Housing and Economic Collapse - In Progress #4

seahorse2 · **Joined:** Mon Oct 18, 2004 12:00 am **Posts:** 2062

From my experience, round two of the economic crisis is just beginning, and that's the commercial real estate bust. The residential real estate bust literally broke the banks, and but for Uncle Sam coming in using TARP, tax credits, guaranteeing debts of FHA etc., along with buying their own bonds, we would be in a full blown depression right now. Even with all that stimulus, the housing situation is not any better.

Now, round two, the commercial real estate bust is beginning. Like residential, it was overbuilt, but also, with the bad economy, businesses are closing. I talked to a real estate appraiser the other day who is working on another case I have. He was at a real estate appraiser meeting, wherein they discussed the commercial real estate problem facing the US. Over the next 32 months, there is $1.2 trillion in commercial loans that need to be refinanced, which is hard to do when the appraisal value of the properties securing the loans has dropped. What kind of fix will Uncle Sam come up with? Who knows, but there will be something. It's too big to do nothing.

patience · **Joined:** Fri Jan 04, 2008 1:00 am **Posts:** 2869

seahorse2,

Good to hear from you! Yes, retail is in big trouble where I live. Small businesses here are very shakey. The trouble at Citi's (now divested?) commercial loan outfit has people worried. If/when they go under, lots of small businesses will flounder for credit, and some more will fail. That takes out more commercial RE, and on it goes.

McDonald's says people are downsizing what they buy there, and Wal Mart is thinning the shelves in many places, I've read, so the problems have run the gamut from high to low budget stores. Traffic is even down in the indoor flea markets here.

What CAN the govt/FED do? FDIC is broke and is ignoring a lot of insolvent banks, apparently for lack of funds to take them over and make good on insured deposits. Govt is broke and deeper in debt every second, and will bail out the FDIC? With what? Treasuries are getting harder to sell to anyone but the FED, who I think is buying about half of them = monetization. Print. That's all I can see. Iceland/Zimbabwe here we come. In slow motion maybe, but the direction looks obvious to me. If (fill in country of choice here) decides to divest themselves of Treasuries, it could happen fast.

I think it's way past time to let this whole works fail, and get on with the cleanup.

mos6507 · **Posted:** Wed Oct 28, 2009 6:46 am

On the morning shows they were talking about how something like 80% of housing markets are seeing price upticks. I'm wondering now whether the Alt-A and Option-ARM time bombs are really going to go off or not. If not, why not? Did people just walk away from their homes before their Alt-As and Option-ARMs reset? Did the bailout somehow save them? That is a big questionmark for me.

seahorse2 · **Joined:** Mon Oct 18, 2004 12:00 am **Posts:** 2062

Moss,

Those ARMS were expiring on people and still are, but now the Feds have kept rates lower and FHA etc are literally backing billions in refinances with 30 year notes. That's what I understand is happening. I read somewhere that the gov't is now responsible for 80+% of all home sales. Without this support, we would be in a real estate toilet bowl.

Something similar will have to happen on the commercial loan bust. The Gov't is going to have to back these loans somehow, bc property values are dropping, so ordinary lenders don't want and can't loan the money.

The problem then shifts to our gov't and taxpayers. We are on the hook for all these mortgages if they go bad or as they go bad.

Also, I don't understand all the economics behind it, but the gov't is keeping loan rates down by issuing and buying lots of short term treasuries. All I understand is there is a problem with doing this indefinitely and finding enough buyers. As the US budget deficit now exceeds the foreign trade surplus, the US gov't has to buy its own treasuries to make up the difference, which is quantitative easing, which can get out of hand.

So, there will be more gov't guarantees on both the residential and commercial. How long they can float the US economy, I don't know. Despite everything they are doing, I don't see the home market improving much in my area. The tax credit did help, but bankruptcies are still high and banks are having to foreclose on lots of stuff. At best, the gov't actions so far have slowed the decline and kept it from a free fall.

Gerben · **Posted:** Wed Oct 28, 2009 8:35 am

seahorse2 wrote:

...
Also, I don't understand all the economics behind it, but the gov't is keeping loan rates down by issuing and buying lots of short term treasuries. All I understand is there is a problem with doing this indefinitely and finding enough buyers. As the US budget deficit now exceeds the foreign trade surplus, the US gov't has to buy its own treasuries to make up the difference, which is quantitative easing, which can get out of hand.

You almost got it. But the US doesn't have a foreign trade surplus. It has a deficit largely thanks to all that imported oil. The US is bleeding dollars. Borrowing them from foreigners has reached its limits and now the US has to create more dollars to finance its bailouts. That can continue as long as foreigners accept those dollars for their oil and other stuff.

emersonbiggins · **Posted:** Wed Oct 28, 2009 9:15 am

mos6507 wrote:

On the morning shows they were talking about how something like 80% of housing markets are seeing price upticks. I'm wondering now whether the Alt-A and Option-ARM time bombs are really going to go off or not. If not, why not? Did people just walk away from their homes before their Alt-As and Option-ARMs reset? Did the bailout somehow save them? That is a big questionmark for me.

Good question. It appears that the infamous Credit Suisse ARM reset chart may have a fundamental error, overestimating the time and amount of rate resets. Here's an article that may shed some light on the subject:
Reset Chart from Credit Suisse has a Major Error

The gist of the article indicates that one of the more popular ARM payment options - the "interest only" option - will only recast in the event of reaching the amortization terms of the loan - 5-10 years or so - or hitting 110 or 125% LTV - something that might not be done until at least 2012, according to the writer. He came to this conclusion after reviewing Wells Fargo's estimates of its own ARM recasts, which do not square with the Credit Suisse chart. So, it appears that doomsday is postponed, but only for about 3-5 years. Enjoy!

From the link:

Quote:

Reset Chart from Credit Suisse has a Major Error
Versions of the Credit Suisse reset graph have been featured in the Financial Times, used by the International Monetary Fund, and are a staple of web sites like these that are dedicated to the housing bubble. It’s fairly shocking then to see what appears to be a major error in their calculations.

Last week (here and here) I noted that something didn’t make sense about Wells Fargo’s estimates that only one third of one percent of their Option-ARM loans would recast before 2012. Reader’s comments and an email from CalcualtedRisk helped me to get my head around what was going on. In fact, Wells Fargo’s numbers are technically correct.

First for some background, when Wells Fargo purchased Wachovia it acquired about $120 billion of Option-ARM loans originated by a Northern California company called Golden West. These Option-ARMs, or “Pick-A-Payment” loans, allowed borrowers to literally pick their monthly payment from four options: 1) a payment that would pay off the loan in 15 years, 2) a payment that would pay off the loan in 30 years, 3) a payment that only covered the interest, and 4) a minimum payment that was less than the interest only payment.

The last option allowed for “deferred interest” or “negative amortization”. In essence, since not all the interest due was being paid by the borrower, the principal balance on the loan would grow each month. This was an extremely popular choice for borrowers at the peak of the real estate bubble, as Golden West noted in their 2005 year-end filing with the SEC:

In 2005, the initial monthly payment selected on almost all new loans was lower than the amount of interest due on the loans.

For obvious reasons this has been of particular concern. If the amount one owes on a loan goes up while the value of the home is decreasing, there is a heightened risk the borrower might walk away from the home leaving the bank to deal with the loss.

As the housing market has continued to deteriorate, the question on everyone’s mind is when will borrowers have to face the reality that they can't make a minimum payment forever? The Credit Suisse chart has been a guidepost for that reality check.

But interest rate resets don't pose much a problem for those with Option-ARMs when rates are low. They can continue making a minimum payment that only adjusts upwards by 7.5% once a year. The real "payment shock" comes when the loan is recast (i.e. becomes fully amortizing over the remaining term of the loan). This occurs after a contractual time limit (normally 5 or 10 years) or, if due to negative amortization, the loan value increases to 110-125% of the original principal of the loan.

For this reason Credit Suisse used the recast date in their chart above for Option-ARMs as stated by Mathew Padilla of the Orange County Register:

Credit Suisse, an analyst told me, used resets in the chart for all loans except option adjustable-rate mortgages, when borrowers can choose a minimum payment that may be less than interest owed (option ARMs are in yellow on the chart… see how they are rising!). For option ARMs it used recasts, which can happen either when the loan amount expands to a maximum allowed — often 115% or 125% of original principal — or a set period, such as five years.

If you’re paying close attention you'll notice that something doesn't add up. Wells Fargo, who holds more Option-ARMs on its books than any other institution, states in their last 10-Q filing:

Based on assumptions of a flat rate environment, if all eligible customers elect the minimum payment option 100% of the time and no balances prepay, we would expect the following balance of loans to recast based on reaching the principal cap: $4 million in the remaining three quarters of 2009, $9 million in 2010, $11 million in 2011 and $32 million in 2012... In addition, we would expect the following balance of ARM loans having a payment change based on the contractual terms of the loan to recast: $20 million in the remaining three quarters of 2009, $51 million in 2010, $70 million in 2011 and $128 million in 2012.

In short, Wells expects $56 million in Option ARMs to recast due to the loan balance reaching 125% of the value of the original loan and another $269 million to recast based on the terms of the loan. Given that we’re talking about a portfolio of over $100 BILLION of these loans, this means ESSENTIALLY NO LOANS WILL RECAST due to the negative amortization limits or contractual terms before 2012.
... (more at link)

Quote:

The bottom line something doens't add up when Wells Fargo predicts virtually no Option-ARM recasts before 2012, while Credit Suisse predicts no recasts after 2012. While I would guess Wells Fargo is underestimating recasts assuming a flat rate environment, the bulk of recasts do look like they will be pushed out to 2014/2015.

Spent · **Joined:** Wed Oct 28, 2009 1:43 pm **Posts:** 3

I'm new to this board, Amazing Looking at all the information out there. Reading this thread it makes me wondering, if the housing/economy is ever going to come back with all the job losses. I frequently check that layoff site deleted , and just today alone, make you sick to see what is happening..Without Jobs, there is nothing.

dorlomin · **Joined:** Sun Aug 05, 2007 12:00 am **Posts:** 1917

emersonbiggins wrote:

Reset Chart from Credit Suisse has a Major Error

ARMaggedon postponed? IGMC.

Quote:

Also worrisome is that we’ve heard from readers that WaMu/JP Morgan is notifying Option-ARM borrowers that they are extending their minimum payments out another 5 years. Are they pushing off recasts into 2014/15 as well?

Two questions, one how this will not affect those that have been cut into CDOs and MBS will it, they should be accounting for very low income but it could push out the date that the asset can be recovered to be resold, even at 30% what was loaned its a recovery of income. Anyone have anythoughts if the CDO holders will be able to or have a legal right to influence how the loan in handled.

Secondly does this mean that these banks will be holding vast amounts of unwritten down dead assets that analysts will be seeing and perhaps they themselves will be seeing on there internal documents and just drag the crisis on and on. Should the banks not be forced to make massive provisions now for these coming losses and just get this damned crisis over? A couple of ugly quarters then get on with dealing with the next crisis. The real one.

Oil.

eXpat · **Joined:** Thu Jun 08, 2006 12:00 am **Posts:** 1677

Global Exposure in Financial Derivatives Surpasses One Quadrillion Dollars

Quote:

When I posted the lowest responsibly sourced figure for global exposure in financial derivatives, $592 trillion, published May 19, 2009 by the Bank of International Settlements, all sorts of hoodoo apologists for Obama, Geithner, Summers, and Goldman Sachs crawled out the woodwork to claim that this figure is ridiculously exaggerated, there's really nothing to worry about, it's just a few bucks, and so on.

All the same hoodoos unfailingly claimed that it's stupid to consider worst-case scenarios when you calculate risk, because...

They have learned absolutely nothing from the ongoing financial meltdown which annihilated some of the oldest and largest investment banks in the world, and plunged the global economy into an almost vertical downturn.

So, since even the lowest reasonable figure for global exposure in financial derivatives attracts so much obfuscation and denial, I might as well be hanged for a sheep as a lamb, and offer up a much larger and probably more accurate estimate, which also includes the huge market in off-the-books derivatives, instead of only considering the OTC market upon which the previous calculation by the Bank of International Settlements was based, and that estimate is...

$1.4 quadrillion.

That's more than one million piles of money, with a billion dollars in each pile.

http://tpmcafe.talkingpointsmemo.com/talk/blogs/rutabaga_ridgepole/2009/07/global-exposure-in-financial-d.php?ref=reccafe
Yes, that´s right $1.4 quadrillion.

Jotapay · **Posted:** Fri Oct 30, 2009 11:05 am

That's a lot of beans.

evilgenius · **Posted:** Fri Oct 30, 2009 11:52 am

Don't forget, much of the derivatives market is about currency exchange. I don't know how much, but it has to be a lot. Given no surprises in interest rates (currency values) much of that is safe.

rangerone314 · **Posted:** Fri Oct 30, 2009 11:55 am

Its too bad we can't create a world currency that is pegged to the price of gold.

careinke · **Posted:** Sat Oct 31, 2009 1:59 am

Quote:

Its too bad we can't create a world currency that is pegged to the price of gold.

Well you could, but due to the quantity of gold, it would be around $100,000 an ounce.

Tuike · **Posted:** Sun Nov 01, 2009 1:56 pm

CIT Nears Bankruptcy Filing

Quote:

CIT Group Inc. plans to file for bankruptcy as soon as Sunday afternoon...

Tuike · **Posted:** Sun Nov 01, 2009 2:58 pm

CIT files for bankruptcy

Quote:

Last Updated: November 1, 2009: 4:33 PM ET
NEW YORK (CNNMoney.com) -- CIT Group Inc., one of the nation's leading funders of small and medium-sized businesses, filed for bankruptcy protection Sunday as part of a reorganization plan that has the support of an overwhelming majority of debtholders.

Housing and Economic Collapse - In Progress #4

Who is online