As if the “sub-prime” meltdown hasn’t already caused enough damage in the housing market and the economy, there is another wave that is going to hit. This wave will be larger than the sub-prime meltdown. It should have been reported by the mainstream media years ago but just now seems to be percolating up to the surface. The chart below from Credit Suisse shows the tidal wave of junk loans set to reset in the next few years.
Tsunami of Upcoming Mortgage Resets Through 2012
The first round of mortgage troubles consisted of loans made to people who has less than perfect credit. Thee people often had incomes, took out adjustable rate loans that made payments affordable with teaser rates. The next batch of loans was often given to people with good to excellent credit. These were known as Alt-A and option ARM loans. These were the “investors” who “bought” multiple homes, often had no experience in real estate and no business investing in it.
Alt-A loans are loans that were given to people who never had to show or prove their income or ability to pay for the loan. These were also known as liar loans.
Option ARMs are home loans where the consumer gets a rate on the loan that starts out low and can also choose how much they want to pay on the loan each month. Over time, the balance of the loan goes up even though a person is making payments on the loan. This is known as negative amortization.
CBS News 60 minutes program finally did a story on this situation. The video is below:
There are so many people at fault for this whole mess. The banks and mortgage brokers should have verified that people would have a good chance of paying back the loans they made by verifying income. Just because someone has great credit doesn’t mean they have the means to pay back a loan. The people interviewed for this story obviously took no responsibility for anything they bought or signed. These home owners don’t even seem to care or seem to feel that they should take responsibility for their actions. They deserve to lose their homes and the US Treasury, the American tax payer should let the majority of these people who “invested” lose their homes and go into foreclosure. The banking regulators never should have let this situation get out of control in the first place. If people can’t read contracts, can’t take responsibility for contracts they sign and somehow think they deserve to live in a home that costs half a million dollars when they make $50,000 a year, then they deserve to lose.
On the version that aired on TV, there was an acupuncturist interviewed for the story. She bought at least 5 properties, didn’t read any of the docs when buying or financing her “investment” properties and doesn’t really seem to be too concerned about it. Poor woman has or will have to sell them all at a loss. Whatever the US govt decides to do about this to prevent a total meltdown, they need to let irresponsible behavior like this get punished and these “investors” pay for their mistakes, negligence and the fraud in which many participated.
Unless you’ve been locked in a cave for the last year or two, you are probably aware of the financial crisis. Home loans were handed out like lollipops on Halloween. Unsuspecting prospective home owners were given what they thought were “treats” that turned out to be tricks. THese were loans on unaffordable homes that will lead them into foreclosure and are leading to an unwinding of highly leveraged worldwide financial markets.
For years, the US has lived on credit and imaginary “wealth”. Much of this imaginary weath was tied to home values. In a market where home prices could only go up, you could buy a house with no money down and take out an Option ARM (Adjustable Rate Mortgage) and have the option to make a payment so small tht the balance of the loan would actually go up each month. There were many other creative financing options made avaialble to promote home “ownership” as well. Once you “bought” a home and the value went up, you could refinance and take money out of the housing ATM or simply take out a home equity loan. The Sub-prime debacle is already in full swing and there is more to come as shown in this article on the the tidal wave of mortgage resets coming our way.
When consumers are desparate, when their homes are worth less than the outstanding balance on their home loans, when they can no longer tap home equity loans, when they are experiencing stagnant wages or losing their jobs, where are they going to turn? Why credit cards of course. It is the American way!
It is nice of Citi to at least acknowledge that their credit card losses “may” rise though 2009. Shouldn’t that say WILL rise through 2009 (and probably dramatically)? Lookout below! We’ve got billions more in exotic mortgage resets coming in the next few years, probably billions in unsecured credit card losses by the likes of Citi and other banks ready to hit as people pay their mortgages (and everything else) with their credit cards.
If it wasn’t such a bad situation, it would be comical to see how this financial crisis is being handled, the PR used to spin major losses and how the tax payers are being fleeced to try to fix this whole problem.
According to the Wall Street Journal, Bank of America has agreed to buy Merril Lynch for 44 billion dollars. Is it just me or does absolutely none of this financial mess make any sense. First Bear Stearns gets a bailout of sorts and gets folded into JP Morgan Chase, then Lehman Bros. seems to be on the brink and somehow Bank of America comes out purchasing Merril Lynch at $29 a share or 44 BILLION. That is quite a hefty 70% premium over the $17.05 per share Merril was trading at the market close on Friday, Sept 12th.
At least it is not our tax money bailing out Merril but we still have to see what happens to Lehman Bros. on Monday. What happens if they crash and burn? Who knows, have we ever seen anything that big crash before? Looking further down the road, what happens when we have 2 global financial firms (Bank of America and JP Morgan Chase) with such a huge concentration of weath and financial power over the financial markets? Is there any way this can be a good thing over the long term?
It also begs the question of the stability of BAC. They’ve bought a ton of stuff over the recent months including Countrywide and now Merril. How much toxic shit are each of those two on the hook for that BAC will now be on the hook for? Better hope it is not to much because it seems like BAC is going to be to big to stop from failing if all that stuff blows up. If Merril wanted to sell before they went the way of Bear & Lehman, then why the hell would BAC want to pony up a 70% premium for something that might be selling for chump change a few months down the road?
This isn’t my area of expertise by any strenth of the imagination but it seems like the way things are going, the bubble is getting bigger and bigger and bigger and more and more stuff is getting pushed under the rug. We still have to face the biggest wave yet of Alt-A and Option Arm resets that will probably come crashing down as the “prime” borrowers” discover they can’t pay. See the chart below from Credit Suisse that shows the upcoming round of mortgage resets.
Tsunami of Upcoming Mortgage Resets Through 2012
Monday will be another wild ride on Wall Street as the Bank of America acquisition of Merril Lynch gets digested by the market. Is it good or bad news? Who knows? The market has been so crazy lately as the financial system crumbles it is anyones guess what will happen.
The other day I was looking at BankRate.com. They have some handy tools to help with finances, moving and estimating the cost ofliving in one city vs. another city. When I looked at the list of things they show a cost comparison for I noticed Lipitor medication - the stuff that is supposed to reduce your cholesterol. A screen shot of the calculator results is below:
At first it just seemed strange but on second thought it is genius. As you may know, pharma advertising is fairly heavily regulated and when ads appear online, they are usually supposed to marked as such. I guess this Lipitor placement is maybe just that a product placement. Maybe it came as part of another ad deal and can be considered editorial so that something as irrelevant as the cholesterol drug Lipitor can be included in something as unrelated to pharmaceuticals as a moving calculator. This appears to be a great way to not have to label it as an ad and not worry about any fair balance or other regulatory statements. What it is likely to do is get a fair number of people to notice it, wonder what does this Lipitor thing in the cost of living calculator have to do with anything and then go search online to find out what it is.
It looks like there are other sponsorships in the list of things to consider when moving. Cascade appeared in the list which seems little more harmless than Lipitor. The stuff they do included in the cost of living calculator is useful so if you are going to move and want to see how the cost of living compares, go use the BankRate.com Cost of Living Calculator.
…Let’s say I don’t have enough money to buy something, should I buy it anyway? Have you ever noticed that here in the US that we never do anything about a known issue until it becomes a crisis in govt, the corporate world and even many individuals? IOUSA is coming to a theater near you.
It’s a shame you have to go to a movie about how the US financial system is falling apart to see something halfway decent in a theater. I can’t remember the last time there was anything worth going to see but IOUSA looks like an excellent film to go see. You’ve probably noticed the chaos on Wall Street, the awful performance of the stock market over the last year or two, the popping of the mortgage bubble. IOUSA presents the financial state of the union - in debt to the tune of 50+ TRILLION dollars in current liabilities and future promises for social security and Medicare. That comes out to around $175,000 per person in the US.
According to David Walker, the former comptroller of the US, this country suffers from a “fiscal cancer”. If I understand correctly, his position of comptroller of the USA was not a particularly political position so he could shoot straight, speak his mind and present the stat of the US financial system as it really is. On March 12, 2008 he resigned and join the Peter G. Peterson Foundation where he thought he could do more good and have a better chance at raising awareness of the issues and bringing about change. I don’t know much about Mr. Peterson but it is nice to see someone with some cash to spend working to bring about positive change and fiscal responsibility in the US.
While I havent’ actually seen IOUSA yet, I do plan to see it and will post a review after going to see it.
