Bad Mortgages Are Only the Beginning 32 comments
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Yesterday I talked a bit about how, through the bailout bill, the government was given the authority to invest the $700 billion in things outside of mortgage debt, the requirement being that the investment be critical to supporting the U.S. economy.
This has led to auto finance companies lobbying the government for aid. I also threw out that we could soon be looking at credit card companies such as American Express (AXP) following suit. I thought that I should expand a bit on this and explain that mortgages are by no means the only problem assets for banks right now, and even though the other debt out there hasn’t received the same type of publicity, the threats are serious.
Mortgage debt has been the poster child for this financial crisis, and rightly so, considering the sheer size of the market and the juicy stories about people getting swindled and then losing their homes. With property prices falling across the country and borrowers defaulting at record paces, banks began to see losses mount beyond their worst case projections.
We all know where that has led. Now we have passed bailout after bailout and are desperately trying to fix this mess before all the troubled debt out there brings down the financial system as we know it. Unfortunately for us, there are some other factors that could contribute to this degradation as well.
Americans have almost $2.6 trillion in consumer credit outstanding, according to the Federal Reserve. Credit card defaults rose 45 percent for JP Morgan Chase (JPM) in quarter three, according to a Washington Post article, and they are expecting things to only get worse. Auto finance companies are echoing the sentiment. This has me worried.
Typically, owner-occupied mortgage borrowers are going to pay their mortgages above every other bill they have. That means they will default on their credit cards, car loan and whatever else before they stop paying their mortgage.
They know that if they stop paying their mortgage, they will lose their home, whereas if they stop paying their credit card bill, all they lose is their credit rating. So the fact that credit card defaults are rising as quickly as they are tells me that people are at the end of their ropes.
Before, they might have been able to get by with using one credit card to pay another, but with banks actively reducing the credit lines of existing borrowers, and being more selective about new borrowers, this option is running out. What happens next is that these people are going to stop paying their mortgages, which will mean a double whammy for banks.
To make matters worse for banks, when people don’t pay their credit card bills, they essentially are out of luck because it is unsecured debt. When people default on their mortgages, at least the bank can go after the house. With car loans banks can go after the car, but since cars depreciate so fast they really are left with little (sounds kind of like the real estate market in some areas).
Despite the attempts by the government to “rescue” the industry it appears things might be getting even worse, and I think it is pretty clear by now that $700 billion isn’t going to be close to enough to actually right this ship.
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This article has 32 comments:
This is the way out.
Assume: $300 million citizens in USA, 200 million passenger vehicles on the road, 20% are currently under lease, 40% are Trucks and SUVs (which have taken a beating in market values as of recent), and a presumed $7,500 expected deficiency between residual and market value at end of lease term.
Do the math... That's $120 BILLION of losses, that to the best of my knowledge hasn't yet been recognized by financial institutions at large.
IMHO, the $120 billion pails in comparison to the larger problem of consumer finance noted in your posting above.
Credit cards are for REVOLVING CREDIT.....short term loans that are paid off completely in or less than 30-days. Anyone that maintains a balance on a credit card can't afford what they bought and should not have made the purchase(s) in the first place.
This crisis will be solved when Americans restrain their purchasing habits to those of their grandparents.
And the current bailout foolishness is an attempt to reinflate the bubble with yet more cheap easy credit. It's like taking hopelessly addicted gamblers to a casino and giving them a line of credit.
What are the talking heads in DC and Wall St thinking ?? Obviously they aren't.
Every victorious battle starts with a point of attack. Get that wrong and you might as well not fight the battle.
> jack
Unscrupulous mortgage brokers and closing agents structured deals and allowed closings to happen where the LAW was broken. The loans that defaulted should have had losses only to the insurance companies.
This country needs to put the perps in JAIL who defrauded HUD, FHA, FmHA, Fannie, Freddie etc, by putting non-conforming, uninsured loans into the system. The perps should also have their licenses voided. We need crooks like that in the financial system like a fish needs a bicycle.
But there are millions of persons out there who can't afford to pay the lawyers to go bankrupt! There will be so many defaulted debtors who won't bother to file, and that will be the bane of the banks.
"Every lender and holder of mortgages REQUIRES PMI on mortgages with less than 20% down."
the Gov would have stayed out of it , let markets sort it out ,take there course . But it is a Election year so the decided to INFLATE the currency IE Print Money and distribute it , like there doing to Big Banks now , Germany tried that in the 1930s it led to Hyper Inflation the 10% a MONTH KIND! Prices doubled every 5 months at the end about mid 1937 Prices rose Every day 3% or 4%. This ended of course total collapse of the Economic system and the OVERNIGHT Rise of a Army Corporal to FURER in a matter of days .
That was rise of Hilter and shortly after WW II.
What Will happen here is unknown except the inflation part , that Will Happen it will take about a year to begin , What to do ? buy hard assets , land, houses. gold and silver just about any hard asset will do they will rise with inflation , paper money will become more and more worthless or put another way it will take more and more of it to buy things in the End it will take a brief case full of $20 bills to go Grocery shopping . I cant see anyway out now and yesteday a goverment offical said when asked about coming inflation said, we cant worry about that now we have to stop the Markets going down , people 401ks and Ira's . The truth is by the Time the Inflation gets really bad 2 or 3 years from now these same officals will be gone away to retire with there Gold leaving the rest of us up the Creek without a paddle. It aint going to be pretty and no matter WHO Wins the election the INFLATION NIghtmare will play out the same!
Look at the recent reports from all the major banks, and you will find their ordinary income easily covers all their charges off with enough left, even in this environment, that they are at PEs around 2 to 4. Yes, I said 2 to 4. For the best it is more like 1.7 actually.
"But wait, they recorded losses, or only narrow profits - they must have lost it all in loan losses". Well no. They took non-cash charges to add to their loss reserves, and they marked down their loans and bonds as their yields rose, despite no actual reduction in income.
Look into control theory as an automation concept of engineering.
All this FREE MONEY in the bailout is going to overshoot. If you think these clowns are going to be able to tell when they need to turn the spigot off you are delusional.
Deflation is the Now Inflation is the Later.
Are we in a deflationionary period? A lot of asset prices are certainly heading south, but prices of the 'stuff' I buy every day haven't shown much sign of joining them. Maybe that will come.
Are we heading into a period of significant inflation? The economics I learned 30 years ago is a bit out of its depth today, but won't the answer depend upon:
1. How the various bail-outs actually evolve in practice. A lot of what has been committed is still in the form of guarantees - which presumably would not be inflationary unless called.
2. What is done with the 'cash' element in the bail-outs. If it is used by recipients to rebuild balance sheets holed by the massive further write-downs that honesty would require, then the cash will simply have disappeared into a financial 'black-hole' and therefore not be inflationary. If, on the other hand, balance sheet obfuscation continues and the moronic Gordon Brown dictum of forcing banks to onlend infusions does gain traction, then - when combined with what are going to be pretty low policy rates in most currencies in the months ahead - we'll all be down at the bullion dealers.
Just a thought - my crystal ball burnt-out weeks ago. Very painful.
Its basically a change in attitude on the part of consumer. Consumers are negative and it feeds to their misery and they pull the temple down.
The actual interest rates available are huge, whatever the Fed sets fed funds at. In case nobody noticed, banks are paying 10-12% to borrow at term and 4-5% short, not 2%.
OldLimey - deflation is an increase in the objective exchange value of money. It is being triggered at this time by a huge rise in the demand for money as a safe haven investment, not by transactions demand, either way. Energy prices have already collapsed, all the commodity price bubbles have collapsed or are in the process of doing so.
All the Fed had to do to bring that about was hold M1 completely flat from the spring of 2005 to the spring of 2008. It did not allow the spendable forms of money that it most tightly controls to rise along with the bubble-blown prices of the inflationary brainstormers. As a result, not one of those increases is going to stick.
Housing didn't stick, oil didn't stick, ags didn't stick, metals didn't stick. None of it did and none of it is going to. Those were all run up on huge reckless bets that any real asset would outperform any nominal debt used to carry it, no matter how absurd the price became or what relation any of it had to real incomes or real demand.
The end of the world trade bet the rent money that there was about to be a hyperinflation, but someone forgot to tell the Fed, and there wasn't any, and they all fell flat on their face.
And to unwind their stupidity, it will be deflation instead. The Fed will work to keep the nominal price level from falling too much, at the consumer level. But all the asset prices will be smashed to atoms.
And they aren't coming back.
The ridiculous pretence that all money claims are fake and any bond at any yield is worthless while any physical object at any price is worth more, was simply as wild a delusion as million guilder tulip bulbs.
Don't expect the fools who ran the whole thing to admit they were wrong, though. They will claim it will all come back, just you wait. Turn those machines back on!
But they are naked, busted, and wrong.
It is pavlovian conditioning and a testament to the power of recent pain to destroy the human mind.
Earth to investors - stop the imaginary inflation games and the imaginary cynicism about everything, and just find any decently run company whose word you trust, and lend to it. They are offer you once in a lifetime terms. Just take them already and we are clean through all of this.
Excellent Intelligent Discourse !!!
Not really into the drama of the movies.
Some things that you did not address that I think you may want to.
Adjustable rate mortgages have begun to reset at tidal wave proportions starting in March of 2008 and will continue to do so well into the first part of 2011. The implications are vast for this stat alone.
We still have an Opaque, Unregulated, Shadow Banking System, with more book value than all the wold's GDP combined, filled with Complex Financial Engineering that no one seems to be able to value. As an example of the possible destruction consider the Lehman's CDS auction just sold 400 million for 8 cents on the dollar. This is a Huge destruction of FUNNY MONEY. Carried onto the regulated books requires margin calls to maintain capital ratios. The Dominoes Continue To Fall. This is the underlying cause of the angst to lend. This is the "Tar Baby" that no one wants to address.
Until these two fundamental issues are dealt with there is no safe haven. What has been set in motion will not be short.
The response will be much of the same of what we have seen - Throw Money At It. If it all goes to replace the destruction - then balance is achieved and we are sold into slavery. If not then inflation and we are sold into slavery.
After the election the true nature of this catastrophe will be brought to light. When power is ceded there will no longer be a need to keep things hidden.
This is no movie; this is real life.
There are greater moves than just the Financials happening that few are aware of. Those in power are preparing for civil unrest and the world militaries are positioning themselves for instability.
One thing is for sure - The World Will Be A Different Place In The Coming Years.
To Assume Benevolence Is Foolish.
Information everybody knows isn't worth knowing. Please tell us something we don't know.
The demand for this easy credit is what had allowed credit card companies to charge usurious interest rates which in turn has created a demand for expensive cars, homes, food and "consumer goods". It seems that American's insatiable gluttony for buying "stuff" on credit has now come home to roost.
Our government is the gluttonous uncle who borrows and spends like a drunken sailor. Borrowing billions to fund invasions and wars that we can ill afford and giving billions of dollars to other countries or their leaders in hopes of endearing them to the U.S. It’s mad!.
What happen to the concept of living within ones means. Having a budget and living within that budget. Earning a living, paying your bills and then saving. We American's should stop this easy credit insanity. We should also stop our drunken uncle (U.S. Government) from spending like a mad man and live within a budget.
It's expensive and time consuming. The system won't get 10 cents back on it's debt by the time all is done. The prisons are full with 2 million people...where will you put 10 million more?
As more and more people realize they can walk away from debt, they will do it. The sheer mass of numbers are on their side. The leverage of the American financial system, and this includes the government should never have been allowed to go beyond 3:1
Ron
The bank bailouts should follow the guidelines of Quicken Financial. This will help stop the fall of real estate by keeping many properties off the market and end up costing the taxpayers considerably less.
Their plan is to subsidize interest payment by 1/3 for 5 years, and reducing the interest charge to the homeowner and giving all a fixed 30 year contract. Sound workable to me.