Monday, August 06, 2007

Another one bites the dust

Yeppers, another home loan vendor bites the dust. But unlike the others, this one wasn't a sub-prime lender. This one is an "alt-A" lender, someone who lends money to folks who have good credit but maybe are buying a little more house than they can afford or something like that. The failures are moving up the home loan lending food chain.

So what does it mean to you? Well, that's still unclear. You can bet that housing prices are going to be down. The assets of these lenders are being picked up by vultures for peanuts. The vultures take the proceeds of the performing loans, but the non-performing loans go into foreclosure. Where the mortgage lender was willing to work with homeowners in hopes that either a) housing prices would rise enough to make it worth foreclosing at some point in the future, b) the homeowner would somehow start paying his loan on time, or c) cows would fly, the vulture is going to foreclose and sell the house at auction to the lowest bidder and write off the loss. That's why he paid only pennies on the dollar for the portfolio of the failed lender, after all -- so that he could wring a few pennies more out of the deal. If it was a $500K loan and he sells the house for $200K after repo expenses, but he only paid $150K for the loan, he's still ahead. But other folks in the neighborhood with $500K houses suddenly just had the values of their homes reduced to $300K, and are underwater on their loans now, and can't get the promised re-fi to deal with their ARM that's about to re-adjust to 13.5% interest after 5 years because their house is no longer worth enough to re-finance the loan with... so the troubles spread.

The eventual result, if too many of these lenders fail, is galloping deflation similar to that in the period 1929-1932. Now, galloping deflation is great for millionaires. It means their millions are worth more (in real terms) because their millions will buy more. It's horrible for working people who have a bit of debt, because they can't sell their services in the open market for enough to service that debt, and end up with all their possessions repossessed by (duh) the wealthy. The period 1929-1932 was probably the greatest transfer of real wealth (land and goods) from working people to the wealthy in the history of the nation, because that's what deflation does -- it transfers wealth from people who owe money (generally working people) to people with lots of money in the bank (generally the wealthy).

So the next question is, "will the U.S. government bail out the lenders?" In a word... no. The only outfits that the U.S. government is going to bail out is going to be Fannie Mae and Freddie Mac, who are too big to allow to fail. If individual mortgage lenders fail, that's disappearing dollars from the economy (since those assets are suddenly worth only 20% of what they were once worth), but given that the Federal Reserve has been cranking out dollars with all the avid fervor of a Weimar Republic finance ministry over the past six years in order to finance the horrible federal balance of payments imbalance, it could be said that what the Fed giveth, the Fed now taketh away. But if Fannie and Freddie go under, the government will have to step in and guarantee those mortgage-backed bonds because if those disappear, then we are truly in the deflationary death spiral because too much money will vaporize out of the economy. The problem is that the U.S. government itself is not exactly in a fiscal situation where it is flush with dough. What that means is that the printing presses will have to be cranked up even more. Now, the printing presses actually have been cranking for a while now to finance the current federal balance of payments deficit (thus why food and fuel have been going up in price -- too many dollars from those presses cranking away chasing too little food and fuel), but if we go the Weimar Republic route we'll all be hauling bales and wheelbarrows full of cash out of the bank every day to buy a loaf of bread and a gallon of gas.

So what's going to happen? Fuck, you're asking a penguin what's going to happen? I haven't the foggiest clue what's going to happen. Galloping deflation (good for rich, bad for working people) is one possibility. Galloping inflation is unlikely -- hurts the rich, y'know, and this regime is all about helping the rich. Lots of working folks losing everything they own to sharks... well duh. This is the Bush Administration, bay-bee! You can bet that whatever happens, Vice President Halliburton will protect his own. Ah gher-uhn-TEEE! (With all due respect to the late Justin Wilson). In the meantime, if you're thinking of buying a house, I recommend doing it only if the payments (minus the interest and property tax deductions) will be the same or lower than what you're paying as rent. Because housing prices are only going one way for the next few years, and that is down, D-O-W-N, bay-bee!

-- Badtux the Economics Penguin

Labels: economy

Comments:

At least Justin won't have to worry about anything...
# posted by sumo : 7/8/07 10:57 AM  

No, az, people are going to be without homes, but they're going to be renting someone else's old homes from their new masters. This is just all part of taking whatever wealth people have, generally their homes, and transferring it to the wealthy, all part of the plans of the Vice President Halliburtons of the world. But the dipshits will just blame themselves for not being mean enough or good enough to come out on top of the conspiracy to rip everything they own away from them, and keep on keeping on with their blinders as to what reality really is.

- Badtux the Cynical Penguin
# posted by BadTux : 7/8/07 11:26 AM  

Tux-o, I occasionally drop in for the snark and frozen pizza reviews, mainly when I see you pop up on Pottersville. I did not know you were an economic genius as well.

I have had the same suspicion as you, which is part of the reason the missus and I sold our glorious house in the city where YOU WISH YOU COULD LIVE you flightless waterbird you. Hurt to do it, and move to bedome renters in this pleasant, but godforsakenly isolated island continent. We saw it coming, and jumped from the path of the speeding-truck-headed-toward-the-cliff that is the U.S. economy.

Oddly, your post gives me hope. When the dust settles, maybe we can get our euros out of the vault and move back to the Bay Area (it IS the best place!) to some of those cheaper houses. The ones that didn't get burned during The Revolution, that is.

I mean, c'mon, if the bank was kicking YOU out of the house that you had $250,000 or so tied up in, wouldn't you set it on fire after it had sat vacant for a couple weeks. Is it just me who thinks that vindictively?

Oh my God! I'm a monster. Or maybe not. We shall see, we shall see...
# posted by Bukko_in_Australia : 7/8/07 7:23 PM  

That should be "become" renters, not "bedome". Why oh why don't I proofread first?
# posted by Bukko_in_Australia : 7/8/07 7:25 PM  

Bukko, that's why lenders try to avoid repossessing homes if at all possible. I once viewed a home which had been repossessed. The people who had lived in it had completely gutted it. I mean, *completely* gutted it, nothing left but hole-filled drywall, no sink, no toilet, no interior doors, no nothing. They'd even torn all the electrical outlets and electrical wiring out of the walls to sell for scrap. Their thought was that if the bank was going to throw them out, they were going to get back as much money as they could by selling what they temporarily owned (the contents of the house). Needless to say I did not buy this particular home. (It had other issues dealing with its construction too, so even as a fixer-upper it was a total loss).

And yes, homes which have been repossessed have a disturbing tendency to go up in flames shortly thereafter, which is another expense that the repossessing bank must assume -- property insurance on their new property, as well as a property manager to occasionally go over and make sure it hasn't burned down yet.

But the sharks buying up these dying loans for pennies on the dollars factor all that into their calculations. They are not going to lose money. The investors in the mortgage companies are going to lose money -- the retirement funds, the hedge funds, etc. -- but the sharks are going to make a tidy profit. And the fact that their tidy profit is going to drive yet more people into not being able to pay their mortgage... well, that's more profit for them, too. So let's party like it's 1929, dudes!

- Badtux the Snarky Penguin
# posted by BadTux : 7/8/07 10:23 PM  

Funny local story along exactly that line.

In the boho seaside suburb of St. Kilda where we live (which is home to a colony of cute, tiny waterfowl known as "fairy penguins" BTW) there's a massive 1920s-vintage Art Deco theatre named the Palais, and a smaller nightclub beside it called the Palace. The local council wants to develop it into a shopping mall, seeing as it sets on waterfront land which is much more valuable since they drove out the drongos and prossies (drug addicts and prostitutes) in the late 90s. They've been used as rock 'n' roll clubs for about a decade, and the management fought in court to keep from getting kicked out. As usually happens when you fight city hall, they lost.

Two weeks after they got the boot, there were fires set in five spots inside the smaller Palace joint. Gutted. They spared the architecturally distinguished Palais, although a huge chandelier that required a flatbed truck to remove went missing (later found in a warehouse controlled by the rock promoter.) Perhaps not unusual for America, but down here people have a higher regard for propriety. Must be the British influence, but they're getting more Americanised every decade.

Right you are about not wanting to evict. I figure the new "sub-prime paradigm" will be for people to lose ownership of their houses, but the bank (or the faceless institution holding control of the loan) will be glad to let them stay there and pay rent. In exchange for all the equity the "owners" had, of course.

A nation of renters, instead of a nation of owners. And ever does the economic power flow upward...
# posted by Bukko_in_Australia : 8/8/07 10:09 AM  

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