The New York Times has reported that Bank of America recently circulated a confidential proposal to select members of Congress warning that the losses from mortgage related writedowns could exceed 789 billion dollars.
From the article: Bold my emphasis, Italics my add.
"To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates." Is it just me, or are we rewarding people for having bad credit or lying about their ability to repay by forgiving debt and giving them lower rates? Why doesn't EVERYONE deserve this?
"“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted." Ok, now this one just makes me laugh.
Ok, people, the real point here is in the number -- 789 Billion Dollars-- that Bank of America floated in Washington. Could it be that the insiders have known all along that this crisis will result in over a HALF TRILLION dollars in losses? Why would they float this number privately, but continue to publically support the notion that the worst is behind us?
Because the worst is not behind us. Not by a long shot. We've got 3 more years of this, at a minimum. Housing values on a national level are going to come down 50 to 60 percent before you even begin to sniff the bottom. The real question is who is going to be dragged under this bus and how long will the bottom last.
Stay tuned.
What Are the Banks Really Doing?
Many thanks to Housing Doom for the post that spawned this comment:
"About one year ago, I read an article that stated the lenders don’t want to sell because that would translate into a loss on paper. However, as long as they hold the property, it is an ASSET! I suspected this a long time ago, even though the press and realtors told me that the banks don’t want to hold the properties….blah, blah, blah. It’s all about perception, not reality. They don’t care it the place falls down, just as long as they look good on paper."
It's an interesting point, and one that seems to make some sense (even though it's evil).
Most of the large mortgage providing banks such as Bank of America, Washington Mutual and Countrywide, Wachovia, Chase, Citigroup and smaller regional banks like National City are insolvent or very close to it because of the multi-billion dollar mortgage writedowns, the explosion of loan-loss reserves on their books and the billions more writedowns to come.
Couple this with the plethora of stories about entire blocks of foreclosed properties not on the market yet and properties where the banks are "sitting" on offers for 3 months or more, and you can see the value of that statement. They need to hold assets on their books and this is an easy way to do it.
But it's not the right thing to do. Not by a long shot. It only adds to the problem. The longer they keep homes on the books, the longer those homes remain vacant. The longer they remain vacant, the higher to probability that the homes fall victim to vandalism, squatting, drug dealing and disrepair. I don't need to tell anyone what that does to the values of the surrounding areas not to mention the bad karma. This also greatly decreases the chance that the home or any of the homes in the area will ever sell, and if they do... for pennies on the dollar. Add to this the 1 million homes that builders are already on pace to build this year (but in 2007 new homes sold at a 600K pace, so they are currently STILL building 40% more new housing than they need), the foreclosures that do hit the market and the existing level of inventory... throw in the credit crunch for good measure and see what happens.
This is frightening, folks. The banks are perfectly willing, if you believe this theory, to perpetuate the spiraling housing market to keep assets on their books to stay solvent. At the same time, they are petitioning the government to take their bad assets. Fed short term borrowing is at record levels and leveraged buyout deals are falling apart due to lack of funding.
Believable? You do the math.
"About one year ago, I read an article that stated the lenders don’t want to sell because that would translate into a loss on paper. However, as long as they hold the property, it is an ASSET! I suspected this a long time ago, even though the press and realtors told me that the banks don’t want to hold the properties….blah, blah, blah. It’s all about perception, not reality. They don’t care it the place falls down, just as long as they look good on paper."
It's an interesting point, and one that seems to make some sense (even though it's evil).
Most of the large mortgage providing banks such as Bank of America, Washington Mutual and Countrywide, Wachovia, Chase, Citigroup and smaller regional banks like National City are insolvent or very close to it because of the multi-billion dollar mortgage writedowns, the explosion of loan-loss reserves on their books and the billions more writedowns to come.
Couple this with the plethora of stories about entire blocks of foreclosed properties not on the market yet and properties where the banks are "sitting" on offers for 3 months or more, and you can see the value of that statement. They need to hold assets on their books and this is an easy way to do it.
But it's not the right thing to do. Not by a long shot. It only adds to the problem. The longer they keep homes on the books, the longer those homes remain vacant. The longer they remain vacant, the higher to probability that the homes fall victim to vandalism, squatting, drug dealing and disrepair. I don't need to tell anyone what that does to the values of the surrounding areas not to mention the bad karma. This also greatly decreases the chance that the home or any of the homes in the area will ever sell, and if they do... for pennies on the dollar. Add to this the 1 million homes that builders are already on pace to build this year (but in 2007 new homes sold at a 600K pace, so they are currently STILL building 40% more new housing than they need), the foreclosures that do hit the market and the existing level of inventory... throw in the credit crunch for good measure and see what happens.
This is frightening, folks. The banks are perfectly willing, if you believe this theory, to perpetuate the spiraling housing market to keep assets on their books to stay solvent. At the same time, they are petitioning the government to take their bad assets. Fed short term borrowing is at record levels and leveraged buyout deals are falling apart due to lack of funding.
Believable? You do the math.
Slipping Deeper into Doo-Doo
Ok, so the title of my post is a little childish. I get it. But when you think about it, so is the ever upbeat reporting of the current financial crisis.
Take this article from Reuters, quoting Ara Hovnanian as saying that housing values should stabilize in the second quarter, with a rebound in sales by Spring of 2009.
"The head of the Red Bank, New Jersey-based home builder said he sees U.S. home prices stabilizing in the first half of this year and that prices likely remain constant for a "couple of quarters." But where will they go after that, oh great one?
"He said sales will sharply rebound once the excess inventory of new homes is sold."
"At the end of 2007, the supply of new homes for sale stood at 9.6 months, according to the U.S. Commerce Department, more than double what is considered a healthy supply."
Ok, so does anyone see the contradiction here? We've got darn near a 10 month supply of new homes available and builders haven't stopped building. Couple that with the supply of existing homes, foreclosures that are soon to be on the market, natural relocation statistics, the contraction of credit and the fact that we have a wildly overpriced housing market, even with the current decline and ... well... I guess it's easy to make predictions when you're already a billionaire.
Take this article from Reuters, quoting Ara Hovnanian as saying that housing values should stabilize in the second quarter, with a rebound in sales by Spring of 2009.
"The head of the Red Bank, New Jersey-based home builder said he sees U.S. home prices stabilizing in the first half of this year and that prices likely remain constant for a "couple of quarters." But where will they go after that, oh great one?
"He said sales will sharply rebound once the excess inventory of new homes is sold."
"At the end of 2007, the supply of new homes for sale stood at 9.6 months, according to the U.S. Commerce Department, more than double what is considered a healthy supply."
Ok, so does anyone see the contradiction here? We've got darn near a 10 month supply of new homes available and builders haven't stopped building. Couple that with the supply of existing homes, foreclosures that are soon to be on the market, natural relocation statistics, the contraction of credit and the fact that we have a wildly overpriced housing market, even with the current decline and ... well... I guess it's easy to make predictions when you're already a billionaire.
Ara Hovnanian
I want some of whatever the hell this guy is smoking.
So let's move on...
The Philadelphia Fed Index declined yesterday from -20 to -24. As expected, "Wreconomists" got it all wrong. Expecting a rise to -10 (and that would be better?), many wreconomists were rather dismayed by the report.
"As far as this indicator is concerned, a recession, and a severe one at that, is already underway," said Paul Ashworth, at Capital Economics."
"The headline index is now consistent with a deep recession, if sustained at this level," said Ian Shepherdson, chief economist at High Frequency Economics in a note."
"It is one of the earliest readings on the U.S. economy in the month and has had a solid track record at predicting national manufacturing and future trends in actual output."
"The collapse in the outlook for activity six months out was particularly worrisome Merrill Lynch said. It posted the steepest decline in the 40-year history of this report, suggesting the United States is facing a recession on par with the early 1990s downturn rather than the milder 2001 contraction." Might I go out on a limb here and say on par with an even deeper recession... one that many of us don't remember?
Benjamin Tal, senior economist at CIBC World Markets "estimates 30% of below-prime mortgages taken out in 2006, including subprime and other exotic mortgages, are already in a negative equity position and that figure could climb to 50%. The urge to walk away from their homes will be high." Yep. Short lived this recession will be. Housing prices... no problem. They're gonna rebound in July this year!
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