responds by fixing that crucial "principal reduction" flaw, it would be a big deal. It would be a significant step toward lowering the foreclosure rate and helping out the housing market.
The Impact on You
So what does this all mean for you, especially if you're investing in financial stocks or bonds and related industries? You simply can't be as bullish on them as you were when Washington was their best friend.
Policy is no longer being written by a bunch of bank lobbyists, then rubberstamped by the Wall Street cronies in Congress and on the Obama administration's financial team. That's good news for the long-term health of the country ... but a potential chink in the armor for the markets, especially financial stocks.
At the same time, the nasty knee-jerk market reaction last week could scare policymakers right back into bailout mode. If stocks roll over ... if home sales continue to slow (as opposed to just suffer a post-tax-cut hangover for a month or two) ... and if mortgage credit tightens anew, the Bailout Brigade might be rolled right back out again.
What is certain is that volatility and confusion levels among investors will rise. So while it's not exactly time to go all-in short here, or dump all your "longs," it IS time to pare back your exposure, take some gains off the table, and let positions that get stopped out stay that way. Then we'll see how this all shakes out.
========================================
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Friday, July 10, 2009
Credit Losses Rising Anywhere and Everywhere
Remember when policymakers at the Federal Reserve told us in 2007 and 2008 that the credit problems were "contained" to the subprime mortgage sector? Or when then-Treasury Secretary Henry Paulson spouted the same line? Oops.
We've already established how those guys were dead wrong about home loans. Indeed, the delinquency rate on U.S. mortgages surged to a record 9.12 percent in the first quarter of this year. Late payments rose in ALL categories, including prime fixed-rate loans, the absolute "cream of the crop" in the mortgage world.
Now, it's clear they were dead wrong about the entire credit market! Credit losses and delinquencies are rising anywhere and everywhere, and I've got the numbers to prove it.
In the first quarter of this year, the credit card delinquency rate shot up to 6.6 percent ... a record high. RVs ... HELOCs ... Personal Loans — Borrowers Can't Pay Back Anything! Get a load of these hot-off-the-press figures from the American Bankers Association (ABA). In the first quarter of 2009 ...
•Home equity loan delinquencies increased from 3.03 percent in the fourth quarter of 2008 to 3.52 percent.
•Home equity line of credit delinquencies rose from 1.46 percent to 1.89 percent.
•Credit card delinquencies rose from 5.52 percent to 6.6 percent (measured on a "percentage of dollars outstanding" basis).
•Direct auto loan delinquencies increased from 2.03 percent to 3.01 percent.
•RV loan delinquencies increased from 1.38 percent to 1.52 percent.
•Mobile home loan delinquencies increased from 2.96 percent to 3.70 percent.
•Personal loan delinquencies increased from 2.88 percent to 3.47 percent.
The home equity loan delinquency rate is a record high. The home equity line of credit rate is a record high. The credit card delinquency rate is a record high. And so is the level of the aggregate consumer credit delinquency index that the ABA has been putting together since 1974!
What about CORPORATE credit quality? Any "green shoots" there? Nope.
-The default rate on junk bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.
-A University of California economist just predicted that a whopping 20 percent of hotel development loans made in the U.S. may default over the next year and a half.
-Standard & Poor's just said it's planning to slash ratings on more than $235 billion worth of commercial mortgage-backed-securities. Loose underwriting, falling asset prices, slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.
What's the Problem? We Had the Biggest Credit Bubble of All Time, That's What!
Slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector. Americans simply borrowed and spent way too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans.
The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. The insanity spread to commercial real estate ... to corporate buyout loans ... to virtually every corner of the credit market!
Now, we're all dealing with the hugely negative consequences of this massive credit bubble. What a shame! I can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.
In the meantime, I continue to suggest the following: Stay away from sectors vulnerable to deteriorating credit quality, tighter lending standards, falling home values, and falling commercial property prices. That includes banks, insurers, home builders, and REITs.
And what about all the talk out of Washington on how these companies are just fine, how the economy is recovering strongly, and how happy times are here again?
Plug your ears and lash yourself to the mast! These guys didn't get the mortgage crisis right. They didn't get the credit crisis right. And they sure as blazes aren't getting the economy right, either. Consider: Just a few weeks ago, politicians on Capitol Hill and policymakers at the Federal Reserve were tripping all over themselves to discuss the "green shoots" in the economy. Now, they're openly admitting they screwed it up.
Joe Biden spilled the beans when he announced that the administration had "misread the economy." Vice President Joe Biden said last weekend that the administration "misread the economy." Their hopelessly optimistic projection that unemployment would peak at 8 percent — has been thrown in the trash. The unemployment rate has instead climbed to 9.5 percent ... and double-digit levels are right around the corner.
Heck, you now have key officials, like Obama adviser Laura Tyson and House Democratic leader Steny Hoyer, talking about the possibility of a SECOND economic stimulus package. That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.
Again, this should come as no surprise to you. Unlike the ivory tower economists in Washington, we live in the real world. We know how bad things are, and how serious the risk is that they'll get worse — MUCH worse. So we've been warning you constantly to avoid risk, and batten down the hatches for a worsening economic storm.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
We've already established how those guys were dead wrong about home loans. Indeed, the delinquency rate on U.S. mortgages surged to a record 9.12 percent in the first quarter of this year. Late payments rose in ALL categories, including prime fixed-rate loans, the absolute "cream of the crop" in the mortgage world.
Now, it's clear they were dead wrong about the entire credit market! Credit losses and delinquencies are rising anywhere and everywhere, and I've got the numbers to prove it.
In the first quarter of this year, the credit card delinquency rate shot up to 6.6 percent ... a record high. RVs ... HELOCs ... Personal Loans — Borrowers Can't Pay Back Anything! Get a load of these hot-off-the-press figures from the American Bankers Association (ABA). In the first quarter of 2009 ...
•Home equity loan delinquencies increased from 3.03 percent in the fourth quarter of 2008 to 3.52 percent.
•Home equity line of credit delinquencies rose from 1.46 percent to 1.89 percent.
•Credit card delinquencies rose from 5.52 percent to 6.6 percent (measured on a "percentage of dollars outstanding" basis).
•Direct auto loan delinquencies increased from 2.03 percent to 3.01 percent.
•RV loan delinquencies increased from 1.38 percent to 1.52 percent.
•Mobile home loan delinquencies increased from 2.96 percent to 3.70 percent.
•Personal loan delinquencies increased from 2.88 percent to 3.47 percent.
The home equity loan delinquency rate is a record high. The home equity line of credit rate is a record high. The credit card delinquency rate is a record high. And so is the level of the aggregate consumer credit delinquency index that the ABA has been putting together since 1974!
What about CORPORATE credit quality? Any "green shoots" there? Nope.
-The default rate on junk bonds has almost quadrupled to 9.5 percent from 2.4 percent a year earlier, according to Fitch Ratings.
-A University of California economist just predicted that a whopping 20 percent of hotel development loans made in the U.S. may default over the next year and a half.
-Standard & Poor's just said it's planning to slash ratings on more than $235 billion worth of commercial mortgage-backed-securities. Loose underwriting, falling asset prices, slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector.
What's the Problem? We Had the Biggest Credit Bubble of All Time, That's What!
Slumping rents and rising vacancy rates are wreaking havoc on the entire commercial real estate sector. Americans simply borrowed and spent way too much during the halcyon days of the early-to-mid 2000s. They were counting on ever-rising home values to bail them out from high-risk loans.
The lending industry actively egged them on, as did policymakers at the Fed, who kept interest rates too low for too long. The insanity spread to commercial real estate ... to corporate buyout loans ... to virtually every corner of the credit market!
Now, we're all dealing with the hugely negative consequences of this massive credit bubble. What a shame! I can only hope that borrowers, lenders, policymakers, and regulators behave more responsibly in the future.
In the meantime, I continue to suggest the following: Stay away from sectors vulnerable to deteriorating credit quality, tighter lending standards, falling home values, and falling commercial property prices. That includes banks, insurers, home builders, and REITs.
And what about all the talk out of Washington on how these companies are just fine, how the economy is recovering strongly, and how happy times are here again?
Plug your ears and lash yourself to the mast! These guys didn't get the mortgage crisis right. They didn't get the credit crisis right. And they sure as blazes aren't getting the economy right, either. Consider: Just a few weeks ago, politicians on Capitol Hill and policymakers at the Federal Reserve were tripping all over themselves to discuss the "green shoots" in the economy. Now, they're openly admitting they screwed it up.
Joe Biden spilled the beans when he announced that the administration had "misread the economy." Vice President Joe Biden said last weekend that the administration "misread the economy." Their hopelessly optimistic projection that unemployment would peak at 8 percent — has been thrown in the trash. The unemployment rate has instead climbed to 9.5 percent ... and double-digit levels are right around the corner.
Heck, you now have key officials, like Obama adviser Laura Tyson and House Democratic leader Steny Hoyer, talking about the possibility of a SECOND economic stimulus package. That's a tacit admission that the $787-billion package enacted in February is failing to get the job done.
Again, this should come as no surprise to you. Unlike the ivory tower economists in Washington, we live in the real world. We know how bad things are, and how serious the risk is that they'll get worse — MUCH worse. So we've been warning you constantly to avoid risk, and batten down the hatches for a worsening economic storm.
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Tuesday, July 15, 2008
Financial Markets on the Edge of Panic: Commentary from Money and Markets
Attention: Pay close attention to Freddie and Fannie Mae in the coming months. Monumental events are on the way! Additional targets to watch include WAMU, Lehman Brothers and Wachovia Bank.
Commentary:
Our nation may be on the cusp of economic catastrophe — call it a panic, a meltdown, an implosion; I don't care what you call it. But it's bad. And it's coming straight at you like a runaway bus.
In times of crisis, people naturally gravitate toward gold, because it's the one investment that can hold its value when the fertilizer hits the fan.
As for silver, well, any trader will tell you that silver is gold on steroids. When gold jumps, silver can leap twice as far, percentage-wise.
What if I'm wrong — what if there is no economic catastrophe? What if the government is able to stop the crises that are lining up from turning into full-blown disasters? Well, gold and silver are STILL good bets to ride the economic tides that are surging now.
Today, I want to explore a reason why I think our country is in real trouble ...
Financial Markets on the Edge of Panic:
I don't have to tell you the news in financial markets is bad ... the problem is it's going to get much, much worse. We are seeing financial institutions collapse like slow dominoes: Countrywide Financial and New Century Financial last year ... Bear Stearns earlier this year ... IndyMac last week. Meanwhile, Fannie Mae and Freddie Mac are on federally mandated life support. Since Fannie and Freddie own or guarantee about half of the $12 trillion of U.S. mortgages, they might be too big to fail. But their shareholders are getting clobbered. And big regional banks are small enough to fail ... which is why National City and Washington Mutual both saw their stocks get 25% haircuts on Monday as terrified investors stampeded for the exits.
These are all just stocks on the leading edge of a much larger problem. The mortgage crisis has become the Andromeda Strain of financial markets, devouring everything it comes in contact with. According to a Bridgewater study, total financial losses from the current credit crisis will hit $1.6-trillion — and that estimate was made BEFORE last week's bad news. It's not just the losses on banks' books. A recent Bank of America study said that the meltdown in the U.S. subprime real estate market had led to a global loss of $7.7 TRILLION dollars in stock market values just since October.
Now we're seeing the damage spread into the "prime" mortgage market. Signs of devastation are everywhere. Two million homes are vacant across America even as tent cities of the dispossessed spring up in urban areas. RealtyTrac, the leading online marketplace for foreclosure properties, said that in June, U.S. foreclosure filings jumped 53% year over year. In fact, one in every 501 U.S. households received a foreclosure filing during the month.
Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. And there are more shoes to drop. In fact, there could be many more shoes to drop. More than 300 banks could fail in the next three years, according to RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150 banks were in trouble!
Bottom line: Your money could be at risk. The percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC.So, more than a third of America's deposits are at risk. Now would be a good time to check and see if the balance in any of your accounts has climbed over the insured limit of $100,000.
Commentary:
Our nation may be on the cusp of economic catastrophe — call it a panic, a meltdown, an implosion; I don't care what you call it. But it's bad. And it's coming straight at you like a runaway bus.
In times of crisis, people naturally gravitate toward gold, because it's the one investment that can hold its value when the fertilizer hits the fan.
As for silver, well, any trader will tell you that silver is gold on steroids. When gold jumps, silver can leap twice as far, percentage-wise.
What if I'm wrong — what if there is no economic catastrophe? What if the government is able to stop the crises that are lining up from turning into full-blown disasters? Well, gold and silver are STILL good bets to ride the economic tides that are surging now.
Today, I want to explore a reason why I think our country is in real trouble ...
Financial Markets on the Edge of Panic:
I don't have to tell you the news in financial markets is bad ... the problem is it's going to get much, much worse. We are seeing financial institutions collapse like slow dominoes: Countrywide Financial and New Century Financial last year ... Bear Stearns earlier this year ... IndyMac last week. Meanwhile, Fannie Mae and Freddie Mac are on federally mandated life support. Since Fannie and Freddie own or guarantee about half of the $12 trillion of U.S. mortgages, they might be too big to fail. But their shareholders are getting clobbered. And big regional banks are small enough to fail ... which is why National City and Washington Mutual both saw their stocks get 25% haircuts on Monday as terrified investors stampeded for the exits.
These are all just stocks on the leading edge of a much larger problem. The mortgage crisis has become the Andromeda Strain of financial markets, devouring everything it comes in contact with. According to a Bridgewater study, total financial losses from the current credit crisis will hit $1.6-trillion — and that estimate was made BEFORE last week's bad news. It's not just the losses on banks' books. A recent Bank of America study said that the meltdown in the U.S. subprime real estate market had led to a global loss of $7.7 TRILLION dollars in stock market values just since October.
Now we're seeing the damage spread into the "prime" mortgage market. Signs of devastation are everywhere. Two million homes are vacant across America even as tent cities of the dispossessed spring up in urban areas. RealtyTrac, the leading online marketplace for foreclosure properties, said that in June, U.S. foreclosure filings jumped 53% year over year. In fact, one in every 501 U.S. households received a foreclosure filing during the month.
Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. And there are more shoes to drop. In fact, there could be many more shoes to drop. More than 300 banks could fail in the next three years, according to RBC Capital Markets analyst Gerard Cassidy, who had in February estimated no more than 150 banks were in trouble!
Bottom line: Your money could be at risk. The percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter, according to an analysis of data reported to the FDIC.So, more than a third of America's deposits are at risk. Now would be a good time to check and see if the balance in any of your accounts has climbed over the insured limit of $100,000.
Thursday, May 1, 2008
Loan Servicing in the Housing Industry - A Solution
For the next three to five years (approximately 2008 through 2012) the residential housing industry will struggle to maintain profitability. The industry faces an oversupply of homes purchased by borrowers who are unable to service their purchase-money loans, refinance loans, or home equity credit lines. Lenders must reconcile depressed real estate values with sometimes questionable underlying debt instruments. New buyers must be found for properties vacated by foreclosure or the threat thereof.
Many profit making opportunities will emerge in the course of solving these problems. You hear about how the ultra affluent and Wall Street is profiting from the credit crisis. This article focuses on the select acquisition of distressed notes secured by single-family residences, and how you can profit too.
Link to Executive Summary: http://www.propertyvestors.com/article_i20-08.pdf
Many profit making opportunities will emerge in the course of solving these problems. You hear about how the ultra affluent and Wall Street is profiting from the credit crisis. This article focuses on the select acquisition of distressed notes secured by single-family residences, and how you can profit too.
Link to Executive Summary: http://www.propertyvestors.com/article_i20-08.pdf
Subscribe to:
Posts (Atom)