Bill Zielinski

More Option ARM Falsehoods: Interest Rates Are Not the Issue

Karl,
Great article. From the perspective of a first hand observer of the option arm financing fiasco, I can tell you that your assertions are exactly right. Virtually all of the option arm borrowers took this product based on the artificially low payment, virtually all of the borrowers paid only the minimum payment and virtually all of the borrowers have already or will default.

U.S. Markets: Keep on Rockin' in the Free World

Jim,
Thanks for another real good analysis.
It's obvious that the powers to be don't seem to comprehend the serious situation that we are in. The only "solution" they have is to borrow and spend more, as has been the case for decades now.
Only when it becomes blatantly obvious to everyone that we are at the edge of the abyss, will the impetus for the right kind of change happen. By that time, of course, it may be too late.

Will 2009 Bring Ring Three of the Financial Circus?

A very well written piece. I agree that the many problems you list will not be solved overnight and we will have a lot of bad news on the economy this year.

I guess the big questions is, to what extent have the markets already discounted these issues?

Alt-A Loans Spiraling Downward

In the long run efforts by the Fed to prop up the price of housing with rate cuts and loan modifications will merely prolong the slide in values. If the Fed had the power to prevent a decline in housing prices, they would have done so. In a free market economy, prices will eventually reflect the reality of matching home ownership with income.

The lending distortions of the past that created the bubble in housing are now gone. It is no longer enough to say that you make $150,000 - you need to prove it. It is no longer possible to get 100% financing with poor credit. The poor lending decisions of the past are causing pain for both borrowers, banks and the economy at large, but ower rates alone will not clear the market.

The free market has solutions to over leverage and poor lending decisions. The solutions are called write offs, bankruptcy and foreclosure. As painful as these measures are, they are the mechanism for building a financially strong base of homeowners who will be far less likely to default on their mortgages.

During the height of the housing bubble several years back, only 10% of California households qualified for a conventional 30 year fixed rate mortgage. The bubble prices were nurtured and sustained by exotic lending programs with no income verification. Fast food workers bought $1,000,000 homes. Now the bubble has burst.

Priced properly, houses will sell. Time and price will accomplish what the Fed cannot. There are oceans of private money looking for an adequate return on capital. Let the free markets do their work - and the pain of the housing bust will soon be solved.

Is America on a Downward Slope?

An incredibly well written dissertation on the financial disaster that the Fed and our political leadership have brought down upon us.

This country is incapable of accepting the fact that the cure to our financial fiasco involves pain and sacrifice rather than more borrowing. The illusion of prosperity, promoted by unsavory and deceitful political and business leaders is still accepted by an uninformed public.

The monetary authorities will do whatever they need to do to keep the bubble from bursting but their success is subject to much doubt. If they are "successful" it only means that they have postponed the real day of reckoning to a later date and increased our debt levels beyond what can ever be managed or repaid.

Maybe some day before it is too late, an uncommon leader will rise to the occasion and talk straight to the American public. Maybe someday this honest man will explain how we have spent our future and that the cure is not more borrowing but pain and sacrifice so that we can have some hope of a better future for our children.

Time is running short.

Low Rates, Big Problems

A significant number of the foreclosures that we are seeing now were the result of the ridiculous leverage and lack of sound underwriting policies that were the norm during the bubble years of mortgage lending. Mortgage loans were being made almost regardless of credit, with no income verification and no down payment. It should not be a surprise that once the bubble popped and prices started dropping that we would experience a large number of foreclosures.
There's a lot of different parties to blame for the housing fiasco but I would tend to blame the lenders more than the borrowers. Given the widely held belief that real estate prices would only go up and with easy no money down financing available, many buyers were acting rationally since they were receiving a risk free long term call on the price of real estate. If prices kept going higher, you sell or refinance and make a killing; if prices dropped you simply walk away.
I would say that the government's attempt to prop up the artificial prices of the past by delaying inevitable foreclosures will only prolong the time it takes to eventually reach a bottom in housing. If someone is in foreclosure, that would generally mean that the homeowner, for whatever reason, can't make the payment or prefers to simply walk away due to negative equity, etc. These people become renters, the foreclosed home is sold at a market clearing price and eventually supply and demand in housing is balanced.
Going forward, if the mortgage industry can restrain itself to lend money only to those that have a documented ability to service the debt, another housing bust will be avoided. Unfortunately in the meantime, there are many innocent homeowners paying a very dear price for the lending insanity that brought this housing crisis upon us all.

Banks Forgiving Mortgage Principle: Reward for Bad Behavior?

I think it likely that the trend towards loan modifications will have unintended adverse consequences such as prolonging and increasing the value erosion of residential real estate. How often do big government sponsored programs work, especially when attempting to interrupt free market forces? The moral hazard is obvious and this program institutionalizes the repudiation of debt on a massive scale, thereby creating more losses for a broad spectrum of debt holders.
There is also a movement to change the bankruptcy laws and allow the courts to forgive mortgage debt. When you combine these factors, lending or investing in mortgages has become very high risk. To compensate properly for the higher risk, mortgage lending by private capital will either disappear or demand an appropriately high risk adjustment factored into the lending rate.