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U.S. Missteps Are Evident, but Europe Is Implicated. “Experts say European lenders… embraced many of the riskiest practices of their American counterparts, bulking up on risky debt and relying on short-term loans, rather than deposits, to finance their operations… While the deposit guarantees and capital injections deployed in [Europe] might allay the immediate panic, these steps will not necessarily free up credit for European businesses… An ocean of short-term debt issued by European banks is set to come due over the next two quarters, with $375 billion maturing in Q4’08 and another $339B needing to be refinanced in Q1’09… Heavy borrowing has made European banks vulnerable.” (NY Times, Oct. 12) 

As discussed in a previous post, Bank of America agreed to offer concessions to 390,000 subprime and pay option ARM borrowers by reducing both the principal owed and/or the interest rate to a level that allows these borrowers to have a an “affordable and sustainable” monthly mortgage payment. An affordable and sustainable payment was determined to be a mortgage payment (including taxes and insurance) that would not exceed 34% of gross monthly income. With this agreement apparently setting a standard for future concessions to homeowners, consider some recent mortgage transactions/applications that I have seen.

• Woman wants to refinance her Connecticut home which she bought in early 2006. The home today would probably sell for no more than $260,000.  Home was purchased for $305,000 with 95% financing; the current interest rate is at 11.625% and she owes $285,000. The negative equity is only $25,000. Borrower has a gross monthly income of $3,780 per month and her current monthly payment of principal, interest, taxes and insurance is $3,682 giving her a debt ratio of 97%. She is currently in arrears on the mortgage and obviously not capable of making the payment. In order for her payment to become “affordable and sustainable” with a 34% debt to income ratio, the lender would have to reduce her loan balance to $158,000 with an interest rate of 1%.

If the home owner gets this deal, not only would her payment become affordable, she could also sell the house and reap a gain of $102,000. The applicant’s income is about the same today as it was when she purchased the home, so there was no drastic decline in income. Obviously, this woman should have never been approved for a mortgage in the first place; both the bank and borrower knew this.

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“So that would drive Libor down and basically tell the banks, 'Look, do your normal business, if anything goes wrong, we'll pay for it.'” - Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co. on Treasury Secretary Paulson’s plan to buy equity stakes in banks. (Reuters, Oct. 10)

It’s a little amusing to me how much attention Jim Cramer’s comments about pulling your “5-Year-Money” out of the market and sitting it in a safe place like cash or bonds garnered over the past few days. I for one, having given similar advice, didn’t find it that controversial. An investor, especially an individual investor, should never put their near term money at risk in the stock market.

By Eric Roseman

One of the biggest casualties of the global financial crisis is the big bust now underway in REITs, or real estate investment trusts. Until mid-2007, U.S. REITs dominated global investment performance in the post-2000 tech stock "bubble" era with eye-popping 25% annualized returns.

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I wrote the following on 9/1/2007, the first day of the blog's existence. As you read it, remember, the dot.com bubble and bust, historically low interest rates, real estate and credit bubble, concerted global interest rate reductions to historically negative real rates, rinse lather repeat... Someone asked me in the comments section, before they subscribed to my paid research, if I was as successful going long as I was going short. Well, my numbers actually looked better long than short - its easier work!

I jump "traditional" asset classes like a floozy jumps bed linen. You see, my asset class of choice is the global economic boom-bust cycle. Guys like Bernanke and Greenspan are the one's who allow me to feed my kids. They pump, dump, inflate to the extreme to bubble and crash, deflate to the extreme to bubble and burst, etc. Let me know if the following 1 year old + article sounds familiar, afterward I will post a graph of what I do for a living (there is a reason why I call this the BoomBustBlog): 

We're coming up on an unprecedented, fabulous, multi-asset buying opportunity. Here's why:

• The stock market is undervalued, all sentiment and most technical measures are saying to buy, and some fine companies are on sale. The problem is that it's been this way for the last couple of weeks and has kept plunging, frustrating all the bottom callers.

  Nonetheless, you need to start working your mindset away from how awful it's been,  to the idea that capitulation and despondence are the current stages of the game, and that the next smart move will be to buy. I would focus on analyzing the leveraged index ETFs such as Ultra QQQ ProShares (QLD), Ultra MC400 ProShares (MVV), and ProShares Ultra Russell 2000 (UWM). 

I’ll never understand why, back in August and September, so many people were buying the home improvement retailers. They bought enough shares to pump the price up into the mid-20s. As far as I can see, the retail business is going to be very difficult over the coming few years, and of all the retailers, the home improvement giants, Lowe's (LOW) and Home Depot (HD), will be among the most severely stressed. 

The discount do-it-yourself home improvement stores saw a booming business during the housing bubble. People were buying homes, for themselves and for investment, and they needed all sorts of things to equip those homes. 

Even though home prices peaked in 2006, at the end of the following year, nationwide property tax revenues were still growing strongly.

The likely reason is that property tax levels are "backward looking" by nature," writes Federal Reserve economist Byron Lutz in a new working paper.

Of all the Big Ideas which have been thoroughly discredited over the course of this crisis, arguably the biggest is the concept that homeownership is always and everywhere a Good Thing. As we've seen over the past couple of years, that's not at all the case: It can cause massive financial pain and suffering, and in places like Orange County and Miami there's a whole class of Smug Renters right now who somehow managed to dodge the homeownership bullet.

So you can imagine my surprise when I pulled up John McCain's lastest bailout plan and was confronted by its name: the Homeownership Resurgence Plan.

Well, John McCain didn't waste any time. In response to the first question of the second presidential debate, the Arizonan offered to buy back any mortgage in America that's worth more than the value of the home.

Since maybe as many as 40 percent of the homes in America may be under water -- that is, the mortgage is worth more than the home -- that's quite a tall order, one that makes the $700 billion bailout/rescue plan look like bubkes. It's a stunning nationalization of mortgages, wild in its cost and implications and somewhat bizarre coming from someone who had tried to pare back Fannie Mae and Freddie Mac. I suspect in the coming days McCain will dial back the plan because it was so outlandishly expensive and such a federal intrusion into the market--not that we're still worrying about that.

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